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November 01 2016

Commentary by David Fuller

Election Polls Tighten but Turnout is the Real Key to Clinton Versus Trump

Here is the opening of this topical article from The Guardian on a race which may have tightened significantly:

Polls are often conducted over multiple days, so we’re only just starting to measure the effect of the FBI’s decision to release new details of its investigation into Hillary Clinton’s private email server to lawmakers on Friday. According to the ABC/Washington Post tracking poll published on Tuesday (conducted October 27-30), the Democratic candidate has now slipped behind Donald Trump, on 45% to her Republican opponent’s 46%. The polling average calculated by RealClearPolitics, a much better indication of national sentiment, shows Clinton is now leading by just 2 percentage points, down from 5 percentage points a week ago.

Those numbers are interesting but not necessarily indicative – polling won’t neatly translate to votes. Far more important will be the turnout- especially since the two leading presidential candidates are so close in terms of unpopularity. And the candidates know it. A senior adviser to Donald Trump reportedly revealed last week that “we have three major voter suppression operations under way” intended to reduce votes for Clinton among African Americans, white liberals and young women.

Even though election day is still a week away, we already have some clues about whether turnout is lower among those groups – because more than 25m ballots have already been cast under the US early voting system. Approximately 125 million to 145 million Americans are predicted to vote in the 2016 election, so those early votes represent a significant share of the expected total.

Higher turnout than at this time in 2012

Of the 15 states that provide detailed information about those ballots, North Carolina, California and nine other states report more early voters than at the same point in the 2012 election. Ohio, Nevada, Colorado and Iowa showed a decline in early voting, and those declines were small.

Early signs of declining turnout from black voters and young voters

The early results offer mixed news for Clinton. Early votes suggest that young voters – who are much more likely than older voters to lean Democratic – might be staying at home. In 12 states, fewer Americans aged 18 to 29 have cast a ballot so far in this election compared with this point in 2012. This could be especially problematic for Clinton if this group is indicative of a broader “Bernie or bust” sentiment in which supporters of the former Democratic candidate Bernie Sanders choose to stay at home rather than voting for Clinton.

Young voters aren’t the only demographic group that appears put off. Early votes suggest that black turnout has fallen in eight states – especially in North Carolina, a state that yields 15 of the 270 electoral college votes needed to win the election and where polling suggests Clinton is in a close contest. If Trump’s strategy is indeed to suppress the black vote, that makes a lot of sense – those voters could be crucial for Clinton to secure the White House.

David Fuller's view -

Just when we all thought the US Presidential Election could not possibly be lost by Hillary Clinton – ‘the least awful candidate’ in this soap opera has apparently had her comfortable lead wiped away by FBI Director James Comey (is a ‘d’ missing from that surname?).  

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November 01 2016

Commentary by David Fuller

Shell Back in the Black as BG Takeover Boosts Production

Royal Dutch Shell has cheered investors with a $1.4bn (£1.1bn) profit for the third quarter, as the takeover of BG Group boosted production and it rebounded from a massive $6.1bn loss caused by writedowns in the same period last year.

Underlying profits at the Anglo-Dutch energy giant - excluding reduced writedowns of $1.3bn - rose by 18pc to $2.8bn, significantly beating analyst expectations, as the extra production and cost-cutting helped offset the impact of lower oil prices.

Shares rose almost 4pc as chief executive Ben van Beurden credited "strong operational and cost performance".

But he warned that "lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain". 

Simon Henry, Shell's chief financial officer, said lower oil and gas prices had reduced its earnings by about $1bn year on year. Despite this, the upstream exploration and production division posted a small $4m profit, confounding expectations of a loss.

Production was up 25pc to 3.6m barrels of oil per day, including an extra 800,000 barrels per day from former BG assets.

"Operating expenses were lower, more than offsetting the impact of the consolidation of BG," Shell said.

Mr Henry said the "most impressive performance" in cost reduction had been in the North Sea, a traditionally high-cost basin, where Shell has made 1,000 job cuts. Production costs had come down by as much as 50pc, he said.

While it was clearly "not the most profitable asset in the portfolio", excluding major ongoing investments the rest of the North Sea was "cash positive". 

"The North Sea's performance is beginning to look considerably better than it was. That however does not mean we hold onto all the assets," he said.

Shell is looking to offload some of its ageing North Sea assets as part of its target to divest $30bn by the end of 2018 to help pay off the debts of the BG takeover. "The question is can we get value for that asset?," he said.

Shell said it was currently working on 16 asset sales across its portfolio but that it was a "value-driven not a time-driven divestment programme".

"We are not planning for asset sales at giveaway prices," he said. However, he insisted there was "no reason today to think the $30bn figure will not be achieved".

Shell also indicated that capital expenditure next year would be at the lower-end of the $25-30bn range.

Analysts at Barclays said strong cashflow, combined with the reduced operating and capital expenditure and divestments, "should prove enough to reassure investors that Shell is well on its way to resetting the business post the BG deal".

David Fuller's view -

Royal Dutch Shell B (est p/e 27.99 & gross yield 6.34%, according to Bloomberg) has sustained its dividend for longer than most analysts expected, rewarding shareholders in the process. 

Can it continue to fund this pay out which is in excess of current Cash Dividend Cover of 0.2?

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November 01 2016

Commentary by David Fuller

Buy Gold No Matter Who Wins the Election, HSBC Says

Here is the opening of this topical article from Bloomberg

There's one certain winner of next week's presidential election, according to HSBC Holdings Plc: investors in gold.

Although they deem a Donald Trump victory more supportive for the price of the metal than a win by Hillary Clinton, the bank's Chief Precious Metals Analyst James Steel says it'll enjoy at least a 8 percent jump whoever wins the race. 

Both candidates have espoused trade policies that could stimulate demand, with gold offering a potential "protection against protectionism," he says. Even the relatively more internationalist Democratic candidate has argued for the renegotiation of longstanding free-trade agreements. That's positive for gold — even if "not on the scale of Mr Trump’s agenda."
If the real-estate magnate triumphs, gold could rise to $1,500 an ounce, according to HSBC, up from around $1,289 at 10:55 a.m. in New York. 

David Fuller's view -

This is a bold forecast from James Steel who is a very experienced analyst.  I think he is right and the only surprise for me is that it took so long for the crowd to become more interested in precious metals.  But that is markets for you and gold, silver, platinum and palladium had plenty of competition from stock markets and especially government bonds. 

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November 01 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the next event on Monday evening 28th November, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively session at The Markets Now seminar, attended by highly experienced international investors, led by our long-term subscribers.  Iain Little has more interesting material, including his popular “Trusts In Focus” programme.  Iain also introduced Clive Burstow of Barings, a specialist in the analysis and management of mining stocks – a hot topic this year.  

I can’t wait and it is always fun to chat with delegates at the cash bar following the three presentations.



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November 01 2016

Commentary by Eoin Treacy

Trick or Tantrum?

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

Long duration has been the trade of the decade, as yields declined and curves flattened on ultra-loose monetary policy. Issuers and fund managers have jumped on the duration bandwagon: over a $1tr has flowed into income funds (IG, HY, REIT and dividend) since QE began, and corporates have taken advantage of low rates to issue ultra-long dated bonds (Brazilian oil company Petrobras issued a 100-year bond in 2015, despite having only 11 years in proven oil reserves). 

However, the duration-party is now over-extended. Savings are being eroded as real interest rates are negative in most developed markets, and central bankers are struggling to purchase bonds under their QE programmes. In our view, sovereign yields need to move higher, and a market correction may be ugly. This is especially as liquidity in the bonds markets has declined since the financial crisis in 2008, further exacerbated by the rise of Exchange Traded Funds which offer daily liquidity to their investors (IMF GFSR report, October 2015). 

4. More Fiscal Stimulus Is on the Way 
Another source of inflation pressure will come from a shift in global fiscal policy. Since the crisis, most developed countries have kept their purse strings tight given existing public debt overhangs. However, more fiscal spending could be on the way after elections. 

This is already happening in Japan, with PM Abe announcing a ¥28.1tn stimulus package after a strong victory in the July Senate elections. Canada and South Korea also pledged extra budgets to step up public spending this year.

Fiscal stimulus should also come in the US after elections, where both candidates have promised more spending, and in the UK as a response to Brexit. Europe is still lagging behind, with the size and implementation of President Juncker’s investment plan underwhelming. However, there is a better chance that governments could coordinate on a spending plan after the German and French elections in 2017.

While fiscal stimulus is also not the panacea to all existing structural problems, it could complement easy monetary policy and generate some positive growth shocks. In a good scenario, it could help to normalise interest rates.

Eoin Treacy's view -

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

Fiscal stimulus means the supply of bonds to fund government spending with increase. If central bank purchases do not keep pace, yields will need to rise in order to attract more investors into the market to soak up the additional supply. Considering how low yields are and how susceptible to interest rate hikes long duration bonds are it is at that end of the curve where the most risk resides. 



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November 01 2016

Commentary by Eoin Treacy

Renzi Looks to Ends of Earth for Referendum Votes to Save Job

This article by Lorenzo Totaro, Chiara Albanese and Marco Bertacche for Bloomberg may be of interest to subscribers. Here is a section:

A little more than five weeks before the ballot on reforms that Prime Minister Matteo Renzi says are needed to streamline the government, Italy’s main pollsters signal that voters are almost equally split, with the naysayers slightly ahead. While the surveys don’t take into the views of overseas voters, history suggests they might break in favor of Renzi. In the 2013 general election his Democratic Party was their No. 1 pick.

The most likely scenario is a victory for “No” by a small margin, JPMorgan economist Marco Protopapa wrote in a note on Friday. London-based Protopapa added that faced with a defeat, Renzi would likely offer his resignation to the president of the Republic, who would reject it and invite the premier to verify that he has the support of a majority in the parliament.

 

Eoin Treacy's view -

Renzi has already rolled back on his commitment to leave office if the referendum does not pass and little wonder considering how close the polls are. An Italian subscriber sent through this article which highlights the fact a number of politicians are beginning to float the idea of delaying the plebiscite to allow for greater focus on managing the response to last weekend’s earthquakes. 



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November 01 2016

Commentary by Eoin Treacy

Email of the day on nickel

I am looking for a way of investing in Nickel. David Suggested in 2014 he sold ETF Nickel but I can't find it anywhere - LSE, FT, your library. If it has gone out of business do you have any other suggestions? The good old Canadian company Inco was bought out by Vale, of which it represents on a small part. Wonderful service. Harry Schultz told me it was. He was right.

Eoin Treacy's view -

Thank you for your kind words and we are both delighted you are enjoyed the service courtesy of a recommendation by the inimitable Harry Schultz. In fact since we do not engage in advertising most of our new business comes from word of mouth so please feel free to proselytise. 



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November 01 2016

Commentary by Eoin Treacy

Time for an Upgrade

Thanks to a subscriber for this report from Deutsche Bank focusing on the India utilities sector: 

Why retirement? Substantial savings for state utilities, better efficiency
India is planning a retirement policy to dispose of 18% of India’s coal-fired old capacity (36GW) over 5-6 years, starting with 6GW (2.2%) by Mar’17. Stringent new pollution norms and a coal linkage transfer policy have been instigated to hasten the retirement. Retirement will lower coal consumption by ~30% and will also cut pollution and reduce the tariff burden for state utilities.

Replacement is warranted and pressing
The states’ role in power generation is declining and will trigger a new capex cycle, for energy security. Additionally, with shut-downs we estimate annual requirement of 19-22GW projects to avoid power shortages. Government (CEA) estimates corroborate the requirement of 24GW annually. Rising PLFs should exceed the 2008 peak by FY19-20e, necessitating further investments now – as the power project cycle is six years from concept to commissioning.

Stage-I Capacity utilisation recovery to benefit utilities (Prefer NTPC)
With higher retirement and lower supply addition (just a 2% CAGR over FY17-22E) – we believe capacity utilisation rates are likely to stage a strong recovery. We raise PLF estimates for utilities by 2-3pps beginning FY18E. With 37% volume growth over four years and valuations still at a c20% discount to the historical average, the sector looks attractive.

 

Eoin Treacy's view -

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

Revitalising the electricity utility sector to remove outdated coal fired stations and to build new more efficient operations is a very positive development. It is also a testament to the ability of the new government to remove roadblocks to Indian infrastructure development that investors despaired would ever be achieved under the last administration. 



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October 31 2016

Commentary by David Fuller

Carney to Stay at BOE Until June 2019 to Help Navigate Brexit

Bank of England Governor Mark Carney said he will extend his time in office by a year to 2019 to guide the economy through Britain’s split from the European Union.

Choosing a middle path between leaving in 2018 as planned or remaining until 2021 as entitled, Carney said in a letter to Chancellor of the Exchequer Philip Hammond that by staying until June 2019 he hoped to “contribute to securing an orderly transition to the U.K.’s new relationship with Europe.”

The decision ends months of speculation about Carney’s future that had raged as he led the charge to safeguard financial markets and the economy following June’s referendum.

By providing continuity at the central bank, the 51-year-old Canadian is likely to soothe market concerns over the uncertainties that still lie ahead as the U.K. negotiates its break with the EU.

Staying put is still likely to raise the ire of some Conservative lawmakers. His response to the Brexit vote and his underestimation of the economy’s resilience prompted calls for him to resign, and he had to fend off a clumsy critique of easy monetary policy from Prime Minister Theresa May.

David Fuller's view -

This is good news for the UK government, given occasional rumours that Governor Carney would actually resign or should even be replaced, given his pre-referendum negative views on the impact of a possible Brexit vote.   

Carney was selected and appointed by Prime Minister David Cameron and Chancellor of the Exchequer George Osborne.  Consequently, it is very likely that he was under considerable pressure to take a similar tone on Brexit, not least as anything else would have been very newsworthy, and possibly even seen as disloyalty in some quarters. 

(See also: Carney Backed by U.K. Business Secretary Amid Resignation Talk, from Bloomberg)



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October 31 2016

Commentary by David Fuller

After Descent to Hell, Miners Emerge Blinking Into Daylight

Here is the concluding section of this interesting article from Bloomberg:

“The diversified majors have responded admirably to the pressures they faced last year,” Investec analysts including Jeremy Wrathall, head of global natural resources, said in a note. “Mining companies took the requisite actions.”

Adkerson has also been swabbing the decks. Freeport has tapped shareholders for cash, and sold assets. It expects to get $5.2 billion from already announced sales in the fourth quarter, and this month reported its first quarterly profit in two years. Freeport shares are up more than 60 percent in 2016.

Glencore, the top commodity trader, sold shares, suspended dividends, reined in spending and offloaded unwanted bits of the business. It has pledged to cut debt to as low as $16.5 billion by the end of 2016 from about $30 billion last year. Anglo, after also halting its dividend, is radically shrinking with plans to sell more than half its mines. It’s set to meet a $10 billion debt target in 2016.

Glencore’s shares more than doubled this year and Anglo’s more than tripled as investors weigh the prospects for a return of dividend payments. The FTSE 350 Mining Index gained 0.7 percent on Monday to near a 16-month high.

Yet such gains are down to luck as much as management. China’s decision to reignite its growth with stimulus spending and U.S. reticence to damp its economy by raising interest rates have boosted asset prices. The cost of coking coal has more than tripled in 2016 and thermal coal gained about 90 percent.

Investors will be wary of any return to the overspending of past years.

“There’s a better chance than there has been in the past that management teams have got it,” said Clive Burstow, who helps manage about $475 million at Baring Asset Management Ltd. in London. “They seem to understand that they cannot just go back to the bad old profligate ways. Their destiny is in their hands.”

David Fuller's view -

Mining is the most cyclical of industries and veteran subscribers have seen the cycle repeated many times since the early 1970s.  1) Metal prices trade below the cost of production, causing a reduction in output and a marginal increase in demand.  2) The global economy finally improves but mining companies are very cautious because they over-expanded in the last boom.  3) Metals rebound from their lows and mining companies belatedly jump on the bandwagon by increasing production, although they lack the confidence, capital and manpower to do this rapidly.  4) Metal prices soar as demand increases more rapidly than supply; mining companies increase staff and borrow for expansion and also takeovers.  5) High metal prices weaken demand; central banks lift interest rates to slow GDP growth and curb inflation.  6) Metal prices fall but over-leveraged mining companies are slow to cut production, causing their shares to slump.  7) Corporate losses force miners to reduce manpower, halt or sell greenfield sites, and close less efficient mining projects. 

Where are we in this cycle?

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October 31 2016

Commentary by David Fuller

Capital Flight from China Flashes Warning as Property Boom Deflates

Capital outflows from China are accelerating. The hemorrhage has reached the fastest pace since the currency panic at the start of the year.

The latest cycle of credit-driven expansion has already peaked after 18 months. Beijing has had to slam on the brakes, scrambling to control property speculation that the Communist authorities themselves deliberately fomented.

How this episode could have happened is astonishing, given that premier Li Keqiang has warned repeatedly that excess credit is becoming dangerous and will ultimately doom China to the middle income trap.

It will be clear by early to mid 2017 that the economy is rolling over and that the underlying 'quality of growth' has deteriorated yet further. "We think the recovery will run out of steam early next year," said Chang Liu from Capital Economics.

This stop-go rotation - an all-too familiar pattern - coincides with an incipient liquidity squeeze in global finance as dollar LIBOR and Eurodollar rates ratchet upwards. A rate rise by the US Federal Reserve will clinch it.

Since the commodity rebound is in great part driven by demand for Chinese industry and construction - and by a touching belief that China's economy will sail majestically through 2017 - this looming slowdown spells trouble.

Stress is already visible in the capital account. Morgan Stanley estimates that net outflows reached $44bn in September. Capital Economics thinks the figure was closer to $55bn, led by a surge in purchases of off-shore securities through the Shanghai-Hong Kong Stock Connect Scheme.

This does not yet match the capital flight seen late last year when a mismanaged shift in exchange rate policy set off outflows averaging $70bn a month, and triggered the global equity rout of January and February. But it is nearing a neuralgic threshold for currency traders.

David Fuller's view -

China has an entrepreneurial, organised economy and an increasingly educated population.  However, it also has a heavy-handed ruling bureaucracy, which is a recipe for corruption.  Against that background it is hardly surprising that anyone who makes a significant amount of money, including bureaucrats, wants to get as much of it out of China as it can. 

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



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October 31 2016

Commentary by Eoin Treacy

China's Factory to the World Mulls the Unthinkable: Price Hikes

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

China’s factories may be on the cusp of delivering a new shock to the global economy after years of undercutting rivals with cheaper costs. This time, increases in prices could reverberate around the world.

To understand why, consider the dilemma facing Jiangmen Luck Tissue Mfy Ltd., now caught in a squeeze between surging wages and tepid demand. The company has already slashed staff by half, shaved prices and automated production to survive. Now, with margins razor thin, it’s weighing the first price increases since 2010.

"There’s just no possibility for me to cut prices any more," says deputy director Roger Zhao, 52, whose company is based in the city of Jiangmen in southern Guangdong province.

"Because costs are already pretty high and I don’t see any possibility they’ll go down, I’m seeking opportunities to raise prices a little bit."

That push to recover lost margins -- even as demand remains muted -- was shared by exporters of everything from clocks to jacuzzis interviewed in Guangzhou last week at the Canton Fair, a biannual gathering where 25,000 exhibitors and 180,000 mostly foreign buyers ink export deals in booths spanning exhibition space equivalent to about 3,400 tennis courts.

For the world economy, decisions from companies like Jiangmen Tissue to stop cutting prices -- and even raise them where demand allows -- removes a source of disinflationary pressure. To be decided is whether China, the factory to the world, swings from becoming a drag on consumer prices to a source of pressure nudging them higher.

Eoin Treacy's view -

Chinese factories have been dealing with margin compression for years. Labour costs have been on a steady upward trajectory while commodity prices have been a mixed blessing. However right now both are increasing and despite the danger of losing their competitive edge the first signs of price hikes are emerging. This article from a couple of weeks ago highlights the first rise in China’s producer price index in nearly five years.  



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October 31 2016

Commentary by Eoin Treacy

Gordhan Wins Reprieve as S. African Prosecutors Drop Charges

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

The announcement Monday by National Prosecuting Authority head Shaun Abrahams signaled a dramatic turnaround in the legal pursuit against Gordhan, who was under investigation over the early retirement of a former colleague at the national tax agency that resulted in 1.1 million rand ($80,149) of allegedly wasteful expenditure. Gordhan was scheduled to appear in court on Wednesday. He’s still being probed for overseeing the establishment of an allegedly illegal investigative unit when was the head of the revenue service.

Gordhan and two former colleagues “did not have the requisite intention to act unlawfully,” Abrahams told reporters in Pretoria, the capital. “I have decided to overrule the intention to prosecute. I have directed the summonses to be withdrawn with immediate effect.”

Gordhan, 67, has been a key driver of a campaign to maintain South Africa’s investment-grade credit rating, which is up for review over the next two months. He called the allegations a political stitch-up, and he’s clashed with Zuma over the affordability of nuclear power plants the president wants to build, and the management of state companies and the national tax agency.

“It is certainly ratings-positive,” Rian le Roux, chief economist at Old Mutual Investment Group in Cape Town, said by phone. “I still think there is some chance we may get a reprieve. It is fairly evenly balanced as to whether we get a downgrade.

Eoin Treacy's view -

This is a positive development from the perspective of South African institutional governance remaining resilient in the face of quite intense political pressure. The clashes, often public, between Gordhan and Zuma are a healthy sign that a debate is ongoing on how best to manage the largest economy on the continent. It is to be hoped that Zuma’s influence is contained and he loses the next election.



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October 31 2016

Commentary by Eoin Treacy

Rio Gives Away Giant Iron Ore Field Once Worth Fighting For

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

The writing has been on the wall for a while. The company took a $1.1 billion writedown on Simandou in February. New Rio Chief Executive Officer Jean-Sebastien Jacques said in August “there is no obvious way to take Simandou to the next phase,” and the company hasn’t been able to find a way to finance it.

“It cleans another dead asset off the portfolio,” said Hillcoat, who added that the market doesn’t apply any value to the asset. “In the brave new world we’re in now, you just can’t develop these projects.”

Guinea will want the new owner, also known as Chinalco, to fare better than Rio. The country is counting on the project to double the size of its $6.5 billion economy and turn it into the third-biggest exporter of iron ore. Earlier this year, Guinea blamed project delays on the “ramblings of the technical team in London,” a reference to Rio.

The parties should finalize the deal quickly to establish a new plan for Simandou’s development, Minister of Mines and Geology Abdoulaye Magassouba said in an e-mailed statement.

“This is a very positive event for the project, but we still have many months of work and major challenges ahead,” Magassouba said.

Before the deal was signed on Friday, Simandou was 46.6 percent owned by Rio, 41.3 percent by Chinalco, and 7.5 percent by the government.

 

Eoin Treacy's view -

Investors have lamented the inability of mining executives to conduct successful M&A activity and I’ve even heard more than a few suggest CEOs should be precluded from engaging in mergers as a condition of taking the job. Simandou is another example of a boondoogle project that was initiated when prices were high and abandoned when prices are bottoming. 



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October 31 2016

Commentary by Eoin Treacy

The Bank of Japan's Moment of Truth Decision Day Guide

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

The Bank of Japan’s two-day policy meeting ends Wednesday, with investors anxiously awaiting the outcome of a comprehensive policy review that may set the future course of Governor Haruhiko Kuroda’s monetary stimulus program.

The biggest questions for many are whether the BOJ is willing to increase the record scale of its asset purchases or to cut its negative interest rate further. By doing neither at recent meetings, even as some consumer prices were falling, Kuroda and his board have fueled speculation that the BOJ’s main policy tools are running up against their limits. Taking little or no action today risks reinforcing that view.  

A narrow majority of economists surveyed by Bloomberg expect the BOJ to announce expanded stimulus. Most of the rest forecast action in November, December or next year, while a few predict no additional easing at all. Any weakening of the BOJ’s commitment to push further with stimulus is likely to force the yen higher and weigh on stocks, while a boost from Kuroda may soften the currency and underpin Japanese shares.

 

Eoin Treacy's view -

The essence of the Bank of Japan’s commitment to hold JGB yields at 0% is that it is willing to monetise as much debt as is needed to stimulate asset price inflation in the wider economy which it hopes will lead to economic growth. 



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October 28 2016

Commentary by Eoin Treacy

October 28 2016

Commentary by Eoin Treacy

Tocqueville Gold Strategy Third Quarter 2016 Investor Letter

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

Gold is extremely under owned in Western investment portfolios. Because supplies of above ground stocks normally available to satisfy Western investment demand have been severely depleted by flows to Asian investors, the price dynamics could be explosive.

Gold has enjoyed a stealth bull market since the advent of radical monetary policies around 2000. As the chart below shows, gold has been the best performing asset class since then, a fact that is completely unrecognized by main stream media and conventional investors. The painful correction from 2011 to year end 2015 camouflaged gold’s strength and explains why most investors remain complacent as to systemic risk, intellectually understanding the unsustainability of radical monetary policy but unmotivated to seek gold’s protection.

It seems unlikely that the long term erosion of investment confidence, the onset of a secular bear market in financial assets, and further advances in the stealth bull market for gold will take place in a linear fashion. There are bound to be shakeouts and fake outs along the way to camouflage the underlying reality that the global financial system as we know it is in extremis. We also believe that the current sharp correction in the precious metals complex is a setup for another major advance toward new highs in metal and share prices. We therefore recommend taking advantage of current weakness to build or establish new positions.

Eoin Treacy's view -

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

 I often think that the role of gold as a hedge is misunderstood. It did well in the 1970s because investors were worried about inflation and outperformed from the early 2000’s because people were worried about deflation. Therefore it is probably best to think about gold as a hedge against the best efforts of the monetary authorities to debase the currency; regardless of what that currency might be. 



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October 28 2016

Commentary by Eoin Treacy

Chip Makers Cut Deals as Cars Get Smarter

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

Ford Motor Co.,  BMW AG and others have said they would have self-driving cars on the road in the next few years, while Tesla Motors has a semiautonomous system already on the road. Tesla last week began shipping vehicles that include hardware that could one day be empowered by software, which must be validated and approved by regulators, to operate in a fully autonomous mode. Tesla Chief Executive Officer Elon Musk aims to demonstrate fully autonomous cross-country drive by the end of next year.

Analog Devices Inc. cited auto applications as a key motivation in a deal announced in July to buy Linear Technology Corp. in a cash-and-stock deal valued at $14.8 billion. NXP became the top auto chip supplier by striking a deal valued at nearly $12 billion last year to buy Freescale Semiconductor Inc.

But the market for years has been fragmented among many suppliers with different specialties competing on price. Where an iPhone has one central chip to power its computing functions, many parts of cars have long used separate chips—a situation that could become even more complex as car makers add more features for safety and other purposes.

“Those will all require more processing capability and likely will be supplied by different suppliers who are not exactly working together,” said Dave Sullivan, an automotive industry analyst at AutoPacific, in an interview.

The push toward autonomous driving is a countervailing force, requiring more powerful chips and software that can analyze feeds from cameras, radar and other sensors using technologies such as deep learning. Tesla Motors Inc. has moved toward a central computing system, announcing last week it had picked chip maker Nvidia Corp. as part of the self-driving hardware it has vowed to include in all its new vehicles.

 

Eoin Treacy's view -

There is not going to be a single day when someone turns a switch and the global vehicle fleet becomes autonomous. Rather it is going to happen in a piecemeal fashion and regulators will hopefully pay attention to what is happening in other parts of the world to come up with an idea of best practice. 

If we set aside the timeline for when cars are likely to be fully autonomous for a moment, the big question for auto manufacturers is still how to make new cars attractive enough to encourage people to pay up but not so attractive that they will cannibalise next year’s sales. The answer would appear to offer more added extras in the form of electronics and connectivity regardless of whether cars are autonomous. 

 



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October 28 2016

Commentary by Eoin Treacy

Iron Ore Surges Amid Coal's Record Rally, Lifting Miners' Shares

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

Iron ore is rallying as coal prices surge, lifting the shares of producers in Australia, the world’s largest shipper. The benchmark spot price in China posted the biggest weekly increase since April after rising for the fourth day in five on Friday.

Ore with 62 percent content rose 1.5 percent to $63.96 a dry ton in Qingdao, the highest price since April, according to Metal Bulletin Ltd. Earlier in Asia, futures in Dalian rose for a seventh day, the longest run since 2013, as Singapore’s SGX AsiaClear most-active contract surged for a third week.

After three years of slumping prices as low-cost mine supply rose and China slowed, iron ore has surged in 2016 as Asia’s top economy boosted stimulus, supporting steel demand. Fortescue Metals Group Ltd.’s Chief Executive Officer Nev Power told reporters this week that the Perth-based company expected prices to hold firm in 2017. Recent advances in iron ore have been supported by gains in coal after a supply crunch in China.

“The price of coking coal continues to rise,” supporting iron ore, said Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen. Coking coal, or metallurgical coal, has more than doubled this year, with futures in Dalian hitting a record on Wednesday. Prices rose Friday after sinking a day earlier.

 

Eoin Treacy's view -

China is now at a point in its development where pollution is costing it more money than it was making from the industries causing it. That’s an important tipping point and has been bullish for coking coal and iron-ore prices as some of the most marginal dirtiest Chinese mining operations have been forced to close. 

Iron-ore prices rallied from late last year to break a lengthy progression of lower rally highs and have been forming a first step above the base since April. A sustained move below the trend mean, currently near $56, would be required to question medium-term scope for a successful upward break. 

 



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October 27 2016

Commentary by Eoin Treacy

Swedish Krona Plunges as Riksbank Signals More Easing to Come

This article by Johan Carlstrom and Amanda Billner for Bloomberg may be of interest to subscribers. Here is a section:

Nordea’s chief analyst in Stockholm, Andreas Wallstrom, said he still expects more easing by the Riksbank, "including a rate cut” to minus 0.6 percent in December. “The government bond purchase program is forecast to be expanded by 30 billion kronor ($3.4 billion), equally distributed between government bonds and index-linked bonds,” Wallstrom said.

“The revised repo rate path delivers enough softness to keep the krona on the weak side,” said Knut Hallberg, an analyst at Swedbank AB in Stockholm. “It shows a bigger probability of a cut.”

Some analysts had predicted the Riksbank would announce more easing already on Thursday after inflation missed the bank’s forecasts by a wide margin last month. The annual inflation rate slowed to 1.2 percent in September after peaking at 1.6 percent at the start of the year.

The Riksbank also cut its inflation forecast for next year, from 1.8 percent to 1.4 percent, and for 2018, from 2.6 percent to 2.2 percent. It predicted that unemployment will average 6.7 percent next year, while economic growth will slow to 3.3 percent this year and 2 percent in 2017.

“I don’t really see the logic of making monetary policy more expansionary,” since the economy is doing well, Bergqvist said. Still, “it’s a good tactic that the Riksbank keeps the door open,” he said.

 

Eoin Treacy's view -

The video interview within the above article is quite illustrative of the complacency of central banks when married to a narrowly defined measure of inflation. Riksbank Governor Stefan Ingves quite clearly admits that a bubble is expanding in the Swedish property market and in the same breath says it is not within the remit of the central bank to do anything about it. In fact, like other central banks asset price inflation is viewed as a positive despite the fact household debt is at a record and the bubble is still inflating. 



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October 27 2016

Commentary by Eoin Treacy

Selling Sweeps Global Government Bonds; U.S. 10-Year Yield Above 1.8%

This article by Min Zeng for the Wall Street journal may be of interest to subscribers. Here is a section:

The combination of low global growth, subdued inflation and ultra loose monetary policy among major central banks has been sending bond yields to unprecedented levels. Yet over the past few weeks, the narrative has appeared to shift.

Concerns have been growing over less support for the bond market from central banks in Japan and Europe as their bond buying is reaching limits. Economists and analysts have started talking about a shift toward fiscal stimulus to combat low growth. Such fiscal action typically raises supply of government debt for funding and is seen as a negative for long-term government bonds.

Demand for haven bonds has also been diminishing as data lately have pointed to some positive signs on the global economic outlook. Meanwhile, inflation expectation is rising, driven by a rally in crude oil prices this month and comments from major central banks to tolerate inflation slightly above their desired targets to tackle still low inflation.

 

Eoin Treacy's view -

Central banks are expressing some reluctance to continue with the same tired strategies that have fostered perhaps the greatest asset price inflation across multiple asset classes in history while failing to stock the kind of inflation central banks measure. Concurrently inflationary pressures are mounting with healthcare and education leading but Chinese producer prices and wages are two important additional factors. 



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October 27 2016

Commentary by Eoin Treacy

OPEC May Need Help to End the Global Glut of Oil

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

If OPEC reduces output to 32.5 million barrels a day -- a cut of 900,000 a day from September levels -- it would be pumping slightly less than the amount needed to meet demand in 2017, the group’s monthly report from Oct. 12 shows. Inventories would contract as a result, but only by 36.5 million barrels over the course of the year, a negligible impact on a stockpile surplus the group estimated at 322 million barrels above the five-year average in August.

If OPEC doesn’t act to reduce stockpiles next year, Societe Generale’s price forecasts would probably have to be revised lower, Mike Wittner, head of oil-market research, said in an e-mailed note. Over the first three quarters of 2017, the bank currently sees Brent averaging $55 a barrel and West Texas Intermediate at $53.50.

 

Eoin Treacy's view -

If oil prices are to be massaged higher Saudi Arabia and Russia will have to come to an agreement to curtail supply and by more than has already been agreed. Such an agreement would require major sacrifices on both their counts since Saudi Arabia is engaged in a rationalisation of generous handouts its citizens have been accustomed to for decades. Meanwhile Russia is actively engaged militarily in both Ukraine and Syria as well as having expensive plans to revitalise its nuclear arsenal. These decisions would also have to be taken in the knowledge that any additional rally in oil prices will encourage even more US unconventional supply back into the market. 



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October 26 2016

Commentary by David Fuller

Jeremy Grantham Says Presidential Cycle Investing Is Dead

My thanks to a subscriber for this article about GMO’s Grantham, speaking at a Morningstar Investment Conference.  Here is the opening:

The rising power of the Federal Reserve has rendered the presidential cycle of market investing largely dead, according to Jeremy Grantham, the chief investment strategist of asset manager GMO.

“They are constantly looking for excuses to push down on interest rates and drive asset prices higher to get some wealth effect. I don’t trust them any more to play the easy presidential cycle,” Grantham said in a recent interview with the Financial Times.

The GMO founder, based in Boston, has shown through research dating back to 1932 that the third year of a president’s term could top those of the other three years of their leadership.

On average, U.S. stocks improve about 0.2% each month in the first, second and fourth years of a presidential cycle. However, in the third, stocks return an average 0.75% to 2.5%.

“The presidential cycle owed everything to the Fed. The Federal Reserve, completely innocently, always decided to come to the aid of the party in power,” said Grantham.

The general theory he has described entailed revving up the economy in the third year of a president’s term, so that the economic benefits would be felt as votes were cast in the fourth year. Stock markets, which generally signal anticipated economic developments, tend to move up ahead of this growth in year three, according to Grantham.

The Federal Reserve board members did not take action to stimulate the economy earlier in the cycle “or everyone would have forgotten about them by year four,” he states.

“The Fed can move stock prices. In the old days it was about all they did. They helped along year three, and their efforts in year three would feed through into the economy in year four -- which it did,” Grantham told the FT.

David Fuller's view -

I think Jeremy Grantham is right, although I have not previously heard this view stated so definitively.  However, veteran subscribers may recall me writing about this cycle in previous decades.  Beyond a brief post-presidential election honeymoon, I used to describe the first two years of a new four-year cycle as equivalent to Hercules cleaning the Augean Stables

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October 26 2016

Commentary by David Fuller

Email of the day

More on EU Brexit anger (note, emails are usually posted anonymously but this is an important follow-up from Dr David Brown’s online email posted yesterday, where subscribers who post emails are also named.  

David,
I thought subscribers might be 'amused' by the article copied below which was published recently. The author is a British lady, hailing from the Plymouth area, and she worked for a while in the hi-tech cluster around Cambridge before moving to Brussels. If one is looking for evidence of the 'anger and fear' of the first stage mentioned above, well here it is.

One can sympathise with her angst as she sees her apparently secure career potentially undermined after Brexit, if not before. But one can only wonder how she thinks this hysterical writing will help her gain employment back in the UK. 'Throwing toys out of the pram' comes to mind.

Her prospects apart, I can only assume her text reflects the mood in Brussels. If any subscriber has direct contact with Theresa May they may wish to forward it to her!

In the Brexshit, by Claire Skentelbery, Secretary General of the European Biotechnology Network.

Her comment on the impact on UK science and our universities does need answering. It is far from the black and white she suggests. Generally 5 of our universities rank in the top 10 in the world, with the remainder of Europe struggling to make the top 20.  It is often asserted that the UK's leadership depends on EU funding - if so why have other countries not kept up with the UK? It is also often asserted that the UK has received a higher percentage of funding from the EU for science than other EU countries. Our universities were strongly in favour of 'remaining' and Cambridge, where I live, was one of few cities returning a majority for 'remain', along with London.

However, the facts are not so clear. A House of Lords report published in April before the referendum states "Despite many assertions that the UK performs very well in terms of EU funding for science and research, it has proved challenging to define unambiguously the level of EU spending on R&D in the UK and how this compares with other Member States." That blows one huge hole in the statement made by Claire Skentelbery.

And the universities themselves are beginning to change their tune. The Russel 20 group is the 'trade body' for the UK's top 20 universities. Its chairman Sir David Greenaway has this week argued that a world where the UK is no longer part of the EU will give universities the freedom they need to exceed expectations.

Another blow for her article is the unmentioned fact that a country does not need to be a member of the EU to access research funding. The House of Lords report states: "Access to many research infrastructures is available to non-EU Member States in continental Europe as well as to countries outside Europe. We found there to be occasional confusion with regards to which infrastructures are EU-managed and which are European in nature." Matt Rigby has written and presented extensively on this misconception which continues to be perpetuated by remainers.

The House of Lords report also states:

"While the UK science community was enthusiastic about EU membership, we have uncovered some qualifications. We heard mixed views on the impact of EU regulations. The benefits of harmonisation were widely recognized but some specific areas, such as genetic modification and clinical trials, were highlighted as causing UK business and research to be disadvantaged compared to competitors outside the EU."

In my own field of research, some EU regulations have been highly damaging to the UK's science base. Problems were highlighted by this article published by the FT 3 years ago: Drug test rules ‘would eliminate biotechnology sector in UK’.

Professor John Bell of Oxford University recently pointed to other damage the EU has done to UK science in an article published by the FT in which he explained the destruction of the UK's leadership in human clinical trials of new drugs. 

He writes about Brexit:

The opportunities in this new world extend well beyond funding issues. The cultural, ethical and philosophical environment that supports science is in many ways fundamentally different in the UK compared to many European countries. Britain is more inclined towards a relatively liberal risk-based regulatory environment that allows fields to move quickly — to reflect on ethical issues but not to over-regulate.

The EU, by contrast, has a record of deep regulatory conservatism, attempting to legislate and control many aspects of science that are not deemed here in the UK to present a significant danger. Consider clinical trials. In the early 1990s Britain was recognised as one of the best places in the world to test new drugs on patients. Decisions were quick and bureaucratic obstacles were few.

The introduction of the European Clinical Trials Directive in 2004 ended all this.

Needless regulatory hurdles associated with huge inefficiencies and delays in effect killed off the clinical trial industry in the UK, where it declined to just 2 per cent of global trials.

Maybe now we can regain our leadership in clinical research.

Finally, to address the issue of movement of scientists into the UK after Brexit, it beggars belief to think that skilled scientists would be denied entry. That seems highly unlikely to me.

In summary, there are gains and losses for UK science from EU membership. As you know, I voted 'remain' but only just, it was a close call. Brexit is certainly not 'all loss' as portrayed in Skentelbery's emotional and uninformed article. I am sure that UK science can thrive outside the EU once emotion fades and transitional issues are resolved.

 

David Fuller's view -

Thank you so much David.  On behalf of all subscribers you have generously offered a valuable service in speaking out on this issue.  I hope readers will repost or forward this email to anyone who may be interested in it, from politicians, including the Prime Minister, to university professors, Brexiteers and also Remainers.      



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October 26 2016

Commentary by David Fuller

The Eurozone is Turning Into a Poverty Machine

There are constant bank runs. The bond markets panic, and governments along its southern perimeter need bail-outs every few years. Unemployment has sky-rocketed and growth remains sluggish, no matter how many hundreds of billions of printed money the European Central Bank throws at the economy.

We are all tediously aware of how the euro-zone has been a financial disaster. But it is now starting to become clear that it is a social disaster as well. What often gets lost in the discussion of growth rates, bail-outs and banking harmonisation is that the eurozone is turning into a poverty machine.

As its economy stagnates, millions of people are falling into genuine hardship. Whether it is measured on a relative or absolute basis, rates of poverty have soared across Europe, with the worst results found in the area covered by the single currency.

There could not be a more shocking indictment of the currency’s failure, or a more potent reminder that living standards will only improve once the euro is either radically reformed or taken apart.

Eurostat, the statistical agency of the European Union, has published its latest findings on the numbers of people “at risk of poverty or social exclusion”, comparing 2008 and 2015. Across the 28 members, five countries saw really significant rises compared with the year of the financial crash. In Greece, 35.7pc of people now fall into that category, compared with 28.1pc back in 2008, a rise of 7.6 percentage points. Cyprus was up by 5.6 points, with 28.7pc of people now categorised as poor. Spain was up 4.8 points, Italy up 3.2 points and even Luxembourg, hardly known for being at risk of deprivation, up three points at 18.5pc. 

It was not so bleak everywhere. In Poland, the poverty rate went down from 30.5pc to over 23pc. In Romania, Bulgaria, and Latvia, there were large falls compared to the 2008 figures – in Romania for example the percentage was down by seven points to 37pc.

What was the difference between the countries where poverty went up dramatically, and those where it went down? You guessed it. The largest increases were all countries within the single currency. But the decreases were all in countries outside it.

David Fuller's view -

I receive the occasional very polite email from Europeans in the EU who generally say they like the service but couldn’t I post some more balanced comments on the EU, including both sides of the story? Well, I previously posted a few emails by an interesting multinational subscriber who for a while was a PR rep of sorts for the EU, until he too became disillusioned.    

Actually, and this may surprise a few of you, I genuinely wish the EU had turned out to be a great success.  That would have been wonderful for Europe and good for the global economy.  I always felt that Europe could have been a very successful free trade area of independent sovereign states, which is what I voted for in the mid-1970s. 

Unfortunately, that proved to be a Trojan Horse for ‘ever more Europe’ and a ruinous single currency without the Federal State, which Europe’s leaders actually decided they did not want.  The rest you know and there is no need for me to rake over those coals. Sadly, the EU is the biggest tragedy for the European Continent since WWII.   

A PDF of Matthew Lynn's report is posted in the Subscriber's Area.



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October 26 2016

Commentary by David Fuller

Sir Howard Davies: Heathrow Is the Only Choice For Airport Expansion

Here is the opening of this authoritative report on an inevitably contentious decision, reported by The Telegraph:

Heathrow Airport alone must be given the go ahead for expansion, the man appointed by the Government to review airport capacity says today.

Sir Howard Davies, the chair of the airports commission, said the case for expanding Heathrow is now "overwhelming" and has "strengthened in recent months" post-Brexit.

Writing in today's Daily Telegraph, Sir Howard's comments come just a day before Theresa May is set to announce the government's favoured option on airport expansion and are likely to reflect government thinking.

Last week it was suggested that Mrs May could announce expansion to both Heathrow and Gatwick, but Sir Howard's comments - coming just 24 hours before the announcement - suggest this is unlikely.

He warns that failure to expand Heathrow alone would be "a mistake".

Sir Howard, who spent four years examining the options on airport expansion on behalf of the government also criticises David Cameron over his failure to make a decision sooner.

He brands the former Prime Minister "an immovable object" 

Sir Howard says: "The arguments for making a decision now, and for Heathrow, have strengthened in recent months. Overseas, the lack of a decision is seen as a symbol of Britain’s inability to decide on its future as a trading nation.

"And the need for a clear strategic direction is more important since the referendum result. The rhetoric about becoming a European Singapore with a “blue water” trading focus seems empty if we cannot connect to the new markets we wish to serve.

"Gatwick is largely a European short-haul airport. It is also oriented towards outward tourism. About 70 per cent of its tourist passengers are Brits going to the sun. Sadly, relatively few residents of Marbella and Corfu come here for their summer break.

"At Heathrow the tourist traffic is largely inbound. With our huge balance of payments deficit we need more high-spending American and Asian tourists to balance the books."

David Fuller's view -

As a Londoner, I am not thrilled to have Heathrow expanded.  However, as a citizen of the UK, I think this is the sensible decision. 

Sir Howard Davies is a smart, experienced and unsentimental chair of the airports commission.  I cannot think of anyone better qualified to have made this decision.  Any decision was certain to be controversial.  However, as with Brexit, our politicians now need to unite behind the decision, approve it and move on in the interests of the country.  We would be a pathetic and poorer laughing stock nation if narcisstic, self-important politicians dragged this through the courts in a painful, expensive delay, which this country neither wants nor can afford. 

A PDF of this report is posted in the Subscriber's Area.

 

Please note: I will be away on Thursday and Friday.



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October 26 2016

Commentary by Eoin Treacy

Tesla Earnings: The Moment of Truth

This article by Stephen Russolillo for The Wall Street Journal may be of interest to subscribers. Here is a section:

Using generally accepted accounting principles, Tesla is expected to log a loss of 59 cents a share. Since going public in 2010, Tesla only has reported one profitable quarter under this basis. That came in 2013, when the stock surged from the mid-$30s to nearly $200. It has been volatile ever since, currently still trading around $200 with a silly valuation.

Whether or not the quarter is profitable, investors will want to hear about future production, which they are counting on to justify Tesla’s share price. Earlier this month, Tesla reported third-quarter deliveries of its vehicles more than doubled from a year earlier to 24,500. It also reiterated its forecast earlier this month that it would produce 50,000 vehicles in the second half of 2016. And it maintains it will deliver 500,000 cars by 2018, thanks to the Model 3 mass-market sedan.

But Tesla has repeatedly overpromised and underdelivered. In the past five years, Tesla has failed to meet more than 20 of Mr. Musk’s projections, according to an analysis by The Wall Street Journal.

 

Eoin Treacy's view -

This is a big week for earnings with Apple yesterday, Tesla today, Alphabet tomorrow and Amazon on Friday. Tesla makes cars people aspire to own and want to be seen driving. That’s something not many car manufacturers can brag about. However there is nothing easy about starting a car company from scratch even if electrc cars have nearly two thirds fewer parts than conventional vehicles.



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October 26 2016

Commentary by Eoin Treacy

Email of the day on virtual reality and augmented reality

The Gartner curve you posted indicates that Augmented Reality and VR are approaching or in 'payback' phase. If so this ETF could be a good investment vehicle. Purefunds Video Game Technology ETF (GAMR) Can you please add it to the Chart Library. Grateful thanks

Eoin Treacy's view -

Thank you for this suggestion and I agree that the video gaming sector is a growth engine quite apart from the evolution of virtual and augmented reality gaming. The question is no longer about whether people will play games, regardless of gender, age or ethnicity, but rather which will be the most effective platforms to deliver the media. Right now mobile apps are by far the most popular because everyone has a phone. 



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October 26 2016

Commentary by Eoin Treacy

Aetna CEO Says Young People Pick Weekend Beer Over Obamacare

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

“As the rates rise, the healthier people pull out because the out-of-pocket costs aren’t worth it,” Bertolini said at Bloomberg’s The Year Ahead Summit in New York. “Young people can do the math. Gas for the car, beer on Fridays and Saturdays, health insurance.”

Premiums for health plans sold to individuals under the ACA, known as Obamacare, are going up by about 25 percent on average for next year. Bertolini said that as costs rise, more individuals will decide not to buy health plans. That’ll push premiums even higher, unless a new president and lawmakers can find fixes for the new markets created by the 2010 health law.

“What happens is the population gets sicker and sicker and sicker and sicker,” Bertolini said. “The rates keep rising to try and catch it. It’s a fruitless chase, and ultimately you end up with a very bad pool of risk.”

The government has emphasized that subsidies are available for many people to help cushion the premium increases. When they are taken into account, about 77 percent of current ACA enrollees will be able to buy health insurance for $100 or less a month, the U.S. said in a report on Monday.

 

Eoin Treacy's view -

When I got my renewal for insurance from Covered California, the local health insurance marketplace, the premium had risen 29% over last year. The only reason it wasn’t higher is because they also raised the deductible and offered less coverage. That’s for a family of four who are healthy, have no allergies, take no medications and exercise regularly. I just did the math and I would be nearly $4000 better off if my family did not have health insurance and opted instead to pay the fine. I’ll buy insurance because I see the value in having cover but it’s not a no-brainer decision.   



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October 25 2016

Commentary by David Fuller

Metals Jump on Economic Optimism as Rand Strengthens With Miners

Here is the opening of this informative report from Bloomberg:

Metals are regaining their luster, a sign the global economy is becoming more resilient, helping to boost stocks and currencies of commodity-producing nations.

Iron ore surged by the daily limit of 6 percent on the Dalian Commodity Exchange and rising steel prices in China spurred a rally from aluminum to zinc. Currencies of resource-exporting nations, South Africa and Australia, led gains versus the dollar. The Stoxx Europe 600 Index headed for its strongest close in three weeks as earnings reports fueled optimism about the profitability of the region’s companies. Spanish and Italian bonds outperformed top-rated German bunds as the region’s improving political and economic outlook sapped demand for haven assets.

Industrial metals have gained steadily this year with an index of London Metal Exchange contracts poised for the first annual increase since 2012 as a pickup in manufacturing in the U.S. and euro area point to an economy that’s getting more robust. A report Tuesday showing German business sentiment rose to the highest level in more than two years in October added to the sense of optimism. Caterpillar Inc. is among companies scheduled to release earnings that may provide more insight on the sustainability of the recovery in energy and mining. Apple Inc. is due to announce earnings after markets close Tuesday.

“We’ve had a whole host of better-than-expected manufacturing data,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Hellerup, a Copenhagen suburb. “Strong gains in China, led by steel and iron ore, are supporting the sentiment, which in turn has attracted increased speculative trading across the metals space.”

David Fuller's view -

I think there are several key factors here.  1) Commodity producers are finally wising up and recalling that supply is the most important variable in the price structure, even for industrial resources.  Supply can change quickly, either due to accidents or wars in producer regions but the most significant change is producer cutbacks, preferably publicised.  Producers have gradually increased cutbacks in the production of metals this year. 

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October 25 2016

Commentary by David Fuller

Fixing American Infrastructure

Here is the opening of a Hillary Clinton fund raising program:

In my first 100 days as president, I will work with both parties to pass a comprehensive plan to create the next generation of good jobs. Now the heart of my plan will be the biggest investment in American infrastructure in decades, including establishing an infrastructure bank that will bring private sector dollars off the sidelines and put them to work there. 

In America, we build great things together—from the transcontinental railroad to the interstate highway system to the Hoover Dam. But today, our investments in infrastructure are roughly half what they were 35 years ago. That’s why Hillary Clinton has announced a $275 billion, five-year plan to rebuild our infrastructure—and put Americans to work in the process. She’ll work to pass her infrastructure plan in her first 100 days of office, as part of a comprehensive agenda to create the next generation of good-paying jobs.

David Fuller's view -

That is my bold highlight above focussing on the $275 billion, five-year plan to rebuild USA infrastructure.  This is a very sensible idea and about time.  It should also have bipartisan support, even if Democrats do not control Congress following the election. 

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October 25 2016

Commentary by David Fuller

Email of the day

On the EU’s response to Brexit:

The current response to Brexit from the EU leadership reminds me of the cycle of emotions that investors are said to go through when things turn against them. That cycle may provide a guide to coming events.

First there is denial, then anger and fear. The EU shows signs of being in these stages. One would hope to move on by next summer but I wonder if these stages may persist through most of 2017 due to rhetoric of politicians during the elections in France and Germany next year. 

Then there is desperation and panic. So the UK may have to handle these emotions from the EU in the future, probably after the continental elections as French and German politicians are unlikely to express such emotions when trying to get elected. 

Experienced investors will know this is followed by emotions such as despondency, capitulation and contempt for the market. The time-table suggested above would push this into 2018. If it coincides with a bear market too, with the EU / ECB having few viable policy options, then the mood in the EU will be bad!

It can be difficult to move beyond this and accept a new opportunity but that is the key transition required. We may be up against it time-wise after triggering Article 50 in the first quarter of 2017 if many months of possible negotiation are lost next year due to the French and German elections. 

So overall, I do not have high hopes for a negotiated settlement. I trust our government will realise it needs a strong and viable plan for this outcome. And if so, maybe they should just get on with it as soon as possible.

David Fuller's view -

Thank you for this very astute observation. I agree with you and maintain that we should leave the EU following the declaration of Article 50, once we see that subterfuge is being used as delaying tactic.

While we are still in the EU, their leaders will be negotiating on the basis of what they have to lose. However, once the UK has left, EU leaders will be negotiating on the basis of what they may wish to regain – free trade and mutual cooperation with the UK, for instance.   



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October 25 2016

Commentary by David Fuller

Mobius Says Gold Will Gain in 2017 as Fed Goes Slow on Hikes

Here is the opening of this interesting report from Bloomberg:

Mumbai: Gold is set to advance by as much as 15% before the end of next year as the Federal Reserve goes slow on increasing interest rates and the dollar remains subdued, buoying bullion demand, according to Templeton Emerging Markets Group.

“The Fed is going to increase the rates by a little bit but not excessively and there is no guarantee that a rise in interest rates will put people off,” executive chairman Mark Mobius said in an interview at a Bloomberg event in Mumbai. “A lot will depend on the real rates.”

Bullion has rallied 19% in 2016 as concern over the health of the global economy, loose monetary policies and the UK’s vote to leave the European Union fanned demand. After raising rates last December for the first time in almost a decade, Fed policy makers have stood pat on borrowing costs in the six meetings since. While the dollar gained to the highest since March on Friday on speculation that rates may soon climb, it remains lower this year.

‘Not that strong’

“The U.S. dollar is not that strong and may even decline,” said Mobius, who also highlighted prospects for increased central bank buying of bullion. “So if that happens, gold gets more expensive.”

David Fuller's view -

I have always liked Mark Mobius, a very knowledgeable and calm optimist who remains dapper at the age of 80.  I would not want his dry cleaning bill for those pale suits but I am sure he can afford it.

During their recovery phases precious metals often outperform during 4Q and 1Q, not least on Chinese and Indian buying.  I am not sure how much of a factor that might be in the current, uncertain environment.  Nevertheless, I would not rule out the possibility and they should at least see further recoveries from the current oversold positions.      



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October 25 2016

Commentary by David Fuller

October 25 2016

Commentary by Eoin Treacy

Ignoring the Debt Problem

Thanks to a subscriber for this article by Paul Volcker and Peter Peterson that appeared in the New York Times. Here is a section:

Whoever wins, the new president will eventually face fiscal realities that force him or her to develop strategies for decreasing the national debt as a share of the economy over the long term.

Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support.

It’s not just federal spending that would be squeezed. The projected rise in federal deficits would compete for funds in our capital markets and far outrun the private sector’s capacity to save, to finance industry and home purchases, and to invest abroad.

Instead, we’d be dependent on foreign investors’ acquiring most of our debt — making the government dependent on the “kindness of strangers” who may not be so kind as the I.O.U.s mount up.

We can’t let that happen — not if we want an America that is able to provide growth and stability at home while maintaining global leadership. We would risk returning with a vengeance to stagflation — the ugly combination of inflation and economic stagnation that we tasted in the 1970s.

Eoin Treacy's view -

This is a cautionary tale from two highly experienced, credible students of the market. What they propose is simple and, if adopted now, would remove many of the issues fiscally minded citizens and investors worry about. However since it most often takes a crisis to force real change we can be almost assured that whoever wins the US presidential election the national debt will expand in order to fund a fiscal spending plan focused on infrastructure. 



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October 25 2016

Commentary by Eoin Treacy

Email of the day on revisions to data

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

Eoin Treacy's view -

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



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October 25 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 25 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 24 2016

Commentary by David Fuller

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

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

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

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

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

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

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

David Fuller's view -

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

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



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October 24 2016

Commentary by David Fuller

Sweden Holds Out Olive Branch to Brexit Britain

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

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

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

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

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

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

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

And:

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

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

David Fuller's view -

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

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

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

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



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October 24 2016

Commentary by David Fuller

Email of the day

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

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

David Fuller's view -

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

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



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October 24 2016

Commentary by David Fuller

Inflation: Ticking Time Bomb for Next Year

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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October 24 2016

Commentary by David Fuller

Mobius Says India Small Caps May Gain More Amid Modi Plans

Here is the opening of this topical report from Bloomberg:

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

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

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

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

David Fuller's view -

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

This item continues in the Subscriber’s Area.



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October 24 2016

Commentary by Eoin Treacy

DDOS Attack Map: What Websites & Areas Are Affected?

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

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

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

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

Eoin Treacy's view -

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



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October 24 2016

Commentary by Eoin Treacy

Review of Bank relative performance

Eoin Treacy's view -

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

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



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October 24 2016

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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



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October 21 2016

Commentary by David Fuller

The Only Thing on Autopilot at Tesla Is the Hype Machine

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

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

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

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

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

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

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

David Fuller's view -

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

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

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



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October 21 2016

Commentary by David Fuller

EU Is In No State to Snub or Bully Britain

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

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

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

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

David Fuller's view -

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



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October 21 2016

Commentary by David Fuller

Why Corporate America Debt Is a Major Risk

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

 



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October 21 2016

Commentary by David Fuller

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

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

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

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

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

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

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

David Fuller's view -

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

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



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October 21 2016

Commentary by Eoin Treacy

October 21 2016

Commentary by Eoin Treacy

MIT EmTech Conference

Eoin Treacy's view -

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

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

 



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October 21 2016

Commentary by Eoin Treacy

Concentrated Investing

Eoin Treacy's view -

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

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

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

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

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

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

 



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October 21 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 20 2016

Commentary by David Fuller

Fed Risks Repeating Lehman Blunder as US Recession Storm Gathers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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October 20 2016

Commentary by David Fuller

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

Here is the opening of this topical article from Bloomberg:

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

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

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

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

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

David Fuller's view -

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

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



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October 20 2016

Commentary by David Fuller

WikiHillary for President

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

Thank God for WikiLeaks.

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

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

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

WikiHillary? I’m with her.

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

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

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

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

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

David Fuller's view -

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

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October 20 2016

Commentary by David Fuller

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

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

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

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

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

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

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

David Fuller's view -

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



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October 19 2016

Commentary by David Fuller

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

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

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

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

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

Oil jumps 6% as OPEC surprises with production cut 

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

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

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

David Fuller's view -

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

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

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

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October 19 2016

Commentary by David Fuller

Why It Is Time for a New Campaign for Brexit

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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

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



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October 19 2016

Commentary by David Fuller

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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October 18 2016

Commentary by David Fuller

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

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

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

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

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

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

David Fuller's view -

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

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

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October 18 2016

Commentary by David Fuller

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

Here is the opening of this interesting article from Bloomberg:

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

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

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

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

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

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

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

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

David Fuller's view -

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

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October 18 2016

Commentary by David Fuller

The Weekly View: We Favor Stocks and Corporate Bonds

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

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

David Fuller's view -

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

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October 17 2016

Commentary by David Fuller

Euro House of Cards to Collapse, Warns ECB Prophet

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

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

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

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

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

And:

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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October 17 2016

Commentary by David Fuller

Where to Invest $10,000 Right Now

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

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

Here’s how.

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

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

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

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

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

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

David Fuller's view -

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

What should we make of this?

This item continues in the Subscriber’s Area.



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October 17 2016

Commentary by David Fuller

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

Here is the opening of this topical article from Bloomberg:

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

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

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

David Fuller's view -

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

This item continues in the Subscriber’s Area.



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October 17 2016

Commentary by David Fuller

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

Here is the opening of this interesting article from Bloomberg:

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

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

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

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

David Fuller's view -

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



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October 14 2016

Commentary by Eoin Treacy

October 14 2016

Commentary by Eoin Treacy

Is the Deepwater Dead?

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

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

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

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

Eoin Treacy's view -

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

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



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October 14 2016

Commentary by Eoin Treacy

Your money market fund has changed

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

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

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

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

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

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

Eoin Treacy's view -

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



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October 14 2016

Commentary by Eoin Treacy

Email of the day on South Africa

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

Eoin Treacy's view -

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

 



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October 14 2016

Commentary by Eoin Treacy

Google and 3D Printing Buildings

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 13 2016

Commentary by David Fuller

Hydrogen Heating a Step Closer as Government Adviser Backs UK Trials

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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



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October 13 2016

Commentary by David Fuller

October 13 2016

Commentary by David Fuller

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

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

Low-Risk Plan: ‘Shot Through the Heart’

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

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

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

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

The logic behind such a plan is…

David Fuller's view -

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

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

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



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October 13 2016

Commentary by David Fuller

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

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

David Fuller's view -

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

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

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



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October 13 2016

Commentary by Eoin Treacy

I have seen the future and his name is Kevin

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

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

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

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

 

Eoin Treacy's view -

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

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



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October 13 2016

Commentary by Eoin Treacy

Email of the day on medical innovation

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

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

 

Eoin Treacy's view -

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

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

 



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October 13 2016

Commentary by Eoin Treacy

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

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

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

 

Eoin Treacy's view -

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



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October 12 2016

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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

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

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



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October 12 2016

Commentary by David Fuller

Soaring Gilt Yields are a Bigger Problem than the Pound Slide

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

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

Investors are reeling, and for good reason.

So what is happening?

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

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

There are cons as well as pros to this.

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

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

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

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

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

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

David Fuller's view -

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

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



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October 12 2016

Commentary by David Fuller

Four Ways the UK Can Take Advantage of a Weaker Pound

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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October 12 2016

Commentary by David Fuller

Email of the day

On dealing with EU countries once out of the EU:

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

David Fuller's view -

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

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

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



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October 12 2016

Commentary by David Fuller

The Markets Now

Held last Monday evening at London’s Caledonian Club.

David Fuller's view -

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

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



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October 12 2016

Commentary by Eoin Treacy

Dollar Advances for a Third Day Versus Euro Before Fed Minutes

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

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

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

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

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

Eoin Treacy's view -

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

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



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October 12 2016

Commentary by Eoin Treacy

Baidu is bringing AI chatbots to healthcare

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 12 2016

Commentary by Eoin Treacy

Email of the day on Brexit and Fanuc

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

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

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

 

Eoin Treacy's view -

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



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October 12 2016

Commentary by Eoin Treacy

Thailand King Critical, What happens if he dies?

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

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

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

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

 

Eoin Treacy's view -

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



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October 11 2016

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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



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October 11 2016

Commentary by David Fuller

Email of the day 1

On sterling’s current slide:

This article makes a lot of sense.

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

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

David Fuller's view -

Thanks for your email and kind words.

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

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

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

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

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

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

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

And:

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

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

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

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

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

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



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October 11 2016

Commentary by David Fuller

The Markets Now

Held Monday evening at London's Caledonian Club.

David Fuller's view -

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

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



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October 11 2016

Commentary by David Fuller

Email of the day 2

On a “hard Brexit”:

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

David Fuller's view -

Thanks and well said.  I could not agree more.



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October 11 2016

Commentary by David Fuller

Email of the day 3

On UK fracking:

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

David Fuller's view -

Thank you – powerfully said and I certainly agree.



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October 11 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 11 2016

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 11 2016

Commentary by Eoin Treacy

Email of the day on South Korea

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

Eoin Treacy's view -

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



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October 11 2016

Commentary by Eoin Treacy

Illumina Dives as Quarterly Revenue Falls Short of Forecast

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

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

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

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

 

Eoin Treacy's view -

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



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October 10 2016

Commentary by Eoin Treacy

Exmed Conference 2016

Eoin Treacy's view -

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

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

Here are some of the themes that are evolving:



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October 10 2016

Commentary by Eoin Treacy

Email of the day on blockchain and healthcare

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

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

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

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

And

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

Eoin Treacy's view -

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

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



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