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July 15 2019

Commentary by Eoin Treacy

Video commentary for June 15th 2019

Eoin Treacy's view -

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

Some of the topics covered include: China growth moderates but market expects assistance, copper steadies, nickel outperforming, oil eases, gold steady, silver and platinum firming, Wall Street steady, bonds firm, Dollar eases particularly against emerging market currencies.



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July 15 2019

Commentary by Eoin Treacy

Saut Strategy July 15th 2019

Thanks to a subscriber for this report by Jeffrey Saut. It focuses on a defence of monitoring charts which may be of interest. Here is a section:

Eoin Treacy's view -

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

The charts tell us everything people have already done with their money and they offer the clearest reality check on our personal theories for market action. The simple fact is that if our view of the market is not support by the price action then we need to change it.



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July 15 2019

Commentary by Eoin Treacy

EM Succumbs to Sub-Zero Epidemic as Debt Pile Doubles in a Week

This article by Selcuk Gokoluk for Bloomberg may be of interest to subscribers. Here it is in full:

A sinkhole of negative-yielding debt in emerging markets has doubled in size over the past week. This time last year it was non-existent.

The amount outstanding soared to $246 billion, driven mostly by the growing pile of corporate debt with sub-zero rates, which almost tripled in seven days, according to data compiled by Bloomberg.

Corporate heavyweights such as China Everbright Bank Co. and Petroleo Brasileiro SA, and sovereigns including Poland and Hungary have seen their rates drop below zero after a dovish turn at Federal Reserve and the European Central Bank sparked a mad dash for yield. Emerging-market bonds handed investors 3.5% over the past two months, more than a percentage point above returns on U.S. Treasuries, according to Bloomberg Barclays indexes.

The amount of negative-yielding corporate bonds almost tripled to $109 billion from a week ago
Sovereign bonds with sub-zero rates climbed about 50% to $136 billion

“This is a global phenomenon, not an EM phenomenon,” said Warren Hyland, who manages emerging-market debt at Muzinich & Co. in London. “Ultimately if less and less of bonds generate a positive yield, that means more and more people are looking for a positive-yielding bond and EM has more of that than elsewhere.”

Eoin Treacy's view -

Negative yields are a problem for investors and represent a massive momentum trade for traders. Moving further out the risk curve is an inevitability for many asset managers and the destination for flows will heavily depend on mandates. Emerging markets are a particularly attractive destination for fixed income investors if they have the currency on their side.



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July 15 2019

Commentary by Eoin Treacy

Bitcoin Tumbles as Trump Critique Tests Stellar Run for 2019

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

The tumble comes days after U.S. President Donald Trump criticized digital coins on the heels of this year’s stellar rally. Trump wrote on Twitter Thursday that he is “not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” adding that “Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity.”

Bitcoin “continues to trade lower as comments from President Trump put downward pressure on the cryptocurrency,” said Alfonso Esparza, senior market analyst at Oanda Corp. in Toronto. Drawing Trump’s ire means “it could fall further to $8,000, giving back all the gains made in June.” Bitcoin initially climbed after Trump’s comments, but has since more than erased the gains.

 

Eoin Treacy's view -

There is a tendency in the opaque crypto market to attach causality to coincidence. I am not at all sure how much credence to give the conclusion that President Trump’s tweets were behind this weekend’s sell off.



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July 15 2019

Commentary by Eoin Treacy

Copper Rises After China Data Flags Resilience

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

“The easing cycle and a potentially stronger demand environment in China will be enough to allow base metals a bit more upside,” JPMorgan analysts Natasha Kaneva and Gregory Shearer say in an emailed report received Monday “We reiterate that this bullish view is more near-term tactical rather than long-term fundamental,” they say “We agree and believe that Chinese metals demand is sufficiently solid to support prices but not strong enough to push them higher,” Carsten Menke, an analyst at Julius Baer, says in an emailed note.

Eoin Treacy's view -

I will be travelling to China and Taiwan between August 5th and 19th this year. The one big take away from last year’s China trip was the sense of unease evident on the street and among vendors. That was in response to the tightening of government oversight on every day life, the attempts to stamp out lending by the shadow banks and the souring sentiment resulting from the first salvos of the trade war. Understandably that has contributed to slowing growth.



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July 12 2019

Commentary by Eoin Treacy

July 12 2019

Commentary by Eoin Treacy

A Whale Is Accumulating Silver Futures

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

 

Instead of selling futures to suppress the price, our market whale appears to have turned buyer; buying enough to cover China’s annual silver imports, the equivalent of about 43,000 Comex contracts. Clearly, the new strategy is to hedge against rising prices instead of suppressing the silver price. Given this new development, one would have thought that the other seven large traders would have tried to limit their silver shorts and at least keep an even book. There are several reasons why they may not have not felt the need to do so:

There are ample quantities of bullion in the vaults in London and Comex depositories, currently totalling 1.66 years’ worth of mine supply, unlike gold where the underlying bullion stock is very small relative to the paper contracts based upon them.

They appear to be unaware of China’s actions and motives. They may not even be aware of the existence of this long position. If they are aware of it, they may think it is just a technical long, against a short in London’s OTC market.

With global commercial demand declining due to the economic slow-down, they probably feel relaxed about the price outlook for silver, which they will regard as an industrial metal. Base metals show little sign of entering a bull market.

Therefore, with the Swaps category only moderately oversold (net short 12,735 contracts) and the Managed Money category only average overbought (net long 21,923 contracts), the other seven largest traders are likely to feel individually comfortable with their short positions, unaware of the extent to which their fellow traders are also short. What they fail to realise is that they are the shorts against the one largest trader who is long.

Eoin Treacy's view -

Silver is a lot less liquid than gold in the futures market, yet there is a lot more silver in the physical market than gold. That typically creates a volatile trading environment for the metal and is why investors have seen silver as a high beta play on gold historically.



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July 12 2019

Commentary by Eoin Treacy

Email of the day - on predicting in which direction a breakout will take

Hoping for a quick refresher, please. The Chart Seminar reinforces that stocks are either trending or ranging. What I am interested in are the indicators which may suggest a stock could breakout of its range (to the upside or downside) in the near term. Thanks for a wonderful service.

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Markets either trend or range so every range is following by a breakout and vice versa. Ranges are explosions waiting to happen because ranges and boring relative to the trending phases. That means expectations for future potential deteriorate at just the same time that energy is being stored up for the next breakout.



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July 12 2019

Commentary by Eoin Treacy

Can Low Rates Explain High Stock Prices? Not So Fast

This article by Mark Hulbert for the Wall Street Journal may be of interest to subscribers. Here is a section:

One such model was proposed in a 2017 article in the Journal of Portfolio Management by Research Affiliates founder Robert Arnott and several colleagues. They found that P/E ratios tend to be lower when real interest rates, or those adjusted to remove the effects of inflation, are either too high or too low. The “sweet spot,” as far as P/E ratios are concerned, is when real rates are between 3% and 4%. Since real rates currently are below 1%, Mr. Arnott’s research provides no support for the above-average current P/E ratio.

In an email, Mr. Arnott poses a rhetorical question for those who believe that today’s low interest rates should automatically translate into higher P/E ratios. If that were the case, “then why don’t negative real interest rates in Europe and Japan justify even higher valuation levels [than in the U.S.]?! Instead, these markets are priced 20-40% cheaper than the U.S.” as judged by their P/E and CAPE ratios, he writes.

Eoin Treacy's view -

Taking historical comparisons as a basis for a world with trillions in negative yielding bonds does not make sense. Once interest rates go below zero it sets of a stampede for yield among yield-to-worst investors and creates a momentum driven trade in the opposite direction for traders. The big difference between Europe and Japan compared to the USA is urgency.



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July 12 2019

Commentary by Eoin Treacy

A $117 Billion Chinese Wealth Manager Says It Was Scammed

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

To be sure, Noah is not alone. Central China Securities Co., a mid-sized brokerage, said on Thursday two asset management products totaling 240 million yuan are in danger of defaulting after the borrower falsified documents. It didn’t provide more details.

For Noah, the incident has raised questions about the firm’s approach to risk management, said Yan Hong, a finance professor at Shanghai Jiao Tong University.

“It exposed the lack of credit-risk controls and absence of a verification mechanism for contract authenticity, which is a low-level mistake for a manager of private credit products,” Yan said.

It’s not the first time that Noah’s investments have run into trouble, as JPMorgan Chase & Co. analysts noted in a July 8 research report. In 2017, products managed by Gopher had exposure to China Huishan Dairy Holdings Co., which collapsed after being targeted by short sellers. In May 2018, Noah’s Hong Kong unit was fined by the city’s securities regulator for failing to comply with know-your-customer, due diligence and other requirements.

One lesson for asset managers is that they should talk to all of the relevant parties in an investment before committing money, said Jesse Si, a Beijing-based senior manager at Mintz Group, which specializes in due diligence investigations.

Eoin Treacy's view -

A clear trend is emerging of fund managers who invested in opaque instruments in an effort to generate outsized returns and are now suffering the consequences. GAM in Switzerland, Neil Woodford in the UK, France’s H2O and a string of Chinese firms have all suffered from being unable to meet redemption requires because they invested in highly illiquid instruments.



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July 12 2019

Commentary by Eoin Treacy

July 11 2019

Commentary by Eoin Treacy

Video commentary for July 11th 2019

July 11 2019

Commentary by Eoin Treacy

Powell Says Fed Has Room to Cut, May Have Kept Policy Too Tight

This article by Craig Torres and Reade Pickert for Bloomberg may be of interest to subscribers. Here is a section:

Powell told Senators that the so-called “neutral rate,” or policy rate that keeps the economy on an even keel, is lower than past estimates have put it -- meaning monetary policy has been too restrictive.

“We’re learning that interest rates -- that the neutral interest rate -- is lower than we had thought and I think we’re learning that the natural rate of unemployment is lower than we thought,” he said. “So monetary policy hasn’t been as accommodative as we had thought.”

Federal Reserve officials in fact marked down their estimate of the longer-run policy rate to 2.5% in June, from 2.8% in March.

Investors fully expect a quarter-point cut at the Fed’s July 30-31 gathering, according to pricing in interest-rate futures, though odds were dialed back a bit after a stronger-than-expected U.S. inflation report earlier on Thursday.

Eoin Treacy's view -

The Fed keeps downgrading its expectations for what the neutral rate of interest is. In other words, their guesstimate of the optimal level to contain inflation but support full employment. That is the rationale used to justify the move to lower rates which has already been priced in.



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July 11 2019

Commentary by Eoin Treacy

Walmart's Supplier Says Chinese Factories in "Desperate" State

This article by Daniela Wei and Jinshan Hong for Bloomberg may be of interest to subscribers. Here is a section:

“U.S. clients are definitely very, very worried,” Fung said in an interview with Bloomberg. “Everyone is making razor-thin margins already and most people have a huge percentage in China. So if the biggest source increases the price by 25%, they are worried,” he said, referring to the scale of tariffs threatened on all Chinese imports to the U.S. by President Donald Trump.

Though Fung didn’t specify Walmart by name, the U.S. retailer is the company’s second-biggest customer after Kohl’s, accounting for 7.6% of revenue, according to Bloomberg data. A spokeswoman for Walmart declined to comment.

Eoin Treacy's view -

The size of China’s manufacturing sector dwarves that of any other country and therefore the migration of US business is hitting choke points because of a lack of infrastructure elsewhere to deal with the demand. That represents a once in a lifetime opportunity to spur manufacturing in cheaper locations like India and Africa to pick up US business.



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July 11 2019

Commentary by Eoin Treacy

Email of the day - on uranium and investing in illiquid shares

How do you think about liquidity in the context of a narrow theme like Uranium? And how would you measure it in this case? Volumes picking up and an increase in market capitalization of the sector? Or does it all tie back to the Fed and other central banks

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Uranium is a comparatively small market with lots of minor constituents and a couple of large producers. When investing in any illiquid market, whether a sector or country index, weight of money moving in and out can have an inordinate effect on prices. That generally means you will not have an issue buying but selling often needs to be done in anticipation of a peak because liquidity can quickly evaporate during a downturn.



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July 11 2019

Commentary by Eoin Treacy

Email of the day on technical indicators

Do you like/follow momentum given that momentum often leads price?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Generally speaking, I look at momentum indicators a couple of times a year. This service is more about chart reading than technical analysis. The basis for our behavioural approach is to assume everything you need to know about the market is right there in the price action if you are willing to allow yourself to see it. 



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July 10 2019

Commentary by Eoin Treacy

Video commentary for July 10th 2019

July 10 2019

Commentary by Eoin Treacy

Powell Signals Rate Cut as Trade War Outweighs Strong Job Market

This article by Craig Torres and Katia Dmitrieva for Bloomberg may be of interest to subscribers. Here is a section:

Powell carefully explained the reasons why the policy committee has shifted its views this year, and noted that “crosscurrents have reemerged, creating greater uncertainty.” Despite a current trade war truce with China, he continued to stress downside risks to the outlook.

“Uncertainties about the outlook have increased in recent months,” Powell said in the text of his remarks. “Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.”

He noted that policy makers are carefully monitoring developments including the risk that weak readings on inflation could be “even more persistent than we currently anticipate.”

In addition, Powell pointed to a slowdown in business investment, decelerating global growth, and declines in housing investment and manufacturing output.

“It strongly suggests they’re going to be inclined to ease at the meeting later this month,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in a Bloomberg Television interview. “He continued to highlight the uncertainties that are weighing on the outlook rather than highlighting the better jobs report.”

Eoin Treacy's view -

The Fed has been saying for a decade that they are going to be data dependent. However, that leaves a lot of leeway over what kind of data they will be swayed by. This graphic of the rate at which people are voluntarily quitting their jobs overlaid with the Fed Funds Rate suggests the domestic US consumer is confident about the economy but the Fed is still getting ready to cut rates.



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July 10 2019

Commentary by Eoin Treacy

China's Venture Capital Boom Shows Signs of Turning Into a Bust

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

But the rise of China’s tech industry put it squarely in the crossfire of the trade war. The Trump administration has accused China of stealing intellectual property and unfairly subsidizing companies in strategic fields, including semiconductors, artificial intelligence and autonomous driving. In May, the U.S. blacklisted Huawei Technologies Co., preventing the telecom giant from buying American components, and is considering doing the same to a swath of startups.

The trade war gives investors one more reason for caution. Valuations had already grown vertiginous. High-profile startups such as smartphone-maker Xiaomi Corp. and delivery giant Meituan Dianping saw their stocks tumble after they went public, reinforcing the impression that private-market valuations had gotten out of hand.

So-called sharing economy startups have also tested the patience of their investors. Companies like Didi, Meituan and bike-sharing provider Ofo blitzed the market with heavy subsidies to grab market share from rivals, making up for their losses with venture money. Now there’s skepticism that many such companies will ever turn a profit.

“You’re really reaching the end of the shared economy -- this idea of let’s give away services for free and make up for it in volume,” Rieschel said. “Some companies -- Didi is the classic case -- are just not showing any ability to become profitable.”

Eoin Treacy's view -

Do visionaries appear at the just the right time, or do they get the opportunities to turn their ideas into a semblance of reality because liquidity is cheap and abundant? A confluence of technological innovations can coalesce to create wonderful new products like the iPhone. Alternatively, we can find new ways of doing things because the cost of running interminable losses is so low relative to the potential pay-out that any venture can secure funding. The latter group have clearly dominated in this cycle which tells us liquidity is the dominant reason behind the surge in valuations for private companies.



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July 10 2019

Commentary by Eoin Treacy

The Future of Housing Rises in Phoenix

This article by Ryan Dezember and Peter Rudegeair for the Wall Street Journal may be of interest to subscribers. Here is a section:

The house in Tolleson is one of several thousand around the city that Opendoor and two competitors—listings giant Zillow Group Inc. and Offerpad Inc.—have bought since 2014 in an attempt to perfect programmatic house flipping. Last year, they bought nearly 5,000 houses in the metro area, roughly one in every 20 existing homes sold. They’re after real-estate transaction fees and anything they can make on reselling the property. Margins are low, so volumes must be high.

Eoin Treacy's view -

The majority of mortgage lending in the USA is performed by non-bank lenders i.e. shadow banks. These kinds of highly leveraged business models work in an upswing but tight margins, acute price sensitivity represent significant medium-term threats. Then there is the fact that by running a volume model, real estate AI companies are contributing to flow but could suffer in a downturn as liquidity evaporates.



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July 10 2019

Commentary by Eoin Treacy

German Vow to Cancel Permits Sends Carbon to 11-Year High

This article by Brian Parkin and Mathew Carr for Bloomberg may be of interest to subscribers. Here is a section:

“We’ve seen an encouraging rise in permit prices, so it’s no surprise that we see it as essential that the instrument continues to work as it should do,” Schulze said. “That’s logical. It makes no sense at all to implement an exit from coal here, only to export pollution licenses into the wider European system.”

And

“Scarcity is central to the aims of the European carbon trading market.”

Eoin Treacy's view -

Regardless of how one feels about the merits of carbon credits there is no arguing with state sponsored bull markets.

 



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July 09 2019

Commentary by Eoin Treacy

Video commentary for July 9th 2019

July 09 2019

Commentary by Eoin Treacy

Sub-Zero Yields Start Taking Hold in Europe's Junk-Bond Market

This article by Laura Benitez and Tasos Vossos for Bloomberg may be of interest to subscribers. Here is a section:

The number of euro-denominated junk bonds trading with a negative yield -- a status until recently associated with ultra-safe sovereign borrowers -- now stands at 14, according to data compiled by Bloomberg. At the start of the year there were none. Cheap money policies since the financial crisis have kept interest rates at, or near, all-time lows for the last decade.

That’s prompted many investors to buy riskier assets that yield enough for them to meet their liabilities, driving bond markets higher and yields lower. The European Central Bank said on Monday it’s ready to add more stimulus to the euro zone, indicating that an end to the age of ultra-low borrowing costs is far from over.

Eoin Treacy's view -

Wimbledon is on the TV and the air conditioning is humming so we are definitely in summer but negative yield on junk bonds suggest we are in silly season.

Negative yields on a sovereign can be at least partially justified by their appeal as safe havens. Junk bonds carry that moniker because of the unreliability of cash flows. It took me a while to corroborate the claims made in this article and while I could not find negative yielding bonds for all of the issuers there are definitely instances of junk bonds that have been bid up to these levels.



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July 09 2019

Commentary by Eoin Treacy

Uber Drivers

Eoin Treacy's view -

Many of the Uber’s we used to get around Columbus had cracked windshields. Generally speaking, insurance covers windshields but that may not be the case with a ride-hailing service. I don’t know enough about it to make a judgement. More than a few claimed it was because of all the grit on the road from construction but that does not explain the number of cars with cracked windshields that had not been fixed.



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July 09 2019

Commentary by Eoin Treacy

Signs of Gloom Push Pound to Its Lowest Level Since April 2017

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

The pound has been hobbled in recent weeks by concern about the U.K.’s political risk as the contest to elect the next prime minister approaches its endpoint, with front-runner Boris Johnson keeping a no-deal Brexit on the table. The pound has fallen about 2% since Prime Minister Theresa May indicated that
she would be stepping down.

“A general pound malaise has taken us through the lows from Friday,” said Jeremy Stretch, head of G-10 currency strategy at Canadian Imperial Bank of Commerce. “It looks increasingly probable that second-quarter GDP is likely to be negative for the first time since the end of 2012. With the third-quarter outlook also poor, this will add to debate about the BOE joining the global easing trend.”

Eoin Treacy's view -

Until quite recently the Bank of England was talking about raising rates. That is a near impossibility today given the global growth outlook and the trajectory of policy in response to deteriorating data.



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July 08 2019

Commentary by Eoin Treacy

July 08 2019

Commentary by Eoin Treacy

Downgrading Global Equities to Underweight

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

Eoin Treacy's view -

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

The argument at this stage in the market cycle is less about valuation and more about the fear of missing out. If bond yields are compressing because of the anticipation of massive monetary easing that bond-equity spread will be a significant tailwind for equities on a breakout scenario.



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July 08 2019

Commentary by Eoin Treacy

Erdogan Draws the Line on Rates After Shock Central Bank Ouster

This article by Firat Kozok and Cagan Koc for Bloomberg may of interest to subscribers. Here is a section:

Hours after unexpectedly forcing out the central bank’s governor, Turkish President Recep Tayyip Erdogan made clear that he expects both the successor and the rest of the establishment to toe the government’s line on monetary policy.

The decision to dismiss Murat Cetinkaya, whose four-year term was due to end in 2020, was announced in the early hours on Saturday following a pause in interest rates that lasted for over nine months. Deputy Governor Murat Uysal was named as a replacement. Investors weren’t impressed -- the lira slid more than 3% in early Asian trading before paring losses.

During a closed meeting after the decree came out, Erdogan told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher interest rates cause inflation, according to an official who was present. He also threatened consequences for anyone who defies the government’s economic policies, the official said.

Erdogan’s office of communication didn’t respond to calls and text messages seeking comment. “By abruptly dismissing Cetinkaya, Erdogan reminded everyone who is in charge of monetary policy,” said Piotr Matys, a London-based strategist at Rabobank.

Eoin Treacy's view -

Governance is everything and when you have an autocrat in power who is resorting to progressively more desperate measures to hold onto power there is a problem. Losing the re-run election for mayor of Istanbul, a couple of weeks ago, was a wake-up call for Erdogan. That’s a position he once held himself and retaining control of the largest city is essential if he wants to hold onto power. That is probably what precipitated the ouster of the central bank chief.



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July 08 2019

Commentary by Eoin Treacy

New Democracy Meets Old Greek Problems After Mitsotakis Win

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

“The weight of responsibility is heavy,” Mitsotakis said in his victory speech in Athens Sunday night. “I assume the burden with complete awareness of the situation the country is in.” Greece’s economy expanded 1.9% in 2018 and is on track for about 2% growth this year. Since Mitsotakis’s victory in the May 26 European Parliament elections, the Athens Stock Exchange general index has risen more than 20%, while yields on 10-year bonds have fallen to record lows. Greece is planning a new bond sale by the end of the month to capitalize on that momentum to secure sustainable access to financial markets that was lost in 2010

Eoin Treacy's view -

Greece has exited its assistance program and has benefitted from some debt forgiveness. The rationalisation of the economy remains underway and significant asset sales have occurred so the new administration does have some leeway in which to move. Perhaps the most important development is the replacement of a leftwing populist with the market friendly administration. That could be particularly beneficial in a recovery scenario.



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July 08 2019

Commentary by Eoin Treacy

China Is Forcing Tourists to Install Text-Stealing Malware at its Border

This article from vice.com maybe of interest to subscribers. Here is a section:

Together with the Guardian and the New York Times, the reporting team commissioned several technical analyses of the app. Penetration testing firm Cure53 on behalf of the Open Technology Fund, researchers at Citizen Lab from the University of Toronto, and researchers from the Ruhr University Bochum as well as the Guardian itself all provided insights about BXAQ. The app's code also includes names such as "CellHunter" and "MobileHunter."

Once installed on an Android phone, by "side-loading" its installation and requesting certain permissions rather than downloading it from the Google Play Store, BXAQ collects all of the phone's calendar entries, phone contacts, call logs, and text messages and uploads them to a server, according to expert analysis. The malware also scans the phone to see which apps are installed, and extracts the subject’s usernames for some installed apps. (Update: after the publication of this piece, multiple antivirus firms updated their products to flag the app as malware).

Eoin Treacy's view -

Xinjiang is one of China’s buffer states which separates the heartland from its neighbours. It is also an energy producer and bread basket so China has additional reasons to quell even a whiff of separatist sentiment. The extend of surveillance and re-education programs (incarceration) is unparalleled in modern history and is a testament to just how overtly authoritarian the administration is.



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July 05 2019

Commentary by Eoin Treacy

July 05 2019

Commentary by Eoin Treacy

Guide to the Markets Q3 2019

Thanks to a subscriber for this chartbook from JPMorgan which may be of interest to subscribers. Here is an important graphic.

Eoin Treacy's view -

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

2018 saw significant multiple compression. The rebound in the first quarter unwound the entire decline but also unwound much of the multiple compression. Earnings guidance for the upcoming reporting season is a lot weaker than over the last few years and is the basis for the opinion that we are about to see an earnings recession.



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July 05 2019

Commentary by Eoin Treacy

Betting Against The Gods Is Now Impossible

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

Eoin Treacy's view -

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

Every mania has a contradiction at its centre. In the 1980s, it was the Imperial Palace in Tokyo really was worth more than the entire state of California. In the 1990s it was earnings don’t matter. In 2000s it was CDS could absolve everyone of default risk. In this decade it is that no one loses money from negative yields.



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July 05 2019

Commentary by Eoin Treacy

Iron Ore's "Disconnected From Fundamentals" After Huge Rally

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

Iron ore has skyrocketed this year, hitting the highest level in more than five years, after a dam disaster at Brazil’s Vale SA and bad weather in Australia curtailed shipments just as Chinese demand expanded. The steelmaking material made another dash higher in recent weeks after Australian miner Rio Tinto Group cut output guidance again following operational problems. The ascent has spurred concerns the advance may prove to be unsustainable.

“Supply is looking pretty decent, with the exception of Rio,” Hedborg said. Exports from Australia in June should be strong as some miners ramp up in the last month of their financial year, he said. In Brazil, Vale has also restarted its Brucutu mine, a major operation that was suspended after the dam
collapse.

Eoin Treacy's view -

The iron-ore price remains in a steep uptrend and exhibits an increasingly wide overextension relative to the trend mean. The first clear downward dynamic is likely to signal a peak of at least near-term significance and the beginning of a reversion towards the mean.



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July 04 2019

Commentary by Eoin Treacy

Video commentary for July 4th 2019

July 04 2019

Commentary by Eoin Treacy

Email of the day on our investment philosophy.

New subscriber here and enjoying the site/audio. Anything on the site or audio that explains your philosophy on markets and approach? I've purchased your book as well so maybe that is the simple answer!

Eoin Treacy's view -

Welcome to the Service and thank you for this email which others may also have an interest in. Crowd Money was my best attempt at creating a companion guide to The Chart Seminar back in 2013 and the principles of crowd psychology and trend consistency covered in it are the basis for the analysis performed in this Service.

FullerTreacyMoney is a top down macro behavioural global strategy service. The best place to be in any market is in a consistent trend. In order to find the most consistent trends we scour the world. Having an appreciation of what a consistent trend is, how they evolve and how they end allows us to form trend running strategies.

There are really only two big factors in the market; crowds of people and monetary policy. Central banks kill off bull markets so we need to pay attention to what they do. Likewise, when oil is surging or when banks can’t make money that impairs liquidity creation so we need to monitor those markets. Of course, the opposite is also true. Central banks help create the liquidity conditions for bull markets to prosper and falling energy prices improve industrial profitability. That also leads to an awareness of long-term cycles in the behaviour of crowds.

Liquidity is not enough. You also need a fundamental story or theme to animate investor interest over the span of secular bull markets. Big themes, supported by abundant liquidity are what drives long-term bull markets. That is why we focus on the rise of the global consumer, the accelerating pace of technological innovation and secular bear market in energy. 

The evolving path of extraordinary monetary policy, rise of populism and geopolitical rivalry can all be viewed in the historical framework of liquidity and crowd psychology.  



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July 04 2019

Commentary by Eoin Treacy

Swiss Standoff With EU Belies Country's Deep Economic Dependence

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

An EU attempt to compel Switzerland to agree to the treaty by denying the country’s bourse recognition under EU equivalence rules seems to have had little or no impact, with the benchmark SMI Index closing at a record high on Tuesday. There may be more salvos to come.

The EU could up the ante by refusing to revise an agreement on technical barriers to trade, which would hit several companies, notably in the medical-technology sector. There’s also Switzerland’s participation in EU research programs like Horizon 2020, which would thwart universities and research and development activity.

“They’re in a position where they’re highly dependent on the EU - just look at the map,” said Nicholas Veron a senior fellow at the consultancy Bruegel in Brussels.

Like Brexit
Switzerland’s issues with the EU are not that different from those of Brexit backers in the U.K. Many in Switzerland are upset about high levels of immigration and regard the 28-member bloc as a dysfunctional bureaucracy. Unlike the U.K., however, Switzerland was never part of the bloc, and instead has a special relationship based on 120 agreements, which the EU now wants to consolidate and streamline into one new treaty.

That’s proved to be a contentious undertaking. The EU made concessions on a dispute arbitration panel, but with labor unions up in arms about wages -- fearing they would face downward pressure in high-income Switzerland -- Bern wouldn’t sign on to the so-called framework deal. Certainly not ahead of a general election in October.

Eoin Treacy's view -

How much of the increasing acrimonious relationship between the EU and Switzerland is about the new treaty and how much is about the impending Swiss election and the desire to look strong and independent to a wavering population?



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July 04 2019

Commentary by Eoin Treacy

Email of the day on Christine Lagarde

A fairly damning assessment of Ms Lagarde that does not bode well for the Eurozone.

Putting Christine Lagarde in charge of the ECB will lead the eurozone into catastrophe

 

Eoin Treacy's view -

Thank you for this article which may be of interest to subscribers. Here is a section:

A smooth functionary might be fine at the ECB in normal times. Over the next five years, however, the eurozone will certainly face another crisis. The German banking system is teetering on the edge of collapse (the once mighty Deutsche Bank’s share price remains the scariest chart in the world). Bond yields have turned negative, signalling recession. Interest rates are already below zero. A currency war is starting with Donald Trump’s America.

The ECB will have to find new ways of holding a rackety currency together. What is that likely to involve? Some form of helicopter money, as printing cash and giving it away is known, bailing out the German banks without anyone noticing, and allowing Italy to quietly float away with a parallel currency. Draghi’s flexibility and creativity might just have allowed him to navigate all that.

Lagarde will stick to precedent and orthodoxy with lawyerly inflexibility – and that will plunge the zone into a potentially terminal crisis.

The accusation that Christine Lagarde lacks the imagination to lead the ECB is potentially important, in extremis, but the reality is she does not need a great deal of imagination to print more money. That is the conclusion of the market.



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July 03 2019

Commentary by Eoin Treacy

July 03 2019

Commentary by Eoin Treacy

Email of the day on the gold/gold miners' ratio:

Thank you very much for your excellent analysis of the precious metals on Friday's video. If possible, can you please also comment on the gold/gdx ratio in one of your future videos and/or comment of the day. As always thanks very much for your excellent service.

Eoin Treacy's view -

Thank you for your kind words and I am delighted you enjoyed the Big Picture video. It’s been a big month for gold and gold shares but the relationship between the two deserves a special mention.

I prefer to look at the ratio the other way around and I use the Gold BUGS Index because it has a more back history.

Gold shares massively outperformed in the early part of the last bull market. They had a lot of leverage to the gold price because they had not been able to invest in new supply for years and were running very tight operations. The focus was on survival rather than expansion. As profits rose and confidence improved the majority of gold miners went on a spending spree in an effort to replace depleted reserves. That erased their free cash flow and loaded their balance sheets with debt. Gold miners’ performance relative to gold peaked in 2003 and investors moved on to ETFs and leveraged products.



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July 03 2019

Commentary by Eoin Treacy

High Profits at Low Rates - The Benefits of Bond Convexity -

This article from portfoliocharts.com contains a number of highly informative graphics and may be of interest to subscribers. Here is a section:

This chart is one of my favorites that I’ve made in a while, as not only does it contain a lot of interesting information but I also learned a lot by making it. Here are a few of the most important takeaways:

1. At high interest rates the coupon is most important, and at low rates capital appreciation is king

2. Short and intermediate term bonds (typically capped at about 10 years) are much less sensitive to interest rates at all levels than long term bonds

3. Low-interest 30-year bonds are very volatile! In fact, the range of returns is similar to what you might expect from the stock market.

4. Note that the spread of total returns for long term bonds is not symmetrical. Because they are increasingly more sensitive with every drop in rates, for the same +/-1% change they actually have more upside than downside.

5. One thing that’s not obvious from the chart is that interest rate sensitivity declines as bonds age. A new 30-year bond will start on the red line. When it only has 15 years left, it has the volatility of the green line. And when it only has 5 years left it has the predictable tight range of the purple line. Just like people, bonds get less active as they mature.

But if you take only one point away from this post let it be this:

Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize.

Eoin Treacy's view -

This is one of the more explanatory and informative reports I have seen on the bond markets and helps to explain the continued momentum driven move despite the fact nominal yields are at objectively unattractive levels. However, it is also worth considering that the most compelling arguments for the success of a momentum strategy almost always appear during the acceleration phase of a bull market



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July 03 2019

Commentary by Eoin Treacy

India's Water Crisis Is Man-Made

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

Climate change activists have long argued that water will be the political flashpoint of the 21st century. Water-stressed India will likely be one of the first places to test that theory. The state of Tamil Nadu complains that it doesn’t receive its fair share of the waters of the Cauvery River; recently, the authority that nominally manages the river accused the government of neighboring Karnataka of holding onto water that it should have allowed to flow down to the Cauvery delta.


Things might get even testier up north, where more than a billion people depend upon rivers that rise in the Himalayas. Bangladesh and Pakistan feel that India is being stingy with river water.  Indian strategists constantly worry that China will divert water from the Himalayan rivers that rise in Tibet to feed the thirst cities in its own north.

The floods in Chennai are a warning. As the world warms, the rains on which India depends have become erratic: They frequently fail to arrive on time, and they fall in a more disparate and unpredictable pattern. The country can no longer afford to waste its dwindling resources.

A rapidly urbanizing and developing India needs to drought- proof its cities and rationalize its farming. Water-harvesting must be a priority, alongside mechanisms for groundwater replenishment. As it is, every summer is hotter and less bearable. If Indians run short of water as well, one of the world’s most populous nations could well become unlivable

Eoin Treacy's view -

India’s population is likely to exceed China’s sometime in the middle of the 2020s and peak around 1.6 billion sometime in the middle of the century. That’s a lot of people in a country that already seems crowded.

Generally speaking, water shortages are usually more about mismanagement of resources than an absolute lack of the precious commodity. There are exceptions of course but when rains fall every year the question is less about quantity and more about the quality of governance. In just the same way countries need clear national energy, commercial, military and political action plans, national water managements plans are also necessary for the long-term welfare of populations.



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July 02 2019

Commentary by Eoin Treacy

Video commentary for July 2nd 2019

July 02 2019

Commentary by Eoin Treacy

Roubini Lives Up to Dr. Doom Alias With Global Recession Call

This article by Gregor Stuart Hunter for Bloomberg may be of interest to subscribers. Here is a section:

On the trade front, deglobalization looms as countries around the world have to choose which country to align with -- the U.S. or China -- once the bilateral negotiations collapse, Roubini said. “This divorce is going to get ugly compared to the divorce between the U.S. and the Soviet Union.”

On top of that, an oil-price shock coming from Iran tensions would raise the prospect of 1970s-style stagflation as a rise in crude prices coincides with slower growth, Roubini said.

Speaking at a blockchain summit in Taipei, Roubini reiterated his skepticism toward cryptocurrencies such as Bitcoin.

“There’s massive, massive amounts of price manipulation” in cryptocurrency trading, he said in remarks at the conference. As for blockchain, “it’s the most overhyped technology ever, it’s nothing better than a glorified spreadsheet,” Roubini said. “Nobody’s using it, and nobody’s ever going to use it.”

Eoin Treacy's view -

The stock market is at a new all-time high, but there is still such an impending sense of doom. That is not what one expects from market tops. Nouriel Roubini has a particular talent for soundbites, not least about cryptocurrencies. However, the challenges he alludes to are worthy of consideration.



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July 02 2019

Commentary by Eoin Treacy

Lagarde to Succeed Draghi as ECB Chief As Economy Weakens

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

In moving from Washington to Frankfurt, Lagarde will be tasked with driving monetary policy in a 19-nation economy which Draghi has already signaled will need more help, likely in the form of lower interest rates and possibly with the resumption of quantitative easing. Inflation is running at barely half the ECB’s goal of just under 2% despite years of negative rates and 2.6 trillion euros ($3 trillion) of bond purchases.

Investors will likely bet that as a seasoned crisis-fighter, Lagarde will share Draghi’s taste for aggressive and innovative monetary policy, especially as her appointment means the more hawkish Bundesbank President Jens Weidmann misses out.

Financial markets are already pricing an ECB rate cut by September, in line with predictions by ECB watchers at Bloomberg Economics and Goldman Sachs Group Inc.

Lagarde last week described the world economy as hitting a “rough patch” and advised central banks to continue to adjust their policies in response. In June 2014, she said she would “certainly hope” the ECB would conduct QE if inflation stayed sluggish -- months before it announced it would do so.

Eoin Treacy's view -

Christine Lagarde fits the bill of a credible dove. Her candidacy ensures the ECB is moving back toward quantitative easing and negative interest rates. That’s good news for the liquidity fuelled bull market.



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July 02 2019

Commentary by Eoin Treacy

Musings From The Oil Patch July 1st 2019

Thanks to a subscriber for this edition of Allen Brooks ever interesting report. Here is a section:

Growing gas production has also allowed buyers to worry less about having substantial volumes in storage to meet winter demand.  Therefore, buyers see little need to lift gas prices to encourage storage injections.  That dynamic has been demonstrated by the low level of storage we reached last year, and now how quickly we are rebuilding storage, while also meeting increased gas consumption from the power and export markets.  

The recent gas production growth, which accelerated starting in 2016, appears to be slowing.  To some degree, it is a function of the Permian Basin crude oil pipeline capacity shortage, which has restricted associated natural gas output.  Will that change when the new oil pipelines begin operating later this year?  Only time will tell, but official forecasts call for a slowdown in the growth of gas production.  That means the bigger question for the natural gas market will be demand.

A recent webinar on the natural gas market and outlook through 2020 had two charts we found very interesting.  The first dealt with the significantly different gas storage picture in Europe.  Today, storage is well ahead of last year, which may have an impact on the amount of future liquefied natural gas (LNG) shipments.  So far, it appears to have had little impact, but the lack of clarity about output levels from the Dutch gas fields could also impact the market for U.S. LNG shipments to Europe.  

The most interesting chart was explaining the firm’s gas price forecast compared to the NYMEX futures strip price.  The forecasters were able to frame their perspective about the upside and downside to their forecast by listing and quantifying the positive and negative factors for gas demand and supply.  We are not endorsing the forecast, but rather pointing out that there are a number of plusses and minuses that need to be considered when making a gas price forecast.  

Eoin Treacy's view -

Natural gas is in a secular bear market. There is no shortage of it and a steep contango remains evident. That continues to exert downward pressure on the price. New sources of outsized demand are required to resolve this condition. Outsized economic growth, hydrogen fuel cells or shifting demand from coal are all candidates.  The downtrend suggests these sources of potential demand are not yet strong enough to influence the market.



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July 02 2019

Commentary by Eoin Treacy

Why India's Troubled Shadow Banks Spook the Market

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

4. Is the crisis spreading?
Mortgage lender Dewan Housing Finance Corp Ltd. missed debt payments in June and Care Ratings Ltd. slashed its AAA credit rating to D this year. A news site alleged in January that the company diverted funds to shell companies, a claim Dewan Housing has denied. Other companies including Reliance Capital Ltd. and Piramal Capital & Housing Finance Ltd. have also had their credit ratings cut on liquidity concerns. Access to funding has gotten tougher for many non-bank financing lenders in credit markets, and they have a record 1.1 trillion rupees ($15.9 billion) of debt due in the third quarter of 2019.

5. Where is this heading?
The worst is probably still to come. Observers warn the credit crunch may hit the property sector next. It is heavily dependent on funds from shadow banks, and concerns are already being reflected in some realtor bonds. The nation’s conventional banks may also see more pain, as about 7% of their loans are extended to non-bank financing companies.

6. How are shadow lenders coping?
As access to funds in onshore debt markets has dwindled, shadow lenders are tapping overseas markets where they have to pay 25 to 50 basis points more than onshore rates to get cash.

7. What’s the economic impact?
India’s consumption engine is sputtering because the shadow-banking sector plays a key role in the nation’s financial system, particularly in delivering credit at the grassroots. A prolonged slowdown in lending from the sector poses a significant challenge to the Indian economy, where consumer spending growth has cooled on everything from toothpaste to air tickets. It expanded just 5.8% in the quarter ended March -- the slowest pace in five years and lagging behind China.

Eoin Treacy's view -

India’s shadow banks are experiencing a liquidity crisis which is throwing the wider market’s valuation premium into focus. We know how this process ends. First, a bad bank will need to be set up and filled with the nonperforming assets of the housing finance companies/shadow banks. If shadow banks are to be rationalised, the conventional banking sector will need to pick up the slack in terms of liquidity provision.  



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July 01 2019

Commentary by Eoin Treacy

Video commentary for July 1st 2019

July 01 2019

Commentary by Eoin Treacy

BIS Says It's Time to Fire Up All Engines to Boost World Growth

This article by Catherine Bosley and Anna Andrianova for Bloomberg may be of interest to subscribers. Here is a section:

The Switzerland-based BIS, which promotes cooperation among the world’s monetary officials, used its annual economic report to urge politicians to “ignite all engines” to overcome a global soft patch. They should make structural reforms and strengthen fiscal and macroprudential measures, instead of relying on ever-lower interest rates in a debt-fueled growth model that risks turbulence ahead.

“The continuation of easy monetary conditions can support the economy, but make normalization more difficult, in particular through the impact on debt and the financial system,” the BIS said. “The narrow normalization path has become narrower.”

U.S.-led protectionism has dented economic confidence and slowed growth, forcing central banks to prepare to ease policy again even if they haven’t yet returned to their pre-crisis settings. The Federal Reserve and the European Central Bank are expected to cut interest rates this year, while nations including Australia, Russia, India and Chile have already started.

Economists at Citigroup Inc. estimate that while fiscal policy in the major industrial countries will be expansionary this year it will be less so in 2020 as past measures in the U.S. wear off.

Eoin Treacy's view -

There is a confluence of factors that are leading to support for Modern Monetary Theory. On the one hand we have central banks stating that the fuel from monetary accommodation is not as effective any longer. They are telling governments to engage in fiscal stimulus and decluttering of the regulatory environment to boost growth. Governments for their part are saying to central banks that they will pursue massive deficit spending if interest rates don’t shoot up immediately afterwards.



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July 01 2019

Commentary by Eoin Treacy

Bitcoin Tumbles as Cryptocurrency's 2019 Surge Starts to Waver

This article by Adam Haigh and Vildana Hajric for Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin slumped, undoing some of this year’s epic rally and amplifying a recent trend of outsized weekend moves.

The largest cryptocurrency fell more than 18% from Friday to trade at $10,294 as of 11:58 a.m. in New York, according to prices compiled by Bloomberg. It’s still up almost 200% since the start of the year. Most other large coins also dropped, with Bitcoin Cash and Dash declining at least 7.6%. Litecoin erased an earlier gain.

Optimism surrounding a potential increase in adoption of cryptocurrencies helped fuel price increases on Bitcoin last month. That took prices back to levels last seen at the start of 2018. The slide over the weekend is at odds with recent moves higher on Saturday and Sunday: surges in weekend activity since the start of May accounted for about 40% of Bitcoin’s price gains this year, according to data compiled by Bloomberg.

Raising the possibility that central banks may feel the need to create tokens, Bank for International Settlements General Manager Agustin Carstens said in an interview with the Financial Times that it may be “sooner than we think that there is a market and we have to create our own digital currencies.”

Eoin Treacy's view -

Bitcoin was originally designed as a response to the debauchment of fiat currencies in response to the credit crisis. By creating a digital asset with limited supply, it aims to hold value in a manner fiat currencies can’t. This limited supply feature is a significant factor in its value proposition but it is incompatible with the wider aim of delivering an alternative financial system.



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July 01 2019

Commentary by Eoin Treacy

Gold Sinks Most in a Year as Trade Truce Deals Blow to the Bulls

This article by Ranjeetha Pakiam and Elena Mazneva for Bloomberg may be of interest to subscribers. Here is a section: 

Gold tumbled back below $1,400 an ounce after the U.S. and China reached a truce in their trade war, dealing a blow to havens.

Prices fell the most in a year after Donald Trump and Xi Jinping agreed to resume negotiations in a bid to resolve differences between the world’s top-two economies. Still, the setback may be temporary as investors now train their focus on U.S. jobs data due Friday for clues on the Federal Reserve’s next move on policy.

“Gold was well overdue a period of consolidation and gold bulls should welcome it,” said Ross Norman, chief executive officer of gold brokerage Sharps Pixley Ltd. “This provides a welcome entry point.”

Eoin Treacy's view -

“Don’t pay up for commodities” is about the most useful adage we came to live by in the commodity bull run of the early 2000s. Commodities are volatile but even that provides a consistency characteristic that is useful for traders. Breakouts are seldom sustained.



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June 28 2019

Commentary by Eoin Treacy

June 28 2019

Commentary by Eoin Treacy

Platinum Giants Resist Pay Demands After Hitting Price Jackpot

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

“These kind of wage demands will keep investors away,” said Ross Harvey, an independent economist. “The costs of doing business in South Africa remain too high, and the policy environment too risky, to warrant large sunk-cost investments.”

While its sister metals have surged, the price of platinum is trading near a decade low, leaving producers claiming they have little cushion to invest. Lonmin rebounded to profit in the six months through March, but only after four years of losses.

“These demands mean that there will be no money to reinvest, which is necessary for a sustainable industry,” said Wellsted.

Still, there are some causes for investor optimism. AMCU’s Mathunjwa has so far dispensed with most of his usual fiery rhetoric in favor of a more conciliatory tone. Moreover, three years ago, the union accepted a 12.5% wage increase for the lowest-paid workers after initially demanding 47%.

Much will depend on whether platinum miners toughen their stance in a bid to limit any wage deal to a single-digit increase, said Ben Davis, a mining analyst at Liberum Capital.

Eoin Treacy's view -

Mining is, perhaps, the best paid job people with less than a tertiary education can have. It obviously comes with drawbacks, not least an increased risk of death. As a result, mining unions have tended to me more militant than most and the pay demands they come up with bear little resemblance to what is considered normal in other industries.

The issue with granting demands for higher pay are multi-faceted, but the two most important are the precedent it sets and what can be requested in return for more money. Mine efficiency, implementation of labour-saving devices and automation are generally not supported by unions because of the effect that would have on the number of people employed. However, if South Africa is to have any hope of revitalising its industry these kinds of work-practice reforms have to implemented.



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June 28 2019

Commentary by Eoin Treacy

Elliott's $34 Billion Roundup Fix Is No Magic Pill

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

Fighting to settle, rather than win, would be the best approach. Bayer has argued Roundup is safe when correctly used, but it has lost three consecutive cases. Its expert evidence has been weighed by juries and has failed to convince them.

A new legal team could try to put different arguments and experts in front of jurors. But consider, too, the heavy punitive damages being awarded – $2 billion in the last case. These are likely to reflect jurors’ dim view of Monsanto's corporate conduct as concerns about the weedkiller’s safety emerged. This issue will recur in every future case.

Appealing would cost Bayer time. By the same token, a settlement would deliver a certain and faster resolution for the thousands of plaintiffs. The individual circumstances of each case make it hard to gather them together into a swiftly-resolved class action.

The snag is that even a fair settlement would not mean a return to business as usual. The best financial scenario for the company would be a deal that is affordable, with farmers continuing to use glyphosate and Roundup staying on sale, perhaps with modified instructions about how consumers should use it appropriately. This is not assured.

Moreover, Bayer will still merit a management discount for all that has happened, and a conglomerate discount given its unproven strategy of combining pharmaceuticals and crop science. CEO Werner Baumann misjudged the risks of buying Monsanto, a deal that brought Roundup with it; he has taken too long to revise his litigation strategy. He could yet turn the situation around by resolving the lawsuits and extracting synergies from the acquisition. Until he does, the jury is out both on his future and a break-up.

Eoin Treacy's view -

Bayer made a mistake in taking on Monsanto’s Roundup liability. However, it also underestimated the animus directed at the company for its work practices over years of rising seed prices, cases against farmers and the anti-GMO movement. Anything that can arrest the risk of both more negative headlines will be a positive, not least because the market has already priced in a disaster.



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June 28 2019

Commentary by Eoin Treacy

Banks Soar as Fed Paves Way for Better-Than-Expected Payouts

This article by Felice Maranz for Bloomberg may be of interest to subscribers. Here it is in full:

The biggest U.S. banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., rallied to the highest in more than a month on Friday, after the Federal Reserve cleared them to boost payouts.

“Ask and ye shall receive” was the common theme with the results of this year’s Capital Analysis and Review, known as CCAR, Evercore ISI’s Glenn Schorr wrote in a note. Most of the banks he covers beat Evercore ISI’s, and consensus, expectations for total dollars of capital return, and all the banks beat in terms of payout ratios.

The “enormous” capital plans announced by JPMorgan, BofA, Citigroup Inc. and Wells Fargo & Co., amounting to a combined total of over $130 billion, show that “the industry is extremely well capitalized,” RBC’s Gerard Cassidy wrote in a note.

Even so, Morgan Stanley’s Betsy Graseck cautioned that the party won’t last. This year’s results were “the last hurrah,” she wrote in a note, with payouts probably declining 21% in 2020, as “capital is now close to optimized.” Her advice? “Enjoy it while you can.”

Eoin Treacy's view -

- Higher dividends are what investors have been waiting for in the banking sector so this is good news. The biggest question raises in the last paragraph above it where the revenue growth is going to come from to sustain payouts?



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June 27 2019

Commentary by Eoin Treacy

June 27 2019

Commentary by Eoin Treacy

For China, Kicking a $9 Trillion Habit Is Tough

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

For now, Beijing doesn’t appear to have many options: The fact that activity is picking up even as officials attempt to calm nerves in the interbank funding market shows the economy’s deeply rooted, steadfast reliance on these institutions for credit, especially when banks are flinching.

For years, trust companies worked alongside China’s banks to keep credit flowing in the system. The headline drop in their assets under management has largely come from a decline in trust beneficiary rights products. These are loans put in a trust special-purpose vehicle, which effectively allows banks to reclassify souring debts. Trust companies have also acted as agents between companies lending to each other. Together, so-called entrusted loans and trust loans stood at 20.1 trillion yuan at the end of the first quarter.

Most of trust-backed products are concentrated at regional lenders – the likes of Baoshang Bank Co., which was recently taken over by regulators. In the early part of 2017, such products, in the form of investment receivables, increased between 10% and 40% at smaller banks. At Baoshang, they rose close to 15% and stood at 153 billion yuan, or a quarter of its assets, according to its latest financials.

Eoin Treacy's view -

When I was the Bloomberg account manager for DWS in Luxembourg back in the early 2000s one of the primary roles the team had was to create special purpose vehicles for loans of dubious quality that management of Deutsche Bank wanted to keep off book. We all know how that turned out and the bank is still reeling from its experiment with balance sheet leverage.



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June 27 2019

Commentary by Eoin Treacy

Ship Owners Need to Step Up Demolition Activity For a Sustainable Market Rebound

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

n a separate note this week, GMS, the world’s leading cash buyer said that “the stagnating inertia in the international ship recycling markets continued this week, with Pakistan, Bangladesh and Turkey entirely offline due to Eid holidays (winding down the Holy Month of Ramadan) and the traditionally quieter monsoon season gradually getting under way in the Indian sub-continent. There was a brief bounce in the Indian market following the election victory of the pro-business Mr. Modi, but local steel prices have begun to cool off ever since and Alang Buyers appear notably reluctant to commit on new vessels as most of the market focus is now shifting to Alang, due to the overall intransigence from Pakistan and Bangladesh and the higher offers emanating from India. The market in Bangladesh remains the quietest of all, with the upcoming budget on June 13th likely to determine the immediate direction on prices, which have already lost USD 20 – USD 30/LDT over the last few weeks. Most yards in Chattogram also remain stuffed with tonnage and demand is at the lowest it has been all year, with essentially no new enquiries emanating from local Buyers. The expectation (as seems to be the case year-after-year) is that new duties / taxes are set to be announced in this budget and prices are likely to decline further thereafter. As such, Bangladeshi Buyers are no longer keen to import fresh tonnage before the date of the budget, given the likelihood of increasing duties within the next week”, GMS concluded.

Eoin Treacy's view -

I had hoped to create a composite chart of the volumes of vessel demolitions in places like India, Turkey, Bangladesh and China. Although Bloomberg has indices for all these metrics, none of them appear to have any data so that is not going to be possible. The reason I wanted to view some clear data on vessel demolitions is because it would give us some intelligence into how clear a signal the rally in the Baltic Dry Index is providing for the health of the global economy.



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June 27 2019

Commentary by Eoin Treacy

Morningstar Downgrades H2O Allegro

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

 

The fund was placed under review on June 19 after Dobrescu flagged up concerns over a conflict of interest. H2O’s chief executive Bruno Crastes was named as a board member of Tennor, a holding company run by Lars Windhorst. Shares in Paris-listed Natixis - H2O's parent company - slumped after the fund was placed under review. Following Morningstar’s announcement, Natixis said Crastes had resigned from Tennor, saying the risk of a possible conflict of interest was "groundless".

Morningstar's Dobrescu said the H2O Allegro fund, which has seen millions of euros of outflows this month, needs to regain investors’ trust. The fund, which takes long positions on the U.S. dollar and eurozone debt, has produced stellar annualised returns of 16.5% over the past eight years but this has been achieved at a “higher risk than investors could have expected”.

The majority of the illiquid bonds that analysts had concerns over have now been sold off or marked down. The exposure to these bonds has been cut from 10% of the portfolio to 3.8% as of June 24.

Eoin Treacy's view -

The siren call of stellar returns from illiquid assets has claimed more than a few funds lately. This practice represents a special type of hubris; that assets under management will never be called back.



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June 27 2019

Commentary by Eoin Treacy

Email of the day on Chart Library bugs with a Mac

FTM charts regularly fail to populate when first opening on an Apple device (mine anyway), but if you change the time line the chart will immediately populate.

So, if you open a chart and it's on 5 years but does not populate, change it to 1 year or whatever you want and all will be well from then on for that chart.

Obviously, if it happens on the next chart you open, repeat the process. 

Bit of a faff but once you know how it works it quickly becomes automatic and seamless.

Very much enjoying your balanced wide ranging and often very illuminating commentaries.

Good man,

Eoin Treacy's view -

Thanks for your kind words and for alerting me to this bug. Last night was the first time I have ever used a Mac so I found it surprising that charts were having difficulty loading. I have forwarded on this issue to our IT chaps who will be taking a look at it.



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June 26 2019

Commentary by Eoin Treacy

Video commentary for June 26th 2019

June 26 2019

Commentary by Eoin Treacy

Google's Quantum Processor May Achieve Quantum Supremacy in Months

Thanks to a subscriber for this article from Interesting Engineering. Here is a section:

After the list goes above 6, the numbers start becoming so large and abstracted you lose the sense of the gulf between where Google is and where it will be at the next step.

In the case of Moore's Law, it started out in the 1970s as doubling every year, before being revised up to about every two years. According to Neven, Google is exponentially increasing the power of its processors on a monthly to semi-monthly basis. If December 2018 is the 1 on this list, when Neven first began his calculations, then we are already between 5 and 7.

In December 2019, only six months from now, the power of Google's quantum computing processor might be anywhere from 24096 times to 28192 times as powerful as it was at the start of the year. According to Neven's telling, by February--only three months after they began their tests, so 3 on our list--, there were no longer any classical computers in the building that could recreate the results of Google's quantum computer's calculations, which a laptop had been doing just two months earlier.

Neven said that as a result, Google is preparing to reach quantum supremacy--the point where quantum computers start to outperform supercomputers simulating quantum algorithms--in a only a matter of months, not years: “We often say we think we will achieve it in 2019. The writing is on the wall.”

Eoin Treacy's view -

Double exponential growth takes the doubling we have been accustomed to and turns it into powers. Therefore, instead of 2, 4, 8, 16 improvements we get 4, 16, 256, 65,536. With that kind of growth rate, the pace of innovation becomes so rapid that new chips become instantly obsolete. It makes a nonsense of ever owning a quantum computer and means provision of cloud services will likely be the primary way in which this kind of computing power is accessed. IBM has already been trialling that kind of access with its Watson artificial intelligence and nascent quantum service.



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June 26 2019

Commentary by Eoin Treacy

Putin's Big Bet on Gold Is Paying Off Nicely

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

The U.S. dollar’s dominance as a global reserve currency is commonly thought to result from the dearth of safe assets. Russia, however, recently has provided an example of how a sizable economy with the world’s fifth biggest international reserves can minimize dollar assets ad still do well. So far, it doesn’t have many followers, but gold buying by central banks is going up.

Since being hit by sanctions for its aggression against Ukraine in 2014, Russia has had good reasons to rethink the composition of its international reserve. While the European Union hasn’t toughened its sanctions for almost five years, the U.S. has been doing it all the time. The Kremlin and the Bank of Russia consider the risk of further restrictions unpredictable and dependent more on U.S. domestic politics than on anything Russia does. In the 12 months since the end of September 2017, the central bank has more than halved the dollar’s share in its international assets and sharply increased the shares of the euro and the renminbi.

Eoin Treacy's view -

Net central bank accumulation of gold is as much about sourcing a hedge against geopolitical trouble as it is a response to the clear threat to the Dollar from the adoption of Modern Monetary Theory by the US government.

Central banks buying dipped in 2017 but started to trend higher in 2018 and hit new decade highs this year. That represents a potent source of demand which is helping to support prices.



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June 26 2019

Commentary by Eoin Treacy

So Close Yet So Far Apart: Inside the Italy-EU Budget Tussle

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

For 2019, the EU could grant Italy flexibility available for unexpected events like last summer’s bridge collapse in Genoa. That would bring the adjustment required down to 0.42% of GDP.

Italy meanwhile says that a series of one-time revenues plus lower-than-expected spending for the populists’ flagship programs are worth about 5.3 billion euros. That’s enough to improve the structural deficit by 0.1 percentage point, the Treasury says -- the commission is forecasting a deterioration of 0.2 points.

If Italy’s numbers are right, then the two sides are just 0.3% of GDP or about 5 billion euros apart. That in itself might be close enough for the commission to give Rome a pass again.

But that may be overshadowed by the prospect of another battle when discussions on the 2020 budget start in September.

Eoin Treacy's view -

Fiscal austerity is the price the Eurozone’s creditors demanded for extraordinary monetary policy. However, it presupposes that the near 20-year process of debt to GDP alignment it represents, will be swallowed by populations faced with a generation of declining living standards and subpar growth. The rise of populism is a message people are unwilling to take that kind of hit to their personal wellbeing particularly when it falls disproportionately on the most heavily indebted and in need of support.



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June 25 2019

Commentary by Eoin Treacy

June 25 2019

Commentary by Eoin Treacy

Fed Lowers Long-Run U.S. Rate Outlook as Growth Outlook Dims

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

“This is really important,” said Torsten Slok, chief economist at Deutsche Bank Securities, who expects a rate cut in July. “For many years, the Fed has been arguing that monetary policy was easy and accommodative and supporting growth and inflation. After a decade of easy monetary policy, the Fed has decided that policy is no longer stimulative.”

Reasons listed for the lower neutral rate include ongoing fallout from the financial crisis, weaker productivity, continued slackness in the labor market and an aging population, which when combined leave the economy structurally weaker and so more vulnerable to rate hikes.

The upshot is the Fed may have to lower rates if it wants to boost expansion to offset global headwinds, including slow global growth and trade disruptions from President Donald Trump’s tariff battles.

Powell will give his view of policy in a speech on Tuesday to the Council on Foreign Relations in New York.

Eoin Treacy's view -

The trend of the Fed Funds Rate is downwards. There is a clear succession of lower major rally highs since the early 1980s and the failure of the Treasury yield to hold the move above 3% late last year suggests another lower high is now in place. If we accept the conclusion the peak of the interest cycle has now passed the next big question is just how low can rates go?



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June 25 2019

Commentary by Eoin Treacy

Swiss Spat With EU Prompts London Curbs on Country's Shares

This article by Alexander Weber, Silla Brush and Viren Vaghela for Bloomberg may be of interest to subscribers. Here is a section:

The political agreement at the heart of the issue -- which seeks to replace treaties on everything from agriculture to immigration and civil aviation -- was finalized in November last year. It hasn’t been endorsed by the Swiss government because it’s unpopular at home, in part because of fears it’ll erode high local wages.

Earlier this month, while saying it was still “broadly positive,” Switzerland asked for some clarifications.” That was seen in Brussels as an attempt by the country to renegotiate the accord, which the EU has ruled out.

The commission has also complained about “foot-dragging” by the government in Bern, and unless the commission decides otherwise, regulatory equivalence of the Swiss stock exchange will expire at the end of the week.

Eoin Treacy's view -

The UK is not the only country which has had difficulty getting a deal negotiated with the EU approved at home. The interesting point about this process, from an outsider’s perspective, is the similarity in the EU’s response to both Switzerland and the UK. The refusal to reopen negotiations, the threat of disavowing regulatory equivalence and imposition of deadlines are being used as tactics in both sets of negotiations.



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June 25 2019

Commentary by Eoin Treacy

A Dark Alley in China's Credit Market Suddenly Getting Rough

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

For firms that obtained funding via unorthodox methods, conditions may become particularly challenging. One of those practices is known as structured issuance, where a company will transfer cash to an asset manager to buy a slice of the bonds the company is itself selling. The manoeuvre helps give the appearance of greater demand for its securities and stronger ability to obtain funding. What could make the practice untenable is if asset managers can no longer use those securities held in custody as collateral for repos.

“Since some repo transactions have defaulted recently, it is unclear whether companies can continue to borrow money from the structured issuance method, said Meng Xiangjuan, chief fixed-income analyst at SWS Research Co. in Shanghai. “If it stops, some issuers will certainly face difficulties operating their business normally, and their debt-repayment pressure will rise,” she said.

Eoin Treacy's view -

The main headline today was the fact some Chinese banks have been breaking the sanction prohibitions on North Korea. However, the fact it is possible for companies to partially fund their own bond issuance by promising to buy it themselves with the funds received is garnering a lot less interest.



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June 24 2019

Commentary by Eoin Treacy

June 24 2019

Commentary by Eoin Treacy

Don't tell me WHAT to buy, tell me WHEN to buy

Thanks to a subscriber for this report from Jeffrey Saut. Here is a section:

Well, as stated on June 3rd, we said a bottom was formed with the SPX at ~2729 and that the SPX was going to trade to new all-time highs.  Three sessions later, with the SPX at 2852, we wrote the stock market was probably going to stall into mid/late-June, but that new all-time highs were still coming.  The stock market did indeed stall, but only for about 5 sessions followed by a breakout to new all-time highs.  Indeed, “Don’t tell me what to buy, tell me when to buy!”

Meanwhile, some Wall Street pundits suggest the SPX has already tagged their year end price target, stocks are expensive, and a recession is on the horizon.  They obviously are NOT listening to the message of the market that is predicting no recession.  Speaking to their other points, while earnings estimates for the S&P 500 have come down from roughly $173 to $168 for 2019, and $188 for 2020, stocks are not all that expensive on forward earnings.  If those estimates are correct, it implies the SPX is trading at 17.5x this year’s estimate, which granted is a tad on the expensive side, but only at 15.7x earnings for next year.  However, our models tell us under the current interest rate environment the right price earnings multiple (PE) should be 19.  Therefore, 19x this year’s estimate yields a price target of 3192 for the SPX.  If 2020’s estimate is anywhere near the mark, the SPX’s price target becomes 3572 (19 X $188 = 3572).  To wit, the average PE multiple at the end of just about every bull market is 18.89x earnings (Chart 1).  As a sidebar, the SPX’s PE ratio at the end of the late-1990’s bull market was over 30.

Eoin Treacy's view -

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

I was in UPS on Saturday returning something to Amazon and I asked the guys working in the store how business was. They said it was busier than normal for the time of year. That’s what I see in Mrs. Treacy Amazon business too. If that’s the case where is the evidence of the recession?



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June 24 2019

Commentary by Eoin Treacy

The Future of Hydrogen

This report from EIA may be of interest to subscribers. Here is a section

The time is right to tap into hydrogen’s potential to play a key role in a clean, secure and affordable energy future. At the request of the government of Japan under its G20 presidency, the International Energy Agency (IEA) has produced this landmark report to analyse the current state of play for hydrogen and to offer guidance on its future development. The report finds that clean hydrogen is currently enjoying unprecedented political and business momentum, with the number of policies and projects around the world expanding rapidly. It concludes that now is the time to scale up technologies and bring down costs to allow hydrogen to become widely used. The pragmatic and actionable recommendations to governments and industry that are provided will make it possible to take full advantage of this increasing momentum.

Hydrogen can help tackle various critical energy challenges. It offers ways to decarbonise a range of sectors – including long-haul transport, chemicals, and iron and steel – where it is proving difficult to meaningfully reduce emissions. It can also help improve air quality and strengthen energy security. Despite very ambitious international climate goals, global energy-related CO2 emissions reached an all-time high in 2018. Outdoor air pollution also remains a pressing problem, with around 3 million people dying prematurely each year.

Hydrogen is versatile. Technologies already available today enable hydrogen to produce, store, move and use energy in different ways. A wide variety of fuels are able to produce hydrogen, including renewables, nuclear, natural gas, coal and oil. It can be transported as a gas by pipelines or in liquid form by ships, much like liquefied natural gas (LNG). It can be transformed into electricity and methane to power homes and feed industry, and into fuels for cars, trucks, ships and planes.

Eoin Treacy's view -

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

The dramatic decline in natural gas prices and the abundant quantities being produced and in reserve mean that it is inevitable that new sources of demand will appear to take advantage. Since natural gas is one of the primary sources of hydrogen, it makes sense to promote fuel cell vehicles or range extenders for electric vehicles. How long it will take for this evolution to have an effect on the market is questionable, but it will probably be the catalytic event necessary to boost prices out of the long-term base. 



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June 24 2019

Commentary by Eoin Treacy

Bitcoin Surpasses $11,000 as Memories of Popped Bubble Fade

This article by Eric Lam, Vildana Hajric and Joanna Ossinger for Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin traded above $11,000 for the first time in 15 months, recouping more than half of the parabolic

increase that captured the attention of mainstream investors before the cryptocurrency bubble burst last year.

“The bounce-back of Bitcoin has been fairly extraordinary,” said George McDonaugh, chief executive and co-founder of London-based blockchain and cryptocurrency investment firm KR1 Plc. “Money didn’t leave the asset behind, it just sat on the sidelines waiting to get back in.”

Eoin Treacy's view -

When I got on the plane yesterday Bitcoin was trading at around $10,000. When I landed in London it was at $11,000. That’s a big move even for bitcoin. So, what’s going on?



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June 21 2019

Commentary by Eoin Treacy

June 21 2019

Commentary by Eoin Treacy

Stocks Whipsawed as Quadruple Witching Spurs Bursts of Volume

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

One scenario on how Friday’s event may have boosted share prices was laid out by Charlie McElligott, a cross-asset strategist at Nomura. In a note earlier this week, he attributed buying to traders who sold bullish options on the S&P 500 at strike prices of 2,950.

The muddling effect from quadruple witching may not be over this week, according to McElligott. As the market loses the buying “impulse” from options traders, stocks may fall next week, prompting a narrative that investors are starting to doubt the Fed and setting the stage for the S&P 500 to rally to 3,000, he said.

“The market then risks ‘mis-reads’ this potential flow-centric weakness in equities next week as some sort of ‘fading the Fed’—when in fact it’s almost entirely mechanical in nature,” McElligott wrote. “This type of head-fake could in fact see more shorts added and sentiment purge, which then perversely is the fodder for a melt-up.”

Eoin Treacy's view -

Quadruple witching is usually a storm in a teacup and seldom corresponds with major tops or bottoms. The one thing we do know is when a market makes a new high after a period of ranging, the headline level puts shorts on notice. 



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June 21 2019

Commentary by Eoin Treacy

Maldives Holidays and SUVs Are Badges of Shame Now: Chris Bryant

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

The windshields of large cars parked in my Berlin neighborhood were plastered this week with angry
messages on lurid orange stickers. The owners were told that: “Driving an SUV causes serious climate damage,” “SUVs harm your unborn child,” and “Driving an SUV causes impotence.” That last one may have been a joke.

Sports utility vehicles have long been hated by the more civic-minded among us. They tend to consume more fuel, spew out more pollution and take up more parking space. It’s been suggested that their size and weight are also partly to blame for the rising number of pedestrian road deaths.

Eoin Treacy's view -

Angela Merkel has been Germany’s Chancellor for longer than anyone before her and her chosen successor has been deemed no longer fit for purpose. That leaves the competition to replace her wide open and it is increasingly likely that the next government will be heavily dominated by the Green Party. This will represent the latest iteration of the populist wave which in this case will see leftwing populists gain sway over a major economy.



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June 21 2019

Commentary by Eoin Treacy

Solar Cycle Science

The subject of solar minimums is starting to arise once more in popular media and this site, from a former NASA scientist, contains all of the relevant information. Here is a section:

In the 1800s astronomers realized that the appearance of sunspots was cyclic, with a period averaging about 11 years. As new features of the Sun (solar flares, filaments, prominences, coronal loops and coronal mass ejections) were discovered, it was found that they too varied along with the frequency of sunspots. The sunspot number is now commonly accepted as a measure of solar activity. Solar activity itself has been linked to satellite failures, electrical power outages, and variations in Earth’s climate. The impact of solar activity on Earth and our technology has created a need for a better understanding of, and the ability to predict, solar activity.

Sunspot activity over the last four hundred years has shown that the amplitude of the sunspot cycle varies from one cycle to the next. The average cycle has a peak sunspot number of about 150. At times, as in the period known as the Maunder Minimum between 1645 and 1715, solar activity can become so weak that it seems to disappear for several decades at a time.

Eoin Treacy's view -

The Maunder Minimum persisted for about 50 years between 1650 and 1700 but rigorous recording of sunspot activity did not really start until 1750. I see a lot of misreporting of data by lobby groups arguing both for and against anthropomorphic climate change with each bending the data to fit their own narrative. I did some cycle analysis of solar cycles a decade ago predicted the lower high of the current cycle so I thought would refresh that now.



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June 20 2019

Commentary by Eoin Treacy

Video commentary for June 20th 2019

June 20 2019

Commentary by Eoin Treacy

Gold Achieves Liftoff as Prices Rocket Toward $1,400 an Ounce

This article by Elena Mazneva and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Investors are pouring money into gold-backed ETFs again, following four months of outflows. Holdings tracked by Bloomberg have already seen the biggest monthly increase since January.

Bullion producers are also catching an uplift. The $10 billion VanEck Vectors Gold Miners ETF, which tracks shares of gold mining companies, jumped to the highest in more than a year on Thursday. And a separate gauge of senior gold producers including Yamana Gold Inc. and Barrick Gold Corp. rallied to the highest since November 2016.

Central Bank Buying
In another bullish signal for gold, central banks are continuing to buy the metal as countries diversify their assets away from the U.S. dollar. China increased its reserves for a sixth straight month in May.

Other countries have also been buying -- first-quarter purchases were the highest in six years, with Russia and China the largest buyers, according to the World Gold Council.
 

Eoin Treacy's view -

The money flowing into gold ETFs is positive but it is nothing compared to the volume that flowed into the asset class during the gold bull market. What is positive, however, is the trend has continued higher since the initial surge in 2016 which suggests net investor demand has remained in place despite the range which has persisted for the last few years.



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June 20 2019

Commentary by Eoin Treacy

Currency war is the next phase of global conflict and Europe, the chief parasite, is defenceless

This article by Ambrose Evans Pritchard for the Telegraph may be of interest to subscribers. Here is a section:
 

The deflationary cancer is now so deeply lodged in the eurozone that it would take helicopter money or People's QE -- monetary financing of public works -- to fight off any future global slump. Such action would violate the Lisbon Treaty and would test to destruction Germany's political acquiescence in the euro project.

In truth QE in Europe has always worked chiefly through devaluation. The euro's trade-weighted index fell 14 percent a year after Mr. Draghi first signalled in 2014 that bond purchases were coming. That was powerful stimulus. When the euro climbed back up the eurozone economy stalled.

It takes permanent suppression of the exchange rate to keep euroland going. As the Japanese have discovered, it is very hard for an economy with near zero inflation and a structural trade surplus to stop its exchange rate from rising unless it resorts to overt currency warfare. That is exactly what Mr. Trump is not going to allow.

Every avenue of monetary stimulus is cut off in the eurozone. Only fiscal stimulus a l'outrance -- 2 or 3 percent of GDP -- will be enough to weather a serious crisis. That too is blocked.

“The ECB has masked the fragility over the last seven years and nobody knows when the hour of truth will come,” said Jean Pisani-Ferry, economic adviser to France's Emmanuel Macron and a fellow at the Bruegel think tank.

“There is no common deposit scheme for banks. Cross-border investments are retreating. The vicious circle between banks and states could come return any moment,” he said.

Mario Draghi's rhetorical coup in July 2012 worked only because he secured a partial approval from Germany for the ECB to act as lender-of-last resort for Italy's debt (under strict conditions). That immediately halted an artificial crisis. The situation today is entirely different. The threat is a deflationary slump. The ECB has no answer to this.

Markets thought they heard a replay of "whatever it takes" in Mr. Draghi's speech and hit the buy button. But economists heard another note in Sintra: a plaintive appeal for EMU fiscal union before it is too late.

The exhausted monetary warrior was telling us that the ECB cannot alone save the European project a second time.

Eoin Treacy's view -

It is arguable how much the USA needs an interest rate cut with full employment, compressed bond yields and a consumer which is in rude health. Low yields are spurring a mortgage refinancing binge and the decline in oil prices is also putting money in people’s pockets.



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June 20 2019

Commentary by Eoin Treacy

Thucydides Trap and gold

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

His main focus is to outline where the US and China are with respect to realpolitik, or practical considerations, and how to avoid war. The signs are not good.

Writing in The Atlantic, Allison states that “Based on the current trajectory, war between the United States and China in the decades ahead is not just possible, but much more likely than recognized at the moment.” That was written in 2015, before the trade war started, so the case for war is even stronger now.

According to Allison, events that could make two nations fall into the trap may be small, “business as usual” conflicts that, if they occurred in a different dynamic, would lead to nothing. For example, the assassination of archduke Ferdinand, a relatively obscure and minor figure, was the spark that lit a whole conflagration of events that plunged Germany, an ascendant maritime power, into war with Britain, whose Royal Navy ruled the seas for decades. Consider the current conflicts between the Chinese and US navies in the South China Sea and the Taiwan Strait. It would not take much - say a collision between two warships - to ignite the powder keg of war.

However, for the threat to be taken seriously, the rising power must have the capability to take on the incumbent power. Henry Kissinger, the US former secretary of state, wrote that “once Germany achieved naval supremacy … this in itself - regardless of German intentions - would be an objective threat to Britain, and incompatible with the existence of the British Empire.”

Eoin Treacy's view -

Technological innovation is a doubled edged sword. It opens up new markets and provides greater efficiencies. It helps to boost economic growth but it also displaces military technology and upsets the status quo. That allows new entrants a chance to gain comparative advantage.



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June 19 2019

Commentary by Eoin Treacy

Video commentary for June 19th 2019

June 19 2019

Commentary by Eoin Treacy

Fed Scraps `Patient' Rate Approach in Prelude to Potential Cut

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

While inflation near the goal and a strong labor market are the most likely outcomes, “uncertainties about this outlook have increased,’’ the Federal Open Market Committee said in the statement following a two-day meeting in Washington. “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

The FOMC vote was not unanimous, with St. Louis Fed President James Bullard dissenting in favor of a quarter-point rate cut. His vote marked the first dissent of Powell’s tenure as chairman.

Policy makers were starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of the year as another eight saw no change and one forecast a hike, according to updated quarterly forecasts.

In the statement, officials downgraded their assessment of economic activity to a “moderate” rate from “solid” at their last gathering.

The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that President Donald Trump’s trade war is slowing the economy’s momentum and that rates are too restrictive given sluggish inflation.

Eoin Treacy's view -

This statement tees up a rate cut in July. That is what the bond market has been pricing in and it got confirmation of that assumption today. Investor focus will now turn to the expectation that another cut will follow in September.



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June 19 2019

Commentary by Eoin Treacy

Musings from the Oil Patch June 18th 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here Is a section on the commodity/S&P500 ratio:

When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  

Eoin Treacy's view -

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

This ratio has been doing the rounds of pundit commentary for the last couple of years because commodities are trading at a such a record low level relative to stocks. Jeff Gundlach in particular has been predicting a resurgence in commodity prices because of their relative discount to stocks and one of the reasons private equity has been so interested in the energy space is because of the relative discount to equities on offer, coupled with the prolific production profiles (and early payback) of unconventional wells.



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June 19 2019

Commentary by Eoin Treacy

Email of the day on gold in other currencies and stock market/commodity ratios:

I am enjoying the commentary as usual. 

I had two questions for which I would be grateful for your opinion:

I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

I thank you and look forward to hearing from you in due course. 

Eoin Treacy's view -

Thank you for these questions which I’m sure will be of interest to other subscribers. Gold is a commodity and subject to supply and demand fundamentals just like everything else but it is also a monetary metal. That means it tends to trade more like a currency than a commodity.



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June 19 2019

Commentary by Eoin Treacy

U.K. Inflation Returns to BOE Target on Air Fares, Car Prices

This article by Jill Ward and Andrew Atkinson for Bloomberg may be of interest to subscribers. Here is a section:

The figures come a day before the BOE’s latest policy decision. As many central banks around the world shift into a more dovish mode, U.K. officials have been trying to push in the other direction, repeating a message that interest rates may have to rise more than the market currently anticipates if there’s a smooth Brexit.

Investors haven’t taken much heed given the continuing uncertainty over Britain’s exit from the European Union. Certainly in the short term, the latest inflation figures give policy makers breathing space to wait and keep interest rates on hold.

The BOE expects inflation to fall back below target this year. In May, it forecast that price growth would average 2.1% this quarter, easing to about 1.6% by late 2019.

Eoin Treacy's view -

The Bank of England is protective of its independence, especially amid the continued contentious discussion about the merits or otherwise of Brexit. Nevertheless, with central banks all over the world signalling a willingness to cut rates, it seems foolhardy of the Bank of England to continue to signal its willingness to raise rates.



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June 18 2019

Commentary by Eoin Treacy

June 18 2019

Commentary by Eoin Treacy

ECB Rate Cut Is Weapon of Choice as Draghi Threatens Action

This article by Paul Gordon and Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

ECB President Mario Draghi appeared to set a low bar for action on Tuesday when he said additional stimulus will be needed “in the absence of any improvement” to the outlook for growth and inflation. He specifically cited rate reductions as an option, sending the euro lower and prompting money markets to price in a 10 basis-point cut by December.

Investors subsequently brought forward their expectations to September after Bloomberg’s report. Commerzbank now predicts such a policy step in July.

“Draghi is going to finish his tenure with a cut,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics. “The door is now open and I don’t see how they can not walk through it.”

Eoin Treacy's view -

There is a first principles question that governments have no appetite to grasp. “How do you recover from a debt bust?” We know what the answers are. You default, recapitalise and try not to make the same mistake again. The problem in Europe is the creditors are Northern European pension funds and the debtors were peripheral banks, who have had much of their debt absorbed by their respective governments. The prospect of debt forgiveness, therefore, has massive issues of moral hazard and was untenable politically, even though it remains necessary if the debt mountains are to be dealt with and growth prospects renewed.



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June 18 2019

Commentary by Eoin Treacy

Are Valuations Irrelevant?

This presentation by Rob Arnott for Research Affiliates may be of interest to subscribers.

Eoin Treacy's view -

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

This is a robust defense of Shiller P/E which, at 30, is at it second highest peak in history; surmounted only by the Tech Bubble. Let’s for a moment consider that it would be unwise to expect the best performers of the last decade to be the best performers of the next decade. After all, it only makes sense when we consider the base effect. It is obviously more difficult to double from a market cap of $1 trillion than from $1 billion.



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June 18 2019

Commentary by Eoin Treacy

Visa, Mastercard, PayPal Join Facebook to Form Crypto Effort

This article by Julie Verhage, Jenny Surane and Kurt Wagner for Bloomberg may be of interest to subscribers. Here is a section:

The currency, called Libra, will launch as soon as next year. It’s what’s known as a stablecoin, one that can avoid massive fluctuations in value so it can be used for everyday transactions. Industry experts and insiders say the payments companies want a seat at the table to help shape the new currency.

“It’s not unusual for the incumbents -- Visa, Mastercard, PayPal -- to partner with a disruptor,” Harshita Rawat, an analyst at Sanford C. Bernstein, said in an interview. “They would at least want to participate in how this product is being developed.”

New payment methods such as Apple Pay and other mobile wallets are often slow to take off, so any competition is likely to be years away. Still, the earlier payments companies come to the project, the more time they have to ensure their businesses don’t suffer.

Eoin Treacy's view -

A stablecoin is specifically designed to hold parity with a base fiat currency and therefore is not suited to speculative investment. They do, however, have attractions as being easy to convert into other crypto assets and have the same portability features. The one challenge stablecoins have had is there have a couple of instances of them being used as Ponzi schemes, because the provider did not have the assets on deposit to support the currency’s value. Facebook will likely solve for that problem at least, considering its substantial cash pile, but the much bigger issue will be in how it can monetise the financial transactions of its billions of users. That is where the clear investment opportunity resides.



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June 18 2019

Commentary by Eoin Treacy

The Man Who Inherited Australia's Downturn Just Isn't That Fazed

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

That’s all put the economy on track for its weakest fiscal year since the last recession in 1991. Even the Reserve Bank, which rarely wades into political territory, is urging more government stimulus after cutting interest rates for the first time in almost three years.

But whether boxed in by his sunny disposition or pledges to deliver a budget surplus made ahead of the government’s shock re-election last month, Frydenberg appears unfazed. While he’ll push to pass tax cuts when parliament resumes on July 2 and ramp up infrastructure spending, that’s about it, leaving the heavy lifting of stimulus to the central bank.

“I’ve found the treasurer to be remarkably sanguine,” said Danielle Wood, an economist at the Grattan Institute, an independent think tank in Melbourne. “When you’ve got the central bank governor coming out and talking about perhaps moving to stimulatory fiscal policy as well as the need for more long-term structural reforms, I’d be hoping for a more substantive response.”

Eoin Treacy's view -

The RBA cutting interest rates to previously unimagined levels, with more to come, is a bonus for consumers with floating rate mortgages, but the wider concern is about the health of the Chinese economy which Australia depends on for export demand growth.



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June 17 2019

Commentary by Eoin Treacy

June 17 2019

Commentary by Eoin Treacy

Internet Trends 2019

This report from Mary Meeker at Bond includes a large number of graphics which may be of interest to subscribers. Here is a section from the introduction:

The rapid rise of gathered / analyzed digital data is often core to the holistic success of the fastest growing & most successful companies of our time around the world. Context-rich data can help businesses provide consumers with increasingly personalized products & services that can often be obtained at lower prices & delivered more efficiently. This, in turn, can drive higher customer satisfaction. Better data-driven tools can improve the ability for consumers to communicate directly & indirectly with businesses & regulators.

Core constituents (consumers / businesses / regulators) are increasingly drinking from a data firehose & management challenges continue to rise for all parties. Broad awareness of challenges (& related vigorous / heated debates) can be the first step in driving change.

Consumers are aware of concerns about Internet usage overload & are taking steps to reduce usage – leading USA-based Internet platforms have rolled out tools to help monitor usage & social media usage growth appears to be decelerating following a period of strong growth. Privacy & problematic content concerns are also top-of-mind & are following similar patterns.

Owing to social media amplification, reveals / actions / reactions about events can occur quickly – resulting in both good & bad outcomes. In markets where online real-time rating systems exist, accountability can be improved vs. offline options as consumers & businesses interact directly while regulators can also benefit.

Rapidly expanding connectivity has helped amplify voices of good & bad actors. This has brought new focus to an age-old challenge for regulators around the world – finding the most effective ways to amplify good & minimize bad, often resulting in different regional interpretations & strategies.

Eoin Treacy's view -

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

The march of technology and pace of innovation as massive data sets are parsed, managed and exploited has helped to drive the bull market in data centres and the resulting cloud-based product offerings. That remains a powerful trend because new business models are springing up to lever the potential for costumer engagement from automating the product offering to cater to user demand. That represents a reversal of the traditional product to customer model and is a primary trend behind the creation of new companies.



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June 17 2019

Commentary by Eoin Treacy

The Power of Self-Learning Systems

This presentation by Demis Hassabis from DeepMind may be of interest to subscribers. I found it fascinating.

June 17 2019

Commentary by Eoin Treacy

Illinois farmers give up on planting after floods, throw party instead

This article by Tom Polansek for Reuters may be of interest to subscribers. Here is a section:

Nationwide, farmers are expected to harvest the smallest corn crop in four years, according to the U.S. Department of Agriculture. The agency last week reduced its planting estimate by 3.2% from May and its yield estimate by 5.7%.

Farmers think more cuts are likely as the late-planted crop could face damage from hot summer weather and an autumn frost.

“An early frost will turn this world upside down,” Rock Katschnig, a farmer from Prophetstown, Illinois, said at the party.

Eoin Treacy's view -

It is one thing to have worries about being able to sell into overseas markets like China, it is quite another challenge not to have inventory at all. The failure to plant spring crops represents a significant risk for farmers if they plant late because of getting the wrong weather at the wrong time and potentially delaying winter crops.



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June 17 2019

Commentary by Eoin Treacy

Facebook's Answer to Bitcoin Is a Double Threat

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

Weekend media leaks suggest that Facebook’s “Libra” project will be a continuation of its past efforts to expand its payments business and keep customers within the walled garden of its social media apps by creating their very own money.

While Zuckerberg is poised to unveil a team of partners – reportedly including eBay Inc., Farfetch Ltd., Spotify Technology SA, Uber Technologies Inc. and Vodafone Group Plc – so far this feels very much like Facebook’s baby. Tellingly, it’s not one that the big banks or the other Silicon Valley and Seattle giants seem ready to adopt quite yet, unless Zuckerberg surprises us with some bigger names at the launch.

The target customer base for these new digital tokens looks certain to be the 2.6 billion-strong user base of Facebook, WhatsApp and Instagram.

While Facebook will no doubt assure us that this project is all about making the lives of its customers ever easier, giving them the ability to actually buy stuff in a way that Bitcoin has rarely offered, it’s hard to square it away with the political effort to curb Big Tech’s monopolistic tendencies (regardless of that roster of launch partners and their $10 million participation fees). 
 

Eoin Treacy's view -

If we were to summarise Facebook’s foray into cryptocurrencies it would be to say that Zuckerberg wants what Jack Ma and Pony Ma have. Alibaba has Ali-Pay and Tencent has WeChat-Pay. Respectively these represent the crown jewels of their respective business empires, because the payments platforms tie users to the parent app but also enable a significant multiplier effect by linking buyers with sellers.  

 



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June 14 2019

Commentary by Eoin Treacy

June 14 2019

Commentary by Eoin Treacy

YouTube University

Thanks to a subscriber for these notes from Jeff Gundlach’s conference call on Thursday. Here is a section:

Eoin Treacy's view -

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

This idea that President Trump has a plan to make sure the economy is humming in the run-up to the Presidential Election is gaining ground on Wall Street and elsewhere. David Rosenberg put out a tweet last week expressing the same sentiment. 

Maybe Trump is a genius, after all. What if he finally gets the steep Fed rate cuts he has been demanding? After that, he ends the trade wars, tariffs go to zero, and the stock market surges to new highs -- just in time for the 2020 election!

I agree it is certainly possible he is self-absorbed enough to try and attempt to shape the economy’s prospects to his own interests but there is an alternative interpretation which does not get a lot of airplay.



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June 14 2019

Commentary by Eoin Treacy

Disruptive Innovation: WHY NOW?

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

Eoin Treacy's view -

Secular bull markets are most often driven by massive technological innovation which creates productivity and growth and efficiencies where none where possible previously. That was true of mechanisation, electricity, semiconductors and the internet. It is also likely to be true of biotechnology, blockchain, artificial intelligence, robotics and batteries.



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June 14 2019

Commentary by Eoin Treacy

This Time It's Different

Thanks to a subscriber for this note from Howard Marks, for Oaktree which may be of interest. Here is a section:

Eoin Treacy's view -

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

The biggest manias tend to have the biggest internal contradictions which everyone is conditioned to accept while the bubble is inflating but can identify as ridiculous after it pops. That is one of the most important tenets of crowd psychology to remember during the Third Psychological Perception Stage of a bull market; where bubble risk is most acute.



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June 13 2019

Commentary by Eoin Treacy

Video commentary for June 13th 2019