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October 05 2016

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

Unfortunately, that is a big ask.

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



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October 05 2016

Commentary by David Fuller

Alaska Oil Reserves May Have Grown 80% on Giant Discovery

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

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

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

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

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

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

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

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

David Fuller's view -

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

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October 05 2016

Commentary by David Fuller

Hurricane Matthew Is a $15 Billion Threat Headed to Florida

Here is the opening of this worrying report from Bloomberg:

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

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

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

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

David Fuller's view -

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



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October 05 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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October 05 2016

Commentary by Eoin Treacy

Musings from the Oil Patch October 4th 2016

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

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

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

Eoin Treacy's view -

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

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

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



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October 05 2016

Commentary by Eoin Treacy

Email of the day on the differences between moving average calculations

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

Eoin Treacy's view -

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



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October 05 2016

Commentary by Eoin Treacy

All eyes on the spending cap

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

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

Eoin Treacy's view -

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

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



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October 05 2016

Commentary by Eoin Treacy

October 04 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 04 2016

Commentary by Eoin Treacy

Australia Stands Pat on Rates as Commodity Rebound Gathers Pace

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

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

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

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

 

Eoin Treacy's view -

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



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October 04 2016

Commentary by Eoin Treacy

October 04 2016

Commentary by Eoin Treacy

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

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

And

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

And 

I really like your new audio/visual format

And

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

And

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

And

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

And

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

 

Eoin Treacy's view -

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



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October 04 2016

Commentary by Eoin Treacy

Email of the day on the possible nationalisation of Deutsche Bank

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

Eoin Treacy's view -

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



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October 04 2016

Commentary by Eoin Treacy

October 03 2016

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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



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October 03 2016

Commentary by Eoin Treacy

Adobe Expertly Balances Growth and Profitability

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

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

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

 

Eoin Treacy's view -

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

 



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October 03 2016

Commentary by Eoin Treacy

Donald Trump Is Handing a Windfall to Mexican Immigrant Families

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

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

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

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

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

 

Eoin Treacy's view -

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



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October 03 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 30 2016

Commentary by Eoin Treacy

Subscriber's Audio and Video Commentary

As discussed in last night's Audio I have recorded the big picture long-term audio in a somewhat different format today using both the Real Audio recorder but also recording my screen movements to create an accompaying video where individual charts are discussed. 

September 30 2016

Commentary by David Fuller

Secret Alpine Gold Vaults Are the New Swiss Bank Accounts

Here is the opening of this interesting article from Bloomberg:

Deep in the Swiss Alps, next to an old airstrip suitable for landing Gulfstream and Falcon jets, is a vast bunker that holds what may be one of the world’s largest stashes of gold. The entrance, protected by a guard in a bulletproof vest, is a small metal door set into a granite mountain face at the end of a narrow country lane. Behind two farther doors sits a 3.5-ton metal portal that opens only after a code is entered and an iris scan and a facial-recognition screen are performed. A maze of tunnels once used by Swiss armed forces lies within.

The owner of this gold vault wants to remain anonymous for fear of compromising security, and he worries that even disclosing the name of his company might lead thieves his way. He’s quick to dismiss questions about how carefully he vets clients but says many who come to him looking for a safe haven for their assets don’t pass his sniff test. “For every client we take, we turn one or two away,” he says. “We don’t want problems.”

Demand for gold storage has risen since the 2008 financial crisis. Many of the wealthy see owning gold as a hedge against the insecurity of banks and a reasonable investment at a time when markets are volatile and bank accounts and low-risk bonds pay almost no yield. It may also be a way to avoid the increasing scrutiny of tax authorities. In high-profile cases, U.S., French, and German prosecutors have gone after citizens of those countries with undeclared Swiss bank accounts.

David Fuller's view -

I first became really interested in gold and silver in the early 1970s, when I was MD of a little research company called Chart Analysis Limited, founded by Teddy Clarke which I eventually bought out.  After years of inactivity, precious metals had developed the best base formations, along with some other commodities.  They were also in the early stages of uptrends within our universe of hand-drawn price charts, which included commodities, most UK shares and also leading international shares from the USA to Japan.  Perhaps a few veteran subscribers still remember those days. 

Commodity Analysis Ltd, also founded by Teddy Clarke, was in the floor above Chart Analysis Ltd so I had plenty of exposure to commodities.  In fact, it was one of the reasons why I had moved to London.  The 1970s produced one of the great bull markets in commodities, not to be repeated until the first decade of this century. 

How about 2016?

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September 30 2016

Commentary by David Fuller

Liam Fox Is Right: Our Future Is Global

Liam Fox, the International Trade Secretary, was quite right yesterday to speak of Britain’s post-Brexit trading potential.Leaving the EU, he argued, means we can not only forge new free-trade arrangements but also make the wider case for liberalisation. Given that the economy has not collapsed since the referendum, and that so many non-EU countries have shown interest in doing business with the UK, there is plenty of reason for optimism. Looking at the state of affairs across the Channel, it increasingly seems as if Britain dodged a bullet by voting to leave.

Take Germany. The country prides itself on prudence and stability, often lecturing southern Europeans on their profligacy. Yet financial markets are gripped with fear over Deutsche Bank and Commerzbank, pillars of the European banking system. Those fears reflect the awkward fact that Germany’s supposedly conservative banks have been big buyers of exotic and thus risky bonds. The markets also remember that in the last financial crisis, Germany’s ultra-respectable regional savings banks were revealed as reckless lenders and had to be bailed out by taxpayers.

In this context, the notion that Frankfurt might replace London as the centre of European banking seems incredible. And while Germany may be Europe’s biggest economy, its problems are not unusual: it is simply the latest eurozone country to be left fearing for its banks. That is telling, a reminder that the currency’s single interest rate for so many diverse economies fosters instability, not least by leaving a high-growth economy such as Germany awash with cheap money.

Will German banks need another bail-out? Will the eurozone survive in its current form? The EU clearly faces major structural challenges as well as that raised by Brexit. We could add the refugee crisis to the list – and the rise of nationalist parties proves that the desire for greater control over national borders is far from unique to Britain. By choosing to vote out, the UK increasingly looks farsighted rather than, as some bitter Remainers have complained, petulant.

The Tory conference begins on Sunday and it is a chance to spread Dr Fox’s message. Brexit, if pursued cleverly, can offer an example to the world of the advantages of free trade. For Britain, it may eventually mean a more competitive and outward looking economy. The future of the UK is global, not just European.

David Fuller's view -

This is a good editorial and I am hoping to see a reasonably united and confident Tory Party Conference, commencing on Sunday, although there is clearly a Hard versus Soft Brexit divide.  Some Remain voters say people did not know what they were voting for.  I disagree and find that patronising.  I believe the majority who voted for Brexit want us to leave the EU and then negotiate terms of trade with Europe and the rest of the world. 

Robust discussions are fine but the Conservative Party will provide better leadership at an important time if it concludes the Conference with a united policy.    

See also: May’s Real Opposition Lies in Tory Ranks as Brexit Splits Emerge, from Bloomberg)

 



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September 30 2016

Commentary by David Fuller

Email in the Daily Telegraph on Thursday:

On demystifying Brexit:

Sir – I do not understand the furore over Brexit.  A plan of action can be summarised in a few paragraphs.

All EU legislation is also already British legislation, other than that currently going through Parliament.  It sands unless repealed.

We withdraw all MEPs immediately and stop paying for EU central costs.  Single market trade continues unless countries within the EU decide they want it to stop.  The rules on migration into Britain from EU countries are immediately supplanted by those applying to migrants from the rest of the world.  All working EU nationals are allowed to stay.  After five years’ residence, they must apply for citizenship.  Only those accepted will be allowed to stay further.

Britain resumes control of agricultural subsides, research funding and fisheries.

Finally, Britain continues to support ongoing projects in EU countries which are net beneficiaries of EU funds for two years, during which time we negotiate how to refinance such projects. 

There it is – and in less than a page of A4.

John Atkins

Cuxham, Oxfordshire

David Fuller's view -

I think he is right.  There has been a huge amount of bluff and bluster, including dire warnings, about how it is much too complicated, tortuous and costly to leave the EU.  We have also heard from EU propagandists that the process would require dozens of highly skilled negotiators and could take many years.  Shamefully, we also heard versions of this from David Cameron and George Osborne during the Referendum, including how it would impoverish the country. 

Fortunately, UK voters were not cowed. Instead, they chose to regain our sovereignty as an independent nation, in control of our borders, immigration policies and fishing rights, free to develop trade agreements not only within Europe but also with other prospering nations around the globe.      

Let’s get on with it.  



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September 30 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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September 30 2016

Commentary by Eoin Treacy

Ultra-Easy Money: Digging the Hole Deeper?

Thanks to a subscriber for this excellent summary of the rationale, effects and repercussions of loose monetary policy. Here is a section:

These are not just theoretical considerations. The BIS Annual Report of 2014 sounded the alarm when it noted that the level of debt in the AMEs (sum of corporate, household and governments) was then significantly higher than it had been in 2007. Moreover, it has since risen further, to over 260 percent of GDP. This increase has prompted the question “Deleveraging? What deleveraging?”18 This suggests that, by following polices that have actively discouraged deleveraging, we may instead have set ourselves up for an even more serious crisis in the future.

As for the history of economic thought, Keynes himself said in Chapter 13 of the General Theory (1936) that monetary stimulus was likely to be ineffective; “If, however, we are tempted to assert that money is the drink that stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip”. This conclusion marked a sharp change from the policy changes he had recommended in the Treatise on Money (1930). Hayek (1930, p21) went even further in suggesting that monetary easing would actually hold recovery back. “To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about”.

And 

The BIS Annual Report for 2016 also highlights a number of persistent market anomalies27. Not only do they indicate price distortions and potential misallocations but could also indicate underlying structural developments whose full implications for market liquidity are not yet obvious. Recall the plight of European banks in 2008 who had borrowed dollars from money market mutual funds in the US. When this source of funding dried up, the Federal Reserve was forced to reopen US dollar swap lines that it had closed only a few years earlier. All that can be said with certainty, is that we are in uncharted territory when it comes to market functioning.

And for the record, it should be noted that central bank policies might have had other downsides as well. First, with income distribution already a source of great concern (due mainly to changing technology and globalization) the recent stance of monetary policy has likely made it worse. The rich own most of the risky financial assets whose prices have increased the most. Conversely, the middle classes mainly hold the less risky interest-bearing assets whose yields are at record lows. While central banks seem increasingly aware of these effects29, what can be done about them is another issue

 

Eoin Treacy's view -

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

I think we can all agree that the introduction of extraordinary monetary policy helped to avoid a much deeper economic contraction but has also led to distortions in how markets function and contributed to asset price inflation. There are substantial questions about what the eventual normalisation of policy might look like but equally important are considerations of what a further intensification of extraordinary policy might look like. 



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September 30 2016

Commentary by Eoin Treacy

Extreme pollution forces China to shut down hundreds of coal, steel operations

This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section:

The country’s state planner said that after inspecting more than 4,600 coal mines it decided to revoke safety certificates for 28 of them and shut another 286 operations for not complying with environmental and safety regulations.

The National Development and Reform Commission (NDRC) also ordered two steel firms to close permanently, 29 companies to suspend output and another 23 to reduce production, it said in the statement.

China will also set up a no-coal zone in cities around Beijing in 2017 to try reducing the capital's hazardous smog levels. As an additional measure, the government will ban factories and households in 18 districts and towns of the Hebei province from both burning coal and building new power generators powered by petroleum coke, Xinhua News Agency reported.

A study by Chinese and American researchers published last month blamed burning coal as the cause of premature death for about 366,000 people in 2013.

 

Eoin Treacy's view -

The fact that China is taking action to at least partially rationalise its coal and steel sector is good news for the global steel sector overall which has been struggling to compete with China’s massive oversupply of cheap product. 

 



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September 30 2016

Commentary by Eoin Treacy

"One Belt, One Road"- An Economic Roadmap

Thanks to a subscriber for this report from the Economist Intelligence Unit focusing on Africa which may be of interest. Here is a section:

According to the World Bank’s Private Participation in Infrastructure Projects Database and InfraPPP, Kenya and Tanzania have awarded 12 PPP infrastructure projects since 2011. These represent investments of more than US$1.3bn (see Africa table 1). All projects relate to electricity generation, mobile-phone networks and roadway construction. As the power networks of the African countries individually profiled in this report still demonstrate high infrastructure risk with their domestic power networks, demand for continued energy sector enhancements is likely to persist until more such projects come online. 

Among projects in various stages of pre-development with confirmed investment values, the largest directly concerning any of the African countries profiled here is the US$7.6bn Dar es Salaam-Rwanda-Burundi Railway, which involves Tanzania (see Africa table 2). For single country projects, Zimbabwe’s US$2.3bn Southern Energy Power Project is being planned around multiple financial contributors including US$1.3bn in debt and US$105m in equity from Chinese sources. Officials in Kenya at present are seeking to address their country’s deficiencies in transportation and energy with two big-ticket projects. The first and most prominent is the US$2.3bn extension of the Standard Gauge Railway connecting the capital, Nairobi, to Malaba, on the border with Uganda, and Kisumu, on the edge of Lake Victoria. The other is a US$2.2bn, 1 gigawatt solar energy programme. Dar es Salaam, Tanzania’s commercial capital, will further benefit from US$2bn in transportation improvements going towards the city’s bus system 

Another 57 identified infrastructure projects are at stages of pre-development or partial completion. Most (nearly 90%) target transportation, water and waste, social and health, energy and telecom needs in Kenya. Tanzania’s projects mainly target port facilities in Dar es Salaam and other commercial centres.

 

Eoin Treacy's view -

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

Africa will be responsible for the majority of population growth over the coming decades. It therefore represents an important potential market for globally oriented companies and countries. China has been at the forefront of developing relationships with African countries not least to secure preferential access to essential resources to fuel its own growth. The building of infrastructure to facilitate the trade between China and East Africa in particular is a major endeavour and should help foster economic development not least as increasing numbers of very low cost manufacturing jobs migrate from China. 



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September 29 2016

Commentary by David Fuller

In U-Turn, Saudis Choose Higher Prices Over Free Oil Markets

Here is a section of this topical article from Bloomberg:

Saudi Arabia has ended its flirtation with free oil markets.

It took the kingdom’s new oil minister, Khalid Al-Falih, just six months to blink, ending the country’s two-year policy of pump-at-will. 

The decision at this week’s meeting of the Organization of Petroleum Exporting Countries in Algiers to cut production was necessitated by Saudi Arabia’s tattered finances. The kingdom has the highest budget deficit among the world’s 20 biggest economies, may delay its first international bond issue and now faces fresh legal uncertainty after the U.S. Congress voted Wednesday to allow Americans to sue the country for its involvement in 9/11.

The decision at this week’s meeting of the Organization of Petroleum Exporting Countries in Algiers to cut production was necessitated by Saudi Arabia’s tattered finances. The kingdom has the highest budget deficit among the world’s 20 biggest economies, may delay its first international bond issue and now faces fresh legal uncertainty after the U.S. Congress voted Wednesday to allow Americans to sue the country for its involvement in 9/11.

And:

For all the justifications, the last two years haven’t panned out as Riyadh thought they would. At home, the kingdom has burned through more than $150 billion of foreign-exchange reserves, government contractors have gone unpaid, and this week the king announced unprecedented pay cuts for civil servants.

Saudi Arabia will suffer a fiscal deficit equal to 13.5 percent of gross domestic product this year, the International Monetary Fund estimates. When it comes to economic growth, Saudi Arabia is slowing sharply to about 1 percent this year while Iran, its nearby rival, is accelerating toward 4 percent.

David Fuller's view -

Saudi Arabia was never likely to achieve more than a Pyrrhic victory in its attempt to bankrupt the USA’s shale oil industry.  In fact, the Saudis have been the biggest losers, burning through more of their once enviable financial reserves than any other oil producer. 

How could this happen?  The Saudi’s were looking for a replay of the 1970s, when they did damage US domestic oil production with the same tactic of competitive oversupply. 

What the Saudis did not fully understand two years ago, was the extent to which technology was changing the global energy industry.  Hydraulic fracturing, known colloquially as fracking, can now tap vast quantities of oil and gas reserves found in shale formations, and not just in the USA. 

Moreover, the combination of previously high oil prices and concerns over global warming have led to the development of renewable forms of energy, which are becoming increasingly competitive. 

(See also yesterday’s lead item: OPEC Agrees to First Oil Output Cut in Eight Years)



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September 29 2016

Commentary by David Fuller

The Era of Robots: Thousands of Builders to Lose Jobs as Machines Take Over, Says Construction Boss.

Skyscrapers in the City of London could soon be built by robots rather than by people, according to the boss of one of the UK’s biggest construction firms.

The result would be huge productivity gains as more work could be done by fewer people – but also mass layoffs as traditionally labour-intensive construction projects hire fewer and fewer staff.

“We’re moving into the era of the robots,” said Alison Carnwath, the chairman of Land Securities, the £8.2bn FTSE 100 construction company.

Speaking at the Institute of Directors’ annual convention, the veteran businesswoman said the pace of technological change has taken her by surprise.

“Five years ago I’d have smiled wryly if somebody had said to me that robots would be able to put up buildings in the City of London – I tell you we’re not that far off, and that has huge implications,” she said.

The adoption of robotics and other new technologies could give parts of the economy a radical boost, as economists and politicians have sought ways to boost productivity, which is key to increasing wages and prosperity.

Those improvements in living standards may not be distributed evenly, however, as redundant building workers may struggle to find work elsewhere.

“Businesses are focusing on [productivity], they want to reengineer how their people can work, they recognise that technology is upon us and is going to destroy thousands of jobs,” said Ms Carnwath, who has been on Land Securities’ board since 2004 and has been chairman since 2008.

David Fuller's view -

This era of accelerating technological innovation, which Fuller Treacy Money has so often talked about for a number of years, is very exciting and productive, leading to remarkable breakthroughs and achievements.  However, it is also highly disruptive, to a degree never previously seen.  One of the biggest problems, which I have mentioned previously, is that jobs are being replaced by technology at a faster rate than new employment opportunities can be found.    

A PDF of Tim Wallace's article is in the Subscriber's Area.



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September 29 2016

Commentary by David Fuller

Goodbye EU, Goodbye Austerity Britain

The era of so-called austerity economics was characterised by modest increases in overall public spending, some unpleasant individual cuts to welfare and huge increases in tax revenues. The rise and rise of our gross and net contributions to the EU aggravated the balance of payments deficit and forced us to borrow more money to meet the demands of Brussels. The sooner we are out of the EU, the sooner we can cancel the contributions. The need for large tax revenues sometimes encouraged the imposition of high taxes that damaged growth and hit jobs. Sometimes raising the rates acutely reduced the tax take. Higher stamp duties hit the property market, while income tax from the rich went up when the rate was brought down a bit.

Leaving the EU is a sovereign decision by a newly sovereign people. It is not something to negotiate with Germany. Offer to continue tariff-free trade, send them the letter and then leave. It should not take two years and does not need to. The rest of the EU are likely to want to carry on with tariff-free trade as they have more to lose from tariffs than us. All services are tariff-free whatever happens, under world rules.

Of course, after we leave we need to continue payments to farmers, universities and others who did get a bit of our EU money back, though most of it did not come home. We can now spend it on our own priorities. But we should not simply use the savings to cut the deficit. We need to get that down by promoting growth. Growth slashes the gap between spending and tax revenues by cutting the need for benefit top-ups as people get jobs and pay rises while boosting the tax revenues as people earn and spend more.

David Fuller's view -

The paragraph above which I have emboldened says it all.  

A PDF of John Redwood's article is in the Subscriber's Area.



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September 29 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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September 29 2016

Commentary by Eoin Treacy

American Exposure to the European Financial Crisis

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

The locus of the 2008 financial crisis was in the United States, and rapid decision making was possible, even if the decisions made were controversial—then and now. The locus of the crisis we are describing will be in Europe, and the greater American exposure to Europe, the greater American pressure will be on Europe to act decisively. Since Europe seems incapable of rapid decision making, this could create a collision with the United States. 

Ultimately, the US is not appreciably exposed directly to the Italian banking crisis. However, the US is deeply exposed to other major Western European countries, particularly France and Germany. The Italian crisis will have deep ramifications, especially for these two countries, and that in turn means that, indirectly, the US economy will feel significant effects from the overall crisis. Looming over it all is the question of derivatives, a question that is all the more ominous because its answer is ambiguous at best. Indirect evidence suggests that this is worse than what the official numbers say, but not so severe as to put the US directly in the path of the coming storm.

In our view, the US will be something of an on-looker this time. While the US will certainly feel the effects of a deeper crisis in Europe, European uncertainty in its response will not create a subsequent political crisis between the US and the EU. Still, the possibility should be borne in mind, depending in large part on how hard the American financial system is hit. Even minor pain and anxiety could cause the US to find the European approach intolerable. Financial crises of this magnitude are not solved by markets but by political systems, which are sensitive to these crises in very different ways than the financial system. 

 

Eoin Treacy's view -

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

Deutsche Bank moved to a new low in afterhours trading today which reflects just how much stress the share is under despite the media fanfare over a single day rally yesterday. The overriding concern many investors will have is that the Eurozone solution to bank problems has included nationalisation rather than bailouts. 



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September 29 2016

Commentary by Eoin Treacy

Beyond Algiers

Thanks to a subscriber for this report from Goldman Sachs which was issued on the 27th, ahead of the OPEC meeting. Here is a section: 

Nonetheless, our 4Q16 oil supply-demand balance is weaker than previously expected given upside surprises to 3Q production and greater clarity on new project delivery into year-end. This leaves us expecting a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously. Importantly, this forecast only assumes a limited additional increase in Libya/Nigeria production of 90 kb/d vs. current estimated output. As a result, we are lowering our 4Q16 forecast to $43/bbl from $50/bbl previously. While a potential deal could support prices in the short term, we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end. Importantly, given the uncertainty on forward supply-demand balances, we reiterate our view that oil prices need to reflect near-term fundamentals – which are weaker – with a lower emphasis on the more uncertain longer-term fundamentals.

Despite a weaker 4Q16, our 2017 outlook is unchanged with demand and supply projected to remain in balance. We expect demand growth to remain resilient while greater than previously expected production declines in US/Mexico/Venezuela/ Brazil/China are offset by greater visibility in the large 2017 new project ramp up in Canada/Russia/Kazakhstan/North Sea. While our price forecast remains unchanged at $52/bbl on average for next year with a 1H17 expected trading range of $45- $50/bbl, we continue to view low cost and disrupted supply as determining the path of an eventual price recovery with our forecasts conservative on both. As we wait for headlines from Algiers, it is worth pointing out that Iran, Iraq and Venezuela have each guided over the past month to a 250 kb/d rise in production next year.

Eoin Treacy's view -

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

Saudi Arabia’s commitment to support a production cut by OPEC of 750.000 barrels made headlines and has influenced the oil market by disrupting the perception, described above, of a balanced market overall. What appears to have made fewer headlines is that Iran will be omitted from the agreement and is therefore free to continue to increase supply in order to regain the market share it lost due to sanctions. Therefore the most likely result is a limited supply cut overall while any boost to prices will encourage unconventional drilling suggesting a cut may be short lived. 



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September 29 2016

Commentary by Eoin Treacy

D-Wave Systems previews 2000-qubit quantum processor

This press release from D-Wave Systems may be of interest to subscribers. Here is a section:

“As the only company to have developed and commercialized a scalable quantum computer, we’re continuing our record of rapid increases in the power of our systems, now up to 2000 qubits.  Our growing user base provides real world experience that helps us design features and capabilities that provide quantifiable benefits,” said Jeremy Hilton, senior vice president, Systems at D-Wave. “A good example of this is giving users the ability to tune the quantum algorithm to improve application performance."

“Our focus is on delivering quantum technology for customers in the real world,” said Vern Brownell, D-Wave’s CEO. “As we scale our processors, we’re adding features and capabilities that give users new ways to solve problems. These new features can enable machine learning applications that we believe are not available on classical systems. We are also developing software tools and training the first generation of quantum programmers, which will push forward the development of practical commercial applications for quantum systems.

Eoin Treacy's view -

D-Wave Systems has received investment from companies like Google and Lockheed Martin as well as NASA but its press releases have tended to trend towards exaggeration. There is considerable debate about the efficacy of the solutions they propose and if one is keeping up with the news there is obviously a chasm between the size of the computers D-Wave claims to be producing and those created by other more conservative companies. 



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September 28 2016

Commentary by David Fuller

OPEC Agrees to First Oil Output Cut in Eight Years

OPEC agreed to a preliminary deal that will cut production for the first time in eight years. Oil prices gained more than 6 percent as Saudi Arabia and Iran surprised traders who expected a continuation of the pump-at-will policy the group adopted in 2014.

The group agreed to drop production to a range of 32.5 to 33 million barrels per day, said Iran’s Oil Minister Bijan Namdar Zanganeh, following a meeting in Algiers. While some members of OPEC will have to cut output, Iran won’t have to freeze production, he said. Many of the details remain to be worked out and the group won’t decide on targets for each country until its next meeting at the end of November.

The lower end of the production target equates to a nearly 750,000 barrels-a-day drop from what OPEC said it pumped in August.

The deal will reverberate beyond the Organization of Petroleum Exporting Countries. It will brighten the prospects for the energy industry, from giants like Exxon Mobil Corp. to small U.S. shale firms, and boost the economies of oil-rich countries such as Russia and Saudi Arabia. For consumers, however, it will mean higher prices at the pump.

"The cut is clearly bullish," said Mike Wittner, head of oil-market research at Societe Generale SA in New York. "What’s much more important is that the Saudis appear to be returning to a period of market management."

The agreement also signals a new phase in relations between Saudi Arabia and Iran, which have clashed on oil policy since 2014 and are backing opposite sides in civil wars in Syria and Yemen. The deal indicates that Riyadh and Tehran, with the mediation of Russia, Algeria and Qatar, were able to overcome the differences that sunk another proposal to cap production earlier this year.

Brent crude surged as much as 6.5 percent to $48.96 a barrel in London. The shares of Exxon Mobil, the world’s largest publicly listed oil company, climbed 4.2 percent, the biggest one-day increase since February.

 

David Fuller's view -

This service has often mentioned that supply is the crucial factor for all commodities.  Supply can change dramatically, particularly for agricultural commodities.  For industrial resources such as crude oil, production cutbacks and supply breakdowns or strikes will firm prices.

In contrast, demand changes gradually, increasing somewhat when prices are low and declining when they are high.  GDP growth or weakness will also influence demand.

This item continues in the Subscriber’s Area.



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September 28 2016

Commentary by David Fuller

Mad Economic Plans of the Labour Party Would Ruin Britain

If anything, John McDonnell, Labour’s shadow chancellor, was controlling himself, restraining his more extreme instincts. He didn’t actually call for the nationalisation of all of the economy, or the introduction of compulsory wage equality, or 90pc tax rates; instead, he tried his best to sound moderate. It didn’t work. His programme is ruinous, backward-looking and economically illiterate. 

True, the Confederation of British Industry managed to put out a mealy-mouthed, painfully laboured press release which wasn’t entirely hostile. But the bottom line remains that a Labour government led by the re-elected Jeremy Corbyn, McDonnell and their hard-left allies would be a disaster for the economy and for business.

He wants to massively increase public spending, dramatically increase government intervention, introduce a Seventies-style industrial strategy with real teeth, decide what parts of the economy are legitimate and which need to be shut down, hike the minimum wage further and faster, and tax wealth. 

It would be a recipe for calamity, a financial and social catastrophe, a negative productivity shock of the like we haven’t seen since – yes, you’ve guessed right – the Seventies. Those companies still reeling from the Brexit vote need to realise that it is Corbyn’s Labour, not our imminent departure from the EU, that is the real enemy.

David Fuller's view -

It is disconcerting, to put it mildly, that the world’s fifth largest economy, and the seventh most efficient according to the World Economic Forum (WEF) (see below), is one bad election result away from being in the hands of a neo-Marxist government.

A government led by Jeremy Corbyn and John McDonnell, with the help of Nicola Sturgeon, would be far to the left of anything this country suffered in the hands of Ed Miliband, Gordon Brown and might have endured in the 1970s if the shambolic Michael Foot had been elected. As a point of reference for non-UK readers, these people make the Clintons look right-wing.   

Corbyn has more often been a figure of fun in the UK, regarded as having no chance in the next general election, and rightly so we hope.  However, the Conservative Party needs to be reasonably united in carrying out the country’s vote to leave the EU.  The surest way to bring Corbyn’s hard-left to power would be to divide and weaken the current government.  

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



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September 28 2016

Commentary by David Fuller

Erdogan Adviser Says Turkey Should Consider Buying Deutsche Bank

Here is the opening of Bloomberg’s report on this provocative comment from Turkey:

Deutsche Bank AG’s crashing share price is prompting takeover speculation from unexpected places. 

Yigit Bulut, a chief adviser to Turkish President Recep Tayyip Erdogan, said the country must consider using a new wealth fund or a group of state-owned banks to buy the Frankfurt-based company. Bulut made the proposal on Tuesday via his Twitter account, saying Germany’s largest lender should be made into a Turkish bank.

The stock of Europe’s biggest investment bank has slumped by more than 50 percent over the past year, falling to a record low on Tuesday, over concerns about its weakening financial position and penalties in the U.S. tied to mortgage-backed securities. Bulut’s comments come after Moody’s Investors Service on Sept. 23 cut Turkey to junk, citing slowing economic growth and deteriorating credit fundamentals.

"For months on TV programs, I’ve been calling on Turkey’s private and public capital: ‘Some very good companies in the EU are going to fall into trouble and we need to be ready to buy a controlling stake in them,’” Bulut wrote on Twitter. "Wouldn’t you be happy to make Germany’s biggest bank into Turkish Bank!!"

The suggestion may ignite political opposition in Germany, where Deutsche Bank -- for all its troubles -- has long been viewed as a national champion and has played an integral role in Germany’s economy.

 

David Fuller's view -

What a metaphorical slap in the face for Angela Merkel.  Cheeky Yigit Bulut, chief adviser to Turkish President Erdogan wants to buy Germany’s ailing flagship bank.  Diplomatic relations between Turkey and the EU in general and Germany in particular have deteriorated significantly in the last year. 

Turkey was paid billions of Euros to keep another huge wave of Middle Eastern and North African migrants out of the EU.  Erdogan wanted unrestricted access to the EU for Turkish citizens and was told no.  Furthermore, various EU leaders, including the UK’s David Cameron before he stood down as Prime Minister after losing the Brexit referendum, had competed with each other in saying that Turkey had no chance of joining the EU for at least a hundred years. 

For Erdogan, this has been the equivalent of saying: we want you to keep our borders clean but your citizens cannot have unrestricted passage in our countries and you might as well not try to join our EU.  I fear it will be a long time before diplomatic relations improve.  



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September 28 2016

Commentary by David Fuller

The UK is the Seventh Most Competitive Economy in the World

Here is the opening of this interesting article from City A.M.

The World Economic Forum (WEF) said the UK had overtaken Hong Kong, Japan and Finland to climb three places in this year’s global competitiveness index, more than reversing last year’s embarrassing fall to 10th place.

The WEF hailed the UK’s strong digital landscape, world-leading institutions and infrastructure, along with its business-friendly regulation and strong connections to the international economy as powering the UK’s climb up the rankings.

The scores are an amalgam of 114 individual measures the WEF believes contributes to the competitiveness of an economy. These range from the macroeconomic environment, education systems and healthcare to business regulation, employment systems and technological penetration.

Switzerland maintained its place at the top of the rankings, with Singapore and the United States completing the top three. The Netherlands, Germany and Sweden were the only other European economies to rank as more competitive than the UK.

The WEF found the UK had the third most “technologically ready” economy in the world, with new technologies widely available, and some of the best internet coverage on the planet. The UK also has the second best management schools in the world, the second-most advanced advertising industry, strong intellectual property rights and scored top for foreign ownership of companies.

Chancellor Philip Hammond said the results “demonstrate our ability to sharpen our edge and improve our competitiveness.”

He added: “This government will build on that progress, as we demonstrate to the world that Britain continues to be highly competitive and open for business.”

David Fuller's view -

These measures are subjective, not least in their sector weightings when evaluating competiveness.  Nevertheless, this is a good showing but the real test will be after the UK has been out of the EU for a year or more.  I will be surprised and disappointed if it does not move up into fourth place, assuming the Conservative government is still in charge.  



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September 28 2016

Commentary by David Fuller

Questor Share Tip: Buy [This Share], Owned by Four Top Managers With Skin in the Game

When it comes to financial performance, we follow the advice of those professionals who say the most important measures are return on capital, the ability to deliver profits in hard cash rather than as a notional figure that derives from complex accounting techniques, and low debt. 

The best growth comes from those companies that can produce these high cashflows from their assets and then reinvest that money in new assets at similar rates of return. Any business that can do this reliably over the long term will deliver a strong compounding effect and should reward shareholders handsomely.

The only instance where such a company will not deliver for shareholders is when the shares were bought at too high a price. As a valuation yardstick, we will look at the much-loved price-earnings (p/e) ratio.

Among the professional investors who focus on return on capital, cash generation and low debt are Terry Smith of Fundsmith, Nick Train of Lindsell Train, Sebastian Lyon of Troy Asset Management and Hugh Yarrow of Evenlode.  

Mr Smith founded Fundsmith and has a large stake in his flagship Fundsmith Equity fund, while Mr Train co-founded the firm he works for and has a multi-million-pound holding in the Finsbury Growth & Income investment trust, which he manages.

Mr Lyon has a similarly large stake in his Personal Assets investment trust. The family of Hugh Yarrow, manager of the Evenlode Income fund, owns a large slice of the management company.

All can therefore be said to have significant “skin in the game” – and all four of the portfolios mentioned own a stake in today’s tipped share, 

David Fuller's view -

However persuasive the argument, I would not want to buy a share shortly after it was tipped by a well know newspaper, especially if it looked temporarily overextended. 

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



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September 28 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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September 28 2016

Commentary by Eoin Treacy

France unlikely to achieve 2017 deficit target: fiscal watchdog

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

"Based on the information at its disposal, (the HCFP) considers as uncertain that the nominal deficit will be brought to less than 3 percent of GDP in 2017," it said in a report issued as Hollande's government prepares to publish its 2017 budget on Wednesday.

Finance Minister Michel Sapin dismissed the watchdog's concerns, saying that it was skeptical every year and yet the deficit targets had been met.

"I therefore reaffirm the seriousness of the budget and the government's determination to bring the deficit to less than 3 percent in 2017," Sapin said in a statement.

Paris hopes to rebuild its fiscal credibility with its European partners by targeting a deficit of 2.7 percent of GDP for 2017, the lowest in a decade and under the EU's limit of 3 percent.

A serial offender of the EU's fiscal rules, France has delayed bringing its deficit below 3 percent several times under both Socialist and center-right governments in recent years.

EU Economic Affairs Commissioner Pierre Moscovici, who in effect polices government finances to ensure they are living up to their promises, said he expected France to get the deficit below the 3 percent threshold next year.

"I think it's possible," Moscovici, a former finance minister in Hollande's first government, said in an interview with L'Opinion newspaper.

France's fiscal watchdog said government forecasts for 1.5 percent GDP growth this year and next were optimistic, noting they were higher than what most private sector economists expected.
"The government's growth outlook, which is based on a number of favorable assumptions, does not display the caution necessary to best meet public finance targets and commitments," it said. 

 

Eoin Treacy's view -

More than any other country France exemplifies that within the EU there is one set of rules for large countries and quite another for smaller ones. If any smaller country had failed to adjust its fiscal deficits in the same way that France has it would have come under severe scrutiny from the EC, ECB and possibly even the IMF. Yet for France there has been no such talk despite the fact it has been a serial offender. 



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September 28 2016

Commentary by Eoin Treacy

Stunning coking coal rally wreaks havoc in steel, iron ore

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

In a new research note Adrian Lunt of the Singapore Exchange says margins for steelmakers in China, which forges almost as much steel as the rest of the world combined have come under pressure again and the tight conditions may continue:

"The recent spike in coking coal prices has sent spot steelmaker margins plummeting back to around their lows last seen in Q4 2015. And unless coking coal prices reverse course soon, this is likely to weigh on steelmaker earnings through the course of Q4 2016, particularly as restocking needs have provided some support to iron ore prices

"With Chinese steel output remaining strong and demand sentiment relatively robust (with continued support from both real estate and infrastructure in particular), steelmaker margin pressures appear likely to persist over the coming months."

While the price of iron ore has also recovered this year – up 31.5% year to date holding above $55 a tonne on Monday – the iron ore/coking coal ratio is now at its lowest level this century according the SGX calculations.

 

Eoin Treacy's view -

Coking coal prices have been rallying all year but the recent surge is a clear acceleration of that trend and suggests there is at least a near-term supply deficit. Many investors have been switched off from investing in coal because of tighter environmental regulations but there is no getting around the fact that coking coal is essential in producing steel at a competitive price and is very different market from steaming coal.   



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September 28 2016

Commentary by Eoin Treacy

China's Ambitious Plan to Make the Yuan the World's Go-To Currency

This article by Robin Ganguly and Cedric Sam for Bloomberg may be of interest to subscribers. Here is a section:

The world will only play along if China leaves the yuan alone

One of the basic definitions of a reserve currency is that it must be freely traded. And the yuan is not quite there yet. The People’s Bank of China is often suspected of intervening in the market to nudge its exchange rate one way or the other. The central bank also limits onshore daily moves to 2 percent on either side of a fixing that it sets. Then there are capital controls, which restrict the ability to move money out of the country.

Despite this, people have found ways to move money out to escape yuan depreciation pressures and a volatile stock market. An estimated $1 trillion has flowed out of China since September 2015.

The Federal Reserve Bank of Dallas suggested in July that the yuan failed a safe-haven test, finding that China’s currency underperforms as market volatility increases.

SDR inclusion is likely to prompt the Chinese government to push ahead with reforms to its
exchange-rate policy, as part of its efforts to bolster international usage of the currency. But challenging the dollar’s hegemony will take more than a while, with the memory of the shock August 2015 devaluation relatively fresh in investor minds. The greenback has maintained its dominance since the mid-20th century, fighting off competition from the yen and the euro.

After the IMF in 2010 rejected China’s request to include the yuan in the SDR basket, the nation took several steps to support its claim. It made the yuan’s fixing more market-based, allowed greater access to its bond market and closed the gap between the currency’s rates at home and abroad. In November last year, the IMF deemed that the yuan was freely tradable enough to become a global reserve currency.

In the long run, a stronger yuan could be a much-needed fix for the global economy as it would increase the purchasing power of China, the biggest consumer of commodities in the world.

 

Eoin Treacy's view -

I find it interesting that this article assumes the Chinese Yuan is likely to become stronger as reforms are instituted and the currency gains access to the IMF’s Special Drawing Rights. There is another way of thinking about the development. 



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September 27 2016

Commentary by David Fuller

How Clinton Beat Trump in Their First Debate, By the Numbers

Here is the opening of this informative article from Bloomberg:

Democratic presidential nominee Hillary Clinton took a page out of Republican Donald Trump’s playbook in their Monday night debate to beat him at his own game.

In the span of just a few hours, Clinton saw her odds of moving back into the White House rise from an already-high 69 percent before the debate to 73 percent afterward, according to prediction market aggregator PredictWise. Trump’s chances slumped accordingly. “This is a large shift” and relatively rare, happening only once or twice per election cycle, said PredictWise founder David Rothschild.

Clinton’s odds of winning several battleground states also improved over a comparable four-hour period: by nine points in North Carolina, four points in New Hampshire, and three points each in Pennsylvania, Ohio, and Colorado.

Snap polls conducted after the debate similarly favored Clinton, including 62 percent of respondents in a CNN poll and 51 percent in a survey by the Democratic firm Public Policy Polling. Even the Mexican peso, increasingly a barometer of Trump-related anxiety, rallied.

At the root of this emerging consensus was Clinton’s ability to control the agenda. At one point she parried a question about her private e-mail server with a scant 46-word reply, all the while keeping Trump on the defensive about his business practices and unreleased tax returns. Trump spoke more than Clinton, including interrupting and attacking 24 more times than his rival.

David Fuller's view -

I watched the debate as it occurred and it was a consummate performance by Hillary Clinton.  She was calm, composed, unflappable and most of all, better informed. 

Clinton was the polished matador, verbally sidestepping a charging Donald Trump.  As the debate progressed she put him increasingly on the defensive with barbed comments.  He fell for it every time, unable to deflect them and becoming increasingly defensive, relying on denial.  He questioned her stamina, but she smiled throughout and he looked exhausted near the end. I could only fault her for occasional smugness. 

We know that debating skills are not the full measure of aspiring presidential nominees.  Trump supporters will be relieved that their candidate did not self-destruct.  They will say that he is a strong, successful businessman rather than a slick politician. 

The same was said about Ronald Reagan after his debate with Jimmy Carter in 1980.  Carter was sharper but Reagan had more warmth and smiled a lot.  Clinton smiled during most of last night’s debate while Trump frowned, glowered and even snarled. Which candidate would you rather join for lunch?

Clinton supporters will say that she was smarter, more inclusive and presidential than her opponent, and showed reassuring energy.  Undecided voters watching this debate for insights are more likely to favour Clinton, even though she is the establishment candidate facing a somewhat rebellious electorate. 

Trump’s momentum during most of September has been checked.  Possible risks for Clinton during the remainder of the campaign are that Trump should be able to improve on his performance in the remaining two debates.  Also, liberal third party candidates are more likely to draw support away from Clinton than Trump.    

(See also: The Complete First 2016 Presidential Debate, and judge for yourself if you have not already seen it.  Additionally, see: I Muted Donald Trump and Hillary Clinton During the Debate.  I Still Knew the Score, from The New York Times.) 



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September 27 2016

Commentary by David Fuller

The Deutsche Bank Crisis Could Take Angela Merkel and the Euro Down

Our image of German banks, and the German economy, as completely rock solid is so strong that it takes a lot to persuade us they might be in trouble.  And yet it has become increasingly hard to ignore the slow-motion car crash that is Deutsche Bank, or to avoid the conclusion that something very nasty is developing at what was once seen as Europe’s strongest financial institution. Its shares have been in free-fall for a year, touching a new low of 10.7 euros on Monday, down from 27 euros a year ago. Over the weekend, the German Chancellor Angela Merkel waded into the mess, briefing that there could be no government bail-out of the bank.

But hold on. Surely that is an extra-ordinary decision? If the German government does not stand behind the bank, then inevitably all its counter-parties – the other banks and institutions it deals with – are going to start feeling very nervous about trading with it. As we know from 2008, once confidence starts to evaporate, a bank is in big, big trouble. In fact, if Deutsche does go down, it is looking increasingly likely that it will take Merkel with it – and quite possibly the euro as well.

Deutsche Bank has been wobbly for a year now. Back in July, it announced a slump in profits and revenues. Back in February, the Bank’s co-CEO John Cryan put out a statement re-assuring staff and investors that the institution was ‘rock solid’ amid an earlier slide in the share price. Anyone whose memory stretches back a whole eight years will know that is the kind of thing bank CEOs say about three minutes before the whole thing goes pop.

Ever since then, the news has gone from bad to worse. Deutsche has struggled to cuts costs and restore profitability, legal challenges have mounted, and then earlier this month the US Justice Department hit the bank with a $14 billion fine over sales of mortgage securities. In its pomp, Deutsche could have written out a cheque with a nonchalant shrug. Right now, no one is sure where it can get the money from.

The damage can be seen in its share price. Last October, the shares were at 27 euros. Back in 2007, they were over 100 euros, and even in the spring of 2009, when banks were crashing all across the world, they were still trading at close on 17 euros. For most of this year they have been sliding fast. On Monday, they crashed again, down another 6pc. Its bonds have slumped as well, while the cost of credit default swaps – essentially a way of hedging against a collapse – have jumped. It all has a very 2008 feel to it.

To make matters worse, the German government looks to have abandoned it to its grisly fate. An article in Focus magazine quoted senior officials as saying the German Chancellor Angela Merkel was adamant that bank would not be rescued. There could be no state assistance if the bank was unable to raise the capital it needs to stay afloat, and she was not planning to intervene to get the American fine reduced. If it was in trouble, it was on its own.

There is, of course, something to be said for a hard-line position. It is hard to be sure the massive bank bail-outs of 2008 were such a great idea. Perhaps we would be better off now if a few had been allowed to fail. That said, Merkel is surely playing with fire. In the markets, investors, along with other financial institutions, have rightly or wrongly come to assume that major banks are, as the saying has it, ‘too big to fail’. You didn’t really have to worry about how solid they were, because if the crunch came the state would always ride to the rescue.

In Germany, that appears not to be the case – certainly for Deutsche, and possibly for its next biggest player, Commerzbank, which is hardly looking much healthier. Would you want to trade a few billion with Deutsche right now, and would you feel sure you’d get paid next month? Nope, thought not. The risk is that confidence evaporates – and as we know, once that is gone a bank is not long for this world.

David Fuller's view -

Angela Merkel, the daughter of a Protestant Minister, grew up in East Germany where she became an exceptional student with a scientific background.  After the fall of the Berlin Wall she became more politically aware.  “Immediately after it happened, three things became clear to me,” she told one of her biographers in 2009.  “I wanted to get into parliament.  I wanted German unification to happen quickly and I wanted a market economy.”

Since 2005, this humanitarian and highly respected German Chancellor has been the most powerful and influential leader in the EU.  More recently, she has also been under immense stress as the EU ambition of becoming a federalist state unravels.  This appears to have affected her judgement, not least over the migration issue, which has angered many other EU leaders and citizens in the 27 countries.  Insisting that there will be no bailout of troubled Deutsche Bank will cost her as well because it is all but inevitable.  A hard line on Brexit will alarm Germany’s automobile manufacturers.  The once unthinkable is now possible – Mrs Merkel may not survive next year’s German federal election.  

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

 



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September 27 2016

Commentary by David Fuller

September 27 2016

Commentary by David Fuller

Brexit Can Make UK Highly Attractive, Says Axel Springer Chief

My thanks to a subscriber for this interesting article from The Financial Times.  Here is the opening and a concluding section:

One of Germany’s most prominent businessmen has said Brexit will be more painful for the rest of Europe than for Britain, and a UK outside of the EU might prove “highly attractive” to foreign investors — in a sharp break with the German consensus on Britain’s post-EU future.

Mathias Döpfner, chief executive of Axel Springer, one of Europe’s largest media companies, said Britain was bound to experience short-term pain as a consequence of its June 23 vote to quit the EU, “but in three to five years from now, my bet would be that England will be better off than continental Europe”.

Speaking to the Financial Times, Mr Döpfner said he saw Britain moving towards a “more free market-oriented model, while Europe is step by step transforming into a transfer union” — with funds being channelled from successful states to the struggling ones. “And that can put a lot of investors off.”

“If Britain can create an alternative here, I think that is highly attractive,” he said, in an interview at Axel Springer’s headquarters in Berlin.

The comments are in stark contrast to the reactions of most of Germany’s business and political elite, which believes that Brexit will be a disaster for the UK economy. Earlier this month, Eric Schweitzer, head of DIHK, the German chamber of commerce and industry, said the economic effects of Brexit would be “very negative” for Britain.

Axel Springer, which narrowly lost out to Japan’s Nikkei in the race to buy FT Group last year, owns the mass circulation Bild, Germany’s best-selling newspaper, as well as conservative broadsheet Die Welt. Under Mr Döpfner’s leadership, the company has expanded internationally and invested heavily in digital properties such as Business Insider and Politico Europe.

And:

He said it would, for example, be able to implement a “very healthy”, “talent-oriented” immigration policy. “You basically integrate and invite the people that you benefit from and not people who only benefit from your social welfare system,” he said.

Meanwhile, the EU would suffer because it would lose Britain’s “healthy influence”, in particular its “pragmatism” and “free-market orientation”, which had led to “sensible compromises” in negotiations between member states. “If it is all defined, let’s say, by France, Spain and Italy making compromises with Germany — I’m a little worried by that prospect,” he said.

David Fuller's view -

Some of those negative views mentioned above reflect the feelings of rejection, uncertainty, anger and envy that Britain is leaving a failing union which they must continue to endure.  I trust these feelings will moderate over time.

Regarding the concluding paragraph above Britain is leaving the EU, not Europe, with which we have been allied for centuries.  Mutual interests and common sense should ensure that this will be on even better terms when Britain is once again a fully independent nation. 

A PDF of the interview with Axel Springer is in the Subscriber’s Area.



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September 27 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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September 27 2016

Commentary by Eoin Treacy

Denver Gold Forum Highlights Trends Reinforce Focus on 'Walk Before Run' Strategies

Thanks to a subscriber for this report from National Bank focusing on gold miners. Here is a section:

Exploration budgets getting a lift. With balance sheets in better shape from non-core asset sales, higher metal prices, and, in cases, financings, senior and junior companies alike are ramping up exploration budgets and project evaluation programs. 

For the juniors and intermediates this could generate discoveries of a size that is material to production. Recent exploration and project examples include Newmarket Gold (Fosterville), OceanaGold (Macraes, Waihi, Haile), Richmont (Island Deep), Alamos (La Yaqui) and Alacer Gold (Gediktepe).

For seniors, exploration spending remains disproportionately focused on near-mine and Brownfield targets (Figure 2) as they look to add and upgrade ounces proximal to existing mine infrastructure. This focus also seems appropriate in the context of recent trends that show a declining discovery rate despite higher-than-average exploration Page 2 expenditures. For example, from 2006 to 2015 some US$54 bln was earmarked for discovery-oriented exploration budgets (69% of total spending from 1990 to 2015), yet gold in major discoveries dropped every year except in 2015. Refer to Figure 3. Thus, in our view, it is unlikely that the recent uptick in exploration spending will generate a different result, specifically new discoveries of a size that can thwart the outlook for production declines. Recognizing that the odds are stacked against them, we view as prudent senior company’s focus on near-mine and Brownfields exploration.

Benign cost pressures bode well for continuing balance sheet improvements and FCF – conditions that appear to buoy the interest of generalist investors. With currency one of the principal drivers of cash cost trends and FX rates in key mining jurisdictions still generally weak vis-à-vis 2014 and 2015 levels, the backdrop remains constructive for lower costs year-on-year (Figure 4). With that, we expect operating margins to remain robust and be of a magnitude sufficient to maintain investor interest in gold equities. In fact, in speaking with several generalist investors, arguably, this was one of the main takeaway from the DGF.

 

Eoin Treacy's view -

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

Mines are depleting assets by definition so management teams have to make tactical decisions about when to spend, what is often significant capital, on increasing their potential supply options. After a generational long bear market the gold mining sector had been unable to address their declining mine life problem so when gold prices began to pick up they poured every available cent into increasing supply. That resulted in their shares underperforming the gold price and represented a serious headwind for the sector when gold prices rolled over. 



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September 27 2016

Commentary by Eoin Treacy

Iger's Legacy at Stake in Possible Disney Deal for Twitter

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

The 65-year-old chairman and chief executive officer of Walt Disney Co. is scheduled to retire in June 2018. He’s already achieved a number of milestones, including Disney’s revival of the “Star Wars” film series and the opening in June of the company’s $5.5 billion Shanghai resort. But one issue bedevils him and most other media executives: how to transition to a world where mobile devices, not TV screens, dominate news and entertainment.

The question underscores Disney’s interest in Twitter Inc. The Burbank, California-based company has hired an investment bank to advise on a possible Twitter merger, Bloomberg News reported Monday. A deal would unite the world’s largest entertainment company, the home of ABC, ESPN and Mickey Mouse, with the technology pioneer that created the 140-character tweet. It could let Iger leave knowing he’s given Disney a big presence in digital media and advertising.

“That would be his final stamp on Disney,” said Tim Galpin, a professor of management at Colorado State University and co- author of “The Complete Guide to Mergers and Acquisitions.” “If he could get that behind him, he could walk off with a final major success story.”

Twitter, whose co-founder and CEO Jack Dorsey sits on the Disney board, has already been dipping his toes in live sports, airing National Football League’s night games. That’s a business that Disney, the parent of the leading sports TV network ESPN, knows well and that clearly intrigues Iger

Eoin Treacy's view -

The acquisition and successful reboot of Star Wars coupled with the opening of the Shanghai resort were major successes for Disney. However that does not obscure the fact that the company’s broadcasting and cable divisions represent almost half of revenues and face challenges from interlopers like Netflix, Hulu and YouTube. These challenges have yet to be addressed. 



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September 27 2016

Commentary by Eoin Treacy

Twilight of the Central Bankers

Thanks to a subscriber for this article by Tad Rivelle for TCW which may be of interest to subscribers. Here is a section:

It’s back to the future – again. Leverage has returned, most notably in the corporate sector where debt metrics have not just roundtripped but indeed are now in excess of the levels experienced before the Great Recession.

And while the Fed clings to the fiction that it is “data dependent,” its response function – cowering in the face of every market “tantrum” – reveals monetary policy to be what it really is: a put on financial prices. But can the Fed, Canute-like, hold back the future tides of de-leveraging? No, though we expect that they, like their comrades in arms at the ECB and BOJ, will keep trying. Indeed, negative rates can be best understood as merely the latest attempt to forestall the failures of policies past. But, is anyone helped by establishing negative “hurdle” rates to incentivize “investment?” If a commitment of capital requires a negative opportunity cost, then whatever activity that might be launched will assuredly be productivity destroying. Negative rates have all the economic “logic” of destroying the village so as to rebuild it. It is monetary madness and while it might hold back the flood for a time, it fairly well guarantees that when the flood comes, it will be worse than it would otherwise.

Face it: the central banking Emperors have no clothes. But, might the Fed come up with new artifices to prop up the towers of leverage they have built? They might, though it would be folly. Yet, underestimating folly is, I suppose, a folly of its own. The Fed could continue to use its printing press to falsify capital market signals, but to what end? When a central bank buys an asset with an electronically printed dollar, a “something for nothing” trade has taken place. Unless everything we understand about economics is plain wrong, the Fed cannot go on blithely adding printing press dollars to the system and expect no ill effects. Essentially, inflationist monetary policies cannot be the answer to the problems caused by inflationist monetary policy.

And this is precisely our point: when the supposed “solutions” to the Fed’s dilemma are merely new “problems,” you know you are approaching the cycle’s end. Our counsel remains as it has been: avoid those assets that will be broken in the coming de-leveraging while keeping a “steady as she goes” attitude towards the future purchase of those assets that will merely bend when the flood comes

 

Eoin Treacy's view -

Friends of ours are moving out of LA because they find the cost of living and the pace of life too hectic. Wishing to spend more time with their kids they are moving to Savannah Georgia. Thinking it would take time to sell their house they asked for a start time of January at their new employment. They were pleasantly surprised, to say the least, to find they received 3 offers within 24 hours of the house hitting the market. 

The Case Shiller 20 Index rallied 5% year on year but that does little to highlight just how hot the property market is in some of the USA’s major cities where prices for desirable locations are well above the 2007 peak. 

 



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September 26 2016

Commentary by David Fuller

Trump, Clinton Deadlocked in Bloomberg Poll Before Key Debate

Here is the opening of this interesting article from Bloomberg:

Donald Trump and Hillary Clinton are locked in a tied two-way race for the presidency as they head to Hofstra University in New York on Monday night for one of the most highly anticipated debates in modern politics.

The Republican and Democratic nominees each get 46 percent of likely voters in a head-to-head contest in the latest Bloomberg Politics national poll, while Trump gets 43 percent to Clinton’s 41 percent when third-party candidates are included.

Clinton faces higher expectations as tens of millions of people tune in for a television spectacle that could reach Super Bowl viewership levels. About half, 49 percent, say they anticipate the former secretary of state will perform better, while 39 percent say that for Trump, a real-estate developer and former TV personality.

Ann Selzer, the Iowa-based pollster who oversaw the survey, said there are signs that Clinton’s margins with women and young voters have eroded over the past three months, helping to explain Trump’s gains.

David Fuller's view -

I suspect that I am far from alone in being surprised that Trump has made it this far in the 2016 US presidential race.  To be tied in the current race with Hillary Clinton and actually ahead if we consider, as we should, third parties in the race is nothing short of astonishing. 

Moreover, Trump has the current momentum, considering that Clinton had remained comfortably ahead until August.  She can presumably reverse that by winning tonight’s important debate comfortably.  She should be able to do this but if Trump does not self-destruct in tonight’s debate, Clinton could be in serious trouble.

Globally, this has proved to be a year for anti-establishment sentiments and the USA is no exception.  Not since the Kennedys had a family been more establishment than the Bush clan, but neither money nor influential supporters could help Jeb’s campaign.  The Clinton’s certainly have a high profile but that has not helped Hillary who struggled to win her party’s nomination. 

Would it not be ironic if establishment press attacks on Trump were actually helping him in the eyes of some undecided voters?  Additionally, if third party candidates Gary Johnson and Jill Stein stay in the race (see Bloomberg’s table in the article above), they will be pulling most of their support from Clinton.      



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September 26 2016

Commentary by David Fuller

Schaeuble Urges Lawmakers to Go Tough on Draghi, Bild Reports

German Finance Minister Wolfgang Schaeuble has urged lawmakers to take a tough stance with European Central Bank President Mario Draghi when he goes before legislators in the lower house of parliament next week, Bild reported.

Schaeuble told lawmakers in the Bundestag to push Draghi to defend the central bank’s low interest rates when he speaks to them on Sept. 28, the newspaper reported, citing those who were present at the meeting. Schaeuble expressed irritation at Draghi’s criticism of Germany’s trade surplus, saying it’s the ECB that’s at fault, according to Bild.

The German minister has criticized the ECB’s extraordinary monetary measures under Draghi, saying low rates have squeezed savings for Germans and created excessive liquidity in markets.

David Fuller's view -

The vision of a Federal Europe is going up in smoke because Germany has no interest in using its trade surplus to bailout ailing EU nations which cannot live with the Euro.   



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September 26 2016

Commentary by David Fuller

Email of the day 1

More on silence being good for our brains:

Le silence est d'or, la parole est d'argent as we say in French.
I have abandoned big cities New York, Paris and Toronto for a small town along the Great Lakes.
But silence is expensive; a lot of us cannot afford it. It cost friends (they are afraid to be bored and do not visit), it cost entertainment (Carnegie Hall, forget about it) it cost long travelling times (we have an airport but we are still waiting for Air Canada to land a 747 here) it costs family (kids, try to tell them about the therapeutic value of silence) it cost painstaking research when we travel (hours and hours to find a quiet room in a quiet lodging in a silent place. When I go to Paris I go to a place run by priests...)
It is a way of life, but I will never change it for a million dollars..
I'd better shut up now, right?

David Fuller's view -

Not at all. Thanks for your interesting and highly relevant comments. Mrs Fuller and I will leave London, eventually, but I am sure we will also return for many short visits.  That is the advantage of living in a smaller country.  



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September 26 2016

Commentary by David Fuller

Get Brexit Right, and I Will be a Tory Again

I left the Conservatives in 1992. I had been a member for 20 years, throughout much of a career which began with scrapping buses and ended up creating 175,000 jobs. I worked my way up from the bottom with the party. Millions of us did, following Margaret Thatcher. 

But when John Major started fudging on the Maastricht treaty on the single currency, I told him I had to go. Since then this has country has stumbled on with the EU disaster through the Blair and Cameron eras. Until now. 

Brexit means everything to me. After I left the Conservatives, I spent millions on campaigns to end the influence of the unelected bureaucracy in Brussels over this great nation. In 2004 I met Nigel Farage and supported Ukip in the European elections that year. Nigel was the master communicator we needed, a man of passion, drive and bravery. That year we won 12 seats. In 2014 we won 24 seats, beating Labour and the Conservatives. That forced David Cameron to hold the EU referendum. 

For me, that referendum was the goal. That was what it was all about. And we have achieved it. What we need to do now is to make sure the Conservatives, my old party, implement the result. 

What does that mean?  The simple fact is we have to get our borders completely under our control. So we must leave the single market. Another reason to to do so is that small businesses, which account for 99 per cent of private sector companies, and which employ 60 per cent of the private sector working population, are smothered by regulations from Brussels. These are the businesses generating new jobs – not big banks. Even though many have no trade with the EU they still have to comply with endless EU regulations.

This, like so many of the powers acquired by Brussels, is astonishing. Frankly, it is shocking that it was the Conservative Party gave up all these powers to an unelected bureaucracy. 

The Conservatives can now change all this, and I want to return to the party to help them. But to do so I, like so many who voted to leave, need a clear commitment that two clear promises are going to be delivered. 

We must take back full control of our borders.  And we must leave the single market.

And:

Once these issues are dealt with I will return to the Conservatives and help them, financially if need be, to implement this programme. 

One way or another we will get this done. A nation without its own borders is not a nation. A nation which does not make its own laws is not a nation. A nation which cannot fish its waters as it wants is not a nation. A nation which has handed over its very passport is not a nation. These things matter. The man in the street wants his passport back.

I’ve never met Theresa May but she looks like a good prime minister to me. She will need to be. Society is terribly damaged. It may not seem that way in London but huge parts of the North and elsewhere are scarred. Today the Conservatives have the best chance to rebuild the nation since Thatcher. 

I am a One Nation Conservative. I come from the grassroots. I started with just £200. I didn’t go to Oxbridge. I’m not a pencilpusher from Goldman Sachs. But I have created 14 businesses and not one has gone down the pan. I reckon I’ve got reasonable judgment. My judgment is that freedom and democracy are beyond value. 

David Fuller's view -

I have nothing but respect for Paul Sykes.  People like him are the backbone of nation.  Margaret Thatcher understood this.  I believe Theresa May does as well, judging from her opening speech in from of number 10 Downing Street, shortly after becoming Prime Minister. 

I think the Conservative Party will struggle if it is unwilling or unable to break free from the EU. 

(I emboldened the four sentences in the article above for emphasis.)

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



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September 26 2016

Commentary by David Fuller

Email of the day 2

On Friday’s Big Picture Audio:

David, superb last night. The way you worked from stocks, through bonds & currencies to resources kept me focused and more importantly, I learned.

I also agree very much with an earlier comment you made, regarding the need to alternate with Eoin because I truly believe that you complement each other very nicely.

Many thanks & regards

David Fuller's view -

Thanks for your kind words.

I agree that Eoin and I complement each other and I look forward to doing more Audios.  



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September 26 2016

Commentary by David Fuller

Brexit Will Complete the Economic Revolution of Margaret Thatcher

As the financial markets, contrary to the scaremongering of the political and economic establishments, have already recognised, the potential economic benefits of Brexit are substantial.

The most obvious is the saving of our massive net financial contribution to the European Union. In this context I am constantly astonished to hear representatives of British universities, whom one would expect to be reasonably intelligent, bemoaning the prospective loss of EU money. There is no EU money. It is British taxpayers’ money, recycled via the EU. And since we pay into the EU budget roughly £2 for every £1 we get back, it is an appallingly costly form of recycling.

Then there is the newfound freedom to negotiate mutually beneficial trade deals with the major world economies, something that the EU has been engaged in for years – indeed, for decades – and has singularly failed to achieve.

But probably the biggest single benefit is the ability Brexit will give us to engage in a thoroughgoing programme of intelligent deregulation.

The European Union indulges in excessive regulation for three self-reinforcing reasons. In the first place, that is the nature of bureaucracies everywhere, and the European Commission is the ultimate bureaucracy. In the second place, it is an article of EU faith that “more Europe” is always desirable, and all too often “more Europe” is seen as more European regulation. And in the third place, Brussels is one of the two world centres of corporate lobbying (the other is Washington).

 There may be no single regulation that stands out as being particularly damaging, but the cumulative effect is substantial. Examples include the system of “CE” (conformité européene) marking on goods, which frequently imposes excessively burdensome standards on all EU companies, including small companies which do no business at all outside the UK. Then there is the notorious Working Time Directive, which limits the hours that employees can work, even if they wish to earn more by working longer.

This is potentially so damaging to small businesses that the UK managed to secure an opt-out from its most restrictive provisions. But the European Commission is determined to remove the UK opt-out. It has already tried to do so on two occasions, and sooner or later, were we to remain in the EU, it would succeed.

The vast and ever-growing corpus of EU regulation causes economic damage throughout the EU. But it is particularly damaging to the UK and to UK SMEs since we have in this country a more rigorous insistence on the rule of law and its implementation than is the case in many, if not most, of the EU’s member states. That is, in itself, a virtue, and should not change. But it makes the escape from the EU regulatory burden all the more important.

David Fuller's view -

I assume that Lord Lawson is correct on the very important point made in his second paragraph above.  If so, it is all the more surprising that so few commentators have mentioned this throughout the Brexit discussions. 

(I emboldened the second paragraph in the article above.)

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



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September 26 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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

 



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September 26 2016

Commentary by Eoin Treacy

Email of the day on zero down mortgages

Today I heard on the BBC news that in the US the banks are giving mortgages with "0" down payments. Is this correct, and if so how serious do you think is the risk of a similiar financial crises as we had in 2008. 

As always thanks a lot for the wonderful service

 

Eoin Treacy's view -

Thank you for your kind words and this question. As you are no doubt aware NINJA loans (No Income, No Job, No Assets) were popular ahead of the credit crisis as lax lending standards made property available to people who had no chance of ever paying back the loans. 

100% mortgages do exist in the USA and are not a new feature. For example the USDA (Department of Agriculture) offers zero down mortgages for rural development and the Veterans’ Administration (VA) offers even more attractive terms to veterans. This article from themortagereports.com may also be of interest. 



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September 26 2016

Commentary by Eoin Treacy

Musings from the Oil Patch September 20th 2016

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

So looking forward in a world of slow economic activity as experienced for the past decade, we can see VMT growth slowing and potentially a shift toward more fuel-efficient vehicle purchases – both not positive for gasoline demand. We then have the question of the impact of greater millennials in the population and the impact of the disruptive factors we enumerated earlier. 

A Ford Motor Company (F-NYSE) senior executive told an analyst meeting recently that the company expected autonomous vehicles to represent 5% of the auto fleet sales in 2025, or potentially a million cars per year. Self-driving vehicle technology seems to be moving toward the mainstream faster than many anticipated. The City of Pittsburgh, Pennsylvania is now allowing Uber to test an autonomous vehicle taxi service. The cars are equipped with 20 cameras and seven sensors to help them navigate the city’s streets. The taxis will be required to have a human driver behind the wheel in case control of the vehicle needs to shift, along with an engineer in the front seat. Right now the service is free, and it has attracted many reporters who will publicize it. Will it attract many customers? Unless a taxi causes significant traffic disruptions or a life-threatening accident, we suspect the test will be declared a success. The industry, however, is still awaiting the federal government’s issuance of guidelines about how self-driving vehicle regulations should be constructed. Traffic laws are primarily under local control, but basic national standards are important for the regulatory process and the vehicle manufacturing process, including vehicle safety and emissions standards. Steering wheels and pedals, or not? 

Self-driving technology’s primary benefit is to reduce and/or eliminate accidents and especially deaths. In 2014, according to data from the U.S. Department of Transportation, which is responsible for the Fatality Analysis Reporting System, there were 29,989 fatal motor vehicle crashes in which 32,675 deaths occurred. This represented 10.2 deaths per 100,000 people and 1.08 deaths per 100 million vehicle miles traveled. Some 38% of the deaths involved car accidents, while 25% related to pickup and SUV vehicle accidents. Only 2% of the deaths involved large trucks while the balance was accounted by motorcyclists, pedestrians and bicyclists. All deaths from large truck crashes were 12% of total vehicle deaths. 

There remain a number of legal issues about self-driving cars that need to be resolved. Who is given a ticket for a self-driving car failing to heed traffic rules or becoming involved in an accident: the passenger, a driver in the vehicle, the owner of the vehicle, or the engineer who wrote the software? These issues will be overcome with time, but the impact on energy markets will likely come in dramatic fashion. Once auto companies feel comfortable that their self-driving cars will not be involved in accidents, they can begin designing vehicles for greater passenger comfort and entertainment, while using lighter materials since the heavy steel cages required now to protect passengers in accidents will no longer be needed. Reducing vehicle weight will make vehicles much more fuel-efficient and thus reduce future fuel consumption.

Eoin Treacy's view -

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

Three themes of autonomous vehicles, electric vehicles and new ownership models tend to be conflated when speculation about the future of transportation is discussed. These could all have an effect on the number of miles travelled but could also break the link between that measure and gasoline consumption. 



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September 26 2016

Commentary by Eoin Treacy

Guide to the 2016 Elections

Thanks to a subscriber for this report from Wells Fargo offering a summary of potential outcomes to the upcoming elections. Here is a section:

Some key risk seem clear: Higher budget deficits and trade restrictions are prominent risks in our scenarios. Limiting trade, widening deficits, and raising the public debt should be negative for the dollar and U.S. financial asset prices during the next four years.

What it may mean for investors: We believe that the worst risks to the financial markets, discussed on page4s 6-10, have the lowest probabilities of occurring and advise investors not to allow the candidates’ broad unpopularity to drive fear of worse financial market impacts that are likely. In our view, investors should avoid large portfolio changes based on election fears or speculations. 

Divided government obscures some potential opportunities but clarifies others: The strong cross-party ideological divide complicates the task of spotting investment opportunities from immigration, health care, trade, and regulation policies. Yet, sector opportunities seem clearer from prescription drug prices caps and, especially, fiscal policy, including tax reform and new infrastructure and defense outlays. 

What it may mean for investors: The previous pages identify some potential investment opportunities, but clues about policy direction may emerging only slowly until January 2018 and possibility not until mid-2016. As the eventual policy priorities become more discernible to financial markets, investors might use this guide to identify the issues and the potential investment implications. 

 

Eoin Treacy's view -

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

The media circus surrounding the US Presidential elections is in full swing with the much anticipated first debate this evening. What is perhaps most important from a markets' perspective is that both candidates support increased fiscal spending. 



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September 23 2016

Commentary by David Fuller

UK Liberation From the EU Demands a Global Financial Investment Zone

The June referendum result has galvanised thinking about the City of London’s future in a UK that will soon cease to be part of the European Union. While much of the recent discussion has centred on the potential negative consequences of Brexit, greater legislative independence will also mean that there may be new opportunities.

One such possibility is the creation of a UK Global Financial Investing Zone. This would be a cross between a free trade zone and a tax jurisdiction. It would have the power to write local laws, be a tax authority unique in the UK tax system, and a governance authority making judicious use of data.

The investing zone would have an entrepreneurial mission: to create an environment that was an attractive base for investment company vehicles – managing money for global investors and being deployed around the world.

This simple sounding mission conceals an extraordinary level of opportunity. Financial services is the world’s largest industry and the UK has a particular strength in it. Britain’s ascent in the past 50 years has been supported by its international links, including a far-flung network of ex-imperial outposts, mainly in the West Indies. Entrepreneurs in the Cayman Islands, the British Virgin Islands, Bermuda and the Bahamas have created tax and governance regimes that have attracted trillions of dollars’ worth of funds.

Of course, some of these appear to have the taint of tax avoidance or worse. But most investors use these regimes because they provide a stable and well-established legal framework, and avoid adverse tax consequences in the investor’s home jurisdiction.

I have spent my life in the business of running global investment funds. These funds are established and run in the Caribbean, as well as Luxembourg, Ireland and Malta in the EU, Jersey, Guernsey and the Isle of Man in the UK, and Curacao and the Netherlands Antilles under Dutch oversight. All the legal, administration and accounting work tends to gravitate there. There seems to be no logical reason for this activity to take place offshore.

Our investors are not trying to avoid tax, and the funds are not trying to avoid sensible regulation. Usually, investors are actually trying to avoid paying tax twice as a result of the tax regimes in different countries not dovetailing properly. Funds may be trying to avoid the restrictive effect of some anachronistic law or rule that no one in authority has had the competence to update. This is why successful governance regimes with a little motivation and entrepreneurial spirit have sprung up in multiple locations.

The UK now has the opportunity to attract some of this business back “onshore”; an “offshore” regime in the heart of the City of London would benefit from the huge concentration of intellectual capital with expertise in the financial industry, IT and law.

David Fuller's view -

The essence of this idea has appealed to me for many decades and David Harding has the knowledge and experience to flesh it out.  Post actual Brexit, we have only had the vote so far, a global financial investment zone in London should be a priority. 

After all, the City will lose a portion of its business, at least temporarily, as some financial firms hedge their perceived risks with further diversification within the EU.  I do not think that will prove popular, due to languages, inefficiencies, potentially bizarre regulations, taxes, etc., at least while the EU survives in its current form.  Meanwhile, the UK government should encourage the City to become even more internationally diversified.  Ireland should do the same, because both countries can only benefit from and even closer financial and commercial alliance.  

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



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September 23 2016

Commentary by David Fuller

Email of the day 1

On what to do about debt:

David, I feel that looming large and completely absent from the self-congratulatory stance of the Fed yesterday was the question of what to do with debt, private, public and corporate. We always talk about the USA because their economy is so large, and GDP consumer component has grown to 69%.. amazing, but this is probably true for the rest of the world.

I just read an article which gave (in my opinion) a clear view of the debt situation and what eventually to do about it.:

All this is far from new and Greece the 7th century BC was witnessing the same environment.

Go to Solon on Wikipedia and then scroll down to "Moral reform" to see their solving of the debt situation. 

I would be very appreciative if you could give your opinion on the potential of future destructive forces of the overall debt situation in the world today

Many thanks, and all the best,

David Fuller's view -

Thanks for providing us with some interesting research, which persuades me that you know more about this subject than I do.  What I will add is that if governments hold most of their own debt, having gradually bought it back and/or often replaced it at advantageous times with very low interest rates, it is not too much of a problem.  For instance, I believe the Japanese government now holds over a third of all JGBs, and they can issue new bonds at extremely favourable rates, so it is not really a problem.  Similarly, former UK Chancellor George Osborne redeemed War Loan and some other even earlier debt at historically low interest rates.  

Many corporations have done the same.  However, there will be some less financially sound firms which have issued bonds at very favourable rates in recent years.  They may have problems if/when a normalisation of interest rates occurs.  Similarly, household borrowers will also be under pressure as interest rates rise and we can expect an increase in defaults. 



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September 23 2016

Commentary by David Fuller

Hollande to Be Ousted in First Round of 2017 Vote, Poll Shows

French President Francois Hollande won’t be able to make it past the first round in next year’s election regardless of the competitors he faces, a poll showed.

Both former President Nicolas Sarkozy and former Prime Minister Alain Juppe would make it to the run-off vote against National Front leader Marine Le Pen if they win the nomination for France’s Republican party, according to the Elabe poll for Les Echos and Radio Classique.

The findings show that Hollande is failing to gain traction with voters as Sarkozy and Juppe battle each other for their own camp’s nomination. With seven months to go until the first round of voting, the Socialist president wouldn’t even beat his former Economy Minister Emmanuel Macron, the survey showed.

“Marine Le Pen will qualify for the second round no matter who runs,” Elabe pollster Yves-Marie Cann said in a note accompanying the poll. Macron “is showing himself a serious contender at this early stage of the campaign at a time when the electoral line up is very uncertain,” he added.

The survey also showed Left Front candidate Jean-Luc Melenchon as making “significant” gains, Cann said. Melenchon would tie Hollande with a score of 15 percent in the first round if Juppe is the candidate on the right, according to the poll.

The survey also shows that French voters see Le Pen as the candidate most able to reform France and ensure that it preserves its social security system. About 20 percent see her as the best-qualified on that issue, compared with 16 percent for Juppe and 13 percent for Sarkozy. Hollande scored 7 percent on that question.

Elabe surveyed 922 voters on Sept. 20 and 21.

David Fuller's view -

I see no reason why Holland should suddenly reinspire confidence.  From a British perspective, it is too soon to accurately forecast the eventual winner of France’s presidential race and how that might affect any ongoing Brexit negotiations.  However, it may drag out the negotiation process, assuming PM May does not go a quick, full Brexit, which has already become the more controversial option. 

Germany’s 2017 elections represent an even more important wildcard in terms of Brexit negotiations.   



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September 23 2016

Commentary by David Fuller

Email of the day 2

On whether the USD (DXY) will provide some strength for commodities:

David and Eoin, do you think the Fed announcement will change the trajectory for the USD (DXY) heading into year end? and in turn potential provide some strength to the commodities?

David Fuller's view -

That is an interesting question.  My view is that DXY will continue to range with the help of the Fed announcement – maintaining a neutral environment - but eventually move higher in anticipation of rate increases.  A stronger DXY will reintroduce a headwind for industrial commodities, although that may be offset by reduced supply for some commodities and somewhat higher demand as/when the global economy next strengthens.   



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September 23 2016

Commentary by David Fuller

Britain Has the Edge Over EU Nations in Trade Talks, Says Civitas

Trade between Britain and the EU creates far more jobs on the continent than it creates in the UK, giving the remaining 27 nations a substantial incentive to strike a positive trade deal with Britain, according to researchers at the think tank Civitas.

The new analysis estimates that 3.6m jobs in the UK are linked to trade with the EU, while 5.8m EU jobs are linked to trade with the UK.

Every major EU economy is in the same position, according to Civitas, meaning that all of the biggest players have strong reasons to come to an open trading agreement with the UK rather than seeking to punish the leaving nation.

Even among the smaller countries, each one has a higher proportion of jobs linked to the UK than the other way around.

“Based on the potential impact on jobs, each EU country should be aware of the significant economic benefit in terms of jobs stemming from trade with the UK,” said Civitas.

“The EU does arguably have to negotiate as a bloc. However, each of the 27 remaining national governments, with between 1.5 and 9.5pc of employment linked to UK trade, should be negotiating in the interests of those that democratically elected them.”

The report, written by research fellow Justin Protts, also argues that the UK is in a sense in a stronger position that the other EU countries.

David Fuller's view -

The UK is definitely in a stronger position, at least in terms of jobs and exports at risk.  However, resentment, envy and growing dissatisfaction with the EU among 27 countries, plus the hazards of group think, are significant obstacles in the path to an economically logical result.

It is worth trying to get a good deal on Brexit, not least because that is also in the EU’s economic interests.  However, their official line, so far, is against preferential treatment for Britain.  While this is partly an emotional reaction by the rejected, the fear of further unravelling among the 27 countries is also a factor.  Bravado aside, it should be clear to Mrs May government where EU red lines really will not be withdrawn, well before the end of 2017.  If the EU still refuses to return full control of our borders and fishing rights, and if it block free access to the single market, then our best alternative, in my opinion, is the so called Hard Brexit, without further delay.  



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September 23 2016

Commentary by David Fuller

Fitch Reveals the $2Trillion Black Hole In China Economy That Heralds A Lost Decade

Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned.

The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning.

It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government.

“There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,” it said.

The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts.

“The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” said Fitch. Capital shortfalls are currently 11pc to 20pc of GDP, but this threatens to hit 33pc in a worst case scenario by the end of 2018.

David Fuller's view -

I think it is well worth reading the rest of this article, posted in the Subscriber’s Area, and if you are able access The Telegraph’s website, or just use the headline to pick the article up on the www, as is sometimes possible, you would be able to see the informative graphs which I am unable to reproduce.

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



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September 23 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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September 22 2016

Commentary by David Fuller

UN Fears Third Leg of Global Financial Crisis With Prospect of Epic Debt Defaults

Here is the opening of this mischievous report by Ambrose Evans-Pritchard for The Telegraph, perhaps best not read if standing near a ledge, busy traffic or other obvious hazards: 

The third leg of the world's intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history.

It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity.

"Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out," said the annual report of the UN Conference on Trade and Development (UNCTAD).

We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare. What is less understood is just how destructive this has been.

Much of the money was wasted, skewed towards "highly cyclical and rent-based sectors of limited strategic importance for catching up," it said.

Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the "profit-investment nexus" that ultimately drives growth and prosperity.

The extraordinary result is that some countries are slipping backwards, victims of "premature deindustrialisation". Many of them have fallen further behind the rich world than they were in 1980 despite opening up their economies and following the global policy script diligently.

The middle income trap closed in on Latin America and the non-oil states of the Middle East a long time ago, but now it is beginning to close in such countries as Malaysia and Thailand, and in some respects China. "The benefits of a rushed integration into international financial markets post-2008 are fast evaporating," it said.

Yet the suffocating liabilities built up over the QE years remain. UNCTAD says corporate debt in emerging markets has risen from 57pc to 104pc of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution.

"If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system," it said.

"There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market," it said. 

David Fuller's view -

I am not a fan of acronyms, especially the long ones, beloved by nerdy backroom types.  To lessen readers’ possible frustration, UNCTAD, stands for United Nations (that’s the easy part) Conference on Trade and Development (the cumbersome part). 

I am not sure why AEP, one of the best financial journalists in the business, decided to share parts of this UNCTAD with us.  Perhaps it is an indirect caution against overconfidence regarding Brexit.  He did warn us shortly after the referendum result, as I recall, that the Brexit process would be challenging over the medium term, before the advantages were realised. That was a sensible comment, I felt.  Brits need to stay focussed and work hard, in order to redevelop a fully independent and internationally oriented UK. 

What about the UNCTAD report?

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



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September 22 2016

Commentary by David Fuller

Email of the day

On Brexit articles, from a pre-subscriber:

I am not currently a subscriber but I always glance at the introductions to articles that you e-mail to me.  I must say that I agree with all of David's comments regarding the EU and am glad that he is helping publicise intelligent articles in favour of Brexit.  Unfortunately, it seems at times that most of these articles are from the Telegraph.  I was disappointed at the very negative response in the Financial Times and it does seem to me that somehow these more positive articles need to appear more frequently in other publications and were they to do so they may calm people’s fears on the subject.

David Fuller's view -

I am glad to hear that you enjoy the Brexit articles, and don’t be afraid to subscribe, it’s an investment.

I am aware of how emotive the Brexit issue is for many of us in the UK.  If I am testing the patience of some subscribers on this subject, I apologise but I do think not only Brexit but overall developments in Europe are hugely important, and they certainly affect markets. 

Re the FT, I assume its ambition is to be the most informative and successful financial paper in Europe.  It may have achieved this but the EU has overly influenced its political and even economic views, in my opinion.    



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September 22 2016

Commentary by David Fuller

America Is Not the Greatest Country on Earth. It is No. 28

Here is the opening of this interesting report from Bloomberg:

Every study ranking nations by health or living standards invariably offers Scandinavian social democracies a chance to show their quiet dominance. A new analysis published this week—perhaps the most comprehensive ever—is no different. But what it does reveal are the broad shortcomings of sustainable development efforts, the new shorthand for not killing ourselves or the planet, as well as the specific afflictions of a certain North American country. 

Iceland and Sweden share the top slot with Singapore as world leaders when it comes to health goals set by the United Nations, according to a report published in the Lancet. Using the UN’s sustainable development goals as guideposts, which measure the obvious (poverty, clean water, education) and less obvious (societal inequality, industry innovation), more than 1,870 researchers in 124 countries compiled data on 33 different indicators of progress toward the UN goals related to health.

The massive study emerged from a decadelong collaboration focused on the worldwide distribution of disease. About a year and a half ago, the researchers involved decided their data might help measure progress on what may be the single most ambitious undertaking humans have ever committed themselves to: survival. In doing so, they came up with some disturbing findings, including that the country with the biggest economy (not to mention, if we’re talking about health, multibillion-dollar health-food and fitness industries) ranks No. 28 overall, between Japan and Estonia.

Eradicating disease and raising living standards are lofty goals that have attracted some of the biggest names to philanthropy. Facebook Inc. founder Mark Zuckerberg and Priscilla Chan, his wife and a pediatrician, on Wednesday pledged $3 billion toward the effort. The new study itself was funded by (but received no input from) the Bill & Melinda Gates Foundation. The 17 UN Sustainable Development Goals (SDGs) themselves are a successor to the Millennium Development Goals, a UN initiative that from 2000 to 2015 lifted a billion people out of extreme poverty, halved the mortality of children younger than five years old, and raised by about 60 percent the number of births attended to by a skilled health worker

The research team scrubbed data obtained on dozens of topics from all over the world. For example, to make sure they had adequate data on vaccine coverage for each region, they looked at public surveys, records of pharmaceutical manufacturers, and administrative records of inoculations. “We don’t necessarily believe what everybody says,” says Christopher Murray, global heath professor at the University of Washington and a lead author of the study. “There are so many ways they can miss people or be biased.” 

The U.S. scores its highest marks in water, sanitation, and child development. That’s the upside. Unsurprisingly, interpersonal violence (think gun crime) takes a heavy toll on America’s overall ranking. Response to natural disasters, HIV, suicide, obesity, and alcohol abuse all require attention in the U.S. 

David Fuller's view -

Interesting but incredibly subjective, in my opinion.  However, size of population seems to be a key factor, if you look at the table at the end of this article which shows The Top 30.  Among the first 23, only the United Kingdom at number 5 and Germany at 15 clearly have larger populations than the other highly ranked countries. 

I am surprised to see the UK so highly rated, not least given all the diesel fumes, especially in London.  Smoking and obesity are also UK problems. Having visited most of these countries, I am baffled to see New Zealand no higher than 30.  The USA does have big problems with violence, alcoholism and obesity, as mentioned, but it also has by far the largest population among the top 30 listed.  



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September 22 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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September 22 2016

Commentary by David Fuller

September 22 2016

Commentary by Eoin Treacy

Email of the day on Japan's stimulus program

Hello I read your analysis about the Topix bank index, for the first time I don't really agree with you. The bank of Japan is doing something new and it could push the Topix banks index up. I cannot attach graphs here to this message, but if on Bloomberg you compare the Topix bank index (or any bank index) to the difference in 30 year and 10 year JGB yields the correlation in the last 2 years is almost perfect. I believe they intend targeting yields to keep the curve ripid to help the banks. The same thing will probably happen in the Eurozone as they soften some capital rules as well, so I think the bank indexes should be watched even if only on a relative basis (bank indexes should outperform general indexes like sp500 and DAX and the yield curve become more ripid in Eurozone Japan and US), sorry I can't attach my Bloomberg graph. I hope at the chart seminar in London you can let me understand why you do not consider correlations such as these. They are not long term correlations, but are valid in a zero bound environment.

Eoin Treacy's view -

Thank you for this email highlighting some key measures of how the financial sector has reacted to the Bank of Japan’s stimulus policies. I look forward to covering these topics with you in person in London this November. It’s looking like an interesting group of delegates will be in attendance. 



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September 22 2016

Commentary by Eoin Treacy

EU Banks May Need Rescue Funds Equaling Twice ECB Capital

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

The Brussels-based SRB, the resolution authority for 142 banks including Deutsche Bank AG and BNP Paribas SA, will use the minimum capital requirement set by the European Central Bank as a proxy for capital that would be needed to absorb losses in a crisis, Koenig said in an interview this month. The ECB last year set an average requirement for the highest-quality capital of 9.9 percent of risk-weighted assets.

Requiring banks to have at least that same amount again in loss-absorbing liabilities will ensure that they can recapitalize themselves quickly after restructuring, Koenig said. This minimum requirement of own funds and eligible liabilities, or MREL, is calculated at the “30,000-foot level,” and more precise levels tailored to each bank will follow after the ECB sets new capital requirements and changes are made to capital, bank-failure and insolvency rules, she said.

“We want to avoid confusing the markets by saying, this is our decision this year, knowing that it will be different next year,” Koenig said. “So we take an indicative step this year. For next year, we hope that some of the dust has settled.

Eoin Treacy's view -

When reading about the increasingly high obstacle of regulation, higher and higher capital requirements for banks and stricter requirements for what constitutes Tier 1 capital I am put in mind of the adage that “generals are always fighting the last war.” These are policies that would have been appropriate before the crisis in order to mitigate risks. They represent a barrier to lending activity today that deters banks from acting as liquidity providers, regardless of where short-term interest rates are set. 



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September 22 2016

Commentary by Eoin Treacy

Email of the day on the Dollar Index

Do you think the Fed announcement will change the trajectory for the USD (DXY) heading into year end? and in turn potential provide some strength to the commodities?

Eoin Treacy's view -

Thank you for this question which may also be of interest to other subscribers. The Fed’s announcement that the economic activity is moderating suggests that the interest rate differential between the US Dollar and other major currencies like the Euro is unlikely to expand rapidly. That would suggest the rangey environment overall for the Dollar Index may continue a while longer, subject to what happens in Europe and Japan. 



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September 22 2016

Commentary by Eoin Treacy

California's legal marijuana market is on the verge of exploding

This article by Ben Gilbert for Business insider may be of interest to subscribers. Here is a section:

We're not talking about de-criminalization, or police de-prioritization.

We're talking about alcohol-style regulation and sale of marijuana to adults, age 21 and up. We're talking about legally allowed personal cultivation, state/local taxation of retail sales/distribution, and re-evaluation of sentences/records for people charged with marijuana offenses.
We're talking about outright, full-on legalization of marijuana. And in the world's sixth largest economy, that means billions of dollars. 

If California's Proposition 64 passes on November 8, and sales begin by January 1, 2018, California's looking at an additional $1.5 billion flooding into the marijuana market. That number swells to just shy of $3 billion in 2019, and nearly $4 billion by 2020, based on the latest report from New Frontier Data and ArcView Market Research.

And to be clear, that's on top of the already booming medical marijuana market — the total size of the cannabis market would reach $4.27 billion in 2018, and would grow to $6.45 billion by 2020.
The ballot initiative has overwhelming support in California: Over 60% of respondents support Prop. 64, compared to just 34% opposed, according to Ballotpedia's average of polls.

 

Eoin Treacy's view -

Evidence from companies like GW pharmaceuticals and others means that the Drug Enforcement Agency’s (DEA) assertion cannabis is a Schedule 1 narcotic with no medical use and a high probability for misuse is looking increasingly outdated. Arguments for full legalisation go a step further and promote the view cannabis is no more dangerous for consenting adults than alcohol. Considering the damage abuse of alcohol is capable of that’s not a particularly high barrier. 



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September 21 2016

Commentary by David Fuller

Yellen Rebuffs Pressure to Hike as Fed Gives Economy Room to Run

“We had a rich, deep, serious, intellectual debate about the risks and the forecasts for the economy, and we struggled mightily with trying to understand one another’s points of view,” she said.

She played down concerns that the Fed’s easy monetary stance was fueling bubbles in the financial markets and the economy. “In general, I would not say that asset valuations are out of line with historical norms,” she said.

Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Yellen may be too complacent. “Historically the Fed has had problems seeing financial instability in real time,” he said.

Weak Productivity

Yellen also argued that monetary policy was not exceptionally easy, in spite of the low level of interest rates. That’s partly because slow productivity growth and an aging workforce have reduced the economy’s potential growth rate and thus its long-run equilibrium interest rate.

“Monetary policy is only modestly accommodative,” she said.

Policy makers on Wednesday lowered their estimate of the economy’s long run cruising speed to 1.8 percent from 2 percent. They also trimmed their calculation of the long-run federal funds rate to 2.9 percent from 3 percent in June.

Former Fed official Jonathan Wright backed Yellen’s decision to give the economy more leash.

“There is little risk and considerable potential benefit from running the labor market somewhat hot for a while” because it could draw more discouraged workers off the sidelines, said Wright, who is now an economics professor at Johns Hopkins University in Baltimore.

Drew Matus, deputy U.S. chief economist at UBS Securities LLC in New York and himself a former Fed official, disagreed. Yellen “might find that room to run disappears pretty quickly,” he said.

David Fuller's view -

The opening sentence above is a memorable classic, but unlikely to inspire confidence much beyond today’s relief / panic rally, fuelled a combination of renewed purchases by momentum traders and short covering by bearish speculators.   

This item continues in the Subscriber’s Area and also contains a video.



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September 21 2016

Commentary by David Fuller

Email of the day 1

On markets:

Hello David

I hope that you are keeping well.

I am looking forward to your seminal or is it secular review of stock markets as it continues?

In this regard, I would be grateful for any comments on the attached articles on companies which seem to me to share many characteristics of the autonomies or are indeed part of that grouping. I know that you are blessed with uncanny intuition which might, just, enable you to guess which fund group sent them to me.

Having regard to your recent comments about value managers turning bearish too early, do you have any thoughts as to whether you continue to prefer autonomies & other ‘high quality’ shares or value plays (other than late cycle commodities/resources which you often mention)?

Wishing you all the very best

David Fuller's view -

Thanks for this interesting email and I look forward to seeing you at our next Markets Now on 10th October.

This item continues in the Subscriber’s Area.



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September 21 2016

Commentary by David Fuller

Email of the day 2

On fat, the American Medical Association and the Heart Association:

The good old American Medical Association and the Heart Association promoted fat as the culprit....

I guess there wasn't a fat industry to pay for the untainted research....whereas the sugar guys could pay for their "research.."

High-fat cheese: the secret to a healthy life?

David Fuller's view -

Well said, and thanks for this video: High-fat cheese: the secret to a healthy life? It is at least the secret to a happier life.  I regret the misleading diet information we received for so many years, including the 1970 & 1980s, when we were told to avoid fats.  The way food industries have funded misleading ‘research projects’ is also a disgrace, and not for the first time.  Similarly, I maintain that pharmaceutical companies have spent $billions funding ‘statins for everyone’ campaigns, and still are by some accounts.

Personally, I have enjoyed a mostly Mediterranean diet for at least the last five years and it includes plenty of healthy natural fats, but very few processed foods.  You are what you eat.  



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September 21 2016

Commentary by David Fuller

Science Says Silence Is Much More Important To Our Brains Than We Think

Here is the opening of this interesting article from Lifehack:

In 2011, the Finnish Tourist Board ran a campaign that used silence as a marketing ‘product’. They sought to entice people to visit Finland and experience the beauty of this silent land. They released a series of photographs of single figures in the nature and used the slogan “Silence, Please”. A tag line was added by Simon Anholt, an international country branding consultant, “No talking, but action.”

Eva Kiviranta the manager of the social media forVisitFinland.com said: “We decided, instead of saying that it’s really empty and really quiet and nobody is talking about anything here, let’s embrace it and make it a good thing”.

Finland may be on to something very big. You could be seeing the very beginnings of using silence as a selling point as silence may be becoming more and more attractive. As the world around becomes increasingly loud and cluttered you may find yourself seeking out the reprieve that silent places and silence have to offer. This may be a wise move as studies are showing that silence is much more important to your brains than you might think.

A 2013 study on mice published in the journal Brain, Structure and Function used differed types of noise and silence and monitored the effect the sound and silence had on the brains of the mice. The silence was intended to be the control in the study but what they found was surprising. The scientists discovered that when the mice were exposed to two hours of silence per day they developed new cells in the hippocampus. The hippocampus is a region of the brain associated with memory, emotion and learning.

The growth of new cells in the brain does not necessarily translate to tangible health benefits. However, in this instance, researcher Imke Kirste says that the cells appeared to become functioning neurons.

David Fuller's view -

Silence in an attractive rural setting is therapeutic.  We ignore this at our peril if we spend all our time in cities, however exciting and glamorous they may be. 



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September 21 2016

Commentary by David Fuller

The Markets Now

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

September 21 2016

Commentary by Eoin Treacy

Banks Emerge as Winners From BOJ With Bonds, Yen Erasing Losses

This article by James Regan and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

The BOJ plans to maintain 10-year yields in the nation at around the current level of close to zero, it said Wednesday, giving it scope to keep loosening policy to revive growth and inflation, while limiting the negative impact on financial companies’ earnings. The BOJ faced a backlash after first deploying negative rates in January, with Governor Haruhiko Kuroda acknowledging it cut into the profits of lenders and insurers by driving long-term yields lower. Next, investors will be looking to the U.S. for any signals regarding the timing and pace of future Fed hikes, with all but four of 102 economists surveyed by Bloomberg predicting policy makers will hold off from raising interest rates.
     
“Central banks are acknowledging that excessively negative rates are damaging to bank profitability,” said Michael Hewson, a market analyst at CMC Markets in London. “There is a perception that maybe what the Bank of Japan is looking to do could be a template for the European Central Bank and potentially the Bank of England.”

Monetary authorities will continue to command attention on Thursday with speeches due from the new governor of the Reserve Bank of Australia as well as the heads of the European Central Bank and the Bank of England. In addition, central banks in countries including New Zealand, Norway and South Africa have policy decisions due that day.

Eoin Treacy's view -

The Topix Banks Index collapsed in January following the announcement of negative rates. While we might look back in a few years and wonder what on earth central banks were thinking, it is now increasingly evident that they are beginning to accept it is a bad idea. Negative rates represent a major headwind for bank profitability and are inherently deflationary, which is the exact opposite of the long-term objectives of central bank policy 



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September 21 2016

Commentary by Eoin Treacy

Self-driving vehicles in China, Europe, Japan, Korea, and the United States

This report by Darrell M. West for the Brookings Institute may be of interest to subscribers. Here is a section:

Vehicles equipped with sensors and cameras navigate the streets of Mountain View, California; Austin, Texas; Kirkland, Washington; Dearborn, Michigan; Pittsburgh, Pennsylvania; Beijing, China; Wuhu, China; Gothenburg, Sweden; Rotterdam, Netherlands; Suzu, Japan; Fujisawa, Japan; and Seoul, South Korea, among other places. Sophisticated on-board software integrates data from dozens of sources, analyzes this information in real-time, and automatically guides the car using high definition maps around possible dangers. 

People are used to thinking about vehicles from a transportation standpoint, but increasingly they have become large mobile devices with tremendous processing power.2 Experts estimate that “more than 100,000 data points” are generated by technology in a contemporary automobile.3 Advances in artificial intelligence (software that applies advanced computing to problem-solving) and deep learning (software analytics that learn from past experience) allow on-board computers connected to cloud processing platforms to integrate data instantly and proceed to desired destinations. With the emergence of 5G networks and the Internet of Things, these trends will harbor a new era of vehicle development.

Between now and 2021, driverless cars will move into the marketplace and usher in a novel period.4 The World Economic Forum estimates that the digital transformation of the automotive industry will generate $67 billion in value for that sector and $3.1 trillion in societal benefits.5 That includes improvements from autonomous vehicles, connected travelers, and the transportation enterprise ecosystem as a whole.

 

Eoin Treacy's view -

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

There are two very big questions when it comes to the viability of self- driving cars. The first is whether it is technologically feasible to let a fleet of autonomous vehicles loose on the roads where the actions of unpredictable pedestrians, animals and weather will test an artificial intelligence to the limit. The second is the extent to which governments will successfully regulate for these vehicles so that insurance considerations can be ameliorated. 



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September 21 2016

Commentary by Eoin Treacy

Gold Seen Entering Long-Term Bull Cycle as Asset Bubbles Pop

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

Parrilla joins a slew of investors who are bullish on gold because of low borrowing costs and central-bank bond buying. Billionaire bond-fund manager Bill Gross has said there’s little choice but gold and real estate given current bond yields, while Paul Singer, David Einhorn and Stan Druckenmiller have all expressed reasons this year for owning the metal.

Some are not confident prices will rise. The probability of three rate hikes through end-2017 means there’s little room for rallies, according to Luc Luyet, a currencies strategist at Pictet Wealth Management. Cohen & Steers Capital Management, which oversees $61 billion, has pared its gold allocation, while investor Jim Rogers said after the Brexit vote in June that he’d rather seek a haven in the dollar than bullion.

While global bond yields are still very low, they’ve been rising. Yields have climbed to 1.21 percent from a record low 1.07 percent in July, according to the Bloomberg Barclays Global Aggregate Index in data going back to 1990. The odds of the Fed hiking in December have risen to 58 percent after the U.S. reported higher-than-expected inflation in August, from just below 50 percent on Thursday.

 

Eoin Treacy's view -

Despite the fact precious metal prices have been in a reaction and consolidation for the last few months, the biggest bulls are unabashed because they don’t see a solution to how central banks can support growth while simultaneously reducing the debt mountain without the assistance of inflation which could involve helicopter money. 



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September 21 2016

Commentary by Eoin Treacy

September 20 2016

Commentary by David Fuller

How Women Won a Leading Role in China Venture Capital Industry

My thanks to a subscriber for this fascinating article by Shai Oster and Selina Wang for Bloomberg.  Here is the opening:

The largest venture capital fund ever raised by a woman isn’t in Silicon Valley or even the U.S. It's in Beijing and is run by a former librarian who keeps such a low profile that she’s a mystery in her native China. Chen Xiaohong rarely attends industry conferences or events. She hadn’t given a media interview in more than a decade until agreeing to break her silence this summer. “I don’t like being part of a club,” said Chen during a four-hour discussion at her firm's headquarters. “I believe in staying independent, making your own decisions.”

Chen, 46, is part of an unusual group of female investors who have risen to the top of the venture business in China and helped fuel the country’s technology boom. They’ve backed some of China's most successful startups and their influence is growing as they raise more money, recruit other women and seed the next generation of technology companies.

Chen and her peers have become part of the mainstream in China in a way that's proven elusive in the U.S. American venture firms have faced accusations of sexism and discrimination for years, including in an unsuccessful lawsuit filed by a female partner against storied Kleiner Perkins Caufield & Byers. Despite the criticism, the firms have made little progress in promoting women. Among the top U.S. venture firms, women make up about 10 percent of the investing partners and only half of the firms have any women of that rank. China is already more balanced: About 17 percent of investing partners are female and 80 percent have at least one woman.

An increasing number, like Chen, lead their firms. Kathy Xu is founder of Shanghai's Capital Today Group, which has $1.2 billion under management and was an early backer of the e-commerce company JD.com Inc. Anna Fang is CEO of ZhenFund, one of the most influential angel investors in China. Ruby Lu, Chen’s partner at her firm H Capital until this month, previously co-founded the China business for DCM Ventures. 

Their success is bringing more women into China's technology industry. The Chinese government estimates females found 55 percent of new Internet companies and more than a quarter of all entrepreneurs are women. In the U.S., only 22 percent of startups have one or more women on their founding teams, according to research by Vivek Wadhwa and Farai Chideya for their book ‘Innovating Women: The Changing Face of Technology.’ 

Chen and her colleagues are building on a tradition of opportunity for women in China that dates back to before the days when Mao Zedong declared they held up “half the sky.” Women worked out of necessity in fields and factories when the country was poor, and fought alongside men during the country's civil war. By comparison, collaborating in an office is simple. Lu’s mother, who served in the People’s Liberation Army, laughed when she heard about her daughter’s diversity training at Goldman Sachs Group Inc. “She said ‘That’s ridiculous. What’s your job got to do with women or men?’ ”

The country is hardly free from discrimination. Men still hold most positions of power in politics and business, and there's plenty of crude sexism in technology. But China has quietly become one of the best places in the world for women venture capitalists and entrepreneurs. Chen raised a new $500 million fund, the biggest ever by a woman, according to Preqin, and increased her assets under management to about $1 billion. The largest women-led fund in the U.S. was about half that size, according to Preqin’s data.

“China is fundamentally different,” said Gary Rieschel, an American who founded the China-based Qiming Venture Partners, where four of the nine investing partners are female. “The venture capital industry in the U.S. has been a private men’s club. It has been much more of a meritocracy for women in China.” 

David Fuller's view -

This speaks well for China and its long-term economic potential – an important point given its current problems in the transition from a predominantly manufacturing based developing economy, to the developed economic model led by consumer industries. 

Veteran subscribers may recall my comments over the years that one could predict the long-term potential of economies by the emancipation of their women.  After all, they hold up “half the sky”, which is surely one of Chairman Mao’s more sensible quotes. 

Countries which subjugate their women, no matter how it is rationalised, are invariably hampering their economic and social development.  It should be an obvious point as women are half the population and educated women have the additional advantage of emotional intelligence. 

How will China resolve its current economic problems?

This item continues in the Subscriber’s Area.   



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September 20 2016

Commentary by David Fuller

Theresa May has Called a Wall Street Summit to Reassure US Banking Giants in the Aftermath of Brexit

Prime Minister Theresa May is to go on a charm offensive with US banks, holding a summit with some of the biggest institutions in a bid to reassure them over potential repercussions of Britain's vote to leave the EU.

Wall Street heavyweights invited to attend the special summit later today include JP Morgan Chase investment banking chief executive Daniel Pinto, Blackrock chief executive Larry Fink, Goldman Sachs chief financial officer Harvey Schwartz and Morgan Stanley president Colm Kelleher.

It is understood that the American executives want assurances that the rights of their employees based in Britain will be protected once the UK leaves the EU.

The prime minister, who is attending the United Nations General Assembly in New York, has sought to meet them amid concerns that they could be preparing to move their European headquarters out of the UK in the wake of the Brexit vote.

She has also invited the likes of technology behemoths Amazon and IBM, as well as bosses from engineering firms Aecom and United Technologies, and Sony Pictures. Several of these firms are currently engaged in large inward investment into the UK.

The meeting will represent the government's first major interaction with US investors since May came to office earlier this summer.

As well as seeking to reassure the Wall Street giants, May is holding a trade and investment event where she is hoping to encourage around 60 “current and expanding” firms to boost their investment in the UK.

Foreign secretary Boris Johnson is also expected to hold a meeting with business representatives on Wednesday.

Tonight, May also addressed the United Nations General Assembly, where she sought to build a global consensus on measures to tackle human trafficking, as well as entering talks on migration where she defended the right to limit the movement of people.

"We need to be clear that all countries have the right to control their borders and protect their citizens and be equally clear that countries have a duty to manage their borders to reduce onward flows of illegal and uncontrolled migration," May said.

David Fuller's view -

This is very positive, essential work by the PM, not least as only she can really speak for Britain today.  I am sure she will be effective. 

Theresa May also has the intelligence and strength of character to negotiate effectively with the EU.  Unlike her predecessor, the message will not be a version of: I want to stay in the EU but please give me some concessions so that I can gain support at home.    

Instead, I think she will make it very clear that Britain will accept nothing less than favourable terms for Brexit, which will also be in the EU’s interests.  This will only be considered if Angela Merkel understands that the UK is prepared to walk away from the European single market, without further negotiations or delay.  

Behind Europe’s angry bluster, the reality is that the EU needs the UK more than the UK needs the EU.  Mrs Merkel will lose further political support if German businesses find that they have to renegotiate trade terms with a UK that has already withdrawn from the EU.  Nevertheless, she may decide to accept this risk, if only for the sake of consistency, knowing that she is near the end of her career.

The biggest risk for the UK, including the Conservative Party, would be the unproductive masochism of a tortuous and expensive multi-year negotiation, with a destructive organisation determined to deter others from abandoning its sinking ship.  



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September 20 2016

Commentary by David Fuller

Email of the day

On the EU and Islam:

From your comment yesterday: “The EU is a club which European democracies can join, but apparently not leave of their own free will when the rules change, as they certainly have.” 

It just struck me that this is similar to Islam in that you are encouraged to join, required not to question and to subsume personal freedom to the will of the Almighty and woe be onto him who turns to apostasy. Little wonder they are welcoming in millions of Middle Eastern migrants with wide open arms. 

David Fuller's view -

Thanks for your original comparison, which is certain to amuse and appal subscribers, as it did for me.   



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September 20 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should also have some interesting discussions, not least over refreshments following the three presentations.  



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September 20 2016

Commentary by Eoin Treacy

Banks Are Now Too Scared to Even Make Money

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

In both cases, those shifting money across borders want to avoid foreign exchange risk, so they hedge using basis swaps. These involve swapping yen or euros in exchange for dollars, which will be swapped back at the end of the contract at the forward rate, typically a year or more later. Meanwhile they pay each other interest at the Libor rate for their currency, plus (or minus) the basis, which moves with demand.

Without banks willing to take the other side of the trade, the basis has blown out to levels usually only seen when the financial system is in meltdown, as in 2008-9 after Lehman or in 2011-2 as the euro seemed to be failing.

Most investors care as much about basis swaps as they do about cash-settled butter futures, but the shifts in the basis have already had highly visible effects. U.S. companies now have little reason to issue bonds in euros, because the basis cost has risen so much it almost entirely offsets the benefit of issuing at a lower yield in Europe. Japanese investors have no reason to buy U.S. Treasurys, as the extra yield they earn would all be eaten up by the basis when they hedge.

In short, the world’s banks aren't doing what they should be doing to grease the flows of money between countries. They’re too regulated and too scared of the risks, slight as those are.

We should welcome the fact that banks now try to price such risks, rather than the precrisis practice of simply ignoring them, but perhaps they are going too far the other way.

 

Eoin Treacy's view -

The reorientation of the money markets funds sector due to take place on October 14th has been a contributing factor in the uptick in LIBOR rates seen over the last couple of months. As the above article highlights it is not the only factor. 

Cross Currency Basis Swaps represent one of the most expedient ways of hedging currency exposure to interest rates and therefore are a hedged carry trade. LIBOR rates breaking out may be considered one of the unintended consequences of negative interest rates. 

 



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September 20 2016

Commentary by Eoin Treacy

Tesla Wins Massive Contract to Help Power the California Grid

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

Tesla Motors Inc. will supply 20 megawatts (80 megawatt-hours) of energy storage to Southern California Edison as part of a wider effort to prevent blackouts by replacing fossil-fuel electricity generation with lithium-ion batteries. Tesla's contribution is enough to power about 2,500 homes for a full day, the company said in a blog post on Thursday. But the real significance of the deal is the speed with which lithium-ion battery packs are being deployed. 

"The storage is being procured in a record time frame," months instead of years, said Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance. "It highlights the maturity of advanced technologies like energy storage to be contracted as a reliable resource in an emergency situation."

 

Eoin Treacy's view -

Tesla is essentially a battery company which also happens to produce electric cars. It has been my argument for quite some time that the only way solar can achieve grid parity is if it is used in conjunction with batteries. As long as solar power is subject to intermittency which forces utilities to maintain excess capacity it will not be taken seriously as a viable alternative to fossil fuels. 



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September 20 2016

Commentary by Eoin Treacy

Performance and valuations of junior gold companies

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

As shown in Exhibit 1, the GDXJ index of smaller cap gold companies (up 129% YTD) is holding near highs of the year despite a recent pull back in the gold price, and since May has outperformed the GDX index of larger cap names, which has risen by 89% YTD. Similarly, junior gold companies we track are currently trading at an average EV/oz valuation of $64/oz versus the YTD high of $74/oz seen in mid- August, the highest level since the $70/oz observed in 2011 and well above the $20–30/oz range of the 2013–2015 trough (Exhibit 2). We believe these valuations are in part due to a scarcity of higher quality gold projects, and we would expect a pick-up in M&A activity and the junior gold companies to continue to post strong relative returns during the remainder of 2016.

Eoin Treacy's view -

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

Precious metal prices have been confined to a reaction and consolidation, of this year’s impressive early gains, for the last few months with many instruments having already completed reversions to the mean. With the Fed and BoJ meetings tomorrow it is reasonable that investors are not rushing to initiate long positions with so much debate about what exactly central banks have planned and the headwind higher rates would pose for precious metal related instruments. 



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September 20 2016

Commentary by Eoin Treacy

The Andalusian 2016 World Cup

Eoin Treacy's view -

This event showcasing the skill and grace of Lusitanos (Iberian horses) in a display of working equitation at South Point in Las Vegas takes place on the 23rd. If you would like to attend this event, as my  and Nevada Trust Company’s guest please RSVP to [email protected]



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September 19 2016

Commentary by David Fuller

Earnings Miracle Needed to Get S&P 500 Values Out of Clouds

The Federal Reserve is looking for any excuse to raise interest rates, global growth is slowing, and yet stock analysts are predicting the fastest earnings expansion since the bull market began. They better be right.

Hitting forecasts for next year would require S&P 500 Index companies to increase profits by 13 percent, something that hasn’t happened since 2011. Failing to do so would risk inflating equity valuations that at 20 times annual income are already the highest since the financial crisis.

While the confidence of analysts helps explain the stock market’s resilience, such profit growth is lately the one thing investors have been conditioned not to expect. They’ve just endured a five-quarter stretch where every prediction for higher earnings fell apart just as reporting season arrived.

“You’d have to have a lot of things working in unison to achieve that number, a lot of things would have to go correctly,” Peter Andersen, chief investment officer at Fiduciary Trust Co. in Boston, said by phone. His firm manages more than $11 billion. “You’ll have areas where growth will be quite strong, like certain technology areas, but other industries like financials will never have that kind of growth through 2017.”

While the U.S. equity market has sidestepped threats in the past ranging from Europe’s sovereign-debt crisis to the prospect of a government shutdown, it’s had much less success thriving in the absence of expanding earnings. Through 2014, both the price of the S&P 500 and the annual income of its members posted six consecutive years without a decline -- but that ended in 2015, when the index slipped 0.7 percent and profits dropped 3.1 percent.

The trend has worsened in 2016, with annual income earned by companies in the S&P 500 falling to $106 a share last quarter from a high of $113 in September 2014. Quarterly profits in the S&P 500 are headed for a sixth straight decline in the third quarter, matching the longest earnings recession on record, according to data compiled by Bloomberg.

Wall Street analysts have continued to push back the turning point. A survey of estimates as recently as July pointed to S&P 500 companies returning to profit growth in the third quarter of this year. Those same analysts now see a decline of 1.4 percent.

Hope springs eternal for the fourth quarter and analysts still predict annual income will increase 10 percent from now to $117 per share by the end of 2016. The projected expansion for the next 12 months is even loftier: to get to $124 a share at this point next year, profits would have to expand another 16 percent, a rate of growth that is twice the historical average.

David Fuller's view -

Well, they would say that wouldn’t they, to paraphrase Mandy Rice-Davies, if they and their clients are enjoying the benefits of a rising stock market. 

This item continues in the Subscriber’s Area and includes an informative video.



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September 19 2016

Commentary by David Fuller

The EU Still Has Not Understood That it is a Totalitarian Institution

Here is the opening and also the memorable final paragraph of this informative column from Janet Daley of the Sunday Telegraph:

There you have it: a perfect summary of the European Union philosophy. In comments which were presumably made without embarrassment, a clutch of senior EU officials last week provided the Telegraph with a concise summing up of how this thing works. The UK, they said, will be forced to give up on Brexit when faced with “the bureaucratic nightmare” in which it will be entrapped by the most vindictive (sorry, the toughest) negotiations that could be devised.

If I hadn’t long passed the point of being shocked, I would find this breathtaking. Here it is, laid out in the most blithe, confident terms: the shameless contempt for a clear expression of democratic will, and the blatant use of the power of an unelected bureaucracy to undermine the intentions of a national government. Not to mention the utter, imperturbable belief in their own righteousness which justifies what might seem to the benighted oiks who think there is some sort of virtue in self-government, like an outrage.

And:

When some future Gibbon comes to chronicle the decline and fall of this modern European empire, it will be clear enough what went wrong: they enforced uniformity instead of trying to understand difference, and in the end, they revived exactly the hateful forces they had hoped to extinguish.

David Fuller's view -

The EU is a club which European democracies can join, but apparently not leave of their own free will when the rules change, as they certainly have. 

This additional article: Elected, yet strangely unaccountable, from The Economist provides further insights.   

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



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September 19 2016

Commentary by David Fuller

Email of the day 1

On “Are Risks Increasing or Decreasing for Stock Markets”:

September 19 2016

Commentary by David Fuller

Email of the day 2

On the Hinkley Point decision:

I was shocked to read that Theresa May had agreed to go ahead with Hinkley Point. Electricity is highly likely be available at a small fraction of the cost from other clean sources for the lifetime of this white elephant. And reports of construction delays, massive cost increases, and safety concerns at EDFs other construction sites are troubling. We taxpayers are being lumbered with a big bill far into the future. And UK industry will be lumbered with high energy costs and reduced competitiveness. This is the kind of decision-making I had hoped we would escape on leaving the EU (if we do!)

David Fuller's view -

Well said, and thanks for your thoughts. This was obviously a political rather than an economic decision. I believe Ambrose Evans-Pritchard had said Mrs May had no choice. I do not know all the background facts so I do not want to be too critical but Mrs May found herself in an invidious position over Hinkley Point, which she had not created.



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September 19 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should also have some interesting discussions, not least over drinks following the three presentations.  



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September 19 2016

Commentary by Eoin Treacy

Long-Term Asset Return Study An Ever Changnig World

This report from Deutsche Bank adopting a Eurocentric approach to global growth may be of interest to subscribers. Here is a section: 

We don’t think it’s a coincidence that asset prices were historically very depressed in 1980 (see Figure 2) and arguably at all time lows in valuation terms. 35 years later and traditional asset valuations in major DM countries have never been higher due to the themes unique to the 1980-present day period.

Extraordinary central bank buying of assets post the global financial crisis has obviously contributed to high asset prices in recent years but the reasons they have had to intervene also stems from the trends originating around 1980 that will be further discussed in this report. 

Another related feature of the post 1980s landscape has been 'globalisation'. Economic activity across the planet has become more integrated as the heavy protectionism that started in the inter-war period and the heavy financial repression/regulation following WWII were swept away. Globalisation has also caused great upheaval in many of the largest developed countries on the planet with many of these themes coming to a head in recent years. 

Income inequality has been a big consequence of globalisation, not necessarily at a global scale but within individual countries as the gains have not been evenly distributed. The chart that perhaps reflects this better than any other is the so called 'elephant' graph (Figure 15) constructed by Lakner and Milanovic which has become a popular addition to the academic economic literature in recent times.

Eoin Treacy's view -

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

There are very obvious challenges faced by Europe that look increasingly likely to be resolved in a messy fashion as a result of a some political upheaval with the rise of populism in a number of Eurozone countries. The increasing activism of a significant cohort of disenfranchised voters who favour populist solutions represents a significant threat to the status quo. With elections in the USA, Germany, France and Italy all scheduled within the next 12 months there is ample potential for additional bouts of volatility. 



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September 19 2016

Commentary by Eoin Treacy

Taiwan Stocks Jump Most in a Year as Apple Suppliers Lead Surge

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

Taiwanese shares jumped the most in a year amid speculation Apple Inc.’s latest iPhone model will prove popular, boosting earnings for the island’s suppliers.

The Taiex index advanced 2.8 percent at the close, its biggest gain since September 2015. Taiwan Semiconductor Manufacturing Co., a major Apple supplier, posted its biggest gain in a year, while Hon Hai Precision Industry Co., the main assembler of iPhones, added 3.9 percent. Apple has jumped 6.5 percent since Taiwan’s markets last traded on Wednesday amid holidays. The island’s dollar strengthened by the most since Aug. 1 against the greenback.

“It’s the Apple story again,” said Michael On, president of Beyond Asset Management in Taipei. “There’s a revived optimism that Apple will increase orders for Taiwanese suppliers after better-than-expected sales of the iPhone 7.”

T-Mobile US Inc. and Sprint Corp. said they’d received almost four times as many orders for the iPhone 7 as previous models, fueling speculation that the new product is off to a faster start than usual. Expectations for the iPhone 7 line had been muted before it was unveiled in San Francisco this month amid slowing growth in global smartphone sales.

 

Eoin Treacy's view -

As the world’s largest company Apple outsources all of its manufacturing which means it has a vast ecosystem of suppliers that are responding favourably to the release of the company’s new products as well as to the relative difficulties being experienced by Samsung. 



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