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January 25 2017

Commentary by Eoin Treacy

Fed Debate Over $4.5 Trillion Balance Sheet Looms in 2017

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

The dollar is a particular source of worry for U.S. policy makers, having appreciated 23 percent since mid-2014. The Fed expects to keep tightening while central banks in Japan and Europe hold steady or consider more accommodation. That could further strengthen the greenback and introduce a headwind for U.S. growth.

“Slowing down the economy a little bit at the long end of the market has some benefits if you think primarily that exchange rates are driven by short-term interest rates,” Rosengren said. “You might want some of the removal of accommodation to come at the long end, which would be done by the balance sheet.”

The Boston Fed released research on Jan. 19 that backs up this view of exchange rates and the yield curve. Former Fed economist Roberto Perli was more skeptical, pointing to global demand for longer-term U.S. Treasuries.

“If long U.S. rates were to increase significantly as a result of balance sheet shrinking, there would still be large inflows into U.S. assets, which would support the dollar,” said Perli, a partner at Washington consulting firm Cornerstone Macro LLC.

 

Eoin Treacy's view -

The Fed’s balance sheet at $4.46 trillion represents a potent source of supply for a bond market that shows increasing signs of topping out. As long as the balance sheet was increasing it was hard to argue with the rationale for pursuing the bullish momentum trade in Treasuries. However with interest rates now rising and the Fed no longer adding to its inventory of bonds a major source of fresh demand has been removed from the market.



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January 25 2017

Commentary by Eoin Treacy

Email of the day on steel errata

Also, at http://www.fullertreacymoney.com/general/email-of-the-day-on-cannabis-and-steel/, it states that Chinese steel production is in the order of 66,000 tons per annum and one Nimitz class aircraft carrier requires around 47,000 tons.

Please see attached the correct figure for Chinese steel production.

Still loving the service after decades of knowing David.

 

Eoin Treacy's view -

Thank you for this graphic from the World Steel Association which quotes completely different figures than those found in tradingeconomics.com. The figures you provided make more sense so I have amended the article. This additional article from CNBC quotes the world Steel Association figures. Here is a section: 



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January 24 2017

Commentary by David Fuller

Europe Learns To Like Hard Brexit and a Good British Ally

The Brexit drama has taken an unexpected twist. Britain's strategy of full withdrawal from the single market and from the EU institutions has been remarkably well-received.

Contrary to fears in some quarters in Britain, the pursuit of a 'clean and hard' Brexit has if anything helped to clear the air, greeted with a degree of relief by political and business leaders in Europe.

What has changed the mood - apart from the passage of time - is the parallel pledge by Britain's leaders to stand beside Europe as a close strategic and military ally, playing its full part in upholding a rules-based global architecture. 

There were signs at the World Economic Forum in Davos that the anger of recent months is slowly draining away, replaced by an acknowledgement of Britain's distinctive history and character. The imperative now is to limit the damage for all sides and find a way to make the new arrangement work. Not all divorces end in hostility.

Emma Marcegaglia, head of the pan-EU federation BusinessEurope, said the no-nonsense nature of Britain's decision may prove to be the best outcome even if it is hard to accept on an emotional level.  

"When I first saw Theresa May's speech my reaction was very bad, and I thought this is going to cause serious problems for British companies and for the rest of us," she said.

"But after thinking about it I now feel that her position is very straight and clear. In a certain sense it clarifies the situation. There could now be a good free trade agreement, like the Canadian arrangement with access for both sides and social protection," she told the Telegraph. 

"It is all so sad. We're going to miss the role of the UK in defending free trade and competition. The British commissioner was always a crucial ally for us in Brussels. But it is done now, and we just have to accept it," she said. 

David Fuller's view -

Last week, Prime Minister Theresa May seized the initiative in Brexit negotiations with the EU.  She said matter of factly that the UK was leaving the EU, and that no deal was better than a bad deal. She could not have been clearer.  She was also constructive in pointing out that Britain was leaving the EU, not Europe.  There was no anger or animosity in her words or voice, and she wished the EU well.

Emma Marcegaglia’s summary above describes the transformation of EU opinions occurring at Davos.  An independent Britain can be a useful ally for the EU.  That is in Europe’s interests.

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



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January 24 2017

Commentary by David Fuller

Email of the day

On Theresa May’s recent statement at Davos:

Theresa May's recent statement, presumably timed for the Davos gathering, appears to have had the desired effect.
Today's FT includes an article (attached) with some very positive statements from German Finance Minister Wolfgang Schauble.
The heading is: Schäuble says post-Brexit trade deal with UK can be done quickly.

Of course, there are elections ahead in Germany and his role afterwards isn't guaranteed, but let's hope he is still influential, when required. 

David Fuller's view -

Thanks for your email and the FT article

Theresa May succeeded in being gracious and responsible, while also taking a strong position on leaving the EU.  That was the correct thing to do, and it has also changed the psychology, not surprisingly.  Schäuble is not interested in a mutually destructive policy towards Theresa May and the UK.  He accepts that the UK is leaving the EU but now wants to maintain a mutually successful alliance with Britain, including a trade agreement.   



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January 24 2017

Commentary by David Fuller

The Special Relationship Is Our Only Indispensable Alliance. Theresa May and Donald Trump Must Renew It

In foreign affairs, symbolism matters. Theresa May’s arrival at the White House on Friday as the first foreign leader to visit President Trump sends a clear message to the world about the intimacy of the ties between London and Washington DC. It also shows that our sometimes derided diplomats have done their job well, and puts to bed the idea that Nigel Farage or anyone else was needed as a go-between.

When the Prime Minister arrives, she will be fresh from addressing congressional Republicans – another privilege that would be accorded to few other foreigners – and I predict she will get on well with Trump, even though their personal traits are as different as is possible among members of the same species.

Try to imagine our PM sending out angry tweets at three in the morning, or savaging our own intelligence agencies. Picture Donald Trump reading files quietly for hours, then asking for more information and refusing to give any commentary on his thoughts. Both defy the imagination. It is the greatest contrast in styles between the holders of these offices, at least since Ulysses S Grant overlapped with Gladstone – and they didn’t have to meet.

Yet Trump evidently is predisposed to find his “Maggie” and he will probably warm to her clarity and firmness. For her part, Theresa May is highly skilled at creating a warm relationship with colleagues when she really wants to, and never in her life will she have been more determined to do so than on Friday.

She knows, as does anyone who has seen government in Britain from the inside at the top, that leaving the EU is a risk, but estrangement from the United States would be a certain disaster. Our nuclear deterrent may be the subject of controversy this week, but we only have missiles that work at all because America is happy to sell them to us – something it does for no one else. Our ability to detect potential terrorist attacks is as strong as it is because British security and intelligence-gathering is tightly integrated with the US.

Every day, all over the world, whatever our ambassadors and soldiers are doing, they are usually doing it in concert with our transatlantic cousins. And our business with America is greater than that with any other single country, even before attempting a special trade deal. The alliance with the USA is the one relationship the UK has that is truly indispensable.

David Fuller's view -

This will be a very relaxed meeting compared to the rigors of Brexit negotiations and the US election battle.  It will also be a successful meeting between two very different but complementary leaders. 

Donald Trump has been gracious in offering Theresa May the first visit for a head of state at the White House.  She will appreciate the honour and be a wise, tactful confidant on international subjects.  He will be on his best behaviour.

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



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January 24 2017

Commentary by David Fuller

CBI Boss Says Theresa May Speech Sent Shockwaves Through EU Businesses

Businesses in Britain and across the EU are reeling from the "shockwaves" sent by Theresa May when she announced the UK will leave the single market, the CBI's director general has warned.

Carolyn Fairbairn told an audience of French businesses in London that they should unite with British companies to stand up for continued links with the EU post-Brexit.

She said that continued access to skilled workers and to European markets are crucial to future prosperity.

"By leaving the single market, the Prime Minister has reduced the available options," the director general said in a speech to the French Chamber of Great Britain, at the French ambassador's residence in London.

She was present in the audience when Theresa May made the announcement last week: "I know the shockwaves it sent around the room and the continent."

She wants to see a comprehensive, wide-ranging free trade agreement negotiated to give the UK and EU sustained access to each others' markets.

"Nobody is saying it will be easy... we know it could end up without a deal, falling back on the World Trade Organisation rules, and we should be under no illusion about what that would mean," Ms Fairbairn.

Those WTO rules would result in tariffs on imports and "almost inevitable" border delays, she said, giving the example of car manufacturers which import parts from across the EU.

"It is time for firms from all over Europe to work together for a deal that works for everyone," she said, calling on companies to "defend openness".

"Let's not take this openness for granted. Let's stand up and say why access to people matters, why access to markets matters. It is not the time to close the door."

Ms Fairbairn also called on the Prime Minister to unilaterally guarantee EU workers currently in Britain the right to remain after Brexit takes place.

"There has been progress and the Prime Minister made encouraging noises last week in Davos," she said.

"But a unilateral commitment is the right thing to do."

David Fuller's view -

Shockwaves?  Absolutely, and EU Businesses affected by a potential hard Brexit will turn on their politicians for damaging their trade with Britain.



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January 24 2017

Commentary by David Fuller

The Markets Now

The next Markets Now will be held in the Morrison Room at The Caledonian Club, on Monday 27th March

David Fuller's view -

I am delighted to say that our guest speaker at this event will be the interesting Charles Elliott, founder of Inflection Point Investments.  The first half of his talk will be on ‘Mega-Cap Tech’, including big and well-known names such as Apple, Microsoft, Google/Alphabet & Amazon.  This will be followed by ‘Emerging Tech’ in which he specialises. 

I can’t wait.



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January 24 2017

Commentary by Eoin Treacy

January 24 2017

Commentary by Eoin Treacy

Goldman Hails Global Rebound as Currie Sees Commodity Demand

This article by Stephen Engle , Ben Sharples , and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

“We’re seeing a cyclical uptick in global economic activity and that’s driving demand, not only for oil but all commodities,” Jeffrey Currie, head of commodities research, said in Hong Kong on Tuesday. “That’s the core reason why we upgraded our outlook on commodities to overweight,” he said, referring to the bank’s November decision.

Commodities made a comeback in 2016 with the first annual gain in six years as stimulus in China stabilized growth, and oil producers led by OPEC reversed course to limit supplies. Currie -- who spoke both on Bloomberg TV and to a reporter -- said the impact of China’s stimulus will probably last well into the first half of 2017. He added that policies from new U.S. President Donald Trump may reinforce inflationary pressures, aiding raw materials.

“U.S. and China are focal points where we’re seeing the uptick, but even the outlook for Europe is much more positive than what people would have thought six months to a year ago,” he said.  “It’s not what’s happening on the supply side but rather what’s happening on the demand side.”

 

Eoin Treacy's view -

The Continuous Commodity Index (Old CRB) is unweighted and therefore gives a more accurate picture of activity in the commodity markets than the CRB Index which is heavily skewed by oil prices. The Index hit a medium-term peak in 2011 below 700 and trended lower for five years until the beginning of 2016. 



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January 24 2017

Commentary by Eoin Treacy

Sibanye $2.2bn acquisition of Stillwater passes antitrust conditions

This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here it is in full:

Sibanye Gold (JSE:SGL) (NYSE:SBGL), South Africa’s largest miner producer of the precious metal, has been given the green light to proceed with the $2.2 billion acquisition of Stillwater Mining (NYSE:SWC), the only US platinum producer.

The deal, announced in December, was subject to antitrust conditions that fall under the US’s Hart-Scott-Rodino premerger legislation.

“Satisfying the HSR Act antitrust condition in a timely manner is an important first step towards concluding the acquisition of Stillwater,” chief executive Neal Froneman said in the statement.
The Johannesburg-listed company, which was spun out of South Africa’s Gold Fields in 2013, spent most of last year shopping for new mines, particularly in the platinum sector.

The company first expanded into the grey precious metal used in jewellery and diesel car engines in Sep. 2015, by buying Aquarius Platinum and three Anglo American Platinum mines.

Together with reducing Sibanye’s dependence on its aging South African mines, the deal will make the company the world's third largest palladium producer and fourth biggest platinum group metals miner, Froneman noted last month when announcing the planned acquisition.

If it goes through, the takeover will be the second-biggest South African outbound M&A transaction since 2015.

 

Eoin Treacy's view -

Sibanye Gold has an Estimated P/E of 8.61 and yields 5.56%. The sharp decline in precious metals prices as well as the expense of the company’s expansion plans contributed to a steep decline in prices over the last few months; falling from a peak near $21 to a low below $7. A mean reversion rally is now underway and clear downward dynamic would be required to check momentum beyond a brief pause. 



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January 24 2017

Commentary by Eoin Treacy

Email of the day on Chinese cotton demand

“Thank you very much for the very interesting comments on China's steel imports in the last two daily comments. If China is indeed trying to prepare herself for war, wouldn't they be buying other commodities too? Are you or anybody in the collective aware of them buying other commodities? As far as I know they have been trying to reduce their strategic stocks of cotton since about 15 months. They might have changed that policy, but at least I am not aware of it. As always I enjoy your comments & audio-video very much. Thanks again. best rgds"

Eoin Treacy's view -

Thank you for this educative email and for your kind words. It is my supposition that China at the very minimum seeks to bolster is military capability to at least boost its conventional deterrent capabilities. 



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January 24 2017

Commentary by Eoin Treacy

Brazil Optimism Pushes Foreign Investment to Six-Year High

This article by Mario Sergio Lima for Bloomberg may be of interest to subscribers. Here is a section:

Foreign direct investment in Brazil soared to a six-year high in December as investors abroad kept an optimistic view of the country’s long-term prospects, the central bank said.

Brazil attracted $15.4 billion in foreign investment last month, more than twice the amount expected by economists in a Bloomberg survey, and the strongest monthly performance since December 2010. In the whole of 2016, foreigners poured $78.9 billion in Brazil, more than enough to finance the country’s current account deficit of $23.5 billion.

“December’s foreign direct investment was really something,” Fernando Rocha, deputy head of the central bank’s economic research department, told reporters in Brasilia. “It shows foreigners hold a positive long-term view of the country.”

Investors remain generally optimistic that Latin America’s largest economy will emerge from its worst recession on record this year, even as economists surveyed by the central bank have recently cut their 2017 growth forecasts and the International Monetary Fund warned of near-stagnation this year.

December’s investment performance was boosted, in particular, by operations in the auto industry, as well as in the retail and power sectors, Rocha said. Yet overall investment has been “quite widespread” across a number of sectors, he added.

 

Eoin Treacy's view -

The ouster of Dilma Rousseff was a catalyst for international investors to take a second look at Brazil. The Real had been rallying from January 2016 in anticipation of the event and encountered resistance following Michel Temer’s inauguration as investors waited to see what kind of reforms could in fact be delivered. 



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January 23 2017

Commentary by Eoin Treacy

January 23 2017

Commentary by Eoin Treacy

2017 Roundtable, Part 2: Manual for a Mixed-Up Market

Thanks to a subscriber for Part 2 of this transcript from Barron’s which may be of interest. Here is a section on German Bunds:

Next, like Felix, I would short German Bunds. They are yielding 0.27%, and Germany’s inflation rate is 1.7%. Historically, it is very rare to have a Bund yield below the inflation rate. The current gap is a record. The Bund yield is unsustainably low.

Schafer: What is the best way for an individual to short German Bunds?

Gundlach: Short the futures. I agree with Felix that the Italian bond market is deeply troubled. Shorting Italian bonds could potentially produce a massive home run; they are yielding 47 basis points less than 10-year U.S. Treasuries, which represents a full buy-in on the idea that the euro zone will last forever. If the euro zone breaks up, a possibility we have discussed, and Italy has to go it alone, sovereign bonds could yield 1.9%. The current yield is insanely low. But shorting German Bunds appeals more. They are more vulnerable at this point than U.S. bonds.

One argument for U.S. bonds when yields hit a low last July was that they yielded more than German Bunds, which had negative yields. In other words, U.S. bonds were better than something really terrible, but that didn’t make them good. Underlying the argument was the notion that German yields would stay negative forever. Well, forever lasted about a month. Since then, Treasury yields have risen more than German rates, but Bunds could underperform in the next leg of the bond bear market.

Zulauf: In 2012, there were widespread fears about the euro zone breaking apart. Back then, money flowed from the southern countries to the northern countries, and into Bunds. The next time the euro zone looks endangered, money will flow out of the euro completely and into another currency, primarily the U.S. dollar.

 

Eoin Treacy's view -

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

Germany has benefitted enormously from the ECB’s quantitative easing program. As the largest economy in the bloc it garners the most purchases which are weighted by GDP. As the region’s largest creditor it holds sway over the direction policy takes. The creation of the Euro alleviated currency risk for Germany and country’s approximating its economic model such as the Netherlands and Austria. However for countries that did not have economies similar to Germany’s it crystallised currency risk. 



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January 23 2017

Commentary by Eoin Treacy

Email of the day on cannabis and steel

For information. Canopy has made an offer to buy Mettrum for Canopy stocks. This will triple my Canopy position and will help you to understand the reason for the similar chart pattern since early December. 

On your presentation yesterday (that I watched today), I was intrigued by the iron ore comment. Canadian iron ore companies (have a look at: Alderon, Labrador iron ore...) are on fire and I sold way too early exactly because I saw China slowing down and their financial situation reminded me of USA 2007-2008. 

So stock piling for war?.... hmm.. It is true that the US never really got out of the depression woes until their implication in the WW2 conflict, which they used also to help breaking European French and English ''Empires'' among others. This is certainly something to watch, and Trump ''shoot first'' attitude probably add to the concern for sure.

 

Eoin Treacy's view -

Thank you for this additional intelligence on the Canadian cannabis sector. Iron-ore is an interesting market because steel is such a political sector. China is expected to account for 71% of global steel production this year according to this article from CNBC. That’s a lot of supply and not all of it is designed to cater to the domestic market. 



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January 23 2017

Commentary by Eoin Treacy

Woman dies from antibiotic-resistant bacteria when no antibiotics worked

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

The death of a hospitalized patient in Reno Nevada for whom no available antibiotics worked highlights what World Health Organization and other public-health experts have been warning: antibiotic resistance is a serious threat and has gone global.

The patient — a female in her 70s — was admitted in for an infection and died in September 2016 from septic shock the CDC announced on Jan. 13. The patient had been treated for multiple infections in India before traveling to the United States. The infection that led to her hospitalization in Reno was caused by a strain of carbapenem-resistant Enterobacteriaceae (CRE)* bacteria known as Klebsiella pneumoniae. Although not all strains of Klebsiella pneumonia are CRE, the strain that infected this patient was resistant to all available antibiotics, according to the CDC. (Carbapeneum is a “drug of last resort.”)

In a paper in The Lancet in October, researchers reported that more than a third of blood infections in newborn babies involving Klebsiella pneumoniae and similar bacteria were resistant to multiple drugs to the point they were virtually untreatable and “threaten the return of a pre-antibiotic era in Indian neonatal intensive care units,” the study’s authors warned.

 

Eoin Treacy's view -

Antibiotic resistance is a vital topic of conversation because it affects all of us and represents perhaps the single biggest risk to general health we can fathom. The pace of technological innovation is perhaps the greatest hope we have of finding a solution that does not rely on fighting a losing war against an enemy capable of changing tactics to overcome conventional responses. This article from NewAtlas highlights one such solution. Here is a section: 

The study combined the new PPMO with meropenem, a type of carbapenem antibiotic that's effective against a broad range of bugs, and pitted it against three different types of bacteria that make use of NDM-1. In all cases, the PPMO restored meropenem's ability to kill the bacteria in vitro, and also managed to kill off an NDM-1-expressing strain of E. coli in tests in mice.

"We're targeting a resistance mechanism that's shared by a whole bunch of pathogens," says Geller. "It's the same gene in different types of bacteria, so you only have to have one PPMO that's effective for all of them, which is different than other PPMOs that are genus specific." Geller says the new drug should be ready for human testing in about three years.


There is every reason for optimism that this problem can be overcome but it requires constant vigilance and technology represents our best chance to overcome it. It is not a problem that will just go away.  

 



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January 20 2017

Commentary by Eoin Treacy

January 20 2017

Commentary by Eoin Treacy

Donald Trump's Presidency: A Look at His Proposed Policy Shifts

This compendium from the Wall Street Journal of some of the primary issues facing the incoming US administration may be of interest to subscribers. Here is a section on energy:

At the top of Mr. Trump’s energy and environmental agenda will be unraveling Obama administration policies that touch on everything from carbon emissions to water.

Much of the action out of the gate will focus on rolling back regulations. Mr. Trump has said he would withdraw Mr. Obama’s signature policy to address climate change, a rule that cuts power-plant carbon emissions. The rule already has faced legal challenges and has been temporarily blocked by the Supreme Court.

The Trump administration, with the help of the Republican-controlled Congress, also will work toward repealing an Environmental Protection Agency rule bringing more bodies of water under federal jurisdiction. Also targeted for repeal: Interior Department rules that require tougher standards for coal mining near streams and that set new standards for emissions of methane, a potent greenhouse gas, from oil and natural-gas wells on federal lands.

While the Trump administration can’t unilaterally repeal most rules right away, it has several options. The EPA and other agencies can immediately start the process to withdraw regulations, and they can relax compliance requirements over time. Meanwhile, Congress can pass measures nullifying rules that have been completed most recently.

Immediately confronting Mr. Trump is a decision regarding the Dakota Access oil pipeline, which extends from North Dakota to Illinois and is nearly built except for a crossing of a Missouri River reservoir.

Mr. Trump may also have a decision to make on the Keystone XL oil pipeline if its developer, TransCanada Corp., reapplies for a State Department cross-border permit the Obama Administration denied in 2015.

On the campaign trail, Mr. Trump said he would withdraw the U.S. from the global climate agreement signed in Paris in late 2015. He couldn’t immediately pull out of the agreement, but he could begin the process of withdrawing.

 

Eoin Treacy's view -

I watched the end of the inauguration speech at my club following my Friday morning HIIT class and the facial expressions of the desk staff were a picture of just how much work needs to be done to reunite the country. High energy costs, high healthcare costs, high education costs and no wage growth combined to create the conditions that got Trump elected. He is going to need to deliver on solutions to some of those problems if he is going to receive the second term he wishes. 



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January 20 2017

Commentary by Eoin Treacy

These Are the World's Most Innovative Economies

This article by Michelle Jamrisko and Wei Lu for Bloomberg may be of interest to subscribers. Here is a section:

South Korea remained the big winner, topping the international charts in R&D intensity, value-added manufacturing and patent activity and with top-five rankings in high-tech density, higher education and researcher concentration. Scant progress in improving its productivity score — now No. 32 in the world — helps explain why South Korea’s lead narrowed in the past year.

Silver medal winner Sweden owes most of its rise to improvement in the manufacturing value-added metric, while Nordic neighbor Finland jumped two spots in large part because of the rise of high-tech firms in the country. Norway held its No. 14 spot from last year.

Fresh ideas tend to pay off big in Sweden, even as the current government is less business-friendly and has imposed labor taxes that could crimp business investment, said Magnus Henrekson, director of the Research Institute of Industrial Economics, a private foundation in Stockholm. The Swedes themselves promote an atmosphere of great personal ambition — unlike some European neighbors that emphasize the collective — and that’s a boon to innovation, he said.

“In the culture, people are super individualistic — this means that people have ideas and are very interested in pursuing them in this way in order to become wealthy,” said Henrekson. “The incentives are there and the tax system favors them.”

 

Eoin Treacy's view -

If the results of the above report are anything to go by then having a relatively small population and an export focus is a common theme for the most innovative countries in the world. Of course being from a small country means companies have to innovate if they are to compete globally. Small countries also can’t afford to slide on education because the pool of available workers is limited and needs to be nimble enough to supply the economy with the skills it requires. Success is therefore multiplied. 



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January 20 2017

Commentary by Eoin Treacy

The Tech Bubble Year 5+

This very well-illustrated presentation by Anand Sanwal from CBInsights for the benefit of attendees at the CanTech Conference in Toronto may be of interest to subscribers. 

Eoin Treacy's view -

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

The pace of technological innovation is graphically illustrated in this report. What becomes very clear is how start-ups view the all-in-one businesses of companies like Starwood, Proctor & Gamble and the car manufacturers and pharmaceutical companies as ripe for disruption. They could be right and there is certainly a great deal of venture capital money willing to make that bet. However we should not expect established companies to go down without a fight.



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January 19 2017

Commentary by David Fuller

European Ideological Civil War Laid Bare In Davos

Europe's leaders lashed out at each other in Davos in an inflamed dispute over how to stop the EU collapsing, laying bare the festering divisions that will plague the European project long after British withdrawal.

"The whole idea of an ever-closer Europe has gone, it's buried," said Dutch premier Mark Rutte, dismissing calls for full political union as a dangerous romantic fantasy.

"The fastest way to dismantle the EU is to continue talking about a step-by-step move towards some sort of superstate," he said at the World Economic Forum.

His comments went to the heart of a fierce battle under way for control over the EU project, and provoked an impassioned counter-attack from Martin Schulz, the European Parliament's president.

Mr Schulz called it profoundly misguided to give up the dream of political union and retreat to the nation state. "If it's Angela Merkel, or Mark Rutte, or whoever else, they must have the courage to say that we need ever-closer union more than ever in the 21st century, and without it the EU has no future," he said.

Mr Schulz accused Europe's ministers of subverting the EU in a "double game", agreeing to measures behind closed doors in the EU's council of ministers and then denying any responsibility once they return home. "This is destroying the European spirit."

He accused prime ministers of arriving for meetings at the Justus Lipsius Building in Brussels and proclaiming before they even enter the door that they are there only to protect their own narrow interest.

"We have some members sitting inside the European Parliament trying to destroy the EU from within. They are drawing EU salaries, and one of them is running for the presidency of France," he said.

Frans Timmermans, the European Commission's vice-president, said there was a "fundamental ideological confrontation going on in our EU". He called on Europe's leaders to stop hiding behind subterfuge and pick their side, rather than blaming Brussels for everything. "You need to show your cards, show where you stand," he said.

David Fuller's view -

The masks of EU solidarity have clearly fallen away at Davos.  This will have shocked delegations from a number of other countries, particularly American readers of The New York Times and The Washington Post, and also anyone influenced by President Obama’s view of the EU and Angela Merkel.

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



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January 19 2017

Commentary by David Fuller

Bankers in Davos See Trump Making Wall Street Great Again

Here is the opening of this topical article from Bloomberg:

Wall Street’s high-flyers in Davos, basking in their firms’ strong fourth-quarter earnings, said they’re confident Donald Trump’s incoming administration will loosen regulatory constraints on financiers -- even if it leaves Barack Obama’s signature Dodd-Frank Act largely intact.

Bank executives, speaking on condition of anonymity at events around the Swiss ski resort, said they’re not counting on Trump to overturn Dodd-Frank. Instead, they expect the federal agencies that enforce the rules to ease up on them and support bankers’ efforts to limit how much capital and liquidity their companies need to pay bills or absorb losses in a crisis.

The bankers said they recognize that changing or overturning the 2010 Dodd-Frank Act would require support in the U.S. Senate that Republicans may lack. Instead they’re counting on Trump’s team to dial back how supervisory agencies enforce and interpret rules. Led by Federal Reserve Governor Daniel Tarullo, U.S. regulators have adopted an extra-strict version of the global standards on capital and liquidity set by the Basel Committee on Banking Supervision in the aftermath of the 2008 financial crisis.

“Legislation, obviously that’s harder to do than just changing regulations,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said in a Bloomberg Television interview with John Micklethwait on Wednesday. “Regulators can change a lot of things easily about compliance, about costs, certain rules about lending, how you use your liquidity, how you use your capital. I would like to see some of those looked at and maybe modified a bit, and I think it would be good for the economy.”

At a panel discussion on the global banking outlook in Davos Thursday morning, JPMorgan asset-management CEO Mary Callahan Erdoes echoed that view.

“It’s going to be a great several years,” Erdoes said. “It’s going to be very positive for businesses in the U.S., which should cascade to businesses around the world.”

David Fuller's view -

There has always been a cycle to bank regulation.  When excessive speculation by banks ends in a crash, as we last saw in 2008, and many of them have to be rescued, there is always a call for new, much tougher regulations.  These are designed to significantly boost cash reserves, limit leverage and also punish the offending banking industry. 

As a consequence, it is more difficult for the economy to recover because banks are unable to provide the liquidity required by their customers, as we have seen since the 2008 credit crisis recession. Eventually, anger towards banks subsides and governments commence easing tight regulations, as we are about to see with the incoming Trump administration. This will help the banking industry and also the US economy.

Some people worry that this will soon lead to another banking crisis.  Those concerns are premature because banks are not about to repeat the same mistakes at the first opportunity.  On average, it usually takes at least a generation before banks lose their discipline and contribute to another financial crisis.     



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January 19 2017

Commentary by David Fuller

The Evolution of Theresa May Sets Brexit Britain On Course for a Bright Global Future

Here is the opening and also the last paragraph of this topical article by Fraser Nelson for The Telegraph:

By her standards, Theresa May was relatively restrained at the Davos summit.  She loves enemies, and not in the Christian way. In front of her stood a congregation of the very people she holds up to ridicule: the plutocratic masters of the global economy, or, as she calls them, “citizens of nowhere”. On another day, she might have delivered one of the machine-gunnings that she reserves for the Police Federation or Boris Johnson. But this time she had another mission: to position Britain as the new global leader in free trade and reintroduce her country to the world.

The result was nothing short of a manifesto for a new British foreign policy and one of the best speeches given by a Prime Minister in recent years. It was a landmark not only in the evolution of her approach to Brexit, but in the development of her own political identity. It shows how far she has travelled in just a few months.

The traditional Davos speech involves clichés about the world’s ills and abstract nonsense like the “fourth industrial revolution”. The Prime Minister preferred to talk plainly. Rather than join them in lamenting populism, she sought to explain it: if people’s legitimate grievances aren’t addressed by established political parties, voters turn to insurgents. She could have added that Britain, virtually alone in Europe, has no problem with populism: the BNP dead, Ukip in crisis. And why? Because we had Brexit. It was not a Trump-style disruption; Brexit was how Britain avoids Trump-style disruption.

This is the point that European leaders find hard to understand. From Sweden to Sardinia, they are facing Eurosceptic insurgents whom they portray as barbaric and xenophobic. So they tell themselves (and their voters) that Britain has succumbed to a similar malady and is now sinking into a pit of hate crime, nativism and isolationism. This is not an anti-British agenda, necessarily, just the panic of politicians who can’t think of other ways to fend off new challengers. Mrs May came to offer some gentle advice: if you respond to people’s concerns, populism tends to go away. As Britain’s recent mini-revolution has just demonstrated.

Still, the Prime Minister has arrived rather late to all this. One of the great risks of Brexit was that the vote would be portrayed as a once-great country in meltdown, retreating from the world. Such concerns needed to be answered clearly, calmly and repeatedly. Had Boris Johnson become Tory leader he would have done this from day one. But Mrs May arrived in office implementing what seemed to be a far meaner version of Brexit than the one compellingly articulated by the Vote Leave campaign. We heard about EU nationals as bargaining chips, companies drawing up lists of foreigners, and new rules making it harder for foreigners to buy British companies.

And:

In her speech, she quoted Edmund Burke, to the effect that if a state cannot change, it cannot survive. That good governments do not become wedded to mistakes, but scour the horizon for opportunities and adapt with the times. As she has worked out, the same is true of prime ministers.

David Fuller's view -

I am relieved.  OK, the Prime Minister and her Cabinet were thrown in at the deep end but they were not providing the kind of Brexit that I voted for.  Fortunately this has changed dramatically in little over a week. 

How did that happen?  Was it a tactical decision to appear to have turned inwards, to lull the Brexit opposition and EU into a false sense of security before striding boldly and positively forward?  I hope not and I don’t think so.

Was it a simultaneous eureka moment By Theresa May and Chancellor of the Exchequer Philip Hammond, or did they receive some very helpful advice?  I suspect it is the latter although we may never know.  However, I do recall mentioning shortly after Theresa May became Prime Minister that she could always get some sound advice from The Telegraph’s editorial team.  While very much on her side, they had become a little more critical in the last several weeks, but no more as we see with the article above. 

Whatever, Theresa May and Philip Hammond have reassured their supporters.  They have also seized the initiative on Brexit and are determined to set their own agenda with a divided EU which is in disarray.  Good luck to them.

Here is a PDF of Fraser Nelson’s article.    

(See also: Instead of wasting time trying to replay Project Fear, banks must help us get the best deal from Brexit, by Allister Heath for The Telegraph)



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January 19 2017

Commentary by David Fuller

January 19 2017

Commentary by Eoin Treacy

January 19 2017

Commentary by Eoin Treacy

FANG was so 2015

Eoin Treacy's view -

Remember 2015 when the F.A.N.G, stocks were all the rage and media pundits were falling over themselves to tell us how you had to own them if you were to have any chance of outperforming the major indices. 2016 was predictably a tamer year for those shares with some spending much of their time consolidating 2015’s powerful gain. However with Netflix making headlines today on successfully boosting subscribers, following an international expansion, I thought it might be worthwhile to revisit this acronym. 



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January 19 2017

Commentary by Eoin Treacy

Bond Guru Who Called Last Bear Market 40 Years Ago Says Go Long

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

Money velocity isn’t a bullet-proof economic indicator. Financial innovation, and the rise of shadow banking, have made it hard to measure exactly how much money is floating around in the financial system. And some would say that "money" itself is going through an identity crisis these days.

Hunt isn’t the only one seeing the record-low pace as an ominous sign. The fact that money velocity declined rapidly during years of near-zero interest rates may signal aggressive monetary easing actually led to deflation instead of inflation, economists at the St. Louis Fed wrote back in 2014.

"In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy," economists Yi Wen and Maria A. Arias wrote.

"I know I’m the minority here,” Hunt said. “I’m just trying to see the world as I think it should be seen.”

 

Eoin Treacy's view -

I have long argued that the disintermediation associated with the internet and technological innovation is a major contributor in the decline in the velocity of money. The downtrend in the data from 1997 offers a graphic representation of the deflationary influence of technology. It also helps to explain why the surge in the quantity of money associated with quantitative easing has not resulted in high inflation. 



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January 19 2017

Commentary by Eoin Treacy

Email of the day on Canadian cannabis stocks

Pot luck... If the Canadian government continue to support AND passes legislation favorable to the development of the cannabis industry, some companies may have exponential growth, My pick has been Canopy on the TSX and I will continue to hold it.

Eoin Treacy's view -

Thank you for highlighting Canopy Growth Corp which as you point out is one of Canada’s most popular vehicles for expressing a view on cannabis. Canada is home to a significant number of recreational cannabis and cannabis related pharmaceutical start-ups, which as you say. would benefit from favourable legislation. You never know before the bull market ends there may be calls to exchange the maple leaf for something even more commercial than maple syrup.



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January 18 2017

Commentary by David Fuller

Dimon Says Euro Zone May Not Survive Without Change in Direction

The euro region could break up if political leaders don’t get to grips with the discontent that’s spurring support for populist leaders across the continent, JPMorgan Chase & Co. Chief Executive Dimon said he had hoped European Union leaders would examine what caused the U.K. to vote to leave and then make changes. That hasn’t happened, and if nationalist politicians including France’s Marine Le Pen rise to power in elections across the region “the euro zone may not survive,” Dimon, 60, said in a Bloomberg Television interview with John Micklethwait.

“What went wrong is going wrong for everybody, not just going wrong for Britain, but in some ways it looks like they’re kind of doubling down,” Dimon said in the interview Wednesday at the annual meeting of the World Economic Forum in Davos, Switzerland. Unless leaders address underlying concerns, “you’re going to have the same political things about immigration, the laws of the country, how much power goes to Brussels.”

Officer Jamie Dimon said. 

Dimon’s remarks on Europe were unusually pessimistic, coming in a wide-ranging interview in which he also criticized regulations that he said stunt economic growth. But he reiterated optimism for President-elect Donald Trump. Minutes later, Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein also expressed concern about Europe, telling CNBC that leaders are facing a backlash in the midst of a long, complicated process to create an economic bloc.

David Fuller's view -

Many people have said this for some time, including in this service, but Jamie Dimon’s view will attract more attention.

Eurozone leaders provide a classic example of arrogant groupthink.  They speak mainly to each other, in the comfort of their palatial headquarters in Brussels and Strasbourg, financed by beleaguered taxpayers, and agree that they know what’s best.  Yes, “they’re kind of doubling down,” as Dimon says.   



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January 18 2017

Commentary by David Fuller

Just Like In the 1980s, Theresa May Faces Chaos From Militant Unions. And Just Like Margaret Thatcher, She Must Not Flinch

Philip Hammond has rightly warned the EU that “we will do whatever we have to do”. So, in addition to pursuing trade agreements around the globe, what could we actually do, to convince the world that we have good enough plans for them to start buying pounds?

Here are five ideas:

  1. Establish Free Ports. My very talented successor as MP for Richmond, Yorkshire, Rishi Sunak, has pointed out how Free Ports could bring a major boost to the economy, manufacturing and the north. This would allow goods to be imported, manufactured and re-exported without any duties or taxes because they would not officially enter the UK. The jobs created could run into tens of thousands, and the merchandise handled into hundreds of billions of pounds.
  2. Give tax incentives to key global industries. Special tax relief for the film industry has been a huge success: major new studios have been built in Britain, over 200 films a year are being made here and we have 260,000 jobs thriving on the back of them. Every £1 of tax relief is meant to bring £12 back into the economy. We could give similar carefully targeted incentives to other creative, scientific and high-technology businesses, helping aerospace, biotechnology and others to see the UK as especially attractive.

This item continues in the Subscriber's Area.

David Fuller's view -

Philip Hammond’s comment that “we will do whatever we have to do” was the perfect response to the EU, and from a former Remainer who previously sounded very pessimistic.    

Here are my brief responses to William Hague’s five ideas:

“Establish Free Ports.”  I had not thought of this but it makes sense to me. 

“Give tax incentives to key global industries.”  I would favour across the board tax cuts which could be revenue neutral or even positive if the UK economy grew sufficiently as a consequence.  Special tax relief did create a booming film industry in the UK and helping the scientific and high-technology businesses is certainly a very good idea since they represent the future.  However, less glamorous industries are also important for a diversified economy and why cherry pick?  We do not want to create unnecessary resentment and damage other contributing industries. 

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



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January 18 2017

Commentary by David Fuller

Email of the day

On Monday’s Markets Now:

I just wanted to say how much I agreed with the subscriber email 2 yesterday on the ‘huge difference’ you & Eoin make with your service.

Give me the Markets Now over Davos any day of the week.

The financial services industry needs more people with competence & integrity like Iain Little & Bruce Albrecht. David Brown’s laser sharp intellect (& I suspect more ‘right brained’ judgement) knocks spots off so many of the city talkers I come across.  

I would have really enjoyed the ‘pub’ afterwards but I had to be home early. I find it best not to irritate my wife by getting home too late & the dog is always there waiting for his walk.

With best regards

David Fuller's view -

Thank you so much.  It was good to see you again, looking so well, and I enjoyed our chat as we were approaching the Club.  There is no better audience than veteran subscribers and I learn something new at every session of Markets Now. 

I sympathise with your wife and patient dog, and am sure your early arrival back home was welcomed.  



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January 18 2017

Commentary by David Fuller

January 18 2017

Commentary by Eoin Treacy

January 18 2017

Commentary by Eoin Treacy

Behind China's Bond Selloff, a Risky Twist on the Repo Trade

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

As much as 12 trillion yuan ($1.73 trillion) in bonds—or 19% of the country’s $9 trillion bond market—could be subject to such repurchase agreements, according to an estimate by Shui Ruqing, president of bond clearing-house China Central Depository & Clearing Co., cited last month in China’s influential Caixin Magazine. Traders say the deals are so opaque that even estimates are hard to make.

Banks sometimes use the “dai chi” agreements to move risky assets temporarily off their books during earnings periods or audits, the people said. Brokers like Sealand typically use them to borrow quickly and flexibly—leveraging their investments many times over, they said.
Until last year, Chinese financial regulators had largely ignored the practice, beyond saying they opposed it during a bond-market crackdown in 2013. But the informal nature of dai chi also meant the trades could be difficult to enforce when conditions worsened.

“Because it’s not really an official business, agreements aren’t legally binding,” said the executive who had bought bonds from Sealand.

Sealand’s problems became apparent on Dec. 15, when the southern China-based company announced that two of its traders had forged dai chi agreements worth 16.5 billion yuan ($2.4 billion), a move that market participants interpreted as meaning the broker didn’t intend to honor the deals.

The amount was more than five times what Sealand had declared in its Sept. 30 financials as its financial assets under official repurchase agreements, and more than seven times its disclosed bond-holdings.

 

Eoin Treacy's view -

China has developed extraordinarily quickly from a closed backwater into a massive financially significant hub. While the pace of development has been blistering the evolution of regulatory standards of governance has been much more moderate. The single party system where cronyism, nepotism and the modern equivalent of simony combine to ensure just about anything is permissible, provided your social standing is within the correct circle, and only exacerbates the situation.  



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January 18 2017

Commentary by Eoin Treacy

Goldman, Citi Beat Estimates as Trading Buoys Wall Street

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

Citigroup Chief Executive Officer Michael Corbat and Goldman Sachs CEO Lloyd Blankfein have been cutting costs and restructuring management to adjust to stricter capital requirements and a revenue downturn since the financial crisis. Goldman Sachs’s 2016 revenue was the lowest in five years, though investors and analysts are speculating the firm’s trading operations could be one of the biggest beneficiaries of Trump’s policies.

“The benefits from higher interest rates, accelerating capital deployment and historically low credit costs have been evident throughout the large-cap U.S. bank earnings releases,” Marty Mosby, an analyst at Vining-Sparks IBG, said in a note. “The fundamental story remains intact.”

 

Eoin Treacy's view -

Bond trading profits are dominating headlines among the major banks but hide the fact that most have seen their businesses contract over the last few years as the high cost of complying with regulation bit into the size and scope of their businesses. 



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January 18 2017

Commentary by Eoin Treacy

Pot Industry Exhales (a Little) After Trump's Attorney General Pick Testifies

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

Dayton said Sessions "may be against marijuana policy reform, but he is not stupid. He knows that these cannabis laws are hugely popular, not just among Americans in red and blue states, but with his boss who campaigned in favor of these laws." 

While his responses, on their face, were hardly a coup for the cannabis industry, Sessions didn't morally condemn pot smokers either. 

"The United States Congress has made the possession of marijuana in every state, and distribution of it, an illegal act," he testified. "If that ... is not desired any longer, Congress should pass a law to change the rule." 

The Drug Policy Alliance, an organization opposed to the war on drugs, called the testimony "wishy-washy at best." The group's senior director of national affairs, Bill Piper, added: "It is clear that he was too afraid to say the ‘reefer madness’ things he said just a year ago, and that’s progress. But he made it clear throughout the hearing that he will enforce federal law."

 

Eoin Treacy's view -

While a good many politicians have made statements condemning cannabis use “evolution” of their views on the topic are increasingly required as an ever increasing number of states legalise recreational or at least medical use. That has created a bull market in supply of the herb, not least because it grows like a weed. Wholesale prices have contracted considerably as operations initiated following Colorado’s legalisation reach commercial scale. That has resulted in mixed performance for the related shares. 



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January 17 2017

Commentary by David Fuller

Theresa May Brexit Speech: PM reveals UK Will Leave Single Market, Flags Australia Trade Deal

I think it is good to get the Australian perspective on this and here is The Sydney Morning Herald’s article on Mrs May’s speech:

London: British prime minister Theresa May has flagged a trade deal with Australia as a priority for a "new global Britain".

In a historic, detailed speech, Mrs May dashed the hopes of Remainers and delighted Brexiteers by setting out a vision of an independent UK – a "trading nation" that will look beyond Europe to "new friends and old allies".

She confirmed the UK would leave the European single market and instead would negotiate a new free trade deal with the European Union.

She was less clear on the UK's role in Europe's customs union, saying Britain would not be part of the common commercial policy or external tariffs, but could remain a "signatory to elements" in order to lower barriers to trade.

She emphasised the British people had voted to regain control of immigration, though she wanted European citizens already in the UK to retain their right to work there.

She revealed that the final Brexit deal would be presented to the British parliament for a vote before it comes into force – though she did not discuss what would happen if it was voted down, saying instead she was confident it would be approved.

Mrs May concluded with a barely-veiled threat to Europe: that if they sought a "punitive" Brexit then it would be "an act of calamitous self-harm" as the UK would retaliate by lowering its tax rates below Europe's to draw companies and investors from the continent.

She also admonished Europe for "trying to hold things together by force, tightening a vice-like grip that ends up crushing into tiny pieces the very things you want to protect".

But she said it was "overwhelmingly and compellingly in Britain's national interest that the EU should succeed".

Mrs May's speech drew a rapturous reception from those who had campaigned for Brexit, with UKIP leader Nigel Farage commenting "I can hardly believe that the PM is now using the phrases and words that I've been mocked for using for years. Real progress."

But it is likely to be less welcome in Europe.

European ambassadors were present in the room for the speech, and Fairfax understands few if any applauded the conclusion.

Some were seen shaking their heads when it came to the threat of Britain becoming a tax haven.

In a deliberate irony the speech took place at Lancaster House in London, where Margaret Thatcher set out her plan for the UK's membership of the single market in April 1988.

Mrs May began by saying she wanted the country to be "a truly global Britain", a "best friend and neighbour" to Europe but one that "goes out into the world to build relationships with old friends and new allies alike ... a great global trading nation respected around the world".

She said the UK would begin by adopting EU laws, then modifying them, to allow a smooth transition and certainty for business.

Mrs May also spent some time reassuring Ireland that there would be a "practical solution" that balanced the common travel area with Northern Ireland with the need to protect the UK's new immigration controls.

"Nobody wants to return to the borders of the past," she said.

On immigration, she said the UK would "get control" of the number of people coming to Britain from the EU, but would guarantee the rights of EU citizens already in Britain as an "important priority", preferably before the rest of the Brexit deal was done.

On trade, she said "as a priority, we will pursue a bold and ambitious free trade agreement with the European Union.

"This agreement should allow for the freest possible trade in goods and services between Britain and the EU's member states. It should give British companies the maximum freedom to trade with and operate within European markets – and let European businesses do the same in Britain.

"But I want to be clear. What I am proposing cannot mean membership of the single market."

This agreement might take in elements of the current single market as it "makes no sense to start again from scratch", she said.

But the UK needs to leave the single market and key elements of the customs union, Mrs May said, in order to strike its own trade deals.

"We want to get out into the wider world, to trade and do business all around the globe."

"Countries including China, Brazil, and the Gulf states have already expressed their interest in striking trade deals with us. We have started discussions on future trade ties with countries like Australia, New Zealand and India. And President-elect Trump has said Britain is not 'at the back of the queue' for a trade deal with the United States, the world's biggest economy, but front of the line."

David Fuller's view -

Well done Theresa May and her team.  This speech has ended much uncertainty and also frustration on the part of Brexit supporters, who’s numbers have increased following the historic vote.

Importantly, even the Chancellor Philip Hammond has come to his senses following a dreary Autumn Statement on 23rd November.   

As for EU spokesmen, I have heard some more lame “cherry picking” comments in response to Theresa May’s speech today.  No, the government is not cherry picking – we are leaving the EU.  



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January 17 2017

Commentary by David Fuller

Dominic Lawson: Why Our Cautious Chancellor Just Dropped a Brexit Bomb On Berlin

It’s not enough for Theresa May to say that if she doesn’t get a bespoke UK/EU free trade deal outside the Single Market and the Customs Union, she will walk away and risk the imposition of tariffs on both sides. She has to mean it — and be believed.
Such rough talk from her supposedly ultra-cautious Chancellor gives her much greater credibility in such a stand-off.

But Mr Hammond’s change of tone is not just a negotiating ploy. As he also pointed out to his German interviewers: ‘Since the referendum, we have seen, on the European side, movement away from the UK positions . . . to things that are anathema to the UK: more political integration.’

Some of that ‘movement’ would now be causing political mayhem in the UK, if we had not already voted to leave. Here are just four examples.

Last week, details leaked of an EU White Paper suggesting Brussels be allowed to impose taxes directly on member states, to include a levy on CO2 emissions, an electricity tax and an EU-wide corporate income tax.

Last month, the European Court of Justice ruled that British laws allowing the security services retention of bulk data on calls and emails would not be allowed to stand as they ‘exceeded what is strictly necessary’.

Also last month, Brussels ruled that all members of the Single Market had to impose a requirement that every off-road vehicle — every quadbike, every golf-cart — had to be covered by insurance for ‘third-party injury and damage’. Our own Department for Transport said that it ‘opposed measures which impose an unreasonable burden on the public’ but that it would have to abide by the new rule until Britain exits the EU.

And, only a few days ago, Brussels ruled that even motorists who break the law by driving without insurance should be protected if their car is damaged — so law-abiding drivers face an increase in insurance bills to cover that cost.

It is only because we are leaving the EU that these four power-grabs — proposing new EU-wide taxes; adversely affecting MI5’s ability to protect the British people; creating a totally new overhead for farmers and families playing around with quadbikes; and driving up the costs of running a car — have not caused an even sharper spike in the British people’s hostility to our membership.
 

David Fuller's view -

That is what the bureaucratic EU does – it makes silly nanny state rules which damage free enterprise, slow GDP growth and increase unemployment.  



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January 17 2017

Commentary by David Fuller

Email of the day 1, as I catch up

On the vetting of Rex Tillerson for US Secretary of State:

I spent much of the afternoon watching the live coverage of Rex Tillerson’s senate confirmation hearings.  I was very impressed with his responses, and found that some of the questions he was asked were entirely inappropriate for a public hearing as they would reveal possible ploys for dealing with the Russians.  The most petty moments were the grandstanding questions of Rubio, who appeared adolescent in contrast to a pro like Tillerson. How fortunate for all that Rubio was eliminated early on in the campaign.

Regrettably there was an overlap and I had to leave that coverage to watch The Donald.  There is clearly something wrong with that man on a personal level, but he has a very good case for the attempted vilification by certain segments of the media.  I loved his rebuff of CNN by refusing to accept any questions from their correspondent.  His comments re Buzzfeed were predictable, NYT, Vanity Faire, Streep pettiness, but that group is a joke anyway.  For me the most impressive moment was the time on stage of his attorney, who detailed the alleged efforts he has made to separate his past business ventures from his future job.  She was excellent, but I did wonder just how many blank pages there were in those stacks of documents lying on the table to her right.  Perhaps the rebuffed CNN reporter will have had a quick look.

David Fuller's view -

Thanks for your thoughts on this important confirmation hearing.  I saw a brief section of the Rex Tillerson hearings over the weekend and was impressed.  He was very articulate, knowledgeable and reassuring on a range of subjects. 

In fact, I would not have minded if he had just become the president elect.  I also maintain that Trump has selected the most capable business team of any president during my lifetime.  I think that will be good for the USA and I hope to see more successful people from the private sector nominated for senior governmental roles in the UK and any other democracies.  

(See also: If Rex Tillerson Is Confirmed By The Senate, What Does That Mean For XOM?, by Martin Tillier for Nasdaq)



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January 17 2017

Commentary by David Fuller

Whisper It, But This Could be a Good Year for Growth

A third major factor making for a stronger world economy is not directly related to the financial crisis. At the beginning of last year the markets and many commentators managed to get themselves extremely worked up over the damage supposedly done to the world economy by low oil prices. By contrast, it seemed to me that low oil prices had to be a good thing. But the losses from low oil prices were highly concentrated and visible in the short term; by contrast, the gains were more widely distributed and might only become evident to the beneficiaries after a period of time. Accordingly, it was likely that there would be a short-term hit to the global economy, offset by a longer-term gain. We are now into that longer term.

Meanwhile, the recovery from ultra-low oil prices has brought a further benefit, namely the easing of the pressure on hard-pressed companies and countries. Russia, for instance, should emerge from recession this year. Even so, oil consuming companies and individuals are still facing much lower prices than they were two years ago. The result is that the world should now be experiencing a substantial net dividend from lower oil prices.

The upshot of all of this is that world growth this year is set to be higher than last year. Not only that, but it may well be a good deal stronger than almost anyone expects.  Of course, in the world of forecasting you have to be prepared for surprises. Over the last few years we have all been exceedingly well prepared for downside surprises. What I am about to say is decidedly risky but I will say it nevertheless: I have a hunch that we now need to be prepared for surprises on the upside.

David Fuller's view -

I have been making many of these points for a while, so I agree with Roger Bootle. 

Businessman Trump will certainly want to improve the US economy and he has selected a highly experienced and business savvy cabinet to help him achieve this goal.  There is a risk that he might trigger a trade war with China, but I think he is too smart for that lose-lose mistake. 

Trump is fed-up with what he saw as Obama’s passivity.  He wants China to know that the US will now compete, and also cooperate, on a level playing field.  The same goes for Russia and any other country, although I think he could be particularly helpful towards the UK, as thanks for Brexit which Trump believes helped him to win the Presidential Election.  He holds little affection for the EU, having heard more about it from Nigel Farage, and having seen some of the whopping legal settlements and fines imposed on US corporations.  He probably views the EU as a rival rather than a friend, and he knows it has seldom paid its 2% of GDP per country NATO fees. 

This item continues in the Subscriber’s Area, where a PDF of Roger Bootle’s column is also posted.



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January 17 2017

Commentary by David Fuller

Email of the day 2

On Fuller Treacy Money and Markets Now:

I just wanted to say again 'thank you'. I know it feels hard work at times but you make a huge difference to many lives with your efforts at Fuller Treacy Money and Markets Now.  Please keep going. I will support you all I can. It is a real pleasure to know you. 

David Fuller's view -

Thank you for this thoughtful email. 

I have learned a great deal from my subscribers over the decades.  They include some of the nicest and most knowledgeable people, sometimes from very different professions, that I have ever met.  



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January 17 2017

Commentary by David Fuller

The Markets Now

David Fuller's view -

We had thirty-five people, including speakers, at The Caledonian Club on Monday evening.  I think that is close to the maximum size for these events because part of the fun is meeting everyone and chatting during the breaks, and also at the cash bar afterwards.  The Caledonian is proving to be an excellent, civilised venue with nice rooms and new projection equipment which is very good.       



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January 17 2017

Commentary by Eoin Treacy

January 17 2017

Commentary by Eoin Treacy

Stocks Could Post Limited Gains in 2017 as Yields Rise

Thanks to a subscriber for this transcript of Barron’s annual roundtable. Here is a section:

Gundlach: People have forgotten the mood regarding stocks and bonds in the middle of 2016. Investors embraced the idea that zero interest rates and negative rates would be with us for a very long time. People said on TV that you should buy stocks for income and bonds for capital gains. This is when 10-year Treasuries were yielding 1.32%. Someone actually said rates would never rise again. When you hear “never” in this business, that usually means what could “never” happen is about to happen. I told our asset-allocation team in early July that this was the worst setup I’d seen in my entire career for U.S. bonds. It occurred to me that the bond-market rally was probably very near an end, and fiscal stimulus would soon become the order of the day. 

Schafer: People were also worried about deflation back then. 

Gundlach: Based on a comparison in July of nominal Treasuries to Treasury Inflation-Protected Securities, or TIPS, the bond market was predicting an inflation rate of 1.5%, plus or minus, for the next 30 years. Now, that is implausible, and kind of proves the efficient-market hypothesis is wrong. More likely, the inflation rate would increase not in five or 10 years, but one year, because commodity prices had already bottomed. The Federal Reserve Bank of Atlanta’s wage-growth tracker is now up 4%, year over year. Oil prices have doubled since January 2016, to around $52 a barrel, which likely means that headline CPI [the consumer-price index] will be pushing 3% in April. 

I expect the history books will say that interest rates bottomed in July 2012, and double-bottomed in July 2016. At some point, the backup in rates will create competition for stocks. Bonds could rally in the short term, but once the yield on the 10-year Treasury tops 3%, which could happen this year, the valuation argument for equities becomes problematic. When the long bond [the 30-year Treasury] was at 2%, bonds had a P/E of 50. Compared with that, a P/E of 20 on stocks didn’t look all that bad. But if the 10-year yield hits 3%, you could be talking about 4% on the 30-year, which implies a P/E of 25. 

Something else happened in 2016: The Fed capitulated, as I predicted a year ago. The Fed gave up on its forecast for higher interest rates and lowered its dot projections for 2017, just when it might have been right. [The Fed’s so-called dot plot shows the interest-rate projections of the individual members of its policy-setting committee.] In December, the Fed had to reverse itself and raise rates. 

Priest: For the first time in years, the Fed didn’t lower its forecast for GDP [gross domestic product] growth in coming years. Central banks and the International Monetary Fund have been dead wrong for years with their annual forecasts for world GDP growth. The danger now is that pressure on P/E multiples will be negative. Unless we get tax reform and more growth in the real economy, the chances of a down stock market aren’t insignificant this year. 

Gundlach: Fed Chair Janet Yellen suggested a few months ago that running a “hot” economy might not be such a bad idea. But when unemployment is low, wages are rising, and significant fiscal stimulus is likely, inflation could exceed consensus expectations. Jim Grant, the founder of Grant’s Interest Rate Observer, wrote a fantastic article a few years ago likening the current environment to the 1940s and ’50s. Short-term interest rates were at 3/8s in the late 1940s, and long rates were around 2%-2.5%. Inflation was running at 2%. Everyone had been predicting higher inflation rates, but after a long period of 2%, they gave up. Then inflation spiked to 8%. It came out of the blue. 

Gabelli: Does the strength of the dollar change your thinking? 

Gundlach: A strong dollar keeps inflation lower. It is helpful to the bond market. A weak dollar isn’t helpful to the bond market. However, I brought along a quote from President-elect Trump today because it makes me think. He said, “While there are certain benefits to a strong dollar, it sounds better to have a strong dollar than it actually is.” Is it really a given that Trump will bring us a strong dollar if he is supposed to be helping the forgotten middle class.

Eoin Treacy's view -

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

Bonds sold off very aggressively following the November election result and the Dollar surged. The news flow has been sensational and Twitter has probably never been so popular but the reality is that both of these overextended short-term moves are unwinding. 



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January 17 2017

Commentary by Eoin Treacy

Iron ore price: China imports top 1 billion tonnes for first time

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

Forging more than half the world's steel, Chinese imports of iron ore for the full year 2016 topped one billion tonnes for the first time. The 1.024 billion tonnes constitute a 7.5% increase over the annual total in 2015 and is indicative to what extent exporters from Brazil and Australia has been able to displace domestic producers struggling with low grades and high costs.

The total value of cargoes climbed to just under $58 billion, with the average import price over the course of 2016 at $56.50 per tonne. The all-time record in terms of dollar value was set in January 2014, when the country imported $111.3 billion worth of iron ore back when prices were firmly in triple digit territory.

 

Eoin Treacy's view -

Iron-ore prices have not quite broken out to new recovery highs but have sustained last year’s breakout from a well-defined base formation and the upside can be given the benefit of the doubt provided that remains the case. 



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January 17 2017

Commentary by Eoin Treacy

Alibaba jumps ahead of Amazon with Maersk tie-up

This article by Sam Chambers for splash247 may be of interest to subscribers. Here it is in full:

Alibaba’s move to partner with Maersk Line should be seen as a game of one-upmanship with US rival Amazon, a leading name in online logistics has said.

Chinese customers will now be able to book space on Maersk ships, a first for the industry and one that potentially removes many freight forwarders as middlemen.

Dr Zvi Schreiber, CEO and founder of logistics technology Freightos, offered his perspective on the bigger picture and what this deal means for online shoppers and Alibaba’s rival, Amazon.

“Maersk is testing the waters of digital sales with one of the world’s largest ecommerce companies while threatening forwarder business. But for Alibaba, this is a direct challenge to global retailers like Amazon. Beyond drones and futuristic supermarkets, Amazon opted to get licensed as a forwarder. Alibaba one-upped them by going directly to the world’s largest ocean liner. Point, Alibaba.” 

 

Eoin Treacy's view -

There is a great deal of speculation going on at present relating to the implications of a Trump presidency on global trade. Certainly an America first manufacturing policy would have profound implications for low cost, high population countries’ ability to compete against what would in all likelihood be a highly automated US attempt to re-shore. Nevertheless even with the most ambitious timetable that kind of initiative could take years to unfold. 



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January 16 2017

Commentary by Eoin Treacy

January 16 2017

Commentary by Eoin Treacy

Brexit Plans Rattle Pound and Stocks as Gold Rises

This article by Cecile Gutscher and David Goodman for Bloomberg may be of interest. Here is a section:

Caution dominated markets amid tough talk from May and Donald Trump about Europe’s economic and political institutions. British government officials trying to limit damage to the pound will speak to major banks in London before the U.K. leader sets out her vision for leaving the bloc in a speech on Tuesday, according to people familiar with the situation. Meanwhile Trump predicted that Britain’s exit will be a success that will encourage others to do the same. He also branded NATO obsolete.

“Markets are trading in risk aversion mode,” said Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London. “Investors and corporates around the world are concerned by the prospect of a hard Brexit. Pound rallies are limited and weak, while plunges are harsh and prolonged.”

 

Eoin Treacy's view -

When we get down to basics. The UK is betting it will not be the only country to leave the EU. If it is correct in that view then it will have made the correct decision by gaining first mover advantage and the current concerns about the form of the subsequent relationship will be academic. 

On the other hand, the European Commission has to successfully sell the idea that the UK should never have been brought in to begin with and that it can hold the remaining group of Eurozone nations together. It has to do that because the prospect of countries leaving the EU, raises the very real possibility that creditors in Germany will not be paid back the money they lent to countries like Greece, Cyprus, Italy, Spain, Portugal, Ireland et al. 

 



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January 16 2017

Commentary by Eoin Treacy

Email of the day on the secular bull market in bonds

Enjoy watching the video presentations. Thought you may be interested in the following interview of Gary Shilling

Eoin Treacy's view -

Thank you for you kind words and this interesting interview which may be of interest to subscribers. 

Gary Shilling’s view that technological innovation is inherently deflationary is very much in tune with our view. The increasing commercial applications of biotechnology, automation, artificial intelligence, the internet and mobile technology are all likely to enhance productivity and could very well represent a deflationary influence. On the other hand, the increasing calls for free money (universal social payments) lower taxes, more spending and deregulation have the capacity to stoke inflation.

 



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January 16 2017

Commentary by Eoin Treacy

Email of the day on MOOCs

On your piece about MOOCs I couldn't help but observe that you did not mention FutureLearn

This service is UK based and is an offshoot of the Open University.

It claims to be the largest MOOC. See below. I've used it and it's very good. I particularly like the fact that many courses are short - 6 weeks and typically 2 - 3 hrs per week.  
All the best

 

Eoin Treacy's view -

Thank you for highlighting FutureLearn.com which, as you point out, is another major centre of online learning and builds on Open University’s long history of distance learning. This article from May last year highlights how a number of universities will allow students to earn as many as 30 credits towards a degree using FutureLearn’s portal. That’s a powerful method to help reduce the cost of earning a primary degree and enhances even further our ability to enjoy learning throughout our lives.



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January 16 2017

Commentary by Eoin Treacy

Email of the day on reshoring and automation

This is indeed well under way and generally government-supported trend globally, with Germany (as always) at the forefront, but also the US and the rest of Europe promoting and facilitating the process.

The article below is interesting I think

It gives an idea of how easily these processes are implemented (2 weeks to start production) and the advantages offered to producers (design innovation + shorter time to market + customisation). €2 million investment for being able to produce a total of 200k pieces every year seems very low.

Shima Seiki (6222) - that provided the machinery to Benetton - is a company worth looking into, and the recent rally in share price confirms what you mentioned re the growth potential from clothing manufacturers in Asia.

This is also confirmed on their IR page
 

 

Eoin Treacy's view -

Thank you for this above article expounding upon the seamless garment manufacturing being pioneered by Shima Seiki. Seamless garment manufacture has been around in the hosiery business for a long time but finishing was always required to sew the legs on the gusset. Introducing seamless manufacture to outer wear is a major innovation and as you point represents an additional sign of increasing interest in automation in the garment industry. 



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January 13 2017

Commentary by David Fuller

Davos Wonders If It Is Part of the Problem

Here is the opening of this topical article from Bloomberg:

Kenneth Rogoff can pinpoint the moment he started to grow concerned Donald Trump would be the next U.S. president: It was when Rogoff’s fellow attendees at the World Economic Forum’s annual meeting last January said it could never happen. “A joke I’ve told 1,000 people in the months since leaving Davos is that the conventional wisdom of Davos is always wrong,” says the Harvard professor and former chief economist of the International Monetary Fund. “No matter how improbable, the event most likely to happen is the opposite of whatever the Davos consensus is.”

The repeated failure of business and political elites to predict what’s coming—last year, that included the U.K.’s vote to leave the European Union—doesn’t strike those returning this month to the Swiss Alps as very funny. After a year in which political upsets roiled financial markets and killed off the careers of once-dominant Davos-going politicians, the concern for delegates attending this year’s meeting isn’t that their forecasts are often wrong, but that their worldview is.

In its four decades of existence, the WEF has nurtured a broad consensus in favor of globalization and open markets. At its core is the notion that capital, goods, and people should be able to move freely across borders, a principle that can deliver huge benefits to those with education and money but seems terrifying to those without either. For the 3,000 people who will convene in the small Swiss town from Jan. 17 to 20, the 2017 event could be a moment of reckoning. At speakers’ podiums, coffee bars, and the ubiquitous late-night parties, they’ll be asking themselves whether Davos has become, at best, the world’s most expensive intellectual feedback loop—and, at worst, part of the problem. “Since the recession, the boom has benefited the upper-income earners and done little for those in the middle or on less. That’s the backlash,” says Nariman Behravesh, the chief economist for research provider IHS Markit. “The Davos vision of the world has not delivered a broad-based economic recovery.”

David Fuller's view -

I think Kenneth Rogoff is right.  Obviously many things are discussed at Davos but there is usually a dominant subject or theme, at least according to the press, and the consensus is generally wrong. 

Why does this happen?  After all, the people attending are generally highly intelligent, if not always analytical or introspective.  Could it be a smear on the part of envious press attending along with other observers who are not principle attendees?  Presumably not if Kenneth Rogoff says “the conventional wisdom of Davos is always wrong”. 

Could it be guilt mixed with fear, leading to a first-class ticket on the Titanic mentality?  They may not be literally at sea but the analogy has relevance as they are sheltered in luxury on a frozen alp.  Presumably they can only go downwards from there. 

There is also a typically behavioural answer.  When a number of different people are confined in close proximity, whether it be at Davos, in stadiums, or large open-plan financial dealing rooms, they quickly become susceptible to groupthink. In other words, their individual thoughts and opinions will be subconsciously suppressed, as they become part of the developing crowd view.  This form of bonding can occur for a combination of different reasons, including friendship, admiration and even fear.  Groupthink is as powerful as it is unanalytical.    

We should monitor reports from Davos, if only because any conventional wisdom could be a contrarian indicator.  Trump’s tweets could be a topic, as they currently are everywhere else, but what conventional wisdom might they produce in Davos?  We will soon know but if it is fear of war with China or Russia, or just a routine impeachment, I might have to buy more commodities.      



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January 13 2017

Commentary by David Fuller

Email of the day 1

On Ambrose Evans-Pritchard and market views:

Dear David, 
Thank you for posting this and other articles from the Telegraph, which are always informative. I particularly enjoy reading A E-P. He has a breadth and depth of experience that is quite unique among UK journalists and he never fails to be dramatic. I remember 2008 when A E-P was calling for a financial crash, and few others agreed. I don't know whether he acted on it and made any money. I rather doubt it. 
One thing I bear in mind (with all newspaper articles) is that journalists are not investors - and if they were successful investors they would not be journalists!
Your views on markets have more gravitas than any journalist.

David Fuller's view -

Thanks for your email and I feel similarly about A E-P.  He is erudite; I enjoy the classical and international references; he is extremely well informed and in my opinion, the most interesting writer in the financial industry.  I too remember A E-P's analysis in 2008 and he was brilliant.

I think you are right about journalists having sensible restraints on trading various instruments, although I hope they can invest in funds.  This article from Business Insider - The Insane Difference In The Rules For Journalists And SEC Employees When It Comes To Trading Stocks, is informative:  I thank you for saying that my views on markets have gravitas, but in this industry we need to remember that we are only as good as our last call / trade / investment.



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January 13 2017

Commentary by David Fuller

Email of the day 2

On the Fed, Mr. Trump and a fiat monetary system:

Hi, David, and thank you for posting the above article. I tend to agree with your assessment of it. My one observation is that while the author impugns the Fed, and justly so, as a principle player in fostering the zeitgeist we hope Mr. Trump will cause to be successfully addressed, he makes no mention of a fiat monetary system that enables the Fed to play its role so generously. Is it fair to view that as a significant omission or am I flirting with the danger of the single story?

David Fuller's view -

I think the Fed or any other central bank is always going to be controversial, not least because they have so much power and influence within fiat monetary systems. My own view is that they generally help economies more than they harm them.  For instance, I maintain that following 2008 we would have seen widespread depressions, rather than many lengthy recessions. 

More recently, the Fed and other central banks have been widely criticised for discouraging economic recovery, not least by making commercial banks less profitable so that they were reluctant to lend.  Critics have also said that only rich people, mainly with equity portfolios, have benefitted from record low interest rates. 

There is definitely some truth to these points.  However, I also think that governments could and should have increased fiscal spending, but very few did so.  With minimal GDP growth, many corporations were also reluctant to spend.  The leading central banks often called for more government and corporate spending but were generally ignored. 

This situation may have looked like the question: Which came first, the chicken or the egg?  However, I think governments were more at fault than the central banks, which were too often left almost solely in charge of providing stimulus. 

In the US, this problem certainly contributed to the election of Mr Trump, who many people said was unqualified to be president.  Like him or loath him, at least Mr Trump proposed very stimulative policies for the US economy, which we never saw from Mr Obama and which Mrs Clinton was not proposing.  

By my count, Trump wins the first round comfortably, before he is even inaugurated.  Of course anything can happen over the next four years and it will certainly be interesting.        



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January 13 2017

Commentary by David Fuller

The Markets Now

 

Here is the brochure for Markets Now on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

At least thirty-one people will be attending, including the speakers.  We will be in the splendid Morrison Room on the right as you enter the Club.  Sarah Barnes might just be able to shoehorn in another couple of people if you contact her via the brochure. 

I am looking forward to a lively, interesting and enjoyable evening.



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January 13 2017

Commentary by Eoin Treacy

January 13 2017

Commentary by Eoin Treacy

The FTSE-100

Eoin Treacy's view -

The UK’s largest cap index is in the process of completing a 16-year range by breaking on the upside. The Index has rallied for six consecutive weeks, hit new all-time highs last week and improved on that performance this week. Prior to this breakout it had spent three years ranging below, but in the region of, its previous peaks. While a short-term overbought condition is evident that is consistent with what is to be expected from a major breakout. 



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January 13 2017

Commentary by Eoin Treacy

Last Lifelines Crumble for Many Greek Families as New Conflict With Creditors Looms

This article by Nektaria Stamouli for Wall Street Journal detailing the human cost of Greece’s economic retrenchment may be of interest to subscribers. Here is a section:

The three-way conflict simmered throughout 2016. Eurozone policy makers say its resolution can’t be put off much longer. Prime Minister Alexis Tsipras is considering the option of snap elections if the creditors don’t soften their positions.

The IMF is holding a hard line partly to put pressure on the eurozone to lighten Greece’s debt burden, say people involved in the negotiations. IMF officials have said Greece’s economy is already overtaxed.

New taxes that came into effect on Jan. 1 are squeezing household incomes further. Economists say even-higher income taxes—in the form of lower tax-free income allowances—could add to a mountain of unpaid taxes. Greeks currently owe the state €94 billion ($99 billion), equivalent to 54% of gross domestic product, and rising, in taxes that they can’t pay. Three in four Greeks can’t pay household bills on time, according to the 2016 European Consumer Payment Report, a private-sector survey.

Extended families often rely on grandparents’ pensions. Further cuts in that lifeline could end hopes for a return to economic growth. Unemployment remains more than double the eurozone’s average at 23%. About 74% of the jobless have been out of work for more than a year and thus receive no benefits.

 

Eoin Treacy's view -

Greece got itself into a world of trouble by fudging economic statistics to gain entry to the euro. By succeeding in that endeavour it paid scant regard to its ability to pay back the vast quantities of money subsequently borrowed and the generous social programs it funded. 



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January 13 2017

Commentary by Eoin Treacy

January 12 2017

Commentary by David Fuller

Perils of the Icarus Trade as the World Runs Short of Dollars

Here is the opening of this topical article on the Trumpian outlook for stock markets in 2017, by Ambrose Evans-Pritchard for The Telegraph:

Bank of America calls it the Icarus Trade. Global stock markets will surge by another 10pc in a parabolic 'melt-up' this quarter, akin to the final stage of the dotcom boom.

This will be followed by a mirror 'melt-down' later in 2017 as the US Federal Reserves squeezes global liquidity, and rising bond yields puncture the Trump reflation trade.

Michael Hartnett, the bank's investment strategist, says there will be a perfect moment for the 'Big Short' within a few months, but first we must all wait for the speculative fever to pass. The warning signs of a market top are not yet flashing red.

The Bull/Bear ratio is a frothy 3.4, but far from extreme. The cash reserves of money managers have fallen to a 19-month low of 4.8pc. The danger zone is nearer 4pc. Powerful rallies tend to draw all but the most steely resisters into the vortex first.

Bank of America recommends "laggard risk assets", singling out British assets as the ultimate unloved play. We in the UK may think that the headline rise of the FTSE-250 over the last twenty months is not so bad, but for sophisticated investors who think in dollar terms it has been a 20pc haircut. Britain PLC is cheap.

Picking the last pennies off tracks before an incoming train is only for the nimble and brave.  Mr Hartnett says bond stress is creeping up on the markets. The peak-to-trough losses for holders of US Treasuries over the last five months are already greater than before the 1987 crash, the Orange County and Mexico blow-ups in 1994, and is not far short of the 'taper tantrum' in 2013.

The great unknown is where the pain threshold lies in a global system with debt ratios that are now roughly 40pc of GDP higher than just before the Lehman crisis. Bank of America fears a further rise in yields of 50 to 75 basis points may be enough to trigger a "financial event".

HSBC's latest global outlook is even darker. Indeed, it is astonishing. The bank expects yields on 10-year US Treasuries to push a little higher to 2.5pc before crashing back to historic lows of 1.35pc by the end of the year, taking global yields with them.

Markets will conclude by the summer that Trumpian stimulus does not add up to much, and that the reflation narrative is a hoax. "We believe that equities are walking a tightrope, and there is a fairly long way to fall," said the bank.

While I do not take a view on stock prices, HSBC's outlook is broadly in line with my own. The world cannot easily withstand the sort of Fed tightening now being etched into forecasts by the macro-economic fraternity.

The Institute of International Finance says debt has reached $217 trillion, a record ratio of 325pc of GDP. What is remarkable is that even in mature economies -  trying to 'deleverage' - the ratio jumped by 6pc of GDP to 390pc over the first nine months of last year.

There is almost nowhere left to hide. Corporate debt in emerging markets has risen from $6.5 trillion to $25.5 trillion since Lehman, with the 'credit gap' signalling danger in China, Hong Kong, Singapore, Thailand, Saudi Arabia, Chile, Turkey, and Indonesia. Total off-shore dollar debt has risen fivefold to $10 trillion since 2000.

David Fuller's view -

One expects a range of different forecasts at the beginning of January each year, and 2017 is no exception.  Love him or loath him, president-elect Trump is particularly newsworthy and a factor in these forecasts.  

On Monday I posted James W Paulson’s bullish report for Wells Capital Management in which he referred to the return of animal spirits no less than 24 times.  In Ambrose Evans-Pritchard’s column above he first quotes Michael Hartnett from Bank of America who predicts further momentum gains before “a perfect moment for the ‘Big Short’ within a few months”.  AEP then cites HSBC’s latest global outlook as even “darker” and in line with his own views.  The bank expects US 10-Year Treasury yields to retest their early-July lows near 1.35%, with equites walking a tightrope from which there is a long way to fall. 

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



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January 12 2017

Commentary by David Fuller

Dimon Praises Cabinet Picks, Says He Is Optimistic About Trump

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he’s optimistic about President-elect Donald Trump’s administration because of the group of people he’s assembled to fill his cabinet.

“If you want to win the game, put Tom Brady on the field,” Dimon, 60, said in an interview Thursday on CBS This Morning. Trump’s “hired a lot of professional people, people that are experienced, successful, smart and patriotic,” he said.

Dimon’s comments came amid this week’s marathon of Senate confirmation hearings. All of Trump’s picks are expected to win confirmation, barring unexpected revelations or major gaffes.

Dimon praised Steve Mnuchin, Trump’s pick for Treasury secretary, saying the former CEO of OneWest Bank Group LLC is “very qualified” and “wants to do the right thing.” Despite rumors last year that he was under consideration for the Treasury job, Dimon said Thursday he wasn’t offered the position, adding that he hasn’t finished his work at JPMorgan and at the Business Roundtable, an association of U.S. CEOs.

Rex Tillerson, Trump’s nominee for secretary of state, is “respected by everyone he deals with around the world,” Dimon said. Tillerson, the former CEO of Exxon Mobil Corp., has faced criticism for his dealings in Russia in the run-up to his confirmation. He was pressed on U.S.-Russia relations during his Senate confirmation hearing on Wednesday, responding that Moscow has acted against U.S. interests and urged an “open and frank dialogue” on areas of mutual concern.

“Rex Tillerson is a class act -- he’s smart, he’s patriotic,” Dimon said. “Almost every big company has dealings in Russia; that doesn’t mean he’s not a patriot.”

David Fuller's view -

I maintain that Trump has assembled the strongest business team for his Cabinet that I have seen from any president in my lifetime.  That can only be good for the US economy, which is positive for global GDP growth generally.  I am obviously not alone in this view, which is widely reflected by Wall Street since the surprising election result on November 8th.   Moreover, this is a team which can be very effective while Republicans also control both the Senate and the House of Representatives.

However, the problem is Trump’s other side, which is both discouraging and highly irritating for many people, even among those who support him.  He is not a fool, and there have obviously been attempts to undermine him.  The US presidential campaign was more contentious than any other which I have witnessed.  It is time to move on and the new president can set the tone for his administration. 

Trump aspires to two terms.  Fine, but to achieve that he will need to develop gravitas.  His inauguration speech will be the time to demonstrate that aspect of his character, along with the inclusivity seen in his brief statement immediately following his election victory.     



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January 12 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  Note how well the UK’s FTSE 100 Index has performed, benefitting considerably from all the inform commodity shares. 

Keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin which fallen back sharply.  China’s government has clearly moved to stem this route for exporting capital and the Offshore Renminbi has also established a peak of at least near-term significance.    

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 12 2017

Commentary by Eoin Treacy

The Robot Rampage

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

Even an America-first advocate like Trump should be concerned by this because people joining the middle classes in Vietnam, Mexico or Egypt will be potential customers for U.S. goods exporters.

Why might it happen? Back when the U.S. middle class flourished after World War II, factory automation was expensive. Robots were limited to only a few sectors -- mainly the auto industry -- and those automatons weren’t that sophisticated. Wages rose thanks to improved productivity, but workers weren’t completely made redundant by the machines.

Poorer countries in Asia or Africa probably won't be that lucky. Today's robots are far more capable, are being deployed in a wider range of industries, and are cheaper too. That leaves less room for wages to rise before humans are priced out of the labor market. More low-cost automation also means manufacturing can be re-shored to developed economies.

German robot maker Kuka AG, acquired last year by China’s Midea Group Co., estimates a typical industrial robot costs about 5 euros ($5.28) an hour. Manufacturers spend 50 euros an hour to employ someone in Germany and about 10 euros an hour in China.

Eoin Treacy's view -

When I spoke to KP Reddy, the CEO of Softwear, a year ago the biggest takeaway was how he described the strong interest they were receiving from major clothing manufacturers in Asia. They want to be fully automated within the decade so they are investing now. 



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January 12 2017

Commentary by Eoin Treacy

Latest memo from Howard Marks: Expert Opinion

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

I’ll end this section by sharing my latest epiphany on the macro.  I realized recently that in my early decades in the investment business, change came so slowly that people tended to think of the environment as a fixed context in which cycles played out regularly and dependably.  But starting about twenty years ago – keyed primarily by the acceleration in technological innovation – things began to change so rapidly that the fixed-backdrop view may no longer be applicable.

Now forces like technological developments, disruption, demographic change, political instability and media trends give rise to an ever-changing environment, as well as to cycles that no longer necessarily resemble those of the past.  That makes the job of those who dare to predict the macro more challenging than ever.

Eoin Treacy's view -

The Velocity of M2 has been declining since 1997. A housing bubble, sovereign debt crisis and bubble, commodity bull market and crash and massive monetary largesse have done nothing to stall the decline.

This argument from the St. Louis Fed in 2014 blames the refusal of consumers to spend as the primary culprit and suggests ultra-low interest rates are at least partially to blame. Here is a section:

And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:

A glooming economy after the financial crisis

The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).



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January 12 2017

Commentary by Eoin Treacy

Bitcoin Falls 6% After PBOC Shanghai Inspects Trading Platform

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

Bitcoin drops 6% after PBOC Shanghai says it conducted on-site inspection at Shanghai-based BTCChina.com to check for any violations of market manipulation, money laundering and safety of customer funds.

Bitcoin prices have plunged 20% from record high of $1,091.7 on Jan. 4

Current trading price at BTCChina.com, platform tailored to Chinese clients, dropped 9% from 24-hour high

Trading volume was 1.5m bitcoins on BTCChina as of today, 1.2m on Huobi.com today, 1.8m on OKCoin.cn

NOTE: Bitcoin trading could only accommodate a small fraction of funds leaving China, Bloomberg Intelligence says

NOTE: BTCChina, Huobi.com, OKCoin.cn are major bitcoin trading platforms providing services to Chinese clients

NOTE: Jan.9, China to Study Bitcoin Custodian Platform: Securities Journal.

Eoin Treacy's view -

Bitcoin is a small market compared to national currencies, However there is no getting around the fact that Chinese traders represent the majority of participants in that market. Therefore rather that Bitcoin representing the primary organ for money leaving the country it has been the victim of its own limited success by embarrassing monetary policy makers.



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January 11 2017

Commentary by Eoin Treacy

Video commentary for January 11th 2016

Eoin Treacy's view -

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

Here is a summary of the points covered:
    
TIPS yields at potential support, Dollar weaker, resources shares hitting new recovery highs, uranium and shipping rallying from deeply oversold conditions, South Korea outperforming, Genetic Sequencing collapsing in price.



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January 11 2017

Commentary by Eoin Treacy

World's top uranium producer Kazakhstan to cut output by 10%

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

State-owned uranium company and global production leader, Kazatomprom, said production for 2017 will be reduced by 2,000 tonnes, which is about 3% of the total global output, according Cantor Fitzgerald Canada Research’s figures.

“These strategic [uranium] assets are far more valuable to our shareholders and stakeholders being left in the ground for the time being, rather than adding to the current oversupply situation,” Kazatomprom Chairman Askar Zhumagaliyev said in the statement.

He added the production would pick up pace once market conditions improve.

Cantor Fitzgerald’s analysts Rob Chang qualified the move as a “game changer,” adding he expected to see across the board strength in the uranium space very soon.

“Kazatomprom’s relentless increases in production over the years was one of the top causes for uranium price weakness,” Chang said in a note to investors.

 

Eoin Treacy's view -

Uranium prices have now unwound their oversold condition relative to the trend mean. It is as yet unclear whether this decision by Kazakhstan was the catalyst for the rally to date and will continue to act as a bullish factor. However what we can conclude is that prices are uneconomic for even the most efficient producers at these levels so marginal supply is under pressure. That is a recipe for higher prices over the medium-term.



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January 11 2017

Commentary by Eoin Treacy

Samsung Proves Its Business Remains Sound Despite Note 7 Fiasco

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

Samsung is emerging from its biggest corporate crisis, when reports of incendiary Note 7s forced the Korean company to kill its most profitable gadget. It still hasn’t revealed the results of a subsequent investigation into an episode that cost Samsung more than $6 billion and assured Apple Inc. of the lead in premium devices over the holidays. It’s now counting on its next marquee phone to repair its reputation.

“Despite the Note 7’s vacuum, Samsung acquitted itself well on the back of sound S7 sales,” said Lee Seung-woo, an analyst with IBK Securities Co. in Seoul. “After a softer landing in the first quarter, Samsung is on track for record June quarter profit with the new S8 coming to market.”

Operating income rose to 9.2 trillion won ($7.8 billion) in the quarter ended December, its biggest profit in three years, the Suwon, South Korea-based company said in preliminary results Friday. That compares with the 8.29 trillion-won average of analysts’ estimates compiled by Bloomberg in the past four weeks.

 

Eoin Treacy's view -

The heir to Samsung’s empire is being accused of taking part in a bribery scandal yet the share continues to outperform suggesting this news was already priced in. Perhaps more important is the fact Samsung was awarded more US patents last year than any other company. That suggests it at least has the potential to improve on its product line even after the Note 7 debacle. 



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January 11 2017

Commentary by Eoin Treacy

Down But Far From Out

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

Gold prices may have peaked in 2013 but so did the balance sheets and debt loads of the gold miners within our coverage, as the companies chased M&A and project development. Throughout 2015, and in particular 2016, the industry as a whole made FCF generation and balance sheet deleveraging high priorities. As seen below, the net debt balances of the gold miners under our coverage have declined 47% since the peak while Net Debt/EBITDA has improved by a full 1x turn, despite an average gold in 2016 that was 12% below the 2013 average.

The industry-wide focus on cost cutting and FCF generation has created companies that are less levered plays to rising gold prices, as was the case in the run up to peak gold prices in 2013. Industry FCF generation, as measured by our coverage universe, has improved greatly in the last few years. Despite much higher gold prices in 2012/13 (averaging $1,540/oz), FCF was negative as both capex and operating costs were significantly higher than current levels. As mentioned above, an industry-wide focus on FCF has clearly shown in the last few years. We forecast 2016E FCF in our coverage universe to exceed $4bn, the highest figure since the turn of the decade. 

Eoin Treacy's view -

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

Gold miners are much more leveraged to the gold price today than they have been in a very long time. They have slimmed down budgets, are eschewing spending on new projects and therefore any improvement in gold prices is reflected in free cash flow.  



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January 11 2017

Commentary by Eoin Treacy

Illumina Introduces the NovaSeq Series a New Architecture Designed to Usher in the $100 Genome

This is an important press release. Here is a section:

The introduction of NovaSeq marks one of the most important inflection points of innovation in Illumina’s history. In the same way that HiSeq X enabled the $1,000 genome with the HiSeq® architecture first announced in 2010, we believe that future systems derived from the NovaSeq architecture we are launching today one day will enable the $100 genome and propel discoveries that will enable a deeper understanding and better treatments for complex disease,” said Francis deSouza, President and CEO of Illumina. “The NovaSeq Systems enable the study of genetic links between health and disease at an unprecedented scale by making it possible to sequence more samples at greater depth and take on projects that would otherwise be cost-prohibitive. By accelerating the trajectory of genomics with these systems, Illumina is making it possible to envision a future in which all people can benefit from precision medicine.”

The NovaSeq Series includes the NovaSeq 5000 and 6000 Systems. These instruments offer ease of use features similar to those found in Illumina’s desktop sequencing portfolio, including automated onboard cluster generation, cartridge-based reagents, and streamlined workflows. With scalable throughput, users will have the flexibility to perform sequencing applications requiring different levels of output by simultaneously running one or two flow cells from up to four different flow cell types.

The NovaSeq 5000 and 6000 Systems are priced at $850,000 and $985,000 respectively. Compared with other Illumina sequencing systems, both have lower per sample consumable costs for most sequencing applications. They provide laboratories that cannot afford the capital cost of a HiSeq X Five or HiSeq X Ten System with a roadmap to completing human whole-genome sequencing projects at a cost of $1,000 per genome.

 

Eoin Treacy's view -

It will be a few years before we have a $100 genome sequencer but the announcement that it is a possible iteration of the new architecture is a major development. 

Falling from $100 million in 2001 to $1000 last year and $100 within the next few years represents an exponential decline which will have ground breaking repercussions for the genetics industry. 

 



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January 10 2017

Commentary by David Fuller

U.S. Small-Business Optimism Index Surges by Most Since 1980

Here is the opening of this promising article from Bloomberg:

Optimism among America’s small businesses soared in December by the most since 1980 as expectations about the economy’s prospects improved dramatically in the aftermath of the presidential election.

The National Federation of Independent Business’s index jumped 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4. While seven of the 10 components increased in December, 73 percent of the monthly advance was due to more upbeat views about the outlook for sales and the economy, the Washington-based group said.

The share of business owners who say now is a good time to expand is three times the average of the current expansion, according to the NFIB’s data. More companies also said they plan to increase investment and keep hiring, which reflects optimism surrounding President-elect Donald Trump’s plans of spurring the economy through deregulation, tax reform and infrastructure spending.

“Rising confidence adds to the economy’s upward momentum,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said in a note. At the same time, the “NFIB membership appears to be disproportionately Republican, so it is possible that the data will start overstating strength, opposite the pattern during the Obama administration.”

The NFIB report was based on a survey of 619 small-business owners through Dec. 28. Small companies represent more than 99 percent of all U.S employers, according to the U.S. Small Business Administration. A small business is defined as an independent enterprise with no more than 500 employees.

Fifty percent of respondents, the biggest share since March 2002, said they expect better business conditions in the next six months. That was 38 percentage points higher than in November. The net share of firms projecting higher sales jumped by 20 points to 31 percent. Some 29 percent say they will boost capital outlays within six months.

“We haven’t seen numbers like this in a long time,” Juanita Duggan, president and chief executive of the NFIB, said in a statement. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy. Business owners are feeling better about taking risks and making investments.”

David Fuller's view -

This is exceptionally good news and can only help US GDP, which is also a boost for the global economy



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January 10 2017

Commentary by David Fuller

The Weekly View: Reducing US Stocks to Bring Balanced Portfolios Closer to Long-Term Targets

My thanks to Rod Smyth for the latest edition of his excellent timing letter, co-produced this week with Kevin Nicholson and published by RiverFront Investment Group.  Here is a brief sample:

In our 12/19/2016 Weekly View, we indicated that we were assessing our tactical position as we felt sentiment was approaching optimistic extremes.  Last week, we made a tactical decision to reduce US Stocks in our balanced portfolios.  Going into the end of 2016, our balanced portfolios had more equity exposure in order to take advantage of the post-election rally in the US.  Below is a summary of our current positioning as a result of the most recent portfolio changes:

1. As we begin 2017, it is our belief that the post-election rally may have gotten ahead of the new administration’s policy implementation.  We remain optimistic about the prospects for US stocks as a result of expected policy changes from the new administration and Congress.  However, our measures of investor sentiment suggest that our optimism is now widely shared.  In the first quarter, the details of policy will become more apparent, as will any differences among policymakers.  This process may be more challenging than anticipated.  

David Fuller's view -

We have a global stock market rally sparked by Trump’s election.  As we approach the first half of January, stock market performances in the first two weeks of January 2017 could not be more different than what we saw in early 2016.  Seasonal factors are favourable, although this made no difference last year. Nevertheless, on average they have worked more often than not, which is why this time of year is known for its favourable seasonal factors. 

Perhaps more importantly, animal spirits in favour of stock markets have returned for the first time in a long while.  Most of the hedge shorts have probably been covered but I doubt that most long-only investors are fully invested. 

This item continues in the Subscriber’s Area, where The Weekly View is also posted, along with an article.



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January 10 2017

Commentary by David Fuller

Email of the day

On changing attitudes:

Here's an article that was written by a friend that appeared in this month's Jan. Issue of Marc Faber's Gloom Boom and Doom.  George is a very successful California Real Estate investor and one of the savviest stock market investors I have ever come across. The article was written in December and is quite timely. I thought I would share it with you, with George's permission. 
 

David Fuller's view -

My thanks to you and George Karahalios, and I am very happy to post his article.  It is powerful, passionate, informative and credible.  I think most subscribers will agree with a great deal of it, as do I.   



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January 10 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  Note how well the UK’s FTSE 100 Index has performed, benefitting considerable from all the inform commodity shares. 

Keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 10 2017

Commentary by Eoin Treacy

January 10 2017

Commentary by Eoin Treacy

Musings from the Oil Patch January 10th 2016

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

As for a new Ice Age, the Russian Academy of Science’s Pulkovo Observatory in St. Petersburg, considered one of the world’s most prestigious scientific institutions, recently issued a new study titled, “The New Little Ice Age Has Started.” According to the study, the average temperature around the globe will fall by about 1.5o C (2.7o F) when the planet enters the deep cooling phase of this new Little Ice Age, expected in the year 2060. The study goes on to predict that after 2060 the Earth will experience four-to-six 11-year solar cycles of cool temperatures before beginning the next quasi-bicentennial warming cycle around the turn of the 22nd century.

Habibullo Abdussamatov is the head of space research at Pulkovo and the author of the study. He has been predicting the arrival of another ice age since 2003, based on his study of the behavior of the sun’s different cycles and the solar activity that then results. His model is based on data from the Earth’s 18 earlier little ice ages over the past 7,500 years, six of them experienced during the last thousand years. Based on his model, he began predicting over a decade ago that the next little ice age would start between 2012 and 2015. Abdussamatov’s models have been affirmed by actual data, including the rise of the oceans and the measurable irradiance sent earthward by the sun. Given the accuracy of his predictions, which have been demonstrated in numerous studies since 2003, he now predicts that we entered the 19th Little Ice Age in 2014-2015. This forecast would appear to fly in the face of climate change scientists pointing to 2015 and 2016 as being the warmest years on record – and forecasts that we will experience more record warmth in coming years.

Mr. Abdussamatov’s views stand in opposition to the conclusions of climate models, as he has tied his forecast of a prolonged cooling spell to solar, not man-made, factors. The recent disappearance of sunspots from the face of the sun, which also occurred during the Little Ice Age in the late 1600s, has made Mr. Abdussamatov’s contention no longer an isolated view. In fact, organizations such as the National Astronomical Observatory of Japan and the Riken research foundation have reached similar conclusions. The battle over whether man-made or natural forces are the primary driving force behind global warming and climate change will likely become more contentious in the next few years. The key point is that the world’s population is at greater risk of serious harm from colder temperatures rather than warm temperatures, which seems to be ignored by government officials and the media. We guess, cold and ice doesn’t lend themselves to as spectacular disaster scenes as heat-related weather events.

Eoin Treacy's view -

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

I am more than willing to accept that humans have an impact on our environment. After all there are a lot of us and we engage in a great many industrial activities. However the sun is a major contributor to weather patterns and its cycles cannot simply be ignored. I predicted back in 2009 the most recent solar activity peak would represent a lower low and that has now come to pass. As we head into another solar minimum we can anticipate colder winters in the years ahead. However to go from there to a prediction of an impending mini-Ice Age is quite a leap. 



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January 10 2017

Commentary by Eoin Treacy

Coking coal price correction turns into rout

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

It's only the 5th, but the year to date fall in the price of coking coal has already reached 8%. The steelmaking raw material is also a round $100 below its multi-year high of $308.80 per tonne (Australia free-on-board premium hard coking coal tracked by the Steel Index) hit in November.

On Thursday the price dropped another 4.5% to $208.10 a tonne, the lowest since September 29 and one of the biggest declines (for the spot price) on record. In 2011 floods in key export region in Queensland saw the coking coal price briefly trade at an all-time high $335 a tonne.
With demand both more diverse and less predictable, the increasingly widespread transition towards market-based pricing couldn’t be more timely

Still, metallurgical coal is up 150% over the past year and averaged $143 a tonne in 2016 (about the same as it did in 2013). There was a more than $100 differential between the spot price average and the fourth quarter contract benchmark.

 

Eoin Treacy's view -

The oldest adage in the commodity markets is that “the cure of high prices is high prices”. There was a temporary dearth of coking coal so prices rose quickly for most of the latter half of 2016. However with new supply coming to market the necessity to pay ever higher prices has been reduced and coking coal has pulled back sharply. A potentially lengthy period of ranging is likely required before substantially higher prices can be sustained. 



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January 10 2017

Commentary by Eoin Treacy

Brazil Worries the 'China of South America' Is Eating Its Lunch

This article by Bruce Douglas and Matthew Malinowski for Bloomberg may be of interest to subscribers. Here is a section:

As Brazil struggles through its worst recession on record, dozens of businesses have set up operations across the border, creating thousands of jobs. Broadly welcomed by the Brazilian government at first, the migration of investment is now facing increasing scrutiny as unemployment rises to unprecedented levels.

"It used to be a joke," said Murillo Onesti of Sao Paulo law firm OLN Advogados, referring to Paraguay’s past reputation in Brazil as a source of cheap knock-offs. "China faced the same resistance at first. But people are seeing now that you can produce better quality goods at a lower price."

In effect since 2000, Paraguay’s "maquila law" aims to replicate the success of Mexico’s maquiladora -- or manufacturing plant -- operations. Goods can be imported tax-free for assembly, then sold locally or exported with only the value-added part taxed at a rate of just 1 percent.

Eoin Treacy's view -

It’s been a long time since we heard anything resembling a capitalist growth story from Latin America. However following a decade where commodity driven profits ushered in high spending rates and socialist ideologues, the continent has had to reassess and more business friendly policies are emerging.

 



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January 09 2017

Commentary by David Fuller

German Fury Grows Over Inflation Horror-Kurve as Fears of Destructive Boom-Bust Cycle Mount

Here is the opening of this important article http://www.telegraph.co.uk/business/2017/01/08/german-fury-mounts-inflation-horror-kurve/by Ambrose Evans-Pritchard for The Telegraph:

Inflation rage is coming to the boil in Germany. Leaders of the country's prestigious institutes warn that the economy is hitting capacity constraints and risks spiraling into a destructive boom-bust cycle.

In a series of interviews with The Telegraph they said that the ultra-loose monetary policy of the European Central Bank is now badly out of alignment with German needs. It has begun to threaten lasting damage, and is fast undermining political consent for monetary union.

"The ECB wants to inflate away the debt of the southern European countries. This is a clear conflict of interest with net creditors like Germany," said Clemens Fuest, president of the IFO Institute in Munich.

"There is a debate building up on the expropriation of German savers by the ECB. This is going to become very difficult if inflation approaches 2pc and they still do nothing. People will conclude that their true motive is redistribution," he said.

What is new is that Germany's inflation rate has suddenly jumped to 1.7pc after a long and deceptive period of quiescence. It is now much higher than in southern Europe.

The mechanical effect is to drive real interest rates to minus 2pc, lower than at any time in German history other than the two hyper-inflations after the First and Second World Wars.

Professor Clemens said the politics are poisonous because the ECB's majority bloc is openly sweeping aside German objections. This plays into the hands of the eurosceptic Alternative fur Deutschland (Afd), while the ruling Christian Democrats are toughening their line to stop a leakage of votes.

"The perception is that we are being dominated by foreigners. This is going to become a big issue in the campaign," he said.

The ECB plans to extend its programme of bond purchases until the end of the year after it expires in March, albeit trimming the pace from €80bn to €60bn a month.

Prof Clemens warned that this is far too slow. "They should start cutting by €10bn a month as soon as April, and end QE completely in October," he said.

The mix of rising inflation and negative rates is toxic for ordinary Germans, who keep much of their household wealth in bank accounts.

It is often claimed that Germany has a unique savings culture. The German term for debt (Schuld) is the same word as guilt. Putting money aside dutifully has a diamantine moral appeal with almost religious undertones.

Economists dismiss this is as a fallacy. Germany's savings habits are the result of tax laws, demographics, and the structure of the banking system. But whatever the cause, the political consequences matter.

The tabloid newspaper Bild Zeitung leapt on the latest price data, splashing with a "Horror-Kurve" showing inflation soaring to seemingly frightening heights.

David Fuller's view -

ECB President Mario Draghi will not tailor monetary policy in favour of Germany when most other EU economies are still struggling to fend off deflation.  Moreover, GDP growth is only just starting to recover in Southern European nations.  They have endured economic depressions during recent years. 

Meanwhile, Germany’s economy is now booming and its rate of inflation has risen from just below zero last April to 1.7% in mid-December.  It could be close to 2% when this month’s figures are released, or even higher.  German house price increases were a modest 1.5% in 2H 2009 but are appreciating at more than 12% per annum today. 

The Bundesbank will continue to complain but Germany remains the chief beneficiary of Euroland.  If it left the single currency, a new Deutschmark would be far stronger and a headwind for Germany’s export-led economy.

These problems were widely anticipated by analysts who knew their currency history.  No single currency for several different countries has survived without fiscal union.  

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



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January 09 2017

Commentary by David Fuller

Some 2017 Impressions

My thanks to a subscriber for this 16-page illustrated report by James W Paulson, Ph.D, Chief Investment Strategist at Wells Capital Management Inc.  Here is the first page:

Welcome to the New Year! The current economic recovery turns nine this summer making it the third longest in U.S. history. However, this calendar-old recovery still appears young at heart. It has not yet sustained a real growth rate above 3%, has never been driven by excessive borrowing or lending nor produced a significant capital spending or housing cycle. Moreover, because it has only recently returned to some semblance of full employment, it has yet to seriously aggravate inflation. Yields about the globe remain near all-time records lows and the Federal Reserve is only now beginning to finally normalize monetary policy. Finally, despite an almost three-and-a-half fold increase in the U.S. stock market from its 2009 low, this bull market has never generated a broad-based public run into equities.

Perhaps for the first time in this recovery, we expect animal spirit behaviors; those originating from confidant businesses, consumers and investors, to increasingly characterize both the economy and the financial markets in 2017. Essentially, this furthers trends already evident during the last few months of 2016. After almost a two-year hiatus, economic growth recently accelerated and broadened about the globe. This rare synchronization in the economic recovery comes just as the U.S. has finally returned to full employment. Consequently, improved economic growth is also aggravating inflation and interest rate concerns.

Although broader economic growth, a restart of the earnings cycle and the election of a pro-business U.S. president have recently combined to boost confidence and awaken the animal spirit throughout the private sector, it also represents a quandary for the financial markets. The stock market begins the year surging to new highs as confidence in the durability of the economic recovery improves. However, the bond market is being battered by rising inflation expectations and recognition that the artificially low yield structure orchestrated about the globe during this recovery may finally be ending.

Here are some specific impressions for the economy and the financial markets in 2017.

Economic growth

The 2017 economic outlook is shaped by many important factors including a synchronization of economic policies about the globe, an economic recovery which is broadening both globally and within the U.S., a refresh and restart of the profits cycle, an end to the global manufacturing recession and collapse in commodity prices, the potential for awakening animal spirits and the increasing likelihood that a

recession is still multiple years away.

Synchronized global economic policies

Not only has global economic growth been persistently subpar, it has never been synchronized. Economic policies typically conflicted during this expansion and economic boats around the globe have seldom risen together. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been restrictive. While Japanese policy officials were hesitant earlier in this recovery, today, similar to the U.S., they are implementing full-out central bank balance sheet stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, is now also fully embracing monetary stimulus. Moreover, the oil crisis has forced energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to also boost accommodation.

Consequently, as illustrated in Charts 1 and 2, in the last couple years, policy officials everywhere have simultaneously attempted to improve the economic

recovery. Already, signs of a synchronized global economic bounce are materializing and we suspect this will become more obvious as the year progresses.

David Fuller's view -

There is a lot to like in this global report which I commend to subscribers.  After eight years of mostly negative comments, including a number of very bearish reports from so many analysts and strategists, this is the most bullish detailed report by far that I have seen since the 2008 crash. 

Market sentiment has steadily improved since Trump’s surprise presidential election.  This is despite many alarmist forecasts in anticipation of a Trump administration, albeit mostly from the left-leaning press.  Clearly the money men are delighted to see a President-elect who is interested in the US economy, and promises a number of stimulative policies.  This has led to a number of upside breakouts, often from multi-year trading ranges from trading ranges, and not just among US indices.     

In fact, James Paulsen mentioned “animal spirit”(s) 24 times in the report above.  Is that a record?  He also mentioned “synchronized” or “synchronization” of economic policies eight times. 

This item continues in the Subscriber’s Area where James Paulsen’s report is also posted.



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January 09 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 09 2017

Commentary by Eoin Treacy

January 09 2017

Commentary by Eoin Treacy

Ariad Enters into Definitive Agreement to Be Acquired by Takeda for $5.2 Billion

This press release from Ariad Pharmaceuticals may be of interest to subscribers. Here is a section:

Dr. Denner continued, “The transaction also underscores the tremendous value that shareholder activism can create for shareholders, patients and society. While ARIAD’s stock price was collapsing and many investors were abandoning the company, Sarissa Capital saw a company with important drugs and innovation and stepped in to become one of ARIAD’s largest shareholders. However, many things needed to be fixed before the value could be realized. With a new board and management team, ARIAD was able to focus on optimal capital allocation and operational excellence. As a result, the company created meaningful shareholder value and advance the options for those suffering from rare cancers.”

“The acquisition of ARIAD is a unique opportunity that will enable us to positively impact the lives of more patients worldwide, advance our strategic priorities and generate attractive returns for our shareholders,” said Christophe Weber, president and chief executive officer of Takeda. “This is a very exciting time for Takeda as we will broaden our hematology portfolio and transform our global solid tumor franchise through the addition of two innovative targeted therapies. Opportunities to acquire such high-quality, complementary targeted therapies do not come often, and we are very excited about the potential for this transaction to benefit patients, our shareholders and other stakeholders.”

 

Eoin Treacy's view -

Developing new drugs is prohibitively expensive. With no guarantee of success large pharmaceutical companies have in many respects outsourced the bulk of R&D to small biotech companies. The result is that these smaller companies spend a great deal of time and effort developing new drugs and become takeover candidates when they develop high probability solutions. Considering the fact that the cost of developing new drugs continues to increase the biotech ecosystem is likely to remain in this condition for the foreseeable future. 



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January 09 2017

Commentary by Eoin Treacy

Email of the day on India's demonetisation

Thank you for another very well done video commentary. I think it was excellent. When you or any one from the collective have time, could you please share their/your views on the effect of India's move to change their currency bills. Thanks in advance

Eoin Treacy's view -

Thank you for your kind words and I am delighted you are enjoying the video commentaries, which have so far been very well received and are a further example of how technology is advancing the ease with which we can communicate. 



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January 09 2017

Commentary by Eoin Treacy

Email of the day on the risk of a pullback on Wall Street:

I love you Vimeo updates and prefer to just the audio. While we have made new highs in the US equity indexes, it appears they are quite extended to the trend means which makes them prone to sharp pull backs in the short term. Would you not agree?

Eoin Treacy's view -

Thank you for your valuable feedback relating to the video commentaries, and for this question sure to be of interest to other subscribers. 

The deep but short lived pullback in 2014 represented the first major inconsistency in what had been a rhythmically trending environment for more than two-years. It represents a clear example of “a consistent trend losing consistency at the penultimate high” which we talk about at The Chart Seminar. The volatile range that unfolded from 2015 lowered investor expectations for future potential and conditioned them to expect sharp pullbacks not least due to the effects of high frequency traders. 

 



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January 09 2017

Commentary by Eoin Treacy

Consulting on the Cusp of Disruption

This article by Clayton M. Christensen, Dina Wang and Derek van Bever for the Harvard Business Review may be of interest to subscribers. Here is a section:

The consultants we spoke with who rejected the notion of disruption in their industry cited the difficulty of getting large partnerships to agree on revolutionary strategies. They pointed to the purported impermeability of their brands and reputations. They claimed that too many things could never be commoditized in consulting. Why try something new, they asked, when what they’ve been doing has worked so well for so long?

We are familiar with these objections—and not at all swayed by them. If our long study of disruption has led us to any universal conclusion, it is that every industry will eventually face it. The leaders of the legal services industry would once have held that the franchise of the top firms was virtually unassailable, enshrined in practice and tradition—and, in many countries, in law. And yet disruption of these firms is undeniably under way. In a recent survey by AdvanceLaw, 72% of general counsel said that they will be migrating a larger percentage of work away from white-shoe firms.

Furthermore, the pace of change being managed by the traditional clients of consulting firms will continue to accelerate, with devastating effects on providers that don’t keep up. If you are currently on the leadership team of a consultancy and you’re inclined to be sanguine about disruption, ask yourself: Is your firm changing (at least) as rapidly as your most demanding clients?

Finally, although we cannot forecast the exact progress of disruption in the consulting industry, we can say with utter confidence that whatever its pace, some incumbents will be caught by surprise. The temptation for market leaders to view the advent of new competitors with a mixture of disdain, denial, and rationalization is nearly irresistible. U.S. Steel posted record profit margins in the years prior to its unseating by the minimills; in many ways it was blind to its disruption. As we and others have observed, there may be nothing as vulnerable as entrenched success.

 

Eoin Treacy's view -

With the rapid pace of technological innovation no sector is immune to disruption. The consulting sector has existed in a bubble for a long time because they have been able to sustain the illusion of fully customisable solutions when in many cases what is being offered is a template driven product. There will of course always be a market for truly customised answers to difficult questions but what can be automated eventually will be as technological innovation marches onwards.



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January 06 2017

Commentary by David Fuller

Our Shell-Shocked Civil Service Is Simply Not UP to the Job On Brexit

We should be grateful to Sir Ivan Rogers for accidentally reminding us that we need wholesale reform of our broken Civil Service, since the cultural chasm between Whitehall and the public has grown dangerously large. 

For Sir Ivan, now thankfully our outgoing ambassador to the EU, and many other mandarins of his ilk, the barbarians truly are at the gates. They now mostly realise that Brexit is going to happen, but remain desperate to find ways to blunt its implementation.

In places, Sir Ivan’s resignation email reads like a parody, a textbook illustration of the dangers of creating a permanent ruling class. At times, one could even be forgiven for believing that he saw himself as a Platonic philosopher-king, entrusted to guard the guardians and to keep those pesky politicians and voters in line, ensuring that they don’t deviate from the expert orthodoxy of the times.

Sir Ivan is one of the most powerful, unaccountable men in Britain, and yet, hilariously, sees his and his colleagues’ job as “speaking truth to power”. He cannot even bring himself to write about Brexit without using inverted commas around the word – or as Americans would put it, sneer marks. He forgets that with independence comes a duty not deliberately to undermine the Government.  

His attack on “muddled thinking” – from Brexiteers in Government, presumably – is especially revealing: it is the meaningless insult favoured by the mandarin classes. The French try to dismiss arguments by deeming them “illogical”; the equivalent British put-down is haughtier, snootier and reeks of classism. 

Yet Sir Ivan himself confuses opinion and facts, claiming that “contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities”. Try telling that to those who repealed the Corn Laws, or to unilateral free trading economies such as Hong Kong. Commerce is something that emerges spontaneously from the free interaction of human beings; it does not require structures. Of course, Sir Ivan is right that in the current context multilateral liberalisation deals may be the best solution to maximise overall free trade, and that these can be fiendishly complex. 

But the problem is that we are asking too much of some of our civil servants, whose heart simply isn’t in Brexit. For the past 50 years or more, the British establishment’s foreign policy mission has been a united Europe. There were other major projects too, including dismantling the Empire, fighting the Cold War, helping to rebuild the free-trading international economy and signing up to a new global environmentalism. But since 1990 at least, the construction of Europe has been our most important foreign policy goal, an all-consuming project.

The Civil Service didn’t just help deliver government policy: it embraced the project. Many of its brightest minds, when exposed directly to Brussels, went native. This was not just the professionalism which sees officials nationalising firms under a Labour government before privatising them under a Tory one: it was a fundamental and permanent shift. Nation-states were out; liberal democracy was out; corporatism and rule by the technocrats were in. 

The Leave side collected very few votes in Whitehall last June: the Civil Service was institutionally Europhile. Officials could barely imagine how Britain could possibly function, let alone thrive, outside of the EU. 

Bizarrely, however, we are operating under the assumption that the people that have dedicated their entire working lives to promoting European integration can suddenly devote themselves to delivering the best possible Brexit. We are asking the old guard to become the revolutionaries, with immediate effect. Some can, of course, especially the younger, more ambitious officials who see how the world is changing, but not all. 

Other countries don’t work this way: Barack Obama’s people are not being asked to implement Donald Trump’s plans. Instead, the president-elect is hiring 4,000 or so people. It is common in other countries for new governments to recruit large numbers of political appointees; it is also healthier as it means the government isn’t controlled by self-serving and institutionalised lifers.

David Fuller's view -

This is a superb analysis by Allister Heath.  I can understand why PM Theresa May did not wish to upend civil service personnel working in the EU, but she and the capable Sir David Davis should have anticipated the problem.  After all, it is difficult to get someone to stop believing in something, when that person’s salary depends on them believing in it.

David Davis is Her Majesty’s Principle Secretary of State for Exiting the European Union.  That is a grand title for what is currently a very small department.  It should be beefed up with known Eurosceptic MPs such as John Redwood, who can work with pro-Brexit Civil Servants led by Sir Tim Barrow. 

I am not suggesting that they prepare for a long negotiating war on the EU’s terms, attempting to overturn their labyrinthine obstacles.  Those are intended to ensure that the EU remains a club which European countries can apply to join but once in, never leave of their own choice.  That is an absurdity.  The future of the UK will not be decided in Brussels. 

Britain needs to seize the initiative so that it can exit from the EU quickly and cleanly.  The key points are not complicated.  1) Theresa May has already said that the UK must have sole control of its immigration policies and all other forms of law making.  2) The next Brexit point should be to offer the EU free trade on a take it or leave it basis, otherwise WTO rules will apply to our trade with the EU.  3) There will be no restraints on the UK’s freedom to trade with any other nations of interest, which are outside the EU’s closed shop.     



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January 06 2017

Commentary by David Fuller

Element Six Diamond Sculptors Push the Envelope From Lasers to the Quantum Realm

The innovation centre dates from 2013, and was born out of a desire to group E6’s R&D teams in one place; it also rationalised its manufacturing facilities across the world. The lab occupies the front plot of Harwell Campus, a science park that is home to around 200 organisations. The European Space Agency is across the road, and it is a short walk to the UK’s Synchrotron, which fires electrons at near-light speeds around a ring.

E6 prides itself on a “start-up” ethos; like Google, it allows its staff to use 10pc of their time to work on pet projects. The 180-strong workforce at Harwell includes people from 54 countries and there are free language classes and sports teams. Hühn acknowledges that Brexit “doesn’t make life easier” when it comes to recruitment, but insists Harwell’s location near Oxford is attractive.

While cutting tools are the bread and butter of E6’s work, it is also forging ahead into more exotic areas. Synthetic diamonds are in the race to become the bedrock of quantum computing – a theoretical field that promises massive computational power that eschews the digital technology of “classical” machines.

Quantum computing involves the entanglement of particles in the sub-atomic realm. When one particle becomes ‘entangled’ with another, it synchronises with its partner, even when they have no physical connection. Manipulating one can change the state of the other. Albert Einstein called it “spooky action at a distance”.

Scientists at E6 and Harvard achieved a breakthrough last year when they proved that one particle could alter another 1.3km away without any possible transfer of data between them. “It fundamentally proved this entanglement process is a physical reality - there’s no other explanation for it,” says scientist Matthew Markham.

Yet the properties of diamonds get even weirder. It transpires that diamonds with a ‘nitrogen vacancy defect’ - a gap in the lattice that makes up the crystal - are highly sensitive to magnetic waves at room temperature. The hope is that these diamonds, embedded in handheld scanners, could eventually replace MRI scanners; experiments have already shown that a red diamond can pick up the firing of an axon in the brain of a marine worm. “In 10 years’ time you could envisage having a helmet with diamond sensors that would be the equivalent of MRI sensors,” says Markham.

Scientists also believe that these diamonds could one day use magnetic distortions caused by the sun to triangulate their position on the earth. This would eliminate the need for GPS, which relies on satellite signals to tell a driver where they are; it could also make driverless cars a reality. Currently a diamond with an NV defect has been calibrated to detect the magnetic signature from a car at 300m.

Many of these experiments are decades away from practical applications. But, as Hühn remarks, sometimes they have to “evangelise” about diamonds to create a market for their products. “We need to demonstrate what can be done and then make it transparent to the market,” he says.

David Fuller's view -

And it all starts with carbon – amazing.

Look what lies ahead: “… quantum computers may theoretically be able to solve certain problems in a few days that would take millions of years on a classical computer. (Source: Nasa)”

This era of accelerating technological innovation has only just begun.  Moreover, it will only be limited by: 1) the availability of time on earth, which hopefully lasts for at least a few million more years; 2) human destructive instincts, hopefully kept in check; 3) more optimistically, the extent of human imagination and creativity; 4) the creativity of artificial intelligence aided by quantum computers.

Unfortunately, E6 is not a publicly listed company.



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January 06 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 06 2017

Commentary by David Fuller

Icelandic Volcanic Heat May Be the Perfect Solution to UK Energy Crunch

Iceland is the answer to our prayers. The country has a surfeit of cheap electricity from volcanoes and melting glaciers that is either sold for a pittance, or goes to waste.

The Icelanders would dearly love to sell this power to us at global prices to pay down the banking debts of 2008. Britain would dearly love to buy it from them as our coal plants and ageing nuclear reactors are shut down, with little to replace them beyond the variable winds of the North Sea.

Advances in high voltage technology make it possible to transmit Iceland's low-carbon power to the industrial hubs of northern England by underwater cables with an energy leakage of just 5pc, and probably at lower costs per megawatt hour (MWh) than the nuclear power from Hinkley Point. And unlike nuclear, the electricity is 'dispatchable'.

“We can turn it on and off in fifteen minutes to half an hour. It is the only battery that is really available today for green energy,” said Hordur Arnarson, head of Iceland’s national utility Landsvirkjun.

It is hard to imagine a more elegant back-up for the UK's vast experiment in off-shore wind, the backbone of British electricity by the late 2020s.

Combined with interconnectors from Holland and France - and soon Norway - it could plug much of the intermittency gap through the dog days of a windless anticyclone. The power can flow both ways: surges in North Sea wind could be stored in Nordic reservoirs.

Roughly 70pc of Iceland's electricity comes from hydropower through glacial run-off. This is mostly sold to aluminium smelters for a derisory price. Water washes over the top of the dams for parts of the year because the island has no way of selling the excess energy.

Hydro could probably provide the UK with one gigawatt of stable baseload, but then there is the tantalising potential of geothermal power from the island's 350 volcanoes as well.

The advances in drilling are breath-taking. An Icelandic project backed by the US National Science Foundation is currently boring the deepest hole ever attempted into the fluids of the inner earth at Reykjanes on the Mid-Atlantic Ridge. As of late December it had reached a depth of 4.626 kilometres, approaching temperatures of 500C.

The team aims to stop just short of the magma, at 200 times atmospheric pressure, where hot rock mixed with sea water releases ‘supercritical steam’ with enormous energy. This is the Holy Grail of geothermal power, if it can be extracted safely in a thermal mining cycle.

David Fuller's view -

Drilling to just short of the magma – what could possibly go wrong?  Hollywood has a new topic (Ice-hot?) for next summer’s splat film. 

Seriously, it is another triumph for technological innovation that the capture and transmission of this energy is even considered feasible.  It may be so but costs in the region of the appallingly expensive and outdated Hinkley Point nuclear project are hardly encouraging.  If lower costs are worth considering, and they certainly should be, fracking for natural gas is a much better idea for the UK and many other countries over the next two decades.

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



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January 06 2017

Commentary by Eoin Treacy

January 06 2017

Commentary by Eoin Treacy

U.S. Payrolls Rise 156,000 as Wages Increase Most Since 2009

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

The employment report added to data ranging from housing to manufacturing and auto sales in suggesting that President-elect Donald Trump is inheriting a strong economy from the Obama administration. The labor market momentum is likely to be sustained amid rising business and consumer confidence.

Trump, who takes over from President Barack Obama on Jan. 20, has pledged to increase spending on the country's aging infrastructure, cut taxes and relax regulations. These measures are expected to boost growth this year.

But the proposed expansionary fiscal policy stance could increase the budget deficit. That, together with faster economic growth and a labor market that is expected to hit full employment this year could raise concerns about the Fed falling behind the curve on interest rate increases.

 

Eoin Treacy's view -

The US Hourly Earnings chart was updated today and it broke out. If people are demanding more money for the same work, it is hard to argue inflation is not picking up. Even though rents have increase, insurance premiums are higher and education has been outpacing wage growth for years these figures do not move the needle in how the Fed measures inflation the way wages do. 



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January 06 2017

Commentary by Eoin Treacy

Yuan Pares Record Rally as Goldman Says Now's the Time to Sell

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

The offshore yuan is sinking because there is some recovery in the dollar, perhaps the unwinding of short-yuan positions has mostly been done, and it’s closing the gap with the onshore currency,” said Roy Teo, senior currency strategist at ABN Amro Bank NV in Singapore. The yuan is likely to weaken this year as capital outflows continue and the U.S.
Federal Reserve increases interest rates, Teo said.

China’s central bank raised its daily reference rate by 0.92 percent to 6.8668 per dollar on Friday, following a 1 percent drop in a gauge of the greenback’s strength overnight.

The offshore yuan was trading 0.8 percent weaker at 6.8457 per dollar as of 5:23 p.m. in Hong Kong, paring its weekly gain to 1.9 percent, the most in data going back to 2010. The onshore rate slumped 0.6 percent. Friday’s fixing was weaker than Mizuho Bank Ltd.’s prediction of 6.8447 and Australia & New Zealand Banking Group Ltd.’s estimate of 6.8456.

The three-month yuan interbank rate in Hong Kong, known as Hibor, surged to a record high, while the overnight rate jumped 23 percentage points to 61 percent, the highest since last January’s cash crunch. Rising interbank rates can make some short positions prohibitively expensive.

 

Eoin Treacy's view -

The Chinese administration has attempted to squeeze short sellers in much the same way it did a year ago when it believed perceptions of the Yuan as a one way bet were too prevalent. That does not mean the Chinese don’t want, or perhaps more importantly need, a weaker currency. They do but they want it to weaken in a measured manner.  



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January 06 2017

Commentary by Eoin Treacy

World's Worst Commodity Radioactive for Investor Portfolios

This article by Joe Deaux, Natalie Obiko Pearson and Klaus Wille for Bloomberg may be of interest to subscribers. Here is a section:

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.

 

Eoin Treacy's view -

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 



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January 05 2017

Commentary by David Fuller

Intel Boss on the Doubling of Computer Power Every Two Years

Intel founder Gordon Moore declared half a century ago that computer power would roughly double every two years as the silicon chips powering them developed.

The maxim, which became known as Moore’s law, directed technology companies for five decades before reaching a crunch point last year. Physicists and technology giants alike said transistors had reached a point where it was no longer economically viable to make them smaller, bringing about the end of the law.

But Intel’s chief executive Brian Krzanich has put an end to such fears with news the company will release a 10 nanometre chip in 2017. The tiny chip will be cheaper than its predecessor, Intel said, keeping Moore’s law alive.

"I've heard the death of Moore's law more times than anything else in my 34-year career and I'm here today to really show you and tell you that Moore's law is alive and well and flourishing," Krzanich said.

The news came as Intel opened the doors on its virtual reality project, which includes applications for the technology, content production and a headset. For Krzanich, VR is one of the most exciting uses of the faster processor coming this year.

“Imagine in your living room being able to walk around the next hotel you’re going to visit, or visiting the event you’re going to,” said Krzanich in a demonstration of the VR uses Intel is working on at the Consumer Electronics Show in Las Vegas.

Some of the applications Intel is developing include live sports games in VR and monitoring remote areas, such as solar panel farms, through a live 360 video stream from a drone and a VR headset.

The chipmaker has teamed up with La Liga to fit three stadiums with 360-degree cameras that will stream to 38 channels this year.

“From the comfort of your home you could be transported to your favourite seat,” said Krzanich. “This is the future of how you’ll view sports. You’ll have the opportunity to go to games you’ve never been to before.”

David Fuller's view -

I do not assume that silicon chips will always be used for the more complex challenges, because the technology for transistors is still in its infancy, relative to future developments.  We live in an exciting era of accelerating technological innovation, which will not end of its own accord.

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



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January 05 2017

Commentary by David Fuller

Email of the day

On the economic consensus being horribly wrong:

Dear David

I really enjoyed reading this very positive article about the UK economy which was written by a distinguished and well-informed commentator.

All the points he makes sound good sense to me. The most surprising thing is the newspaper in which it was published, the rabidly anti-Brexit Independent. Maybe some newspapers are at last tiring of their own negativity!

Best wishes

David Fuller's view -

Thanks for this and more people in the UK now hold similar views, than at the time of the referendum. 

The biggest risk, in my opinion, would be a frustratingly long exit from the EU, which would increase uncertainty, not least within both the UK and international business communities.  I hope the Supreme Court will bear this in mind and decide on what is best for the UK under the current circumstances.  However, if it rules that legislation is required before notice of Brexit is served – a debatable legal point - I think the additional delay would be both divisive and more costly for the UK economy. 



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January 05 2017

Commentary by David Fuller

President Mark Zuckerberg? It May Not Be as Crazy as It Sounds

When 13 tech bosses – among them some of the world’s richest entrepreneurs – were summoned for a meeting with Donald Trump, one face was conspicuous in its absence.

Facebook’s role in the US election had been much scrutinised: it was accused of being a petri dish for fake news that allowed anti-Clinton stories to spread like wildfire; and the social network was employed to great effect by the Trump campaign, which built up profiles of voters to target and bombarded them with ads.

And yet, Mark Zuckerberg was nowhere to be seen at Trump Tower. Instead, he sent his trusted deputy and chief operating officer, Sheryl Sandberg, making Facebook the only company at the meeting without its CEO in attendance.

Zuckerberg has not explained his absence, but two likely – and related – reasons may well become clear. Firstly, the man who started Facebook 13 years ago now has priorities outside of its daily running: as with many tech founders, he would prefer the nitty gritty of advertising relationships and regulatory tangles to be dealt with by someone else, as Zuckerberg focuses on his missions – the $45bn fund he has set up with his wife Priscilla Chan, or the internet.org project to bring connectivity to the world’s poor.

But more fundamentally, Zuckerberg may see a photo-op with the president-elect as harming his own political ambitions, especially if he plans to act on them sooner rather than later.

If your main impression of Facebook’s founder came through seeing The Social Network in 2010, you might find the film's portrayal of Zuckerberg as an awkward Machiavellian schemer a little difficult to square with the idea of a role in public office.

But in recent years he has been spring cleaning his image. Connecting directly to the world via his own Facebook page, Mark Zuckerberg is now the family man, the internationalist and the statesman (his profile is full of images documenting meetings with Narendra Modi, officials in Beijing, and Pope Francis).

While like much of his Silicon Valley brethren, he is a natural liberal, lobbying on immigration and science research, but Zuckerberg has been careful to appeal to a wider base. In response to allegations that Facebook suppressed conservative news, he fired the team responsible and replaced them with supposedly bias-free algorithms. He has declined to take the immediate action that many liberals demanded on Facebook’s fake news problem.

He has come out as religious after years of claiming atheism, a move that a cynic could point to as practically mandatory for high office. And most recently, he announced his ambition to visit every state in the US in order to understand the effect of globalisation. “We need to find a way to change the game so it works for everyone,” he said on Tuesday.

David Fuller's view -

It may seem a bit early to be discussing this possibility shortly before President-elect Trump is sworn in on 20th January… but perhaps not.  After all, Trump has certainly opened the door for unconventional candidates who have never held political office. 

Might the possibility of a bad Trump presidency close that door?  Theoretically, yes although I think it would be premature to assume that Trump will be judged as having more failures than success over the next four years.  In any event, Trump and Zuckerberg have very different profiles.   

I think it would be a great idea if Zuckerberg ran for President in 2020, or 2024.  Governance is everything and countries with the most capable leaders generally outperform.  If nominated by his Party, I suspect Zuckerberg would win.

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



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January 05 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs throughout January.  If indices such as the Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Looking further ahead, I would give the upside the benefit of the doubt provided the early November reaction low is not challenged.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  Sharp reactions in Bitcoin and the offshore Chinese Renminbi suggest that China is trying to slow its currency outflow.     

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

 



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January 05 2017

Commentary by Eoin Treacy

January 05 2017

Commentary by Eoin Treacy

America's Roster of Public Companies Is Shrinking Before Our Eyes

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

The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.

In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.

Private funding markets have taken on attributes of public equity, such as an ability to hand employees shares they can trade. Airbnb Inc.’s recent $850 million funding round, which valued the home-rental company at $30 billion, enabled employees to sell $200 million of stock. Investors, particularly in late-stage funding rounds, now often have a better view of a private company’s financials than they used to, including through quarterly conference calls.

“There’s no great advantage of being public,” says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of “The Vanishing American Corporation.” “The dangers of being a public company are really evident.”

 

Eoin Treacy's view -

There have been two important themes that have shaped the view going public is not the most worthwhile exercise for new companies. The overbearing nature of regulatory requirements has increased substantially over the last decade, not least in response to the financial crisis, and this represents a significant cost for public companies which private companies avoid. It is quite simply a hassle for small companies to go through the motions of preparing earnings reports on a quarterly basis and formulating them in such a way as to be amenable to analysts. 



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