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February 28 2017

Commentary by David Fuller

French Industry Shuts Le Pen Out of Debate on Economic Policy

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

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

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

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

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

And:

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

David Fuller's view -

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

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

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

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

(See also Monday’s Comment of the Day)



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February 28 2017

Commentary by David Fuller

February 28 2017

Commentary by Eoin Treacy

February 28 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 28 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 28 2017

Commentary by Eoin Treacy

The Seven Deadly Myths of U.S. Defense Spending

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

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

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

 

Eoin Treacy's view -

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



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February 28 2017

Commentary by Eoin Treacy

Warren Buffett's Best Investment

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 27 2017

Commentary by David Fuller

Good-Cop, Bad-Cop Diplomacy May Pay Off

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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February 27 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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



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February 27 2017

Commentary by David Fuller

Trillions of Dollars Are at Stake When Trump Speaks to Congress

Here is the opening of this topical article from Bloomberg:

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

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

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

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

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

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

David Fuller's view -

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

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February 27 2017

Commentary by David Fuller

February 27 2017

Commentary by Eoin Treacy

February 27 2017

Commentary by Eoin Treacy

Short-term Overbought Conditions

Eoin Treacy's view -

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

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

 



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February 27 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 27 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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February 24 2017

Commentary by David Fuller

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

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

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

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

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

David Fuller's view -

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

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

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

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

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



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February 24 2017

Commentary by David Fuller

UK Tories Lash Out at EU $63 Billion Brexit Bill

Here is the opening of this provocative article from Bloomberg:

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

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

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

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

David Fuller's view -

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



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February 24 2017

Commentary by David Fuller

Email of the day

On gold, interest rates and inflation:

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

David Fuller's view -

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

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

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February 24 2017

Commentary by David Fuller

The Commercial Realities of Brexit

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

(See also Thursday’s Comment of the Day) 



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February 24 2017

Commentary by David Fuller

The Markets Now

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

February 24 2017

Commentary by Eoin Treacy

February 24 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 24 2017

Commentary by Eoin Treacy

Italexit is not a solution for Italy's problems

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

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

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

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

Eoin Treacy's view -

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

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

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

 



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February 24 2017

Commentary by Eoin Treacy

The second stage of disruption

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 23 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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



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February 23 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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

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



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February 23 2017

Commentary by David Fuller

The Markets Now

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

February 23 2017

Commentary by Eoin Treacy

February 23 2017

Commentary by Eoin Treacy

Renewed Love for Gold into Early 2017

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

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

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

Eoin Treacy's view -

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

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



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February 23 2017

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 23 2017

Commentary by Eoin Treacy

Saudi Arabia $2 Trillion Aramco Vision Runs Into Market Reality

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

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

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

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

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

Eoin Treacy's view -

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



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February 23 2017

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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February 22 2017

Commentary by David Fuller

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

Here is the opening of this topical article from Bloomberg:

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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February 22 2017

Commentary by David Fuller

Trump Eyes Easing Obama Rules for Sprawling Pipeline Network

Here is the opening of this article from Bloomberg:

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

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

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

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

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

Read More: Why Keystone counts

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

David Fuller's view -

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

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



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February 22 2017

Commentary by David Fuller

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

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

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

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

David Fuller's view -

This strategy makes sense to me.

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



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February 22 2017

Commentary by Eoin Treacy

February 22 2017

Commentary by Eoin Treacy

Big Batteries Coming of Age Prompt Bankers to Place Bets

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 22 2017

Commentary by Eoin Treacy

The Mark Zuckerberg Manifesto Is a Blueprint for Destroying Journalism

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

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

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

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

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

 

Eoin Treacy's view -

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



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February 22 2017

Commentary by Eoin Treacy

Deviations From Covered Interest Rate Parity

I found this report by Wenxin Du, Alexander Tepper and Adrien Verdelhan for the National  Bureau of Economic Research to be fascinating and commend it to subscribers. Here is a section:

In this paper, we examine the persistent and systematic failures of the CIP condition in the post crisis period. After formally establishing CIP arbitrage opportunities based on repo rates and KfW bonds, we argue that these arbitrage opportunities can be rationalized by the interaction between costly financial intermediation and international imbalances in funding supply and investment demand across currencies. Consistent with this two-factor hypothesis, we report four empirical characteristics of the CIP deviations. First, CIP deviations increase at the quarter ends post crisis, especially for contracts that appear in banks’ balance sheets. Second, proxies for the banks’ balance sheet costs account for two-thirds of the CIP deviations. Third, CIP deviations co-move with other near-risk-free fixed income spreads. Fourth, CIP deviations are highly correlated with nominal interest rates in the cross section and time series.

Looking beyond our paper, we expect a large literature to investigate further the CIP deviations. The deviations occur in one of the largest and most liquid markets in the world after the crisis in the absence of financial distress, suggesting that other arbitrage opportunities exist elsewhere. While trading in exchange rate derivatives is a zero-sum game, the CIP deviations may have large welfare implications because of the implied deadweight cost borne by firms seeking to hedge their cash flows. Furthermore, the existence of CIP deviation introduces wedges between the interest rates in the cash and swap markets, which affects the external transmission of monetary policy. The welfare cost of the CIP deviation is behind the scope of this paper; it would necessitate a general equilibrium model. Yet, even without such model, the CIP condition is a clean laboratory to test the impact of financial frictions in a very general framework. In this spirit, we present the first international evidence on the causal impact of recent banking regulation on asset prices. We expect more research in this direction in the future.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. When aberrations appear in what is by definition a zero-sum game it is certainly a topic worthy of further study. This is a subject likely to be of particular interest to large institutional traders where a move of 10s of basis points can be multiplied by weight of money and leverage. 



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February 21 2017

Commentary by David Fuller

Fillon Jumps in French Polls as Macron Pays for Campaign Gaffe

Here is the opening of this topical report from Bloomberg:

Republican candidate Francois Fillon is back on track to qualify for the run-off in France’s presidential race, a poll showed on Tuesday, as a sweetened program of reforms and intensive campaigning on social media and across the country pay dividends.

Fillon leapfrogged independent front-runner Emmanuel Macron, gaining three percentage points to 21 percent, while Macron shed five points to 18.5 percent, according to the survey by Elabe for L’Express magazine. National Front leader Marine Le Pen would still get the most votes in the first ballot on April 23 but she would lose to Fillon by 56 percent to 44 percent in the second round on May 7. Le Pen was on 28 percent, up as much as two points.

Contenders across the board are searching for traction in the most open presidential election in living memory. The campaign has already seen former Prime Minister Alain Juppe lose the Republican primary after a year as favorite while one ex-president dropped out and the incumbent Francois Hollande opted not to run.

For a dashboard on European political risk, click here

While no surveys have shown Le Pen winning the presidency, Elabe showed she’s narrowing the gap polling above 40 percent in the second round against both Fillon and Macron for the first time.

The prospect of the anti-euro Le Pen cutting through the melee to claim victory has pushed the spread between French 10-year bonds and similar-maturity German bunds to its widest in more than four years. The risk premium rose 2 basis points to

Fillon, a 62-year-old former prime minister, has made gestures to both conservative and moderate voters in the past days with an intense campaigning to ram home his credentials on security while dialing back his plan to cut health care spending. Macron was in London Tuesday to raise his international profile, meeting with Prime Minister Theresa May before a rally later to court expatriate and a fund-raising dinner.

For an analysis of the hurdles facing a Le Pen presidency, click here

Running for office for the first time in his career, Macron suffered his first significant misstep of the campaign last week, when he qualified French colonial rule in North Africa as a “crime against humanity.” Since then he’s taken the brunt of rivals’ attacks and was forced to apologize to French citizens who left Algeria when it gained independence in 1962.

David Fuller's view -

There are two reasons why this year’s French presidential election is probably closer than French pollsters currently indicate. 

This item continues in the Subscriber’s Area.



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February 21 2017

Commentary by David Fuller

Brexit Could Be the Best Thing That Ever Happened to the UK Tech Industry

The EU used to be a start-up on a mission. The first mission was peace, after two world wars in four decades. Then food security… the single market… eastern expansion… the euro. It achieved extraordinary things. 

But at some point it grew too big. It did not know what its mission was any more. It caught “institutionitis”. To quote Yuval Harari in his book Homo Deus: “As bureaucracies accumulate power, they become immune to their own mistakes”.

How do I know this? Well, when your second largest customer, sorry, country, gives you a vote of no confidence, and instead of resigning or promising reform, you continue exactly as before and “punish” it for its “mistake”, you have a clear case of institutionitis.

When two million migrants enter your Schengen zone illegally in a single year, stoking an alarming rise in the Far Right, and it takes you years to do anything about it, you have institutionitis.

When four of your member countries still have youth unemployment of more than 40pc five years after the financial crisis, and you say it’s not your problem, you have institutionitis.

In companies, the cure for institutionitis is the market. Companies that stop caring about their customers will be killed off by a new disruptive company (hopefully one backed by my VC fund) turning up and stealing their customers. The old companies change, or they die. It’s healthy. 

In government bodies, the cure for institutionitis is democracy. If a government is doing a lousy job, we throw it out and replace it with new leadership and bold policies. That is healthy. It clears out the bureaucrats who have forgotten their purpose. But there is no way to “throw out” the EU if it does a lousy job. 

What is worse, our national governments, whom we can throw out, increasingly find they cannot make the dramatic change which people are calling for because the EU has tied their hands. So we, too, get infected by EU institutionitis. We cannot behave like a start-up any more. 

Which brings me to Britain, and our tech sector. I voted firmly to Remain in last year’s Brexit vote, but the EU’s response has forced me, uneasily, to re-think. 

Most of us in the UK tech sector have blithely assumed the EU is “a good thing” because it gives our companies access to fantastic pools of talent, and untrammelled access to the world’s biggest single market.

But what about all that fantastic talent outside the EU? Is it really fair that if I am Polish or have an Italian grandma then I get access to the UK willy-nilly, but if I am Indian or Zimbabwean I have to pass stringent tests and arduous visa renewals every year? 

Tech City & Nesta’s Migration survey, published this week, shows that non-EU nationals make up a higher share of the UK’s tech sector than those from the rest of the EU – and they are more likely to have a Master’s or PhD. 

ROLI is a case in point: it has 60 Britons in its team, and 17 people from the rest of the EU, but nearly twice as many, 33, from the rest of the world. They include Chinese product designers, Ecuadorian engineers, Korean material scientists, American execs… ambitious companies think beyond the EU.

At Oxford and Cambridge universities right now, we have more than 11,000 students from non-EU countries such as the US, China and India, against 6,000 from the rest of the EU. Yet our EU bias means we send most of those brilliant non-EU students back home at the end of their studies.

There is no doubt that extracting ourselves from the EU is going to be an almighty and expensive pain in the neck. 

Yet Brexit could prove to be a fabulous chance to simplify our immigration policies, so that the most brilliant enterprising people from every country, Asian, African, European or American, have a fair chance to work in the UK, and to nudge our most ambitious entrepreneurs to think beyond the Atlantic, the Mediterranean and the Black Sea in terms of talent. 

And perhaps the upheaval of Brexit might even cure us of institutionitis, and free us to become a truly “start-up” nation. 

David Fuller's view -

My only criticism of this article is that the EU was never on a mission of the type Harry Briggs describes.  It was the European Common Market, also called the European Free Trade Area of separate, independent states which was on a mission. 

The EU suffered from “institutionitis” from the day it was founded and the Euro launched without any federal backup.  That was around the time Harry Briggs gained his impressive MA (hons) (1st Class) Experimental Psychology degree from the University of Oxford in 1998.    

Everything else Harry Briggs says in the article above is absolutely correct, in my opinion. 

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



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February 21 2017

Commentary by David Fuller

Email of the day 1

On the problem of antibiotic resistance:

“Further comment on Amoxycillin, mentioned recently in email of the day 2. When I sent in my original observation on the use of Amoxycillin as a treatment for chest infections in dogs, (very honoured to see my email in print) I was of course using it some 20 years ago when antibiotic resistance was a minor problem. Things are very different now. The truth is that since 1987 there has not been any new class of antibiotics developed. It has simply not proved to be a profitable proposition for drug companies to fund research and development into a drug that will possibly be used in a patient over a period of some five to seven days. Far more profitable it seems, in an era of a rapid increase in the elderly population to develop drugs that are going to be used by this group over many years or even decades.

David Fuller's view -

Many thanks for this follow up.  You obviously know more about this than I do and I decided to also run it past your fellow subscriber, Dr David Brown, who is a specialist in this field and the author of Email of the day 2 below.



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February 21 2017

Commentary by David Fuller

Email of the day 2

More on the problem of antibiotic resistance:

Dear David

 It's a broad generalisation to say there have been no new classes of antibiotics. There have been some but unfortunately not against many of the most deadly bacteria.

 Bacteria are generally divided into 3 classes, the mycobacteria (TB etc), and Gram-positives (MRSA etc) and Gram-negatives (E coli etc). There have been a few new classes of antibiotic in recent decades against 2 of the 3, though not against Gram-negatives such as E coli, K. pneumoniae, A baumannii and P aeruginosa. Gram-negatives have an extra cell coat (2 instead of just one that Gram-positives have) which makes it much more difficult for antibiotics to gain entry. And these bacteria have also developed capability to pump out our antibiotics or degrade them rapidly. Those four Gram-negatives in particular are a major cause for concern, as we have had no effective new chemical classes invented against them since the 1970s. They are increasingly gaining resistance to our best antibiotics. There have been some new antibiotics against them launched onto the market but these are minor variations on the same old chemical templates. These are easier to discover but also easier for the bacteria to resist. We desperately need new chemical templates. All efforts have failed for nearly 4 decades.

 Apart from the scientific problems, there are commercial problems too. The pharmaceutical industry cannot make money from antibiotics for several reasons.

First, they are very difficult to invent. I heard a talk by Sir Andrew Witty, CEO of GlaxoSmithKline in which he said it has proved to be the hardest area of drug discovery. Scientists from both GSK and AstraZeneca separately published major review articles summarising over a decade of research in each company trying to find new antibiotics, with no success in either company.

Second, the commercial model is broken. Antibiotics cost a lot to invent yet get used for only a few days when needed, compared with drugs for chronic indications such as cancer, high blood pressure and diabetes which are easier to invent and get used every day. So companies make little money from antibiotics.

 Third, if a drug company does in future invent a stunningly good antibiotic, there will be intense pressure to reserve it for use as a last resort when other antibiotics fail, to save it from resistance for for use in the most seriously ill patients. Again, this indicates low sales volume. It would need very high prices or a very different commercial model to overcome this problem. The review that David Cameron established under Jim O'Neill a few years ago proposed a new commercial model, and also John Rex at Astra Zeneca has been a thought leader on new models. I have attended several meetings with them both including meetings with politicians in parliament but progress seems to have stalled now we have a new government with other priorities.

 Re amoxycillin, my view is that it should never be used alone. It has been an excellent antibiotic for over 3 decades, one of the best, but inevitably bacteria are becoming resistant to it. There is a version in which it is used alongside a resistance breaker called clavulanic acid, (co-amoxyclav is the commercial name, and here is the Wikipedia entry https://en.wikipedia.org/wiki/Amoxicillin/clavulanic_acid). This combination is still effective for many infections. I carry it myself when I travel in the Himalayas, as I will be doing in coming weeks.

Finally, I thought I would add some advice for subscribers if they get a serious infection.

This item continues below.

David Fuller's view -

Dear David,

On behalf of all subscribers, thank you so much for this import email, generously and thoughtfully provided. It contains potentially lifesaving information.

As a personal aside, when a young, very nice temporary doctor at our personal surgery offered me amoxicillin for my developing chest infection, I recognised the name and accepted it rather hopefully. The 5-day course did nothing for my condition but caused me to optimistically assume that I was getting better.  The next two weeks were a disturbing reality check.  I trust I will be less naïve next time.  

A PDF of Dr David Brown's full email appears in the Subscriber's Area.



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February 21 2017

Commentary by Eoin Treacy

February 21 2017

Commentary by Eoin Treacy

Musing from the Oil Patch February 21st 2017

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

All of the forecasts for domestic oil production appear feasible. The U.S. is home to some of the best oil and gas geology in the world with the largest number of independent explorers testing new theories about where to find and how to produce more hydrocarbons cheaper. These hundreds of independent operators are supported by the largest, most technically sophisticated oilfield service industry. Combine these elements with the deep capital markets existing in the United States that ensures that the petroleum industry has access to adequate capital for creating value for investors, and you have the makings of a vibrant and healthy industry. Depending on events around the world, the risk for the domestic oil industry is that its success could undercut the global oil industry’s recovery and knock down the prospect for a slow steady rise in oil prices and future domestic oil output. We don’t know what the odds of that happening are, but it is a scenario that everyone should keep in the back of their minds as they cheer on the nascent oil industry and oil production recoveries. However, too much U.S. oil success could actually be a bad thing for the industry, but probably a good thing for consumers.

Eoin Treacy's view -

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

The US oil sector remains highly competitive at today’s levels and the quantity of oil and gas available for export continues to increase. With a tight spread between near and far contracts, the futures curve is flat suggests a great deal of hedging has already taken place; supporting the view producers are profitable at today’s levels. 



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February 21 2017

Commentary by Eoin Treacy

North Korea lights fire under coking coal price

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

On Saturday the totalitarian dictatorship's largest trading partner, China, reacted to the Feb. 12 test of a long-range ballistic missile by announcing a ban on coal from the rogue nation till the end of 2017.

The decision by the China's Ministry of Commerce, issued jointly with the country's customs agency, was made to comply with a UN Security Council resolution that China helped draft and pass in November.

Along with restricting the export of coal, the resolution also targets non-ferrous metals, statues and other luxury items like tapestries.

China's import ban on North Korean coal was supposed to be lifted in January but the missile test has meant that Beijing's coal ban will continue.

Last year China imported 22.4 million tonnes of anthracitic coal that can be used as an alternative to coking coal in the steelmaking process from North Korea, a nearly 15% rise from 2015.

China forges more steel than the rest of the world combined and the country last year imported a total 59.2 million tonnes of coking coal, an increase of nearly 24% over 2015.

Eoin Treacy's view -

China and Russia have long applied a satellite state foreign policy strategy in order to protect their borders from the risk of being overrun by a surprise land invasion. North Korea has played just such a role for China which the ban on coal but import of anthracite highlights. Does anyone really think North Korea would be testing ballistic missiles without China’s tacit support? 



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February 21 2017

Commentary by Eoin Treacy

Japan's manufacturing sector hasn't looked this good in years

Thanks to a subscriber for this article by David Scutt for Business Insider. Here is a section: 

Output, new orders, new export orders, stock purchases and employment all grew at a faster pace than they did in January.

As lead indicators, the strength in new orders — both at home and abroad — bodes well for activity levels in the months ahead.

An increase in order backlogs, along with a faster decline in inventory levels, also points to a strengthening in activity levels.

“Encouragingly, with backlogs of work accumulating for the first time in 14 months, the added pressures on capacity should ensure growth will be maintained at a solid pace during at least the first half of this year,” said Samuel Agass, an economist at IHS Markit.

“Subsequently, business confidence was at a survey-high.”

That’s good news, and suggests the positive momentum in the global economy may have continued after a strong start to the year.

Eoin Treacy's view -

Despite the fact the Yen has spent the last few months strengthening, in what was a steady reversion back towards the mean, the fact it is trading considerably below where it averaged in the last decade is a broad positive for the Japanese market.  



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February 21 2017

Commentary by Eoin Treacy

Email of the day on creating Preset Templates

I would like the code to access Eoin's Dow/Gold chart which was on this weekend's transcript.

Also is there a chart plotting inflation rate v interest rates.  Again an interesting comment made by Eoin

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. To create the Dow/Gold Ratio follow these instructions.

Select the Dow Jones Industrials Average from the Major Charts Section of the Chart Library.
Click on the Charting tab (located right above the chart area)
Select Gold from the Relative dropdown menu.
Set the date range at the top of the page to 50 years.
Hit Apply.

To save this chart as a template so you can come back to it later.

Click on Charting.
In the greyed out area click on Save.
Give the Preset a name and Click OK.

This will save the ratio into your Chart menu located in the upper right. Anytime you wish to look at the Dow/Gold ratio all you need do is pull up the Dow’s chart and click on the relevant Preset from the dropdown menu.

To create the ‘real interest rate spread’ follow these instructions.

First find the Fed Funds Rate using the Chart Library’s search.
Click on Charting
Click on Other Relative
In the ensuing popup box type CPI and click on search.
Click on US Chained CPI All Items MOM
Change the ratio dropdown to difference.
Click on Apply.

To save this chart as a template so you can come back to it later.

Click on Charting.
In the greyed out area click on Save.
Give the Preset a name and Click OK.

This will save the ratio into your Chart menu located in the upper right. Anytime you wish to look at the chart of real interest rates all you need do is pull up the Fed Funds Rate Chart and click on the relevant Preset from the dropdown menu.

I would suggest adding the Fed Funds Rate and the Dow Jones Industrials Average to your Favourites so they are easy to find whenever you wish to view ratio or spread charts. 



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February 20 2017

Commentary by David Fuller

Why Britain Should Consider Unilateral Free Trade

The debate about our trading relationships after we have left the EU is now hotting up.

Most economists would agree about the optimum end result, namely free trade between the UK and both the EU and the rest of the world. But there are disagreements about the best route from here to there.

The case for free trade is essentially the same as the case for free markets in general, that is to say, left to its own devices the market allocates available resources to their best possible use, given consumer preferences and the production possibilities afforded by existing technology.

There is no point in trying to be self-sufficient for its own sake in any, let alone all, forms of economic production. If we so chose, the UK could be self-sufficient in bananas. But the cost of doing this would be prohibitively high. It makes much more sense for us to produce the things in which we have a comparative advantage relative to other countries and to exchange whatever we produce for bananas (and any and everything else) that we wish to buy from other countries.

Of course, just as there are arguments to restrain, correct or encourage market forces in a purely domestic setting, so there are some arguments for sometimes restricting trade across borders. But they are limited. The word “protection” is misleading. It suggests the warm embrace of cuddly caring. Who would not want that? It might be better if it were replaced by “trade interference”. Unfortunately, the apparent attractions of trade interference mean that it is resorted to far too frequently.

Naturally, each producer group would like its output to be protected against foreign competition. Those who suffer from such measures are everybody else in the economy who would buy its output, or the output of its foreign competitors. They will now have to pay higher prices. This group overwhelmingly consists of consumers. So there is a tension in debates about trade between producers and consumers.

Producers are much more concentrated than consumers. This gives them a substantial advantage in the battle for hearts and minds. Indeed, in such discussions the consumer interest hardly gets a look in. At international trade negotiations, the discussion is about the competing interests of producers in different countries.

David Fuller's view -

A country cannot suddenly become a successful unilateral free trade entity at the flip of a switch.  It needs to constantly hone its competitiveness from quality control to management and skilled personnel.  It needs research triangles from universities with strengths in the sciences and engineering, to corporations and government incentives including competitive taxation, to develop and also attract skilled entrepreneurs. 

The UK is already doing this but it can always do more.  In today’s competitive and increasingly high-tech world, the opportunities are greater than ever before but a country needs to keep moving forward to remain competitive.

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



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February 20 2017

Commentary by David Fuller

Things Going Wrong In Donald Trump White House? No Problem, Blame the Media

To get to the point which he was to reiterate endlessly in his memorable solo press conference the next day: that those media outlets (in Trump’s Twitter terminology, “the failing New York Times and Washington Post”) had been fed “illegal” leaks by conspiring security services which were determined to undermine the Trump presidency.

And, if they had, then that is the big story here, Trump claimed over and over again: not his shambolic White House, but a plot by Washington insiders and the intelligence agencies to undermine a democratically elected president.

The press briefing with Mr Netanyahu – however dramatic it may have been in actual foreign policy consequences – turned out to be just a warm-up act for the spectacular event that came 24 hours later.

As we saw – those of us who watched goggle‑eyed through that entire 75-minute performance – the second press conference was almost beyond belief. It was certainly the most shocking public display of unhinged, out-of-control, buffoonish aggression by a US president in living memory.

There are two equally alarming possibilities: either his relentless outpouring of accusation, self‑contradiction and on-the-hoof pronouncements does reflect his view of reality, or it was an almost hysterically defensive fusillade designed to bolster his own confidence in the face of a string of unexpected setbacks.

The most serious of the concerns about his presidency is the one he would not deal with for the longest time: at least two attempts were made to get him to give a “yes” or “no” answer to the question of whether members of his election team were in touch with Russian officials during the campaign.

On each occasion, he threw out vague accusations about the Russian connection story being a “ruse”: a sham designed by Hillary Clinton’s people to conceal the mistakes they made in her campaign. On what I believe was the third request, he finally replied that “nobody I know of” had held conversations with Russian agents.

Nobody he knows of? There is enough deniability there to cover a number of eventualities. Where he left no room for doubt was in another statement about Russian associations.

He was adamant that he personally had nothing to do with Russia – no loans, no deals, no financial arrangements of any kind. Should this categorical denial prove to be false in any respect, it would be grounds for impeachment.

David Fuller's view -

Many of us who have seen a few of Donald Trump’s press conferences, and would be relieved if he could grow into the presidential role, will feel uneasy about what we have witnessed. 

Aside from the very important challenge of helping the US economy to fulfil more of its awesome GDP growth potential, Trump appears to be a complete novice in too many other respects.  Nevertheless, he has appointed a number of highly experienced and accomplished people to his cabinet.  That speaks well for the President and I hope he relies on them.  If not, and if there is a high turnover in senior positions, Trump will be in real trouble when faced with the 2018 mid-term elections.  

A PDF of Janet Daley's column is in the Subscriber's Area.



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February 20 2017

Commentary by David Fuller

Le Pen Party Says HQ Raided in Parliamentary Aides Case

Here is the opening of this short report from Bloomberg:

French investigators searched the headquarters of the National Front as part of a probe into whether party leader Marine Le Pen used European Parliament money to pay for jobs related to domestic politics.

In a statement, the party characterized the search as “a media operation whose only goal is to disrupt the smooth operation of” Le Pen’s presidential campaign “at a moment when she’s made major advances in the polls.”

The European Parliament has ordered Le Pen to repay the amount, estimating the improper payments at 336,146 euros ($357,000). She has refused to give the money back, saying the jobs weren’t fictitious, and has appealed the decision. French prosecutors who got a report from the EU’s anti-fraud office, OLAF, have opened a legal probe of their own.

A year ago, the FN’s offices in Nanterre, a few kilometers west of Paris, were raided as part of the same probe opened by Paris prosecutors in March 2015.

Meanwhile, Monday’s daily OpinionWay poll showed that first-round support the for anti-euro, anti-immigration Le Pen rose 1 percentage point to 27 percent, with independent Emmanuel Macron and Republican Francois Fillon unchanged at 20 percent each.

While no survey so far has shown Le Pen even close to a victory in the run-off, she’s quickly narrowing the gap to her rivals. OpinionWay showed Macron would defeat Le Pen by 58 percent to 42 percent in the May 7 second round. His advantage has halved in less than two weeks.

David Fuller's view -

It may not be edifying but this is certainly an interesting and perhaps hotly contested year in French politics, and it has only just started.  Le Pen is the biggest beneficiary of the anti-EU vote.  



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February 20 2017

Commentary by Eoin Treacy

February 20 2017

Commentary by Eoin Treacy

Mondelez, Kellogg, et al -- Let the Deal Frenzy Begin

This article by Brooke Sutherland and Gillian Tan for Bloomberg may be of interest to subscribers. Here is a section:

The buyout firm's typical playbook has been to target companies with weak margins and then slash costs like crazy to boost profitability. But even a cost-cutter extraordinaire like 3G needs to eventually find revenue growth. Sale gains at Unilever's personal-care business slowed in the most recent quarter, but that industry is certainly growing faster than the staid cereal and sandwich-spreads markets.

The bid may fail. Unilever has rejected Kraft Heinz's offer and at least one analyst is bashing the idea, calling it a "sloppy" combination with questionable logic. There may also be antitrust pushback. But it's hard to see 3G going back to hunting for slow-growth food brands after this. It clearly has its eyes on a different sort of prize. That should be a wake-up call for packaged-food investors who may have been hoping for salvation via 3G and Warren Buffett, the firm's dealmaking billionaire sidekick. 

Would-be 3G targets Kellogg, Mondelez, Campbell Soup and General Mills have all implemented some form of zero-based budgeting -- one of the buyout firm's favorite tools whereby every expense has to be justified each year -- as well as other productivity self-help efforts such as shedding lower-margin and non-core assets. Kellogg is targeting an operating margin of nearly 18 percent by 2018, while Mondelez is aiming to cut $3 billion in costs. Campbell on Friday upsized its cost-savings target to $450 million by fiscal 2020, while General Mills says its on track to drive down expenses by $880 million with its margin-management and efficiency plans. 

Eoin Treacy's view -

Interest rates are low, but rising, so the window for attractive borrowing costs with which to fund takeovers is closing. On the flip side the prospect of synchronised global fiscal stimulus is improving so there is ample scope for the market for global demand for consumer staples to continue to increase. Therefore the rationale for takeovers now, despite the relatively high price tag is still attractive. 



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February 20 2017

Commentary by Eoin Treacy

Email of the day on the cost of gold mining

Thank you for another very well done Friday audio. Your comments on gold were very interesting for me. I wonder if you or the collective have an idea about the possibility of technological innovation that might make gold production cheaper, the way oil production has become cheaper.. Thanks in advance

Eoin Treacy's view -

Thank you for your kind words and I am delighted you are enjoying the new format of videos and audios. Anglogold Ashanti have been pioneering a number of new technologies not least reef boring and thermal spawning. Both are designed to economically extract gold from previously uneconomic regions such as very thin reefs or the supporting walls of old mines. As with any new technology, development takes time but the company is hopeful about the prospects for future production. This informative section from Anglogold Ashanti’s site may also be of interest. 



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February 20 2017

Commentary by Eoin Treacy

Email of the day on the Dow/Gold ratio scenarios

I have been following your Dow/ gold analysis, but while in the long term you are probably right, in the short term there are other interpretations of how the ratio could move, especially if you put the ratio on a log scale 

I’m attaching another possible and probable path in normal scale, and in log scale. the short term rise could be a pause before the real bottom, it has happened in the past. 

PS: considering you are a real international traveler and investor, where would you say are the safest banks today?  I think Singapore, but I heard it is getting difficult to open an account there 

Eoin Treacy's view -

Thank you for these nicely illustrated charts. Is there the possibility that the Dow/Gold ratio pull back? Absolutely. It posted a higher reaction low in the early 1930s and a lower low in the early 1980s. In both cases it pulled back following the initial breakout out. 



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February 20 2017

Commentary by Eoin Treacy

Citigroup Pays Fine to Settle South African Rand Collusion Probe

This article by Vernon Wessels and Renee Bonorchis for Bloomberg may be of interest to subscribers. Here it is in full:

Citigroup Inc. agreed to pay an administrative penalty of 70 million rand ($5.4 million) to settle a South African antitrust investigation that it participated in a cartel to manipulate the value of the rand.

The figure does not exceed 10 percent of Citigroup’s annual turnover in South Africa and comes after the New York-based lender undertook to cooperate with the Competition Commission and “avail witnesses to assist the prosecution of the other banks that colluded in this matter,” the Pretoria-based commission said in an e-mailed statement on Monday.

“This settlement was done to encourage speedy settlement and full disclosure to strengthen the evidence for prosecution of the other banks,” Commissioner Tembinkosi Bonakele said in the statement. Barclays Africa Group Ltd. has also agreed to cooperate, people familiar with the matter said last week.

The commission on Feb. 15 referred a collusion case to the country’s Competition Tribunal for prosecution and identified lenders including Bank of America Merrill Lynch, HSBC Holdings Plc, BNP Paribas SA, Credit Suisse Group AG, JPMorgan Chase & Co. and Nomura International Plc as among those that participated in price fixing and market allocation in the trading of foreign-currency pairs involving the rand.

Commerzbank AG, Macquarie Group Ltd., Australia & New Zealand Banking Group Ltd., Investec Ltd. and Standard Bank Group Ltd. were also named.

Eoin Treacy's view -

This news item may be responsible for the spike in open interest in Rand options. The currency has been strengthening since the news broke, in line with other commodity currencies and suggests that a good many traders were short and that the continued resilience of the commodity complex is a tailwind for related currencies. 



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February 17 2017

Commentary by Eoin Treacy

February 17 2017

Commentary by Eoin Treacy

Beyond The Supercycle How Technology is Reshaping Resources

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

First came the “fly-up,” the price spike on world markets for oil, gas, and a broad range of natural resources that began in 2003. Then came the abrupt bust, as prices tumbled and global spending on natural resources dropped by half in the course of 2015 alone. Now, even as resource companies and exporting countries pick up the pieces after this commodity “supercycle,” the sector is facing a new wave of disruption.1 Shifts taking place in the way resources are consumed as well as produced—less noticed than the rollercoaster commodity price ride but no less significant—will have major first- and second order effects on both the sector and the global economy. These shifts are the result of technological innovation, including the adoption of robotics, Internet of Things technology, and data analytics, along with macroeconomic trends and changing consumer behavior.

We see three principal effects of this technological revolution:
Consumption of energy will become less intense as people use energy more efficiently thanks to smart thermostats and other energy-saving devices in homes and offices, and the use of analytics and automation to optimize factory usage. Transportation, the largest user of oil, will be especially affected, by more fuel-efficient engines and by the burgeoning use of autonomous and electric vehicles and ride sharing.

Technological advances will continue to bring down the cost of renewable energies such as solar and wind energy, as well as the cost of storing them. This will hand renewables a greater role in the global economy’s energy mix, with significant first- and second-order effects on producers and consumers of fossil fuels.

Resource producers will be able to deploy a range of technologies in their operations, putting mines and wells that were once inaccessible within reach, raising the efficiency of extraction techniques, shifting to predictive maintenance, and using sophisticated data analysis to identify, extract, and manage resources.

Scenarios we have modeled suggest that these developments have the potential to unlock $900 billion to $1.6 trillion in incremental cost savings throughout the global economy in 2035, an amount equivalent to the current GDP of Indonesia or, at the top end, Canada. As a result of lower energy intensity and technological advances that improve efficiency, energy productivity in the global economy could increase by 40 to 70 percent in 2035. We believe these changes will have profound implications not just for companies in the resource sector and for countries that export resources, but also for businesses and consumers everywhere.

 

Eoin Treacy's view -

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

The long-term cycles of supply and demand can be boiled down into the simply maxim that high prices encourage consumers to be efficient and suppliers to invest in expansion. Low prices encourage consumers to use more while suppliers are forced to be more efficient. Following a decade long super cycle producers are now much more efficient while consumers are really only beginning to increase demand as economic growth picks up. 



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February 17 2017

Commentary by Eoin Treacy

Email of the day on the VIX

Read on twitter the following "is this too-quiet market the calm before the storm" I am wandering storm or no storm if going long the VIX on the SP500 or a European VIX could be on a risk reward basis a sound trade with the VIX being at a historical low. or could the VIX go even lower to new lows? we also had/have negative interest rates. would appreciate your expert opinion 

Eoin Treacy's view -

The VIX is quite depressed right now because Wall Street is rallying so persistently and because that rally is relatively broad based. 
 

 



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February 17 2017

Commentary by Eoin Treacy

Biotechnology rotation

Eoin Treacy's view -

The Nasdaq Biotechnology Index is going through a significant rotation. Some of the biggest companies that led on the breakout from the long-term base in 2012 are now trending lower. Gilead Sciences is representative. It was among the best performers on the breakout but peaked in 2015 and has continued to trend lower while many of the other major constituents have spent a year ranging. 

The focus thrown on drug pricing during the US Presidential Election has long lasting repercussions because it has highlighted the practice of raising prices for legacy drugs. That is the exact opposite of what we see in other sectors where competition forces prices lower over time. The Trump administration is now talking about bringing down drug prices and enhancing the ability of Medicare to negotiate bulk prices and allow consumers to buy drugs overseas. These issues represents a significant issue for legacy pharmaceutical companies and established biotech companies without the compensating factor of a promising drug pipeline. It also means demand for M&A is likely to continue to increase. 

 



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February 16 2017

Commentary by David Fuller

Hotly Disputed, but No Longer Unthinkable: Could France be Ready for President Le Pen?

I have used the headline from Ambrose Evans-Pritchard’s article as shown in The Telegraph, in preference to the sensationalist online headline.  Here is the opening: 

If Marine Le Pen wins France's presidential elections in May, all talk of punishing Britain for the outrage of Brexit will become irrelevant.

French diplomacy will pirouette overnight under a National Front (FN) leader. The Élysée Palace will seek an Entente Cordiale with the British, offering a bilateral alliance on new foundations.

It will then be the European Union that faces an existential choice: whether to reinvent itself as a loose federation of nation states, or succumb to galloping disintegration

"What is the point in punishing a country? It is senseless, unless you think the EU is a prison, and you are condemned if you escape. I want to rebuild our damaged relations with the United Kingdom," she told the Daily Telegraph.

"A people decides its own destiny. You cannot force a country to do something that is against its own interests, or against the democratic process," she said.

It is a far cry from the language of President François Hollande, who told Europe that Britain must "pay a price" to deter any other country from toying with temptation.

Whether she has a chance of winning is hotly-disputed, but it is no longer unthinkable and the consequences are epochal. Bookmakers have lifted the odds to one in three as of February 13, an "alarming" development says Oxford Economics.

"France is the political heart of Europe, and the moment we leave the euro the whole project collapses," said Ms Le Pen. She leans across the table in her tiny office in the European Parliament with a glint of mischief.

French pollsters note her imperturbable serenity as the pillars of the French political system crumble around her, and the coronation of ex-premier François Fillon goes horribly awry. "She has established herself as an anchor of stability on the political landscape," says Frédéric Dabi from the polling group Ifop.

The latest L'Express poll found that she trails Mr Fillon by just 44 to 56 in a run-off election, nearing the margin of error in this ferbrile climate. The tabou of voting for the Front National is not what it was, and Britain's referendum shock has played into her hands.

"Brexit has been a powerful weapon for us. In the past our adversaries have always been able to say that there is 'no alternative' but now we have had Brexit, and then Trump, and Austria," she said.

"A whole psychological framework is breaking down. I think 2017 is going to be the year of the grand return of the nation state, the control of borders and currencies," she said.

David Fuller's view -

Most articles mentioning Marine Le Pen dismiss her chances in this year’s elections because they are written for or quoted from the French establishment.  I think Ambrose Evans-Pritchard has a better perspective, partly because he is an original thinker and also a Francophile who is fluent in the language. 

While the consensus view is that Le Pen cannot win the Presidency in this year’s elections, I think she will at least do better than the polls suggest.  Why? 

This item continues in the Subscriber’s Area.



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February 16 2017

Commentary by David Fuller

Tillerson Forced to Stay at Sanatorium in German Village for G-20.

Here is the opening of this report by Bloomberg:

On his first trip abroad as U.S. secretary of state, Rex Tillerson was forced to stay at a sanitarium in a German village known for its hot springs, 30 minutes from where other world leaders gathered. Diplomatic security agents mingled in the parking lot with elderly people in wheelchairs arriving for spa treatments.

Tillerson, the former head of Exxon Mobil Corp., was at the sanitarium because Bonn’s hotels were all booked by the time he confirmed his attendance at this week’s Group of 20 meeting. Counterparts including U.K. Foreign Secretary Boris Johnson had to make a trek out to meet him.

The unusual diplomatic debut continued during an awkward encounter with Russian Foreign Minister Sergei Lavrov. After Lavrov delivered some perfunctory opening remarks alongside Tillerson, U.S. aides quickly ushered reporters from the room. “Why did they shush them out?” Lavrov asked.

And:

The curious start to his first foreign trip may demonstrate little more than the adjustment Tillerson is making after years of traveling with a small entourage as chief executive officer of Exxon to being a highly sought-after Cabinet member in President Donald Trump’s administration. Two weeks after winning confirmation, Tillerson has yet to lay out his most urgent foreign policy priorities and hasn’t had a news conference.

The lack of outreach to the media extends to the State Department briefing room in Washington, where a spokesman’s normally daily question-and-answer exchanges with reporters have yet to resume since Trump took office almost four weeks ago. Tillerson also continues to lack a deputy secretary, who could help manage day-to-day issues at the department.

The few remarks Tillerson has made reflect the changed circumstances of his new job. In his meeting Thursday with Saudi Foreign Minister Adel al-Jubeir, the two bantered about Tillerson’s flight from the U.S., which arrived late Wednesday night.

"I’m not used to traveling like that you know,” Tillerson said. “I’m used to getting on at night, spending the night on the plane and then going to work. It’s quite civilized."

David Fuller's view -

What a childishly petty snub by the EU, most likely from an unelected bureaucrat who will hide behind his anonymity in connection with this incident.  



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February 16 2017

Commentary by David Fuller

Email of the day 1

On a small world:

David, I sincerely wish you a speedy recovery to full health. I have been a subscriber since I believe 1984 and met you at your second to last Chart Seminar in May 2006 and have truly benefitted from the service. My middle son works for Richard Chandler and is presently with Eoin at the seminar in Dubai. Again my best wishes and thanks.

David Fuller's view -

Many thanks for your kind words and interest in this service over so many years. 

I met your fine son and two of his colleagues at a lunch when they visited London around yearend 2016, to talk about the current seminar in Dubai.  He will certainly learn from Richard Chandler – an imposing leader, legendary investor and dedicated trainer of his team. 

I met the remarkable Chandler brothers when they attended one of my European 2-day workshops on behavioural technical analysis in autumn of 1987, a few days before the Crash.  I always worked with current market examples, as does Eoin.  Needless to say, delegates were able to identify plenty of behavioural and technical warning signals at that important time.    



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February 16 2017

Commentary by David Fuller

Jim Cramer: You Do Not Want to Be in Retail Stocks

The stock market has continued to churn out record high after record high, putting together the best record-breaking streak since the early 1990s. 

While the broader indices have been climbing, retail has been stagnant, with a number of these stocks acting just "dreadful," TheStreet's Jim Cramer, co-manager of the Action Alerts PLUS portfolio, said on CNBC's "Stop Trading" segment Thursday. 

Cramer highlighted a recent research report from JPMorgan analyst Matthew Boss. Boss "slashed numbers very big" for Macy's (M), Nordstrom (JWN) and J.C. Penney (JCP), Cramer pointed out. 

Macy's has been talked about as a takeover target, but with its fundamentals in decline, that may warrant a lower takeover price, Cramer reasoned. Boss's research report lays out a "chilling" situation of the mall, he added. 

But it's not just the big department stores, either. Stocks like Abercrombie & Fitch (ANF), Gap (GPS) and L Brands (LB) have been impacted, too. These stocks are not the place to invest, Cramer said, explaining that the truth is simple: consumers are staying home, playing video games, ordering deliveries and playing on their iPhone. 

That's where the money has been flowing, Cramer said, to at-home entertainment, not the mall. 

David Fuller's view -

Yes, fewer people are visiting the malls.  The real reason, which Cramer certainly knows but may have felt he should not mention, is that people are buying from Amazon, the most brilliant and efficient retail system ever invented.  



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February 16 2017

Commentary by David Fuller

Email of the day 2

On behavioural TA and pharmacology:

Neither have I had the pleasure of meeting you face to face, but having met Eoin at now 2 chart seminars, and read your comments from time to time as a subscriber, I have a mental picture of the sort of person you might be.

I find your measured response to financial and political comments and news (in which we drown on occasions) is one of the main reasons I keep coming back. The world does not always make the same sense as say nature, mathematics or physics. Perhaps another reason I have endured here is a growing appreciation of the behavioural aspect of financial analysis, and how well it has been articulated by you and Eoin.

I was going to side step comment on your recent illness because it is a personal matter and I couldn't think of anything useful to add, except of course to add my best wishes for your recovery. Fatigue following a respiratory infection can be a real problem.

I enjoyed the anecdote about amoxycillin used for canine RTI and your pun in response. Dry. It reminded me of a series of articles on antibiotic resistance discussed a few months ago by Eoin. We are fortunate to live in an era (end of an era?) in which the majority of common bacterial infections are still sensitive to something (at least where I live). This aspect of pharma has been so successful in the past that they appear to have stopped developing new products. Are we living on credit?

David Fuller's view -

Thank you for this thoughtful, interesting and varied email.

Re behavioural technical analysis – the description for my field which I have used since the mid-1970s – is easily explained.  Don’t tell the market what to do because it probably isn’t listening. Instead, remember that the market eventually responds to fundamentals but will more often be volatile in the manner of a crowd.  So remain calm.  Watch the market by looking mainly at weekly and monthly charts, in the manner of David Attenborough peering through the reeds and observing a herd on the African plains.  The herd will mostly mill about, as price charts mainly range, before suddenly taking off.  Don’t stand in the way but run with the herd, at least until it clearly stops.

Re antibiotics, we have every reason to be grateful for them, not least because they have approximately doubled average life expectancy over the last hundred and fifty years or so, while wars have become less frequent and smaller. However, the bugs (germs) don’t stand still.  They adapt and come back.  The most vulnerable are young children, the unhealthy and the old.  Antibiotics may have extended my life recently, and I am still on them.  However, I will try to avoid a similar illness over the next several years, because the combination of antibiotics, including penicillin, may not be as effective for me anytime soon.      



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February 16 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

February 16 2017

Commentary by David Fuller

It Does Not Matter Whether the Trump Base Liked His Press Conference

As media Twitter had a field day with how unhinged President Donald Trump seemed in Thursday's press conference, there was the usual response from the Real America Whisperers that "his base eats this up" and that, to a lot of people, Trump looked like he was winning by dressing down the media.

All of this is beside the point.

Like any president, Trump has a large base of people who will always like him and a large base of people who will always hate him. In Trump's case, the latter group may be larger than normal. But neither of these is the groups that will decide his fate.

Trump's presidency lies in the hands of the Trump-curious: The approximately 15% of Americans who dislike him but tell pollsters they think he might do a good job. A lot of these are people who voted for Trump despite having an unfavorable view of him.

With these voters on his side, Trump can wield a fearsome coalition that will help him retain Congress in two years and persuade Republicans and Democrats in Congress to bend to his agenda in the meantime. Without them, he is unpopular and ridiculous.

The Trump-curious do not "eat up" whatever Trump does. They are guardedly optimistic about him (or were, a month ago) and hope that he will deliver positive change in their lives.

I doubt Thursday's press conference did much to move public feelings about Trump either way. The Trump we saw is one we've seen a lot before. But it also wasn't a brilliant strategy to remind the Trump-curious why they voted for him.

If Thursday's performance imposed a cost on Trump, it was because it did little to convey the messages that he is busily working to create good-paying jobs for Americans, or that he is breaking the logjams that have made Washington look so dysfunctional to so many, or that he is restoring whatever voters feel is lost in their communities.

Put another way, the biggest problem is not what he said, but what he didn't say.

He still has time to deliver on the hopes of the voters who took a chance on him. But the idea (either triumphant or defeatist) that Trump can build the public support he needs simply by attacking the media and playing on his hard-core voter base's resentments is incorrect.

David Fuller's view -

I don’t like Trump’s public persona, but I am less happy about the mutually destructive baiting game which we are witnessing.  As President of the United States, I wish him well, because that would be good for the global economy. 

 

Please note: I will be away on Friday but Eoin will be back.



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February 15 2017

Commentary by David Fuller

U.S. Spy Agencies, FBI Probing Trump Team Russia Calls, Officials Say

Here is the opening of this disturbing article from Bloomberg:

U.S. intelligence agencies and the FBI are conducting multiple investigations to determine the full extent of contacts that President Donald Trump’s advisers and associates had with Russia during and after the 2016 campaign, according to four national security officials with knowledge of the matter.

Several agencies are conducting the inquiries into Russia’s efforts to meddle in the U.S. election and coordinating as needed, said the officials, who requested anonymity to speak about sensitive matters. The investigations predate the dismissal of retired Lieutenant General Michael Flynn as national security adviser on Monday.

Trump associates whose activities the agencies are examining include his former campaign chairman Paul Manafort, energy consultant Carter Page, longtime Republican operative Roger Stone and Flynn, two of the officials said. Manafort, in a statement to Bloomberg, said he “never had any connection to Putin or the Russian government -- either directly or indirectly -- before during or after the campaign.”

The FBI has two parallel ongoing investigations, one official said. A counterintelligence investigation is looking at Russian espionage activities and to what extent, if any, they involve communications with or collusion by U.S. officials. The second, a cybersecurity investigation, is probing the hacking of U.S. political groups and operatives.

For example, investigators are focusing on a phone call Flynn had in December with Sergey Kislyak, Russia’s ambassador to the U.S., which was intercepted by intelligence agencies and shared with the FBI, the two officials said. The FBI interviewed Flynn about that communication shortly after Trump was inaugurated.

Leading congressional Republicans have joined calls by Democrats for a deeper look at contacts between Trump’s team and Russian intelligence agents Wednesday, indicating a growing sense of political peril within the party as new reports surfaced of extensive contacts between the two.

Senate Intelligence Committee staff started collecting information in January on its broader probe of Russia’s alleged interference in last year’s election, according to Democrat Senator Joe Manchin of West Virginia, who sits on the panel. Manchin said Wednesday he expects the committee to begin calling in witnesses starting later this month. Among those he would like to see testify are Flynn, Manafort and former acting Attorney General Sally Yates, who was fired after she refused to defend Trump’s executive order on immigration.

David Fuller's view -

This beggars belief. 

Worryingly, Trump has made far more enemies than friends since winning the US presidential election. This will both isolate and distract President Trump, to the detriment of his office. 

The smart move by Trump would be to welcome the multiple investigations by US intelligence agencies and the FBI, while promising full cooperation. 

This item continues in the Subscriber’s Area and discusses Wall Street.



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February 15 2017

Commentary by David Fuller

Richest Investors in the World Still Cautious On Equities Amid Populist Surge

Here is the opening of this topical article from Bloomberg:

Rich investors are shunning equities because of concerns about the political impact from Donald Trump’s administration and Brexit, according to Christian Nolting, chief investment officer at Deutsche Bank AG’s wealth management unit.

“People are still cautious; there is still demand for bonds and people are not ready to move into the more risky equity space,” Nolting said in an interview in Dubai. The perception “is that there are a lot of risks out there and a lot of uncertainty.”

Markets have been reeling from unexpected events including Britain’s vote to leave the European Union and the election of Trump as U.S. president. Populist candidates in the Netherlands, France and Germany are stoking fears of a breakup of the European Union, adding to the political uncertainty. Deutsche Asset Management has cut European holdings in its multiasset funds to the lowest on record due to uncertainty about how elections in Europe will impact markets.

Currencies are now one of the most important asset classes as investors keep cash on the sidelines or in bonds, Nolting said. “We don’t expect a massive shift from bonds into equities as equities still represent a different risk profile,” he said. Some larger clients will buy stocks if they are hedged but shares are not cheap, according to the CIO.

David Fuller's view -

If this is true, although some of these comments in the article above are dated, it is good news for stock markets.  Significant money on the sidelines will both cushion downside risk and help to fuel the rally which follows.

When markets experience explosive upside breakouts, you can be sure that there are plenty of investors kicking themselves for being underweight and praying for a correction.  



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February 15 2017

Commentary by David Fuller

What if Britain had never joined the EU in the first place?

Here is the opening and also part of the conclusion of this intriguing column by Philip Johnson for The Telegraph:

It is March 25, 1957. The place: Rome. Gathered in the Palazzo dei Conservatori on the Capitoline Hill are ministers and officials from seven European nations, there to sign a treaty establishing the European Economic Community. As the meeting ends, the British prime minister Harold Macmillan, appointed just a few weeks earlier, shakes hands with West Germany’s chancellor Konrad Adenauer. A new partnership has been forged, a momentous event for two nations that just 12 years earlier had been at war.

Except, of course, it didn’t happen. The Treaty of Rome was indeed signed on March 25, 1957; but the UK was not represented at the conference that brought the EEC into being. What if we had been? Would the EU be celebrating its 60th anniversary next month as a united entity or would Britain have pulled out long ago? Or, perhaps, had we been on board from the start it would never have grown into the unwieldy, unaccountable structure that we see today but would have remained the loose-knit trading zone we always wanted. 

And:

It is arguable that our economy began to recover in the 1980s because of the reforms of the Thatcher government, breaking the power of the trade unions, freeing up the labour market and selling off state assets. As we prepare to leave the EU it is at least worth considering what life might have been like on the outside. For a start we would have saved billions of pounds in net contributions and been free to strike trade deals with the emerging economies of Latin American and south-east Asia. This might have been to our considerable advantage: in the years since we joined the accumulated trade deficit with EU member states is about £500 billion.

One thing that was supposed to come from membership, but didn’t, was the returns of national self-confidence dented by the end of empire. Being part of a supranational body, especially after the Maastricht treaty forged much closer economic and political ties, diminished our sense of independence. It was intended to, of course; but while other EU countries were content with that, the British never were. So had we stayed out we would probably have had a very good relationship with the EU – certainly better than the one we are likely to end up with when the bruising Brexit negotiations are concluded.

Counter-factual histories usually try to legitimise the way things are today by implying they could have been a lot worse had matters taken a different course. Yet where our membership of the EU is concerned, the alternative might have been preferable to the reality. There is one other oddity about this: whether in the alternative world or the real one, the Germans always end up on top. Funny that.

David Fuller's view -

Very few people read the weighty documents detailing European leaders’ long-term ambition to form a Federal Super State.  I certainly didn’t.  Instead, practically everyone was enthusiastic about the sensible concept of a European Common Market, not knowing that it was only a halfway house. 

However, two interesting but very different politicians – Enoch Powell and Anthony Wedgwood Benn, who alarmed more people that they reassured during long careers, did know about the largely German and French ambitions for Europe. 

(Read: Enoch Powell and Tony Benn were right on Europe – it was a great deception, by Christopher Booker for The Telegraph)   

Lastly, I am far more optimist about the relationship between the UK and ongoing or former EU countries once the process of Brexit is completed and Britain has regained its sovereignty.  UK and European minds will then be able to focus on the importance of good trade and diplomatic relations between neighbours.   

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



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February 15 2017

Commentary by David Fuller

Email of the day

On my medical setback (I’m restricting myself to just one):

Hi David, I am quite sure you have been inundated with get well messages from so many subscribers already. As I am of a similar age to yourself I would just like to add my own good wishes for a speedy recovery from your chest infection.

My interest in your site goes right back to the hard copy Chart Analysis days. Unfortunately, I have not met you in person at any of the events you host as I have now spent many retirement years in South Africa. We all I am sure appreciate your unique input and analysis especially to the attention you draw to relevant articles by some outstanding financial journalists. I have been very fortunate with my own health as of now but am aware of the time fuse getting shorter! (For your interest I found that Amoxicillin worked very well on many of my canine patients with bad chests!)

David Fuller's view -

Thank you so much. 

I have insufficient words to fully express my gratitude to subscribers for all the kind and thoughtful emails which I have received following a medical setback that I trust is only a temporary problem.

I posted this email because I have not met this gentleman, although we have exchanged emails over the decades.  That is also true of many other subscribers and I value our email connections, which are often informative.

I was also amused by the last sentence above which mentions Amoxicillin.  It reminded me that after a week or so of my chest infection I went to our local surgery and was prescribed Amoxicillin for a week.  It had no effect, unfortunately, so I may not be sufficiently dogged.

Continue to enjoy that fine South African weather and the wonderful fruit.



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February 15 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

February 14 2017

Commentary by David Fuller

China Steel Mills Hunt for High-Grade Iron Ore to Boost Output

Here is the opening of this topical article from Reuters:

Cashed-up Chinese steel mills are chasing top quality iron ore to help increase output and meet Beijing's tougher environmental standards, driving the premium for high-grade ore to its biggest in two years.

In the latest sign of renewed optimism among China's steel producers as capacity cuts boost steel prices, producers are turning away from cheaper ore with a lower iron content, contributing to growing stockpiles at domestic ports.

The preference will help boost top miners such as Brazil's Vale and Australia's Rio Tinto and BHP Billiton, whose premium quality ore has been taking market share from China's domestic producers.

Iron ore with a 61.5-percent ore grade was trading at a premium of 123 yuan ($18.42) a tonne to 58-percent grade at Chinese ports last week, a level last seen in mid-2014, according to data from industry website Mysteel. (tmsnrt.rs/2bwmHqj)

Chinese steel prices have risen following mill closures and output curbs flowing from an environmental crackdown and Beijing's efforts to tackle a supply gut, buoying mills' profitability. China has promised to slash steel capacity by 45 million tonnes this year.

"We've had pretty good sales over past few months, as steel mills are profitable again since June," said an iron ore trader in Beijing, who sells 65-percent iron ore.

"They like to buy higher grade ore as this can help increase steel output, leading to surging premiums."

A tonne of 61.5 percent ore is currently selling for 445 yuan a tonne at eastern Rizhao port versus 370 yuan for a 58 percent ore.[MYSTL-SIIO-RAYF][MYSTL-IO615-RAF]

Higher quality ores produce more steel for each tonne that is processed, helping to boost output, and can reduce emissions as less coke is used in the production process.

Some mills are also using larger volumes of more expensive lump ore to mix with fines to save on the sintering process, which creates a product that can be used in a blast furnace but is a major cause of pollution, traders said.

In July and August, Tangshan city ordered curbs and some suspensions at sintering and coke plants, which turn coal into a fuel for use in blast furnaces.

David Fuller's view -

This is one the better charts of Iron Ore (MBIO62DA Index) as it shows more back history. Quoted in USD, it shows the churning base formation between 2015 and three-quarters of 2016. Iron Ore exploded up out of that formation before consolidating near $80 for several months and then continuing its advance.  I would certainly give the upside the benefit of the doubt, provide Iron Ore remains above $80.

This item continues in the Subscriber’s Area.



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February 14 2017

Commentary by David Fuller

Yellen Sees More Rate Hikes Ahead If Economy Stays on Course

Here is the opening of this apt article from Bloomberg:

Federal Reserve Chair Janet Yellen said more interest-rate increases will be appropriate if the U.S. economy meets the central bank’s outlook of gradually rising inflation and tightening labor markets.

“At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” she told the Senate Banking Committee in prepared remarks Tuesday.

Yellen’s semiannual report on monetary policy is her first since Donald Trump became president vowing to boost U.S. growth, which could push the Federal Open Market Committee to pick up the pace of rate hikes if such steps fan higher inflation. She reiterated that falling behind on inflation could harm to the economy and possible cut short the expansion.

“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she added.

David Fuller's view -

Trump’s main effort is to strengthen the US economy.  Surely he knows how to do this.  He has also selected a very capable cabinet team of Wall Street experts to help him achieve this important objective. 

Yellen’s current concern is most likely the possibility of a trade war. This is understandable because Trump’s crude Art of the Deal tactics, supposedly to bully opposition into a weaker position, amount to playing with fire on the international stage.  These are obviously not one-off relationships; a president often has to negotiate with foreign leaders on numerous occasions. 

Trump needs to keep smart daughter Ivanka close to hand.  This kept him in line with Canada’s Justin Trudeau and should also help elsewhere. 

Meanwhile, the next quarter-point rate hike from the Fed could occur in March, although commentators only rate this as a 34% possibility.  That may be too low.

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February 14 2017

Commentary by David Fuller

Yellen Says Reducing the Regulatory Burden is a Legitimate and Important Goal and Bank Stocks Are Rising

Federal Reserve Chair Janet Yellen spoke to Congress on Tuesday in her first congressional testimony since President Donald Trump took office, and bank stocks are rising.

In the speech, Yellen stressed the importance of mitigating financial regulation, specifically the Dodd-Frank financial reforms created after the Great Recession. 

Yellen said that she would work with Treasury Secretary Steven Mnuchin to conduct a comprehensive review of post-crisis regulations and told the Senate Banking Committee it was important for regulators to constantly be looking for ways to reduce the burden on institutions.

She described the exercise in reducing the regulatory burden as a "legitimate and important goal" for the Fed and other regulators. 

Financials are soaring on the back of the news.

David Fuller's view -

 

This is very positive and largely unexpected news from the Fed Chairman.  Bank shares soared again, as one would expect.

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February 14 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 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. 

The new brochure will be available shortly.  



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February 14 2017

Commentary by Eoin Treacy

Email of the day on protectionism representing a headwind for global companies

I would like to know your opinion on this article about Autonomies the recently appeared in The Economist

Eoin Treacy's view -

This is the second article I’ve seen the Economist run focusing on the threat to big global companies represented by protectionism so they certainly have an axe to grind. It’s funny because I was just off a long overnight flight the last time I wrote about this topic so let me try to do a better job this time after a 16-hour flight to Dubai.



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February 14 2017

Commentary by Eoin Treacy

Bottom is in for Uranium; Gold & Silver Off to the Races in 2017

Thanks to a subscriber for this report from Cantor Fitzgerald which may be of interest. Here is a section on uranium

Kazatomprom that it plans to cut its annual uranium production by 10%, or by 5.2M lbs U3O8. This amount translates into roughly 3% of 2015 global production and marks an inflection point in the space. Since at least 2001, Kazatomprom has relentlessly increased production into an oversupplied market and is arguably the single biggest cause for the weakness in the commodity aside from the Fukushima disaster. In fact, we had long since given up on expecting Kazatomprom to exercise production restraint as its mines were the lowest cost operators in the world and constant production increases appeared to be a cultural focus in Kazakhstan.

While some skepticism exists on whether Kazatomprom will actually follow through with this cut (as opposed to OPEC style “cuts”), we suspect that at least some of the production reduction will occur among joint venture operations managed by western producers such as Cameco. Moreover, we believe the impact will be more than the announced cut amount because the market was likely factoring in a typical Kazatomprom increase as opposed to a cut. So instead of a 3-5% increase we are expecting a reduction of 10%, or a 13-15 percentage point swing.

Cameco’s announcement of Tokyo Electric Power Holdings’ (“TEPCO”) termination of its supply contract has cast some concern over what will happen with the U3O8 pounds that were earmarked for the Japanese utility. In total, the contract was for 9.3M lbs U3O8 to be delivered from 2017-2028, this works out to 775,000 lbs annually. TEPCO was selling some if not all of the material it was contractually obligated to purchase already. As such, we believe the worst case scenario arising from the cancellation is that Cameco does the exact same thing and sells the material into the spot market. However, we think there is room for potential positivity from this announcement, as Cameco could instead elect to not produce the pounds at all (and further cut costs by doing so) or it could elect to store them in inventory to await higher prices. Either of those two actions would effectively be removing some of the excess supply in the market. 

Eoin Treacy's view -

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

azakhstan stamped its dominance on uranium market by engineering a multi-year decline and succeeded in driving a significant number of small explorers out of business.  Last week’s news Tokyo Electric cancelled a major Cameco contract highlights just how successful their policy of flooding the market with supply has been. Having achieve their goal, the decision to limit supply is an important catalyst for the uranium market. 



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February 13 2017

Commentary by David Fuller

February 13 2017

Commentary by David Fuller

Trump Gives Trudeau Assurance on Canada Trade Relationship

Here is the opening of this article on a productive meeting

President Donald Trump assured Prime Minister Justin Trudeau that Canada isn’t the main target of his plans to reset U.S. trade relationships, as both leaders said they are committed to maintaining commercial ties and economic integration that support millions of jobs on both sides of the border.

At a joint news conference with Trudeau at the White House, Trump emphasized that, in dealing with the U.S.’s two North American Free Trade Agreement partners, he’s more bothered about trade imbalances with Mexico than with Canada.

“We have a very outstanding trade relationship with Canada,” Trump said, adding that they will be “tweaking it” in order to make it better for both countries. “It’s a much less severe situation than what’s taken place on the southern border.”

Trump’s comments mark a victory for Trudeau, whose government has sought for weeks to distance itself from Mexico on trade matters in a bid to protect a relationship with the U.S. that is worth $541 billion a year. The conciliatory remarks are also in line with investor expectations, which have shown little concern about a major trade upset between Canada and the U.S.

David Fuller's view -

Given all the uncertainty and bluster coming from the White House, this was obviously a successful meeting between Trump and Trudeau.  Thank heavens. 

This item continues in the Subscriber’s Area where another article is posted.



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February 13 2017

Commentary by David Fuller

The Demise of Deadly Diesel

Here is the opening of this sobering article from Bloomberg:

Diesels make up about half of Europe's car sales. In 10 years time, I'd wager the percentage will be far closer to zero and that diesel's demise is going to cost the autos industry billions.

In Britain, the government is toying with the idea of a diesel scrappage plan to tackle the nitrogen oxide (NOx) emissions that kill about 75,000 Europeans prematurely each year.

EUROPEAN NOX-RELATED DEATHS EACH YEAR

75,000

It’s the latest in a succession of European measures which could see diesel cars barred from cities, their fuel incentives removed and parking made more expensive. Last month London issued a “black" alert because of high air pollution, prompting one school to restrict the time kids were able to play outside. Diesel is becoming stigmatized: sales have started to decline in the U.K. and Germany, albeit slowly.  

Diesel Downer

Diesel sales in Germany have fallen as a percentage of total vehicles sold

Last month, Fiat Chrysler Automobiles NV became the latest automaker to be accused by the U.S. of violating pollution laws over its diesel emissions. Meanwhile, France has referred Peugeot and Renault to prosecutors. Elzbieta Bienkowska, the EU industry commissioner overseeing the VW scandal told the Financial Times that her patience was wearing thin with national regulators over their lack of haste in examining carmakers other than VW.

VW's rivals all deny wrongdoing, and it's possible none has broken the law. "Existing models comply with the EU law against which they were approved," the European Automobile Manufacturers' Association (ACEA) says of the large discrepancies between laboratory and real-world emissions.  

But given the deaths from disease linked to air pollution, it seems a little arcane to be arguing about whether technology that -- for example -- switches off NOx emission controls at low temperature fits the legal definition of a "defeat device". At the very least, carmakers have done a poor job of explaining that diesel cars are much dirtier than the public had reason to expect.

David Fuller's view -

The emissions discrepancies of automobile companies were outrageous, and a number of them have been fined.  Many others will suffer financially because they are holding billions of euros in diesel vehicles for which the market is rapidly vanishing.  However, the bigger scandal was the push by European governments and their advisors to favour diesel vehicles.  They did this in spite of evidence from the USA that NOx pollution from diesel was lethal. 



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February 13 2017

Commentary by David Fuller

Trump: A Two-Year Presidency

My thanks to a subscriber for this topical article by Kathleen Parker for The Washington Post. Here is the opening:

Good news: In two years, we’ll have a new president. Bad news: If we make it that long.

My “good” prediction is based on the Law of the Pendulum. Enough Americans, including most independent voters, will be so ready to shed Donald Trump and his little shop of horrors that the 2018 midterm elections are all but certain to be a landslide — no, make that a mudslide — sweep of the House and Senate. If Republicans took both houses in a groundswell of the people’s rejection of Obamacare, Democrats will take them back in a tsunami of protest.

Once ensconced, it would take a Democratic majority approximately 30 seconds to begin impeachment proceedings selecting from an accumulating pile of lies, overreach and just plain sloppiness. That is, assuming Trump hasn’t already been shown the exit.

David Fuller's view -

This has to be a real possibility. In the eyes of most democrats, Trump is the mad king: volatile, vainglorious and untrustworthy.  More than a handful of republicans agree, although most of them remain quieter.

The irony is that Trump has appointed the best business team that I have ever seen. Don’t take my word for it – look at Wall Street which has risen strongly since 8th November.  This is logical because the money men correctly anticipate lower corporate profits, less regulation, fiscal spending and stronger economic growth. This is Trump’s rally.  Moreover, it has encouraged similar policies in a number of other countries where stock markets and GDP forecasts are also rising.  However, if Trump harangues Cabinet colleagues in the manner of his former game show, The Apprentice, he will continue to lose crucial support.  Moreover, sharp-edged Art of the Deal tactics with international leaders will lead to further isolation.

Trump has a window of opportunity in which to save himself by becoming a president who is both widely respected and popular.  However, that would be a pleasant surprise because it does not appear to be in his nature. 



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February 13 2017

Commentary by David Fuller

Does This Government Have Guts Enough to Solve the Housing Crisis?

Last week’s housing White Paper showed that the Government is well aware that the ludicrously high price of British property is a manifestation of terrible failure. Moreover, the document explicitly recognises that Britain’s housing crisis is not only about the unaffordability of houses to own but also about the appallingly high level of rents.

It clearly states that fundamentally, both prices and rents are high because, given our rising population, we have not built enough homes.  This is a welcome departure from so many previous Government initiatives, some of which are unfortunately still with us, that have focused on helping this or that “deserving” group to get on the “housing ladder”.

If all you do is to boost the demand for housing then the only result can be higher prices, without anyone, on average, enjoying any improvement in their accommodation. 

Having said that, there are several unimpressive aspects to this document. It used to be said that getting radical reform of the educational system faced enormous opposition from “the Blob”, that is to say the entrenched interests of teachers and civil servants. The housing market also has its Blob, and there is more than its fair share of sloppy thinking dotted around this document, including the ritual snipes at landlords and developers and references to “unfair” rents, whatever that means. 

David Fuller's view -

The biggest housing crisis is in greater London.  One solution is to build more quality housing blocks with attractive middle-income flats, as we have been seeing in the expanding City and also in previously derelict sites as we also saw with the Olympic Village.  

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



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February 13 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 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. 

The new brochure will be available shortly.  



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February 13 2017

Commentary by Eoin Treacy

February 13 2017

Commentary by Eoin Treacy

Email of the day on accelerating trends in the currency markets

Just finished to watch the video

Interesting take on India and the Rupee

Last week I entered a short Non Deliverable Forward NFD on USDINR for myself for the same reasons you mentioned in the video . Now I feel mentally confirmed …confirmation bias through an expert opinion J

I did the same in December with MXN . I will start to place stops here - in case we have some kind of “Trump induced” relapse

On TRY I still don’t dare..(though the Turkish  ISE index equity market is the best market YTD if you have noticed , even in USD and EUR terms) . but TRY has just started to barely move below the 4 level on the €

Thank you for the lots of insight in the commentaries . The next challenge will really be the bond market 

 

Eoin Treacy's view -

Thank you for sharing your views and congratulations on seizing opportunities in what have all been counter trend moves against accelerating moves. 

At The Chart Seminar we describe acceleration as a trending ending. In an uptrend the trading activity which creates the acceleration expends the available demand very quickly so that the point when there are no more buyers available is quickly reached. At that point all that are left are overextended leveraged holders sensitive to even small moves against their positions. When the reversal comes it can be violent as stops are hit. The pullback is often contrary to the received wisdom propagated by the media which is exactly what we have seen recently in the currency markets. . 



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February 13 2017

Commentary by Eoin Treacy

Silicon will blow lithium batteries out of water, says Adelaide firm

Thanks for a subscriber for this article by Benn Potter for the Australian Financial Review. Here is a section:

Chairman Kevin Moriarty says 1414 Degrees' process can store 500 kilowatt hours of energy in a 70-centimetre cube of molten silicon – about 36 times as much energy as Tesla's 14KWh Powerwall 2 lithium ion home storage battery in about the same space.

Put another way, he says the company can build a 10MWh storage device for about $700,000. The 714 Tesla Powerwall 2s that would be needed to store the same amount of energy would cost $7 million before volume discounts.

 

Eoin Treacy's view -

A race is underway to develop new types of batteries and, for the foreseeable future, there is room for a number of competing technologies. The reason for this is the pace of innovation is slower than in other sectors but also because energy storage is required for widely differing sectors. Batteries need to be small and light for handheld devices, big and have almost infinite recharging capabilities for utilities and need highly efficient power to weight ratios for transportation. That suggests there is ample potential for a number of different technologies to play roles in all of these sectors. 
 

 



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February 13 2017

Commentary by Eoin Treacy

Africa's Cities: Opening Doors to the World

This heavyweight 166-page report from the World Bank may be of interest to subscribers. Here is a section:

How can Africa’s leaders and policymakers spring cities from this trap? Crucially, they must first realize that the problem does not begin with low capital investment and the lack of physical structures, or even with undersized infrastructure. To be sure, low investment in structures limits urban economic density; it exacerbates spatial fragmentation, and it precludes agglomeration economies. But the lack of investment results from low investor expectations, which result when cities are spatially dispersed and disconnected.

When potential investors and trading partners look at African cities, they see spatial fragmentation and a lack of connections. They know that such fragmentation constrains public service provision, inhibits labor market pooling and matching, and prevents firms from reaping scale and agglomeration benefits. So the key to freeing Africa’s cities from their low development trap is to set them on a path toward physical and economic density, connecting them for higher efficiency and boosting expectations for the future. The first priority is to reform land markets and land use planning — to promote the most efficient uses of urban land, and to develop land at scale.
Informal land markets are not good enough for African cities. Urban land is a vital economic asset, and asset transactions are viable only where purchasers can rely on enduring extra-legal documentation of ownership. A formal market both offers purchasers the protection of the state and — because transactions are readily, observable and recorded — generates the public good of accurate valuation.

Clear rights to urban land are a precondition for formal land markets. African cities struggle with overlapping and sometimes contradictory property rights systems — formal, customary, and informal (box 3). When these systems pose barriers to urban land access, they impede the consolidation of plots and the evolution of land use. Firms cannot readily buy downtown land to convert it from low-density residential use into higher-density apartments, or to build clusters of new commercial structures. Land transactions are long, costly, and complicated (World Bank 2015c). Such market constraints reduce the collateral value of structures, giving developers little incentive to invest in residential height — while tempting all parties to enter informal arrangements (Collier 2016).

 

Eoin Treacy's view -

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

Africa is going to account for a billion new consumers within the next couple of decades so improving standards of governance are going to be essential if that demographic dividend is not going to be squandered. 
 



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February 10 2017

Commentary by Eoin Treacy

February 10 2017

Commentary by Eoin Treacy

A must read: ballast water convention

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

The convention will reinforce multi-year shipping upcycle
The Ballast Water Management Convention, which is scheduled to come into force in September 2017, requires all ships sailing in international waters to install a Ballast Water Management System (BWMS). In light of the high cost and uncertainties associated with BWMS, we expect shipowners to scrap most of their vessels of above 15 years in the coming 2-3 years. We estimate global dry bulk fleets will shrink 1.5% in 2018 and 3.9% in 2019 while VLCC utilization will pick up starting 2018. Buy Pacific Basin and CSD.

An introduction of this convention 
Initiated by the IMO in 2004, the Ballast Water Management Convention was designed to prevent transfers of invasive aquatic species via ships’ ballast water. After the accession of Finland, the convention was ratified in Sept. 2016, and will enter into force in Sept. 2017. Thereafter, new vessels will have to install the BWMS on delivery date. For existing vessels, they are required to carry out retro-fit until their next International Oil Pollution Protection (IOPP) renewal survey (conduct every five years). While some vessels could get a grace period of up to five years (assuming the IOPP is renewed just before September this year), there are high levels of uncertainty over this exemption as the IMO is scheduled to further debate this exemption in July.

Potential impacts on shipping market
The BWMS is expensive (USD2.5m for a VLCC and USD1.5m for a Capesize). This extra cost, along with higher maintenance expense, would substantially lift the breakeven level for 15+ years old vessels. Alongside the freight rate discount (to new ships) and rising demolition prices, our analysis shows that scrapping is the best option for shipowners. Currently, 14% of dry bulkers and 19% of VLCCs are above 15 years old and we expect this proportion of capacity to largely exit in the coming 2-3 years. Coupled with falling newbuild deliveries, we expect dry bulk supply growth to drop to 0.9% in 2017, and decline 1.5% in 2018 and 3.9% in 2019 (vs. 2.3% in 2016). Similarly, we expect VLCC utilization rates to pick up to 85.1% in 2018, in part due to the 2015-16 peak cycle.

 

Eoin Treacy's view -

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

The Baltic Dry Index has been ranging in a volatile manner for eight years because a lot of the new ships ordered in the commodity bull market were delivered at just the time that global economic activity collapsed. The result has been a surplus of ships, where the lives of old vessels were prolonged because it was more economic to keep them in service than to scrap or sell them. The introduction of the Ballast Water Management Convention has the potential to represent a significant bullish catalyst for the sector. 



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February 10 2017

Commentary by Eoin Treacy

Reckitt Has a $16.6 Billion Way of Fending Off Boredom

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

Infant nutrition is a new area for Reckitt. The company’s traditional strengths were once in household products. Think stuff you put on the floor rather than stuff you pop in the mouth. Through a series of takeovers, consumer healthcare has become an important part of Reckitt’s business -- its brands include Strepsils and Nurofen. Baby formula is another new departure and will put Reckitt in head-on competition with formidable rivals like Nestle SA and Danone SA.

Believing this is a good move means believing the growth rate for infant nutrition will be much faster than Reckitt’s existing markets. Perhaps it will. While growth has stuttered in recent years, it is poised to rebound, according to estimates from Euromonitor International, a research firm.

The lack of overlap with Reckitt's businesses means cost savings are relatively low given the size of the deal – just 200 million pounds ($250 million) annually after three years. As a result, it will take as long as five years for the returns to cover the threshold 7 percent to 8 percent cost of capital.
That’s a long time to wait.

Some investors have been concerned about the amount of debt being taken on to fund this all-cash transaction: net debt will initially be about four times the companies' combined Ebitda in 2017. That concern is valid, but it shouldn't be overdone: credit ratings companies have barely blinked and leverage should fall quickly from that level.

Reckitt has done deals well in the past and probably needs one to regain momentum. Fourth-quarter sales were disappointing, with like-for-like sales growing a measly 1 percent. Guidance for growth this year is lower than analysts hoped.

 

Eoin Treacy's view -

This is not the first time one Autonomy has consumed another and is a further example of how capitalism trends towards concentration. In the other words the large consume the weak. 



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February 10 2017

Commentary by Eoin Treacy

Copper Jumps Most Since 2013 as Strike Combines With China Boost

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

“We continue to see concerns about the deficit in the copper market,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, said in a telephone interview. “We could have a significant deficit if this strike continues for a while.”

Copper for delivery in three months climbed 4.6 percent to settle at $6,090 a metric ton at 5:50 p.m. on the London Metal Exchange. That’s the biggest gain since May 2013. Aluminum, lead, nickel, tin and zinc also advanced on the LME.

An index of 18 base-metal producers climbed as much as 3.4 percent, with shares of Freeport-McMoRan Inc. and Rio Tinto Plc among the biggest increases.

 

Eoin Treacy's view -

Strike action at the world’s largest copper mine is the catalyst which has spurred interest in copper prices over the last couple of days. However the bigger picture is that global economic growth is picking up following a lengthy period of disappointment and commodity producers are cautious about investing in new supply following the trauma of a significant bear market. 



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February 10 2017

Commentary by Eoin Treacy

Backing into World War III

This article by Robert Kagan for the Brookings Institute is well worth taking the time to ponder. Here is a section:

Coming as it does at a time of growing great-power competition, this narrowing definition of American interests will likely hasten a return to the instability and clashes of previous eras. The weakness at the core of the democratic world and the shedding by the United States of global responsibilities have already encouraged a more aggressive revisionism by the dissatisfied powers. That, in turn, has further sapped the democratic world’s confidence and willingness to resist. History suggests that this is a downward spiral from which it will be difficult to recover, absent a rather dramatic shift of course by the United States.

That shift may come too late. It was in the 1920s, not the 1930s, that the democratic powers made the most important and ultimately fatal decisions. Americans’ disillusionment after World War I led them to reject playing a strategic role in preserving the peace in Europe and Asia, even though America was the only nation powerful enough to play that role. The withdrawal of the United States helped undermine the will of Britain and France and encouraged Germany in Europe and Japan in Asia to take increasingly aggressive actions to achieve regional dominance. Most Americans were convinced that nothing that happened in Europe or Asia could affect their security. It took World War II to convince them that was a mistake. The “return to normalcy” of the 1920 election seemed safe and innocent at the time, but the essentially selfish policies pursued by the world’s strongest power in the following decade helped set the stage for the calamities of the 1930s. By the time the crises began to erupt, it was already too late to avoid paying the high price of global conflict.

In such times, it has always been tempting to believe that geopolitical competition can be solved through efforts at cooperation and accommodation. The idea, recently proposed by Niall Ferguson, that the world can be ruled jointly by the United States, Russia, and China is not a new one. Such condominiums have been proposed and attempted in every era when the dominant power or powers in the international system sought to fend off challenges from the dissatisfied revisionist powers. It has rarely worked. Revisionist great powers are not easy to satisfy short of complete capitulation. Their sphere of influence is never quite large enough to satisfy their pride or their expanding need for security. In fact, their very expansion creates insecurity, by frightening neighbors and leading them to band together against the rising power. The satiated power that Otto von Bismarck spoke of is rare. The German leaders who succeeded him were not satisfied even with being the strongest power in Europe. In their efforts to grow still stronger, they produced coalitions against them, making their fear of “encirclement” a self-fulfilling prophecy.

 

Eoin Treacy's view -

US isolationism in one form under Obama and taking another form under Trump represents a change to the global geopolitical balance. It leaves an opening for increasing “assertiveness” from Russia, China and their proxies. That represents a medium-term risk premium for markets but is unlikely to represent a problem in the short term. 



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February 09 2017

Commentary by Eoin Treacy

February 09 2017

Commentary by Eoin Treacy

Musings from the Oil Patch February 7th 2017

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

Prior to OPEC’s Vienna Agreement last November, putting oil in storage because of its higher future value was a strong motivation for growing storage volumes. Now the curve is much flatter, and for oil priced three years in the future, that price is lower than the current one, providing a strong disincentive for putting oil in storage. Backwardation plays a significant role in oil producers’ decisions to hedge their production since they risk the potential of the price moving higher if the more traditional contango environment returns. As Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC put it, "What happens to the curve does depend on how the OPEC cuts will be carried out. The oil futures curve is indicating that the current OPEC cuts are here to stay for a while." U.S. oil producers will be very happy if that proves to be the case. While history would suggest otherwise, the pending (early 2018) initial public offering for Saudi Arabia’s state oil company, Saudi Aramco, an important component of its domestic economic restructuring effort, might force the country to hold its output down much longer than it has indicated. The reality may be that hundreds of small U.S. oil producers may screw up Saudi Arabia’s grand plan while hurting speculating oil traders with their record bullish oil price bet. A lower future oil price after a record bullish oil futures bet would be consistent with our recent history.

Eoin Treacy's view -

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

BP and Exxon Mobil spend a great deal of time and effort producing annual reports on energy use and issue predictions on how it will evolve over the time. That helps keep investors informed on how the companies plan to mobilise capital to take best advantage of how they see events unfolding. Saudi Arabia, as the world’s largest low cost producer, does not issue public annual reports. However its plans to IPO the company tell us more than any report ever could about the conclusions the Saudi Arabian administration has reached about the future of the oil market.



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February 09 2017

Commentary by Eoin Treacy

Markets on the cusp ...?

Thanks to a subscriber for this report by James W. Paulsen for Wells Fargo may be of interest to subscribers. Here is a section

Trends matter, for among other reasons, because they impact the impressions, expectations and actions of policy officials, investors, consumers and businesses. For this reason, we think investors should be aware of just how many financial market trends are on the cusp this year threatening to breach significant milestones.

Undoubtedly, not all of the trends we highlighted will actually break new ground this year and perhaps none will reach levels that draw much investor focus. However, in 2017, the following list of financial market trends are worth monitoring because they are “on the cusp”…

1. Evidence of inflation is broadening and inflation expectations embedded in the 10-year Treasury TIP bond is only about 0.5% below the highest level in at least 20 years.

2. Three major themes are on the cusp in the U.S. stock market. First, is the recent breach of a two-year old trading range in the S&P 500 Index to a new recovery high possibly suggesting a third leg in this bull market? Second, the relative total return performance of conservative investments is nearing its lowest level of the entire recovery. And finally, the relative performance of small cap stocks is within 10% of rising to a new all-time record high relative to large cap stocks.

3. Bond investors face several important trends on the cusp including the potential end of a 30-year bond bull, a flatter Treasury yield curve and investment grade yield spreads about to reach new narrows for the recovery.

4. The U.S. dollar is in a two-year old trading range which, with a break, will settle whether this is just a pause in an ongoing dollar bull market or the start of a fresh dollar bear market.

5. In the commodity markets, crude oil is on the cusp of breaking out of a two-year old trading range above $60 and industrial commodity prices are within 10% of rising to a new six-year high.

So far, this year has been dominated by political news and what it means for future economic and regulatory policies. Perhaps, however, in a year with so much on the cusp, investor mindsets will eventually become more impacted by financial market trends breaking outside old recovery trading ranges? 

 

Eoin Treacy's view -

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

I find the choice of words “on the cusp” to be very interesting because it represents a point of view which is outside. It suggests an investor is out of the market and potentially on the cusp of investing again. 

Perhaps that’s not overly surprising. The main stock market indices spent almost two years ranging and endured some scary pullbacks during that time. Bonds have sold off aggressively in the last few months which would have prompted at least some investors to raise cash. Commodities prices are rallying of off very depressed levels but with since they are already a year into an advance there are logical questions being asked by those on the side lines centring on whether they are already too late.

 



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February 09 2017

Commentary by Eoin Treacy

Machines Can Replace Millions of Bureaucrats

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

In some countries, some of the people in these jobs -- such as postal employees -- are public sector workers. But government clerks who do predictable, rule-based, often mechanical work also are in danger of displacement by machines. In a recent collaboration with Deloitte U.K., Profs. Osborne and Frey estimated that about a quarter of public sector workers are employed in administrative and operative roles which have a high probability of automation. In the U.K., they estimated some 861,000 such jobs could be eliminated by 2030, creating 17 billion pounds ($21.4 billion) in savings for the taxpayer.

These would include people like underground train operators -- but mainly local government paper pushers.

This week, Reform, the London-based think tank dedicated to improving public service efficiency, published a paper on automating the public sector. It applied methodology developed by Osborne and Frey to the U.K.'s central government departments and calculated that almost 132,000 workers could be replaced by machines in the next 10 to 15 years, using currently known automation methods. Only 20 percent of government employees do strategic, cognitive work that requires human thinking -- at least for now, while artificial intelligence is as imperfect as it is. Most of the rest are what the Reform report calls the "frozen middle" -- levels of hierarchy where bureaucrats won't budge without approval from above.

Almost all British government departments have 10 employee grades or more. The department for environment, food and rural affairs has 13. Most of the middle-level tasks are routine and rigidly regulated and motivation is low: Only 38 percent of middle-level bureaucrats say they feel good about what they do.

In the U.K., the average civil servant takes 8 sick days a year, while a private sector worker takes 5. In the last two decades public sector spending rose by an average 3.1 percent a year, about 16 times faster than productivity.

 

Eoin Treacy's view -

The majority of commentary is focusing on the how, what and when of Brexit but there also needs to be some thought for how the UK is going to enhance its competitive position in a post EU world. Tax structures, trade deals and deregulation all need to be high on the agenda but so does limiting needless spending in government. 



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February 08 2017

Commentary by Eoin Treacy

February 08 2017

Commentary by Eoin Treacy

The Dow/Gold Ratio

Eoin Treacy's view -

The Dow/Gold Ratio is one of the most storied ratios in finance not least because it is made up of two of the instruments with the longest back histories. We can spend a great deal of time thinking and writing about secular bull and bear markets but the Dow/Gold ratio gives us evidence of how major bull markets transition into decade long periods of underperformance of stocks versus gold before transitioning again into decades long bull markets of relative outperformance by stocks.
 
There are three major peaks and two confirmed major lows on the above chart. 

 



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February 08 2017

Commentary by Eoin Treacy

On Target Japan

Thank to Martin Spring for this edition of his ever interesting newsletter. Here is a section on Japan: 

Dividends are “being raised relentlessly,” says Price Value Partners? Tim Price. Incredibly, some international analysts say Japan is now an equity income play, after decades when its companies were notorious for neglecting their shareholders.

Whereas “the balance sheets of US companies are groaning with years of accumulated debt, Japanese balance sheets are now the strongest in the world,”

Tim says. Stock buybacks are now accelerating, and unlike the US, where buybacks are “debt-fuelled,” those in Japan are funded out of cash. John Seagrim of CLSA says: “The deep value opportunities in Japan are almost endless,” with 1.480 listed companies trading below their tangible book values.

For the first time in years, the Japanese stock market now has strong domestic support. Jeffrey Gundlach says the government is encouraging it via three sources of “pretty much automatic buying” at an annual rate in excess of 5 per cent of total market capitalization. The central bank is buying ¥6 trillion (about $53 billion) worth of equities every year, corporate Japan is investing about the same amount, the state pension fund ¥5 trillion, private investors about ¥4 trillion.

 

Eoin Treacy's view -

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

Japan posted its largest current account surplus in a decade in the 2016 suggesting the country is benefitting low oil prices, the weakness of the Yen, improving global GDP growth and tourists from neighbouring countries flocking to its shores.



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