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April 07 2020

Commentary by Eoin Treacy

Nobody ever pressed "Stop" before

Thanks to Iain Little and Bruce Albrecht for this insightful report which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

Let’s set aside for the moment questions of timing and think about what changes we can expect to be durable from the virus-induced recession.

The first thing that springs to mind is a loss of income which will take a while to recover. For some that will be quite soon, for others who need to find a new job it will take longer. As we go from full employment in many countries to something less that necessarily represents lower growth overall and by extension lower corporate earnings.



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April 07 2020

Commentary by Eoin Treacy

Cyclical Bear Ending; Secular Bull to Resume; Investor Feedback & FAQs

Thanks to a subscriber for this report by Mike Wilson at Morgan Stanley. Here is a section:

Eoin Treacy's view -

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

The idea of Modern Monetary Theory scandalised investors a year ago but very much the reality today as central banks fall over themselves to accommodate the efforts of governments to spend their way out of the trouble. My contention since early this year was the coronavirus will be temporary but the monetary and fiscal effects will be very long lasting.



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April 07 2020

Commentary by Eoin Treacy

Welcome to the $1.5 Trillion Minefield of Defaulted Chinese Debt

One of the biggest challenges of buying Chinese corporate debt is working out the borrower’s ties to the government, says Soo Cheon Lee, chief investment officer at SC Lowy, a credit-focused banking and investment firm. “China is not about the financials, it’s about relationships,” Lee says. “That’s driving a lot of the liquidity available to a company. You really need to understand the local landscape, and it’s difficult for foreign players to understand who has that connection or support from the state.”

Sometimes a Chinese company will appear to be in dire straits, only to come up with the cash for a debt payment at the last minute, Lee says. “For most of the companies in Asia, we know two weeks before whether they have financing or if they are going to restructure,” he says. “I think it’s very unique for China to not be able to predict a default.”

Some firms are not what they appear to be, Lee says. “If you are truly a state-owned enterprise,” he says, “you will continue to get support from the government or state-owned banks. But when we look at companies that claim to be SOEs but aren’t really SOEs, we see they’re having some difficulties.”

Eoin Treacy's view -

I think a handy rule of thumb for anyone thinking of dipping a toe in China’s distressed debt markets is “state support is a precondition, not a nice to have”. $1.5 trillion in defaulted debt is a juicy target provided covenants can be enforced. The extent to which that is possible in an autocracy is to ascertain how much the ruling families might be inconvenienced by a default.



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April 06 2020

Commentary by Eoin Treacy

Video commentary for April 6th 2020

Eoin Treacy's view -

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

Some of the topics discussed include: FAANGs outperform by a wide margin while other markets unwind deep oversold conditions, mortgage servicers under extreme pressure increases chance of additional stimulus, Dollar steady but gold outperforming. bond ease.



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April 06 2020

Commentary by Eoin Treacy

Felix Zulauf: "We have created the biggest excesses in generations"

Thanks to a subscriber for this interview of Felix Zulauf which appeared in market.ch. Here is a section:

Over the past decade, a huge mountain of Dollar denominated debt has been built up outside the U.S., especially in emerging markets, and particularly in China. According to the BIS, these loans increased from $5.8 trillion to more than $12 trillion between 2009 and 2019. When the crisis hits, short-term loans are often not extended because lenders turn risk-averse. Then debtors have to scramble to buy Dollars in the market. As the Dollar rises, the debt in the debtor's home currency increases, which in turn increases the pressure on them even more. Weak economies such as Turkey, Brazil and South Africa are caught in a vicious cycle. That's why I've been warning for some time about investing in emerging markets, including China. They just have a huge Dollar debt problem.

Do you expect a «Lehman Moment» in this crisis, the collapse of a major market player?

In every crisis there are companies that perish. It won't be any different this time. Given the excessive indebtedness in the corporate sector, one would have to expect some spectacular bankruptcies. But given the speed with which central banks have acted - much faster than in 2008 -, this will no longer threaten the financial system per se.
 

Eoin Treacy's view -

Swap lines have been extended to considerably more countries than during the global financial crisis. In 2007, the focus of attention was the developed market banking sector so swap lines were limited to G-7 central banks. At the end of March that list was expanded to Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand. The notable exceptions have been to countries like Turkey, South Africa and China.



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April 06 2020

Commentary by Eoin Treacy

Coronavirus mortgage bailout: 'There is going to be complete chaos,' says industry CEO

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

“This is a crisis so easily correctable,” he said. “The GSEs [Fannie Mae and Freddie Mac] for years have always assured the servicing community that in the event of a major credit event, they’ll be there to make sure they provide the liquidity. From what we are hearing, and we can’t verify it, the FHFA director instructed the GSEs not to set up a liquidity or advance facility.”

When asked for a response to the industry plea, Calabria on Monday declined to comment.

Both Stevens and Bray said that because of this new and momentous risk in the mortgage market, it is suddenly much harder for borrowers to get new loans or refinance current mortgages. Wells Fargo is already placing restrictions on jumbo lending to its customers.

“It’s just going to create more fear within the nonbank servicing sector. The banks that service them are going to start to not lend,” said Bray. “Ultimately that impacts homeowners. They won’t be able to be served because these companies will be in the middle of a crisis. We’ve seen a lot of businesses close their doors, and if you start closing the doors of servicers, you’re impacting people’s lives much more than other sectors. You’re talking about their homes. It’s the largest asset they have.”

Eoin Treacy's view -

The buck has to stop somewhere. If homeowners are given a free pass on skipping mortgage payments that simply pushes the onus for making payments up the line to servicers who need to pay mortgage bond coupons. When major tenants like H&M or Primark refuse to pay rents, it puts a great deal of pressure on landlords who still have mortgage payments to meet. I have not seen any commentary yet on how much forbearance will be made available to commercial property REITs.



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April 06 2020

Commentary by Eoin Treacy

Facebook Strikes Deal for AR Displays, Squeezing Out Apple

This article by Alex Heath and Amir Efrati for The Information may be of interest to subscribers. Here is a section:

Facebook’s deal with Plessey illustrates how tech giants are racing to secure the building blocks needed for AR headwear—technology experts believe could be as transformational as the introduction of PCs and smartphones. Facebook CEO Mark Zuckerberg recently predicted that “we will get breakthrough AR glasses that will redefine our relationship with technology” in the 2020s. 

To create such a device, Facebook has teams building its own operating system, apps, silicon chips, and tech capable of deciphering human thoughts. It also continues to invest in VR headset maker Oculus, which it acquired for roughly $2 billion in 2014.  

In a statement, Facebook said it wants to build “a glasses form factor that lets devices melt away so we can be more present with our friends, families, and surroundings.” 

“This will take years, so across AR/VR we’re continuing to invest in extensive research on this deep tech stack and components such as small-scale displays,” the company said.

The AR devices that have been released so far from the likes of Magic Leap and Microsoft are clunky, expensive headsets with extremely limited graphics capabilities that haven’t sold well. 

Eoin Treacy's view -

Mark Zuckerberg was an early advocate of virtual reality as the next big social medium. Having tried out the Oculus Quest over the last few weeks I think he is onto something.



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April 03 2020

Commentary by Eoin Treacy

April 03 2020

Commentary by Eoin Treacy

Small Business Aid Flowing at Different Speeds Across Globe

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

Governments raced to craft stimulus programs to shield businesses from the economic fallout of the coronavirus, but now they face the challenge of getting the funds flowing.

A review of efforts in the Group of Seven nations suggests Germany and France are proving the most successful, in part because they can take advantage of existing bureaucracy. Others need to win the approval of lawmakers, while logistical obstacles are also emerging that slow the money.

The obvious risk is that the longer programs take to get up and running, the greater the chance firms fail and the economic recovery is delayed.

Eoin Treacy's view -

Small businesses are among the biggest employers on aggregate but also represent among the biggest customers for large companies. However, because the sector is necessarily disparate in nature there is a clear difficulty in ensuring the most in need receive funds.



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April 03 2020

Commentary by Eoin Treacy

Email of the day - on renewables

ETFs TAN and FAN: what is your opinion on the quality of the constituents in both products? I do believe going forward this be a huge trend. but how many companies will make it to the other end? thanks very much for educating us in these turbulent times!

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. The renewables or alternative energy sector was a clear outperformer into the beginning of March but quickly played catch up with the wider market during a panicky period two weeks ago. I believe it is certainly worthwhile to ask whether the factors which contributed to earlier outperformance are still relevant following what are in some cases declines in the order of 50%.



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April 03 2020

Commentary by Eoin Treacy

April 03 2020

Commentary by Eoin Treacy

Email of the day on investment trust data:

Congratulations on your work on UK investment trusts. I have studied the sector for 40 years and as you know used to present it at David's "Markets Now" evenings. The key reason why retail savings vehicles like the IT sector maintain dividends better than most is that they are permitted to pay dividends out of reserves. This means that in bad years, they can "borrow from the future" and smooth those dividend payments over time. Investors need therefore to check the precise statutory position of each investment trust before buying as there may be technical impediments to the use of reserves. They are a wonderful sector to invest in longer term, and the collapses in markets have widened discounts in many cases. I strongly suggest you do a similar analysis of IT sector discounts. You may find some great Easter presents, even if Easter in 2020 has been cancelled because of Covid19. Keep up the good work. Iain

Eoin Treacy's view -

Thanks for the words of encouragement and the additional intelligence on mechanics of how some investment trusts are capable of sustaining their impressive records of dividend growth.

I know David was always keen on picking up positions in investment trusts when they were trading at historic discounts so I agree it is certainly a topic for further study. I have been searching for additional intelligence on the investment trust sector with a particular focus on trying to find average discount data. So far, I have not had any luck with finding it elsewhere so I have resolved to generate it myself.

Bloomberg does have average discount data on the system. However, this is not available for export on a bulk basis for the universe of investment trusts. Instead I have downloaded the last twenty years of discount/premium data for 240 investment trusts. It’s going to take me some time to compile the data for average discounts versus current figures but I certainly hope to have it in an accessible fashion by Easter.



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April 03 2020

Commentary by Eoin Treacy

April 02 2020

Commentary by Eoin Treacy

April 02 2020

Commentary by Eoin Treacy

Saudi Will Only Cut Oil Output if Others Do, EA's Sen Says

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

“It’s very clear that Saudi Arabia is maintaining its position - it will cut only if everyone else cuts,” Energy Aspect’s Amrita Sen says in a Bloomberg TV interview.

Russia does not see benefit in cutting production given the 20m b/d drop in demand “No way” Saudi Arabia can cut enough to compensate for such a decline

NOTE: Sen speaks following U.S. President Donald Trump’s tweet saying he expects Saudi Arabia and Russia to cut production by 10m bbl

There could be a deal later in the year, but it’s too early as it is unclear how low demand will go; “There’s a lot of hope and expectation rather than anything concrete”

Market will correct through market mechanisms; Energy Aspects believes world will run out of storage in May, producers will then have no choice but to shut production, but prices will remain low

It’s unlikely that the U.S. would ever join Russia and Saudi Arabia in coordinated cuts

“How do you get the U.S. to join something that it would call a cartel?”; there are thousands of producers in the U.S., so it would be impossible for the country to cut

Eoin Treacy's view -

The shock from the coronavirus lock down is still rippling through the energy markets but that is not why Saudi Arabia chose now to launch a price war with Russia. They are much more concerned with the fact oil demand growth is slowing down, if not contracting, on a secular basis. That presents singular problems for countries who entire existence is predicated on oil exports.



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April 02 2020

Commentary by Eoin Treacy

Gundlach Sounds Alarm on 'Paper Gold' ETFs Raking in Billions

This article by Katherine Greifeld and John Gittelsohn for Bloomberg may be of interest to subscribers. Here is a section:

The process of swapping GLD shares for physical gold sits “outside of normal dealings,” according to State Street Global Advisors head of ETF research Matthew Bartolini. Bank of New York Mellon, the fund’s trustee, doesn’t interact with the public but only with middlemen known as authorized participants -- traders who channel assets in and out of the fund. An investor would have to work with one of GLD’s APs to acquire gold, he said.

“An individual investor wishing to exchange the Trust’s shares for physical gold would have to come to the appropriate arrangements with his or her broker and an authorized participant to receive the gold bars,” Bartolini wrote in an email.

Gundlach said earlier in March that while he was neutral on gold mining companies, the metal would ultimately go higher. The $51 billion DoubleLine Total Return Bond Fund, Gundlach’s mortgage-focused flagship fund, lost 1.3% this year through Monday and returned an annual average 2.6% over five years.

For Bloomberg Intelligence’s Eric Balchunas, that process isn’t necessarily a problem. Most investors buying gold ETFs are doing so to get exposure to bullion’s price movement, rather than to acquire physical gold, he said.

“The problem with getting physical gold is you’ve got to insure it or keep it in a safe spot,” Balchunas said. “Generally speaking, most people don’t want gold. They want the return stream that gold gives.”

Eoin Treacy's view -

There is no way to hold physical gold in a fund without incurring some form of risk. However, there is also no way of holding physical gold personally without also incurring some form of risk. Most people are satisfied to receive the diversification and potential for appreciation gold represents. However, it is inaccurate to describe gold as offering a return stream. It does not pay dividends. For that you need gold miners.



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April 02 2020

Commentary by Eoin Treacy

Borrowers Brave Record Jobless Claims With Bigger, Bolder Sales

This article by Molly Smith and Hannah Benjamin for Bloomberg may be of interest to subscribers. Here is a section:

Even as the number of jobless claims soar, companies around the globe are capitalizing on investors’ thirst for debt by moving ahead with larger and riskier bond offerings.

T-Mobile US Inc. is selling $19 billion of bonds in the year’s second-largest sale, while the high-yield market is coming back to life with three new deals, including one from Tenet Healthcare Corp. T-Mobile and Tenet announced their debt offerings just ahead of what turned out to be 6.6 million more Americans applying for unemployment benefits, double last week’s record. More borrowers like VMware Inc. and Ross Stores Inc. came forward after that, on top of 17 in Europe.

Issuers are seeing a resurgence in risk appetite, as massive demand for new issues has allowed companies to go bigger and bolder with their debt offerings. Cruise line operator Carnival Corp., though technically investment-grade rated, was able to draw massive demand from high-yield investors for a bond sale that ended up being larger and cheaper than expected. Junk bond funds are expected to see a record inflow this week when Refinitiv Lipper reports data later Thursday, reversing six straight weeks of outflows.

Eoin Treacy's view -

There are two important factors at work in the investment grade market. The first is interest rates might be zero, economies under duress and anxiety high but investors still need to capture yield and cashflows. The second is the Federal Reserve is backstopping purchases of investment grade debt so investors now have a measure of security in purchases that did not exist two weeks ago.



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April 01 2020

Commentary by Eoin Treacy

April 01 2020

Commentary by Eoin Treacy

Email of the day - on the outlook for banks

Many thanks for your continuing high-quality service, exemplified by the comprehensive Income ITs spreadsheet you produced yesterday. It will be invaluable for Private Investors such as myself. On a separate topic, do you have any views on the banks in the light of the suspension of dividends? In particular, I see that HSBC shares are approaching chart support from 1997-98 and 2016.

Eoin Treacy's view -

Thank you for this question. There is no denying that bank shares have declined significantly so it is logical to question whether they are close to a low. With dividends being eliminated, a rise in defaults inevitable, a moratorium on buybacks, and tight margins from low interest rates the big question is whether the bad news has been priced in.



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April 01 2020

Commentary by Eoin Treacy

Which Way Now?

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

Many companies went into this episode highly leveraged. Managements took advantage of the low interest rates and generous capital market to issue debt and some did stock buybacks, reducing their share count and increasing their earnings per shares (and perhaps executive compensation). The result of either or both is to increase the ratio of debt to equity. The more debt a company has relative to its equity, the higher the return on equity will be in good times…but also the lower the return on equity (or the larger the losses) in bad times, and the less likely it is to survive tough times. Corporate leverage complicates the issue of lost revenues and profits. Thus we expect to see rising defaults in the months ahead.

Likewise, in recent years, the generous capital market condition and the search for return in a low- interest-rate world caused the formation of leveraged investment entities. As with leveraged companies, debt increased their expected returns but also their vulnerability. Thus I believe we’re likely to see defaults on the part of leveraged entities, based on price markdowns, ratings downgrades and perhaps defaults on their portfolio assets: increased “haircuts” on the part of lenders (i.e. reduced amounts loaned against a dollar of collateral); and margin calls, in portfolio liquidations and forced selling.

In the Global Financial Crisis, leveraged investment vehicles like Collateralized Mortgage Obligations and Collateralized Debt Obligations melted down, bringing losses to the banks that held their junior debt and equity. The systemic importance of the banks necessitated their bailouts (the resentment of which contributed greatly to today’s populism). This time, leveraged securitizations are less pervasive in the financial system, and their risk capital wasn’t supplied by banks (thanks to the Volcker Rule), but mostly by non-bank lenders and funds. Thus I feel government bailouts are unlikely to be made available to them. (As an aside, it’s not that the people who structured their leveraged entities erred. The merely failed to include an episode like the current one among the scenarios they modelled. How could they? If every business decision had to made in contemplation of a pandemic, few deals would take place.

Eoin Treacy's view -

Corporate leverage has increased substantially over the last decade because low interest rates made balance sheet optimisation strategies a no brainer. What board would refuse the prospect of reducing the interest on existing debt by refinancing, and using the difference to reduce the share count? Afterall equity is an inherently more expensive form of financing. That was the logic in the early part of the cycle but refinancing was quickly exhausted. Companies then migrated to “maximising shareholder value” by inflating the share price with debt fuelled buybacks. Some companies are obviously much more guilty of this practice than others and have been among the biggest decliners so far.



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April 01 2020

Commentary by Eoin Treacy

Counting the Job Cuts at Tech Startups: Fully Charged

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

The list is long, and probably doesn't come close to capturing the total job loss. In the last few weeks, there have been reported cuts at WeWork (250), Bird Rides Inc. (more than 400), ZipRecruiter Inc. (400 layoffs and furloughs) and direct-to-consumer clothing company Everlane (200 cuts and furloughs).

For now, the layoffs are affecting largely companies with a high cash-burn rate—like Bird—or companies that haven’t raised money in the last year or two—like ZipRecuiter—and thus lack a big cash cushion, or both. But many industry watchers expect the job cuts to spread as the lockdown continues. 

“This coronavirus pandemic is affecting very qualified people,” Lee said. His site also includes an option to add a documents so that laid-off employees and human resources departments can enter names and contact details, providing leads to anyone who wants use the list to make some hires. Lee added:

“It’s something that I thought might be a good service to tech.” The list may also be of service to Lee. His company Human Interest, which he co-founded with Paul Sawaya five years ago, announced on March 11 that it had raised $40 million in a round led by family office Oberndorf Enterprises LLC, bringing its total capital raised to $75 million. Now, the company is hiring, mostly engineers, Lee said. That makes it one of a rarified group of companies currently in a position to pick up talent, rather than shed workers. 

Some startups likely can put off layoffs for some time, given that venture capitalists invested $137 billion into startups last year, according to the National Venture Capital Association. But not all will want to.

Many firms, including Sequoia Capital, are urging their portfolio companies to conserve cash, and salaries are often among the biggest expenditures at startups.

 

Eoin Treacy's view -

Having a cash reserve is a nice-to-have during the good times. It’s essential during a crisis when burn rates need to be slowed in order to deal with the realisation earnings and profits are further away than ever.



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March 31 2020

Commentary by Eoin Treacy

Video commentary for March April 11th 2019

March 31 2020

Commentary by Eoin Treacy

Email of the day on UK listed investment trusts' history of dividend growth

I was interested in your comments about companies which have a long record of paying dividends. It is maybe worth mentioning that a good number of UK registered investment trusts have long records of increasing dividends year by year. They tend to have reserves which can be used to bolster pay outs in years when dividend income comes under pressure. Regards from Scotland

Eoin Treacy's view -

Thank you for your kind email and this reminder that Scotland has a long history of investments that concentrate on dividends. It took several hours today, but I was finally able to compile a reasonably complete list of UK listed investment trusts with admirable records of dividend increases. It turns out there is no easy way to compile the data so I did the grunt work of eyeballing the dividend histories of all 145 trusts with histories of dividend growth.

As far as I can see there are only two which have never cut their dividend in 31 years of history. Three have not cut their dividend in at least 28 years and three more have maintained that feat for more than 20 years.



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March 31 2020

Commentary by Eoin Treacy

'The common enemy'

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

Eoin Treacy's view -

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

Corporate defaults are inevitable considering the leverage in the system and the sudden disappearance of revenue for many companies. Where companies had borrowed heavily to fund acquisitions or buybacks, they now have to make debt payments with no, or much reduced, incoming revenue. That is an obvious problem particularly affecting some of the most indebted tourist, auto and aeronautics companies. The biggest challenge for banks will be in how exposed they are to small companies on a local level because many are now in dire financial straits.



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March 31 2020

Commentary by Eoin Treacy

Copper Rises on China, Trimming Big Quarterly Slump

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

Copper climbed as a strong rebound in Chinese manufacturing bolstered the outlook for demand, trimming the industrial metal’s biggest quarterly drop since 2011.

China’s official purchasing managers’ index rose this month, up from a record low in February, signaling the world’s second-largest economy is restarting. While the outlook remains uncertain as the country faces a growing threat from slumping external demand, production cuts at major mines around the world are shoring up sentiment for copper.

The metal extended gains after President Donald Trump called on Congress to provide $2 trillion for infrastructure spending in the U.S.

Eoin Treacy's view -

On a day when Wall Street pulled back on book squaring at the end of the quarter copper prices were quite firm. China’s reported economic activity has been strengthening as the economy starts back up and commodity investors are expecting significant infrastructure development as some of the more traditional levers of growth are leaned on.



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March 30 2020

Commentary by Eoin Treacy

Video commentary for March 30th 2020

March 30 2020

Commentary by Eoin Treacy

March 30 2020

Commentary by Eoin Treacy

James Grant 'Nobody Knows Anything'

Thanks to a subscriber for the transcript of this interview conducted by Sprott Asset Management which may be of interest. Here is a section:

JG: Yes, yes. Patience is absolutely in order and also gold is … you know, I confess I’m a gold bug and I blurted it out — gold — before you even asked the question. Yes, but it’s not to the end of emulating Scrooge McDuck. That’s not the point.

The point is to have liquid wealth available when opportunity presents itself. Gold is many things but it’s not regenerative. And there’s nothing as an investment like a well-priced, successful, profitable well-financed business. So, what you want is gold for opportunities. You also want it, not so much as a hedge against monetary disorder because we have that, you want it as an investment in monetary disorder. That’s a second reason. So, I guess that’s a little bit of Scrooge McDuck reason but I hold it for those two reasons. I think that it’s going to be helpful for both.

I look forward to liquidating some of my gold bullion, as modest as that stack of coins is. I look forward to, at some point, liquidating that, if I have the nerve and the opportunity to accumulate something that is going to be yielding dividends and cash flow. But the other portion, well I think, I hope, I’ll never sell — that’s the bottom dollar: an investment in the evident tendency of monetary affairs. The arc of monetary evolution points to greater and greater interventions, more radical policy which begets still more radical policy, financial repression and more of that. We got more QE this week than they did under the Bernanke Fed.

So, to me the arc of this is very clear and you want gold, both for the inevitable spills in the market for financial assets as well as for the seemingly inevitable destruction, or certainly impairment, of the government-issued money. Those are my reasons.

Eoin Treacy's view -

Governments the world over are telling us this is not the time to worry about deficits. That begs the question, when is the best time? The Velocity of Money is cratering because of the shutting down of economic activity and the reduced number of transactions required to fulfil an online sale. That removes the inflationary bias from massive monetary and fiscal stimulus in the short term.



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March 30 2020

Commentary by Eoin Treacy

SoftBank Drops 10% After OneWeb Files For Bankruptcy Protection

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

It is the latest blow to SoftBank founder Masayoshi Son, who last week unveiled a plan to raise $41 billion to buy back shares and slash debt. The announcement sent the shares soaring more than 50% in just a few days. The rally was interrupted when Moody’s Corp. cut its debt rating by two notches, saying the Japanese investment firm’s plan to sell off assets during a market downturn threatened its total value. SoftBank’s shares traded 6.7% lower on Monday morning in Tokyo.

Son had often pointed to OneWeb as one of the cornerstones of an investment portfolio that ranges from ride sharing, co-working and robotics to agriculture, cancer detection and autonomous driving. The startup was working on providing affordable high-speed access anywhere in the world and targeting 1 billion subscribers by 2025. Son has painted a picture of a future where satellite networks cover every inch of the Earth and a trillion devices connected to the internet disgorge data into the cloud where it is analyzed by artificial intelligence.

OneWeb listed liabilities and assets of more than $1 billion each in its Chapter 11 petition in U.S. Bankruptcy Court in White Plains, New York. The company had been in advanced discussions earlier in the year for a fresh investment, it said in a statement. But the discussions fell apart after the coronavirus pandemic sent markets into a tailspin, it said.

Eoin Treacy's view -

The unlisted unicorn sector is difficult to monitor because they have no obligation to report earnings and depend almost entirely on the private markets for funding. It is reasonable to expect many loss-making companies are going to experience significant challenges from the economic shut down, while others will likely have benefitted from the abrupt move to cloud and delivery utilisation.



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March 27 2020

Commentary by Eoin Treacy

March 27 2020

Commentary by Eoin Treacy

U.K. Virus Aid Package Beats Financial Crisis Stimulus

This article by Alex Morales, Lucy Meakin and Andrew Atkinson for Bloomberg may be of interest to subscribers. Here is a section:

The coronavirus crisis has transformed the fiscal landscape at a stroke. Britain was on course for a budget deficit of 55 billion pounds in the fiscal year starting April. Now, according to the Institute for Fiscal Studies, borrowing could be as much as 200 billion pounds as an economy on course to shrink at least 5% this year hammers tax revenue and drives up spending on welfare.

That could leave the deficit just below the 10% reached in the aftermath of the financial crisis and push up already elevated debt levels.

The chancellor announced his first economic package to deal with the outbreak when delivering the budget on March 11, unveiling 12 billion pounds of measures to mitigate the effects of the outbreak on the economy.

As evidence mounted that the crisis was snowballing, he followed up with a 350-billion pound stimulus package comprising government-backed loans as well as 20 billion pounds of grants and tax cuts for struggling companies.

Then, last Friday, he announced 7 billion pounds of extra welfare spending and said the government would pay 80% of salaried employees’ wages up to a maximum of 2,500 pounds a month -- a plan Bloomberg Economics estimates will cost 17.5 billion pounds.

Announcing further details of the job-retention program today, the Treasury said the government will also cover employers for the National Insurance and minimum auto-enrolment pension contributions of furloughed workers, saving firms 300 pounds a month per employee on average.

Eoin Treacy's view -

The trouble with the coronavirus is not so much in the mortality rate but in the speed with which it is spreading. Overloading hospitals with scarce resources and scary reports of tens of thousands dying has put a great deal of pressure on the economy. However, it is also worth considering that despite the scale of the challenge faced in Italy, they have seen the peak in the infection growth rate. That suggests the problem is unlikely to get worse.



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March 27 2020

Commentary by Eoin Treacy

The Fed's Cure Risks Being Worse Than the Disease

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

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.

Eoin Treacy's view -

My rule of thumb for plotting a route through the market mayhem of the last six weeks has been to take what people expressed disquiet about last year and amplify it. Modern Monetary Theory has gone global even quicker than the coronavirus. It is now the de facto economic policy for much of the world and has seen just about every government concede to the requirement for fiscal laxatives.



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March 27 2020

Commentary by Eoin Treacy

Enevate's silicon-anode batteries promise ultra-fast EV charging

This article by Loz Blain for New Atlas may be of interest to subscribers. Here is a section:

With some US$111 million in investment from major companies, including LG, Samsung, Mitsubishi, Renault and Nissan, Enevate now says its cells are ready for the big time. In an interview with Charged EVs, Park said Enevate is designing packs for the 2024 and 2025 model years to get its cells into consumer products with major manufacturers. There are no announcements around who or what exactly they're making packs for, but the list of companies above may be instructive.

As far as we're aware, though, the infrastructure to support blast-charging at the kinds of rates we're talking about here simply doesn't yet exist. Tesla's V3 superchargers are currently capable of blast-charging a Model 3 at 250 kilowatts, which would give you around 133 km (83 mi) of range in five minutes.

These batteries would charge three times faster, at around 0.75 megawatts, which is a huge power draw. An alternative method might involve trickle-charging massive supercapacitors all day at slower rates so they've got enough energy to supply the cars super-quickly when they need it, but we're yet to see anything like that in action, and the size of those supercapacitors might end up being prohibitive.

Eoin Treacy's view -

It is almost as if I see a new story about advancements in battery technology every day. They all come with caveats but the one thing we can be sure of is the quantity of capital now devoted to solving the issue of energy density and range anxiety is growing persistently. Producing a doubling of energy density with a low charging time is the hold grail of the sector today and it is reasonable there will be a solution in the market within five years. 



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March 26 2020

Commentary by Eoin Treacy

Video commentary for March 26th 2020

Eoin Treacy's view -

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

Some of the topics discussed include: upside key reversals for the Dow, S&P500 and Nasdaq-100, Microsoft and Apple, VIX Index moderating, Dollar falling as epic money priniting kicks off, gold firm, TED spread still expanding,  



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March 26 2020

Commentary by Eoin Treacy

Fed Set to Launch Multitrillion Dollar Helicopter Credit Drop

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

“The Fed has effectively shifted from lender of last resort for banks to a commercial banker of last resort for the broader economy,” said JPMorgan Chase & Co. chief U.S. economist Michael Feroli.

The coming rain of credit -- historic in both size and scope -- will be made possible by $454 billion set aside in the aid package for Treasury to backstop lending by the Fed. That’s money the central bank can leverage to provide massive amounts of financing to a broad swathe of U.S. borrowers.

“Effectively one dollar of loss absorption of backstop from Treasury is enough to support $10 worth of loans.” Fed Chairman Jerome Powell said in in a rare nationally-televised interview early Thursday morning. “When it comes to this lending we’re not going to run out of ammunition.”

He told NBC’s “Today” show that the Fed was trying to create a bridge over what may well be a substantial decline in the economy in the second quarter, to a resumption of growth sometime in the latter half of the year.

“It’s very hard to say precisely when that will be,” he said. “It will really depend on the spread of the virus. The virus is going to dictate the timetable here.”

While the Fed can help by keeping interest rates low and ensuring the flow of credit, “the immediate relief” for Americans will come from the Congressional aid package, Powell said. The bill includes direct payments to lower- and middle-income Americans of $1,200 for each adult and $500 for each child.

Combined with an unlimited quantitative easing program, the Fed’s souped-up lending facilities are set to push the central bank’s balance sheet up sharply from an already record high $4.7 trillion, with some analyst saying it could peak at $9-to-$10 trillion.

Eoin Treacy's view -

The new stimulus plan is providing money to 90% of consumers, but also to corporations, municipals and both the government and corporate bond markets. In terms of both size and scope the package is designed to provide a life line to all markets and, so far, it is having the desired effect.



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March 26 2020

Commentary by Eoin Treacy

Email of the day on upgrading to an annual subscription

I read Eoin’s commentary today and saved myself a lot of money.

Could I pay the difference and pay an additional £542 today for a full year sub?

I would be very grateful if that could be arranged.

Eoin Treacy's view -

Thank you for your support and I am delighted you are finding value in the service. We are happy to help any monthly subscriber to upgrade to annual subscription and will of course perform a pro-rate credit against the annual total.

From an international potential subscriber’s perspective, the accelerated decline in the Pound also offers a favourable entry point for annual subscriptions.



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March 26 2020

Commentary by Eoin Treacy

Wall Street Braces for Dollar Demand to Spike at Quarter-End

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

At the same time the extent of virus damage starts to show in data, Wells Fargo & Co. reckons the recent plunge in equities has left pension-fund portfolios so far out of balance that it will force them to dump about $40 billion in Treasuries and other debt before the month is out.

Even ignoring quarter-end, JPMorgan Chase & Co. was predicting pension and other investment funds would have to shift billions into equities to counter the historic rout.

These kinds of flows can create turmoil for currencies. The forum overseeing conduct on the $6.6-trillion-a-day foreign-exchange market warned on Thursday volatility may surge in the coming days.

“At the end of every month and even more so the end of every quarter, we tend to see strong corporate demand for the U.S. dollar,” said Athanasios Vamvakidis, head of G-10 foreign exchange strategy, Bank of America Merrill Lynch. “This seasonality is strong on our flows, particularly for end-quarter. Having said that, the global crisis may be a more important dollar driver now.”

Eoin Treacy's view -

The ebbing and flowing of global liquidity over the last month has resulted in some acute volatility for the Dollar. It initially sold off heavily because carry traders were being unwound, which saw short-term demand for the Euro and Yen soar as funds were repatriated. That subsequently morphed into a Dollar shortage as demand soared with banks refusing to lend.



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March 26 2020

Commentary by Eoin Treacy

Gaming Boom Hides Struggle to Create New Hits in Isolation

This article by Takashi Mochizuki, Zheping Huang, Olga Kharif and Vlad Savov for Bloomberg may be of interest to subscribers. Here is a section:

At a time when Valve Corp.’s Steam online gaming service is breaking records and global gaming publishers are registering increased demand due to millions of people stuck at home, the systems designed to build those companies’ future success are faltering.

One game project that Upfall Studios was doing work for has been put on hold because its developers weren’t able to demo it at GDC and haven’t yet managed to pitch it remotely. Two other developers Amador has collaborated with are also struggling to secure remote calls with publishers.

Before the coronavirus grew into a global pandemic, it was already interrupting the supply chain for game art and assets, as many big publishers rely on outsourcing to art studios in China, which was first to suffer the effects.

Super Smash Bros. creator Masahiro Sakurai wrote in industry magazine “Famitsu” last week that the release of additional content for his blockbuster series would be delayed due to the coronavirus. Private Division, a unit of Take-Two Interactive Software Inc., said last month that its Outer Worlds action role-playing game would also be late arriving on Nintendo Co.’s Switch due to the pandemic.

Eoin Treacy's view -

We bought an Oculus Quest (untethered virtual reality headset) as a surprise for my daughter’s birthday last week. We did not realise at the time how limited supply was. It was sold out for months up till early March and sold out again within two weeks.

It is the most innovative piece of gaming technology I have seen since the Nintendo Wii came out 14 years ago. The immersive environment and visceral experience of reality lend a degree of fun and playability I was not prepared for. I boxed competitively at university and the Apollo Creed game is the closest thing anyone is likely to come to being in the ring in real life.



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March 25 2020

Commentary by Eoin Treacy

Video Commentary for March 25th 2020

Eoin Treacy's view -

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

Some of the topics covered include: attention turns to buybacks as details of fiscal package emerge, palladium surges and is now short-term overbought, Dollar eases versus Euro and Pound, stock markets extend rebounds but Wall Street fails to hold intraday high, bonds steady but high yield spreads are elevated and the TED spread is still expanding. 



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March 25 2020

Commentary by Eoin Treacy

The Great Leverage Unwind

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

In addition to Troubled Asset Relief Program (TARP)-like programs to assist companies and industries, there is no other choice but for the Fed to step up to keep markets functioning. That’s why I’ve been saying that we would need to see about $4.5 trillion of quantitative easing (QE) before everything was resolved. This is in addition to emergency lending through the discount window, dealer repo operations, central bank liquidity swaps, and the Commercial Paper Funding Facility, Primary Dealer Credit Facility, and Money Market Mutual Fund Liquidity Facility. That would take the Fed’s balance sheet to at least $9 trillion, or about 40 percent of last year’s gross domestic product (GDP). That might sound like an alarmingly big number, but to put it in perspective the Bank of Japan’s balance sheet is the equivalent of 105 percent of GDP. So, the United States is a piker on QE.

Eoin Treacy's view -

The Fed has now entered its ‘at all costs’ phase of assistance. I will freely admit my initial estimate from six months ago the Fed’s balance sheet would reach $6 trillion is now wildly overoptimistic. Considering the extent of the challenge and the desperate need for liquidity $10 trillion is probably a more likely number for the size of the Fed’s balance sheet.



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March 25 2020

Commentary by Eoin Treacy

Canceled Stock Buybacks Mount, and They May Not Return for Years

This article by Phil Serafino, Kasper Viita and Sarah Ponczek for Bloomberg may be of interest to subscribers. Here is a section:

The comment suggested his distaste for the practice predates the coronavirus outbreak and echoed criticism from Democratic presidential candidates who have long viewed buybacks as a waste and social ill.

“When we did a big tax cut and when they took the money and did buybacks, that’s not building a hangar, that’s not buying aircraft, that’s not doing the kind of things that I want them to do,” Trump said on Friday. “We didn’t think we would have had to restrict it because we thought they would have known better. But they didn’t know better, in some cases.”

Trump said he would support a prohibition on buybacks for companies that receive government aid. The five biggest U.S. airlines -- prime targets for bailout funds -- spent 96% of their free cash flow on repurchases over the last decade, money that could have been used to build rainy-day funds. Overall
buybacks started to slow in the first couple of months of the year in the U.S., when they were $122 billion in January and February, down 46% from a year earlier in the slowest start to the year since 2009.

While some viewed share repurchases as one of the driving forces behind the bull market, the practice was constantly criticized, particularly in populist circles. Companies were simply inflating their stock prices inorganically, using cheap money in the process, so the argument went, exacerbating wealth inequality as the ultra-rich cashed out.

Eoin Treacy's view -

Buybacks have been the primary source of demand supporting the market, particularly during pullbacks, over the last decade. The problem with relying on buybacks as a rationale for being bullish is they are inherently procyclical. The majority of companies are not in a position to buy back shares following big declines. Additionally, since debt loads have increased, at least in part to fund buybacks, they are overleveraged at peaks and debt obligations come before equity during a downturn.  



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March 25 2020

Commentary by Eoin Treacy

Email of the day on dollar cost averaging

Many thanks for the latest Big Picture Long-Term video. For the last ten years my forty-year old twins have been investing every month in the Vanguard Star Fund. My instinct is to advise them to continue this monthly investment as long as they have a regular income. What do you think about this strategy?

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. Dollar cost averaging works because you get to buy more during the declines and less at the top by never wavering in the amount regularly committed to the market. Therefore, it only succeeds in achieving in controlling the average purchase price if it is practiced, or initiated, during big market declines.



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March 25 2020

Commentary by Eoin Treacy

Eoin's personal portfolio: last updated March 26th

Eoin Treacy's view -

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.



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March 24 2020

Commentary by Eoin Treacy

Video commentary for March 24th 2020

Eoin Treacy's view -

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

Some of the topics discussed include: potential for a reversionary rally has increased substantially but pressure on corporate balance sheets will remain as a scramble to retain investment grade credit ratings begins. Gold surging on flagrant devaluation of fiat currencies. 



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March 24 2020

Commentary by Eoin Treacy

Email of the day on bottoming characteristics:

Thanks for answering my question here. Eoin, which primary trend ending would you most likely expect to see following the current melt down? Is there an ending that presents itself most frequently following this very very rapid collapse in markets?

Eoin Treacy's view -

Thank you for this question which I believe the majority of investors are pondering at present. The top put in over the last 18 months has Type-2 characteristics.

The swift pullback in Q4 2018 was in hindsight a loss of consistency at the penultimate peak for the S&P500. The failed break above 3000, with the dynamic of the failure being larger than the dynamic of the breakout, took the market back down to test the lower side of the underlying range and then it broke below the lows near 2500.



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March 24 2020

Commentary by Eoin Treacy

Email of the day on how best to play a bull market in gold:

Favorite way to play higher gold prices? commodity, miners, royalty/streaming, etc?

Eoin Treacy's view -

Thank you for this question which others may have an interest in but it is not an easy one to answer. I think it really depends on what your personal disposition is.

Many people suspicious of the ultimate ambitions of government prefer to hold physical gold. There is a shortage right now because refineries have shut down because countries are on lock down. Air traffic limitations also makes it difficult to transport the metal. Gold is not much like toilet paper but there is a rush on at present to secure supplies. Meanwhile mine production is still rising so the physical supply situation is likely to moderate eventually. 



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March 24 2020

Commentary by Eoin Treacy

Email of the day on global valuation tables

Historically you have shown the PE ratios for a number of the major indices. Considering the levels, the markets are at now, it would be interesting to look at these again. Is this something you can share with the collective.

Eoin Treacy's view -

Thank you for this email which may be of interest to subscribers. I produced the Fundamental Valuation Tables on a monthly basis for approximately 8 years but they always had to carry a number of riders at the bottom of the page highlighting caveats that needed to be taken into account before looking at the data. These included the absence of data for some indices, the distorting effect of ADRs and the fact P/E ratios are based on indicated earnings rather than any other calculation and as a result were prone to spikes. As a result, I stopped producing the reports when I found a better online resource.

Germany based Star Capital produce comprehensive valuation tables for just about every country which also include cyclically adjusted P/Es. This is all presented in an attractive graphic format.

Shiller’s Multpl.com is an additional resource for long-term charts of P/Es for the USA as well as bond yields that may be of interest.



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March 23 2020

Commentary by Eoin Treacy

Video commentary for March 23rd 2020

Eoin Treacy's view -

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

Some of the topics discussed include: Fed to buy corporate bonds, Australian QE, Synchronised global monetary and fiscal stimulus, stock market s very oversold and dividend aristocrat yields at historic highs, oil stocks extremely oversold, gold and silver firming on currency debasement fears.



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March 23 2020

Commentary by Eoin Treacy

Coronavirus Peak?

Eoin Treacy's view -

The SARS epidemic did not become a pandemic. Its effects were limited to a relatively small number of countries and, even then, the majority of infections occurred within the hospital setting. The trough in markets evolved when the growth rate in new infections moderated which eventually contributed to the peak in new infections. COVID-19 is global and has infected many more people that SARS ever did and particularly because the large numbers of serious cases have overwhelmed healthcare systems.



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March 23 2020

Commentary by Eoin Treacy

Near-Zero Liquidity in S&P Futures Means 'Slippage' Risk Is High

This article by Sarah Ponczek for Bloomberg may be of interest to subscribers. Here it is full:

Liquidity is vanishing for U.S. equity futures. Traders of S&P 500 e-minis are now only offering to buy or sell a few contracts at a time -- often numbering in the single digits -- compared with an average of more than 1,000 just a month ago, data from Deutsche Bank Asset Allocation show.

Drastically thin markets are alarming because they can fuel outsize price swings. With futures markets being halted almost every day in the wake of wild swings, the lack of liquidity is so severe now that it’s fueling concern even among the pros who’ve lived through the worst market crashes in history.

“There’s no liquidity in any market,” said Rick Bensignor, the founder of Bensignor Group and a former strategist for Morgan Stanley, who has traded the futures market for 40 years. “When you’re talking about restructuring a portfolio too, you have to think about the potential slippage that’s involved to get anything done.”

Of course it’s no surprise that markets would thin out when investors, strategists, and economists alike are unsure of the ultimate impact of the coronavirus pandemic. And it’s not clear if the low liquidity may be feeding upon itself -- i.e., are traders staying away because liquidity is so horrible, or is it just a natural side effect caused by all the uncertainty?

“‘Thinly traded’ now an understatement considering how much liquidity in futures market has collapsed,” tweeted Liz Ann Sonders, the chief investment strategist at Charles Schwab. U.S. contracts hit exchange-mandated halts for the ninth time in 10 days overnight Sunday, before an announcement of unlimited quantitative easing from the Federal Reserve ignited gains that lasted just 20 minutes before turning negative again.

Strategists at JPMorgan Chase & Co. have estimated liquidity in U.S. futures markets is seven times worse than the poorest levels during the financial crisis. According to Bensignor, typically when it comes to size, anywhere from 200 to 500 blocks trade on both the bid and offer side of a wager at every tick. Watching his screen Monday morning, there were fewer than 10.

“You are going to have to deal as you restructure portfolios,” he said in an interview on Bloomberg Television. “You’re also going to have to realize that doing so is going to cost a lot of money compared to what you had to do in the past, where you could basically just do it for no cost because of the liquidity.”

Eoin Treacy's view -

One of the reasons stock markets have sold off so aggressively is because the spike in volatility initiated an epic deleveraging in the macro hedge fund sector. The knock-on effect of that deleveraging was to inhibit the ability of high frequency traders to make markets. That exposed, again, the limitations of the Volcker Rule.



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March 23 2020

Commentary by Eoin Treacy

Gold Investors Are Betting It Really Is 2008 All Over Again

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

“If its price trajectory proves similar to 2008, we could see the precious metal’s benefits resurging as market stress continues to assert itself,” said Catherine Doyle, an investment specialist in the real-return team at Newton Investment Management. “We continue to have significant exposure for this very reason.”

Eoin Treacy's view -

Anyway we look at it, the efforts of governments and central banks to support economies and reflate asset prices are going to come at the expense of the purchasing power of their currencies. Therefore, any asset that offers insulation from currency devaluation, either by offering a higher yield or limited supply is likely to benefit.



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March 20 2020

Commentary by Eoin Treacy

March 20 2020

Commentary by Eoin Treacy

Margin Calls Hit Wall Street Like '30 LTCMs Out There' at Once

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

Margin calls are the likely culprit behind a slump in Treasury futures that sunk a popular hedge fund trade in recent weeks. Funds who had been making highly-leveraged bets on price moves between Treasury futures and bonds saw their positions collapse when investors hit with margin calls sold the contracts.

Some of the recent dollar strength may also have been driven by margin demands. South Korean brokerages who hedge their exposure to structured products with dollar-denominated derivatives positions are facing calls, forcing them to scoop up dollars. In gold, investors liquidating bullion holdings to raise cash have been blamed for the metal’s epic slump.

Wild moves reign among risky assets like corporate bonds and oil -- opening up the possibility of more margin stress.

“Half the people we talk to think the current environment is worse than the financial crisis,” the Wells Fargo strategists wrote.

Eoin Treacy's view -

The Volcker Rule was designed to cut banks out of the shadow banking sector. Instead it created an additional step between how shadow banks can access liquidity and the central bank. Since banks were unable to go after the most lucrative leveraged trades, they instead provided macro hedge funds with the capital required to pursue these strategies.



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March 20 2020

Commentary by Eoin Treacy

Email of the day on where private equity sees opportunity:

Thank you for the excellent commentary received daily! A question for your view - PE industry claims $2trillion "dry powder" available for deployment but can this be LP drawdown commitments which still has to be called & will come from liquidating other investments at current market prices or even defaulting on obligations?

Eoin Treacy's view -

Thank you for your kind words. It is the support of subscribers like you that ensures this service persists.

In the aftermath of the credit crisis Blackstone deployed billions in the US housing market and became one of the biggest residential landlords in the country. That action helped put a floor under the market. They correctly concluded the majority of people would not have the resources to save for a down payment and would instead be renters indefinitely.



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March 20 2020

Commentary by Eoin Treacy

Precious Metals: Navigating uncertain times

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

Eoin Treacy's view -

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

The Dow/Gold ratio has clearly broken its decade-long uptrend. In the last month it has broken below the 1000-day MA. That’s a monumental event because it has never happened in a secular bull market before. This has been achieved by the gold price going nowhere while the stock market has collapsed by approximately 30%



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March 20 2020

Commentary by Eoin Treacy

The Doctor Who Helped Defeat Smallpox Explains What's Coming

This article by Stephen Levy for Wired.com may be of interest to subscribers. Here is a section:

The world is not going to begin to look normal until three things have happened. One, we figure out whether the distribution of this virus looks like an iceberg, which is one-seventh above the water, or a pyramid, where we see everything. If we're only seeing right now one-seventh of the actual disease because we're not testing enough, and we're just blind to it, then we're in a world of hurt. Two, we have a treatment that works, a vaccine or antiviral. And three, maybe most important, we begin to see large numbers of people—in particular nurses, home health care providers, doctors, policemen, firemen, and teachers who have had the disease—are immune, and we have tested them to know that they are not infectious any longer. And we have a system that identifies them, either a concert wristband or a card with their photograph and some kind of a stamp on it. Then we can be comfortable sending our children back to school, because we know the teacher is not infectious.

And instead of saying "No, you can't visit anybody in nursing home," we have a group of people who are certified that they work with elderly and vulnerable people, and nurses who can go back into the hospitals and dentists who can open your mouth and look in your mouth and not be giving you the virus. When those three things happen, that's when normalcy will return.

Eoin Treacy's view -

Testing, testing, testing. This virus story is not going to be controlled until we have widespread and repeated testing. Without that self-imposed quarantine is a stop gap measure.



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March 20 2020

Commentary by Eoin Treacy

Email of the day on trend endings

I first attended the Chart Seminar way back in 2005 in London when I was joining the Chandler brothers in Dubai who had previously been tutored by David. Do you have on the site a recap of the 3 trend ending characteristics, perhaps with some charts to demonstrate. I know them to be an Acceleration b) Key Reversal and c) Churning Time and Size, I would find it very helpful through to see your explanations in the written word, with some charts to recap.

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. The three primary trend endings are 1) acceleration, 2) the massive reaction against the prevailing trend, 3) ranging time and size. Here is a link to a discussion of these chart patterns from 2017. 

The key reversal is most useful when it occurs following an acceleration and is dynamic in nature. Here is a link to Comment of the day in August 2019 



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March 19 2020

Commentary by Eoin Treacy

Video commentary for March 19th 2020

March 19 2020

Commentary by Eoin Treacy

Reduce/ re-orientate equities, raise cash, favour USD, EUR and CHF

Thanks to Iain Little and Bruce Albrecht for this edition of their Global Thematic Investors’ Diary. Here is a section:

The Coronavirus crisis, the most serious event since the Global Financial Crisis (“GFC”) of 2008/2009, has set in motion a series of governmental policies whose unfortunate effect is to choke both demand and supply in the global economy.  These policies - prudential measures taken by governments united in their desire to appear to be “doing something”- are likely to be worse, economically speaking, than the disease itself.  Relief comes only with the passing of time or the finding of an anti-viral remedy, the latter a distant prospect at this stage.

Earnings news, monetary news, fiscal news and pandemic news are all following the disheartening course that we feared.  An emergency Fed meeting last Sunday, slashing rates to near zero, failed to reassure.  The next day, Wall Street produced the second of 2 record points drops in a week, falling -13%.  Equity markets have fallen by an average of about -30% from their January highs.

Equity markets are now oversold and distorted by panic.  The market finds it hard, if not impossible, to “price” risk when an end to the crisis is undefined and earnings unknown. And what discount rate should one use in a global panic when rates are near zero?  Many stocks trade under “fair value” on “normalized” earnings.  But the risks being taken by governments are such that there may be worse to come: bankruptcies in directly affected sectors like leisure, hospitality, airlines, hotels and “bricks and mortar” retail.  There may even be nationalizations in troubled sectors.  On the other hand, other sectors, also hit hard by the same waves of panic selling, may emerge as new long-term leaders in a changing world where personal safety, health fears, depersonalizing technology and e-commerce may enjoy further and more widespread adoption.

Eoin Treacy's view -

Millions of people just lost their jobs in the retail and restaurants sector. Weekly jobless figures are reported with a two-week lag, so today’s 281,000 increase is reflective of the week ending March 7th. Most cities in lock down made the decision over last weekend so next week’s figure will be higher but the release on April 2nd is likely to take jobless figures to new highs. The only limiting factor is the ability of people to sign on for benefits given the system’s capacity restraints.



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March 19 2020

Commentary by Eoin Treacy

Fed Starts Dollar-Swap Lines With Nine More Central Banks

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

 

The Federal Reserve established temporary dollar liquidity-swap lines with nine additional central banks,
expanding the rapid roll-out of financial-crisis-era programs to combat the economic meltdown from the coronavirus pandemic.

The new facilities total $60 billion for central banks in Australia, Brazil, South Korea, Mexico, Singapore, and Sweden, and $30 billion each for Denmark, Norway, and New Zealand. The swap lines will be in place for at least six months.

The announcement followed the late Wednesday launch of a Fed facility to support money market mutual funds and comes as part of sweeping emergency measures the U.S. central bank has unleashed to support the economy from the coronavirus.

The Fed already has standing swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.

Eoin Treacy's view -

Boosting the availability of Dollars is a necessary development following the currency’s surge over the last two weeks which is reflective of a massive deleveraging in the nonbank lending community of hedge funds.



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March 19 2020

Commentary by Eoin Treacy

Europe Bonds Soar as Lagarde Pledges No Limits to ECB Action

This article by Jana Randow and John Ainger for Bloomberg may be of interest to subscribers. Here is a section: 

The Bank of England followed Thursday with its second emergency cut in borrowing costs this month, taking the benchmark rate to a record-low 0.1%. The BOE also announced a boost in its asset-purchase program target to 645 billion pounds ($752 billion), made up mainly of gilts.

The two decisions mark the latest in an escalating global response to an outbreak widely seen driving the economy into recession. ECB President Christine Lagarde reinforced the message that policy makers will do all they can, saying there are “no limits to our commitment to the euro.”

The program brings the total of the ECB’s planned bond purchases this year to 1.1 trillion euros, its biggest annual amount ever.

“The ECB was forced to react quickly,” Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, wrote in a note to clients. “The new envelope of 750 billion euros should help bring in spreads more lastingly, but it is questionable whether this will be the turning point of the broader financial market rout.

Eoin Treacy's view -

The bonds of peripheral Eurozone members did indeed bounce today but Germany’s bonds sold off. Spreads might be tightening as a result of the ECB’s actions but this is significantly altered environment from what we have seen previously.



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March 18 2020

Commentary by Eoin Treacy

Video commentary for March 18th 2020

Eoin Treacy's view -

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

Some of the topics discussed include: risk parity leverage imploding which is contributing to volatlity in everything. Pound and Norwegian Krone accelerate lower, oil remains weak very oversold conditions but recession risks rising. 



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March 18 2020

Commentary by Eoin Treacy

Global Money Notes #28 Lombard Street and Pandemics

Thanks to a subscriber for this edition of Zoltan Pozsar’s report on global money market liquidity. Here is a section:

Eoin Treacy's view -

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

A point I have made repeatedly over the years is understanding how volatility shapes the size of positions in quantitative funds is essential to understanding market structure. The funds which deploy high leverage by betting on low interest rates and record low volatility look like geniuses when times are good but the deleveraging that arises from a spike in volatility can have a swift effect on both performance and the wider market.

Volatility on both equities and bonds is surging. At the same time the inverse relationship between bonds and equities is breaking down. That is particularly deadly for the much-vaunted risk parity strategy which is experiencing its biggest drawdown in years.



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March 18 2020

Commentary by Eoin Treacy

Impact of non-pharmaceutical interventions (NPIs) to reduce COVID19 mortality and healthcare demand

This report by Neil Ferguson and team at Imperial College may be of interest to subscribers. Here is a section:

In the (unlikely) absence of any control measures or spontaneous changes in individual behaviour, we would expect a peak in mortality (daily deaths) to occur after approximately 3 months (Figure 1A). In such scenarios, given an estimated R0 of 2.4, we predict 81% of the GB and US populations would be infected over the course of the epidemic. Epidemic timings are approximate given the limitations of surveillance data in both countries: The epidemic is predicted to be broader in the US than in GB and to peak slightly later. This is due to the larger geographic scale of the US, resulting in more distinct localised epidemics across states (Figure 1B) than seen across GB. The higher peak in mortality in GB is due to the smaller size of the country and its older population compared with the US. In total, in an unmitigated epidemic, we would predict approximately 510,000 deaths in GB and 2.2 million in the US, not accounting for the potential negative effects of health systems being overwhelmed on mortality.

For an uncontrolled epidemic, we predict critical care bed capacity would be exceeded as early as the second week in April, with an eventual peak in ICU or critical care bed demand that is over 30 times greater than the maximum supply in both countries (Figure 2). The aim of mitigation is to reduce the impact of an epidemic by flattening the curve, reducing peak incidence and overall deaths (Figure 2). Since the aim of mitigation is to minimise mortality, the interventions need to remain in place for as much of the epidemic period as possible. Introducing such interventions too early risks allowing transmission to return once they are lifted (if insufficient herd immunity has developed); it is therefore necessary to balance the timing of introduction with the scale of disruption imposed and the likely period over which the interventions can be maintained. In this scenario, interventions can limit transmission to the extent that little herd immunity is acquired – leading to the possibility that a second wave of infection is seen once interventions are lifted.

Eoin Treacy's view -

Here is a link to the full report.

A friend in San Francisco was skiing in Colorado last week with ten friends. They are all now sick and one has been diagnosed. On Monday he was feeling ill and running a temperature of 103 so he called the CDC. They called back in about half an hour, told him to shelter in place, avoid the ER and gave him an appointment to be tested three days later. Today he is having difficulty breathing and still has not been tested.



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March 18 2020

Commentary by Eoin Treacy

Email of the day on the 10-year - 3-month yield curve spread

March 17 2020

Commentary by Eoin Treacy

Video commentary for March 17th 2020

March 17 2020

Commentary by Eoin Treacy

Email of the day - what will signal a bottom:

I understand the reasoning behind the various precautions being recommended & taken, but what will be the criteria for sounding the all clear? Using the present logic, it seems that as long as there is at least 1 person with the virus the threat remains & the precautions should remain.

Eoin Treacy's view -

Thank you for this question which others may also have an interest in and it is a highly relevant topic as trends accelerate.

Unemployment data is about to get ugly. Jobless figures are reported with a two- week lag so the update on Thursday will be for March 7th. Thousands of people lost their jobs yesterday with shutdowns in cities like New York, Los Angeles and San Francisco, The same will be true in much of Europe where economic activity is grinding to halt. Retailers like TJX have hundreds of thousands of employees and we need to question how long they can sustain payroll without cutting headcount significantly.

Temporary worker numbers peaked more than a year ago but can be expected to fall off a cliff when next reported on April 3rd.



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March 17 2020

Commentary by Eoin Treacy

Rescue Pledge Triggers Biggest Treasury Bond Rout Since 1982

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

The Treasury market buckled Tuesday at the prospect of a flood of U.S. spending to fend off an economic nightmare.

Yields at the long end of the curve shot higher on Treasury Secretary Steve Mnuchin’s proposal for a $1.2 trillion stimulus package. Rates on 10- and 30-year bonds shot up more than 36 basis points, their biggest one-day increases since 1982, while an iShares ETF tracking Treasuries maturing in 20 or more years sank a record 6.7%. The U.S. 10-year yield, the world’s borrowing benchmark, is now more than 70 basis points above the record low set last week.

The surge in yields is in response to the massive supply pressure on the way, rather than any expectations for a recovery in growth or inflation, said Jon Hill, rates strategist at BMO Capital Markets.

“It’s clear there’s a recession coming, and policy makers need to do everything they can to avoid a depression,” Hill said.

Tuesday’s market reaction also follows emergency steps by the Federal Reserve to support commercial-paper markets and pump more liquidity into the system, and Sunday’s surprise interest-rate cut, which took the target policy rate to near-zero. These efforts have amplified the steepening in the yield curve, as the gap between two- and 10-year yields touched its widest point in two years, at 59 basis points.

Eoin Treacy's view -

I recorded an interview with Jim Puplava today on FinancialSense Online and he quoted back to me my statement “that the coronavirus will be temporary but the policy response is infinite” I stand by that view because the worst case scenario is we get a vaccine in a year and that allows activity to pick again. Between now and then the range of policy responses is increasing by the day.



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March 17 2020

Commentary by Eoin Treacy

Email of the day on accurate numbers of cases

Eoin, hello. How can you be so sure that China is faking the numbers on coronavirus infections? I am hoping that their success shows a successful path to controlling the virus

Eoin Treacy's view -

Thank you for this question. The first and most important point is China’s propaganda machine has gone into overdrive with the response to the coronavirus. The reaction has been used as an excuse to greatly increase oversight and control of the economy. That extends to even more critics of the regime disappearing and increasingly opaque methodologies in how the numbers of infected are counted. 



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March 17 2020

Commentary by Eoin Treacy

Email of the day more on coronavirus prepping:

My friend Chen Lin of  What is Chen Buying? What is Chen Selling?   (chenpicks.com ) included some very valuable information below in his letter .

Please read this important information

I want everyone to stay safe, keep your bodies strong and wait for better times.

These are some suggestions to keep you and your beloved one safe in the crisis.

1. Get an oximeter. Why? The current coronavirus test in the US is not accurate according to my sources. Because the virus may or may at your nose or throat at time of test. Usually it takes 2-3 times to give a more accurate test results. For citizens, the best test is to use an oximeter and watch you and your beloved ones oxygen level in your blood. This is a much more reliable way to discover if you are infected with the virus and you can do it easily at home. As we know, early detection can save lives and I want to have one before the American public start to buy.

2. Have some sinus drug like Afrin at home. Why? When you have a sinus infection, you breathe very hard and can push the virus into you lung, if there are present on you or around you.

3. Have some anti septic mouth rinse and rinse your month a few times a day. It can kill the germs as well as virus in your mouth and upper throat.

I also heard advise to take a hot shower after your come back home. Plus all the recommendations from the CDC is helpful. Remember to stay safe and we will see this crisis through.

Eoin Treacy's view -

It feels like eons ago but it was only two weeks ago, that I wrote about the precautions my family had taken to stock up for what was looking like an inevitable self-imposed quarantine. Mrs. Treacy did buy a pulse oximeter yesterday, because it is a handy way to figure out if you do indeed need medical attention or are simply suffering from a cold.



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March 16 2020

Commentary by Eoin Treacy

Video commentary for March 16th 2020

March 16 2020

Commentary by Eoin Treacy

Fed Has Acted Yet Dollar Funding Markets Remain Under Pressure

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

Over the past week, the Federal Reserve has hit the U.S. dollar funding markets with a barrage of liquidity and tools to ensure they remain lubricated. Yet indicators of funding stress are still showing pressure.

In an emergency action Sunday, the central bank slashed interest rates to zero, adjusted the parameters of global dollar swap lines, in additional to offering trillions of dollars of liquidity via operations for repurchase agreements. Here’s what some of the key metrics have to say about the level of distress in the financial system:

Despite the Fed action, the repo market remains volatile. At one point during Monday’s trading session, the rate for overnight general collateral was around 2.50%, according to ICAP, which is well above the central bank’s new target range for the fed funds rate of 0% to 0.25%. While the bid-ask spread is now around 2%/1.25%, the central bank said it plans to conduct another overnight repo offering of up to $500 billion.

Cross-Currency Basis Swaps
The Fed on Sunday also lowered the rate on its U.S. dollar liquidity swap lines in coordination with other central banks. As a result, the three-month cross-currency basis for dollar yen -- a proxy for how expensive it is to get the greenback -- briefly spiked to its widest on record Monday in Asian trading before pulling back, according to Bloomberg data since 2011. Strategists at Bank of America believe volatility may persist until the Fed fixes the commercial-paper market and there are “more avenues available to secure USD funding.”

Libor-OIS
The gap between the London interbank offered rate and overnight index swaps expanded Monday to the widest level since 2009, led by an increase in Libor’s three-month tenor.

Widening: QuickTake
Rates on three-month commercial paper for non-financial companies reached the highest level since the financial crisis relative to OIS. This suggests companies may be having difficulty selling commercial paper, as they tend to do during times of stress. As a result, Wall Street strategists expect the Fed to announce a resurrection of a crisis-era facility for commercial paper.

Eoin Treacy's view -

The Fed reactivating swap lines between other central banks, cutting rates to zero, reducing reserve requirements for banks to zero and announcing a $700 billion quantitative easing program all point to a clear effort to ensure the financial system remains liquid as the economy shuts down. Ensuring liquidity is a priority for central banks but it is a factor that sends a signal to stock market investors that there may be something else they need to pay attention.



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March 16 2020

Commentary by Eoin Treacy

An Anguished Cry From the NHS Front Line: Coronavirus Is About to Explode Among Medical Staff

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

It strikes them as preposterous that you could achieve anything close to the threshold level of immunity - ultimately 60pc - over the six month window of time available to us before the second (more dangerous?) wave hits in the autumn.

The explosive rise in cases - with 13pc needing intensive care in the Italian region of Lombardy - would smash the system.

As a sample, I offer extracts from an email received on Sunday from consultant cardiologist at a top British hospital, with high-powered credentials, who is working in the front line.

His Whatsapp group of 10 fellow doctors has a Wuhan sense of frustration about it. Things are going horribly wrong. Covid-19 is taking off among NHS staff.

“One of them seems to probably have Covid, as has multiple symptoms. Two of them have personally treated a patient with Covid before the patient was diagnosed, eg with no protective measures in place. It is clear that there are certainly multiple cases amongst staff and patients in every NHS hospital today, and they are actively spreading, with nothing stopping them.

"One of the 10 is in his 50s, and has somewhat restricted lung capacity because of an orthopaedic problem – he spent this weekend making a will and putting his affairs in order. He had realised that with the current NHS leadership, there was basically nothing he could do to avoid catching it in coming days. Crunching the statistics, he realised that several consultants in the hospital will probably die.

“We have received no advice at all to take any measures to reduce spread in the hospital. Where the South Koreans were attending hospital in full hazmat suits, I will be arriving in my suit and
tie tomorrow with nothing to prevent me catching it, and working in an operating theatre that a Covid patient was in on Friday, nobody aware that he had it, and the staff members I will be working with, will all have been in contact with that patient.

Eoin Treacy's view -

“Panic early” or “Keep Calm and Carry On”? That is the decision provided to the UK government last week and they went with the latter, which was the wrong move. They are now, belatedly organising a change of heart. Social distancing is now top priority and not before time. What we now need to see is a clear follow through on shutting down contact between infected people and a massive ramp up of testing.



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March 16 2020

Commentary by Eoin Treacy

Email of the day on lists dividend aristocrats

I used to be able to find a list at the chart library for a list of the shares that are dividend aristocrats by Eoin. I was unable to do so today. Is it still available and if so, can you please advise how I can reach it? Tks in adv.

Eoin Treacy's view -

Thanks for this question which others may have an interest in. The route to find the lists of dividend aristocrats is to open the Chart Library. Select the International Equity Library. The lists of Dividend Aristocrats stocks are the second item on the left-hand column. Here is a link to the lists
 



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March 13 2020

Commentary by Eoin Treacy

March 13 2020

Commentary by Eoin Treacy

Email of the day - on what the market reaction to the coronavirus portends

Today’s commentary regarding the developing crisis in the credit markets is a major concern.  With that worry in mind, the Boeing chart and S & P Banks Index chart become alarming. 

The financial markets appear to have been kept afloat only by increasing credit at lower and lower interest rates which may have reached their bottom limit.

In Australia, the COVD-19 is already affecting the economy.  A New Zealand/Australia cricket match today was played without spectators.  Next week’s opening round of Australian football will also be played behind closed doors!  Micro businesses, such as coffee shops, are reducing staffing levels.  Small business loan defaults are inevitable and will put extra pressure on banks which are already under threat.

Are equity markets signalling a debt crisis that even the Fed cannot overcome?

And

Thanks for your calm evaluation of the current situation. I just want to remind the collective of one of David's mantra: I remember him saying, "If you are going to panic, panic early". I know it is not easy but with your analysis of past recessions, would you be willing to make a very rough prediction as to how long do you think before markets will start to stablise. Thanks again. Best rgds

Eoin Treacy's view -

Florida has hurricanes every year. People know when they are coming, so they stock up on essentials, take out a subscription to Netflix and hunker down to wait it out for a few days. Hurricanes have an economic impact that measures in the billions because of the damage done to physical infrastructure but economies pick right back up afterward because of the additional spending on rebuilding. It’s the classic version of the broken window argument in economic theory.

Hurricanes cause isolated credit events in the most overleveraged, least well-insured businesses but does not result in a wider credit event even when they are particularly disastrous like Hurricane Katrina. The coronavirus is worse than a hurricane. Let’s try and unpick why that is:



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March 13 2020

Commentary by Eoin Treacy

Eoin's personal portfolio: commodity long stopped out at loss, stock market index short opened

Eoin Treacy's view -

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.



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March 12 2020

Commentary by Eoin Treacy

Video commentary for March 12th 2020

Eoin Treacy's view -

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

Some of the topics discussed include: Central banks fail to placate investor fears, Wall Street declines further. solvency issues coming to fore with overvaluation, leverage and liquidity issues all coming to the fore, India breaks down, cloud following the market down.



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March 12 2020

Commentary by Eoin Treacy

Blackstone, Carlyle Urge Portfolio Companies to Tap Credit

This article by Sridhar Natarajan and Heather Perlberg for Bloomberg may be of interest to subscribers. Here is a section:

The moves -- along with similar plans by Hilton Worldwide Holdings Inc., Wynn Resorts Ltd. and Boeing Co.-- are signs of the uncertainty coursing through corporate America as a global pandemic, a price war in oil markets and other problems threaten to tip the U.S. economy into a recession. A sudden and sustained increase in companies tapping credit lines could eventually strain banks if conditions become so dire that borrowers won’t be able to meet their obligations.

Lenders offer revolving credit lines to strengthen relationships with companies and don’t typically intend for them to be drawn upon en masse. In normal times, revolvers serve as the corporate equivalent of credit cards, giving companies room to borrow as needed and repay when shortfalls ease. Under normal
circumstances, the lines are seldom maxed out. Extensive use can be seen as a harbinger of distress.

Oil and natural gas companies can come under particular funding stress when prices fall. That’s because their credit lines are periodically updated based on market prices, potentially motivating companies to tap them early.

Blackstone’s private equity operation is the firm’s largest business by assets, at $183 billion. Energy accounts for almost 10% of the total portfolio, the New York-based company said in October. Rival private equity firms also are weighing similar actions, according to executives at two of them.

“From an economic perspective, the virus has created dislocation in the market and fear among the people,” Blackstone co-founder Stephen Schwarzman said in an interview in Mumbai last week. “Once that starts, one has to find the impact of negative consequences.”

Eoin Treacy's view -

Sequoia kicked off efforts to lock down funding last week with its memo to partner companies and other private equity companies are following suit this week. Additionally, large companies with potential cashflow issues are also drawing down on credit lines. That is putting strain on banking balance sheets as they attempt to deal with the cut to interest margins and the potential clients will have solvency issues.



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March 12 2020

Commentary by Eoin Treacy

Fed to Widen Treasury Buying, Expand Repo to Ease Market Strain

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

U.S. stocks trimmed staggering losses of more than 8% earlier in the day as investors absorbed the Fed’s muscular decision.

The buying will include coupon-bearing notes and match the maturity composition of the Treasury market, it said. Ten-year U.S. Treasury yields fell sharply to trade around 0.68%.

“The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities,” the New York Fed said.

Term repo operations in large size have also been added to help markets function, it also said. The New York Fed said it would offer $500 billion in a three-month repo operation at 1:30 p.m. and repeat the exercise tomorrow, along with another $500 billion in a one-month operation, and continue on a weekly basis for the rest of the monthly calendar.

Eoin Treacy's view -

The call on the repo market is likely to continue to rise because banks, the world over, are increasingly starved of liquidity. The liquidity shortage that appeared in Q3 was but a foretaste of the difficult environment we are currently presented with and suggests the remedial action to ensure property functioning of the money markets is going to be significantly larger than currently envisioned.



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March 12 2020

Commentary by Eoin Treacy

Risk Parity Trade Made Famous by Ray Dalio Is Now Ringing Alarms

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

Vontobel Asset Management’s risk-parity product has cut its stock position from 140% about a month ago to around 28%, while its bond exposure remains around 260%, says head of multi-asset Daniel Seiler.

“You reduce your volatility with a negative correlation and if that is not the case anymore, you will obviously need to reduce the volatility with a different measure and this could deleverage your whole portfolio,” he said from Zurich, referring to the link between bonds and shares.

On a positive note, for both asset classes to fall in tandem for an extended period, “what you would need is an inflationary shock and at the moment I don’t see that at all,” Seiler added.

With bond yields now so low, there are others on Wall Street who may disagree.

Eoin Treacy's view -

An inflation scare is one possible scenario where both bonds and equities fall at the same time. It is not the only one. Against a background where the pace of economic activity is taking a war-like dislocation the bigger risk is a solvency crisis or a liquidity crisis.



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March 12 2020

Commentary by Eoin Treacy

Coronavirus: Why You Must Act Now

This article by Tomas Pueyo is the best write-up on the spread of the coronavirus I have seen. Here is a section:

 

Here, you can just use a share of official cases to true cases. How to decide which one? For the Bay Area, they were testing everybody who had traveled or was in contact with a traveler, which means that they knew most of the travel-related cases, but none of the community spread cases. By having a sense of community spread vs. travel spread, you can know how many true cases there are.

I looked at that ratio for South Korea, which has great data. By the time they had 86 cases, the % of them from community spread was 86% (86 and 86% are a coincidence).

With that number, you can calculate the number of true cases. If the Bay Area has 86 cases today, it is likely that the true number is ~600.

France and Paris
France claims 1,400 cases today and 30 deaths. Using the two methods above, you can have a range of cases: between 24,000 and 140,000.


The true number of coronavirus cases in France today is likely to be between 24,000 and 140,000.

Let me repeat that: the number of true cases in France is likely to be between one and two orders or magnitude higher than it is officially reported.

Don’t believe me? Let’s look at the Wuhan graph again.

Eoin Treacy's view -

Testing as many people as possible, isolating anyone who has come into contact with an infected individual and curtailing travel everywhere is the only way we are going to see a decline in the number of new cases. The pressure health services come under as the number of new severe cases explodes is non trivial and is the primary reason the death rate in Italy is so high. Unfortunately, the USA’s reliance on private healthcare, motivated by profits rather than potential need, is hampering the ability to get tests done.  

Early action in locking down community transmission is the only solution and even if it is not early it is still the only solution. My family has been on a social distancing regime for the 10 days week. I cancelled all travel, but we are going on full self-quarantine after school today. Even then our school has not yet closed but that seems inevitable at this stage.

 



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March 11 2020

Commentary by Eoin Treacy

Video commentary for March 11th 2020

Eoin Treacy's view -

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

Some of the topics discussed include: bonds and equities sell off together, S&P500 in the region of the 1000-day MA, oil and gold weak, Dollar steadies, fallout from the coronavirus is promoting massive monetary and fiscal stimulus but it has yet to gain traction in asset prices. 



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March 11 2020

Commentary by Eoin Treacy

ECB's Lagarde Warns of 2008-Style Crisis Unless Europe Acts

This article by Fergal O'Brien for Bloomberg may be of interest to subscribers. Here is a section:

Lagarde told European Union leaders on a conference call late on Tuesday that without coordinated action Europe “will see a scenario that will remind many of us of the 2008 Great Financial Crisis,” according to a person familiar with her comments. With the right response, the shock will likely prove
temporary, she added.

Lagarde said her officials are looking at all their tools for Thursday’s policy decision, particularly measures to provide “super-cheap” funding and ensure liquidity and credit don’t dry up, said the person, who declined to be identified because the call was private.

Still, she stressed that central-bank measures can only work if governments throw their weight behind them too, with steps to ensure banks keep lending to businesses in affected areas, said the person. An ECB spokesman declined to comment.

Lagarde spoke hours before the Bank of England became the latest central bank to take emergency action. It announced a 50 basis point interest-rate cut early Wednesday, combined with measures to help keep credit flowing, and said it still has more policy space to act if needed.

Eoin Treacy's view -

The ECB has been cautioning Eurozone governments for much of the last decade that fiscal stimulus has to be part of the solution to the region’s debt/growth challenges. That exhortation has fallen on deaf ears as the region’s creditors imposed fiscal conservativism on the most profligate debtors.



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March 11 2020

Commentary by Eoin Treacy

BOE Cuts Rates in Coordination With Treasury Virus Response

This article by Fergal O'Brien, David Goodman and Anooja Debnath for Bloomberg may be of interest to subscribers. Here is a section:

Chancellor of the Exchequer Rishi Sunak announced 30 billion pounds ($34 billion) of fiscal stimulus and pledged to spend 600 billion pounds by 2025 on a massive infrastructure program, alongside measures to help businesses and the National Health Service weather the disruption from the disease.

The European Central Bank is expected to join the easing this week after President Christine Lagarde warned leaders on Tuesday that the crisis has echoes of 2008.

“The bazookas are loaded and the BOE just fired their first salvo,” said Luke Hickmore, investment director at Aberdeen Standard Investments. “It seems unfeasible that the ECB does not also find ways of supporting the banking system. Europe needs to get its act together -- and act together.”

Eoin Treacy's view -

The predictable 50 basis cut to the Bank of England’s interest rates is the first volley in a range of supports. The announcement of massive infrastructure spending, fiscal deficits but less bond issuance than originally anticipated is all designed at making the best of a bad situation. That final point where less bonds were issued than expected was probably aimed at countering the claim Modern Monetary Theory is being deployed.



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March 11 2020

Commentary by Eoin Treacy

Boeing Plans Full Drawdown of $13.825 Billion Loan

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

Boeing obtained the loan from a group of banks last month to help it deal with its cash burn while it prepares to return its 737 Max plane to the skies. It initially tapped about $7.5 billion of the debt, and is now expected to draw the rest, said the people, asking not to be named discussing private information. Boeing plans to draw the remainder of the loan as a precaution due to market turmoil, one of the people said.

Companies affected by the virus are increasingly turning to banks for short-term financing to provide a safety net. United Airlines Holdings Inc. raised $2 billion in new liquidity with a secured term loan, while Norwegian Cruise Line Holdings Ltd. recently signed a new $675 million revolver. Should credit conditions worsen, more firms may start to draw down their credit lines, market watchers say. Boeing’s loan came about before Covid-19 spiraled into a global crisis and was expected to be fully drawn eventually.

“They want to have cash on the balance sheet,” said Bloomberg Intelligence’s Matthew Geudtner. The Max grounding, the company’s joint venture with Embraer SA and looming debt maturities will also weigh on Boeing’s cash hoard, he said.

Eoin Treacy's view -

The easiest way to determine where the biggest risks reside in this market is to use this metric: Whatever people were worried about in 2019, the coronavirus makes things worse.



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March 11 2020

Commentary by Eoin Treacy

Eoin's personal portfolio: commodity long initiated February 18th 2020

Eoin Treacy's view -

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.



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March 10 2020

Commentary by Eoin Treacy

Video commentary for March 10th 2020

March 10 2020

Commentary by Eoin Treacy

Market Makers "Didn't Show Up for Work," Macro Risk CEO Says

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

“It’s literally as if the market makers didn’t show up for work,” Curnutt said in a Bloomberg Television interview, referring to options and junk-bond exchange-traded funds such as the iShares iBoxx High-Yield Corporate Bond ETF, known by its ticker, HYG. “The posted bid-offers on the screens illustrated that there was no one in the market posting for something that is one of the more liquid -- usually -- hedges to use.”

Banks have been constrained by rules created after the 2008 financial crisis. That has pushed some market-making activity to other types of financial institutions including Citadel Securities and Virtu Financial Inc., which was one of a handful of firms that rose in trading Monday as the S&P 500 slipped
7.6%.

“The traditional liquidity provider in times of stress -- the bank -- really isn’t there,” John McClain, portfolio manager at Diamond Hill Capital Management, said in an interview. “Banks themselves have a lot more regulation around what they can be doing.”

Still, for all that, trading was relatively orderly in HYG and other debt ETFs, especially compared with the underlying bonds. The liquidity concerns still didn’t mean there was a “full-blown breakdown in markets,” Curnutt said.

Philipp Hildebrand, vice chairman of BlackRock Inc., agreed. “I was there in 2008, and the difference is the financial system essentially seized up, which is not what happened, at least not so far,” he said. “It’s an important signal that the ETF market functions.”
 

Eoin Treacy's view -

ETFs have been a wonderful innovation which have opened up asset classes which were never previously available to retail investors. They have also allowed the cost of investing to come down and reduced performance deviation from the broad market averages. The challenge is ETFs can often be more liquid than their underlying indices and instruments. That represents a significant challenge in times of stress and particularly during bouts of contagion selling.



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March 10 2020

Commentary by Eoin Treacy

Shale's Profitability Problem Just Became Much Worse

This article by Rachel Adams-Heard and Kevin Crowley for Bloomberg may be of interest to subscribers. Here it is in full:

With West Texas Intermediate crude trading just above $30 a barrel, America’s shale producers’
profitability problem just became much worse. Only a handful of companies in two areas of the country have breakeven costs lower than the current oil price. Wells drilled by Exxon Mobil Corp., Occidental Petroleum Corp. Chevron Corp. and Crownquest Operating LLC in the Permian Basin, which stretches across West Texas and southeastern New Mexico, can turn profits at $31 a barrel, data compiled by Rystad Energy show, while Occidental’s wells in the DJ Basin of Colorado are also in the money at that price, which is where oil settled Monday. For everyone else, drilling new wells will almost certainly mean going into the red.

Eoin Treacy's view -

The most expensive segments of the oil sector focusing on higher cost production are at risk of being shut in. Even in the best of times a lot of offshore supply has a $40 cost of production but deepwater and Brazil’s pre-salt can stretch to $70. Canada’s tar sands can be among the highest cost production areas but legacy operations have lower costs. Meanwhile the low-price environment is likely to represent an acceleration in the pace of consolidation in the unconventional sector.



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March 10 2020

Commentary by Eoin Treacy

Xi Jinping visits Wuhan, in major show of confidence as China turns corner on coronavirus

This article by James Griffiths for CNN may be of interest to subscribers. Here is a section:

He "will visit and express regards to medical workers, military officers and soldiers, community workers, police officers, officials and volunteers who have been fighting the epidemic on the front line, as well as patients and residents during the inspection," Xinhua reported.

That Xi can visit the city suggests the government has supreme confidence in his safety and epidemic controls put in place there. The closest he previously came to the frontlines of the outbreak was visiting virus treatment centers in the capital Beijing, which has far fewer cases than Wuhan.

Senior government officials, including Vice Premier Sun Chunlan and Premier Li Keqiang, have visited Wuhan, but it was assumed until now that the risk to Xi, even if slight, was not worth the potential cost. Since taking office in 2011, Xi has centralized authority massively, becoming China's most powerful leader since Mao Zedong, and were the 66-year-old to fall ill, that could seriously destabilize the political system.

Eoin Treacy's view -

Xi’s visit to a heavily sanitised sites in Wuhan is clearly aimed at signaling China is over the worst of the epidemic. What is less reported on is they have simply stopped counting. The majority of regions outside Hubei are only counting serious cases and ignore people with mild symptoms or those who are asymptomatic.



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March 10 2020

Commentary by Eoin Treacy

Britain Seen Announcing Biggest Bond Deluge in Nearly a Decade

This article by John Ainger and Greg Ritchie for Bloomberg may be of interest to subscribers. Here is a section:

 

“Market momentum this powerful will not be reversed by even a very large supply shock,” said John Wraith, a U.K. rates strategist at UBS Group AG in London. “Negative yields are clearly a possibility, especially in safest, shortest issues.” The scope of estimates from primary dealers of U.K. government bonds, known as gilt-edged market makers, was broad ranging.

The most conservative -- Morgan Stanley -- sees a supply of 146.3 billion pounds, while Nomura International Plc estimates an increase to 185 billion pounds. That’s a level not trumped since former leader Gordon Brown oversaw a record 228 billion in 2009-10 to help extricate the country from the financial crisis.

Now that Johnson has delivered on his election promise to “get Brexit done” after years of political turmoil, to retain support he must address the concerns of those in some of the poorest regions of the U.K. That requires funding for infrastructure, health care and job creation. Finance minister Rishi Sunak on Sunday hinted the nation’s fiscal rules could be ditched as he prepares a massive package of measures to tackle the coronavirus crisis.

Eoin Treacy's view -

The entire UK yield curve is a couple of interest rate cuts from negative yields so it is an ideal time for the government to borrow more than it needs to ensure ample liquidity to combat the negative effect of the coronavirus, to placate a restive population eager for better standards of living and to ensure a smooth exit from the EU.



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March 09 2020

Commentary by Eoin Treacy

Video commentary for March 9th 2020

March 09 2020

Commentary by Eoin Treacy

Wall Street Urges Shock-And-Awe Stimulus to End Market Bleeding

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

“Overall we expect declines in equities to continue until the coordinated response has a size where it offsets the impact from COVID-19,” said Peter Garnry, head of equity strategy at Saxo Bank. “What is happening now is that oil price war and COVID-19 have increased the probability of a new credit crisis.”

As such, the stars may be aligning for extraordinary stimulus. “If fiscal expansion comes with explicit guarantee from the central bank to backstop any funding required then you basically have the closest you get to ‘helicopter money’” said Garnry. “It’s too early at this point but it all depends on how the global pandemic plays out and whether we get another credit crisis.”

Ian Shepherdson, founder of Pantheon Macroeconomics, said on Twitter rising coronavirus cases in the U.S. could see the Fed cut rates to zero and a $1 trillion stimulus package. In the meantime, potentially brace for the Treasury curve to fall near zero with the S&P 500 tumbling further, he wrote.

Former Fed economist Claudia Sahm suggests the federal government should send money to people affected, push banks to ease pressure on borrowers and boost unemployment support. Bill McBride, who runs the Calculated Risk blog, has floated making all virus tests free and expanding insurance for the jobless.

Eoin Treacy's view -

Monetary policy beats most other factors most of the time has been a refrain at this service for decades. There is clear need for combined monetary and fiscal stimulus from most countries and if that is coordinated then all the better. However, while these kinds of supports for consumer activity are necessary, we need to also see progress made in the spread of the virus.



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March 09 2020

Commentary by Eoin Treacy

Rosneft Plans to Increase Output as Russia Digs in for Price War

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

Last week in Vienna, ministers from Russia, Saudi Arabia and other members of the group left a fractious meeting with no deal to continue the cuts beyond April 1. Saudi Arabia heavily discounted its oil over the weekend, triggering a plunge of more than 20% in international crude futures.

Rosneft’s London-listed shares dropped 19.5% on Monday, while markets in Moscow were closed for a public holiday. In a separate statement, Russia’s finance ministry said that the country’s oil-wealth reserves would be sufficient to cover lost revenue “for six to 10 years” at oil prices of $25 to $30 a barrel.

 

Eoin Treacy's view -

Unconventional oil and gas has been one of the biggest gamechangers for the global economy in history. When the world’s biggest consumer, where production peaked decades ago morphs into the world’s biggest producer and a net exporter it changes the fundamentals and interrelationships of the market.



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March 09 2020

Commentary by Eoin Treacy

Recession Looms in Europe as French Demand 'Call to Arms'

This article by William Horobin and Fergal O'Brien for Bloomberg may be of interest to subscribers. Here is a section:

The downbeat assessments come amid a meltdown in financial markets not seen since the height of the global financial crisis in 2008. It marks a grim start to the week for European Central Bank policy makers, who meet in Frankfurt and may be forced to lower interest rates and step up bond purchases. The U.S. Federal Reserve has already acted, with an unexpected easing last week.

“I want a strong, massive, coordinated response,” Le Maire said on France Inter Radio as the central bank slashed the outlook for the country’s economic expansion this quarter to 0.1% from 0.3%.

“We should work on a stimulus plan with fiscal and budgetary measures, and tax cuts, so that when the epidemic crisis is over we can relaunch the economic machine,” he said. The virus is another blow to the euro area’s second-largest economy, after disruption from strikes caused output to shrink at the end of 2019.

“This slowdown is potentially severe but temporary,” Bank of France Governor Francois Villeroy de Galhau said in a rare statement accompanying the report.

Eoin Treacy's view -

The markets tend to test new central bankers and Christine Lagarde’s honeymoon period is definitely over. The ECB will be expected to lay out what kind of assistance it is willing to provide. While room for interest rate cuts is limited because they are already so low, there is plenty they have do to ensure ample liquidity in the system.



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March 09 2020

Commentary by Eoin Treacy

South Korea's Virus Outbreak May Be Slowing, Officials Say

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

This article highlights widespread testing as one of the primary reasons South Korea has been able to make headway against the outbreak. Here is a section:

South Korea has borne its virus outbreak relatively well despite the scale of the spread. The country has been testing people for the virus at the fastest pace in the world, which appears to have allowed early detection of cases and keep its mortality rate lower than average. Infections have also been largely contained to Daegu and surrounding areas, although the government has not imposed restrictions over people’s movements like in China and Italy.

“New cases of coronavirus have been continuously slowing down, to 248 yesterday, after reaching a peak of 916 on Feb. 28. We should continue this trend,” President Moon Jae-in said in a meeting with his senior secretaries Monday. “Still, we need to stay vigilant as sporadic small group infections in Daegu, North Gyeongsang and other areas continue.”
 

Eoin Treacy's view -

The growth rate of South Korea’s cases appears to have peaked which suggests the measures put in place so far have helped contain the spread. The Kospi Index pulled back sharply today to test its recent lows.



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March 06 2020

Commentary by Eoin Treacy

March 06 2020

Commentary by Eoin Treacy

Covid-19 and Global Dollar Funding

Thanks to a subscriber for this edition of Zoltan Pozsar and James Sweeney’s report for Credit Suisse on the plumbing of the global financial sector. Here is a section:

Eoin Treacy's view -

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

The Credit Suisse team do an excellent job of highlighting where the risks are and provide a handy list of instruments to monitor to get an idea of how liquidity flows are functioning.

The repo market illiquidity in September was a signal to everyone that the tightening program had gone too far. There was nowhere near enough available capital in the system to allow the global money market to function. The Fed stepped in with a large swift injection of liquidity; inflating its balance sheet by $400 billion in four months.



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March 06 2020

Commentary by Eoin Treacy

Email of the day on the coronavirus infection rate

On coronavirus: figures from US I note that 14 people have now died in US from this disease and yet only 250 other cases have been identified. Would I be right in concluding that as the mortality rate is 1%, around 900 other cases are unidentified because of the absence of testing kits?

Eoin Treacy's view -

The WHO announced a mortality rate of 3.4% today but in order to come up with a true figure a large statistical sample needs to be taken and as of today only about 2000 people have been tested in the USA. A reliable figure for the mortality rate will probably only be arrived at after the virus has run its course and emergency measures give way to more careful study. The most relevant statistic for subscribers is the most at risk group is over 70. That means look after yourself and do everything to protect at risk individuals from infection.



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