Investment Themes - General

Search all article by their themes/tags in the search area
below for example “Energy” or “Technology”.

Search Results

Found 1000 results in General
January 05 2017

Commentary by Eoin Treacy

Bitcoin Suffers Biggest Fall in Two Years Following China Currency Gains

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

Bitcoin's value suffered its biggest single-day decline in two years Thursday, just hours after China's offshore yuan posted its biggest two day gain and days after the cryptocurrency touched $1,000.

The price of bitcoins against the U.S. dollar fell 13% in London trading, changing hands at around $950 each by 13:45 GMT. Bitcoins traded as low as $880 during a volatile session which saw it reach as high as $1137, according financial bookmakers IG.

The moves follow the biggest two-day gain on record for China's offshore yuan, which trades more freely than the domestically controlled currency of the world's second-largest economy. Speculation of government buying led the gains as investors bet authorities are determined to stem capital outflows and avoid a sustained decline in the currency ahead of the inauguration of President elect Donald Trump, who has vowed to label China as a currency manipulator.

The connection is relevant in the nearly all of the daily trading in bitcoin is linked to the yuan, which has fallen more than 7% against the dollar over the past year, as speculators attempt to skirt currency controls and ensure value.

The offshore yuan gain 1% to 6.7989 against the greenback in Asia trading, putting downward pressure on the dollar index and boosting the yen in foreign exchange trading. The move whipsawed the dollar index, a measure of its strength against a basket of six global currencies, from a near 14-year high on Tuesday to three-week low of 101.74 by the start of European trading before it recovered to 102.10 by 13:45 GMT

Eoin Treacy's view -

I have been pointing out in recent audios that China represents the majority of Bitcoin trading and what goes on in that country is likely to have a profound impact on the value of the cryptocurrency. In many respects we might look on Bitcoin as the anti-Renminbi because it tends to do best when Chinese investors are worried about the stability of their domestic currency. 



This section continues in the Subscriber's Area. Back to top
January 05 2017

Commentary by Eoin Treacy

Treasuries Soar Most Since Post-Brexit as Market Volatility Hits

This article by Brian Chappatta and Edward Bolingbroke for Bloomberg may be of interest to subscribers. Here is a section:

Treasuries extended gains across the curve, driving down benchmark yields by the most since the days after the June Brexit vote, as traders across financial markets backed away from crowded bets.

The benchmark 10-year U.S. yield plunged about eight basis points to 2.36 percent at 12:15 p.m. in New York, touching the lowest level since Dec. 8, according to Bloomberg Bond Trader data. It’s on pace for the biggest decline since June 27. The 10-year break-even rate, a market measure of inflation expectations, fell from close to the highest level since 2014.

Across financial markets, trends snapped Thursday as investors weighed the risk of a lackluster payrolls report Friday and the prospect that trades based on Donald Trump’s impending presidency had gone too far. Data from the ADP Research Institute on Thursday indicated companies added fewer jobs in December than forecast. The figures come a day before the Labor Department releases its monthly payrolls report. 

“A bunch of the widely predicted trades for this year are all being broken at the same time, with oil going lower, investment-grade corporates widening out, TIPS break-evens tightening, and then rates rallying as a result,” said Mike Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $343 billion. “Some key levels being broken just inspired further buying.”  

 

Eoin Treacy's view -

The odds are in favour of the view that the 35-year bull market in bonds is over, however it would be a mistake to think that such a lengthy expansion will end overnight. Inflationary expectations might well be justified in the medium-term but they have run ahead of the market and Treasury yields in the region of 2.5% are competitive with many equities and therefore desirable by bond investors conditioned over generations to buy the dip. 



This section continues in the Subscriber's Area. Back to top
January 05 2017

Commentary by Eoin Treacy

Email of the day on separate video and audio files

The VIMEO software for the new subscriber’s audio demands lots of download capacity. I am fixing this issue with my phone company. Is it possible to include a separate Audio file with the combined Video & Audio? If I am away from the house I like the choice to just to listen to the audio. If this is too difficult don't worry I like the new Video and Audio format. Eoin see you in Singapore in April.

Eoin Treacy's view -

Thank you for this question which gives me the opportunity to clarify what services we are in fact providing and I look forward to renewing our acquaintance in Singapore in April. 

I record the video and audio file concurrently and post them separately. You will find links to the video on the homepage for the relevant day but I also post the regular audio file separately in the Subscriber’s Audio section. You can access it either through the embedded audio player at the top of the page of via the Subscriber’s Audio section of the site where all our audios are archived. 



This section continues in the Subscriber's Area. Back to top
January 04 2017

Commentary by David Fuller

Harvard Academic Sees Debt Rout Worse Than 1994 Bond Massacre

Here is the opening of this interesting article from Bloomberg

If you thought you had already read the gloomiest possible prognosis for bonds, wait until you read this one.

Paul Schmelzing, a PhD candidate at Harvard University and a visiting scholar at the Bank of England, said if the latest bond market bubble bursts, it will be worse than in 1994 when global government bonds suffered the biggest annual loss on record.

“Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded,” wrote Schmelzing in an article posted on Bank Underground, which is a blog run by Bank of England staff. “History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 ‘bond massacre’”.

Schmelzing, whose research focuses on the history of international financial systems, divided modern-day bond bear markets into three major types: inflation reversal of 1967-1971, the sharp reversal of 1994, and the value at risk shock in Japan in 2003.

The Bank of America Merrill Lynch Global Government Index of bonds fell 3.1 percent in its worst-ever annual loss in 1994 as then-Fed Chairman Alan Greenspan surprised investors by almost doubling the benchmark rate. Treasury 10-year yields surged from 5.6 percent in January to 8 percent in November.

The current bond market is facing the “perfect storm” of potential steepening of the bond yield curve, monetary policy tightening, and a multi-year period of sustained losses due to a “structural” return of inflation resembling that of 1967, he said. Last quarter was the worst for government bonds since 1987, according to data compiled by Bloomberg.

Global inflation expectations, as measured by the yield difference between nominal and index-linked bonds, have risen to the highest since May 2015 after falling to a record low in February last year.

“By historical standards, this implies sustained double-digit losses on bond holdings, subpar growth in developed markets, and balance sheet risks for banking systems with a large home bias,” Schmelzing said.

David Fuller's view -

I maintain that US 10-year Treasuries will not break their July low of 1.318% during my lifetime.  In fact, it may not be broken in this century.  Why?  Because this is one of the biggest bubbles of all time.  It developed over 35 years and took US yields to their lowest levels since The Great Depression (1929-39). 

However, this is certainly not a consensus view.  Until very recently, there was a clear consensus that we were living in ‘a new normal’ of disinflation and deflation.  We were told that GDP growth in developed countries would remain historically low for many more years.  In fact, some bond market experts say that US 10-year Treasury yields will break their July 2016 lows within the next three years.  It is often hard to accept that one’s favourite trend is ending.

Consequently, for perspective we should look at some long-term charts.

This item continues in the Subscriber’s Area, where six charts and an additional article are also posted..



This section continues in the Subscriber's Area. Back to top
January 04 2017

Commentary by David Fuller

Sir Tim Barrow Appointed as UK Ambassador to the EU

Theresa May has appointed Sir Tim Barrow, a career diplomat, as the new British ambassador to the EU in Brussels, replacing Sir Ivan Rogers, who quit on Tuesday.

Her decision means she has ignored calls from within the Tory party to appoint a wholehearted Brexiter – possibly from outside of the civil service – to the job.

Rogers, the head of UKRep – in effect the UK embassy in Brussels – resigned in frustration on Tuesday urging his fellow civil servants to provide impartial advice, and stand up to muddled thinking. He also made clear he thought that the UK government not only lacked an agreed exit strategy, but also a coherent exit negotiating team.

Barrow was the UK ambassador to Moscow until 2015 and in March 2016 succeeded Sir Simon Gass as political director at the Foreign Office. He has extensive European experience and acted as first secretary at UKRep. His appointment is also a victory for the Foreign Office, which lost the UKRep post to former Treasury officials in 2012.

May is due to trigger article 50, to formally start EU talks, in March, requiring her to urgently recruit someone committed to delivering Brexit, but also knowledgeable about how the labyrinthine EU works.

Barrow said: “I am honoured to be appointed as the UK’s permanent representative to the EU at this crucial time. I look forward to joining the strong leadership team at the Department for Exiting the EU and working with them and the talented staff at UKRep to ensure we get the right outcome for the United Kingdom as we leave the EU.”

A Downing Street spokesperson called Barrow “a seasoned and tough negotiator, with extensive experience of securing UK objectives in Brussels”. They added: “He will bring his trademark energy and creativity to this job, working alongside other senior officials and ministers to make a success of Brexit.”

David Fuller's view -

Theresa May certainly needs a British ambassador who is committed to delivering a successful Brexit.  Sir Tim Barrow apparently has the presence and credentials for this important task, including being “knowledgeable about how the labyrinthine EU works”.  However, the UK should not be playing the labyrinthine game, designed to deter countries from leaving the EU.  Until EU negotiators fully understand that a quick, hard Brexit is not only a possibility, but would also be preferred by many UK citizens and businesses, negotiations will be a waste of time.   



This section continues in the Subscriber's Area. Back to top
January 04 2017

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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

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

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

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



This section continues in the Subscriber's Area. Back to top
January 04 2017

Commentary by Eoin Treacy

January 04 2017

Commentary by Eoin Treacy

The Ugly Unethical Underside of Silicon Valley

This article by Erin Griffith for Fortune may be of interest to subscribers. Here is a section:

No industry is immune to fraud, and the hotter the business, the more hucksters flock to it. But Silicon Valley has always seen itself as the virtuous outlier, a place where altruistic nerds tolerate capitalism in order to make the world a better place. Suddenly the Valley looks as crooked and greedy as the rest of the business world. And the growing roster of scandal-tainted startups share a theme. Faking it, from marketing exaggerations to outright fraud, feels more prevalent than ever—so much so that it’s time to ask whether startup culture itself is becoming a problem.

Fraud is not new in tech, of course. Longtime investors remember when MiniScribe shipped actual bricks inside its hard-disk boxes in an inventory accounting scam in the 1980s. The ’90s and early aughts brought WorldCom, Enron, and the dot-bombs. But today more money is sloshing around ($73 billion in venture capital invested in U.S. startups in 2016, compared with $45 billion at the peak of the dotcom boom, according to PitchBook), there’s less transparency as companies stay private longer (174 private companies are each worth $1 billion or more), and there’s an endless supply of legal gray areas to exploit as technology invades every sector, from fintech and med-tech to auto-tech and ed-tech.

The drama has some investors predicting more disasters. “What if Theranos is the canary in the coal mine?” says Roger McNamee, a 40-year VC veteran and managing director at Elevation Partners. “Everyone is looking at Theranos as an outlier. We may discover it’s not an outlier at all.” That would be bad news, because without trust, the tech industry’s intertwined ecosystem of money, products, and people can’t function. Investors may find the full version of the old proverb is more accurate: “One bad apple spoils the whole barrel.”

 

Eoin Treacy's view -

Fraud isn’t generally identified immediately because it takes time for such contrivances to be discovered. The impetus for investigation doesn’t generally arise until someone goes looking for the money that was invested, when the expected return does not materialise. It took the credit crisis to reveal problems with Madoff’s Ponzi scheme, yet it had functioned unperturbed by regulators for years before that event. The above article does an excellent job of identifying the frauds which have occurred in Silicon Valley as well as the culture that promotes exaggeration.



This section continues in the Subscriber's Area. Back to top
January 04 2017

Commentary by Eoin Treacy

China Said to Consider Options to Back Yuan, Curb Outflows

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

China’s currency stockpile has probably shrunk further after hitting a five-year low of $3.05 trillion in November, according to the median estimate in a Bloomberg survey before data due as early as this week.

Capital outflows from China accelerated in recent months as the yuan suffered its worst year of losses against the U.S. dollar since 1994, declining 6.5 percent. About $760 billion left the country in the first 11 months of 2016, according to a Bloomberg Intelligence gauge. The yuan will decline 2.7 percent the rest of this year, according to the median estimate in a Bloomberg survey.

“The policies, if implemented, can help increase foreign-exchange supply in the onshore market, and hence help defend the yuan in the short term,” said Carol Pang, vice president for fixed income, currency and commodities at Zhongtai International Holdings Ltd. in Hong Kong. “However, it won’t change market expectation of further depreciation.”

 

Eoin Treacy's view -

The Renminbi is somewhat oversold at present following a quicker pace of depreciation in the last quarter than seen in the three-year downtrend to date. Therefore there is scope for a reversionary rally or at least some steadying. 



This section continues in the Subscriber's Area. Back to top
January 04 2017

Commentary by Eoin Treacy

Lithium producers can't expand fast enough to meet demand: An interview with Orocobre CEO Richard Seville

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

So the project was one of those moments when you look back on it where we did the hard analytical work, drew a conclusion, acted on our judgement, and it worked and went according to expectations.

I don’t mean picking a certain price I just mean a general trend. I’m quite proud of that actually and sometimes the detail work is really valuable. We’ve redone it recently to understand the hard rock sector and the conversion plant capacity in China. Although that’s harder than what we did in Chile I think we got a pretty good understanding.

That again supports the view that supply growth is being over estimated and over simplified and that it will take longer—just like we did—and there will be delays because of complications in China and offtake and everything will slip because it always does.

So when you look at the supply/demand curve, our view is that it (lithium market) goes very tight for a number of years. And the first relief, if it is relief, will really be that period around 2020.

 

Eoin Treacy's view -

The only way to get around the fact many sources of renewable energy are intermittent is through storage. Right now lithium is the benchmark electrolyte for batteries’ and a great deal of research is going into developing better anodes and cathodes to boost energy density, safety, recharging speed and cost. That suggests the lithium product cycle still has a long way to run which is benefit for miners of the element not least as new potential demand growth drivers evolve. 



This section continues in the Subscriber's Area. Back to top
January 04 2017

Commentary by Eoin Treacy

Email of the day on long-term iron-ore prices

Just wonder why the Iron ore chart in the library starts only in 2008. Is there another source for 50 years of iron prices?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Iron-ore is not traded on a futures exchange. Historically prices have been fixed by contracts between the major miners and consumers with little involvement from the markets. The price for iron-ore quoted in the Chart Library is for Chinese imports at Ningbo and is used as a benchmark because China is such a dominant force in the market. We only have data since 2008 because that is when China started reporting it.  



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by David Fuller

Trump Criticizes House GOP Move to Weaken Ethics Office

President-elect Donald Trump blasted a move by House Republicans to effectively weaken the independent Office of Congressional Ethics that investigates lawmakers’ alleged misconduct.

“With all that Congress has to work on, do they really have to make the weakening of the Independent Ethics Watchdog, as unfair as it may be, their number one act and priority,” Trump wrote on Twitter Tuesday morning. “Focus on tax reform, healthcare and so many other things of far greater importance!’ He closed his tweet with “#DTS,” a reference to his campaign promise to “drain the swamp” of corruption in Washington.

Trump was reacting to a move House Republicans made behind closed doors Monday night, when the caucus voted to approve an amendment to a broader House rules package that would make the office “subject to oversight” by the House Ethics Committee and significantly restrict its powers. The House will vote Tuesday on the rules package as members open the 115th Congress.

The approval of the amendment, proposed by Judiciary Chairman Bob Goodlatte of Virginia, comes amid broader calls from Trump for steps to fight corruption in Washington, including term limits on lawmakers and restrictions on lobbyists.

“Republicans claim they want to ‘drain the swamp,’ but the night before the new Congress gets sworn in, the House GOP has eliminated the only independent ethics oversight of their actions," Minority Leader Nancy Pelosi of California said in a statement. "Evidently, ethics are the first casualty of the new Republican Congress."

House Speaker Paul Ryan defended the change in a statement Tuesday that insisted the ethics office will still “operate independently.”

“The evenly divided House Ethics Committee will now have oversight of the complaints office,” said Ryan of Wisconsin. He said the House panel would exercise that oversight only to "ensure the office is properly following its rules and laws," and said he’s instructed the House committee not to "interfere with the office’s investigations or prevent it from doing its job."

David Fuller's view -

Commenting on Trump’s tweets has already become an international blood sport and the President-elect has yet to be sworn in.  Is this good for democracy?  Yes, if it increases interest and involvement in the political process.  No, if it permanently lowers the standards of political decorum, not that they were very high before Trump’s tweets. 

Meanwhile, I’ll credit Trump for his timing and propriety with the two tweets above.  Yes – DTS.  

  (Stop Press: New Republican Congress reverses ethics move after outcry, from the BBC)



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by David Fuller

British Ambassador to the EU Sir Ivan Rogers Unexpectedly Quits Just Weeks After Row Over Leaked Brexit Memo

Sir Ivan Rogers has quit just months before Theresa May triggers formal Brexit negotiations with the EU in which he would have been expected to play a major role. 

He was expected to be in post until October 2017 but will instead leave within the coming weeks and a replacement will be announced in due course.

A UK Government spokesperson said: "Sir Ivan Rogers has resigned a few months early as UK Permanent Representative to the European Union. 

"Sir Ivan has taken this decision now to enable a successor to be appointed before the UK invokes Article 50 by the end of March. We are grateful for his work and commitment over the last three years".

The Financial Times reported that Sir Ivan did not explain the reasons behind his decision when he informed staff of his decision to leave early, but that he played down his resignation by stating it was only slightly ahead of his planned departure date.

The news has prompted concerns that the UK will get a worse Brexit deal than it would have if he remained part of the team.

Charles Grant, director of the Centre for European Reform think-tank, said: "Ivan Rogers's resignation makes a good deal on Brexit less likely. One of the very few people at the top of British government who understands [the] EU".

David Fuller's view -

Sir Ivan may understand the EU’s intentionally convoluted procedures but he was one of Cameron’s appointees to this insiders’ club and they had different plans.  He should have resigned with Cameron and I think Prime Minister May’s team ought to appoint their own pro-Brexit representatives for negotiating with the EU. 

These need not be mainly civil servants.  I would prefer to see some smart, tough and pro-Brexit businessmen and lawyers among the UK’s negotiating team.   Additionally, the UK should push for an early exit from the EU, as I have said repeatedly.  There is little to be gained from lengthy negotiations.  These would only be divisive and frustrating in terms of UK business planning.  A lengthy exit would also delay the establishment of new trade links with other countries.  EU governments will be under pressure from their own corporations, to negotiate mutually sensible trade terms with the UK, once we have left this closed shop. 

A PDF of The Telegraph’s article is posted in the Subscriber’s Area, along with a link to another relevant article.



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by David Fuller

Compulsory Motor Insurance for Lawnmowers, Gold Buggies and Mini Quad Bikes?

A few years ago, I bought one of those irresistible Christmas presents that you pretend are for the kids, but which you really want to try out yourself. 

It was a quad bike. To be accurate, it was a mini quad bike. It was superb. In length and breadth it was no bigger than an armchair, but it was full of grunt.

We would all pile on it in a pyramid of humanity and careen around the garden: up the bank, into the ditch, slap bang into the tree. It had fat round tyres with deep grass-chewing treads. It roared with a proper trail bike roar, and sent out pleasing clouds of aromatic white smoke.

We gave it some welly, I can tell you; and after a while our tyres began to feel the strain. One day the technical demands became too much. I gave it away to the next door neighbour, who is more mechanically minded than I am, and whose kids are younger and certainly less heavy.

So it is in his interests that I now report an appalling development in the life of off-road quad bike owners. If my neighbour wants to continue to enjoy that quad bike; if he wants to thrill his children; if he wants to exercise the right of every free-born Brit to pootle blissfully on his own quad bike on his own private land – then he is going to have to pay. As things stand, he is going to have to find insurance. Yes: to find a broker to cover the risk posed by his quad bike – to any human being or property coming into contact with that rumbustious rugrat of a machine. 

I hope I do not have to try too hard to convince you that this is insane. Of course this quad bike is dangerous, in the sense that the contents of your cutlery drawer are dangerous. It is perfectly true that if you drove that quad bike at full tilt over a 6ft ha-ha, you would probably do yourself an injury. If you happened to be hurtling round a blind corner, and your neighbour happened to be coming the other way, planning to remonstrate with you, perhaps, about the noise, your neighbour might suffer in the collision. But this country has rubbed along for decades – more than a century, in fact – without seeing any statutory requirement to insure off-road vehicles such as quad bikes. 

Where does it come from, this new rule, or this threat of regulation? There is not a single MP – not even a Liberal Democrat – who has campaigned for the compulsory insurance of off-road children’s quad bikes. There is no pressure group; there have been no querulous voices on the Today programme. There is no need, no call, no demand, no appetite, no reason, no justification, not even the shred of the beginnings of a case – in the United Kingdom – for this kind of pointless and expensive burden on millions of people.

David Fuller's view -

It is hardly surprising that the number of new regulations increases in line with the number of unelected regulators in office.   

A PDF of Boris Johnson’s article is posted in the Subscriber’s Area.



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by David Fuller

Try Not to Tell the Markets What to Do

David Fuller's view -

We are too often tempted to pontificate.  This lack of ego control may indicate a need to attract attention, not least to influence others when we have positions which will be affected.  These egregious mistakes are made by all investors from time to time, and radical short to medium-term forecasts can indicate desperation.

Comparatively inexperienced investors may be less prone to this loss of judgement than experienced leveraged traders.  However, they may impede their own learning curve if overly influenced by those who appear to have better insights or at least more experience.

How can we reduce these problems?       

This item continues in the Subscriber’s Area.



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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

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

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

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



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by Eoin Treacy

January 03 2017

Commentary by Eoin Treacy

Email of the day on Friday's big picture long-term video and audio

Thank you for Friday’s weekly summary, especially the long excursus on technology

It is good from time to time to digress on the long term trends that are likely to influence markets in the future

The short term price action is important but your reflections on the technology developments are very much appreciated

Good work in the New Year!
And

Thank you so much for another nice long term audio last Friday. But you did not comment on precious metals, and gold mining companies. Could you kindly comment on these as well as the oil companies i.e. shell/Exxon etc. at your convenience. Tks again. And best wishes for the New Year to you and David.

 

Eoin Treacy's view -

Thank you both for your well wishes and I look forward to covering both the outlook for technology and precious metals in depth this year. Last Friday I intentionally decided to expound upon the case for technological innovation representing a powerfully bullish factor for both the global economy and the stock market over the coming decades. 



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by Eoin Treacy

January 03 2017

Commentary by Eoin Treacy

Earnings, Not Donald Trump, Are Stocks' Best Friend in 2017

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

“It’s earnings growth that drives stocks over the long term,” said Tom Cassidy, chief investment officer at Univest Wealth Management Division. While “we won’t know if any of these policies will actually be implemented until later next year,” a continued rebound in earnings should nevertheless prop up stocks for additional gains, Mr. Cassidy said.

?Earnings for companies in the S&P 500 grew 3.1% in the third quarter from a year earlier, according to FactSet, entering positive territory for the first time since the first quarter of 2015, when they grew 0.5%. Analysts polled by FactSet expect the rebound to continue, and are estimating a 3.2% growth rate in the fourth quarter of 2016.

An end to the longest earnings slump since the financial crisis also comes against a backdrop of improving economic data. U.S. gross domestic product, a broad measure of the goods and services produced across the economy, posted its strongest quarterly pace of growth in two years in the third quarter, according to data released by the Commerce Department in December.

 

Eoin Treacy's view -

There is no doubt that the earnings recession which prevailed for the last 15 months acted as a headwind to sentiment and more importantly corporate profits. There were fears that the loss of momentum in margin expansion was a precursor to recession and this was enough to keep many investors on the side lines. 



This section continues in the Subscriber's Area. Back to top
January 03 2017

Commentary by Eoin Treacy

China to become net importer of some rare earths

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

According to the Adamas outlook for rare earth demand from 2016 through 2025 over the past five years upwards of 30,000 tonnes of annual rare earth oxide demand were lost due end-users’ growing concerns over supply security. On top of that more than 20,000 tonnes were lost as a result of the ongoing phase out of several mature technologies, such as fluorescent lamps, NiMH batteries, and hard disk drives used in PCs.

According to the authors following the lengthy and painful adjustment, the REE market will return to strong global demand growth for a number of rare earth elements including neodymium, praseodymium, dysprosium, and lanthanum. The resulting rise in price will help "sustain the profitability and growth of today’s dominant producers, and incentivize continued investment in exploration and resource development globally":

REE demand will boom from 2020 onwards as growth rates of top end-use categories including electric vehicles, wind turbines and other hi-tech applications accelerate.

 

Eoin Treacy's view -

Rare earth miners went through a crushing bear market and it is arguable whether it has ended. The growth of new sources of demand is a potential medium-term bullish catalyst. However it is unlikely China will surrender its dominance of the global supply chain not least because it wishes to attract and support advanced manufacturing companies. 



This section continues in the Subscriber's Area. Back to top
December 30 2016

Commentary by Eoin Treacy

December 30 2016

Commentary by Eoin Treacy

Australia ASX 300 Overextensions

Eoin Treacy's view -

Over the last two days I have created spreadsheets for the constituents of the S&P500 and the FTSE-350; ranking them by overextensions relative to the trend mean. Today I am conducting the same exercise for Australia’s ASX 300. 

This is a particularly illiquid time of year and it takes less capital for traders to move markets. This is easiest where accelerated moves are in evidence, stops will have been placed and algorithmic systems have little difficulty identifying them. 
 



This section continues in the Subscriber's Area. Back to top
December 30 2016

Commentary by Eoin Treacy

Euro Jumps 1.6 Percent in Minutes as Algo Orders Surprise Market

This article by Michael G. Wilson and Kevin Buckland for Bloomberg may be of interest to subscribers. Here is a section:

The euro surged as much as 1.6 percent against the dollar in the Asian morning Friday as a rush of computer-generated orders caught traders off guard.

The sudden move started under $1.05 and algorithmic orders snowballed above that level, causing what little liquidity there was on the year’s last trading day to vanish, according to foreign-exchange traders. In minutes, Europe’s single currency jumped to a high of $1.0653, forcing some dealers to take losses to cover positions.

And

“It could be stops taken out in thin liquidity,” said Simon Pianfetti, a senior manager at the market solutions department at SMBC Trust Bank Ltd. in Tokyo. “But it’s still a big move.”
An hour later, the currencies had pared gains and traders were swapping stories on who had come out ahead in dealing rooms. The euro was up 0.5 percent as of 6:14 a.m. in New York, while the franc was 0.4 percent higher. The yen had flipped to a 0.3 percent loss from a 0.4 percent advance.

The sharp move in the world’s most-traded currency pair punctuated a year that’s seen several unexpected moments of extreme volatility, most notably the pound flash crash in October. Again in early Asia time, the British currency dropped more than 6 percent against the dollar in two chaotic minutes, exacerbated by a rush of computer-driven sell orders amid thin liquidity. There is concern that such price swings will become increasingly common, with Boston-based consultant Aite Group estimating algorithmic transactions have more than tripled in the past three years.

 

Eoin Treacy's view -

Algorithmic trading systems have proliferated in an environment where computing power has reached the speed required to support the ambitions of traders. Ultralow rates and massive availability of liquidity have lent fuel to these kinds of programs. The result has been a marked uptick in market specific volatility where programs can profit from what I consider “stops arbitrage”. In much the same way that prior program traders found disparities in pricing between different exchanges, current programs can fish for stops around psychological levels.  



This section continues in the Subscriber's Area. Back to top
December 30 2016

Commentary by Eoin Treacy

Solar Panels Now So Cheap Manufacturers Probably Selling at Loss

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

“Certainly it would be a challenge for anyone to make money at that price,” Osborne said in an e-mail. “The blended cost for most last quarter was about 36 cents to 38 cents.”

The current price is also lower than cost estimates from Trina. The biggest supplier of 2015 expected to reduce costs to about 40 cents a watt by the end of the year, from 45 cents in the second quarter, Chief Financial Officer Merry Xu said in an August conference call. The Changzhou, China-based company’s shareholders on Dec. 16 agreed to a $1.1 billion deal to take the company private. A spokesman declined to comment Friday.

Some companies’ cost structures remain competitive, even with prices this low. Canadian Solar Inc., the second-biggest supplier, reported costs of 37 cents in the third quarter, down from 39 cents in the second quarter. The company has said its costs are among the lowest in the industry, and it expects to reach 29 cents a watt by the fourth quarter of 2017. Many of its competitors expect costs in the low 30s by then, Osborne said.

 

Eoin Treacy's view -

Producing solar cells in an environment where prices are falling and likely to continue to fall as new technologies are integrated into the manufacturing process is a highly competitive business. Companies unable to compete will go bankrupt and even the most successful face the threat of obsolescence. Consumers are the primary beneficiaries. 



This section continues in the Subscriber's Area. Back to top
December 30 2016

Commentary by Eoin Treacy

Pharma's Pricing Troubles Will Get Worse in 2017

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

A structural decline in U.S. pricing power is ominous for every pharmaceutical company -- particularly if it extends to brand-new drugs, or to areas, such as cancer, that traditionally have strong pricing power. Highly effective new cholesterol-lowering drugs from Amgen and Sanofi/Regeneron have had notably sluggish launches since being approved in 2015, as a result of cost-driven roadblocks to patient access. Meanwhile, the market for expensive, immune-boosting cancer drugs -- dominated by Merck & Co. Inc. and Bristol-Myers Squibb Co. when 2016 began -- gained a new entrant this year in Roche Holding AG. Pfizer Inc. and AstraZeneca PLC may join next year. Having five similar drugs on the market would make pricing pressure all but inevitable. These trends quietly gathered strength in 2016, and 2017 will give us more of a sense of just how far they will go. This, regardless of what Donald Trump decides to do, could well be the defining biopharma story of the year.

Eoin Treacy's view -

The pharmaceutical industry has led a charmed existence for a long time because it has been able to increase prices for legacy drugs because of little to no competition. It is the antithesis of what we see in the consumer electronics sector where price pressure is enormous and demand for constant improvements and ever lower costs is the norm. 



This section continues in the Subscriber's Area. Back to top
December 29 2016

Commentary by Eoin Treacy

December 29 2016

Commentary by Eoin Treacy

FTSE-350 Overextensions relative to the 200-day MA

December 29 2016

Commentary by Eoin Treacy

Indian Sugar Shortage Deepens as Cane Crop Set to Disappoint

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

India’s sugar shortfall is worsening as disappointing cane crops boost the need for imports this season.

Reduced cane supplies in the states of Maharashtra and Karnataka mean output will probably fall to the equivalent of 21.3 million metric tons of white sugar, according to Tropical Research Services, which advises several hedge funds on agriculture markets. That’s 4 percent smaller than forecast last month and 15 percent below a year earlier.

The El Nino weather pattern that ended this year hurt cane crops in India, the biggest sugar-consuming country and second- largest producer. At the same time, the harvest in No. 2 exporter Thailand is running behind last season’s pace, helping tighten global supplies already forecast to fall short of demand.

“Early reports from both the key Maharashtra state in India and also from Thailand suggest their cane crops could disappoint," James Liddiard, a partner at Agrilion Commodity Advisers LLC, said in a report Wednesday.

 

Eoin Treacy's view -

Brazil’s sugar crop is coming in ahead of expectations suggesting that the disappointing figures in Thailand and India will be at least partially compensated for. However contracts are in backwardation out to late 2018 so the supply deficit is not a short-term phenomenon and it will take time for new planting to rebalance the market. 



This section continues in the Subscriber's Area. Back to top
December 29 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 28th 2016

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

With the election of Donald Trump as the nation’s 45th president, there are signs environmental restrictions on fossil fuels will be loosened and more room will be made for fossil fuels. That will be a significant shift in the recent trends for environmental and energy regulation. Whether it significantly alters the current trajectory for the dirtiest of our fossil fuels – coal – remains to be seen. Clearly, short of an outright ban on renewable energy plants, the current backlog of new, cleaner power plants will not change, so our near-term energy mix will continue to shift toward more renewable fuels. The issue for the energy industry is whether the economic trends in place boosting renewable fuels are altered and slow down the pace of additions of new renewable fuel plants. That will partially depend on whether current renewable fuel mandates and subsidies are renewed once they reach their expiration dates, or even if they are outright cancelled early.

At the present time, businessmen, energy executives and consumers are struggling to understand the true economics of electricity. Analysts have strived to produce cost estimates for electricity produced by different fuels in such a way that they can be analyzed on the same basis. Standardized cost estimates provide a means to assess the impact on different fuel sources of various environmental policies. The process is called levelized cost of electricity. This tool enables direct comparison of electricity costs from power plants fueled by either fossil fuels or renewables. One drawback from this tool is that it assumes every kilowatt of power generated has the same value to consumers regardless of when during the day it is produced. It ignores the reality that during summer days in the southern regions of the United States, electricity to power air conditioners in the afternoon when temperature reach their highest levels is of greater value to consumers than during the middle of the night when temperatures drop.

 

Eoin Treacy's view -

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

Electricity pricing is a moving target for both energy companies and environmentalists alike. The challenge is to deliver energy when it is most required rather than when it is easiest to produce and the only way of solving that issue for renewables is with storage or back-up conventional capacity. 



This section continues in the Subscriber's Area. Back to top
December 28 2016

Commentary by Eoin Treacy

December 28 2016

Commentary by Eoin Treacy

Overextensions relative to the trend mean

Eoin Treacy's view -

We do not regard the 200-day MA moving average as a sacrosanct level where support or resistance need to be found in order to confirm the consistency of a trend. Rather we look on it as the trend mean around which prices move. In an upward trending environment we can expect the price to find support in the region of the trend mean as long as a demand dominated environment persists.  Since the crowd plays such an important role in the day to day gyrations of any market prices can and do overshoot. 



This section continues in the Subscriber's Area. Back to top
December 28 2016

Commentary by Eoin Treacy

December 28 2016

Commentary by Eoin Treacy

Africa's mixed political transitions in the 3 Gs: Gabon, the Gambia, and Ghana

This article by Vera Songwe for the Brookings Institute may be of interest to subscribers. Here is a section:

Ghana is the pride of Africa when it comes to democratic transitions. Once again, its most recent election has proven this point.  Despite the tense and intensely fought campaign both parties continue to pledge respect for the process. Indeed, there is much to celebrate around Africa’s leadership transitions, but much remains to perfect the process the continent over. This year many elections were held freely and fairly on the continent, and both incumbents and new leaders were elected to office—including Benin, Cabo Verde, São Tomé and Príncipe, and Zambia for example. And in an unprecedented move the President of Mauritania and Angola all declared they will not seek re-elections at the end of the term. A very positive and encouraging trend if the pronouncements come to pass.

However, in a number of countries the old has not given way to the new, and the evolution of democracy is still in motion with too-often deadly consequences for the citizens in Burundi, Gabon, and the Gambia to name a few. These examples demonstrate that the concept of leadership transition has not yet been fully adopted. A number of lessons can be drawn from these latter experiences. The populations are increasingly more vocal about transparency of elections. Both sides incumbent and opposition have increasingly equal chances of getting their voices heard and results tend to be closer in these countries. There is still a need for vigilance, and the tendency to slip remains. Peaceful leadership transitions are not yet the norm.

 

Eoin Treacy's view -

The investment case for Africa is predicated on standards of governance improving. Unsurprisingly there is considerable variability in performance across the continent, nevertheless the general trend is toward gradual improvement and that is a very positive development. The recovery in commodity prices is an additional positive development from an investment perspective. 



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by David Fuller

The Chaos Theory of Donald Trump: Sowing Confusion Through Tweets

Here is the opening of this article from The Washington Post:

Donald Trump’s sudden embrace this week of a nuclear arms race — and his staff’s scramble to minimize the fallout — underscored an emerging modus operandi for the president-elect: governance by chaos.

Since winning the election, Trump has seemed to revel in tossing firecrackers in all directions, often using Twitter to offer brief but provocative pronouncements on foreign and domestic policies alike — and leaving it to others to flesh out his true intentions.

In the past week alone, Trump has publicly pitted two military contractors against one another, sowed confusion about the scope of his proposed ban on foreign Muslims and needled China following its seizure of a U.S. underwater drone.

But nothing has created more consternation for many foreign policy experts than Trump’s assertion on Twitter Thursday that the country should “greatly strengthen and expand” its nuclear capability.

On Friday, after his staff had tried to temper his comments, Trump doubled down — telling a television talk show host that in an arms race against any competitor, the United States would “outmatch them at every pass.”

Trump has pledged to shake up both Washington and the world order, and boosters argue that a degree of unpredictability can be useful, particularly when it comes to foreign policy. But the mixed messages and erratic nature of his pronouncements have alarmed even some Republicans, who say it’s important to know how seriously to take the leader of the free world.

“We’re just operating in this world where you cannot believe the things he says,” said Eliot Cohen, a foreign policy expert and former George W. Bush administration official at the State Department. “It will have large consequences for our allies and our adversaries, and it’s going to greatly magnify the danger of miscalculation by all kinds of people.”

Trump’s team has struggled with the new resonance that becoming president-elect has given Trump’s Twitter habit. They have repeatedly said that his statements on social media do not necessarily reflect his official policy and have at times sought to play down the import of his actions.

But Trump supporters say the rest of Washington is going to have to get used to his more freewheeling style.

David Fuller's view -

President-elect Trump has had a flying start a month before he will be sworn in as President.  He deserves credit for assembling a heavyweight team of highly successful business leaders to help him re-energise the US economy.  Wall Street celebrated his election with new all-time highs. 

That’s the good news.  The bad news may start with an excessive number of tweets, which do not add to his credibility.  In fact, they can make him look unstable. 

If Trump wants to be a great president, he could start by emulating Theodore Roosevelt, commencing with: “Speak softly and carry a big stick”.  Here are some more excellent quotes from President Roosevelt.



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by David Fuller

Email of the day 1

On Homo Deus: A Brief History of Tomorrow:

Dear David, I wish you and Eoin and all the team the very best for 2017. I am reading Yuval Noah Harari's book "Homo Deus". It offers us his thoughts on the future of humanity and covers many of the themes that your team develop in your commentaries. It follows his excellent book called "Sapiens on the history of humanity. May I share this intelligent analysis with the rest of the FullerTreacy community. Regards, Alan

David Fuller's view -

Thank you so much and I return your sentiments for 2017. 

You may indeed share this intelligent analysis with the rest of the Fuller Treacy community, and I thank you for doing so. 

Mrs Fuller and I first heard Yuval Noah Harari speak when he was interviewed at the wonderful Hay-on-Wye Festival two years ago, and was talking about Sapiens: A Brief History of Humankind - well worth reading.  I have already ordered a copy of Homo Deus., which is just about to be released in London.   



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by David Fuller

Email of the day 2

On notes from the Milken Institute meeting on The Evolution of Asset Management:

Dear David

I have attached more notes from last weeks' meeting organised in London by the Milken Institute. I found this session particularly interesting. The topic was 'The Evolution of Asset Management.' We all sense that change is coming so it was interesting to attend this panel comprising 3 constituencies: current asset managers, openly disillusioned customers, and new technology companies aiming to disrupt the status quo. It was all very polite but some strong messages came across which I have summarised in the pdf.

Asset managers are trying new markets, such as direct lending in place of banks, and investments in private equity including hi-tech startups (I wonder how many really understand what they're doing). And they are experimenting with big data and automated trading though there was disagreement about how successful this actual is. No evidence was given.

Other key messages that I took away were:

1. Customers are not particularly happy with performance or fees, saying there's much waste in unnecessary infrastructure.

2. The public availability of so much information that was previously available only to professionals is a game changer, as it reduces the 'added value' of asset managers.

3. The result is a growing trend for DIY investing. It started with HNWs setting up their own wealth funds and it is spreading to other private investors as they/we become more empowered by technology.

Also, corporations are starting to retake control of their defined benefit pension schemes by managing them in-house. To quote one panelist: "Corporations whose db plans failed to deliver will ask 'why would I delegate investment to those who are clearly the dumbest investors in the world.' Public and private pension funds need returns of 7-8% but they have been receiving much less than that from the AMs to whom they out-sourced. The pension asset managers always get their fees yet it's the corporate that has the liabilities on its book when there is under-performance. One panelist stated that several corporations in the US have already taken in-house control of their db plans and he expects this to become more widespread.

Of course, my impression of the discussion inevitably reflects my view of the topic.

Others may interpret it differently, so here is a link to a recording of the panel in case readers wish to check it out themselves.

Best wishes

David

David Fuller's view -

Thanks, David, for sharing your thoughts on The Evolution of Asset Management, as discussed at the Milken Institute conference.  If you mention this during your presentation at the Markets Now seminar on 16th January, I am sure it will generate further discussion. 

David’s additional notes on this topic are posted in the Subscriber’s Area. 



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

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

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

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



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by David Fuller

December 23 2016

Commentary by Eoin Treacy

December 23 2016

Commentary by Eoin Treacy

U.S. shale is now cash flow neutral

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

Oil prices are probably already high enough to spark a rebound in shale production.

The IEA says that in the third quarter of 2016, the U.S. shale industry became cash flow neutral for the first time ever. That isn’t a typo. For years, the drilling boom was done with a lot of debt, and the revenues earned from steadily higher levels of output were not enough to cover the cost of drilling, even when oil prices traded above $100 per barrel in the go-go drilling days between 2011 and 2014. Even when U.S. oil production hit a peak at 9.7 million barrels per day in the second quarter of 2015, the industry did not break even. Indeed, shale companies were coming off of one of their worst quarters in terms of cash flow in recent history.

That all changed around the middle of 2015 when the most indebted and high-cost producers went out of business and consolidation began to take hold. E&P companies began cutting costs, laying off workers, squeezing their suppliers and deferring projects that no longer made sense.

By 2016, oil companies large and small had shed a lot of that extra fat, running leaner than at any point in the last few years. By the third quarter, oil prices had climbed back to above $40 and traded at around $50 per barrel for some time, replenishing some lost revenue. That was enough to make the industry cash flow neutral for the first time in its history.

 

Eoin Treacy's view -

The price of anything is heavily influenced by the marginal cost of production. If US onshore domestic unconventional oil plays are cash flow neutral at $50 it is reasonable to expect they will invest any free cash flow in expanding production at prices above that level. 



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by Eoin Treacy

Gleanings

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

Another theme we think is surfacing is inflation driven by Trump's potential fiscal stimulus program. Hence, a return to "real assets," or stuff stocks, should have an increased weighting in portfolios. Verily, the price of real assets, relative to financial assets, is at historic lows. Consequently, investors' mindsets should be focused towards higher inflation, higher interest rates, and reduced disinflation. As an example, China's PPI hooked up in September for the first time since 2012. We believe the same thing is happening here in the U.S. 

Accordingly, REITs, timber, agriculture, collectibles (wine, art, diamonds, precious metal coins, farmland, etc.), and MLPs should have an increased weighting in portfolios, in our view. To this MLP point, we recently met with one of the savviest MLP-centric portfolio managers on Wall Street, who believes the midstream and downstream MLPs are ripe for a number of good years going forward. He suggests the bad news is in the rearview mirror: the capital markets are wide open for the MLPs; we are consuming an extra 1 million barrels of crude oil per day, and the MLPs traded at around a 30% discount relative to par.

 

Eoin Treacy's view -

The MLP sector is highly leveraged as a rule so it collapsed when oil prices fell. By the same token it is also benefiting from the rise in oil prices and with the high yields evident, particularly in the pipelines sector, it now offers upside leverage. 

The Alerian MLP Total Return Index hit a new recovery high this week and a clear downward dynamic would be required to question medium-term potential for additional upside. 



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by Eoin Treacy

The bizarre business of intentional product failure: planned obsolescence

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

Today built-in obsolescence is used in many different products. There is, however, the potential backlash of consumers who learn that the manufacturer intentionally make the product obsolete faster. Such consumers might turn to an alternative producer (if any exists) that offers a more durable alternative. In other words, this nasty strategy is not available for small companies who would only lose customers.

Given today’s tremendous increase of international corporate power and severely reduced competition, planned obsolescence has become an attractive possibility for products than ever in human history.

Built-in obsolescence was already used in the 1920s and 1930s when global mass production became possible and rigorously optimized. 

 

Eoin Treacy's view -

I have to have my car smog tested soon and coincidentally the check engine light came on just ahead of when the test was due. In talks with the chaps at the dealership and with other customers while I was waiting the scale of obsolescence by design is quite astounding. 

For example, one of the technicians recounted how he bought a manufacturer’s original part for his Audi Q7 on eBay. He thought he had gotten a wonderful deal only to find that Audi’s computers will not code any part that is more than three years old; even if it is unused, one of their own and appropriate for the car in the question. 

 



This section continues in the Subscriber's Area. Back to top
December 23 2016

Commentary by Eoin Treacy

Email of the day on back pain, lifestyle and emotional reserves:

I had lots of back problems as I was a dancer until I had my operation. 1 fusion and 1 plastic disc that give a little movement. One interesting thing was that they put in synthetic bone of some description for the fusion, and within 6 months, it would all be replaced by growth bone and the synthetic would have disappeared! Yes, key hole if it's just a disc snip!

And 

I’ve had the same myself – also see if you can get Bowen Therapy over there. I tried this 3 years ago and I haven’t had a problem since (touch wood). I wish Lily a very speedy recovery. 

And 

Add swimming to your wife's list of options for a longterm solution. It is medically recognized as a very effective remedial method and it helped me combat lower back pain (brought on by muscle spasm, not a herniated disc) some years ago. A caveat: avoid breast stroke as it arches the back. Do the crawl or back stroke, instead. Incidentally, even walking lengths of the pool is beneficial.

 

Eoin Treacy's view -

Thank you all for these informative emails. Lifestyle, diet and exercise all contribute to wellbeing and help restore the emotion reserve we require to participate in markets. I have made a conscious decision over the last couple of weeks to avoid trading because of the multiple tasks I am focusing on at home but as the situation calms down I look forward to exploiting developing opportunities not least as there a considerable number of oversold and overbought conditions evident in a large number of markets. I intend to spend most of next week identifying these charts and sharing them with subscribers. 



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by David Fuller

Jamie Dimon on Trump, Taxes, and a U.S. Renaissance

As recently as September, you thought it would be difficult for people on Wall Street to get into the new administration. Now, Donald Trump has tapped several Wall Street figures. What do you think they’re going to bring that’s different?

Obviously, I was dead wrong about that. But you had a complete upheaval. The Republicans are in charge, and they have not been anti-business the way you’ve seen the Democrats largely be anti-business for years. I think if you are going to be president, you should have the best people sitting around a table. I think it’s a mistake for the American public to constantly be told that if you work for an oil company or you work for a bank, that automatically makes you bad. I think a lot of these people are very qualified people who are patriots. They’re going to want to help the country. They’re not going to try to help their former company. These are people with deep knowledge that will hopefully do a great job.

I think it’s a reset moment for how businesses are going to be treated: 145 million people work in America; 125 million of them work for private enterprise; 20 million work for government—firemen, sanitation, police, teachers. We hold them in very high regard. But you know, if you didn’t have the 125 you couldn’t pay for the other 20. Business is a huge positive element in society. But for years it’s been beaten down as if we’re terrible people. So I think it’s a good reset.

Detroit is a perfect example where civil society, not-for-profits, government, business all work together to improve the lives of American citizens. If you can duplicate what they’ve done in Detroit around the country, you’re going to have a huge renaissance.

What is your diagnosis about what’s going on in this country, this economic angst, the anti-immigrant sentiment?

It’s not anti-immigration per se. America’s changing too much for that. The core of the frustration and anger were two things. First, middle-class incomes have really not grown for 15 years. Second, the difference between unskilled and skilled has been growing over time. The unskilled really have a hard time having what you would call a living wage.

There are solutions. Skills training, like they do here in Michigan. I would also greatly expand the earned income tax credit. We only do it for mothers with babies. We don’t do it for single men. So if you’re making $8, $9 an hour, the government will pay you $3 or $4 [as part of your tax refund]. Figure it as negative income tax. If I can give you a job at a living wage, it helps small businesses. It’s not necessarily good for big business, but it’s a wonderful thing to do for society.

I think fixing corporate taxes, immigration, trade, all done properly will have fast results in America. Unfortunately, a lot of people who talk about fixing those problems, their answer is beating up on business is going to make it better. It’s not.

David Fuller's view -

Whatever one thinks of Donald Trump, he has certainly reignited the enthusiasm of Wall Street, not least among many of its most experienced and successful leaders.  There are many more interesting points in this interview, which I commend to you.   



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by David Fuller

Donald Trump is Holding a Government Casting Call. He is Seeking The Look

Donald Trump believes that those who aspire to the most visible spots in his administration should not just be able to do the job, but also look the part.

Given Trump’s own background as a master brander and showman who ran beauty pageants as a sideline, it was probably inevitable that he would be looking beyond their résumés for a certain aesthetic in his supporting players.

“Presentation is very important because you’re representing America not only on the national stage but also the international stage, depending on the position,” said Trump transition spokesman Jason Miller.

To lead the Pentagon, Trump chose a rugged combat general, whom he compares to a historic one. At the United Nations, his ambassador will be a poised and elegant Indian American with a compelling immigrant backstory. As secretary of state, Trump tapped a neophyte to international diplomacy, but one whose silvery hair and boardroom bearing project authority.

The parade of potential job-seekers passing a bank of media cameras to board the elevators at Trump Tower has the feel of a casting call. It is no coincidence that a disproportionate share of the names most mentioned for jobs at the upper echelon of the Trump administration are familiar faces to obsessive viewers of cable news — of whom the president-elect is one.

“He likes people who present themselves very well, and he’s very impressed when somebody has a background of being good on television because he thinks it’s a very important medium for public policy,” said Chris Ruddy, chief executive of Newsmax Media and a longtime friend of Trump. “Don’t forget, he’s a showbiz guy. He was at the pinnacle of showbiz, and he thinks about showbiz. He sees this as a business that relates to the public.”

“The look might not necessarily be somebody who should be on the cover of GQ magazine or Vanity Fair,” Ruddy said. “It’s more about the look and the demeanor and the swagger.”

As Trump formally announced his vice presidential pick in July, he said that Mike Pence’s economic record as Indiana governor was “the primary reason I wanted Mike, other than he looks very good, other than he’s got an incredible family, incredible wife and family.”

And in picking retired Marine Gen. James Mattis as his nominee for defense, Trump lauded him as “the closest thing to General George Patton that we have.”

Mattis has a passing physical resemblance to the legendary World War II commander, as well as to the late actor George C. Scott, who won an Academy Award for his portrayal of Patton in the 1970 biopic. Trump also seems particularly enamored with a nickname that Mattis is said to privately dislike.

“You know he’s known as ‘Mad Dog’ Mattis, right? ‘Mad Dog’ for a reason,” Trump said in a recent interview with the New York Times.

The president-elect, however, does not mention Mattis’ other sobriquet, which is “Warrior Monk.” Or his call sign: “Chaos.”

On the other hand, in Trump’s book, not having the right kind of appearance is tantamount to a disqualifier. During the presidential campaign, he stirred a controversy when he pronounced that Democratic nominee Hillary Clinton lacked “a presidential look, and you need a presidential look.”

David Fuller's view -

He’s right, and the look applies to every animal species on the planet.  Among humans, the right look opens important doors but they may not stay open for long if not backed by intelligence and integrity.   



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by David Fuller

Email of the day 1

On “Beware of height nervousness”:

 

After the first big surge in the early 1980's, I remember seeing "Beware of height nervousness". Probably not an appropriate comparison but something to bear in mind.

David Fuller's view -

You remember your market history very clearly, so thanks for sharing this recollection.  I am assuming that you are referring to the very important low in August 1982, which finally launched Wall Street's huge secular bull market which lasted until the end of the century. There was an earlier low in April 1980, followed by a persistent move to new all-time highs in November of that year.  You can see this more clearly in the centre of this segment which I took from the monthly semi-log chart above. 

That short, sharp rally was almost entirely retraced in what I often referred to as a post-breakout consolidation, leading to the first step above the base. What you modestly point out may indeed prove to be a very appropriate comparison



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by David Fuller

Email of the day 2

On the UK negotiating trade terms with EU countries pre or post a clean Brexit:

I have never been impressed by the argument that, because the UK imports more from the EU than it exports to it, the EU has more to lose. In value terms this is true but it is only part of the picture. The percentage of EU exports that come to the UK is much smaller than the percentage of total UK exports that go to the EU. Thus any increase in trade restrictions between the EU and the UK may cost the EU more in absolute value terms but the percentage damage to the UK economy will be much greater than the percentage damage to the EU. Only quoting half the facts is the sort of dishonesty that we were bombarded with by both sides during the referendum campaign.

David Fuller's view -

You make a correct point on absolute value terms, but I think it would be more relevant if the EU had first achieved fiscal union, turning it into ‘a United States of Europe’, with a central government to redistribute funds as economically required.  However, the EU’s founders and subsequent national and also bureaucratic leaders knew that it could not achieve fiscal union because no country’s population supported this further loss of sovereignty.  So the EU proceeded with stealth, completely ignoring repeated wise advice from so many who knew their economic history: no currency union has ever survived for long without fiscal union.  This presumably remains out of reach for the 27 countries which have not yet decided to leave the EU.  With the exception of Germany, most are clearly unhappy with the Euro, which has been the chief reason for their economic underperformance.   

Following a clean Brexit, I do not think German automobile manufacturers will be either impressed or influenced by the EU’s absolute value relative to trade percentages with the UK, if they can only export to us on WTO terms.  They would certainly pressure Angela Merkel, if she is still around.    



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by David Fuller

Email of the day 3

Also on the UK negotiating trade terms with EU countries pre or post a clean Brexit:

December 22 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, currently short-term overbought.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  It will be interesting to discuss all of this at Markets Now on the 16th.



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by Eoin Treacy

December 22 2016

Commentary by Eoin Treacy

Jingle bulls, jingle bulls, jingle all the way!

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

The reality is that company managers are not Scrooges. Indeed aggregate real capex as a proportion of output is at or near record levels in America (figure five). It’s obvious! – Father Christmas would chuckle to his reindeer. What else has caused the rampant over capacity we observe down those factory chimneys as we zoom about? And clearly too much – not too little – capex also explains why businesses are having such a hard time raising prices and growing their top lines. More than 40 per cent of American companies will have seen no revenue growth this year – globally almost half won’t (figure six). 

So the wise men were correct to point their fingers at businessmen – but for the wrong reason! Reckless over spending rather than deliberate under spending has led to the lack of growth and general unease. Investors were also oblivious to the decline in revenue growth caused by a profligate expansion of assets. Or maybe they were just not bothered. After all, toy factories were returning sacks of money to shareholders and equity prices were somewhere north of Lapland. This was sustainable, Father Christmas knew, because the erosion in asset-turn (revenues divided by assets) was being off-set by rising margins (figure seven) – thus supporting returns on equity.

This overlooked dynamic explains everything from anaemic growth and booming equities to the rise of passive funds and lull in corporate deal making. What is more, it is a global phenomenon – especially so in emerging markets where excess capacity is chronic. To most people this looks worrying, given the tailwinds of lower wages, lower rates, and worldwide tax fiddling, which have pushed margins higher, are becoming headwinds. Only Father Christmas understands what an opportunity this is. Margin pressure will force companies to change behaviour for the better – with dazzling repercussions. 

And the winds have already turned in America. For example, average hourly earnings growth has doubled since two years ago (figure eight) and keeps rising. Even Father Christmas’s laziest elf appreciates that his labour is scarce these days and has demanded more porridge. Meanwhile borrowing costs have turned upwards having declined for most of the millennium (illustration nine). Finally, there is less scope for taxes to fall than everyone thinks – American companies already pay a much lower effective tax rate than they did a decade ago (figure ten). 

Margin pressure is the snowball in the face company bosses need to start investing more cleverly. Out with the irrational extra production line, fourteenth systems patch or mindless overseas expansion in order to boast being global. And in with capex that boosts productivity and returns. So ineffectually have most firms been spending money that investment will rise despite being elevated in real terms. The biggest gains will be made by the lowest quality companies. Forget about robots and artificial intelligence; this is about basic new IT infrastructure, client relationship software or logistics systems. So many companies do not do the simple things well because the tailwind of low wages, taxes and interest rates has meant they haven’t needed to. Only the top ten per cent of American companies have managed to significantly boost their returns on capital, excluding goodwill, over the past 15 years (figure 11). Other developed countries have similar skews too.

Eoin Treacy's view -

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

There are a number of important points raised in this short report that are worth considering. Corporate margins are close to record highs and the loss of momentum in margin expansion has been a source of concern for many investors over the last couple of years. 



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by Eoin Treacy

Businesses Are Friskier After Trump Victory, BofA's Moynihan Says

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

Bank of America Corp. doesn’t expect Donald Trump’s election to jolt the U.S. economy next year, but its corporate customers are enthusiastic and already seeking funds to expand, according to Chief Executive Officer Brian Moynihan.

Mid-sized companies “are friskier, they’re more active,” Moynihan, 57, said in an interview with Bloomberg Television’s David Westin for broadcast Thursday. Recently, some have been drawing down credit lines to invest in operations, he said. “They feel better about the prospects of the regulatory environment and their businesses. They feel better about the possibility of final demand.”

Moynihan, who runs the second-largest U.S. lender, said it may take a while for Trump’s initiatives as president to play out in the economy, which already was benefiting from rising consumer spending. The bank has forecast about 2 percent growth next year, he said -- up from the 1.6 percent that economists estimate for 2016.

 

Eoin Treacy's view -

Friskier clients must be a welcome development for banks because it will be easier to sell them new products. It’s been a long time since it a banking CEO has been able to say that. Additionally the banking sector could be one of the greatest beneficiaries of deregulation, lower taxes and fiscal stimulus. 



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by Eoin Treacy

Apple's Search for Better iPhone Screens Leads to Japan's Rice Fields

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

That push has also put a spotlight on suppliers of previously obscure technologies, testing their capacity to satisfy demand that drives sales of more than 200 million iPhones each year. A couple of years ago, Apple sought to use strong sapphire glass for iPhones, only to abandon the effort when a manufacturer couldn't deliver enough of acceptable quality and went bankrupt. The scratch-resistant material is now featured on the Apple Watch.

Now OLED is the big goal. The technology has been included on top-end smartphones for years, including almost all of Samsung Electronics Co.'s high-end phones. While LCDs rely on a backlight panel, OLED pixels can glow on their own, resulting in thinner displays, better battery life and improved contrast. OLED screens can also be made on flexible plastic, allowing for a wider variety of shapes and applications.

"OLEDs aren't just for flat areas, but can be used on edges, so smartphone makers will challenge themselves by building displays with new shapes," Tsugami said. "These qualities in OLED will give it an advantage."

 

Eoin Treacy's view -

Delivering advances in technology to the masses has a long lead time considering how long it takes to build new factories and indeed the machines to fill them. The story of how long it takes to build a single OLED production line is a testament both to impressive innovation and precision engineering as well as the ability of companies to survive until their products hit the big time. 



This section continues in the Subscriber's Area. Back to top
December 22 2016

Commentary by Eoin Treacy

Email of the day more on back pain

I was sorry to hear about your wife's disc problem. My wife had a bad episode some years back and eventually had to resort to surgery, the sciatic pain having become unbearable. Luckily we discovered that the surgery could be minimally invasive - keyhole, in fact, to simply remove the detritus from the burst disc (L5) which was pressing on the sciatic nerve. A few hours later and she was out of bed and pain free. 

I have suffered from a more generalised lower back pain most of my adult life, but many years ago I discovered a morning stretch which I do every day and which I believe really helps. It was explained in a book by an Australian physiotherapist called Sarah Key. It's been brilliant for me. I later discovered an article in an NHS primary care journal which explains in detail how it works, and which I have attached (sorry for poor quality). It's dead easy to do. You can order Sarah's "back block"(for the stretch)  from her web site, though I bought good back block mats from yogamatters.com. Perhaps this may be useful to add to your other subscriber's excellent recommendations.

And 

Just read the back stuff. I’ve had multiple back surgeries including a fusion. The basic stuff is out patient and like going to the dentist. You are fine the next day and pain is gone at the moment your eyes open. The world of back surgery deniers are living in the 1984. I tried everything else. Had surgery way later than I should have. 

Insurance companies had a rule and most likely still do that you must try 3 non-invasive courses before they would pay for back surgery. This started for me in the later 1990s. Then with any type of work you were taking a chance. Now it’s quick and simple. A fusion is much more difficult but even then you are walking the same day and home the next. 

And 

I can testify that core exercises to strengthen the lower back muscles and also the stomach muscles are easy to do and really work. Nearly 40 years ago, two different surgeons told me I had to have an operation, including disc infusion or removal.  With the core exercises I avoided all that and have had no back problems subsequently.  

The other exercise, which soon becomes automatic, is never bend over, let alone to lift something, without tightening your stomach muscles.  

 

Eoin Treacy's view -

Thanks to every subscriber who has shared their experience of back pain. It’s a dizzying learning curve but Mrs. Treacy has been greatly helped by all the well wishes shared by the Collective. 

I’m happy to report she is making steady progress following a cortisone injection last week. She had an MRI this week which confirmed a tear in her S5/L1 disc. While time will tell whether this problem is long lasting, stretching and exercise are beneficial in their own right and cost nothing. 

Thankfully surgical procedures are improving all the time should one be required. One encouraging statistic is that the majority of herniated discs resolve on their own within six weeks. If she is lucky enough to be in that category a stretching and muscle strengthening regime would make eminent sense and I believe should form part of any long-term solution.

 



This section continues in the Subscriber's Area. Back to top
December 21 2016

Commentary by David Fuller

Merkel Said to Close Off Banks-for-Cars Brexit Deal Before Talks

Chancellor Angela Merkel is seeking to stiffen German resolve on Brexit, singling out the car industry as vulnerable to any British attempt to strike market-access deals ahead of the U.K.’s exit from the European Union.

In a closed-door meeting with German lawmakers, Merkel said some industries might press for such accords with the U.K. government and that political leaders should oppose them, according to two people who attended. In particular, allowing U.K. banks to do business in the EU in return for Britain granting market access to European carmakers is a non-starter, Merkel was quoted as saying by the people, who asked not to be identified because the meeting was private.

The comments are the most specific signal yet of German concern that Prime Minister Theresa May’s government might try to sidestep the other 27 EU governments and seek sector-by-sector advantages before Brexit talks have even begun. As Merkel seeks to enforce the EU’s insistence on a package deal, some ministries in Berlin earlier instructed officials to avoid back-door contacts with U.K. counterparts for the same reason.

“Merkel is rightly warning against special deals for individual industries,” Heribert Hirte, a lawmaker in the chancellor’s Christian Democratic Union, said in an interview. “We can’t enable cherry picking.”

A German government spokesman declined to comment on what Merkel told lawmakers in the meeting last week, saying her position on Brexit -- that the U.K. must accept the EU’s free movement of people, capital, goods and services to have full market access -- is unchanged.

The U.K. government has underscored the auto industry’s importance by giving assurances that persuaded Nissan Motor Co. to keep investing in Britain while May tries to balance taking the country out of the EU with safeguarding investment and jobs. For Germany’s auto industry, the stakes may be even bigger.

David Fuller's view -

This may be no more than yet another somewhat mischievous volley from the EU, so I would not take it too seriously.  We have often seen that Angela Merkel will change the EU’s “inviolate” rules when it suits her to do so.  Since EU policies are always a work in progress, I regard that as practical rather than merely cynical.  

Since the EU is mired in problems, a safe rallying point is its collective dislike of the UK.  After all, the British public had the audacity to defy David Cameron and vote for Brexit, without even needing any help from Vladimir Putin. 

The British public was voting for self-governance because the EU’s agenda had changed.  This shocked EU officials who took it personally.  Some have repeatedly said that the UK should be “punished”, so that other nations in the EU would not follow our lead.  In other words, the EU had become a club which European nations could join, but never leave of their own choice.  This does not strike me as a compelling enticement. 

EU officials are also angry because with the UK leaving, they will lose their second largest contributor to this expensive club.  That means bureaucratic perks in Brussels will have to be downsized.  Against this background, I maintain that it would be unwise for the UK Government to contemplate mutually sensible negotiations over a lengthy period.

This item continues in the Subscriber’s Area. 



This section continues in the Subscriber's Area. Back to top
December 21 2016

Commentary by David Fuller

The Weekly View: US Stocks Are A Bit Stretched, But New Highs Confirm Bull Market

My thanks to Rod Smith for the latest issue of this excellent timing service, published by RiverFront Investment Group.  Here is a brief sample:

In conclusion: Measures of investor sentiment and anecdotal conversations with investors make us aware that a mood shift has occurred and that some investors are clearly worried that US stock indices have risen.  Our studies of trends and sentiment suggest that the current combination of the two may present an opportunity to return portfolios closer to long-term target norms, but do not indicate to us that risk should be brought below those norms.  

David Fuller's view -

This is a sensible comment from RiverFront. 

As an overall view, this bull market since 2009 had been characterised by its lack of euphoria, despite big gains for indices against a monetary policy background which has been very stimulative.  Yes, some individual shares have done well but there has been little overall euphoria.  In fact, a number of once favoured hedge-funds have damaged themselves by shorting the US and UK stock markets.  This has often been described as ‘the most hated bull market in history’.

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



This section continues in the Subscriber's Area. Back to top
December 21 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

 

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, currently short-term overbought.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as the S&P 500 remain steady, let along firm, we could see another upside momentum move.  It will be interesting to discuss all of this at Markets Now on the 16th.



This section continues in the Subscriber's Area. Back to top
December 21 2016

Commentary by Eoin Treacy

December 21 2016

Commentary by Eoin Treacy

Japan sees start of bull run, focus on Trumponomics and 'America first' policy approach

Thanks to a subscriber for this report by Kazuhiro Miyake for Daiwa Securities which may be of interest. Here is a section:

 

As for exchange rates, which are important for Japanese stocks, US long-term interest rates warrant attention. If the 10-year Treasury yield rises to 3%, we think the yen will depreciate to Y120-125/$. In this case, expectations for the Bank of Japan (BOJ) to change its monetary policy framework would probably emerge. We forecast Japanese corporate earnings will recover sharply from 2H FY16 and significant upgrades to consensus earnings estimates are likely, due in part to yen depreciation. With free cash flow to equity expanding rapidly, shareholder payout capacity should increase.

Outlook for Japanese stocks: Against the backdrop of interest rates starting to increase worldwide in July 2016 and US long-term interest rates and the dollar rising since Mr. Trump’s victory in the presidential election, global investors have been shifting funds from bonds to equities and taking a more positive stance toward Japanese stocks. We think funds will flow into the Japanese stock market. Assuming Y115/$, we forecast TOPIX EPS of 94 for FY16, 108 for FY17, and 120 for FY18. Based on this, we expect the Nikkei Stock Average to reach 21,000-21,500 by end-2017. If the yen weakens to Y120/$, we forecast the index to be around 22,500.

Eoin Treacy's view -

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

The Yen is a powerful arbiter of investor interest in Japanese stocks. Despite the fact that many of the country’s largest exporters have relocated to cheaper locales there are still a lot domestic businesses that benefit from the competitive advantage of a weaker currency. 

Additionally the low interest rate environment and abundant liquidity that accompanies quantitative easing in a considerable number of jurisdictions means hedged access to nominal price movements have never been cheaper.



This section continues in the Subscriber's Area. Back to top
December 21 2016

Commentary by Eoin Treacy

Angela Merkel faces her darkest hour

This article by Derek Scally for the Irish Times may be of interest to subscribers. Here is a section:

For years, Merkel has remained firm but fair. She condemned scores of sexual assaults at Cologne’s New Year celebrations and a series of attacks in Bavaria over the summer, all of which had some asylum seeker involvement. But her appeals not to conflate individual asylum crimes with the entire asylum population is wearing thin with many Germans as the year ends with another series of horrifying crimes.

A young Afghan man is accused of raping and murdering a 19-year-old woman in Freiburg, near the Black Forest. This week Germans were perplexed and horrified by news of a foiled attack on a Christmas market in southwestern Ludwigshafen by a 12-year-old German-Iraqi boy.

Populist pied pipers
Those high-profile incidents have catalysed an already darkening mood towards Germany’s new arrivals and German mainstream politicians are torn between whether to challenge the populist pied pipers or join them.

Far less reported, of course, are the by now daily attacks on asylum seekers and refugee homes, particularly in Germany’s east. But in the seething, post-factual social media cesspool, where every crime carried out by an asylum seeker or refugee is multiplied by many more fictional incidents, Christmas has come early for the far-right Alternative für Deutschland (AfD).

Days after agreeing a programme of “targeted provocation” to maximise support in next September’s federal elections, senior AfD leader Marcus Pretzell wasted no time putting theory into practice on Monday night. Just an hour after the attacks, he tweeted that the Berlin victims were “Merkel’s dead” – and was promptly told by others to “shut your brown mouth”.

Merkel is on the defensive as she heads off for Christmas and into an uncertain new year, her already complicated fourth term election bid in 2017 now considerably more difficult.

 

Eoin Treacy's view -

The German electoral system is designed to ensure a host of small parties cannot gain access to the Bundestag which means power tends to be shared between a relatively small number of major parties. A challenge for the Alternative for Deutschland is that while it has been successful in gaining support in regional elections it does not yet have the critical mass to secure places in the Federal Lower House. 



This section continues in the Subscriber's Area. Back to top
December 21 2016

Commentary by Eoin Treacy

Italy lawmakers approve 20 billion euro plan to prop up banks

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

If Monte dei Paschi's capital plan fails, Prime Minister Paolo Gentiloni's new government is likely to meet this week to issue an emergency decree to inject capital into it.

But that could prove to be politically explosive given that investors are required to bear losses under EU bailout rules.

Parliamentary approval for the 20 billion euro government plan was needed to allow the state to take on new debt. Italy's debt burden, at about 133 percent of annual output, is already the second highest in the euro zone after Greece.

The measure approved by parliament on Wednesday says the state can borrow money to provide "an adequate level of liquidity into the banking system" and can reinforce a lender's capital by "underwriting new shares".

The failure of Monte dei Paschi, the world's oldest bank, would threaten the savings of thousands of Italians and could undermine confidence in the country's wider banking sector, saddled with a third of the euro zone's total bad loans.

Before the vote, Economy Minister Pier Carlo Padoan vowed to shield retail bank investors from losses.

"The impact on savers, if a (government) intervention should take place, will be absolutely minimised or non-existent," Padoan told parliament.

Italy Senate also approves government request to lift debt to help banks
Monte dei Paschi said it expected its net liquidity position, now at 10.6 billion euros, to turn negative after four months.

 

Eoin Treacy's view -

A bailout of Italy’s banking sector highlights clearly that the EU has one set of rules for small countries but is willing to set them aside in the cause of realpolitik to ensure the sustainability of the currency regime. 

A rationalisation I have heard promulgated is that the bail-in imposed on the people of Cyprus was nothing more than a refusal to bailout Russian billionaires and that Italy represents an altogether different case. That of course ignores the very real pain and suffering of savers who had their assets confiscated simply because they were unlucky enough to live in Cyprus. 

 



This section continues in the Subscriber's Area. Back to top
December 21 2016

Commentary by Eoin Treacy

How One Huge American Retailer Ignored the Internet and Won

This article by Kim Bhasin and Lindsey Rupp for Bloomberg may be of interest to subscribers. Here is a section:

But don’t expect a trend heading back in time. This is a difficult system to replicate, said Simeon Siegel, an analyst at Instinet. TJX boasts a wide net of inventory buyers who find small batches of desirable clothing, then make a small bet on those goods. This is unlike the traditional department store model, where buyers look at runway trends and make large orders of a few items, hoping that they’ll be the winner for the season.

“You’re buying closed-out product and you’re buying samples,” said Siegel. “You have to be very attuned to the numbers and very attuned to the fashion. The vendor base that you need to be plugged into and the intelligence that goes into buying the product is the most important asset they have. You need to find the most compelling stuff.”

When stores like T.J. Maxx do it right, they leave their shoppers filled with feelings of adventure and serendipity, says Jordan Rost, vice president of consumer insights at Nielsen, a research firm. Even an unsuccessful trip to a discount store can reinforce the thrill of the hunt. The instincts driving customers into parking lots is similar to those shopping online, Rost says. They’re searching for deals and the best item to fill some broad want or need without a target in mind.

As shoppers across generations and demographics become more focused on value than ever before, the excitement of finding something on sale has an even broader appeal. Millennials who grew up relying on e-commerce for all their needs are coming through the doors, too.

“Younger consumers are really open to that kind of open- minded approach to shopping, not necessarily coming in with a specific brand or product in mind,” says Rost. “Discovery is part of the experience.”

 

Eoin Treacy's view -

Retail is anything but simple however there would appear to be three primary business models. A business can compete on price, convenience or exclusivity. Amazon has mastered convenience, TJX competes on price while luxury brands offer exclusivity. In an increasingly connected world it is possible for all three business models to survive but it is hard to excel at more than one. 



This section continues in the Subscriber's Area. Back to top
December 20 2016

Commentary by David Fuller

The US is Crying Out for Donald Trump Economic Tonic

Starting on January 20 2017, the United States will be a very different place to the one it has been for decades. President Donald Trump, who is an unconventional Republican, will control the Senate (52 Republicans to 48 Democrats); the House of Representatives (241 Republicans to 194 Democrats); 34 Republican Governors (out of 50) and the largest Republican control of the state legislatures ever. He could well appoint three new Supreme Court Justices and reform monetary policy from A to Z as well. 

In 2009 when President Obama took office, the political world in Washington was the opposite. Times have changed.

The defining issue in the US (and everywhere else) is the economy. America has had the single worst recovery in the past 70 years and there’s little improvement in sight. Government over the past eight years has doubled down on stimulus spending, taxes on the rich, regulations, dirigiste low interest rate monetary policies and failed trade initiatives. 

Unfortunately, these policies do work – but in the opposite directions to the ones their proponents hoped. Somehow most western governments have conflated helping the poor with hurting the rich. We’ve found out once again the hard lesson – that if governments tax those who work and pays those who don’t work, there will be lots of people not working.

Stimulus spending, meanwhile, is analogous to asking a poor man to spend himself into wealth. It just doesn’t happen.  And then again, whoever heard of an economy that’s been taxed into prosperity? Not I. 

Government-mandated low interest rates guarantee that no one will lend either to risky borrowers or to working-class homebuyers, and low interest rates will also destroy the lives of retirees and pensioners. And then there are trading blocs like the European Union, where the likes of Ireland are joined at the hip with countries they don’t trade with and held at a distance from countries they do trade with (such as the US and the United Kingdom).

Recognising that the future is more difficult to forecast than the past, I believe the new administration in the United States will reduce the corporate tax rate from 35 per cent (the highest in the OECD) to 15 per cent (the 3rd lowest); replace depreciation schedules with 100 per cent expensing of capital purchases in the year of purchase for tax purposes; eliminate the estate tax and repeal ObamaCare and replace it with common-sense health care savings accounts. 

Tax legislation will also proceed to reduce personal income tax rates, undo many executive orders that over-regulate our economy, increase needed infrastructure projects, negotiate fairer trade agreements and increase economic efficiencies in government purchases.

The nicest part of America’s checks and balances on government is that the House and the Senate will provide wonderful guidance to the administration and vice versa. The resultant policies will be first class, and I believe these policies will be supported on a bipartisan basis, just as they were when Reagan was president.

David Fuller's view -

Republican President Dwight D Eisenhower served for two terms commencing in 1953.  He succeeded with a very stimulative economic programme which Arthur Laffer, still a student at the time, would have approved of.  

President Ronald Reagan had a similarly stimulative economic programme, influenced by Arthur Laffer. 

 I have not seen any reports that Arthur Laffer is part of Donald Trump’s advisory team but the President-elect will almost certainly know of the Eisenhower and Reagan economic policies mentioned above.  The key difference was the tightness of monetary policy when Eisenhower and Reagan entered the White House, so it took the better part of a year each before their stimulative polices proved to be effective. 

In contrast, President-elect Trump will hit the ground running with monetary policy only just coming off record low interest rates and the US economy clearly showing signs of economic recovery.  He will also have a reasonably free hand since Republicans will control both Houses of Congress, in addition to a clear majority of the country’s state Governorships. 

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



This section continues in the Subscriber's Area. Back to top
December 20 2016

Commentary by David Fuller

European Stranglehold Over the IMF Has Become a Curse

The International Monetary Fund seems cursed. One managing-director embroiled in scandal is perhaps unlucky: to suffer three in a row starts to look serious.

First it was the Spaniard Rodrigo Rato, now awaiting trial for embezzlement for allegedly running a "corrupt system" at the helm of Bankia.

Then it was France’s Dominique Strauss-Kahn, accused of louche conduct in a New York hotel room.

Now it is the turn of Christine Lagarde, inheritor of the French fief and today convicted of criminal negligence by a top French court in a case that has strange whiffs of political chicanery.

The guilty verdict certainly calls into question her full fitness to lead a financial superpower with resources of $668bn, and vice-regal dominion over whole countries and societies.

All three are European, the only race able to compete for the post under the Bretton Woods carve-up that has prevailed since the end of the Second World War. The fact that this has led to trouble is not accidental.

“European politics has become very corrupt. It is almost inevitable that the European system will throw up people who have done something that will later be construed as having crossed the line, and who are therefore tainted,” said Ashoka Mody, the IMF’s former deputy-director for Europe.

“My reading is that Europe is in very long-term decline from political and economic pre-eminence, and there is a great temptation to cut corners as they try to face these challenges,” he said.

This European stranglehold over the Fund is now over. It is inconceivable that the next IMF chief will be chosen in the old cosy way.

The Asian powers will not tolerate it any longer. If nothing is done they will walk away from the Fund entirely and create their own financial structures, probably revolving around China.

The Fund mishandled the East Asia crisis in 1998, imposing fiscal retrenchment that went far beyond the therapeutic dose, and dished out the same medicine to countries as starkly different as Korea and Indonesia.

It was bad economic science. Asia’s rising powers concluded that the IMF system was stacked against them. The Class of 1998 turned instead to “self-insurance” by building up such vast foreign reserves that they would never again be at the mercy of the Fund.

This accumulation of excess savings led to the pre-Lehman capital glut and is a key reason why the world economy has been so far out of kilter for the last fifteen years, ending in a global liquidity trap.

When the European crisis blew up, the Fund was suddenly all too willing to bail out countries - and on terms that were not available for the Asians, or the Latin Americans before them. The IMF was in effect hijacked by its European masters for a series of rescues that used up 80pc of its total lending between 2011 and 2014.

The terms violated cardinal rules. Greece, Ireland, and Portugal were each allowed to borrow 3,000pc of their quotas, triple the normal limit. In the case of Greece, the Fund’s management violated their charter by lending to a state known to be insolvent rather than demanding a debt restructuring. An internal probe has since shown that they pulled the wool over the eyes of the IMF board.

Some shortcuts can perhaps be justified given the real danger of contagion to Italy and Spain at that moment, and given fears of a global financial melt-down. Yet what emerges from the board’s probe is that the eurozone political class treated the Fund as their tool. The US went along with this in tacit collusion, but that is surely about to end under the Trump White House.  

The IMF remains vital to the global financial system but it is clearly an organisation that has lost its way. Cleansing must begin from the top down. This could start with the appointment of former Indian central bank governor, Raghuram Rajan, or the Korean chief economist of the Bank for International Settlements, Hyun Song Shin. George Osborne's moment has passed.

David Fuller's view -

Most Eurozone economies show some signs of stabilising, following ECB President Super Mario Draghi’s record stimulus and more recent purchases of corporate bonds, in addition to Christine Lagarde’s earlier generous lending (my emphasis above).  Let’s hope this stimulus aids an actual recovery, including for the EU’s Southern European countries.  If not, less benign terms will be available when the IMF moves away from European control as Christine Lagarde’s second 5-year term expires in July 2021, and more importantly, Mario Draghi’s 8-year term at the ECB ends in October 2019.

A PDF of AEP’s column is posted in the Subscriber’s Area, along with a further article.



This section continues in the Subscriber's Area. Back to top
December 20 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally.  Since timing is everything, here are two trends which are just beginning to signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



This section continues in the Subscriber's Area. Back to top
December 20 2016

Commentary by Eoin Treacy

December 20 2016

Commentary by Eoin Treacy

The Emerging Markets Hat Trick: Time to Throw Your Hat In?

This article by Rob Arnott and Brandon Kunz for Research Affiliates may be of interest to subscribers. Here Is a section:

A common link between EM equities and EM local debt is the currency exposure. Based on our relative purchasing power parity (PPP) model, EM currencies tumbled from 25% above fair value in 2011 to 30% below fair value in January of this year. Even after this year’s rebound they remain about 19% cheap to the US dollar. If EM currencies’ relative valuations strengthen just halfway back to historical norms, such a move would translate into a near 1.0% tailwind to yearly returns over the next decade.

Although EM currencies, represented by the JPMorgan Emerging Local Markets Index Plus, have rebounded since January 2016, they continue to trade near the discounts associated with the 1997 “Asian Contagion” and 1998 Russian debt default. EM currencies can certainly get cheaper before they revert toward historical norms, but they might just as easily snap back quickly to fair value. Our relative PPP reversion expectations with high EM cash rates, a faster growing working-age population, and continued productivity growth as EM economies “borrow” technological advances from developed economies, all support our projected real return for EM currencies of 3.9% a year over the next decade.

 

Eoin Treacy's view -

The strength of the US Dollar represents a major shift in the status quo for many emerging markets, but most especially commodity exporters and comes at a time when budgets were already constrained by a multi-year bear market in commodity prices. US denominated debt has obvious risks for companies lacking substantial Dollar denominated income sources and that is likely to remain a headwind. The other side of the coin is that local currency debt is increasingly attractive for the same companies but the cost of that debt will likely rise. 



This section continues in the Subscriber's Area. Back to top
December 20 2016

Commentary by Eoin Treacy

China Throws Out South China Sea Rule Book

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

During the Cold War, rules of the road, diligently adhered to, prevented accidents that might have brought the U.S. and the Soviet Union to war. China and the U.S. have been working on similar protocols. Last week’s apparently calculated act of lawlessness, though, changes the game.
Between Mr. Trump’s cavalier approach to China’s sacred cows, and China’s new disdain for legal niceties, expect regular eruptions. China is clearly testing U.S. resolve.

A shift in strategy assumes of course that the decision to snatch the drone came from the top rather than a rogue commander, though the latter possibility is just as ominous: It would raise questions about Mr. Xi’s sweeping reorganization of the armed forces designed to impose greater Communist Party control.

Mr. Xi’s administration has declared “maintaining stability” to be its top task for 2017 as the economy sputters. Now, the challenge from Mr. Trump to Beijing is forcing both countries into uncertain waters. Mr. Xi’s navy has just literally and figuratively rocked the boat.

 

Eoin Treacy's view -

Change doesn’t come easily and for a decade just about everything went right for China. Its economy was growing faster than any other. Hundreds of millions of people were lifted out of poverty and into the middle classes. China’s new consumers are feted all over the world and Hollywood blockbusters pander to Chinese sensibilities. Meanwhile the USA went through a massive credit crisis, was mired in two unproductive wars in the Middle East and Afghanistan, while Europe has spent almost a decade wallowing in the misery of austerity. 



This section continues in the Subscriber's Area. Back to top
December 20 2016

Commentary by Eoin Treacy

Email of the day on back pain, biotech and 'overall'

Disc issues are a pain (pun intended), fear not, take a serious peak at regenexx.com they use you're own blood platelets and, or stem cells. Having taken a few biff's over the years, I've successfully used them for ACL repair (5 doctors said the only option was surgery), disc bulges, shoulder and wobbly ankle type stuff. I've been to the doctors only twice in the past 12 year's, both times for vaccine's only, so you can imagine that I did not walk through Regenexx's door on a whim. Although I've no social network footprint (neanderthal), there was no hesitation when asked if I'd appear in a testimonial video for the ProActive section of their website. Both physically and, cost effective, this is one of the good direction's the medical world is moving in. Dr Centeno has written some book's 'The Spine Owners Manual' may be of special interest to Mrs Treacy, all free download's. 

For exorcise...Dr Kelly Starrett is turning the longevity of movement in physical activity on it's head. He's written book's too and, has a plethora of YouTube material, for efficiency just type in his name and the body part that interests you. 

Changing tack, two weeks ago I tuned in to one of your 'comment of the day' following a break of some three/four years or so and was mightily impressed by the delivery and quality of information. Having attended your first Chart Seminar, it was very nice to hear once more your insight's delivered with the occasional colloqualism to keep it real in your delightful Irish lilt. One throw away...'overall' appears to be a keen favourite word, a week last Sunday it was used 41 times during a 56ish minute presentation, the previous Thursday 14 times in 23 minutes. This is not a bad thing per se, I just wondered if you are aware of it. Eoin, you and David have played lead roles in teaching me a whole new language over the past years, seriously, so I very much hope you will at worst have a chuckle. Good health to you and yours, The fun continues,

 

Eoin Treacy's view -

Thank you for this informative email and I remember you well from The Chart Seminar almost a decade ago. I trust Monaco will always be Monaco regardless of what currency one might be using.  I’m delighted you are tuning back into the audios/videos and enjoying them. I can only smile and feel grateful that you are so attentive as to count my overall use of the word overall in what are wholly unscripted broadcasts. In what is generally a stream of consciousness I am occasionally aware of overly using a word but with the hurdles of kinda, sorta, overall, now then and the occasional colloquialism I am glad the message is getting through. 



This section continues in the Subscriber's Area. Back to top
December 20 2016

Commentary by Eoin Treacy

Email of the day on wool prices

I was looking for the up to date fine wool chart in the soft commodities section of the chart library. It seems that it has stopped updating in February 2014? Is it possible to rectify this please? Thank you and Happy Christmas

Eoin Treacy's view -

Thanks you for this inquiry which may be of interest to other subscribers. Unfortunately, ASX no longer quotes wool futures which is why the price stops in 2014. Following an extensive search on Bloomberg there are no wool futures contracts quoted on any exchange. There is a spot price quoted by the Australian Wool Exchange representing the Annual Wool Selling program which has end-of-week pricing and is updated on Fridays.  



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by David Fuller

Glass Half Full at Leaving the EU? Look at the Gains of Truly Free Trade

The key thing to appreciate is that if we withdrew from the CAP (EU common agricultural policy) and dropped the CET (EU common external tariff) on imports from the ROW (rest of the world) then this would be a move in the direction of free trade giving a large saving to UK consumers and other users of foreign imports. 

Prices would fall, offsetting the increase from the earlier fall of sterling. Admittedly, this would put increased competitive pressure on domestic producers and would tend to result in increased imports. But offsetting that is the likelihood that EU exporters to the UK would cut their prices in order to compete with imports from the ROW.

Take wine as an example. If the UK price of wine from South Africa, Australia, Chile et al fell significantly then the UK price of French wine would have to fall or France would suffer a big loss of business. Some industries (including agriculture) might need support but, helped by the now much lower pound, most manufacturing sectors would cope very well, with some benefiting strongly from lower import prices.

Bamboozled by the post-war consensus in favour of multilateral trade deals, and emasculated by the transfer of competencies to the EU, politicians and government officials, as well as many businesspeople, still don’t fully appreciate the attractions of free trade. The balance of trade is viewed as a sort of profit and loss account. Exports are good and imports are bad. But this is nonsense. In reality, the gains from trade derive not from exports but from the exchange of exports for imports. In this exchange imports are just as important as exports.

According to all the great economists, the ultimate aim of economic activity is consumption. Investment and production are means to this end. But there is another tradition in popular thinking and economic policy-making that values production for its own sake. It is called mercantilism. This is the philosophy that underlies the economic policies of Germany, which seems content to run huge current account surpluses without end. Our leaders must not succumb to it.

By all means let us try to gain preferential access to European markets if we can. But if we don’t succeed, this is no reason for us to restrict or penalise imports. We should be aiming for completely free trade – with everybody. Moreover, to embrace free trade ourselves, we don’t need to engage in endless negotiations taking umpteen years. If they don’t play ball we should simply do our own thing.

This won’t be readily accepted by our business lobby groups, many of whom will argue for tit–for–tat and for continued protection against the ROW. This is because much of the advantage of free trade will accrue to consumers, who do not have a say in their deliberations. It is up to ministers and officials to take full account of the interests of 65 million consumers who, if they understood what was at stake, would be clamouring for free trade.

David Fuller's view -

I think Roger Bootle is right, but I am not aware that anyone within the UK government is actively advocating this course, and certainly not the Chancellor of the Exchequer.

Perhaps the Government is holding its Brexit cards close to its chest prior to the Declaration of Article 50, but I believe the country would welcome can-do leadership from PM May and her team.  This can only help to build confidence and support which both the country and the Government need.  

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



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by David Fuller

Vlad the Ruthless knows exactly what he is doing, unlike his foes in the West

Apart from anything else, this story shows the extraordinary effect of propaganda and polarisation. If Mr Putin had hacked Mr Trump’s emails in order to assist Mrs Clinton, imagine how the conservative movement would have raged at the infamy of the hacker and the treason of the candidate favoured by Russia. Instead, the most self-consciously patriotic voters in the United States went for the man supported by the biggest enemy of their patria on the planet.

One must, of course, give credit where credit is due. The Western leader most to blame for the global advance of Putin’s Russia is not Mr Trump – who is still not in office – but President Obama. His preference for displaying virtue over exercising power has let down America’s friends everywhere – Egypt, Israel, Saudi Arabia, the Philippines and even, in a mild way, Britain – and encouraged America’s foes – Iran, Syria, Cuba, Russia. Hardly any effort has been made by the Obama administration to expose Mr Putin’s behaviour, counter his threats, galvanise European allies or trace, publish and impede the workings of Russian money, espionage and cyber-war in the West. 

Donald Trump might turn out to be bolder. It is possible that Mr Trump’s correct perception that Nato has become increasingly hollow will be the prelude to his reviving it as an alliance which means what it says. In which case, Secretary of State Tillerson’s ability to talk directly to Putin might come in handy. But Mr Trump did not just win the election by promising, as all of his predecessors since Roosevelt have done, that America will continue to underwrite the world order during his presidency. If I were living in Poland or Estonia, let alone Ukraine, I wouldn’t be betting my future on him. 

I wouldn’t do so even in Britain. You have to be over 90 to have an adult memory of a time when the United States did not stand behind this country in global affairs, so we may not be quick to recognise the symptoms if this is changing. But if it is, we have almost no idea what will hit us. 

David Fuller's view -

As a long-term optimist, I am hoping this column by Charles Moore is too pessimist.  Additionally, his paragraph on President Obama above (my emphasis in bold) seems harsh under the circumstances.  Americans had had enough of wars after the costly invasion of Iraq and wars of attrition by ground troops in other regions of the deeply troubled Middle East. 

Nevertheless, Obama’s “preference for displaying virtue over exercising power has let down America’s friends”, as Charles Moore says above.  It was seen as weakness, although the President’s use of precision missiles to target known terrorists was both controversial, extremely effective, and far from a sign of weakness.

What about the markets?

This item continues in the Subscriber’s Area, ehere a PDF of Charles Moore's article is also posted.  



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by David Fuller

Email of the day

On AEP’s article posted last Friday: The Eurogroup Is the Real Villian in Greece Today, Not the IMF:

Dear David
Ambrose' article is a powerful description of the unfolding mess. It does seem to be a matter of 'when' not 'if' the euro disintegrates, with politicians trying to delay the inevitable to avoid it happening under their watch. 

Given the history of Europe in the 20th century, it could be very difficult for Germany to be the country that exits the euro first and therefore be accused of abandoning the 'European ideal'. I feel very sorry for Germany, a country which is still paying the price for its war-mongering in the last century. 

The euro mess is mostly of France's making. It wanted a European currency to challenge the dollar. Remember how anti-USA France has been historically? Frenchman Jacques Delors chaired the group that drove through economic and monetary union. Germany was not in favour but it got press-ganged into the euro idea as a price to pay for German reunification after the fall of the Berlin Wall. France and the UK were not in favour of the reunification as they feared the growth in strength of Germany that would inevitably follow. Both countries had twice suffered dreadful destruction at the hands of Germany only a few decades earlier. However France then reneged on its partnership with Britain by telling Germany it would support reunification if Germany supported a new currency, the euro, to challenge the dollar. Since 'one nation' mattered most to Germany it then gave support for the euro, despite many misgivings. 

The countries of south Europe are the first to suffer, but it will rebound on France too eventually. 

Recently, the euro has been a great short opportunity with a classical trend pattern since it broke down against the US dollar in mid 2016.

Best wishes

David

David Fuller's view -

Thanks for this background information which has refreshed my memory of how controversial German unification was in the early 1990s.

Here is Wikipedia on German reunification.



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally.  Since timing is everything, here are two trends which are just beginning to signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by Eoin Treacy

December 19 2016

Commentary by Eoin Treacy

Bond Selloff Shows Risks of China's Efforts to Restrain Credit

This article by john Lyons and Rachel Rosenthal for the Wall Street Journal may be of interest to subscribers. Here is a section: 

The clearest sign that many Chinese are worried is the amount of money flowing out of China despite strict measures to stop it. China’s foreign reserves have dropped by 21% to $3.05 trillion in the past two years.

Chinese authorities are aware of the risks. On Friday, a senior Chinese government economic working group said for the first time that controlling financial risk and reducing asset bubbles had become a priority, according to a statement reported by Chinese state media. The country’s top decision-making body, the Politburo, issued a similar warning earlier this year.

As much as 15% of the value of bank loans to Chinese companies may go unpaid, researchers at the International Monetary Fund estimate. Even riskier are an estimated $8.5 trillion in off-balance sheet “shadow” finance issued by a matrix of banks and lightly regulated institutions.

A key question now is how much of China’s bond market is owned outright, and how much was bought with money borrowed under murkier circumstances such as shadow finance, raising risks. Analysts estimate leverage in the system overall is between 1.2- and 5-times assets, a relatively low figure, although in pockets of the market it can go much higher.

But since much of the financial system is lightly regulated, the true amount of leverage in the system is unknown. Market experts say asset managers routinely use bonds as collateral to buy more bonds, repeating the process many times over.

 

Eoin Treacy's view -

Chinese citizens are allowed to hold foreign currency accounts domestically and there is an annual $50,000 limit per person that can be exchanged. With January 1st swiftly approaching and the Yuan still weak, the potential for even more selling pressure simply based on this legitimate desire to hedge domestic exposure is nontrivial considering the size of China’s population.



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by Eoin Treacy

Welcome to Uberville

This article from The Verge by Spencer Woodman may be of interest to subscribers. Here is a section:

These companies are arriving at an opportune time for cities, many of which are struggling just to fund existing transit service, much less expand it to meet the needs of growing numbers of urban commuters. Both Uber and Lyft tell The Verge that the past year has seen a surge in public officials interested in giving the companies taxpayer dollars for public transit contracts. For the companies, it’s an appealing new way to establish themselves as vital infrastructure, especially in low-density communities like Altamonte where running traditional mass transit can be expensive. Given the pace at which these partnerships are coming together, it’s possible to imagine ride-hail companies taking on the role of all-encompassing, smartphone-driven public transit providers, one town at a time.

But for some transit advocates, the embrace of Uber and its competitors risks undermining civic ideals of accessibility and transparency. In Altamonte, there are already signs that these concerns could be warranted. The pilot program is unusable for people without a smartphone or credit card, and the company attempted to have the city sign an unusually far-reaching nondisclosure agreement.

Ultimately, critics worry that if these programs succeed, they could pluck the affluent commuters who wield real political influence off trains and busses, leading to a crisis of declining ridership and decreasing clout for traditional public transportation.

Uber has so far been pitching itself as a supplement to existing transit programs rather than a replacement. But in June of last year, for the company’s five-year anniversary, Uber CEO Travis Kalanick envisioned a future where increasing efficiency would make Uber cost-competitive not just with owning a car, but with traditional mass transit. When drivers drop off a customer only to pick up another, chained together in a "perpetual trip," Kalanick said, "not only is it much less expensive than taking a cab or owning a car, it has the potential to be as affordable as taking a subway, or a bus, or other means of transportation. And that’s what we believe is the real game-changer. Those are the things we’ll be working on in years to come."

 

Eoin Treacy's view -

Uber and to a much lesser extent Lyft are increasingly ubiquitous. More than a few people I know make use of Uber for their teenagers’ school run rather than buy them a car. Many airports allow pickups and many business travellers no longer rent cars. Ride sharing/hailing apps are comparatively cheap, quick and easy to use provided of course you have a smartphone and a credit card. 



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by Eoin Treacy

Email of the day on the Dow / Gold ratio

Your big picture LT video sessions are really excellent & getting even more sharper by the week....... Just one query: where can I find the Dow/Gold ratio index in your chart library ?

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you are enjoying the video commentaries. The reason I used the Bloomberg chart in the video is because they have gold prices going back as far as 1900. Unfortunately they do not supply us with the same data which means out ratio can only go back to the late 1970s. 

To create ratio in the Chart Library:
Select the Dow Jones industrials Average from the Chart Library search. 
Click on the Charting button on the same ribbon
From the Relative dropdown select Gold CMX (cont 2nd mth) 



This section continues in the Subscriber's Area. Back to top
December 19 2016

Commentary by Eoin Treacy

Email of the day - on back pain, recovery and maintenance

When I heard on Friday’s Big Picture Presentation that you wife had popped a disc in her back it gave me flashbacks to the time I suffered from this problem.

Over the past 30 years I regularly do exercises to ensure my back muscles are always sufficiently fine-tuned to cope with any unusual daily stresses and strains.

Just like the discipline of working through charts on a daily basis, I also ensure the back muscles receive daily attention!

I hope the attached helps.

 

Eoin Treacy's view -

Thank you so much for the well wishes and Mrs. Treacy also passes on her gratitude for your generously contributed advice. For a very active person she has had a succession of bad luck this year. Shortly after enthusiastically picking up tennis she developed tennis elbow which inhibited her yoga schedule. Coupled with a lot of time behind a desk heading into the Christmas season I suspect it was the lack of core exercises and stress that contributed to the back problem. Your regime highlights has the benefit of being able to do anywhere and we have resolved that in 2017 we will do back exercises together every morning.



This section continues in the Subscriber's Area. Back to top
December 16 2016

Commentary by David Fuller

The Eurogroup Is the Real Villain In Greece Today, Not the IMF

We know why Europe will not grasp the nettle. Chancellor Angela Merkel has sworn to the Bundestag that EMU bail-outs will never cost German taxpayers a single cent, and similar sagas are playing out in Holland and Finland.

A debt write-off would be an admission that it costs real money to hold the eurozone together. It would require parliamentary votes heading into the coming electoral Annus Horibilis of 2017.

So Greece gets dribs and drabs in the form of lower interest payments. But as the IMF makes clear, the country will still be bankrupt at the end of its Troika programme. It is stuck in semi-permanent infeudation.

The original sin of the Greek rescues was to convert debt owed to banks and private investors into debt owed to the taxpayers of other EMU states, some of them poorer than Greece, or running even bigger primary surpluses.

How do you explain to the peoples of the Baltic states or Slovakia that they should give debt relief to the Greeks? The politics of this have become infernal. So the path of least resistance is for everybody to lie and pretend that the Greek bail-out is workable.

For tactical reasons, the Leftist Syriza government chooses to go along with much of this deception, knowing that it is essentially broken as a political movement and entirely at the mercy of the Eurogroup Working Group.

Alexis Tsipras threw in his lot with this conspiracy in July 2015 after he took his country to brink, and then capitulated. His game now is to lash out at the IMF over austerity, when he knows perfectly well that he signed an EU Memorandum last year that stipulates a primary surplus of 3.5pc. 

"They're being disingenuous. I know because the Troika tried to shove this Memorandum down my throat, and the whole idea of such a surplus is preposterous," said Yanis Varoufakis, the former finance minister.

Syriza's real dispute with the IMF is over market reform. Mr Tsipras clings to 'Old Labour' job laws and a bloated pension system, even though that means slashing investment and cutting so deep into discretionary spending that public buses have run out of spare parts and hospitals have run out of syringes.

As for the IMF, it is fighting for its own survival. It allowed itself to be dragged into multiple rescues of a rich currency union that had ample means to sort out its affairs but refused to use them.

This fiasco consumed 80pc of the Fund's total lending between 2011 and 2014. It was unprecedented in scale and character, and infuriated China, India, and Latin America.

There is no longer any tolerance on the IMF board for further squalid fudges over Greece, and it is almost unthinkable for the Fund to take part in the latest €86 bail-out under the current EU terms.

The election of Donald Trump has clinched it. "We have enough problems; let Germany handle it. It's peanuts for Germany,” he said when asked what he would do about the country.

"Frankly, Putin probably comes in to save the day, if Germany doesn’t,” he added, for good measure.

If only Greece had defaulted and left the euro in May 2010 when the crisis first detonated, and had been able to do so without bringing down the temple on everybody's heads.

The country would have suffered a short sharp shock like Argentina when it broke the dollar peg, with temporary capital controls and a temporary nationalisation of banks. The chances are that it would now be four years into a blistering 'V-shaped' recovery with a super-competitive drachma.

Actually, it is still not too late for liberation, and next time nobody will stop them.

David Fuller's view -

Perhaps I lack imagination but I do not see how the EU could survive in its present form, let alone resume its political agenda.  If so, some may regard this as a tragedy.  However, I believe many individuals on the Continent would regard a breakup of the EU with relief. 

What are the prospects for investors? 

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



This section continues in the Subscriber's Area. Back to top
December 16 2016

Commentary by David Fuller

Donald Trump Cabinet of Oil Men and Generals Is Just What Is Needed to Get US Out of its Rut

America has a long tradition of appointing political outsiders to the administration. The “can do” attributes that business and the military bring to government have on the whole served America well.

Yet Trump is taking this penchant for non politicians to a whole new level. It is hard to think of any line-up that more perfectly matches Dwight Eisenhower’s depiction of government by the “military industrial complex” than this one. Generals, billionaires, business leaders and Wall Street financiers are utterly dominant.

One way or another, Goldman Sachs always has a placeman or two in the administration, but to have three alumni – Cohn, Mnuchin and Bannon – in key positions is unprecedented. Trump’s cabinet has begun to resemble a kind of cross between the Fortune 500 rich list, a financier’s reunion party and a military junta.

It could admittedly all turn out very badly. The scope for cronyism is obvious. What’s more, business people can find the transition to the intense public scrutiny of democratically-accountable government difficult and frustrating.

Most companies are benign dictatorships where even key decisions are automatically executed from the top down. Government by consent is by contrast necessarily more complex, compromised and slow-moving.

Yet if the likes of Tillerson can bring even half the determination shown in business to Trump’s new administration, then we are in for a very different and decisive form of politics. Exxon once came first. Now it will be America. No more half-hearted adventurism or senseless adherence to past loyalties and causes; just hard headed focus on the bottom line.

David Fuller's view -

Donald Trump is going to be the most controversial US president in living memory.  It will be an interesting four years.  I hope he is re-elected because that would suggest a successful first term.  A cabinet drawn from largely outside the two Houses of Congress is refreshing.  That should be good for the US economy and if so, the global economy will also benefit.  

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



This section continues in the Subscriber's Area. Back to top
December 16 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally.  Since timing is everything, here are two trends which are just beginning to signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



This section continues in the Subscriber's Area. Back to top
December 16 2016

Commentary by Eoin Treacy

December 16 2016

Commentary by Eoin Treacy

Asian Markets 2017

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

We are positive on Indonesia in the regional context. We continue to regard Indonesia as one of the prominent structural growth stories in the region and the recent equity market correction is a good buying opportunity. The combination of a tax amnesty, a build out of much-needed infrastructure and the roll-out of a healthcare scheme should support growth going into the New Year. With regards to the tax amnesty programme and repatriation, approximately 29% of funds have been repatriated to Indonesia by the end of November, implying that more is to come 

These repatriated funds will be put to work in 2017, allowing for funding of government infrastructure projects. Looking ahead, the equity market’s performance may hinge on a stronger earnings outlook and continuation of the positive earnings revision ratio trend 

Some have pointed at rising political risk following demonstrations against the Jakarta mayor, a Christian who had made some comments on Islam. While this might have little to do with government policies, the mayor is a close ally of President Joko Widodo. The removal of the mayor in upcoming elections in February could have an impact on support for the president and his policies.

Based on the macro-environment, we see consensus forecast for 11% EPS growth for 2017 as quite reasonable. We are expecting a pick-up in economic activity due to greater and more efficient fiscal spending, stronger commodity prices and resilient consumer spending 

Infrastructure investment remains a key theme for the market, as Indonesia looks to modernise its road-rail network. In addition, our banks’ analysts expect the asset quality concerns to peak out by end 2016, which means credit cost should at the very least stabilize in 2017. This should benefit Indonesian banks.

Eoin Treacy's view -

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

Widodo has not been blessed with Modi’s large majority and as a result has had a more difficult route to implementing reform and cleaning up cronyism. Nevertheless progress has been made and the currency stabilised from last year. 

The weakness of the currency boosted the nominal performance of the stock market which has been largely rangebound since 2013. Foreign currency funds offer a truer perspective on the performance of the market when the Rupiah is accounted for.  



This section continues in the Subscriber's Area. Back to top
December 16 2016

Commentary by Eoin Treacy

U.S.'s ICE Backs U.K. in Battle to Keep Euro Clearing in London

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

Intercontinental Exchange Inc., the world’s third-biggest clearinghouse, has taken sides in the tussle between the U.K. and some European Union leaders over a key corner of the financial industry.

The U.K. is the world’s largest hub for clearing euro interest-rate derivatives, a vital activity that ensures buyers and sellers of the contracts get paid. London also accounts for 75 percent of euro derivatives trading, some $574 billion a day.

“There is no reason why this should change as a result of Brexit,” ICE said in a document seen by Bloomberg. “Given that the euro is the world’s second-largest reserve currency and as such provides significant benefits for member states, the wider EU and companies trading overseas, any such protectionist move could severely damage confidence in the currency within the global economy.”

The paper comes as the Financial Times, citing an unnamed French central bank official, said Thursday that the EU’s executive arm should change the rules on euro-denominated interest-rate derivatives even before U.K. leaves the bloc. The ICE paper was circulated to EU member states.

Since Britain’s vote to leave the EU, clearing has become a focal point for those aiming to chip away at London’s role as the continent’s financial center. Leaders in France and Germany want the City’s profitable clearing business, arguing that any clearing of euro derivatives should take place within the bloc.

 

Eoin Treacy's view -

Continental Europe has long looked with longing eyes on the City and wondered how they could create a similar ecosystem in Paris, Frankfurt or Rome. The bad news is there is no easy answer. 



This section continues in the Subscriber's Area. Back to top
December 16 2016

Commentary by Eoin Treacy

Mexico's Trump-Fueled Rout Belies Latin America Markets Bonanza

This article by Ben Bartenstein, Aline Oyamada and Isabella Cota for Bloomberg may be of interest to subscribers. Here is a section: 

“Latin America will recover more than other regions in GDP terms and do more reforms,” said Dehn, a London-based head of research at Ashmore Group, whose top pick is Brazil.

President Michel Temer’s push to pass spending and pension overhauls is another reason investors remain bullish on Brazil.

The real has jumped 19 percent this year, the second-largest advance in the world, helping bolster returns in local bonds. It will soar another 10 percent by the second-quarter of 2017 before weakening to 3.4 per dollar by year’s end, according to Gustavo Rangel, the chief Latin American economist at ING Financial Markets LLC and the region’s top currency forecaster last quarter, according to Bloomberg rankings.

While Brazil’s prospects continue to improve, Mexico’s outlook is more mixed. Trump’s pledges to rip up the North American Free Trade Agreement and build a wall along the southern border have unsettled investors in assets from the region’s second-biggest economy, with the peso plunging 16 percent this year. Mexico sends almost 80 percent of its exports to the U.S.

 

Eoin Treacy's view -

For almost a decade the Dollar trended consistently lower against the currencies of commodity producers and emerging markets. That ended a few years ago and currency market volatility now plays an important role in any consideration of when and whether to invest in these markets. 



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by David Fuller

How Trump Courted Sandberg, Cook and Bezos

Here is the opening of this topical report from Bloomberg:

Tech executives summoned to meet with Donald Trump in New York Wednesday had reason to suspect they were being lured into a trap. In the run-up to the election, the President-elect clashed with industry bellwethers over such issues as immigration, manufacturing and smartphone security. Many in Silicon Valley’s upper ranks made no secret of their support for Hillary Clinton, some expressing disdain for her opponent. And Trump himself excoriated media executives in a similar summit three weeks ago and has used the bully-Twitter-pulpit in recent weeks to criticize other industries, using 140 characters or less to drag down companies’ stocks.

But concerns that the new administration would similarly use the Trump summit to browbeat big tech evaporated not long after the industry elite made their way through Trump Tower lobby, surrounded by reporters, security and enormous shining Christmas wreaths. Seated at a long conference table, near Facebook’s Sheryl Sandberg, Apple’s Tim Cook, and Amazon’s Jeff Bezos, Trump laid the compliments on thick.

"This is a truly amazing group of people," Trump told a group that included Tesla founder Elon Musk, Microsoft Chief Executive Officer Satya Nadella, Alphabet CEO Larry Page and IBM’s Ginni Rometty. "We want you to keep going with the incredible innovation. There’s nobody like you in the world. There’s nobody like the people in this room."

Inside the 25th-floor conference room, once cameras were ushered out, the tone of the conversation was amiable and conciliatory, according to people who attended or were briefed on the meeting. Trump was engaged, and he listened more than he spoke, said the people, who asked not to be identified discussing a private meeting. The executives spoke freely, introducing themselves to a group that included Vice President-elect Mike Pence; Trump’s three eldest children; Gary Cohn, the former Goldman Sachs president and Trump’s top chief economic policy adviser; and Peter Thiel, a PayPal co-founder and Trump transition team member, who helped orchestrate the summit.

"Very good to be here," Cook said, according to a transcript. "And I look very forward to talking to the President-elect about the things that we can do to help you achieve some things you want.” Oracle CEO Safra Catz said, "we are looking forward to helping you." Happiness abounded for Cisco CEO Chuck Robbins, who exclaimed, "We’re happy to be here and happy to help and happy to work with you.”

David Fuller's view -

If Trump can produce a tax deal which makes it worthwhile for tech CEOs to repatriate their $billions held overseas, he will have done more for the industry and the US economy generally than anything from the previous administration over the last eight years.  



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by David Fuller

World Energy Hits a Turning Point: Solar That Is Cheaper Than Wind

Here is the opening of this interesting article from Bloomberg:

A transformation is happening in global energy markets that’s worth noting as 2016 comes to an end: Solar power, for the first time, is becoming the cheapest form of new electricity. 

This has happened in isolated projects in the past: an especially competitive auction in the Middle East, for example, resulting in record-cheap solar costs. But now unsubsidized solar is beginning to outcompete coal and natural gas on a larger scale, and notably, new solar projects in emerging markets are costing less to build than wind projects, according to fresh data from Bloomberg New Energy Finance

The chart below shows the average cost of new wind and solar from 58 emerging-market economies, including China, India, and Brazil. While solar was bound to fall below wind eventually, given its steeper price declines, few predicted it would happen this soon.

“Solar investment has gone from nothing—literally nothing—like five years ago to quite a lot,” said Ethan Zindler, head of U.S. policy analysis at BNEF. “A huge part of this story is China, which has been rapidly deploying solar” and helping other countries finance their own projects.

This year has seen a remarkable run for solar power. Auctions, where private companies compete for massive contracts to provide electricity, established record after record for cheap solar power. It started with a contract in January to produce electricity for $64 per megawatt-hour in India; then a deal in August pegging $29.10 per megawatt hour in Chile. That’s record-cheap electricity—roughly half the price of competing coal power. 

“Renewables are robustly entering the era of undercutting” fossil fuel prices, BNEF chairman Michael Liebreich said in a note to clients this week.

David Fuller's view -

It is entirely logical that technology will continue to lower the cost of solar power, until it is the cheapest source of energy by far.  After all, it neither has to be discovered and then extracted, nor does it need refining.  It is free energy, arriving every day from the largest nuclear reactor within our solar system - by far.  The means of capturing solar energy are multiplying at a rapid rate, particularly within urban areas where it is most needed.  Storage of solar energy is limited but this too will change, now that it is a priority.   

This item continues in the Subscriber’s Area and contains an additional article.



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by David Fuller

Email of the day

On reducing the delay over Brexit:

David

I hope our PM reads this article and acts accordingly. She may need a reshuffle early in 2017 to remove some remoaners. 

David Fuller's view -

Thanks for your comments and the link to a sensible article by John Mills.  Here is a brief section:

There is clearly a case for getting the Brexit negotiations concluded as soon as possible. The only significant economic downside to the EU referendum vote so far has been some signs of a fall-off in investment for which uncertainty must be part of the cause.

As long as we are in the EU, we run up costs of £250m a week, which obviously we must avoid if we can. So we need to get negotiations completed within the two year period, which may well mean within 18 months, allowing for a period of time for ratification. What can we do to make sure this happens?

First, having a relatively tight deadline will concentrate the minds of the negotiators. The longer the time available, the longer it will take. This will not make problems easier to solve. It will just provide an excuse for putting off tackling the difficult issues.

Second, we need to ensure that negotiations on the arrangements over our leaving the EU run concurrently with discussing what will happen after we have left. It makes no sense to run these two aspects of Brexit consecutively, wasting time which is in no one’s interest.

Third, we need to keep it as simple as we can, building on well-established existing trade arrangements instead of creating new ones, unless, in a few cases, these are absolutely essential. If – as will probably happen – we finish up outside the Single Market but with a free trade deal, all the necessary alignments of standards, for instance, will already be in place.

Theresa May is not the problem, in my opinion.  Nevertheless, she needs genuine support and sensible council from those who favour a swift, Clean Brexit. 

I assume she has contingency plans if Brexit is held up by either the Supreme Court or remainers in both Parliament and the House of Lords. 

(See also Roger Bootle’s article and my reply to it, posted on Tuesday 13th December.)



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally.  Since timing is everything, here are two trends which are just beginning to signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by Eoin Treacy

December 15 2016

Commentary by Eoin Treacy

The worst of both worlds

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

Australia’ economy shrunk by 0.5% in 3Q16. Typically in such a situation a cut in official interest rates can ease the pain. While the RBA may choose to lower interest rates, its impact on customers’ borrowing costs may be limited. In fact mortgage rates could rise again soon.

Why? The RBA only controls the cost of borrowing overnight. The longer the term of the bond, the more the market sets its yield. As the marginal investor in the A$ bond market is from overseas what happens in the global market place drives our longer term bond yields.

Just as Australian home loan borrowers could do with some relief interest rates are edging up. The reason is Australian banks raise insufficient deposits to fund their loan book. The balance of funds comes from the bond market. Should the cost of borrowing for our “AA” rated banks rise further customers will likely get more hikes on their mortgage rates.

A concern Spectrum has is if the U.S continues to grow at near its current 3% run rate both U.S and Australian bond yields could rise further. Borrowing while rates were falling was easy 

Since the 1980’s Australian households have piled on the debt. Much of this has gone into residential real estate. The continuous fall in interest rates and rising property prices created a re-affirming inducement to borrow more. Today, Australian households have world beating debt levels. This makes parts of the sector hyper-sensitive to rate rises. Should the cost of borrowing rise notably from here wide-spread financial stress within Australian households looks set to follow.

 

Eoin Treacy's view -

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

Australian 10-year bond yields last traded above the trend mean in 2013 when rates were 2.5% or 100 basis points above today’s level. The yield is closing in on the 3% level more in sympathy with US Treasuries than any particular hike in Australian inflation expectations. 



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by Eoin Treacy

China Halts Trading in Key Bond Futures as Panicky Investors Sell Securities

This article by Yifan Xie and John Lyons for the Wall Street Journal may be of interest to subscribers. Here is a section:

Some of these bubbles have burst dramatically over the last 18 months, with the crash in China’s stock markets last summer the most notable example. On Thursday, the pain spread to China’s $9 trillion bond market, which remains overwhelmingly driven by domestic investors, despite some opening up to foreigners this year. The yield on 10-year government bonds had reached as low as 2.6% in August.

“People woke up to the fact that the bond bubble is too large,” said Hao Hong, co-head of research at Bocom International, which is owned by Hong Kong’s Bank of Communications. “The bond market in China is under severe pressure, across the board.”

The U.S. Federal Reserve’s decision to raise interest rates helped trigger the selloff. Chinese investors believe it increases the chance China will guide its own rates higher to stem the yuan’s recent decline against the dollar and heavy capital outflows from the country.

But the bond market slump also exacerbates the policy dilemma facing China’s central bank. It has tightened short-term lending in recent weeks in an effort to make it harder for speculative investors to borrow money. The problem is that such tightening moves—along with any future rate rises—could provoke market plunges and panics as liquidity dries up.

 

Eoin Treacy's view -

One of the greatest challenges the Chinese administration has is that many of its capital markets are dominated by individual investors rather than institutions. Coupled with a wide spread between the lending and deposit rate speculation is rife and that tends to encourage manic periods of both buying and selling. 



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by Eoin Treacy

Euro-Area Maintains Momentum as Weaker Currency Helps Factories

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

The latest signs that the economy is growing at a steady -- if not spectacular -- pace come a week after the European Central Bank’s decision to prolong its asset purchases through 2017, while lowering the monthly amount starting in April.

With euro-area inflation still low, President Mario Draghi said the central bank will have a presence in markets “for a long time.” He also warned of potential uncertainty ahead linked to national votes in 2017.

“There is clearly the potential for political uncertainty to derail growth as elections loom in the Netherlands, France and Germany, and Brexit discussions begin,” said Markit Chief Economist Chris Williamson.

Williamson said the intensification of inflationary pressures was the “most significant development” this month and something that will “please ECB policymakers.”

In Germany, the region’s largest economy, the composite PMI was at 54.8 this month after a reading of 55 in November, capping the strongest three-month period since the second quarter of 2014. France’s index rose to 52.8 -- an 18-month high-- from 51.4.

 

Eoin Treacy's view -

The Euro broke decisively below $1.05 today to extend its medium-term downtrend following an almost two-year long distribution. That will enhance the competitiveness of all Eurozone companies versus their non-Eurozone opposition but will do nothing to ameliorate Germany’s advantage relative to the periphery.



This section continues in the Subscriber's Area. Back to top
December 15 2016

Commentary by Eoin Treacy

The Chart Seminar 2017

Eoin Treacy's view -

We are currently in the planning stages for choosing venues for The Chart Seminar next year.

Right now we will certainly have a London seminar in November.

Based on positive subscriber feedback we will have a seminar in Singapore towards the end of the 2nd week of April. The CFA Institute has once more agreed to co-host this event and I will also provide certificates for continuous professional development to anyone who wants one.

I now also have some copies of the Mandarin edition of Crowd Money so please specify which version you would like to receive at the seminar when booking. 

If you are interested in either of these venues or would like to suggest a venue please contact Sarah at [email protected]  I would be more than happy to plan a US based seminar next year if we have the critical mass to make it viable and I will likely be stopping off in Japan on the way back from the seminar if there is any interest for an event in Tokyo. 



This section continues in the Subscriber's Area. Back to top
December 14 2016

Commentary by David Fuller

Putin Game Is to Neuter and Divide the West, and He Is Succeeding

And now your goal, as Mr Putin, is nothing less than European impotence. You want to make it impossible for them to pursue hostile actions such as sanctions on your cronies, expanding Nato or refusing to build new gas pipelines. If that can be achieved, your regime will be richer financially, safer politically, and seen at home as the tough and effective leadership that helps the average Russian to ignore the parlous long‑term state of the country. 

With the election of Mr Trump, there is a path to fulfilling this goal, provided it is done with care and cunning. First it involves consolidating the position of Bashar al-Assad in Syria, regardless of how much violence has to be unleashed before Trump’s inauguration. That opens the way to offering the new US administration an end to the war in Syria on Russia’s terms, with Mr Assad in power in most of the country, and the whole world able to see that you can count on Russia as an ally, but never trust the support of the West. 

Having dealt with that early in 2017, the next step is to use it as the basis for a rapprochement with America, but cautiously, so that congressional critics of Mr Trump are not given too much ammunition. A good way to disarm suspicion is to offer to go back into one or two of the international agreements – on arms control and nuclear facilities – recently abrogated by Moscow. There will be some relief and even praise in the Western media, hailing a “new era” in relations and analysing Mr Putin’s good diplomacy and return to responsibility. 

Simultaneously, the extraordinary success and skill being developed by Russia in manipulating Western elections will offer rich pickingsin 2017. The universal assumption for many years that social media and the internet would be agents of freedom has left most people slow to grasp that new technologies can be turned into powerful means of authoritarian power – for the first time reaching deep into other nations and societies. 

Mr Trump has already disavowed the CIA’s findings that Russian hacking was designed to promote his victory. That the president-elect of the USA refuses to believe well-founded research by his own agencies is an unmitigated triumph for Moscow. Such tactics can now be used to promote the election of pliable candidates across Europe, with the scope to fund them as well. 

The French National Front has already borrowed €9 million from a Russian bank. A combination of donations and social media operations can help to push disorientated European voters the right way. Recent months have seen a pro-Russian president elected in Bulgaria, and a new government friendly to Moscow in Moldova. The Netherlands rejected the EU treaty with Ukraine in a referendum, and growing parties like the Five Star Movement in Italy have Russian ties. 

Add a bit of military intimidation and internal agitation in the Baltic States – one third of Latvians are ethnic Russians – and another part of Europe will feel weakened. Then subtly help opposition parties in Germany’s autumn elections to undermine Angela Merkel. Manipulate politics in Montenegro so it doesn’t want to join Nato. Hug Serbia and keep Bosnia paralysed by the same techniques. Keep pushing up the price of oil by deals with the Arabs, so that Russian gas is sought-after. 

Do all these things and soon the EU, particularly without the UK, will lack the will to challenge Russia. In foreign affairs and energy policy, Europe is only as strong as its weakest link, and soon this strategy will make sanctions impossible, western security weaker and buying Russian energy impossible to resist. Mr Putin will be able to do as he wishes, with whom he wishes.

Mr Trump is a great advocate of doing deals. The first step in doing a good deal is to have your eyes open to the strategy of the other side. Europeans certainly need to spend more on defence. 

But America needs to see what could be about to unfold: under cover of better relations, the division, weakening and neutering of the West. 

David Fuller's view -

‘Once a KGB operative, always a KGB operative’.  This old adage certainly applies to Putin, who had a rough two years following the collapse of crude oil prices in 2H 2014.  Naturally, Russian citizens did far worse. 

However, Putin is in a somewhat stronger position today.  Brent Crude oil is trading above $50 following the belated decision to reduce supplies somewhat, in line with OPEC.  For Russia, this is probably no more than the reality that it will see another reduction in output due to the harsh Siberian winter.  Having invested heavily in military equipment, Russia has also increased the sale of weapons to Iranians and other regimes which are either unable to buy from the West or disinclined to do so.  At home, Moscow’s constant stream of daily propaganda, along with Putin’s ‘heroic’ ability to see off evil doers, continues to embellish his tough guy patriot image.  So far, this is just enough to keep a lid on protests at home, although this may not always be the case. 

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



This section continues in the Subscriber's Area. Back to top
December 14 2016

Commentary by David Fuller

Kissinger at 93 Expounds on Rex Tillerson, One-China and Trump

Henry Kissinger, the 93-year-old foreign policy guru to world leaders, isn’t slowing down. On Wednesday he weighed in on Donald Trump’s pick of Exxon Mobil Corp. chief Rex Tillerson as the top U.S. diplomat, the importance of the ‘One-China’ policy and the president-elect’s decision to take a phone call from Taiwan’s leader.

Speaking to the Committee of 100, a non-profit that works on improving U.S.-China relations, Kissinger dismissed criticism that Tillerson’s work winning contracts with Russia for Exxon disqualifies him for the State Department job.

“I pay no attention to the argument that he is too friendly to Russia," Kissinger said. "As head of Exxon it’s his job to get along with Russia. He would be useless as the head of Exxon if he did not have a working relationship with Russia.”

Citing his acquaintance with Tillerson from serving together on the board of a Washington-based think tank, Kissinger praised Trump’s selection and added that "we should not think about these relationships as the personal relationship of individuals."

David Fuller's view -

What a wise old gentleman and an inspiration for us all. The third paragraph above, which I have placed in bold, is the key one to note given all the comment on Tillerson’s cordial relationship with Putin.



This section continues in the Subscriber's Area. Back to top
December 14 2016

Commentary by David Fuller

Fed to Step Up the Pace of Interest Rate Rises Next Year

The US Federal Reserve has signalled that it will step up the pace of interest rate rises next year as a robust jobs market and stronger growth prompted the central bank to raise rates for only the second time in a decade.

Janet Yellen, the Fed’s chairman, described the increase as a “vote of confidence in the economy”, as officials unanimously opted to raise its Federal funds target range to between 0.5pc and 0.75pc, from 0.25pc to 0.5pc.

Ms Yellen said expectations of fiscal stimulus following Donald Trump’s US presidential victory had been one of “several” factors influencing changes to the Fed’s projections, as ­policy­makers in­dic­ated three  more hikes next year.

“Job gains have been solid in recent months and the unemployment rate has declined”, Fed officials said in a statement.  Economic activity was expanding at a “moderate pace” while some measures of inflation expectations had increased “considerably”.

The dollar jumped against the euro and pound and US Treasury yields climbed after policymakers upgraded their growth and interest rate forecasts and projected a further fall in the unemployment rate. The Dow Jones Industrial Average came within 40 points of a record high of 20,000 shortly after the interest rate decision , though the index closed down 0.6pc at 19,792.53.

The world’s biggest economy is now expected to grow by 2.1pc in 2017 and by 2pc in 2018, compared with previous forecasts in September for growth of 2pc per year. The Fed’s growth projection for 2019 was also revised up, to 1.9pc from 1.8pc. Unemployment, which fell to a nine-year low of 4.6pc in October, is  now predicted to drop to 4.5pc next year, where it is expected to remain for the next three years.

The Federal Open Market Committee (FOMC), which sets interest rates, signalled that they could rise to around 1.4pc by the end of 2017, suggesting three further  increases of 0.25 percentage points over the coming year if the economic outlook evolves as anticipated. Its so-called “dot plot”, where policymakers indicate their expectations for the likely rate path over the medium term, showed policymakers  predicting rates will rise to around 2.9pc by the end of 2019 .

David Fuller's view -

I am glad to say that Fuller Treacy Money never took the overly gloomy groupthink view that the world would remain stuck for many more years in a disinflationary or deflationary environment of minimal GDP growth, with negligible inflation and record low interest rates. 

Instead, focussing on the world’s largest economy, I forecast back in 2009 and many times thereafter, that the severe credit crisis recession would require at least 5 to 7 years of convalescence, and possibly somewhat longer before recovering. Today, it is just under 8 years since the US economy bottomed. 

This was not a lucky guess on my part.  Instead, it was based on the average of what we saw following other credit crisis recessions over the last 100 or more years. 

The key factors behind this lengthy convalescence were deleveraging by both corporations and consumers, which considerably lowered government tax revenues.  Extreme caution followed.  The result was an economy in stall, as were so many others around the globe, with the central bank providing the main stimulus. 

Following nearly eight years of minimal GDP growth, I think the US economy is now showing clear signs of recovery, led by consumer spending.  This is greeted with considerable relief but confidence is still low, not least among forecasters.  The Fed’s forecasts for GDP growth over the next two years are 2.1% in 2017 and 2% in 2018.  That is very conservative and could be correct, depending on circumstances, although we can only guess.  However, my view is that surprises will be on the upside, for GDP growth, inflation and interest rates. 

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



This section continues in the Subscriber's Area. Back to top
December 14 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers are managing to make the most of the Trump bull market rally.  Since timing is everything, here are two trends which will eventually signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



This section continues in the Subscriber's Area. Back to top