The Trump administration’s foreign policy has been a dizzying spectacle of mixed messages and policy reversals during its first three months. But in last week’s crucial tests, President Trump made good decisions about Syria, Russia and China — moving his erratic administration a bit closer toward the pillars of traditional U.S. policy.

The decision to strike a Syrian air base was a confidence builder for an inexperienced and sometimes fractious White House, a senior official said. Trump couldn’t be sure when he launched the attack that a Russian wouldn’t be killed, or that some other freak mishap wouldn’t arise. The military option he chose had two virtues: It was quick, surprising Russians who hadn’t expected such prompt retaliation; and it was measured, sending a calibrated message rather than beginning an open-ended military intervention.

Trump famously likes to win, and he can probably claim a win here after weeks of chaotic setbacks. As a result, the Syria operation, generally praised at home and abroad, has consolidated the power of Trump’s core foreign policy team, in ways that may alter the political balance of this White House.

Here’s the consensus among top Republican and Democratic former officials I spoke with: National security adviser H.R. McMaster ran a tight interagency process; Defense Secretary Jim Mattis offered the president clear, manageable options. Trump mostly stayed off Twitter, encouraging his team members to do the work rather than disrupting them.

Perhaps the most visible beneficiary is Secretary of State Rex Tillerson, who has found his voice after an agonizingly slow start. Tillerson clearly has gained Trump’s confidence and has also forged an alliance with the decisive backstage operator in this White House, senior adviser (and Trump’s son-in-law) Jared Kushner.

Trump’s liabilities are better known than his assets. Nevertheless, he is a shrewd operator and flexible – good qualities for a president.  He also has a number of very good advisors.

The world's leading currency institute is bracing for a dramatic rise in the US dollar as the Federal Reserve rushes to tighten monetary policy, setting the stage for a protectionist showdown and a fresh debt crisis in emerging markets.

Adam Posen, president of the Peterson Institute for International Economics, said investors have badly misjudged the confluence of forces at work in Washington.

They wrongly assume that fiscal stimulus will come to little under Donald Trump, and are equally wrong that Janet Yellen Fed's will remain dovish as the US nears full employment.

"The Fed is going to be far more aggressive than people think. Our view is that there will be three to four more rate rises this year," he told The Telegraph.

This would amount to a global monetary shock, all the more so since the Fed is also floating plans to reverse quantitative easing (QE) by halting the roll-over bonds as they mature. This move to shrink the Fed's $4.5 trillion balance sheet may come earlier than originally supposed, perhaps by the end of the year.

The effect of Fed tightening would be to drain dollar liquidity from the international financial system, the exact opposite of what happened in the emerging market boom earlier this decade when so much of the Fed's easy money leaked into East Asia, Latin America, Africa, and the Middle East.

"We expect the dollar to rise by another 10pc to 15pc. The concern is that this will suck capital out of the more fragile emerging markets and lead to fresh capital outflows from China," Mr Posen said.

"It may vary country by country but it could be like the 'taper tantrum'. Malaysia and Brazil look vulnerable to us," he said, speaking at the Ambrosetti forum of global economists on Lake Como.

A hawkish Fed could prove painful for investors still hoping that central banks will come to the rescue whenever there is trouble, be it the 'Yellen Put' in the US,  the 'Draghi Put' in Europe, or the 'PBOC Put' in China.

The Fed is itching to show that it is not a prisoner of Wall Street, after being forced to retreat many times in recent years. It effectively delayed rate rises last year due to China’s currency scare. Now the coast looks clear.

"Central bankers don't think policy should be constrained just because somebody in the markets is going to lose money," Mr Posen said.

This sounds like a worst-case scenario to me, although I have a high regard for Adam Posen.  I do expect the Fed to raise rates at least two more times this year, strengthening the Dollar in the process.  The key for markets is the timing and extent of these moves.

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

Dear David This article in the Sunday Telegraph summarises a poll of views of the UK population 9 months after the Brexit vote. Although one has to be a little sceptical about polls in general, the results do make a lot of sense. The title says it all: "Big decision has been made so just get on with it." http://www.telegraph.co.uk/news/2017/04/08/big-decision-has-made-just-get-writes-lord-ashcroft/

 Apparently the 'remain' camp is now a lot less than 48%! Top priority recorded was to stop paying anything at all into the EU budget and to be rid of the European Court of Justice. Those came higher than control of immigration. That shows what really drove the vote last summer. Best wishes 

Thanks for this email and the link to Lord Ashcroft’s column in The Telegraph.  My impression is certainly that support to remain has shrunk considerably, not least because EU officials have not distinguished themselves with their adolescent bluster and threats of punishment since the Brexit vote.  Meanwhile, PM Theresa May has made it very clear that we are leaving the EU, not Europe with which we will continue to have strong links and mutual interests. 

Judging from voter priorities mentioned by Lord Ashcroft above, we need to leave the EU quickly.  That may be unsettling but not if one considers that mutually sensible trade agreements are much more likely to be agreed once we are free from EU red tape.  It was designed with the sole intention of deterring countries from exercising their democratic right and leaving the EU.     

A superbly sinister Reagan campaign ad from 1984 shows a bear stalking through undergrowth. Over the drum of a heartbeat a gravelly voice warns: “There is a bear in the woods. For some people the bear is easy to see. Others don’t see it at all. Some people say the bear is tame. Others say it’s vicious and dangerous. Since no one can really be sure who’s right, isn’t it smart to be as strong as the bear?”

In recent days the West has decided to approach the bear and flex its muscles. Over the weekend the foreign secretary Boris Johnson pulled out of a long-planned meeting with the Russian foreign minister Sergei Lavrov and called for more punitive economic sanctions. Sir Michael Fallon, the defence secretary, made the statement that Russia was “by proxy... responsible for every civilian death last week”. Yesterday the foreign ministers of the G7 met to agree a demand that President Putin withdraw military support from Assad. Tomorrow Rex Tillerson, the US secretary of state, goes to Moscow to deliver a “clear and co-ordinated message” that the Kremlin must toe the line.

The new approach is to square up to the bear: challenge Russia explicitly; demand a climbdown. Given that Moscow has failed to oversee the elimination of President Assad’s chemical weapons this is, of course, perfectly reasonable. Whether it will be successful is another thing. I fear this approach won’t work, because it does not pay due care to the critical thing: the psychology of the man who is Russia.

To talk of psychology in the field of international relations may seem lightweight to some. Experts in foreign affairs prefer the hard-edged lexicon of strategic interests to the fluffy language of feelings. But thinking on geopolitics too often forgets the human beings at its heart: their fears, insecurities and vanities. In a country where there are checks on power, the psychology of the leader matters less. Their emotional edges will be blunted by layers of process. In a system like the Kremlin, however, where the leadership is absolute, the mindset of the man matters profoundly. It should be factored more carefully into the western approach.

Humiliation, pride and status anxiety are central themes of the Putin story. A telling detail: as a teenager he was disturbed to see his peers developing faster, growing taller — so he took up judo to keep his “place in the pack”. Anything to avoid the humiliation of being slight, small, pushed around. Give me the boy and I’ll show you the man: the one who joins deep dives into Lake Baikal, discovers “ancient Greek urns” in the Black Sea, shoots an endangered tiger with a tranquilliser dart, rides bare-chested on horseback. Every adventure is staged to assert status, to keep his place at the top of the pack. Meetings with other leaders reek of power play and status anxiety, such as the notorious bilateral with Angela Merkel in which he introduced his labrador to a German chancellor known to fear dogs. Afterwards Merkel remarked: “I understand why he has to do this — to prove he’s a man. He’s afraid of his own weakness.” These absolutes emanate from Putin: nothing is less bearable than humiliation, nothing more important than pride.

If this psychological profile is correct, and it makes sense to me, I think there is little chance that Putin would join other European nations, turning G7 into G8 once again. Even if he did join, he would most likely stay in character until told to leave as happened previously.  After all, Putin is the man who described the breakup of the Soviet Union “the greatest geopolitical disaster of the last century”.  He also said in 2004 that “there is no such thing as a former KGB man”, although they now call it the FSB.  

North Korean state media on Tuesday warned of a nuclear attack on the United States at any sign of U.S. aggression as a U.S. Navy strike group steamed towards the western Pacific.

U.S. President Donald Trump, who has urged China to do more to rein in its impoverished neighbour, said in a Tweet North Korea was "looking for trouble" and the United States would "solve the problem" with or without China's help.

Tension has escalated sharply on the Korean peninsula with talk of military action by the United States gaining traction following its strikes last week against Syria and amid concerns the reclusive North may soon conduct a sixth nuclear test.

North Korea's official Rodong Sinmun newspaper said the country was prepared to respond to any aggression by the United States.

"Our revolutionary strong army is keenly watching every move by enemy elements with our nuclear sight focused on the U.S. invasionary bases not only in South Korea and the Pacific operation theatre but also in the U.S. mainland," it said.

South Korean acting President Hwang Kyo-ahn warned of "greater provocations" by North Korea and ordered the military to intensify monitoring and to ensure close communication with the United States.

"It is possible the North may wage greater provocations such as a nuclear test timed with various anniversaries including the Supreme People's Assembly," said Hwang, acting leader since former president Park Geun-hye was removed amid a graft scandal.

Trump said in a Tweet a trade deal between China and the United States would be "far better for them if they solved the North Korea problem".

"If China decides to help, that would be great," he said. "If not, we will solve the problem without them!"

Trump and his Chinese counterpart, Xi Jinping, met in Florida last week and Trump pressed Xi to do more to rein in North Korea.

The North convened a Supreme People's Assembly session on Tuesday, one of its twice-yearly sessions in which major appointments are announced and national policy goals are formally approved. It did not immediately release details.

But South Korean officials took pains to quell talk in social media of an impending security crisis or outbreak of war.

"We'd like to ask precaution so as not to get blinded by exaggerated assessment about the security situation on the Korean peninsula," Defence Ministry spokesman Moon Sang-kyun said.

Saturday is the 105th anniversary of the birth of Kim Il Sung, the country's founding father and grandfather of current ruler, Kim Jong Un.

A military parade is expected in the North's capital, Pyongyang, to mark the day. North Korea often also marks important anniversaries with tests of its nuclear or missile capabilities in breach of U.N. Security Council resolutions.

Is the world a marginally more dangerous place since the end of the 20^th Century?

I think so for five reasons: 1) The global economy has been weaker in the 21^st Century to date; 2) The aging and unhealthy President Boris Yeltsin resigned as President of Russia on 31^st December 1999, and handed over presidential powers to Prime Minister Vladimir Putin; 3) Communist China has become a global superpower; 4) There was a dearth of Western geopolitical leadership over the last eight years which has emboldened rogue regimes; 5) The advance of technology and globalisation enable more countries to become nuclear powers. 

This item continues in the Subscriber’s Area.

The fate of India’s world-beating stock-market rally hinges on a routine event: earnings season.

Equities are trading near record levels in Mumbai, bolstered by bets that a state election victory will embolden Prime Minister Narendra Modi to push ahead with his reform agenda. Valuations rose to the highest level since 2010 at the end of March and the S&P BSE Sensex index is the top-performing gauge this year among the world’s 10 biggest stock markets.

The gap between share prices and company profits has widened since 2014 on expectations economic growth will filter into bottom lines. That hasn’t happened consistently -- while India’s GDP expanded 7 percent or more in each of the last four quarters, Sensex profits fell in two of those periods amid a tepid investment climate and rising bad loans.

“The return expectations have to moderate,” said Mahesh Patil, who helps manage about $30 billion in assets as co-chief investment of Birla Sunlife Asset Management Co. “If expectations are more realistic, the market should be able to deliver that in the medium term.”

Earnings season kicks off Thursday, when software developer Infosys Ltd. is scheduled to report. Company results will show performance during the first full quarter since Modi ordered a recall of high-value currency notes in November in a bid to reduce graft.

Sensex members will post a 9.1 percent increase in net incomes for the three months ended March, helped by higher commodity prices, Deutsche Bank said last week. That would be the biggest quarterly climb in a year, data compiled by Bloomberg show.

India remains a great story for long-term investors.  In terms of governance, India probably has the most effective leader of any country.  President Narendra Modi is brilliant, economically savvy, a strong leader, and a charismatic speaker from a humble background.

India also has by far the largest young population in the world. 

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

“I’m a Remainer but there are more important issues for the British economy than whether or not we are members of the European Union. Maybe even some good could come from leaving,” he said.

Whether Theresa May’s Tory Party is culturally disposed to meet this challenge is an open question. In his view the May government has been exasperatingly slow out of the starting gate: it has dropped the ball badly in Asia; and risks starving the country of vitally needed foreign talent with the wrong kind of immigration curbs.

Jim O’Neill, who resigned from his post as Treasury minister last year after a string of policy disputes, said Theresa May has been skillful in handling talks with the EU. Nobody in sophisticated circles pays much attention to the tabloid dichotomy of “hard” and “soft” Brexits at this stage, an issue that has been overtaken by events.

Yet she is surrounded by advisers with insular views who do not understand how fast the wider world is changing. “These people lack strategic perspective. We should have a minister almost permanently camped in China trying to do trade deals, but they simply don’t think about China when the get out of bed. It is not in their DNA,” he said.

And:

For all his criticism of the Government, he says the headline posturing over Brexit is largely aimed at placating elements of the Tory party and press. “The actual policy is much more nuanced,” he said.

There will have to be some kind of free trade deal for the car industry given the complex cross-border supply chains. “It must be something close to the single market. If we fall back to WTO rules, there will be serious trouble,” he said.

Surprisingly, Lord O’Neill is less worried about the City, where he had a ring-side seat for decades and learnt to judge the reflexes of the American and Asian finance houses.

“People have exaggerated the risks. As we creep through the weeks it is pretty obvious that the big global players are going to shift marginal operations out of London, but the idea that large swaths of the financial industry will decamp to Frankfurt and Paris is just crazy,” he said.

“They don’t have the social and human infrastructure, and the more imaginative EU leaders know that a flourishing City is actually good for Europe,” he said.

“I didn’t want Brexit but, basically, we can cope.”

Theresa May’s Government has been “slow out of the starting gate” because no one in David Cameron’s government expected a national vote in favour of Brexit, least of all the former Prime Minister.  Slow is frustrating for those of us who voted for Brexit, but all but irrelevant relative to the long-term outlook for a country regaining its sovereignty and role as a global trading nation.

Most UK ministers will lack a strategic perspective and the international experience to deal with the challenges and opportunities of Brexit, having been locked within the closed-shop EU for most of their careers.  Additionally, they are career politicians.  Therefore, taking a leaf from Donald Trump, Mrs May would be wise to recruit a UK Development Organisation of highly experienced and internationally successful British bankers and businessmen, to work with the Government. 

Among Trump’s best decisions have been his choices of Cabinet Ministers.  They include few Republican Senators or Congressmen, but there has never been a more experienced US Cabinet, in my opinion.  Mrs May needs a similar team to put this country on its strongest footing.    

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

As regular readers know, I am not in the habit of recommending large increases in public expenditure. On the contrary, I want public spending to be kept under a tight rein so that the tax burden can be reduced, with consequent benefits from improved incentives and efficiency. But there is one area where I feel strongly that the British Government is not spending anywhere near enough – defence.

Over recent decades it has been common for the public, egged on by politicians, to expect the state to solve just about every sort of problem in their lives. This statist philosophy derives from a failure to understand the appropriate role of government in the economy and society. For most sorts of economic activity, and a good deal of the rest of national life, government’s primary job should be to keep out of it.

But there are several things that only the state can properly provide. Prime among these so called “public goods” is defence. Yet in the UK, defence spending has fallen sharply as a share of GDP. It is currently rumoured that the number of Royal Marines is about to be cut severely in order to save money. Meanwhile, the Royal Navy’s much depleted warship strength may also be reduced.

This potential scaling back is not because of any assessment that the threats to the UK’s security have diminished. On the contrary, they have surely increased. It is driven entirely by the urge to save money, accompanied by the hope (fingers crossed!) that the UK, its dependent territories or its allies won’t face attack. This is economism gone mad. Sometimes economic considerations should take a backseat.

Admittedly, the latest squeeze is prompted by the need to fund the construction of two large aircraft carriers. But the “economy drive” is nothing new. Before Mrs May took over as Prime Minister, the Cameron–Osborne duo devastated Britain’s armed forces in a bid to save what turned out to be comparatively small amounts of money. Meanwhile, quite apart from whatever they squandered elsewhere, they continued to honour the pledge to spend 0.7pc of GDP per annum on overseas aid, which has been enshrined in law.

This is nonsensical. Unless the May–Hammond duo wish to go down in history as similarly complacent about the UK’s protection, this law needs to be repealed and a substantial part of the money saved should be redirected towards the defence budget. Being largely spent in the UK, this extra money would boost aggregate demand and create jobs, especially in manufacturing.

And:

Something similar is true of relations with the US. The more we can persuade the Trump administration that we have serious military capabilities to deploy in conjunction with US forces, the more likely it is that the US will put effort into securing a favourable US–UK trade deal, which would probably lead on to other favourable trade deals around the world.

More fundamentally, military service brings large benefits to society, benefits that most members of recent British governments, with scarcely any military experience or connections, have failed to appreciate. Traditionally, people from working class backgrounds have gained a sense of discipline, self-worth and identification with the wider community through serving in the armed forces. Many of them have acquired trades and traits that have helped them to secure employment once they have rejoined “Civvy Street”.

With globalisation and technological progress eroding traditional job opportunities, the potential contribution to human development from military service has increased. Yet there has probably never been a time in the UK’s recent history when the proportion of the population serving in our armed forces, and the corresponding extent of their influence in society, have been so low.

Brexit isn’t the only challenge facing Mrs May. If she does not restore a good part of the UK’s fighting capability she will be judged by history as failing in a central part of her duties.

I am pleased to see Roger Bootle state these views, especially when it is fashionable in many European countries to say that defence spending is a waste of money and unnecessary.  I also favour 2-year conscription (draft system) for all males.  This builds character at all levels of society by putting the nation first.  Among the larger economies within democratic Europe only the UK and France pay the minimum on defence of 2% and this really should be increased. 

This item continues in the Subscriber’s Area with a review of some defence shares and also a PDF of Roger Bootle’s article.

Nuclear fusion energy has often been sarcastically said to be always 30 years away. This scientific inside joke is meant to suggest we will never have the technology to make a working commercial nuclear fusion reactor. But despite the disappointments and failed promises over the last 50 years, the latest news suggests we might have reached a turning point in fusion energy research.

Many people confuse nuclear fusion reactors with nuclear fission reactors. But fission operates on the principle of placing enough fissionable radioactive material – uranium or plutonium – together that a chain reaction will take place in which particles given off by the fuel smash into other atoms in the material to produce excess energy.

This reaction has to be carefully managed through various means – including non-fissionable control rods – to avoid a disastrous runaway reaction.

But all of the concerns that people have about fission reactors – and these concerns are definitely justified following the incidents at Chernobyl and Fukushima – don’t apply to a fusion reactor. Nuclear fusion reactors cannot melt down, explode, or otherwise fail catastrophically in a way that threatens the environment.

If a nuclear fusion reactor did have a problem, it would simply stop working. In addition, the nuclear fusion energy production process produces very little radioactive waste – and what waste is produced has a much shorter half-life than the long-lasting, highly dangerous radioactive byproducts created by fission.

Another advantage that a commercial fusion reactor would have over fission reactors is that fissionable materials are extremely difficult to find and process for use, making them very expensive and essentially a limited resource. A nuclear fusion reactor would likely use deuterium, which can be extracted from ordinary seawater in virtually unlimited quantities.

Energy production via a nuclear fusion reactor has been on the wish list of many governments around the world, which is why an international project known as ITER was established to construct a massive experimental tokamak fusion reactor. As reported by the Manufacturer, the purpose is to confirm the feasibility of large-scale production of fusion energy.

The ultimate goal of the project is for ITER to be the first fusion reactor to achieve the production of more energy than it requires to operate. Reaching this breakeven point has been the Holy Grail of fusion research. Thirty-eight nations have joined this effort to construct the experimental ITER reactor in southern France – with the cost being astronomical.

However, the scientists, engineers and bureaucrats running this program admit that it will be many decades – perhaps as far away as 2050 – before an actual commercial reactor based on ITER will be in operation.

It has become virtually a mantra for nuclear fusion energy researchers that bigger is, in fact, better when it comes to building a nuclear fusion reactor. This is why governments are pouring tens of billions of dollars into the construction of the colossal experimental ITER reactor – that itself will not produce energy for consumption.

Fortunately, a number of other private organizations and companies around the world are trying to make fusion power a reality much quicker, perhaps even as soon as 2030. In addition, several individual governments have their own private nuclear fusion energy programs apart from ITER.

Nuclear fusion has long been the holy grail of global energy, with no Parsifal equivalent in sight.  That may be changing, although it would not make a great opera.  However, more wealthy people, governments and university science departments are investing increasingly large sums of money to achieve nuclear fusion.   

When they succeed, which I would define as generating far more energy than they use in the process of creating nuclear fusion, it will be the greatest invention of all time. 

A link to this week's Big Picture Long-Term Video is posted in the Subscriber's Area. 

At the United Nations, diplomats privately debated a resolution that would condemn the poison-gas attack and demand access to Syrian air bases by UN investigators. Russia, which has backed Assad militarily since late 2015, would probably veto that measure after putting forward a separate measure which wouldn’t compel Syria to provide such access.

At the UN Security Council on Wednesday, U.S. Ambassador Nikki Haley stood up at her desk to show diplomats photos of dying children gasping for air. She accused Russia of pushing a “false narrative” that blames rebel forces for the attack, and issued a new warning.

Safronkov, the Russian diplomat, said he’d been “very frank” in consultations with U.S. officials.
“We have to think of negative consequences, and all responsibility of military action will be on the shoulders of those who initiated such doubtful and tragic enterprise,” he told reporters at the UN

Syria’s government said pilots bombed what turned out to be a rebel-controlled chemical weapons stockpile, while Russian officials on Wednesday said it’s too soon to assign blame for the attack. Nonetheless, it appeared before Thursday night’s missile strike that Russia’s support for Assad hadn’t diminished.

Tillerson’s talk of creating a coalition “gives the impression that in the West there is a rush to use the situation to take from Assad the success in turning around the situation in the country and attain their previous goal: removing him from power at any cost,” Konstantin Kosachyov, chairman of international affairs committee in the Russian parliament’s upper house, said by email.

The State Department official said Thursday afternoon that Tillerson would go to Moscow as planned for meetings with senior officials on April 12. That visit was expected to include a meeting with President Vladimir Putin.

 

Russia’s only Mediterranean port is in Syria. They cannot afford to lose it. With so many warring parties and a number of competing agendas the conflict is messy to say the least because it is far from clear what group would rule the country if the current regime were toppled. Nevertheless, Russia has one of the clearest objectives and the fact it is unwilling to rein in Assad’s most brutal tendencies is a testament to just how tenuous their combined control of the country is. 

Industrial end-markets are still at the beginning of their digitalization journey
The Industrial Internet is about optimizing entire manufacturing systems, including products, processes, supply chains and business models. We estimate digitized solutions could generate c.15% annual opex savings in industrial markets by making assets more efficient. This could reduce the addressable market size for traditional manufacturers of big iron machines. However, this should translate in a market opportunity of c.$200bn for IIoT suppliers in areas like predictive maintenance or operation optimization.

IIoT strategies are as much defensive as they are offensive 
Industrial companies will have to be good at software to remain successful as an increasing share of the manufacturing value chain could shift to providers of sensors, data analytics and industrial cloud architectures. For example, a key risk for the manufacturers of large pieces of equipment requiring maintenance/retrofit is that software companies specializing in analytics or 3D printing might take a growing share of the lucrative service business pie.

3 building blocks for success: Siemens and Schneider well placed
We believe successful companies in an IIoT world will combine an integrated platform of digital solutions; deep domain know-how to give context to data analytics and automation/control activities to in real-time the insights from data analysis on manufacturing processes. Siemens stands out for its comprehensive portfolio of automation and software tools but, the group faces significant digital disruption risks on servicing of its installed base. We rank Schneider and ABB highly. Both have relatively similar IIoT competencies but in different end-markets. We also estimate Schneider is running 5 years ahead of ABB in implementation of its group-wide digital platform and strategy.

 

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

China’s labour costs have been on an upward trajectory for some time and they have already lost many low cost manufacturing jobs to even cheaper locales. With more than a billion people they have an interest in enhancing productivity to ensure they retain the moniker of “workshop of the world”. 

Our bottom line: We actually left feeling more encouraged about the prospects for risk assets in the near term, though some of our long-term concerns about the “Union” remain intact. See below for full details on our latest views, but our initial Thoughts from the Road are as follows:
Despite significant political uncertainty — and almost in spite of itself — European GDP continues to chug along at a steady clip. In fact, we are lifting our 2017 GDP forecast to 1.7% from 1.4% previously, driven by better than expected investment trends. Maybe more important, though, is that our quantitative GDP model is forecasting robust growth in Europe of 2.5% for 2017 (Exhibit 11). This forecast is driven largely by the powerful effects of the European Central Bank’s highly accommodative monetary policy regime, partially offset by stagnant housing market concerns. However, if mortgage lending growth does accelerate, implied growth by our model could be even stronger, though we fully acknowledge an overall political risk discount of 50-75 basis points to our quantitative growth model likely makes sense in the current environment.

Investors should continue to think about a European macro environment where consumption, particularly around experiences, remains compelling relative to overall trend growth. This viewpoint is consistent with an emphasis on sectors such as travel, health/beauty, and home improvement. By comparison, we remain cautious on global trade, and our research shows increasing examples of China insourcing manufacturing equipment that used to be built by leading European industrial enterprises (Exhibit 10). Our bigger picture conclusion is that globalization flows and production increasingly now appear to be moving towards more of a regional model, with a particular emphasis on Asia, Europe, and the Americas.

Europe continues to barrel down the path of a two-tiered economy, which is likely long-term unsustainable, in our view. Specifically, there is a large and growing dichotomy between Germany, with its strong growth, and the rest of Europe, Italy in particular. See below for details, but Italian GDP is now seven percent below its 2008 level in real terms; by comparison, Germany is a full eight percent above its 2008 level in real terms. During the next few quarters we believe that the ECB will allow Germany to run “hot,” leading to a further widening between Europe’s largest and fourth largest economies. Somewhat ironically, the better Germany’s GDP performs, the more German bunds the ECB has to buy, while Italy’s economic underperformance currently leads to less ECB purchases of Italian sovereign debt. We view these types of divergences as unsustainable, underscoring our belief that Europe will need to implement monetary and fiscal policies that better smooth economic growth and equality across the region; otherwise, we fear it will lead to even more dire populist reactions, particularly if immigration issues are not reconciled

 

These are common sense points from what we might consider to be a dispassionate observer of the evolving political and market situation in Europe. Europe is pushing through agreements like the Bank Resolution and Recovery Directive and the European Deposit Insurance Scheme. 

Vanguard's legacy was set by founder John Bogle, now retired, whose revolutionary idea was a low-cost index fund that kept fees low and returns higher -- as much as 0.50 percent higher annually over time.

That consumer-friendly concept has drawn in more than 20 million investors since its founding in 1975, and it's an edge that Vanguard is keen to maintain. 

When Fidelity Investments recently ran full-page ads in the Wall Street Journal and the New York Times touting its "lower-than-Vanguard" expense ratios on several funds and ETFs, Vanguard hit back and lowered those of several funds,  said Dan Wiener, editor of the Independent Adviser for Vanguard Investors. “What we’re talking about here is bragging rights.”

Indeed, Vanguard says its fee cuts this year alone have created $143 million in savings across 124 funds.  

So much money has poured into Vanguard’s largest funds – the $465 billion Total Stock Market Index and S&P 500 – that the team that runs those along with 200 more index funds has grown to 80 people today, led by Portfolio Manager Gerry O’Reilly and co-heads of trading Mike Buek and Ryan Ludt, from just a small team two decades ago.

Online, Vanguard fans are giving the firm the benefit of the doubt — for now.

After all, Vanguard’s assets have tripled in a decade, rising by $1 trillion to $4.2 trillion in just the last five years. Costs have fallen from 0.68 percent to 0.13 percent on average since 1975, McIsaac added.

“Until recently the quality of customer and operational service, and technology was always superb.  Virtually error free,” wrote a client named Larry Mariasis on the Wall Street Journal’s comment pages. “But the pace of recent growth has impacted negatively the quality of service. ... Vanguard needs to seriously consider slowing down its growth ... to catch up with staff hiring and training.  Otherwise Vanguard risks tarnishing an amazing reputation.”

David L. Zalles, a Blue Bell accountant, says his peers complain about mistakes in record-keeping at Vanguard. He said he personally had been "disappointed" about the tax cost basis record-keeping. "No one at Vanguard apparently understands the actual reporting requirements."

Vanguard spokeswoman Arianna Stefanoni Sherlock said that the company had seen "an uptick in service-related complaints in sporadic months of last year," but that the stress "has all but abated," due in part to hiring here and for its Arizona and North Carolina locations.  

I saw a somewhat different version of this article on Bloomberg Intelligence last night but it cannot be taken off the terminal.  So I asked Eoin, who joined FTM from Bloomberg over a decade ago, and he forwarded this related article above.

Vanguard’s biggest fan is Warren Buffett, who has long been a critic of fund management fees, because they mostly underperform stock market indices. I think it was about two years ago that Buffett announced that most of the money for his wife would be placed in Vanguard’s S&P 500 tracker.

The hero of Vanguard’s low fees is founder Jack Bogle, now retired.  His success has inevitably attracted competition, so Vanguard has continued to lower fees, to currently 0.13% for the S&P tracker.  It can do this because of all the money it holds.

What about the current problems with customer service delays?

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Nicola Sturgeon has been accused of being out of touch with Scotland about Brexit after a major survey found almost two-thirds of Scots oppose her demand for a different deal and support Theresa May’s UK-wide blueprint.

The First Minister’s justification for a second independence referendum was severely undermined by the NatCen research, which found 62 per cent of Scots think trade and immigration rules should be the same as in the rest of the UK.

An overwhelming majority also support Mrs May’s plan to curtail free movement from the EU and oppose the First Minister’s insistence that it continue, with 64 per cent believing that immigrants from the Continent should be subject to the same restrictions as those from elsewhere in the world.

The research concluded that Scots’ views are similar to those of people in the rest of Britain and warned Ms Sturgeon that her argument that the Prime Minister’s Brexit blueprint justifies an independence vote “is unlikely to prove particularly persuasive.”

The Conservatives said the survey showed it was Ms Sturgeon who is out of touch with Scots’ views on Brexit, with even a majority of independence supporters demanding curbs on immigration.

The kindest thing I can say about Nicola Sturgeon is that she was shown Brave Heart at an impressionable age.

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

Britain must embrace its new, nasty brand. As we enter negotiations with the EU, everything is going to be on the table. We are no longer partners in a project to create a harmonious Europe. We are a nation state bargaining for our people’s self-interest. We want the world to love us for our tea and decency. But on this occasion we’re going to have to fight – and if that means acting nasty to convince as nasty, so be it.

I know, I know – that’s a very simplistic narrative. In fact, Britain has always been regarded as an irritant on the continent. We begged to get into the Common Market. Once in, we said we weren’t all in, just halfway in. Now we say we want out. The Europeans must think we’re mad, especially since Theresa May tied the future security of Europe to a good trade deal with Britain. But the Government has not gone Looney Tunes Right-wing and nor is it really being nasty. It is simply stating the facts.

One fact is that the EU is not negotiating with a regular European state. This isn’t “so long Portugal and thanks for all the fish”. Britain has one of the best intelligence services in the world; we have nuclear weapons; we are at the heart of Nato. This is part of the context to these talks and it would be odd if the UK did not mention it. One reason why we’ve been running the fifth largest defence budget in the world is so that we can purchase clout.

Is this outrageous? No. It is rational. It was equally rational of Spain to insist that any decisions about Gibraltar that come up in the Brexit talks should be run by Madrid. Spain wants Gibraltar, just as the Argentinians want the Falklands. That’s an expression of national self-interest, that’s understood.

But it’s also rational of Britain to point out that the Gibraltarians voted by 99 per cent in 2002 to reject joint sovereignty with Spain. And it is equally rational to add that the UK has a commitment to maintaining Gibraltar’s status that is, implicitly, backed by force of arms.

Agreed, and Mrs May should prepare the UK electorate for the probability that under the circumstances, we may well have to leave the EU quickly and before a mutually beneficial agreement is concluded.  The EU will negotiate more realistically when they are focussed on regaining sensible trade, rather than to negatively make an example of Britain while attempting to string out discussions in order to gain more revenue.

A PDF of Tim Stanley's column is posted in the Subscriber's Area.

Please note: I will be away on Friday.

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

The paralysis has no quick fix. Last night (April 4), in an effort to lift spirits, France’s presidential debate organizers decided to trot out all 11 eligible candidates for the second televised debate, rather than just the top five. The barrage of small candidates on stage left each with “no room to develop an idea,” and voters no time “to exercise their judgment,” one critic (link in French) argued. “Does this really help the undecided to form an opinion?” another asked (link in French).
All the better for France’s far-right wing. Voter turnout in France (80% in 2012) has long upstaged that of neighboring Germany (71%), the UK (66%) and Switzerland (47%). But as that number drops in France’s multi-round system, the odds of a far-right win creep up.

That’s because fervent support for Le Pen in the first round will likely carry over to votes for her in the second. But candidates with more tepid support, including centrist Emmanuel Macron, conservative François Fillon, and socialist Benoît Hamon, may suffer if non-Le Pen voters abstain (paywall) in the second round. Right now, Le Pen and Macron are neck-and-neck in French polls for the first round.

The predicament was similar in 2002, when candidate Jacques Chirac’s famous slogan (link in French) “Vote for the Crook, not the Fascist” helped him secure a landslide victory against Le Pen’s father, Jean-Marie Le Pen, in the second round. This time, voters may have had their fill of crooks and fascists both.

 

Last night my 11-year old asked me what does ennui mean? My French classes from secondary school came roaring back with Mrs. O’Donoghue joking that ennui was roughly translated into boredom but the reaction of the class provided a much better definition than any she could come up with. Here is what Google comes up with “mid 18th century: French, from Latin mihi in odio est ‘it is hateful to me.’ and “a feeling of listlessness and dissatisfaction arising from a lack of occupation or excitement.” Ennui is a problem for entrenched politicians when they face a strident minority willing to vote. 

“My business model right now … for Blue Origin is I sell about $1 billion of Amazon stock a year and I use it to invest in Blue Origin," said Bezos, the chief executive of Amazon.com Inc (AMZN.O) and also the owner of The Washington Post newspaper.

Ultimately, the plan is for Blue Origin to become a profitable, self-sustaining enterprise, with a long-term goal to cut the cost of space flight so that millions of people can live and work off Earth, Bezos said.

Bezos is Amazon's largest shareholder, with 80.9 million shares, according to Thomson Reuters data. At Wednesday's closing share price of $909.28, Bezos would have to sell 1,099,771 shares to meet his pledge of selling $1 billion worth of Amazon stock. Bezos' total Amazon holdings, representing a 16.95 percent stake in the company, are worth $73.54 billion at Wednesday's closing price.

For now, Kent, Washington-based Blue Origin is working toward far shorter hops - 11 minute space rides that are not fast enough to put a spaceship into orbit around Earth.

 

Amazon is a behemoth which has benefitted enormously from Bezos’ stewardship over the last two decades. However it must raise the eyebrows of investors when they hear he is willing to dispense with a $1 billion in stock per annum to fund what is an interesting, potentially worthwhile but ultimately an expensive vanity project. 

The National Association of Software and Services Companies (NASSCOM), a trade group that represents the Indian IT industry, played down the possible impact of the new USCIS memo. “The clarifying guidance should have little impact on NASSCOM members as this has been the adjudicatory practice for years and also, as several of our member executives have noted recently, they are applying for visas for higher-level professionals this year,” the association said in an emailed statement.

The Indian IT sector has been preparing for this sort of tightening for some time now. For instance, TCS, India’s largest IT services company, has sharply reduced the number of US visa applications: In 2016, it filed only 4,000 compared to 14,000 the year before. In 2015, the company also began tweaking its business model to effectively operate in “a visa-constraint regime,” former TCS CEO N Chandrasekaran explained in January.

Late last year, Infosys, the second-largest in the sector, too, signalled that it would look to hire local talent more aggressively in the US, a far cry from the turn of the decade when such companies were infamously called out for “body shopping“—i.e, hiring Indian software professionals to use them on short-term projects elsewhere.

Despite all such evasive action, though, the US clampdown will hurt the sector. “It’ll be a short-term jolt,” said Sanjoy Sen, a former Deloitte partner and doctoral researcher at UK’s Aston Business School, although the exact magnitude of the impact will depend on the size of the companies and their levels of preparation. Smaller firms with a headcount in the hundreds, in particular, may be harder hit, Sen said.

 

The Indian outsourcing sector is one of the country’s primary foreign revenue generators  and the ability to send workers to the US for medium-term project work has been an important support for that business model. The new US administration is already changing how the foreign worker program function and that represents a challenge for outsourcing companies. However if time differences could be overcome the evolution of cloud computing and distributed work environments mean that the absolute requirement to have programmers based in Silicon valley could be reduced. 

It was a pleasure to be interviewed by Jonathan Davis for his Money Makers podcast series on Monday and I will post a link to it as soon as I have one. 

I have also agreed to participate in the 2017 Tech Investor’s Symposium hosted by Southbank Research in London on May 15th where I will be talking about evolving technology trends. 

U.K. Prime Minister Theresa May plans to help Saudi Arabia lower its dependency on oil exports and increase the participation of women in the workforce as the Gulf kingdom seeks to modernize its economy.

Britain will help reform the Saudi Ministry of Defense, and foreign and trade ministers from both nations will hold six-monthly meetings under an agreement to be sealed in Riyadh on Wednesday when the premier is due to meet King Salman bin Abdulaziz Al Saud.

U.K. tax and privatization experts will also advise Saudi officials on how to diversify the country’s economy away from oil, according to a statement from May’s office.

A week after triggering two years of talks to pull Britain out of the European Union, May is on a diplomatic drive to strengthen ties with Saudi Arabia, a major commercial partner that buys 40 percent of U.K. arms exports, as well as an ally in the fight against terrorism.

Saudi Arabia is seeking a sixfold increase in non-oil government revenue by 2030, and it also aims to increase the participation of women in its workforce to 30 percent from 22 percent.

On Monday, May refrained from criticizing Saudi Arabia’s record on human rights and the rights of women as she began a three-day trip to the Middle East, choosing instead to focus on “historical’’ ties. 

The premier also said her presence in Saudi Arabia would show “what women can achieve.’’ She disembarked from her plane in Riyadh on Tuesday to greet Saudi officials without wearing a headscarf, in contravention to the U.K. government’s own advice on women’s attire in the country.

Smart move.  There is a gap in this market because Trump has offended Muslims and the EU continues to look inwards. 

It would have been ridiculous if Theresa May had marched in and criticised Saudi’s rulers on human rights, not to mention unproductive.  She is someone who can lead by example without offending her hosts.

Britain could and should have an extremely strong trade and advisory relationship with the Saudis, which is exactly what this country needs.  I hope the Prime Minister builds on this business development role.  Lead from the top if you want to open commercial doors. Then send in qualified teams who can help the Saudis or anyone else in developing numerous projects.

May’s positive leadership will also help in her in negotiations with the EU on Brexit.  Her can-do entrepreneurial approach will finally convince EU officials that, yes, Britain really is leaving and very likely to be more successful over the long term as an independent sovereign nation trading with the world.    

I am a professional gas and oil trader and see the impact on the industry and other related areas, most of it related to the changes with regards to a future Brexit that has not even happened yet. It made me wonder even last year when people who work in this industry argued (viciously even) - before the June referendum - in favor of it; people who will certainly lose their jobs over the next 2 years (aside the possibility of relocating to a EU country) from what I can see already happening.

Of course there are other aspects, but it would be quite hard to find positive aspects in terms of employment and opportunities for the industry I am working in at least.

These are hard facts and the arguments I am reading are pretty soft i.e. independence. Just some thoughts...

Best regards

Herbert (German national currently located in Vienna Austria)

Many thanks for your important email.

Yes, there is considerable uncertainty, including for international traders in your position.  Responsible corporations will inevitably have various contingency plans.  Sensible people hope that the UK and EU will be able to agree on a mutually beneficial Brexit but we cannot count on this. Brexit is a development in progress. 

We know that the UK will leave the EU but we do not know what the terms of separation will be. Nevertheless, I see no reason why oil and gas trading will diminish anytime soon.  Moreover, successful multinational traders such as yourself will remain in demand.

Good luck and let me know how this plays out for you.

Nearly 450,000 years ago, when Earth was in the grip of an ice age, ice stretched right across the North Sea, from Britain to Scandinavia. The low sea levels meant that the entire English Channel was dry land, a frozen tundra landscape, crisscrossed by small rivers.

Britain’s separation from mainland Europe is believed to be the result of spill over from a proglacial lake - a type of lake formed in front of an ice sheet - in the North Sea, but this has remained unproven. Now, researchers from Imperial College London and their colleagues from institutes in Europe show that the opening of the Dover Strait in the English Channel occurred in two episodes, where an initial lake spill over was followed by catastrophic flooding. 

Ten years ago, the researchers from Imperial College London revealed geophysical evidence of giant valleys on the seafloor in the central part of English Channel. They believed these valley networks were evidence of a megaflood gouging out the land, which they speculated may have been caused by a catastrophic breach in a chalk rock ridge joining Britain to France.

The new study by the team, working with their colleagues in Europe, now shows for the first time the details of how this chalk ridge in the Dover Strait, between Dover and Calais, was breached. New geophysical data collected by colleagues from Belgium and France has been combined with seafloor data from the UK showing evidence of huge holes and a valley system located on the seafloor.

The team show that the chalk ridge acted like a huge dam and behind it was a proglacial lake. This lake was first hypothesised by scientists more than 100 years ago and the authors of today’s study show how the lake overflowed in giant waterfalls, eroding the rock escarpment, weakening it and eventually causing it to fail and release huge volumes of water onto the valley floor below.

The team believe that the huge holes that they analysed on the seafloor are plunge pools, created when water cascading over an escarpment hit the ground and eroded rock. The plunge pools in the Dover Strait are huge – up to several kilometres in diameter and around 100 metres deep and were drilled into solid rock. Around seven plunge pools run in a line from the ports of Calais to Dover. The researchers suggest these plunge pools are evidence of an overflow of water from the lake in the southern North Sea.

Our subscriber added the comment:

And we loved our independence ever since!

Yes, and I’m forecasting that our second natural Brexit process will be slightly less traumatic.  

Robots could wipe out humans within the next few hundred years, according to Astronomer Royal Lord Rees.

The astrophysicist predicted that "within a few centuries machines will have taken over", with the potential of billions of years of history ahead of them - longer than humanity has had. 

It would make human dominance on Earth just a small transitional phase in the planet's history. 

Speaking to website The Conversation, Lord Rees, Emeritus Professor of Cosmology and Astrophysics at the University of Cambridge, said within the next 10 or 20 years we could expect to have technology that will allow us to search for alien life. 

However he said even if there is life out there, it may not necessarily be "intelligent life". 

"My guess is that if we do detect an alien intelligence, it will be nothing like us. It will be some sort of electronic entity," he said. "If we look at our history on Earth, it has taken about 4 billion years to get from the first protozoa to our current, technological civilisation. 

"But if we look into the future, then it’s quite likely that within a few centuries, machines will have taken over – and they will then have billions of years ahead of them.

"In other words, the period of time occupied by organic intelligence is just a thin sliver between early life and the long era of the machines.

"Because such civilisations would develop at different rates, it’s extremely unlikely that we will find intelligent life at the same stage of development as us. More likely, that life will still be either far simpler, or an already fully electronic intelligence."

Do you think the super-intelligent robots will also say that they are created in God’s image?

Mrs Fuller and I have enjoyed hearing Lord Rees speak on a number of occasions, including at the Hay-on-Wye Festival.  He regards the ascendency of robots as a natural, inevitable progression.  Lord Rees is certainly not alone in this view.  A number of top intellects in science and tech industries agree.

Oh well, at least it should end global pollution. 

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

Details of these traders are posted in the Subscriber's Area.

Little more than 2 1/2 years from now, the global fleet of merchant ships will have to reduce drastically how much sulfur their engines belch into the atmosphere. While that will do good things -- like diminishing the threat of acid rain and helping asthma sufferers -- there’s a $60 billion sting in the tail.

That’s how much more seaborne vessels may be forced to spend each year on higher-quality fuel to comply with new emission rules that start in 2020, consultant Wood Mackenzie Ltd. estimates. For an industry that hauls everything from oil to steel to coal, higher operating costs will compound the financial strain on cash-strapped ship owners, whose vessels earn an average of 70 percent less than they did just before the 2008-09 recession.

The consequences may reach beyond the 90,000-ship merchant fleet, which handles about 90 percent of global trade. Possible confusion over which carriers comply with the new rules could lead to some vessels being barred from making deliveries, which would disrupt shipments, according to BIMCO, a group representing ship owners and operators in about 130 countries. Oil refiners still don’t have enough capacity to supply all the fuel that would be needed, and few vessels have embarked on costly retrofits.

“There will be an absolute chaos,” said Lars Robert Pedersen, the deputy secretary general of Denmark-based BIMCO. “We are talking about 2.5 million to 4 million barrels a day of fuel oil to basically shift into a different product.”

 

Until ship owners have visibility on whether refiners will be changing the delivery conditions on futures contracts for fuel oil/gas oil, they will be unwilling to commit to multi-million dollar retrofits of existing ships. This news comes on top of last year’s decision by the Ballast Water Management Convention which requires all ships sailing in international waters to install a Ballast Water Management System by September 2017 which also necessitates a significant additional cost for maintaining existing shipping inventory. 

As we contemplate the next cycle, we cast our view back on the industry’s history. The last great cycle came out of the explosion in oil prices in the latter half of the 1970s due to geopolitical events, but realistically it resulted from the peaking of U.S. oil output and the transferring of pricing power to the OPEC cartel. What broke the back of that price explosion was new, large sources of oil – offshore basins in the North Sea and West Africa, in particular, along with Alaska. Those were the resources that drove the industry over the subsequent 30 years. Shale is what is driving the industry now, and likely will drive it for the foreseeable future. What could that mean for oil prices? Look at Exhibit 1 where we show the inflation-adjusted oil prices from the late 1960s to 2016. After the bust of the early 1980s, the oil price traded for 18 years without ever going above $45 a barrel in current dollar prices except in response to one-off geopolitical events. 

The recent oil price bust followed a much longer period of super-high oil prices than in the 1970s. To our way of thinking, we are likely to experience another extended period of lower, but stable, oil prices. Will it be 18 years? We don’t know. Will oil prices stabilize around $45 a barrel? We don’t know. Might the price range be $55-$60 a barrel? It could be. Will it be $70 a barrel or more? We doubt it, except for brief periods. This isn’t because we think history always repeats itself, but rather because the oil industry is fighting maturing economies around the world, meaning slower demand growth. Developing economies are where oil demand is growing the fastest, but those countries have the benefit of employing the most recent equipment designs and technologies, suggesting their economies will be much more energy-efficient than earlier developing economies at the same point in time. Think about how no country now would consider string telephone wires to allow communication – cell towers are the answer. The oil industry is also fighting a global push to de-carbonize economies in order to fight the damage of climate change, which has the potential to significantly lower global oil consumption growth.

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

This piece rhymes very strongly with our long-held view that shale oil and gas represent game changers for the energy complex. This has resulted in US onshore shale now representing an important swing producer for the global market. 

Deutsche Bank AG is poised to receive orders for almost all of the 8 billion euros ($8.5 billion) of stock on offer to investors as the sale draws to a close, according to people familiar with the matter.

Investors have pledged to buy more than 95 percent of the stock on sale in the rights offer, which ends Thursday, said the people, asking not to be identified because the details aren’t public. About 80 percent of existing investors decided to participate in the capital increase, with some opting to boost their exposure and new investors buying the rest, said one person.

The shares are trading well above their offer price, a key factor in attracting demand.

The capital increase -- the bank’s fourth since 2010 -- is the centerpiece in Chief Executive Officer John Cryan’s new turnaround plan, which he announced in early March after Deutsche Bank failed to sell its Postbank unit to bolster capital. The company’s key Qatari shareholders are buying shares to maintain their stake, according to people familiar with the matter. Chinese investor HNA Group Co. has built up its stake to 4.76 percent, and that number may increase, said one person with knowledge of the firm’s strategy.

 

The German banking sector has been largely nationalised with only a handful still listed. Deutsche Bank represents the nation’s only truly international bank and every effort has been made to turn it around following what has been a very difficult decade. 

The European Central Bank has declared victory over deflation in a watershed shift in policy, clearing the way for an end to negative rates and emergency bond purchases after years of deep economic malaise.

Triple tail-winds from QE, a cheap euro, and the end of fiscal austerity have all combined with powerful effect, at last lifting the economy out of a low-growth trap, or ‘Lost Decade’ as some economists describe it.

A blizzard of new figures paint a picture of accelerating growth across the region, with with unemployment falling to an eight-year low of 9.5pc - though it is still twice the level of the Anglo-Saxon and non-euro Nordic states. The eurozone’s jobless rolls have dropped by 1.24 million over the last year.

“Since the crisis we have had serious concerns about deflationary risks on several occasions in the euro area, but now we can say they have disappeared,” said Peter Praet, the ECB’s chief economist.

The comments are significant since Mr Praet has long been viewed as an arch-dove on the ECB’s executive council. Analysts at Citigroup say that German-led hawks in Frankfurt appear to be gaining the upper hand in their fight against quantitative easing (QE), raising the risk of a tightening signal over the next two policy meetings.

Mr Praet said last year’s blast of stimulus by G20 authorities in response to the Chinese currency panic had averted a worldwide downturn and was now feeding through into full-blown recovery.  “This coordinated reaction was very effective,” he told the Spanish newspaper Expansion.

What is not yet clear is whether the eurozone is entering a virtuous circle - driven by rising investment - or whether the current cyclical recovery is largely a sugar rush that will fade as stimulus is withdrawn.

This is the second time in the last fortnight that AEP has reported a change in sentiment across at least the North American and European economic scene. Financial sector euphoria evidenced shortly following Donald Trump’s election victory has given way to a more sombre mood. 

The previously lagging S&P Banks Industry Group Index outperformed during the Trump rally.  JPMorgan CEO Jamie Dimon led the high-profile cheerleading, talking about the revival of ‘animal spirits’ in markets.  Many stock markets rose as did government bond yields.  Industrial commodities also extended their rallies.

The switch flipped after mid-March and guest commentators on Bloomberg and CNBC warn that stock markets are vulnerable.  They are also singing the praises of US 10-Year Treasury Bonds (weekly & daily) where yields have fallen back from just above 2.60%, as they did in December, and are now testing 4-month range lows near 2.30%. 

Is this the pause that refreshes or have we entered a quite different phase?

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

Global Technology: We currently prefer non-mega-cap technology globally.  US Technology stocks trade at close to a market multiple, despite the fact that they are forecasted to grow earnings at a faster rate.  In our view, the key positioning strategy in technology is to avoid the mega-caps.  Mega-caps tend to have the least growth and can often carry the greatest expectations.  We prefer an equal-weighted basket of tech stocks.

Charles Elliott also favoured smaller-cap technology companies for their better valuations and often faster growth, in his excellent presentation at The Markets Now recently. 

I will add that fashionable mega-cap technology firms are often pushed higher by Exchange Traded Funds and market momentum programmes.  That can be impressive but it is risky for people to chase the strong rallies, which shed gains quickly in the next correction.  

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

Tesla broke out to new highs yesterday. The share’s stratospheric advance stopped three years ago when it announced it was going to build a battery “gigafactory” which would cost billions of Dollars it didn’t have. That investment is now over and the company is ramping up production. That’s great news for Tesla’s long suffering investors but what does it say about all the other car companies. 

Dear Eoin, concerning today's posting on the water situation, I recently visited one of Israel's 5 water desalination plants. Over the last 10 years Israel has totally overcome its historic water shortage problem by desalinating sea water. It has done so in collaboration with Veolia. In addition this new technology is being exported worldwide. Once again we have an example of how human genius is applied to important problems and how new technology is overcoming them. Great to be able to be positive when pessimism reigns around the world.

Thank you for this first-hand account and I agree that solving Israel’s water challenges is a significant victory for a country where water security is highly politicised. This article from MIT Technology Review carries more information. Here is a section: 

The Sorek plant incorporates a number of engineering improvements that make it more efficient than previous RO facilities. It is the first large desalination plant to use pressure tubes that are 16 inches in diameter rather than eight inches. The payoff is that it needs only a fourth as much piping and other hardware, slashing costs. The plant also has highly efficient pumps and energy recovery devices. “This is indeed the cheapest water from seawater desalination produced in the world,” says Raphael Semiat, a chemical engineer and desalination expert at the Israel Institute of Technology, or Technion, in Haifa. “We don’t have to fight over water, like we did in the past.” Australia, Singapore, and several countries in the Persian Gulf are already heavy users of seawater desalination, and California is also starting to embrace the technology (see “Desalination Out of Desperation”). Smaller-scale RO technologies that are energy-efficient and relatively cheap could also be deployed widely in regions with particularly acute water problems—even far from the sea, where brackish underground water could be tapped.

Earlier in development are advanced membranes made of atom-thick sheets of carbon, which hold the promise of further cutting the energy needs of desalination plants.

Now that the process of leaving the EU has formally begun, I have been musing on the links between government and economic performance and the implications for the future of the EU and the UK. We have decided to leave the EU primarily for reasons of governance, that is to say, the desire to “take back control”. Nevertheless, this can potentially have decided economic effects.

Most Brexiteers do not believe they will be negative. On the contrary. Yet it seems that many European politicians and officials confidently believe that the UK has acted profoundly against its economic self-interest. Sometimes, they even seem to believe that, isolated and impoverished, the UK will barely manage to stay afloat at all. So they see Brexit as a futile but costly political gesture.

Our Remoaner MPs seem to believe something similar. It is amusing, although also troubling, to hear many of them on the Left, who have spent a lifetime trying to make things more difficult for British business, and whose closest brush with the harsh realities of finance is filling in their own expense forms, bewailing Britain’s fate if we don’t have “full access” to the single market – whatever they think that means.

But why are both domestic Remoaners and continental opponents of Brexit so pessimistic about our prospects? I think the answer is largely to do with their conception of the government/economy nexus. Many seem genuinely to believe that prosperity flows from the fountain pens of the politicians, officials and diplomats who make laws and sign agreements.

And:

Over the last 80 years, there have been only six countries in the whole of Europe that have escaped invasion or government by dictatorship – Switzerland, Sweden, Ireland, Malta, Cyprus and the UK. It is striking that the first three of these countries were neutral during the war while the fourth and fifth were part of the British Empire. They weren’t under dictatorship but neither were they normal democracies.

This history of recent political and national trauma explains why many European countries have been unperturbed by the cession of so much sovereignty to Brussels. Their own political cultures are riddled with the consequences of their troubled past. We stand out as not suffering from this problem.

As we are about to recover our independence, we now have the opportunity both to breathe new life into our own democracy and, through better governance, to improve the performance of our economy. I don’t see much sign of either of these things developing across the Channel.

I think Roger Bootle’s points are very well taken. 

I also think that most EU bureaucrats and government officials cannot believe or accept that their 60-year project is failing, especially as the USA provided so much aid, encouragement and praise, at least at the beginning.  Those same EU officials will also be aware that they are not popular in their home countries.  They are also afraid that other EU countries will enact their own versions of Brexit when they see that the UK is actually better off under its own sovereign control. 

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

The promising graphene oxide sieve could be highly efficient at filtering salts, and will now be tested against existing desalination membranes.

It has previously been difficult to manufacture graphene-based barriers on an industrial scale.

Reporting their results in the journal Nature Nanotechnology, scientists from the University of Manchester, led by Dr Rahul Nair, shows how they solved some of the challenges by using a chemical derivative called graphene oxide.

Isolated and characterised by a University of Manchester-led team in 2004, graphene comprises a single layer of carbon atoms arranged in a hexagonal lattice. Its unusual properties, such as extraordinary tensile strength and electrical conductivity, have earmarked it as one of the most promising materials for future applications.

But it has been difficult to produce large quantities of single-layer graphene using existing methods, such as chemical vapour deposition (CVD). Current production routes are also quite costly.

On the other hand, said Dr Nair, "graphene oxide can be produced by simple oxidation in the lab".

He told BBC News: "As an ink or solution, we can compose it on a substrate or porous material. Then we can use it as a membrane.

"In terms of scalability and the cost of the material, graphene oxide has a potential advantage over single-layered graphene."

Of the single-layer graphene he added: "To make it permeable, you need to drill small holes in the membrane. But if the hole size is larger than one nanometre, the salts go through that hole. You have to make a membrane with a very uniform less-than-one-nanometre hole size to make it useful for desalination. It is a really challenging job."

Graphene oxide membranes have already proven their worth in sieving out small nanoparticles, organic molecules and even large salts. But until now, they couldn't be used to filter out common salts, which require even smaller sieves.

Previous work had shown that graphene oxide membranes became slightly swollen when immersed in water, allowing smaller salts to flow through the pores along with water molecules.

Now, Dr Nair and colleagues demonstrated that placing walls made of epoxy resin (a substance used in coatings and glues) on either side of the graphene oxide membrane was sufficient to stop the expansion.

Restricting the swelling in this way also allowed the scientists to tune the properties of the membrane, letting through less or more common salt for example.

Graphene is one of the most useful products ever invented but apparently difficult to use on a commercial scale, at least so far.  Mrs Fuller drew my attention to graphene years ago and wanted to know how to invest in it?  I remain convinced that it will eventually have many applications which remain almost unimaginable today.

This item continues in the Subscriber’s Area.

David,
I think you are underestimating the challenges of enacting a tax cut following the failure of the attempted overhaul of Obamacare. The budget savings in that bill were critical for paying for the tax cut. Now the maths only works if a boarder tax is included, and that, I am told, is a non starter in the senate. I have no doubt that Trump will turn his attention to corporate tax cuts, but the politics of that will likely be just as challenging as the ACA.

Thanks for your thoughts.  You would know more about this than I do. I have not seen figures stating the potential savings from the attempted overhaul of Obamacare, or comments that Trump was relying on that for financing some of his proposed tax cuts. 

However, I would expect some Laffer Curve benefits from Trump's proposed tax cuts, which I assume would have sufficient cross-border support to pass.

Our guest speaker will be Dr David Brown.  

Sarah Barnes reports that we currently have 10 delegates for June.   

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

I wonder if you could please analyse why the historic charts of Japan's main equity market are so divergent? 

As you know, the Tokyo market reached its "bubble era" peak in Jan. 1990 at 38,564 but has since recovered to around 19,063. 

The Topix bank index peaked at the same time at 1,480 but is still languishing at a fraction of that level, 182.64 today. 

The Topix 2nd Section index on the other hand is now at an all-time high from its peak of 4,500 reached in 1990 to approaching 6,000. 

Normally the banks are the lead indicator but Japan's banks underwent immense restructuring so I can understand why they have languished but the discrepancy between these charts seems huge.

 

Thank you for this email which raises important points worth covering with regard to Japan’s primary stock market indices. 

The Topix is also known as the Tokyo Stock Price Index. It is a free-float adjusted market capitalization-weighted index and comprised of all 1997 shares in the 1st Section of the Tokyo Stock Exchange. 

Here is where some of the idiosyncrasies of the system begin. The 1st Section is supposed to comprise all of the large companies and the 2nd Section holds whatever is left. However, at least 80 of the 567 companies in the 2nd Section have larger market caps than the smallest company in the Topix which highlights the fact that the weightings are not actively managed.

Diesel cars’ popularity in Europe has been waning as Volkswagen’s emissions-test manipulation scandal, which emerged in late 2015, compounded concerns that pollutants from the fuel are outweighing the benefits of its lower CO2 emissions. Mercedes outlined plans last week to accelerate a rollout of battery-powered cars by 2022, saying combustion engines would continue to be refined only for a transitional period.

“Diesel’s share in Europe has been declining for years because of stricter emissions regulation making the technology more expensive,” and potential restrictions on the models in cities such as Munich will probably damp sales further, Thomas Schlick, an automotive consultant at Roland Berger, said by phone. “The longer-term implications for a drop in combustion- engine demand are significant for the industry as by our calculations about one-third of jobs in the auto industry are related to drive-train technology.”

The German automotive industry received a robust defence from Angela Merkel when the diesel cheating scandal broke. That means the sector has been given ample time to transfer away from what is a serious polluting influence on major cities not least in relation to nitrogen oxide emissions. If they are to now meet the strict emissions controls which we can expect will be enforced then more efficient internal combustion engines, hybrids and electric vehicles are inevitable.

Is there a chart in the Chart Library of the CHF to USD exchange rate please? I found a chart the other way around i.e. USD to CHF but prefer to see it as CHF to USD. Many thanks

Thank you for this question which may be of interest to other subscribers. To find all of the Swiss Franc cross rate simply type CHF into the Chart Library’s search. CHF to USD is the first result and is followed by CHF to USD. 

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area.

The number of listed companies in the U.S. rose 50 percent from 1976 to 1996 and fell 50 percent from 1996 to 2016. This has not happened in other parts of the world, opening a U.S. listing gap. This is important because the U.S. comprises one-half of the value of the world’s stock market.
A company’s decision to list involves weighing costs and benefits. Net benefits appeared to be positive in the first 20 years of this period and have turned negative in the last 20 years. As a result, delistings have exceeded new listings by a large margin since 1996.

Regulation appears to have played a role in two ways. The cost of being public, especially after the implementation of the Sarbanes-Oxley Act in 2002, has risen in the past two decades. That said, the shrinkage in the population of listed companies started well before that law was implemented. Further, relatively accommodative anti-trust enforcement allowed for robust M&A activity.

As a result, listed companies today are on average larger, older, and more profitable than they were 20 years ago. Further, they operate in industries that are generally more concentrated. The overall size and maturity of listed companies means they are more likely to pay out cash to shareholders in the form of dividends and share buybacks than companies were in the past.

We speculate that the maturation of listed companies has also contributed to informational efficiency in the stock market. Gaining edge in older and well established businesses is likely more difficult than it is in young businesses with uncertain outlooks. In turn, the greater efficiency may be one of the catalysts for the shift that investors are making from active to indexed or rule-based strategies.

The chief investment officer (CIO) of an institution in the mid-1970s could gain reasonable exposure to U.S. equities by investing in an early stage venture fund and a large market index such as the S&P 500 (itself not an easy thing to do at the time). Today, that CIO needs to participate in early- and late-stage venture capital, a private equity buyout fund, and the S&P 500. Only a few investors have access to all of these alternatives.

The universe of alternative investments, including venture capital, buyout funds, and hedge funds, has grown sharply in the past 20 years to provide some investors with access to more investment opportunities as well as to employ more sophisticated methods to generate excess returns. The growth of these asset classes has led to lower returns for investors.

Venture capital funds launched in the 1990s outperformed public markets. But funds started since 2000 have underperformed public markets, with an improvement in recent years. Buyout funds with vintage years before 2006 outperformed public markets, but those launched in the last decade have only equaled the returns of the market. Hedge funds have also seen diminishing excess returns in the past decade. The difference between the top and bottom performers is larger in venture capital than in buyout funds.

 

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

Regulation and cost are a major obstacle to listing. Meanwhile the very low interest rate environment means venture funds are flush with cash to bid up the prices of private assets. Together that has contributed to the ability of unlisted companies to accrue massive valuations while also allowing established companies’ source capital for takeovers and buybacks. 

Republicans in Senate and then House did the opposite this past week, voting along party lines to reverse the consumer protections. Comcast, AT&T, Verizon, and other companies have long wished to leverage personal data, seeing Google and Facebook making billions from it through customized advertising revenue. Most web sites, including Bloomberg.com, track Web use in order to deliver relevant advertisements to users.

The ISP’s could not win a policy argument before the FCC, but Congress was willing to act quickly amid the flurry of big issues confronting the public in the first 100 days of the new administration.

Once President Trump signs this bill into law, as he has pledged to do as part of his assault on Obama-era regulation regardless of their value, these telecommunication companies will be able to monitor all sorts of data use and cross-reference it with a user’s location, the time of day, and even the concentration of other service users. As more commerce occurs through phones, these companies could launch payment applications that muscle out similar services from Apple or Google. That kind of consumer data is especially valuable. Then, telecommunication companies could sell ads on the locked or home screen of a phone -- something even Google and Facebook can’t do.

Beyond that, Congress is also removing regulations that made telecommunication companies responsible for the leads of valuable -- and possibly dangerous -- private information through security breaches.

 

I can imagine that many US citizens are not particularly happy with the move to allow internet service providers to sell our household’s browsing history. Nevertheless, if this does in fact pass into law it will afford a number of, what are otherwise considered rather staid, companies the opportunity to compete for ad revenue with the likes of Google and Facebook. 

The gap between water supply and demand – predicted to reach 40% by 2030 – will not be filled by surface water resources, so aquifers are being exploited more and more for agriculture, power generation and daily use in fast-growing cities.

About 30% of the world’s freshwater comes from aquifers, yet a third of the 37 largest aquifers studied by the University of California between 2003-13 were severely depleted, receiving little or no replenishment from rainfall.

Some of the most stressed aquifers are in the world’s driest regions such as Asia, up to 88% of which is water-stressed. South Asia accounts for half the groundwater used globally, but the continent’s aquifers – many of which were formed millennia ago when areas like northern China had a more humid climate – are no longer being replenished regularly by rainfall.

Boreholes are getting deeper and water tables are falling. In Pakistan’s Punjab province, over-pumping is lowering the water table by up to a half a metre per year, threatening food and water security and making thirsty crops, such as sugarcane and rice, tougher to grow.

 

The rapid pace of urbanisation as well as the steady migration of people towards the coasts is stressing both the ability of natural water resources to cater to the number of people as well as the ability of infrastructure to deliver adequate water supplies. That is as true of California as it is of Pakistan. The rising global population is quite another problem since there is little infrastructure where the majority of population growth is occurring. This map of where the least number of people have access to indoor toilets also highlights just how acute the lack of basic sanitation is. 

Credit strategists are increasingly disturbed by a sudden and rare contraction of US bank lending, fearing a synchronised slowdown in the US and China this year that could catch euphoric markets badly off guard.

One key measure of US corporate borrowing is falling at the fastest rate since the onset of the Lehman Brothers crisis. Money supply growth in the US has also slowed markedly. These monetary and credit signals  tend to be leading indicators for the real economy.

Data from the US Federal Reserve shows that the $2 trillion market for commercial and industrial loans peaked in December. The sector has weakened abruptly as lenders tighten credit, especially for non-residential property. Over the last three months it has dropped at a rate of 5.4pc on annual basis, a pace of decline not seen since December 2008.

The deterioration in the broader $9 trillion market for loans and leases has been less dramatic but it too is shrinking, falling at a 1.6pc rate on a three-month basis. “Corporate lending has ground to a halt and I am staggered that the Fed is raising rates. They have made a very big mistake,” said Patrick Perret-Green from AdMacro.

Credit experts at several big US banks have issued warnings over recent days, albeit sotto voce. "We’ve been surprised how little attention the slowdown in US bank lending has garnered," said Matt King, global credit strategist at Citigroup.

While they are not yet alarmed, their concerns are worth heeding. Credit has tended to pick up signs of trouble several weeks before equity markets in recent episodes of financial stress.

"Without another big dose of momentum, the cracks in the global reflationary consensus are liable to grow bigger. All around, existing trends are being called into question," he said.

Net corporate bond issuance has also stalled, indicating that borrowing by US firms as a whole is in decline. "So much for a Trump-driven expansion. Beneath the surface, we think a seismic battle is taking place," he said.

Elga Bartsch and Chetan Ahya from Morgan Stanley said the credit squeeze is a warning sign and needs watching closely. “On our estimates, the credit impulse turned negative at the end of 2016. We have not seen such a sharp deceleration in bank lending to US corporates since the Great Financial Crisis,” they said.

“Historically, credit downturns have led recessions. The plunge could reignite concerns that a highly leveraged US corporate sector may react strongly to even limited interest rates increases,” they said.

Monetary tightening in the US so far this cycle has been equal to 13 rate rises under the Fed’s Wu-Xia model, which includes the effects of withdrawing stimulus from quantitative easing. Nobody knows where the pain threshold lies in a global financial system that is more leveraged than at any time in history, including Fed officials themselves.

A study by the International Monetary Fund of 122 recessions in rich economies since 1960 shows that these slumps are typically preceded by a slowdown in credit starting to four to five quarters earlier.

Morgan Stanley said there may be less to worry about this time since the M1 money supply is more or less holding up. This indicator has “reliably contracted” before eight of America’s post-war recessions.

How serious is this?  It is certainly a warning, indicating that we are not fully out of the economic trough just yet and into the sunlit fields of sustainable economic recovery. 

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

In the early years of the EU’s existence, apart from the Common Agricultural Policy (CAP), which involved a ludicrous waste of money, it did not make any monumental economic mistakes. Nor was it obvious that the EU was going to become the bureaucratic nightmare that we know today. But before too long, the regulatory bandwagon started rolling. The single market became the mechanism through which the same crackpot over-regulation would be applied across the whole of the European Union.

For all its faults, provided that the world economy remained fairly stable, the EU would probably have been able to stagger on reasonably well. The trouble is, though, that over the past few decades the world has undergone three enormous shocks: the collapse of communism, the advent of globalisation and the communications revolution. These shocks demanded the utmost flexibility in order for the economy to adjust to them. But flexibility is exactly the thing the EU has learnt not to do.

Not only that, but more recently it has made three big mistakes. The first is the formation of the euro, which many economists, including me, correctly identified as a prosperity-destroying machine long before its inception. The second was the failure to amend the free movement rules once the EU had been extended to encompass the former communist countries of eastern Europe. The third was the introduction of the Schengen passport-free travel zone, which has proved to be a security nightmare at just the time that security is at a premium.

In my view, these bad decisions should not be viewed as one-offs. The EU is so badly formed and its institutions so weak and brittle that it has an in-built tendency to make poor decisions. This means that whenever a serious issue emerges that demands efficient decision–making and good governance, it will be likely to fall short.

There are also two big issues coming up in the lift that will pose serious challenges to the EU: the ageing population and the advent of artificial intelligence and robotics. I confidently expect the EU to make a botch of both.

I suppose you could say that the fundamental source of all its mistakes was there right from the beginning of the EU, namely the belief on the part of its elites that the countries of Europe should transform themselves into a single or federal state. In 1973 and 1975 I failed to see the full consequences of this vision. Today, in common with the majority of my fellow citizens, I can see them all too clearly.

Yesterday, I described the EU as the biggest bureaucracy ever created.  Bureaucracies do not evolve beyond absorbing others.  They are obsessed with protecting what they have.  For the EU this meant creating an economic closed shop, within a club which countries could join but never leave, at least until Brexit.   

Bureaucracies dumb down creativity.  They fall into groupthink which is often negative and ultimately unproductive.  

Bureaucracies are often corrupt.  The EU buys loyalty by inviting failed politicians of note within its member states to join its cushy Members of the European Parliament (MEPs). 

(See also Wednesday’s Comment of the day)

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

While Theresa May was serving notice of Britain leaving the European Union, David Cameron was in Kiev discussing his own downfall. His heart was never really in the European project, he said, making him a rather unconvincing salesman during the referendum campaign.

But he skipped over his biggest mistake: entering talks with the EU with no plan for what to do if talks failed. He promised a new deal for UK membership but came away with almost nothing. Now he’s giving speeches for Ukrainian oligarchs. The moral of his sad story: never enter a negotiation unless you’re genuinely prepared to walk away.

Yet the Prime Minister now looks as if she might repeat the same mistake. She has said “no deal is better than a bad deal” but has never elaborated – and shows every sign of being terrified of the “no deal” option. She finds herself in precisely the same bind as her predecessor. She is aiming for success in her negotiations, so doesn’t want to talk about failure. But if the EU senses that she is not serious about walking away, and would sign anything, why should they be generous? 

When Mrs May talks about accepting “no deal” she can only be referring to one thing: World Trade Organisation rules under which countries trade if they have no other arrangement. This, the WTO option, is spoken of as a calamity, the hardest of hard Brexits, the cliff edge, the suicide option – and worse.

That it would mean losing access to European markets, tariffs coming up and walls being built around an island nation that naively thought it was voting for global free trade. Ministers have not dared to calculate what WTO deal might mean.

Which is odd, given that WTO rules are those which govern Britain’s trading relations with 111 countries – including our largest single customer, the United States. It’s hardly a disaster, given that our trade with such countries has grown much more quickly than it has with the EU for the last couple of decades.

There’s no question of Britain losing “access” to European markets: every country from Afghanistan to Zimbabwe can sell its wares in Europe. The only issue is tariffs, and everyone who signs the WTO rules (ie, most countries on earth) agree to keep the tariffs pretty low.

This is the point of the WTO: its rules are a huge achievement, a global ceasefire in trade wars, a worldwide truce that has lasted for decades. So the EU could not, really, punish Britain – now matter how much Jean-Claude Juncker might like to. It is unable to treat us any worse than it treats the US, which would mean – at worst – a tariff averaging about 4.5 per cent on our exports. As high as 10 per cent for cars.

But if Britain retaliated then the sales of BMWs and Renault would be hit hard. A fall in the pound would more than make up for tariffs on our exports, while imports (especially cars) would be pricier than ever. The most difficult question for Nissan’s plant in Sunderland is whether they’d be able to cope with demand.

These are obvious points.  The EU played with Cameron, because it knew he wanted to stay in, at all costs. 

If Theresa May allows the EU to handle negotiation procedures, which it seems determined to do, she will be toyed with as well, only more sadistically. 

The problem is, Theresa May would understandably like a civilised and sensible negotiation process, achieving the best outcome for both sides.  Who wouldn’t? 

Unfortunately, this is not a vicarage tea party.  May needs to be very tough. Her team is not. I think she needs a bigger team.  If not, at minimum she should replace inexperienced Amanda Rudd with experienced, articulate Iain Duncan Smith.  

Early on in the discussions, EU reps will put May in a very disadvantageous position.  At that point, she needs to call the bluff and declare that if they are not willing to proceed on a mutually beneficial basis, discussions are over.  She and her team then need to walk out and initiate no further contact.  It might or might not work, depending on how self-destructive the EU wishes to be. 

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

Our next Markets Now will be on Monday 12^th June, once again in the Morrison Room at the Caledonian Club, so please note that date if you are interested.  Our guest speaker will be Dr David Brown.  

Here is Charles Elliott’s excellent presentation on Investing in Technology. 

Please note: I will be away tomorrow.

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

The premium on one-month options over the rate of actual market swings remains near a 10-week high set on Tuesday. It may increase further should Brexit-related negativity be less than feared in the near term, which would reduce realized volatility, and also as the implied rate should rise on capturing the second round of the French elections due May 7.

Realized volatility could find support as the euro-pound pair’s prospects look increasingly bearish on charts, with current market positioning significantly skewed toward sterling declines. Leveraged net short positions in the pound this month are at the highest level since November.

Not all investors have given up on the pound, with the British economy performing better than expected. BlackRock Inc., which reduced some of its exposure to sterling ahead of the triggering of Article 50, has said it is still marginally long as an expected slowdown of the U.K. hasn’t materialized.

With the latest reports suggesting that the European Central Bank isn’t anywhere close to reducing economic stimulus, a short-squeeze on the pound could materialize.

 

Now that Article 50 of the Nice Treaty has been triggered there are at least three big questions outstanding with regard to the Pound and the Euro. 

How willing is the Bank of England to run hot on inflation with the economy at full employment and economic growth continuing to surprise on the upside? 1-year notes yields pulled back today suggesting investors are less inclined to think an interest rate hike is anywhere on the horizon. 

Currently, selling across the borders of India's 29 states means paying a central sales levy, which can't be set off against tax paid on raw materials procured from within a company's home jurisdiction. Those input credits will now be available under a GST.

This would do two things: One, given enough competition, most manufactured goods should get cheaper, stoking demand. Two, more companies will want to engage in interstate commerce, which they avoid at present by moving goods (without selling) to their own small, inefficient warehouses around the country.

Smaller Indian industrial firms -- those with less than $1 billion in revenue -- end up carrying more than five times their annual sales as inventory, compared with just 36 percent in China. A narrowing of this gap would boost profitability. More centralized warehousing would also boost demand for higher- tonnage trucks made by Tata Motors Ltd. and Volvo AB. 

But GST is also causing some anxiety. As Gadfly wrote last year, India is planning to employ Jeff Bezos of Amazon Inc. as its tax collector. All e-commerce marketplaces will deduct 2 percent from what they pay sellers of merchandise and deposit the money with the government. Sellers would then have to claim input-tax credits. The increase in working capital may be problematic for small businesses working on thin margins. Amazon India estimates that 180,000 jobs could be at risk.

 

India has a dismal record of collecting taxes which has led to all manner of levies on transactions to pad out state coffers. This has created an environment where business is penalised and interstate trade is less appealing than attempting to embark on overseas expansion. 

Although electric vehicle adoption has been slower in the U.S. than expected, the price of battery packs has been dropping fast, to the point that auto industry observers see electric cars as poised to become cost-competitive with gas-powered vehicles—and thus to become popular outside the specialty markets of luxury buyers and those seeking green cred. Tesla’s soon-to-arrive Model 3 and the Chevy Bolt now in dealerships are priced at about $30,000 after subsidies, but a battery assembly that a few years ago might have cost Tesla $300 per kilowatt hour (a Model S uses 60 to 90 kilowatt hours’ worth of lithium ion batteries) today costs General Motors $145 per kilowatt hour for its Bolt. And the figure is hurtling toward $100, the number that HSBC Securities (USA) Inc. and consultant Wood Mackenzie Ltd. agree will make electric vehicles as cheap as gas-powered cars, freeing mass-market EVs from their current dependence on subsidies.

Lithium represents a “supply inelasticity meets rising demand” market. Higher prices are having the anticipated effect of encouraging investment in new supply but it takes time to build a brine or mining operation and the vagaries of developing operations in Argentina, Chile and Bolivia represent challenges for newcomers to the sector. That is why some smaller companies are focusing on more expensive plays closer to home such as in Nevada. China is also the fourth largest producer of lithium and its ability to achieve scale quickly in terms of manufacturing represents a significant wild card for the sector. 

The European Union is encircled on the outside, split three ways on the inside, and is saddled with a corrosive currency union that is still not established on workable foundations and is likely to lurch from crisis to crisis until patience is exhausted.

Europe’s economic “Lost Decade”, and the strategic consequences that stem partly from this failure, have emboldened enemies and turned the Continent into a dangerous neighbourhood. The EU now badly needs a friend on its Atlantic flank.

While it would be undignified for any British government to exploit these circumstances (and Theresa May is certainly not doing so) this is the diplomatic and military reality as Britain triggers Article 50.

Along an expanding arc across the East, the EU faces a pact of autocrats. Russia and Turkey are moving closer to an outright alliance - an ideological hybrid like Molotov-Ribbentrop - that cuts at the heart of Nato. Both are openly at war with the post-Second World War liberal order.

The Kremlin is meddling in the Baltics, the Balkans, and the EU’s internal democracies. Vladimir Putin acquired a military edge during the energy boom - when the EU was disarming to meet austerity targets - and now enjoys a window of opportunity to extract maximum advantage.

In the West, the EU faces Donald Trump. This is a US president who refused to shake the hand of German Chancellor Angela Merkel. For the first time since the launch of the European project in the 1950s, the US no longer sees the EU as an asset in the diplomatic equation. Many in the White House would happily see it broken up.

This means that Washington will no longer allow the eurozone to use, or misuse, the International Monetary Fund for its own internal purposes. The implications are already apparent in talks over Greece, but they do not stop there.

It would be lamentable statecraft for EU leaders to pick a fight with Britain in these circumstances. For all the noise over Brexit, the UK is really the least of their problems. A clash would be worse than futile, as Italian premier Paulo Gentiloni said in London. Key figures in Germany, Poland, and Spain have repeatedly made the same point.

As the initial bitterness over Brexit fades, EU leaders are pleasantly surprised to learn that they, like many, misunderstood the referendum. Britain is not resiling in any way from Western liberal principles. It upholds all its strategic commitments to Europe through Nato, and is stepping up its defence EU’s eastern border with infantry and aircraft; it remains a champion of global free trade (more so than the EU itself); it has stuck by its climate pledges.

The country does not have a populist government. The Prime Minister could hardly be more cautious and proper, a child of the vicarage. She has defended the European cause in US Republican circles, almost as if she were its ambassador. Her cordial overtures have for the most part been received well in EU capitals and the upper echelons of the Commission.

The constitutional caveat, of course, is that Britain will act as an independent nation. It cannot accept the permanent jurisdiction of the European Court over almost all areas of UK law and policy, the baneful and masked consequence of the Lisbon Treaty.

It was always on the cards that the UK would have to extract itself from a venture that spends most of its energy trying to hold the euro together. Monetary union must evolve into a full-fledged federal state, with a single EMU treasury, fiscal system, and government, if it is to survive. Britain obviously cannot be part of such a structure. Trying to obfuscate this constitutional fact helps nobody.

In short, nine months after the referendum, Europe’s leaders are reconciled to the necessity of separation. The debate has moved beyond the false dichotomy of soft and hard Brexits. Most welcome the clarity of British withdrawal from the single market, recognising that it may be healthier for both sides than a messy fudge based on the hybrid Norwegian model. Scotland’s Nicola Sturgeon is barking up the wrong tree if she really thinks that the EU is pushing hard for Brexit Britain to stay in the single market.

There are, of course, discordant notes, especially in France, where much of the political elite is stuck in a time-warp. Emmanuel Macron, the electoral boy-wonder, offers little beyond ideological pedantry and the old EU Catechism when it comes to Brexit.

He is apt to dictate absolutist terms with an imperial tone. No such terms are imposed on Canada in its trade pact with the EU, and for obvious reasons: Canada is an independent state.

I doubt he will succeed in trying to chastise Britain since he also wants an unbreakable “Franco-German position” on Article 50 talks, and Germany has different interests. The old Rhineland axis was in any case rendered obsolete by the fall of the Berlin Wall. Any attempt to reconstitute it will merely underscore France’s painfully subordinate role in what has become (to the dismay of the German people) a German Europe. Better for France to hang on to the tight Franco-British defence and security pact for a little strategic ballast.

With or without Brexit, the EU has to keep living with the error of monetary union, so destructive that one leading voice of the French establishment has written a book, La Fin du Rêve Européen, calling for the euro to be broken up in order to save what remains of the European project.

The eurozone is horribly split into the creditor and debtors blocs, each with clashing macro-economic interests, and each clinging to their own narrative of what happened in the debt crisis. Quantitative easing by the European Central Bank and a cyclical economic upturn have masked the tension over the past two years, but the underlying North-South rift is still there.

The ECB will have to taper and ultimately end its bond purchases as global reflation builds. The markets know that once Frankfurt rolls back emergency stimulus, as it must do to avert a political storm in Germany over rising prices, Italy, Portugal, and Spain will lose a buyer-of-last-resort for their debt.

The core problem remains: the conflicting needs of Germany and the South cannot be reconciled within EMU. The gap in competitiveness and debt burdens is too great. They should not be sharing a currency union at all.

As matters now stand, Italy’s anti-EU Five Star movement leads the polls by a six-point margin with 32pc of the vote. The four anti-euro parties are likely to win over 50pc of the seats between them in the Italian parliament in the elections early next year.

This is one of the most realistic and comprehensive assessments of the European Union’s political situation that we are likely to see, in my opinion.  Moreover, it is discussed in the context of the Western world. 

What is not mentioned in this fine article above, is the credit which the European Union has been generously given by other commentators, not least from across the Atlantic, for maintaining post WWII peace throughout much of Europe. 

I will quibble with this because the EU was not actually created before 1993, following the Maastricht Treaty, otherwise known as the Treaty on the European Union.  Considerably earlier, The European Economic Community (EEC) was created in 1957.  It was more familiarly known as the Common Market and also the European Free Trade Association (EFTA).

Peace within Europe or any other global region, I suggest, is more likely maintained by independent, democratic governments with successful economies.  This is what the European Common Market / EEC / EFTA, actually achieved, to their considerable credit. 

Sadly, the Maastricht Treaty’s creation of the EU in 1993 marked the beginning of the end for Continental Europe’s self-governing and mostly economically successful countries, which were being homogenised in what became the biggest bureaucracy ever created. 

The introduction of the Euro in 1999, purely for political reasons, has been nothing short of a tragedy in term of declining economic performance and rising unemployment.  Moreover, this failing system has become fractious, not only among European countries but also within individual nations, leading to populist uprisings.

What about Europe’s financial markets?

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

Our next Markets Now will be on Monday 12^th June, once again in the Morrison Room at the Caledonian Club, so please note that date if you are interested.  Our guest speaker will be Dr David Brown.  

My Markets Now PowerPoint is posted in the Subscriber's Area.

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

The United Kingdom wants to agree with the European Union a deep and special partnership that takes in both economic and security cooperation. To achieve this, we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU.

If, however, we leave the European Union without an agreement the default position is that we would have to trade on World Trade Organisation terms. In security terms a failure to reach agreement would mean our cooperation in the fight against crime and terrorism would be weakened. In this kind of scenario, both the United Kingdom and the European Union would of course cope with the change, but it is not the outcome that either side should seek. We must therefore work hard to avoid that outcome.

It is for these reasons that we want to be able to agree a deep and special partnership, taking in both economic and security cooperation, but it is also because we want to play our part in making sure that Europe remains strong and prosperous and able to lead in the world, projecting its values and defending itself from security threats. And we want the United Kingdom to play its full part in realising that vision for our continent.

The UK is not applying for membership of the EEA and is going for a free trade agreement with the EU. That’s a bold step and will require active engagement from the EU if it is to have any hope of being achieved. The question of money is going to be front and centre. The EU now has a hole in its budget in the order of €15 billion a year. Germany wants the UK to commit to paying up before negotiations start. It would be lunacy for the UK to agree to that since the issue of the EU budget is one of its trump cards (pardon the pun). 

I hope you are well. I was wondering what you thought of this article (Japan gambles on Toyota’s hydrogen powered car) about Toyota’s lack of faith in electric vehicles because 'a battery breakthrough is not in prospect'

Thank you for this email raising an important issue regarding energy density. Here is a section from the article:

Fuel cell vehicles, by contrast, need all the manufacturing skills of a car company. “From the industrial strategy point of view, fuel cell technology is extremely difficult, it’s in the world of chemistry not machinery,” says Hiroshi Katayama at the advanced energy systems and structure division of the ministry of economy, trade and industry (METI). If auto technology goes down the hydrogen path, Japan will be well placed. But if it doesn’t, Tokyo will have made a major miscalculation.

Toyota’s faith in hydrogen is best understood by looking at a car it never made: a pure electric vehicle. For the 20 years since it invented the Prius hybrid, Toyota has been the carmaker best-placed to launch a fully electric vehicle. It had the batteries, the motors and the power electronics but chose not to deploy them because of concerns about range limits, refuelling time and the risk of batteries degrading as they age.

It has announced plans for its own electric vehicle to exploit the demand from the premium segment opened up by Tesla and to meet emissions standards in the US and China. Yet Toyota’s fundamental doubts about battery-powered vehicles have not gone away.

The long dreamt-of Sakichi battery would store energy at the same density as the chemical bonds in petrol: roughly 10,000 watt-hours per litre — enough to power a family car for hundreds of kilometres on a single tank. The low energy density of the best batteries, about one-twentieth that of petrol, is why today’s electric cars have limited range.

Turkish President Recep Tayyip Erdogan has lambasted friend and foe alike in a campaign for vast new powers, but his political fate may hang on the one thing he’s stopped carping about: the price of money.

With the April 16 vote on strengthening the presidency too close for pollsters to call, Erdogan is no longer berating the central bank and commercial lenders over borrowing costs they’ve pushed to a five-year high. He’s betting any measures taken to arrest the lira’s plunge will pay off at the ballot box.

The lira’s value versus the dollar is more than just a pocketbook issue in Turkey, where millions of voters still remember the abrupt devaluations that ravaged their livelihoods in past decades and view the exchange rate as the most important indicator of the nation’s economic health.

Turkey’s trade deficit is the biggest of all top 50 economies relative to output and most of its imports and foreign debt are priced in dollars, so sharp declines in the lira can be ruinous for legions of entrepreneurs like Ramazan Saglam, who owns a print shop in a working-class neighborhood of Ankara.

“I bitterly recall when the dollar jumped in 1994 and 2001 -- my business collapsed both times,” Saglam said. “I’m supporting the new presidential system wholeheartedly because I don’t want to go bankrupt again.”

Turkey is a NATO member, it controls the Bosphorus so it’s in a strategic position geopolitically and it is flirting with becoming an outright dictatorship. That represents an uncomfortable problem for its NATO allies who will be all too aware that allowing Turkey to migrate towards Russia’s sphere of influence would be a serious loss. In addition, refugees represent an election catalyst for half a dozen European countries to which Turkey holds the key. That means there is little the EU can do but protest at the trend toward despotism. 

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

It appears that asset markets are priced as if secular stagnation were a certainty. Certainty is a particularly dangerous assumption when it comes to investing. As Voltaire stated, “Doubt is not a pleasant condition, but certainty is absurd.”

In order to believe that asset market pricing makes sense, I think you need to hold any number of “impossible” (by which I mean at best improbable, and at worst truly impossible) things to be true. This is certainly a different sort of experience from the bubble manias that Ben mentioned in the opening quotation, which are parsimoniously captured by Jeremy’s definition of bubbles – “excellent fundamentals, irrationally extrapolated.” This isn’t a mania in that sense. We aren’t seeing the insane behaviour that we saw during episodes like the Japanese land and equity bubble of the late 1980s, or the TMT bubble of the late 90s, at least not at the micro level. However, investors shouldn’t forget that the S&P 500 currently stands at a Shiller P/E of just over 28x – the third highest in history (see Exhibit 17).

The only two times that level was surpassed occurred in 1929 and in the run-up to the TMT bubble. Strangely enough, we aren’t hearing many exhortations to buy equities because it is just like 1929 or 1999. Today’s “believers” are more “sophisticated” than the “simple-minded maniacs” who drove some of the other well-known bubbles of history. But it would be foolish to conflate sophistication with correctness. Current arguments as to why this time is different are cloaked in the economics of secular stagnation and standard finance work horses like the equity risk premium model. Whilst these may lend a veneer of respectability to those dangerous words, taking arguments at face value without considering the evidence seems to me, at least, to be a common link with previous bubbles.  

 

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

I find myself agreeing with a great deal of what James Montier is arguing. I believe that it does not make sense to take a secular trend which is obviously at a highly developed stage and extrapolate it into infinity. That is just not how markets work. Yet that is exactly what we see in the bond markets. 

Have you noticed how much debate there is over so many issues that we confront? It is usually a face-off between those who can see an issue clearly in one corner, and those with vested interests in the other. As an example, the global warming debate is one that has been ongoing for a long time largely due to the inability to achieve consensus amongst scientists and the complications of obtaining meaningful measurements. But something that should be less controversial is the state of the property market in Australia. Do we have a bubble or don't we?

We do have an extraordinarily strong market that cannot go on forever. The bigger the cycle upturn the harder the fall on the other end. The collapse of the mining and resources boom was proof of that. After every party there is a hangover. We are seeing many initiatives being proposed, and some undertaken, that are designed to take the heat out of the market. Yet there will still be pain in due course especially for the inexperienced property investors who have been dragged into euphoria of booming property prices.

In the meantime we see arguments for and against a bubble and an impending collapse. Perhaps we should be focusing on sensible measures rather than trying to do a King Canute. You don't have to wait for direction from the government or the regulators in order to think ahead. Start getting your finances in order now so you can weather the storm.

 

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

Australian government bond yields might not be as low as those in Europe, Japan or the USA but they have been trending lower for just as long. Relative seclusion from the credit crisis in the USA and sovereign debt and banking crisis in Europe as well as proximity to the commodity demand growth markets of Asia has allowed Australia to go a long time without a recession. That suggests what happens in China is likely to have much greater influence on Australia than anything that goes on in North America or Europe. 

Brown and his team will have plenty of competition. In restaurants alone, more than 5 billion lb of ground beef are consumed every year. And then there’s the other meat-alternative companies that have charged into the space. Beyond Meat is another high-profile faux-beef company that’s looking to make inroads into the retail market, and Memphis Meats announced last week it created the world’s first meatless chicken tenders made from self-reproducing cells.

Until now, Impossible Foods has slowly entered the market by popping up in high-profile restaurants in New York City and San Francisco. The goal, though, is to get in front of the most devout meat lovers. In fact, that’s part of Brown’s metric for success. Forget the people obsessed with vegetables.

“Our definition of success is: we score zero points if a vegan or vegetarian buys our burger,” Brown says. “The more of a meat lover they are, the more they are our target customer.”

The company’s market research has shown that even the most devoted American meat eaters will never stop wanting it—but they would be interested in a product that tastes just as good and is also made of plants, Brown says. In other words, a product that comes from an animal is not part of the intrinsic value of a burger. It’s more about how delicious, nutritious, and affordable that product is.

 

Meat is big business but it is also highly water intensive and over consumption can contribute to a number of health issues. If every burger is a quarter-pounder then Impossible Burger is going after about 1% of the restaurant meat market in its first year. That’s an ambitious target and the company’s success will come down to both taste and cost. If the new breeds of veggie burgers have the same taste and texture as beef and are also cheaper, that represents a significant threat to the farming sector quite apart from the trend towards veganism. 

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

Investors should be particularly sensitive to indicators that are associated with being in a misaligned world. This analysis can be applied both to sunk capital and new investment. For companies with low growth capex, margins on existing production will clearly be more important than incremental value creation or destruction on new investment. For high growth companies, returns relative to the cost of capital on new investment will be more critical. 

Investors should be wary of high-carbon companies where decarbonisation is likely to be demand driven (for example coal generators facing lower production as subsidised renewable production is built). However there may be value opportunities where decarbonisation is supply driven (for example restrictions on coal production, or forced coal closures could increase margins on remaining capacity even while overall volumes drop). 

Investors should look for low carbon companies in sectors where supply constraints are likely to be more significant than demand constraints as volumes grow. They should be wary of sectors where the mechanisms for growth are likely to drive down returns (for example long asset lives with technological progress and short-term market pricing). 

By understanding the positioning of companies in the matrix of volume and value, investors can make an informed judgment. Market valuations can be set against current opportunities and future expectations. Shareholder engagement can help ensure the right corporate strategy

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

Governments need revenue so regardless of what one’s feelings are with regard to climate there is a strong potential for higher taxes, particularly in Europe which is a major fossil fuel importer. The impetus for similar taxes in energy producing nations, not least the USA, is less compelling.  

We believe estimated prevalence is the best measure of the overall cancer market’s size. We have estimated future prevalence for 2014-2018 (Tables 3, 6, 9). To arrive at these estimates, we used the 2012 or 2013 estimate and added estimated incidence (Tables 1, 4, 7) and subtracted estimated deaths (Tables 2, 5, 8) for each year. Exceptions included cancers that did not have prevalence data for 2012 or 2013. In cases where 2013 prevalence was not available for US patients, we used the 2009 prevalence estimate for 2013 or the incidence estimate. For these same exceptions outside the United States, we estimated 2012 or 2013 prevalence as a ratio to incidence that was consistent with US data.

Based on prevalence, we estimate the overall market for cancer therapies in the United States is slightly over 14 million patients growing at 7% per year. In Europe, we estimate the overall market is composed of 8 million patients and is growing at 16% per year. In Japan, we estimate the market is nearly 2 million patients and is growing 13% per year. We believe incidence is the best measure of front-line (newly treated) cancer market’s size (Tables 1, 4, 7). Therefore, we conclude the market for front-line therapies in the US is currently 2 million patients and is decreasing at 8% per year. In Europe, we estimate the market for front-line therapies is approximately 3.1 million patients and is growing at 4.5% per year. In Japan, we estimate the market for front-line therapies is currently 680,000 patients and is growing at 2% per year.

We believe the best measure of the market size for second-line and greater (relapsed/refractory) therapies is prevalence less incidence, which should account for all living patients who are not newly diagnosed. Therefore, we conclude the market for relapsed therapies in the US is currently 15 million patients and is growing at 10% per year. In Europe, we estimate the market for relapsed therapies is approximately 10.8 million patients and is growing at 11% per year. In Japan, we estimate the market for relapsed therapies is currently 2.1 million patients and is growing at 8% per year. 

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

Cancer is a blight on humanity. Because it is based on what is in many respects a random mutation of genes, it avoids notice by the body’s immune system. The net result is that there are many different types of cancer but even within individual groups no two are the same. That represents an acute challenge for drug therapies because while the total market is large, individual therapies are required to treat every patient. Therefore personalised medicine is likely to emerge first in cancer treatment which means oncology represents an important market to monitor. 

Citi’s equally large credit card book – in nominal terms the most profitable part of the business – has a gross spread of almost 1,100bp, but also reported over 300bp in defaults in 2016.  Still, with a 800bp net margin before SG&A, credit cards are Citi’s best business.  Indeed, Citi’s payment processing and credit card business are the crown jewels of the franchise.  If there were some way to sell the rest of the Citi operations, the payments processing and credit card business could be worth a multiple of Citi’s current equity market valuation. 

The trouble with Citi and many other US banks is that their business are dominated by consumer credit and real estate exposures, with little in the way of pure C&I loans.  When you look at most US banks, the vast majority of the exposures are related to real estate, directly or indirectly.  Thus when the Fed manipulates asset prices in a desperate effort to fuel economic growth, they create future credit problems for banks.  As our friend Alex Pollock of R Street Institute wrote in American Banker last year:

“[T]he biggest banking change during the last 60 years is… the dramatic shift to real estate finance and thus real estate risk, as the dominant factor in the balance sheet of the entire banking system. It is the evolution of the banking system from being principally business banks to being principally real estate banks.”

So whether a bank calls the exposure C&I or commercial real estate, at the end of the day most of the loans on the books of US banks have a large degree of correlation to the US real estate market.  And thanks to Janet Yellen and the folks at the FOMC, the US market is now poised for a substantial credit correction as inflated prices for commercial real estate and related C&I exposures come back into alignment with the underlying economics of the properties.  Net charge offs for the $1.9 trillion in C&I loans held by all US banks reached 0.5% at the end of 2016, the highest rate since 2012.

 

Commercial real estate has been directly influenced by the extraordinary monetary policies employed by the Fed and other central banks. I don’t think it is an exaggeration to conclude that rising rents have been a contributing factor in the migration of businesses online and the denuding of the high street and malls of active businesses. 

It’s crunch time in America. The financial markets surged on Donald Trump’s election, on the assumption that his economic policies would, on balance, be pro-growth. Yes, Wall Street rightly loathes protectionism and the tech industry in particular is opposed to proposed restrictions on immigration – but business as a whole hopes that the President’s policies on tax, healthcare, spending, banking, regulation, energy, infrastructure and, maybe even in time, monetary policy would be neo-Reaganite.

It’s still too soon to tell how all of this will pan out, but time is running out for the Trump administration on the economic front. It needs to get a lot more done a lot more quickly. There is, of course, healthcare reform. But the first real, tangible piece of good news has come from a very different area: there has now been some genuine movement on energy, with the Keystone pipeline authorisation. That is good news: the US needs to embrace all kinds of domestic energy production, and other countries should follow suit. The shale revolution 
has already transformed the US economy, which would be in a far weaker place without it.

But while Trump has delivered on energy, he will need to turbocharge the rest of his agenda if he wants to keep on side those in business and Wall Street who thought that, despite his many downsides, the new president would end up improving the US economy overall.

Reagan ought to be the Republican role model: a true believer in free market economics, he was a brilliant, lucid and powerful advocate for individual liberty. He cut marginal tax rates and simplified the tax system, while slashing the number of pages in the Federal Register from 70,000 in 1980 to 45,000 in 1986, as a note by Adam Slater from Oxford Economics reminds us.

He did what very few politicians manage: he genuinely took an axe to red tape, deregulated extensively and simplified what rules remained. By contrast, the regulatory burden rocketed under Barack Obama. The Fraser Institute’s index of economic freedom confirms that America became a more free-market and economically liberal economy during the 1980s; in recent years, it has fallen back drastically.

Many of Trump’s economic policies are not that different from Reagan’s.  However, Trump should have prioritised economic policies from the first days of his administration, rather than wasting his initiative on political disputes and repealing Obama’s healthcare programme.  This has been politically divisive, while policies for economic stimulus would have had much more cross-party support.  They may be harder to pass in future.     

Ironically, perhaps today’s realisation by Trump and Paul Ryan that they do not currently have sufficient support to repeal the Affordable Care Act cause them to refocus on policies for increasing GDP.

WASHINGTON — Just two months in, Donald Trump's presidency is perilously adrift.

His first major foray into legislating imploded Friday when House Republicans abandoned a White House-backed health care bill, resisting days of cajoling and arm-twisting from Trump himself. Aides who had confidently touted Trump as the deal's "closer" were left bemoaning the limits of the presidency.

"At the end of the day, you can't force somebody to do something," White House spokesman Sean Spicer said.

On its own, the health care bill's collapse was a stunning rejection of a new president by his own party. And for Trump, the defeat comes with an especially strong sting. The president who campaigned by promising "so much winning," has so far been beset by a steady parade of the opposite. With each setback and sidetrack, comes more concern about whether Trump, the outsider turned president, is capable of governing.

"You can't just come in and steamroll everybody," said Bruce Miroff, a professor of American politics and the presidency at the State University of New York at Albany. "Most people have a modest understanding of how complicated the presidency is. They think leadership is giving orders and being bold. But the federal government is much more complicated, above all because the Constitution set it up that way."

This latest article is very good and expands on some of the points made in response to earlier reports above.

The US economy is well known for performing despite the background of ineffective central governance. Nevertheless, it would be better if this was not put to the test too frequently. US GDP growth would be easier to increase and sustain with an economically savvy White House which also had a chance of uniting the country, as we saw with Ronald Reagan.   

Commenting on the potential for Scotland to become independent, Colin Ellis, chief credit officer for EMEA at Moody's, has warned the country would face "downward pressure" on its finances in the event of independence, according to The Times.

The warning comes as lower oil price, currently sitting at around $55 a barrel, have left Scotland facing a large budget deficit and worse off financially than before the previous referendum in September 2014. 

Back in 2014, when the oil price was above $100, an independent Scotland could have received a rating between A and Baa, placing it within the investment grade bracket.

However, Moody's Ellis said current circumstances could see Scotland's rating drop to Ba, a junk status (also known as sub-investment grade), which would place it on a par with Azerbaijan and Guatemala.

Governance is Everything has long been a mantra at this service.  Unfortunately for Scotland, it has the worst governance in the UK, evidenced by everything from its weak economic performance, rising debt and deteriorating educational system, documented in earlier articles posted on this site. 

That will eventually change through the democratic process, although not as quickly as it might with stronger opposition.

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

I am looking forward to another lively and enjoyable evening, which will now include a short presentation from a fourth speaker well known to Iain Little.

Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Please note: I will be away on Monday with The Markets Now preparations and also on Tuesday for a minor corrective medical procedure. 

House Republican leaders abruptly pulled a Republican rewrite of the nation’s health-care system from consideration on Friday, a dramatic acknowledgment that they are so far unable to repeal the Affordable Care Act.

“We just pulled it,” President Trump told the Washington Post in a telephone interview.

The decision came a day after Trump delivered an ultimatum to lawmakers — and represented multiple failures for the new president and House Speaker Paul D. Ryan (R-Wis.).

The decision means the Affordable Care Act remains in place, at least for now, and a major GOP campaign promise goes unfulfilled. It also casts doubt on the GOP’s ability to govern and to advance other high-stakes agenda items, including tax reform and infrastructure spending. Ryan is still without a signature achievement as speaker — and the defeat undermines Trump’s image as a skilled dealmaker willing to strike compromises to push his agenda forward.

“I don’t blame Paul,” Trump said, referring to Ryan.

Rep. Bradley Byrne (R-Ala.), who planned to vote for the legislation, said that Friday would have been the “first big vote in the presidency of Donald Trump. I think it’s a statement, not just about him and the administration, but about the Republican Party and where we’re headed.”

“So much about political power is about perception. And if the perception is that you can’t get your first big initiative done, then that hurts the perceptions down the road about your ability to get other big things done,” Byrne said in an interview before the decision.

The decision came hours after Ryan visited the White House to warn Trump that despite days of intense negotiations and sales pitches to skeptical members, the legislation lacked the votes to pass.

Trump had personally lobbied 120 lawmakers, either in person or on the phone, White House press secretary Sean Spicer reminded reporters on Friday. The president had “left everything on the field,” Spicer said.

Trump has a steep learning curve as President.  This is not surprising as he has never held public office before.  He needs to learn how to be a better politician, including trying to reverse his declining ratings with the public. That will not be easy, although it is very important.  He also needs to ensure that his next important bill passes. 

A link to today's big picture long-term video is posted in the Subscriber's Area. 

Populism is a political and social phenomenon that arises from the common man, typically not well-educated, being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them. These sentiments lead that constituency to put strong leaders in power. Populist leaders are typically confrontational rather than collaborative and exclusive rather than inclusive. As a result, conflicts typically occur between opposing factions (usually the economic and socially left versus the right), both within the country and between countries. These conflicts typically become progressively more forceful in selfreinforcing ways.

Within countries, conflicts often lead to disorder (e.g., strikes and protests) that prompt stronger reactions and the growing pressure to more forcefully regain order by suppressing the other side. Influencing and, in some cases, controlling the media typically becomes an important aspect of engaging in the conflicts. In some cases, these conflicts have led to civil wars. Such conflicts have led a number of democracies to become dictatorships to bring order to the disorder that results from these conflicts. Between countries, conflicts typically occur because populist leaders’ natures are more confrontational than cooperative and because conflicts with other countries help to unify support for the leadership within their countries. 

In other words, populism is a rebellion of the common man against the elites and, to some extent, against the system. The rebellion and the conflict that comes with it occur in varying degrees. Sometimes the system bends with it and sometimes the system breaks. Whether it bends or breaks in response to this rebellion and conflict depends on how flexible and well established the system is. It also seems to depend on how reasonable and respectful of the system the populists who gain power are. 

In monitoring the early-stage development of populist regimes, the most important thing to watch is how conflict is handled—whether the opposing forces can coexist to make progress or whether they increasingly “go to war” to block and hurt each other and cause gridlock.

Classic populist economic policies include protectionism, nationalism, increased infrastructure building, increased military spending, greater budget deficits, and, quite often, capital controls.
In the period between the two great wars (i.e., the 1920s-30s), most major countries were swept away by populism, and it drove world history more than any other force. The previously mentioned sentiments by the common man put into power populist leaders in all major countries except the United States and the UK (though we’d consider Franklin D. Roosevelt to be a quasi-populist, for reasons described below). Disorder and conflict between the left and the right (e.g., strikes that shut down operations, policies meant to undermine the opposition and the press, etc.) prompted democracies in Italy, Germany, Spain, and Japan to choose dictatorships because collective/inclusive decision making was perceived as tolerance for behaviors that undermined order, so autocratic leaders were given dictatorial powers to gain control. In some cases (like Spain), strife between those of conflicting ideologies led to civil war. In the US and UK, prominent populist leaders emerged as national figures (Oswald Mosley, Father Charles Coughlin, Huey Long), though they didn’t take control from mainstream parties. 

 

A link to the full report is posted in the Subscriber's Area. Fiscal austerity is a hard pill to swallow. Whether it is for people who lost their homes during the USA’s credit crisis or those who had wages and benefits slashed as a result of the EU’s banking and associated sovereign debt crisis. 

Generally speaking the best outcomes arise when fiscal austerity is associated with a major currency devaluation. That way the boost to competitiveness softens the economic blow while the austerity bred reforms cement the potential for future growth. 

“We have to calculate scientifically what the British commitments were and then the bill has to be paid,” he said.

Asked if the bill will be 50 billion pounds, which is about 58 billion euros, Juncker replied: “It’s around that.”

May plans to launch Britain on a two-year process of negotiations to quit the EU on March 29, by triggering Article 50 of the bloc’s Lisbon Treaty. The size of Britain’s exit bill will be among the first -- and most contentious -- topics for discussion, with British ministers indicating they do not believe the U.K. is liable for such a large sum.

Juncker’s statement is the clearest indication from the commission of the size of the bill, and is in line with an estimate cited by Austrian Chancellor Christian Kern last month.

So far, the EU’s chief Brexit negotiator, Michel Barnier, has argued that the terms of the divorce, including the size of the bill, must be settled first, before any negotiations over the new trading relationship between the U.K. and the EU can begin.

Britain wants talks on the exit and a new free trade deal to run simultaneously -- and its argument received a boost on Friday when the Italian government said the two sets of talks could “overlap” to some extent.

“We will be at the end of the exit negotiation and at the same time we can start the new deals on trade, and we hope also for example on security,” Italian junior minister for European Affairs Sandro Gozi said in a Bloomberg TV interview.

 

As far as I can make out the net figure for what the UK contributes to the EU every year is less than £10 billion, at least according to the figures quoted here.   Therefore, the £50 billion the EU is hoping for represents between five and seven years lost income. 

We may not be done with the bull market in bonds, or at least a very extended period of ranging if this article has merit. It is publicly available so ok to post. Would appreciate your comments 

Thank you for this article which may be of interest to subscribers. I too think of the declining velocity of money as a headwind to inflationary pressures getting out of control. However this image of what they consider low interest rates, as below 4.5% is an average level over the last century rather than what might be considered low. 

The overthrow of Mubarak, one of a series of military men to rule Egypt since the 1952 abolition of the monarchy, embodied the hopes of the Arab Spring uprisings that shook autocrats from Tunisia to the Gulf and briefly raised hopes of a new era of democracy and social justice.

His release takes that journey full circle, marking what his critics say is the return of the old order to Egypt, where authorities have crushed Mubarak's enemies in the Muslim Brotherhood, killing hundreds and jailing thousands, while his allies regain influence.

Another military man, Abdel Fattah al-Sisi, stepped into Mubarak's shoes in 2013 when he overthrew Mohamed Mursi, the Brotherhood official who won Egypt's first free election after the uprising.

A year later, Sisi won a presidential election in which the Brotherhood, now banned, could not participate. The liberal and leftist opposition, at the forefront of the 2011 protests in Cairo's Tahrir Square, is under pressure and in disarray.

Years of political tumult and worsening security have hit the economy, just as Mubarak always warned. Egyptians complain of empty pockets and rumbling bellies as inflation exceeds 30 percent and the government tightens its belt in return for loans from the International Monetary Fund.

 

Egypt might not have oil but it is strategically important and has a large young population. The release of Mubarak and return to a business as usual stance by the Al-Sisi administration is unlikely to do anything to quell the disaffection of protestors and it would appear to be only a matter of time before they regroup. 

Contrary to widespread belief, the US is not facing economic and strategic decline in any foreseeable future.

It had already reclaimed its superpower lead before Donald Trump swept into office vowing to make America great again. With hindsight we can see ever more clearly that the Lehman crisis was a false alarm.

Loss of dominance has long been a staple of US discourse. John Kennedy decried the ballistic "missile gap" with the Soviet Union before the 1960 election, when Russia had just four missiles and the US had thousands with explosive power equal to 1.3 million Hiroshima-sized bombs.

Ever since I began covering the US as a journalist in the early Reagan years, there have been bouts of soul-searching.  Paul Kennedy's theory of imperial over-stretch in Rise and Fall of the Great Powers was all the rage in the late 1980s, when the Washington clerisy thought Japan destined for economic leadership.

Edward Luttwack upped the ante in 1994 with Endangered American Dream, warning that the US was turning into a third world nation. This was just as the US was about establish its undisputed hegemony over the digital age.

US decline was a myth then, and remains a myth today. Putative rivals have all run into trouble or face structural limits that will be obvious within a decade. India's time has not yet come.

And:

A decade ago the US was preparing to import liquefied natural gas (LNG) on a large scale. The terminals have since switched into export hubs. American shale gas is being shipped to Europe.

The effect is to force down the market price of gas in EU, depriving Russia's Gazprom of its lockhold on prices. Lithuania's "Independence" terminal can now import LNG, eliminating dependence on the Kremlin. Poland is following suit. That strategic implications are profound.

As Goldman Sachs said this week, US shale oil can go from zero to peak output within six to nine months. It can do so on a big enough scale to hold down global crude prices, and for long enough to bleed OPEC and the Kremlin almost white.

The Permian Basin in West Texas alone could match Saudi Arabia's Ghawar field within five years, topping 5m barrels a day. Fracking technology has cut break-even costs so fast that old "super-basins" are poised for stunning revivals. It is no longer a question of whether the US will become a net oil exporter, but how soon.

While the US "manufacturing renaissance" has been patchy, cheap gas has restored the fortunes of the plastics, chemical, and glass industries. The American Chemistry Council is tracking $130bn of new investment along the Gulf Coast, expected to create 460,000 jobs by 2022. The US unemployment rate is 4.7pc, near a  half-century low

This is the recovery that Donald Trump managed to turn into a landscape of “rusted-out factories scattered like tombstones” in his dystopian inaugural address.

It is of course standard fare for opposition candidates to decry the decline of America during campaigns. What is different about President Trump is that he continues to push this line after taking office, presumably because he believes his own wild claims.

We all have to reach our own conclusions about Donald Trump. My view is that he matters less than we now think. His presidency may prove no more than a four-year embarrassment, leaving few traces.

His plans to slash science and technology funding by 20pc would indeed risk the sort of decline he rails against. But his budget is dead on arrival in Congress.

His contempt for allies and the multilateral bodies that vastly lever America's strategic power is folly but the US Senate is likely to take charge and run foreign policy on traditional lines. Grown-ups at the helm of the State, Defence, and Treasury departments will navigate the reefs. America's institutions and courts will contain Mr Trump.

Donald Trump won the US Presidential election for two very different reasons.

1) He recognised that vast stretches of America between the East and West Coasts contained plenty of angry voters, who Hillary Clinton once described unwisely as “the deplorables”. Job losses due to accelerating technological innovation were a big problem, especially for less skilled workers.  For instance, people were working at Walmart for $9 an hour, while a little over a generation earlier their ancestors earned $30 an hour in steel mills.  That was before globalisation and competition from developing Asian economies led to many of the US’s rust belts.   

2) Most of the financial community and a considerable number of Republican business people were fed up with onerous financial regulations, high taxation and limited economic growth. The Lehman crisis was no “false alarm”, as stated above, because it could have triggered a depression without a massive monetary stimulus from the Federal Reserve and also central banks in other countries.  Unfortunately, Barack Obama was far more interested in regulation than economic stimulus.

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

So it begins. This is either going to be the most tedious two years of argy-bargy, mind-numbing detail, procrastination, futile grandstanding, and empty threats ending with something that looks remarkably like the present arrangements... or it isn’t.

What could and should happen is that the UK creates not just a stunning precedent in the modern European era of a country leaving what was supposed to be an everlasting relationship, but an entirely new model of the nation state fit for the 21st century.

Europe has almost forgotten – sometimes with good historical reasons – what pride in nationality might mean, and how democratically responsive governments in touch with their populations might have something valuable to offer the world.

Ironically, the idea of the self-governing state directly answerable to its own people was lost in the terrible shame of the twentieth century’s nationalist crimes.

But the EU now finds itself harbouring a return to just the kind of populist nativism which it was designed to prevent. Will this generation of British politicians have the vision and the strength of character to re-invent nationhood? Who knows?

Until this moment, I suspect that at least some of the EU establishment doubted that Theresa May would go through with it. Presumably this is why Donald Tusk has to be given forty-eight hours to make a formal response to the announcement of the actual date: he and his colleagues must be allowed to come to terms with the reality that some political leaders mean what they say.

Yes, this is really happening. March 29th will be the first day of the rest of our lives.

I’ve said it many times – don’t play the expensive and frustrating EU delaying game.  Leave the EU politely but quickly and without an agreement, if necessary, which can come later. 

The alternative, described by Janet Daley in her opening sentences above, would be like spending two years on a tiny desert island with Jean-Claude Junker. 

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

I am looking forward to another lively and enjoyable evening, which will now include a short presentation from a fourth speaker well known to Iain Little.

Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

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

There is no law of nature that dictates that global oil demand must eventually reach a peak and then begin an irreversible decline. The well-known “law” of Hubbert’s Peak applies to supply, not demand, and the advent of modern technology (fracking, horizontal drilling, enhanced recovery, etc.) has led to a fundamental rethink of whether oil supply will peak after all. In this context, we see comments such as the one from Shell, suggesting that peak demand will come first, rendering peak supply a moot point.

There is no direct historical precedent for worldwide demand for a major energy commodity to peak on a sustained basis. (Sorry, whale oil doesn’t count.) Despite all of the regulatory and other headwinds, for example, global consumption of coal is still growing. But it is true that there is precedent for national and even regional demand to peak. Coal demand in Europe peaked in the 1960s, and has since fallen to substantially lower levels. Oil demand in Japan peaked in the 1990s. Oil demand in Europe peaked more recently, in 2006, one year after the U.S. By definition, a peak is something that can only be known in retrospect, but with a decade having passed, it seems abundantly clear that European oil demand will never get back to its pre-2006 levels. With regard to the U.S., the situation is less clear-cut because of the demand recovery in recent years, but 2005 may well be the all-time peak. The theory of peak global oil demand holds that when enough parts of the world reach a peak, a global peak will result, because the few places still growing will not be enough to offset the decliners. In this sense, the theory is conceptually valid. Thus, we would not argue with the notion that peak oil demand is a matter of time. The real question is: how much time?

 

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

I had not previously seen the statistics about peak demand for Europe and Japan so I found this report enlightening and commend it to subscribers. Peak demand is an important theme and explains why Saudi Arabia guards its Asian markets so jealously; offering discounts again as recently as two weeks ago. Asia and Africa represent the two big growth markets for international oil products just as they represent the major growth areas for coal consumption. 

Four immuno-oncology drugs from Merck, Bristol-Myers and Roche brought in $464 million in February, declining 4% from $483 million in January, Leerink analyst Seamus Fernandez said, citing data from tracker Symphony Health.

But February was a shorter month, which could be partly responsible for the decrease, Fernandez said in a research report. Despite the slowdown, Merck's Keytruda sales grew 2% in February vs. the prior month.

Meanwhile, Bristol-Myers' drugs Opdivo and Yervoy held on to a collective 69% market share, falling 1% vs. January. Merck's Keytruda now has 24% of the market, up from 23% the prior month. Roche's Tecentriq was flat at 7% share.

Immuno-oncology drugs fight cancer by teaching the body's immune system to identify cancer cells hiding behind specific proteins. Those proteins are called checkpoints.

 

CRISPR-Cas9 gene editing is quickly revolutionising the genetics sector by reducing the cost and increasing the speed of innovation. That is particularly good news for cancer treatments because there are so many different mutations and each needs a tailored approach. In fact the end point of research and another area receiving a great deal of interest is the synthetic biology sector where custom viruses can be written to attack a patient’s personal cancer. 

“The markets are trading at all-time-high multiples and are pricing in a lot, or expecting reforms to continue and growth to come back fairly quickly,”  Chhaochharia said. “The risk-reward is definitely not attractive.”

Skeptics like Chhaochharia are becoming harder to find as foreign and local investors pile into equities and analysts predict further gains. The S&P BSE Sensex will climb to 32,000 by year-end, up 10 percent from current levels, according to a survey of traders and investors by Bloomberg News on March 14, three days after Modi won the state polls. Citibank, which previously forecast the Sensex to reach 30,000 by September, now sees the gauge at 31,500 in December.

Overseas investors have plowed a net $3 billion into Indian equities in March, the biggest monthly inflow in a year, while mutual funds have been buyers for seven months through February.

The liquidity-aided euphoria saw a department store chain double in its trading debut on Tuesday, and an exchange-traded fund of state companies on Friday got bids for about four times the target.

 

10-year local currency Indian government bonds yield 6.82%. That’s well below the 9% which was on offer in 2014 but the question of the currency is much less pressing today than it was then. More than any other factors, the combined trends of the currency and the bond market offer a window into how large foreign investors view the prospects for India. 

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

Is this the beginning of a liquidity crisis in China which I have long suspected? 

Thank you for the above article which raises some interesting points about the Chinese shadow banking system and liquidity in the financial sector generally. Here is a section:

China’s smaller lenders faced tighter liquidity this week as benchmark money market rates climbed to the highest level since April 2015, reflecting a mix of technical factors including cash hoarding for quarter-end regulatory checks. By letting borrowing costs rise, the People’s Bank of China may have been sending a warning to over-leveraged lenders, according to Banco Bilbao Vizcaya Argentaria SA. The central bank has been known to allow short-term jumps in money market rates to discourage excessive borrowing.

“The PBOC wants to warn the smaller lenders not to play the leverage game excessively,” said Xia Le, chief economist at BBVA in Hong Kong. “It’s a tug of war between the central bank and the financial institutions.”

I hope this email finds you and your family well. Unfortunately I'm again not able to attend The Chart Seminar but plan to when it arrives back here in the States. Question, could you please comment on why you got short equity futures using Nasdaq futures instead of a much weaker market like Russell. I usually sell weakness and buy strength. Kind regards

Thank you for this question which may be of interest to subscribers and I look forward to meeting up again at a future venue for The Chart Seminar. I agree that when one is looking for the end of a trend it is generally better to short the market which represents the epicentre of risk and is therefore the weakest. 

We wanted to provide customers notice of how a possible hard fork of the Bitcoin protocol into Bitcoin Core and Bitcoin Unlimited will affect Coinbase accounts.

The only version of Bitcoin supported on the Coinbase platform today is Bitcoin Core, currently represented by the symbol BTC.

We may provide support for Bitcoin Unlimited in the future depending on market conditions and stability of the protocol, but we cannot guarantee whether or when such support may be available. Customers who wish to access both blockchains at the time of the hard fork should withdraw their BTC from Coinbase since we cannot guarantee what will happen during the hard fork or when this access may be available.

If one chain receives an overwhelming majority of support from miners, users, and exchanges, we reserve the right to alter the names of chains or discontinue support for certain chains in the future.

 

This is not exactly great news for investors in bitcoin since the essence of the platform is that the blockchain is inalienable and now they find that there are going to be two blockchains. 

Nike Inc. tumbled the most in 19 months after third-quarter sales missed estimates, renewing concern that the long-dominant athletic brand is losing market share to Adidas AG and Under Armour Inc.

Revenue rose 5 percent to $8.43 billion, the Beaverton, Oregon-based company said after the market closed on Tuesday. Analysts estimated $8.47 billion, on average.

Under Armour and a resurgent Adidas have been grabbing market share from Nike, especially in the U.S. That’s led investors to sour on the stock, which had its first annual decline in eight years last year. And last quarter’s results only reinforced Nike’s woes as North American sales rose just 3 percent. Executives on a conference call didn’t provide much reason for optimism, either. Worldwide futures orders, excluding the effects of currency fluctuations, fell 1 percent, the first drop since 2009. Analysts had predicted a 3.4 percent gain.

 

Nike produces great products and has a dominant position in the apparel sector which makes it a target. With Adidas moving to a fast fashion model, Nike is under pressure to innovate and most particularly by moving to an online presence. Under Armor might be grabbing market share but it has also struggled to boost its online offering and as a customer of all three, I personally find the online shopping experience far from compelling with all their sites. 

American shale with gusto, planning to spend a combined $10 billion this year, up from next to nothing only a few years ago.

The giants are gaining a foothold in West Texas with such projects as Bongo 76-43, a well which is being drilled 10,000 feet beneath the table-flat, sage-scented desert, and which then extends horizontally for a mile, blasting through rock to capture light crude from the sprawling Permian Basin.

While the first chapter of the U.S. shale revolution belonged to wildcatters such as Harold Hamm and the late Aubrey McClendon, who parlayed borrowed money into billions, Bongo 76-43 is financed by Shell.

If the big boys are successful, they’ll scramble the U.S. energy business, boost American oil production, keep prices low, and steal influence from big producers, such as Saudi Arabia. And even with their enviable balance sheets, the majors have been as relentless in transforming shale drilling into a more economical operation as the pioneering wildcatters before them.

“We’ve turned shale drilling from art into science,” Cindy Taff, Shell’s vice president of unconventional wells, said on a recent visit to Bongo 76-43, about 100 miles (160 kilometers) west of Midland, Texas, capital of the Permian.

Bongo 76-43, named after an African antelope, is an example of a leaner, faster industry nicknamed “Shale 2.0” after the 2014 oil-price crash. Traditionally, oil companies drilled one well per pad—the flat area they clear to put in the rig. At Bongo 76-43, Shell is drilling five wells in a single pad for the first time, each about 20 feet apart. That saves money otherwise spent moving rigs from site to site. Shell said it’s now able to drill 16 wells with a single rig every year, up from six in 2013.

With multiple wells on the same pad, a single fracking crew can work several weeks consecutively without having to travel from one pad to other. At Bongo 76-43, Shell is using three times more sand and fluids to break up the shale, a process called fracking, than it did four years ago. The company said it spends about $5.5 million per well today in the Permian, down nearly 60 percent from 2013.

“We’re literally down to measuring efficiency in minutes, rather than hours or days,” said Bryan Boyles, Bongo 76-43’s manager.

Exxon, Shell, and Chevron will be able to spend more than independents can for service contracts and prime drilling acreage. But if the majors pursue acquisition deals, as they’ve done before, the wildcatters stand to reap the benefits.

Exxon invested big in shale in 2010 when it bought XTO Energy Inc. in a deal valued at $41 billion. For years, however, the major companies spent little on shale, instead focusing on their traditional turf: multibillion-dollar engineering marvels in the middle of nowhere that took years to build. The wells that Big Oil drilled were mostly in deep water, where a single hole could cost $100 million, rather than shale wells that can be set up for as little as $5 million each.

And:

Chevron said it estimates its shale output will increase as much as 30 percent per year for the next decade, with production expanding to 500,000 barrels a day by 2020, from about 100,000 now. “We can see production above 700,000 barrels a day within a decade,” Chevron Chief Executive Officer John Watson told investors this month.

Exxon said it plans to spend one-third of its drilling budget this year on shale, with a goal to lift output to nearly 800,000 barrels a day by 2025, up from less than 200,000 barrels now. The company doubled its Permian footprint with a $6.6 billion acquisition of properties from the billionaire Bass family. Darren Woods, Exxon’s new CEO, said shale isn’t “on a discovery mode, it’s in an extraction mode.”

The US is now the swing producer of crude oil, increasing output in the Permian Basin and other sites when prices are attractive relative to production costs, while cutting back domestic supplies and buying in oil when they are much lower. 

Prices of WTI Crude oil have fallen back from $55 this month, mainly because US production has increased sharply and some OPEC producers are quietly abandoning their previously announced ‘cutbacks’.  Russia promised OPEC that it would lower production but that was mainly due to the freezing weather in Siberia during January and February, and they have been increasing production subsequently. 

This item continues in the Subscriber’s Area.

This item continues in the Subscriber’s Area.

The International Energy Agency (IEA) has warned oil and gas companies that failing to adapt to the lower carbon energy agenda could lead to over a trillion dollars worth of assets being abandoned by 2050.

The IEA estimates that a step-change in climate policy away from fossil fuels and towards cleaner sources of energy would leave a total of $1 trillion of oil assets and $300bn in natural gas assets stranded.

The report, undertaken in partnership with the International Renewable Energy Agency, said the move to reduce global greenhouse gases could hold “significant consequences for the energy industry” if companies fail to adapt their portfolios in the wake of the Paris Agreement.

Oil majors including BP and Shell are already adjusting the balance of future investment with a bias towards gas rather oil.

In the past BP’s has focused on oil for 60pc of its portfolio while gas has made by the difference, but last year this ratio flipped in favour of gas. Shell has made moves towards gas production and transport with last year’s £35bn acquisition of BG Group, a leader in producing and shipping cargoes of liquefied natural gas in the global market.

The agency warned that keeping to the Paris deal would require carbon emissions from the energy sector to peak before 2020 and fall by more than 70pc from today’s levels by 2050.

This would require the share of fossil fuels used to create energy to halve between 2014 and 2050 while the share of low-carbon sources - such as renewables, nuclear and carbon capture - would more than triple worldwide to make up 70pc of energy demand in 2050.

The IEA makes a good point although I think its estimates are too low.  There is vastly more oil and natural gas around the globe and most of the potential shale sites have yet to be touched.  Additionally, with technological improvements continuing, consider the adage: If you want to produce more oil, just go back to where you found it before because the supply has not been depleted.    

A PDF of Jillian Ambrose’s article is posted in the Subscriber’s Area.

The triggering of Article 50 is almost upon us and we are hurtling haplessly towards a “hard Brexit”, at least according to many Remainers who still believe that the EU is about to give the UK a two year punishment beating.

As we lay battered and bruised on the ground, the EU will then - so the narrative of the sweaty palmed cynics goes - refuse to safeguard our trade links and instead grasp us in a death grip and irrationally leap off a cliff, because this would apparently show the world the benefits of EU membership.

The SNP call it a “hard Tory Brexit” for good measure, pushing the lie that the evil Westminster bogeyman is actively seeking a “hard Brexit”, even though the Government’s clearly stated objective is to negotiate a comprehensive trade agreement. They calculate that the negotiations will fail or be abandoned; leading us towards an economic crash that will ensure the Scots finally cut the cord for the supposed safety of separatism and being a one party state.

Meanwhile, a hardcore contingent in the Brexiteer camp believes that we should either refuse to negotiate at all or flounce away as soon as we dislike a demand. I’ve argued before on these pages that this would be a needless act of self-harm, automatically putting us behind a bleak wall of tariffs and non-tariff barriers that would cause very real disruption and economic turmoil. The truth is this isn’t really a viable option.

And:

The truth is that both sides desperately need to minimise disruption and clear the way towards a reasonable, amicable and mutually beneficial “divorce”. By the end of Article 50 negotiations there will be an agreement upon a transitional arrangement to allow trade continuity and we will have a blueprint of our future relationship. Then, talks will continue until we have concluded a full trade and cooperation agreement which will leave the UK outside the EU but with strong ties and close cooperation.

This is, of course, the very definition of something being easier said than done. There will be ups and downs and frustrations and protestations, but in the end a mutually beneficial deal will be concluded. Nobody will get everything they want and everyone will boast to their domestic audience about the concessions they won. After all is said and done and all the threats have been issued, this is the necessary political and economic outcome.

Hang on, why, the Remainers will ask - as they have asked for the last 18 months – will the EU agree to such a thing? ‘Why is it in the EU’s interests to give the UK a good deal?’ The answer is obvious. The principle of Mutually Assured Destruction applies. The UK cannot afford to carry out its bluff about walking away from negotiations; but the EU cannot afford it either.  

 

I do not agree with all of this. Whose interest is it in to haggle for two years on the assumption that the principle of Mutually Assured Destruction will lead to a last minute satisfactory agreement? 

Theresa May’s cautious, constructive approach may end in a mutually satisfactory agreement but that is not certain.  Playing by the EU’s rules will be expensive for another two years. It would also be a masochistic exercise and it would delay the development of trade agreements with other countries outside the EU.

Psychologically, during a two year negotiation EU representatives would be trying to limit their losses while ensuring that other countries are unlikely to follow the UK’s painful path. 

However, if the UK pushes for a quick, cooperative agreement suitable for both parties but the EU stalls, if only for the UK’s continued financial contributions, I think we should just cancel further negotiations and payments, and leave.  That would concentrate political and especially corporate EU leaders’ attention. They would have every incentive to quickly negotiate mutually sensible agreements with the UK.    

A PDF of Ben Kelly’s article is posted in the Subscriber’s Area.

We have another interesting list of experienced delegates, currently up to 25 and certainly not just from London. In fact, they are attending from far and wide. 

I am looking forward to another lively and enjoyable evening, which will now include a short presentation from a fourth speaker well known to Iain Little.

Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.

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

Following yesterday's mention of the VIX Index how can a private investor buy it and put it away at this relatively low level? It seems to me that one can only purchase it on a very short term basis.

Thank you for this question and it’s not an easy one to answer. ETFs are doomed to lose money until the brief time volatility spikes higher specifically because of the time value of money arguments discussed yesterday. They suffer from exactly the same problem as the commodity futures ETFs which fall because the contango is realised whenever the contracts roll. 

Details of these trades are posted in the Subscriber's Area. 

Taiwan dollar advances 0.3% after closing at the strongest level in more than two years Monday

TWSE climbs 0.6%; inflows into stocks exceed $3.8 billion for 2017, the third-biggest in Asia, according to data as of Monday

Stocks including Wistron gain on Apple-related optimism, with Fubon Securities raising rating on the stock

Ten-year bond yield rises 2bps to 1.14%

 

The Taiwan Dollar has appreciated by more than 10% against the US dollar over the last 12 months and extended that advance today. It is overbought in the short-term but its recent strength has broken the Dollar’s five-year progression of higher reaction lows suggesting a medium-term change to the relationship between supply and demand. 

“Liberals frequently care more about feelings than facts, and your smug Tesla-owning frenemy will never admit it, but in day to day usage, the big BMW is actually 18% more efficient, and 18% kinder to the planet. (Don’t get too cocky, Mr. 7 Series: at a US average 12 cents per KwH, the electricity cost to the Tesla owner for 1000 miles works out in total to about $81, as opposed to $98 for the gasoline. The reason the Tesla is less efficient, but still cheaper to run, is that the power company pays a lot less for fuel than the automobile driver does. But when the issue is green impact, not greenbacks, the BMW wins handily.)

And

“Of course, no self-respecting Green Weenie would settle for powering his car by the sun, but his house by Con Edison. And with the average efficient house using 1 KwH per hour, i.e., 24 KwH per day, the house needs 4.8 KwH capacity, and considering efficiency losses and reserve requirements, that means 6.9 KwH for the house. So to power both the Tesla and the house, Green Man needs at least 1,443 square feet of power production, at a cost of $115,000. But even using a Tesla-only setup, $60k would buy 25,641 gallons of gasoline (at the current US average price of $2.34 per gallon). The Big BMW could travel, on that much fuel, 24,000 x 24 MPG = 615,384 miles. Game, set and match – Munich and Detroit. Sad!” 

While we didn’t do the analysis, all of Mr. Karo’s numbers were sourced, which was not a surprise, given that he is a Philadelphia lawyer, and the math works. Although Mr. Karo expresses disdain for braggadocios Tesla owners, presumably because of his experiences with some owners he has encountered, the economics in this analysis suggest that gasoline-powered vehicles will have a longer future than EV-proponents suggest, or would like to see happen. Tesla owners will not be swayed by Mr. Karo’s analysis. Instead, they will declare that with falling battery and solar panel costs coupled with their improving efficiencies, the cost advantage will soon swing in favor of EVs. However, the inability of EVs to be swapped for gasoline-powered vehicles in a one-to-one exchange for all applications means there is an extensive convincing period ahead before the public fully embraces them. Just how long that convincing period will be is anyone’s guess. 

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

There are four major themes in transportation at the present time. These are electric vehicles, automation, connectivity and sharing. Let’s for a moment take the environmental question out of the argument for electric vehicles. Many people buy them because they are cheaper to run and have fewer moving parts so they tend to be reasonably reliable.