As the high yield market has continued to strengthen, credit spreads have tightened to 381 basis points, which is near a 10-year low (credit spreads measure the extra amount of income required to compensate investors for default risk and are a common gauge for the overall health of the economy).

There are two ways to look at the current level of credit spreads. The first is an optimistic view which would suggests the bond market is not signaling any stress in the economy. Historically, tight credit spreads (smaller premium for default risk) have reflected economy strength and a reassurance that a recession in the near-term was unlikely. In previous recessions, credit spreads have widened prior to equities falling and have therefore been an informative leading indicator for the economy.

On the other hand, it’s easy to see why some investors have a more pessimistic view regarding tight credit spreads. Without lower coupon payments, there is a smaller margin of safety for default risk. In other words, investors aren’t protected as much in the event of a recession. Furthermore, with credit spreads near a 10-year low, it might seem like there is only one way for them to go, which is higher!

US high yields spreads have been inert for 18 months but in that time Treasury yields have risen quite considerably. What that tells us is the yield on junk bonds is also rising and the coupon demanded to attract investor interest is also higher.

“Oil prices don’t have any real reason to rally significantly,” said Phil Streible, senior market strategist at R.J. O’Brien & Associates LLC in Chicago.

Crude has tumbled about 20 percent since touching a four-year high last month as bearish supply signals around the globe crowded out concerns about disrupted exports from Iran and Venezuela. The waivers announced this week by U.S. Secretary of State Mike Pompeo apply to China, India and six other nations.

“The U.S. has for now given a lifeline to Iran,” said Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland. “The end result of the sanctions is softer than expected. The final outcome of the sanctions also confirms the political fear of high gasoline prices.”

 

By issuing exemptions to tariffs to China and India, Iran can now import equipment and material from those countries to try and boost production. That essentially hands the Iranian oil market over the Asia and pretty much re-establishes the status quo that existed before the liberalisation agreement was put in place.

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

Some of the topics covered include: rotation underway in the major indices, they need to push back above their MAs but that might take a while, China eases, India firms, Australia somewhat oversold, Europe needs to hold its lows, Dollar eases, gold and oil quiet. 

There are no signs yet of imminent recession. Morgan Stanley says: “Consumer
confidence remains high and spending on services remains healthy.” There’s no significant weakness yet in “early-cycle” industries such as advertising or casinos.

We can expect the Fed to err on the side of caution in raising interest rates. Future earnings growth of around 10 per cent sounds fine to me. And nearly all commentaries about Trumpian policies are infested with emotion and ignore positive outcomes.

The fundamentals of the world economy remain sound. The US remains the world leader in the new technologies that drive much of the growth. China, we’re told, is “slowing down”… but to an incredible 6.2 per cent a year. India is doing even better. Europe, despite its crazy politics, doesn’t seem to face any credible major threats to its prosperity and abundant welfare systems.

All of which suggests that what the markets have been experiencing is nothing more than a major correction. Sentiment has been shocked by the speed and dimensions of the trend reversal. Those with lots of cash will hold back and not recommit till they see positive news. This suggests the probability that markets will soon stop falling, but they’re not likely to bounce back strongly for a while, and to trade in a range for some months to come.

But what if I’m wrong with my relative optimism? What if the current stock-market weakness is not merely a correction, a pause for consolidation after years of excitement, but an ominous signal of something much worse to come?

The Economist recently ran a speculative report on the subject of The Next Recession. Its big fear is that governments won’t be up to the job of taking swift action to deploy the many policy tools available to underpin economic growth and to drive recovery.

The traditional stimulus policy of easing credit won’t be available because interest rates are already too low, while going to the extreme of negative ones – charging interest on bank deposits or bonds -- is (probably correctly) viewed as too dangerous.

Personally, I’m not convinced by the argument that central banks will not be able to ride to the rescue the next time we have a recession because interest rates are already too low. The simple fact is that when you control the money supply, and hold vast swathes of the bond market there is no limit to the number of extraordinary monetary and fiscal levers that can be deployed if the need arises. As we have learned over the last decade, just because it has never been done before does not mean it can’t be.

Value investing, which was pioneered by Benjamin Graham and Warren Buffett, has struggled since 2015 as so-called growth stocks beat out their inexpensive brethren. Sidman joins a growing list of managers that have given up on the strategy. In the last week alone, Bloomberg has reported plans by both Chieftain Capital Management and SPO Partners & Co. to return client money. John Griffin closed Blue Ridge Capital last year. Another long-time value investor, Eddie Lampert, has been flailing after his bet on Sears Holdings Corp. went awry.

Value strategies work best after a really big decline because they are oriented towards identifying the mispricing of individual stocks relative to their intrinsic value. However, they are prone to selling too early as prices advance for exactly the same reason.

Mrs H was a fully self-funded retiree, owning a modest home in the outer northern suburbs of a capital city, living off the income from a portfolio of direct shares and some bank deposits. Her assets, other than the home, totalled $650,000, with $50,000 in non-income bearing assets. Of her investments, $500,000 are invested in fully franked dividend paying Australian companies and $100,000 invested in term deposits and cash. Mrs H is ineligible for a part aged pension, since her assets exceed the maximum assets test level (currently $564,000 for a single homeowner).

Mrs H currently has a taxable income of $30,571. The $100,000 in deposits only earns $2,000 in interest, while the share portfolio yielded an average 4% cash dividend providing $20,000. Importantly the dividends were all fully franked, receiving $8,571 in franking credits (these are included in taxable income). With no tax payable due to the Seniors tax offset, Mrs H received a full refund of her franking credits, considerably boosting her cash income from $22,000 to $30,571.

Since Mrs H is not eligible for any pension entitlements, she would no longer receive those franking credits under the ALP proposal. The loss of $8,751 would reduce Mrs H’s income by 28%, reducing her weekly income by $165, from $588 per week to just $423 per week.

This means her income would actually fall below the full aged pension for a single homeowner ($23,889 p.a. or $916.30 per fortnight /$458.15 per week).

Full franking on dividends is the number one topic of conversation that comes up when I have conducted The Chart Seminar in London. It has been one of the primary factors in Australian investors tending to favour their domestic market’s dividend paying stocks. Significant changes to the tax structure for dividends and pension could have a significant knock-on effect for the banks in particular because so many investors own them for income.

Obsolescence by design is a major component of the business plans for just about all manufacturing companies. A friend of ours is the world’s largest manufacturer of the sensors in elevator doors. He has stated on more than one occasion that the business would not exist if the sensors did not fail after approximately 15 months, so that is how they design their products. It’s what keeps cashflow moving.

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

President Donald Trump wants to reach an agreement on trade with Chinese President Xi Jinping at the Group of 20 nations summit in Argentina later this month and has asked key U.S. officials to begin drafting potential terms, according to four people familiar with the matter.

The push for a possible deal with China was prompted by the president’s telephone call with Xi on Thursday, the people said, requesting anonymity to discuss internal deliberations.

Afterward, Trump described the conversation as “long and very good” and said in a tweet that their discussions on trade were “moving along nicely.”

Trump asked key cabinet secretaries to have their staff draw up a potential deal to stop an escalating trade conflict, the people said, adding that multiple agencies are involved in drafting the plan. It was unclear if Trump was easing up on U.S. demands that China has resisted, and reaching any accord still faces significant hurdles.

 

The mid-term elections are on Tuesday so it is hard to view any political utterance as anything other than noise until that event has passed. The decision to write a draft proposal for a trade agreement does not mean it will be something the Chinese can sign without conceding defeat in the trade war so this is far from a settled topic. Nevertheless, even a word of encouragement for beaten down Chinese shares was enough to pressure shorts.

The decision to publish the cases, which involved millions of dollars in fines, is seen as a warning that the government is less willing to tolerate what is considered a grey area in the country's capital control rules. Liu Xuezhi, an economist at China's Bank of Communications, said this showed Beijing's crackdown on offshore commercial deals was being extended to individual investors.

"The government regulation on foreign currency is becoming more thorough. They are extending supervision from corporates to individuals," he told The Australian Financial Review.

"The tight control on foreign capital will be maintained for the next one or two years. This would bring an impact to the Chinese investors who are planning to buy properties overseas, including Australia."

Zong Liang, a senior researcher with the Bank of China, said he expected the move to more closely monitor transactions would stay in place for the next five years and weaken the appetite for Chinese investors in Australian property.

China needs to control capital flight if it is to have any hope of navigating a future of lower leverage, higher defaults and modest growth. Chinese people have been most active in getting money out of the country by buying property which is a significant outlay and is coming under increasing scrutiny with potentially worrying repercussions for international property markets.

Regarding your piece yesterday on balancing one's portfolio and finding safety, I would add a somewhat personal view. As I am in the finance industry myself, the restrictions on investing in listed securities is quite a burden and I'm finding traditional buy-to-let investing more and more compelling. It should work reasonably well also as an inflation hedge, since the rent can be adjusted with inflation and the real value of the principal generally moves with inflation. Of course this equation depends on things like whether your area has population growth and the yield curve of your respective currency, but at least in EUR the FIXED financing costs are so ridiculously low that it is hard to see how one can lose money on a say 60-70 percent financing over a 15-20 year horizon. A practical issue is that there is a (modest) amount of work when finding a new tenant, for example. For me, this also provides a nice additional retirement income, since the tenants have paid off the bank loans roughly at the same time as I'm about to leave the workforce, so that the rents become cash flow to me. Just a personal thought here, it may not be the best choice for everyone.

Thank you for this informative email and I agree that the potential for raising rents is an attractive inflation hedge, not least because property prices, as fixed assets, tend to rise with the inflation rate. However, it is also worth considering that property prices have been boosted by quantitative easing and the ridiculously low funding levels that you speak of have been available to everyone for a decade already. The key, as you mention, fixing financing costs, low leverage and attractive capitation rates.

Thanks a lot for a very informative comment of the day today. Can you please share your opinions on platinum/gold at your convenience. Thanks in adv. best rgds.

Thank you for this question which is topical considering the recent turn to outperformance by the precious metals sector.

Platinum is trading at a substantial discount to gold which is unprecedented in the last 35 years.

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

Some of the topics covered include: value returning with some deep oversold conditions, strong cashflow business continue to outperform, Wall Street continues to exhibit relativel strength, Dollar weakens, precious metals and copper rebound, crude oil weak.

Yesterday’s article in The Wall Street Journal raises an interesting issue that may be interesting for discussion (see attached and the link - https://www.wsj.com/articles/octobers-market-rout-leaves-investors-with-no-place-to-hide-1540978259 ).

“Adding to the stock market’s anxieties has been a rare simultaneous drop in bond prices that has pushed yields near their highest levels in years. The dual breakdown in stock and bond prices has upended investors’ traditional safety tool kit of buying Treasurys during periods of volatility, leaving many with losses.”

Traditional investment portfolios of 60% equities and 40% bonds lost more than 3% in October and are down 1.2% this year, on pace for a rare annual loss that was last seen in 2008, as well as during volatile periods in 1990, 2001 and 2002, said Luca Paolini, chief strategist at Pictet Asset Management, which manages $191 billion. Even investors who are heavier on fixed income would still be in the red, with allocations of 75% bonds and 25% equities falling more than 2% this month to drag their performance down 1.1% for the year… Declines in bond prices, meanwhile, have exacerbated investors’ pain. Annualized losses among U.S. Treasurys and investment-grade bonds are at 9.7% and 4%, respectively, the third-steepest declines since 1970, according to a recent Bank of America Merrill Lynch report.”

Portfolio with 60% equities and 40% bonds allocation has been the most traditional advice for individual investors for decades. But I just thought, those were decades of the secular, almost 40-year bull trend in the bond market. If, as you and David often say, we are now witnessing the beginning of the secular bear market in bonds, then this 60-40 allocation represents troubles ahead. Bonds will probably stop being the same safe haven they were in the past. Yes, they will continue to provide some stability to a portfolio in a sense that they won’t fall 10% as equities but instead of rising in times of turmoil, they will also slump.

If this is the case, how allocation can be changed and where investors will look for safe heavens?

As always, it would be interesting to know your view.

In a period of disinflation or deflation fixing the interest rate you receive works wonderfully because its value increases over time. That has been one of the primary tailwinds for fixed income portfolios for decades. If on the other hand you are looking at a time of rising interest rates and rising yields then floating rate instruments become more attractive.

At a Halloween party last night, I was talking with a couple of brokers who were celebrating the end of what has been a difficult month for the financial sector. More than a few were praying for a Santa Claus rally which might help flatter what have been rather unimpressive results this year. That set me to thinking about where the most oversold conditions are evident in the S&P 500 because following such a big decline there is must be value to be found.

“We’re thinking more broadly that this is another peak in the dollar, and we’re going to see it drifting lower in the next year,” Mark McCormick, head of North America FX strategy at TD, said in an interview. “The market has priced in an excessive amount of global stress.”

The S&P 500’s nearly 7 percent drop in October likely fueled rebalancing flows back into U.S. stocks, which are now reversing, McCormick said.

But yuan strength is also a factor, he said, after China’s leadership signaled more stimulus measures are being planned to shield the economy from repercussions of U.S. trade protectionism. And Brexit developments may lift the euro and the pound, which are undervalued relative to their cyclical drivers, TD says. The dollar, meanwhile, is more than 3 percent rich to the bank’s global factor model.
 

The Euro found support today in the region of its August low and posted its largest rebound in months to check near-term supply dominance. However, a sustained move above $1.18 will be required to question the medium-term downward bias.

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

Some of the topics discussed include: Unwinding of short-term oversold conditions continues, dividend growth companies have some of the most consistent trends, Dollar strong, commodities weak, Bonds yields hold breakout. 

The selloff underscores the perils that funds face when they pile into the same stocks. Equity funds suffered after the top 10 stocks they’re most “crowded” in underperformed the S&P 500 Index by almost 3 percent on Oct. 29, the worst day since 2010, Morgan Stanley said. In addition, the top 10 stocks that funds bet against outperformed the index by more than 1 percent.

Funds that use computer-driven models to follow big market trends were whiplashed as price volatility spiked. Among the casualties: Leda Braga’s BlueTrend hedge fund, GAM Holding AG’s Cantab unit and Man Group Plc’s AHL unit. Other quant models that lost money include Renaissance Technologies’ U.S. equity fund.

Never mistake a bull market for brains is one of the most important pieces of advice anyone can receive when momentum strategies in all their forms are the most fashionable investment vehicles. If all algorithms are taught to do is remember the trend is your friend then automatic sell signals go in at the first failure of the price at the moving average. Meanwhile indices are generally market cap weighted so that ETF passive investing is essentially a momentum strategy biased towards mega-caps. Nevertheless, a crisis has to be seen to be getting worse in order to continue have a deleterious effect on markets and there is increasing evidence of volatility abating. 

The signal of increasing urgency came just hours after purchasing manager reports showed an across-the-board deterioration that risks spilling into a broader drag on global growth. The world’s second largest economy is being damaged by its trade war with the U.S. and a domestic debt cleanup.

With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding.

“Accepting slower growth has long been a challenge for Beijing, but now the rate of slowdown is firmly out of the comfort zone,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “In recent years the balancing act has been addressing risks in the financial system against pressure to stabilize economic growth. It appears the latter is again more of a priority.”

Major rallies in Chinese mainland stocks tend to be state sponsored. It’s the Communist Party’s equivalent of a central bank put and it’s something investors have tended to wait for before committing to a rally.

Cross-border e-commerce1 has developed into a large, quickly growing ecosystem – and has become a great success story for many e-tailers, meaning retailers and manufacturers selling their products over the Internet directly to end consumers.

This success can be shown in real numbers: in 2015, the cross-border e-commerce market accounted for USD 300 billion GMV2, about 15% of e-commerce overall. This rapid growth, however, has just begun and will continue: the cross-border market is expected to grow by about 25% annually until 2020 – nearly twice the rate of domestic e-commerce and a growth rate that most traditional retail markets would dream of achieving. In 2020, it is expected to account for about USD 900 billion GMV, translating into a roughly 22% share of the global e-commerce market. This growth momentum yields unrivaled opportunity for retailers and manufacturers. As this report will show, crossborder e-commerce is not an e-commerce giant story – all types of manufacturers and retailers will be able to successfully go global.

Even beyond 2020, all evidence shows that demand for products from abroad is not going to recede. That said, considering the patterns according to which e-commerce companies expand their regional footprint today, one could assume that every e-commerce purchase will eventually become a local purchase. This is mainly due to the higher cost efficiencies that localized fulfilment and the quicker shipments that shorter distances naturally promise at first glance. However, even e-commerce giants such as Amazon, Alibaba, and Zalando, which already operate local distribution centers in several countries, ship a significant part of their sales cross-border. This is driven by, for instance, the enormous number of stock-keeping units (SKUs) offered by some of these players. But having slow-turning SKUs sitting in inventory everywhere – a prerequisite for pure local fulfilment – is much more costly than shipping a certain share of orders cross-border. And in order to fulfill consumers’ wishes for faster delivery, many e-tailers offer premium international shipping options to their customers, e.g., for a surcharge. This is testimony that cross-border is not a passing phase or trend, but rather a significant staple in the e-commerce market that requires premium shipping.

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

The global postage and shipping industry represents a number of competing trends right now. On the one hand you have companies like Amazon which is prevailing on its largest sellers to expand internationally by making their products available in countries like Canada, Mexico, UK, Germany, France and Spain. That requires bulk shipping of inventory to its international fulfilment centres and often requires an increased compliance cost to manage multiple sales tax regimes.

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

Some of the topics discussed include: potenital for a recovery rally, dispersion in the performance of various sectors, what does a top look like and whether this is a medium-pause or topping formation. 

A link to this article is posted in the Subscriber's Area.

The VIX Index has not spiked on this occasion by nearly as much as the move we saw in February because the market fell more slowly this time than last. That also highlights the fact that the bulk of selling pressure has taken place in the highly leveraged part of the technology sector.

Unlike metals like Zinc/Lead and Nickel, there was some copper development during the downtime (e.g. Las Bambas, Constancia etc) but this is not sufficient to replace mines that have exited or reduced production and deal with even conservative forecasts of growth in consumption.

Now that the uptime has arrived (came and went and is coming again) the small to medium projects that are dependent on gold credits (or vice versa) are having a tougher time gaining traction (or even attention as gold’s prospects look so murky). That leaves the larger projects to attempt to fill the gap in the pipeline caused by so many years of the Copper price being in the dumpster. 

It was surprising to recently review a listing of the top twenty western copper mines and see that two date back to the 19th century and more than half of the large producing mines date back to pre-1950s. On the next page we list the major projects that could make a difference to the copper supply situation though with the caveat that most are potentially only replacing existing production that is declining or being shuttered.

The list of upcoming mines of size by its very nature is exclusively composed of projects that are in the multi-billion dollar capex category. This means that they tend to be the hands of majors or will ultimately have to gravitate to majors to ever get off the starting blocks. 

The Chinese copper stockpile has been a significant overhanging concern for the price for most of this year. It was accumulated to preserve the economy from the potential for higher prices. The broader issue is that many investors regard copper as a barometer of the global economy because it is used in every country in the world and is integral to infrastructure and technology build out. The fact that prices have been falling over the last six months has shaded perceptions of the health of the Chinese economy and questions the wisdom of building up a stockpile in the first place.

More long nights lie ahead. Brazil’s nascent recovery from the worst recession in history hinges on his success, and the nation’s benchmark index has climbed 13 percent since mid-September -- close to its all-time high -- on optimism Bolsonaro would win, giving Guedes a chance to implement business-friendly policies. They include dozens of privatizations, a massive reform of the pension system and a revamp for the nation’s byzantine tax code.

Bolsonaro, who’s admitted he has only a “superficial understanding” of economics, has said he’s placing full control over the nation’s finances in the hands of Guedes, who was trained at the University of Chicago and founded both a private equity firm and a think tank for liberal economic theories. Yet for all that success, he’s had zero experience in implementing public policy.

“One thing’s for certain: Guedes is the guarantor of Bolsonaro’s alleged conversion to liberalism, and if for any reason he leaves the government, there will be an earthquake in markets,” said Ricardo Lacerda, chief executive officer of Sao Paulo-based boutique investment bank BR Partners.

How big an earthquake? One top market analyst said Brazil’s benchmark stock index could tank as much as 40 percent, reaching levels not seen since the 2016 impeachment of Brazil’s former president, Dilma Rousseff. While that’s probably overstating things, it’s the kind of hyperbole that’s characterized Brazil’s election rhetoric ever since polls made it clear in recent months that Bolsonaro was heading to victory.

 

It’s a truism but the market likes market friendly administrations. The potential for Bolsonaro to tackle engrained corruption, grant the central bank independence and streamline regulations have resulted in the Real rallying to test the region of the trend mean. Investors are probably now likely to wait and see what the new administration’s program for government will be before getting more bullish.

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

Some of the topics discussed include: Interest rate sensitive sectors continue to lead lower but are increasingly oversold in the short term. strong cash flow generators outperforming, Value has improved following this decline and increasing evidence of climactic action but clear upward dynamics will be required to check supply dominance. 

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

BASS: You know, the Chinese are in the worst financial situation they’ve been in, in the last 17 years because they operated domestic economy where they control the printing press, they control the press narrative, they control the price level and they control their people as we’ve seen them detain over a million of them in Jingjang for their religious preference. So they can change a lot of things domestically, but their -- the arbiter of the Chinese plan is their cross rate or their exchange rate with the rest of the world. China Inc.’s working capital account is now going South because they’re running what we believe to be a structural and more permanent deficit on the current account. And so, i.e., their working capital, their dollar balance whether it’s dollars, euros, yen or pounds, it’s mostly dollars. And their dollar balances is headed south. And so, the U.S. is in a very particularly interesting negotiating position today. We are in the strongest negotiating position we’ve ever had against China. They’ve kind of leveled the playing field a little bit more with their, let’s say, subversion of WTO rules, their intellectual property theft and basically everything they’ve done to take advantage of the U.S. over the past 15, 17 years.

China has the domestic economy on lock down and has an epic local government debt issue. It also has some of the largest deposits of any banking sector as well as large sovereign reserves. The only clear way to match liabilities with assets while also depreciating the currency, to support the export sector, is to avoid capital flight.

The global environment remains positive, although growth is moderating due to the poorer performance of emerging economies. The impact of protectionism is so far limited

In Argentina, a new round of capital flight and currency depreciation in August led to a further fiscal adjustment, the revision of the agreement with the IMF and the abandonment of the inflation target regime, which means an end to the economic program of President Macri’s first two years

The new monetary-exchange rate scheme seeks to control FX volatility by absorbing all surplus liquidity in pesos and targets holding the nominal monetary base constant until June 2019 setting up broad bands within which the FX can float, with limited intervention by the Central Bank outside this band

In 2019 the government will attain primary fiscal equilibrium with spending cuts and a new tax on exports, and the programme with the IMF ensures that the financial programme can be met with limited roll-over

The currency crisis and the new monetary and fiscal tightening lead us to revise our forecast for GDP growth in 2018 and 2019 downwards and our estimates of inflation upwards. The sharp real depreciation of the peso and the recession will result in rapid correction of the current account deficit

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

When is the best time to buy into an emerging market? That is a question I think a lot of people will be contemplating at the moment because emerging markets are trading at a substantial discount to developed markets and particularly Wall Street.

Well, we have now sold our CA ranch overlooking Silicon Valley after 24 years of making it a better and better home. While the home got better, the political and economic climate just kept getting worse and worse. When we moved to CA (back in '81, several homes ago), it was still a land of opportunity and a bastion of free enterprise. Startups were everywhere, and engineers came in droves to work on exciting new technologies that made a real and important difference in the world. I came to Silicon Valley to work on some of the most exciting technologies, and to participate in building companies that made cool products for happy customers.

Gradually the atmosphere changed, with more and more socialist governments at every level, and. as happens with all socialist systems, a gradual move to a more fascist environment with more and more rules and less and less tolerance for opposing views. As governments at every level continued to grow, taxes grew. But at least as important were the increases in the costs of local services, and the costs of public utilities which were forced to use "green" energy despite the substantially higher costs. "Green" businesses (like Tesla) were increasingly subsidized by ever increasing taxes. All the while the state has become less and less business-friendly.

Meanwhile respect for individual rights, respect for our constitution, and respect for our country declined, with local and state politicians and many of our representatives to the federal government taking actions and making statements that would be considered treason in almost all other countries around the world. These people preach hatred, condone violence against those who disagree with them, and seek to destroy the foundations of our Republic. These people have poisoned the atmosphere of California.

We are sad to leave our many friends here in Silicon Valley. And the food...

However, with each ending, there is a new beginning.

Our new beginning is in the high country of Arizona, where we start a new chapter in our lives. We are blessed that our daughter is moving with us, and also blessed with having found a new home that promises to continue our legacy of creating a great place to live. High on a ridge overlooking mountains and valleys, we start anew with optimism and a renewed love of the land and nature, in a place where our political views are welcome, and do not make us the enemy - love of freedom, respect for the constitution, honor for our real history, a firm belief in free enterprise and capitalism, steadfast commitment to individual rights, property rights, and the rule of law, and real love for our great country.

Thank you for sharing your perspective and good luck in building a new life in Arizona.

At The Chart Seminar, we define ranges as explosions waiting to happen but I am increasingly of the belief that this conclusion is not limited to markets but is applicable to all situations where crowds are present.

The breaking of the status quo, which is represented by debt-fuelled social democracy, has resulted in support for more extreme views. That has variously led to support for both extreme dictatorial and free market solutions. That imbalance between the political belief systems has resulted in a trend of polarisation that shows no sign of ending.

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

Some of the topics covered include: Wall Street bounces but Amazon and Google down in the after hours, short term bonds oversold, Euro weak, China bouncing.

Japanese stocks may have finally bottomed after the ratio of short bets on shares trading on the Tokyo Stock Exchange climbed to a record high. Spikes in bearish bets indicate extreme pessimism and can lead to a short squeeze if stocks rebound, driving up prices further. When the ratio reached near current levels in March, it marked the start of a 9 percent rally over the next two months for the Topix index. The gauge has since lost all those gains and is trading near a one-year low amid growing concerns over upcoming corporate earnings and a slowdown in China’s economy.

The Nikkei-225 broke below the trend mean in a dynamic manner this morning in sympathy with the wider corrective phase evident on major stock markets globally.

Only once in the past century, in the 1930s, have we had deflation, serious deflation. In 2008–2009 there was cause for concern. The common characteristic of those two incidents was collapse of the financial system.

We can’t expect to prevent all financial excesses and recessions in the future. That is the pattern of history with free markets, financial innovation, and our innate “animal
spirits.”

The lesson, to me, is crystal clear. Deflation is a threat posed by a critical breakdown of the financial system. Slow growth and recurrent recessions without systemic financial disturbances, even the big recessions of 1975 and 1982, have not posed such a risk.

The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end, be what brings it about.

That is the basic lesson for monetary policy. It demands emphasis on price stability and prudent oversight of the financial system. Both of those requirements inexorably lead to the responsibilities of a central bank.

It has been a very long time since Paul Volcker was the head of the Fed and there has been a distinct change of culture since then. The Fed is now a serial bubble blower and the decision to adopt quantitative easing has created massive excesses in the global economy, which the market is now exploring.

For weeks now, traders have been expecting U.S. slaughter rates to jump as the government has consistently reported a swelling domestic herd this year. Hurricane Florence hit North Carolina, one of the top hog states, in mid-September, slowing down processing operations. But that bottleneck should have cleared by now, and analysts were expecting a sudden rush of hogs to market. Instead, slaughter rates have stayed low, raising questions about whether the animals were ever really there, said Rich Nelson, chief strategist at Allendale Inc. in McHenry, Illinois.

The lower-than-expected U.S. slaughter is coming at a time when a highly contagious, pig-eradicating virus is spreading through China, the world’s top pork consumer. African swine fever continues to spread in the country, with several new outbreaks reported this week. The combination of supply woes sent hog futures in Chicago up by the exchange limit of 3 cents on Wednesday to settle at 57.525 cents a pound. Prices have surged 11 percent this week.

“We don’t have this backup in market hogs like we expected,” Nelson said, adding that U.S. Department of Agriculture estimates for rising animal inventories may have been miscalculated.

This sounds like a case of supply inelasticity meets rising demand.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

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

Some of the topics covered include: Wall Street eases in early trading, Europe weak, China quiet, Dollar firm, gold and oil steady, Bonds rally.

The US-China trade war is disrupting the electronics supply chain, which is centered on China and many of the Northeast Asian economies. PMIs are coming off for Korea, Taiwan and Singapore, key electronic producers in the supply chain. Electronics exports around the region are also slowing. For ASEAN (excl. Spore), the electronics-related data is somewhat mixed, with softer exports but tentative signs of higher orders and investment.

Some of ASEAN’s exports in products targeted by US-China tariffs are performing strongly, including Indonesia’s and Malaysia’s mineral products. There are also visible signs of greater FDI into ASEAN, particularly Vietnam, Thailand and Malaysia, as firms adopt a more flexible production network outside China to circumvent the tariffs. FDI into manufacturing for these countries has picked up significantly in the past two quarters. 

US businesses have been frontloading their purchases both to stock up for the holidays and to avoid tariffs. That inventory build is flattering import figures but says little about the potential for demand next year.

The latest map (generated in early October) shows that natural gas combined cycle is the cheapest technology for large swathes of the eastern and western regions of the United States (light brown).  This conclusion is true even at a natural gas fuel cost of $5.07 per million British thermal units (MMBtu).  Solar PV is the cheapest power for most of Arizona, Colorado, Wisconsin, Minnesota and Missouri (purple).  Wind provides the cheapest power for much of the central U.S., New York, and small swathes of Appalachia (green).

What is most enlightening is a similar map showing the cheapest technologies based on current natural gas prices (in this case, $3.24/MMBtu).  In contrast to the previous map, this one shows natural gas winning in Arizona, much of the Panhandle of Texas, most of Oklahoma, and nearly half of New York.  The latter is amusing as Governor Andrew Cuomo (D) has banned the development of natural gas resources in the state by fracturing, including blocking new and expanded pipelines crossing the state to haul gas to New England. 

The significance of these two maps, especially the one utilizing current natural gas prices, is that natural gas wins in the battle to be the cheapest source of electricity in almost every region where solar and wind power are being forced into the grid via government mandates and/or subsidies.  An argument for emphasizing wind and solar is the significant declines in their capital costs – an 80% drop in the cost of solar panels in recent years, for example.  The reality is that when based on more precise cost data for building new power plants, wind and solar prove to be less competitive than touted by environmentalists and politicians.  Quite possibly, the message delivered by these maps is what is prompting the growing attacks against increased use of natural gas as a “bridge” fuel to a cleaner energy world.  A truly competitive playing field for power fuels would leave renewables with a much smaller national footprint.  That might be an outcome utility customers would welcome.  

There is a broader question that has been largely left unasked by the investment community. Renewables are improving in cost and efficiency but they have not reached a point just yet where they are competitive with what are conventional sources. Even with the best of intentions there is no getting around the fact that the sun does not shine at night and there are plenty of days with no wind. Batteries are improving all the time but we are not at a point where back up fossil fuel supply can be closed and it could be years before that is the case. However, that is not the question I am referring to.

“The main reason is simply that the more a relationship moves to an extreme end of its range, the more likely it becomes that it will begin to move back toward its longer-term average.”

A historically high level of assets in money market funds, which are a home for risk-averse investors, would generally indicate that investors are feeling cautious. But Becker argued that relative to equity fund assets, money markets are actually low.  

Becker said that for asset level data he used the full history offered by Morningstar, which goes back to February 1993, covering 25 years of data. “This suggests that over the last 25 years investors have never felt more confident,” he says. 

In this case, such a move could happen quickly or slowly. It could happen more slowly through changes in allocations of new money (e.g. investors decide to stop putting new 401[k] money into equity mutual funds and start putting it into MMFs). Or it could happen quickly through a sharp decline in the stock market, causing equity funds to and money-market fund assets to get larger relative to equity fund assets.

There is certainly a concern that we are late in the cycle but there is another reason why there is so little cash in money market funds compared with historical totals. They have not been paying any interest so why would anyone invest in them. That’s changing now with more than a few institutions and family offices I talk to moving cash into money market funds.

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

Some of the topics covered include: stock market selling pressure increases, global banking sectors all under pressure, China and Europe leading on the downside, Wall Street weakens, oil breaks below $80. gold does not hold its initial rally and US Treasuries steady.

S&P500 Banks Index – breaking down to new reaction lows and a sustained move back above the trend mean will be required to question supply dominance.

For its part, the EU should do more to help Italy take the tough steps it needs. The European Commission, the European Central Bank, and the German government have erred in insisting on rigid enforcement of the EU Stability and Growth Pact, particularly the 3%-of-GDP cap on fiscal deficits.

Although some countries have been allowed to breach the deficit cap during challenging times, Italy is almost never afforded much accommodation, owing to its high debt levels. Yet as the experience of Belgium and Japan shows, high government debt can be reduced only through sustained economic growth.

Complicating matters further, some reforms to boost long-term productivity can actually reduce growth in the short term. Thus, any government enacting such measures will need to have the option of pursuing counter-cyclical stimulus.

Another problem concerns monetary policy. The ECB could stand to be more broad-minded in how it pursues its inflation target of just under 2%. That target, along with Germany’s own 2% target, leaves Italy locked into a state of low inflation, even when it could benefit from more monetary-policy stimulus.

Under these conditions, the EU authorities would do well not to oppose the current Italian government’s plans too aggressively. If mainstream liberals are worried about the implications of a democratically elected populist government, then they should worry even more about what could come next if economic circumstances worsen. At this stage, Italy needs stronger nominal GDP growth – plain and simple.

There has been a lot of commentary about the rise of populism what that means for the state of the social democratic centrism which has been the dominant force in European politics for decades. However much less discussion of the demands put on Eurozone consumers, particularly on the periphery as a result of the sovereign wealth crisis.

It is not possible to analyze today’s Japanese economy without considering the impact of the formation and collapse of the bubble and enormous fiscal deficits. The two policies that originated in the Structural Impediments Initiative noted above are intimately related to these phenomena. The policy coordination severely restricted Japan’s fiscal and monetary policies, which when combined with the sudden financial liberalization of the time and the delay in BoJ tightening, is frequently cited as a cause of the rise and fall of the bubble. The increase in public works investment of the Structural Impediments Initiative is also singled out as a remote cause of the fiscal deficit. 

In fact, Japan’s fiscal and monetary policies have long been repeatedly swinging from success to failure. We cannot pin all the blame for the bubble’s expansion and collapse and for the fiscal deficits on the Structural Impediments Initiative in light of such macroeconomic shocks as the Japanese financial crisis, the Asian currency crisis, the GFC, and devastating natural disasters as well as the responses to these. Nonetheless, it is a deeply rooted view that there is a cause-and-effect relationship between the bubble and international policy coordination, including the impact of subsequent BIS regulations on Japanese financial institutions. 

China had intensely researched Japan-US trade friction prior to the recent escalation of trade issues between it and the US. Chinese policymakers appear to view the Plaza Accord as responsible for causing Japan’s bubble and subsequent downturn and they are considered reluctant to substantially adjust the exchange rate as a result. Given the major changes to the environment for the Chinese yuan, this view is not necessarily correct now, but it is still highly likely that China has looked at Japan’s experience as an object lesson, including the Japan-US Structural Impediments Initiative.

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

The extent to which the Plaza accords were instrumental in weakening the Dollar and thereby strengthening the Yen and how much that contributed to the bubble and subsequent stagnation in the Japanese economy is a major concern for the Chinese economy today.

Here is a section from a related report, also from Mizuho, discussing the likelihood for a lose/lose outcome to the deteriorating state of US and Chinese trade relationships.

For Hyman and other realtors -- not to mention home sellers -- the list of market challenges has grown in recent years. The slowdown, triggered by a slew of new taxes and stretched affordability, has been compounded by Britain’s impending exit from the European Union, and now there’s the threat of a new levy on foreign buyers.

That’s a lot of uncertainty to deal with when you’re looking to fork out 486,000 pounds ($633,000), the average London home price -- or far more, if you’re close to the center.

The real problem is all those years of skyrocketing prices. Even with the current weakness, only a third of young adults can afford to buy a house a London on a 10 percent deposit and a maximum mortgage of 4 1/2 times their salaries, according to the Institute for Fiscal Studies.

And the cost of the average London residence is almost 14 times the median full-time salary in the city.

And

“While a Brexit resolution will remove some of the uncertainty weighing on London house prices, the capital faces an affordability crisis," said Niraj Shah, a London-based economist at Bloomberg Economics. “Add to that the tax changes to the buy-to-let sector as well as proposed higher stamp duty on foreign buyers and the London housing market is likely to remain subdued for some while yet."

The trend of voters demanding better affordability in the housing market is a growing global phenomenon. It is a clear symptom of the failure of asset price inflation, resulting from quantitative easing, to trickle down to higher wages and better prospects for regular people. So far we have seen clear efforts to curtail price rises in Canada, Australia and the UK, all of which have some of the highest prices in the world relative to domestic incomes.

3. The words you should never say

Bill Mann: Do you think that there are opinions or beliefs in the market that you find to be particularly unhealthy for investors?

Howard Marks: The first thing (and I try to make this clear in the book, and it's essential if people are going to be able to deal with cycles) is everybody wants an easy answer. Everyone wants to know how long an upswing lasts. And the first step is you must dispense with any concept of regularity.

The whole book is based around Mark Twain's statement that history does not repeat but it does rhyme. When he says it doesn't repeat, in our case he wasn't talking about the market. He was talking about history. But the truth is market cycles vary one to the next in terms of their amplitude, their speed, their violence, their duration. It's all different. And so people want to know how long an upswing is and the answer is we absolutely can't tell them. So expecting regularity and, thus, predictability is wrong.

And then you can go from there to the whole concept of predictions. What makes the market go up and down? To a small extent it is what I call fundamental developments in the economy and the companies. But to a large extent it's psychology or, let's say, popularity. And it should be clear by now to everyone that the swings in popularity are unpredictable. And if they are, then most forecasts are not going to work.

So the next concept is that people say to me, "OK, when will the market turn down?" And I never answer a question that starts with the word "when." In the investment business, sometimes we know what's going to happen. We never know when. So I would dispense with that immediately.

You must accept the ambiguity in the situation and accept the need to live with uncertainty. And that's why in the book I say there are certain words that every good investor should drive out of his vocabulary. Things like never, always, must, can't, has to. These words are out. We can talk about likely events. We can talk about probabilities. More and less likely. But we can never say has to or won't.

One of the biggest lessons from The Chart Seminar in my view is that it is senseless to tell the market what to do. It doesn’t listen. We need to foster the humility to allow the price action to unfold as it will and tailor our tactics accordingly. To do other than react to reality is to engage in fantasy.

At The Chart Seminar, we talk about distilling everything in the market down to two things. Money flows and crowd psychology. We use charts to monitor both. It is impossible to predict exactly where a top might appear but we can narrow the range down to when monetary policy is restrictive and investors are overenthusiastic.

The three primary trends are acceleration, a massive reaction against the prevailing trend and ranging, time and size. Let’s look at some examples.

Amazon has a history of accelerating. It’s half the reason people want to own the share. Every time it accelerates it has reverted to the mean so each of the accelerations is a minor trend ending. The primary consistency of the trend is it finds support in the region of the trend mean, consolidates for a while and rebounds. It has paused at big round numbers like $1000, $1500 and $2000 so the current pullback falls into the ‘normal’ category provided it finds support in the region of the trend mean.

Microchip Devices has posted a massive reaction against the prevailing trend over the last few weeks. Prior to that it exhibited a loss of momentum, greater volatility and failed upside breaks which all constituted a lengthier range. The clear downward dynamic is a trend ending characteristic.

It is quite normal that after a Type-2 topping characteristic we see a range develop below the peak, which can be considered a period of right-hand extension or a first step below the top.

Oil ranged mostly between $100 and $120 between 2011 and the middle of 2014. That lengthy range corresponded with a high degree of confidence the $100 level would hold so when it declined below that level it triggered a lot stop and the price collapsed. The prior to formation was represented by ranging, time and size.

Meanwhile, Microsoft remains in a reasonably consistent medium-term uptrend, characterised by a succession of short-term ranges one above another. Provided the $100 level holds as an area of support during this reaction the trend can be considered consistent.

The next venue for The Chart Seminar will be in London on November 12th and 13th. Please contact Sarah at sarah@fullertreacymoney.com to secure your place.

Quite a bit happened in the 67 hours since the market closed Friday and reopened in China to help support stocks:

CSRC spokesman Chang Depeng said China supports overseas-listed companies to participate in M&A of A-share listed companies.

President Xi Jinping vowed “unwavering” support for non-state firms, while the country’s stock exchanges committed to help manage share-pledge risks.

China also released its widely expected plan to cut personal income taxes after data showed the nation’s economy grew at the slowest pace since 2009.

PBOC adviser Ma Jun expects policy measures will support the market, and the nation’s central bank strengthened the yuan fixing by most since Sept. 21.
 
There was also a bullish Goldman report that sent securities firms in both Hong Kong and the mainland surging.

We saw the first evidence that the Chinese administration is aware of the decline in the stock market and willing to do something about it last week and the above factors are a further iteration of that. That has at least provided a catalyst for a reversion back towards the mean

So AEIQ is taking fliers on tiny companies and riding the wave in small caps to beat the S&P, right? But it outdoes small-cap indexes, too. Since inception, the ETF is beating the Russell 2000 with noticeable help from the “selection effect,’’ meaning picking particularly good securities, Bloomberg data show. AIEQ’s active return over the small-cap gauge is 6.03 percent, all of which can be explained by individual stock
selection.

To true believers, nothing random is happening. “It’s not serendipity or luck. Rather, it is grunt work analysis of computational analysis of data and looking at your blogs and social media and press releases, and a conglomerate of all that,’’ Rick Roche, managing director at Little Harbor

Advisors, a boutique investment firm focused on quantitative strategies, said in an interview at Bloomberg’s New York headquarters. “Machine learning’s power in terms of getting data and uncovering potential alpha is much better in the small cap and the mid cap space than it is large cap.”

It’s easy to be impressed by the way AIEQ’s seems to adapt over time, adding large caps to its portfolio and dialing down smaller companies right as they fell out of favor. In truth, though, other things may be going on. Sure, the machine might’ve sussed out an unwinding of the small-cap trade in the wake of rising rates and less trade bluster. Less amazingly, the ETF may have just needed to buy larger stocks as it got bigger and swelled toward $200 million.

Either way, it helped. Since the start of August, AIEQ’s greater allocation to larger companies has juiced its performance, a Bloomberg analysis shows. “That’s the benefit of our strategy, right? It is very flexible and dynamic,’’ said Art Amador, COO and co-founder of Equbot, the company behind the ETF’s software. “The idea of, ‘Hey, it’s small caps today,’ doesn’t mean tomorrow we’re going to keep playing in the small-cap universe. In fact, it’s quite the opposite.’’

When you buy an ETF you are buying all the shares in the index with a market cap bias. Logically some will do better than others but there is an implied momentum trade because of the focus on the best performing the large companies.

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

Some of the topics discussed inclide: China follows through on the upside, Wall Street steadies from the region of the trend mean, Europe remains under pressure, oil steady, gold and bonds quiet.

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

About the development of technologies in Batteries and EV, I think a great standpoint is that of Umicore (UMI BB), which is one of the main producers of cathodes. They had their Capital Market Day in June, and with a bit of patience one can follow the webcast on their site here:  , and specifically the part presented by Mr Vandeputte 

One of the points made is that manufacturing autos is complex to the point no one takes on technological risk with a light heart, so the technology currently in use will probably stay around for a years before we get some leap forward into something different such as solid-state batteries.

Thank you for this informative email as well as the reports from Umicore which I’m sure will be of interest to the Collective. Much of the investment focus for batteries has been on lithium but as you say other battery components also offer investment avenues for the sector.

Economic policy makers including Vice Premier Liu He, who also weighed in on Friday, are now left walking a tightrope. To fortify the nation’s negotiating position on trade with the Trump administration, they need to stem the $3 trillion stock rout and support growth at home -- all without giving up on their goal of containing soaring debt levels.

"China is under pressure on multiple fronts," said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong. "Logically, all this pushes China to make a deal, yet I don’t think there is a deal to be had."

While the Shanghai Composite opened lower on Friday morning after the officials’ statements, it rallied in the afternoon and closed with a 2.6 percent gain. Some investors speculated that China’s “National Team” of state-backed funds stepped in to add some oomph to policy makers’ verbal intervention.

China started jawboning the market higher today which is a welcome sign that the administration is beginning to pay attention to the rout in domestic shares. Talking the market higher is free so it is usually the first recourse officials resort to in their efforts to support markets. However, it will need to be followed by clear action to arrest the decline if negative investor sentiment is to be influenced.

The problem for pro-Brexit camp in May’s Cabinet is that what is agreed as a fix for the Irish border could morph into a long-term status quo for the whole U.K. Businesses have long called for the U.K. to remain in the customs union to ease trade with the bloc, an option EU chief negotiator Michel Barnier has repeatedly offered as a way out of the stalemate. In parliament, the main opposition Labour party is also pushing for a customs union.

The thorny question of how to avoid a hard border between the U.K. and the Irish Republic has held up progress in Brexit talks since March. Time is running out for the EU and the U.K. negotiating teams to settle the terms of the divorce and sketch out the future trading arrangements before Britain leaves the bloc on March 29.

A summit of EU leaders in Brussels this week had been billed as the moment when the exit agreement would be struck but instead broke up with major issues still unresolved. The key question remains how to come up with a backstop for the Irish border.

UK business needs have to have some confidence in what its trading relationship with the EU is going to be post Brexit. The EU needs to blunt the threat the UK will set itself up as a freewheeling capitalist enclave that would compete and win inward investment. Therefore, both parties have a clear interest to reach a deal but the result of the negotiations are not going to be what many people thought they were voting for when the approved Brexit.

These Top 10 lowest cost gold mines are all below all-in-sustaining costs (AISC) $550/oz level and will prove profitable – even if the price falls 50%.

Mining Intelligence looked at costs at primary gold mines and found 10 operations that would still make money, even if gold halves in value from today's levels. AISC metrics has been taken as a basis of comparison and ranking.

Since the World Gold Council (WGC) published a Guidance on AISC in June 2013, which introduced a transparent standardised production cost estimation metrics intended to be used commonly by the global gold industry, a majority – yet not all – of the leading publicly-trading gold producing companies successfully adopted WGC’s recommendations and implemented AISC to their official reports.

AISC metrics provide a more comprehensive look at mine economics than the traditional "cash costs" approach that many companies may interpret arbitrarily – and it includes such important expenses as overhead outlays and capital used in ongoing exploration, mine development and production.

All in sustaining costs are certainly a useful metric for addressing the prospects for any mine. However, when we address the list above what we are presented with are the lowest cost of production mines but they are mostly the legacy properties companies started with before they had to spend more money to acquire additional properties which generally do not have the same attractive cost structure.

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

Some of the topics discussed include: stock markets weak, China leads lower, Europe needs to rally soon to avoid top formation completion characteristics, Italian bonds, evidence of rotation underway, gold breaking out in Renminbi

Earnings remain in focus though the depth of the sell-off overshadowed most major reports. Weak results from Germany’s SAP and Taiwan Semiconductor dragged American tech indexes lower.

Earnings misses from several U.S. industrial firms and a Bank of America downgrade of the housing sector fueled worries that higher interest rates and the trade war are hitting profits.

Philip Morris surged on strong demand, buoying consumer shares. Elsewhere, emerging-market assets also fell after declines in Europe and Asia. The Japanese yen gained the most in a week and gold traded near three-month highs.

I’ve been clicking through a lot of charts over the last couple of days and there are some very clear conclusions that jump out. The most important of these is that a major rotation is underway. The big momentum trades than really animated markets in the early part of the year are underperforming whereas a good many that have been out in the wilderness for the last couple of years are increasing showing signs of activity.

Ericsson AB's ERIC, +5.15% third-quarter net profit exceeded estimates by a significant margin as the telecommunications equipment company continued to keep a tight rein on costs while seeing strong demand from operators racing to launch new fifth-generation networks.
 

Ericsson's quarterly net profit ballooned to 2.75 billion Swedish kronor ($307.7 million) from a loss of SEK3.56 billion as sales rose 8.9% to SEK53.81 billion.

Analysts polled by FactSet had expected a net profit of SEK630 million on sales of SEK50.28 billion.

The gross margin rose to 36.5% from 26.9% while the operating margin grew to 6.0% from a negative margin of 7.4%.

"We continue to invest in our competitive 5G-ready portfolio to enable our customers to efficiently migrate to 5G," said Chief Executive Borje Ekholm. "Strong sales were mainly driven by a continued high activity level primarily in North America."

Amid the furore about new technology there are some that we should pay particular attention to because of their enabling characteristics which can boost personal productivity. These are 5G, batteries, cancer therapy, automation and artificial intelligence.  

I continue to be amazed at the tremendous pace of technological advances in the EV and EV battery sector, including critical improvements in the time required to recharge, the longevity of the charge and the methods available to charge.  You may have already seen the following announcement as it is a few months old, and may well be aware of these developments. However, I have personally only just seen this article today, stating that China is in the process of building sections of a motorway that is electrically conductive and can recharge vehicles whilst continuing to drive at speeds up to 120km/hr (75mph). 

http://smarthighways.net/china-to-build-a-motorway-that-charges-electric-cars-as-they-drive/

Looking further into the process that enables such a development, apparently adding graphene to the concrete renders the road surface electrically conductive and enables it to recharge vehicles.  

https://www.energymatters.com.au/renewable-news/electric-cars-charge-driving/

There is also a pilot road currently being tested in Sweden that charges specially designed vehicles from an electrified track in the surface of the road.  I dare to venture that the latest technology being utilised in China would already render obsolete the cumbersome Swedish system!  

https://www.energymatters.com.au/renewable-news/electric-cars-charge-driving/

You often mention how the pace of technological developments influences markets and economies, however I am struggling to keep up with so many new developments in the various sectors. 

Thank you for this email and the attached links. I certainly sympathise with the feeling of occasionally being overwhelmed by the pace of innovation but if we focus on enabling technologies as a first principle exercise I don’t think we will go far wrong.

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

Some of the topics discussed include: Wall Street rebounds from its lows, Treasuries ease, Dollar firm, China is the epicentre of risk, India led lower by banks, oil and gold stable.  

The focus on funding to sustain growth at the local level echoes a broader shift in the central government, which last year was focused on reducing leverage in the financial system. That phase is essentially over, thanks in part to an escalating trade war with the U.S., according to Citigroup Inc. analysts.

“The markets are right, in our view, to feel more concerned about the sustainability of China’s debt and the increased financial risks,” said Liu Li-Gang, chief China economist at Citigroup in Hong Kong. He also saw “renewed pressure” on the yuan.

Even with the central government’s shift toward stimulus, however, S&P sees Beijing determined to “bring discipline to the financing practices of local governments and their LGFVs.” That ultimately may mean local authorities aren’t fully able to keep LGFVs afloat, however, and the bottom line is “the default risk of LGFVs is increasing.”

Last week China announced it was increasing the number of Systemically Important Financial Institutions (SIFIs). That measure is aimed at clearly signaling there is a group of banks the government is going to support come what may. That’s not so unusual but it does raise the broader question of what about the rest?

The withdrawal is part of a concerted push by Mr. Trump to counter China’s dominance and punish it for what the administration says is a pattern of unfair trade practices. The move is expected to be announced on Wednesday, according to senior administration officials.

The Universal Postal Union treaty, first drafted in 1874, sets fees that national postal services charge to deliver mail and small parcels to countries around the world. Since 1969, poor and developing countries — including China — have been assessed lower rates than wealthier countries in Europe and North America.

While the lower rates were intended to foster development in Asia and Africa, Chinese companies now make up about 60 percent of packages shipped into the country, taking advantage of the lower rates to ship clothing, household gadgets and consumer electronics. Many websites now offer free shipping from China, in part because of the cheap postal rates, administration officials say.

Privately-owned Chinese companies are among the largest third-party sellers on major internet venues like eBay and to a lesser extent Amazon. A US based seller pays a minimum of $2.66 for a small package with tracking from the US Postal Service. Sellers from China pay domestic local rates on international shipping. It might take longer to arrive but there is no way to beat Chinese sellers on price and particularly for small-sized goods.

It is only in the last few weeks that the FTSE 250 has dropped meaningfully further behind the rest of the world’s stock markets compared with its position immediately after the referendum. There is a similar outcome if we look at the pound on a trade-weighted basis as calculated by Deutsche Bank AG:

On this basis, the pound remains almost 20 percent weaker than its 2015 peak, but it is also some 5 percent stronger than at its recent low in October 2016, when May first unveiled her plan to seek what is now known as a “hard Brexit,” in which the UK left the EU without attempting to stay in the EU’s tariff-free single market, in a speech to the Conservative party’s conference.

The pound’s resilience is remarkable given the great level of uncertainty. This is in large part because the issues now rest almost entirely on U.K. politics. Broad outlines of a deal have been thrashed out. The risk that the EU, a cumbersome body if ever there was one, rejects a final deal are not trivial, but by far the greatest risk is that no deal can pass the U.K. parliament. Foreign-exchange strategy notes on sterling are now almost entirely taken up with the mathematics of Westminster.

So, avoiding the technical niceties of trade and immigration policy, the source of greatest uncertainty is the U.K.’s parliament, where four broad political options remain
possible:

* It agrees to a “deal” on its future relationship with the EU;
* It goes ahead with a “no deal” option, with future trading relations with the EU bloc set by World Trade Organization rules;
* It votes down a deal and a general election (to vote in an entirely new House of Commons) is called; 
* It votes down a deal and another referendum on Brexit (known as a “People’s Vote” to its supporters) is called.

There is great difference between these options, and great political risk. But neither the stock market nor the foreign-exchange market appears to see the situation as much more alarming than it was at the end of June 2016.

None of the negotiating parties have much of an incentive to conclude the talks so offering the UK an additional year for a transition agreement is a fresh sign that the Europeans see talks going on even longer than previously anticipated. For Theresa May’s part she has to take any deal agreed back to parliament where her weakened government faces the real threat of being defeated or relying heavily on the opposition. This is not new news which is why the Pound has been relatively stable against the Euro.

“The eyes of the world are on Canada and Canadians should feel very proud, because people have been fighting for decades to make this moment a reality,” said Brendan Kennedy, chief executive officer of Tilray Inc., the largest cannabis company by market value.

After running up dramatic gains in the lead-up to legalization, cannabis shares failed to join the party Wednesday. Aurora Cannabis Inc. had slumped as much as 15 percent by 10:17 a.m. in Toronto for the worst drop since February, before paring losses. Canopy Growth Corp. was down 3.4 percent at 1:15 p.m. and Tilray Inc., the world’s largest pot company by market value, fell 6 percent.

Medical marijuana has been legal in Canada since 2001 but it’s only been about four years since the first cannabis companies began to list on Canadian exchanges. In that short time, about 140 pot companies have gone public in Canada, with a combined market value of more than C$60 billion ($48 billion).

I’m reminded of Mark Twain’s quip that reports of his death are greatly exaggerated. There was certainly some evidence of buy the rumour, sell the news today as some people took the day of legalisation as an opportunity to realise profits but the declines seen need to be put in the context of the advances seen over the last couple of months and the broad consistency of the medium-term trends.

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

Some of the topics discussed include: impressive rebound by the Nasdaq-100 from a key area of previous support, Europe firms which increases scope for a reversion to the mean, China remains weak with property leading lower, India steady, oil steady, commodities stable.

Underpinning Meituan’s success is what the company calls “abundant labor supply.” The cost of paying workers for each food order is about $1, or 20 percent of the expense incurred by delivery services in the U.S. An average order takes about 35 minutes, versus more than an hour in America.

For that, China’s urban consumers can thank the army of rural migrants who have crowded into cities in search of work. A deep pool of more than 280 million such workers exists to service the needs of middle-class city dwellers, enabling fast e-commerce and offline-to-online businesses.

But don’t take them for granted. Soon, there may be no cheap labor left in China’s large cities. 

To fight pollution and traffic jams, mega-cities have started to restrict and even kick out migrant workers. Beijing plans to cap its population at 23 million in 2020, only 1.3 million more than its current size. Meanwhile, Shanghai has a target of 25 million by 2035, leaving room for only 800,000 newcomers. Meituan, which is battling Alibaba Group Holding Ltd. for food delivery customers, alone deploys more than half a million of delivery riders daily, over half of whom are based in the four tier-1 cities of Shanghai, Beijing, Shenzhen and Guangzhou.

As the author above states it can be pretty cozy to live in China’s major cities. The quality of restaurant food is excellent and deliveries, which are essentially free, means you do not have to wait in line. However, this situation is predicated on cheap labour and even in China that is an exhaustible resource. 

I'm a big fan of your service. I would like to buy soft commodities somehow but not sure what good vehicles there are to do so. I think if I buy futures there are high costs involved? Do you have any ideas? I already own water/fertiliser/agricultural equipment companies. All the best

Thank you for this email and I am delighted you are enjoying the service. I agree, investing in futures carries the considerable risk of loss if contangos are not managed; particularly if prices range or trend lower. The ETFS Agriculture ETF is a good example of that phenomenon and has been trending lower since early 2011.

Is a crashing Rupee good or bad for India? Big debates here. Exports more competitive, of course, but how far is these external accounts a driver of Indian growth? Isn't India one giant domestic economy and isn't therefore a stronger Rupee good in the shape of lower oil and energy prices (rural villages) and overall business and consumer confidence? Happy for the community to discuss

Thank you for this question which has a number of facets and is likely to be of interest to the Collective. India has a large domestic economy and a large current account deficit. The reason it has such a large and persistent current account deficit is because its export sector is not sufficiently developed to counter balance domestic demand. That contributes to the persistent weakness of the Rupee.

China Galaxy International analyst Tony Li said the U.S.-China trade dispute and a stock-market selloff were weighing on consumer sentiment. “Consumers have turned more cautious and are less willing to spend much on luxury items,” he said.

The holiday slowdown was bigger than expected, and investors should closely watch for any further weakening this year, he added.

Meanwhile, Goldman Sachs said escalating trade tensions, slowing growth and policy uncertainty have weighed on Chinese stocks. In a pessimistic case, if annual growth slows to 6% and the yuan falls a further 5% against the dollar, shares could decline 10% more, the bank said.

I was chatting with Mrs. Treacy yesterday about the slowdown in China and she passed along this link to a story from epochtimes.com detailing how recent homebuyers are disgruntled with the steep discounts’ developers are now offering on properties. Here is a section:

On Oct. 2, more than 40 new homeowners in the city of Jingdezhen in Jiangxi Province gathered in protest outside the sales office of a property developer, and angrily shouted complaints such as “refund our money” and “we bought in the evening, and the price dropped in the morning.”

The next day, in Shanghai’s high-end Pudong District, dozens of new homeowners congregated in front of a housing development, carrying signs emblazoned with the slogan “Refund my hard-earned money.” The developer, Country Garden, had lowered prices from 35,000 yuan per square meter ($470 per square foot) to 26,000 yuan overnight.

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

Some of the topics discussed include: China, Europe than USA is the order of separation from the epicentre risk, gold and oil steady, Treasuries ease. Wall Street testing the MA, NVDA breaks down, Rotation underway, 

Yet this is where the bad news comes in. As our special report this week sets out, the rich world in particular is ill-prepared to deal with even a mild recession. That is partly because the policy arsenal is still depleted from fighting the last downturn. In the past half-century, the Fed has typically cut interest rates by five or so percentage points in a downturn. Today it has less than half that room before it reaches zero; the euro zone and Japan have no room at all.

Policymakers have other options, of course. Central banks could use the now-familiar policy of quantitative easing (QE), the purchase of securities with newly created central-bank reserves. The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals. Governments can boost spending, too. Even countries with large debt burdens can benefit from fiscal stimulus during recessions.

The question is whether using these weapons is politically acceptable. Central banks will enter the next recession with balance-sheets that are already swollen by historical standards—the Fed’s is worth 20% of GDP. Opponents of QE say that it distorts markets and inflates asset bubbles, among other things. No matter that these views are largely misguided; fresh bouts of QE would attract even closer scrutiny than last time. The constraints are particularly tight in the euro zone, where the ECB is limited to buying 33% of any country’s public debt.

We are living today in a world that was previously unimaginable. Negative interest rates have been with us for a decade and about $7 trillion has negative yields. Investors would literally rather pay to own bonds. Meanwhile some of the largest privately held companies continue to attract tens of billions in capital with little prospect of near-term or even medium-term profits. Therefore, I find it hard to fathom why people are so reticent about embracing the possibility that even more drastic action will not be embraced if the current suite of policy tools is exhausted.  

The market isn’t tight everywhere, though. As evidenced by prices, there are localized gluts and producers who would gladly put more supply on the market if logistics would oblige. U.S. benchmark crude futures, priced at Cushing, Okla., are $9.00 a barrel below Brent and cash prices in the prolific Permian Basin are even cheaper. A lack of pipeline capacity is to blame.

None of that holds a candle to western Canada at the moment. Western Canada Select crude cash prices are now $46 a barrel below Brent. Pipeline and rail capacity already was stretched and, according to JBC Energy, a gas pipeline incident in the Pacific Northwest has worsened the situation significantly. Refineries in the region have had to scale back operations and thus crude purchases.

West Canada crude is trading at its widest discount to Brent Crude since at least 2013. At $57, as of Friday’s close, that is enough of an incentive to use any means available to get the oil to market. If previous spikes in the spread are any guide that is exactly what we can expect over the coming months.

I find little information published about the lifespan of a battery pack. Today’s IC engines easily last for 10 years or 150,000 mi., frequently longer. I've seen no comparable information for battery packs or what the rate of decline in charge acceptance is over time. If that lifespan is considerably less than that of an IC engine, that price difference would have to be significant to be economic.

Thank you for this question which may be of interest to other subscribers. The cost of electric vehicle batteries has been trending lower and is likely to continue to do so as global manufacturing capacity scales up. However, as you highlight lithium batteries suffer from losing degradation over time and with repeated recharging and that represents an issue for consumers. Here is a section from ez-ev.com:

Electric cars run on lithium-ion batteries that are drained and recharged repeatedly, which causes natural degradation of the battery, leading to range loss over time. Most estimates have projected that a typical lithium-ion electric battery car can be driven about 100,000 and maintain a good driving range. But if you realize you are needing to recharge your battery too often, you may want to take it in and see whether it needs to be replaced.

Electric Car Battery Warranties
All of the top-selling electric vehicles come with battery warranties. While electric car batteries do lose capacity over time, it does not happen as fast as the average electric consumer device, which has a 1-4 year expected battery life. Most car companies will offer a warranty based on a number of years from purchase, or the number of miles driven, whichever is reached first. If within the warranty period, the car’s battery is unable to charge above a certain capacity, the battery can be replaced. Here are a few examples of today’s popular EV battery warranties:

That suggests to me that if one is thinking about buying an electric vehicle it is much smarter to lease since one can avoid the cost of replacing batteries while availing of new technology as it becomes available. That point is also highlighted by the fact that electric cars like the Nissan Leaf and Chevrolet Volt have among the steepest depreciation profiles.

One of the primary business models being explored by car manufacturers, is to redeploy older batteries that are no longer fit for transportation, into household and industrial use. Nissan in particular has been actively pursuing this route.

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

Expanded production comes with downsides, however. Tesla posted on its website Friday that buyers must place their orders by Oct. 15 to get their car by the end of the year and qualify for the expiring U.S. federal tax credit. Tesla was the first company to sell 200,000 electric cars cumulatively in the U.S., which triggers the gradual phase-out of the subsidy. The $7,500 credit will drop by half for Tesla on Jan. 1.

Musk boasted in 2016 that Tesla would make more than 100,000 Model 3s by the end of 2017. It didn’t work out that way. As often happens on Musk time, Tesla arrived late to an impossible goal. But Model 3 production now appears to be cruising—from the first cars off the line in July 2017, it took about 14 months for the company to build the initial 100,000 Model 3s. At the current rate of production, it will build the second 100,000 in less than six months.

This is a good news story for Tesla. Getting production numbers up is essential if the company is going to reach the economies of scale necessary to ever make a profit. The big question which I have seen addressed is what that number is? Musk has stated on more than one occasion that he wants to get the price of a Model 3 down to around $35,000 but how many of them will the company have to make to make a profit at that price?

Treasury said in its April report that it is considering expanding the number of countries it examines from 13, with analysts speculating that the number could go as high as 20. Such a move would be a sign of the Trump administration ramping up its use of the currency channel to negotiate better trade deals for the U.S.

Mnuchin has said since July that Treasury is concerned about the yuan’s recent drop. The currency has slid more than 9 percent against the dollar in the last six months, raising speculation that China has been deliberately weakening its currency as tensions with the U.S. escalate.

The Trump administration has pivoted to a more aggressive stance toward China since the president said last month the country is interfering in U.S. elections. Vice President Mike Pence delivered a speech last week in Washington signaling a firmer U.S. push-back against Beijing as trade anxiety weighs on the looming midterm congressional elections.

The US administration imposed 10% tariffs on Chinese imports and the Renminbi dropped by about the same amount. If we are to conclude this is the market being particularly efficient then so be it, but Ockham’s Razor suggests the Chinese administration is managing the currency lower. That might be justified based on the slowing growth trajectory of the economy but the bigger issue is the Renminbi is weakening and that is putting downward pressure on just about all regional currencies.

Thanks to a subscriber for Russell Napier’s latest missive which may be of interest. Here is a section:

That matches the big picture portrayed in demand statistics from the World Gold Council, an industry group. Bar and coin investors, industrial users and jewelry buyers purchase the yellow metal year-in and year-out; and central banks have been doing the same thing ever since they gave up their selling spree in 2009. As a result, ETFs and related funds are the key swing factor in the gold market, driving its slump from 2013 through 2015 when they became net sellers, and helping support its modest revival by turning into buyers in the years since.

That relationship seems to have intensified of late. The raw beta when gold is the dependent variable jumped to 1.65 in the past three months, suggesting moves in ETF holdings are now having an even bigger influence on the spot metal than usual. 

In some ways this doesn’t change the old argument for investing in gold, which is that the important beta isn’t related to ETF holdings but to stock-market returns. When fear rises and the value of your equity portfolio falls, the yellow metal still has a mild tendency to climb and offset the losses
elsewhere.

Still, those who look on gold as a refuge from the madness of crowds shouldn’t get ahead of themselves. These days, the crowds are in the driver’s seat.

ETF Holdings of gold peak at 72 million ounces in May and the total fell by 5 million ounces by early October. That represented a 6.86% decline in the total but perhaps more significantly it represented the reversal of what had been a source of demand for the metal.

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

Some of the topics discussed include: Wall Street remains weak, China breaks to new lows, Midcaps are underperforming, Treasuries were steady, oil weak, gold breaks on the upside, 

A link to the full note and section from it is posted in the Subscriber's Area.

There is no one factor that investors can point to that offers a clear reason for why the market pulled back so sharply on Wednesday. Instead a confluence of events triggered stops which has resulted in a significant number of US large cap shares closing what were somewhat overbought conditions relative to their respective trend means.

Gold may have finally snapped out of its inertia.

Prices headed for their biggest gain since March 2017 as of 10:51 a.m. in New York after a slump in global equity markets and data showing slower-than-expected U.S. inflation stoked demand for the metal as a store of value. Futures were set for a third straight gain, the longest rally since Aug. 22.

Bullion, which touched a six-week-high $1,218.60 an ounce on Thursday, has traded near $1,200 since late August as traders weighed geopolitical risks that could boost the metal’s allure as a haven against rising interest rates that dampen its appeal.

The inflation data may spur the Federal Reserve “to pump the brakes on further hikes,” Phil Streible, a senior commodity broker at RJO Futures, said in a telephone interview. The slump in global equities is also luring investors to “safe-haven” assets, he said.

Gold has been trading in an inert manner for more than a month following a persistent decline from this year’s peak near $1350. To pause in such a narrow band is not characteristic for such a volatile instrument, and gold finally broke up and out to new recovery highs today.

Hong Kong didn’t fare much better, with the Hang Seng Index dropping 3.5 percent, the biggest in eight months. Tencent Holdings Ltd., the most valuable stock listed in Asia, slid 6.8 percent to extend a record losing streak to a 10th day.

Chinese shares have been the ground zero for the trade war with the U.S. The Shanghai Composite has lost 24 percent in the past 12 months, one of the worst performers among 94 global gauges tracked by Bloomberg, with the majority of the decline happening this year. A slowing economy and weakening currency is only adding to the gloom.

"Panic? The general mood among fund managers is more like ‘playing dead,’" said He Qi, portfolio manager at Huatai Pinebridge Fund Management.

Telecom and technology shares led declines on the mainland, with ZTE Corp. and 360 Security Technology Inc. tumbling more than 9 percent. Tech shares also dropped the most in Hong Kong, following the sector’s rout in New York.

Volume on the Hang Seng Index and China’s large-cap CSI 300 Index was about 70 percent more than their 30-day intraday average, according to data compiled by Bloomberg. Foreign investors dumped 3.6 billion yuan ($520 million) onshore shares through Hong Kong-China stock links. "It’s been a rough day," said William Wong, head of institutional sales trading at Shenwan Hongyuan Securities HK Ltd.  

Institutional investors have been reducing their portfolio, while we see hedge funds shorting in Hong Kong." A crackdown at Chinese borders on undeclared goods also hurt luxury goods companies, with Prada SpA tumbling 10 percent, the most since September 2017. Jiangxi Ganfeng Lithium Co. dropped as much as 33 percent on its trading debut.

"Negative sentiment is outweighing any positive catalysts, and investors would take any rebound as a chance to sell," said Louis Tse, Hong Kong-based managing director at VC Asset Management Ltd., adding that Shanghai shares may fall further after breaking the key support level. "If we’re talking about seeing an end of the tunnel -- I don’t think so."

There is no doubt that increasing tensions between China and the USA have been one of the factors contributing to the underperformance of the Chinese market so far this year. However, the tightening of credit standards, particularly cutting off funding lines for the shadow banking sector and regional banks has also been an important consideration in the underperformance.

Yes I know some expats who have retired in Dubai but I doubt if any labourer will be allowed to do so.
2) Re Japan's immigration: I thought Germany used to have "guest" workers for it's factories who were there for as long as their work permits lasted and no citizen rights.

And this from another subscriber

I note you state in your comment that it is impossible to retire in Dubai when you stop working. This is no longer the case. The Dubai government has recently introduced new legislation that will allow anyone over 55 to remain in the country provided they qualify under certain monetary thresholds.

Thank you both for these insightful comments which certainly helped to boost my knowledge. Germany’s guest worker program was originally designed to rebuild the country after the WWII but the net result was that the workers stayed and the country now has a 3 million strong ethnic Turkish population.

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

Some of the topics discussed include: Volatility breaks out, Wall Street falls in a dynamic manner, led lower by small caps and the NYSE FANG Index, Europe breaking lower, China steady, India steady, oil weak, gold steady and bonds firming. Risk off.

U.S. stocks tumbled the most since April as fresh concern about the impact of the trade war with China roiled technology and industrial shares. Treasuries rose with the yen demand for haven assets.
The S&P 500 fell to the lowest in almost two months, the Dow Jones Industrial Average plunged as much as 640 points and the Nasdaq 100 Index tumbled more than 3 percent in a broad selloff in U.S. equities. Boeing and Caterpillar dropped at least 2.9 percent, while computer companies kept the broader measure on its longest slide since Donald Trump’s election win.

Fastenal Co. added to angst that the trade war with China is raising materials costs that will crimp profit margins. Estee Lauder and Tiffany led losses after French luxury goods maker LVMH confirmed China is enforcing customs rules more strictly as trade tensions remain high. The Cboe Volatility Index rose past 20 for the first time since April. Oil fell from $75 a barrel even as a major hurricane headed for the Florida Panhandle.

“The biggest thing going on in markets is you’re seeing an unwind,” Sameer Samana, a global quantitative and technical strategist for Wells Fargo Investment Institute, said by phone. “You had stocks doing really well, rates for the most part were very well-behaved. When you’ve got these risk-off moments, especially when you’re later in the cycle, there is some concern on the part of investors where it’s like, ‘Is this the beginning of the end?”’

The VIX Index popped on the upside today, for the first time in months, to break the sequence of lower rally highs that has been in evidence since the January spike. Perhaps more importantly it has held the advance through the close which suggests an absence of traders buying the dip.

Lula, Dilma and the labor party known as Partido Trabalhista PT, ruined Brazil. They robbed state companies and pension funds blind and ruined them. They instituted massive corruption as a means to collect funds in order to stay in power. They used the Development Bank BNDES to finance tin pot dictators in Africa and Latin America so as to be able to siphon off money for the party. PT caused Brazil’s worst recession in history, the highest rate of unemployment ever and a large reduction in GDP per capita. Wide spread corruption in all three branches of government and large scale hiring of public servants for electoral purposes were made a state policy. Public schools and universities were used for ideological purposes. Their quality dropped to astonishing levels, such that students are science ignorant and can neither interpret a text nor think clearly. They are unemployable. Laws were put up for sale. Of 1000 Medidas Provisorias (express approval laws) proposed by PT, 900 correspond to the sale of privileges (exemptions, subsidies, etc) The media was put under control through the tap of state publicity so that PT and sympathizers control TV, newspapers all NGOs and opinion pollsters. PT allied itself with Organized Crime which now controls Rio, is a major threat all over the country and recently tried to murder Bolsonaro. All this has caused a massive revolt, so that the Bolsonaro vote is far more an expression of anti-PT disgust than for the candidate himself. He was the only one to voice matters clearly. By far the least bad choice.

Thank you for this on ground perspective from Sao Paolo. A bull market paves over a lot of cracks in people’s willingness to tolerate declining standards of governance. No one was worried about all of the issues you detail above when commodity prices were surging and there was money for everything. It was only when commodity prices collapsed and funding evaporated that the extent of corruption was revealed. This is about as close to Warren Buffett’s adage “you don’t know who has been swimming naked until the tide goes out”.

In the context of today's comment on the hacking of Supermicro, should we not be looking to invest in Purefunds ISE Cyber Security ETF now that it has pulled back to the moving average?

Thank you for this question and it was something I was thinking about yesterday when I was writing about the implication of the Chinese hardware hack.

How are you? RiverFront has been a useful source of information for our community. It will no longer provide its newsletter to those living outside the USA. Are you able to receive it where you live? Regards

Thank you for this request. Yes, I can receive it and I will post it more regularly in Comment of the Day in future.

Greetings from Japan. You have observed that this country seems to be opening up to foreign workers to offset its demographic decline. Indeed, most restaurants and convenience stores employ Asians nowadays. However, as you know, Japan is an insular, monocultural country and there is a great deal of resistance to immigration. Having lived here for over 30 years I'm convinced that the cultural shock of absorbing huge numbers of foreign workers will be too much for Japanese society. I'm therefore encouraged to hear that the government intends to be very selective over which countries' nationals it intends to accept. Those which refuse to take back their nationals if Japan wishes to expel them will not be considered, Iran being one example cited. Hopefully, this indicates that the government has taken the abject lessons of Europe on board and will be stringently selective, including cultural and religious factors in deciding their eligibility. You have also mentioned that immigrants will boost the economy through their spending. I doubt this, as many will be low-skill workers who will be intent on sending as much of their earnings as possible back home rather than on buying furnishings and goods for their small, rented accommodations.

Thank you for this insightful email and I agree it is going to be a massive culture shock for Japan to absorb large numbers of migrants but it is also true that those people have to live. The big question about projections for future spending will rest on the argument for family reunifications. Children are expensive and spur spending. Meanwhile Japan has a declining birth rate and needs young people. The insular nature of Japanese society may attempt to avoid that solution and instead adopt a similar policy to Dubai where it is impossible to retire in the emirate so when the work runs out you have to leave.

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

Some of the topics discussed include: Australian stocks under pressure but resources outperforming, emerging markets remain under pressure, Europe and Wall Street quiet, oil firm, bonds quiet, platinum firming, 

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

China is busy trying to paint itself as the protector of the global trade network but this amounts to doublespeak when we look at their actions rather their words. China has abused the international web of trade relationships to boost its own economy and was allowed to do so because of a mistaken belief that prosperity would breed liberalism. Western leaders bet the livelihoods of millions of their own citizens on China eventually evolving into a free market liberal democracy but that has failed to materialise. If anything, China’s authoritarianism is becoming even more engrained.

The more recent manipulation is different from the one described in the Bloomberg Businessweek report last week, but it shares key characteristics: They’re both designed to give attackers invisible access to data on a computer network in which the server is installed; and the alterations were found to have been made at the factory as the motherboard was being produced by a Supermicro subcontractor in China. 

Based on his inspection of the device, Appleboum determined that the telecom company's server was modified at the factory where it was manufactured. He said that he was told by Western intelligence contacts that the device was made at a Supermicro subcontractor factory in Guangzhou, a port city in southeastern China. Guangzhou is 90 miles upstream from Shenzhen, dubbed the `Silicon Valley of Hardware,’ and home to giants such as Tencent Holdings Ltd. and Huawei Technologies Co. Ltd.

The tampered hardware was found in a facility that had large numbers of Supermicro servers, and the telecommunication company's technicians couldn’t answer what kind of data was pulsing through the infected one, said Appleboum, who accompanied them for a visual inspection of the machine. It's not clear if the telecommunications company contacted the FBI about the discovery. An FBI spokeswoman declined to comment on whether it was aware of the finding.

There is an air of “shutting the barn door after the horse has bolted” to this reporting since the revelations date from earlier this year and whatever data was available has likely already been stolen. It is reasonable to assume that China has as much data about everyone in the West as it could want and that cyberwarfare is certainly going to be a part of any future conflagration.

Vanadium pentoxide (V2O5) which makes its way into so-called vanadium redox flow batteries used in energy storage systems breached $20 a pound for the first time since 2005 this month. That’s a four-fold increase from the start of 2017.

Simon Moores of Benchmark Mineral Intelligence, a battery materials research and price discovery provider based out of London, says the recent success of lithium ion batteries being deployed in increasing larger systems that are exceeding 1GWh has brought to light the huge potential of the market for all types of battery technologies.

Vanadium flow batteries have lifespans of over 20 years without capacity loss, are non-flammable and can operate at any temperature. Another advantage over lithium ion is that this type of battery can be charged and discharged simultaneously making it highly suitable for large-scale storage from renewable sources such as solar and wind when connected to an electricity grid. Main downside is low energy density which means comparatively large installations needed.

“If a vanadium battery producer steps forward with bold plans to produce vanadium flow at mass scale, giving the industry its Elon Musk or lithium ion moment, the potential for the technology to be the second most deployed ESS battery in the world is there,” says Moores.

“Raw material self-sufficiency is a critical component to this. At least a third of the cost of a vanadium flow battery is vanadium pentoxide which makes up the liquid electrolyte.

“If companies are thinking of creating the Gigafactory of vanadium flow batteries, they will either need to own a mine or implement a new pricing system where the fully recyclable vanadium in the battery is leased."

Battery technology is improving all the time and a race is on to develop models which will be the foundation of an electric vehicle. Concurrently, efforts are underway to develop batteries that can perform at scale for utilities which are increasingly reliant on renewables are inherently intermittent sources of energy. Those are two completely different growth trajectories and given the different priorities it is quite likely there will be a number of potential solutions that eventually make it to market. 

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

Some of the topics discussed include: China remains weak and in need of stimulus to reignite bullish interest, Europe weak, Italian yields break out, India pause, gold weak, oil steady, Wall Street steady but evidence of rotation increasingly evident. 

The next three weeks promise to be intense. For while Bolsonaro’s lead appears almost insurmountable, the millions of Brazilians who vehemently oppose his populist candidacy – and its undertones of misogyny, homophobia and dictatorship denial - will make a furious, last-ditch effort to halt his march to the presidency. But they will be fighting against powerful forces not entirely dissimilar to those that helped put Donald Trump in office in the U.S. and Andres Manuel Lopez Obrador in Mexico and gave the U.K. its Brexit shock.

“It’ll be three weeks of a dangerous and highly polarized scenario,” said Mauricio Santoro, a political scientist at the State University of Rio de Janeiro. “The level of conflict will be very high,” he said, adding that both have to overcome very high rejection rates to win.
 

The rise and success of fringe candidates is a not a coincidence but is rather a reflection of the global revolt against the status quo which is direct result of the failure of quantitative easing to fuel growth for asset owners at the expense of savers. The most recent symptom of that reaction is in Brazil where it has been the catalyst for millions of people to protest at the pattern of corruption which has been a fact of life for decades.

Shell and its partners’ commitment to the project, which will cost roughly $14 billion to construct, signals growing confidence in global gas markets, as rising demand diminishes the threat that new supplies entering the market will cause a glut. It marks the end of a seven-year effort, blighted by weak prices that pushed back the final investment decision on the project by two years.

The decision suggests the prospects are positive for other large gas-export projects. A cluster of developments are currently vying for approval in Qatar, Russia, Mozambique and the U.S. Yet in the U.S. the outlook is dimming.

Earlier this month, China imposed a 10% tariff on imports of super-chilled gas from the U.S. in retaliation to levies imposed by the Trump administration. China is the biggest source of new global LNG demand and is expected to be a voracious consumer in the coming years as a result of efforts to move away from smog-inducing coal-fired power. Its demand rose around 50% in 2017.

“Right now, this is not very good for American LNG projects working hard to take final investment,” said Morten Frisch, a U.K.-based independent gas industry consultant.

More than a dozen LNG projects are awaiting regulatory approval in the U.S., though analysts say only a few are likely to get the go ahead before the end of next year. If Chinese buyers fall away, those projects could become more difficult to finance.

Natural gas is abundant and is the natural alterative to coal as economies develop and urbanisation concentrates demand within cities which are easier to run utilities to. It is the clearest bridging commodity which has any hope of meeting emissions goals before next generation batteries eventually transform the economics of renewables. That could be a decade from now and even then, gas will remain an important resource for cooking, heating and cooling. 

Picking up on today’s big picture commentary, as well several recent comments about China’s mission to create a semiconductor sector, I attempted to identify the largest Chinese based semiconductor manufacturers and assess whether they might benefit from such an initiative. I noted that SMIC (Semiconductor Manufacturing International Corporation) based in Shanghai is listed in HK ((981:HK) and the US (SMI:US).   Do you feel that Chinese semiconductor manufacturers, such as SMIC, might stand to benefit from further state investment in the local sector to enable more independent control over their supply chain of semiconductors? The SMIC Chart at this stage would certainly not support this hypothesis as it has underperformed the SOX Index, but seems to be quite oversold.  Your insight into this topical issue would be much appreciated.

By the way, for whatever reason, code 981:HK is shown in the Chart Library as China Green Holdings Limited (actual stock code 904:HK) and not SMIC! 

Thank you for the excellent service - I look forward to starting virtually every day here in Sydney with your valuable and insightful video commentaries. 

Thank you for this email and I am delighted you are enjoying the daily video commentaries. I've also amended the ticker for SMIC.

China has demonstrated time and again that it has no interest in importing chips that could offer a backdoor for foreign governments into its IT networks. At the same time, it has pioneered a major offensive to insert its own devices into the bones of the global IT infrastructure so it can do its own listening. Both of those objectives mean having a domestic chip manufacturing industry is essential to Chinese government policy.

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

A notable exception was AWS’s data centers inside China, which were filled with Supermicro-built servers, according to two people with knowledge of AWS’s operations there. Mindful of the Elemental findings, Amazon’s security team conducted its own investigation into AWS’s Beijing facilities and found altered motherboards there as well, including more sophisticated designs than they’d previously encountered. In one case, the malicious chips were thin enough that they’d been embedded between the layers of fiberglass onto which the other components were attached, according to one person who saw pictures of the chips. That generation of chips was smaller than a sharpened pencil tip, the person says. (Amazon denies that AWS knew of servers found in China containing malicious chips.)

And

One Friday in late September 2015, President Barack Obama and Chinese President Xi Jinping appeared together at the White House for an hourlong press conference headlined by a landmark deal on cybersecurity. After months of negotiations, the U.S. had extracted from China a grand promise: It would no longer support the theft by hackers of U.S. intellectual property to benefit Chinese companies. Left out of those pronouncements, according to a person familiar with discussions among senior officials across the U.S. government, was the White House’s deep concern that China was willing to offer this concession because it was already developing far more advanced and surreptitious forms of hacking founded on its near monopoly of the technology supply chain.

In the weeks after the agreement was announced, the U.S. government quietly raised the alarm with several dozen tech executives and investors at a small, invite-only meeting in McLean, Va., organized by the Pentagon. According to someone who was present, Defense Department officials briefed the technologists on a recent attack and asked them to think about creating commercial products that could detect hardware implants. Attendees weren’t told the name of the hardware maker involved, but it was clear to at least some in the room that it was Supermicro, the person says.

The problem under discussion wasn’t just technological. It spoke to decisions made decades ago to send advanced production work to Southeast Asia. In the intervening years, low-cost Chinese manufacturing had come to underpin the business models of many of America’s largest technology companies. Early on, Apple, for instance, made many of its most sophisticated electronics domestically. Then in 1992, it closed a state-of-the-art plant for motherboard and computer assembly in Fremont, Calif., and sent much of that work overseas.

Over the decades, the security of the supply chain became an article of faith despite repeated warnings by Western officials. A belief formed that China was unlikely to jeopardize its position as workshop to the world by letting its spies meddle in its factories. That left the decision about where to build commercial systems resting largely on where capacity was greatest and cheapest. “You end up with a classic Satan’s bargain,” one former U.S. official says. “You can have less supply than you want and guarantee it’s secure, or you can have the supply you need, but there will be risk. Every organization has accepted the second proposition.”
 

China aspires to global domination and the Communist Party is willing to deal, cajole, bribe, beg, borrow and steal to get what it wants. The Belt and Road Initiative is a big part of that. Whereas attempting to create a domestic semiconductor sector is major part of the Made In China 2025. The interruption of the supply chain for the global chip manufacturing sector has been underway for years and is only now becoming public. It represents further evidence that there is no lower limit to what China is willing to do to achieve its goals.

David Einhorn, a prominent critic of Tesla Inc., bashed the carmaker, saying its woes resemble that of Lehman Brothers Holdings Inc. before the bank failed.

“Like Lehman, we think the deception is about to catch up to TSLA,” Greenlight Capital said in a quarterly letter Friday seen by Bloomberg. “Elon Musk’s erratic behavior suggests that he sees it the same way.”

Einhorn pointed to parallels by saying “Lehman threatened short sellers, refused to raise capital (it even bought back stock), and management publicly suggested it would go private” in the months leading up to the bank’s collapse.

Einhorn said in the letter his short position on Tesla was his second biggest winner in the third quarter. Greenlight’s main fund has lost 26 percent this year.

Tesla is a CCC+ rated credit and trades at an eyewatering valuation. It is now one of the top sellers of sedans in the USA but that is likely only because many companies are no longer selling sedans. The biggest redeeming quality the company has is that the battery factory is built and production is underway but that does not surmount the fact the company loses money on every vehicle.

The offer falls short of what May wants, potentially making it harder to get the deal approved in the U.K. Parliament, where she faces opposition on all sides. However, the document is expected to be vaguely worded, and with as much positive language as possible to help her sell it at home. Hardline Brexit-backers in her party might find it easier to vote for the EU’s offer instead of the tighter ties sought by May, since they have been pushing for a regular free-trade deal all along.

The risk is that because the EU’s plan doesn’t include frictionless trade across the EU-U.K. border, it will focus more attention on the most controversial part of the divorce deal -- how to keep the Irish border open. It will make it even more important that the so-called Irish backstop is acceptable to the U.K. government and its Northern Irish allies.

If the DUP were still controlled by Ian Paisley the mere suggestion that the Irish border be moved to the Irish Sea rather than between the six counties and the Republic would be a complete non- starter. As it stands, it’s an open question to what extent Arlene Foster is willing to bend on the Unionist ideal of a progressively sharper focus on the united part of United Kingdom.

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

Some of the topics discussed include: China hacking of global supply chain is a problem, Treasury yields extend rally with high commonality internationally, China weighs on emerging markets, but Brazil outperforms, FTSE-100 among leading decliners and industrial metals under pressure,

A link to today's video commentary may be of interest to subscribers. 

Some of the topics discussed include: Treasury yields, long and short dated and TIPS break out. Stock markets quiet, oil firm, fiscal stimulus expanding in Europe, Dollar firm,  

The yield on 10-year Treasuries, a benchmark for global borrowing, rose to the highest level since 2011 amid growing optimism about the U.S. economy. The rate on 30-year securities reached a four-year high and the dollar gained.

Improved investor appetite for riskier assets drove the leap in yields, with stocks rising toward records on upbeat news about American jobs and ebbing concern about the fiscal situation in Italy. The jump in yields Wednesday, which pushed them above previous 2018 highs set in May, followed stronger-than-anticipated reports on U.S. services and private payrolls and came after the Federal Reserve lifted interest rates last week.

The government reports payroll figures for September on Friday, and economists forecast a decline in the jobless rate to 3.8 percent. It hasn’t been lower since 1969.

Treasuries are extending a September swoon that was triggered in part by quicker-than-forecast wage growth in employment data released early last month.

“This started overnight with the Italian risk-on trade and the U.S. data today was definitely stronger” than forecast, said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald in New York. “After last month’s payroll, the market started to catch up to the Fed and it’s a continuation of that. There is reason to be believe we can continue to trickle to higher yields.”

The yield on the 10-year borrowing benchmark climbed as much as 7 basis points Wednesday to 3.1343 percent, surpassing the May intraday high of 3.1261 percent. The yield on the 30-year increased as much as 7 basis points to 3.29 percent.

Money-market traders are now pricing in more than two Fed hikes in 2019, seeing about 0.54 percentage point of tightening, approaching policy makers’ projections for three rate increases next year. About two months ago, the market saw just slightly
more than one increase.

The yield curve, which has been on a flattening trend for much of this year, steepened sharply amid Wednesday’s break-out in long-term yields.

The gap between 2- and 10-year yields surged more than 3 basis points to about 28 basis points, reaching its steepest since August.

The yield curve spread popped on the upside today with the yield on the 10-year breaking out. The last 10 basis point rally was between April and May so right now this is an equal sized rally within the downtrend but it will likely be enough to allay fears on an imminent inversion.