What’s this about? Paradoxically, it’s an unintended consequence of Vanguard’s strategy of driving fees on bread-and-butter indexes like the S&P 500 and the Russell 1000 down to the 5 basis point range. Advisors – whether human or robot – are not going to guide investors there; they can’t live on 5 basis points. And since for-profit fund companies can’t compete with Vanguard head to head on the S&P 500 battlefield, they will collect their higher fees elsewhere. Through product differentiation. Ergo, not only the oft-mentioned iShares Frontier Index, with a 79 basis point expense ratio, and the Italy ETF, with a 48 basis point fee, but also smart beta funds. 

The challenge to the rational practice of indexation is the profit motive. Index funds are, by definition, commod-itized products: one S&P 500 or Russell 1000 fund can be no different than another. And it is wholly rational that the for-profit companies that promote index funds try to avoid selling near-zero-fee products. The use of market-ing to promote the sense of product differentiation to the customer in order to secure a higher price is not new: it’s done for vodka, cigarettes and shampoo. As the examples above illustrate, the ETF industry has hijacked tra-ditional indexation and distorted it to a dangerous degree. One cannot even be sure that when one buys a country fund, one even gets that country. 

The Unavailability of Alternative Asset Classes/Sectors 
Let’s suppose that it dawned on some modest proportion of investors that, though they thought they were at-tending an academic symposium, they were actually in the midst of what had devolved into a wild party. They decided it was time to leave. To go where? Small-capitalization stocks, a traditional alternative, are no longer a practical alternative. Because of the $1+ trillion that has flowed into ETFs since the Financial Crisis, in practical terms, ETF organizers could only accommodate this magnitude of demand with stocks that have substantial trading liquidity. They necessarily promoted large-capitalization indexes. Accordingly, over 80% of the stock market is invested in large-cap stocks (greater than $10 billion). Only 4.6% of the stock market, by value, are companies less than $2 billon in size. They simply cannot absorb a sufficient portion of the equity pool; they cannot be a functional alternative.

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

I think it is safe to say low fees are an unabashed positive development from the perspective of investors. Gaining access to major indices, deemed to represent the benchmark for market performance, at a low price is good enough for the vast majority of investors. The reason so many pundits are now talking about the trend into passive funds is twofold. 

HK$ has gone up for 4 months and possibly turned exponential at the inflection point near 7.775. Could this be like buying USD inasmuch as HKD is linked to USD?

Thank you for this email and there has been speculation of late about the sustainability of the Hong Kong Dollar’s peg against the US Dollar which has resulted in some downward pressure on the former.  

This initiative, which probably could have been better named something like the “NVIDIA Deep Learning Portal”, will actually set NVIDIA up as a channel and demand aggregator for these partners' cloud services, not compete with them. The tool will provision the latest tested versions of AI software stack and development frameworks and then will deploy these software containers on hardware infrastructure provided by the NVIDIA’s partners, initially on Amazon Web Services and the Microsoft Azure Cloud.

Through this new program, NVIDIA will basically manage a cloud registry and repository of the latest 3 versions of tested applications, optimized libraries and frameworks, which are continually evolving through the open source community. In fact, NVIDIA regularly optimizes these frameworks and then offers these improvements back to the open source community for inclusion upstream. The software is put in an NVDocker container, which is then deployed on the user’s hardware of choice. Think of this as the next generation of CUDA and CuDNN, now expanded to the complete set of Machine Learning software and integrated with container provisioning.

 

Nvidia is on a mission to own the graphics card market. It already has a dominant position but the growth markets for its chips rest not in its traditional gaming sector but in artificial intelligence and autonomous vehicles. The creation of a portal to help companies manage the development of related software using its chips helps to lock them into its ecosystem and cement the firm’s dominant position. 

“At this point, we’re estimating over 150,000 acres of rice will have been lost by the time this is over,” says Jarrod Hardke, Arkansas Extension rice specialist. “Of course, soybeans and corn will be taken out, but to less an extent. There wasn’t as much of those crops planted in the region being affected – especially corn, which is typically planted in lighter soils on higher ground.”

The May 1 NASS report said 89 percent of Arkansas’ expected 1.2 million-acre rice crop had been planted.

 “Once rice is 10 days submerged, you can start writing it off. Some will survive but once that 10-day mark is hit you’re on the downhill side of expectation for a good rice crop. Rice may like a flood but doesn’t like to be submerged. And while it may survive being submerged longer than other crops it has a breaking point.”

In many cases, says Hardke, “the water isn’t going down but is leveled out. And farther downstream the flooding is getting worse. The additional rain last week just added insult to injury. More rain is forecast for (the week of May 8).

 

The soft commodity sector has been acting as a drag on the wider commodity complex for much of the year but there are initial signs of some respite emerging. The low price of grains and beans was pricing in close to a perfect crop this year but adverse weather has at least partially ameliorated that situation. 

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

The risks of a White House impeachment crisis and months of Washington paralysis are rising exponentially. You do not fire the head of the Federal Bureau of Investigations lightly.

Donald Trump's sacking of James Comey in the midst of an expanding counter-espionage investigation  - on seemingly bogus grounds - is a political assassination. It is comparable to the Saturday Night Massacre in the Watergate saga, and arguably worse.

For all his faults, Richard Nixon was at least a foreign policy statesman. Few ever suggested that his inner circle had joined forces with a hostile power to subvert a US election.

The presumption has to be that the Oval Office is trying to obstruct a probe of Mr Trump's campaign team for suspected collusion with Kremlin. As the New York Times states today in a front page editorial: "Mr Comey was fired because he was leading an active investigation that could bring down a president." It certainly appears as simple as that.

Whether the escalating constitutional crisis poses a risk to inflated global equity and credit markets is far from clear. There is no historical template for this. It is certainly the sort of catalyst that could shatter complacency, even if VIX volatility index for now remains eerily becalmed at a 24-year low.

As a Washington correspondent in the 1980s and 1990s, I covered both the Iran-Contra affair and the scandals leading to the impeachment of Bill Clinton by the House of Representatives, and had own my brushes with the FBI along the way.

In both episodes, markets shrugged off events. Nothing perturbed Wall Street. We journalists at the coal face of the Clinton saga were often asked to give talks in Washington to financial institutions eager to learn whether events might spin out of control.

There was a cottage industry of investor newsletters and talk-radio hosts convinced that political Armageddon was coming, and with it a cathartic stockmarket crash. Those who "shorted" Wall Street on such advice lost a lot of money.

I think every investor and pundit interested in the US Presidential Election cycle has wondered, often out loud as I have, if President Trump would face impeachment proceedings at some point.  

The possibilities of this happening are the stuff of dreams for media types.  Conspiracy theories, illegal actions, presidential lies and especially sex scandals will always have an element of prurient appeal for the public, especially among those who don’t have a good book to read.

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

France’s new president, Emmanuel Macron’s party is called En Marche! Which roughly translates as Forward we Go!’ He is not the only one going forward, the Eurozone economy and stock markets have done well this year, and as the first 2 clips of our chart below show, Europe is starting to outpace the US. Global markets generally (as measured by the MSCI World Index) are already up around 10% through Friday’s close, which is roughly what we were expecting for the year. With overseas markets doing slightly better than the US and high yield doing better than the Bloomberg Barclays Aggregate Bond Index, it certainly is tempting to follow the old Wall Street adage and “sell in May and go away”. However, even though some summer volatility would certainly not be a surprise, we maintain an overweight to stocks, especially overseas stocks, and are hopeful that a multi-year bull market is still in its early stages. We believe it is important to remember that the recovery in the Eurozone is only 3 years old, interest rates are zero, and the European and Japanese central banks are still buying bonds and thereby adding to their balance sheets every month.

This is a far cry from alarmist forecasts which we see and hear from a number of other US commentators, not to mention self-destructing hedge fund managers.  We know the risks so no complacency here but the super-bears remain contrary indicators.

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

This seminar is already half full so don’t delay if you are interested; another sell-out is likely.  

There is so much to talk about and on behalf of our speakers, we look forward to hearing the views and questions from our experienced delegates.  

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

The Kospi index dropped the most since March as North Korea reiterating its pledge to push forward with another nuclear test showed Moon Jae-in, the victor in Tuesday’s presidential vote, is unlikely to get a honeymoon. While Citigroup Inc. to Morgan Stanley are betting on further upside for South Korea’s record- setting stocks, analysts and investors are seeking more from Moon, who ran on a platform of corporate reform and rapprochement with North Korea.

“Markets will take this on the chin,” said James Soutter, who helps manage the equivalent of about $500 million at K2 Asset Management in Melbourne, referring to the election.
“Rumblings out of North Korea on further nuclear tests should have a bigger influence on markets than the election.”

While Korean technology shares rallied on bets Moon will bolster the sector as a way of delivering more jobs, the Kospi spiked lower, declining 1 percent Wednesday -- the most since March 3 -- as utilities and banks paced losses. Markets in Seoul were closed for the election Tuesday, so the drop came after a 2.3 percent surge in the Kospi on Monday, its best day since September 2015

The South Korean Kospi Index has been ranging for six years but broke out ahead of the election to new all-time highs. Increased tensions with North Korea coinciding with a short-term overbought condition suggest there is scope for some consolidation of the recent run-up. However a sustained move below the trend mean would be required to question medium-term scope for additional upside. 

Mainland markets have struggled under the government’s campaign to trim risk in the financial sector, making stocks the least linked to the offshore index since 2006. With history showing sentiment can flip quarter to quarter, international traders are riding on a bet that solid corporate and economic data will continue to support the divergence.

“These investors don’t believe that any of this will lead to a crisis,” said Caroline Yu Maurer, the Hong Kong-based head of Greater China equities at BNP Paribas Investment Partners.
“For stocks, people are buying earnings growth rather than macro stories. The market is quite resilient as long as that holds.”

For a gauge that is rarely this expensive relative to the rest of the world, improving earnings are emerging as a key line of defense against worsening sentiment. While profit estimates are being upgraded at the fastest pace since 2010, they’re failing to keep pace with the index’s rally, which has pushed valuations toward the highest levels since 2015. The gauge gained another 0.4 percent on Wednesday, while the Shanghai Composite slumped 0.9 percent to its lowest level since October.

 

The mainland Shanghai Composite is heavily weighted by state owned enterprises like banks and infrastructure companies which are the primary focus of the clamp down on the shadow banking sector and financial leverage in “private lending clubs”. Privately owned companies, many of which are listed in Hong Kong or the USA continue to perform not least because they are not overly impacted by the financial sector tightening currently underway.

Industry’s sales/earnings growth and margin structure are enviable, M&A on-tap
1. With increases in sales and earnings power and improving product approval rates, large-cap biotech has stuck to its knitting, i.e., developing products for smaller, more focused disease areas with high unmet needs.
2. 2015 was a banner year for worldwide biopharma M&A. After downturns, such as seen in 2016, M&A typically picks up as valuations become realistic.
3. Drug pricing, recent slowdown in large-cap sales/earnings momentum, many companies between product cycles and some clinical disappointments, are all still overhangs.

And 

1. Sales/earnings growth deceleration following peak sales/earnings in 2014 for the large-cap companies.
2. Has led to generalist and momentum money reducing exposure/abandoning the sector.
3. This deceleration in sales/earnings growth to trough in 2017, then rapidly start accelerating again.
4. Currently GILD is the laggard in its peer group for expected sales/earnings growth over the next three years.

 

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

R&D is expensive, riddled with uncertainty and big bureaucracies tend to stifle the creativity necessary for the kind of out of the box thinking which leads to breakthroughs. The result is that large pharmaceuticals companies often buy promising biotechnology companies, usually at a premium, rather than invest in the uncertainty of in-house development. 

The Prime Minister has said that no deal with the EU is better than a bad deal. The importance of this judgement has recently increased as the possibility of securing any deal, let alone a good one, seems to have receded.

We have been left with the impression that we are going to have to pay an enormous divorce settlement, agree to the continuing jurisdiction of the European Court of Justice and accept free movement, at least for a time, before the EU will even discuss a future trading arrangement with the UK, never mind the “bold and ambitious” free trade agreement (FTA) that Theresa May is seeking.

Perhaps unsurprisingly, the structure of the negotiations seems to be stacked against us. The two-year time deadline is a major disadvantage. As and when talks stall, the pressure will begin to build as time ticks away. Moreover, as the former Greek finance minister Yanis Varoufakis warned recently, the EU is a past master at intimidating others by deft use of agendas and timetables.

What we need is a well worked-out Plan B. If Plan A fails then there is something to fall back upon, but also, paradoxically, a viable Plan B would mean that we are more likely to succeed with Plan A.

Unless EU leaders see that we have an alternative and are prepared to walk away, not in fear and trepidation, but with a reasonable degree of confidence about our future, then they may well believe that it is in their interest not to give any ground to us. Above all, the Government must avoid the trap that David Cameron fell into. He asked for very little but got even less. His mistake was to make it clear that however little he got he would still support staying in the EU.

But is there a plausible Plan B? Not according to erstwhile Remainers and their sympathisers, who often use lurid language to describe our plight if we leave without a deal.

You might well think that economics is a dry subject, not open to hyperbole. In fact, when it comes to areas of uncertainty, and especially when there are sharp differences of opinion, language is important.

In the debates running up to the referendum, politicians and businesspeople talked about the overriding importance of having “access to the single market”. This conjured up the image of some precious restricted space, with entry possible only through a locked door, perhaps closely guarded by a bibulous Jean-Claude Juncker, carefully checking membership cards.

I think this particular penny has now dropped. As I and others pointed out all along, every country in the world has “access” to the single market. It is just a matter of having to pay the EU’s tariffs and abiding by its various rules and regulations governing product quality, for example, just as we have to when we sell into any market in the world. That’s why countries all around the world that are not members of the single market have managed to export into it so successfully. “Access to the single market”, so powerful as an image, is in fact a chimera.

So it is with regard to the subject of the UK’s exit. Some politicians and businesspeople talk of the UK “crashing out” of the EU. Another metaphor is of British business facing “a cliff-edge”. They say that without a deal, the UK would “fall into the clutches of the WTO”.

It is as if the World Trade Organisation (WTO) were some sort of monster that devours its members – especially juicy new ones like us. In fact, the UK helped to set up the WTO in the first place and has remained a member all along, albeit with our seat vacant because our trade policy has been run by the EU. On leaving the EU, we would simply take up our seat once again.

Mind you, Remainers often portray trading “under WTO rules” as a disaster. At the very least, it supposedly represents a step into the unknown. Yet this simply means trading with countries without having an FTA and using WTO rules to govern trading practices. As part of the EU, the UK already trades under WTO rules with over 100 countries around the world, including the United States (our largest single export market), as well as China, India, Brazil and Singapore.

This arrangement is often described as the “WTO-only option”. But because this sounds so Spartan and threatening I have suggested that we should instead refer to it as “the American option”.

After all, without an FTA between the EU and the US, “WTO-only” is the basis on which trade between them takes place. Suddenly, it does not sound so threatening.

In saying this, I am not suggesting that there are no sorts of agreement that can and should be signed. In particular, there are various technical arrangements called Mutual Recognition Agreements (MRAs) without which goods trade is next to impossible.

The EU has such agreements with virtually all countries around the world, including those that are neither members of the single market nor have an FTA in place.

Getting such agreements should be a simple matter and should not cause our negotiators any problems, not least because such MRAs are already in place.

All the UK has to do is simply to carry them over into the new world. If the EU refused to agree MRAs with us, this would count as discrimination under WTO rules and would lead to huge fines.

If our leaders, senior officials and negotiators, as well as the majority of British businesspeople and the commentariat, can convince themselves that not having an FTA with the EU is a perfectly acceptable outcome, then the Government will be in a strong position to say no to a bad deal. Especially for a country like the UK, the open sea should hold no terrors.

All of this makes sense to me.  I have long felt that Roger Bootle is far more accurate on this subject than militant Remainers and British EU advocates who either misunderstand the issue or aspire to cushy jobs and fat pensions (effectively bribes) for unelected bureaucrats in Brussels. 

Prime Minister Theresa May is committed to at least opening Brexit negotiations with the EU, following the General Election on 8^th June.  Thereafter, I maintain that on encountering the first irrational obstacle she should just declare an end to negotiations and announce that the UK was leaving the EU. 

In addition to Roger Bootle’s views above, Patrick Minford has been clear on this point all along.  

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

I do not understand why some in the EU Commission seem to think the UK owes the bloc any money on leaving. The UK is not seeking a divorce from Europe. It is a silly misrepresentation. We are surrendering our membership of the European Union, but expect to have strong and positive ties with the rest of Europe after we have left. There will be much trade, many joint ventures, common research, shared campaigns in international politics, cultural, academic and business links.

I have great news for our EU partners. Because it is no divorce, there is nothing in the EU treaties which gives the UK a claim on the assets Brussels has built up during our period of membership. It is true we have made a big financial contribution, which has in part been invested in buildings and other stores of value. We lose that. Because it is no divorce and we have no children, the EU does not have to pay us maintenance in the future either.

It also means there is also nothing in the treaties which give the EU the right to send us a leaving bill. They cannot expect us to carry on meeting financial obligations after we have left, or pay the interest on loans taken out to buy assets we no longer share.

The EU has had a strange attitude towards UK membership. They first blocked our joining in the 1960s. They were then critical of our reluctance about the social union, defence union, monetary union and borders union.

They offered us some opt-outs, but pressed us to do many things the UK would rather not do.

Some of them understandably were unhappy about their cross-Channel partner who never wanted to join the full project but just wanted a trade arrangement or common market.

You would have thought when we decided to leave they would be pleased. It enables them to get on with completing their extensive union without UK reluctance, always seeking to slow or water it down. As democratic countries you would expect them to respect the verdict of British electors. Instead, some of them seem to want to keep us in, or claim to want to punish us for leaving.

They both claim the EU is a precious prize for any country to be a member, and that you need to lock countries into it under threat of worse if they dare to leave.

I suspect these attitudes are more the Commission’s than the member states’. The individual countries should prove to be more realistic. They have businesses that want to trade tariff-free with the UK after exit as they did before.

They have citizens living in Britain that they need to support, by accepting the continued right of our citizens to live in their countries. They will understand that the balance of votes and power within the EU has shifted, and each remaining member state will be a bit more powerful when the UK votes and voices go.

The Commission thought they could control the negotiations over Brexit. They wrongly expected the UK to seek to remain within the so-called single market. In return the EU would demand continued freedom of movement and continued budget contributions. As ending our payments and controlling our own borders were two central features of the reasons to go, that was never likely.

Instead the UK has a friendly and simple offer. We will willingly accept tariff-free imports from the EU with no new barriers to their trade with us, if they reciprocate. Why would they want to impose tariffs, when under World Trade Organisation (WTO) rules the main losers would be the big agricultural export industries of the continent who sell us so much more than we sell them, and the continental car industry facing a more modest 10 per cent tariff?

If the EU wants to charge us for buying their imports and selling them rather fewer exports, the cheapest and easiest way to do so is through tariffs, under WTO rules. We know what that is like, as that is how we have to trade with the rest of the world all the time we are in the EU. One of the prices of membership is dearer food from the rest of the world. Once out we could decide to remove the tariffs we no longer wish our consumers to pay.

Now, about that bill. I assume the EU won’t be sending one, as ministers in the UK can only spend money against a clear legal requirement. There is no such legal base.

This is easily one of the best articles that I have seen on Brexit and I think John Redwood is absolutely correct.

Any logical person in the UK or EU would like to see a friendly, mutually beneficial agreement in terms of the UK’s exit from the EU.  However, this may not be timely or even possible in dealing with 27 separate EU nations.  For this reason I have always felt that the serious negotiations were likely to take place after we have already left the EU.

Emmanuel Macron’s lightning conquest of France has put Germany in an awkward spot.

Berlin may have to start fleshing out its European rhetoric and contemplate a Franco-German grand bargain on the future of the EU, or risk serious consequences down the road. Excuses are running thin.

French voters have picked an apostle of Europe and an arch-defender of the Franco-German axis. While this is welcomed with jubilation by some in Berlin, it raises thorny questions that others would prefer left unanswered.

Charles Grant from the Centre for European Reform says Mr Macron’s strategic gamble is to restore French credibility, and then to lever this to extract a “new concordat on the euro” from Germany.

He plans Nordic labour reforms, easier collective bargaining rules, and the sort of tax shake-up that German leaders have long demanded. It is the French riposte to the Hartz IV reforms that - supposedly - lifted Germany from its sickbed a decade ago.  

The quid pro quo is that Berlin must agree to eurozone fiscal union, and cut its corrosive current account surplus - now 8.6pc of GDP and in breach of EU rules.

“If France is not reformed, we will not be able to regain the confidence of the Germans,”  Mr Macron told Ouest-France.  “After that Germany must ask whether its own situation is tenable. It is accumulating surpluses which are neither good for its own economy nor for the eurozone.”

He wants a eurozone finance minister and budget, with joint debt, and a banking union with shared deposit insurance, all legitimized by a new parliament for the currency bloc. It implies a unitary eurozone superstate.

This calls Berlin’s bluff. The German elites often argue that they cannot accept such radical proposals as long as other eurozone states scoff at budget rules and fail to put their house in order. Whether Germany’s real motive is to protect its mercantilist interests as a creditor power and run monetary union to suit itself is conveniently never put to the test.

As French economy minister, Mr Macron was an acerbic critic of the austerity regime imposed on the eurozone by Germany. He decried the current half-way house of an orphan currency with no EMU government to back it up, and argued that was is folly to try to close the North-South gap in competitiveness by imposing all the burden of adjustment on the weakest high-debt states. Such a policy misdiagnoses the cause of the EMU crisis -  capital flows, rather than fiscal or moral failure - and leads to a deflationary vortex for the whole system.

Emmanuel Macron is the most interesting new arrival in European politics for a long time and he is challenging conventional views in the dysfunctional EU.

Basically, if they want to make it work, bring in fiscal union, as anyone with a modicum of financial savvy and historic awareness knows.  However, the idea of fiscal union - effectively creating a United States of Europe - was never popular with the European electorate.  Moreover, it was even less popular with many European governments.  That is why it was gradually being ushered in via the back door by EU bureaucrats. 

Today’s question: is the EU now too dysfunctional and too populist to openly discuss fiscal union? I would have thought so but along comes fresh-faced, intelligent Emmanuel Macron, apparently challenging Germany on this subject. I can sense the alarm in Europe’s largest economy.

It makes no difference for the UK.  We will shortly resume our historic role as a sovereign nation.

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

Have you ever tried to make an international transfer through a French bank? Neanderthals Age.  It will be very difficult to beat London´s financial services. Macron will have to deal with unions and after that with a strong regulatory culture inserted in France.

You make a very important point.  I have enjoyed many trips to France with family and friends, and was fortunately able to cover all transactions with a credit card or occasionally cash.  However, financial services are another matter and I think you are correct.  

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

Last week, HNA was the subject of wild online speculation after a fugitive Chinese billionaire said in a television interview that relatives of a senior Chinese leader, Wang Qishan, had a stake in the company. No proof was provided.

The allegations leveled by the billionaire, Guo Wengui, who has ties to China’s former spy chief, is part of his broader war on the Chinese government. From his New York apartment, Mr. Guo, using his Twitter account and Google’s YouTube, has been making claims of widespread government corruption. China has requested his arrest, on separate corruption charges.

As speculation swirled that HNA could be drawn into a political firestorm, shares of one of the company’s Hong Kong affiliates tumbled late last month. Soon after, critical news articles on the group began disappearing from Chinese websites, prompting concerns that government censors had handed down orders to delete unfavorable news about HNA.

 

Mrs. Treacy has been following this story closely. Guo’s interview on Voice of America’s Chinese channel in late April, which had been headlined as an exposé, was cut short when Chinese officials called the show directly to insist it be cut off. Here is a section from an article discussing the event: 

Morrison is changing the terms of the economic debate, from dire warnings on debt and deficit to a more politically astute one of prosperity and opportunity. His infrastructure plan aims to create a virtuous circle: such investment may trigger private-sector spending and increased household consumption that would boost the economy.

“We continue to forecast a slower deficit consolidation than projected in the budget,” Marie Diron, associate managing director at Moody’s Investors Service, said in a statement after the release. “We assume that GDP growth will be somewhat slower than projected by the government, at 2.5-2.7 percent in the next few years. Productivity growth has slowed in Australia, like in other high-income economies. We estimate that this slowdown is partly related to long-lasting factors that will continue to weigh on growth.”

Infrastructure projects include a new airport in Western Sydney; acquiring greater or outright ownership of the Snowy Mountains hydroelectric scheme and then expanding it; upgrading highways across the nation; and funding for a Melbourne-to-Brisbane inland railway.

The Australian economy has gone 25 years without a recession which is an incredibly impressive achievement. In that time the currency has been highly volatile; acting as a pressure release valve. The decision to spend A$75 billion in infrastructure projects will help to absorb some of the available labour that the drop off in commodity supply growth investment has left but the outright effort to stoke inflation through wage growth is likely to take a toll on both the currency and bond yields. 

Data from the Depository Trust & Clearing Corporation shows dollar-topside bets outweigh bearish views this week. That includes $700 million on the 115.00 level, another $600 million going through on 116.00 calls, and $140 million on the pair reaching 133.00 within the next year.

Yen haven demand has also lost traction, as the French election result provided a market-friendly outcome, as shown by risk reversals, a gauge of market positioning and sentiment.

While demand for dollar-yen puts over the next month still outweighs that for calls, it does so at the lowest in almost two months. Dollar puts trade on a 38-basis-point premium over calls on the one-month tenor, which compares to an average in the past year of 105 basis points.

 

The result of the 1st round of the French election acted a risk-on catalyst for global markets with the VIX dropping abruptly and the Nasdaq-100 running to new highs. Safe haven assets like the Yen, Dollar, bonds and gold on the other hand have experienced selling pressure. 

The sweeping victory of Emmanuel Macron in France opens the way for a radical shake-up of the country's antiquated labour code and punitive tax regime, greatly boosting the hopes of Paris as it tries to capture valuable business from the City of London.

The French financial industry is seizing on the 'Macron effect' to step up its charm offensive in the Square Mile and Canary Wharf, convinced that the election of an ex-Rothschild banker in France has combined with a hard Brexit to create a perfect opportunity. 

Officials have been criss-crosing London over recent days meeting sovereign wealth funds and bankers from the US, Japan, China, and other countries, selling the promise of a reformist revolution in Paris. What is faintly ominous for London is that they are pulling forward the timetable for what they believe to be the expected exodus. 

"We think that the process will now accelerate because it looks like a hard Brexit, and we think it will happen within months," said Arnaud de Bresson, head of finance federation Paris Europlace.

"Investment banks and asset managers now understand that they will have to move part of their euro activities, which was not the case in our earlier meetings when it was still business as usual," he told the Daily Telegraph.

"We expect them to move some of capital market as well as fund management business to Paris in phases. We think we can gain 20,000 jobs, 10,000 directly. This is quite reasonable," he said, though he was coy about names. City advocates say such claims are wishful thinking.

I think Emmanuel Macron is an extremely impressive and capable figure.  I am glad he won the Presidency because he is far more entrepreneurial than any of his rivals.  This can only be good for France.

How might this affect the City in the light of the hard Brexit which we are likely to see?

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

PARIS (The Borowitz Report)—On Sunday, the people of France annoyingly retained their traditional right to claim intellectual superiority over Americans, as millions of French citizens paused to enjoy just how much smarter they were than their allies across the Atlantic.

In bars and cafés across France, voters breathed a sigh of relief in the knowledge that arrogantly comparing themselves to the U.S. population, a longtime favorite pastime of the French people, would remain viable for the foreseeable future.

Pierre Grimange, a Parisian café-goer, sipped on a glass of Bordeaux and toasted his nation “for not being so dumb as the United States after all.”

“A lot was at stake today: the future of our liberal traditions and our democracy itself,” he said. “But by far the greatest loss of all would have been our right to look down on Americans.”

“Grâce à Dieu, that has been secured!” Grimange exclaimed.

But, sitting a few tables away, Helene Commonceau, another Parisian, admitted that she did not understand what all of the celebrating was about. “We are smarter than the Americans, true, but they have set the bar very low, no?” she said. 

Andy Borowitz is the New York Times best-selling author of “The 50 Funniest American Writers,” and a comedian who has written for The New Yorker since 1998. He writes the Borowitz Report, a satirical column on the news, for newyorker.com.

Across China, the virus that could spark the next pandemic is already circulating. It's a bird flu called H7N9, and true to its name, it mostly infects poultry. Lately, however, it's started jumping from chickens to humans more readily--bad news, because the virus is a killer. During a recent spike, 88% of people infected got pneumonia, three-quarters ended up in intensive care with severe respiratory problems, and 41% died.

What H7N9 can't do--yet--is spread easily from person to person, but experts know that could change. The longer the virus spends in humans, the better the chance that it might mutate to become more contagious--and once that happens, it's only a matter of time before it hops a plane out of China and onto foreign soil, where it could spread through the air like wildfire.

From Ebola in West Africa to Zika in South America to MERS in the Middle East, dangerous outbreaks are on the rise around the world. The number of new diseases per decade has increased nearly fourfold over the past 60 years, and since 1980, the number of outbreaks per year has more than tripled.

Some recent outbreaks registered in the U.S. as no more than a blip in the news, while others, like Ebola, triggered an intense but temporary panic. And while a mutant bug that moves from chickens in China to humans in cities around the world may seem like something out of a Hollywood script, the danger the world faces from H7N9--and countless other pathogens with the potential to cause enormous harm--isn't science fiction. Rather, it's the highly plausible nightmare scenario that should be keeping the President up at night.

The U.S. Centers for Disease Control and Prevention (CDC) ranks H7N9 as the flu strain with the greatest potential to cause a pandemic--an infectious-disease outbreak that goes global. If a more contagious H7N9 were to be anywhere near as deadly as it is now, the death toll could be in the tens of millions.

"We are sitting on something big with H7N9," says Michael Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota and a co-author of the new book Deadliest Enemy: Our War Against Killer Germs. "Any one of these cases could trigger something big. By then it'd be way too late."

Too late because even as the scientific and international communities have begun to take the threat of pandemics more seriously, global health experts--including Bill Gates, World Health Organization director Dr. Margaret Chan and former CDC director Dr. Tom Frieden, to name just a few--warn that nowhere near enough is being done to prepare, leaving the U.S. scarily exposed. That's because the system for responding to infectious disease is broken. So broken that it recently prompted Gates and his wife Melinda to put their weight behind a major public-private initiative called the Coalition for Epidemic Preparedness Innovations (CEPI). The Gates Foundation alone will devote $100 million over the next five years to CEPI, which will help speed the development of vaccines against known diseases, like MERS, while also investing in next-generation technologies that can counter future threats.

Pandemics will always be a periodic threat, mainly due to overly intensive farming.  Thank heavens for Bill and Melinda Gates, and their Coalition for Epidemic Preparedness Innovations (CEPI).

David

I remember one of your comment about the book and how much it impressed you.

I take every morning the time to listen to something new or recurrent that makes me (hopefully) think (hopefully) differently…

One podcast that I usually follow loosely is Barry Ritholtz: Masters in Business.

Today I listened to the interview of Yuval Noah… I recommend it.

Just one comment: around minute 43 he noted that the new religion will be happening in Silicon Valley. I cannot figure out if he was positive or not about it, but if so (The new religion), what consequence does it has on our self determination and freedom, the cherished prize of democracy if you go to ‘’church'' everyday of your life when you open any connected device.

This will define our (new) times as much as war defined our time not too long ago (my father as Navy officer spent 12 years of his life doing so and it must have influenced the following next 25 years of the rest of his life) 

Enjoy, and all the best,

Many thanks for this interesting email and the Barry Ritholtz interview.  I like Barry – a thoughtful, intelligent man and am pleased to be reminded of his Masters in Business radio interviews, not least regarding Yuval Noah Harari who I think is easily one of the most interesting people on the planet.

Re minute 43 and the new religion in Silicon Valley: little is explained but I think he is referring to the god-like machines that tech geniuses are creating.  With tongue in cheek and meaning no offence, I have often said that for me, Google was the closest representation of God which I ever expect to encounter.

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

You seem to have had a couple of problems with your Friday Big Picture report. A skype call rang for an interminable length of time in the background which was a distraction to me and I think, to yourself. Perhaps you should switch off Skype as a precaution before you start recording? Then, the report ended abruptly in your mid-sentence. You were talking about Bitcoin and I was finding it very interesting. What happened?

Thank you for this email as well as a number of others from subscribers. I’ve been having some grave difficulties with my recording software over the last two sessions with the microphone ceasing to work mid recording. I’ve been trying to trace the fault all weekend and believe I have solved the problem. I was not aware the microphone was sensitive enough to pick up the Skype ringing and will log out in future when recording. Please accept my apologies for these technical difficulties. 

In recent years, changes in liquidity in China have caused considerable upset.   How significant is the following reported change? 

Thank you for this useful graphic as well as the link to the associated article. Here is a section:

Mark Orsley and I have been working on a “Chinese Liquidity Monitor” which tracks the PBoC’s various measures (repos, reverse repos, OMOs, SLFs, MLFs, Pledged Supplementary programs)—see below. The key point here: it’s not just the sharp decline in the ‘rate of change’ of PBoC ‘lending’ / ‘financing’ / ‘credit creation’….it’s that liquidity is being outright REMOVED.

Hedge funds and other speculators increased their short positions in the Canadian dollar to the highest level on record, according to data from the Commodity Futures Trading Commission. The loonie, which is the worst-performing major currency this year, has been under pressure in recent weeks amid concerns over a potential trade war with the U.S., a plunge in crude oil and financial woes of alternative mortgage lender Home Capital Group Inc.

The Canadian Dollar skirted the worst effects of the credit crisis by virtue of having a strongly regulated banking sector when just about everywhere else in the G7 had given into the worst excesses to deregulation. The rebound in oil allowed the Loonie to retest its 2008 peak in 2011 but the subsequent decline in commodity prices has taken its toll.

Londoners are paying lower home rents for the first time in more than seven years amid rising supply and weakening demand from senior executives for properties.

The average rent paid in April for new lettings in Greater London was 1,519 pounds ($1,968) a month, a 1.2 percent decline from a year earlier, HomeLet, the U.K’s largest reference- checking and rentals insurance company, said in a statement on Monday. Annual rental inflation across the U.K. was 0.4 percent in the same period, the lowest in seven years.

"Rents have been rising at a more modest pace across the whole of the U.K. in recent months," HomeLet Chief Executive Officer Martin Totty said. "We continue to see landlords and letting
agents weighing tenant affordability considerations very seriously.”

London’s housing market is weakening amid affordability issues, new taxes and preparations for Brexit. Landlords rushed to buy homes before the introduction of a new stamp duty sales tax in April of last year, boosting supply and leading to greater competition for tenants.

The number of tenancies agreed at 1,000 pounds to 5,000 pounds a week fell 3.7 percent in the first quarter from a year earlier, Knight Frank said on Friday. Demand in that segment of the market usually comes from senior executives in industries including financial services, the broker said.

Home values in the U.K. capital grew at their slowest annual rate in almost five years in February as values in the most expensive boroughs including Camden and Kensington and Chelsea fell, according to Acadata and LSL Property Services Plc.

 

Uncertainty surrounding the ramifications of Brexit and the potential for several thousand workers and their families to decamp to continental Europe is likely having a knock-on effect for rental demand. 

In the race for international tech talent and inward investment, the UK ranks third in Europe behind Finland and Sweden for digital inclusion and skills (EC Digital Economy and Society Index – DESI). But the new government should not forget that around half of our most valuable tech workers hail from overseas with some 30pc coming from the EU and 20pc from further afield. To avoid a post-Brexit brain drain, the UK must remain a destination for international talent, with an immigration policy to match.

And to ensure that in the future more of our tech capability is grown at home with jobs filled by British citizens, the next government must 
do even more to encourage the 
take up of science, technology, engineering and maths (STEM) subjects in schools.

Of the 320,000 students in England studying for A-levels last year, the number taking STEM subjects was largely stable, according to Department for Education data. Where it is increasing, it is in tiny increments.

Last year, the number of students entered for A-level computing increased by just 0.3 pc to 1.7 pc. And the 23.8 pc of A-level students entered for mathematics represented an increase of just 0.5 pc. STEM subjects need to move further up the education agenda accompanied by more support for targeted vocational training and apprenticeships.

Continued investment in infrastructure to support an increasingly digitised marketplace is also vital. Applications and productivity gains requiring world-class connectivity can only gather momentum if the physical backbone is there to provide the necessary support.

The last government’s “Universal Service Obligation” aimed to give every business and individual in the country the right to request an affordable high-speed broadband connection. The intention was laudable, but in practice today the UK ranks no higher than sixth for overall European connectivity and just 10th for Next Generation Access. Further investment in digital infrastructure should remain a key priority for the next government.

The UK is the fifth largest global economy and renowned for innovation and our entrepreneurial spirit. We are home to many world class businesses spanning technology, hi-tech engineering and pharma research, financial services, the professions, education and the creative arts. Government initiatives to cultivate the smartest talent and encourage the right investment will help capitalise on these strengths and accelerate our position at the vanguard of the 4IR.

Thankfully, the long, sad history of the UK surrendering its sovereignty within the EU is now ending.  Britain will soon have the freedom to welcome additional talent from all over the globe, not just the EU.  A newly competitive economic environment will be ideal for expanding our tech industries. 

A PDF of Jeremy Hand’s article is posted in the Subscriber’s Area.

Amen. Some might see this column - and your comments- as political. Not so, they are Realpolitik - a German concept that many in Brussels ignore while continuing to push a centralisation policy that is not very well appreciated by the electorates who are their ultimate masters, albeit currently disenfranchised by the delegated authority system of the EU.

Thanks, Norman, I appreciate your comments.

Furthermore, I think we always knew that leaving the EU was going to be both challenging and divisive, although I believe a clear majority now favours Brexit.  I am glad that Theresa May is leading the country at this crucial time and I maintain the UK’s long-term prospects are excellent.   

Good and Bad Aspects of Passive Funds

Investing via exchange traded funds (ETFs) and other forms of index-tracking management can make sense, as it minimizes costs and avoids manager selection risk.

The trouble with its alternative, active management, is finding those who are consistently good at it, without most or even all of the gains being gobbled up by fees and other costs. Usually such managers are too frightened of the risk to their careers in making idiosyncratic decisions to stray far from being almost-trackers. They are poor value for investors.

The trouble with passive management is, it means putting your money into the most popular shares, which are the most expensive because of their popularity, and may be the poorest choices for the longer term.

As Ian Lance of RWC Partners reminds us: “Passive investors in 2000 were allocating large chunks of their money to bubble stocks like Cisco, Sun and Yahoo, and also to accounting frauds like Enron and Worldcom, which were on their way to zero.”

The bias towards buying the biggest stocks, which are not likely to be the best, seems to be particularly true in the emerging markets sector.

Well-known fund manager Terry Smith says increasing amounts are being allocated to its largest companies, but “they are not good companies.”

Last year the return on capital employed of the top ten constituent stocks of the MSCI Emerging Markets index averaged just 12 per cent. Over the past ten years their returns have shown a more or less continuous decline. That has been particularly true of Chinese companies, “which seem to be investing on the basis that debt capital… for them is close to free.” Such an assumption is always dangerous, “as the Dotcom era and Japan in the late 1980s illustrated.”

These giant companies are expensive, currently trading on price/earnings ratios averaging 28 times, compared to 23 for all firms in the MSCI index. It doesn‟t seem likely that this reflects expectations of significant improvement in earnings.

Trouble is, “if money pours into markets via ETFs, it will cause the shares of the largest companies… to perform well irrespective of their quality or value, or lack of it, even though active managers seeking quality and/or value will not want to own them.

“The weight of money flows will make it a self-fulfilling prophesy that the index will outperform the active managers who behave in this rational manner.”

Longer-term, it makes sense to buy more shares in good companies. They will eventually produce superior returns. But you need patience to wait for that to happen. In the meantime, the weight of index-tracking buying makes it difficult to manage actively, focusing on good companies that are not popular. That‟s why most investors would do better to opt for index funds such as ETFs.

A courageous admission by an expert who himself manages an emerging markets fund.

 

I have long favoured Investment Trusts also known as Closed-End Funds in some other countries, including the USA. 

Incidentally, Iain Little includes a review of Investment Trusts during each of his Markets Now presentations, the next of which will be on Monday 12 June at London’s Caledonian Club.   

On Target is posted in the Subscriber's Area.

A link to this week's long-term video commentary is posted in the Subscriber's Area. 

“The mindset is still quite cautious about inflation expectations, but I’m quite sure that with continuous accommodative monetary policy, supported by fiscal policy, we’d be able to eventually raise wages and prices significantly,”

CNBC cites BOJ Governor Haruhiko Kuroda in interview.

* Projected growth rate of 1.5% “not great” but it’s well above medium-term potential growth rate

* Means output gap to shrink and become positive while labor market continues to tighten

* Wages, prices would eventually rise to achieve 2% inflation target around fiscal 2018

* Yield curve control “has been functioning quite well”

* 10-yr JGB target should, for the time being, be maintained around 0%

* Acknowledges that “headline inflation has been quite slow to adjust upward” in part because of weakness in oil prices

 

Since its bubble burst in the late 1980s Japan has been attempting to combat deflation and despite its best efforts failed. The big question is whether this was because they were not aggressive enough early on in forcing the banking sector to write down large bad loan books, or was it because their bust occurred in one of the greatest disinflationary periods in modern history and no matter what they did they could not have fomented inflation? I suspect the answer lies somewhere in between. 

The US market, the largest consumer of avocados, is facing a 50-60 per cent decline in Californian output from average levels, because of bad weather, while its main source of imports, Mexico, is expecting a 20 per cent fall in production, says Óscar Martínez at Reyes Gutiérrez, a Spanish avocado importer and distributor.

“The US needs to get extra avocados, and Peru is expected to divert their supplies attracted by their high prices,” he adds.

Avocado trees tend to alternate between “on” years, producing a bumper crop, and “off” years, where the tree recovers from the stress of the previous year’s large production.

In Mexico, the world’s largest producer and exporter of avocados, the off-year has coincided with bad weather, sending the market soaring.

Prices for Mexican Hass avocado have more than doubled since the start of the year, with a 10kg box of avocados jumping to 550 pesos ($26).

Supplies from other producers have also been hit. “Lower output is also expected for the US and Peru where the harvest has been delayed due to heavy rains and flooding,” says Jara Zicha, analyst at Mintec.

 

My daughters informed me last night that we need to buy more avocadoes because they want to start bringing them to school for lunch. There is already evidence of prices rising with the bags we usually buy going from 8 fruit to 5 in the last couple of months. 

The video worked exceedingly well. In August, Wal-Mart Stores Inc. announced it would acquire Jet.com for $3.3 billion in cash and stock. It was an extraordinary sum for a 15-month-old, purple-hued website that was struggling to retain customers and is still far from making a profit. Even more astonishing, Lore and his management team in Hoboken, N.J., were put in charge of Wal-Mart’s entire domestic e-commerce operation, overseeing more than 15,000 employees in Silicon Valley, Boston, Omaha, and its home office in Arkansas. They were assigned perhaps the most urgent rescue mission in business today: Repurpose Wal-Mart’s historically underachieving internet operation to compete in the age of Amazon. “Amazon has run away with it, and Wal-Mart has not executed well,” says Scot Wingo, chief executive officer of Channel Advisor Corp., which advises brands and merchants on how to sell online. “That’s what Marc Lore has inherited.”

Lore’s ascendancy at Wal-Mart adds bitter personal drama that wouldn’t seem out of place on Real Housewives of New Jersey to a battle between two of the most disruptive forces in the history of retail. In 2010, Wal-Mart tried to buy Lore’s first online retail company, Quidsi Inc., which operated websites such as Diapers.com for parents and Wag.com for pet owners. But it moved too slowly and lost out to a higher bid from Amazon.com Inc. Lore then toiled at Amazon for over two years before quitting, in part out of disappointment with its refusal to invest more in Quidsi and to integrate his team into the company, according to two people close to him.

 

You get a lot with your Amazon Prime membership from free 2-day shipping to photo storage and Amazon TV but you do not get the cheapest price on the majority of goods and Prime is not free. It costs $99 a year so you really need to shop, archive and watch Amazon to get your money’s worth and for many people that works out since it has built its subscriber base to 80 million people from 40. 

It is not the British government that is living on another planet but the Europeans, or at least those briefing the anti-Brexit media. I have always resisted falling into the old trap of endless Second World War analogies: they make it impossible to have a sensible discussion.

But I’m finding it increasingly hard to avoid concluding that the EU is actually engaging in a bizarre attempt at reenacting the settlement that followed the First World War: the €100 billion figure is so extreme, so devoid of any rational basis or genuine legal logic that it must be seen as an attempt at imposing reparations on Britain. We are guilty of crimes against the European dream, and must therefore face cruel and unusual punishment.

This is a shocking state of affairs, not least because of what it tells us about the increasingly delusional state of mind of many in Brussels (and even some in Germany), who see us as some sort of weak, vanquished foe ripe for the clobbering.

The last time this sort of idiocy was attempted was in 1919, at the Treaty of Versailles, when a defeated Germany was ordered to accept full responsibility for the war and to pay vast reparations to the allied powers.

A “Reparation Commission” was set up, and Germany was told to pay an immediate 20 billion marks in gold, commodities, ships, securities and other assets, while accepting occupation, oversight and endless humiliations.

John Maynard Keynes called it a Carthaginian peace, likening it to the total subjugation imposed on that Tunisian city-state by Rome. He decried France’s revanchism, and its obsession with extracting tributes from the Germans, and rightly predicted that the whole affair would end in tears in The Economic Consequences of the Peace.

History never repeats itself, of course, and we are a successful, powerful nation that won’t be bullied by anybody. But the fact that Juncker is even trying it on should serve as a reminder that the Eurocrats are out of their depth, intellectually as well as practically; far from being accomplished negotiators, they are pathetic amateurs desperate to conceal the fact that they are terrified that the British cash will soon run out. Their arguments are bogus.

The EU isn’t a force for economic freedom. It keeps demonstrating its mercantilism, and explicitly sees trade as a one-way favour, a privilege in return for which money and control (via European-imposed rule and the jurisdiction of its court) must be surrendered.

In reality, trade is always mutually beneficial, and no other “trading block” charges a “fee” for access. The fact that Barnier and his gang want to make us “worse off” by imposing protectionist barriers on UK firms expose them as economic illiterates with no interest in free markets.

Divorced from reality by their own ambitions and dreams, the EU’s political headquarters has become a bully pulpit, currently led by the toxic Jean-Claude Juncker and his acolytes.  This has been a disaster for European freedom, democracy and the rich cultural history of its diverse nations. They have been disempowered and homogenised by the EU, although that process is now in its latter, unsustainable phase.  

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

Brexit has “shattered” the principle of ever closer union in the EU, according to the Belgian finance minister, who warned that the bloc had to transform itself to survive.

Johan Van Overtveldt said there was “clearly a problem” with the European Union, as he called for a quick, comprehensive trade deal with the UK and warned that punishing Britain would be counterproductive.

Mr Van Overtveldt said a “different” and “better” EU, that focused on key areas such as security, migration, jobs and trade instead of policing trivial policies would help to boost prosperity in the bloc and remove the discontent sweeping across the Continent.

“Sixty years after signing the Treaty of Rome, and 25 years after the Maastricht Treaty, the European Union is in trouble and is certainly in need of new inspiration and new directions. The EU cannot continue operating the way it does today,” he said at an event organised by the European Economics and Financial Centre in London.

He urged policymakers to take a different approach to integration and said the idea of an EU forged in crisis put forward by Jean Monnet - dubbed the father of Europe - was “dead”.

Well done Johan Van Overtveldt! These are the most sensible public comments that I have heard from a senior EU political figure. That he may not have been able to say this in Europe is worth noting but I am glad that he felt free to do so on behalf of the European Economics and Financial Centre in London. 

A PDF of Szu Ping Chan’s article is posted in the Subscriber’s Area.

Dear David - The words coming out of the EU elite appear to be getting more disgusting by the day. I say that as a 'remain' voter who now regrets the way he voted! If Juncker and co think their words and actions will sway Brits their way they are seriously deluded. I work here in the UK with many Europeans who were delighted that Theresa May proposed a rapid solution to the residency issue, but then were shocked by the EU's actions.

This article by Brian Monteith for City A.M. – The EU is Scared: It knows no deal is better for Britain than a bad deal, is probably right in suggesting that the mood in Brussels is panic being hidden as toughness: 

"The leaks that have emerged from EU Commission president Jean-Claude Juncker since his dinner with Theresa May at Downing Street last week confirm what any realistic observer has known since last June. Juncker & Co are afraid. Very afraid. I can agree with the president that Theresa May inhabits a different galaxy, but he is looking through the wrong end of the telescope; it is she who is firmly grounded in the mortal world of realpolitik, while the EU leadership at every level lives in an ethereal cosmos of inert gases disappearing up its own black hole. First, ask any seasoned negotiator about how best to conduct the process of finding a mutually desirable agreement, and they will tell you that, when you walk in to the meeting, you need to know what would make you give up on the talks and walk out again. Theresa May has already worked that out and it scares Juncker and his chief negotiator Michel Barnier."

Theresa May is playing it superbly. She was right to call the election and that has rattled Brussels as they fear she will get a strong mandate from the British people. After the election, in a strong position, I suspect she will go quite slow for a while in order to let Juncker and Barnier dig even deeper holes for themselves with their outrageous bullying demands, so that when she decides to leave without a deal it will be very clear to the world who caused that inevitable decision.

Thanks for your informed thoughts on this subject and also for the link to Brian Monteith’s apt article for City A. M. 

I think it was the economist Patrick Minford who first warned us many months ago that Britain would not be able to negotiate with the EU, at least not initially.  Its entire strategy has been to create an impenetrable farrago of rules, conditions and fictitious charges to deter any country from leaving the EU. The negativity of this strategy is appalling and very unlikely to work with the UK, provided Mrs May gets a strong majority from the General Election on 8^th June, as most of us expect. 

Meanwhile, the EU’s last amateurish and pathetic strategy is to invent new rules and soaring financial charges to frighten Mrs May into surrender.  It is already having the opposite effect.  

A senior Swiss banker told me last night at dinner (over much wine!) EU behaviour is down to alcoholic psychology
“EU is like a reformed alcoholic. Versailles, WW I, WW II the pathology. Psychologically, the nation states worried about a relapse into mutually destructive nation-state-hood used the crutch of the EU (“Ever closer Union”, “common market” etc) as an AA cure. So when threat of Brexit or Greece comes along, they turn nasty and aggressive like an alcoholic fearing disintegration of the personality”….Hadn’t heard this one before!

Nor had I but I don't think Switzerland is contemplating joining the EU. How wise the Swiss were to turn it down from the very beginning.

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

If driverless deliveries prove faster, cheaper, safer, and more accurate, they would likely be adopted quickly and affect all parts of the country. Truck driving is much less concentrated in particular areas than, say, coal mining or steel making.

In 2016, there were 1.7 million heavy and tractor-trailer truck drivers, with a median annual wage of $43,590; 859 hundred thousand light-truck and delivery workers, who earned $34,700; and 426 hundred thousand driver/sales workers, who earned $28,449. So a rough estimate would be that driverless deliveries would put at least 2.5 million drivers out of work, not counting drivers’ helpers and a substantial number of workers in truck stops and roadside services patronized by truckers. Truck drivers drink a lot of coffee.

Like many lost manufacturing jobs, truck driving requires skill, some special training, hard work, and fortitude, but not much formal education. If you did not go beyond high school, but are a reliable, safe driver—especially if you are willing to work the demanding schedules of long-haul truckers—you can support a family and have decent benefits by driving a truck.

The transition to driverless deliveries would also create some new jobs, many of them technical jobs involving software development and programming that would command relatively high wages. Vehicle maintenance jobs would still be necessary, and would likely require enhanced electronic skills with higher pay than current truck maintenance jobs. Expanded demand for the cheaper delivered products would likely create additional jobs in the transportation sector. It is impossible to predict the ultimate effects of any major technological change, but in the short run it is a good bet that a lot of former drivers would be looking for work and finding their skills and experience ill-suited to available jobs at comparable wages.

The one question I get wherever I go to talk is what am I going to do when the robots take my job? It’s a big question but over the last year it has really moved into the public consciousness. The prospect of machines driving down our roads with no human behind the wheel has lent a sense of reality to the debate that was not present in years past. 

More positively though, in terms of capital investments, the flow of FDI into Africa recovered in 2016 after a dip in 2015. During 2016, capital investment into Africa rose 31.9%. Investment per project averaged US$139m, against US$92.5m in 2015. This surge was driven by several large, capital intensive projects in the real estate, hospitality and construction (RHC), and transport and logistics sectors. The continent’s share of global FDI capital flows increased to 11.4%, up from 9.4% in 2015. That made Africa the second fastest growing destination when measured by FDI capital.

This somewhat mixed picture is not surprising to us. We believe that investor sentiment toward Africa is likely to remain somewhat softer over the next few years. From our point of view, this has far less to do with Africa’s fundamentals than it does with a world characterized by heightened geopolitical uncertainty and greater risk aversion. Companies already doing business in Africa will continue to invest, but will probably exercise a greater degree of caution and be more discerning. We are still of the opinion that any shorter-term shifts in FDI levels will be cyclical rather than structural. We also anticipate that the evolution of FDI — increasing diversification in terms of sources, destinations and sectors — will continue. Over the longer term, as economic recovery slowly gathers pace and as many African economies continue to mature, we also anticipate that levels of FDI will remain robust and will continue to grow.  

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

Africa is a massive continent which for all practical purposes is undeveloped. It is also going to represent the bulk of population growth and the most attractive demographics over the next 30 years so there is a logical explanation for why FDI is flowing towards countries with improving governance and/or abundant mineral wealth. 

The widely expected decision contained no concrete commitment to the timing of the next rate increase. Even so, investors increased bets on a move in June after absorbing the Fed’s sanguine assessment of the outlook and its encouraging observations on inflation, following data showing first-quarter economic growth of 0.7 percent and monthly price declines in March.

“Nothing in the statement today, which was voted unanimously by the FOMC, leads me to believe that the Fed is even close to changing its mind on rates,” Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients. “Base case is for a couple more rate hikes this year -- probably in June and September -- and for the beginning of balance sheet shrinkage in December.”

3-month Treasury bills are beginning to price in a rate hike in June but the rate is still only 86 basis points while the Fed Funds Target rate is 75 to 100 basis points. That highlights just how reluctant bonds traders have been to give credence to the Fed’s estimates of how often and by how much they are willing to raise interest rates. 

Brexit Secretary David Davis flatly rejected a reported bill of as much as 100 billion euros ($109 billion) from the European Union, and threatened to walk away from the bloc without a deal if provoked.

Britain would have no obligation to pay a Brexit bill if it leaves the EU without an accord, Davis said on BBC Radio 4’s “Today” program on Wednesday. While “nobody is looking for that outcome” since the goal is to reach an agreement with the EU, “we have to maintain the alternative option” of walking away, he said.

The latest flashpoint was a Financial Times report that said EU negotiators had revised their initial calculations upward from about 60 billion euros. The FT said that according to its calculations, the new net figure for the bill would be as much as 75 billion euros, once Britain’s share of EU spending and repaid loans were accounted for, giving a gross 100 billion euros. The newspaper’s previous calculations had given a net figure of 40 billion euros to 60 billion euros, in line with the EU’s estimate.

“We’ll not be paying 100 billion,” Davis told ITV. “We’ve never seen a number” from the EU, Davis said. He refused to specify how much Britain is prepared to pay, saying “what we’ve got to do is discuss in detail what the rights and obligations are.”

Davis also rejected as “gossip and spin” the weekend report in the German newspaper Frankfurter Allgemeine Sonntagszeitung that Juncker had expressed shock and skepticism at May’s approach to negotiating Brexit after a dinner meeting last week.

The dinner at May’s Downing Street residence was “constructive,” said Davis, who was one of 10 people in the room. “There were some disagreements,” he said, but the atmosphere was “absolutely not” hostile.

May won a measure of support from several European government officials, who distanced themselves from Juncker’s apparent skepticism about the chances of a Brexit deal. Leaked details of the dinner are “not helpful,” Irish government chief whip Regina Doherty said on Tuesday. The comments set the “wrong tone” as Ireland wants a “vibrant” trade relationship with the U.K. after Brexit in 2019, she said in an RTE radio interview.

“What we’ve seen recently is that at times these negotiations are going to be tough,” May told BBC television in an interview Tuesday. “During the Conservative Party leadership campaign, I was described by one of my colleagues as a bloody difficult woman. And I said at the time the next person to find that out will be Jean-Claude Juncker.”

(See also: May Accuses Juncker Team of Trying to Sabotage U.K. Election, from Bloomberg)

I have said it too many times to repeat in detail: The UK needs to end Brexit talks immediately if anything like the recent absurd threats are repeated as negotiations commence. That would be a challenge for all involved but also a show of strength by the UK. It would pave the way for mutually beneficial negotiations to emerge sometime later.  

The timing of the EU’s bombing raid on Downing Street has caught London by surprise. Germany has hardened its position markedly since the Tories called the snap-election. All signs are that Chancellor Angela Merkel has given a green light to those in Brussels and Paris who want to hold Britain’s feet to the fire.

This comes despite a string of relatively conciliatory gestures by Theresa May: her defence of Nato and the EU cause in Washington; her unbroken support for the UK’s security and global commitments; her Lancaster House speech calling for intimate ties with Europe, whilst respecting the integrity of the EU’s four freedoms by leaving the single market.

None of this has made any difference. Anti-British rage has exploded in EU governing circles. After the Phoney War, the logic of Article 50 is at last hitting home.

For whatever reason, the German finance ministry and Kanzleramt have chosen to interpret Britain’s snap-election as a hostile act, rather than an attempt by Mrs May to limit the influence of Brexit ultras in her own party and to smooth the way for a softer deal.

Berlin and Brussels are irritated, and have let their irritation show. They had expected to deal with a fragile UK government over the next two years, one without a clear mandate for its Brexit strategy, and vulnerable on multiple pressure points. None of this is so clear any longer.   

What we now face is diplomatic war and a very dangerous situation. At the end of the day, it is Germany that is setting policy, and Germany has demonstrated in its handling of Europe’s monetary union that it is apt to see events through a self-serving moral prism - without doubting its own righteousness - and is capable of catastrophically bad economic and political judgment.

Whether the fall-out from the Brexit Dinner has poisoned relations irretrievably remains to be seen. Trust has for now been shattered. Ultra-hard Brexiteers who always argued that it was futile to negotiate any deal with the EU’s Caesaropapist machinery are gaining more credibility by the day.

It is now imperative to draw up a ‘Plan B’ that limits the need for negotiations. I floated one possibility last week (to the horror of many readers): the revolutionary option of unilateral free trade, modulated by a free exchange rate that would cause extreme discomfort to the European Central Bank. We would never again have to admit Mr Juncker into the hallowed halls of a British institution.

We should unilaterally announce total protection of all EU citizens living legitimately in the UK, regardless of what the EU does. We should unilaterally declare an open Irish border and total working rights and privileges for all Irish wishing to work in the UK, regulating back-door inflows of future EU migrants by other means.

We should refer the divorce claims to the international court of treaties in The Hague.  If the EU wishes to thwart any of these actions - which would not be easy - let it explain the moral basis of its decisions.

What Britain must not do is to limp along responding sheepishly to orders issued by Brussels. Above all it must not go down the suicidal route of trying to bluff the EU. The UK must act.

 

 

Since the early 1970s the clustering metamorphosis of European politics has received high praise from democracies the world over. Historic enmities had been laid to rest, or so it was believed.  This was largely true during the European Common Market phase as independent nations traded freely with each other and generally prospered.

How we miss those halcyon days which ended with the launch of the Euro, although no federal structure to make it viable.  Instead, under the Euro European nations lost their independence and became states within an economic system largely run by Germany. 

Obviously, this was not working, evidenced by the Eurozone’s steadily shrinking GDP growth as a percentage of the global economy.  Southern European nations which had prospered during the European Common Market era have experienced economic depressions worse than the 1930s, as their economies collapsed and unemployment soared.   

My concern since the launch of the Euro has been that it would revive historic enmities among European nations.  Sadly, we have seen this develop and it continues to worsen.  The UK, never a member of the single currency, should be less affected by this problem.  However, Brexit is a convenient excuse and it is already being blamed for undermining the European project.  

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

The ships from Hamburg steam into Mobile Bay several times a month. Loaded upon them are the titanic parts of flying machines: tails, already painted; wings, already functional; the fuselage, in two segments, front and rear. The pieces are set on flatbed trucks and escorted by police cars to a decommissioned Air Force base, Brookley Field, about four miles from the harbor. There, between the runways, the European aerospace company Airbus has built a $600 million factory to assemble airplanes in the United States.

It’s an odd arrangement for many reasons, not least among them being the fact that Airbus could assemble its planes almost anywhere. The finished product is easy to move (it flies), and the hardest work of making it is buried in its components. The vertical stabilizer is made in Getafe, Spain. The wings come from Broughton, Wales. The front of the fuselage is made in Saint-Nazaire, France; the back, in Hamburg. What happens in Mobile doesn’t resemble manufacturing so much as the assembly of a particularly large and tremendously complicated piece of Ikea furniture. Here, the American workers attach the pieces of the airplane using tools and connectors, many of which are also imported from Europe. Many of the supervisors come from the continent, too; the Mobile factory manager was raised about 10 miles from the wing plant in Wales. And the company says that it saves no money by building planes in Mobile.

This project was obviously underway well before Trump’s presidential election victory.  I assume Airbus will be very pleased because there seems little reason for US airlines not to buy planes assembled in Mobile Bay, should they wish to, even if all the parts have to be shipped to the US.   

Apologies: Copy reduced by internet problems in London.

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

Nevertheless, this will be an interesting test of the view, which I and some others have espoused, that the Fed is in the process of shifting operating regimes -- from following markets to being more willing to lead them.

Last week’s disappointing reading of 0.7 percent gross domestic product growth for the first quarter, the lowest in three years, added to other data releases (such as retail sales, inflation and autos) suggesting that the U.S. economy -- and consumption in particular -- is going through a softer economic patch. In previous years, this would have provided the Fed with the excuse to soften its policy signals, assuring markets that monetary policies will remain ultra-stimulative and minimizing the risk of financial asset volatility. Indeed, these are the signals that the European Central Bank reiterated last week when its governing council met. And the ECB did so despite official recognition that, in the case of the euro zone, economic conditions have improved and forward downside risk is lower.

The Fed’s inclination to repeat past practices is countered by three considerations.

* An element of the recent data weakness is likely to be both temporary and reversible.

* The Trump administration has reiterated its intention to pursue a large tax cut that, if approved by Congress (a big if), would most likely lead to a considerably wider budget deficit, at least in the short-run until economic growth and budgetary receipts pick up (especially given the lack of large revenue measures).

* Though even harder to quantify, the Fed is not indifferent to the collateral damage and unintended consequences of prolonged reliance on unconventional monetary policies.

I believe the bond market is exhibiting what I term a “boy who cried wolf” mentality. After so many warnings and almost a decade where the Fed’s inflation target was wide of the mark on consecutive years there is no appetite for pricing in rate hikes until they are deemed to be imminent. I agree with El Erian, the flow of stimulative rescue funds has a conditioning effect on those benefitting from them. There is no credible belief that the Greenspan, Bernanke and now Yellen puts will be withdrawn.

Workers employed by US multinationals in Ireland earn almost twice the average industrial wage and are paid significantly more than their counterparts in other foreign-owned firms.

New figures from the Central Statistics Office (CSO) show employees of US firms here earned an average of €59,836 in 2015, which was nearly double the industrial earnings average of €36,519.

It was also higher that those working for UK multinationals based in Ireland, who earned an average of €34,691, or those working for German multinationals, who earned an average of €42,039.

The research also shows US multinationals accounted for €581 billion of the foreign direct investment (FDI) in Ireland, equating to over 70 per cent of the €796 billion total.

This was more than originally thought as previous surveys tended to examine FDI on a “country of origin” basis.

However, this time the CSO examined the controlling parent of the firms involved to get a better picture of the true origin of the investment.

Unsurprisingly, US FDI in Ireland dwarfs that from any other country, reflecting the long-standing ties between the two countries. Foreign investment from the UK amounted to just €19 billion, while the stock of investment from Germany and France was €12 billion and €8 billion respectively.

The 12.5% corporate tax rate as well as membership of the EU have been instrumental in Ireland’s success in attracting both investment and high paying jobs. It is that latter point which helps to compensate the government for the loss of corporate tax revenue and why the 12.5% rate is so important to Ireland’s economic health. 

One of the funds is designed to deliver 400 percent of the daily performance of S&P 500 .SPX stock index futures, while another fund will aim to deliver four times the inverse of that benchmark. That means a fund could go up 8 percent on a day the index it tracks falls by 2 percent.

ETFs offering three times leverage already trade in the United States, but more reactive products have been limited to listing in Europe.

"We're excited about it," said Sam Masucci, chief executive officer at Exchange Traded Managers Group LLC, which is distributing the product, though he said the product is "not going to be for everybody.

"But for those people that are looking for the leveraged exposure to the S&P and they're not looking to do it by way of a futures product here you have a publicly listed security," Masucci said.

Regulators' move to approve the products comes after a difficult time for sponsors of more exotic ETFs.

Leverage and appetite for it are usually symptomatic of a bull market which has been in motion for a number of years because investors have plenty of retrospective evidence of higher prices and competition for outperformance trumps conservatism and prudence. I have seen anecdotal evidence that hedge funds routinely take on leverage orders of magnitude higher than is now permissible with ETFs. 

There’s plenty of talk about the retail industry dying, with malls closing and the slump stressing iconic chains like Sears Holdings Corp. and J. Crew, but healthier big-box giants such as Wal-Mart Stores Inc. and Costco Wholesale Corp. are still chronically in need of employees, at least for now. The number of U.S. retail jobs was about the same last year compared with 2015, according to the Bureau of Labor Statistics. What’s really bedeviling retailers is annual turnover -- at 65 percent, it’s the highest since before the Great Recession -- making it necessary to keep hiring. The chains are so hungry for good help they’re poaching workers from fast-food restaurants.

“Those jobs tend to be more transitional, they tend to be more fluid, and as a result there tends to be higher turnover,” said Michael Harms of Dallas-based researcher TDn2K. “Even though you hear headlines like retail is dying and the robots are coming, there’s still a lot of things that need human touch points. It’s a dogfight over good employees.”

What interested me most about this story was not so much the fact big box stores need more workers as their share of the retail market increases, but the effect this is having on restaurant wages. 

On a baking hot day in July 2015 Greece's radical-Left Syriza government won a spectacular mandate to defy the austerity regime of the EU-IMF Troika.

Against all expectations, 61pc of the Greek people voted in a referendum to reject the Carthaginian terms of their latest bail-out deal, a scorched-earth 'Memorandum' described by a young French economy minister named Emmanuel Macron as a "modern day version of the Versailles Treaty".  

It seemed as if the long-running showdown between Athens and the EU authorities had reached an explosive juncture. Markets were braced for the ejection of Greece from the euro in short order. Monetary union was on the verge of break-up.

Yet the rebel victory instantly and inexplicably metamorphosed into surrender, and with it died the final hopes of the European Left. Premier Alexis Tsipras stunned his own people and the world by announcing that there would be no rupture with the Troika after all, and furthermore that he would join hands with the conservative cadres of Greece's ancien regime. 

The extraordinary developments are recounted by Yanis Varoufakis in his deeply unsettling account, 'Adults In The Room, My Battle With Europe's Deep Establishment', published in extracts in the Telegraph. What the former finance minister reveals is that leaders of the Syriza government were seriously worried about dark forces in the shadows. They were frightened.

Vested interests with huge sums at stake – within Greece, and implicitly across the eurozone – were prepared to defend the existing financial order by any means necessary. The prime minister feared a military coup. 

His warnings to Mr Varoufakis in soul-searching talks that night certainly raise eyebrows, all vividly narrated in a subchapter entitled 'the overthrowing of a people'.

The final days of the referendum were surreal. Unbeknownst to the Greek people, Alexis Tsipras had called the snap-vote expecting to lose. Most of the Syriza leaders did not campaign. What they wanted was an "emergency exit", calculating that a respectable defeat would give them a way out after boxing themselves into a corner.

But humiliated and long-suffering Greeks instead seized on the chance to express their defiance, rising to a "gigantic celebration of freedom from fear" in the final intoxicating rally at Syntagma Square.

And:

As the scale of the victory became clear on election day Mr Varoufakis penned a triumphant piece. "In 1967, foreign powers, in cahoots with local stooges, used tanks to overthrow Greek democracy. In 2015 foreign powers tried to do the same by using the banks. But they came up against an insanely brave people who refused to submit to fear."

He then went to join the victory party at the prime minister's Maximos Mansion, only to discover that the betrayal of the vote was already under way. "As I walked in, Maximos felt as cold as a morgue, as joyful as a cemetery. The ministers and functionaries I encountered looked numb, uncomfortable in my presence, as if they had just suffered a major electoral defeat," he said.

Only he and his wife Danae were wearing jeans, once de rigueur in Syriza circles. "Sitting there, I began noticing things about the people around me that had previously escaped me. The men resembled accountants. The women were dressed as if for a state gala," he said. They were like the pigs on two legs, drinking with men, glimpsed through the window in George Orwell's Animal Farm.  

Mr Varoufakis told the prime minister that it was his duty to honour the referendum, that he should seize on the thundering expression of popular will to escalate Greece's war of resistance, and to present the ECB and Berlin with a stark choice. It was wasted breath. The decision to accept what he calls "unconditional surrender" had already been taken, and a new finance minister willing to go along with this volte face had already been picked.

The EU has been a costly mistake since the launch of the single currency in 1999, without a Federal State to deal with the inevitable inequities between individual states (formerly independent countries) which would arise.  EU bureaucrats knew that they did not have the votes for a Federal Union.  Nevertheless, they undermined democracies in the region and also their economic prosperity by launching the Euro in an environment which several centuries of previous history showed was bound to fail.

Subsequently, unofficially centralised governance within the EU resembles a left-wing mafia rather than a healthy democracy.  That is what Prime Minister Theresa May faces, despite her best efforts to sincerely promote an agreement in the mutual interests of both a departing UK and also the EU. Fortunately, she now realises this, as do a sufficient proportion of the UK electorate to give her a significant majority.  That may not influence the EU but it will help the UK to first deal with turbulence following a hasty exit from the EU before fulfilling its potential in the global economy. 

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

When the 27 EU leaders met to review their Brexit talks guidelines yesterday, it took them just one minute to approve the draft. They then burst into applause – almost akin to a Soviet-era meeting of Warsaw Pact comrades. The guidelines are provocative and blatantly breach the UK’s own red lines. Britain, in turn, must spell out that it is prepared to walk away if it is unsatisfied with the deal that talks produce.

The EU’s mask of collegiality and high ideals is slipping. As it does, so the decision of the British voters to walk away last year looks even wiser. Extracts from Yanis Varoufakis’s memoir of the 2015 Greek crisis depict an EU where the Germans dominate and the Union, they insist, must be preserved at all costs. He claims that Emmanuel Macron, probably France’s next president, described the EU’s deal for Greece as a latter-day “Versailles Treaty”. Angela Merkel apparently overheard and barred Mr Macron from talks.

Greece is not Britain: a great deal more for the Union is at stake this time around. The EU’s guidelines reflect it. Theresa May attracted shrill criticism for pointing out that continental security might be affected by the course of negotiations, yet the EU has shamelessly put absolutely everything on the table: the cost of the so-called divorce, from which they are determined to wring every penny, Gibraltar, UK bases in Cyprus and, in a concession to the French, an effort to stop any financial deregulatory drive by Britain.

The UK cannot accept a settlement that would, say, tie its hands on tax and regulation after it leaves the EU: the country voted to get out in part to liberate its economy. And there are matters on the table that have nothing to do with the EU – such as the future of Ireland. Britain therefore has to make it absolutely clear that it will not be drawn into diplomatic traps or be landed with bills and commitments that reduce its status and undermine the raison d’être behind Brexit.

The EU needs to be reminded that it relies so much on the UK’s markets, intelligence and military that it would be foolish to act so bullishly over the terms of settlement. It is in everyone’s interests to separate amicably and agree as soon as possible on a new trade arrangement. That is what Britain should aim for. If the Europeans will not play ball, however, they must be in no doubt that Britain has the strength and will to go it alone.

People like Jean-Claude Junker have been completely in denial about not only the UK’s determination to leave the EU but also our potential to prosper by doing so.  I do not think this will really change until at least several months after the UK has left.  The sooner all this occurs the quicker we will get back to mutually sensible trade relationships with the EU.  

“Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is ‘long in the tooth’ and about to end,” he said, adding that investors were also living in fear of the 1987 crash back in 1987.

Finally, there’s the bull market super cycle.

As you can see by the chart below, the market’s pattern over the past century has been about 15 to 20 years of economic boom followed by 10 to 15 years of downturn. The cycle that we’re currently in looks to have started with the highs reached in 2013, and Fahmy says he believes it could last for many more years.

Veteran subscribers to this service are very familiar with this theme, having lived through the last two secular bear markets and the previous secular bull market.  The lengthy bearish phases are basically sideways trading ranges, punctuated by a couple of terrifying crashes.  We saw these crashes from Jan 1969 to Jun 1970 and Jan 1973 to Oct 1974.  Similarly, they occurred again from Sep 2000 to Nov 2002 and Nov 2007 to Mar 2009.  People of my generation will also remember the 1987 crash, which actually occurred within the previous secular bull market.  It was triggered by everyone trying to hedge at the same time with what was the newly introduced S&P 500 futures contract, as leading central banks raised rates sharply and simultaneously. 

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

For the first time since 2010, the global economy is enjoying a synchronous recovery (see chart). The developed markets’ (DM) private sector is exiting deleveraging after several years of slow growth due to a focus on balance sheet repair and, after four years of adjustment, the emerging markets are in a recovery mode. These trends create a positive feedback loop. Indeed, the DM economies account for 60% of emerging market (EM) exports, so as their real import growth accelerates, EM exports are rebounding. What’s more, an improving EM outlook reduces DM disinflationary pressures. 

How sustainable is this recovery? Typically business cycles end with macrostability risks (price, external and financial) spiking, forcing policymakers to tighten monetary and/or fiscal policy. In this cycle, considering that emerging markets inflation and current account balances are moving toward their central banks’ comfort zones, it is unlikely that macrostability risks will surface soon. Moreover, the emerging markets now have high levels of real rate differentials vis-àvis the US, providing adequate buffers against normalization of the Federal 

DEVELOPED MARKET RISK. In our view, the key risk to the global cycle is apt to come from the developed markets— most likely the US, considering that it is most advanced in the business cycle. Moreover, the US tends to have an outsized influence on the global cycle, particularly the emerging markets. While price stability features prominently in debating the monetary policy stance of any central bank, financial stability is clearly emerging as an equally important factor.

How will it play it out? For insight, we can look at history. The late ’60s saw fiscal expansion at a time of strong growth and low unemployment. In the mid ’80s, the US pursued expansionary fiscal and protectionist policies in an improving economy. We look at similarities and differences versus today, analyzing asset class performance by fiscal deficit and unemployment quartiles.

To that end, private-sector leverage has picked up modestly in the US. In fact, the household-sector balance sheet, which was the epicenter of the credit crisis, had been deleveraging until 2016’s third quarter. Moreover, the regulatory environment has been relatively credit-restrictive. Hence, we see moderate risk to financial stability. However, risks could rise, considering that monetary policy is still accommodative, and particularly so if the administration eases financial regulations. Price stability is a critical risk, too—especially since the core Personal Consumption Expenditures Index inflation rate is close to the Fed’s target and US unemployment is around the rate below which inflation could accelerate. Reflecting this, we expect the Fed to hike rates six times by year-end 2018 (see page 3). We expect other major DM central banks to take a less dovish/more hawkish stance

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

The MSCI World Index broke out to new all-time highs in March and continues to extend that breakout. There is no denying that the Index is heavily weighted by the USA but it has been a generally firm period for global stock markets as economic growth figures pick up against a background where interest rates are still relatively accommodative. 

As automobiles transition from being completely under the control of a human driver to being totally controlled by machines and computers, several things can happen. If cars can operate without having accidents, highway speeds can be increased, which could reduce vehicle fuel-efficiency, boosting fuel consumption. Fully-autonomous driving will also enable classes of the population currently unable to utilize vehicles, adding more vehicle miles traveled to the nation’s transportation system and increasing fuel consumption. Those classes of people include non-drivers, along with the elderly, disabled and young people. A study by Carnegie Mellon University estimates that this expansion of the driving population could increase vehicle miles traveled by 14%, or adding 295 billion miles of driving annually. That will mean more fuel consumed, regardless of how fuel-efficient the vehicles are that these classes of people utilize. A rough calculation based on vehicles with 30 miles per gallon ratings, means about 675,000 barrels a day of additional gasoline, or approximately a 7% increase on today’s gasoline consumption. Fully-autonomous driving suggests more vehicle use, more miles driven and more fuel consumed. The offset is if fully-autonomous vehicles dominate the growing car/ride-sharing segment of the transportation sector, which could act to reduce fuel consumption. 

Whether the vehicles of the future are ICE-powered or derive their power from some other fuel source will be influenced by the outcomes of the other two broad trends. For example, if we become a nation of car-sharers, there will be fewer vehicles needed, vehicle miles traveled might decline, although they just as easily could increase. A fully-autonomous vehicle provides the possibility of having a greater impact on fuel consumption than human-driven vehicles. First, cars that don’t have accidents can be made from lighter materials that facilitates more EVs since greater battery weight will be offset by lighter vehicle bodies and frames. That could help EVs overcome some of the range-anxiety challenges for many potential buyers. It could help accelerate the electrification of the automobile fleet, which would have a significant negative impact on vehicle fuel consumption. On the other hand, if ICE powered vehicles remain the popular option, fuel consumption might not be as impacted as in an EV-favored scenario. With fully-autonomous vehicles offering the potential for increased vehicle use, fuel consumption is likely to increase. 

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

The Jevons Paradox suggests that if the price of a vital commodity falls use will increase so that the greater efficiency achieved through advancing technology is absorbed by demand growth. In fact the only commodity I can think of that has been completely obviated from popular use is whale oil. In every other case uses might have changed and costs might collapse but we end up using more of it. 

Tergnier may be Macron’s toughest sell.

The town, with a population of 13,000, used to vote Communist and then Socialist. It turned to the National Front as its sprawling rail freight station — once one of France’s biggest — shed hundreds of jobs. Steelworks, a sugar-manufacturing plant and other firms closed down or moved elsewhere leaving the jobless rate at 15 percent. The national average is 10 percent. Thirty-six percent of voters backed Le Pen last month, among her highest votes in the country.

“Globalization is bad for Tergnier,” said mayor Christian Crohem, 67, who heads a mainly leftist coalition. “We’ve brought more countries into the EU and we’ve allowed businesses to move around, so we’re up against workers from abroad who don’t play by the same rules, it’s unfair competition.”

He tells the story of a 70-year-old woman who came to see him recently because she didn’t have enough money to feed herself. Sitting in his office, she cried with shame as she asked him for a handout to buy food.

“That kind of thing really gets to you,” he says. “People here feel abandoned, and so do we, the officials they elect.”

 

In a country like France, which prides itself on its social infrastructure, this kind of story is all the more troubling. Fiscal austerity over much of the last decade has laid bare the hollowing out of rural and legacy manufacturing centres right across the developed world. We are talking about France right now because the election is on Sunday but this is a broad issue which has contributed to populism in a number of countries and there is little evidence of sincere efforts to curb it. 

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

Acceleration in market share gains: Our AlphaWise survey indicated that the low price course strategy is highly effective for leading players to gain market share, thanks to their strong brand name, well established systems, standardized teaching procedures, and strong teaching curriculum development capabilities. We expect the promotional environment in China's K-12 after-school tutoring market will become a new norm, and the low user stickiness in the market will benefit the leading players like TAL and New Oriental, as they're considered top providers for potential switchers. We believe New Oriental's roll out of its low price strategy to over 30 cities and TAL's acceleration in capacity expansion will accelerate their market shares in the coming quarters. Although this may bring some short-term uncertainty to revenue growth and margins when the summer course revenues are booked, we believe this strategy is value accretive to the leading players given they can manage to achieve high retention rate.

Market demand remains robust amid macro slowdown: According to our AlphaWise survey results, K-12 after school tutoring expenses are the last item to cut among major household expenses during weak financial conditions. Moreover, 24% of respondents intend to increase their spending on tutoring classes in the next 12 months. This shows that education is not only resilient during macro downturns, but also remains a structurally growing sector in China. 

Good potential for online education: The survey results also show that the acceptance level of online education is very high and 43% of respondents thought online education was as good as offline, but more convenient. We believe this bodes well for future demand for the leading players' online and O2O initiatives, which could bring in incremental revenue opportunities with better operating leverage.

 

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For most families education is the surest and in many cases only way to climb out of poverty. Despite the fact there is a great deal of debate about the best way to impart knowledge and indeed what should be prioritised in the West, Chinese parents are under no illusion, their child has to perform well in the state exam. Competition is such that the only way to ensure your child is getting the grades they need when you do not have knowledge/time yourself is to employ a tutor. 

Indonesia: buy for the 2H17/2018 recovery? Our earlier worries for equities – politics, tax scrutiny, rising rates, earnings risk – have not disappeared, but we now think an expected period of support for EM currencies will help to keep bond yields and risk-free rates down – a bigger tailwind. This is coupled with improving earnings momentum with an acceleration to 17% growth in 2018, supported by less bank provisioning and increased infrastructure momentum ahead of the 2019 elections and a consumption recovery. Our Focus List includes BBCA, ASII, TLKM, UNTR, LPPF and LINK; our new index target implies 8% upside.

Malaysia: window still open. We initiate on Malaysia (Malaysia strategy initiation) and position it as our No.2 OW in ASEAN. Interest is back, as evidenced by US$1bn of foreign equity inflows in March. We see room for more outperformance from: 1) upcoming elections, 2) infrastructure pick-up, 3) better commodity prices, 4) return of earnings growth, and 5) currency support. We add IHH Health Care to our Focus List. 

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

The AEAN region was among the first to recover following the credit crisis and has been a centre of investor interest for more than a decade. It remains a hotbed of economic growth not least because of favourable demographics and proximity to the world’s major population centres. Governance is everything and ASEAN offers some wildly different examples of how countries have gotten it right and indeed wrong. 

The arguments for higher bond yields
The global economy is experiencing a cyclical recovery regardless of the political noise, and its performance should remain the key driver of fixed-income markets over the next 12 months. U.S. data releases have been strong and the employment picture continues to improve, leading many investors to prepare their portfolios for reflation. We believe that Trump’s loosening of financial regulations should re-ignite the animal spirits that went missing after the 2008 financial crisis, creating self-sustaining economic growth. Corporate America will likely invest and hire more, pushing up the cost of capital and inflation. 

Aiding this momentum will be an administration stocked with business-minded department heads and White House advisors. Trump has appointed Steve Mnuchin, a former Goldman Sachs executive, as Treasury secretary and billionaire investor Wilbur Ross to head the Commerce Department. Gary Cohn, the recently departed Goldman Sachs president, is Trump’s top economic counsellor. These appointments help to validate the optimism towards streamlining  regulations and promoting business investment. 

A tight labour market is another source of economic optimism and will foster inflationary pressures as higher wages embolden consumers to spend more. A higher-inflation, faster-growth environment would be a departure from the slow growth mindset that has prevailed since 2012. 

Assuming that the government spending materializes as advertised and stokes economic growth, we would expect yields to be pulled higher by competition for capital between Treasury bonds and businesses and individuals seeking loans. Here’s why: capital must be financed either from abroad and/or with domestic savings, and administration proposals aimed at reducing imports would increase the importance of domestic savings as a source of capital. Domestic private savers as a group tend to demand higher compensation for loans than foreign entities, potentially leading to higher rates as growth quickens. 

 

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American Airlines offered pay rises of 5% and 8% for cabin crew and pilots last week. That’s well ahead of inflation and is further evidence of a tight labour market fuelling wage demands. 

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

Potash prices are recovering after a decade of weakness, lifting the prospects of a turnaround in fortunes for fertilizer companies following a slump in farm spending.

Potash Corp. of Saskatchewan Inc., the world’s second- biggest producer, boosted its full-year earnings forecast on Thursday and said strong demand will continue for the rest of the year as North American farmers seek to replenish soil nutrients after record harvests. Chinese potash shipments are expected to increase in 2017, it added.

The Canadian company’s performance suggests the potash recovery is in “full force," Sanford C. Bernstein & Co. analyst Jonas Oxgaard said in a note. Canpotex -- the joint venture handling overseas sales for Potash Corp. and its two largest North American peers, Agrium Inc. and Mosaic Co. -- has kept the market tight and driven up prices, while volumes have exceeded expectations in North America and export markets, a positive sign for the companies, he said.

“I think we’ve seen the turnaround already,” Oxgaard said by phone. “We expect continued price increases in potash.”

Potash Corp. maintained its forecast for worldwide industry potash shipments of as much as 64 million metric tons this year, up from 60 million in 2016. It raised its prediction for Latin American shipments. China, the largest market, is now seen consuming as much as 15.5 million tons.

The most important thing that happened in the potash market in the last decade was Uralkali’s attempt to reassert its dominance on the market by massively increasingly supply when it broke its relationship with Belaruskali in 2013. More than any other factor that contributed to the collapse in pricing. 

Good morning Eoin. I attempted to send this message from my mobile which I fear I bungled. I expect you must have a mountain of email daily, not least the amount which must be caught up after your travels. I hope you had a great trip. You may recall, I asked a month ago for your thoughts on liquidity in China. The Regulators have continued to rein in, essentially squeezing out smaller banks. I found it interesting that the Govt took a survey of banks regarding their recent policies, or is that positive. In any event, I will re-produce the article, I refer below:

Thank you for your warm regards and the attached article from Market News. We had a wonderful trip to Asia. Thanks to Mrs. Treacy’s guangxi, I had the pleasure of having lunch with a senior Citic Securities dealer while in Beijing in 2014 who explained that the only game in town at the time was lending to private investment clubs which he referred to as “Chinese hedge funds”. 

We think accounts should take notice of this list because there could be as much as USD 3.2B to trade in these names at the June 2017 quarterly review (assuming our forecast holds). We estimate accounts could buy USD 1.3B in the new Canadian additions and sell USD -1.8B for funding.

What to expect from the Benchmark Change? This is not the first benchmark change for the GDXJ. Market Vector Index Solutions (previously known as Market Vector Indices) expanded the universe for the Junior Gold Miners Index after the ETF provider ran into similar problems in 2014. Specifically, Market Vector Indices allowed larger companies to qualify for the index by changing the requirements from needing 90%-98% (of the full market capitalization of the eligible universe) to needing 80%-98%. According to our analysis, the market capitalization range for new constituents effectively doubled to USD 95M – USD 995M (from USD 95M – USD 448M under the previous methodology). The buffer zones (for existing constituents) also expanded to include constituents that ranked between 75% and 80% (of the eligible universe) versus 80% and 90% under the previous methodology. The previous methodology change was announced on October 13, 2014 and took effect at the December 2014 quarterly review.

Overall, the 2014 index additions outperformed the GDXJ by 9.8% between the date the methodology changes were announced and the determination date for the index review. The additions outperformed the GDXJ by an additional 14.0% between the determination date and the effective date of the index review, bringing total outperformance to 23.8% from the announcement date of the methodology changes. Note, the 2014 additions had a 3.6% post-announcement pop, so accounts that cautiously waited for a methodology change could still wade into the trade post-announcement and benefit from the index flows.

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

The fact that the junior gold miners ETF is being reconstituted to allow more large companies entry begs the question why have a juniors ETF in the first place? The answer of course is that the fund has grown to $4.2 billion under management which is a lot of money to invest in small companies and needs the room to buy larger cap companies. The result is that there will be little difference between GDX and GDXJ. 

The European Union is hardening its terms on Brexit. There is a new hint of hostility in the language. The tone is peremptory.

Those of us who hoped that Germany would push quietly for an amicable settlement can no longer be so confident. We now learn from Handelsblatt that the German finance ministry insisted on some of the most unfriendly changes to the EU's latest working documents.

Berlin stipulated that Britain must honour "all obligations" (Verpflichtungen) for divorce payments, a tougher wording than the earlier, gentler talk of legal and budgetary "duties" (Pflichten).

It demanded that Britain desist from tax dumping and financial deregulation that would “jeopardize the stability of the union". This demand is almost insulting. British regulators have led efforts to recapitalize banks. It is the eurozone and Germany that have dragged their feet on tougher capital rules.

There is no longer any attempt at diplomatic tact. The document states that the European Commission will "determine" when the UK has made "sufficient progress" as it jumps through the hoops, the way it handles accession talks for supplicants hoping to join. It reads like an imperial curia discussing a colony.

The French too have stepped up their demands, insisting that financial services be excluded from the trade deal. The City of London must respect the "regulatory and supervisory standards regime" of the EU in any future arrangement, suggesting that Britain will have to accept the sway of the European Court.

And:

Adam Posen, head of the Peterson Institute in Washington, said Britain would face a rough time with no EU trade deal but at least such a plan has creative allure. "It is far more credible than other options," he said.

The current dismal narrative on Brexit would be transformed overnight.  Britain would suddenly be seen by the rest of the world as pioneering nation at the forefront of globalism, reasserting Thatcherite audacity, rather than a crabby islanders in decline. "People's jaws would drop," says Professor Patrick Minford from Cardiff University.

Pure free trade cuts through the Gordian Knot, eliminating the need for an army of technocrat negotiators and for yet more of those supra-national tribunals that so proliferate, eviscerating democracies and sapping consent for globalism.

Prof Minford says the hide-bound political class has yet to give such clear blue sky proposals a serious airing. "It is so unfamiliar. It takes a mental somersault to break free of mercantilist thinking," he said.

Economists for Brexit - now Economists for Free Trade - certainly got off on the wrong foot last year by suggesting that the UK would be positively richer under such a model. This invited a blizzard of criticism.

My own view has always been that there will be a negative shock from Brexit and withdrawal from the single market, with effects on GDP at best neutral by 2030 with the right policies.

Professor John Van Reenen, a trade expert at MIT and a vocal critic of the Minford plan, says retreat to the WTO would cost roughly 2.5pc of GDP compared to remaining in the EU, with losses rising over time to 8.5pc due to productivity effects.

He agrees that unilateral elimination of barriers is the best WTO variant since it at least mitigates damage to supply-chains entering Britain from the EU. "It offsets some losses but the politics of all this would be very hard," he said.

Projections as to what will happen to the UK economy by 2025, 2030, or whenever in the event of a Plan B hard Brexit are pulled out of the air and therefore a complete waste of time.  We don’t know what the EU will be like at those future dates, or even if it will still exist as anything other than a rump of nations effectively controlled by Germany.

What we do know today is that the EU remains in turmoil due to its own failings.  Consequently, its bureaucrats are angry, vindictive, self-destructive and envious of the UK.  This is a loser’s mentality and I hope it will change.

Meanwhile, the best that Britain can do now and over the lengthy medium term, is to continue the development of our economy, into a highly competitive, entrepreneurial and productive entity, which attracts talented people who wish to invest in the UK and trade with us. 

As to Brexit negotiations, we know what we are likely to face.  Consequently, we should be focussing on Plan B, assuming that it will be our only sensible course, rather than hoping that the EU will change its colours and negotiate constructively in our mutual interests.  Britain will succeed either way, so long as it holds its nerve.  

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

CHINA’S SOLUTION – THE BIGGEST INFRASTRUCTURE SPENDING BINGE IN HISTORY

In 2014, Chinese President Xi Jinping announced a staggeringly ambitious new foreign policy and economic investment initiative, the One Belt/One Road (or New Silk Road) initiative.  The goal of One Belt/One Road is to better connect China with the rest of the global economy through specific infrastructure projects, including enhanced port facilities for shipping lanes and new highway and high speed rail connections for overland routes. New infrastructure projects are intended to connect China North into Russia, south into Southeast Asia and west across Central Asia and Europe all the way to the Atlantic coast.  In addition to opening new markets for Chinese products, One Belt/One Road is being marketed as a way for places like Pakistan and Uzbekistan to potentially enjoy an economic explosion similar to the one China has experienced over the past 20 years.

The planned scale of One Belt/One Road is unprecedented, with even America’s post-World War ii Marshall Plan paling by comparison. Although the plan initially encountered resistance and roadblocks, new projects have been coming on line fairly rapidly over the past several months and approximately #$1 trillion in One Belt/One Road projects are currently under construction. According to a McKinsey report, China hopes to eventually scale the program up to an annual expenditure of $2-3 trillion and intends to maintain this level of expenditure for several years. To put that into perspective, President Trump is targeting an infrastructure plan of around $1 trillion, and that $1 trillion expenditure is expected to be spread out over a 10 year period.

The Marshall Plan, mentioned above, focussed on rebuilding a devastated Europe, including all countries which were not part of the Soviet Union.  In contrast, the oddly named One Belt/One Road project is another grandiose scheme, favoured by Chinese governments, to jumpstart faltering GDP growth.  At least it is better than building more ghost cities.

I hope it succeeds because that would be good for global GDP growth.  However, I would prefer to see China create more of a free market environment for its entrepreneurs.  China’s economic emergence over the last 30 years has been inspired, disciplined and often spectacular but the next stage of development is more challenging.  Their population has the potential to achieve anything but their political system encourages corruption and the best talent is seldom given free reign.  

The world is gripped by a technology race and those countries or companies that fail to recognise this will very quickly fall behind. My constant refrain to all politicians is: “Put your faith in engineers and in revolutionary technology – invest in them and give them a supportive environment that encourages risk-taking and new ideas.”

Britain is now in a uniquely advantageous position to become a world leader in technology, exploiting the new-found trading freedom that comes from leaving the European Union. We can operate in a business-friendly regulatory environment, negotiate directly with other markets (in particular, Asia) and sell our high-technology goods, boosting the balance of payments in the process.

Singapore is not a bad model to look to. They are focused on developing and exporting high-technology products harnessing their highly skilled workforce.

But Britain’s success in this regard is contingent on quickly deepening the skills in our economy. Education is where it all begins: it is young people who will create the technologies that we export in future. Yet Britain will be one million engineers short by 2022. It is time for a new approach and recognition that engineers are among the best wealth-generators an economy could hope for.

It was refreshing, after continued pleas to successive government ministers, that Jo Johnson, minister of state for universities, science, research and innovation, challenged me to open a new kind of university on Dyson’s Malmesbury campus. He is pushing through the Higher Education and Research Bill to encourage the creation of a new generation of universities. We intend to be the first to take advantage of it, and I hope others will follow.

Johnson has spotted that it is companies which are experimenting, investing and developing to create the future, and has concluded that they are well placed to educate and equip the next generation. Dyson files more patents per year than any UK university technology transfer office. This inventiveness could be put to good use, inspiring and educating future prolific patent filers.

The legislation will allow us to attain university status and achieve degree-awarding powers of our own. Until then, we will partner with Warwick University. Regardless of the legislative outcome, the Dyson Institute of Engineering and Technology will welcome its first undergraduate students in September. They will work on “live” projects from the off, and will be mentored by practising scientists and engineers – world experts in their field – who will teach alongside academics from Warwick University, an institution renowned for engineering.

Rather than hypothesising about what it is like to be an engineer from the lecture hall, they will find themselves in the risk-filled world of inventing new, real-world technology.

This is a terrific idea from Jo Johnson and James Dyson.  For decades we have seen Dyson’s frustration over the lack of qualified engineers in the UK.  The potential is certainly there and now he will be able to train more of his own staff.  This is an excellent opportunity for smart, ambitious students.  

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

Mario Draghi showed growing enthusiasm about the state of the euro-area economy, while cautioning that inflationary pressures remain too weak to contemplate paring back stimulus.
“It’s true that growth is improving, things are going better,” the European Central Bank president told reporters in Frankfurt on Thursday after the Governing Council agreed to keep its stimulus settings unchanged. “In 2016 we were speaking of a fragile and uneven recovery. Now it’s solid and broad.”

Euro-area economic data have demonstrated increasing resilience in recent months, prompting ECB officials to publicly debate when they might start to wind down asset purchases and raise interest rates. Draghi’s reticence to touch on that discussion reflects concern that core consumer prices are too weak and would fade without continued monetary support.

“The risks surrounding the euro-area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside,” he said. “Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.”

Economists predict the first hints of an exit from extraordinary stimulus may come by June 8, when the Governing Council next announces policy and publishes projections on the economic outlook.

Speaking shortly after the European Commission’s economic confidence index showed the highest reading since August 2007, the ECB president acknowledged that the region’s recovery is becoming “increasingly solid.” Data next week is expected to show the economy grew 0.4 percent in the three months through March, and indicators in the past month suggest further strengthening.

 

The ECB has taken on lot more responsibilities but its core mandate is to achieve an inflation rate close but not more than 2%. The ECB’s favoured inflation rate, the Eurozone 5yr in 5yr Forwards rate hit a medium-term low near 1.25% last year and since rebounded. It is now testing the 1.6% region which coincides with the trend mean and a sustained move below that level would be required to question potential for additional upside. 

Industrial metals prices are projected to jump 16% this year due to strong demand, especially from China, and supply constraints, including mine disruptions in Chile, Indonesia and Peru, the World Bank says in its commodities markets outlook published on Wednesday.

Researchers at the institution believe zinc has the brightest prospects this year and will follow up 2016's 60% price gain with a 32% jump this year.

Lead, often a byproduct of zinc mines, will also build on last year's gains and is expected to add 18% in value due to mine supply constraints brought on by permanent closures due to resource exhaustion, as well as discretionary closures and downscaling in Canada, Peru and Australia top zinc miner and trader Glencore.

[Lead] demand remains strong for the battery and industrial sectors, including increasing demand for “stop/start” vehicles, which use batteries containing 25 percent more lead than conventional units. However, lead demand faces threats from a maturing electric bike sector in China and alternate battery technologies (e.g., lithium).

The authors of the report also warn however that zinc-lead fundamentals may change longer term as higher prices "prompt greater supply in China, and Glencore’s idled capacity eventually restarts."

 

The industrial metals represent a clear bright spot within a commodity complex that is under pressure from excess supply, not least in the food sector. The mining sector on the other hand has been through a painful process of rationalisation where expansion has been cancelled and uneconomic supply shuttered. Generally speaking it takes time for higher prices to justify the expense of reopening mines so the potential for a further recovery remains intact. 

Fields has struggled to generate enthusiasm for plans to pour billions into new technologies and take on upstarts like Uber Technologies Inc. and Waymo, Alphabet Inc.’s self-driving spinoff. The CEO has said earnings will rebound next year as new models including the redesigned Lincoln Navigator are expected to start paying off. Until then, earnings will continue to be pinched in a U.S. market that’s also seeing auto demand roll back following a seven-year growth spurt.

“This will be the toughest quarter,” Chief Financial Officer Bob Shanks told reporters at Ford’s headquarters in Dearborn, Michigan. “The balance of the year, in the aggregate, will be flat to better.”

Profit excluding some items was 39 cents a share during the first three months of the year, beating the 34-cent average estimate of analysts surveyed by Bloomberg as well as the company’s own projection given in March. Net income on that basis fell to $2.22 billion.

 

The key to any business is succeeding in giving people what they want. Recreational horseback riding is fun but horses as a mode of transport leave a lot to be desired. For many people recreational driving is fun but the slog of commuting on congested roads leaves a lot to be desired. The gap between the reality of driving and the idea of driving is just too wide. Incumbent companies have no choice than to invest in electrification and automation because the latter in particular gives everyone a chauffeur, which is something until now only the wealthiest individuals could afford. 

In an article published in the British Journal of Sports Medicine (an affiliate of BMJ) on April 25, researchers from the UK and California reviewed all the existing studies about cholesterol and heart disease. Based on all the published literature, “the conceptual model of dietary saturated fat clogging a pipe is just plain wrong,” they write.

Cholesterol isn’t totally blameless in the world of heart disease. They do form little bubbles inside arteries “like pimples,” write the researchers, and often cause heart attacks when they burst.
But coronary artery disease is just that—a disease. It’s a result of constant inflammation. In all the studies they could find, lowering fat levels in diets failed to reduce heart attacks, strokes, or other kinds of heart disease. Although cholesterol from fats is bad, it’s been overly vilified.

What does work to prevent heart disease, though, is exercise. Walking 22 minutes a day (about 150 minutes per week) can help reduce heart disease, with a balanced diet that contains a combination of fruits, veggies, and fats from both plants and animals.

These two papers aren’t saying that high-fat diets are good for you, but fats—including the saturated ones—may not be as bad as was once thought. The reality is our perception of fats has probably been skewed by the results that have been reported, both in journals and the media.

 

Dietary advice is as prone to fads as fashion trends and what is seen as rock solid truth in one decade is debunked as patently false the next. That gives us a lesson for markets where the perception of surety is integral to the persistence of a bull market only to eventually be displaced when the biggest bull becomes the epicentre of risk. 

It has always seemed disingenuous to say that fats are bad when French, German, Italian and Japanese diets are loaded with fats and yet their populations do not experience even close to the same levels of obesity as the USA and also have higher life expectancies. If fats, either “good” or “bad”, are not the problem then perhaps it is reasonable to look for culprits in inactivity and sugar consumption. 

Stress and the psychological dietary compensations we indulge in to deal with it are an additional consideration. I wonder how long it will take for mental health to become the next dietary fad. 

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

Although initial mobile payment developments were geared toward driving adoption and acceptance, focus has shifted to improving monetization. We believe Pay with Venmo remains a significant opportunity and conservatively estimate potential contribution to revenue growth in FY20 of ~3.5pts and given the higher transaction margins driven by cheaper funding sources (ACH, Balance), estimate potential EPS contribution of $0.28 in FY20. In addition, working capital loans to merchants and/or installment plans provided by PayPal, Square, and Alipay leveraging Big data offer high margin revenue opportunities. Providers are also emphasizing efforts on channels where adoption is easier as well as use cases which offer differentiated value propositions. Accordingly, we believe in-app and inbrowser will dominate mobile payments while in-store mobile payments will be predominantly focused on differentiated value propositions such as omni-channel support, order ahead, and offer/coupon redemption. 

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

One of the big questions for every online business is how to make it easier to take people’s money. Impatience, number of clicks, creating urgency, ensuring security and insuring purchases represent important considerations that have in many respects been solved by the various providers, with software and encryption getting better all the time. 

Waymo will be purchasing an additional 500 Chrysler Pacifica minivans to support the 100 already doing the rounds.

The push to slot self-driving cars into the everyday reality of average Arizona families represents another significant step in autonomous driving development. Waymo has covered more than 3 million miles since its inception in 2009, and the benefits of that experience are beginning to show.

According to reports submitted to the Californian DMV earlier this year, Waymo cars covered 635,868 miles (1,023,330 km) last year, and human drivers only needed to intervene 124 times. That's a huge improvement over 2015, where self-driving systems disengaged 341 times in just 424,331 mi (682,895 km) of testing.

The rapid pace of technological innovation is transforming our world, economy and financial markets faster than is easily comprehendible. I find it to be a useful thought experiment to identify the most promising technologies and then to think about what they are going to displace. For example the evolution of electric vehicles is not great news for automotive parts suppliers since EVs have far fewer parts. 

The weakness in precious metals, energy contracts and particularly soft commodities has resulted in the Continuous Commodity Index breaking below the trend mean and it is now testing the November lows above the psychological 400 level. A short-term oversold condition is now evident but upside follow through on Tuesday’s upward dynamic will be required to signal more than temporary steadying in this area. 

The Chinese and U.S. stock markets are going in opposite directions.

An intensifying crackdown against leverage in Asia’s biggest economy has rocked the hither-to unflappable Shanghai Composite Index over the past week, sending it to a three-month low last session. In the U.S., the largest equity market is embracing a risk rally spurred by the French election, with the S&P 500 Index continuing to build on reflation-trade gains ignited by Donald Trump’s November victory.

The divergence means the two markets are the least in tune since August 2008 -- just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system.

Chinese officials have mainly kept mainland stocks on a tight rein after routs in mid-2015 and the start of 2016 reverberated through world financial markets. Until Monday’s 1.4 percent slump, the Shanghai Composite Index hadn’t fallen more than 1 percent for 86 trading days.

As Beijing’s focus on reducing risk in the financial system shifted from money-market tightening and reducing leverage to containing speculation and irregular trading, the two markets starting moving in opposite directions in the past month.

The latest step by officials is targeted at entrusted investments -- read more about the deleveraging efforts here.

In one sense, it’s a sign that investors overseas aren’t as worried about Chinese market ructions as they were in previous years -- perhaps partly thanks to underlying strength in China’s economy. Given how mainland stocks have become increasingly linked to global markets, however, the divergence may prove to be a short-term phenomenon, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.

“The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world," So said.

The apt opening for my comment on the article above is this quote from the memorable Benjamin Graham:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

In the short run market moves are a matter of confidence. If a sufficient number of influential investors in the market crowd are feeling optimistic, they will buy. When others see the market rising they will also be tempted to buy in what becomes a self-feeding bullish trend.  This will continue until most investors interested in the trend are already long. 

While the market holds its ground for a short period, most investors will remain hopeful.  However, when the market has clearly paused for longer than earlier on within the trend, some investors will be tempted to close their position. When the market has fallen back more sharply than previously seen, others will become pessimistic and also sell, causing a bearish trend to form which retraces more of the previous advance. 

International investors face many more choices and this can be confusing.  A practical way to monitor these markets is by looking at weekly price charts for the indices of interest, showing at least 10-years of back history for perspective.  They will quickly reveal Benjamin Graham’s voting machine results in terms of relative strength or weakness over the short to lengthy medium term.  Those longer term charts will also show bullish or bearish weighing machine characteristics.

So which stock markets look the most interesting?

This item continues in the Subscriber’s Area.

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

It was a personal pleasure to meet up with subscribers on this trip to both Singapore and Japan but also educative to get on-the-ground intelligence for how these markets are doing. 

Details of this trade are posted in the Subscriber's Area. 

Hello I keep seeing documentaries explaining that in the future in order to feed everyone more people will be eating insects, I hope they are wrong, but if it is true are there any ways to invest in this theme?

Thank you for this question which appears to have made its way into the public arena for some reason. Interestingly my daughter assured me last night that we would all be eating insects in the future, at least according the Time for Kids she had just read at school. Personally I regard that as a pretty dystopian way of thinking about the future. I understand the argument that insects are easier to raise, require less water, grow faster and are packed with protein. However wouldn’t it be better if we just ate less meat to begin with? In my opinion the most compelling bullish case for farming insects is as food for other animals or fish. 

Under a sweeping proposal called “Made in China 2025,” as well as a five-year robot plan launched last April, Beijing plans to focus on automating key sectors of the economy including car manufacturing, electronics, home appliances, logistics, and food production. At the same time, the government wants to increase the share of indigenous-branded robots in China to more than 50 percent of total sales volume by 2020 from 31 percent last year.

Robot makers and the companies that automate will be eligible for subsidies, low-interest loans, tax waivers, and rent-free land. “Fair or unfair, you can expect Chinese companies will get a lot of preferential treatment and funding,” said Rose with Boston Consulting. “They actually have a comprehensive plan to get there. And their track record isn’t terrible either.”

Industrial automation is crucial for China, home to an aging population and shrinking labor force. Manufacturing wages have more than doubled in the last decade. Also, younger Chinese workers, “don’t want to do repetitive work,” said James Li, President of ABB Robotics China, the local unit of Switzerland’s ABB Ltd. and one of the first robot companies to set up in China. It supplies machines that spray paint cars and man electronics assembly lines. “Robotics is hot,” said Li, who notes that local governments are investing heavily in industrial parks to develop the technology.

 

The big question for robot manufacturers is will China do for their sector what it did for the solar sector? My sense of the challenges involved is that Chinese dominance of the robotics sector is a medium-term rather than short-term possibility. The companies involved have a lot of progress than needs to be made in developing software, optics and interfaces to truly challenge incumbents. However we can be reasonably assured they will be get better every year.  

In the coming two weeks of the French campaign, Marine Le Pen’s challenge is to break through a wall of voter antipathy that she inherited from her father. Emmanuel Macron’s task is to persuade the French he has the gravitas and experience to be president.

The far-right Le Pen and centrist Macron both took just under a quarter of the vote in a contest with 11 candidates. Now they must convince the rest of the population that they have what it takes to lead the country after the May 7 runoff.

The next round will see two radically different visions. Macron embraces globalization and European integration, Le Pen channels the forces of discontent that triggered Brexit and brought Donald Trump to power. The runoff will also be unique in that it will be the first contested by neither of the major parties, giving Macron, 39, and Le Pen, 48, space to try to forge alliances that might have seemed unlikely until recently.

“Marine Le Pen’s toughest job is to break the traditional glass ceiling which her father Jean-Marie also suffered from,” said Yves-Marie Cann, a pollster at Elabe. “Even if her image is better than his was, the truth remains that most voters say they don’t share her ideas and have a bad opinion of the Front.”

Macron has still to convince voters he has the aura of a head of state and can reach out to a nation in which 40 percent of the electorate opted for anti-European extremes on both left and right. A snap Ipsos survey late on Sunday suggested that Macron, who’s aiming to be the country’s youngest head of state, would win by 62 percent to 38 percent for Le Pen, who would be the country’s first female president.

“Macron is not yet the president the French want,” said Frederic Lazorthes, a communications consultant who was an adviser to Prime Minister Dominique de Villepin. “He needs to show that he can assume the great responsibility of a nation that is divided and convince the country that it can thrive in a globalized world.”

Yes, Macron is young at 39 and inexperienced but he is also very smart, having defeated the two established French parties – the Socialists and the Republicans.  He also established his own centrist party En March! which I believe means Forward! or On The Move!

I would not underestimate Macron. Markets have already assumed that he will win next month’s runoff comfortably and I agree.     

This item continues in the Subscriber’s Area.

As President Donald Trump contemplates whether to make good on his campaign promise to yank the United States out of the Paris climate accord, an unlikely lobbying force is hoping to talk him out of it: oil and coal producers. 

A pro-Paris bloc within the administration has recruited energy companies to lend their support to the global pact to cut greenhouse gas emissions, according to two people familiar with the effort who asked not to be identified.

Cheniere Energy Inc., which exports liquefied natural gas, became the latest company to weigh in for the pact to cut greenhouse gas emissions in a letter Monday to White House energy adviser G. David Banks. 

"Domestic energy companies are better positioned to compete globally if the United States remains a party to the Paris agreement," Cheniere wrote. The accord "is a useful instrument for fostering demand for America’s energy resources and supporting the continued growth of American industry."

Exxon Mobil Corp., previously led by Secretary of State Rex Tillerson, Royal Dutch Shell Plc and BP Plc also have endorsed the pact.

The industry campaign to stick with the Paris accord comes amid deep divisions in the Trump administration over the carbon-cutting agreement. Both the president’s daughter, Ivanka Trump, and her husband, Jared Kushner, a White House special adviser, have urged the president to stay in the deal, along with Tillerson. 

Climate Change Pact That Made History Now Faces Trump: QuickTake

On the other side are senior adviser Stephen Bannon and Environmental Protection Agency Administrator Scott Pruitt, who on Friday said "we need to exit" the pact.

Gas producers and exporters are highlighting the value of the agreement, which could help prod a worldwide move toward that fossil fuel.

Exxon Mobil argued in a letter last month that U.S. slashed its carbon emissions to 20-year lows because of greater use of natural gas, and "this success can be replicated globally” as part of the accord.

BP spokesman Geoff Morrell said the company continues to support the Paris deal, noting that "it’s possible to provide the energy the world needs while also addressing the climate challenge." And Shell spokesman Curtis Smith said the company remains "strongly in favor" of the agreement.

What Trump’s Climate Views Might Mean for World: QuickTake Q&A

Coal producers Cloud Peak Energy Inc. and Peabody Energy Corp. also are lobbying in favor of the accord, even though the miners could be disadvantaged by a global shift toward cleaner sources of electricity. Cloud Peak pitches the Paris agreement as a platform for the U.S. to advocate using carbon capture and other high-efficiency, low-emissions technology to generate electricity from coal.

Trump is nearing a decision on whether he will fulfill repeated pledges to withdraw the U.S. from the accord he previously derided as "bad for U.S. business." The White House postponed a planned Tuesday meeting of senior administration officials, including Pruitt, Tillerson, Kushner and Bannon, to go over the pros and cons of staying in the agreement, according to an aide citing a scheduling conflict.

There is not a single good reason that I have heard for leaving the Paris Climate Pact.  Stay in and at least you know what everyone is saying, and you can agree or disagree, and offer any other suggestions. Leave the Pact and you will be regarded as a petulant pariah state.  The USA should be at the table of any important international Pact, if only in the interests of good will. 

Has anybody examined the effect of these turbines on fatality of seabirds eg seagulls, cormorants etc. flying into these huge "propellers".
Where does the green movement stand on this fatality factor?

This service has certainly commented over the last decade on the danger of birds being killed by windmills.  It troubles many subscribers and is only the latest serious problem for wildlife.  The fact is, mankind’s increasing presence has had a devastating impact on virtually all forms of wildlife, driving many species to the brink of extinction.  We depend on livestock but our treatment of them through intensive farming has become increasingly cruel as we have supposedly become more civilised. This is a grim legacy for our species. 

President Donald Trump has promised a “massive” tax cut for Americans. He may be able to achieve it -- but only temporarily, if the changes can’t meet the criteria needed by lawmakers to make permanent changes.

News that Trump’s plan isn’t likely to include a border-adjusted tax, or BAT, suggests his proposed tax measures won’t meet the standard of revenue neutrality. That’s because the border tax that House Speaker Paul Ryan has proposed would generate more than $1 trillion in revenue over a decade, helping to pay for individual and corporate rate cuts.

“BAT is a big number, so it makes you wonder how they get to revenue neutrality without it,” said economist Douglas Holtz-Eakin, the president of the conservative advocacy group American Action Forum in Washington and a supporter of the border-adjusted tax. “On the campaign, they didn’t mention revenue neutrality, so maybe they don’t care.”

Treasury Secretary Steven Mnuchin on Saturday repeated the administration’s goal of getting “sustainable” economic growth of 3 percent or higher, and said Trump is counting on tax reforms to pay for themselves by boosting the economy and tax receipts along with it. Mnuchin in recent months has forecast growth as high as 4 percent.

“The difference of a little over 1 percent of GDP over a 10-year period of time can generate as much as $2 trillion of revenue in the U.S.,” Mnuchin said at the International Monetary Fund meeting in Washington. “There’s no question: we’re looking at reforms that will pay for themselves with growth.”

Sensible tax cuts will boost economic confidence, lift the stock market and most importantly, increase US GDP growth.  

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

Many thanks for the ongoing quality of the service you are providing. I am writing to enquire about your opinion the dry bulk industry. Just by looking at the individual stocks' chart (SBLK, SB, GOGL, DRYS) as well as the dry bulk index, they seem to have bottomed out and in an initial stage of recovery. I am not very familiar with the drivers of this particular industry, but I find the chart action quite appealing. Any kind of input would be highly appreciated.

Thank you for this topical question. Shipping is a highly cyclical business and has been in a funk since the decline that followed the heady days of the commodity boom. With high shipping rates, new ships were ordered and have been delivered. However the fall-off in global growth meant all that extra capacity contributed to a situation where there are plenty of ships to cater to the world’s freight requirements. So what has changed?

Hope all is well with you and family .  What do you make of the markets lack of volatility and remarkable resilience in the face of all the geopolitical risks that are occurring.  Is it because everyone is stuck in passive index funds?  Doesn't it make the rollover when it occurs more severe?  Maybe I'm getting old.

Thank you for this question which I sense many people are asking. I agree the number of geopolitical questions which have arisen over the last couple of years represent an additional risk premium for markets. However the biggest question is whether these developments and potential future ramifications make the case for policy tightening more or less compelling. 

Here is a link to the interview I conducted with Jonathan Davis for his Money Makers podcast before I flew out to Asia a couple of weeks ago. 

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

The worst downturn in the history of the oil industry has been followed by the fastest drilling rig recovery in history. From massive layoffs and corporate restructurings, oil and gas and along with oilfield service companies have had to switch gears and figure out how quickly and profitably they can grow along with the current recovery. As someone mentioned, the industry has crammed a year’s worth of rig activity growth into a few months – something that is creating a challenge for the oilfield industry. 

As the energy companies are about to start reporting financial results for the January - March 2017 period, numerous oilfield service company managements have already signaled that the numbers will likely not reflect the levels of profitability Wall Street analysts had expected due to the costs of responding to the explosion in activity, especially following OPEC’s surprise output cut to help drive a recovery in oil prices. From the rapid climb in the rig count, it is clear that not only had investors and analysts bought into the recovery scenario, but so too had exploration and production (E&P) company managements. 

There is an expression in English literature that “all things come to those who wait,” but that isn’t the case in the oil patch – especially if one wants to make money. In reality, the expression “the early bird gets the worm” is more appropriate to describe how people in the E&P business operate, but it is taking a toll on the pace of the recovery in oilfield service company profits. Service company managers have had to spend money to reactivate equipment and re-crew them before they can actually earn revenue. The more aggressive a company has been, or is, in ramping up its idle equipment, the greater are the costs incurred. At the present time, everyone is comfortable in the belief that the delay in gratification – increased profits – will be worth the effort, and the wait. Whether that proves a correct assumption or not will depend on how the recovery continues unfolding and what happens to well costs, which is what is driving the increased activity. Everyone has to make money going forward for the recovery to be sustained. That doesn’t mean, however, that everyone will enjoy the levels of profitability experienced during the era of $100+ a barrel oil prices. But, unless people make money, the industry will not be able to support additional activity, or possibly even support the current level of work. So where are we in this recovery?

 

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

Unconventional oil and gas wells are more expensive to drill and have prolific early supply surges which peak quickly. That means operators are uniquely positioned to respond to lower prices by cutting back on drilling and to higher prices by stepping up drilling. It might not be great news for worker job security but it means the USA is increasingly the swing producer in the global oil market. 

Offshore wind turbines are about to become higher than the Eiffel Tower, allowing the industry to supply subsidy-free clean power to the grid on a massive scale for the first time.

Manufacturers led by Siemens AG are working to almost double the capacity of the current range of turbines, which already have wing spans that surpass those of the largest jumbo jets. The expectation those machines will be on the market by 2025 was at the heart of contracts won by German and Danish developers last week to supply electricity from offshore wind farms at market prices by 2025.

Just three years ago, offshore wind was a fringe technology more expensive than nuclear reactors and sometimes twice the cost of turbines planted on land. The fact that developers such as Energie Baden-Wuerttemberg AG and Dong Energy A/S are offering to plant giant turbines in stormy seas without government support show the economics of the energy business are shifting quicker than anyone thought possible -- and adding competitive pressure on the dominant power generation fuels coal and natural gas.

“Dong and EnBW are banking on turbines that are three to four times bigger than those today,” said Keegan Kruger, analyst at Bloomberg New Energy Finance. “They will be crucial to bringing down the cost of energy.”

About 50 miles (80 kilometers) off the coastline in the German North Sea, where the local fish and seagulls don’t complain about the view of turbines in their back yards, offshore wind technology is limited only to how big the turbines can grow. Dong has said it expects machines able to produce 13 to 15 megawatts each for its projects when they’re due to be completed in the middle of the next decade -- much bigger than the 8-megawatt machines on the market now.

Just one giant 15-megawatt turbine would produce power more cheaply than five 3-megawatt machines, or even two with an 8-megawatt capacity. That’s because bigger turbines can produce the same power from a fewer number of foundations and less complex grid connections. The wind farm’s layout can be made more efficient, and fewer machines means less maintenance.

“Right now, we are developing a bigger turbine,” said Bent Christensen, head of cost of energy at Siemens Wind Power A/S, in a phone interview. “But how big it will be we don’t know yet.”

I did not predict this 3 to 4 years ago but I am delighted that wind power is now becoming much more competitive and self-sufficient.  I still have concerns about maintenance costs relative to solar power but we will see.  One should not underestimate technological innovation in this era. 

A leaked European Union paper outlining the bloc's initial negotiating position in Brexit talks hints at a clever zero-sum strategy. The EU's main goal is to deter other potential exiters and offload all the anxiety about the truly important issues in the divorce on the U.K. alone.

The paper (actually called a "non-paper" in EU parlance because it's still a draft) makes it clear that the EU wants to negotiate Britain's departure in stages. Just two contentious issues are to be addressed in Stage One: the treatment of EU citizens now living in the U.K. and the bill to be settled by the departing country. Essentially, the U.K. will be told that if it wants any kind of closure on a trade deal, it first needs to take care of the EU migrants and agree to pay a large sum of money (in euros, please) to honor previous commitments and move London-based EU agencies elsewhere. 

At the same time, the initial EU position makes agreement on both issues as difficult as possible. For the 3.5 million EU citizens living in Britain, including more than 900,000 Poles and more than half a million other eastern Europeans, the bloc wants a lifelong right to live and work in the U.K. on the same basis as locals; these EU citizens would also retain the right to claim U.K. benefits for children living in other countries, bring over relatives and confer resident status on third party nationals through marriage. And they would also be subject to the jurisdiction of European courts.

That won't be easy for Prime Minister Theresa May to swallow, even if she gets a decisive mandate in the June election. Immigration was a major issue for voters who backed Brexit. The government may argue that "grandfathering" the immigrants already in the U.K. is the lesser evil, but to the anti-foreigner voters this means the current situation -- the one that angered them in the first place -- will be frozen for decades.

In the letter May sent EU leaders when activating the Brexit procedure she, too, stressed the need for an early deal on EU citizens in the U.K., and U.K. citizens in the EU -- about 1.2 million people, many of them retirees in Spain and France. But the divergent nature of the two groups of migrants makes the EU's demands far weightier than the U.K.'s. EU workers in the U.K. are young, often needy and far more numerous, especially taking into account possible family reunification. There is no easy compromise to be reached, and that suits the EU fine. As the bigger trading partner that stands to lose less if there is no resulting trade deal, time is on its side.

Concerning the exit payment, the EU paper also lays out an extreme position: The bloc is going for a one-time pay-out big enough to anchor the expectations of other countries that may try to leave the union; and there's no mention of handing over its share of EU assets. No future campaign based on promises to invest in health care instead of contributing to the EU budget will fly if negotiators attain this goal. 

There is also no reason for EU negotiators to compromise here. Though Brexit leaves a hole in the union's budget, no political constituency important to the negotiators will be seriously hurt. A strong deterrent to more renegades is more important.

There's nothing expressly malicious in the bloc's initial negotiating position. The union is confidently laying its cards on the table; its position will likely be highly public throughout the process (there's hardly a choice given the many potential sources of leaks), while the U.K., under more pressure to make compromises, isn't likely to be as forthcoming.

The longer that game goes on, the better for the EU's cause of maintaining unity and discouraging further secession. With 27 member states, there's always a big election somewhere: In France right now, in Germany later this year, in Italy sometime soon. For pro-EU forces running in these elections, the more uncomfortable Brexit looks, the better.

A temporary extension of the U.K.'s membership, explicitly mentioned in draft negotiation guidelines the European Commission has written up for the bloc's Council of Ministers, would be a godsend to these centrist political forces: It would show that leaving is a cumbersome process that's far easier to initiate than to pursue, and that the two-year time frame that exists for it is unrealistic. A transition arrangement that drags on and becomes semi-permanent doesn't cost the EU anything, but it will likely hurt May's government badly.

If the EU knows how to do anything, it's to draw out inconclusive negotiations. That can be a useful skill.

If Leonid Bershidsky is right (he has certainly added some relevant details to support my own views since the Brexit vote) then it shows just how short-sighted and desperate EU negotiators and politicians have become. 

Absurdly, they view the EU as a club which any reasonably democratic and predominantly Christian European nation can join - although there is a catch – they can never leave.  EU bureaucrats themselves pay lip service to democracy but often regard it as inconvenient and expendable, as subscribers may have noticed.

If the EU tries to carry out the policy detailed above, effectively attempting to punish the UK as an example to deter any other nations from trying to leave, this will only increase European-wide disillusion.  

Sterling strengthened on short covering following Theresa May’s announcement of a General Election on Monday, which was confirmed by a comfortable majority vote on Tuesday. Apparently, traders felt that an increased majority for the PM would make a so-called hard Brexit less likely.

This item continues in the Subscriber’s Area.

Treasury Secretary Steven Mnuchin sent U.S. stock prices to a daytime high Thursday when he said the Trump administration will produce an ambitious plan to overhaul the U.S. tax code “soon.”

But it’s not the first time the administration has promised an imminent plan, and the obstacles to a sweeping tax-code rewrite of the sort Mnuchin described Thursday haven’t gotten any smaller. A key Senate committee has yet to see final details of a White House plan, a congressional aide said. And tax-related challenges presented by the 2010 Affordable Care Act remain in place amid Republicans’ disagreement on how to dismantle the health-care law they’ve criticized for years.

On top of that, House Speaker Paul Ryan’s proposal to tax U.S. companies’ domestic sales and imports -- while exempting their exports -- has stirred controversy among U.S. businesses, created conflict among Republicans and has yet to win President Donald Trump’s endorsement.

So even as stock traders welcomed Mnuchin’s pledge to enact comprehensive tax legislation before the end of this year, skeptics questioned the prospect.

“Clearly they’re saying what they’d like to believe is true,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a progressive policy group in Washington. “We now know that we must heavily discount their assertions,” said Bernstein, who served as former Vice President Joe Biden’s chief economic adviser.

Mnuchin’s success in bringing forward a commercially attractive tax plan, or otherwise, will probably be the biggest single factor in determining the extent of Wall Street’s stock market reaction / correction before significantly higher levels are seen.

Assuming that Theresa May wins a landslide victory on June 8, she will be the only leader of a major EU state with a crushing mandate and the backing of a unified parliamentary phalanx.

All others will be in varying states of internal disarray. None will have a workable majority in parliament. Bitter internal disputes will continue to fester over the loss of democratic control under monetary union, whether or not eurosceptic parties actually come to power.

This gives the Prime Minister formidable clout. We have moved a long way from the first chaotic weeks after the referendum when Belgian premier Charles Michel could suggest in all seriousness that the British institutional system was disintegrating, a country led by populist dreamers, disappearing into a "black hole". Such was the view in Brussels.

The tables have since turned. Britain will enter the Brexit talks led by an ancient and disciplined party of great governing credibility - solid on NATO, free trade, climate accords, and liberal principles - with UKIP and the ephemeral forces of populism scattered to the four winds.

Discord lies on the other side of the Channel. Let us suppose that the ardent Europeanist Emmanuel Macron makes it through to the presidential run-off in the French elections on Sunday - far from certain - and therefore captures the Elysee two weeks later. How is he going to govern and reform France?

His manifesto is studiously vague. The French parliament will be split five ways and Balkanized. Anti-EU candidates from hard-Left to hard-Right have garnered half the support in this extraordinary campaign, united on core complaints that the EU has eviscerated French sovereignty and that the euro has become a cloak for German interests.

There is much hope in French progressive circles that Mr Macron will be able to rebuild the eurozone on better foundations with a putative Chancellor Martin Schulz in Germany. Even if Mr Schulz were to beat Angela Merkel in October, this would be wishful thinking.

There is scant difference between the German Social Democrats and Christian Democrats on euro ideology. Both are captive to mercantilist thinking. Both think Germany's current account surplus of 8.5pc of GDP is a virtue. Both are opposed to fiscal union and pooling of debts. Both are wedded to creditor interests. There is only a German view.

Italy above all is a political accident waiting to happen. Beppe Grillo's Five Star movement leads the polls by a staggering eight percentage points. It has suffered no erosion after its latest plans for a parallel "fiscal currency", a Trojan horse for the lira.

I think AEP is right, although Mrs May will need to be strong, wise and successful in her negotiations with the EU.  This was never going to be easy, especially as EU officials have so far shown a grab what you can mentality.

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

If Helm is to be believed the oil market downturn is only getting started. The latest collapse is the harbinger of a global energy revolution which could spell the end-game for fossil fuels. These theories were laughable less than a decade ago when oil prices grazed highs of more than $140 a barrel. But the burn out of the oil industry is approaching quicker than was first thought, and the most senior leaders within the industry are beginning to take note.

In the past, the International Energy Agency (IEA) has faced down criticism that its global energy market forecasts have overestimated the role of oil and underplayed the boom in renewable energy sources. But last month the tone changed. The agency warned oil and gas companies that failing to adapt to the climate policy shift away from fossil fuels and towards cleaner energy would leave a total of $1 trillion in oil assets and $300bn in natural gas assets stranded.

For oil companies who heed Helm’s advice, the route ahead is a ruthless harvest-and-exit strategy. This would mean an aggressive slashing of capital expenditure, pumping of remaining oil reserves while keeping costs to the floor and paying out very high dividends.

“They’d never do it because no company board would contemplate running a smaller company tomorrow than today. It’s not in the zeitgeist of the corporate world we’re in, but that’s what they should do,” Helm says.

BP and Royal Dutch Shell are slowly shifting from oil to gas and making even more tentative steps in the direction of low-carbon energy. But Helm is not entirely convinced that oil companies have grasped the speed with which the industry is undergoing irrevocable change.

“As the oil price fell, at each point, oil executives said that the price would go back up again,” says Helm. “What the oil companies did was borrow to pay their dividends on the assumption that this is a temporary problem. It’s my view that it is permanent,” he adds.

For a start, there is scant precedent for the price highs of recent decades. Between 1900 to the late Sixties oil prices fluctuated in a range between $15 a barrel to just above $30 a barrel – even through two world wars, population growth and a revolution in transport and industry.

It was geopolitical events which caused oil prices to surge by more than $100 a barrel following the Middle East oil embargoes of the late sixties and early seventies. They collapsed back to $20 by the Eighties.

So, what drove oil prices to the heady levels of $140 a barrel just less than 10 years ago?

“China,” says Helm, barely missing a beat. “If you look at both the rapid growth in emissions and the rapid growth of oil, fossil fuel and all commodity prices, it was while China was doubling its economy every seven years. This is a phenomenal rate.

Oil prices spiked above $140 a barrel in 2008 because of supply reductions from OPEC countries, not least due to regional wars.  This has never been fully recognised as a huge factor in what is generally remembered as the credit crisis recession which followed.  

In 2009 OPEC lowered production once again, leading to a move back above $120 a barrel two years later.  By 2014 subsidised renewables were gradually eroding the market for crude oil. However, the really big change was the US development of fracking technology, leading to a surge in the production of crude oil and natural gas. 

We should always remember these two adages, particularly with commodities: 1) the cure for high prices is high prices.  These lower demand somewhat but the bigger overall influence is an increase in supply.  Conversely, the cure for low prices is low prices.  Demand increases somewhat when prices are lower but more importantly, supply is eventually reduced. 

How have these adages influenced commodity prices in recent years and what can we expect over the lengthy medium term?

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