Canopy Growth has been granted a license by New York state to process and produce hemp with the help of efforts by Gov. Andrew Cuomo and U.S. Sen. Charles Schumer.

Canopy Growth hopes to establish large-scale production capabilities focused on hemp extraction and product manufacturing within the United States. Depending on board approval of a specific site, Canopy plans to invest between $100 million and $150 million in its New York operations, "capable of producing tons of hemp" on an annual basis.

The company is currently evaluating a number of sites in the Southern Tier of New York, which will become one of its first extraction and processing facilities outside Canada. Management hopes to announce the specific location within 100 days.

The outlook for US Federal legalisation or reclassification of cannabis took a hit with Donald’s Trump’s electoral success, given his antipathy towards the sector. However, Canada went ahead and became the first major economy to legalise cannabis and its companies have a head start on possible US competitors in the event the political climate in the USA changes.

I promised last week I would experiment with dictation software so subscribers could have the benefit of the video in written format.

I’m trying to teach Dragon Professional 15 how to take down what I say, but the results are far from perfect. Here is the original transcript and the corrected version which took a couple of hours to amend. The software can purportedly learn from documents, so I am feeding it the corrected transcripts to try and teach it how I speak.

I’ll persist through the rest of the week and hopefully I will be able to get better results with more examples to customise the natural language processor. However, it is not practical to spend two hours correcting copy that takes twenty minutes to speak.

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

Some of the topics discussed include: Markets quiet as potential areas of resistance at tested. Natural gas rounds emphatically. gold miner M&A picking up, Pound is steady but testing the first area of resistance heading into the Brexit deal vote, emerging markets continue to outperform

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

The markets have quickly turned from giving credence to the Fed’s prognostication that they would raise rates as many as two times this year to pricing in none and a cut in 2020. However, it is also worth considering that for the moment, at least, the market is pricing in one cut not a succession of cuts. The extent of the decline seen to date, therefore, has been to price out any net positive from the tax cuts; netting off trade frictions now to the earlier, and possibly temporary, bump to consumer demand.

The cost to create the world’s largest gold company: A 17 percent premium for a $10 billion all-shares acquisition that faces some big-time challenges down the line.

Newmont Mining Corp.’s deal for Goldcorp Inc. stands in stark contrast to the recent zero-premium merger between Barrick Gold Corp. and Randgold Resources. The key question: Why? In October, Goldcorp shares fell to their lowest since 2002 after the miner reported lower output and higher costs than expected.

Since then the stock improved only marginally before today. The merged company will have the world’s largest production and reserve base, and the kind of liquidity and diversified assets required to attract institutional investors. At the same time, "Newmont has some difficult times ahead with drastic surgery needed at Goldcorp,” according to John Ing, an analyst at Maison Placements Canada.

"In the short term and medium term, the deal is not good for Newmont," Ing said in an interview with Bloomberg News on Monday.

When the price of both the acquirer and the target fall following an M&A announcement, that is generally a sign investors are not all that happy with the price being paid and/or the prospects for the merged entity. The market’s conclusion therefore is that shareholders are on the hook for the cost of the merger.

Chinese shipments are already under pressure from slowing demand from top trade partners -- Europe’s recovery is under question, with Germany triggering recession fears, Japan is facing a tougher 2019 and the U.S. itself forecast to see waning growth after a robust 2018. China’s exports to the U.S., European Union, Hong Kong, Japan and Taiwan all fell from a year earlier. South Korea’s exports--often viewed as a bellwether for world trade--fell in December.

"There is a clear downward trend," said Zhou Hao, an economist with Commerzbank in Singapore who was among the few to accurately forecast a December contraction in exports. "This is not just due to the trade war and tariffs. On top of those, the major drag is slowing global demand."

While China is no longer as dependent on trade, as the world’s largest exporter, factory output, profits and employment still hinge on demand from overseas. Its domestic appetite also affects production by commodity and machinery exporters around the world. Stabilizing trade is one of the goals the leadership set for 2019, on top of supporting employment, investment and the finance sector.

One of the primary reasons China was so willing to engage in outsized stimulus in response to the credit crisis was because of the impact the loss of demand in the USA and Europe has on the economy. The collapse in the oil price contributed to the loss of demand from the Middle East and other commodity producers. The loss so quickly of its traditional sources of foreign income both resulted in the stimulus and the commitment to support the growth of the domestic economy.

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

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

The Congressional Budget Office expects the US deficit to explode on the upside over the coming years. The US Treasury has hundreds of billions in bonds to sell and the Federal Reserve is inconveniently now a net seller. The rational investor is rightfully questioning where demand is going to come from.

Human progress is defined by the desire to take risk — whether that’s getting married, buying a home, having kids, getting on a plane, taking a new job, even moving to earthquake country (where this talk originally took place, in Los Angeles, as part of the a16z Summit 2018).

All of these decisions require evaluation under conditions of uncertainty, which is where insurance — really, distributed risk — comes in. So, in this talk, a16z general partner Angela Strange describes how pooling risk changes as we reinvent a legacy business like insurance through technology. What’s the impact at an individual, industry, and economy level? And how will new entrants finally disrupt the ultimate game of life

When I was thinking about buying life insurance, I saw HealthIQ advertising better rates for fit people on the MyFitnessPal app where I record all of my exercise and everything I eat.

That process is what I credit with controlling my seesaw weight over the last couple of years and I highly recommend the regimen for anyone with similar difficulties with their weight. I found that by being honest with myself and recording everything I ate, I naturally began to make better decisions; plus, I like the charts.  

In India, GSM/EDGE-only has remained the dominant technology during 2018, accounting for around 56 percent of total mobile subscriptions at the end of this year. However, the country has experienced strong growth in the number of LTE subscriptions over the last couple of years, and at the end of 2018 LTE will account for close to 30 percent of all mobile subscriptions. As the transformation toward more advanced technologies continues in India, LTE is forecast to represent 81 percent of all mobile subscriptions at the end of 2024. 5G subscriptions are expected to become available in 2022. The Middle East and Africa comprises over 70 countries and is a diverse region.  It varies from advanced markets which have mobile broadband subscription penetration of 100 percent, and emerging markets where around 40 percent of mobile subscriptions are for mobile broadband. At the end of 2018, more than 20 percent of all mobile subscriptions will be for LTE in the Middle East and North Africa, while in Sub-Saharan Africa, LTE will account for just over 7 percent of subscriptions. The region is anticipated to evolve over the forecast period and, by 2024, 90 percent of subscriptions are expected to be for mobile broadband. Driving factors behind this shift include a young and growing population with increasing digital skills, as well as more affordable smartphones. In the Middle East and North Africa, we anticipate commercial 5G deployments with leading communications service providers by 2019, and significant volumes in 2021. In Sub-Saharan Africa, 5G subscriptions in discernible volumes are expected from 2022.

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

India and Africa are the only regions in the world with less than 100% mobile phone penetration. The rollout of 4G in India two years ago is a major evolution for the economy but also represents a major opportunity for international companies seeking a direct route to the nation’s consumers. 4G is the gateway to mobile banking, internet access, online shopping, education and entertainment.

You have recently mentioned possible German fiscal easing. I am reading "Berlin Rules" by former UK ambassador to Germany, Paul Lever. On page 190 he wrote that German politicians perceive their country's interests in several ways, one of which is "the further development and enforcement of mechanisms for maintaining fiscal discipline in all eurozone states." Fiscal discipline is part of German DNA and this is supported by the new Hanseatic League of northern EU member states' governments. I fear that your suggestion for German fiscal easing is, if I might use the term, "wishful thinking."

 

Thank you for this email which highlights the clear desire of German citizens to generally abide by a strong fiscal regime. That is particularly easy to do when the country is running large surpluses and the savings rate is in the order of 10%. However, spending continues to increase and the surplus is shrinking as a result.

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

Some of the topics discussed include: liquidity conditions remain tight, 2-year yields test the MA, S&P500 at first area of potential resistance, signs of early upside leadership in biotech and cloud computing, gold eases, oil steady. 

The first TLTROII operations will have a residual maturity falling below one year this summer, which may lead to a liquidity squeeze for certain euro area banks within a few months. Therefore, we expect it to be quite certain that the ECB will have another longerterm liquidity operation, which we expect to be announced in March and implemented in June ahead of the implementation of the new NSFR in July 2019. 

The effectiveness of the operation will depend on the modalities and the devil will be in the detail. It is uncertain how the ECB will structure such an operation and consequently how large a take-up there will be. The crucial modalities include rate procedure, eligibility criteria, maturity. In ECB Research - TLTRO3: Italy to be main beneficiary, 9 November 2018, we argued that if the modalities were identical to the ‘carrot approach’ under TLTRO2, we could see an additional EUR100-150bn taken. However, with the recent comments from ECB President Mario Draghi at the December press conference, we are leaning towards similar terms as with the 2011/12 VLTRO operations

Step 2 – postpone the guidance on the first rate hike
The first easy choice indicating a change in policy direction is a postponement of the first rate hike beyond the current ‘at least through the summer of 2019’ language from the ECB. The ECB has been doing forward guidance in recent years, and so stronger guidance is not a new phenomenon or politically difficult to do. However, with the US slowing down and China likewise, a significant postponement of an ECB hike guidance could well also mean that the ECB will not be able to hike in this cycle – leaving less room for manoeuvre in a future recession. 

However, markets have already re-priced ECB expectations and this measure would be likely to have a limited impact. If the next step were communicated as a cut, however, a marked impact should be expected. 

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

The ECB had to abandon conventional Austrian doctrine and re-embark on quantitative easing in 2015, in large part to unwind the damage done to the region’s economy from withdrawing the first round of stimulus. The latest round of QE has just ended and the German economy is on the cusp of at least a technical recession, France and Italy are already embarking on fiscal stimulus and the banking sector is in a shambles. It is only a matter of time before another ECB volte face.

Remember back a half-dozen years ago when all the hedgies were bearish and David Tepper came out and said something to the effect of; “if the economy weakens, then the Fed will ease and stocks go up. If the economy strengthens, then stocks will go up because earnings will be rising. Therefore I am buying.”

Well, I think it’s almost the exact opposite situation today. If the economy strengthens then Powell will hike and stocks will fall from the liquidity withdrawal. If the economy weakens, then Powell has shown he is loathe to come to the market’s rescue and he will be slow to lower rates.

I don’t think you need to overthink this. The Fed has tightened into either a slowdown, or a recession. The market sniffed it out, but the Fed ignored the signals for a bit and made the sell-off worse. Now the market is in the process of correcting that overreaction by rallying.

But don’t forget that Powell has absolutely no stomach for frothy financial markets, so beware getting too excited about the Fed’s recent dovish talk. This is not Yellen or Bernanke’s Fed. Powell has a different set of beliefs, and although he has succumbed to market pressures for the moment, it won’t take much for the old tone-deaf Powell to return.

Powell reiterated his view today in expressing the Fed’s patience with interest rate hikes but committing to continued balance sheet run-off. The market has already priced in the opinion the Fed will not raise rates again and will probably be cutting rates in 2020.

Before Xmas I forwarded an article by EPB Macro Economics who assessed that the Fed had already tightened too much and that a marked slowing of the economy was inevitable.  The latest EPB report (see attached) highlights that there has already been an inversion in US Treasuries, and that the Fed interest rate cycle has now peaked, but deteriorating economic data will cause more volatility in equity markets.

A link to the full report and a section from it are posted in the Subscriber's Area.

I agree we are late in the cycle and that has been a constant theme in the Subscriber's video for the last 18 months. The inconsistency in the trends on Wall Street, with evidence of completed top formations until proven otherwise is a clear indication that this is a particularly important time to pay attention to liquidity and credit conditions. Here is a section from the report:

Eoin/Sarah, I think I've asked you before but are E's video's available in writing? I do find them somewhat tedious and long winded to listen to. And time consuming. I see my sub is up for renewal I'm not sure I'm going to continue anymore if I can't get more of his wisdom in writing. Perhaps I'm missing something? Please advise. Cheers

Thank you for this email which I thought would be worth sharing with subscribers. We provide this service at below cost and on a levelized basis to everyone from sovereign wealth funds to entrepreneurs, family offices to retirees and everyone in between on a global scale. It’s a vocation for both David and I but it’s always a challenge to keep up with the pace of communications technology and the service has morphed over the last 16 years from a print publication to being purely online and providing written, audio and video commentary as well as access to the Chart Library.

I started providing the videos more than two years ago and there is no doubt it takes longer to talk through a chart than to simply speak about the markets. The old audios seldom ran above 15 minutes but it seems to just take longer to cover the same topics while recording videos. Delegates at The Chart Seminar in Australia and the UK last year reported preferring the videos because they no longer have to pull up the charts by hand while listening.

I am willing to trial voice to text software but from what I have heard it is error prone so the transcripts are bound to have typos or be incomprehensible and I do not have the time to edit them in a timely manner for publication. Transcription services generally cost $5 per minute for express service, which is within 12 hours so it is doubtful I would get them back in a timely manner for a daily service.

I think the best thing is to cover the three most important points of the day in the first five minutes of the video and progress to bigger topics from there. I don’t plan on altering the Friday Big Picture format.

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

Some of the topics discussed include: short-term oversold condition replaced with short-term overbought condition so the real test of a significant lows will be if we see higher reaction lows and subsequently higher highs, Dollar weak, emerging markets, gold, oil and commodities firm, 

A link to the full report and a section from it are posted in the Subscriber's Area. 

The broad global adoption of fiscally stimulative policies is unlikely to be as coordinated as the monetary response to the credit crisis was. The big arbiters of how much liquidity is provided to the global economy and eventually the markets will be in which large countries adopt fiscal stimulus. Germany, China and Brazil are the big additional potential sources of stimulus so it is their political machinations that are most worth watching.

The consortium includes Bank of America Merrill Lynch (NYSE: BAC), E*TRADE Financial Corp. (NASDAQ: ETFC), Morgan Stanley (NYSE: MS), TD Ameritrade Holding Corp. (NASDAQ: AMTD), UBS AG (NYSE: AG), and Virtu Financial Inc. (NASDAQ: VIRT). Charles Schwab, Citadel Securities and Fidelity Investments are also on board with the project.

"The founding members of MEMX represent leading retail brokers, global banks and financial service firms, and market makers – a diverse array of market participants organizing for the common goal of improving markets for retail and institutional investors," said Douglas Cifu, chief executive officer of Virtu Financial. "The launching of MEMX is a testament to the market-wide demand for competition, innovation, and transparency." TD Ameritrade executive VP Steve Quirk also issued a statement.

"As a founding member of MEMX, we look forward to being part of an initiative we believe will transform markets for the better," he said. "All types of investors could benefit from this simplified investing experience that will foster competition and promote practices that put the needs of investors first."

The primary stock exchanges have been among the better performers in the financial sector over the course of the last decade as volume surged with the introduction algorithmic trading. The colocation services offered by the exchanges does however raise the question as to whose interests they are in fact serving.

Philippine bulls are on a roll, and who can blame them? The nation’s equities index has started the year beating many global peers, and foreign fund managers are putting back money in a market that was among Asia’s worst in 2018.

Traders at Rizal Commercial Banking Corp. and AB Capital & Investment Corp. are riding the rally by deploying their cash, rather than cutting their stock holdings as they did last year whenever equities went into high gear. The Philippine Stock Exchange Index has rallied more than 6 percent in the first
trading days of January, including a 2.8 percent gain Wednesday.

It closed at an eight-month high, breaking a key resistance level and moving closer to the 8,000 that traders say it could surpass this quarter.

“It’s a good strategy to ride the prevailing positive mood, even if only for the short term,” said Gerard Abad, who manages $380 million as chief investment officer at AB Capital. “We will see a continuation of the improvement in inflation, and it helps that the U.S. Fed has become dovish. That eases pressure on the central bank to raise rates.”

There is no one talking about a secular bull market in emerging markets anymore and that is a good thing from the perspective of a long-term investor. It means it is not a crowded trade.

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

Some of the topics discussed include: Wall Street close to the first area of potential resistance, Europe steady but still underpeforming, China unimpressive. High yield spreads rapidly unwinding oversold condition but also now at first area of resistance. The big question is where is the next source of liquidity going to come from.

The whiplash reversal in junk-bond spreads underlines the treacherous nature of markets at the moment. It's hard to find precedents for a reversal of sentiment on the scale we saw in the last couple of sessions. It's possible that the scale of the shift is justified by either the jobs data or Powell's put, but it seems likely that the Street's reduced capacity for making-markets is exaggerating the swing.

The last time we saw a two-day decline in U.S. high-yield spreads of this magnitude was in 2009, but that was in the context of a longer rally. There was a similar turnaround in late 2000, but in retrospect that just looks like a blip on the chart. The index in those days was less than a quarter of the size it is now and more susceptible to events in individual names.

It's not a lack of flow. Yesterday's volume of high-yield corporate trading was 67% above average, according to Trace data.

But trading isn't the same as liquidity. Market-making desks have much less capacity for assuming risk than they did before the crisis. They were never much help in a full-on panic, but if market-makers took down fewer bonds in the sell-off that would leave them less able to react when the market turns around. So, you can have a market in which too much money is scrambling after too little paper.

It's possible the culprit might be the growth in popularity of junk ETFs like HYG and JNK, but the assets in those two funds have fallen by one-third from the peak in 2017. Or you could just blame quants and algos. They seem to be the go-to scapegoat for everything hard to explain in the markets these days, just ask Cliff Asness (sarcasm alert).

Credit leads the stock market. Bond managers’ primary concern is default probability. Bonds don’t pay more if a company does well. Instead, the price of the bonds may rise which reduces their allure for new buyers on a yield to maturity basis. Unlike stocks, bonds have a clear end date, by which either gains have to be locked in or the issue redeems at par. That means bond investors are much more alert to credit conditions, default rates and the factors that can influence them which tend to affect bonds before stocks.

Since then, the hypothetical of a monthly subscription to All Things Apple has assumed an extremely unofficial name—Apple Prime—based on Amazon’s bundle of free shipping, movies, music, photos and various other services. Last week, the notion took on sudden urgency, as Cook sliced Apple’s sales outlook, sending the company’s stock plunging 8 percent for the week and nearly taking the rest of the stock market down with it.

Proponents of Apple Prime are now reading tea leaves and seeing puzzle pieces moving into place. In his note to shareholders last week, Apple’s chief executive officer wrote under the heading of “other initiatives to improve our results” that Apple was working on “making it simple to trade in a phone in our stores, finance the purchase over time, and get help transferring data from the current to the new phone.”

The idea is that instead of paying a cool grand for a new iPhone every year, devotees might pay Apple a monthly stipend for automatic access to the latest device. Apple already has an iPhone upgrade program that costs $37 a month, administered by Rhode Island-based Citizens One. Presumably Apple could then bundle this with access to music, storage, the AppleCare warranty program, and the much ballyhooed but still largely invisible stable of Apple-financed TV shows and films, like an upcoming animated movie. “This is Apple Prime. And it is coming,” tweeted investor and Apple watcher MG Siegler, after reading Cook’s letter.

The subscription business model is the tech industry’s answer to the cyclicality which has plagued it since its dawn. By creating products that are essential to modern living they have turned a boom to bust pattern into an easily modellable stream of cashflows that any fundamental value-oriented investor can justify having a position in.
 

The Telegraph newspaper cited three unidentified EU sources as saying British officials had been “putting out feelers” and “testing the waters” on an extension of Article 50, which sets out the conditions for leaving the EU.

Brexit Secretary Stephen Barclay denied the report and said London would not seek to extend the divorce while German Foreign Minister Heiko Maas said it was not time to discuss such a course. Ireland, though, said it would not stand in the way if Britain made such a request.

“Certainly from an Irish perspective, if such an ask happens, we won’t be standing in the way on that,” Irish Foreign Minister Simon Coveney told journalists after a meeting with Maas in Dublin.

“If it is the case that at some point in the future that the British government seeks an extension of Article 50, then that is something that will have to get consideration at an EU level,” Coveney said.

Ireland’s economy would be hit hard by a disorderly Brexit and the most contentious part of May’s deal is an insurance plan aimed at preventing a hard border between the Irish Republic and Northern Ireland.

May is said to intend to “move swiftly” if her deal is voted down in parliament, as seems likely. The UK is due to leave the EU on March 29th so 80 days from now. One is reminded of Phileas Fogg’s race around the world but perhaps the more appropriate literary comparison is with Don Quixote and tilting at windmills, but this time in the Low Countries.

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

Some of the topics discussed include: Dollar testing important support againsts the Euro, select emerging market currencies breaking out led by the Rupiah. China steady, oil firm, gold steady, sugar firms, grains and beans have base formation characteristics, high yield spreads start to contract.

I thought you may find this interesting. If we think we have a LT top on bond prices, the Powell put and fiscal excesses may just cause the next bull move and the move to higher inflation. I thought this FT chat on labor market was interesting ..best   

Thank you for this email which is timely considering the extent of the rally we have seen in bond prices over the last few months. The Merrill Lynch 10-year Treasury Futures Total Return Index has rallied impressively and is now testing the sequence of lower rally highs evident since the middle of 2016. A short-term overbought condition is now evident and this is a natural area where resistance might be expected.

The 40th anniversary of Deng Xiaoping’s opening up of the Chinese economy, and the end-of-year Central Economic Work Conference last month, suggest that Mr Xi is prepared to accede to change but not to anything that threatens China’s core interests. He cannot risk caving in to US pressure. Foreign companies and SOEs will still be required to buy and prioritise locally. Local governments and tech companies are bound to support the security, innovation, and industrial transformation of the state. Industrial policy designed to boost China’s technological and military capacity is not up for negotiation. Changes to intellectual property laws are aimed more at small businesses rather than SOEs and big technology companies. Changes in foreign ownership caps and technology transfer will have to go some way for foreign companies to back away from reconsidering supply chain strategies. So, while we can anticipate some flexibility in the optics of Mr Xi’s negotiating stance, no one really doubts that he is firmly in control, and remains committed to both the Made in China and Belt and Road strategies, which are enshrined in the party’s constitution.

Liu He, Xi’s top economic advisor, turned up at the talks between the US and China today despite the fact they were to be led by mid-level officials. That’s a signal China is taking these negotiations seriously.

The simple fact is that if China wants to achieve its ambitions of becoming a global super power in a military, economic, technological, political and cultural sense it needs to placate the USA today so that it can show its true strength later. That, in fact, was exactly the strategy Deng followed when he advised the Party to hide its strength and just play along with the global economy in opening up.

Indonesia is often seen as an emerging market bellwether with its high yields, strong economic growth and a reformist government, with foreign investors holding about 40 percent of local-currency bonds. The direction of its markets may provide clues as to whether the stress that swept developing nations last year may be coming to an end.

Federal Reserve Chairman Jerome Powell’s comments on Friday indicating a possible pause in rate hikes, an easing in China’s monetary policy, and hopes of improvement in trade tensions between Beijing and America have all combined to boost emerging markets on Monday.

“The rupiah looks to be on that nice catch-down trade given the Goldilocks’ moment that markets are reveling in,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Fed’s Powell humming all the right notes out of the markets song book has gone a long way” in boosting the rupiah, he said.

Indonesia is a commodity exporter, has a large young population, an evolving manufacturing sector, and while now an energy importer is still an oil producer. With a reform minded administration it has exhibited relative strength this year not least because it got its currency devaluation done in 2015.

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

Federal Reserve Chairman Jerome Powell said the central bank can be patient as it assesses risks to a U.S
economy and will adjust policy quickly if needed, but made clear he would not resign if President Donald Trump asked him to step aside.

“With the muted inflation readings that we’ve seen, we will be patient as we watch to see how the economy evolves,” Powell said Friday on a panel with his predecessors Janet Yellen and Ben Bernanke at the American Economic Association’s annual meeting in Atlanta.

“We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track,” he said, adding “there is no pre-set path for policy.”

The financial markets have been busying pricing out the potential for additional rate hikes this year in the aftermath of the last Fed meeting. That was a clear message to policy makers that they were making a mistake in signaling a willingness to persist in raising rates and running off the balance sheet concurrently.

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

Is there a link to your updated list of Autonomies? I searched on site but could not find. Thank you and Happy New Year to you and David!

 

Happy New Year and thank you for this question which may be of interest to other subscribers. We have a section in the International Equity Library devoted to the 168 autonomies. What become obvious over the last decade is capitalism trends towards consolidation and there has been a continuing trend of mergers between the world’s largest companies. The result is that it has been a relatively dynamic list. 

“Underpinning this wave of buying is mounting evidence that Saudi Arabia has taken an axe to its oil production,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd. Oil’s positive start to 2019 follows its worst quarter in four years and a 20 percent annual loss driven by panic over a growing glut of crude. While OPEC’s output plunged by the most in almost two years last month and producers have pledged to curb supplies through the first half of 2019, concerns about oversupply prevail as stockpiles at America’s main storage hub show signs of swelling.

And

The majority of oil executives surveyed by the Dallas Fed are still planning to boost spending in the next year, even after a plunge in prices. Saudi Arabia raised pricing for most crude grades to Asia and for all blends to buyers in the U.S. for delivery in February as the world’s biggest exporter cuts output to clear a global oil glut. As the new year begins, the oil market looks set to be dominated by big shifts in production. A few months ago, investors were struggling to comprehend just how much cash the largest oil companies were about to dump on them. Those mountains of money have now been reduced to mere hills.

Saudi Arabia following through and cutting supply is a positive development but the declining economic activity in Texas is also an important consideration since the unconventional supply is a big part of the reason for the glut which has seen prices decline so swiftly.

In normal times, it’s Canada’s turn to shine at this later stage in the cycle—typically benefitting from rising commodity prices and still-solid global growth. But the TSX was bludgeoned this year (down double-digits) by trade tensions, a housing slowdown and weak domestic oil prices. Next year’s growth outlook is dulled by oil production cuts, slower U.S. spending, slipping auto sales and the overhang of record consumer debt. Providing a mild offset will be the new LNG project, mildly stimulative fiscal policy in the lead-up to the October federal election, as well as (presumably) some certainty on the North American trade front. But with the big interest-sensitive sectors still gearing lower, we look for 2019 Canadian GDP growth to simmer down to a 1.8% pace following this year’s as-expected 2.1% advance. With population growth recently clocking in at 1.4% y/y, this points to quite modest per capita gains.

Even this more restrained GDP growth will tighten the labour market further, producing the lowest unemployment rate seen in Canada since the early 1970s. This will be the key ingredient convincing the Bank of Canada to tighten further in 2019, tempered somewhat by Governor Poloz’s view that there is still some hidden slack in job markets—surprisingly sluggish wage growth recently lends serious credence to that opinion. Overall, we look for the Bank to hike rates two times (50 bps) in 2019, following a year when policy actually met expectations to a T. Curiously, 10- and 30year Canadian bond yields are now only slightly above year-ago levels, and the GoC curve is even flatter than the flat Treasury curve; bonds clearly expect cooler Canadian growth next year as well. That view also appears to be built into the Canadian dollar, which spent most of the year on the defensive amid trade tensions and wobbly WCS prices. We look for only a mild recovery in 2019 for the loonie amid firmer oil prices and if/when the USMCA is ratified.  

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

Alberta is talking about secession. It’s never going to happen but the fact the province is even talking about it tells a tale of the ignorance the Ottawa government has for what helped Canada become a globally significant economy.

Happy New Year to you and your family in California

Thank you for responding to my question, directly on the daily commentary .

In that commentary you said that banks still prefer to hold a reserve at the FED in their balance sheet rather than holding Treasuries (as a result of the balance sheet reduction) , although both have same credit rating (i.e. the credit rating of the US government)

I don’t understand the last point. Why should banks prefer holding a lower yielding reserve asset  than a higher yielding Treasury bond, if we isolate the duration difference between the 2?  I am struggling to understand why balance sheet reduction is so bad a thing for banks (as liquidity providers as you point out) if they exchange one asset for the other. Their lending power is not impaired as a consequence. Or am I wrong? actually lending activity by commercial banks in the US has been picking up until end of 2018 notwithstanding the equity markets gyrations

Btw. I am attaching a link of chart showing the increase of Treasuries and Government agency papers + MBS by commercial banks in US. They are picking up.  They have accelerated in December so much that the new 10 years yield now discounts only one rate hike for 2019.  Very bearish an implicit scenario.

Thank you for this follow-up question. (The original was posted in the Comment of the Day on December 21st  )

The money the central bank pay banks for parking reserves is guaranteed but Treasuries change in value from day to day and therefore have more volatility. Any volatility represents more risk than none and therefore more uncertainty

This may in part be a reaction to the bad PMI data and the equity market sell-off we have seen," said Michelle Lam, a greater China economist at Societe Generale SA in Hong Kong.

“They’re trying to restore market confidence and need to ease credit conditions to boost lending to the private sector and because of high seasonal demand for cash.” China’s manufacturing purchasing managers index fell into the contraction territory last month, the weakest since early 2016. Early indicators for December signal the economic slowdown is deepening, after official data showed industrial production growth was the weakest in a decade and industrial profits fell
for the first time in almost three years in November.

Stimulus Pledge
Chinese financial stocks surged Friday as Premier Li Keqiang visited the nation’s biggest banks and pledged more support for the economy. Li said China will strengthen the scale of its counter-cyclical adjustments of macro policies and further cut taxes, while urging banks to take full advantage of tools including reserve ratio cuts, and to support private and small businesses’ financing needs.

“How much can this help the economy remains to be seen,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “The central bank has been handing liquidity to the banks, but the banks are unwilling to lend. This is a classic case of banking disintermediation amid the
down cycle.”

China’s bank reserve requirements have been cut significantly over the last few years with little sign just yet that the banks are willing to voluntarily take on more risk. That is particularly true for the corporate sector now that defaults are a reality.

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

Some of the topics discussed include: Apple leads Wall Street lower, China remains under pressure, industrial metals trending down, safe havens conitnue to outperform, India, Indonesia and Brazil exhibit relative strength.

A link to the full report and a section from it are posted in the Subscriber's Area. 

“It looks more like a liquidity event with the move happening in the gap between the New York handover to Asia,” said Damien Loh, chief investment officer of hedge fund Ensemble Capital Pte., in Singapore. “It was exacerbated by a Japan holiday and retail stops getting filled on the way down
especially in yen crosses.”

As a result, the yen surged against every currency tracked by Bloomberg, and was up 1 percent against the dollar at 107.78 by 9:30 a.m. in London.

The haven asset has strengthened against all its major counterparts over the past 12 months as concerns over global economic growth mounted and stocks tumbled. It rose 2.7 percent against the dollar last year, the only G-10 currency to gain versus the greenback.

“Yen strength has been omnipresent since mid-December, cementing the status of the yen as the only true safe haven these days amid political risks elsewhere,” said Christin Tuxen, head of currency research at Danske Bank A/S.

The quiet time around the holidays is when algos have a particularly good opportunity to trigger stops and to enact outsized moves which have the scope to set the stage for trading for months afterwards.

In a speech at his swearing-in ceremony in Brasilia on Wednesday, Guedes promised a sweeping overhaul of the country’s state apparatus and business environment to unleash corporate potential and free future generations from debt.

"Private-sector pirates, corrupt bureaucrats and creatures from the political swamp have conspired against the Brazilian people," he said. "Excessive spending has corrupted Brazil." Bolsonaro has tapped Guedes, a graduate of the University of Chicago, to manage economic policy in a country hamstrung by rising debt, a gaping fiscal deficit and slow growth. Bolsonaro won the October election by a wide margin as part of a popular backlash against crime, corruption and economic malaise.

In his comments Wednesday, Guedes highlighted the urgency of the task ahead. "Our business class is chained down by interest rates, high taxes and labor costs," he said, adding that he believed the ideal tax burden would be around 20 percent of gross domestic product, rather than the current rate of 36
percent.

Earlier in the day, the new energy minister, Bento Albuquerque, said Brazil would deliver on plans to capitalize Eletrobras, prompting shares in the state-run company to jump as much as 9.7 percent. He added that he would seek a lower tax burden and few subsidies in the electricity sector.

Markets tend to reward the efforts of right-wing populists because they promise to streamline bureaucracy, cut regulation and boost economic growth; all of which tend to improve sentiment towards asset prices. Bolsonaro’s decision to appoint a University of Chicago economist as his finance minister is a signal, he has growth and employment as his first set of priorities and that is likely to be appreciated by investors.

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

Some of the topics discussed include: China remains weak, stock markets globally look increasingly likely to unwind short-term oversold conditions but credit conditions remains tight and safe haven assets continue to perform, 

A link to the full report and a section from it are posted in the Subscriber's Area.

When David and I came up with the idea of the Autonomies back in 2010 we were thinking of companies that could perform come hail or shine in the evolving secular bull market. There are three fundamental strands to that belief and one technical.

The rise of the global consumer is a euphemism for the spread of capitalism and improving standards of governance which have historically delivered improving standards of living and higher consumption of goods and services. As long as capitalism continues to spread and governance improves millions of people are likely to be lifted out of poverty and into the middle classes. Asia and Africa are ground zero for that trend to persist in the coming decades

The latest boardroom exits were prompted by the rejection of its rescue plan, Carige said. Its top management were replaced in late 2018 after Malacalza won a board battle to pursue a capital-raising rather than a merger.

Italy’s finance ministry is studying a plan under which Carige is bought for a symbolic price, possibly by UniCredit SpA, La Stampa reported Wednesday, without saying where it got the information. Such a deal might mirror Intesa Sanpaolo SpA’s takeover of two Veneto-based banks with state support in 2017.

The painful contraction and rationalisation of the Italian banking sector continues with Carige representing the latest in a litany of failed lenders which have been unable to write off loans despite the fact they have no chance of being paid back. The result is Italy will be left with a handful of large institutions and the rest will be allowed to fail which will further concentrate risk and strengthen the ties between the state and the banking sector.

Further evidence of slowing Chinese growth weighed as a closely-watched manufacturing gauge had its lowest reading since May 2017.

“There are a lot of uncertainties lying ahead,” said Banny Lam, head of research at CEB International Investment Corp. “The markets will likely be stuck in a downtrend over the next few
weeks.”

Property stocks were among Wednesday’s biggest decliners on the Hang Seng Index, with China Resources Land Ltd. and Country Garden Holdings Co. both falling more than 6 percent.

“Some funds are readjusting their positions for the new year and may be dumping stocks in sectors with an uncertain outlook like property and health care,” said Linus Yip, a Hong Kong-based strategist with First Shanghai Securities Ltd. “That’s why we’re seeing a sell-off.

Hong Kong has some of the highest property prices in the world which are a function of extraordinarily low interest rates, abundant and persistent demand from well-heeled mainland residents. Tightening liquidity is a significant threat to that trend persisting while ebbing demand from Chinese residents amid downward pressure on the domestic economy is also a concern.

Happy New Year!

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

Some of the topics discussed include: review of 2018, where are we in the cycle, what's going well now and what does that tell us, what can we expect from 2019. 

The big drawdown that began in January represented a major inconsistency for what had previously been an impressively consistent trend. The subsequent ranging belied the churning that was taking place inside the major Wall Street indices as leadership narrowed to focus on the mega-cap technology companies.  Facebook peaked in the summer and Apple in October and that was one of the causal factors in the ensuing sell-off as large cap underperformance weighed on ETFs.



The fact that Advanced Micro Devices was the best performing share on the S&P500 this year is a testament to the extraordinary volatility we have seen in single stock names. The share opened in January at $10.42, peaked in September at $34.14 and closed today close to $18.32.

Many thanks for another great year of top-class service. All the very best for 2019 and beyond. The following article in today's Observer gives on-the-ground evidence of the slowdown in the Chinese economy. 

Thanks for your well wishes, your kind words of encouragement and Happy New Year!

Here is a section from the article:

“People have started to reduce or even stop spending money because they don’t expect the economy will perform well,” said Ye Tan, an independent economist based in Shanghai. “Companies and individuals are wary about the economy.”

Going into 2019, China faces not just a slowing economy but also a protracted trade war with the US, a pile of debt that threatens the world economy along with the Chinese financial system, and a populace demanding better environmental, labour, and health protections.

Next year, China’s leaders face some of the most difficult policy decisions they have had to make in years. Analysts say they are confronting a choice between pushing headline growth through Beijing’s traditional levers of infrastructure spending funded by debt, or painful reforms that lower financial risk but raise the possibility of unemployment, and ultimately social instability.

Officially, China’s economy is humming along. Economic growth is expected to slow to 6.3% next year, after reaching 6.6% in 2018. The economy expanded by 6.5% in the third quarter, the country’s slowest quarter since 2009.

Yet economic indicators from auto sales to manufacturing activity are all flashing red. In November, growth in China’s manufacturing sector stalled for the first time in more than two years. Annual auto sales in the world’s largest car market are on track to contract for the first time since 1990.

Gold gained ground this quarter as world equities plunged and doubts stacked up about the pace of economic growth in 2019. A weakening dollar in December aided the rally amid expectations the Federal Reserve will dial back the pace of rate increases next year. That’s also helped to boost holdings in gold-backed exchange-traded funds.

“For gold prices, I think there is upside to be seen in 2019,” Jingyi Pan, market strategist at IG Asia Pte., told Bloomberg TV on Monday, citing prospects for fewer tightening moves from the U.S. central bank. “It does look like one where we will see a slackening of expectations in Fed hikes.”
 

The big picture is the world’s governments have a lot of debt and the rise of populism is burnishing the attraction of fiscal stimulus. That is likely to put downward pressure on fiat currencies, with no country wanting a strong one. For a monetary metal that cannot simply be lent into existence that’s potentially very good news.

 

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

Merry Christmas to you and your family. Thank you for all the hard work you have put in 2018 to produce such a valuable service. I'm sure that the Euro's travails are the last thing on your subscribers' minds this festive season but this YouTube video may be of interest to the Collective. It is a lecture given in fluent English) by German economist Dr. Oliver Hartwich last July, entitled 'Target 2 and the Euro Crisis'. He explains this arcane subject with great clarity and humour. 

Thank you for your kind words and this enlightening video which as you say offers a very useful exposition of the internal transfer mechanism that makes up the Euro. The simply fact is that the Euro was designed to be the currency of a pan European federal super state and has the transfer mechanisms appropriate for that objective without it in fact existing.

U.S. credit spreads widened to the highest levels since the summer of 2016 as funds saw outflows even as major American equity indexes posted a second day of gains.

Investment-grade bond spreads widened 2 basis points to 152 basis points on Thursday. The index has widened every day since Dec. 14 and most trading sessions this quarter

The junk bond index also rose Thursday, although the move was less pronounced. The index widened 1 basis point to 531 basis points, the highest level since Aug. 4, 2016. It’s risen 113 basis points this month
 

Investment-grade funds saw outflows of $4.4 billion for the week ended Dec. 26, the most since December 2015, according to Lipper. Junk bond funds registered the biggest outflows since October.

The stock market is short-term oversold and we have evidence of a short covering rally that began on the 26th. However, credit markets have not been the subject of bargain hunting and spreads continue to widen.

Gold is a monetary metal and therefore attracts the most interest when it is appreciating against most currencies. We have added charts for Gold in US Dollar, Euro, British Pounds, Japanese Yen, Australian Dollars, New Zealand Dollars, Swiss Francs, Indian Rupees, Chinese Renminbi, South African Rand, Brazilian Real, Turkish Lira, Swedish Krona, Singapore Dollars. These can be found using the Bloomberg ticker for gold XAU in the search or in the Metals section of the menu.

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

Some of the topics discussed include: Rebound on Wall Street is extended signally a low of near-term significance, Treasuries ease, gold steady, Dollar eases, Europe and China weak, 

For all of the previously described reasons, the period that we are now in looks a lot like 1937.

Tightenings never work perfectly, so downturns follow.  They are more difficult to reverse in the late stage of the long-term debt cycle because the abilities of central banks to lower interest rates and buy and push up financial assets are then limited.  When they can’t do that anymore, there is the end of the long-term debt cycle.  The proximity to the end can be measured by a) the proximity of interest rates to zero and b) the amount of remaining capacity of central banks to print money and buy assets and the capacity of these assets to rise in price.  

The limitation in the ability to print money and make purchases typically comes about when a) asset prices rise to levels that lower the expected returns of these assets relative to the expected return of cash, b) central banks have bought such a large percentage of what there was to sell that buying more is difficult, or c) political obstacles stand in the way of buying more.  We call the power of central banks to stimulate money and credit growth in these ways “the amount of fuel in the tank.” Right now, the world’s major central banks have the least fuel in their tanks since the late 1930s so are now in the later stages of the long-term debt cycle.  Because the key turning points in the long-term debt cycle come along so infrequently (once in a lifetime), they are typically not well understood and take people by surprise.  For a more complete explanation of the archetypical long-term debt cycle, see Part 1 of “Principles for Navigating Big Debt Crises” (link).

So, it appears to me that we are in the late stages of both the short-term and long-term debt cycles.  In other words, a) we are in the late-cycle phase of the short-term debt cycle when profit and earnings growth are still strong and the tightening of credit is causing asset prices to decline, and b) we are in the late-cycle phase of the long-term debt cycle when asset prices and economies are sensitive to tightenings and when central banks don’t have much power to ease credit.

Both the Dow Jones Industrials and the S&P500 posted large upside key day reversals yesterday to signal lows of at least near-term significance. Neither followed through on the upside today but they did hold the moves. Considering just how much they fell since early this month there is certainly scope for a rebound but the true test of whether more than near-term support has been found will be in the extent to which they hold their lows.

China has also said it will suspend additional tariffs on U.S.-made vehicles and auto parts for three months starting on Jan. 1, adding that it hopes both sides can speed up negotiations to remove all additional tariffs on each other’s goods.

Bloomberg, citing two people familiar with the matter, reported on Wednesday that a U.S. trade team will travel to Beijing the week of Jan. 7 for talks.

A person familiar with the matter told Reuters last week that talks were likely in early January.

In yet another reconciliatory sign, China issued on Tuesday a so-called negative list that specifies industries where investors - domestic or foreign - are either restricted or prohibited.

The unified list is seen as another effort to address concern among Western investors that there is no level-playing field in China. Investment in key Chinese sectors, however, is still prohibited.

Gao said China would “comprehensively” remove all market access restrictions for foreign investors by the end of March, in areas not included in a foreign investment “negative” list published in June.

China has a lot more to lose from a trade war than the USA. While it is difficult to get accurate statistics on the health of the economy the simple fact that car sales are declining at a rather rapid pace is a clear signal the Chinese consumer is at least holding off on making purchases. Here is a link to an article from the Wall Street Journal covering the story and here is a section: 

In the frenzy, some companies became complacent, assuming growth would be endless and easy to capture, according to Mr. Gong and other analysts. Then the growth evaporated. Sales grew 3% in 2017 and declined 2% in the first 11 months of 2018.

China now has enough factories to build 43 million cars but will produce fewer than 29 million this year, according to consulting firm PwC. While foreign and domestic auto makers alike find themselves under pressure, the slowdown has hit those that misread the market hardest of all.

Hope you are enjoying a well-earned Christmas break with lots of gourmet eating!

I have a very simple question.  What happens to the Euro banking index if Deutsche Bank gets nationalised?

Thank you for the well wishes. We enjoyed an eclectic mix of fare on Christmas Day foregoing a bird in favour of a 5lb lobster cooked Cantonese Style and complimented with a honey glazed ham. We washed it all down with Fortnum and Mason’s English Mint Tea which I can’t recommend highly enough. This was a landmark year for the family since my ten-year old has finally developed a taste for Mahjong so we had the requisite four to play for hours after dinner to much shouting, laughter and banter.  

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

The leaders pledged to cut taxes and fees “on a greater scale,” increase the issuance of special-purpose local government bonds by “a relatively large margin,” and strike a balance between monetary tightening and easing to ensure “reasonably ample liquidity,” as they promised to continue to take measures to address the financing difficulties faced by private and small companies. The measures are part of official efforts to “strengthen counter-cyclical policy adjustments,” which refers to government support to boost economic growth, according to Xinhua. Proceeds from sales of special-purpose local government bonds are often used to fund infrastructure investment, a key driver of economic expansion.

They noted that the world is facing a “once-in-a-century” change that entails both crisis and opportunities. They urged the nation to “turn crisis into opportunities” by improving its technology and innovation capabilities, deepening reforms and opening up further, participating in global economic governance system overhaul, and speeding up a transition to high-quality growth, the report said.

China has been weighing on the shadow banking sector for much the last two years in a bid to contain the risk that has been building in the regional banking sector. That curtailment of access to liquidity and enforcement of rules that have previously been ignored has been a major contributor to slowing growth.

I understand the problem about reducing the FED balance sheet and raising rates at the same time.

The impact on liquidity is however less intuitive to me. While the effect of interest rate hikes is clearer, the effect of a Balance Sheet reduction is less so.

Am I wrong to assume that what technically happens when the FED reduces i.e. sell bonds is that the private sector, through the banking system, receives these bonds? In exchange banks reduce the account balance that they hold at FED.

If banks get Treasuries in their book, they also receive more interest income (coupons) that goes into the system. This money was blocked in the book of the FED until then.

Why is this necessary bad?

Thanks for this question which I’m sure others have an interest in. Since the financial crisis banks have been paid interest on the excess reserves, they hold at the Fed. Against an uncertain environment in the real world they therefore had an incentive to park vast sums at the Fed. In return they received interest income on that money in line with the Fed’s Funds rate. 

“The rules create the worst possible situation,” said David Miller, a tax lawyer at Proskauer Rose LLP.

The impact on hedge funds is among the curve balls taxpayers are dealing with as the one-year anniversary of the tax overhaul nears and the IRS issues thousands of pages of regulations implementing the law. The cap also represents another hit for the industry from the GOP tax law. The overhaul eliminates the deduction for management expenses investors previously qualified for, and many New York managers are hurt by the new cap on state and local tax deductions.

Just what people owe on their taxes is going to become apparent when tax returns start to get turned in next year and it’s not going to be good news for the millions of people living in the USA’s highest population, highest taxed states California and New York.

India’s ascent on the global stage has claimed another victory after its stock market overtook Germany to become the seventh largest in the world.

The Asian giant edged past the equity market of Europe’s largest economy for the first time in seven years, according to data compiled by Bloomberg. That means, after the U.K. leaves the European Union in March, the bloc would have only one country -- France -- among the seven biggest markets.

The move reflects India’s positive returns this year as companies’ reliance on domestic demand enabled them to avoid the meltdown in other emerging markets spurred by Federal Reserve tightening and a trade war between the U.S. and China. It also highlights the challenges facing the EU, including its future relationship with the U.K., a standoff with Italy over budget allocations and separatist clashes in Spain.
 

India is benefitting right now from the decline in oil and other commodity prices as well as the fact its absence of a big export-oriented manufacturing sector insulates the economy from strife abroad.

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

Some of the topics discussed include: stock markets remain weak and while increasingly oversold a lot of technical damage has been sustained with an increasing number of completed top formations. Dollar and Treasuries ease, gold and yen strong, India and Indonesia exhibiting relative strength. 

The US market today is nothing like it was a century ago because of international earnings which skew the perspective of the economy the broad averages might have once been expected to deliver. Nevertheless, when the averages move in tandem it gives us a picture on what people are doing with their money.

If you look at outlooks published by the sell-side, I think that 80-85% percent of what I read is looking for a weaker dollar,” said Ed Al-Hussainy, currency strategist at Columbia Threadneedle Investments. “And in my experience, when all the forecasts are looking the same way, the currency generally doesn’t behave the way these forecasts predict it will.”

The narrative for dollar bears is roughly as follows: The U.S. can’t keep up its better-than-everyone-else economic performance. America’s growth rate will get closer to the rest of the world, the Fed will stop or slow interest-rate hikes and the advantage an investor gets from holding dollars will diminish.

However, this story of global growth convergence may sound familiar to those who have seen it trip up forecasters before.

Around this time last year, the prevailing view was bearish on the dollar for similar reasons, and the median forecaster in a Bloomberg survey thought the greenback would slide to $1.21 against the euro from $1.18, the spot price at the time.

Instead, the dollar rallied to $1.14. (For the record, Norddeutsche Landesbank and Sumitomo Mitsui Trust Bank predicted a move to $1.14 late last year.)

The Fed thinks it is going to be able to raise rates twice next year and continue on its balance sheet run off. That is the primary reason to be bullish of the Dollar. The stock and bond markets are signaling investors are unwilling to give much credence to that view.

Secretary of State Michael Pompeo and Homeland Security Secretary Kirstjen Nielsen said in a statement they were “concerned” that the alleged operation violated a 2015 agreement China made with the U.S. to stop supporting cyber theft of intellectual property and trade secrets.

The indictments against the two, unsealed in federal court in Manhattan on Thursday, underscore one of the primary U.S. grievances in the ongoing trade fight between the Trump administration and Beijing: the systematic theft of U.S. intellectual property and forced technology transfers from companies doing business in China.

Those complaints are a central issue in negotiations U.S. and China are working under a 90-day deadline President Donald Trump and Chinese President Xi Jinping set after agreeing Dec. 1 to halt additional tariffs and trade penalties. Since July, the two countries have imposed tariffs on a combined $360 billion in each other’s imports, a bruising conflict could undermine the global economy at a time when growth is leveling off.

The hackers, known in the cybersecurity community as Advanced Persistent Threat 10, stole information from companies in an array of industries, including banking and finance, telecommunications, biotechnology, automotive, health care and mining, according to the indictment.

The group hacked the U.S. Navy, making off with the personal data of more than 100,000 personnel, and successfully infiltrated computers linked to NASA’s Jet Propulsion Laboratory, the indictment said. Zhu and Zhang were indicted in abstentia.

Industrial espionage has been a major part of China’s technological evolution policy for the last decade and longer. In fact the data collection underway has been on a scale that dwarfs that of any other country with the possible exception of the USA itself. Here is a link to an article from the New York Times highlighting how China has been listening to European diplomatic communications for years. Here is a section:

Unlike WikiLeaks in 2010 or the Russian hack of the Democratic National Committee and other Democratic Party leaders in 2016, the cyberattack on the European Union made no effort to publish the stolen material. Instead, it was a matter of pure espionage, said one former senior intelligence official familiar with the issue who spoke on the condition of anonymity.

It also displayed the remarkably poor protection of routine exchanges among European Union officials after years of embarrassing government leaks around the world.

In this case, the cables were exposed after a run-of-the-mill phishing campaign aimed at diplomats in Cyprus pierced the island nation’s systems, said Oren Falkowitz, the chief executive of Area 1.

“People talk about sophisticated hackers, but there was nothing really sophisticated about this,” Mr. Falkowitz said. After getting into the Cyprus system, the hackers had access to passwords that were needed to connect to the European Union’s entire database of exchanges.

Area 1’s investigators said they believed the hackers worked for the Strategic Support Force of the People’s Liberation Army, part of an organization that emerged from the Chinese signals intelligence agency that was once called 3PLA.

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

Some of the topics discussed include: Fed Balance sheet tightening on autopilot, hawkish tone sees risk assets braaking down, Dollar firm, gold downside key reversal,. Treasuries breaking out. 

Here are the Key Takeaways from today's FOMC events:

The FOMC hiked rates a fourth time this year to a decade high, ignoring President Trump’s criticism, and lowered its outlook to two hikes from three next year.

Powell specifically endorsed the dots, citing them in his press conference as a guideline for the committee and a useful tool.

The committee tweaked its guidance to ``some further gradual increases’’ -- a more hawkish development compared with the alternative of dropping the guidance.

Powell said all meetings are live for possible moves next year, but gave no strong hints as to when the Fed would raise next.

There was unanimous support for the hike.

Powell said that Trump's comments had no impact on policy and that the Fed is committed to doing what it thinks is best.

Powell said financial conditions caused a slight downgrade in 2019 forecasts but no real change in the outlook.

Markets took FOMC and Powell as hawkish, with the yield curve flattening and stocks falling.

The dot plots suggest two interest rate hikes next year but Jay Powell basically said they are going to be data dependent next year. The one thing that stood out to me from the press conference was that no one asked questions about the pace of balance sheet run off. That says a lot.

What prompts investors to chuck Graham and Dodd for a bucket of sheep entrails? More than a couple of factors, including the proliferation of easy-to-use charting functions on Thomson Reuters and Bloomberg terminals, Yahoo Finance, and Google charts.

Most obvious is the burgeoning success of passive investing. In 2007 index funds accounted for 15 percent of ETF and mutual fund assets, according to the Investment Company Institute. In 2017 that number was 35 percent.  

As recently as last year, fewer than one in ten active large-capitalization U.S. stock managers had beaten the S&P 500 during the previous 15 years. 

Accordingly, active money managers today are on a somewhat desperate quest for new ideas, trading strategies, or tactics — anything to narrow the gap between their own performance and that of the big indexers. It is, after all, a struggle for their own survival. 

“Wall Street is neither fundamental nor technical,” say MIT’s Lo. “They are opportunistic.”

Indeed, the problems bedeviling fundamental research feed into the rising popularity of technical analysis. “One reason people gravitate toward technical is they get frustrated with fundamentals,” says Stovall. “Price is never readjusted. Earnings are often readjusted. GDPs are often readjusted.”

Part of being a chartist is being contrarian. The reason price action appeals to many of us is precisely because it is not well understood by the masses. Therefore, when I read articles like this, extolling the benefits of technical analysis and trend following, I can’t help but feel cautious rather than vindicated.

“When the price is good, we have work, but when it isn’t, we have no money to pay the rent, no money for food, no money for the doctor,” said Ms. Poló, 56, standing on the side of the road in Baja California state, where the bus she was riding had broken down about three hours from the border.

Coffee prices have been stuck below the cost of production for the longest stretch since the global financial crisis, leading some producers to abandon crops and some to migrate for new jobs. The shift is being driven by currency fluctuations that are encouraging sales and production in Brazil, the world’s largest coffee producer, spurring a record crop that is driving down prices for other coffee-growing nations.

“We’re now back in real terms to where we were 20 years ago, when farmers abandoned land because they couldn’t make ends meet,” said Paul Rice, president and chief executive of Fair Trade USA, which works with 1 million coffee producers in 42 countries.

A 2017 study by Cornell University for Fair Trade USA placed the average cost of coffee production at $1.40 a pound. Coffee prices have been below that price for 20 straight months, the longest stretch since 2008, according to FactSet data.

When commodity prices fall below the cost of production supply destruction takes place and the lowest cost producer gains market share. For Robusta coffee the question is whether central America can remain competitive with larger producers like Vietnam and Brazil for Arabica.

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

Some of the topics discussed include: analysis of the total number of stocks outstanding in China, Europe, the UK and USA. stock market steady ahead of the Fed meeting tomorrow, Big tech exhibiting relative strength over the last week, gold stead, safe havens firm, Treasury prices breaking out. 

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

When half of all corporate debt is rated at BBB, one big step above junk, that raises big questions about financing costs and source of the funds necessary to continue to buy back prodigious quantities of shares.

Expectations that Xi’s speech would give stocks a boost (or at least, prevent a sell-off) were thwarted, and since “nothing special” was announced, Asian shares are following the overnight sell-off in the U.S., said said Castor Pang, head of research at Core Pacific-Yamaichi International HK.

Francis Lun, chief executive officer of Geo Securities, agreed. Investors were disappointed by the speech as they had been expecting some comments on economic stimulus or the further opening-up of the Chinese economy, he said. “But he didn’t mention it. That’s why A shares dropped 1 percent and also dragged down Hong Kong stocks.”

Xi Jinping doused hopes he would be a reformer by denouncing Deng’s policy of hiding the nation’s strength and playing nice with the international community. Instead he has asserted China’s intention to be more assertive internationally, to become independent of the Dollar’s patrimony and to become independent technologically.

“Oil has gotten caught up in all the panic you’re seeing,” said Bill O’Grady, chief market strategist at Confluence Investment Management LLC in St. Louis. “This is all about fears of a recession. It’s risk-off everywhere.”

A U.S. government report Monday forecast surging shale-oil production, adding to worries about a glut. In Moscow, Russian Energy Minister Alexander Novak said production is rising, although the country is preparing to implement output curbs to conform with an OPEC+ accord.

Crude’s mired in a bear market amid growing skepticism that cuts by the Organization of Petroleum Exporting Countries and its allies will be deep enough to prevent a surplus in 2019. The group’s efforts to balance the market have been undermined by the relentless growth in U.S. shale, which veteran crude trader Andy Hall said is making it harder to predict global supplies.

It’s all well and good to talk about the relentless growth of US shale but West Texas Intermediate at $46 is uneconomic for a substantial proportion of shale drillers. The response is going to be less drilling as soon as any hedges on supply run off. That is the great strength of unconventional wells. They are more capital intensive to bring online but their supply is elastic because continuous drilling is required to sustain production after initial prolific period. That give companies the ability to more closely match supply to demand than conventional wells.

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

Some of the topics discussed include: S&P500 at a new closing low, Defensives outperforming on a relative basis, oi prices weak, Dollar eases, gold steady, All eyes on the Fed.

In a mid-year commentary, which I cannot locate, you presented a strategy for coping with the customary October seasonal downturn.  Implementation of that advice will have saved subscribers many years of subscriptions.  Thank you for those invaluable comments.

More recently you have devoted much time discussing the dual impact of rising interest rates and Fed balance sheet reduction.  The attached article (a bit long) states that the US Fed, being excessively influenced by equity markets, but ignoring an already slowing real economy has tightened excessively and, because of lags in the effect of monetary policy, will not now succeed in reversing the economic downturn already underway.

Trying to second guess the Fed while anticipating an inevitable slowing economy is making portfolio management even more difficult than usual.

Thank you for this kind email and I am delighted you are getting value from the service. There are two Fullerisms I have been ruminating on recently. The first is “monetary policy beats most other factors most of the time” The second is “the Fed has killed off more bull markets than all other factors combined”.

Here is a section from the conclusion of the article you included:

The Federal Reserve has pushed monetary policy too far. It makes sense that the market is rapidly pricing out future monetary tightening. There is a high probability that if the Fed raises rates in December, this will be the last hike of the economic cycle.

Even if no rate hike occurs, balance sheet reductions will still be running in the background, reducing excess reserves, putting further strain on the banking sector and perpetuating a deceleration in economic growth.

The Federal Reserve has already pushed too far.

Moore: We think we're in the later stage of the cycle. So, let's be clear, our barbell approach doesn't mean just hold an anchor in high quality, which we think you should, and then just swing for the fences and lower quality assets that seem to be de-rated.

That would be great if we didn't have any worries about policy — both the monetary side as well as the trade policy to consider. But what we think people should be focused on are companies that have excellent balance sheets, that have business models, that are sustainable through all parts of the cycle.

That's where we're not expecting to see huge amounts of earnings volatility, even if we continue to have a sequential economic growth slowdown. Although again, still above-trend, so still pretty good.

But also think about what areas of the market, whether it's industries or assets, have really fallen out of favor, like emerging markets this year. Places where the fundamentals haven't deteriorated, and be willing to take a bet on some higher-volatility, slightly riskier assets as well. So, this barbelled approach, don't take risk entirely off. But if you need to sleep at night a little bit better, make sure that there's big quality nut to rest on.

Ciolli: We keep talking about the possibility of an economic recession, but it does not seem like it's in your base case for 2019. However, you do mention that the table may be set for something in 2020. Can you outline your recession view and what, if anything, people can do next year to prepare for that if it does transpire in 2020?

Moore: I think actually it's consensus at this point that 2019 is not the year that we have the US-led recession.

I also just want to note something here. A lot of times when we talk about recession in our outlook, and then also talk about recession in the market, it does tend to be a little US-focused. And that we need to recognize that different regions and countries and markets are at different points in their cycle. I think about this a lot as an equity person. The profit cycle is really different, region from region. And we had seen some profits recessions in non-US markets, even while the US continued to make new highs.

So, that aside, in 2020 and onwards, we think that recession probability increases for the US. Part of that is because we are just at the later stage of the cycle. We also know that it takes some time for tighter monetary policy to really play out in the economy and have an impact. It's possible that we'll see a slowdown in activity at that point, or greater inflationary pressure, frankly, from higher wages feeding through. It's not our base case at this moment, but it's a non-zero probability.

We recognize that investors need to be positioned for that eventual slowdown, well in advance. As you know, equity markets tend to price in these changes in economic growth far before we would actually get the data. We just want to have quality portfolio construction and make that a significant thing that we're focused on in 2019. So that we don't get to 2020, when the economic data starts to soften a little bit, and find ourselves flat-footed.

There has been a clear rotation out of the most aggressively priced portion of the market and into clearly defensive sectors. Talking about the clear benefits of investing in high quality balance sheets is a hard sell when growth stocks are powering ahead. However, when the lustre comes off the shiniest new economy names investors rediscover cashflows and dividend discounting.

Europe’s retail crisis is spreading from bricks-and-mortar stores to e-commerce as Asos Plc plunged the
most in 4 1/2 years after warning that Christmas shopping got off to a disastrous start.

The gloomy update from a U.K. online retailer that competes with Amazon.com Inc. and has furnished fashions to the likes of Meghan Markle shows that retail weakness is widespread in the runup to the holidays.

Asos fell as much as 43 percent Monday in London, wiping more than 1.4 billion pounds ($1.8 billion) off the market value. The news dragged down other online retailers like Boohoo Group Plc and Zalando SE, as well as store operators like Marks & Spencer Group Plc and Next Plc.

“This goes against the script,” said Stephen Lienert, a credit analyst at Jefferies. “It was supposed to be bricks and mortar that’s dying and online is the future, but that headline gets ripped up today.”

Brick and mortar and online retailers share one common factor. They both rely on consumers to be ready to buy what they are selling. That works well when the economy is doing well but Europe’s economies are under pressure at just the same time the ECB has ended its quantitative easing program.

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

It’s also important to note that the natural tendency in a growing economy, absent any tax changes, is for revenue to rise. Real revenue dropped in 2016, but that was because of the mini- recession that had started the year before. Revenue has risen during every other year of the current recovery. This year the economy is growing at what may turn out to be the fastest pace since the 2000s, around 3 percent, yet revenue is down. Some of that economic growth is surely due to the tax cuts and to this year’s spending increases, but it’s clear that the Tax Cuts and Jobs Act has so far displayed none of the magical revenue-increasing properties that some of its supporters claimed for it last year. If we take last year’s revenue growth of 1.1 percent as the — very conservative — baseline, it would seem instead to have so far resulted in a revenue decline of 3.5 percent, or $109 billion.

Federal spending, meanwhile, is up an inflation-adjusted 2.9 percent so far this year. That’s bigger than the revenue decrease but smaller than last year’s 3.5 percent increase. Overall, my read of the two charts above is that the overall shift since 2015 from shrinking deficits to rising ones has been mainly about rising spending, but the increase in the deficit this year has been mainly about the tax cuts.

It is generally accepted that counter cyclical policies are the most appropriate for any economy. You loosen when the going is tough and tighten when the going is good and that is expected to keep growth relatively steady with less aggressive peak to trough swings.

Korean carmaker Hyundai on Tuesday announced a $6.7 billion program to raise production of fuel cells 200-fold going from 3,000 this year to 700,000 per annum by 2030.

The hydrogen society is probably further into the future than its promoters want you to believe, and detractors are plentiful 

Toyota was the first to back the technology for passenger vehicles, launching its Mirai – "future" in Japanese – back in 2015. Honda is bringing the Clarity back to its line-up and Hyundai’s Nexo SUV is launching in North America next year. Hyundai also inked a collaboration on fuel cells with Volkswagen in June.

The hydrogen society is probably further into the future than its promoters want you to believe, and detractors are plentiful. (Elon Musk was not only talking his book when he called fuel cell cars "extremely silly".)

Alongside Hyundai's announcement, the Korean government also made a commitment to roll out a fuel cell fleet and charging stations. But Canada, for example, got its first and so far only public hydrogen fuelling station only in August and California’s years long backing for fuel cell cars have hardly moved the needle on consumer and business uptake.

Nevertheless, the impact on platinum could be enormous.

There’s a simple reason – today's fuel cell cars need a full ounce of platinum versus a 2 – 4 grams PGM loading for your average gasoline (primarily palladium) or diesel vehicle.

The automotive sector has been investing in fuel cell technology for years so one of the reactions to the collapse of demand for diesel engines has been the acceleration of commercialisation efforts. The other factor in the development of fuel cells is dependent on ready availability of hydrogen. The low natural gas price, particularly in the USA is a major enabler of that evolution.

The U.K. also anticipated it could appeal to traditional allies in Northern Europe, like Sweden, Denmark and the Netherlands. Inside the EU they had together championed the values of free markets and open trade. But once the U.K. left, a different dynamic took over.

One issue the U.K. missed was that some of these governments were also faced with euroskepticism and political concerns about EU overreach.

In the turmoil immediately after the 2016 Brexit referendum, Mark Rutte, prime minister of the Netherlands, one of the most like-minded countries, said the U.K. had just “collapsed: politically, monetarily, constitutionally and economically.”

Mr. Rutte, facing the political fight of his life against the right-wing populism of Geert Wilders, had a fundamental political interest in ensuring that Brexit turned out to be an anti-model for how to handle angst about Brussels. The Dutch leader echoed that point on Thursday.

“If anyone in the Netherlands thinks Nexit is a good idea, look at England and see the huge damage it’s done,” he said.

The U.K. also missed that it would come to be seen as a rival. Some Northern European countries have many cutting-edge small exporters who worried that an U.K. outside the EU would undercut them in international markets and in the EU if Britain retained easy access to the bloc’s markets.

Mrs. May’s so-called Chequers proposal in July 2018, which aimed at keeping the U.K. in the EU’s single market for goods but able to sign free-trade agreements with the U.S. and others, was viewed on the continent as a blueprint for the U.K. becoming an EU offshore-manufacturing assembly platform.

“It’s always going to be a relationship now of tension and not just partnership, because our interests are diverging from theirs and we are seeking to derive deliberate advantage from having left,” Mr. Rogers said. “We can’t expect them not to react.”

Lord Palmerston’s “England has no eternal friends, England has no perpetual enemies, England has only eternal and perpetual interests” is as true today as ever but it does not just apply to England. The EU has displayed a better understanding of that maxim than the UK has over the last few years. If you are setting up outside the club then you can’t logically expect help from the people you are now intending to compete against. Respect, yes, but assistance, no.

Virgin first unveiled the VSS Unity in 2016 and has flown it (with the rocket engine) four times now. Each test pushed the altitude a little higher: 16.0 miles, 21.7 miles, 32.3 miles, and now 51.4 miles. Unity replaced the VSS Enterprise, which broke apart in 2014 because its “feathering” airbrake system was accidentally deployed too early. That accident killed co-pilot Michael Alsbury and injured pilot Peter Siebold. Virgin took steps to make sure the same thing can’t happen on new versions of its SpaceShipTwo design.

Safety is of higher importance than ever as Virgin Galactic nears its ultimate goal of taking passengers into space. For a mere $250,000, a person can ride up to the edge of space aboard one of Virgin’s spacecraft. The trip won’t be long, but they’ll get a few minutes of weightlessness before the craft heads back down for a landing. Virgin Galactic started pre-selling tickets several years ago and says it has sold all available seats through 2021.

Space tourism looks likely to be a significant growth sector in future but it is another example of an industry that exists today because we have had a decade of incredibly low interest rates which has made funding available for just anything anyone could imagine.

Thanks to a subscriber for this video which graphically depicts the changes in the yield curve over the last 18 years. More than any other factor it highlights just how extraordinary the last decade has been for the bond markets. 

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

Some of the topics covered include: the end of QE and the beginning of fiscal stimulus globally, oil firm, stocks quiet, bonds ease, gold steady, uranium firms.

They would be pricing in various economic realities: the slowing rate of U.S. economic growth, the U.S. government's exploding debt, the diminished Treasury revenue caused by the 2017 tax cuts, and the Fed's pursuit of a monetary policy keeping rates well above their average for the decade.

Investors see growth slowing, and it shows. Extreme fluctuations in the stock and bond markets the past month reflect investor anxiety over the transition from a brightening economy to the creeping sense that the best of this cycle has come and gone.

U.S. government debt is also moving in the wrong direction. Since 2016, when the federal budget deficit as a percentage of gross domestic product declined to a decade-low of 2.2 percent from more than 10 percent in 2009, the deficit nearly doubled to almost 4 percent. GDP increased to a record $19.39 trillion at the end of 2017 as the annual rate climbed to 2.2 percent from 1.8 percent in 2007. But U.S. growth will deteriorate to an annualized 1.9 percent by 2020, according to economists surveyed by Bloomberg, putting more pressure on the widening deficit. Revenue isn't stepping in to close that gap. The Trump tax cuts are estimated to increase these deficits by $1 trillion during the next 10 years.

China can borrow at cheaper rates than the USA right now. Is that a big contrary indicator or is it the shape of things to come?

Struggling French nuclear giant Areva (rebranded as Orano this year) slashed production more than a year ago. In August Paladin put its Langer Heinrich mine in Namibia on care and maintenance, although this week the Sydney-based miner said it's working on a possible restart of operations with vanadium as a byproduct (vanadium is trading at record highs and the only metal outperforming uranium).

In a research note on Kazatomprom, BMO Capital Markets says the production discipline from top miners will break the trend of rising global uranium inventories following the Fukushima nuclear disaster in Japan in 2011 and prompt the first production deficit in more than a decade.

And

China has 42 operating nuclear reactors, 16 reactors under construction and a further 43 planned. At the end of November, the country's national uranium corporation bought control of the Rossing uranium mine in Namibia. China is also behind the only sizeable uranium mine to come into production in the past few years, the Husab mine in Namibia, although ramp there has been slow.

Japan is steadily firing up its shuttered nuclear plants and considering China’s demand for clean energy it is unlikely to be deterred from continuing its construction program. Meanwhile when the world’s major producers find it more cost effective to buy in the spot market than produce the metal themselves then we know prices are depressed.

Still, the central bank said 1.5 percent growth was a level that would help the country close a gap with euro-area peers. It expects consumers to drive growth next year thanks to a rise in spending power, supported by tax cuts.

“French growth should remain above its average of recent years: That is still a rather favorable economic situation,” Villeroy said.

The central bank’s forecasts do not take into account Macron’s planned tax cuts. But it said the measures could also support consumer spending next year.

In the Les Echos interview, Villeroy also commented on the European Central Bank’s decision to end its net asset purchases. He said a “gradual normalization” of policy is justified by euro-area figures, but the central bank remains flexible in uncertain times and has powerful instruments available.

Countries on the periphery of the EU got the message loud and clear that the EU has one set of rules for large countries and quite another for small countries when depositors were bailed-in during Cyprus’s troubles but were rescued when Banca di Monte Paschi di Siena was going under.

The yield curve spread has been in the news lately and with good reason considering how much of a move we have seen in the last week and because it has such an impressive record as a lead indicator for future recessions. With volatility on stock market increasing and perhaps more importantly some stress becoming evident in the credit markets I think it is timely to spend some time to do a thorough review of lead indicators for future recessions.

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

Some of the topics discussed include: Theresa May survives, Pound bounces, Wall Street steadies but not dynamically, precious metals firm, Dollar eases, oil weak, uranium outperforming, Bonds likely to unwind short-term overbought condition. 

The first observation I drew is that he was keen to point out the lead indicators for future recessions he employs and how many of them are positive versus negative. Of course, some of these have longer lead-times to a signal than others which is not a point he made. The clear conclusion was that there are certainly challenges emerging and that quantitative tightening is a headwindf for stock markets. The clear message here is that if the Federal Reserve continues to remove liquidity and the ECB holds to its commitment to end purchases that is likely to continue to represent a headwind for asset prices.

Few months ago, Jerome Powell, the Fed Chairman expressed the desire to smooth out past wild swings in the economy by fine-tuning its monetary policy.  Those are not mere words, but the Fed is already putting it into practice.  Note the statements made by the various Fed members. 

In the past, after the election, the Fed would slam the brakes to clean out the excesses.  After the Mid-term election, it would start to stimulate the economy.  Hence, the “Four-Year Cycle”.  The Fed has been tapping on the brakes instead of slamming them.  Hence, the slowing in the economy.  Many, however, are jumping to the conclusion that a recession will take place next year.

The Fed’s new goal is not easy to achieve, but if successful, the U.S. will experience a period of unparallel prosperity and the stock market will continue to climb to heights no one ever believe possible.

Despite its importance, few paid attention to Powell’s announcement.

One of David’s clearest lessons is monetary policy beats most other factors most of the time. Last year I was writing about the fact that the Fed was asking for trouble by planning to reduce the size of the balance sheet and raise interest rates concurrently. They have delivered a medium-term correction in stocks the big question now is what’s next?

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

Rather than ask whether fundamentals matter of what the outlook is, perhaps it is better to ask whether precious metals are an uncorrelated asset? The answer to the first group of questions is obvious yes, fundamentals do matter and the relative cost of production coupled with demand profiles are important to the market. However, the relative cheapness of the precious metals, excluding palladium, makes them attractive for investors seeking to hedge exposure to increasing volatility in other asset classes.

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

Some of the topics discussed include: Brexit and Europe discussion, Modi looks likely to buy the election which is stimulative, Leverage loans and high yield spreads linked and trending higher,  

The impact of sterling’s depreciation has been underwhelming for a few reasons. For one thing, firms are locked into global supply chains and rely heavily on foreign inputs. Half the components in a “British-made” car come from abroad. If exports rise, so do imports.

The economy is also highly geared towards high-value-added stuff like pharmaceuticals. Buyers of these goods and services are insensitive to price changes. Not all industries fit this mould, notably tourism. Dollars buy more rides on the London Eye than before. In June visits by foreigners (including businesspeople) were up by 7% year on year. Yet visitors seem to be economising: their overall spending in real terms is no higher than before.

Optimists maintain that the benefits of a depreciation take a long time to filter through. Firms need to get finance together and seek out new markets to exploit their new competitive advantage.

The case of Dr Fox’s ice-cream industry, however, suggests that exporters are in no rush. Though export revenues have risen, this largely reflects the fact that with a weaker pound a given quantity of foreign-currency sales leads to higher sterling revenues. In the first half of 2017 firms exported about the same quantity of ice cream (600m scoops, by our reckoning) as in the same period the year before. Firms seem to be using sterling’s weakness simply to bank bigger profits, rather than to move into new markets.

It is a similar story across the private sector. Profitability is near record highs yet investment is stalling. Last year non-financial firms stuck an extra £74bn ($96bn) in their bank accounts, by far the largest figure on record. Firms’ tentative behaviour should be a wake-up call for ministers, who expect them to lead the charge of a reorientation of British trade away from the EU after Brexit.

All other factors being equal a depreciating currency boosts the prospects for exporters because they gain competitiveness. The bigger the domestic export sector the more immediate the boost. In the UK’s case the domestic manufacturing sector has been in decline for decades, so not only will it take time to rebuild confidence enough so that entrepreneurs become more ambitious but the devaluation would need to persist.

India named a former bureaucrat who oversaw Prime Minister Narendra Modi’s controversial cash ban program as its new central bank chief, a day after Urjit Patel abruptly quit following disagreements with the government.

Shaktikanta Das, 63, who often sought a cut in interest rates during his time at the Finance Ministry, was appointed for a three-year tenure, according to a statement on Tuesday from the Personnel Ministry. He will be the 25th governor of the 83-year-old monetary authority.

And

Das will take charge of the six-member monetary policy committee, which left interest rates unchanged last week after two hikes earlier this year. With inflation undershooting the central bank’s forecasts, there are growing expectations that the RBI will shift to a neutral policy stance from its current tightening bias, which could set the stage for a rate cut.

“There was a disconnect between the government and the central bank and the market now expects a less hawkish stance under the new regime,” said Aashish Sommaiyaa, chief executive officer at Motilal Oswal Asset Management Co. in Mumbai.

The RBI has been rather aggressively targeting the bad loans in some of the India banks, most particularly those in private hands rather than the politically connected state-owned institutions. The decline in oil prices has been a meaningful event for India and that will be used as an argument for adopting a more dovish monetary policy.

It’s crucial for the long-term health of leveraged loans, which have already surpassed junk bonds in magnitude, to allow investors to be more discerning. One of the most appealing parts of loans is that they’re supposed to have priority over traditional securities. But as Bloomberg News’s Sally Bakewell and Kelsey Butler wrote last week, heavily levered companies have been tapping the loan market over and over again, securing $100 billion of so-called incremental debt this year because money managers were willing to acquiesce to almost all issuers’ demands. On top of that, a larger share of companies have loans as their only form of debt, which doesn’t do lenders any good if they go under.

It’s pretty obvious that this sort of behavior won’t end well. That’s why it might be a blessing in disguise that the market has taken a breather. “There’s no need to chase new issues,” Michael Nechamkin, co-chief investment officer at Octagon Credit Investors, told Butler and Jeannine Amodeo. The ones who pull back, they note, are those that aren’t desperate for financing but were hoping to lock in cheap borrowing costs in the once-hot market. As for those who can’t afford to drop out? They pay up — restoring some balance between buyers and sellers.

With over $7 trillion in negative yielding debt investors have been willing to forgo covenants to capture yield. That has been most acutely evident in the leveraged loan market where corporations have been binging on debt in order to fund buybacks and pay dividends. The logic goes that will reduce the weighted average cost of capital and therefore strengthen the balance sheet. However, that only works as long as business is going well. In times of stress dividends can be cancelled but loans need to be paid back which can be a problem when liquidity is tight.  

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

The delay in the vote means an EU summit later in the week will be the next focus for markets. Traders had been planning to stay late at the office Tuesday in anticipation of significant price swings on the vote. May said she would try to address concerns over the Irish border and step up preparations for a no-deal scenario.

“This is very strong risk-off move,” said John Wraith, head of U.K. macro rates at UBS Group AG. “The market clearly believes she will not get anything material enough from the EU to turn that scale of opposition around, so even if the vote is delayed it’s going to end in the same way -- with a big defeat for the government, and the end of the Withdrawal Agreement -- but now it will happen even closer to the date of the cliff edge.”

The EU has said they have nothing left to offer and will not negotiate further. However, that is not exactly true. If the UK does in fact leave the EU without a deal, then negotiations on a trade deal will probably begin immediately. For the UK, that will probably only be one of many deals it will need to negotiate.  

The last thing the EU needs is a major economy, like the UK, on its doorstep with a devalued currency and an incentive to be as competitive as possible. Quite whether those in power in the UK realise that is another story.

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

As the above report highlights the yield curve has not yet inverted but at 13 basis points it is very close to inverting. There is definitely some chatter about the near inversion in 1994 and how that presaged the evolution of the bubble in the late 1990s.

After a relative tech IPO dry spell of 2015 and 2016, there’s less of a stock feeding frenzy around each new tech listing now. Snapchat’s valuation has moved from outlandish at its IPO to tame.(1) Most other tech companies that went public in the last couple of years also trade relatively in line with their older peers. That shows investors have grown more discriminating about when to pay a rich price for fast-growing companies. I think that temperance will carry over to IPOs for Lyft and Uber. 

Ultimately, though, Uber and Lyft have more to worry about than IPO order. Uber in particular has yet to prove its basic business model makes sense after 10 years of history. Economic and market conditions are deteriorating. In the U.S., people are openly talking about the “R-Word” — recession. Those are all good reasons to hurry and go public. But Uber and Lyft shouldn’t overthink the advantages of hitting the stock market first.  

At The Chart Seminar we ask this question; when is the best time to sell your company? The answer is simple when you think about it. When you can get more for it than you think it is worth. The founders and early investors in multi-billion Dollar unicorns have a clear incentive to diversify exposure by seeking to sell when the going is good, because it will obviously be a more difficult prospect when the going is bad.