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

Some of the topics covered include: Wall Street extends rally but fails to hold intraday high, Treasuries susceptible to some consolidation, Gold and precious metals pause, oil weak, Dollar eases, Rand and Peso steady, Renminbi breaks downwards from its short-term range, 

In your recent big picture video, you outlined the possible trajectory of some of the emerging market currencies in a declining dollar environment. Some time ago I emailed in to state my reasons why I thought the ZAR might be one of the worst in the immediate future. Events since the recent election have only served to confirm that view. At the moment there is a struggle going on in the ANC regarding the mandate of the Central Bank The powerful ANC secretary general wants the mandate changed from the focus on inflation to include growth and jobs considerations. In a public statement this week, Mr Ace Magashule wants the bank to embark on a policy of "Quantity Easing" whatever that might mean!! This would inevitably send South Africa in the direction of Zimbabwe. This country could end up worse than Zim for the following reason.

Recently, there have been a series of xenophobic attacks involving firebombing of trucks on some of the main motorways. Local companies have been employing drivers from Zimbabwe who are intelligent and highly motivated at the expense of local South Africans. The history of primary and secondary education could not be more different in these adjacent countries. Even under Mugabe the colonial legacy of education was left in charge of the churches who maintained a strong culture of teaching and learning rooted in Christian values. Zimbabwe still uses the Cambridge University exams for both "O" and "A" levels set in 1954. In South Africa, the Apartheid government passed the Bantu education act into law which took away the control of the churches and gave it to the state. This has proved to be an unmitigated disaster by any measure. The last thing South Africa needs right now is a huge population of poorly educated young people currently around 30% many of whom embrace a culture of entitlement

Thank you for this on-the-ground perspective of the environment in South Africa. The dumbing down of curricula is a global phenomenon linked to the cutting of educational funding, the expanding power of teacher’s unions, the lack of commitment from parents to take responsibility for the education of their own children and the desire of politicians to show results against a background of deteriorating fundamentals. It’s a secular trend and shows little sign of changing because it would require everyone to work harder for a distant benefit which seems to be beyond the ability of society to collectively deal with right now.

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

China has overplayed its hand in the rare earth metals sector. Two years ago, it produced 80% of the worlds supply, now it produces 70%. The global economy is now alert to the fact that these metals represent vital components in all manner of new technology products.

With the silver/gold ratio at multi-year lows, coupled with the adage that silver is high beta gold, I’ve been evaluating from a contrarian perspective whether to increase my exposure to silver whilst the market is in the depths of despair and await a possible turnaround. 

The problem is where to venture as the fundamentals of virtually every silver producer are pretty scary, including CDE, which has been mentioned from time to time in your Comment of the Day.

I came across this informative article which analyses in some detail the current state of the market and its various producers, the declining percentage of their production which is silver related, and their prospects of outperformance should the silver price recover. 

I would appreciate your insight into this analysis and which companies, or ETF’s, you feel might be worth considering for investment.

Thank you for this informative article which may be of interest to other subscribers. Here is a section:

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But silver generates much-lower cash flows than gold due its lower price. Silver miners have been forced to adapt.

This is readily evident in the top SIL miners’ production in Q1’19. SIL’s largest component in mid-May as this latest earnings season ended was the Russian-founded but UK-listed Polymetal. Its silver production fell 15.0% YoY in Q1, but its gold output surged 41.1%! Just 17.5% of its Q1 revenues came from silver, making it overwhelmingly a primary gold miner. Its newest mine ramping up is another sizable gold one.

SIL’s second-largest component is Wheaton Precious Metals. It used to be a pure silver-streaming play known as Silver Wheaton. Silver streamers make big upfront payments to miners to pre-purchase some of their future silver production at far-below-market unit prices. This is beneficial to miners because they use the large initial capital infusions to help finance mine builds, which banks often charge usurious rates for.

China has spent much of the past five years tightening its gripover Hong Kong with little challenge. Now, hundreds of thousands in the city are fighting back.

Hong Kong is bracing for a potentially historic showdown over extradition legislation that could for the first time subject residents to face justice in Chinese courts, further eroding the city’s autonomy. Opponents on Sunday staged one of the largest protests since the former British colony’s return to China: Organizers said more than 1 million participants showed up, while police put the figure at 240,000.

Tensions are only heating up, with demonstrators vowing to surround the city’s Legislative Council on Wednesday, when lawmakers debate scores of proposed amendments. Hong Kong’s Beijing-backed leader, Carrie Lam, defended the bill in a 45-minute news briefing Monday, saying it was necessary to prevent the city from becoming a “haven” for fugitives and vowing to press ahead with its passage. China endorsed her government’s efforts later in the day.

Deng promised the “one country, two systems” model would last for a century. Hong Kong will be lucky if it makes it to quarter of that time. Extra judicial disappearances have been a feature of Hong Kong life for the last decade and this extradition law would institutionalise the process. Tightening mainland oversight, particularly of critics of the administration is inevitable regardless of how many people protest. In the meantime, there is a clear intent to express power and control over Chinese territories so this situation has the potential to escalate.

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

Bond traders’ conviction that the Federal Reserve will cut interest rates within months in response to a weakening growth outlook and escalating trade tensions firmed after a batch of weaker-than-expected U.S. jobs data.

Fed funds futures show a quarter-point cut almost fully priced in for July, and indicate about 70 basis points of easing by the end of 2019. The two-year Treasury yield fell as much as 11 basis points to 1.77%, close to the 2019 low reached Wednesday, and it was on course for its fifth weekly decline.

The last time that happened was back in July 2016, when the U.S. central bank’s target range was 2 percentage points lower than right now.

Lead indicators for future problems are flashing orange. If the Fed were to persist in its policy of continuing to raise rates and reducing the size of the balance sheet it would contribute to recession risk. If it steps on the monetary accelerator once more it risks further inflating a bubble, not least in the nonbank lending and private equity sectors.

At the Marcus Evans conference I attended at the beginning of this week one of the speakers, R. McFall Lamm, formerly chief strategist at Deutsche Asset Management and now at Stelac Private Equity made a couple of interesting points about the yield curve.

Shell’s Prelude floating LNG plant offshore Australia is expected to load its first cargo on the vessel Valencia Knutsen, which is currently idled in the area, according to commodity shipment tracker Kpler.

* The vessel arrived near Prelude on June 4 and was likely attempting to load from the facility, but it left berth range a few hours after arrival, Kpler analysts said

** The vessel will probably be moored alongside the Prelude facility before the end of the week: Kpler

* NOTE: Shipment of the first LNG cargo is “imminent,” Platts reported on June 4, citing Shell’s head of integrated gas, Maarten Wetselaar

When Royal Dutch Shell announced it was ready to spend billions on developing a major offshore LNG processing facility in Northern Australia a few years ago it was considered a risky venture. However, the company’s long-term bet on natural gas representing a much better demand growth trajectory than crude oil has been proved correct. 

“As long as Street forecasts fail to properly reflect BYND’s remarkable potential, we remain overweight.” Notes that “eventually this stock’s hefty valuation will more than offset the fast-growing fundamentals.”

Notes the importance of CEO Ethan Brown calling the forecast “very conservative” and telling investors that the company doesn’t include foodservice customers in guidance until they are past the testing stage.

JPMorgan has a $233 million 2019 sales target -- vs the company forecast of $210 million -- and the analyst says his estimate may be conservative. “It is conceivable that Tim Hortons alone (a current customer with nearly 5,000 locations that is not yet in guidance) could account for most of that
gap.” Rates overweight, price target to $120 from $97

Meat alternative providers like Beyond Meat and Impossible Burger have a clear benefit in that they are providing a new product which is fashionable. The trendiness of vegan food products that are considered both healthy and taste good represents a significant market phenomenon which has been growing in importance at local eateries around Los Angeles for the last couple of years. The primary benefit of these products for fast food chains like McDonalds, Burger King or Jack in the Box is they attract a new demographic that normally avoid such establishments.

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

Some of the topics discussed include: Euro steadies, Gold breaks out in Renminbi and strengthening in more currencies, Treasuries ease, Wall Street extends gains, Oil steadies

I have been particularly taking note of the chart for The Total Known ETF holdings of gold over the past two weeks and observe it has bounced emphatically off the trend mean. Does this reinforce your view that gold is due for a bullish outlook?

ETF Holdings of Gold represent a significant source of demand for gold as an investible asset class. At 71.4 million ounces ETFs represent larger stockpiles than most countries and therefore reflect a signal as to the interest of the international community in the gold market.

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

The Gold/Silver ratio is at rather extreme but not the most extreme levels seen historically. David long described silver as high-beta gold and poor man’s gold. The less liquid nature of silver trading and the various use cases for the metal contribute to it being more volatile than gold.

Dry powder: How much is too much? With competition rising and deals hard to find, GPs’ stocks of uncommitted capital, or dry powder, reached a record high of $1.8 trillion in 2017 (Exhibit 14). That was up 9 percent year on year; indeed, dry powder has grown by 10 percent on average every year since 2012. Does the industry have too much capital? Probably not, or at least not yet. If we compare dry powder to other measures, such as funds raised and AUM, “stocks” of capital available for investment have changed little over the past few years vis-à-vis the size of the industry. Dry powder as a percentage of in-year fundraising has been between 220 and 280 percent for the past six years. As a percentage of AUM, dry powder has been similarly consistent, at 30 to 34 percent. Nor are there any significant variations among asset classes, suggesting that GPs are finding adequate opportunities in every field. Furthermore, by the metric we introduced in the 2017 edition of this report, years of PE inventory on hand, dry powder still seems adequate to deal flow. If we divide dry powder by deal volume on a seven-year trailing basis, the industry seems to have cycled through its capital in a stable way for the past several years (Exhibit 15).

This report while focusing on 2018, references a lot of data from 2017. The quantity of capital now held by private equity groups in anticipation of a buying opportunity stands at $3 trillion. That’s almost a multiple from a couple of years ago and speaks both to the quantity of money still sloshing around and the dearth of attractively valued assets to buy with it.

While Draghi is using similar tactics to U.S. Federal Reserve Chair Jerome Powell in promising to react to any deterioration in the outlook, the challenge is that he’s seen as having less room for maneuver. ECB rates are still at record lows and the balance sheet hasn’t started to be wound down.

Moreover, he has less than five months left in office and there’s no clear sign who his successor will be, nor whether they’ll have the same commitment to the radical measures that hallmarked the Italian’s eight-year term.

“The market believes Draghi’s take on inflation is wishful thinking,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, which predicts the ECB will cut the deposit rate toward the end of this year and extend its low-rate pledge to mid-2021. “The talk about contingencies is cheap, but to reverse the decline in inflation expectations he will have to walk the walk.”

The ECB only ended their QE program in December so it is going to take some time to rebuild appetite for additional easing measures. The market is convinced of the need, particularly with German, Italian and French PMI’s in negative territory, however the ECB is unwilling to act prematurely.

 

If passed, the new legislation would allow the transfer of fugitives from Hong Kong to jurisdictions with which it has no extradition deal, including mainland China.

Organisers estimated the turnout to be between 2,500 and 3,000, but police said attendance peaked at 880.

Four Nordic chambers of commerce also jointly expressed concern that the bill had been “fast tracked without the thorough consultation and full legislative scrutiny that is customary for a piece of legislation of this nature”.

The city’s last colonial governor Chris Patten meanwhile urged the government to shelve the bill, arguing it would “strike a terrible blow” to Hong Kong’s rule of law.

Any hope that Hong Kong will be allowed to host critics of the mainland’s administration are being quashed. The time when Hong Kong is completely subsumed within China is drawing progressively closer as the “one country, two systems” approach is abandoned.  

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

Some of the topics covered include: ADP new jobs report pulls back sharply, Dollar pulls back from its intraday peak, stock and bond market steady,, oil extends pullback, gold tests its high for the year before easing. 

Some of the topics covered include: ADP new jobs report pulls back sharply, Dollar pulls back from its intraday peak, stock and bond market steady,, oil extends pullback, gold tests its high for the year before easing. 

Gold’s rounding base formation characteristic looking like it was going to be resolved on the upside in the first quarter of last year. That was not to be and the subsequent sharp drawdown, reminding everyone of the volatility that the gold market is known for.

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

The biggest issue for oil prices right now is the risk of slowing Chinese demand growth and what that means for global demand growth. Auto sales in China are declining. Regardless of whether that is because of regulatory restrictions on purchases or because of slowing growth the reality is we are seeing fewer cars being sold. With thousands of jobs being lost at auto makers that is both a factor for oil demand growth but doubly so because of the impact on GDP growth.

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

The best time to use moving averages as stops is when we have evidence of a year consistent trend where the price has bounced successively from the trend mean. Nevertheless, a moving average is a trend smoothing device that lags by definition and markets often overshoot so it is reckless to think of the moving average as a sacrosanct level

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

Some of the topics covered include: Fed signals it is listening to the messages being sent by the bond market, Wall Street rebounds, Dollar eases, Europe bouncing led by banks, gold steady, oil quiet, China eases and India pauses, Treasuries pause.

Federal Reserve Chairman Jerome Powell signaled an openness to cut interest rates if necessary, pledging to keep a close watch on fallout from a deepening set of disputes between the U.S. and its largest trading partners.

Referring to “trade negotiations and other matters,” Powell said Tuesday in Chicago that “we do not know how or when these issues will be resolved.”

“We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective,” Powell said in opening remarks at a conference at the Chicago Fed.

The big question last year was how much tolerance the Federal Reserve has for drawdowns in the stock market. 10% was not enough in January, not least because Jay Powell had just taken the job. However, the persistent pace of raising rates and reducing the size of the balance set nerves on edge that the Fed was not paying attention to signals sent by the market. A 20% drawdown was enough to change that and the Fed rode to the rescue in December.

The decision to freeze withdrawals gives Woodford time to position illiquid holdings, the company said in a statement late Monday. While investments in unlisted securities are unusual for a mutual fund, Woodford hasn’t shied away from them.

Two of the top 10 holdings in Woodford’s main fund, accounting for about 7% of assets, were in private companies. A significant drop in size could undermine Woodford’s ability to run the fund effectively, Hargreaves Lansdown said in a statement explaining its decision to remove that fund and the Income Focus Fund from its list.

Freezing withdrawals "is a difficult to decision to make," said Emma Wall, Hargreaves’s head of investment. "It’s disturbing for investors. Any negative news like this is worrying. But it gives him the breathing space to get on being an investor rather than constantly worrying about redemptions. He can use these 28 days to offload illiquid assets, which he’s doing anyway.”

I’m at a Marcus Evans fund managers speed dating event in Palm Springs at the moment. What I find particularly interesting is the exposure it gives me to the strategies being purveyed and where investment managers believe there is money to be made.

I sat in on a panel discussion yesterday where there was a lively discussion about the merits of Liquid Alternatives. The asset class was created in response to the desire for liquidity that arose from the fear of a repeat of the halted withdrawals that occurred during the credit crisis. Many people, however, have complained that the long/short strategies that characterise the product offering are closet trackers and fail to deliver the uncorrelated returns required by Modern Portfolio Theory. Instead they, to a man, recommending ditching liquid alternatives and buying bonds. That’s a clear testament to the fact the bond rally is forcing investment managers to participate because the momentum is beating everything else.

Chinese authorities already maintain a vast surveillance net, including tracking people’s DNA, in the western region of Xinjiang, which many Uighurs call home. But the scope of the new systems, previously unreported, extends that monitoring into many other corners of the country.

The police are now using facial recognition technology to target Uighurs in wealthy eastern cities like Hangzhou and Wenzhou and across the coastal province of Fujian, said two of the people. Law enforcement in the central Chinese city of Sanmenxia, along the Yellow River, ran a system that over the course of a month this year screened whether residents were Uighurs 500,000 times.

Police documents show demand for such capabilities is spreading. Almost two dozen police departments in 16 different provinces and regions across China sought such technology beginning in 2018, according to procurement documents. Law enforcement from the central province of Shaanxi, for example, aimed to acquire a smart camera system last year that “should support facial recognition to identify Uighur/non-Uighur attributes.”

Last April, Mrs. Treacy was at a 7-Eleven in Guangzhou and the cashier offered her a 10 Yuan discount for taking her photo and before she could answer had already taken her data. A day later she found herself accidentally paying for items at a different store with her face.

We are having a significant discussion in the West about privacy and how much of our data should be available to corporations. That discussion does not exist in China and regardless of what venue gathers your data, it all ends up in the hands of the government and that is everything from passwords to fingerprints, to facial features, to browsing history, to utility usage, to travel history to social media contacts to purchasing patterns and genetics.

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

Some of the topics discussed include: China's regional banks represent an understated but large risk to the economy, gold follows through on the upside, FAANG shares lead on the downside, Treasuries at the first area of potenital resistance if the trend is to remain consistent. Dollar eases and European stock markets at potential support with Germany steadying. 
 

Some of the topics discussed include: China's regional banks represent an understated but large risk to the economy, gold follows through on the upside, FAANG shares lead on the downside, Treasuries at the first area of potenital resistance if the trend is to remain consistent. Dollar eases and European stock markets at potential support with Germany steadying. 

Within China, all forms of debt have risen, reflecting a shift in the dynamics of its economy. Before the crisis, China had largely managed to finance its growth without recourse to much debt. The inflows from exports had done the job. The population, fast reaching middle-class living standards, still tended to fund itself conservatively. But household debt has almost tripled from 18.8% of China’s GDP before the crisis to 51.2%. All this debt has successively less impact in stimulating economic growth.

There are reasons why China’s debt is not creating greater fears. If countries want to avoid crisis, issuing a greater share of debt in their own currency is key. This avoids the risk that a devaluation can force them into default, and it leaves them with the option—not necessarily a good one—of printing money to escape difficulties.

China does more than 90% of its borrowing in local currency, which limits the risks somewhat. Meanwhile, almost all large emerging markets now do more than half of their borrowing in their own currency. But not all emerging markets have made uniform progress in converting to local market debt. The two biggest exceptions are Argentina and Turkey—and it is no coincidence that these two countries both slipped into crisis during 2018 as a strong dollar put pressure on their currencies.

Where the burden of debt resides in an economy gives us a clue as to where the greatest effect will be felt from a problem. When the credit crisis struck it was mortgage debt in the USA which led the market downwards and it was consumers who felt the brunt of the decline with the foreclosure crisis and erasing of savings. Today, debt resides on company balance sheets and in China’s regional banking sector in particular.

Successive attempts to wring leverage out of the regional banking sector have finally had the desired effect of ending shadow banking. However, without resource to government capital, Dollar loans or private lending clubs, the regional banks are in serious peril. This is a difficult sector to monitor because only a handful are listed on the stock market.

American antitrust officials are under increasing pressure from both Democratic and Republican lawmakers to step up scrutiny of technology giants, and several presidential candidates have already weighed in. Massachusetts Senator Elizabeth Warren laid out a detailed plan for breaking up the
tech giants in March.

European officials have already been aggressively pursuing antitrust cases against American tech firms, including Google, while so far the U.S. has been mostly hands-off.  That may be changing amid continuing criticism that lax enforcement in the U.S. has allowed tech platforms to dominate their markets. The FTC earlier this year set up a task force to examine the conduct of tech companies and their past mergers.

President Donald Trump and many Republicans have complained that Facebook, Google and Twitter Inc. suppress conservative views.

Google, with a sprawling empire of businesses that could feasibly be targets, is in the dark about the focus of the investigation and hopes to learn more this week, according to another person familiar with the situation.

Capitalism trends towards concentration but ultimately runs up against the barrier of antitrust. The size and influence of companies like Amazon, Google and Facebook is the primary obstacle they face rather that the monopolies they control, although this latter point will be used to justify and attempted action.

Africa, largely ignored in a U.S.-China trade war that could roil economies worldwide, is quietly piecing together the world’s largest free-trade zone.

The African Continental Free Trade Area comes into force on paper on Thursday after the required 22 countries ratified the deal a month ago. Once it’s passed by all 55 nations recognized as part of the African Union, it would cover a market of 1.2 billion people, with a combined gross domestic product of $2.5 trillion. The potential benefits are obvious, if the usual hurdles of nationalism and protectionism don’t yet stand in the way.

The deal would help the continent move away from mainly exporting commodities to build manufacturing capacity and industrialize, said Jakkie Cilliers, head of African Futures and Innovation at the Pretoria-based Institute for Security Studies. Boosting intra-regional trade would spur the construction of roads and railways, reducing the infrastructure gap in Africa, he said.

Africa is the global centre for population growth and represents an important demographic growth engine for the global economy over coming decades. The creation of a free trade area to promote transnational trade right across the continent is a positive development that will help spur growth for many economies.Building up trade that is not exclusively reliant on resource extraction is a major objective for just about every commodity producer but it is especially important in high population growth markets because people need jobs if their productive capacity is to be realised. That’s a long-term objective.

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

The vague wording of the Chinese state media report opens the door for Beijing to target a broad swathe of the global tech industry -- from U.S. giants like Alphabet Inc.’s Google, Qualcomm Inc. and Intel Corp. to even non-American suppliers that have cut off China’s largest technology company. Those run the gamut from Japan’s Toshiba to Britain’s Arm.

Shares in Apple Inc. slipped less than 1% while Qualcomm Inc. gained less than 1% and Intel Corp. was little changed in U.S. trading Friday. U.S. stocks slumped as the Trump administration’s trade spats intensified.

“Surely companies that have announced cutting supplies to Huawei, such as Panasonic and Toshiba, would be under threat,” said Michelle Lam, Greater China economist at Societe Generale SA in Hong Kong. “It could be very damaging to multinational companies.’’

The lopsided nature of the trade relationship between the USA and China means the impact of tariffs is equally lopsided. China’s decision to stop buying agricultural products and to advise the population to boycott US goods is the extent of what can be achieved. The geopolitical theatre is where China has more cards to play, not least in its support for North Korea, Iran and Pakistan. The purge/execution of North Korea’s lead negotiator with the USA over the last week is a sign that card is also being readied for play.

Understanding what is happening on the border is difficult because, while the numbers are currently higher than they have been in several years, they are nowhere near the historic levels of migration seen across the southwest border. Arrests for illegally crossing the border reached up to 1.64 million in 2000, under President Clinton. In the 2018 fiscal year, they reached 396,579. For the first five months of the current fiscal year, 268,044 have been apprehended.

The difference is that the nature of immigration has changed, and the demographics of those arriving now are proving more taxing for border officials to accommodate. Most of those entering the country in earlier years were single men, most of them from Mexico, coming to look for work. If they were arrested, they could quickly be deported.

Now, the majority of border crossers are not single men but families — fathers from Honduras with adolescent boys they are pulling away from gang violence, mothers with toddlers from Guatemala whose farms have been lost to drought. While they may not have a good case to remain in the United States permanently, it is not so easy to speedily deport them if they arrive with children and claim protection under the asylum laws.

Families with children can be held in detention for no longer than 20 days, under a much-debated court ruling, and since there are a limited number of detention centers certified to hold families, the practical effect is that most families are released into the country to await their hearings in immigration court. The courts are so backlogged that it could take months or years for cases to be decided. Some people never show up for court at all.

Families with young children immediately require services and are a long way from self-sufficiency. That represents a challenge for border facilities never designed to handle the numbers of people seeking admission. It effectively means that anyone turning up at the border is given leave to remain in the USA.

“LNG is now so cheap it’s competing with coal almost,” said Caroline Bain, chief commodities economist at Capital Economics Ltd., who sees slowing demand for coal. “It’s not actually falling off a cliff. We think it’s going to be a long slow death rather than tomorrow.”

The price slump is one sign of Europe’s determination to phase out coal as it seeks to slash climate warming emissions without holding back the economy. Renewables are also in the fight for market share, with onshore wind and solar power “fast becoming cheaper than average power prices in Europe’s largest markets,” according to a research by BloombergNEF.

Front-month Dutch gas prices, a benchmark for Europe, plunged 50% this year as record volumes of LNG landed in northwest Europe. Coal for next year has dropped 30% after a mild winter left inventories at European ports unusually high.

“There’s too much coal,” said Hans Gunnar Navik, a senior analyst at StormGeo AS. As “natural gas out-competes coal,” renewable generation is replacing both of them, he said.

In the pricing of commodities supply is much more volatile than demand. Generally, bull markets don’t end because the market runs out of buyers but because new sources of supply appear to satiate demand. That is why we define secular bull markets in commodities in terms of a step up in the marginal cost of production.

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

Some of the topics covered include: Crude oil pulls back to break its uptrend, grains and beans steady, iron ore at a new high, Wall Street steady, Treasuries firm, review of recession lead indicators and long-term moving averages. 

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

The Federal Reserve aggressively tightened policy last year by both raising rates and reducing the size of its balance sheet simultaneously. That has had more of an effect on international growth than domestic growth but the underperformance of the banking and industrial sectors is a testament to slowing activity. We are at the point in the cycle where we can expect easier policy. The big question is whether the Fed will act soon enough to avoid negative economic figures.

“There are many people now focusing on single-name distressed situations rather than doing plain-vanilla index trades,” said Jochen Felsenheimer, the Munich-based managing director of XAIA Investment GmbH. “There are lots of idiosyncratic situations rather than systematic triggers.”

Distressed situations are increasing as companies struggle to manage the debt piles they built up during years of largesse. The cost of insuring such companies is surging, with swaps on some of Europe’s riskiest names costing thousands of basis points compared to about 300 basis points for the region’s high-yield benchmark.

Investors are paying up for protection amid speculation they’ll cash out when companies collapse. Moody’s Investors Service forecasts the speculative-grade default rate in Europe will nearly double to about 2% next year from 0.9% in April.

“Defaults are still quite low, but swaps are definitely more relevant today than they were a few years ago,” said Justin Jewell, senior portfolio manager at BlueBay Asset Management in London. “For funds that have the flexibility, these tools are becoming effective again.”

The manner in which intangibles have been squeezed out of the valuation of major companies like Kraft Heinz, General Electric and Tesla represent significant changes in the way the prospects for companies is being assessed by the debt markets. That change is a factor of tightening liquidity conditions particularly last year but the strength of the Dollar remains an inhibiting factor to global liquidity this year.

There is some evidence of that happening, even with the previous, smaller tariffs. Since the third round of U.S. tariffs on China went into effect in late September, U.S. imports from China have faltered. An 8% growth rate in October turned to an 18% decline on the year in March. Yet import growth from Taiwan has risen from 12% to 21% over the same period. Imports from Vietnam grew 34% in March, up from a 15% rate in October. And imports from South Korea also surged in the first quarter: They were up 18% on the year, against just 9% in the fourth quarter of 2018.

Some of those shifts might represent manufacturers in China rerouting goods through neighboring countries. Chinese export growth to Southeast Asia and Taiwan accelerated in the first quarter of 2019, even as its overall export growth slowed. Regardless, the result is probably more expensive goods in the U.S. and lower employment in China, as Chinese companies shift elements of supply chains across borders or lose market share to pricier but tariff-free Asian competitors.

Many U.S. policy makers would argue that some pain for U.S. households is worthwhile if it achieves broader strategic goals. In the meantime, however, the big winners from the Sino-U.S. trade conflict are still across the Pacific.

In the cryptocurrency world, “trust” is the buzzword. It occurs to me it is also the primary asset which has been lost in the pursuit of the trade war. The USA and other countries were willing to tolerate China’s misdeeds for years until the populist revolution highlighted just how much damage had already been sustained by the middle classes. Now the unfair trade practices and theft China has engaged in are no longer being tolerated and normal trade practices are being demanded. China is not in a position to accept those terms and that is setting up the conditions for a protracted disagreement which is likely to ebb and flow for years.

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

Some of the topics discussed include: global sovereign yield compression, need for the Fed to cut rate soon, Wall Street in the region of its trend mean, oil and gold stable. grains ease from intraday highs, rare earth metals surging, Dollar firm, 

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

The commonality in the compression of global sovereign yields is a clear sign bond investors, everywhere, have concluded we are at the top of the interest rate cycle. If interest rates are unlikely to rise, they can fall and the big question is when that is likely to happen.

I have a simple question.  A large number of cloud computing companies seem to show strong growth on the price charts for the last few years.  Do you think that this is a fundamentally based trend which will continue, or is it just another dot com bubble?

I am as always addicted to your excellent research and presentation.  Watching your video is the first thing I do every morning, and I even have to divide the Friday video into three parts, otherwise I feel deprived on Mondays.

Thank you for your kind words and I am delighted you enjoy the videos. The cloud computing sector has been one of the best performers in this bull market as the app-based economy has flourished on the back of data centre buildouts.

The People’s Daily, a flagship newspaper of the ruling Communist Party, said in a commentary that the U.S. shouldn’t underestimate China’s ability to fight the trade war. The country is “seriously” considering restricting rare earth exports to the U.S., the editor-in-chief of the Global Times, a newspaper affiliated with the Communist Party, said in a tweet. An official at the National Development & Reform Commission told CCTV that people in the country won’t be happy to see products made with exported rare earths being used to suppress China’s development.

 

The U.S. relies on China for about 80% of its imports of rare earths, the group of materials that are used in everything from electric cars to high-tech military equipment. Rare earths, which include elements such as cerium and dysprosium, are relatively abundant in the Earth’s crust but mine-able concentrations are less common than other ores.

China produces about 70% of the world’s mined rare earths and its industry is dominated by a handful of producers including China Northern Rare Earth, China Minmetals Rare Earth Co., Xiamen Tungsten and Chinalco Rare Earth & Metals Co. Some of the country’s listed rare earths stocks are small caps, making them easy targets of speculation.

The country has taken a proactive approach to managing the global market, Bank of America Merrill Lynch said in a report, citing steady exports in the 1990s that depressed prices and a 40% reduction in its export quota in 2010 that led to a spike.

The last time rare earths were a political football in 2010, it was because China cut off exports to Japan in an effort to force high-end manufacturing to migrate. That set off a massive run-up in rare earth metal prices, investment in new mining facilities and a drive towards substitution. Faced with the threat of losing it dominant position China relented and began exporting again. Prices collapsed, most of the new miners went bust and some semblance of normality returned. How is this occasion different?

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Some of the topics discussed include: Treasuries extend breakout, Wall Street ease back to test their MAs, golds eases, oil steady, grains breaking out, Italian yields subject to selling pressure, Euro weak, South African Rand weak, China and India steady

Trust is the basic value of interpersonal cooperation and the cement of our social order. The erosion of our “trust capital” can be observed in many areas of society.

The breakdown of trust in the international monetary order is manifesting itself in the highest gold purchases by central banks since 1971 and the ongoing trend to repatriate gold reserves.  

Gold reaffirmed its portfolio position as a good diversifier as trust in the “Everything Bubble” was tested in Q4/2018. While equity markets suffered doubledigit percentage losses, gold gained 8.1% and gold mining stocks 13.7%.

The normalization of monetary policy was abruptly halted by the stock market slump in Q4/2018. The “monetary U-turn” that we already forecasted last year has begun. 

Recession risks are significantly higher than discounted by the market. In the event of a downturn, negative interest rates, a new round of QE, and the implementation of even more extreme monetary policy ideas (e.g. MMT) are to be expected. 

When it comes to trust in investments, our vote is clear. Trust looks to the future, forms itself in the present, and feeds itself from the past. Gold can look back on a successful five-thousand-year history as sound money.

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Gold is a monetary metal and therefore is best valued like a currency rather than as a metal, stock or bond. Of course, currencies are generally income producing but if the last decade has taught us anything that is not always the case. One of the clearest arguments for owning gold in the aftermath of the credit crisis were the negative interest rates that prevailed which made gold alluring by comparison. With similar conditions arising now, the big question many people are asking is why gold hasn’t done better?

According to the new parliament’s seat distribution based on preliminary results, 15 PINE parties throughout the European Union made gains in the election and 12 lost seats. In total, they gained just 25 seats – 3.3% of the total of 751. Without Italy, they would have come out even with the 2014 result. In a small number of countries there has been no change in PINE support.

The rise of Italian nationalism and what one could call an anti-establishment revolution there make the country the EU’s biggest trouble spot for the next legislative period. It’s unclear what the bloc can do about it except wait for Italians to become disappointed in Matteo Salvini’s League (and the national conservative Brothers of Italy, or FDI, party) – something that might come with painful economic side-effects.

The U.K. is the other obvious problem, but perhaps a receding one – either because Brexit will eventually happen or because it won’t. Last week’s election delivered a net loss of seats to British PINE parties. The success of Nigel Farage’s Brexit Party was as spectacular as the downfall of his former project, the U.K. Independence Party, and the ruling Conservatives faced a catastrophic loss that doesn’t augur well for them in the next general election. All this is for the British voters to sort out, though: The EU can hardly help at this point and it’s wise for it to wait out the crisis.

Other than the two obvious hot spots, eastern Europe remains somewhat problematic for the “ever closer union” project because of the strength of Hungary’s Fidesz and Poland’s Law and Justice (PiS). These aren’t exactly euroskeptical parties, but they are focused on not giving up any more national sovereignty, and they’re resolutely illiberal. The parties work to defang the independent media and build up propaganda machines that make them immune to scandals (PiS survived a whole strong of them in the run-up to the European election) and they tighten the political control of the courts.

The European election results reflect a rumbling sense of discontent but did not deliver the ground swell of support for populist or ant-EU to upend the centrist status quo. If we look under the surface there is a clear battle going on, but the opposition is split between populists and, the left leaning, Green movement which has allowed the centrist bloc to continue to hold sway.

Claims known as prevented plant pay out when farmers are unable to sow crops at all. With unceasing rain keeping farmers out of fields, growers are increasingly weighing how best to get paid and ease the impact from the bad weather and an escalating U.S.-China trade war.

“You hate to farm for insurance, but in a year like this, you keep that in the back of your mind,” Nelson, whose farm is near the east-central town of Paola, said by phone. Storms across the Midwest and Great Plains have resulted in the wettest 12-month stretch on record in the U.S., with the deluge closing refineries and snarling Mississippi River traffic. Crucially for agriculture markets, it’s also hampered crop planting. Worries over tighter supplies due to the soggy weather drove Chicago corn futures to surge as much as 3.9% on Friday, topping $4 a bushel and rising to the highest level in almost a year.

The wet weather’s showing no signs of easing. Severe weather that broke out late Sunday across the Central U.S. and into the Midwest is expected to continue to cause havoc. The insurance deadline for sowing has already passed for some farmers in southwestern Missouri, southeastern Kansas and western Tennessee. They now have to decide whether to plant with less coverage, or make prevented-plant claims.

The cyclicality of grain prices, where old crop prices rise heading into the harvest of winter planting and fall thereafter is predicated on the assumption that there is a winter crop to harvest. There is likely to be significant volatility because hard red wheat crops are expected to be OK, but a significant rally appears to be getting underway in old crop contracts. The true test of the health of the new crop will come when it the front month July contract rolls.  

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Last October there was a full hike priced in, but now those expectations have completely collapsed to the point where there is two cuts already embedded into the Eurodollar futures curve.

Although it’s not quite this simple, to make money at the short end, the Fed will have to cut more than twice in the next year and a bit. Could that happen? For sure. No doubt about it. Maybe the economy hits a real air pocket and the Fed cuts aggressively. Or there is some geopolitical event and the Fed is forced to slash rates.

But the point to ask yourself is whether that is a good bet? I contend that with everyone leaning so heavily one way, the surprise will not be how much money they make, but instead if things don’t play out exactly as ominously as forecasted, how quickly the trade goes sour.

There is little room for error. Or put it another way, the global economy better collapse as quickly as these bears believe as even a lengthening of the process will make their trade unprofitable.

And in case you are bullish the long end of the curve and believe a slow-to-cut Fed is your best friend, don’t forget what Tariff Man has done to inflation. Next year should see a rise of 50 basis points across the board to core inflation. Sure commodities are falling hard, but that helps more with China’s inflation situation than with America’s.

The bond market is indeed pricing in rate cuts by the end of the year. The big question is how much of that is hedging of fears about the potential for a slowing global economy and resulting US Dollar outperformance and how much is about the need for an end to quantitative tightening in order to fend off fears about an impending recession?

The cloud over Yes Bank is the result of the Reserve Bank of India (RBI) announcing last Fall that the bank’s co-founder and former CEO, Rana Kapoor, had not provided adequate reserves for bad loans in 2017. The RBI asked Kapoor to step down and find a replacement, which is a fairly radical move.

When Gill took over this spring, he immediately took large write offs to clear the decks, but has since changed his tone and become much more optimistic (I am referring to his interview on 5/17/19 on CNBC India). He is adamant that there are no more skeletons in the closet.

I am inclined to take him at his word, since the RBI has been closely scrutinizing Yes Bank for the past 6 months and knows the full extent of any problems. Also, the RBI found no issues in its most recent review of Yes Bank’s reserves, released just after Gill took the helm (but before his first earnings announcement in which he wrote off everything). The RBI also just appointed a representative to the board, so Gill is being held accountable in real time.

Local investors remain nervous that there is more bad news coming in the next quarters, but I hold the view that the bank has adequate collateral for its important exposures (ADAG and Essel group), will get through this phase, and that perceptions will change – I think the shares will return to their historic valuation range in the next two to three years, providing excellent returns from the current price.

The capital raise in the next 6 weeks could also be a catalyst in this process. That could be when the bank announces a capital raise, possibly with the participation of a Private Equity firm or other marquee investor. Tier 1 capital is now 8.3%, and the bank needs the capital to continue to grow.

Long term shareholder returns from private sector banks in India have been excellent (HDFC Bank, Axis Bank, or Kotak Bank compare very well to the S&P 500 over 5, 10, or 15+ yrs. In USD). Yes Bank is trading at a severely distressed level compared to its historic valuation range, and I believe there is a strong possibility of making a 2x return in 3 years, and more over a 5-7 year time horizon.

I am set up to invest in India (which is no small feat, 4-6 months of paperwork)

The market capitalization in USD is $4.7bn, book value is $3.88bn, price/book is 1.21x. This is the lowest p/b ratio since the financial crisis (See chart below). In Aug 2013 the p/b ratio got down to 1.5x and recovered to 4.37x book by Jan of 2015. The mean p/b during the bank’s history appears to be around 2.7x, which is normal for private sector banks in India due to their continuing high growth and high ROE.

Here is a chart of Yes Bank’s p/b range since 2009. It is important to note that when the shares reached 1.5x book in 2013 they were INR 49/share, compared to today’s price of 137/share, owing to the bank’s very fast rate of growth in book value.

Veteran subscribers will be familiar with the fact that India is our favourite market for the long-term. The challenge for many investors has always been in how best to express that view since it is difficult to transact in Indian shares and the number of Global Depository Receipts is limited. That leaves funds which may or may not perform.

Allen Benello is fund manager, a long-time subscriber and dear friend who has gone through the 4-6-month process of being set up as a Foreign Portfolio Investor (FPI) by the Securities and Exchange Board of India (SEBI). He has offered to answer any questions subscribers might have about opening a brokerage account in India and can be reached at ABenello@WRPartners.com.

Johnson said he would prepare for no-deal, go back to Brussels to renegotiate the toxic Irish backstop, and make clear that he’s prepared to leave without a deal if the EU says no. He said he believes the U.K. will leave the EU on Oct. 31 -- the latest deadline -- with or without a deal.

He has long indicated that he’d be willing to pull the U.K. out of the bloc without a deal and has criticized May for surrendering to the EU. That has spooked markets, and the pound has weakened on concerns that a hardliner would pursue a no-deal exit.

Johnson’s other tactic is to get Parliament to rule out the possibility of canceling Brexit --- an option the U.K. legally has. That would make the threat of no-deal more credible, and could concentrate minds in the EU, where some officials continue to hope that the U.K. might change its mind.

The EU has repeatedly said it won’t reopen the divorce deal and won’t change the Irish backstop. It’s the most contentious part of the agreement as it potentially keeps the U.K. bound to the EU rules indefinitely and treats Northern Ireland differently to the rest of the country. Johnson noted that a majority in the Parliament has voted to renegotiate the backstop.

As for a second referendum, Johnson thinks it’s a very bad idea. “Put Brexit to bed, pacify this bawling that’s been going on for so long,” he said.

With all the best will in the world, the Brexit question is still going to be an enormous dispute to settle successfully. The first rule of negotiating is you need to be willing to walk away. That is why the threat of a hard Brexit needs to remain on the table and needs to be credible. The UK needs to do everything possible to plan for a hard Brexit because preparing for the worst and hoping for the best is the only strategy one can follow when faced with tough odds. From that perspective Boris Johnson is the best man for the job.

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

Here of the topics discussed include: whiff of risk off in the market with China related instruments taking the brunt of selling. Treasuries, yen and gold steady, Wall Street testing the region of the trend mean, Oil pulls back sharply to break its uptrend, 

“If someone is victorious, it is India,” he said. “If someone is victorious, it is democracy. If someone is victorious, it is the electorate.”

Striking a populist tone and evoking mythical Hindu figures engaged in war, Mr. Modi framed the elections as a victory by and for ordinary Indians, over those who write off the poor and downtrodden. At the end of the battle, he said, was “the guarantee of a bright future for India.”

“Some are saying, ‘Modi, Modi, Modi.’” he said. “This is not Modi’s victory. This is the victory of the expectations of the honest citizen of this country.”

“This is the victory of the mother who was longing for a toilet,” he continued. “This victory is of the farmers who sweat to fill the stomachs of others. This is the victory of the 400 million unorganized laborers.”

Exceeding all predictions, Modi’s party is winning a majority of seats.

Mr. Modi, one of the most powerful and divisive leaders India has produced in decades, appeared easily headed for another five-year term, according to election returns.

With most votes counted, the Election Commission reported that Mr. Modi’s Bharatiya Janata Party, or B.J.P., was ahead in about 299 parliamentary districts, far beyond the 272 seats it would need for a majority in the 543-seat Parliament. At this pace, the party would actually expand on its current majority — a development no one was predicting in recent months. And its actual majority will be larger, as its established coalition partners have won at least a few dozen more seats.

Narendra Modi declated victory today which is going to maintain his party’s dominant position in the recent elections. That ensures the business-friendly environment which has prevailed for the last five years will persist and further strengthens his hand in pushing through reforms, assuming of course that is what he intends. There is also the matter of building a temple to Ram on the site of a mosque, which is likely to inflame religious tensions over coming months. How that is handled will give us a clear clue as to just how populist the administration has become.

Again, very grateful thanks for the very interesting and thoughtful comments you post each day. They are helpful to both newer investors and the more experienced who may get locked into their way of thinking. I count myself in that category! One factor that does not get mentioned perhaps as often as it should is the impact of currency movements on investment portfolios. Those of us using pound sterling as our home currency may feel particularly sensitive to this at this time. Those of us that assess gold as a possible investment often check gold in different currencies to determine whether a broad-based uptrend is evolving (eg compare gold in USD, Euro where the pattern looks quite different.) But I suspect fewer investors factor in currency movements when buying stocks in the USA, Europe, India, Japan and China. What are your thoughts on this?  

Thank you for this question which I believe will be of interest to other subscribers. From everything I have witnessed over the years large institutional investors look for three attributes when deciding to invest in markets beyond assets denominated in their domestic currency. These are potential for currency market appreciation, potential for capital market appreciation and yield differentials. I see no reason why investors of all hues shouldn’t follow the same rationale. That is the basis for thinking as a globally oriented investor and why this is a Global Strategy Service.

With an equities rally wavering, trade relations between world’s two largest economies deteriorating and U.S. borrowing costs slipping, the commodity often seen as a haven in times of turbulence is encountering troubles of its own. Gold prices are headed for a fourth straight monthly drop, and have seesawed between weekly gains and losses since late April.

Bullion, which hasn’t posted more than three straight daily gains since March, has been stuck in a fits-and-starts pattern as signs of resilient growth and a rising dollar counter concern that the world economy is set to slow. Even increased wagers that the Federal Reserve will ease monetary policy this year haven’t been enough to sustain rallies in bullion, which can benefit from low rates because it doesn’t pay interest.

“Prices are kind of range bound, nobody is making any money, so on the margin, people are just disinterested,’’ said John Laforge, the head of real asset strategy at Wells Fargo Investment Institute, which oversees 1.9 trillion. “You really need something fearful out there, which is the scary part. You really need something that rattles markets for gold to take off.’’

I like to see these kinds of articles because they give us some perspective on what sentiment towards an asset class is like. As you can see from the above passage the broad feeling is this “market has no legs” and “can’t sustain a rally”. That tells us the majority of people are not in the market.

The root cause of the problem is that too few Tories realise that we are in the midst of the political equivalent of a bank run: the depositors are queuing to take their money out, and the whole system is about to implode. The choice is either urgent, decisive and painful action, or a Canadian-style collapse for the Tories when the inevitable general election comes. Every passing day is an embarrassment, further toxifying the Tory brand, and each one of Mrs May’s pronouncements costs the party yet more support that it will struggle ever to recover. The European elections will be a catastrophe.

Tory MPs and the remaining members of the Cabinet need to understand the depth of their predicament, and do anything they can to accelerate Mrs May’s ejection from office. They should snap out of their debilitated stasis, pull out their fountain pens and get writing to Sir Graham. The other Cabinet members must realise just how badly their own reputations are being damaged: they are propping up Mrs May, and they are still far too obsessed with their own leadership prospects to want to rock the boat. Do they really want to lead a rump opposition party, or even lose their own seats, which is where their cowardice and excessive caution could eventually lead?

There may be a chance of a Tory-Brexit Party pact at some point but zero chance that supporters of Mrs May’s deal or her allies will be spared the full force of Nigel Farage’s party. Any Cabinet minister with a sense of self-preservation must therefore follow Mrs Leadsom in repudiating both. It is their only chance.

Theresa May took the job of Prime Minister in large part because no one else wanted it, and everyone knew from the outset it was a poison chalice. She has failed, as expected, to bridge the chasm between the Leave and Remain sides of her party. However, because of the betrayal of the vote for a clean break she is now is facing the clear potential for schism with in the Conservative Party. Under Theresa May’s watch a third force has emerged in UK politics, with far more groundswell appeal than the Liberal Democrats ever had. That is something she deserves all the blame for. The lurch towards the fringes and away from the status quo is now well underway. It has been my opinion for months that both the Conservatives and Labour would be eviscerated at the next election. Now we know what the alternatives look like.  

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

Some of the topics covered include: buybacks continue to support markets but are dependent on earnings growth, Australia, New Zealand continue to trend higher supported by weak currencies, China pauses, Oil weak, gold steady, bonds trending higher. 

The dips may have, in fact, provided good buying opportunities for companies to step in and buy at lower prices, said Jim Paulsen, chief investment strategist at Leuthold Group.

“There’s something to be said about insiders showing confidence that their stock is probably going to go up. They think it’s relatively cheap or a good opportunity to buy it back,” said Paulsen. “It’s typically a good sign that has led to higher stock prices.”

Buybacks have climbed in recent years even as they’ve come under pressure from politicians who are focusing on corporate governance as an election issue. While far from being a consensus view, repurchases have been a bull case that strategists like David Kostin at Goldman Sachs have cited for the 10-year rally to keep going.

Corporate appetite has dwarfed that from all other investors as the biggest source of demand for U.S. stocks. Net purchases from corporations totaled $1.6 trillion during the past three years while investors from pensions to mutual funds to individuals were sellers, according to data from Goldman Sachs.

While it’s only one bank’s client flows, BofA’s data demonstrated a similar pattern. Over the last three weeks when stocks slipped, companies stepped up buying while hedge funds and individual investors retreated. During the stretch, buybacks totaled more than $7 billion. By contrast, selling from the other two categories reached almost $1 billion.

Regardless of how one feels about the merits of share buybacks they have been the primary transition mechanism for monetary and fiscal easing to enter the stock market. If that conclusion is correct then only a significant downtrend in corporate earnings or a need to defend the company’s credit rating is likely to change the spending priorities of big corporations.

Overnight swap markets are currently pricing in two RBA cuts by November. Westpac Banking Corp. economist Bill Evans on Tuesday brought forward his forecast for the first reduction in the cash rate to June, with a second to follow in August. Commonwealth Bank of Australia and Royal Bank of Canada expect the same.

JPMorgan Chase & Co. though says two cuts may not be enough. “From where we are today, this is still not sufficient to fully neutralize risks to the RBA staff’s current forecasts, suggesting risks to a sub-1% cash rate,” economist Ben Jarman wrote in a note.

Franklin Templeton’s Canobi expects the RBA to lower borrowing costs three to four times over the next nine to 12 months as tepid inflation weighs. “We never felt that inflation has really had a grip since the RBA started easing in 2016, and it still looks pretty weak,” he said.

Australian mortgages are full recourse and floating rate. The Australian consumer is carrying some of the highest leverage ratios in the world, second only to Canadians in the G7. That’s fine as long as the property market is rising but when it starts to contract pressure starts to build on leverage at even a slight down turn in the ability of consumers to service their debts.

On our latest grassroots research trip to India, we visited three lower-tier cities — Ahmedabad, Pune, and Lucknow — to meet with middle-class consumers between the ages of 20 and 30. We also conducted an online survey of 1,200 millennials across the country. This paper outlines our observations and offers potential investment implications driven by a rapidly changing “Young India.”

High-level observations
• India is home to more millennials than any country in the world, with nearly 473 million people born between 1985 and 2000.1
• Digital democratization is driving lifestyle convergence between metro and lower-tier cities.
• Expanding internet access and a wave of national pride have begun to shift consumption trends.
• The desires to bridge tradition with modernity and gain independence without losing family ties have boosted markets for inventive products and aspirational experiences.

Trend: Digital democratization is reshaping consumption patterns Internet and mobile penetration in smaller cities like Pune and Lucknow are beginning to match that of large, metro cities like Delhi and Mumbai. Data prices in India have plummeted 95% to approximately 18 rupees (US$0.26) per Gigabyte (GB) since 2016 (Figure 1), contributing to an eightfold increase in usage with the average user consuming nine GB of data per month as of the end of 2018 (Figure 2).

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The evolving populist, followed by nationalist trends first root in India. There is increasing evidence that this two-fold pattern is evolving elsewhere. The success of populist candidates in a large number of countries and the increasingly nationalistic rebasing of political dialogue that has occurred subsequently suggests there is a clear trend underway in the global market which is supportive of regionalisation rather than globalisation.

You have probably have had your fill of Brexit but I thought you would find this piece quite insightful in explaining the rise of the Brexit Party. 

The weekend results are going to be far more interesting than we have ever believed an EU election could be.

https://unherd.com/2019/05/how-farage-outflanked-everyone/

Thank you for this article which I agree is a useful primer on the rise of a populist party. The process has been long and drawn out in the UK because people believed that by voting for Brexit, what they were going to receive was change. The failure of incumbents to deliver necessarily requires the rise of a new power which at least promises to deliver.

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

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

Some of the topics discussed include: Brazil bounces, Australia extends gain, China and US steady, Europe steady. Euro eases, Pound extended decline, industrial resources ease. 

Nigel Farage’s Brexit Party is poised to dominate the upcoming European elections in the U.K., according to spread betting firm Sporting Index.

The anti-EU party will win 28 seats, the firm said. Prime Minister Theresa May’s Conservatives will win seven, while Labour will take 13 and the Liberal Democrats 12, Sporting Index predicted in an email in London on Tuesday.

Sporting Index has had a consistently strong record in predicting some of the key twists and turns of the Brexit saga. Last month, about two hours before the latest vote on May’s Brexit deal, the spread betting firm forecast she’d lose by 60 votes. She was defeated by 58.

“The Tories look set to face the consequences over their handling of Brexit, with the Brexit Party and Liberal Democrats making significant gains due to their clear stance on one of the most polarizing events in British politics,” Sporting Index’s Phill Fairclough said.

On Tuesday, May offered lawmakers a vote on whether her Brexit deal should be subject to a referendum, in a last-ditch bid to save it. Last time MPs voted on a second referendum, there was just a 12- vote difference, with 280 backing a confirmatory vote on a deal and 292 against it.

There is a large contingent of UK voters who thought they would never be voting in a European election again. Presented with the opportunity to stuff the European parliament with Eurosceptics they are likely to leap at the chance.  The UK isn’t the only country where parties at odds with the European union’s aim of further cohesion are likely to gain ground. France, Italy, Austria, Sweden, Denmark and Spain all have room for electoral upsets. Perhaps the greatest irony is from next week the continent will have a more Eurosceptic voice than Westminster.

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The diesel cheating scandal had a huge effect on demand for platinum from the automotive sector in 2017 and 2018 which resulted in a significant drawdown. The automotive sector has been busy trying to clear up its image and play catch up with Tesla so diesel fell by the wayside. However, the significant surge in palladium prices, to levels where substitution becomes economic, raises questions about the bearish hypothesis on platinum.

I noticed that you did not mention Coinbase as a vehicle to use cryptocurrency; what would be the risks of opening an account with coinbase vs stockbrokers. Thank you.

Thank you for this question which is highly topical for anyone considering buying cryptocurrencies via an exchange. The reason Fidelity’s move to provide custody is such a big deal is because it lends security to your holding.

I loved Lex’s tongue-in-cheek view of lithium-on batteries. A useful energy density chart that shows where lithium-ion batteries are - roughly in between lead batteries and liquid hydrogen.

Thank you for this story and I also enjoyed the tongue and cheek nature of the energy density comparisons. I suppose it is no longer politically correct to point out that whale blubber has about 87% the specific density of kerosene which is better than lithium ion batteries. If that could be artificially replicated, we really could see whales fly.

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

Some of the topics discussed include: India elections favour Modi, Australian elections favour commodoties, Trade War intensifies, Semiconductors pull back, Europe weak, oil and gold steady, Treasuries ease, VIX steady.

In India, exit polls have often been off the mark but financial markets, among others, have rarely showed the patience to await the official results.

In 2014, most exit polls accurately predicted that the NDA had an upper hand over the UPA, but few foresaw that the BJP alone would get an absolute majority. In 2009, the UPA ended up getting more seats than forecast by polls.

In 2004, all exit polls had predicted a win for the NDA, but the Congress-led alliance’s triumph surprised the pollsters.

India is at an important juncture. It has millions of new voters entering the electorate at each election. That means politicians have to appeal to their interests if they are to secure power. Economic growth was the clear strategy which propelled Modi to power in 2014. Following the slow pace of reform over the last five years, a much more nationalistic and populist tone has been witnessed in electioneering.

Former Treasurer Morrison is the Liberals’ third leader in four years and has only been at the helm since August. Factional infighting saw right-winger Tony Abbott dumped in 2015 by his own lawmakers for millionaire moderate Malcolm Turnbull, who in turn was ousted in a party vote.

Morrison, an evangelical Christian who represents one of the country’s most socially conservative districts, moved swiftly to unite the party and set about crafting a strategy to close down Labor’s long-standing lead in opinion polls.

He relentlessly attacked Shorten’s promise to boost the minimum wage, curb tax incentives for investors and take tougher action against global warming, insisting the slowing economy couldn’t risk such policies. While his reputation as an effective campaigner grew on the trail, polls still had him trailing by at least 2 points going into Saturday’s election, and book-makers had him at long odds to win as the ballot boxes closed.

I was chatting with a couple of ladies from Newcastle (NSW) on the plane back from Florida in March and they were very clear in their conclusion that young people had no idea what had helped to generate the economic prosperity Australia has become synonymous with over the last forty years. Of course, they are from one of the largest coal exporting terminals in the world, but that perspective helps to highlight not only the reluctance to embrace growth killing climate prohibitions but a generational divide.

From now, Huawei will be able to use only the public version of Android and won’t have access to proprietary apps and services from Google, according to a person familiar with the matter. Though existing phones are expected to keep functioning largely as usual for now, users could lose some app functions, including some artificial-intelligence and photography features, the person said.

In a separate move, German chip maker Infineon Technologies AG said it was terminating the delivery to Huawei of some components originating in the U.S., in a sign that even non-U.S. suppliers to Huawei are being swept up in the U.S. trade restrictions. Infineon didn’t specify which components were affected by the action but said the “great majority” of products it sells to Huawei aren’t subject to trade restrictions.

Separately, Qualcomm Inc., San Diego, has suspended shipments to Huawei of its chips, and some employees have been told not to communicate with the Huawei side, according to a separate person familiar with the matter. Qualcomm chipsets are used in certain Huawei smartphone models. Huawei also designs a large number of its own chips for higher-end phones.

Huawei is a Chinese national champion, so the Chinese government looks on the efforts to excise it from competing internationally as a direct afront to the Made in China 2025 program which is one of Xi Jinping’s central policy objectives. There is no Chinese company with an operating system capable of replacing Android. Until now they never needed one but we can be sure this sequence of events is going to further accelerate the drive towards Chinese technological independence, however long that takes.

re the EURO If the Euro currency breaks up, for example, if weak Italy or strong Germany leave, the transition to something else will have to be managed , to avoid chaos; either there is a new Euro, or regional Euros, or the countries go back to their old currencies. Something entirely digital could be invented overnight, perhaps through temporary dollarisation of prices now in Euro. If currency has to be printed, this would take weeks. The French destroyed their Franc printing presses back in 2000/ How would you see the transition ? How would this affect the Swiss Franc ? 2) REQUEST for INCLUSION of the following stock in Chart Library: Tanzanian Gold Corporation ( TNX), listed in Toronto. present price 0, 93 CAD Thank you

Thank you for this question which may be of interest to other subscribers. I believe thinking there is a difference between the Deutsche Mark and the Euro is one of the most common misconceptions of investors. The “creation” of the Euro was more about extending the umbrella of the Deutsche Mark to the whole continent, with its low borrowing costs, than forming a new currency out of nowhere.

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

Jeff Gundlach has a good record of spotting trouble early and he appears to share the view espoused by Ray Dalio that the Federal Reserve is going to need to adopt even more extraordinary measures to tackle the next downturn because of the quantity of debt outstanding.

China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat of higher tariffs, while the government said stimulus will be stepped up to buttress the domestic economy.

Without new moves that show the U.S. is sincere, it is meaningless for its officials to come to China and have trade talks, according to a commentary by the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily, the Communist Party’s mouthpiece. The Ministry of Commerce spokesman said Thursday he had no information about any U.S. officials coming to Beijing for further talks.
 

China running ahead of the USA on patent filings has been a common statistic quoted to highlight the country’s growing incentive to uphold intellectual property laws. What is less commented on is what these patents are for.

Eoin mentions buying Ethereum in this report but I cannot make out which vehicle he used. Can you help please?

PS:  I am enjoying my one month’s free trial and will definitely sign up.

Thank you for this question and welcome to the Collective of subscribers. As a new subscriber you might not be aware that the vast majority of what I trade is via spread-betting which is tax advantageous for UK investors because of the absence of capital gains tax. If I take an investment position it will stated as such and would refer to a share or fund.

Are there collective funds (ETFs etc) through which we can invest in a basket of cryptocurrencies?

Thank you for this question which may also be of interest to subscribers. The number of crypto funds is proliferating with hundreds now participating in the market. The provision of custody services by companies like Fidelity, E-Trade and JPMorgan will further enhance the ability of institutions to invest either through these funds or directly in the market.

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Some of the topics covered include: bitcoin pauses, gold pulls back, Dollar strong, stock markets steady, bond ease, monetary policy beats most other factors most of the time. defensives outperforming. 

Theresa May took a major step closer to leaving office, in the face of growing demands to quit as U.K.
prime minister over her failure to deliver Brexit.

The embattled premier agreed to set out a timetable for her exit early next month, after she puts her Brexit deal to another vote in the House of Commons, the Conservative Party’s most senior rank-and-file politician Graham Brady announced. The pound fell.

“We had a very frank exchange with the prime minister,” Brady told reporters on Thursday, after he and other senior Conservatives met her for a showdown behind closed doors. Brady said he and May agreed that they will meet again to finalize the timetable for electing a new Conservative leader after the Withdrawal Agreement Bill is put to a vote in the House of Commons in the first week of June. This meeting will happen regardless of whether the Brexit deal law is approved or rejected, he said.

Theresa May has had the unenviable job of trying to shepherd disparate groups within her own party towards a conclusion everyone could get behind. It was a nigh on impossible job and she has failed to get a deal through parliament. The Labour party have no incentive to help out because they are eyeing the next election and would be punished by their membership if they were seen to be helping out Conservatives. In my view, that is the primary reason cross party talks are failing.

Days after his coalition partner roiled markets by threatening to breach European Union fiscal rules, Deputy Prime Minister Luigi Di Maio of the Five Star Movement said Italy’s government wants to rein in the debt load to avoid it spiraling.

“Nobody wants to go over 140%,” Di Maio said during an event in Florence. “Otherwise, the debt-to-GDP level would be out of control.” He added that some investments could be financed by increasing the deficit level provided that it boosts economic output, limiting the debt ratio.

The country’s debt-GDP level was 132.2% at the end of last year.

"I think that 130% is already a lot," European Commissioner for Economic and Financial Affairs Pierre Moscovici told reporters in Brussels when asked about Italy’s debt.

Italy has a domestic economy that is struggling and a group of high-profile exporters heavily reliant global growth. Trade war worries are weighing on sentiment particularly as the populist government seeks to modestly breech EU fiscal deficit limits.

This has become a pattern where you get a big aggressive statement from the administration that might impact trade and then the market reacts aggressively as it did on Monday and then it seems to back off,” Chicago-based Susan Schmidt, head of U.S. equities at Aviva Investors, said in an interview. “Business is still doing well. I think if the market can stay focused on the facts and the data, then I think the market will hold.”

Strong economic data and earnings, along with hints from the Trump administration that it may be willing to compromise on trade has helped stocks rebound from the battering they took when the tariff battle with China flared. But the headlines have come fast and furiously, most recently President Donald Trump signed an order that’s expected to restrict Chinese telecommunications firms from selling in the U.S.

China’s dependence on global trade is far greater than the USA’s and the market has been voting with its feet by both supporting the Dollar, the bond market and the stock market since the trade war began.

The rationale for allocating to emerging markets rests on three pillars: Superior economic growth has resulted in positive market returns historically, low correlation within emerging markets and across asset classes has provided diversification benefits, and relative scarcity of information has created opportunities for active portfolio management. Long-term historical data confirms that emerging markets have provided positive long-term risk-adjusted excess returns and enhanced portfolio diversification. Their diversity has led to high cross-sectional return dispersion, both at the country and at the security level, creating opportunities to add value through active country allocation and stock selection. Omitting this equity segment would have introduced a performance drag on global indexed strategies and reduced the investment opportunity set of active strategies. The opening of the domestic Chinese capital market and its integration into international markets is likely to have a transformative effect on the emerging markets equity segment. MSCI introduced domestic Chinese equities (A shares) into the MSCI Emerging Markets Index in June 2018 at a reduced weight. Chinese equities listed in mainland China and Hong Kong currently represent 30% of the index but could grow to over 40% when A shares are included at full weight. The growing size of China within emerging markets raises the prospect for investors of making dedicated allocations to China. Whether investors make separate China allocations or continue to seek opportunities across global emerging markets, the segment likely will remain an essential element of the global equity universe in the future.

China already dominates the emerging markets sector and its influence is likely to further increases with the increased weighting of A-Shares. At 40% of the Index it will become increasingly difficult to invest in emerging markets without gaining at least some exposure to China. That will be either because of direct participation or because of the reliance of some markets on Chinese demand.

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Some of the topics discussed include: alt-coins break out, bitcoin still firm, stock markets rebound from the region of their respective trend means, Treasuries remain firm, Gundlach believes MMT inevitable, I agree, 

Ethereum and Ripple's XRP have climbed sharply this week as the bitcoin and cryptocurrency industry comes together for one of the biggest events in the cryptocurrency calendar starting—Blockchain Week NYC and CoinDesk’s Consensus 2019 event, running all this week out of the New York Hilton Midtown.

Bitcoin and cryptocurrency analyst Nik Patel has meanwhile found that, historically, after bitcoin surges higher smaller cryptocurrencies such as ethereum and Ripple's XRP generally rally hard in the aftermath.

"Of the previous four [alt coin] bear cycles, the average drawdown has been 69.7%. The current drawdown of this [altcoin] bear cycle is 66.5%. The average growth experienced across the past five [altcoin] bull cycles was 617%," Patel said via Twitter, suggesting we could be about to see a further rise in the value of many so-called altcoins.

A big question for investors is always whether to bet on the leader continuing to outperform and when to look at laggards that have the potential to experience a catch-up play.

As you say, the US has many alternative sources of cheap goods but there are limited sources of US technology. China also has no alternative buyers of its products. Round One of the international confrontation will be won by the US.

Buyers can always look elsewhere because there is always someone who is willing to provides services at a lower cost or who can manufacture a copycat item which is “good enough” Sellers have to focus on retaining that competitive edge but often have a hard time replacing lost customers, particularly when they are have already maxed out their growth.

Revenue climbed to 93.5 billion yuan ($13.6 billion) in the three months ended in March, about 1.8% above estimates as adjusted earnings-per-share of 8.57 yuan topped projections for 6.5 yuan. Alibaba expects sales in the current year to jump at least 33% to more than 500 billion yuan.

As Alibaba pushes deeper into businesses like cloud computing, it’s getting better at understanding e-commerce customers and making money from recommendations based on their preferences. The move is driving more sales than traditional search and boosting its ability to sell targeted advertising to merchants on its main Taobao platform. That is bolstering revenue growth even as escalating U.S.-Chinese tensions threaten to further dampen the world’s No. 2 economy.

“The results were really good, especially given how the macro economy hasn’t been that great," said Steven Zhu, an analyst with Pacific Epoch in Shanghai. “It’s a great sign that core e-commerce was growing strong.”

Ecommerce has more penetration among consumers in China than in the USA or Europe not least because consumer attitudes towards consumption are not as embedded with brick and mortar as they are elsewhere. That is driving consumption, particularly among the high spending millennial generation towards online shopping and following brand representatives on social media.

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Some of the topics discussed include: Major indices firm from the region of their respective trend means, oil steady, grains and beans surge, gold eases, Dollar steady, bonds quiet. 

“Investors are looking for opportunities to get into this market, and so far in 2019 there really haven’t been any ‘buy the dip’ opportunities other than last week,” Ryan Nauman, market strategist at Informa Financial Intelligence, said by phone. “And you’re also seeing President Trump confirmed a meeting with President Xi during next month’s G-20 summit, which provides some optimism that despite the increase in tariffs, negotiations are still ongoing.”

Even as investors pick through Monday’s carnage for deals, the trade tussle between Washington and Beijing is keeping markets on edge as traders try to gauge its impact on the global economy. On Monday, all three major U.S. benchmarks dropped more than 2% -- only the second time this year that’s happened -- after China targeted some of the biggest U.S. exporters in response to American tariffs. Trump eased concerns talks would break down when he said he and Chinese President Xi Jinping would meet at the G-20 conference in late June.

Investors don’t believe a trade war is inevitable and still hope that a deal will be done sooner rather than later. The threat from that conclusion is the extension of tariffs from the original set of goods to all goods imported from China will have an inflationary effect which is not being priced in. That is not so surprising considering how wrong inflation forecasts have been over the last decade. Nonetheless, the risk of inflation from escalating tariffs is non trivial.

The impact of late planting on projections of the U.S. corn and soybean planted acreage is an important question right now due to the very wet and/or cold conditions so far this spring through much of the Corn Belt.  We estimate the relationship of late corn planting to corn and soybean planted acreage and prevented plantings in this article.  If late corn planting is 10 percent or more above average, we find that the chance of corn planted acreage decreasing is 83 percent and the average decrease is 1.4 million acres.  The level of prevented plantings for corn is about 1.2 million acres larger than average when late planting is near 10 percent or more above average.  This indicates that there is a reasonably high chance that planted acreage of corn will decline 2-3 million acres from expectations based on the March 30 USDA Prospective Plantings report.  Likewise, we find that when late corn planting is 10 percent or more above average that the chance of soybean planted acreage increasing is 83 percent and the average increase is 0.9 million acres.  However, the level of prevented plantings for soybeans also increases, offsetting much of the acreage switch.  This indicates there is a reasonably high chance that planted acreage of soybeans will not change much compared to expectations based on the March 30 USDA Prospective Plantings report.  It should be noted that changes to corn and soybean planted acreage could be even larger if planting conditions do not improve substantially in the next two weeks.  Finally, corn and soybean acreage changes could also be impacted by policy changes made in response to reaching or not reaching a trade deal with China.

The flooding which left much of the USA’s midwest under water for much of February has had an effect on planting has represents a catalyst for short covering as a number of grains and beans are in the region of multi-year lows.

 

Oil climbed as drones struck Saudi Arabia’s main cross-country crude pipeline, while President Donald Trump said a trade deal with China is still within reach.

Futures gained 1.2% in New York, amid assaults on the world’s chief crude exporter. State-owned Saudi Aramco halted operations in the area after the strike on two pumping stations, which was claimed by Iran-backed rebels from neighboring Yemen. The attack followed damage to four oil tankers anchored off the United Arab Emirates on Sunday.

The intensification of sanctions on Iran risked retaliation among the country’s proxies across the Middle East with Yemen being a good example. It is almost inevitable that Hizballah will now also rachet up activity as well.

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

Some of the topics discussed include: Trade War Intensifies, stocks extend pullback, Dollar, Yen, Treasuries and gold firm, potential for a stagfltionary environment if tariffs are extended to all Chinese imports, oil reverses early gain but grains and beans reverse early loss, Asian and commodity currencies weak.

The rate on the January fed funds futures contract implies that the central bank’s benchmark will fall to 2.075% by the end of 2019. This is more than 25 basis points below where the effective fed funds rate stood Friday, showing traders are fully pricing in a quarter-point reduction. The implied rate on the contract ended last week at 2.15%.

This is happening as China threatens retaliatory tariffs on some American imports, an escalation in the trade war with U.S. President Donald Trump. The clash is fueling concern about economic growth, prompting a key part of the U.S. yield curve to invert again -- a sign to many that the risk of a recession has increased.

While “China/U.S. trade ripple effects certainly affect the Fed’s outlook, I think this is more of a macro move,” said Todd Colvin, senior vice president at futures and options broker Ambrosino Brothers in Chicago. “It’s not about whether or not the Fed sees policy shifts, that is, as much as it’s looking at
global growth woes, or increased market volatility.”

Jay Powell probably didn’t bargain for the environment he has been presented with since taking the helm of the Federal Reserve. Reducing the size of the balance sheet was supposed to be part of the re-arming of monetary policy to provide for the next crisis. It turned out to be the primary cause of the volatility last year and offered graphic evidence of just how addicted to liquidity the market is.

China announced plans to raise duties on some American imports starting June 1, defying a call from President Donald Trump to resist escalating a trade war that is sending stocks tumbling and clouding the outlook for the global economy.

Less than two hours after Trump tweeted a warning that “China should not retaliate -- will only get worse!” the Ministry of Finance in Beijing unveiled the measures on its website. The new rate of 25% will apply to 2,493 U.S. products, with other goods subject to duties ranging from 5% to 20%, it
said.

The next salvo was poised to come later Monday, when the Trump administration is expected to provide details of its plans to impose a 25% additional tariff on all remaining imports from China -- some $300 billion in trade.

There are a large number of companies that both manufacture in China but also rely on Chinese orders to support growth. There has been some speculation in the media about China’s desire to sell its holdings of US Treasuries but that would do as much damage to themselves as to the USA. Meanwhile making life difficult for the USA’s largest companies is an obvious strategy to exert the maximum possible shock on the US administration.

Uncertainty over how the dispute would be resolved in the one-month deadline set by Washington will reinvigorate a hunt for haven assets in a world already hampered by slowing growth.

An easy bet will be to short the expected losers: risk-sensitive currencies from Asia to South America, they say. “To be honest, I thought the dollar would be rising at a much faster pace than this -- markets were pricing in a Goldilocks environment and they were clearly wrong,” said Stephen Miller, an adviser at asset manager GSFM and a former head of fixed income at BlackRock Inc.’s Australian business.

“Right now I’d be long U.S. dollar versus EM currencies, the likes of Argentina and Turkey.” There’s a 60% chance that China and U.S. won’t reach a deal in the coming weeks, according to analysts at Australia and New Zealand Banking Group Ltd., after last week’s talks laid bare divisions including the removal of existing tariffs and a breakdown in trust. While both nations plan to continue negotiations, traders are waiting for Beijing’s retaliation measures after Washington slapped more duties.

The Chinese renminbi has long been used as policy tool and tariffs being imposed on a wider range of goods, there is a clear argument for having a weaker currency. The country is obviously going to experience some difficulties from tariffs imposed on exports to one its largest trading partners but the potential for domestic inflation to spike on the back of a weaker currency is likely to limit the scale of devaluation.

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Chinese policy makers could devalue the yuan to offset the impact of U.S. duties on China’s economy. The offshore yuan weakened 5.5% against the dollar in 2018, drawing Trump’s ire and fueling speculation that the country was deliberately weakening its currency. While it has fallen 1.8% this week, the currency rose on Friday after the People’s Bank of China set its daily fixing at a stronger-than-expected level.

However, China’s painful experience with devaluing the yuan in 2015, which prompted capital to flee the nation, is likely to dissuade a similar move, according to Tao Wang, UBS Group AG’s chief China economist and head of Asia economic research. “China doesn’t like the self-fulfilling outflows that come as a result of depreciation, which tend to diminish domestic confidence,” she said. “In addition, yuan depreciation last year angered the Trump administration and led to higher U.S. tariffs.”

Watch your own backyard first, worry about everything else afterwards has been the Chinese response to the imposition of additional tariffs on its US exports. The first order of business appears to have been to do what was necessary to avoid a negative reaction in the domestic stock market. That was achieved by clear support coming through for the A-shares market and it posted an upside key day reversal. This action is a testament to the fact that bull markets in China are state sponsored.

The Federal Reserve probably will be more inclined to cut interest rates now that President Donald Trump has followed through on his threat to increase tariffs on U.S. imports from China. But it won’t rush into doing so.

While the higher levies will put upward pressure on inflation by raising import prices, the central bank will likely be more attentive to the potential drag they’ll exert on the economy by depressing consumer and business spending, Fed watchers said.

“We would expect the Fed to initially focus on the growth implication and look past the inflation impact,’’ Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a May 7 note to clients.

The Federal Reserve is highly unlikely to raise rates against a background of low domestic inflation and heightening international tensions. That has been one of the primary reasons bond market investors have concluded we are at the top of the interest rate cycle.

At the same time, apparel prices dropped steeply for a second month, falling 0.8% in April after a 1.9% March drop that was the most since 1949. Apparel only accounts for just over 3% of the CPI but a new methodology in March had dragged down the overall index.

I thought the above was an interesting figure in light of a conversation I had with a friend who is the owner of a garment factory in Los Angeles a couple of days ago. He said the tariffs were terrible for his business because they fall on imports of fabric but not on finished products.

Virgin Galactic already has about 700 customers who are each paying $250,000 for a 90-minute flight. Branson’s space effort had suffered delays due to major engineering changes that were required after the 2014 crash of its VSS Enterprise, which killed pilot Michael Alsbury.

Virgin Galactic plans a few additional test flights from New Mexico in late summer or early fall, with additional employees along for the ride as the company finalizes its operating procedures.

“We want to make sure we have a very choreographed service and offering planned out,” Whitesides said. “We want to give the pilots a few times to just fly it.”

Of the work remaining to be done, Whitesides said “the No. 1 thing is we need to finish installation of the commercial cabin. Our interiors team is sort of going through that process to create the world-class Virgin cabin everyone expects—and that’s going to entail a lot of work.”

Beyond the cabin work, Virgin Galactic is also ferrying its ground and training equipment from California. “We’ve moved from the realm of space-age physics to logistics,” he said.

We are at the dawn of commercial space flight and that represents the creation of a brand-new investment arena, which for the moment is primarily in private hands. Nevertheless, there are going to be ancillary movements in a host of supporting sectors such as tourism, communication, defense, manufacturing, experimentation, mining etc.

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Some of the topics discussed include: Wall Street and junk bonds rally off their intraday lows, grains and beans testing potential areas of support. Still a great deal of uncertainty about the outcome of trade negotiations, 

But the mood on both sides going into the talks appears to be hardening with Lighthizer calling members of Congress ahead of the discussions to warn that a deal this week is unlikely, according to people familiar with the conversations. While Trump on Wednesday insisted that Liu was coming to make a deal and dubbed him a "good man," he later told a rally of supporters that China "broke the deal" by backsliding on prior commitments, leading him to order higher tariffs.

China has disputed Trump’s characterization that the country reneged. But it has also sent its own signals that a deal could take time.

Unlike in some of his previous visits to Washington, Liu is not traveling with the designation "special envoy" of Xi Jinping, according to people briefed on his trip. Chinese officials’ public statements have also hardened in recent days with Beijing vowing to retaliate against Trump’s tariff increase and rejecting the idea that it has reneged on any commitments made during the months of tough negotiations that have led to this week’s showdown.

“China is credible and honors its word and that has never changed,” Commerce Ministry Spokesman Gao Feng told reporters on Thursday.

The Ministry of Commerce also announced it would soon publish details of new retaliatory tariffs.

Haggling is a part of Chinese culture and nothing is agreed until everything is agreed is a common tactic. Fawning over one item to distract attention from the real intent of the negotiation, only to introduce that object later in a backhanded manner, in order to get a better price is also common. Why would trade negotiations be any different. Reintroducing points already considered settled appears to be a central tactic in Chinese negotiating style but that is normal in all Chinese dealings rather than being an individual tactic to the trade negotiations.