The Philippines ordered the closure on Thursday of 21 mines, mainly nickel producers that account for about half of output in the world's top nickel ore supplier, in a government campaign to fight environmental degradation by the industry.

Manila also suspended operations at another six mines, including the country's top gold mine operated by Australia's Oceanagold Corp, as Environment and Natural Resources Secretary Regina Lopez vowed to put the public's welfare above mining revenues.

"My issue here is not about mining, my issue here is social justice," Lopez, a staunch environmentalist, said at a briefing that showed footage of damage from mining to an audience including priests and residents of mining communities.

 

To the best of my knowledge, Nickel was the worst performing LME traded industrial metals over the last couple of years. Indonesia’s decision to relax export restrictions was a major influence on that outcome but the result has been that many mining operations are not economic at today’s prices. 

Rupee rose to strongest in 8 weeks as PM Modi stuck to fiscal prudence in budget presented Wednesday, Fed signaled it wasn’t in a hurry to raise U.S. rates.

USD/INR falls 0.2% to 67.3725, lowest since Dec. 8; seventh day of losses is longest losing streak since Dec. 8

Positive stock sentiment in response to budget may keep INR bears at bay for now, Citibank says in note. Medium-term trend remains dependent on broader USD trend, global risk sentiment, oil prices

Tailwinds from declining oil prices, widening real rates now dissipating, issues of competitiveness may soon arise. Stays tactically neutral INR, no longer bullish for medium term

Buy rupee as India budget shows fiscal prudence, Scotiabank says

Contained budget gap to give RBI room to cut rates, S&P Global Ratings says Govt endeavor is to improve on FY18 fiscal gap est., 

Economic Affairs Secretary Das says Expect bond yields to remain range bound over the next 5-6 weeks on positive investment demand from banks, CPI expected to stay sub-4% in Jan./Feb. and supply lull in February and March, says Morgan Stanley in note dated Monday
Expectations for RBI rate cut at the Feb. 8 monetary policy meeting Yield on govt bond due Sept. 2026 drops 3bp to 6.40%

 

The Rupee had been reflecting widespread angst that the Indian budget would be inflationary in nature and that fear had been weighing on sentiment not least in the aftermath of demonetisation. With a more fiscally responsible tone being set, the Dollar has pulled back to test its progression of higher reaction lows. A sustained move below it would signal Rupee dominance beyond the short-term. 

Boston Dynamics was an aspiring defence contractor when it was acquired by Google. Since Google’s long held mantra is to do no evil that pretty much precluded the company from selling robots that might one day be designed to kill people. The problem is that it’s hard to design robots to displace manual labour outside of strictly controlled environments. The company is making rapid strides in that field but the primary growth avenue is in places where humans would be in danger, not least from other humans. That is at least part of the reason Alphabet is looking for a buyer for the company.   

Wow. As U-turns go, this one takes some beating. TheCityUK, the main lobbying arm for the financial and associated business services sectors, appears to have suddenly embraced Brexit. In common with all the other big City groups and all the big banks, it was strongly in favour of remaining in the EU, seemingly at almost any cost. It argued loudly that the status quo, and especially the rules governing access to EU markets, was worth the cost in terms of counter-productive regulations, such as banking bonus caps or inappropriate, absurd Solvency II insurance rules.

No longer: its latest missive appears to have been penned with the zeal of the convert. The press release is entitled “TheCityUK hails opportunity for trade and investment policy reset”. While it obviously remains worried about the threat of protectionism from the EU, its new report emphasises the upsides of developing new markets.

Around 33pc of the UK’s exports of financial services go to the EU, which also accounts for roughly 40pc of Britain’s trade surplus in financial services. There is no doubt, therefore, that Europe is a crucial market for UK financial services firms. But it’s not that simple. The EU actually matters more to other sectors of the economy (44pc of all our exports of goods and services now go to the EU, a fast-declining share). Even more importantly, as TheCityUK points out in its new report, “over the next 10-15 years, 90pc of global economic growth is expected to be generated outside Europe and these markets – developed and emerging – must be a priority focus for the country post-Brexit”. In other words, we need to fight to retain as much access as possible to the EU, but our long-run future lies in trading a lot more with other economies, including emerging and already developed countries.

A recent Financial Services Briefing by Shanker A Singham and Victoria Hewson, published by the Legatum Institute, put this very well. It points out that international and wholesale banking business related to the EU is between 20pc-25pc of the total. That’s a big number, helped by the availability of passporting, but still means that a huge amount of business is conducted by the City without any passporting mechanism. We shouldn’t obsess about the minority of activity that goes to the EU while neglecting the majority that doesn’t.

Allister Heath describes himself an optimist.  He certainly is but a very sensible rather than greedy optimist.  If you can keep that emotional balance and are interested in the markets, and also look at charts for evidence of relative strength plus the eventual crossover to weakness, you will do well in the markets. 

A PDF of Allister Heath’s article is in the Subscriber’s Area, along with a second article.

Francois Fillon’s French presidential campaign plunged deeper into trouble on Tuesday after further revelations about his use of public funds to employ members of his family.

The Republican candidate’s daughter and son allegedly earned 84,000 euros ($91,000) from 2005 to 2007 while working for him when he was a Senator, Le Canard Enchaine said. His wife, Penelope Fillon, earned more than 900,000 euros during over a decade as a parliamentary assistant and a contributor to a magazine, according to Le Canard.

The newspaper’s initial report on Penelope’s job last week triggered a prosecutor to open a preliminary probe into the family’s affairs. The candidate says he’s innocent.

“I am confident, I am calm and I’m waiting for the end of the investigation,” Fillon said in Paris. “Never has a situation like this one occurred. Never, three months before an election, was such an big and professional operation set up to eliminate a candidate other than through a democratic vote. Everyone will reap the consequences.”

The scandal has gripped France over the last week and offers the prospect of another twist in a race that has the nationalist Marine Le Pen leading the polls and has already seen household names like President Francois Hollande and his predecessor, Nicolas Sarkozy, fall by the wayside. That said, polls show that Le Pen is still a long shot for victory in the second round of voting, with Emmanuel Macron also poised to benefit -- at least in the short term -- from Fillon’s woes.

“His image has been seriously damaged, and what’s worrying for him is that even among his supporters many are not convinced,” said Yves-Marie Cann, director of political studies at pollster Elabe in Paris. “The fire is not contained.”

We have known for a long time that 2017 was going to be an important year in terms or EU elections.  Well, we are only one month into the year but it would be premature to describe it as a non-event.  This would be a scandal in the UK but my impression is that the French may only shrug their shoulders. 

Interestingly, Marine Le Pen continues to lead the polls while everyone who claims to be knowledgeable about French elections says she has no chance.  After all, the French have never been shy about doing what they want in the EU, where they are the junior partner to Germany. 

That may sound like groupthink but why take the risk of voting for someone who actually wants to leave the EU?  Well, the French economy has experienced a depressingly large amount of terrorism over the last year or so.  The crippling strikes continue; it is so much harder to run a business in France with all the French/EU regulation, and the brain drain continues. 

London is described as the fourth or fifth largest ‘French City’, and millions of classy, well-educated and commercially successful French families are thriving over here.  They spend their holidays in France, understandably, but I see no evidence that they are thinking of leaving because of the Brexit vote.    

As a matter of strict objective fact, Donald Trump’s trade guru is correct. Germany is the planet’s ultimate currency manipulator.

The implicit Deutsche Mark is indeed “grossly undervalued” The warped mechanism of monetary union allows Germany to lock in a permanent ‘beggar-thy-neighbour’ trade advantage over Southern Europe, inflicting mass unemployment on the victim countries and blighting their futures.

Whatever you think of Peter Navarro’s trade philosophy, he is right that Germany’s chronic, huge, and illegal current account surplus - 8.8pc of GDP - saps global demand and seriously distorts the world economy.

Let us concede that this super-surplus is an accident of history, rather than the result of a strategic conspiracy by Chancellor Helmut Kohl in the early 1990s. The German people never wanted the euro in any active sense.

The Bundesbank went to some lengths to head off the creation a ‘greater euro’ with too many ill-suited countries, constructed on the unworkable foundations that we can all see so clearly today.

That said, monetary union was never entirely innocent. The German Chambers of Commerce and Industry (DIHK) railed against the periodic devaluations by Italy and France in the various fixed exchange experiments of the pre-euro era. They were fully aware of the mercantilist advantage of fixing the D-Mark rate in perpetuity, and their influence played its part in the German acceptance of the Maastricht Treaty.

Once the euro was underway, GermaAs a matter of strict objective fact, Donald Trump’s trade guru is correct. Germany is the planet’s ultimate currency manipulator.

The implicit Deutsche Mark is indeed “grossly undervalued” The warped mechanism of monetary union allows Germany to lock in a permanent ‘beggar-thy-neighbour’ trade advantage over Southern Europe, inflicting mass unemployment on the victim countries and blighting their futures.

Whatever you think of Peter Navarro’s trade philosophy, he is right that Germany’s chronic, huge, and illegal current account surplus - 8.8pc of GDP - saps global demand and seriously distorts the world economy.

Let us concede that this super-surplus is an accident of history, rather than the result of a strategic conspiracy by Chancellor Helmut Kohl in the early 1990s. The German people never wanted the euro in any active sense.

The Bundesbank went to some lengths to head off the creation a ‘greater euro’ with too many ill-suited countries, constructed on the unworkable foundations that we can all see so clearly today.

That said, monetary union was never entirely innocent. The German Chambers of Commerce and Industry (DIHK) railed against the periodic devaluations by Italy and France in the various fixed exchange experiments of the pre-euro era. They were fully aware of the mercantilist advantage of fixing the D-Mark rate in perpetuity, and their influence played its part in the German acceptance of the Maastricht Treaty.

Once the euro was underway, Germany then pushed through policies in labour law and tax policies that amounted to an ‘internal devaluation’ - cutting unit labour costs in manufacturing in the single year of 2005 by 4.4pc, for example - and continued to screw down its intra-EMU exchange rate long after there was any justification for doing so. The effect was to further entrench commercial supremacy.

Large current account surpluses are invariably the result of tax policies, regulations, hidden barriers, and an overall governing structure that punishes consumption and fosters exports. Germany - for example - forces households to cross-subsidize the power costs of export industries.

This would not matter much if Germany had a floating exchange rate: the currency would correct for the distortions over time. But such practices within the euro system are an entirely different matter. Nothing self-corrects.

It is easy to lose sight of what is going on here, with all the insults, protests and inflammatory tweets appearing every day.  Trump certainly has an obnoxious side and he is not afraid to use it.  This is in some respects a very effective verbal military campaign. 

Inevitably there will be costs with this approach, particularly when Trump backs a questionable cause, as will certainly happen.  However, he has picked an awesomely strong business team – the best that I have ever seen. 

In confronting China and Germany, forget Marquess of Queensberry Rules – Trump is a street fighter.  Pick the right targets, Donald. 

A PDF of AE-P's column is in the Subscriber's Area. 

I am delighted to say that our guest speaker at this event will be the interesting Charles Elliott, founder of Inflection Point Investments.  The first half of his talk will be on ‘Mega-Cap Tech’, including big and well-known names such as Apple, Microsoft, Google/Alphabet & Amazon.  This will be followed by ‘Emerging Tech’ in which he specialises. 

The new brochure will be available shortly.  

Last week, much attention was rightly focused on the Dow Jones Industrial Average as it breached the 20,000 mark for the first time.

In past cycles, such peaks have led to bouts of euphoria as investors had a fear of missing out on further gains. Although a similar feeling could be motivating some investors today, many seem to still be scarred by the two crashes of the past 16 years or so in which the market was cut in half each time.

The thinking is that any time stocks reach a new high it must mean that we are close to a peak that will surely bring the market crashing down. That is always a possibility, of course, but investors in stocks have to remind themselves that they will see many highs in a lifetime of investing. Generally speaking, stocks go up most of the time. A few of those highs will be temporary peaks but most will simply lead to even more highs down the road.

For example, looking at over 100 years of data on the Dow going back to 1915 shows that stocks have had 1,252 highs. That works out to an average of about 12 new highs every year. Assuming the average investor is in the markets for 40 years, that would be almost 500 highs in a lifetime of investing in stocks.

This table shows the number of highs by decade going back to 1915: (see article)

There was an enormous dry spell following the Great Depression, but beyond the aftermath of that cataclysmic period, new highs in stocks are perfectly ordinary. Almost five percent of all trading days over this time span have seen new highs.

To take this a step further, it can also be useful to look at how well stocks have performed in the ensuing years after reaching highs. This table shows how the Dow has performed one, three and five years after reaching a new high:

The average total returns for one, three and five years are right around the long-term average in the stock market  of about 9-10 percent annually over this period. And stock market returns have been positive for most of the time following these events over all three time horizons.

There are some caveats. If five percent of all trading days have led to highs, That means stocks are trading below a high 95 percent of the time. So the majority of the time stocks are in a state of drawdown, which can affect the psyche of any investor who doesn’t understand this fact. Most of your time as a stock market investor is spent in a state of regret.

Investors will need to click on the article above to access these important tables but few of you will be surprised.  The last two sentences posted above, which I have set in bold, are hugely significant and should never be forgotten.  Moreover, they should be shown to any novice investor. 

If you have a pessimistic disposition, you will struggle to make money in stock markets over the longer term.  

It’s time for Jorge Paulo Lemann to get back in the hunt.

That, anyway, is the word inside the food industry, where the Brazilian billionaire has been doing blockbuster deals roughly every two years. In 2013, he persuaded Warren Buffett to team up on H.J. Heinz. Then, in 2015, the duo orchestrated the $55 billion merger of Heinz and Kraft Foods.

“It’s logical that this would be the year,” said David Palmer, a food industry analyst at RBC Capital.

The talk has traders on edge. Last month, a story in a little-known Swiss magazine, resurfacing well-worn speculation about Lemann’s plan to buy Mondelez with Buffett, spurred an immediate pop in the U.S. snack giant’s shares. (They soared 28 percent in just a few minutes.) So far, no deal has been announced. Regardless, the question of what Lemann might go after in 2017 has just about everyone grasping for leads. Besides Mondelez, some other names include General Mills, Kellogg and Campbell Soup.

And:

Buffett’s Berkshire Hathaway is Coke’s biggest shareholder (with a 9 percent stake) and Lemann once called the company his dream acquisition.

To swallow the $179 billion soft-drink maker, an offer would probably need to come from Anheuser-Busch InBev, which Lemann controls along with other Brazilian billionaires and wealthy Belgian families. AB InBev and Coke both declined to comment.

As recently as 2015, Buffett said a deal was “very unlikely” because Coke wasn’t looking for one. But last month, his son Howard announced he wouldn’t stand for re-election to the company’s board. CEO Muhtar Kent also said he will step down next year and hand the reins to his lieutenant, James Quincey. That’s fueled speculation a deal is more likely now.

“This seems like a situation tailor-made for a 3G transformation,” said Steve Wallman, a fund manager and longtime Berkshire shareholder.

Warren Buffett’s cash and cash equivalents currently sits at $85 billion, according to Bloomberg.  That is Berkshire Hathaway’s biggest cash holding since at least 1900 and most likely an all-time record.  Moreover, it is presumably still growing.  

We can interpret that in two ways.  1) Buffett is concerned about valuations and is building-up his cash reserves so that he can buy following at least a sharp correction. This has proved to be his preferred strategy over the decades.   2) Buffett may feel that with global GDP improving, plus Trump’s domestic economic policies, Wall Street may be right in propelling US share indices to new all-time highs.  In that event, he may help Jorge Paulo Lemann to arrange a buyout of Coca-Cola.

This item continues in the Subscriber’s Area. 

David
Red is the new black. Some serious power dressing there!!
All the best
Clive

Indeed, and I trust your lady is now resplendent in that Amanda Wakeley bargain, or perhaps to avoid comparisons, in the stunning wool-crepe blazer from Alexander McQueen shown at the back of the article.  I am sure it will catch a few discrete eyes when you bring her to Markets Now.   

President Donald Trump’s escalating threats against Mexico have led to calls for a guerrilla struggle of national resistance from across the political spectrum, uniting the Mexican people as almost never before in modern times.

A string of elder statesmen warn that the country faces grievous injury and is now in a state of de facto hostilities with Washington, forcing Mexicans to fight back on every front and whatever the cost.

“An eye for an eye, and a tooth for a tooth,” said former president Vicente Fox. “Trade is important, jobs are important, but they are not as important as dignity. We must not be cowed or it will paralyse us,” he said.

Felipe Calderon, who led the country a decade ago, said Mexico must retaliate immediately and where it hurts most, targeting counter-sanctions against the districts of US congressmen who have been the most vocal supporters of Mr Trump’s plans for a border wall and his talk of trade tariffs.  

“We are seeing the behaviour of a bully. He who declares war against us will have to respond. There are going to be costs. Mexico will suffer. But we’ll show the size of our country and what our people are made of,” he said.

“We must have a retaliation strategy in every area where the bilateral relationship with Mexico has value. We must put everything in the balance,” he told a forum on Mexico City’s Televisa.

Mr Calderon said Mexico should fight tactically in the US courts and global bodies to tie the US administration in knots, targeting the lines of cleavage in Mr Trump’s own political base. It is a strategy used before in a cross-border trucking dispute, but this time it would be on a much greater scale.

“We must revise the whole relationship point by point, including the presence of US agents in our country,” he said. Anti-terror co-operation on Isis should be frozen.

“They have to understand that they cannot take Mexican support for granted. Trump has no idea what this means in terms of security and fighting organised crime and narco-traffic,” he said.

Could we have already seen the best of Trump in less than ten days as President?  I certainly hope not as that would be the ultimate nightmare, and not just for the USA.  

I am assuming that he is more sensible than that.  However, what we know is that he has a huge ego and shoots from the hip, not least on a range of topics which neither he nor any other individual could fully understand on their own.

I credit Trump with appointing a strong, independently minded cabinet.  While they are all very likely to be appointed, Democrats are in no hurry to end the hearings, which will not be completed before sometime in February.  Rex Tillerson, Secretary of State, is the most important and very capable but he will not hold office before this Wednesday, at the earliest.  

I do not think any of them would hesitate to confront Trump on a serious issue, but we will soon find out.  Trump respects them so he is likely to listen.  Meanwhile, Trump has already started some potentially destructive fires, with countries, some of his own powerful CEOs and the US population which did not support him. 

Wake up Trump and smell the coffee.

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

I am delighted to say that our guest speaker at this event will be the interesting Charles Elliott, founder of Inflection Point Investments.  The first half of his talk will be on ‘Mega-Cap Tech’, including big and well-known names such as Apple, Microsoft, Google/Alphabet & Amazon.  This will be followed by ‘Emerging Tech’ in which he specialises. 

The new brochure will be available shortly.  

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

It looks as if, in the future, the global business scene will have three elements. A smaller top tier of multinational firms will burrow deeper into the economies of their hosts, helping to assuage nationalistic concerns. General Electric is localising its production, supply chains and management. Emerson, a conglomerate that has over 100 factories outside America, sources about 80% of its production in the region where it is sold. Some foreign firms will invest more deeply in American-based production in order to avoid tariffs, if Mr Trump imposes them, much as Japanese car firms did in the 1980s. This is doable if you are large. Siemens, a German industrial giant, employs 50,000 in America and has 60 factories there. But midsized industrial firms will struggle to muster the resources to invest more deeply in all their markets.

Politicians will increasingly insist that companies buying foreign firms promise to preserve their national character, including jobs, R&D activity and tax payments. SoftBank, a Japanese firm that bought ARM, a British chip company, in 2016, agreed to such commitments. So has Sinochem, a Chinese chemicals firm that is buying Syngenta, a Swiss rival. The boom in foreign takeovers by Chinese firms, meanwhile, may fizzle out or explode. Many such deals, reliant on subsidised loans from state banks, probably make little financial sense.

The second element will be a brittle layer of global digital and intellectual-property multinationals: technology firms, such as Google and Netflix; drugs companies; and companies that use franchising deals with local firms as a cheap way to maintain a global footprint and the market advantage that brings. The hotel industry, with its large branding firms such as Hilton and Intercontinental, is a prime example of the tactic. McDonald’s is shifting to a franchising model in Asia. These intangible multinationals will grow fast. But because they create few direct jobs, often involve oligopolies and do not benefit from the protection of global trade rules, which for the most part only look after physical goods, they will be vulnerable to nationalist backlashes.

Since I wrote a book championing the big global companies, which dominate their respective niches, we refer to as Autonomies and co-manage a fund devoted to investing in them I think it is safe to say I have a bias in commenting on this story. Nevertheless, it raises some important questions.

Big global companies do well when the global economy is expanding so a transition from synchronized global monetary stimulus to synchronized global fiscal stimulus is a positive potential development which is already being reflected in stock prices. In addition, the potential for lower US corporate taxes is an important consideration since it is still the world’s largest economy by a long shot.  

Thank you for this extensive overview of the rates and currencies situation, which deservedly so need our full attention.

I will add to the “puzzle of what to make of all this" 4 further concerning facts

1 The evidence of constant decline in the global trade, referenced by a flow chart from the Dutch Central bank, I sent to David sometimes ago.

2 The concern of extensive froth in the supposedly growth of earnings supported by ever extended buybacks and ever extended gap (pun intended) between GAAP vs non GAAP while revenues are still stalling. This may be a strong argument for repatriation of $ to support balance sheets, but as any action begets a reaction, please see No 4

3 The leverage everywhere at levels that may not be healthy in this volatile environment.

4 And what could concern mostly everyone is the growing scarcity and consequently cost of US$ :

 

The world needs a growth spurt to help mitigate the issues with leverage and unimpressive lopsided expansions that have resulted from quantitative easing which you highlight above. Without growth in GDP and earnings, the inevitable conclusion to a period of expanding multiples is either a bubble or at least a period of heightened volatility. 

Three massive battery storage plants—built by Tesla, AES Corp., and Altagas Ltd.—are all officially going live in southern California at about the same time. Any one of these projects would have been the largest battery storage facility ever built. Combined, they amount to 15 percent of the battery storage installed planet-wide last year.

Ribbons will be cut and executives will take their bows. But this is a revolution that’s just getting started, Tesla Chief Technology Officer J.B. Straubel said in an interview on Friday. “It’s sort of hard to comprehend sometimes the speed all this is going at,” he said. “Our storage is growing as fast as we can humanly scale it.”

A Fossil-Fuel Disaster
The new battery projects were commissioned in response to a fossil-fuel disaster—the natural gas leak at Aliso Canyon, near the Los Angeles neighborhood of Porter Ranch. It released thousands of tons of methane into the air before it was sealed last February.

In its wake, Southern California Electric (SCE) rushed to deploy energy storage deals to alleviate the risk of winter blackouts. There wasn’t any time to waste: All of the projects rolling out this week were completed within 6 months, an unprecedented feat. Tesla moved particularly nimbly, completing in just three months a project that in the past would have taken years. 

The Porter Ranch gas leak made headlines in Los Angeles all last summer but it was a blessing for Tesla because it gave the company an opportunity to demonstrate how it can deploy its batteries at scale in a tight timeframe. 

Batteries are an essential piece of the renewable energy, electric vehicle puzzle. Every innovation that brings down battery costs has an outsized effect on a host of other sectors. Tesla, with its now completed giga-factory, is well placed to benefit from these emerging themes. 

The steady rise of US shale production has stalled a strong week of oil price gains, as market fears grow that the extra oil flows could scupper Opec plans to drain the oversupplied market knocked a dollar from the price.

Oil prices have been buoyed this week by optimism that the deal between producers in the Organization of Petroleum Exporting Countries and major producers outside of the cartel is beginning to relieve the global glut.

The market climbed from around $54 a barrel late last week to $56.42, almost 5.5pc higher than the price before Opec agreed the historic supply deal in November.

By midday the oil price had retreated to $55.60 after new data showing the extent of the US shale industry recovery reignited market jitters.

US oil and gas flows were decimated by the two year oil rout due to higher costs for rig operators in shale-rich pockets of the States than in major producers in the Middle East and Russia.

As oil prices have doubled over the last year from lows of less than $28 a barrel to over $50 many shale producers have been able to restart flows, threatening the price rises which have allowed their revival in the first place.

Analysts at brokerage Cenkos said that the latest data shows that US output has risen by more than 6.3pc over the last six months, with some concerned that further rises will offset moves by Opec to curb output.

“Traders will look closely at the weekly rig count data, set to be released this afternoon,” Cenkos added.

Crude oil may still be the world’s most important commodity in terms of production and consumption but its price volatility this year will probably be less than what we see for most other resources.

OPEC has abandoned its ruinous death spiral policy with which it was trying to wipe out the US shale oil industry.  Less productive shale resources have been abandoned and debt-leveraged shale companies have closed, but the US is still a major producer.  Moreover, the technology of shale production is now more efficient than ever. 

Therefore we are very unlikely to see further attempts by OPEC to flood the market with oil.  And while it was inevitable that US shale production would increase as the price rose above $50, the US oil industry has no interest in driving crude oil prices back below $30. 

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

Theresa May will provide the first test for how world leaders can deal with Donald Trump when she arrives in the U.S. to welcome the new president to the global stage and lay the groundwork for a U.S.-U.K. trade deal.

“As we rediscover our confidence together –- as you renew your nation just as we renew ours –- we have the opportunity, indeed the responsibility, to renew the special relationship for this new age,” the U.K. prime minister will tell Republican lawmakers gathered in Philadelphia on Thursday, according to excerpts from her prepared remarks. “We have the opportunity to lead, together, again.”

The good news for May, who’s due to meet Trump at the White House on Friday, is that he’s eager to cement relations and nail down a U.K. trade deal too -- for his own reasons. He’d like to further drive a wedge into a fractured Europe and strengthen at least one trade relationship as he exits the Trans-Pacific Partnership and prepares to renegotiate Nafta.

A close relationship between the U.S. and U.K. would prove that neither nation is turning inward -- Trump after an election victory fueled by his “America First” campaign, and May as she takes Britain out of the European Union after last year’s Brexit referendum.

So May is opting to brush aside the worldwide protests that followed Trump’s inauguration and worked hard to secure Trump’s first meeting in office with a foreign leader.

People are overreacting to Trump’s brashness and underestimating May.  These two leaders have already strengthened the Special Relationship well beyond what we saw during the Obama years.  This will be good for both countries.   

2017 presents markets with significant potential policy changes on taxation, regulation, healthcare, infrastructure and trade.  After years of gridlock, where the main focus of policy has been on central banks, now the focus is squarely on the new administration and Congress.  On balance, we expect global stocks and interest rates to rise.

Since November, the prevailing mood of investors has been one of optimism about faster economic earnings growth from lower taxes and less regulation, and we agree.  For now, the more alarming rhetoric on trade seems to have been viewed as part of a negotiation.  At RiverFront, we recognize that policy negotiation through tweeting is just a part of the new world.  Our challenge is to avoid the emotional cycle generated by the headlines and seek to assess policy changes that we believe will actually occur.  For now, we will seek to make changes when we believe assets become mispriced.  The baton pass from the dry language of central banks to the colourful one of politicians is our new reality.  

There is much of interest in this short letter, and I commend it to subscribers.  

The Weekly View is posted in the Subscriber’s Area.

I am delighted to say that our guest speaker at this event will be the interesting Charles Elliott, founder of Inflection Point Investments.  The first half of his talk will be on ‘Mega-Cap Tech’, including big and well-known names such as Apple, Microsoft, Google/Alphabet & Amazon.  This will be followed by ‘Emerging Tech’ in which he specialises. 

I can’t wait.

A link to this week's big picture long-term vdieo is posted in the Subscriber's Area.

Polls suggest that National Front leader Marine Le Pen will make it to France’s run-off vote on May 7, giving her a shot at claiming the presidency on anti-euro, EU-skeptic ticket. She shared a stage last weekend with Frauke Petry of Alternative for Germany and Geert Wilders, whose anti-Islam platform has helped propel his Freedom Party to within reach of winning the March 15 Dutch election.

Europe’s anti-establishment forces are drawing inspiration from Donald Trump’s surprise elevation to the U.S. presidency and unexpected victory of Brexit supporters in last year’s referendum. Another common strand is an anti-immigration stance that has flourished during the worst refugee crisis since World War II, with more than one million people fleeing war and oppression in Syria, Afghanistan and elsewhere having sought asylum in Germany alone.

Gabriel, who is poised to become German foreign minister in a cabinet reshuffle allied to the Sept. 24 election, pointed to France’s two-round ballot as the key moment that will shape Europe’s destiny. While no recent poll has shown Le Pen coming close to winning the second round, Brexit and Trump’s victory have made political analysts and investors reluctant to rule anything out.

“If Europe’s enemies, after Brexit last year, manage once again in France or in the Netherlands to be successful, then the threat to us is the collapse of the greatest civilization project of the 20th century, the European Union,” Gabriel said in a speech to lower-house lawmakers in Berlin on Thursday.

 

No one has much faith in polls anymore because people lie about their intentions and those that respond to polls are often not representative of the swing voters that shape results. Lurches to the right in the UK and USA represent dissatisfaction with the status quo. France’s generous social programs have helped nullify populist uprisings until now, but an unemployment rate stuck at 10.2% and youth unemployment of 24% are intransigent problems that the current political apparatus does not appear to have a solution for.

"These countries are under enormous fiscal pressure and are reacting to it," said Samar Maziad, a sovereign analyst at Moody’s.

President Mauricio Macri has made Argentina’s economy more competitive since he took over in 2015, and an 8 percent gasoline price increase this month has contributed to Buenos Aires-based YPF’s recent rally to the highest in more than a year. Argentina is moving to completely liberalize prices by 2018. YPF declined to comment on its stock price.

Mexico has lifted prices about 20 percent this month as it opens state-owned Petroleos Mexicanos’s monopoly to foreign competition. It has pledged to completely phase out fuel subsidies over the course of the year. The so-called “gasolinazo,” or fuel-price slam, sparked protests across the country that curtailed fuel distribution and has left President Enrique Pena Nieto’s approval rating at an all-time low of 12 percent. Mexico is planning another fuel price increase on Feb.

The main outlier is Venezuela, the region’s biggest exporter with the cheapest gasoline in the world at about 15 U.S. cents to fill a tank, even after the first price increase in almost two decades last year. Colombia got a head start when it began tracking international prices in 2008, a year when fuel subsidies contributed to an economic contraction.

In Brazil, where subsidies drained an estimated $40 billion from Petrobras between 2011 and 2014, Chief Executive Officer Pedro Parente has shown greater independence from the government to set fuel rates. Under Parente, the company formally known as Petroleo Brasileiro SA set a new price methodology in October and has implemented five adjustments since then.

 

Fuel subsidies are politically popular but ruinous for oil companies. Subsidies represent a drag on finances which are at partially offset when oil prices are high but represent an existential threat when prices are low. The collapse of regional currencies, massive deficits and challenges to growth have resulted in populist socialist governments being replaced with more fiscally minded right wing parties across the continent. As commodity prices recover that is translating into their stock markets beginning to do better. 

"The Chinese holiday can exaggerate some of the moves," Bob Haberkorn, a senior market strategist at RJO Futures in Chicago, said in a telephone interview. "We’re going to get lighter volume coming in. A lot of the focus is moving into risk assets."

Gold futures for April delivery fell 0.1 percent to $1,191.40 at 11:08 a.m. on the Comex in New York. Futures earlier fell as much as 0.8 percent, touching the lowest since Jan. 11. The four-day losing streak would be the longest since Nov. 14.

After touching a two-month high earlier this week, gold’s rally has withered as surging stock markets fueled investor appetite for risk. The Dow Jones Industrial Average climbed above 20,000 for the first time this week and the MSCI All- Country World Index is near a record.
The metal pared earlier losses Friday after a report showed U.S. economic growth slowed more than forecast last quarter on the biggest drag from trade in six years and more moderate consumer spending. Business investment picked up, which may be a harbinger for faster expansion in 2017.

“We expect full year Chinese demand to still fall short of levels seen in 2015,” Nell Agate, a Citigroup Inc. metals analyst, said by e-mail from London. “It’s possible that Chinese jewelry sales are likely to slow as the Chinese break for new year festivities.”

 

Gold is at a pivotal juncture right now. Having unwound the majority of its overextension relative to the trend mean the questions now are how much of the short-term rally can be sustained, whether gold can successfully post a higher reaction low and subsequently hold a move above $1200 to confirm a return to demand dominance. 

The spread of 2-year US Treasury yields over German and Japanese yields - the classic driver of currency moves - has doubled to over 120 basis points since June. This is drawing powerful flows of money into US debt markets. It is a formula for a super-dollar, and it has further to run.

Everything has a late-cycle feel to it. The Cape-Shiller price-to-earnings ratio for the S&P 500 stocks is already above 24, higher than any time over the last 130 years with the exception of the 1929 and the dotcom peak in 2000.

Can Wall Street go higher? Certainly. The creator of the measure, Nobel laureate Robert Shiller, told me in Davos that there may be a final blow-off surge. Mood matters - he argues - and the animal spirits unleashed by Trump's pledge to cut taxes and slash regulations by 75pc could push the Cape-Shiller ratio towards the dotcom record of 45.

This would be followed by a cathartic crash and a day of moral judgment. The Shiller view is that Trump's own supporters will turn against him - and against his wealthy swagger - just as culture turned in the 1930s and people rejected the Coolidge ethos of the Roaring Twenties.

There is no sign yet that Mr Trump is willing to back down on any of his core policies. So my suspicion is that he will try to break out of this dollar trap by leaning on the Fed to delay rate rises and ultimately by ordering intervention to hold down the US exchange rate.

There are precedents for such currency action. The Swiss National Bank vowed in 2011 to spend unlimited sums to stop the franc rising above €1.20 as it battled deflation. The Japanese did it on a nuclear scale in 2003. The Chinese pursued a mercantilist strategy during its growth-spurt, keeping the yuan weak to gain export share.

Recourse to such methods by the holder of the paramount reserve currency would be a different kettle of fish. It would amount to a global free-for-all, a Hobbesian monetary disorder.

Currency intervention is by law a US Treasury prerogative. The New York Fed must in effect do what it is told, if ever ordered to buy foreign bonds. This is the means by which Mr Trump can bend the Fed to his will. Does anybody really think he will resist such a temptation?

The Donald Trump bull market in US stocks has morphed into a Trump global uptrend, which has been very powerful in a number of countries since his election on 4^th November.  Following that date it has been one-way traffic in the US stock market which always exerts a strong influence on equities in many other countries.

Why have the US and a number of other stock markets been so strong?  1) People were underinvested before the election result was known; 2) There were a number of short positions in the market; 3) Investors like Trump’s programmes for tax cuts and fiscal spending; 4) Animal spirits have been reawakened and not just in the US; 5) Interest rates remain low although they have started to rise in the US and many other countries will eventually follow this lead; 6) Investment liquidity has increased as fixed-interest investors sense that the bond market bubble is beginning to burst, causing them to sell and transfer some those funds to stock markets. 

How long will this bull market last?

This item continues in the Subscriber’s Area.  

It’s not what every woman would do as she prepares to meet Donald Trump, but on her flight to the U.S., Theresa May was sounding distinctly flirty.

Asked how a pastor’s daughter with a reputation for caution would deal with a president regarded as brash and impulsive, May smiled. “Haven’t you ever noticed?” she said. “Sometimes opposites attract?”

While some countries seek distance from the billionaire Trump, May is going all-out for the closest possible relationship. As she prepares to meet him, the premier is hoping to capitalize on that bond as Britain negotiates its withdrawal from the European Union.

“We’re both very clear that we want a trade deal,” May told reporters aboard her Royal Air Force plane. “It will be in the interests of the U.K. from my point of view, that’s what I’m going to be taking in, into the trade discussions that take place in due course.”

On Friday, May will become the first foreign leader to meet Trump at the White House since he took office and ripped up the rule book, from trade policy to his use of Twitter. However, she flew into a diplomatic storm after Mexican President Enrique Pena Nieto canceled plans to see Trump because of a growing dispute over the wall he wants built along the border.

Reagan-Thatcher

May’s own playful overture will be welcome in the White House -- where Trump has talked of recreating the touchy-feely relationship between Ronald Reagan and Margaret Thatcher -- but they risk causing unease in Britain.

Tens of thousands of Britons joined the worldwide protests the day after Trump’s inauguration, attacking his statements about women. May faces domestic calls to hold Trump to account over comments he’s made on torture and over his climate policy.

A strong, free-trade relationship between the USA and UK can only be in their mutual interests.  Moreover, Trump’s support will strengthen Britain’s hand in dealing with a disorganised and angry EU.  It is a wakeup call for EU leaders, showing them what they have to lose with self-destructive talk of “punishing” Britain wanting to regain its sovereignty.     

Supermarket price wars will limit the strain on household budgets this year, the Chancellor said on Thursday, as official figures cemented the UK's position as the fastest growing major advanced economy in 2016.

Philip Hammond said the "incredible market share war" between supermarkets over the past few years would help to curb shop price rises and support consumer confidence, as he signalled that growth in 2017 could outpace official forecasts.

It came as data published by the Office for National Statistics showed the UK economy grew by 0.6pc in the final three months of 2016, matching the expansion in the previous quarter.

This is faster than the 0.5pc growth predicted by economists and compares with the Treasury's dire predictions ahead of the EU referendum that a vote to leave the bloc would trigger a year-long recession.

Thursday's figures mean the economy expanded by 2pc over the year.

While Britain is the first G7 nation to report fourth-quarter growth figures, International Monetary Fund estimates suggest that growth in Germany and the US, which are expected to have expanded by 1.7pc and 1.6pc respectively last year, will not outpace the UK.

Mr Hammond said he believed that the current subdued levels of business investment would "come back and mak[e] a significant contribution" to growth as the country's future trading relationship with the EU became clearer.

This is significantly better than Project Fear groupthink led us to believe, and Sterling’s devaluation has helped the economy to grow.  Nevertheless, we are still in the EU, albeit on the way out.  The Trump / May Special Relationship free-trade deal will be a big boost for the UK economy, cushioning any temporary downside after Brexit becomes a reality.  

(See also: Trump Greets U.K.’s May as World Leaders Look For Cues, from Bloomberg) 

Well done Gina Miller. Not only has she won a famous legal victory but she has clarified what the June 23 referendum was all about. For many who voted to leave the European Union it was about restoring control and sovereignty to our nation.

So perhaps it was not what Mrs Miller intended, but the case before the Supreme Court has made a reality of Brexit. It can now proceed with the full wind of the law and Parliament in its sails. The very people who for decades were utterly indifferent to the fact that our Parliament had been emasculated by its self-imposed subservience to supra-national institutions have given it a new lease of life.

By challenging Brexit in order to stop it she has supercharged it. Remainers have become the great defenders of the sovereignty they previously wanted to see pooled.

Mind you, for a legal hearing of such constitutional magnitude it ended with something of a whimper. The Supreme Court reasserted what most people had always thought to be the case – that the Government cannot change the law by executive fiat. Indeed, even the Government never argued that it could. 

What was at issue was whether triggering Article 50 amounted to a change in the law. But so much of our legislation is tied up with EU membership that once the Attorney General, Jeremy Wright, had accepted that the departure procedure was irrevocable he was going to lose. His only point was that this was a treaty matter and therefore fell within the scope of an executive prerogative, but the judges did not agree (or rather, eight of them didn’t; the fact that three justices found for the Government shows this was not as clear cut as many had assumed).

What is less easy to explain is why the Remain side also accepted that triggering Article 50 was an irrevocable act. Arguably, Lord Pannick QC had to make this point to win his legal case, but politically it means that any Remainer hope of thwarting Brexit has been scuppered. The main parties too have declined to stand in its way, accepting that, to all intents and purposes, the June 23 referendum was the moment when we decided to leave. This is an important constitutional point that the court has not really addressed.

This was an interesting, if somewhat complicated legal decision, which Mrs May’s government was well prepared for.  MPs who oppose the Government will have their say, although they have already had their chance to vote in the Referendum.  Additionally, public support in favour of Brexit is much stronger today than it was at the Referendum on 23^rd June.  The Project Fear campaign was clearly wrong, and the EU has hardly distinguished itself with its post-Referendum threats.

If the Government cannot get Brexit past Parliament and the House of Lords – unlikely but possible – the Government will call a General Election and win with an increased majority.     

I am delighted to say that our guest speaker at this event will be the interesting Charles Elliott, founder of Inflection Point Investments.  The first half of his talk will be on ‘Mega-Cap Tech’, including big and well-known names such as Apple, Microsoft, Google/Alphabet & Amazon.  This will be followed by ‘Emerging Tech’ in which he specialises. 

I can’t wait.

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

Time costs money for Italy, due to collective action clauses (CACs) and thus, purely on financial grounds, it reduces Italexit risk and makes any voluntary debt re-profiling a better option to eventually sustain its borrowings, Mediobanca says in note.

Highlights no growth undermines debt sustainability; Sentix Index, which estimates the one-year probability of Italy leaving the monetary union based on the assessment of investors, signals stress

Says redenomination in any Eurozone country is a function of the freedom allowed on bonds issued under domestic law and the constraints of the recently introduced EU discipline on
CACs 

Quantifies cost of re-denomination, says four variables suggest EU280b loss, partly offset by EU191b gain from the Lex Monetae on bonds under domestic law

Compares CACs and non CACs pairs of Italian govies displaying similar features in order to test Mediobanca’s “time costs money” finding; that means as time goes by the
financial incentive for redenomination declines

Data suggest 30bps yield premium on 3.5yr non CACs bonds actually drops to 10bps on 12yrs

Says “Quanto” spread captures the “convertibility risk” implied in the premium between USD- and EUR-denominated CDSs

Data suggest that at end 2016 for the first time Italy’s “Quanto” exceeded Spain’s, confirming Italy crucial role for eurozone future given a 90% correlation the brokerage notes between Italexit probability and a euro break-up probability

I think most people would agree that if Italy quits the Euro the currency will be unable to function as a cohesive unit. Italy would use the opportunity of devaluation to flood the Eurozone with cheap goods which would encourage other countries to follow its lead. That’s not news and the EU is fully aware of the implications of a large country like Italy leaving the currency union. 

Retail sales rose 10.9 percent in December from a year earlier, the best monthly result in 12 months. Chinese imports of Swiss watches are up after falling for seven consecutive months through July, rising 7.9 percent in November from a year earlier. Led by its best-selling Macan SUV, Porsche had a 12 percent sales increase in 2016. Tiffany on Jan. 17 reported “strong growth” in China. On Jan. 19, Luca Marotta, chief financial officer of Rémy Cointreau, said the outlook for the Chinese New Year was “very, very positive.” Xi hasn’t ended his anticorruption drive, but its chilling effect on spending is easing. “A rebound across all luxury categories is now in progress,” Bloomberg Intelligence analyst Deborah Aitken wrote on Jan. 9.

During the Lunar New Year holiday, millions of Chinese will travel and shop at home and overseas. Bookings for international air travel made in December for Chinese New Year rose 9.8 percent from the previous year, according to ForwardKeys, an analyst of tourism data. Mainland tourist arrivals in the gambling hub of Macau jumped 7.8 percent in December, the largest increase since February 2015. Chinese consumers “are still very confident,” says Amrita Banta, managing director of Agility Research & Strategy, a consulting firm focusing on the affluent.

In Macau, tourist arrivals from mainland China for the first three days of the holiday period increased 9.1 percent to 234,000 compared to Chinese New Year in 2016, the Macau Government Tourism Office reported on its website Thursday.

Yet they may not be prepared to spend as much. Rather than purchase expensive items as gifts, Chinese are buying more for personal use, says Bruno Lannes, a Bain partner in Shanghai.

The strong weakness of the Yuan might currently be offering a tailwind for luxury goods companies since consumers have an incentive to buy now rather than pay more later. Additionally the potential for stronger economic growth and the knock-on effect that would have on consumer spending may be an additional factor in the outperformance of luxury goods’ stocks. 

Shares of Blackstone rose 1.7 percent to $31.14 at 9:58 a.m. in New York, extending gains this year to 16 percent.

Blackstone, led by Chief Executive Officer Steve Schwarzman, sold $3.8 billion of private equity holdings during the quarter, including part of its stakes in food-service distributor Performance Food Group Co. and cement maker Summit Materials Inc. Its real estate business, which oversees $102 billion, disposed of $3.5 billion in assets, including the DoubleTree hotel in London, the Burlington hotel in Dublin and the Hyatt Regency Pier 66 hotel in Fort Lauderdale, Florida.

Hilton, Blackstone’s biggest public holding, jumped 19 percent during the quarter. The firm has been paring its Hilton stake through share sales and through an agreement to sell about $6.5 billion of the stock to China’s HNA Group.

Those private equity and real estate sales helped fuel $691.8 million of distributable earnings, which reflect cash profits on asset disposals and fund management fees, compared with $878 million a year earlier. Blackstone said it will pay stockholders a dividend of 47 cents a share on Feb. 13. 

 

Private equity firms were among the greatest beneficiaries of low interest rates and abundant liquidity, which allowed them to raise cash for acquisitions at very low levels. However the collapse in oil prices coupled with Fed tapering contributed to weak performance in many publicly traded funds. The potential for an uptick in economic activity resulting from the expectation that the new US administration will be more business friendly has contributed to a better performance recently. 

The Dow Jones smashed the landmark 20,000 barrier for the first time ever this afternoon as optimism about Trump’s pro-growth policies boosted financial markets.

Resuming a rally that began in the wake of Donald Trump’s shock US presidential election win, the index rose by as much as 0.73pc to 20,057.89.

The rally was reignited by Trump’s signing of numerous executive orders since his inauguration on Friday. Last night, he also tweeted about his intention to build a wall on the Mexican border.

The Dow Jones has surged by more than 10pc since November and it came within a whisker of touching the historic 20,000 mark on January 6. It fell in the run up to Trump’s inauguration as traders grew cautious of his protectionist policies and sought clarity on the administration’s new policies.

It has taken the index just two short months, or 42 sessions, to climb from the first close above 19,000 to 20,000. It’s worth noting the rise between 18,000 and 19,000 took some 483 trading sessions.

The biggest winners of the Trump rally include investment banks Goldman Sachs and JP Morgan, rising by 34pc and 26pc, respectively, amid hopes Trump’s fiscal stimulus package will trigger inflation and stoke a rise in interest rates.

Neil Wilson, of ETX Capital, said: "It’s psychologically huge and, after a bit of pullback ahead of the inauguration, really confirms that the ‘great rotation' from bonds to stocks is definitely upon us. Fears about protectionism are running second to optimism about inflation and growth – for now at least." 

DJIA 20,000 is a nice round number milestone and several other important US indices have also been in very good form recently.  For instance, the tech-heavy Nasdaq Composite and also the Nasdaq 100 have also pushed steadily higher since Donald Trump’s presidential election victory.  The breadth of this advance is also confirmed by the Russell 2000 Index of mid-cap shares.  DJ Transports recorded a potentially important Dow Theory buy signal with their new all-time high nearly two months ago.

Some market commentators are stunned by this strong performance.  They find it hard to believe, noting that Donald Trump is an impulsive, narcissistic, wild card.  Well, he is also a successful businessman and investors like his promise of stimulative policies, from tax cuts to deregulation and infrastructure spending. If the US economy has finally commenced a period of stronger GDP growth, and all evidence was pointing to this before the election, Trump’s policies should only boost medium-term prospects for the US economy.  That should provide a significant boost to corporate earnings on average. 

So what could go wrong?

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

Everybody hates Wi-Fi. The boxes are ugly, and it never seems to work when you need it. But just when you thought wireless internet was unfixable, the most boring and hated appliance in your house may be on the verge of actually, um, working.

Many of today’s devices are overcoming the design and technological flaws that marred the industry throughout its existence. The latest gadgets boast more effective antennas and do a better job cutting through radio interference. Some just look nicer than the hideous routers of yesteryear, with their thicket of wires, blinking lights and plastic parts akimbo.

A review of four newly released devices that employ the latest home-wireless technologies showed impressive results. In Bloomberg’s tests, the wireless routers were dramatically more reliable than their predecessors and attractive enough to earn a place on the mantle.

Looks matter more than you might think. Most people tuck routers under a desk or behind a cabinet to hide their unsightly fixtures. This would be OK, if not for the laws of physics. Every wall, desk or dresser that stands between the router and whatever gadget is trying to connect to it degrades the signal. Ideal placement is in the middle of a room, with no obstructions to allow wireless signals to move freely.

I can’t wait. 

For as long as I have had desktop computers and televisions, they have been surrounded by Sargasso Seas of ugly wires, cables, transformers and multiple relay plugin systems.  It looks like a slum.  And when something goes wrong, as it too frequently does, a tedious and lengthy process turning switches off and back on, while unplugging and plugging in again has to occur.  And if out of desperation I have to call in the local techy assistant to sort it out, I then ask what went wrong?  The usual answer is: ‘that’s just computers’.  Alternatively, something was loose because someone tripped over a wire or cats were running around behind the desk. 

Give me a break.  The end of terrible Wi-Fi will not come soon enough.    

I am delighted to say that our guest speaker at this event will be the interesting Charles Elliott, founder of Inflection Point Investments.  The first half of his talk will be on ‘Mega-Cap Tech’, including big and well-known names such as Apple, Microsoft, Google/Alphabet & Amazon.  This will be followed by ‘Emerging Tech’ in which he specialises. 

I can’t wait.

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

More pipelines from Canada would also “generate greater competition for crudes of comparable quality such as those imported from Mexico or Venezuela,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London, said in an instant message.

The administration moved to expedite approval and construction of the Keystone XL pipeline as well as the Dakota Access line through North Dakota. Trump said he wanted to renegotiate terms to get a better deal for the U.S., including more U.S.-made materials in the lines.

The 830,000-barrel-a-day Keystone XL has been blocked since it was first proposed in 2008. TransCanada said in a statement it will reapply for the project.

 

Canada represents a problem for OPEC. It has vast reserves which are largely economic at today’s prices and it borders the world’s largest consumer. Despite that proximity its tar sands have been stranded, inhibited by lack of access to key global markets, which has made Canada something of a bit player in the global market. With the development of pipelines West, East and South that could all change in the coming decade. 

Palladium was susceptible to a pullback following such an impressive rally. Today’s clear downside key day reversal is in keeping with similar reactions during what has been a choppy 12-month uptrend and suggests a process of mean reversion is now underway. 

But the importance of Meta in the context of making science accessible to everyone is anchored in its AI-driven technology. Thousands of scientific papers are published every day, and the sheer volume of available data means it’s hard to whittle it down to what’s most important to individual studies. Ultimately, access is just one part of the challenge. For access to information to truly empower the scientific community, one has to be able to systematically analyze and review all the available data available. That’s where Meta comes in. It can easily find the most relevant material that will further the research in a fraction of the time it would take a human.

Isaac Newton is reputed to have said “If I have seen further than others, it is by standing upon the shoulders of giants.” He successfully built on the work of those who had come before him. One of the greatest challenges in human history has not only been to come up with ingenious solutions to difficult problems, but to also ensure we don’t forget or lose them. 

The printing press allowed us to duplicate manuscripts which reduced the risk of losing knowledge. The internet has been a similarly disruptive innovation for a whole range of reasons but perhaps most important is that by distributing availability of knowledge it further reduces the risk it will be lost. With so much research now being conducted, the evolution of artificial intelligence to greatly enhance the ability of researchers to find the shoulders of giants on which to stand is a further iteration of this trend. 

The commercial viability of artificial intelligence is coming hot on the heels of the internet from an historical perspective and represents a powerful tailwind for the continued acceleration of technological innovation. 

The dollar is a particular source of worry for U.S. policy makers, having appreciated 23 percent since mid-2014. The Fed expects to keep tightening while central banks in Japan and Europe hold steady or consider more accommodation. That could further strengthen the greenback and introduce a headwind for U.S. growth.

“Slowing down the economy a little bit at the long end of the market has some benefits if you think primarily that exchange rates are driven by short-term interest rates,” Rosengren said. “You might want some of the removal of accommodation to come at the long end, which would be done by the balance sheet.”

The Boston Fed released research on Jan. 19 that backs up this view of exchange rates and the yield curve. Former Fed economist Roberto Perli was more skeptical, pointing to global demand for longer-term U.S. Treasuries.

“If long U.S. rates were to increase significantly as a result of balance sheet shrinking, there would still be large inflows into U.S. assets, which would support the dollar,” said Perli, a partner at Washington consulting firm Cornerstone Macro LLC.

 

The Fed’s balance sheet at $4.46 trillion represents a potent source of supply for a bond market that shows increasing signs of topping out. As long as the balance sheet was increasing it was hard to argue with the rationale for pursuing the bullish momentum trade in Treasuries. However with interest rates now rising and the Fed no longer adding to its inventory of bonds a major source of fresh demand has been removed from the market.

Also, at http://www.fullertreacymoney.com/general/email-of-the-day-on-cannabis-and-steel/, it states that Chinese steel production is in the order of 66,000 tons per annum and one Nimitz class aircraft carrier requires around 47,000 tons.

Please see attached the correct figure for Chinese steel production.

Still loving the service after decades of knowing David.

 

Thank you for this graphic from the World Steel Association which quotes completely different figures than those found in tradingeconomics.com. The figures you provided make more sense so I have amended the article. This additional article from CNBC quotes the world Steel Association figures. Here is a section: 

The Brexit drama has taken an unexpected twist. Britain's strategy of full withdrawal from the single market and from the EU institutions has been remarkably well-received.

Contrary to fears in some quarters in Britain, the pursuit of a 'clean and hard' Brexit has if anything helped to clear the air, greeted with a degree of relief by political and business leaders in Europe.

What has changed the mood - apart from the passage of time - is the parallel pledge by Britain's leaders to stand beside Europe as a close strategic and military ally, playing its full part in upholding a rules-based global architecture. 

There were signs at the World Economic Forum in Davos that the anger of recent months is slowly draining away, replaced by an acknowledgement of Britain's distinctive history and character. The imperative now is to limit the damage for all sides and find a way to make the new arrangement work. Not all divorces end in hostility.

Emma Marcegaglia, head of the pan-EU federation BusinessEurope, said the no-nonsense nature of Britain's decision may prove to be the best outcome even if it is hard to accept on an emotional level.  

"When I first saw Theresa May's speech my reaction was very bad, and I thought this is going to cause serious problems for British companies and for the rest of us," she said.

"But after thinking about it I now feel that her position is very straight and clear. In a certain sense it clarifies the situation. There could now be a good free trade agreement, like the Canadian arrangement with access for both sides and social protection," she told the Telegraph. 

"It is all so sad. We're going to miss the role of the UK in defending free trade and competition. The British commissioner was always a crucial ally for us in Brussels. But it is done now, and we just have to accept it," she said. 

Last week, Prime Minister Theresa May seized the initiative in Brexit negotiations with the EU.  She said matter of factly that the UK was leaving the EU, and that no deal was better than a bad deal. She could not have been clearer.  She was also constructive in pointing out that Britain was leaving the EU, not Europe.  There was no anger or animosity in her words or voice, and she wished the EU well.

Emma Marcegaglia’s summary above describes the transformation of EU opinions occurring at Davos.  An independent Britain can be a useful ally for the EU.  That is in Europe’s interests.

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

Theresa May's recent statement, presumably timed for the Davos gathering, appears to have had the desired effect.
Today's FT includes an article (attached) with some very positive statements from German Finance Minister Wolfgang Schauble.
The heading is: Schäuble says post-Brexit trade deal with UK can be done quickly.

Of course, there are elections ahead in Germany and his role afterwards isn't guaranteed, but let's hope he is still influential, when required. 

Thanks for your email and the FT article. 

Theresa May succeeded in being gracious and responsible, while also taking a strong position on leaving the EU.  That was the correct thing to do, and it has also changed the psychology, not surprisingly.  Schäuble is not interested in a mutually destructive policy towards Theresa May and the UK.  He accepts that the UK is leaving the EU but now wants to maintain a mutually successful alliance with Britain, including a trade agreement.   

In foreign affairs, symbolism matters. Theresa May’s arrival at the White House on Friday as the first foreign leader to visit President Trump sends a clear message to the world about the intimacy of the ties between London and Washington DC. It also shows that our sometimes derided diplomats have done their job well, and puts to bed the idea that Nigel Farage or anyone else was needed as a go-between.

When the Prime Minister arrives, she will be fresh from addressing congressional Republicans – another privilege that would be accorded to few other foreigners – and I predict she will get on well with Trump, even though their personal traits are as different as is possible among members of the same species.

Try to imagine our PM sending out angry tweets at three in the morning, or savaging our own intelligence agencies. Picture Donald Trump reading files quietly for hours, then asking for more information and refusing to give any commentary on his thoughts. Both defy the imagination. It is the greatest contrast in styles between the holders of these offices, at least since Ulysses S Grant overlapped with Gladstone – and they didn’t have to meet.

Yet Trump evidently is predisposed to find his “Maggie” and he will probably warm to her clarity and firmness. For her part, Theresa May is highly skilled at creating a warm relationship with colleagues when she really wants to, and never in her life will she have been more determined to do so than on Friday.

She knows, as does anyone who has seen government in Britain from the inside at the top, that leaving the EU is a risk, but estrangement from the United States would be a certain disaster. Our nuclear deterrent may be the subject of controversy this week, but we only have missiles that work at all because America is happy to sell them to us – something it does for no one else. Our ability to detect potential terrorist attacks is as strong as it is because British security and intelligence-gathering is tightly integrated with the US.

Every day, all over the world, whatever our ambassadors and soldiers are doing, they are usually doing it in concert with our transatlantic cousins. And our business with America is greater than that with any other single country, even before attempting a special trade deal. The alliance with the USA is the one relationship the UK has that is truly indispensable.

This will be a very relaxed meeting compared to the rigors of Brexit negotiations and the US election battle.  It will also be a successful meeting between two very different but complementary leaders. 

Donald Trump has been gracious in offering Theresa May the first visit for a head of state at the White House.  She will appreciate the honour and be a wise, tactful confidant on international subjects.  He will be on his best behaviour.

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

Businesses in Britain and across the EU are reeling from the "shockwaves" sent by Theresa May when she announced the UK will leave the single market, the CBI's director general has warned.

Carolyn Fairbairn told an audience of French businesses in London that they should unite with British companies to stand up for continued links with the EU post-Brexit.

She said that continued access to skilled workers and to European markets are crucial to future prosperity.

"By leaving the single market, the Prime Minister has reduced the available options," the director general said in a speech to the French Chamber of Great Britain, at the French ambassador's residence in London.

She was present in the audience when Theresa May made the announcement last week: "I know the shockwaves it sent around the room and the continent."

She wants to see a comprehensive, wide-ranging free trade agreement negotiated to give the UK and EU sustained access to each others' markets.

"Nobody is saying it will be easy... we know it could end up without a deal, falling back on the World Trade Organisation rules, and we should be under no illusion about what that would mean," Ms Fairbairn.

Those WTO rules would result in tariffs on imports and "almost inevitable" border delays, she said, giving the example of car manufacturers which import parts from across the EU.

"It is time for firms from all over Europe to work together for a deal that works for everyone," she said, calling on companies to "defend openness".

"Let's not take this openness for granted. Let's stand up and say why access to people matters, why access to markets matters. It is not the time to close the door."

Ms Fairbairn also called on the Prime Minister to unilaterally guarantee EU workers currently in Britain the right to remain after Brexit takes place.

"There has been progress and the Prime Minister made encouraging noises last week in Davos," she said.

"But a unilateral commitment is the right thing to do."

Shockwaves?  Absolutely, and EU Businesses affected by a potential hard Brexit will turn on their politicians for damaging their trade with Britain.

I am delighted to say that our guest speaker at this event will be the interesting Charles Elliott, founder of Inflection Point Investments.  The first half of his talk will be on ‘Mega-Cap Tech’, including big and well-known names such as Apple, Microsoft, Google/Alphabet & Amazon.  This will be followed by ‘Emerging Tech’ in which he specialises. 

I can’t wait.

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

“We’re seeing a cyclical uptick in global economic activity and that’s driving demand, not only for oil but all commodities,” Jeffrey Currie, head of commodities research, said in Hong Kong on Tuesday. “That’s the core reason why we upgraded our outlook on commodities to overweight,” he said, referring to the bank’s November decision.

Commodities made a comeback in 2016 with the first annual gain in six years as stimulus in China stabilized growth, and oil producers led by OPEC reversed course to limit supplies. Currie -- who spoke both on Bloomberg TV and to a reporter -- said the impact of China’s stimulus will probably last well into the first half of 2017. He added that policies from new U.S. President Donald Trump may reinforce inflationary pressures, aiding raw materials.

“U.S. and China are focal points where we’re seeing the uptick, but even the outlook for Europe is much more positive than what people would have thought six months to a year ago,” he said.  “It’s not what’s happening on the supply side but rather what’s happening on the demand side.”

 

The Continuous Commodity Index (Old CRB) is unweighted and therefore gives a more accurate picture of activity in the commodity markets than the CRB Index which is heavily skewed by oil prices. The Index hit a medium-term peak in 2011 below 700 and trended lower for five years until the beginning of 2016. 

Sibanye Gold (JSE:SGL) (NYSE:SBGL), South Africa’s largest miner producer of the precious metal, has been given the green light to proceed with the $2.2 billion acquisition of Stillwater Mining (NYSE:SWC), the only US platinum producer.

The deal, announced in December, was subject to antitrust conditions that fall under the US’s Hart-Scott-Rodino premerger legislation.

“Satisfying the HSR Act antitrust condition in a timely manner is an important first step towards concluding the acquisition of Stillwater,” chief executive Neal Froneman said in the statement.
The Johannesburg-listed company, which was spun out of South Africa’s Gold Fields in 2013, spent most of last year shopping for new mines, particularly in the platinum sector.

The company first expanded into the grey precious metal used in jewellery and diesel car engines in Sep. 2015, by buying Aquarius Platinum and three Anglo American Platinum mines.

Together with reducing Sibanye’s dependence on its aging South African mines, the deal will make the company the world's third largest palladium producer and fourth biggest platinum group metals miner, Froneman noted last month when announcing the planned acquisition.

If it goes through, the takeover will be the second-biggest South African outbound M&A transaction since 2015.

 

Sibanye Gold has an Estimated P/E of 8.61 and yields 5.56%. The sharp decline in precious metals prices as well as the expense of the company’s expansion plans contributed to a steep decline in prices over the last few months; falling from a peak near $21 to a low below $7. A mean reversion rally is now underway and clear downward dynamic would be required to check momentum beyond a brief pause. 

“Thank you very much for the very interesting comments on China's steel imports in the last two daily comments. If China is indeed trying to prepare herself for war, wouldn't they be buying other commodities too? Are you or anybody in the collective aware of them buying other commodities? As far as I know they have been trying to reduce their strategic stocks of cotton since about 15 months. They might have changed that policy, but at least I am not aware of it. As always I enjoy your comments & audio-video very much. Thanks again. best rgds"

Thank you for this educative email and for your kind words. It is my supposition that China at the very minimum seeks to bolster is military capability to at least boost its conventional deterrent capabilities. 

Foreign direct investment in Brazil soared to a six-year high in December as investors abroad kept an optimistic view of the country’s long-term prospects, the central bank said.

Brazil attracted $15.4 billion in foreign investment last month, more than twice the amount expected by economists in a Bloomberg survey, and the strongest monthly performance since December 2010. In the whole of 2016, foreigners poured $78.9 billion in Brazil, more than enough to finance the country’s current account deficit of $23.5 billion.

“December’s foreign direct investment was really something,” Fernando Rocha, deputy head of the central bank’s economic research department, told reporters in Brasilia. “It shows foreigners hold a positive long-term view of the country.”

Investors remain generally optimistic that Latin America’s largest economy will emerge from its worst recession on record this year, even as economists surveyed by the central bank have recently cut their 2017 growth forecasts and the International Monetary Fund warned of near-stagnation this year.

December’s investment performance was boosted, in particular, by operations in the auto industry, as well as in the retail and power sectors, Rocha said. Yet overall investment has been “quite widespread” across a number of sectors, he added.

 

The ouster of Dilma Rousseff was a catalyst for international investors to take a second look at Brazil. The Real had been rallying from January 2016 in anticipation of the event and encountered resistance following Michel Temer’s inauguration as investors waited to see what kind of reforms could in fact be delivered. 

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

Next, like Felix, I would short German Bunds. They are yielding 0.27%, and Germany’s inflation rate is 1.7%. Historically, it is very rare to have a Bund yield below the inflation rate. The current gap is a record. The Bund yield is unsustainably low.

Schafer: What is the best way for an individual to short German Bunds?

Gundlach: Short the futures. I agree with Felix that the Italian bond market is deeply troubled. Shorting Italian bonds could potentially produce a massive home run; they are yielding 47 basis points less than 10-year U.S. Treasuries, which represents a full buy-in on the idea that the euro zone will last forever. If the euro zone breaks up, a possibility we have discussed, and Italy has to go it alone, sovereign bonds could yield 1.9%. The current yield is insanely low. But shorting German Bunds appeals more. They are more vulnerable at this point than U.S. bonds.

One argument for U.S. bonds when yields hit a low last July was that they yielded more than German Bunds, which had negative yields. In other words, U.S. bonds were better than something really terrible, but that didn’t make them good. Underlying the argument was the notion that German yields would stay negative forever. Well, forever lasted about a month. Since then, Treasury yields have risen more than German rates, but Bunds could underperform in the next leg of the bond bear market.

Zulauf: In 2012, there were widespread fears about the euro zone breaking apart. Back then, money flowed from the southern countries to the northern countries, and into Bunds. The next time the euro zone looks endangered, money will flow out of the euro completely and into another currency, primarily the U.S. dollar.

 

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

Germany has benefitted enormously from the ECB’s quantitative easing program. As the largest economy in the bloc it garners the most purchases which are weighted by GDP. As the region’s largest creditor it holds sway over the direction policy takes. The creation of the Euro alleviated currency risk for Germany and country’s approximating its economic model such as the Netherlands and Austria. However for countries that did not have economies similar to Germany’s it crystallised currency risk. 

For information. Canopy has made an offer to buy Mettrum for Canopy stocks. This will triple my Canopy position and will help you to understand the reason for the similar chart pattern since early December. 

On your presentation yesterday (that I watched today), I was intrigued by the iron ore comment. Canadian iron ore companies (have a look at: Alderon, Labrador iron ore...) are on fire and I sold way too early exactly because I saw China slowing down and their financial situation reminded me of USA 2007-2008. 

So stock piling for war?.... hmm.. It is true that the US never really got out of the depression woes until their implication in the WW2 conflict, which they used also to help breaking European French and English ''Empires'' among others. This is certainly something to watch, and Trump ''shoot first'' attitude probably add to the concern for sure.

 

Thank you for this additional intelligence on the Canadian cannabis sector. Iron-ore is an interesting market because steel is such a political sector. China is expected to account for 71% of global steel production this year according to this article from CNBC. That’s a lot of supply and not all of it is designed to cater to the domestic market. 

The death of a hospitalized patient in Reno Nevada for whom no available antibiotics worked highlights what World Health Organization and other public-health experts have been warning: antibiotic resistance is a serious threat and has gone global.

The patient — a female in her 70s — was admitted in for an infection and died in September 2016 from septic shock the CDC announced on Jan. 13. The patient had been treated for multiple infections in India before traveling to the United States. The infection that led to her hospitalization in Reno was caused by a strain of carbapenem-resistant Enterobacteriaceae (CRE)* bacteria known as Klebsiella pneumoniae. Although not all strains of Klebsiella pneumonia are CRE, the strain that infected this patient was resistant to all available antibiotics, according to the CDC. (Carbapeneum is a “drug of last resort.”)

In a paper in The Lancet in October, researchers reported that more than a third of blood infections in newborn babies involving Klebsiella pneumoniae and similar bacteria were resistant to multiple drugs to the point they were virtually untreatable and “threaten the return of a pre-antibiotic era in Indian neonatal intensive care units,” the study’s authors warned.

 

Antibiotic resistance is a vital topic of conversation because it affects all of us and represents perhaps the single biggest risk to general health we can fathom. The pace of technological innovation is perhaps the greatest hope we have of finding a solution that does not rely on fighting a losing war against an enemy capable of changing tactics to overcome conventional responses. This article from NewAtlas highlights one such solution. Here is a section: 

The study combined the new PPMO with meropenem, a type of carbapenem antibiotic that's effective against a broad range of bugs, and pitted it against three different types of bacteria that make use of NDM-1. In all cases, the PPMO restored meropenem's ability to kill the bacteria in vitro, and also managed to kill off an NDM-1-expressing strain of E. coli in tests in mice.

"We're targeting a resistance mechanism that's shared by a whole bunch of pathogens," says Geller. "It's the same gene in different types of bacteria, so you only have to have one PPMO that's effective for all of them, which is different than other PPMOs that are genus specific." Geller says the new drug should be ready for human testing in about three years.

There is every reason for optimism that this problem can be overcome but it requires constant vigilance and technology represents our best chance to overcome it. It is not a problem that will just go away.  

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

At the top of Mr. Trump’s energy and environmental agenda will be unraveling Obama administration policies that touch on everything from carbon emissions to water.

Much of the action out of the gate will focus on rolling back regulations. Mr. Trump has said he would withdraw Mr. Obama’s signature policy to address climate change, a rule that cuts power-plant carbon emissions. The rule already has faced legal challenges and has been temporarily blocked by the Supreme Court.

The Trump administration, with the help of the Republican-controlled Congress, also will work toward repealing an Environmental Protection Agency rule bringing more bodies of water under federal jurisdiction. Also targeted for repeal: Interior Department rules that require tougher standards for coal mining near streams and that set new standards for emissions of methane, a potent greenhouse gas, from oil and natural-gas wells on federal lands.

While the Trump administration can’t unilaterally repeal most rules right away, it has several options. The EPA and other agencies can immediately start the process to withdraw regulations, and they can relax compliance requirements over time. Meanwhile, Congress can pass measures nullifying rules that have been completed most recently.

Immediately confronting Mr. Trump is a decision regarding the Dakota Access oil pipeline, which extends from North Dakota to Illinois and is nearly built except for a crossing of a Missouri River reservoir.

Mr. Trump may also have a decision to make on the Keystone XL oil pipeline if its developer, TransCanada Corp., reapplies for a State Department cross-border permit the Obama Administration denied in 2015.

On the campaign trail, Mr. Trump said he would withdraw the U.S. from the global climate agreement signed in Paris in late 2015. He couldn’t immediately pull out of the agreement, but he could begin the process of withdrawing.

 

I watched the end of the inauguration speech at my club following my Friday morning HIIT class and the facial expressions of the desk staff were a picture of just how much work needs to be done to reunite the country. High energy costs, high healthcare costs, high education costs and no wage growth combined to create the conditions that got Trump elected. He is going to need to deliver on solutions to some of those problems if he is going to receive the second term he wishes. 

South Korea remained the big winner, topping the international charts in R&D intensity, value-added manufacturing and patent activity and with top-five rankings in high-tech density, higher education and researcher concentration. Scant progress in improving its productivity score — now No. 32 in the world — helps explain why South Korea’s lead narrowed in the past year.

Silver medal winner Sweden owes most of its rise to improvement in the manufacturing value-added metric, while Nordic neighbor Finland jumped two spots in large part because of the rise of high-tech firms in the country. Norway held its No. 14 spot from last year.

Fresh ideas tend to pay off big in Sweden, even as the current government is less business-friendly and has imposed labor taxes that could crimp business investment, said Magnus Henrekson, director of the Research Institute of Industrial Economics, a private foundation in Stockholm. The Swedes themselves promote an atmosphere of great personal ambition — unlike some European neighbors that emphasize the collective — and that’s a boon to innovation, he said.

“In the culture, people are super individualistic — this means that people have ideas and are very interested in pursuing them in this way in order to become wealthy,” said Henrekson. “The incentives are there and the tax system favors them.”

 

If the results of the above report are anything to go by then having a relatively small population and an export focus is a common theme for the most innovative countries in the world. Of course being from a small country means companies have to innovate if they are to compete globally. Small countries also can’t afford to slide on education because the pool of available workers is limited and needs to be nimble enough to supply the economy with the skills it requires. Success is therefore multiplied. 

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

The pace of technological innovation is graphically illustrated in this report. What becomes very clear is how start-ups view the all-in-one businesses of companies like Starwood, Proctor & Gamble and the car manufacturers and pharmaceutical companies as ripe for disruption. They could be right and there is certainly a great deal of venture capital money willing to make that bet. However we should not expect established companies to go down without a fight.

Europe's leaders lashed out at each other in Davos in an inflamed dispute over how to stop the EU collapsing, laying bare the festering divisions that will plague the European project long after British withdrawal.

"The whole idea of an ever-closer Europe has gone, it's buried," said Dutch premier Mark Rutte, dismissing calls for full political union as a dangerous romantic fantasy.

"The fastest way to dismantle the EU is to continue talking about a step-by-step move towards some sort of superstate," he said at the World Economic Forum.

His comments went to the heart of a fierce battle under way for control over the EU project, and provoked an impassioned counter-attack from Martin Schulz, the European Parliament's president.

Mr Schulz called it profoundly misguided to give up the dream of political union and retreat to the nation state. "If it's Angela Merkel, or Mark Rutte, or whoever else, they must have the courage to say that we need ever-closer union more than ever in the 21st century, and without it the EU has no future," he said.

Mr Schulz accused Europe's ministers of subverting the EU in a "double game", agreeing to measures behind closed doors in the EU's council of ministers and then denying any responsibility once they return home. "This is destroying the European spirit."

He accused prime ministers of arriving for meetings at the Justus Lipsius Building in Brussels and proclaiming before they even enter the door that they are there only to protect their own narrow interest.

"We have some members sitting inside the European Parliament trying to destroy the EU from within. They are drawing EU salaries, and one of them is running for the presidency of France," he said.

Frans Timmermans, the European Commission's vice-president, said there was a "fundamental ideological confrontation going on in our EU". He called on Europe's leaders to stop hiding behind subterfuge and pick their side, rather than blaming Brussels for everything. "You need to show your cards, show where you stand," he said.

The masks of EU solidarity have clearly fallen away at Davos.  This will have shocked delegations from a number of other countries, particularly American readers of The New York Times and The Washington Post, and also anyone influenced by President Obama’s view of the EU and Angela Merkel.

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

Wall Street’s high-flyers in Davos, basking in their firms’ strong fourth-quarter earnings, said they’re confident Donald Trump’s incoming administration will loosen regulatory constraints on financiers -- even if it leaves Barack Obama’s signature Dodd-Frank Act largely intact.

Bank executives, speaking on condition of anonymity at events around the Swiss ski resort, said they’re not counting on Trump to overturn Dodd-Frank. Instead, they expect the federal agencies that enforce the rules to ease up on them and support bankers’ efforts to limit how much capital and liquidity their companies need to pay bills or absorb losses in a crisis.

The bankers said they recognize that changing or overturning the 2010 Dodd-Frank Act would require support in the U.S. Senate that Republicans may lack. Instead they’re counting on Trump’s team to dial back how supervisory agencies enforce and interpret rules. Led by Federal Reserve Governor Daniel Tarullo, U.S. regulators have adopted an extra-strict version of the global standards on capital and liquidity set by the Basel Committee on Banking Supervision in the aftermath of the 2008 financial crisis.

“Legislation, obviously that’s harder to do than just changing regulations,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said in a Bloomberg Television interview with John Micklethwait on Wednesday. “Regulators can change a lot of things easily about compliance, about costs, certain rules about lending, how you use your liquidity, how you use your capital. I would like to see some of those looked at and maybe modified a bit, and I think it would be good for the economy.”

At a panel discussion on the global banking outlook in Davos Thursday morning, JPMorgan asset-management CEO Mary Callahan Erdoes echoed that view.

“It’s going to be a great several years,” Erdoes said. “It’s going to be very positive for businesses in the U.S., which should cascade to businesses around the world.”

There has always been a cycle to bank regulation.  When excessive speculation by banks ends in a crash, as we last saw in 2008, and many of them have to be rescued, there is always a call for new, much tougher regulations.  These are designed to significantly boost cash reserves, limit leverage and also punish the offending banking industry. 

As a consequence, it is more difficult for the economy to recover because banks are unable to provide the liquidity required by their customers, as we have seen since the 2008 credit crisis recession. Eventually, anger towards banks subsides and governments commence easing tight regulations, as we are about to see with the incoming Trump administration. This will help the banking industry and also the US economy.

Some people worry that this will soon lead to another banking crisis.  Those concerns are premature because banks are not about to repeat the same mistakes at the first opportunity.  On average, it usually takes at least a generation before banks lose their discipline and contribute to another financial crisis.     

By her standards, Theresa May was relatively restrained at the Davos summit.  She loves enemies, and not in the Christian way. In front of her stood a congregation of the very people she holds up to ridicule: the plutocratic masters of the global economy, or, as she calls them, “citizens of nowhere”. On another day, she might have delivered one of the machine-gunnings that she reserves for the Police Federation or Boris Johnson. But this time she had another mission: to position Britain as the new global leader in free trade and reintroduce her country to the world.

The result was nothing short of a manifesto for a new British foreign policy and one of the best speeches given by a Prime Minister in recent years. It was a landmark not only in the evolution of her approach to Brexit, but in the development of her own political identity. It shows how far she has travelled in just a few months.

The traditional Davos speech involves clichés about the world’s ills and abstract nonsense like the “fourth industrial revolution”. The Prime Minister preferred to talk plainly. Rather than join them in lamenting populism, she sought to explain it: if people’s legitimate grievances aren’t addressed by established political parties, voters turn to insurgents. She could have added that Britain, virtually alone in Europe, has no problem with populism: the BNP dead, Ukip in crisis. And why? Because we had Brexit. It was not a Trump-style disruption; Brexit was how Britain avoids Trump-style disruption.

This is the point that European leaders find hard to understand. From Sweden to Sardinia, they are facing Eurosceptic insurgents whom they portray as barbaric and xenophobic. So they tell themselves (and their voters) that Britain has succumbed to a similar malady and is now sinking into a pit of hate crime, nativism and isolationism. This is not an anti-British agenda, necessarily, just the panic of politicians who can’t think of other ways to fend off new challengers. Mrs May came to offer some gentle advice: if you respond to people’s concerns, populism tends to go away. As Britain’s recent mini-revolution has just demonstrated.

Still, the Prime Minister has arrived rather late to all this. One of the great risks of Brexit was that the vote would be portrayed as a once-great country in meltdown, retreating from the world. Such concerns needed to be answered clearly, calmly and repeatedly. Had Boris Johnson become Tory leader he would have done this from day one. But Mrs May arrived in office implementing what seemed to be a far meaner version of Brexit than the one compellingly articulated by the Vote Leave campaign. We heard about EU nationals as bargaining chips, companies drawing up lists of foreigners, and new rules making it harder for foreigners to buy British companies.

And:

In her speech, she quoted Edmund Burke, to the effect that if a state cannot change, it cannot survive. That good governments do not become wedded to mistakes, but scour the horizon for opportunities and adapt with the times. As she has worked out, the same is true of prime ministers.

I am relieved.  OK, the Prime Minister and her Cabinet were thrown in at the deep end but they were not providing the kind of Brexit that I voted for.  Fortunately this has changed dramatically in little over a week. 

How did that happen?  Was it a tactical decision to appear to have turned inwards, to lull the Brexit opposition and EU into a false sense of security before striding boldly and positively forward?  I hope not and I don’t think so.

Was it a simultaneous eureka moment By Theresa May and Chancellor of the Exchequer Philip Hammond, or did they receive some very helpful advice?  I suspect it is the latter although we may never know.  However, I do recall mentioning shortly after Theresa May became Prime Minister that she could always get some sound advice from The Telegraph’s editorial team.  While very much on her side, they had become a little more critical in the last several weeks, but no more as we see with the article above. 

Whatever, Theresa May and Philip Hammond have reassured their supporters.  They have also seized the initiative on Brexit and are determined to set their own agenda with a divided EU which is in disarray.  Good luck to them.

Here is a PDF of Fraser Nelson’s article.    

(See also: Instead of wasting time trying to replay Project Fear, banks must help us get the best deal from Brexit, by Allister Heath for The Telegraph)

Iain Little's presentation last Monday: Things To Watch Post Trump - What I'm Buying Today, is posted in the Subscriber's Area.

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

Remember 2015 when the F.A.N.G, stocks were all the rage and media pundits were falling over themselves to tell us how you had to own them if you were to have any chance of outperforming the major indices. 2016 was predictably a tamer year for those shares with some spending much of their time consolidating 2015’s powerful gain. However with Netflix making headlines today on successfully boosting subscribers, following an international expansion, I thought it might be worthwhile to revisit this acronym. 

Money velocity isn’t a bullet-proof economic indicator. Financial innovation, and the rise of shadow banking, have made it hard to measure exactly how much money is floating around in the financial system. And some would say that "money" itself is going through an identity crisis these days.

Hunt isn’t the only one seeing the record-low pace as an ominous sign. The fact that money velocity declined rapidly during years of near-zero interest rates may signal aggressive monetary easing actually led to deflation instead of inflation, economists at the St. Louis Fed wrote back in 2014.

"In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy," economists Yi Wen and Maria A. Arias wrote.

"I know I’m the minority here,” Hunt said. “I’m just trying to see the world as I think it should be seen.”

 

I have long argued that the disintermediation associated with the internet and technological innovation is a major contributor in the decline in the velocity of money. The downtrend in the data from 1997 offers a graphic representation of the deflationary influence of technology. It also helps to explain why the surge in the quantity of money associated with quantitative easing has not resulted in high inflation. 

Pot luck... If the Canadian government continue to support AND passes legislation favorable to the development of the cannabis industry, some companies may have exponential growth, My pick has been Canopy on the TSX and I will continue to hold it.

Thank you for highlighting Canopy Growth Corp which as you point out is one of Canada’s most popular vehicles for expressing a view on cannabis. Canada is home to a significant number of recreational cannabis and cannabis related pharmaceutical start-ups, which as you say. would benefit from favourable legislation. You never know before the bull market ends there may be calls to exchange the maple leaf for something even more commercial than maple syrup.

The euro region could break up if political leaders don’t get to grips with the discontent that’s spurring support for populist leaders across the continent, JPMorgan Chase & Co. Chief Executive Dimon said he had hoped European Union leaders would examine what caused the U.K. to vote to leave and then make changes. That hasn’t happened, and if nationalist politicians including France’s Marine Le Pen rise to power in elections across the region “the euro zone may not survive,” Dimon, 60, said in a Bloomberg Television interview with John Micklethwait.

“What went wrong is going wrong for everybody, not just going wrong for Britain, but in some ways it looks like they’re kind of doubling down,” Dimon said in the interview Wednesday at the annual meeting of the World Economic Forum in Davos, Switzerland. Unless leaders address underlying concerns, “you’re going to have the same political things about immigration, the laws of the country, how much power goes to Brussels.”

Officer Jamie Dimon said. 

Dimon’s remarks on Europe were unusually pessimistic, coming in a wide-ranging interview in which he also criticized regulations that he said stunt economic growth. But he reiterated optimism for President-elect Donald Trump. Minutes later, Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein also expressed concern about Europe, telling CNBC that leaders are facing a backlash in the midst of a long, complicated process to create an economic bloc.

Many people have said this for some time, including in this service, but Jamie Dimon’s view will attract more attention.

Eurozone leaders provide a classic example of arrogant groupthink.  They speak mainly to each other, in the comfort of their palatial headquarters in Brussels and Strasbourg, financed by beleaguered taxpayers, and agree that they know what’s best.  Yes, “they’re kind of doubling down,” as Dimon says.   

Philip Hammond has rightly warned the EU that “we will do whatever we have to do”. So, in addition to pursuing trade agreements around the globe, what could we actually do, to convince the world that we have good enough plans for them to start buying pounds?

Here are five ideas:

1. Establish Free Ports. My very talented successor as MP for Richmond, Yorkshire, Rishi Sunak, has pointed out how Free Ports could bring a major boost to the economy, manufacturing and the north. This would allow goods to be imported, manufactured and re-exported without any duties or taxes because they would not officially enter the UK. The jobs created could run into tens of thousands, and the merchandise handled into hundreds of billions of pounds.
2. Give tax incentives to key global industries. Special tax relief for the film industry has been a huge success: major new studios have been built in Britain, over 200 films a year are being made here and we have 260,000 jobs thriving on the back of them. Every £1 of tax relief is meant to bring £12 back into the economy. We could give similar carefully targeted incentives to other creative, scientific and high-technology businesses, helping aerospace, biotechnology and others to see the UK as especially attractive.

This item continues in the Subscriber's Area.

Philip Hammond’s comment that “we will do whatever we have to do” was the perfect response to the EU, and from a former Remainer who previously sounded very pessimistic.    

Here are my brief responses to William Hague’s five ideas:

“Establish Free Ports.”  I had not thought of this but it makes sense to me. 

“Give tax incentives to key global industries.”  I would favour across the board tax cuts which could be revenue neutral or even positive if the UK economy grew sufficiently as a consequence.  Special tax relief did create a booming film industry in the UK and helping the scientific and high-technology businesses is certainly a very good idea since they represent the future.  However, less glamorous industries are also important for a diversified economy and why cherry pick?  We do not want to create unnecessary resentment and damage other contributing industries. 

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

I just wanted to say how much I agreed with the subscriber email 2 yesterday on the ‘huge difference’ you & Eoin make with your service.

Give me the Markets Now over Davos any day of the week.

The financial services industry needs more people with competence & integrity like Iain Little & Bruce Albrecht. David Brown’s laser sharp intellect (& I suspect more ‘right brained’ judgement) knocks spots off so many of the city talkers I come across.  

I would have really enjoyed the ‘pub’ afterwards but I had to be home early. I find it best not to irritate my wife by getting home too late & the dog is always there waiting for his walk.

With best regards

Thank you so much.  It was good to see you again, looking so well, and I enjoyed our chat as we were approaching the Club.  There is no better audience than veteran subscribers and I learn something new at every session of Markets Now. 

I sympathise with your wife and patient dog, and am sure your early arrival back home was welcomed.  

David Brown’s excellent presentation on our new Industrial Revolution is posted in the Subscriber’s Area.

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

As much as 12 trillion yuan ($1.73 trillion) in bonds—or 19% of the country’s $9 trillion bond market—could be subject to such repurchase agreements, according to an estimate by Shui Ruqing, president of bond clearing-house China Central Depository & Clearing Co., cited last month in China’s influential Caixin Magazine. Traders say the deals are so opaque that even estimates are hard to make.

Banks sometimes use the “dai chi” agreements to move risky assets temporarily off their books during earnings periods or audits, the people said. Brokers like Sealand typically use them to borrow quickly and flexibly—leveraging their investments many times over, they said.
Until last year, Chinese financial regulators had largely ignored the practice, beyond saying they opposed it during a bond-market crackdown in 2013. But the informal nature of dai chi also meant the trades could be difficult to enforce when conditions worsened.

“Because it’s not really an official business, agreements aren’t legally binding,” said the executive who had bought bonds from Sealand.

Sealand’s problems became apparent on Dec. 15, when the southern China-based company announced that two of its traders had forged dai chi agreements worth 16.5 billion yuan ($2.4 billion), a move that market participants interpreted as meaning the broker didn’t intend to honor the deals.

The amount was more than five times what Sealand had declared in its Sept. 30 financials as its financial assets under official repurchase agreements, and more than seven times its disclosed bond-holdings.

 

China has developed extraordinarily quickly from a closed backwater into a massive financially significant hub. While the pace of development has been blistering the evolution of regulatory standards of governance has been much more moderate. The single party system where cronyism, nepotism and the modern equivalent of simony combine to ensure just about anything is permissible, provided your social standing is within the correct circle, and only exacerbates the situation.  

Citigroup Chief Executive Officer Michael Corbat and Goldman Sachs CEO Lloyd Blankfein have been cutting costs and restructuring management to adjust to stricter capital requirements and a revenue downturn since the financial crisis. Goldman Sachs’s 2016 revenue was the lowest in five years, though investors and analysts are speculating the firm’s trading operations could be one of the biggest beneficiaries of Trump’s policies.

“The benefits from higher interest rates, accelerating capital deployment and historically low credit costs have been evident throughout the large-cap U.S. bank earnings releases,” Marty Mosby, an analyst at Vining-Sparks IBG, said in a note. “The fundamental story remains intact.”

 

Bond trading profits are dominating headlines among the major banks but hide the fact that most have seen their businesses contract over the last few years as the high cost of complying with regulation bit into the size and scope of their businesses. 

Dayton said Sessions "may be against marijuana policy reform, but he is not stupid. He knows that these cannabis laws are hugely popular, not just among Americans in red and blue states, but with his boss who campaigned in favor of these laws." 

While his responses, on their face, were hardly a coup for the cannabis industry, Sessions didn't morally condemn pot smokers either. 

"The United States Congress has made the possession of marijuana in every state, and distribution of it, an illegal act," he testified. "If that ... is not desired any longer, Congress should pass a law to change the rule." 

The Drug Policy Alliance, an organization opposed to the war on drugs, called the testimony "wishy-washy at best." The group's senior director of national affairs, Bill Piper, added: "It is clear that he was too afraid to say the ‘reefer madness’ things he said just a year ago, and that’s progress. But he made it clear throughout the hearing that he will enforce federal law."

 

While a good many politicians have made statements condemning cannabis use “evolution” of their views on the topic are increasingly required as an ever increasing number of states legalise recreational or at least medical use. That has created a bull market in supply of the herb, not least because it grows like a weed. Wholesale prices have contracted considerably as operations initiated following Colorado’s legalisation reach commercial scale. That has resulted in mixed performance for the related shares. 

London: British prime minister Theresa May has flagged a trade deal with Australia as a priority for a "new global Britain".

In a historic, detailed speech, Mrs May dashed the hopes of Remainers and delighted Brexiteers by setting out a vision of an independent UK – a "trading nation" that will look beyond Europe to "new friends and old allies".

She confirmed the UK would leave the European single market and instead would negotiate a new free trade deal with the European Union.

She was less clear on the UK's role in Europe's customs union, saying Britain would not be part of the common commercial policy or external tariffs, but could remain a "signatory to elements" in order to lower barriers to trade.

She emphasised the British people had voted to regain control of immigration, though she wanted European citizens already in the UK to retain their right to work there.

She revealed that the final Brexit deal would be presented to the British parliament for a vote before it comes into force – though she did not discuss what would happen if it was voted down, saying instead she was confident it would be approved.

Mrs May concluded with a barely-veiled threat to Europe: that if they sought a "punitive" Brexit then it would be "an act of calamitous self-harm" as the UK would retaliate by lowering its tax rates below Europe's to draw companies and investors from the continent.

She also admonished Europe for "trying to hold things together by force, tightening a vice-like grip that ends up crushing into tiny pieces the very things you want to protect".

But she said it was "overwhelmingly and compellingly in Britain's national interest that the EU should succeed".

Mrs May's speech drew a rapturous reception from those who had campaigned for Brexit, with UKIP leader Nigel Farage commenting "I can hardly believe that the PM is now using the phrases and words that I've been mocked for using for years. Real progress."

But it is likely to be less welcome in Europe.

European ambassadors were present in the room for the speech, and Fairfax understands few if any applauded the conclusion.

Some were seen shaking their heads when it came to the threat of Britain becoming a tax haven.

In a deliberate irony the speech took place at Lancaster House in London, where Margaret Thatcher set out her plan for the UK's membership of the single market in April 1988.

Mrs May began by saying she wanted the country to be "a truly global Britain", a "best friend and neighbour" to Europe but one that "goes out into the world to build relationships with old friends and new allies alike ... a great global trading nation respected around the world".

She said the UK would begin by adopting EU laws, then modifying them, to allow a smooth transition and certainty for business.

Mrs May also spent some time reassuring Ireland that there would be a "practical solution" that balanced the common travel area with Northern Ireland with the need to protect the UK's new immigration controls.

"Nobody wants to return to the borders of the past," she said.

On immigration, she said the UK would "get control" of the number of people coming to Britain from the EU, but would guarantee the rights of EU citizens already in Britain as an "important priority", preferably before the rest of the Brexit deal was done.

On trade, she said "as a priority, we will pursue a bold and ambitious free trade agreement with the European Union.

"This agreement should allow for the freest possible trade in goods and services between Britain and the EU's member states. It should give British companies the maximum freedom to trade with and operate within European markets – and let European businesses do the same in Britain.

"But I want to be clear. What I am proposing cannot mean membership of the single market."

This agreement might take in elements of the current single market as it "makes no sense to start again from scratch", she said.

But the UK needs to leave the single market and key elements of the customs union, Mrs May said, in order to strike its own trade deals.

"We want to get out into the wider world, to trade and do business all around the globe."

"Countries including China, Brazil, and the Gulf states have already expressed their interest in striking trade deals with us. We have started discussions on future trade ties with countries like Australia, New Zealand and India. And President-elect Trump has said Britain is not 'at the back of the queue' for a trade deal with the United States, the world's biggest economy, but front of the line."

Well done Theresa May and her team.  This speech has ended much uncertainty and also frustration on the part of Brexit supporters, who’s numbers have increased following the historic vote.

Importantly, even the Chancellor Philip Hammond has come to his senses following a dreary Autumn Statement on 23rd November.   

As for EU spokesmen, I have heard some more lame “cherry picking” comments in response to Theresa May’s speech today.  No, the government is not cherry picking – we are leaving the EU.  

It’s not enough for Theresa May to say that if she doesn’t get a bespoke UK/EU free trade deal outside the Single Market and the Customs Union, she will walk away and risk the imposition of tariffs on both sides. She has to mean it — and be believed.
Such rough talk from her supposedly ultra-cautious Chancellor gives her much greater credibility in such a stand-off.

But Mr Hammond’s change of tone is not just a negotiating ploy. As he also pointed out to his German interviewers: ‘Since the referendum, we have seen, on the European side, movement away from the UK positions . . . to things that are anathema to the UK: more political integration.’

Some of that ‘movement’ would now be causing political mayhem in the UK, if we had not already voted to leave. Here are just four examples.

Last week, details leaked of an EU White Paper suggesting Brussels be allowed to impose taxes directly on member states, to include a levy on CO2 emissions, an electricity tax and an EU-wide corporate income tax.

Last month, the European Court of Justice ruled that British laws allowing the security services retention of bulk data on calls and emails would not be allowed to stand as they ‘exceeded what is strictly necessary’.

Also last month, Brussels ruled that all members of the Single Market had to impose a requirement that every off-road vehicle — every quadbike, every golf-cart — had to be covered by insurance for ‘third-party injury and damage’. Our own Department for Transport said that it ‘opposed measures which impose an unreasonable burden on the public’ but that it would have to abide by the new rule until Britain exits the EU.

And, only a few days ago, Brussels ruled that even motorists who break the law by driving without insurance should be protected if their car is damaged — so law-abiding drivers face an increase in insurance bills to cover that cost.

It is only because we are leaving the EU that these four power-grabs — proposing new EU-wide taxes; adversely affecting MI5’s ability to protect the British people; creating a totally new overhead for farmers and families playing around with quadbikes; and driving up the costs of running a car — have not caused an even sharper spike in the British people’s hostility to our membership.
 

That is what the bureaucratic EU does – it makes silly nanny state rules which damage free enterprise, slow GDP growth and increase unemployment.  

I spent much of the afternoon watching the live coverage of Rex Tillerson’s senate confirmation hearings.  I was very impressed with his responses, and found that some of the questions he was asked were entirely inappropriate for a public hearing as they would reveal possible ploys for dealing with the Russians.  The most petty moments were the grandstanding questions of Rubio, who appeared adolescent in contrast to a pro like Tillerson. How fortunate for all that Rubio was eliminated early on in the campaign.

Regrettably there was an overlap and I had to leave that coverage to watch The Donald.  There is clearly something wrong with that man on a personal level, but he has a very good case for the attempted vilification by certain segments of the media.  I loved his rebuff of CNN by refusing to accept any questions from their correspondent.  His comments re Buzzfeed were predictable, NYT, Vanity Faire, Streep pettiness, but that group is a joke anyway.  For me the most impressive moment was the time on stage of his attorney, who detailed the alleged efforts he has made to separate his past business ventures from his future job.  She was excellent, but I did wonder just how many blank pages there were in those stacks of documents lying on the table to her right.  Perhaps the rebuffed CNN reporter will have had a quick look.

Thanks for your thoughts on this important confirmation hearing.  I saw a brief section of the Rex Tillerson hearings over the weekend and was impressed.  He was very articulate, knowledgeable and reassuring on a range of subjects. 

In fact, I would not have minded if he had just become the president elect.  I also maintain that Trump has selected the most capable business team of any president during my lifetime.  I think that will be good for the USA and I hope to see more successful people from the private sector nominated for senior governmental roles in the UK and any other democracies.  

(See also: If Rex Tillerson Is Confirmed By The Senate, What Does That Mean For XOM?, by Martin Tillier for Nasdaq)

A third major factor making for a stronger world economy is not directly related to the financial crisis. At the beginning of last year the markets and many commentators managed to get themselves extremely worked up over the damage supposedly done to the world economy by low oil prices. By contrast, it seemed to me that low oil prices had to be a good thing. But the losses from low oil prices were highly concentrated and visible in the short term; by contrast, the gains were more widely distributed and might only become evident to the beneficiaries after a period of time. Accordingly, it was likely that there would be a short-term hit to the global economy, offset by a longer-term gain. We are now into that longer term.

Meanwhile, the recovery from ultra-low oil prices has brought a further benefit, namely the easing of the pressure on hard-pressed companies and countries. Russia, for instance, should emerge from recession this year. Even so, oil consuming companies and individuals are still facing much lower prices than they were two years ago. The result is that the world should now be experiencing a substantial net dividend from lower oil prices.

The upshot of all of this is that world growth this year is set to be higher than last year. Not only that, but it may well be a good deal stronger than almost anyone expects.  Of course, in the world of forecasting you have to be prepared for surprises. Over the last few years we have all been exceedingly well prepared for downside surprises. What I am about to say is decidedly risky but I will say it nevertheless: I have a hunch that we now need to be prepared for surprises on the upside.

I have been making many of these points for a while, so I agree with Roger Bootle. 

Businessman Trump will certainly want to improve the US economy and he has selected a highly experienced and business savvy cabinet to help him achieve this goal.  There is a risk that he might trigger a trade war with China, but I think he is too smart for that lose-lose mistake. 

Trump is fed-up with what he saw as Obama’s passivity.  He wants China to know that the US will now compete, and also cooperate, on a level playing field.  The same goes for Russia and any other country, although I think he could be particularly helpful towards the UK, as thanks for Brexit which Trump believes helped him to win the Presidential Election.  He holds little affection for the EU, having heard more about it from Nigel Farage, and having seen some of the whopping legal settlements and fines imposed on US corporations.  He probably views the EU as a rival rather than a friend, and he knows it has seldom paid its 2% of GDP per country NATO fees. 

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

I just wanted to say again 'thank you'. I know it feels hard work at times but you make a huge difference to many lives with your efforts at Fuller Treacy Money and Markets Now.  Please keep going. I will support you all I can. It is a real pleasure to know you. 

Thank you for this thoughtful email. 

I have learned a great deal from my subscribers over the decades.  They include some of the nicest and most knowledgeable people, sometimes from very different professions, that I have ever met.  

We had thirty-five people, including speakers, at The Caledonian Club on Monday evening.  I think that is close to the maximum size for these events because part of the fun is meeting everyone and chatting during the breaks, and also at the cash bar afterwards.  The Caledonian is proving to be an excellent, civilised venue with nice rooms and new projection equipment which is very good.       

A link to today's video may be found in the Subscriber's Area. 

Gundlach: People have forgotten the mood regarding stocks and bonds in the middle of 2016. Investors embraced the idea that zero interest rates and negative rates would be with us for a very long time. People said on TV that you should buy stocks for income and bonds for capital gains. This is when 10-year Treasuries were yielding 1.32%. Someone actually said rates would never rise again. When you hear “never” in this business, that usually means what could “never” happen is about to happen. I told our asset-allocation team in early July that this was the worst setup I’d seen in my entire career for U.S. bonds. It occurred to me that the bond-market rally was probably very near an end, and fiscal stimulus would soon become the order of the day. 

Schafer: People were also worried about deflation back then. 

Gundlach: Based on a comparison in July of nominal Treasuries to Treasury Inflation-Protected Securities, or TIPS, the bond market was predicting an inflation rate of 1.5%, plus or minus, for the next 30 years. Now, that is implausible, and kind of proves the efficient-market hypothesis is wrong. More likely, the inflation rate would increase not in five or 10 years, but one year, because commodity prices had already bottomed. The Federal Reserve Bank of Atlanta’s wage-growth tracker is now up 4%, year over year. Oil prices have doubled since January 2016, to around $52 a barrel, which likely means that headline CPI [the consumer-price index] will be pushing 3% in April. 

I expect the history books will say that interest rates bottomed in July 2012, and double-bottomed in July 2016. At some point, the backup in rates will create competition for stocks. Bonds could rally in the short term, but once the yield on the 10-year Treasury tops 3%, which could happen this year, the valuation argument for equities becomes problematic. When the long bond [the 30-year Treasury] was at 2%, bonds had a P/E of 50. Compared with that, a P/E of 20 on stocks didn’t look all that bad. But if the 10-year yield hits 3%, you could be talking about 4% on the 30-year, which implies a P/E of 25. 

Something else happened in 2016: The Fed capitulated, as I predicted a year ago. The Fed gave up on its forecast for higher interest rates and lowered its dot projections for 2017, just when it might have been right. [The Fed’s so-called dot plot shows the interest-rate projections of the individual members of its policy-setting committee.] In December, the Fed had to reverse itself and raise rates. 

Priest: For the first time in years, the Fed didn’t lower its forecast for GDP [gross domestic product] growth in coming years. Central banks and the International Monetary Fund have been dead wrong for years with their annual forecasts for world GDP growth. The danger now is that pressure on P/E multiples will be negative. Unless we get tax reform and more growth in the real economy, the chances of a down stock market aren’t insignificant this year. 

Gundlach: Fed Chair Janet Yellen suggested a few months ago that running a “hot” economy might not be such a bad idea. But when unemployment is low, wages are rising, and significant fiscal stimulus is likely, inflation could exceed consensus expectations. Jim Grant, the founder of Grant’s Interest Rate Observer, wrote a fantastic article a few years ago likening the current environment to the 1940s and ’50s. Short-term interest rates were at 3/8s in the late 1940s, and long rates were around 2%-2.5%. Inflation was running at 2%. Everyone had been predicting higher inflation rates, but after a long period of 2%, they gave up. Then inflation spiked to 8%. It came out of the blue. 

Gabelli: Does the strength of the dollar change your thinking? 

Gundlach: A strong dollar keeps inflation lower. It is helpful to the bond market. A weak dollar isn’t helpful to the bond market. However, I brought along a quote from President-elect Trump today because it makes me think. He said, “While there are certain benefits to a strong dollar, it sounds better to have a strong dollar than it actually is.” Is it really a given that Trump will bring us a strong dollar if he is supposed to be helping the forgotten middle class.

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

Bonds sold off very aggressively following the November election result and the Dollar surged. The news flow has been sensational and Twitter has probably never been so popular but the reality is that both of these overextended short-term moves are unwinding. 

Forging more than half the world's steel, Chinese imports of iron ore for the full year 2016 topped one billion tonnes for the first time. The 1.024 billion tonnes constitute a 7.5% increase over the annual total in 2015 and is indicative to what extent exporters from Brazil and Australia has been able to displace domestic producers struggling with low grades and high costs.

The total value of cargoes climbed to just under $58 billion, with the average import price over the course of 2016 at $56.50 per tonne. The all-time record in terms of dollar value was set in January 2014, when the country imported $111.3 billion worth of iron ore back when prices were firmly in triple digit territory.

 

Iron-ore prices have not quite broken out to new recovery highs but have sustained last year’s breakout from a well-defined base formation and the upside can be given the benefit of the doubt provided that remains the case. 

Alibaba’s move to partner with Maersk Line should be seen as a game of one-upmanship with US rival Amazon, a leading name in online logistics has said.

Chinese customers will now be able to book space on Maersk ships, a first for the industry and one that potentially removes many freight forwarders as middlemen.

Dr Zvi Schreiber, CEO and founder of logistics technology Freightos, offered his perspective on the bigger picture and what this deal means for online shoppers and Alibaba’s rival, Amazon.

“Maersk is testing the waters of digital sales with one of the world’s largest ecommerce companies while threatening forwarder business. But for Alibaba, this is a direct challenge to global retailers like Amazon. Beyond drones and futuristic supermarkets, Amazon opted to get licensed as a forwarder. Alibaba one-upped them by going directly to the world’s largest ocean liner. Point, Alibaba.” 

 

There is a great deal of speculation going on at present relating to the implications of a Trump presidency on global trade. Certainly an America first manufacturing policy would have profound implications for low cost, high population countries’ ability to compete against what would in all likelihood be a highly automated US attempt to re-shore. Nevertheless even with the most ambitious timetable that kind of initiative could take years to unfold. 

A link to today's video commentary may be found in the Subscriber's Area.

Some of the items discussed include:

Caution dominated markets amid tough talk from May and Donald Trump about Europe’s economic and political institutions. British government officials trying to limit damage to the pound will speak to major banks in London before the U.K. leader sets out her vision for leaving the bloc in a speech on Tuesday, according to people familiar with the situation. Meanwhile Trump predicted that Britain’s exit will be a success that will encourage others to do the same. He also branded NATO obsolete.

“Markets are trading in risk aversion mode,” said Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London. “Investors and corporates around the world are concerned by the prospect of a hard Brexit. Pound rallies are limited and weak, while plunges are harsh and prolonged.”

 

When we get down to basics. The UK is betting it will not be the only country to leave the EU. If it is correct in that view then it will have made the correct decision by gaining first mover advantage and the current concerns about the form of the subsequent relationship will be academic. 

On the other hand, the European Commission has to successfully sell the idea that the UK should never have been brought in to begin with and that it can hold the remaining group of Eurozone nations together. It has to do that because the prospect of countries leaving the EU, raises the very real possibility that creditors in Germany will not be paid back the money they lent to countries like Greece, Cyprus, Italy, Spain, Portugal, Ireland et al. 

Enjoy watching the video presentations. Thought you may be interested in the following interview of Gary Shilling; 

Thank you for you kind words and this interesting interview which may be of interest to subscribers. 

Gary Shilling’s view that technological innovation is inherently deflationary is very much in tune with our view. The increasing commercial applications of biotechnology, automation, artificial intelligence, the internet and mobile technology are all likely to enhance productivity and could very well represent a deflationary influence. On the other hand, the increasing calls for free money (universal social payments) lower taxes, more spending and deregulation have the capacity to stoke inflation.

On your piece about MOOCs I couldn't help but observe that you did not mention FutureLearn

This service is UK based and is an offshoot of the Open University.

It claims to be the largest MOOC. See below. I've used it and it's very good. I particularly like the fact that many courses are short - 6 weeks and typically 2 - 3 hrs per week.  
All the best

 

Thank you for highlighting FutureLearn.com which, as you point out, is another major centre of online learning and builds on Open University’s long history of distance learning. This article from May last year highlights how a number of universities will allow students to earn as many as 30 credits towards a degree using FutureLearn’s portal. That’s a powerful method to help reduce the cost of earning a primary degree and enhances even further our ability to enjoy learning throughout our lives.

This is indeed well under way and generally government-supported trend globally, with Germany (as always) at the forefront, but also the US and the rest of Europe promoting and facilitating the process.

The article below is interesting I think

It gives an idea of how easily these processes are implemented (2 weeks to start production) and the advantages offered to producers (design innovation + shorter time to market + customisation). €2 million investment for being able to produce a total of 200k pieces every year seems very low.

Shima Seiki (6222) - that provided the machinery to Benetton - is a company worth looking into, and the recent rally in share price confirms what you mentioned re the growth potential from clothing manufacturers in Asia.

This is also confirmed on their IR page
 

 

Thank you for this above article expounding upon the seamless garment manufacturing being pioneered by Shima Seiki. Seamless garment manufacture has been around in the hosiery business for a long time but finishing was always required to sew the legs on the gusset. Introducing seamless manufacture to outer wear is a major innovation and as you point represents an additional sign of increasing interest in automation in the garment industry. 

Kenneth Rogoff can pinpoint the moment he started to grow concerned Donald Trump would be the next U.S. president: It was when Rogoff’s fellow attendees at the World Economic Forum’s annual meeting last January said it could never happen. “A joke I’ve told 1,000 people in the months since leaving Davos is that the conventional wisdom of Davos is always wrong,” says the Harvard professor and former chief economist of the International Monetary Fund. “No matter how improbable, the event most likely to happen is the opposite of whatever the Davos consensus is.”

The repeated failure of business and political elites to predict what’s coming—last year, that included the U.K.’s vote to leave the European Union—doesn’t strike those returning this month to the Swiss Alps as very funny. After a year in which political upsets roiled financial markets and killed off the careers of once-dominant Davos-going politicians, the concern for delegates attending this year’s meeting isn’t that their forecasts are often wrong, but that their worldview is.

In its four decades of existence, the WEF has nurtured a broad consensus in favor of globalization and open markets. At its core is the notion that capital, goods, and people should be able to move freely across borders, a principle that can deliver huge benefits to those with education and money but seems terrifying to those without either. For the 3,000 people who will convene in the small Swiss town from Jan. 17 to 20, the 2017 event could be a moment of reckoning. At speakers’ podiums, coffee bars, and the ubiquitous late-night parties, they’ll be asking themselves whether Davos has become, at best, the world’s most expensive intellectual feedback loop—and, at worst, part of the problem. “Since the recession, the boom has benefited the upper-income earners and done little for those in the middle or on less. That’s the backlash,” says Nariman Behravesh, the chief economist for research provider IHS Markit. “The Davos vision of the world has not delivered a broad-based economic recovery.”

I think Kenneth Rogoff is right.  Obviously many things are discussed at Davos but there is usually a dominant subject or theme, at least according to the press, and the consensus is generally wrong. 

Why does this happen?  After all, the people attending are generally highly intelligent, if not always analytical or introspective.  Could it be a smear on the part of envious press attending along with other observers who are not principle attendees?  Presumably not if Kenneth Rogoff says “the conventional wisdom of Davos is always wrong”. 

Could it be guilt mixed with fear, leading to a first-class ticket on the Titanic mentality?  They may not be literally at sea but the analogy has relevance as they are sheltered in luxury on a frozen alp.  Presumably they can only go downwards from there. 

There is also a typically behavioural answer.  When a number of different people are confined in close proximity, whether it be at Davos, in stadiums, or large open-plan financial dealing rooms, they quickly become susceptible to groupthink. In other words, their individual thoughts and opinions will be subconsciously suppressed, as they become part of the developing crowd view.  This form of bonding can occur for a combination of different reasons, including friendship, admiration and even fear.  Groupthink is as powerful as it is unanalytical.    

We should monitor reports from Davos, if only because any conventional wisdom could be a contrarian indicator.  Trump’s tweets could be a topic, as they currently are everywhere else, but what conventional wisdom might they produce in Davos?  We will soon know but if it is fear of war with China or Russia, or just a routine impeachment, I might have to buy more commodities.      

Dear David, 
Thank you for posting this and other articles from the Telegraph, which are always informative. I particularly enjoy reading A E-P. He has a breadth and depth of experience that is quite unique among UK journalists and he never fails to be dramatic. I remember 2008 when A E-P was calling for a financial crash, and few others agreed. I don't know whether he acted on it and made any money. I rather doubt it. 
One thing I bear in mind (with all newspaper articles) is that journalists are not investors - and if they were successful investors they would not be journalists!
Your views on markets have more gravitas than any journalist.

Thanks for your email and I feel similarly about A E-P.  He is erudite; I enjoy the classical and international references; he is extremely well informed and in my opinion, the most interesting writer in the financial industry.  I too remember A E-P's analysis in 2008 and he was brilliant.

I think you are right about journalists having sensible restraints on trading various instruments, although I hope they can invest in funds.  This article from Business Insider - The Insane Difference In The Rules For Journalists And SEC Employees When It Comes To Trading Stocks, is informative:  I thank you for saying that my views on markets have gravitas, but in this industry we need to remember that we are only as good as our last call / trade / investment.

Hi, David, and thank you for posting the above article. I tend to agree with your assessment of it. My one observation is that while the author impugns the Fed, and justly so, as a principle player in fostering the zeitgeist we hope Mr. Trump will cause to be successfully addressed, he makes no mention of a fiat monetary system that enables the Fed to play its role so generously. Is it fair to view that as a significant omission or am I flirting with the danger of the single story?

I think the Fed or any other central bank is always going to be controversial, not least because they have so much power and influence within fiat monetary systems. My own view is that they generally help economies more than they harm them.  For instance, I maintain that following 2008 we would have seen widespread depressions, rather than many lengthy recessions. 

More recently, the Fed and other central banks have been widely criticised for discouraging economic recovery, not least by making commercial banks less profitable so that they were reluctant to lend.  Critics have also said that only rich people, mainly with equity portfolios, have benefitted from record low interest rates. 

There is definitely some truth to these points.  However, I also think that governments could and should have increased fiscal spending, but very few did so.  With minimal GDP growth, many corporations were also reluctant to spend.  The leading central banks often called for more government and corporate spending but were generally ignored. 

This situation may have looked like the question: Which came first, the chicken or the egg?  However, I think governments were more at fault than the central banks, which were too often left almost solely in charge of providing stimulus. 

In the US, this problem certainly contributed to the election of Mr Trump, who many people said was unqualified to be president.  Like him or loath him, at least Mr Trump proposed very stimulative policies for the US economy, which we never saw from Mr Obama and which Mrs Clinton was not proposing.  

By my count, Trump wins the first round comfortably, before he is even inaugurated.  Of course anything can happen over the next four years and it will certainly be interesting.        

At least thirty-one people will be attending, including the speakers.  We will be in the splendid Morrison Room on the right as you enter the Club.  Sarah Barnes might just be able to shoehorn in another couple of people if you contact her via the brochure. 

I am looking forward to a lively, interesting and enjoyable evening.

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

The UK’s largest cap index is in the process of completing a 16-year range by breaking on the upside. The Index has rallied for six consecutive weeks, hit new all-time highs last week and improved on that performance this week. Prior to this breakout it had spent three years ranging below, but in the region of, its previous peaks. While a short-term overbought condition is evident that is consistent with what is to be expected from a major breakout. 

The three-way conflict simmered throughout 2016. Eurozone policy makers say its resolution can’t be put off much longer. Prime Minister Alexis Tsipras is considering the option of snap elections if the creditors don’t soften their positions.

The IMF is holding a hard line partly to put pressure on the eurozone to lighten Greece’s debt burden, say people involved in the negotiations. IMF officials have said Greece’s economy is already overtaxed.

New taxes that came into effect on Jan. 1 are squeezing household incomes further. Economists say even-higher income taxes—in the form of lower tax-free income allowances—could add to a mountain of unpaid taxes. Greeks currently owe the state €94 billion ($99 billion), equivalent to 54% of gross domestic product, and rising, in taxes that they can’t pay. Three in four Greeks can’t pay household bills on time, according to the 2016 European Consumer Payment Report, a private-sector survey.

Extended families often rely on grandparents’ pensions. Further cuts in that lifeline could end hopes for a return to economic growth. Unemployment remains more than double the eurozone’s average at 23%. About 74% of the jobless have been out of work for more than a year and thus receive no benefits.

 

Greece got itself into a world of trouble by fudging economic statistics to gain entry to the euro. By succeeding in that endeavour it paid scant regard to its ability to pay back the vast quantities of money subsequently borrowed and the generous social programs it funded. 

Singapore’s Strait Times Index is breaking upwards to new recovery highs amid a firmer tone for the Singapore Dollar and is being let by the financial sector.