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

Unconventional oil and gas have been game changers for the US energy sector and with increasing export capacity that moniker will increasingly be true for the global market.

Together with the fact that US tight oil supply is also of the sweet light variety makes it an attractive option for refiners, particularly since a great deal of the additional supply coming from Saudi Arabia is of the heavier variety.

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

Xi has ratcheted up his drive to curb debt risk, pollution and poverty at a time when the world’s second-largest economy is on a long-term growth slowdown. His efforts to rein in spending contrast with an historic expansion of U.S. borrowing under Donald Trump during a period of economic expansion.

The 2018 targets “suggest slower growth and a fiscal drag,” said Callum Henderson, a managing director for Asia-Pacific at Eurasia Group in Singapore. “This makes sense for China in the context of the new focus on financial de-risking, poverty alleviation and environmental clean-up, but is less good news at the margin for those economies that have high export exposure to China.”

Growth handily surpassed 2017’s target with a 6.9 percent expansion that was the first acceleration since 2010. Economists forecast a moderation to 6.5 percent this year amid the ongoing deleveraging drive and trade tensions with the Trump administration and a further deceleration to 6.2 percent in 2019.

China has significant challenges ahead as it engages with deleveraging, particularly among the regional lenders. However, it is also worth considering that fiscal discipline at this stage in the cycle is admirable since it will leave the government with some firepower when the economy next slows. That is the exact opposite of what the US government is doing at present which is of course why interest rates are set to continue to rise.

Earlier this year, when Bitcoin’s price fell by more than 60 percent from its record close, a less-noticed Bitcoin figure also plunged: the number of daily transactions.

There are many explanations for the fall-off in trading, from software- to news-related. What’s less understood is why the level hasn’t recovered as Bitcoin’s price made a 50 percent comeback since Feb. 5. That’s left some investors wondering whether the cryptocurrency is waning in popularity.

The average number of trades recorded daily has roughly dropped in half from the December highs and touched its lowest in two years last month, even as Bitcoin became a household name and roared back to near $11,000.

The transaction data may be bad news for Bitcoin bulls, according to Charles Morris, chief investment officer of Newscape Capital Group in London, who invests in cryptocurrencies. Trading and purchases on the Bitcoin network, which can be measured by metrics like transaction volume, is indicative of price direction, he said.

Following a crash of bitcoin’s magnitude it is only reasonable that some people are shy about now continuing to invest at such a feverous pace. The 69.65% peak to trough decline will have resulted in a large number of people coming under severe hardship but the fall was also enough to encourage bargain hunters at least in the short term. The decline in trading volume is also not so surprising for exactly the same reason.
 

"Established producers need to reconsider their production plans quickly and substantially in light of the huge production increase from U.S. shale," the agency’s Executive Director Fatih Birol said Monday on the sidelines of the CERAWeek by IHS Markit conference in Houston. Asked whether he was referring to OPEC nations, Birol said: "All OPEC producers are established producers."

The Organization of Petroleum Exporting Countries and allies including Russia, Mexico and Kazakhstan agreed to cut production in late 2016 in an effort to clear a glut in crude inventories. They defied the skeptics by going deeper than their pledged curbs and maintaining them for long enough to deplete the bloated stockpiles.

Yet the strategy has also backfired by unleashing “a new wave of growth from the U.S.” that leaves little space for OPEC to increase output once the cuts expire at the end of the year, according to the agency’s report.

The U.S. will dominate global oil markets for years to come, satisfying 80 percent of global demand growth to 2020, the IEA said. Supplies from other non-OPEC nations will make up the rest.

US unconventional supply is elastic since the pace of production can only be sustained by continued drilling. When prices are high production can be hedged out as far as two years which ensures profitability. At the same time, drilling multiple horizontal wells is a capital-intensive exercise and the sector has been issuing a great deal of debt to fund production in the hope prices will stay higher for longer.

 

I just have a couple of queries for you:

Where can I find the US yield curve spread chart (10yY-2yY) in your chart library?

Based on expected MT to LT yield rising environment, should I keep my PIMCO income Fund (Global Investor Series Plc), or dispose of it? 

Thank you and best regards 

Thank you for these questions which may be of interest to other subscribers. I created this video to discuss both how to create the chart and save it as a preset template for when you want to find it later which I hope will be of use to you. 

A link to this week's Big Picture Video focusing on inflation is posted in the Subscriber's Area. 

A link to Tudor-Jones comments are posted in the Subscriber's Area.

The market has long relied on the assumption that in a crisis the Federal Reserve will wade in to the rescue by boosting money supply and helping to reflate asset prices. However, it is not until a crisis occurs that investors truly knew whether Greenspan, Bernanke or Yellen had their backs. Jerome Powell is a lawyer, rather than an economist by training, and has yet to be tested. Therefore, investors do not know how he will react in a time of market stress. That remains an uncertainty that is being priced into this market.

It tackled oppressive summer heat and sandstorms, the population more than doubling in a decade to approach 3 million. Foreigners, who make up the vast majority of Dubai’s residents, flocked for work, banking and fun.

Now it’s about how to keep the party going, even one in a country where unmarried couples can’t legally live together and where free voice calls over the Internet and Apple’s FaceTime are blocked.

Few places reflect the challenge more than the site of the expo, without which the emirate could face a sharp economic slowdown. Dozens of cranes are busy working on the 438-hectare (1,080-acre) site south of Dubai’s center. The city is the first in the Middle East to be awarded the event in its 167-year history. The pressure is on to make it work beyond the short-term influx of visitors.

“The impact that it has in terms of generating opportunities for the economy is definitely big,” said Marjan Faraidooni, who’s in charge of the legacy impact and development for the expo. “If we don’t showcase things that are cool, then we’re not living up to our reputation.”

Here was the view from my balcony this morning which highlights how much building is still going on in Dubai, with the horizon peppered with cranes.

The likelihood now is that the German government will rush to introduce some sort of national policy, to ensure at least some level of consistency across the country.

It's not just about Germany either - cities across Europe are struggling to meet EU air quality standards, and may well see the German ruling as setting a precedent.

New diesel cars won't be affected, but that's not really the point. Consumers are already moving away from the technology - and the prospect of city bans will only accelerate that process.

So diesel's decline is likely to gather momentum.

That's a problem for the industry, because while diesels produce high levels of nitrogen oxide - a major urban pollutant - they emit relatively low levels of carbon dioxide, a greenhouse gas.

So moves to control one environmental problem may end up undermining efforts to combat another - unless we all start driving electric cars very soon.

Platinum has been struggling to rally since the Volkswagen scandal broke in 2015 and this ban of diesel vehicles from city centres represents an additional headwind.

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

One of them, and arguably the smartest strategist on “The Street,” is my friend Tony Dwyer, who writes:

Why bother worrying about a retest? Given our positive fundamental core thesis and 3100 target, many wonder why we bother calling for a retest of the “shock drop” ending the week of 02/09.  The answer is simple – when a retest happens, fear it is something more significant causes many to reduce risk, just at the very time history suggests increasing it.  In all prior occurrences of such a historic spike in the 10-week rate-of change in volatility as measured by the CBOE Volatility Index (VIX), there was an average bounce of 5.62% (ex-2008 instance) prior to the retesting of the low 30 trading days later.  With a gain of 4.89% from our signal highlighted in “Shock drops, pops and flops,” the market is following the script, which means the comfort of the rebound should soon fade, either from fear of Fed, disappointing data, or some combination of the two.

Obviously, opinions vary on the “Street of Dreams,” but that’s what makes a market.  We happen to think a full retest of the “selling climax lows” is not going to happen, but then anything can happen in the equity markets.  So, what caused yesterday’s Dow Dump (-380 points).  Well, we think it was cognitive dissonance, which would be the ability to hold two disparate thoughts at the same time.  In the current case it is whether to believe the softening headline economic reports (durable goods, housing, etc.), or the details within those reports that show final sales up 3.3%, domestic final sales better by 4.3%, and private domestic final purchases improving by 4.6%, which suggest the economy is really strong.  We continue to think the economy is stronger than a “garlic milkshake!”  This morning the S&P 500 futures are off about 7-points as we write at 5:12 a.m. as the Street awaits Fed head Powell’s part 2 testimony to lawmakers.  Clearly, Wall Street is currently of the belief that Jay Powell is more hawkish than his predecessors.  Surely time will tell; but, until he demonstrates a more dovish disposition, the perception will be the new Fed Chair is a hawk.

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

Ranging appears to be the most amenable course of action for the market following the sharp drawdown in February that resulted in a 10% pullback. February was the first month in 15 where the S&P500 recorded a negative return. Since that was the longest run of consecutive positive monthly returns in decades it is reasonable that this inconsistency represents at least a pause for markets.

For starters, history tells us that the dynamics of the supply and demand for money are relevant for determining an appropriate level for interest rates. The Federal Reserve is decreasing the supply of money by tapering their balance sheet, while the demand for money will increase with the latest bout of expansionary fiscal policy (i.e. tax reform). Professor Lars Oxelheim of the Financial Times, recently wrote how historical precedence has shown how this supply/demand shift can lead to significantly higher interest rates over a short period of time. Of course, this would impact the valuation of all asset classes as discount rates head higher. Market strategist Dave Rosenberg recently added that “we have a government policy that is aimed at pushing fiscal deficits higher and pulling trade deficits lower. Say this over and over again – these two goals can only co-exist with rising interest rates.”

Also, who is going to stroll in on their white horse and be the new big US treasury bond buyer? We know that the Fed is pruning their bond portfolio. After all, newly installed Fed Chairman Powell showed his true colors six years ago when he warned of the “Greenspan put” and its implicit encouragement of risk taking. Considering his concerns back then, I cannot imagine him being overly dovish given the valuation excesses in our environment today. Furthermore, the Chinese could play monetary hardball as a response to any hostile U.S. trade actions and choose to mitigate their participation in our auctions, thus causing a sudden spike or pernicious reset in interest rates. Frankly, Xi Jinping has a license to do whatever he wants at this point.

Let’s lay aside for a moment the arguments about whether inflation is in fact rising or not, or whether we can expect all of the deflationary forces that have contributed to the decades long decline of yields to continue. Let’s just devolve to the first principles of markets. There are more sellers than buyers.

The election is likely to prompt a question that could force 5 Star to define its future—and potentially that of Italy, too. Is it a governing force or simply a protest movement?

On one side are members, including Luigi Di Maio, the party’s 31-year-old candidate for premier, who are pushing it to join an alliance with mainstream parties. According to polls, 5 Star would receive about 27% of votes—not enough to govern alone, but potentially enough to play a major part in a coalition government.

Mr. Grillo has roundly rejected that scenario, saying that unless 5 Star wins an outright majority, it should remain an opposition party. Joining a coalition government is “like saying that a panda can eat raw meat,” he said in January. “We only eat bamboo.”

If no single party or coalition emerges with a parliamentary majority, Italy’s president could ask parties to attempt to form a grand, cross-party coalition that could have a limited lifespan.

This history of protest parties that enter government as part of a coalition is not favourable so Grillo is exhibiting political savvy in eschewing the temptation to enter power without a majority. However, Italy’s political system is so fractured that receiving a majority is a tall order which suggests the most likely scenario is another coalition that supports the status quo or limited reform at best. Nevertheless, until the event has passed it will continue to represent an uncertainty.

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

Some of the topics covered include: small key reversals on Wall Street yesterday suggest the impetus of the short covering rally is fading, stocks generally fall in sympathy. Eurozone banks testing the region of the trend mean and Italian yields inert ahead of the election, discussion of the impact of Chinese dictatorship on headline grabbing shares. 

Some skeptics believe all this good news about the prospects for the economy supports the bearish, not the bullish, case for the equity market. They argue that the economy was already doing well before the fiscal stimulus provided by the tax cut. With unemployment at 4.1% and headed to 3.5%, the economy did not need any stimulus. It was already at full employment and the additional federal spending would cause the economy to overheat, resulting in higher inflation to and rising bond yields. They argue that those who are bullish on the market should hope for slower growth. My view is that this is an earnings-driven market and the improving profit forecasts will offset rising inflation and interest rates.

Some observers believe a 10% correction is enough, at least for a while. Valuations have come down to reasonable levels, the market is no longer excessively overbought and intermediate-term interest rates are showing signs of stabilizing. The Crowd Sentiment indicator has moved from close to 80 down to 61, putting it in “neutral” territory where we could see a short term rally. It would be nice if investors had to endure only two weeks of pain before the market headed higher again.

I believe the positive sentiment that provided the background for the decline has only partially been corrected. Consumer confidence is high, reaching levels not seen since the late 1990s, but the savings rate has dropped to 3.4% as consumer net worth has increased. The last time the savings rate was this low was two years before the 2008-9 recession. We know that the Federal Reserve is moving toward a more restrictive monetary policy and the European Central Bank is talking about tapering. Less accommodative monetary policies are generally not good for the equity markets. Consumer debt has risen sharply since 2009 as confidence has increased, but federal debt may be the real problem. According to Doug Kass and Larry McDonald, that debt was $9 trillion in 2007 and carried a cost of servicing of 4.75% or about $425 billion a year. (In 2000 it was only $6 trillion with a cost of servicing of 6% or $360 billion, but with a tax cut and two wars to finance, debt soared in the new millennium.) Today it is $20.5 trillion with a debt service cost of 2.25% or $460 billion, slightly more than in 2007. Think of what interest rates going above 3% would do to the budget deficit.

None of these issues make me bearish but they do make me think the correction is not over. I am bothered by the role that quantitative algorithmic trading and leveraged Exchange Traded Funds played in accentuating the rise in the market and its decline. These are basically trading tools, not investment strategies, and while it can be argued that traders contribute to market liquidity, I fear that these mechanical techniques have produced a certain level of instability in frenetic periods such as the one we just experienced.

I am on the record as saying I think the market is more likely to range than trend so I see more in Byron Wein’s views to agree with than disagree with.

You mention lead indicators, could you explain those you prefer?

At FullerTreacyMoney we look at two different types of lead indicator. The first is what one might think of as individual to the animating theme behind a trend, the others are broad market indicators.

Thank you very much for another nice long term video. I think your idea the potential of Africa is very interesting. Would you have any suggestions how to invest to benefit from the growth of Africa? Thanks in advance

Thank you for this email which others may have an interest in. One of the primary challenges in investing in Africa is that there are only about 1700 companies listed on the entire continent. Additionally the shares of most of the listed companies are illiquid.  To compound the challenge, many of the companies are linked to the resources sector which means they tend to be cyclical.

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

Some of the topics discussed include: Modi losing his lustre in India, Fed remains committed to balance sheet run off, Dollar firms, oil and gold weak, Treasury yields firm.

Earlier the poor Indian farmer could sell his cow for Rs 25000 when it stopped giving milk. No longer. Now cattle buyers don't step forward lest Hindu goons lynch them.

So the farmer with an unproductive cow leaves it in some open area, and this cow becomes yet another addition to the tens of thousands of emaciated cows standing around in the countryside.

Worse, they eat up the farmer's crop. Losing him the little he has.

India has 120 million cows, according to the last agriculture census. Why would those cow-owners vote for a Modi who impoverishes them?

When Nanded voted against the BJP and Modi this week, it was speaking for all of rural India. Village voters will pulverize Modi in 2019.

About urban distress, facts speak. Mahesh Vyas is India's most respected statistician and founder of CMIE, our most credible source on the Indian economy.

Citing figures, he wrote that demonetization triggered huge job losses. Seven million of them in one year between Jan 2016 and Jan 2017. He was talking of formal jobs in the private sector.

Those seven milllost jobs means at least 28 million people pauperized, at four people per family, people who depended on those salaries to eat and live.

Today a failing GST has paralyzed commerce all over India. Small traders and manufacturers just can't cope with the paperwork.

And they can't afford the services of trained accountants.

Could Modi lose the 2019 election in India? It’s a question the majority of investors haven’t even to contemplate but it behoves us to at least consider the possibilities.

Modi is an economic reformer and his success in Gujarat was one of his most alluring attributes in delivering what was a stunning electoral victory at the last election. However, Modi is also a populist, in fact he was the first of what is now an increasingly long line of successful populist politicians. Granting single party rule to the BJP also promoted Hindu nationalism to the national stage where it has become more assertive. 

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

The Continuous Commodity Index has been ranging for the 16 months. On the weekly chart it has Type-2 bottom with righthand extension characteristics or what I would consider a first step above the Type-2 bottom.
 

Both a section from the report and the report are posted in the Subscriber's Area.

China has successfully developed a domestic demand driven digital economy out of nothing less than a decade ago. The introduction of social media, ecommerce, online banking, payments and saving are all contributing to the upskilling of the population.

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

The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.

The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.

That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when our portfolio, overall, performed poorly (or the converse).

This mark to market rule which Buffett is speaking about will have a large impact not only on Berkshire Hathaway but potentially also on banks that conduct trading and investment banking activities. That will likely contribute to them representing high beta plays on stock market performance.

One of the more vivid images that Americans have of drug abuse is of a rat in a cage, tapping a cocaine-infused water bottle again and again until the rodent expires. Years later, as recounted in Johann Hari’s epic history of the drug war, Chasing the Scream, a curious scientist replicated the experiment. But this time he added a control group. In one cage sat a rat and a water dispenser serving diluted morphine. In another cage, with another rat and an identical dispenser, he added something else: wheels to run in, colored balls to play with, lots of food to eat, and other rats for the junkie rodent to play or have sex with. Call it rat park. And the rats in rat park consumed just one-fifth of the morphine water of the rat in the cage. One reason for pathological addiction, it turns out, is the environment. If you were trapped in solitary confinement, with only morphine to pass the time, you’d die of your addiction pretty swiftly too. Take away the stimulus of community and all the oxytocin it naturally generates, and an artificial variety of the substance becomes much more compelling.

One way of thinking of postindustrial America is to imagine it as a former rat park, slowly converting into a rat cage. Market capitalism and revolutionary technology in the past couple of decades have transformed our economic and cultural reality, most intensely for those without college degrees. The dignity that many working-class men retained by providing for their families through physical labor has been greatly reduced by automation. Stable family life has collapsed, and the number of children without two parents in the home has risen among the white working and middle classes. The internet has ravaged local retail stores, flattening the uniqueness of many communities. Smartphones have eviscerated those moments of oxytocin-friendly actual human interaction. Meaning — once effortlessly provided by a more unified and often religious culture shared, at least nominally, by others — is harder to find, and the proportion of Americans who identify as “nones,” with no religious affiliation, has risen to record levels. Even as we near peak employment and record-high median household income, a sense of permanent economic insecurity and spiritual emptiness has become widespread. Some of that emptiness was once assuaged by a constantly rising standard of living, generation to generation. But that has now evaporated for most Americans.

The hollowing out of the middle class might be a handy soundbite but what if it can be taken literally? Escapism is part of the human condition and the spectrum of distractions we pursue is indeed influenced by the health of our individual social settings. 

The party has in recent decades largely observed an unwritten retirement age of 68 for its top leaders, but its charter does not have any limit on terms. That means there are no restrictions on the general secretary position, but the Chinese constitution does limit presidents to a maximum of two five-year terms. 

Analysts said ending the two-term limit gives the strongest indication yet that Xi will stay in power longer than his recent predecessors at a time when the leadership was “fixated on stability”.

There was intense speculation in the lead-up to the party’s five-yearly congress in October over whether Xi would continue to lead the party beyond two terms, with some questioning whether his ambitious plans to “rejuvenate” China could be achieved within 10 years.

Governance is Everything. Does the removal of term limits represent a retrograde step? If we look at the anything beyond the short term then the answer had to be in the affirmative. Absolute power corrupts and the removal of term limits means any semblance of checks and balances will be removed. Xi has been clear that no one is above the law but China does not have an independent judiciary so that statement means nothing. 

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

Can gold really breakout when real interest rates are rising?

Thank you for this question which I have been pondering for a while. Gold does not have a yield so the only way it can outperform on a total return basis is for the price to rise. The reason it can do that is because the supply of gold is not easily or quickly increased. That’s it’s primary advantage relative to electronic money which is wished into existence by a simple keystroke. 

Thanks, Eoin for all your recent helpful comments. could you please comment now on the new oil market, I believe run by China, due to start on 01 March 2018 which is backed by gold and how this might affect world markets in so many different ways.

Thank you for this question which may be of interest to subscribers. I last commented on this subject in Comment of the Day on October 2nd. 

Van Dijk sees investment in e-commerce businesses as helping to reduce a valuation gap with Naspers’s stake in Chinese Internet giant Tencent Holdings Ltd., which is worth more than the company as a whole. E-commerce units, which include online food delivery in India and educational software in the U.S., have the highest potential for an initial public offering, Het Financieele Dagblad cited the CEO as saying. He didn’t set a timeline.

If Naspers decides to list its ecommerce ventures in Amsterdam the question of whether that will include its 30% stake in Tencent is going to have a major influence on the market since it almost certainly represent a powerful new high growth addition to the Euro STOXX 50. 

It is equally noteworthy that most of the peaks in M2 velocity shown in the prior chart, with a couple of exceptions, occurred when the U.S. dollar was in protracted bear markets from 1972 to 1980, 1985 to 1995 and 2002 to 2008. Moreover, the first and third of those down-cycles was marked by generally-rising yields on 10-year U.S. Treasuries. In other words, one could argue that rising UST yields were a symptom of capital flowing out of the dollar, which contributed to a higher cost-of-money and higher inflation.

These relationships shed some insight into the idea that tighter monetary policy — reflected in the slowing growth rate of M2 and the onset of the Fed’s balance-sheet reduction — is likely to be inflationary in practice. When money supply growth slows and the demand for funds increases — such as with the $1 trillion-plus fiscal deficits we wrote about last week — the conditions are ripe for an inflationary surge and a falling dollar. One could also argue that this will be good for real assets (which were hurt by QE during 2010 to 2016) but bad for financial assets (which benefited from QE).

The Velocity of Money is reported quarter in arrears so it tends to be a lagging indicator but it did turn upwards at the last reading in December. It stands to reason that if the economy has less slack and the government is about to blow out its deficits then inflationary pressures rise. 

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

Some of the topics discussed include: commodity driven markets outperforming, VIX pausing above 15, Wall Street has not held intraday highs for the last four sessions, FTSE rallies off its lows, oil firm, gold steady, China rebounding after the New Year Break.

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

Battery chemistry is complicated and the rate at which energy density doubles is about every five years. That’s quite a bit slower than the 18-month pace of doubling of efficiency seen in the semiconductors sector on which Moore’s Law is based. 

One school of thought says that shifting perceptions about the European Central Bank’s policy outlook had a significant role to play in the surge in U.S. Treasury yields that began in September and picked up speed last month, roiling global stocks.

Behind the argument is the observation that ECB policy has had much more impact on markets than the Federal Reserve’s. That’s because ECB bond purchases were so large that they exceeded the net issuance of respective government bonds -- unlike the Fed. That pushed European investors into other markets, such as Treasuries. One estimate has them buying more than a trillion euros ($1.2 trillion) of foreign bonds since ECB QE began.

ECB’s importance popped up on Treasuries traders’ radar screens last June, when President Mario Draghi gave what were perceived to be hawkish remarks at the Sintra confab, sending yields climbing round the world. In the fall, expectations grew that the ECB would announce a taper of its purchases. Yields started jumping in mid-October, when Bloomberg reported the ECB was thinking of halving its QE program.

And traders may want to set a reminder for the minutes of the ECB’s January meeting. Last month’s release said policy makers were open to tweaking their policy guidance given a strengthening economy. Later in January, news came that ECB policy makers were favoring a short taper to bring an end to QE.

Those January indications coincided with a surge in yields that’s continuing to affect markets, with 10-year U.S. touching their highest since 2014.

The ECB’s balance sheet has risen from €2 to €4.5 trillion since late 2014 and it remains on an upward trajectory. The rise of populist parties as well as the surprise success of Macron in France can all be levelled at the shifting of private sector debts onto sovereigns and the fiscal austerity demanded by creditors to pay those debts down. The deflationary effects that set off resulted in the ECB feeling they had little choice but to pursue extraordinary monetary accommodation. 

Brazil is now seen as more corrupt than Argentina for the first time in over two decades after suffering last year one of the biggest plunges among the nations tracked by a global transparency ranking.

Latin America’s largest economy fell 17 positions in the2017 index released by graft watchdog Transparency International on Thursday. It now ranks 96th among 180 nations, tied in the region with Colombia and Peru. Only two other countries in the whole index -- Bahrain and Liberia -- slid more than Brazil last year. Argentina meantime rose 10 spots, to 85th place and now ranks better than Brazil for the first time since 1996.

A series of corruption scandals have rocked Brazil over the past few years as the so-called Carwash probe uncovered a massive kickback scheme involving the country’s political and business elite. Former President Luiz Inacio Lula da Silva was convicted for graft last year while allegations against President Michel Temer are still being investigated. In Argentina, meanwhile, President Mauricio Macri has worked to make public tenders more transparent and successfully pushed for a law allowing plea bargain testimonies to resolve corruption cases.

Among key Latin American countries, the least transparent are still Venezuela (169th position) and Mexico (135th spot).

Transparency International’s ranking is based on surveys and assessments from 12 institutions and has become a benchmark gauge of corruption perception used by analysts and investors.

There is no Brazilian politician that has not been embroiled in the carwash probe. That’s bad news. However, the fact the scandal has broken, is being addressed by the judiciary and is making headlines both domestically and internationally speaks to the fact that Brazil does have institutions that can tackle corruption if the will to do is present. 

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

Some of the topics discussed include: short-term overbought conditions may be unwound, Dollar steady, inflation sensitive investments under pressure, gold continues to hold in the region of the upper side of its base, 

Your recent assessments of the markets appear to be that a period of ranging is likely to be followed by markets going up again. Of course, whilst no one knows what the future will be, I wonder why you don't see the greater likelihood of markets turning down after some consolidation. With the amount of US debt increasing, interest rates increasing, and stock market levels already high by historical standards, are you not more concerned that markets, being forwards looking, might be more likely to head down than up? Esp. since markets struggle when interest rates go above 3%? I appreciate your talk of share rotation, but a rising tide lifts all boats and surely the opposite is true when markets tank?

Thank you for these questions which I think everyone asks from time to time. For someone in our position of attempting to forecast the outlook for markets the most important thing we have to remember is that markets rise for longer than they fall but when they fall they often do so quite quickly. However, they do not fall without first exhibiting topping characteristics. 

You have cited the Gold/Dow relationship and how if this ratio was to do what it has in the past, Dow has lots of upside versus gold. However, Jesse Felder sees it just the opposite. Not sure why your tow ratio charts would be opposite. Here is a link to the public post. 

Thank you for this email which may be of interest to other subscribers. In the Big Picture Long-Term audios and videos, I tend to use the Dow/Gold ratio over the course of the last century because it gives us a graphic illustration of how stocks outperform gold in secular trends but gold outperforms stocks following stock market peaks. 

The attacks on the oil and gas industry in the U.S. for its methane emissions have been based on reports and estimates of the volume of leaks from its drilling and transportation activities.  Fighting these leaks is in the companies’ best interests because it will help the bottom lines as less natural gas will be lost to the atmosphere and income will be enhanced.  Fixing the leaks on their own is also a way the oil and gas industry can hope to stave off further debilitating regulations.  Now, however, the industry is hopeful of an easing of the methane containment rules for companies drilling and producing natural gas from federal lands by the Trump administration.  

 

While the discussion about methane leak control for the oil and gas industry is dominating the headlines, there remains a huge untapped source of natural gas in the form of methane hydrates under the ocean that some governments are working to exploit.  These hydrates are where molecules of methane gas are entrapped within an ice lattice.  They form under very low temperatures or high pressures, or a combination of the two.  They are usually found on the outer continental shelves around the world.  (They have been found in the pink areas of the global map in Exhibit 18.)  The challenge is that they have been difficult (risky) to mine, as well as costly.  They have the potential to blow up any vessel attempting to extract the hydrates from the sea floor.  The U.S. Bureau of Ocean Energy Management (BOEM) estimates that the U.S. has 51,338 trillion cubic feet of methane hydrate gas resources.  If only half of BOEM’s estimate is realized, there are 1,000 years of supply based on the current consumption rate of natural gas in the United States.

 

Last year, China, a country with significant needs for more natural gas but lacking success in finding and developing meaningful reserves, has been experimenting with tapping methane hydrates.  The country’s focus is on hydrates situated in the South China Sea, which helps explain China’s attempt to claim territorial rights to that area of the Pacific Ocean.  At the same time, Japan, another nation lacking adequate energy resources, has successfully extracted methane hydrates from an area offshore the Shima Peninsula.  The implications of successful development of methane hydrate mining by either or both countries would be significant for the future of the global liquefied natural gas (LNG) business.

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

If one were looking for a single reason China is so interested in claiming the South China Sea, then methane hydrates are probably the answer. The existence of such vast resources is no secret. Just like shale oil and gas, geologists have known about methane hydrates for years. However, they have been largely irrelevant to the energy sector because of the cost of production. 

In it, the MPs say Mrs May "must" ensure Britain can change its laws without authorisation from Brussels from the moment it leaves the bloc in March 2019.

And they demand the UK be "free to start its own trade negotiations" from day one of the transition period.

Ministers have also been urged to fight back harder against the EU setting a timetable for negotiations and to "take control" of tariff schedules - in other words the customs union.

The letter was signed off by MP John Penrose "on behalf of ERG officers" and sent to Mrs May on Friday, with a copy leaked to Sky News on Tuesday.

The requests do not necessarily defy Government policy on Brexit but come at a crucial time in negotiations within the Conservative Party about what type of divorce to pursue.

Here is a link to the full letter which is now on Twitter.

Theresa May is sandwiched between those who are willing to renounce negotiations and revert to WTO rules of trade with the EU, and the rest of the party who want to see as little disruption to the economy as possible. However, as she attempts to tread a path between these opposing groups, she also has to keep Northern Ireland’s Democratic Unionist Party on side.  

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

Some of the topics covered include: bond yields and the outlook for inflation, gold pauses at the upper side of its base, Wall eases but Europe steady on weaker Euro, Yen eases and stocks in the region of the MA, bitcoin continues to rebound and the VIX is holding above 20. 

I have been a long-time subscriber and attended the Chart Seminar around ten years ago. Back then you were a young kid and David led the show. Showing no disrespect for David who admire greatly, you have become at least an equal when it comes to your daily audios. I found this weekend's long-term picture very interesting and well done. I think you have properly described where we are at presently and the likely outcomes in the medium and longer terms. I do get the sense over here in the US that we may be facing an environment of Stagflation. With rising inflation and what now looks like slower growth in the near term, combined with a shrinking Fed balance sheet and rising rates, we could be facing some real headwinds for equities. Can you share your insights on an environment of stagflation and what asset classes would generally over-perform and underperform if the past is a guide? Thank you and keep up the great work!

Thank you for your kind words. David is a visionary I can only hope to emulate. Luckily, the reason we have always gotten along so well is because we share a very similar world view.

Tax cuts funded with debt, a potential infrastructure bill funded with debt and the prospect of tariffs on steel and other basic commodities all represent inflationary pressures. 

"The workforce is becoming more and more global, so to attract and retain the best people, you need to be prepared to pay competitive salaries," said Marc Burrage, managing director of Hays Japan. Seniority-based pay systems are among the reasons for Japan’s low salaries, he said. "It’s a concerning situation and if it’s not addressed soon, it will start to bite in terms of productivity."

Mrs. Treacy is planning a trip to Japan in April to source Akoya pearls so the girls and I will be tagging along to Kobe and Osaka. I asked a long-time subscriber in Japan what his perception of rising inflationary pressures is. Here is his response: 

At the same time, Walmart Chief Executive Officer Doug McMillon is trying to convert the company’s brick-and-mortar shoppers into online customers, who spend almost twice as much overall and seek out higher-priced items.

At Walmart’s e-commerce unit, sales rose 23 percent last quarter. That’s less than half the pace of previous periods. The Bentonville, Arkansas-based company had been getting a tailwind from its acquisition of Jet.com, an online upstart that it bought in 2016. Still, the company maintained its full-year forecast for online sales growth of about 40 percent.

The company needs to widen its e-commerce base, especially among younger and professional demographics, said Neil Saunders, managing director of research firm GlobalData Retail.

Wal-Mart is spending a lot of money on its ecommerce platform but the cold reality is that its backend is antiquated compared to that offered by Amazon, eBay or Etsy. Maybe it is focusing on selling its own products over those of third party sellers but if that is the case one has to question why it has been marketing to Amazon sellers so aggressively. 
 

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

Some of the topics discussed include an extensive review of bonds and bond proxies. 

And that is the likely fate of conventional retail. Like the railroad, there’s an extraordinarily surfeit of retail space built with little consideration of what the market will actually sustain; recent declines in the retail revenue per square foot in brick-and-mortar stores suggests that things are getting worse, fast. And like the railroad, there’s a new way of doing business on the block, except that instead of changing how we move people and goods, online retailing promises a new way of delivering them to the end consumer. 

If the per capita retail footprint declined as much as the railroads did, it would fall all the way down to 2.82 square feet per capita. That’s a lot of empty malls and defunct big box stores, but retail won’t disappear any more than the railroads have gone extinct.

In fact, in 2014, the inflation-adjusted revenue that railroads earn per mile of track is 2.7 times what it was a century ago. More startling still, the so-called “ton miles” of freight carried on the nation’s railroads (a ton mile is one ton of freight carried one mile) has tripled since 1960, even as the total size of the operational railroad system has declined dramatically.

That points to the likely future of conventional retail: a drastic reduction in the per capita footprint, with the remaining stores capable of earning far more money per square foot. It’s not the brightest of futures. But it’s also not the end of the world.

Near where I live in Los Angeles, a large mall is close to shutting since it’s primary tenants, Macys and Nordstrom, have decamped to the newly refurbished Westfield mall in Century City near Beverly Hills. The two malls are about a mile apart but until a couple of years ago Macys seems to have been comfortable with the idea of having two large stores within close proximity of one another. In between the two malls the only businesses that have survived are universally service oriented. So, what is going to be done with all the empty commercial space sitting on valuable pieces of real estate?

In an effort to sharpen Reckitt Benckiser’s focus on brands such as Strepsils and Mucinex cold remedies, Kapoor has moved to separate the company’s home-care and health businesses. Reckitt also became a leader in infant nutrition with the acquisition of Mead Johnson Nutrition Co. last year.

On Monday, it increased its forecast for synergies from the deal to about $300 million from $250 million. This year’s savings will only “slightly exceed” additional infrastructure expenses associated with the new health and home-and-hygiene business units, the company said.

Morgan Stanley analysts led by Richard Taylor described the company’s outlook as conservative.

A question someone asked of Charlie Munger at last week’s Daily Journal AGM stuck with me over the weekend. It was how he thought the established brands would fare with increased competition from the likes of Costco and Amazon who are pioneering their own products often in direct competition. His answer was that white- labelling and own-brand selling would have an effect, but if one were to take a long-term view the established brands would still have value. 

In 1969, at the beginning of the previous inflation-induced default on American obligations, 23% of the Federal Reserve’s Treasury bond holdings had a time to maturity of less than 90 days and 1.2% had a maturity date greater than 10 years. The Treasury bond portfolio itself comprised 68% of the Federal Reserve’s assets, the balance being “cash items in process of collection,” foreign currency, and gold. That was a resilient balance sheet.

Currently, 6% of the Federal Reserve’s Treasury bond holdings have a time to maturity of less than 90 days and 26% have a maturity date greater than 10 years. The Treasury bond portfolio itself comprises 55% of the Federal Reserve’s assets, and another 40% is comprised of mortgage-backed securities. That is not a resilient balance sheet—it is highly sensitive to interest rates.

Myrmikan has argued for eight years that it is rising rates that will destroy the value of the Federal Reserve assets and, therefore, the value of its liabilities, a unit of which is known as a “dollar.” Gold, having the most stable value of any substance in nature, must rise as the dollar falls. Therefore, gold naturally correlates with interest rates, as the following chart of the inflationary 1970s illustrates.

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

The USA has a lot of debt and a great many unfunded liabilities. The only way countries have gotten themselves out of problems like this previously is to either default or inflate the debt away. Procyclical polices and debt fueled infrastructure spending suggest the USA is going for the latter option. Doubling down on the military is a none too subtle move designed to emphasise the world’s pre-eminent military power might be withdrawing from overseas commitments but it is not going away.  

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

The Dollar is weak, wages are rising, the participation rate has bottomed and unemployment is due to fall further. That is a recipe for inflation.

The surge in supply of Treasuries due over the course of the next few months and years, while the Fed is planning to further reduce the size of its balance sheet, represents additional downside pressure on Treasury prices over the medium term. 

Continued global space industry expansion will further extend space-enabled capabilities and space situational awareness to nation-state, nonstate, and commercial space actors in the coming years, enabled by the increased availability of technology, private-sector investment, and growing international partnerships for shared production and operation. All actors will increasingly have access to space-derived information services, such as imagery, weather, communications, and positioning, navigation, and timing for intelligence, military, scientific, or business purposes. Foreign countries—particularly China and Russia—will continue to expand their space-based reconnaissance, communications, and navigation systems in terms of the numbers of satellites, the breadth of their capability, and the applications for use.

Both Russia and China continue to pursue antisatellite (ASAT) weapons as a means to reduce US and allied military effectiveness. Russia and China aim to have nondestructive and destructive counterspace weapons available for use during a potential future conflict. We assess that, if a future conflict were to occur involving Russia or China, either country would justify attacks against US and allied satellites as necessary to offset any perceived US military advantage derived from military, civil, or commercial space systems. Military reforms in both countries in the past few years indicate an increased focus on establishing operational forces designed to integrate attacks against space systems and services with military operations in other domains.

Russian and Chinese destructive ASAT weapons probably will reach initial operational capability in the next few years. China’s PLA has formed military units and begun initial operational training with counterspace capabilities that it has been developing, such as ground-launched ASAT missiles. Russia probably has a similar class of system in development. Both countries are also advancing directed-energy weapons technologies for the purpose of fielding ASAT weapons that could blind or damage sensitive space-based optical sensors, such as those used for remote sensing or missile defense.

Of particular concern, Russia and China continue to launch “experimental” satellites that conduct sophisticated on-orbit activities, at least some of which are intended to advance counterspace capabilities. Some technologies with peaceful applications—such as satellite inspection, refueling, and repair—can also be used against adversary spacecraft.

Satellites represent key pieces of military infrastructure without which many advanced pieces of modern military equipment do not work.  Therefore, it is inevitable that space become a theatre in any future conflagration. 

The apparel industry—unlike cars or electronics—seemed protected. Fabrics are notoriously difficult to work with, meaning nimble human hands are often better than machines. There was plenty of labor in Bangladesh, Cambodia and China, reducing the urgency to automate.

But labor costs have been climbing, even in developing countries. And technology is becoming so advanced that machines can increasingly handle difficult tasks such as manipulating pliable fabrics, stitching pockets and attaching belt loops to pants.

All that is upending the economics of the apparel industry, which long served as the first rung on the economic ladder for poorer countries, especially in Asia. A 2016 International Labor Organization study predicted some Asian nations could lose more than 80% of their garment, textile and apparel manufacturing jobs as automation spreads.

“I worry about developing countries—they are in the bull's-eye of this automation revolution” as robots master repetitive tasks once dominated by poor nations, said Erik Brynjolfsson, director of the MIT Initiative on the Digital Economy. Most jobs of the future require significant skills training—and that is where more-developed nations thrive, he said. 

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

The textile sector has for generations represented the first rung on the road to economic development. That is probably still the case since there are still plenty of low cost, high population areas, not least in Africa.

However, while in previous generations a country could rely on the textile sector for job growth for decades, technological innovation now demands much faster progression up the value chain as well as the fostering of a domestic market. 

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

Investigations by the nation’s graft ombudsman and Auditor- General found that graft is endemic in the state, with tens of billions of rand stolen or squandered each year. Zuma appointees head almost all the law-enforcement agencies, which have been slow or loathe to act against some of his closest allies who’ve been implicated in the free-for-all. The new president will need to replace several key officials, reassert confidence in the independence and integrity of the criminal prosecution system and show that the government is intent on ensuring all those found guilty of corruption are held accountable.

2. State-owned companies in chaos
The looting spree largely targeted state companies, especially power utility Eskom Holdings SOC Ltd., which is at risk of running out of cash. While Ramaphosa has already overseen the appointment of a new board at Eskom, it still needs to appoint a permanent chief executive officer, fill several other top management posts and urgently raise new funding. South African Airways and oil and gas company PetroSA Ltd. are among the other entities that have been hobbled by a lack of leadership and oversight.

 

Governance is Everything has been a mantra at this service for decades. Zuma did everything he could while in power to line the pockets of everyone loyal to him and that system of rent seeking and bribery is going to take a long time to unwind. It could well be that the water crisis in Capetown and the near bankruptcy of Eskom were the final catalysts for Zuma’s ouster. Right now, the market is willing to give the benefit of the doubt to Ramaphosa that some of these issues can be addressed. Capetown’s situation is urgent so Ramaphosa is unlikely to have much of a honeymoon period.

Understanding the structure of China’s shadow banking system is crucial for analysing China’s financial system. We provide a stylised map of shadow banking in China, which highlights the main forms of shadow banking and the resulting financial system interlinkages. Shadow banking in China takes a markedly different form compared to that in the United States. A key characteristic is that commercial banks are the dominant players in China’s shadow banking system. The system is effectively a “shadow of the banks”, while securitisation and market-based instruments still play only a limited role.

We show that the structure of shadow banking in China is evolving. Its size and dynamics have changed rapidly in recent years. The main area of growth has shifted from shadow credit provision to private firms with less privileged access to formal bank credit, towards offering alternative savings instruments (e.g. WMPs and trust products). Similarly, at the intermediate stage, new and more complex “structured” shadow credit intermediation has emerged and quickly has reached a large scale. This is driven by banks trying to alleviate regulatory burdens (e.g. NPL provisions or LTD ratio ceilings) through a reclassification of existing bank assets into investment receivables. Tight and growing financial sector linkages further raise the potential for the transmission of financial shocks among savers, banks and the bond market. In addition, new forms of internet-based credit intermediation, such as P2P lending, have been expanding at an extraordinary pace. As a result, shadow banking in China is growing more complex and thereby becoming slightly more similar to the US shadow banking.

We tend to hear a great deal about the problem of non-performing loans and the shadow banking sector in China. However, a point that often seems to be overlooked is that not every bank is equally affected. 

The iron ore price which has been defying expectations of a pullback for months gained on Wednesday with benchmark Northern China import prices rising to a five-week best of $78.25 a tonne. The last time the steelmaking raw material traded above $80 was April 2017. Coking coal was also higher at $233.10 a tonne. Premium Australian exports were at $154 a tonne this time last year.

Obituaries were being written for Anglo two years ago before the 100-year old company went on radical restructuring drive. Since then the world's fourth largest diversified miner has surged 500%

The bullishness spilled over to mining's heavyweights which outperformed broader gains on US equity markets.

Shares in world number one miner BHP Billiton (NYSE: BHP) gained 2.8% in New York while Anglo-Australian peer Rio Tinto (NYSE: RIO) added 1.8%. Both companies are worth more than $100 billion having doubled in value since the beginning of 2016 when the mining industry hit the bottom of the cycle.

Vale (NYSE: VALE.P), the world's top iron ore and nickel producer, was one of the best performers on the day with a 6% jump valuing the company at $73.1 billion. The Rio de Janeiro-based company is up 30% over the past year and is up a fourfold since the end of the downturn when iron ore reached $37 a tonne and nickel bottomed at $7,700 a tonne.

The vast majority of the global economy is still growing at a rate well above the trend of the last few years and that is helping to boost demand growth for commodities. Considering the majority of miners are no longer willing to bet big on expansion and development of greenfield sites, they now exhibit greater commonality with metal prices and even have potential to act in a high beta manner. 

Cisco is one of the richest companies in the technology industry. It has more than $70 billion in cash, most of which was earned overseas and parked there. The company will now bring back some of that money and devote an additional $25 billion to buying back stock. Cisco took a charge of $11.1 billion related to new tax laws, leading to a net loss of $1.78 a share in the second quarter. Excluding some items, it reported a profit of 63 cents a share, beating analysts’ estimates for 59 cents.

Sales rose for the first time in eight quarters to $11.9 billion in the three months ended Jan. 27, also coming in ahead of estimates.

Robbins is seeking to restore the growth that once made Cisco the biggest company in technology. It’s a challenge amid a fundamental change in the networking industry that’s forcing Cisco to acquire new skills and adapt its business model. The technology of networks is increasingly shifting to software control and security of data flow and away from fixed-purpose hardware. At the same time, some of the largest buyers of gear -- owners of data centers such as Amazon.com Inc.’s Amazon Web Services and Microsoft Corp.’s Azure -- are increasingly designing their own hardware forcing Cisco to come up with new, cheaper and more flexible products that might interest them.

A $25 billion buyback program is enough to move the needle for the majority of shares and Cisco extended the breakout from its more than decade long base formation. 

Hello Eoin, agreed: spreads in Euro area are to be looked closely, with a first trigger possibly the elections in Italy (beginning of March). Limited advances in terms of reforms and budget consolidation indicate Italy has thrown away the opportunity offered by QE to mend its ways. A slowdown in global economic growth or the implementation of protectionist measures may curb the country’s only engine of growth, i.e. its (thank God) very strong exports. It is a delicate situation which - but this is just a gut feeling - does not seem to be fully appreciated by market participants (Italy's equity market has been so far relatively strong).

Italy’s upcoming election is unlikely to result in strong government but it could usher in another populist administration inspired, if not led by Silvio Berlusconi. Against that background there is little chance of the reforms needed to set the economy back on a path to anything close to fiscal rectitude. 

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

Some of the topics discussed include: Gold and gold shares surge, stocks steady, bonds yields hit new recovery highs, Volatility futures expire, Dollar weak particularly against the Yen.

I drove into downtown LA this morning to hear Charlie Munger talk at the Daily Journal AGM. Here are some of the points he raised.  

Global markets were whipsawed last week after U.S. wage data spurred investors to reappraise the outlook for global inflation and weigh consequences for monetary policy and asset valuations. While investors often seek gold as a haven during times of turmoil, the metal fell on the same concerns that helped spark the selloff in stocks: the prospect of higher interest rates. Bullion regained some ground early this week.

The retail sales number “is one of the moving gears that can cause the Fed to actually take a step back from raising interest rates,” Daniel Pavilonis, a senior market strategist at RJO Futures, said in a telephone interview. “There’s a lot of uncertainty in the market and it’s helping gold. Traders are asking, is this number problematic enough to hold off on raising rates, or it is just temporary?”

Gold has been ranging mostly below $1350 since the middle of 2016 in another of a succession of 18-month ranges seen over the last 15 years. Gold is a hedge against financial troubles that reduce investors’ purchasing power so if there is any chance that the Fed will fall behind the curve of rising inflation, gold can be seen as a sound hedge.

As markets get spooked by the rising yield environment, (US 10 -year treasury’s at 2.7%, up 11% ytd and the German 10 year Bund at 0.67%, up c.55% ytd) investors continue to question equity valuations following a 9 year bull run as bond/bund yields begin to factor in a rising interest rate cycle. Given this backdrop we’ve seen a rotation out of bond proxy/high yield stocks like telco’s and utilities into the banking and insurance sectors. The chart below shows the correlation between the European banking sector and the German 10 year bund over the last year.

As you know we have been positive on the European banking sector for some time, given the improving economic backdrop across the Eurozone which bodes well for the sector. The latest European Q4 GDP came in ahead of expectation and when you look at historical data, 2016 estimates for Q4 2017 were 1.4% but came in at 2.7%. Specific to the banks, balance sheets have been repaired, lending growth is accelerating, consumer spending is improving, and confidence levels are going in the right direction. Both core and peripheral European banks are primed to take advantage of this upturn and to some extent has been reflected in higher moves over the last year or so. The sector though continues to trade at attractive valuations due to historical legacy issues but we believe that these issues, including Non-Performing Loans “NPL’s”, have been well managed and should be less of a headwind going forward. Quantitative Easing “QE” from the ECB is nearing an end, per recent comments from the central bank, as the market moves to a more normalised interest rate environment over the coming years to the benefit of the banking sector. 

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

Two of the consequences of quantitative easing were to rob savers of yields and to compress the profitability of banks by reducing the interest rates they could earn on short-term paper. The change to raising rates is a net positive for the banking sector. There is ample evidence of this in the USA following the announcement of the tax cuts and as the Fed gradually raises rates. 

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

The cult of the equity is largely a US, UK and Australian phenomenon. In Europe, bonds are still a popular asset class for retail investors. Retail investors in Italy will remember the reverse convertible products peddled by banks over the last couple of decades. The quantity of such products on the books of Banca Monte dei Paschi di Siena was one of the primary contributors to the bank’s eventual demise. If anything, this helps to emphasise the point that there is no shortage of dodgy products in both the bond and equity markets that tend to gain popularity when there is a dearth of yield.

The yen briefly weakened Friday when local media reported Prime Minister Shinzo Abe is set to nominate Kuroda for a second five-year term, strengthening speculation that has been in the market for weeks. Kuroda’s record easing helped push the yen to almost 126 per dollar in mid-2015, the weakest in more than a decade. The currency was at 108.43 on Tuesday.

The Federal Reserve started to trim its balance sheet last year, while the European Central Bank is also looking to unwind stimulus. Few economists predict the BOJ will deepen its already unprecedented easing after Kuroda failed to achieve a 2 percent inflation target in his first term. Foreign investors think if the BOJ can’t expand stimulus, its next step will be a move toward an exit. Domestic investors only see policy being tweaked.

The Bank of Japan is at a crucial juncture because right now Japan is the only country running both easy monetary and fiscal stimulus. The Eurozone is close because it is tapering its quantitative easing while the fiscal austerity strait jacket has been loosened. Concurrently, the USA is swapping monetary largesse for fiscal largesse and there is already talk of an additional infrastructure bill which is only likely to add greater fiscal stress to the budget. 

content machine, dominating the majority of phones worldwide. Now “what’s on your mind?”

Four hundred hours of video are uploaded to YouTube every minute, which means that Google has more video content than any other entity on earth. It also controls the operating system on two billion Android devices. But AT&T needs to divest Adult Swim?

Perhaps Trump is right that the merger of AT&T and Time Warner is unreasonable, but if so, then we should have broken up the Four ten years ago. Each of the Four, after all, wields a harmful monopolistic power that leverages market dominance to restrain trade. But where is the Department of Justice? Where are the furious Trump tweets? Convinced that the guys on the other side of the door are Christlike innovators, come to save humanity with technology, we’ve allowed our government to fall asleep at the wheel.

Capitalism trends towards concentration as the large and strong consume the weak. Despite claims to the contrary, it in the interests of company executives to ensure the company they work for comes out on top by whatever means necessary. It is rare in the extreme that fines levied, after the fact, match the benefit from ensuring a competitor’s demise. Therefore, large companies, that dominate their respective niches, tend to persist for as long as they retain the hunger to dominate. 

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

 

The Dow Jones Industrials Average completed a reversion towards the mean at Friday’s low and extended the rebound today to confirm a low of near-term significance. Some short covering is now underway, but the damage to sentiment done by the speed of the decline suggests ranging will be required to encourage convalescence.

This is what David had to say during an email exchange we had this morning:

Could you please advise how you work out the trend mean and also at which percentage and up that you regard it as overextended. I note that you use a 40 ema on the weekly. 

Thank you for this question which comes up from time to time. We use the 200-day exponential moving average which is analogous to the 40-week MA. Incidentally, the Chart Library only does the calculation once so that regardless of whether you are looking at a daily, weekly or monthly chart the moving average will be calculated using days.

Deciding by how much an instrument needs to be trading above its trend mean to qualify as an overextension will depend both on what is characteristic of that market and the stage of the cycle the instrument is in. For example, a volatile share like Amazon routinely has overextensions in excess of 10% while for an Index like the Dow Jones Industrials Average that condition is relatively rare.

Meanwhile it is normal for prices to become overextended following a breakout from a well-defined range because the trend has been inert and the breakout is therefore surprising. That generally signifies the beginning of a trend while an acceleration following an already well-established consistent trend is suggestive of an impending consolidation or even correction. 

Northern European countries will argue that the key to making the EU more resilient is to ensure that existing rules are more effectively enforced. For example, the German, Dutch and Finnish governments have called for changes to the way the EU budget is administered to make future EU funds conditional on member states undertaking reforms that would boost economic convergence.

That will put them on a collision course with countries in Eastern Europe who fear that the EU budget will be turned into another tool to allow Brussels to interfere in their domestic politics.

It will also put them on a collision course with the French government, which believes that simply relying on stricter enforcement of rules to rebuild trust isn’t sufficient.

French officials argue that the answer is deeper political integration based less on rules and more on institutions. They point to the creation of the European Central Bank as an example of a significant pooling of sovereignty that was greeted with suspicion at first but has won broad public trust by operating independently and decisively. They say that a similar leap is needed now.

But to succeed, France will need to convince skeptical partners that any new institutions can be trusted to apply EU rules consistently and ensure member states respect their obligations—rather than deepen what has become the EU’s true rule-of-law crisis.

The European Union has one set of rules for large countries and quite another for small countries. At the same time the national champions of large countries can act with impunity while just about everyone else is expected to abide by the mille feuille of bureaucracy spewing from Brussels. 

Of course, technology also has the potential to help us connect with people wide and far. Kaku noted this point, outlining how tech will allow us to exchange thoughts and ideas as never before. “You will be able to talk to people in any language because your contact lenses will translate speech,” Kaku predicted.

Want to take a trip? Regardless of whether you’re going near or far, you won’t own your car; you also won’t drive one. Cars will drive you. You’ll also be able to travel much lighter than you do today because, as was mentioned above, you’ll be able to create most of what you want or need on demand.

For the things we do what to buy, Kaku believes we’re headed toward a future that will be socioeconomically unlike anything we’ve experienced.

“We are building up to something that I call ‘perfect capitalism,'” he said, describing the concept as “eliminating the middlemen, eliminating all the frictions of capitalism.” In this society, Kaku said, “the winner” will be all of society. The losers? The middlemen. The Stockbrokers.

Moore’s law delivered upon a doubling of computing power every 18 months for 40 years but is now slowing down as the atomic limits of silicon atoms are approached. That has resulted in two primary responses by chip makers. The first is to focus more on power consumption than computing power and the second is to invest heavily in developing new forms of computing whether quantum, optical, memristors or other solutions. 

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

Your continuing analyses are invaluable.  A week ago, on 6 Feb 2018 when the Dow had its 1175-point fall, the report hit the news headlines in Western Australia at 5.30 am.  My wife woke me to say, “Sorry for waking you but I’ve just heard on the news that the Dow Index has collapsed by more than 1,100 points; I thought that you may want to do something”.  I calmly advised her that I had already sold all our US shares. I pulled the blanket over my head and went back to sleep.  That peace of mind came from implementing your guidance.

Today I read an optimistic forecast which may be worth sharing with readers. The analysis said:

“While those all-time-low fixed income yields are rising thanks to forthcoming inflation, S&P 500 earnings are also rising, thanks to robust economic strength and tax reform. That means valuations no longer need to be sky-high to support higher stock prices.

The analysis then referred to the “Equity Risk Premium (ERP)”and argues that because equity earnings are expected to rise, the premium will rise more rapidly than the 10-year bond yield and support higher prices.

The full article is at: 

Thank you for this heart-warming account and interesting article which lays out what I consider to be the most common argument on Wall Street for why stocks should continue higher. This is based on outsized earnings growth projections and the assumption 3% is an important floor for Treasury prices. 

Tesla now faces a steady stream of severe and largely irreversible negative catalysts, including tax- credit expiration, broad competitive entry and platform quality issues, Hedgeye writes in a note.

Says TSLA’s demand is at risk; while the bull story is that "people want these cars," delays, competition and reliability are likely to jeopardize this assumption

Notes battery degradation, quality issues; says aging platforms are likely to become an increasing issue for would-be buyers

TSLA shares have dropped 11% since reporting 4Q results on Feb. 7 post-market vs the S&P 500 Index (SPX) falling 2.9% over the same period.

TSLA short interest 21.6% of free float vs year-low of 18.8% in Oct., high of 29.2% in April: Markit data

Tesla doesn’t make money so every source of fresh capital is important to the company. Having tapped the bond and equity markets the company began taking deposits for its Model 3 which the company counts as revenue. One might rightfully question the accounting integrity of that decision since these are deposits based on the assumption a car will be delivered. 

In just six months, China CITIC Bank Corp. culled its investment receivables by almost half to 585 billion yuan ($92 billion) as of Sept. 30. That figure must be even smaller now after Beijing fired another warning shot in November. It's a similar picture at other mid-sized lenders such as China Everbright Bank Co. and China Minsheng Banking Corp.

But banks have to make money somehow. Replacing wealth- management products has been an explosion in consumer loans, from mortgages to auto and cash advances. Financial institutions in China lent 6.2 trillion yuan to households last year, up 30 percent from 2016. Should the CBRC turn its blowtorch on that revenue stream as well, bank earnings will take a hit.

To be sure, the biggest will get by just fine. They can always rely on their strong deposit franchises for cheap funding and continue lending to low-risk state-owned enterprises. It's more difficult for mid-sized banks, which rely on the interbank market for funding. Three-month Shibor is at 4.8 percent versus

2.8 percent in September 2016.

One may argue that stock market fluctuations don't matter. But in this case they do, because China's smaller banks are eager to shore up capital as they brace for stricter cushioning rules. According to UBS Group AG analyst Jason Bedford, bringing the sector's core Tier 1 capital ratio to 10 percent would require more than 1 trillion yuan of capital raising, with smaller and policy banks bearing much of the burden.

In August, Bank of Jiangsu Co. reopened the A-share IPO market for lenders, one that had been dormant since Everbright's listing in 2010. Since then, more than 5 billion yuan of proceeds have been raised and there are about 20 more financial institutions in the queue. If stocks sink, banks will find tapping public markets difficult because of the unspoken rule that new bank shares can't be sold below book.

The bulk of the dodgy lending issues and non-performing loans people tend to worry about in the Chinese banking sector reside in the largely unlisted smaller banks so the issue is difficult to monitor. As sources of funding for these small institutions are cut off, with bans on wealth product creation and prohibition on consumer leverage coming into effect, the appetite of Chinese investors for IPOs and the valuations they achieve will be a useful indicator of how the challenges the banking sector has are viewed by domestic investors. 

One of the requests subscribers have asked for most over the last few years has been to have an easy way to find what positions I have open at any given time. Therefore, I repost this section on a daily basis and the title will always include the date of my most recent trade.  

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

One worrisome thing for bond investors that’s contributing to volatility is the unknown: new Federal Reserve Chairman Jerome Powell. For years after the financial crisis, they could count on Ben S. Bernanke and Janet Yellen to essentially limit how far prices can fall in financial markets -- colloquially referred to as a “put,” after the option. In other words, the bet was that central bankers would add stimulus or, in recent years, halt their tightening path on signs of unusual turbulence.

Judging by remarks this week from policy makers, who were unmoved by rising yields and the losses in stocks, the Powell Fed isn’t rushing to signal that tendency. New York Fed President William Dudley on Thursday called the stock selloff “small potatoes” and said it has no economic implications.

“The market has been kind of having a panic attack -- we really haven’t heard from Powell and it would help if he made some soothing comments,” said Ed Yardeni, president of Yardeni Research. “I don’t think he wants to establish right away that he wants a ‘Powell put’ the way we had a ‘Greenspan put’ and a ‘Bernanke put.”’

The market peaked in August of 1987 around the same time as Alan Greenspan took office. Following Black Monday, in October of that year he stated the Fed would provide whatever liquidity was required and over the course of the next few months proceeded to bailout Long-term Capital Management. Thus, the Greenspan put was born and the market proceeded to rally for the next 12 years. 

Tesla Inc. has all the tools to meet its planned Model 3 production rate in the first quarter. The only problem is they’re still in Germany.

The electric-car maker -- which is still targeting about 2,500 of the cars a week by the end of March -- has designed a new automated system for module production for its battery factory near Reno, Nevada. The line’s already working at its German Grohmann unit but it needs to be shipped to the U.S. next month before it can go into use, Chief Executive Officer Elon Musk said.

“That’s got to be disassembled, brought over to the Gigafactory, and re-assembled and then brought into operation at the Gigafactory. It’s not a question of whether it works or not. It’s just a question of disassembly, transport and reassembly,” he said on a conference call Wednesday. Once that milestone’s completed, Tesla will next need to fix material handling constraints at its Fremont, California, assembly plant before it can reach its 5,000-a-week goal by the end of June.

Tesla -- which has pushed back its Model 3 production targets several times -- is banking on the more affordable model to propel it from niche electric-car maker to mass-market manufacturer. The slower ramp means less money is coming in the door from customers taking delivery, and Wall Street is watching closely for any signs the targets could slip again.

The launch of the SpaceX' super heavy rocket was delayed on multiple occasions but suddenly everything seemed to go right ahead of the earnings announcement the day after. I don’t think I’m the only one who doesn’t see this as a coincidence. Tesla is attempting to build a world class heavy manufacturing centre from scratch which is no simple task and in doing so faced much greater competition than SpaceX does in launching rockets.

South Korea’s surprisingly weak economic performance in the last three months of 2017 isn’t cause for concern but does support the case for a cautious stance on central bank policy, according to economists and bank officials.

The economy ended its streak of outperforming expectations in the last quarter by recording its first quarter-on-quarter contraction since the global financial crisis.

That resulted in growth for the year—at 3.1%—coming in just below the government’s 3.2% target, but above 2016’s expansion of 2.8%. Markets on Thursday brushed aside the result, with the Kospi jumping 1% to reach record highs.

Still, the result will temper recent optimism about the economic outlook, while likely dispelling any idea at the Bank of Korea about raising rates until much later in the year. In November, the central bank raised rates for the first time in more than six years.

South Korea is the world’s 11th largest economy and it did not grow in the last quarter of 2017. This was explained by the surge in investment in the early part of year that eased back in the latter part of year but the failure to growth was an anomaly amid strong numbers for the rest of the global economy. Domestic consumption is expected to pick up this year and the Olympics may add some tourist revenue so a recession may be avoided but it bears monitoring nonetheless 

The central bank left its rate at 0.5 percent as expected and raised growth and inflation forecasts. While the pound was boosted by the central bank’s tone, sterling could see gains tempered by the fact the BOE’s policy path remains closely tied to progress in the Brexit talks, according to Viraj Patel, a currency strategist at ING Groep NV.

In a press conference, Governor Mark Carney said that while the bank sees more tightening than it did in November, this was a “crucial” year for the Brexit negotiations and everyone would be better informed next year, which would have an effect on the central bank’s thinking. Rises will be gradual and the bank is not tied to a specific rate path, he said.

It was a “Brexit-contingent hawkish signal,” said Patel, among the most bullish forecasters on the pound. The greater prospect of a rate increase in coming months “reinforces our $1.45 target for cable in the first quarter of 2018.”

Jacob Rees-Mogg has the wonderful luxury of not holding a ministerial position and can therefore say whatever he wishes. That straight-talking manner has made him a champion of the Conservative’s Brexit camp. Theresa May continues to walk a fine line between appeasing warring factions within her own party while also needing to keep Northern Ireland’s DUP onside in order to maintain her majority. 

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

“We remain of the view that the U.S. term premium is still too low when conditioned against the macro outlook, and the uncertainty around it,” Francesco Garzarelli and his fellow strategists wrote in a note Tuesday. “We recommend preserving a short duration exposure and expect the rebuild of the term premium to lead to a steeper” U.S. yield curve.

Goldman Sachs issued a short recommendation for 10-year Treasuries in November, which the strategists maintain. The firm’s model for fair value -- given economic fundamental and the expected pace of Fed tightening -- has the note at 3.09 percent, compared with about 2.8 percent now.

The term premium is the extra compensation that buyers demand to hold longer-maturity debt instead of a succession of short-term securities year after year. A widely used valuation tool, it tumbled across world markets in the wake of the financial crisis as the Fed and its counterparts bought debt as part of stimulus measures.

The 10-year Treasury term premium is negative 0.29 percentage point, up from a record low of negative 0.84 percentage point in 2016. As the name implies, it’s normally positive.

Its increase in 2018 marks a departure from its typical downward trend during Fed tightening cycles. But much is different this time around -- namely, the central bank’s balance-sheet tapering.

The Fed is buying fewer bonds and the Treasury is attempting to issue more. That is a recipe for yields to move higher. The imposition of deficit fueled tax cuts has reignited the prospect of the bond market taking issue with fiscal profligacy while the prospect of an additional infrastructure bill is likely to have an even greater deleterious effect. 

Injecting minute amounts of two immune-stimulating agents directly into solid tumors in mice can eliminate all traces of cancer in the animals, including distant, untreated metastases, according to a study by researchers at the Stanford University School of Medicine.

The approach works for many different types of cancers, including those that arise spontaneously, the study found.

The researchers believe the local application of very small amounts of the agents could serve as a rapid and relatively inexpensive cancer therapy that is unlikely to cause the adverse side effects often seen with bodywide immune stimulation.

“When we use these two agents together, we see the elimination of tumors all over the body,” said Ronald Levy, MD, professor of oncology. “This approach bypasses the need to identify tumor-specific immune targets and doesn’t require wholesale activation of the immune system or customization of a patient’s immune cells.”

One agent is currently already approved for use in humans; the other has been tested for human use in several unrelated clinical trials. A clinical trial was launched in January to test the effect of the treatment in patients with lymphoma.

Immuno-oncology is a rapidly evolving field in its own right but has significant tailwinds behind in the form of the falling cost of genetic sequencing and the gene editing using CRISPR-Cas9. Together with decades of progressive research in the oncology field the prospect of a cure for cancers of many different hues is within reach. 

If Asia and indeed Africa follow the trend of energy usage in the OECD then it is logical to expect more gas fired power generation and more gas used for cooking. At the same time the evolution of the electric vehicle represents a growing challenge for gasoline demand over the medium-term. At the same time electricity demand is likely to trend higher and gas will play a part in the energy mix along with renewables, batteries, nuclear and coal. These are medium to long-term considerations which energy executives will need to come to terms with but what about right now?

Snap Inc.’s first earnings beat as a public company, prompted at least five upgrades from analysts after the social-media company reported fourth-quarter revenue and daily active users ahead of estimates. The results blindsided short sellers who prompted upgrades from at least five analysts, and garnered a Street-high price target of $24 from Bank of America Merrill Lynch.

Analysts lauded the reacceleration of daily active user growth and advertising revenue growth, better-than-expected average revenue per user and the impact of the app redesign.

Still, some remained skeptical, with Morgan Stanley noting the potential that revenue trends could slow in 2018, while Susquehanna downgraded the stock amid competitive pressures from Facebook Inc.’s Instagram.

Snap climbed as much as 33 percent at 9:45 a.m. in New York, trading above its $17-per share IPO price for the first time since July. Here’s a roundup of what analysts are saying about Snap’s results.

Snap is used primarily by teens and tweens so it has appeal as a portal to the social interactions and advertising models of young people. Meanwhile Instagram is battling the company as it attempts to copy some of the Snap’s features while trying to appeal to the younger generation. 

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

A section this note is posted in the Subscriber's Area.

Credit Suisse is redeeming its short volatility (VelocityShares Daily Inverse VIX Short-Term ETN – XIV) not least because its indicative value was around 20% of the closing price in afterhours trading. ETN are not ETFs. They are perhaps best compared to swap contracts but often contain covenants allowing the issuer to close the trade at times when it is in their interest such as yesterday. 

If one was long XIV, you just could be screwed...

"Investors" who buy long vol ETN's should be really concerned - VXX completely failed to track the VIX today, going up only 33% as VIX slammed up 115.5%. Now of course they'll say that they squared up after hours, but still achieved maybe 60% or roughly a 50% tracking error. As you and I have discussed multiple times, the vol ETNs were just growing nightmare seeds waiting to be exploded upon the market. Now we may get to see just how good the counterparties are for those ETN's (as we whistle past the graveyard). The press continues to mistake the vol ETN's for ETF's - a serious mistake in thinking.

My rule: never buy a loan based on shaky (or no) collateral that represents a derivative of a derivative of a derivative of a set of derivatives.

I was and am long vol through simple puts and a straddle on SPY. Tomorrow my cash management rule will likely require rolling the puts down. Of course, it is another day, and we could see a super-fast reversal as always...

Tonight, Bitcoin is slipping away towards 6,000. A distant cousin of mine, a late-50's woman whose life was spent (honorably) raising children while her hubby worked as a blue-collar guy in the nearby nuclear weapons manufacturing facility, called me to ask if she should invest in bitcoin. I tried my best to explain to her that she should only invest money she could afford to lose, and should only gamble away money she could afford to burn. I also explained that bitcoin was not a currency, but rather a commodity, and had no intrinsic value whatsoever. 45 minutes of pushback from her was my limit. I'm sure she is busily trying to figure out how to put that 8-year-old PC in her closet together so she can trade those golden promises of untold wealth. 

I'm sure you're VERY busy these days :)

Thank you for the insight into your options trading which I’m sure will be of interest to the Collective. I can identify with the story of the person whose money is burning a hold their pocket to invest in Bitcoin. My mother is in hospital at the moment after a scare with pneumonia but is happily well on the road to recovery although it appears she is going to need a heart valve replacement. On the phone this morning she recounted how due to overcrowding at her local hospital she spent two days in the male ward where a fortysomething year old had been admitted following a stroke. However, all he wanted to do was proselytise about the wonders of bitcoin and nothing more than to convert everyone he met into a speculator. 

One point: I hear from various parts /commentators and sometimes you also comment about the strength or weakness of USD

Why is it that people see rising inflation in the US and - consequently - potential rate hikes as USD bullish?  Every time any news hints to potential rising inflation (like the wage growth number on Friday) the crowd jumps in and buy the USD for a couple for days (and sell gold like last Friday).

Inflation is - if anything - eroding the purchasing power of the USD. I don’t get how this can be USD bullish.

Not even the rate hikes by the FED to counter inflation are bullish. If you look back, the USD has stopped rising vs EUR when the FED has started hiking in Dec 2015. And when the hikes accelerated in 2017 the USD tumbled.

On the opposite, countries fighting against deflation / or low inflation and low or negative interest rates like JPY or CHF, have positive trends.

To me all this bullishness on the USD on rising wage numbers (hence inflation fears) look strange. I don’t believe it lasts beyond the short-term reaction of a couple of days (interesting: helped by the sell-off of risky assets USD was down big vs JPY today on Feb 5).

P.S. one point I also hear over and over from commentators is that the interest rate differential is in USD favor and that is USD bullish.

So what:  if you are a EUR or JPY investor, the forward premium that you pay on a ccy hedge wipes out your entire interest rate differential and more if you include broker spreads

Thank you for this insightful email which raises a number of points which I hope I can do justice to. There are two points that we need to address. The first is of the dollar, or indeed any fiat currency, as a store of value, then the individual merits of fiat currencies which are necessarily ratios because one cannot buy one without selling another.

Gold is hands down the best monetary asset for holdings its purchasing power since an ounce of gold today can buy pretty much the same quantity of goods it could 50, or even 100 years ago. If one takes that long-term perspective then fiat currencies cannot compete. As with any currency, relative values fluctuate so, we get medium-term and even secular trends.

However, if we look purely within the foreign exchange field, trends seldom last more than a few years.  David has long said “no country wants to have a strong currency, while some need a weak currency more than others”. If we apply that logic to the US Dollar and its relationship to other fiat currencies perhaps we have something to base our rationale for looking at the market on. 

S&P500 Consumer Staples has lost momentum over the last couple of years with larger pull backs that dip into the underlying range and somewhat less impressive rallies subsequently. Last week’s downside weekly key reversal with follow through this week represents another in a series of failed upside breaks. It is back testing the region of the 200-day MA and will need to continue to hold the 550 area if top formation completion is to be avoided. 

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

Some of the topics covered include: Type-2 top formation characteristics, sharp drawdowns on the most overextended indices suggesting peaks of least near-term and probably medium-term significance. Bonds rally from deep oversold levels, gold steady, oil eases but commodities generally steady, Asian and European markets likely to sell off tomorrow in sympathy as the Dollar rallies.

On Friday the bond market pulled back and so did the stock market.

That’s doesn’t happen very often.

Ray Dalio’s Bridgewater, one of the most successful hedge funds in the world, originated ‘risk parity’ to take advantage of the fact that bonds and the stock market seldom move in the same direction.

The whole rationale for the strategy is that when the stock market pulls back, investors will naturally seek a haven in the bond market. Dalio might have pioneered the approach but it has subsequently been employed across a wide swathe of the financial sector. A conservative estimate is more than $500 billion is devoted to this strategy.  

Thank you for another very helpful weekend broadcast. At this interesting moment in the markets, your insights are worth a great deal to me.    

I am fascinated by one thing in my own portfolio. Today is a good example. When just about everything is down 1 to 4 percent, my Copper ETF is up 2.3% and the Nickel ETF is up 3.4%. I have noticed this on other days recently. Do the algorithms see these as long-term hedges and buy accordingly?

Thank you for sharing your observation. Rather than attribute this action specifically to algorithms lets think about what we should expect from the maturing phase of the interest rate cycle. 

Bitcoin declined for a fifth day, breaking below $7,000 for the first time since November and leading other digital tokens lower, as Lloyds Banking Group Plc joined a growing number of big credit-card issuers halting purchases of cryptocurrencies on their cards.

The biggest digital currency sank as much as 18 percent to $6,985 as of 1:12 p.m. in New York, according to composite Bloomberg pricing. It has erased almost 65 percent of its value from a record high $19,511 in December. Rival coins also retreated on Monday, with Ripple losing as much as 17 percent and Ethereum and Litecoin also weaker.

Bitcoin’s longest run of losses since Christmas day has coincided with investors exiting risky assets across the board, with stocks globally retreating in the wake of a slump in U.S. markets Friday. Bitcoin so far seems to be struggling to live up to any comparison with gold as a store of value, which is an argument made by some of its supporters. Bullion edged higher as other safe havens -- the yen, Swiss franc and European bonds -- also gained.

Weeks of negative news and commercial setbacks have buffeted digital tokens. A growing number of big credit-card issuers have said they’re halting purchases of cryptocurrencies on their cards, including JPMorgan Chase & Co. and Bank of America Corp. Several cited risk aversion and a desire to protect their customers.

Meanwhile, North Korea is trying to hack South Korea’s cryptocurrency-related programs to steal digital currencies and has already stolen tens of billions of won worth, Yonhap News reported. And authorities in digital-coin powerhouse South Korea and other countries are weighing increased regulatory scrutiny of the industry, news which helped spark the ongoing selloff.

China will block all websites, including foreign platforms, related to cryptocurrency trading and initial coin offerings in an attempt to finally stamp out speculation in the market, according to the South China Morning Post.

More than 10% of all cryptocurrency wallets have been hacked. If that were the case with banks, they would be empty, but banks do not offer the kinds of rewards cryptocurrencies offer so greed keeps people coming back for more. I’ve seen more than a few comparisons today highlighting the fact bitcoin has experienced even larger pullbacks before. To mind that misses the point. 

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

This week's video focuses on putting the pullbacks seen in stock and bond markets this week into context. 

I will be in Melbourne on the week of April 16th and would be delighted to hold a Chart Seminar subject to interest. Please contact Sarah Barnes at sarah@fullertreacymoney.com to confirm your place today. 

A section from the report is posted in the Subscriber's Area.
 

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

The total assets accumulated on the balance sheets of the Federal Reserve, ECB, BoJ and PBoC, when redenominated to US Dollar’s stand at $20.5 trillion. That’s an increase of $500 billion since December.