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August 31 2016

Commentary by Eoin Treacy

Gold's rate-risk, enhanced

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

Janet Yellen's view of the world. Last Friday at Jackson Hole, the US Federal Reserve Chair, Janet Yellen, largely re-iterated her moderately positive take on the US economy: that the impact of a soft business environment and USD crimped export demand growth is being offset by rising economic activity elsewhere, featuring robust household spending. Indeed, Ms. Yellen believes that net-growth has been sufficient to deliver almost full employment, while inflation remains sub-2%. In coming years, the Fed expects moderate real-GDP growth + tightening of the labour market + inflation lifting above 2%. 

Implications for gold. Ms. Yellen delivered nothing new at this event. Her view of the current state of the US economy and its outlook could reasonably be described as balanced – confirmed by the subdued general market response to the event. Her most provocative statement regarding the cash rate itself was that the case for a hike had ‘strengthened in recent months’ – but any such move would require more economic data, and no time frame was offered. What does this all mean for the gold price? Ms. Yellen’s growth statements appear subtly more bullish, more insistent; comments on rate positioning probably less dovish – enhancing the risk of a short-term rate hike. This, in turn, constrains the short term upside of gold’s price (i.e. lifts demand for US$-assets; reduces demand for non-yielding gold).

 

Eoin Treacy's view -

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

The Fed’s very gradual policy of raising interest rates, against a background where most other major central banks are still easing, or experimenting with negative rates, represents a moderate tailwind for the US Dollar. However when we consider the impact this might have on gold it is really worth considering in what currency one is denominating the metal in. 



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August 31 2016

Commentary by Eoin Treacy

D.E. Shaw Considering Major Stake in TerraForm

This article by Nathan Reiff appeared in Investopedia and may be of interest to subscribers. Here is a section:

D.E. Shaw is one of the most recent companies to express an interest in buying SunEdison's shares of TerraForm. Shaw already owns about 6.7% of TERP shares following a negotiation made to forgive SunEdison debt. While this is a significant stake already, it is nowhere near SunEdison's huge percentage of ownership of the company. By purchasing up additional "Class B" shares in TerraForm, D.E. Shaw would attempt to capitalize on SunEdison's bankruptcy declaration by acquiring one of its most valuable holdings.

Golden Concord has also recently made it known that it is interested in purchasing now-defunct SunEdison's shares of TERP stock. The company, which is China's largest new energy company that is not government-owned, no doubt also sees a prime investment opportunity. For both D.E. Shaw and Golden Concord, however, added interest in SunEdison's stake in TERP means that the competition for those shares is rising, and the price is likely to go up as well. Throughout Monday, August 29, shares of TERP were trading at higher levels as a result of the increased interest.

 

Eoin Treacy's view -

To coin a pun “solar has been under a cloud of late”. Last year’s decision by Nevada to side with established utilities and force solar power providers to help pay for the grid, which they had being using for free, foreshadowed wider questioning of the subsidies on which the installation sector has relied upon. The bankruptcy of SunEdison and Tesla bailing out/absorbing SolarCity are both symptomatic of the challenges facing the sector. 



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August 31 2016

Commentary by Eoin Treacy

SWIFT discloses more cyber thefts, pressures banks on security

This article by Jim Finkle for Reuters may be of interest to subscribers. Here is a section:

A SWIFT spokeswoman declined to elaborate on the recently uncovered incidents or the security issues detailed in the letter, saying the firm does not discuss affairs of specific customers.
All the victims shared one thing in common: Weaknesses in local security that attackers exploited to compromise local networks and send fraudulent messages requesting money transfers, according to the letter.

Accounts of the attack on Bangladesh Bank suggest that weak security procedures there made it easier to hack into computers used to send SWIFT messages requesting large money transfers. The bank lacked a firewall and used second-hand, $10 electronic switches to network those computers, according to the Bangladesh police.

SWIFT has repeatedly pushed banks to implement new security measures rolled out after the Bangladesh heist, including stronger systems for authenticating users and updates to its software for sending and receiving messages. But it has been difficult for SWIFT to force banks to comply because the nonprofit cooperative lacks regulatory authority over its members.

SWIFT told banks Tuesday that it might report them to regulators and banking partners if they failed to meet a November 19 deadline for installing the latest version of its software, which includes new security features designed to thwart the type of attacks described in its letter.

The security features include technology for verifying credentials of people accessing a bank's SWIFT system; stronger rules for password management; and better tools for identifying attempts to hack the software. 

 

Eoin Treacy's view -

The vulnerability of central banks and financial institutions to cybercrime is truly worrying and the fact the Bangladesh central bank didn’t have so much as a firewall exemplifies just how big the problem is. Swift is a global network with huge vulnerabilities. The problem is the penalty for laxity is so low that governments have been slow to act. It is questionable whether anyone will even lose their job because of the Bangladesh scandal. 



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August 30 2016

Commentary by David Fuller

The City Will Win Again In Brexit Bang

Here is the latter section of this fascinating article by Iain Martin, author of the about to be released book: Crash Bang Wallop: The Inside Story of London’s Big Bang and a Financial Revolution that Changed the World, writing in The Sunday Times:

Of course, just because the pessimists were wrong about the euro’s impact on London does not mean all will go well this time. Indeed, there is a warning from history about potential decline that is worth taking seriously. The City’s worst experience in the modern period came with the outbreak of the First World War, which shut the gloriously open cross-border markets of the Victorian and Edwardian era, when money flowed across continents, largely unimpeded by government intervention. Capital controls, which were introduced in the Second World War and continued after it, restricted businesses and individuals who wanted to move money around the world. It meant the healthy and normal flow of investment in and out of the country was curtailed.

It was a mad approach ended by three uncoordinated innovations. In 1963 the German-Jewish refugee Siegmund Warburg and his team in London invented the Eurobond (nothing to do with the later euro), which created a new way for companies in Europe to borrow and tap into the vast pool of dollars outside America. It became a multitrillion-dollar market and attracted American and Japanese financiers to London.

Then, in 1979, the Conservative chancellor, Geoffrey Howe, scrapped exchange controls. Money could move around freely, a seemingly shocking innovation at the time that transformed the working of the economy. The Big Bang in 1986 completed what amounted to a lifting of the shutters, a reopening after a long shutdown from 1914 to 1963.

What all those innovations had in common was an openness to outside influences. The UK must not cut itself off. But then that is not what is being proposed by Theresa May’s ministers or by most sensible Brexiteers, who seek free trade for the City. If sensible voices prevail it should be possible to arrive at a compromise with the EU in which co-operation and trade continue in return for some common standards.

The City’s biggest advantage, however, is unrelated to the EU. It is simply this: London is brilliantly placed to benefit from the change that is already beginning to sweep through finance. Few areas of economic activity are more ripe for disruption than banking and finance in the West, with its long-established and over-large institutions, powerful central banks and closed networks of licensed operators, gaming regulation and political links.

Thirty years on from the Big Bang, finance is about to be blown apart again, this time by a digital revolution. Many big banks may be stuffed. It will be full-on creative destruction.

Digital disruption — in finance it is called fintech — is ready to destroy elements of the old system, and the City is a leader in that regard already. Three floors of the main tower at Canary Wharf are full of young coders and entrepreneurs launching start-ups, attempting to reinvent finance and London all over again. Elsewhere, in the clusters of tech developments in the East End, the fintech crowd is also a strong presence developing products for investment and retail banking.

Rival centres such as Silicon Valley on the US West Coast and tech-savvy Israel are in the race too, but only London and New York combine fintech with those traditional advantages of being hubs full of people who know about making money from money.

Some of the more obvious changes coming will be noticeable to us as consumers, in the form of new online banks that will make switching accounts so easy that it takes a matter of seconds to complete. New ways to pay (facial recognition instead of even a contactless card) are promised for customers who are already used to getting what they want from online streaming and delivery services.

The UK is particularly well placed partly because it has taken so enthusiastically to the internet and online shopping. Our internet economy has almost doubled in size since 2010. This year it is expected to provide 12.4% of the UK’s GDP. In South Korea it is 8%, in China 6.9%, in the US 5.4% and in Germany 4%.

The British are making the transition to the future fast, creating an opportunity for the City to offer new products to retail customers. By combining new technology and apps with fresh thinking on how to sell shares to individual investors, we may even be able to revive the Thatcherite notion of a share-owning democracy. When interest rates are so ridiculously low and savings return nothing, it might appeal to millions of Britons.

But the biggest changes will be in the main, non-domestic business of the City, deep in the wiring of the international financial system and the giant debt and trading machine that props up our governments, which borrow from it.

The blockchain — digital technology that greatly increases the security of financial transactions — is the most audacious and fashionable fintech innovation of all. It has been invested in heavily by some of the old banks.

The underground digital currency bitcoin (a new form of money) is based on blockchain technology. All that underpins the virtual currency is code, a mathematical calculation that allows it to be produced and traded in a way both sides can see and have total trust in. No government or central bank controls it, and the transaction costs, unlike in traditional banking, are zero.

The best-known proponent of the blockchain is Blythe Masters, a British former JP Morgan financier now based in New York. The insight of the team that Masters runs was that it could be taken mainstream, so that main banks could use the underlying blockchain methodology to move dollars, pounds and euros and transact quickly at low or no cost.

Governments are worried about the potential loss of control involved, of not being able to see what is going on inside the financial system. That is one of the reasons the Bank of England has backed the work of a team of academics from University College London who have come up with RSCoin. It is claimed to be many times faster and more reliable than bitcoin, but the most important respect in which it differs is that it can be controlled directly by the Bank of England and the state, to manage the money supply and help the government ensure financial stability. Although this infuriates the original supporters of bitcoin, the libertarians who want a revolt and a new system entirely free from government interference, it is another example of London’s innovation.

Whatever the outcome of these battles between the old and the insurgent new, it seems that how we pay, save, invest and even think about money is in the process of being transformed. In such a fast-moving situation, the very idea of worrying too much about a large regulatory bloc — such as the EU or the eurozone — handing down orders may soon look out of date, if it does not already.

Having maximum freedom of manoeuvre may be a post-Brexit asset that attracts rather than repels investors to the UK. Brexit is not without its difficulties, of course, but the Square Mile can work its strange magic again. All that one can say for sure is that the City will survive, and prosper. It usually does.

Crash Bang Wallop: The Inside Story of London’s Big Bang and a Financial Revolution that Changed the World, by Iain Martin, is published by Sceptre on September 8 

David Fuller's view -

There is no question in my view that the City would be better off completely outside the EU, which has chipped away at some of its advantages and would love to reintroduce the dreaded Financial Transaction Tax.

Of course there are risks to Brexit, particularly initially.  However, the City remains well ahead of the EU’s considerably smaller financial sectors in terms of international innovation.  Consider blockchain mentioned above and also RSCoin, created by academics from University College London, which can be controlled directly by the Bank of England.

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



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August 30 2016

Commentary by David Fuller

Apple Ordered to Pay Up to $14.5 Billion in EU Tax Clampdown

Apple Inc. was ordered to pay as much as 13 billion euros ($14.5 billion) plus interest after the European Commission said Ireland illegally slashed the iPhone maker’s tax bill, in a record crackdown on fiscal loopholes that also risks inflaming tensions with the U.S.

The world’s richest company benefited from selective tax treatment that gave it an unfair advantage over other businesses, the European Union regulator said Tuesday. It’s the largest tax penalty in a three-year campaign against corporate tax avoidance. Apple and Ireland both vowed to fight the decision in the EU courts.

Ireland allowed Apple to pay an effective corporate tax rate of 1 percent on its European profits in 2003 down to 0.005 percent in 2014, according to EU Competition Commissioner Margrethe Vestager.

“If my effective tax rate would be 0.05 percent falling to 0.005 percent -- I would have felt that maybe I should have a second look at my tax bill,” she told reporters.

The U.S. Treasury Department, which has pushed back hard against the EU state-aid probes, said the commission’s actions “could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU.”

White House Press Secretary Josh Earnest said that Apple executives have shared concerns about the company’s tax treatment overseas with officials in President Barack Obama’s administration.

Administration officials are broadly concerned that what Earnest called the EU’s “unilateral approach” doesn’t undermine coordinated efforts to prevent an “erosion of the tax base.” Also, he said, they want to ensure that any actions are fair to U.S. taxpayers and U.S. businesses.

Apple, which employs about 6,000 people in Ireland, was one of the first companies caught up in the EU’s backlash against corporate tax-avoidance. The EU, like other global regulators, has targeted firms that sidestep taxes by moving around profits and costs to wherever they are taxed most advantageously -- exploiting loopholes or special deals granted by friendly governments.

David Fuller's view -

Subscriber’s views on this individual case may vary but it certainly marks a deterioration in EU’s relationship with the USA – see this article from The Wall Street Journal: The EU’s Tax Attack on U.S. Business, published four days ago before the Apple case was raised.

See also Tim Cook’s message to the Apple Community in Europe.

Speaking personally, I think the democratic nation of Ireland should be free to set its own tax policies, in the interests of its own citizens.  However, Ireland is no longer a sovereign state within the EU.  The power now resides in Brussels.  



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August 30 2016

Commentary by David Fuller

British Sovereignty Depends on Leaving the EU and the Single Market

Here is the conclusion of this apt column by Gerard Lyons for The Telegraph:

To regain sovereignty and to have a sensible points-based migration system it is necessary to be outside both the EU and the Single Market. That should rule out the Norway option.

That fills some with fear, but it should not. The UK is remaining global in its focus, while at the same time ensuring more share in success through a better migration and domestic economic policy.

There is every reason to expect us to remain a strong and attractive economy in which to invest, while key challenges we face – like our twin deficits – are not the result of Brexit.

Now it is possible the UK may agree a specific deal with the EU. After all, they need the City, and also we are a huge export market for them. But we can’t assume anything.

Hence we should proceed based on leaving and trading under the World Trade Organisation (WTO). On that basis, we can leave at the end of Article 50 being concluded, whatever happens.

The UK is already a member of the WTO and it is there to facilitate trade, not stop it. Outside the EU, we can trade freely under WTO rules and reduce import tariffs.

If we accept that is what would happen if we leave, then that should give the UK greater bargaining power in any EU negotiation. Also, from that base, in time, we could conduct trade deals in our best interests, focused on services, with fast growing markets as well as with the EU.

It is people and firms that trade, not bureaucrats. Being competitive and having something that others want to buy are key. Globalisation, the internet and technical change point to new networks, and highlight that ideas and trade in the 21st century know no bounds.

Dr Gerard Lyons is Chief Economic Strategist at Netwealth Investments and an adviser to Parker Fitzgerald.

David Fuller's view -

If “Brexit means Brexit”, as the PM has repeated, it really should be a swift process of total withdrawal from the EU.  Then, and only then, can the UK government negotiate freely with other nations, including those of the EU.  Anything less than a total withdrawal will waste time and energy in the web of EU rules and regulations designed to prevent countries from leaving. 

PM Theresa May’s biggest challenge may be to gather all the UK support she can for this transition, although the EU is unintentionally helping with its own policies, including the tax claim against Apple and Ireland.    

A PDF of Gerard Lyons' column is in the Subscriber's Area.



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August 30 2016

Commentary by Eoin Treacy

How the European Commission calculated 13bn tax bill

This article by Suzanne Lynch for the Irish Times may be of interest to subscribers. Here is a section:

Ms Vestager said on Tuesday that the commission had concluded that the splitting of Apple’s profits between the two parts of the AOE and ASI companies “did not have any factual or economic justification.”

In short, the commission has concluded that Ireland gave illegal state aid to Apple, in breach of EU law.

It will now fall to lawyers for the accused to contest this.

The refrain from Government circles has long been that the EU may not have liked the tax structures that were in place at the time when the Apple deal was struck but that does not mean that they were illegal.

It may be some years before a definitive answer on this question will be reached.

 

Eoin Treacy's view -

The European Commission has raised important issues for Ireland not least because without its sovereign ability to set taxation there is very little reason for such a large number of Silicon Valley’s best and brightest companies to choose the little island in the North Atlantic as their favoured destination for European headquarters. 



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August 30 2016

Commentary by Eoin Treacy

Ports, a Sign of Altered Supply Chains

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

“The running joke going around is that flat is the new growth,” said Jett McCandless, chief executive of transportation-technology startup project44.

Freight volumes are stagnating despite strong consumer spending, which rose for a fourth-straight month in July. The problem for traditional retailers: More of those dollars are being spent online, or on entertainment and services such as health care.

Many retailers are stuck with large amounts of unsold goods as a result, reducing their need to import more merchandise. Even after a year of attempting to slim down inventories, retailers’ ratio of inventories to sales, a measure of excess stocks, touched 1.5 in June, close to a seven-year high, according to the Census Bureau. In their most recent earnings reports, Target and Lowe’s reported inventories up more than 4% over the same period last year.

J.C. Penney is placing “slightly smaller orders…or holding back quite a bit” to reduce inventories, Mike Robbins, J.C. Penney’s executive vice president for supply chain, told investors in June. The company has reduced the size of some orders at the beginning of major shopping seasons by as much as 70%.

The focus on reducing inventories is proving to be a drag on growth because it signals that businesses are spending less, and might be pessimistic about future demand. Inventory drawdowns cut second-quarter growth by 1.26 percentage points, to just 1.1%.

Shipping lines are struggling to plan their routes as order volumes become more difficult to predict, said Niels Erich, spokesman for a group of 15 major shipping lines known as the Transpacific Stabilization Agreement. In the past, carriers could count on the peak summer months to make up for slower winter trade.

 

Eoin Treacy's view -

There is no doubt that the disintermediation which characterises online retail has a deflationary impact on how economic growth is measured because it inhibits the velocity of money. I do not view it as a coincidence that the Velocity of M2 has been contracting since 1997 when the internet began to have an impact on the retail sector. 



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August 30 2016

Commentary by Eoin Treacy

The Frozen Concentrated Orange-Juice Market Has Virtually Disappeared

This article by Julie Wernau for the Wall Street Journal may be of interest to subscribers. Here is a section:

Americans drank less orange juice in 2015 than in any year since Nielsen began collecting data in 2002, as more exotic beverages like tropical smoothies and energy drinks take market share and fewer Americans sit down for breakfast.

When they do drink orange juice, they aren’t drinking it from concentrate.

Frozen concentrated orange juice was invented in Florida in the 1940s, primarily as a way to provide juice for the military, readily storable and easy to ship. But frozen juice has been losing favor for years.

Not-from-concentrate orange juice surpassed the concentrated orange-juice market in the 1980s. Now, the 1.4 million gallons of frozen concentrate that Americans drink each month pales in comparison to the 19.1 million gallons of fresh juice consumed each month, Nielsen said.

Louis Dreyfus Co. is scaling back the one citrus facility in Florida that is devoted entirely to concentrated orange juice. The commodities giant is laying off 59 of the plant’s 94 workers as its sells the operation that packs frozen concentrated orange juice into cans for retail.

 

Eoin Treacy's view -

Changing consumption habits where people are more concerned not only with the taste but the quality of the foods they consume are having wide ranging effects on the commodity markets. To most people frozen orange juice does not taste as good as a freshly squeezed navel or Valencia orange. However since squeezing one’s own oranges is both time consuming and expensive the vast majority of orange juice consumed comes from either concentrate or is pasteurized. 



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August 29 2016

Commentary by Eoin Treacy

Macro Morsels

Thanks to a subscriber for this edition of Maybank’s report which in this issue makes a number of bearish points. Here is a section on buybacks:

The new wrinkle is that Trim Tabs Investment Research indicates that corporate buybacks have suddenly plunged. We show the estimated repurchase levels below in dark blue that mirror the lowly levels of 2012. Share buybacks always rise during equity bull markets.

With paltry organic economic growth since the 2009 recovery, share buybacks become a critical source of buying power to maintain rising stock prices. When repurchases fall sharply, stock prices, in general, are more likely to fall as well.

We can theorize this drop is due to (1) anxiety over anti-business policies discussed by both Presidential candidates or (2) uncertainty over the Federal Reserve desire to raise rates making corporate debt issuance for stock buybacks more costly.

Corporate debt issuance has receded about 8% from the record 2015 levels and is still quite high. We suspect that once we get past the November 8th US presidential election, share buybacks will normalize. However, if they remain weak, then expect stock prices to be valued with far more risk.
Federal Reserve Board Presidents have been very vocal these days that strong job growth warrants raising the Fed funds rate sooner rather than later. Sure, the labor market has grown as sharply as any strong economic recovery could and “official” U3 unemployment is low, but the sluggish economy hovering just above stall speed remains a fixture.

U6 unemployment including marginal workers is well over 9%, wage inflation in this strong jobs market has remained below normal and Purchasing Managers Indices (PMI) have stalled. The composite PMI of services and manufacturing indicates a GDP that should be closer to 1% than the 2.5 to 3% many have expected during the 2nd half of 2016.

 

Eoin Treacy's view -

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

I’ve argued for much of the last five years that buybacks represent one of the primary arteries for quantitative easing to influence the stock market. The logic is that with ultralow interest rates companies have an incentive to favour debt over equity financing and therefore issue bonds to fud buybacks. This has contributed to trillions of dollars being poured into the equity markets since 2009 and represents a major component of the liquidity that has fuelled the bull market. 



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August 29 2016

Commentary by Eoin Treacy

Has Colombia achieved peace? 5 things you should know

This article from the Brookings Institute may be of interest to subscribers. Here is a section:

The accord is only the beginning: As many have already commented, after the agreement comes the hard work of building peace. This can be broken down very broadly into reestablishing government control over rural areas where state presence has historically been limited or absent, addressing the needs of victims of the conflict, and demobilizing and reintegrating former combatants in ways that contribute positively to society. On the security front, the Disarmament, Demobilization, and Reintegration process (DDR) is already a concern to Colombia watchers. It is unclear if all members of the various FARC combat and support units will agree to demobilize or if they will instead migrate into other insurgent organizations such as the Ejercito de Liberación Nacional or join Colombia’s vast network of criminal organizations. In fact, a recent experience with the demobilization of right-wing paramilitaries affiliated with the Autodefensas Unidas de Colombia under President Uribe showed that a substantial number of former combatants joined criminal organizations, known as BACRIM or Bandas Criminales. The state will have to move swiftly to establish its presence in those areas where the FARC once operated, or else these gaps will be filled by organized crime. For those insurgents that do demobilize, their success will depend on their ability to find legitimate work and the people’s ability to accept former combatants as members of their community.

Eoin Treacy's view -

In Freakonomics Dubner and Levitt make some very instructive points on the incentives drug dealers have to persist in what is typically a dangerous, competitive environment where death is a realistic possibility before the aspiration to achieve riches is every achieved. If we accept that demand for illicit narcotics is a relative constant, subject to a moderate growth rate, then volatility arises as a factor of supply. 



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August 29 2016

Commentary by Eoin Treacy

Yuan Bears Emerge From Hibernation as Fed Threatens G-20 Calm

This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:

Derivative markets are pointing to renewed bets on yuan depreciation, with a three-month measure of expected price swings poised for the biggest monthly increase since January. Other indicators, such as the premium on options to sell the yuan over those to buy and the discount of forward contracts over the spot rate, have also climbed, indicating rising expectations for declines.

The increased pessimism comes after a period of calm that sent the measures to the lowest in at least nine months as the Federal Reserve held off on raising interest rates and investors bet that China would steady the yuan before it hosts a Group of 20 meeting in September. Traders are probing the People’s Bank of China’s willingness to allow the yuan to fall between the G-20 gathering and the currency’s entry into the International Monetary Fund’s Special Drawing Rights on Oct. 1, especially with the chances of Fed action increasing.

"After G-20 ends next Monday, the market may want to test how much yuan depreciation the PBOC can tolerate," said Gao Qi, a strategist at Scotiabank in Singapore. "China doesn’t want the yuan to move too much during G-20 and become a topic of discussion. SDR’s impact will be smaller than G-20." 

 

Eoin Treacy's view -

China is under the spot light as it prepares to host the G-20 summit next week and not least because it wants to use the event as an opportunity to showcase its newly found position as an economic superpower. However the fact the Chinese administration is engaged in a massive transition from an investment and export oriented business model to one more supported by internal consumption, services and high technology cannot simply be ignored. 



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August 26 2016

Commentary by David Fuller

Stock Rally Fizzles After Hawkish Remarks From Fischer; Bonds Fall

Here is the opening and also the concluding paragraph of this report from Bloomberg on a day of churning markets:

Stocks erased gains after Federal Reserve Vice Chairman Stanley Fischer said Chair Janet Yellen’s remarks leave open the possibility of an interest-rate hike in September. Bonds fell, while the dollar rose.

Global equities extended their weekly decline after Fischer told CNBC that Yellen’s remarks were consistent with the possibility of two hikes this year. Stocks had rallied earlier Friday as investors focused on her bullish comments on the U.S. economy. Treasury two-year note yields, among the most sensitive to monetary policy, jumped to the highest since June. The dollar rose against all major peers. Crude traded near $47 a barrel.

“Fischer wants to make September still on the table,” said Mark Kepner, managing director and equity trader at Themis Trading LLC in Chatham, New Jersey. “He mentioned he’s not concerned about the low growth we have had the first six months. He’s saying growth is more a productivity and investment story. There are light volumes, lightly staffed desks and these moves can easily happen.”

And:

“Fischer really maintained the focus on the near-term, whereas Yellen was a bit more comprehensive across the cycle,” said Eric Theoret, a foreign-exchange strategist at Bank of Nova Scotia in Toronto. “That’s where the distinction lies. Yellen’s was a broader discussion, Fischer’s was very much a narrow, near-term discussion and because of that we did see that broad dollar rally.”

David Fuller's view -

I did not actually see or hear the full statements by Yellen and Fischer, but assume that they and their colleagues share many of the same uncertainties and changing or differing opinions as the rest of us.   Meanwhile, the US economy is sort of stronger than those of other developed nations but that is not saying much.  2Q profits are less than inspiring, to put it mildly.  Fischer may be trying to inspire ‘the productivity and investment story’, if that comment in the penultimate paragraph shown above accurately conveys what he said. 

This item continues in the Subscriber’s Area and contains an additional article.  



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August 26 2016

Commentary by David Fuller

French Support for the EU Project is Crumbling on the Left and Right

The drama of Brexit may soon be matched or eclipsed by crystallizing events in France, where the Long Slump is at last taking its political toll.

A democracy can endure deflation policies for only so long. The attrition has wasted the French centre-right and the centre-left by turns, and now threatens the Fifth Republic itself.

The maturing crisis has echoes of 1936, when the French people tired of 'deflation decrees' and turned to the once unthinkable Front Populaire, smashing what remained of the Gold Standard.

Former Gaulliste president Nicolas Sarkozy has caught the headlines this week, launching a come-back bid with a package of hard-Right policies unseen in a western European democracy in modern times.

But the uproar on the Left is just as revealing. Arnaud Montebourg, the enfant terrible of the Socialist movement, has launched his own bid for the Socialist Party with a critique of such ferocity that it bears examination.

The former economy minister says France voted for a left-wing French manifesto four years ago and ended up with a "right-wing German policy regime". This is objectively true. The vote was meaningless.

"I believe that we have reached the end of road for the European Union, and that France no longer has any interest in it. The EU has left us mired in crisis long after the rest of the world has moved on," he said.

Mr Montebourg stops short of 'Frexit' but calls for the unilateral suspension of EU labour laws. "As far as I am concerned, the current treaties have elapsed.

David Fuller's view -

The predictable fragmentation of the Eurozone is likely to be a somewhat angry process as we are already seeing.  That is unfortunate and not without risks but I think many Europeans will also focus on a return to the European Common Market.  This would once again consist of independent democracies with control over their own currencies, freely trading with each other.  They should also consider using a separate commercial unit of exchange for convenience, as I have mentioned previously.  We have seen that the risks of open borders outweigh the benefits and the use of passports or secure identity cards for citizens within the European Common Market is a minor inconvenience. 

The unravelling of the EU will make the UK’s exit less complicated, as there is no need for punitive policies or inane complications, previously strategized by Brussels officials to prevent countries from leaving.  If Germany wants to trade with the UK, and it does, then so will the rest of Europe.        

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



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August 26 2016

Commentary by David Fuller

Apple and the Transatlantic Squabble Over Taxes

Here are the opening two paragraphs and the conclusion of this Editorial from Bloomberg:

The U.S. Treasury thinks it's bad enough that companies such as Apple park piles of cash overseas to avoid paying tax. What's worse is when foreign authorities change the rules that attracted the money in the first place, and tax those holdings for themselves.

In effect, the European Commission is threatening to do just that. Apple and other U.S. companies could soon be hit with retrospective demands for tax running into the billions of dollars. This week the Barack Obama administration objected, accusing the commission of, among other things, exceeding its authority and violating the norms of international tax policy.

And:

With the U.S. tax code in its current state, the administration is hardly in a position to lecture other governments on the subject of clarity and certainty in tax policy. The charge that the commission is violating international tax norms is especially rich, considering that the U.S. is almost unique in taxing its companies on their worldwide income and its citizens regardless of where in the world they live and work.

By far the best remedy for the U.S. complaint would be to fix the U.S. tax system. For corporate taxes, that means two things: Apply a lower, internationally competitive rate to a simpler and broader base. And switch to a so-called territorial system -- as is used almost everywhere else -- which taxes profits according to where they're earned, not where the company resides. These reforms wouldn't eliminate international tax avoidance, but they would reduce it, both directly and by making it easier for governments to cooperate effectively to that end.

The alternative is to feud and strike postures -- a lot easier than comprehensive tax reform, admittedly, but much less productive.

David Fuller's view -

Most of us think multinational corporations should pay regional taxes in countries where they are earning profits.  However, there is also a grey area, I believe, because the responsibility for assessing taxes lies with the countries in question.  I do not blame public corporations for using legal tax avoidance in the interests of their profits and shareholders.  I agree with Bloomberg that the US should switch to a territorial system and their tax programme needs to be modernised.  One can only hope. 

Meanwhile, too many governments and economic regions, from the EU to the USA, are in search of tax revenue to reduce budget deficits and perhaps improve their economies.  Against this background successful multinational corporate Autonomies are viewed as milch cows.    

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August 26 2016

Commentary by David Fuller

Email of the day

More on the next shoe to drop in Europe:

Yesterday I wrote about why I think the UK should leave the EU as rapidly as possible by declaring unilateral free trade. There is another reason that I did not mention which I believe makes it urgent that we do so. I voted 'remain' but I am a pragmatist interested among other things in protecting my financial assets. The ill-conceived Euro and the dysfunctional currency block is an accident waiting to happen and one senses that time is running out. A new phase to the drama may unfold soon.
The financial press has focused on Italy's woes and its coming referendum. This article from back in June in the FT outlines the issues and the risks that come with the referendum.

The Eurosceptic Five Star Movement wants to take Italy out of the Euro but remain in the EU.The party topped the polls in a recent survey with 30.6% support versus 29.8% for the Renzi's ruling Democratic Party.

Whatever the outcome of that poll in October, Italy will remain a huge risk to the Euro. Back in the month of May you posted in your daily comment an article by Ambrose Evans-Pritchard who wrote that "Leaving the Euro may be the only way to avert a catastrophic de-industrialization of the country before it is too late."

Industrial production in Italy is back to where it was in the 1980s.

And here's another one to watch - see attachment and article at this website:

Portugal rocked the Euro boat a few years ago, and concern seems to be reappearing, signaled as ever by the bond market. Yields have been rising over the past couple of weeks. The article opens with:

"The fate of Portugal rests in the hands of DBRS, the last remaining credit rating agency assigning an investment grade rating to its sovereign debt (Fitch, Moody's and S&P have all lowered the country's debt rating to junk).  Due to a requirement that participant countries have an IG rating from at least 1 rating agency, the DBRS rating is literally the only thing allowing Portugal's bonds to remain eligible for the European Central Bank's 1.7 trillion euro bond buying program.  DBRS is set to update its Portugal rating on October 21 and investors in Portugal sovereign risk are starting to get a little nervous."

DBRS are probably feeling the pressure, though with the EU's form of ignoring and reinterpreting rules to shore up the system there must be some doubt the outcome will be as black and white as the article states. But we have been warned. As with Italy, it seems unlikely the Euro can work for Portugal in the mid-term. The article states:

"The socialist minority government that came to power in November 2015 has 

not helped the situation by:

raising the minimum wage, increasing the number of public holidays

 and reversing other key reforms,

that will make it more difficult for the country to meet its EU fiscal targets.  

To be sure, the collapse in oil prices have indirectly taken a toll on Portugal as 

well with exports to it's 4th largest trading partner, Angola, falling by 42% in the 

first half of 2016." 

In summary, the potential for turmoil around the Euro at any time suggests it would be wise for Britain to declare universal free trade and exit the EU as rapidly as possible.

For investors, the question is what can we do to protect ourselves from these or other events as the Euro unravels, as it surely must do, the only issue is the timing. Here are my thoughts and it would be great to have your input too David. The euro comprises 57.6% of the dollar index so any downward pressure on the Euro will have implications for the dollar and hence for asset classes which are priced in dollars. Strengthening USD does seem to be an outcome, possibly later this year but very likely in the mid-term, with consequent attraction towards USD denominated financial assets including the US stock markets, precious metals and US real estate.  Money could move out of the Eurozone into other markets though I read that German bonds are a popular buy on speculation that any eventual total collapse in the Euro will lead to reinstatement of the Deutschmark at a premium. GBP could begin to look a safe haven again. The USA and the dollar could be the biggest draw for financial assets though if the dollar rises too far and too fast that will leave the Fed in a very difficult situation, unable to lower already rock-bottom rates to slow dollar gains and also unable to raise rates if the economy overheats. Eventually a strong dollar could damage the US economy and possibly precipitate the next cyclical bear market. I think that is some way off so let's enjoy this possibly final and remunerating phase of one of the longest bull markets in history.
 

David Fuller's view -

Thanks for this detailed email.  Worldwide free trade is certainly our economic goal and this message cannot be repeated too often.  I also believe that corporations will rapidly redevelop these international business skills, especially with the full diplomatic cooperation of the Conservative government.  I think we should exit the EU in a tactically sensible strategy, which is even more important than haste, especially as time is now on our side.  Theresa May and her appointed team probably have this in hand and she will need the support of many Remain voters, in the interests of the country. 

Re investments, you certainly will have this service’s input.  Also, Eoin and I always welcome the views of subscribers, from which we have all benefitted over the years.  I think one starts with the right questions.  For instance, investors have been wary of EU countries for some time.  So, at what point will they view a breakup of the EU as economic salvation for its better economies and companies?  Also, could the Euro become a firm currency in a considerably slimmed down EU led by Germany, or will the single currency be scrapped because it was always going to cause havoc without the federal state that the majority of Europeans never wanted?   



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August 26 2016

Commentary by Eoin Treacy

Mylan CEO Blamed Obamacare for EpiPen Sticker Shock

This article by Jen Wieczner for Fortune.com may be of interest to subscribers. Here is a section:

Now Mylan appears to be learning the same hard lesson this week that Martin Shkreli and Valeant  VRX -0.51%  learned last year: Investors love when pharmaceutical companies raise drug prices—until everybody else gets really upset about it. Shares of Mylan  MYL 1.66%  have dropped more than 11% this week, down more than 5% on Wednesday alone.

And the EpiPen controversy is drawing comments from some high-profile figures, including Hillary Clinton and Martin Shkreli himself, who tweeted that he thought the EpiPen’s price should even be higher. On Wednesday, Clinton said there was no justification for the price hikes. Her comments came shortly after the Senate Committee on Aging asked Mylan to provide information on the reasoning behind what it called the “drastic” price increase of EpiPen, and the American Medical Association “urge[d]” Mylan to “rein in these exorbitant costs.”

The pricing scandal is happening at the worst possible time for Mylan. This is typically the company’s biggest season, driven by EpiPen sales, which peak during back-to-school shopping as parents and schools equip for the coming year.

Eoin Treacy's view -

Biotechnology companies justify the high price of new drugs with the argument that it is the only way to recoup the cost of developing them. Without high prices there would be no incentive to invest in the uncertainty of R&D and lengthy clinical trials. 



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August 26 2016

Commentary by Eoin Treacy

The Fed is now hostage to Wall Street

Thanks to a subscriber for this interview of James Grant by Christoph Gisiger for Finanz und Wirtschaft. Here is a section:

Obviously, the financial markets like this cautious mindset of the Fed. Earlier this week, US stocks climbed to another record high.

Isn’t that a funny thing? The stock market is at record highs and the bond market is acting as if this were the Great Depression. Meanwhile, the Swiss National Bank is buying a great deal of American equity.Indeed, according to the latest SEC filings the SNB’s portfolio of US stocks has grown to more than $60 billion.

Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.

Other central banks, too, have become big buyers in the global securities markets. Basically, it all started with the QE-programs of the Federal Reserve.

It is a truism that central banks do this. They’ve done this of course for generations. But there is something especially vivid about the Swiss National Bank’s purchases of billions of Dollars of American equity. These are actual profit making, substantial corporations in the S&P 500. So the SNB is piling up big positions in them with money that really comes from nothing. That’s a little bit of an existential head scratcher, isn’t?

 

Eoin Treacy's view -

One of the most important lessons learned from quantitative easing is that it is highly effective at inflating asset prices. This link to the Nasdaq’s record of Swiss National Bank holdings, primarily of US Autonomies, is a clear example of that. If banks are lending, or printing, money into existence they have an incentive to acquire assets that have a legitimate claim on future cash flows or have an intrinsic value. 



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August 26 2016

Commentary by Eoin Treacy

Dollar Rises as Yellen, Fischer Spur Bets for Fed Rate-Increase

This article by Maciej Onoszko and Lananh Nguyen for Bloomberg may be of interest to subscribers. Here is a section:

 

“Fischer really maintained the focus on the near-term, whereas Yellen was a bit more comprehensive across the cycle,” said Eric Theoret, a foreign-exchange strategist at Bank of Nova Scotia in Toronto. “That’s where the distinction lies. Yellen’s was a broader discussion, Fischer’s was very much a narrow, near-term discussion and because of that we did see that broad dollar rally.”

Investors’ sentiment has oscillated in recent weeks on the pace of Fed monetary tightening after it raised rates in December for the first time since June 2006. The dollar’s 5 percent loss this year reflects a dimming outlook for the U.S. central bank to reduce stimulus and diverge from unprecedented easing in Europe and Asia.

Bloomberg’s Dollar Spot Index, which tracks the currency against 10 peers, rose 0.8 percent as of 2:41 p.m. in New York, reaching the strongest level since Aug. 10. It fell as much as 0.6 percent. The greenback gained 0.7 percent to $1.1201 per euro and added 1.3 percent to 101.81 yen.

 

Eoin Treacy's view -

The Yen has been particularly strong against the Dollar this year while the Euro has been largely locked in a range for more than a year. The prospect of the interest rate differential between the US Dollar and other major currencies widening further represents a tailwind for equity markets fighting deflation with weaker currencies. 



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August 25 2016

Commentary by David Fuller

Mobius Says Helicopter Money Will Be Next Big Experiment By Japan

Here is the opening of this topical article from Bloomberg:

The Federal Reserve signals a reluctance to raise interest rates. The yen strengthens to 90 per dollar. Haruhiko Kuroda decides to act.

Helicopter money is coming, says Mark Mobius, even as soon as next month.

The 80-year-old investment veteran is outlining how he expects central banks to respond to sluggish economic growth. For Mobius, executive chairman of Templeton Emerging Markets Group, traditional easing measures have just made people save instead of spend or borrow. Combined with a stronger yen, he says that’s going to force the Bank of Japan governor to contemplate a policy he’s repeatedly ruled out.

“They’re really beginning to think what ammunition they have,” he said in an interview on a visit to a typhoon-struck Tokyo this week. “The first reaction is to say, OK, let’s go for helicopter money, let’s get money directly into the hands of consumers,” he said. “I think that would probably be the next step.”

Stimulus Flood

Central bankers have flooded their economies with monetary stimulus in the eight years since the global financial crisis, driving up asset prices -- including the stock markets that Mobius invests in -- while struggling to kickstart global growth. A foray into negative interest rates in Japan has been met with the yen surging to about 100 per dollar, falling stocks and dwindling bank profits.

Helicopter money, a kind of last resort in unconventional monetary policy, comes in several forms. The most simple is printing money and giving it to the public, hoping -- and even creating incentives that -- they’ll spend it. Others include financing state spending directly, or in other words putting money into the hands of companies.

David Fuller's view -

That some version of helicopter money will be authorised shortly for Japan is a logical forecast from Mark Mobius.  I think he is right, since the strong yen will increase deflationary pressures which have confounded Japan for so many years. 

Mobius has long been a calm, sensible observer of global markets and few others have his experience.  He is also a natty dresser, usually in an off-white suit.  In fact, I don’t think I have ever seen him in a dark suit.  Is this a worrying omen, or a practical precaution before using chopsticks at a banquet in Tokyo?

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August 25 2016

Commentary by David Fuller

Email of the day

On UK should declare unilateral free trade:

Note: You can access the links in the email below because they were provided by the subscriber and I have loaded them so that you will not be removed from this site when you close them, unlike with links in newspaper articles which I post.

I mentioned briefly when we met a couple of weeks ago that the UK should declare unilateral free trade as it leaves the EU. We didn't get time to explore the thinking behind this so I have collated here some articles which set out the case, very compellingly in my view. First, an article in today's City A.M.  

Roger Bootle, whom I know you respect, has also proposed unilateral free trade. I believe you published this article when it first appeared.

He says "If we declared unilateral free trade, we would immediately cut through the doubts concerning a possible trade deal with the EU and put ourselves in the driving seat with regard to any future negotiations. Because this policy would involve abolishing tariffs on imports from the rest of the world, it would reduce prices and intensify competition in the UK market. Continental exporters would find they would only be able to sell to us at lower prices. The industries that would suffer, such as the German car industry, would put pressure on their governments for a deal with us, which we might accommodate – if it suited us. With one bound, we would be free."

Bootle was one of the very few economists who actually analysed the pros and cons of EU membership and published a book (The Trouble With Europe) arguing the case. Few politicians or economists went to such lengths. One who did is Patrick Minford. He has also written compellingly on this topic and the pdf attached goes into the issue in some detail.

The counter-argument has been put by Martin Wolff in the Financial Times in an article titled "Brexiteers' idea of unilateral free trade is a dangerous fantasy."

This was written before the referendum, and is in tune with the FT's opposition to leaving both before and after the referendum outcome. He finishes by dismissing the idea saying "Forget free trade: the UK will not return to the 19th century." Oops... wasn't that the century in which Britain was Great?

Wolff appears to favour tariffs. In contrast Minford has this to say to those who argue that universal free trade would not work for the UK: "It relies on the idea that under Brexit the UK would move to being a protected economy with tariffs and barriers against the rest of the world including the EU, much as it was back in the 1970s when it was ‘the sick man of Europe’. Yet after three and a half decades of market reforms since those grim times, the UK is now largely a free market economy and Brexit would allow it to join the global market as a free trading nation, able to buy its goods and services from the world market at world prices, and ready to sell its products to the world at those world prices too.

Incidentally, the most egregious article I have seen was this one in the FT arguing that voters should not have been given a referendum as the decision was too complicated (presumably for lesser mortals than the author.)

Incidentally, the most egregious article I have seen was this one in the FT arguing that voters should not have been given a referendum as the decision was too complicated (presumably for lesser mortals than the author.)

What the author conveniently forgets is that the decision to join was made by referendum - presumable he was OK about that. Then, despite his argument that we are not wise enough to decide these things by referendum, he illogically finishes by arguing for a second vote! I guess this is in true EU style: 'Come on you peasants, vote until you give the right answer.' Emotion always trumps reason once belief and self-interest are involved.

I lived and worked in Switzerland for a while and became impressed with their referendum system, held several times each year with many questions each time. The politicians role is to implement what the voters want. Switzerland may be the only true democracy on the planet, and the country wonderfully exemplifies the complete opposite of the attitude in that FT article and the attitude of the EU. Switzerland has a record of many centuries of effective governance and harmony despite having 4 totally distinct races and languages. It's also one of the wealthiest countries perhaps because of these factors. If the EU had been established on the Swiss model maybe it could have achieved similar prosperity, harmony and long-term survival as Switzerland. But the EU model is in many ways the opposite.

As you know, I voted Remain. I could have voted either way, but the desire to avoid breakup of the UK swung my vote. But now that the democratic decision to leave has been made I am fully behind the decision and actually rather happy about it. But we could mess it up by haggling deals with an EU which will be unable to do anything fast or effectively and which will assume it has the upper hand. During my long career as a senior executive in industry I attended several coaching courses on negotiation skills. The most important thing I learned was the concept of BATNA - be very clear what is your 'Best Alternative To A Negotiated Agreement.' You are negotiating from a very weak position if you are not absolutely clear about how you can reasonably walk away. If there is no negotiated agreement with the EU then the willingness of the UK to open to free trade across the world is by far the best option. It may anyway be the best solution.

Which leaves my one remaining concern, the stability of the UK. Phillip Johnson outlined one potential solution that makes very good sense to me, if not maybe for a certain power-hungry politician in Scotland! Though her country-folk may be wiser than her if it came to a vote.

What are your thoughts for and against unilateral free trade?  Do you see any major negatives?

Best wishes

David Fuller's view -

Thanks for a terrific email, certain to be of interest to subscribers in the UK, Europe and probably beyond.  I also appreciate the informative links and reports. 

Replying to your points, I have also posted Telegraph articles by Patrick Minford, Roger Bootle and others on free trade.  It makes sense as we will obviously want to be trading with the world, where possible, not just the protectionist, socialist, slow-growth EU.  Also, we do not want to be slavishly following the EU’s tortuous rules on leaving the Eurozone, which are mainly designed to lock countries in.  

Free trade is desirable, I believe, although it is certainly not without risks.  A number of our industries will be alarmed over the prospect of free trade, even if we have reciprocal agreements with many countries.  China springs to mind, as does any other country with state-controlled industries.  Consider steel - how can you protect Port Talbot or any other industry which China would like to bankrupt through state subsidies, so that they would have greater access to our market? Perhaps we don’t trade with China, although I would be reluctant to close doors on any important country.  Perhaps we need to have a few strategic industries, such as Port Talbot steel, which receive preferential treatment such as very inexpensive energy, for instance.  Other companies would want similar subsidised benefits, but then we would be moving away from free trade. These are challenges, albeit manageable.

Re the FT, it has some good columnists and contributors but too many bad ones in its desire to be the EU’s socialist business (oxymoron?) English language paper.  The article by Richard Thaler is shocking, as you point out. 

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August 25 2016

Commentary by David Fuller

August 25 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 24th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest. Here is a section:

The Obama administration’s Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) released their Phase II fuel efficiency and greenhouse gas emissions regulations for heavy-duty trucks. This group includes the largest pickup trucks sold as well as the traditional 18-wheelers on the highways. The standards are to be phased in between the 2021 and 2027 model years. The existing standards, which were designed for the 2014 through 2018 model years, will remain in place until the new standards take effect.

The heavy-duty truck standards come as the government has just begun negotiations with auto manufacturers over the final fuel efficiency ratings for light-duty vehicles where the industry is lagging behind the targets in the standards. Heavy-duty trucks are the second largest and fastest growing segment of the U.S. transportation system measured by their emissions and energy use. They currently account for about 20% of carbon emissions, yet only account for about 5% of the vehicle population. 

Carbon emissions from transportation is now the largest contributor to overall greenhouse gas emissions. Three charts showing annualized sector shares of total emissions confirm this conclusion. It should be noted that the country’s total carbon emissions peaked in January 2008 and have declined steadily since. On an absolute basis, over the past 8 1/3 years there are 1,410.1 million metric tons of less carbon emissions, or a decline of 16.2%. The transportation sector contributed about 9.1% of that decline. The significance is that transportation’s emissions dropped 6.4% over that time span while overall emissions declined 16.2%. The overall figure reflects the sharp decline from coal’s use due to the shale revolution and low natural gas prices along with static electricity consumption. At the same time, the decline and then flat trend in vehicle miles driven coupled with more fuel-efficient autos also helped reduce the transportation sector’s emissions. One can see these trends at work by looking at the sector shares in 1973, 2008 and 2016.

The United States has done well in reducing its carbon emissions by 16.2% since the start of 2008. The weak economy and energy revolution have been primarily responsible. Going forward, the energy policies targeting the transportation sector, coupled with technological improvements in overall energy use, will become more important in driving down carbon emissions. Thus, the reason for the heavy-duty truck standards. They have support from the industry and truck manufacturers who see economic opportunities from more efficient engines. The Independent Truck Owners Association estimates the new standards will add $12,000-$14,000 to the cost of new tractors, which often cost upwards of a quarter of a million dollars, but they hope to recover those higher costs through improved fuel efficiency.

 

Eoin Treacy's view -

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

The surge in supply of natural gas coupled with the fact it is both cleaner than other fossil fuels and domestically available is supporting a revolution in developing new sources of demand. Toyota is now marketing is hydrogen fuelled Mirai automobile in the USA where the hydrogen will be sourced from natural gas. Improving the efficiency of the heavy vehicle fleet is a laudable goal and will also improve the environment so it can be viewed as a win win which is dependent on natural gas prices staying competitive. 



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August 25 2016

Commentary by Eoin Treacy

If Not Normal, Where Are We in the Cycle? Late

Thanks to a subscriber for this note from Wells Fargo which may be of interest. Here is a section:

Credit Standards: Move to Tighter Standards
Over the economic cycle, banks adjust their lending standards but, unfortunately, the dynamic adjustment of credit standards appears to impart a very pro-cyclical bias to the credit cycle. From the middle graph, we can see that the percentage of banks that tighten credit drops dramatically in the early phase of an economic recovery (1992-1994, 2002-2004, 2010-2011) and remains low for most of the economic expansion. Then the percentage of banks that tighten credit rises sharply just before a recession (1999-2000, 2007-2008). This credit cycle, while certainly rational from an individual bank’s point of view, becomes quite pro-cyclical when viewed in the aggregate. We have entered the tighter credit phase of this cycle.

For Whatever the Reason: A Flatter Yield Curve
Ever since the taper tantrum in 2013, there have been two distinct moves in the yield curve as illustrated in the bottom graph. The long-end of the yield curve has exhibited a bullish flattening trade with the decline in the 10-year/two-year spread. This reflects the yield pick-up for U.S. Treasury debt relative to what is available for investors in Europe and Japan, while also reflecting the incentive of a stronger dollar to attract foreign inflows. Meanwhile, the short end of the yield curve reflects the anticipation of a FOMC increase in rates or at least some form of tighter policy going forward.

Uncertainty in financial markets provides the motivation for two distinct
moves. First, investor uncertainty at the global level has prompted a safehaven move into U.S. Treasury debt. Meanwhile, uncertainty on the economic outlook limits the extent of Fed tightening of policy as well as the private market discounting of future fed funds moves.

 

Eoin Treacy's view -

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

With interest rates so low there is very little margin for error when trading in bonds and not least when so many are sporting negative yields. An increasing number of seasoned bond investors are expressing emotions ranging from caution to fear and frustration at the destabilising influence of central bank policy on the markets. They are in a difficult position because pre-empting an end to the 35-year bull market has resulted in underperformance while overstaying one’s welcome, when it eventually does peak, will result in ever larger underperformance. 



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August 25 2016

Commentary by Eoin Treacy

South Africa President Zuma Says He Can't Stop Gordhan Probe

This article by Mike Cohen and Sam Mkokeli for Bloomberg may be of interest to subscribers. Here is a section:

Gordhan, 67, was named finance minister in December after Zuma roiled markets by firing Nhlanhla Nene from the position and replacing him with a little-known lawmaker. His relationship with Zuma has been a fractious one, with the president denying his requests to fire the nation’s tax chief for insubordination and appoint a new board at the state-owned airline.

“President Jacob Zuma wishes to express his full support and confidence in the minister of finance and emphasizes the fact that the Minister has not been found guilty of any wrongdoing,” the Presidency said in a statement. “The negative effect of these matters on our economy, personal pressure on the individuals affected as well as the heads of institutions, however disturbing, cannot be cause for the president to intervene unconstitutionally.” 

The National Prosecuting Authority hasn’t received a docket from the police and there was no indication when they would receive one, Luvuyo Mfaki, a spokesman for the national prosecutor, said by phone. City Press reported that the docket would be handed to the NPA on Friday after the police questioned tax agency officials including Ivan Pillay, the former deputy commissioner, and Oupa Magashula, the ex-commissioner.

 

Eoin Treacy's view -

Standards of political governance have been declining steadily since the ANC assumed what is in effect single party rule. Institutions and laws which support the free market, such as the independence of the judiciary, minority shareholder and property righrs have all been under attack. Continued political turmoil and the volatility of Zuma’s administration are additionally not good for confidence. 



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August 25 2016

Commentary by Eoin Treacy

August 24 2016

Commentary by David Fuller

Hedge Funds Suffer Biggest Redemptions Since 2009 as Returns Lag

Here is the opening of this interesting article from Bloomberg:

For hedge funds, the news is getting worse.

Investors pulled an estimated $25.2 billion from hedge funds last month, the biggest monthly redemption since February 2009, according to an eVestment report.

The withdrawals were the second straight for the beleaguered industry, which saw $23.5 billion pulled in June. They bring total outflows this year to $55.9 billion, driven by “mediocre” performance after a number of funds lost money last year, according to Wednesday’s report.

“Unless these pressures recede, 2016 will be the third year on record with net annual outflows, and the first since the outflows in 2008 and 2009 -- a result of the global financial crisis,” eVestment said.

Hedge funds, which charge some of the highest fees in the money-management business, have faced mounting criticism from clients over steep costs and performance that mostly hasn’t kept pace with stock markets since the financial crisis. The 10 funds with the highest redemptions in July lost an average of 4.1 percent in the first seven months of this year. Industrywide, funds returned an average of 1.2 percent this year through July, according to data compiled by Bloomberg, compared with about 7.6 percent for the S&P 500 Index.

Last month’s withdrawal was the highest since a net $28.2 billion was redeemed in February 2009, according to eVestment.

David Fuller's view -

I would not want to read too much into any one statistic, but unless all of this capital coming out of hedge funds has gone straight into long-only funds, ETFs or privately managed accounts, it does not sound like an encouraging stock market statistic to me. 

On the other hand, money rushing into hedge funds near the top of a market has often warned that stocks were becoming unsustainably overextended.  Conversely, heavy unloading of hedge funds in the teeth of an obvious bear market was a sign of climactic selling prior to an eventual recovery. 

I do not think the current data will add to investor confidence, which was already conspicuous by its absence.  



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August 24 2016

Commentary by David Fuller

Scotland Must Live Within Its Means Instead of Relying On English Taxpayers

Here is the opening of this editorial from The Telegraph:

Public spending in Scotland in the last financial year totalled £68.6 billion. Taxes levied in Scotland amounted to just £53.7 billion, a difference of some £15 billion. Were Scotland an independent country, it would have a budget deficit of around 10 per cent of GDP, among the highest in the world. But Scotland is not independent and these are just figures compiled under the so called Government Expenditure and Revenue Scotland (GERS) statistics. They were introduced by the Conservatives in the 1990s before devolution to demonstrate the importance to Scotland of continued membership of the UK. Never has the point been made more starkly.

In a Union, it should not matter that one constituent part has higher spending and lower revenues than another. Fiscal transfers from wealthier to poorer areas are crucial to national and social cohesion. However, the Scottish National Party does not wish to be part of this Union, even though the Scottish people voted two years ago to stay in. There have been mutterings from the SNP about a second referendum following the UK-wide decision to leave the EU because Scotland voted to remain. But the GERS figures show this to be utterly fanciful. Scotland could not survive on its own, certainly not with the levels of expenditure it has now.

The case for independence was predicated on tax revenues from North Sea oil, but Scotland’s share of these fell by 97 per cent to just £60 million in the last financial year. There is no realistic prospect that Scotland would now seek to turn its back on its main export market. Moreover, to get its public finances into the necessary condition to join the EU as an independent nation, as the SNP promises, would require austerity measures that the nationalists would never contemplate.

David Fuller's view -

I credit Nicola Sturgeon with chutzpah but she has overplayed an increasingly weak hand.  Had Scotland won their 2014 independence referendum when Alex Salmond was First Minister of Scotland, the region would have been in serious financial trouble.  Salmond resigned immediately after the 55 to 44 percent result which rejected independence.  Sturgeon would presumably have to do the same if she dared to call for another referendum and lost.

The recent Olympics were a wonderfully unifying factor for the UK’s young athletes and the goodwill generated has spread across the country.  Canny Scots would reject a second independence referendum, even though Scotland did not support Brexit.  The EU’s Socialist appeal is waning and a united UK is more likely to prosper over the longer term, even though the next year or two may be challenging.  

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



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August 24 2016

Commentary by David Fuller

The Weekly View: Factors Driving Emerging Markets

My thanks to Chris Konstantinos for this timely publication published by RiverFront Investment Group. Here is a brief sample:

So where does China’s much-maligned economy find itself today? We describe it as stabilizing, albeit at a much lower growth level than in times past.  Important indicators of the “smokestack” part of China’s economy, such as electricity usage and railway freight, have all shown signs of improvement recently, as has the Market Manufacturing PMI (a survey of manufacturers), which is now just back in expansion for the first time in roughly a year (see chart below). “New China” indicators, related to services sectors and the burgeoning middle class consumer, have remained solidly in expansionary territory, with areas like consumer confidence rebounding and home prices in Tier One cities making new highs.

David Fuller's view -

 

This makes sense to me and the rest of this issue is well worth reading.

See also my comments on China posted on Tuesday. 

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



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August 24 2016

Commentary by David Fuller

Prince William Helps Celebrate 70 Years of North Rhine Westphalia

Here is a key section of Prince William’s speech:

In short, what began 70 years ago as a relationship of necessity between an occupying power and a region in ruin, is today a partnership of genuine friendship and of massive mutual benefit.    This partnership will continue despite Britain’s recent decision to leave the European Union. The depth of our friendship with Germany and with North Rhine-Westphalia will not change. Bilaterally and internationally we will continue together to lead efforts to promote prosperity, security and stability in the world.

David Fuller's view -

This is a welcome and important statement from one of the UK’s highest-profile public figures.  It can only help to instil mutually beneficial goodwill before the Brexit negotiations commence.  



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August 24 2016

Commentary by David Fuller

August 24 2016

Commentary by Eoin Treacy

UK Industrial Revolution 2.0

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Potential GDP growth slowed in the UK after the debt crisis and Brexit is another structural shock. Monetary policy does not have the ability to correct these impairments. A structural policy is required, for example, the priority being given by new British PM, Theresa May, to the industrial sector within economic policy. An industrial renaissance is the objective.

We motivate the need for industrial strategy through the new information based theory of economic growth. Over time, knowledge and knowhow is created and embodied into products. The more specialized these products and the broader the range produced, the more complex the economy. Complexity is a medium- to long-term predictor of economic growth.

The UK is not coming from a standing start. The UK has retained or created industrial strengths in sectors from cars and industrial machinery to aerospace and defense. The sizeable depreciation of sterling and relatively low production costs give UK industry an advantage. These cyclical benefits can be secured with a structural policy aimed at maximizing R&D (knowledge) heavy, high-skill (knowhow) manufacturing.

A modern industrial strategy is about creating the right environment for new products and markets to emerge and jobs and income to grow. A successful neo-industrial policy requires a holistic approach. We discuss four areas likely to appear within an industrial strategy: infrastructure (including digital), energy, skills and innovation. Policies here could enhance complexity and the economy’s capacity to generate, share and use information. A consistent policy approach with long-term commitments could counterbalance Brexit-related uncertainty.

The Chancellor, Philip Hammond, is expected to ease the UK’s austerity policy by year-end. We argue the fiscal adjustment needs to be seen through the lens of industrial strategy. Public sector funding costs are extremely low and the Bank of England has re-started gilt-based QE. After the referendum the government has a reason and opportunity to maximize the benefits via an industrial policy.

 

Eoin Treacy's view -

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

As we pointed out ahead of the referendum, the UK had a big choice to make. It could become a vassal state subject to an increasing autocratic central government or it could throw out the rule book and refashion itself into a free market example of dynamism that would benefit from its proximity to, but separation from, a much larger neighbour.  I described this latter option as the Hong Kong solution and it would appear to be what the UK is now moving towards. 



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August 24 2016

Commentary by Eoin Treacy

A Grim Outlook for the Economy, Stocks

Thanks to a subscriber for this interview of Stephanie Pomboy expressing a bearish view which appeared in Barron’s. Here is a section:

The presumption supporting equity prices is that all the bad news we’ve seen this year has been due to anomalies—the lagged effect of the strong dollar and weaker energy prices as well as Brexit. Everyone is looking for a significant second-half rebound for earnings and GDP—when the clouds will part and the sun will come out. I strongly believe that won’t happen, in large part because of inventories. Inventory accumulation has been explosive.

What’s caused this growth in inventories?
It isn’t because companies ramped up production. Companies aren’t using cheap capital to increase production and capital expenditures, but are lavishing money on shareholders instead. They bought the lie that consumer spending would turn up any moment, and produced at the same pace. Now they find themselves with a monster inventory overhang. Inventory-to-sales ratios across a variety of industries—manufacturing, machinery, autos, wholesale—are at the highest level since 2009. In prior inventory liquidation cycles, nominal GDP growth is cut in half during the liquidation phase. As for profits, we’re starting with five negative quarters and we haven’t even begun the inventory liquidation cycle. So the second half will be a real eye-opener.

In your view, today’s too-low rates will cause the next financial crisis. Describe it.
In the past rates that were too high were the trigger. Not this time. No. 1, we have basically bankrupted corporate and state and local pensions by having rates at these repressive levels. If you lay on top of that a decline in equity prices, there will be a scramble to plug holes in pensions. Obviously if a state or local government has to divert funds to plugging its pension, it won’t build more roads. The corporate sector has the luxury of kicking the can down the road, and because their spending has been on buybacks, not plants and equipment, the economy would suffer less. For S&P 1500 companies, the pension deficit is roughly $560 billion, but for state and local governments, it’s $1.2 trillion. According to the Center for Retirement Research, if you used a more conservative discount rate, the unfunded liability would go to $4 trillion.

No. 2, you’re pushing consumers to the brink as they try to save enough for retirement at zero rates. You’re already seeing a reluctant return to credit-card usage, a clear sign of distress—they are charging what they previously paid with cash. The credit-card delinquency rate is picking up.

 

Eoin Treacy's view -

The way people generally think about pensions is that you accumulate a pot of money over your lifetime, purchase an annuity with a yield greater than your living costs and a maturity that extends to the end of one’s life. Of course that is not realisable in practice so pension funds have to manage the duration of the overall portfolio so they can plan to meet future liabilities with some degree of accuracy. 

The problem is that in formulating their models they typically assume a 7% yield. That’s OK when nominal interest rates are somewhere close to that level but with rates close to zero, for nearly a decade, they have no choice but to rely on capital appreciation to make up for the absence of yield. The alternative is to take on a lot more risk to capture the yield they require. For example, and this is obviously not a recommendation, Rwanda’s senior unsecured US Dollar B+ 2023 bond currently yields 6.195%. 

 



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August 24 2016

Commentary by Eoin Treacy

Delphi, Mobileye Join Forces to Develop Self-Drive System

This article by Mike Colias for the Wall Street Journal may be of interest to subscribers. Here is a section: 

We’re able to pool the investment as well as the technology and execution risk in one place so it doesn’t have to be duplicated by multiple [auto makers] over and over again,” Mr. Clark said.
The pair will jointly invest “several hundred million dollars” in the effort, but a spokesman declined to provide other details.

In January, Delphi and Mobileye expect to demonstrate a system that can navigate tough road conditions, such as entering a roundabout, merging into highway traffic, or making left turns across multiple traffic lanes.

Both companies have deep relationships with car makers, but their system won’t be ready until 2019. Integrating their tech in future vehicles could take as much as two years, the companies concede, making it unlikely to hit the market until 2021 or 2022.

Mobileye Chairman and Chief Technology Officer Amnon Shashua said the pair hope to overcome any timing hurdles by offering “a new level of driving intelligence,” mimicking a driver’s decision making behind the wheel in complex situations. “If we don’t want to clog a city with robotic systems that get stuck in busy traffic, you must endow these systems with intelligence.”

 

Eoin Treacy's view -

Automotive manufacturers have an incentive to deliver on autonomous vehicles because they believe it would have the same effect on car ownership as the introduction of smart phones did for hand held mobile devices. Prior to the introduction of the iPhone most people already had a mobile phone yet they felt compelled to upgrade when the additional benefits of a smartphone were revealed, For companies trying to differentiate themselves in an increasingly competitive market autonomous vehicles represent a compelling vision for the future. 



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August 24 2016

Commentary by Eoin Treacy

Email of the day - on moving averages for economic data

Moving averages for economic series - i.e. only monthly data exist. How do I get a 12 month or longer moving average? If I put in 12 I get a very jerky looking chart, not as smooth as I would expect...

Eoin Treacy's view -

Generally speaking, economic data is only released once a quarter so a moving average for a year would be only 4 data points which is likely to create a jerky looking chart if you look at two short a time range, or if there is a big difference in the range of the data. For example this chart of UK GDP is smoothed with a 20 quarter MA over 50 years and creates a smooth line. 



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August 23 2016

Commentary by David Fuller

China Caught In Dead Money trap as Central Bank Pleads for Fiscal Stimulus

Here is the opening and also the last two paragraphs of this interesting article by Ambrose Evans-Pritchard for The Telegraph:

China is at mounting risk of a Japanese-style "liquidity trap" as monetary policy loses traction and the economy approaches credit exhaustion, forcing a shift towards Keynesian fiscal stimulus.

Officials at the Chinese People’s Bank (PBOC) have begun to call for a fundamental change in strategy, warning that interest rate cuts have become an increasingly blunt tool.

They cannot easily stop companies hoarding cash or halt the slide in private investment.

Sheng Songcheng, the PBOC’s head of analysis, set off a storm last month by warning that the economy had “started to show some signs of being caught in a liquidity trap”.

He has since stepped up his pleas for action by the fiscal authorities to relieve the burden on the central bank, a Chinese variant of the parallel drama that is being played out in Europe and Japan.

Mr Sheng told China Business News on Monday that the country has a very low reliance on foreign borrowing and can easily afford to shore up the economy with a Keynesian boost.

“China can let its deficit-to-GDP ratio rise to over 3pc or even 5pc in the long run. It can spur growth more effectively by lowering corporate taxes than by cutting the interest rate,” he said.

The powerful State Council has now joined the chorus with calls this week for a $75bn cut in business taxes to boost confidence and channel stimulus to the productive economy.

And:

Simon Ward, a monetary expert from Henderson Global Investors, said there is nothing to fear. The surge in M1 is a sign that companies and consumers are shifting money into their accounts in order to spend it, and this will cause economic growth to pick up yet further over coming months.

Mr Ward said the ‘velocity’ of M2 money is almost certainly accelerating. “It is the opposite of a liquidity trap,” he said.

David Fuller's view -

I would be very surprised if China was at increasing risk of a Japanese-style liquidity trap, as mentioned in the opening sentence above.  Some financial commentators are understandably spooked by widespread deflation but that is a far greater problem for developed than developing economies. 

This item continues in the Subscriber’s Area where a PDF of the article is posted and a number of charts are shown.



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August 23 2016

Commentary by David Fuller

Clive Hale: View from the Bridge: When?

My thanks to the author for his latest report, written with experience, wisdom and panache.  Here is the opening:

"The art of financiering consists principally in multiplying and confusing accounts, till, at last, no one has courage to undertake an examination of them." William Cobbett "The Budget" 1805

 

“I imagine that Ben Bernanke, Mario Draghi and Haruhiko Kuroda all stay awake at night imagining ways to force negative rates on savers. But the larger question, beyond a sociopathic desire to control others in service of one’s own intellectual dogma, is why anyone would advocate such policies. I can’t emphasize strongly enough that there is no economic evidence that activist monetary intervention has materially improved economic performance in recent years.” John Hussman 2016

 

The effects of quantitative easing may be diminishing compared with a few years ago, but “what we should say is, ‘Effects are diminishing, so let’s do more.’ This is the spirit of Abenomics.” Etsuro Honda, an advisor to Japanese prime minister Shinzo Abe

 
William Cobbett would no doubt be amazed at the level of “multiplying and confusing” that is practised by the central banks and the general banking system at large. Large perhaps not being an adequate description of say the Fed’s balance sheet, investment banks’ derivatives’ books or unacknowledged bank bad debt all of which are up there in the trillions.

John Hussman has dared suggest that the emperor has no clothes. It is no mere suggestion, but fact, that quantitative easing, negative interest rates, deployment of helicopters (do they know how expensive it is to fly helicopters?!) and other sundry methods, designed on the back of a fag (cigarette to our US readers) packet, to normalise economies, has failed. Unless of course your goal is to inflate the stock and bond markets to levels of over valuation that will ultimately lead to a crash, which of course our heroic masters of the economic universe will fail to see coming and will have very little ammo left to do anything about.

The question is of course, “When?” With any degree of accuracy, it is an impossible question to answer. Etsurosan is typical of his breed confidently predicting that more of the same will work…eventually – beatings will continue until moral improves etc etc. Japan has been subjected to 25 years of monetary experimentation and has little, and that’s being generous, to show for it. GDP is barely above 1991 levels and the mean growth rate is less than 1%. The Nikkei was over 22,000 and interest rates were 6%; today they are 16,500 and minus 0.1%. The only thing to have gone up is the BoJ’s balance sheet from under Yen 1 trillion to over Yen 4 trillion and, as if that weren’t enough, they want to do more!

David Fuller's view -

Quantitative easing (QE) has pushed most stock markets higher, as was intended, and central banks (CBs) hoped that this would increase confidence, leading to stronger economies.  This has not really happened, as we know, not least because there has been less fiscal spending by governments anxious to get their budget deficits down before interest rates eventually move higher. 

Similarly, most corporations have been cautious and therefore reluctant to spend on research and development.  Instead, they have rewarded management and shareholders with stock buybacks which have also flattered earnings.  Record low interest rates in Western economies and Japan have also encouraged corporate takeovers.

This item continues in the Subscriber’s Area where View from the Bridge can also be seen.    



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August 23 2016

Commentary by David Fuller

On Target: Is This Bull Market Sustainable?

My thanks to the ever-interesting Martin Spring for his latest letter.  Here is the opening:

Most investors are making money. Shares are going up, bonds continue to rise in value, gold is doing well again. Yet there‟s an uncanny, artificial feeling about the markets.

Wall Street is looking great. The major indexes – the S&P 500, the Nasdaq Composite, the Dow Jones Industrial Average – have broken out on the upside to all-time highs, which has got the chartists excited.

Although European markets look the dodgiest, they‟ve stopped falling. London has been rocketing since its Brexit low. Emerging markets are having a great year – up by a third so far. The biggest Asian bourses, Japan and China, have been building bases as if they‟re getting wound up for take-off.

It‟s not only equity investments that are delivering gains.

The bull market in US Treasury bonds maintains its momentum, adding to the pain of all those forecasters who got it wrong, while the 20-year bull market in German Bunds is doing even better. Corporate bonds are recovering, even those in the “junk” sector.

Gold bugs are excited – big rises in values this year suggest the four-year bear market is over. Industrial commodities have bounced back. Even oil, recently the biggest investment problem, is now rising strongly once again and well above its new year lows.

Property is buoyant almost everywhere as long-term investment funds continue to shift into an asset that attractively combines relatively good yields with capital gains. (Don‟t be misled by the current crisis in the London commercial market – it‟s largely a short-term problem caused by Brexit panic).

So what is there to worry about?

David Fuller's view -

This issue of Martin Spring’s letter contains excellent, informed analysis.  On Target is posted in the Subscriber’s Area.  



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August 22 2016

Commentary by David Fuller

Carbon Capture Can Drive a 21st Century Revival of British Industry

Renaissance beckons for the once great industrial hubs of northern England and Scotland, and the unexpected catalyst may be stringent global climate controls.

What looks at first sight like an economic threat could instead play elegantly to Britain's competitive advantage, for almost no other country on earth is so well-placed to combine energy-intensive manufacturing with carbon capture at a viable cost.

The industrial clusters of the Tees Valley and the Humber are linked by a network of pipelines to depleted and well-mapped oil and gas fields in the North Sea, offering rare access to infrastructure for carbon storage deep underground.

Liverpool has old wells of its own offshore in the Irish sea. Scotland's heavy industry in Grangemouth and the Forth have feeder pipelines to the Golden Eye.

Such sites may not be worth much today - with carbon prices in Europe too low to matter at barely $5 a tonne - but the COP21 climate deal agreed in Paris last December transforms the long-term calculus.

It implies a tightening regime of higher carbon penalties for the next half century, ending in net zero CO2 emissions. Once prices approach $50 a tonne the equation changes. Beyond $100 it inverts the pyramid of energy wealth: profits accrue to those with access to the cheapest low carbon power.

"Storage will be much more valuable than the fossil fuels themselves. If you are an energy-intensive industry in the middle of Europe and you don't have C02 storage, you're stuffed," said professor Jon Gibbins from Edinburgh University.

David Fuller's view -

This is interesting and entrepreneurial long-term thinking.  I believe we will hear more of it following Brexit because the UK has voted to retake control of its destiny.  That is an exciting and positive development which will inspire additional creativity and economic development.  



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August 22 2016

Commentary by David Fuller

Why the UK is Using Less Energy, but Importing More, and Why It Matters

The UK is in the midst of an energy revolution. Since the late 1990s the Government has committed to using cleaner energy, and using less of it.

Billions of pounds have been invested in renewable energy sources that generate electricity from the wind, waves and plant waste.

At the same time the UK has managed to cut its energy use by almost a fifth as households and businesses have steadily replaced old, inefficient appliances and machinery with products that use far less energy to run. Energy demand has also fallen due to the decline of the UK’s energy-intensive industries, such manufacturing and steel-making.

But Government data shows that the UK’s reliance on energy imports is at its highest since the energy crisis of the late 1970s, raising serious questions over where the UK sources its energy and what a growing dependence on foreign energy means for bills and for security.

In a leaner, greener energy system, why is the UK more dependent on foreign energy sources than it has been in more than 30 years?

David Fuller's view -

The short answer is that the UK has largely run out of commercially viable North Sea oil at today’s prices.  It has also made a commendable push into renewables while cutting back on the use of coal.  However, this has been an expensive policy and the country faces an increasing risk of energy shortages. 

Fortunately, there is a medium-term solution to this problem if the government moves quickly.

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



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August 22 2016

Commentary by David Fuller

India Appoints a New Central Bank Governor

Here is the opening of this article from The Economist:

AS MUCH as the financial markets they seek to influence, central banks need the confidence of investors to function. So uncertainty over their leadership and questions about their independence are seldom welcome. On August 20th Narendra Modi, India’s prime minister, belatedly appointed a new head of the Reserve Bank of India (RBI), nine weeks after Raghuram Rajan, the respected incumbent, surprised everyone by announcing he wouldn’t stay on the job for a second term (as most of his predecessors had) after his three-year term expires on September 4th.

The new governor is Urjit Patel, a former management consultant and corporate adviser, who has served since 2013 as one of four RBI deputy governors. Mr Patel is thought to be of similar ilk to his current boss. That is reassuring for investors still baffled as to why Mr Rajan, a former IMF chief economist with a good record as head of the RBI, was effectively sacked by Mr Modi.

Mr Patel’s remit at the RBI has been to help shape monetary policy. The newish inflation-targeting framework, which has been successful in stemming rising prices (helped by outside factors such as falling oil prices), is as much his as Mr Rajan’s. So is the incoming arrangement, whereby interest rates will be set by a panel comprising government and RBI appointees rather than the RBI’s boss being in sole charge. Though he lacks the stature of Mr Rajan, which probably helped fend off inevitable calls for lower interest-rates from ministers and industrialists, Mr Patel is seen as just as hawkish as the outgoing governor. His appointment should alleviate fears that Mr Rajan's exit was a ploy by Mr Modi to hobble a fiercely independent central bank.

David Fuller's view -

Mr Rajan was apparently a little too outspoken for Mr Modi.  Urjit Patel certainly has the qualifications to be governor of the Reserve Bank of India, where he has served as a deputy governor since 2013.

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



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August 22 2016

Commentary by David Fuller

Europe Seeks Life After Brexit as Merkel Meets Allies at Sea

Here is the opening of this topical article from Bloomberg:

The Italian aircraft carrier Giuseppe Garibaldi usually patrols the Mediterranean as the flagship of the European mission to save shipwrecked refugees. On Monday, it will host the leaders of Germany, France and Italy as they try to ensure the European Union doesn’t founder in the aftermath of Brexit.

The meeting of Angela Merkel, Francois Hollande and Matteo Renzi off the coast of Naples will be rich in symbolism.

The Garibaldi, named after the general who helped unify the Italian state in the 19th century, is tackling one of today’s greatest challenges to the European project in migration. Before they are helicoptered aboard from the island of Ventotene, the leaders will visit the grave of Altiero Spinelli, an anti-fascist who helped draft a 1941 manifesto calling for a federal Europe. Spinelli wrote on cigarette papers smuggled out of a prison camp on Ventotene while interned during World War II and later became an EU commissioner.

The present-day leaders of the euro area’s three biggest economies will focus on both the future vision of Europe and immediate challenges such as Britain’s vote to leave the EU, economic growth, terrorism and political turmoil in Turkey, as well as migration. They’ll hold a news conference and then have dinner on board the Garibaldi, seeking to shape where Europe goes from here and the EU’s negotiating stance toward the U.K.

David Fuller's view -

We hear that today’s meeting of Angela Merkel, Francois Hollande and Matteo Renzi aboard the aircraft carrier Giuseppe Garibaldi “will be rich in symbolism”.  No doubt, although perhaps not as intended.  Cartoonists may see it as an initial rescue of shipwrecked politicians who will face even more uncomfortably hot waters in next year’s elections.   

Left of centre political commentators, and not just within Europe, have long described the European Union as a ‘noble experiment’.  Unfortunately, it is another foundering socialist policy, which enriched the elite, while eroding European democracy, weakening the region’s economies and creating shameful levels of unemployment.  



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August 22 2016

Commentary by David Fuller

European Sneers Take Shine Off GB Medal Haul

Britain’s stunning medals success in the Rio Olympics may have been a cause for elation at home — but in parts of Europe it has met with sneers, incredulity and withering criticism of UK sports policy.

Great Britain achieved its best Olympic performance in more than a century, garnering a total of 67 medals, including 27 golds. It ended the Rio games second in the overall medals table after the US and ahead of China.

Some fellow Europeans were impressed. Others were sceptical.

Germany’s Frankfurter Allgemeine newspaper, for example, singled out Team GB’s spectacular success in cycling, which it said “has led its rivals to wonder if there isn’t something fishy going on with the Brits”.

The paper also had harsh words for the Britain’s “no compromise” approach to funding, which allocates money to sports with a realistic chance of earning medals and has withheld it from disciplines that failed to meet their medals target in 2012.

“It made no difference how popular the sport was with the public, how suitable it was for the mass market,” the paper said. “Volleyball and table tennis were excluded from funding programmes, despite their broad appeal and wide take-up in the population.”

The article was headlined: “No compromise: why the Brits win more often in Rio than China, and what a high price they pay for it.”

There was a similar reaction in Spain, where the El País daily described Britain’s pursuit of Olympic glory as “brutal and heartless”, stating: “Every medal is the product of calculation, not the spirit of a nonconformist athlete.”

Perhaps even more irritating to British sports fans was the approach taken by the European Parliament. In a tweet it airbrushed out the Britain’s performance, instead congratulating the whole of the EU on the 325 medals it had collectively won.

That earned this terse response from one @JDrewer: “If you want to know why the Brits decided to leave the EU, this tweet pretty much sums it up.”

David Fuller's view -

Oh dear.  How thoughtless of our Olympic athletes to deny their critics of schaudenfreuda which could have been satisfied by a post-Brexit crisis of confidence. 

(See also: Treacy Crouch: The heroes of Team GB have inspired the nation – we must harness that feeling for good)



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August 22 2016

Commentary by David Fuller

Email of the day

On nuclear fission being the bane of human civilization: 

Nuclear fission will ultimately be the bane of human civilization. There are no solutions for storing spent fuel which is stored in pools around reactor sites and will remain deadly for uncounted future generations. The innards of reactors wear out in a several decades but remain deadly to life for tens of thousands of years. How will they be dismantled and stored safely? Multiply these hazards by future reactors yet to be built to imagine the legacy we are leaving. Renewable energy is the only way.

David Fuller's view -

Well said.  You are correct and I have not mentioned this often enough. We can reduce the risk with individual reactors by converting to new nuclear but containment of deadly spent fuel from reactors still leaves lethally dangerous sites which have to be cordoned off for ever.  The tradeoff, I suggest, is that even 20th Century nuclear power shortens far fewer lives than any fossil fuel.  Meanwhile, renewable energy is one of the long-term solutions to our requirements but many more people would die prematurely from hardship if we could only use renewables today.  The other long-term solution, which many of us had hoped to see and surely our grandchildren will, is nuclear fusion. 

See also: Why Nuclear Fusion Is Always 30 Years Away, from Science for the Curious Discover.



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August 19 2016

Commentary by David Fuller

Why Economists Are Hopeless When it comes to Brexit

I love economists, I really do. I adored economics at school, spent five years studying the subject at university and have written about the economy, among other topics, for my entire professional career. I like hanging out with dismal scientists.

But it’s time for economists to take a chill pill. They need to relearn a little humility, especially when it comes to trying to understand the impact of a gargantuan event such as Brexit.

Grasping its implications is not in their or anybody else’s comfort zone, and they would be better off admitting as much sooner rather than later.

Every so often, when they are not too busy being self-important, economists realize the absurdity of what the public expects of them.

There are whole websites devoted to jokes about economists, with various anonymous authors gently poking fun at themselves. One soon gets the hang of the art form: “It’s tough to make predictions, especially about the future” – that sort of thing.

It is a shame, therefore, that economists, as a group, seem unable to display such self-awareness when it comes to their extreme, near-unanimous forecasts about Brexit.

As recently as a few days ago, something like 90 per cent believed that Armageddon was on the cards merely as a result of the Leave vote. Yet whenever dismal scientists agree so passionately about the impact of a complex, one-off and multi-faceted event, alarm bells deserve to go off.

Anybody who has followed economic forecasts closely over the past 15 years knows full well how wrong the consensus almost invariably turns out to be – not surprisingly, as it is a case of predicting the unpredictable.

The average economist always gets turning points in the business cycle wrong, is too optimistic at the height of a boom and too pessimistic at the trough of a recession.

Their predictions about unemployment, wage growth, productivity, central bank and market interest rates and inflation have all been drastically off the mark in recent years. This is as true of City forecasters as it has been of the bank of England and official bodies.

Most damaging of all was all the nonsense about double or triple-dip recession a few years ago, a pathology compounded by data that keeps being revised.

If that weren’t the case, and if working as an economist conferred upon practitioners some near-magical, proto-astrological insight, business, investing and life in general would be too easy. It’s time the profession stopped pretending that it is dealing with a simple, mechanistic world.

It is far too soon to tell what the short-term impact of Brexit will be – after all, expectations and animal spirits are inherently intangible and arbitrary. There may still be a sharp downturn. But so far, all the official data has utterly confounded the consensus view among economists.

David Fuller's view -

Most economists are prone to group think, which is usually wrong.  When most economists hold a similar view, they are thinking about themselves in terms of financial fears and insecurity, instead of striving to think objectively for themselves.

You are probably already thinking, correctly, that as analysts and investors or traders we face the same challenges.  It is not easy to avoid group think.  However, if you remember that consensus views are usually contrary indicators, especially when widely held, you will be more objective and perhaps profit from your contrarian thinking.   

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August 19 2016

Commentary by David Fuller

Brexit Boom: Five Charts Which Show Britain Has Escaped an Economic Apocalypse

Unemployment is down, prices are steady, shoppers are confident and the government ran a budget surplus in July.

The first economic data for July – the month following the Brexit referendum – was published this week, and shows no signs of an immediate economic collapse.

It is early days and a slowdown is still expected, but the data are reassuring so far.

Campaigners such as former Chancellor George Osborne warned that a vote to leave the EU would cause “a profound economic shock”, and stock markets dived following the result.

But since then share prices have risen back above their pre-vote levels and fears of a recession are falling.

David Fuller's view -

It is a colorful headline but hyperbolic.  More people are energized than depressed by Brexit and others are carrying on as normal.  It will be several years before we can objectively assess the results of Brexit.  Meanwhile, this is a governance issue and standards of governance are never constant but vary over time.  Nevertheless, if one believes in democratic control of a nation by its own citizens, Brexit is a very positive development.   

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

 



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August 19 2016

Commentary by David Fuller

How to Survive a Melt-Up

Ever since the financial crisis investors have been bombarded with books, blog posts, articles and advice about how to survive the next bear market/Lehman Brothers/black swan/recession/subprime/1987/big short moment in the markets.

And don’t get me wrong, preparing yourself mentally for market downturns can be a helpful exercise. These things are inevitable so planning for a wide range of outcomes that includes the potential for large losses in risk assets is a decent way to ensure that you don’t panic when markets do fall.

But there’s another risk in the markets that most investors don’t spend too much time worrying about — a melt-up in prices.

It would seem to me that all of the ingredients are in place for a potential U.S. equity bubble. Interest rates are extremely low, central banks around the globe are almost accommodative across the board, there is a substantial need for returns from pensions and retirees and a general lack of alternatives elsewhere to invest. That doesn’t mean it has to happen, but the pieces are in place for upside volatility, something very few investors believe could occur these days.

In fact, if you look back historically at how stock markets have generally performed, they are much more likely to rise substantially than fall substantially in a given year. My colleague Michael Batnick ran those numbers this week and found that since 1926, “U.S. stocks were nearly six times more likely to be up twenty percent one year later than they were to be down twenty percent.” Here’s his chart:

David Fuller's view -

The chart in this article is worth keeping for perspective because it confirms what most investors already know but can easily forget in nervous, volatile markets.  Given reasonable governance, stocks rise more than they fall over time, due primarily to GDP growth and inflation. 

To benefit from market volatility, the simplest and most important guideline for any young investor is: Buy-Low-Sell-High.  



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August 18 2016

Commentary by David Fuller

Britain Should Leap-Frog Hinkley and Lead 21st Century Nuclear Revolution

It is hard to imagine now, but Britain once led the nuclear revolution.

Ernest Rutherford first broke the nuclei of atoms at Manchester University in 1917. Our Queen opened the world's first nuclear power plant in 1956 at Calder Hall.

Such were the halcyon days of British atomic confidence, before defeatism took hold and free market ideology was pushed to pedantic extremes.

Most of Britain's ageing reactors will be phased out over the next decade, leaving a gaping hole in electricity supply. By historic irony the country has drifted into a position where it now depends on an ailing state-owned French company to build its two reactors at Hinkley Point, with help from the Chinese Communist Party.

The horrors Hinkley are by now well-known. The European Pressurized Reactor (EPR) is not yet working anywhere. The Olkiluoto plant in Finland is nine years late and three times over budget. EDF's Flamanville project is not faring much better.

What is clear is that the costs of 'old nuclear' have spun out of control everywhere in the developed world. It is too expensive to keep trying to refine an inherently dangerous technology dating back sixty years in a Sisyphean attempt to make it less threatening after Chernobyl and Fukushima.

The capital cost of new nuclear plants in Europe and the US has risen from $1,000 per kilowatt in the 1970s to around $5,500 today in real terms. Hinkley will be nearer $8,000. Hence the lapidary term 'negative learning' coined by Yale scientist Arnulf Grubler.

The standard light water reactors were solid workhorses in their day - and averted huge releases of CO2 from fossil fuels - but they operate at 100 times atmospheric pressure. They need costly containment structures  to prevent an explosive release of deadly radioactive gases across hundreds of miles. 

 

This nuclear cost spiral has been happening just as solar and wind costs plummet, and the verdict is in. The nuclear share of global power has dropped to 10.7pc from 17.6pc in 1996. Ten new reactors were built last year, but eight were in China. In Europe they are shutting down.

There is an alternative. Research into a radical new wave of safer, cleaner, and cheaper reactors is suddenly reaching critical mass, some are entirely compatible with the intermittency of wind and solar.

This is what Theresa May should be looking at as she launches her industrialisation drive and fashions an energy policy fit for the 21st Century.

The Washington think tank Third Way has identified fifty advanced reactor projects in North America, including eight based on molten salt fuel, ten on liquid-metal, and some based on fusion designs.

David Fuller's view -

It is beyond comprehension that any intelligent person with a reasonable understanding of competing energy developments in 2016 could think that the Hinkley Point white elephant was a good idea.  This was a short-term pre-Brexit political decision which should never have been seriously considered.  It totally ignored economic risks, given EDF’s reworked and risky Heath Robinson technology, plus the company’s catastrophic delays and soaring costs on Finland’s Olkiluoto Island and France’s own Flamanville project on the Cotentin Peninsula.  

 Prime Minister Theresa May wisely put Hinkley Point on hold, to the consternation of French and Chinese officials, before leaving for her walking holiday in Switzerland.  If her advisors are up-to-date on our worldwide energy revolution and the Hinkley Point debate, Mrs May will be able to resume her sensible overhaul of Britain’s energy policies on return.  These commenced with realistic financial incentives for people living in regions where fracking needs to occur.  However, the delicate diplomatic issue, for which she will not thank David Cameron or George Osborne, concerns Hinkley Point.  The plain truth is that it does not add up and would be a costly disadvantage for the UK over 35 years. 

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August 18 2016

Commentary by David Fuller

Oil Prices Break Back Above $50 a Barrel

Oil prices broke above $50 a barrel for the first time in five weeks as hope that the world’s largest suppliers may act to cut the glut in global supply continues to drive prices higher for a sixth consecutive day.

Brent crude moved above $50 a barrel for the first time since early July on Thursday morning before dipping back to $49.70 later in the day. But by the afternoon the market surged well above the key earlier highs to around $50.80 a barrel.

The recent rally in prices, from lows under $42 a barrel just two weeks ago, began late last week after Saudi energy minister Khalid bin Abdulaziz Al-Falih said the Oraganization of Petroleum Exporting Countries would meet in Algeria next month to discuss measures to stabilise oil market prices with major producers outside of the cartel.

The rally found further support earlier this week after Russian energy minister Alexander Novak said that his country - the world's third largest supplier of oil - was involved in the early discussions

Shakhil Begg, an analyst with Thomson Reuters, said oil prices bounced back as continued short covering activity sustained a rally which has propelled prices by more than 20pc since the lows of early August.

David Fuller's view -

The Saudis’ 2H 2014 attempt to replay their successful 1970’s script - increasing oil supplies and driving the price down to knock out high cost producers - was always going to fail in the current era.  They were really targeting US shale oil production, without understanding the importance of this quantum technological leap which was beginning to tap billions of gallons of previously inaccessible oil, at increasingly commercial prices. 

In fairness to the Saudis, they were not alone.  In fact, most western oil analysts also failed to grasp the potential of this rapidly developing new technology.  They talked about high drilling costs, rapid depletion rates within a few months, while polluting water tables and triggering earthquakes.

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August 18 2016

Commentary by David Fuller

Labour Force: We Are Moving Part-Time as the Jobs Market Hollows Out

Full-time employment has slid 64,500 since December while part-time employment has surged 136,600. The net result of 72,300 extra Australians in work reflects a hollowing out of employment rather than a boost in hours. There were scarcely any more hours worked in July than in December.

The international definition used by the Bureau of Statistics requires it to count someone as "employed" even if they work only one hour per week.

"With more than 86 per cent of total net jobs created over the last 12 months part-time, it is clear that Australia is becoming a nation of part-time employment growth with all the attendant negative consequences," said Bill Mitchell, director of the Centre of Full Employment and Equity at the University of Newcastle.

David Fuller's view -

 

This trend has been clear for a number of years – the downside of technology in human terms is that many jobs across most industries and professions are being replaced more quickly than new jobs, other than part-time, can be found.  Additionally, Australia’s economy is adversely affected by China’s slowdown.

Click on The Sydney Morning Herald link above to see a painfully good cartoon on this subject.  



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August 18 2016

Commentary by David Fuller

Italy Wants the EU to Change Tack on Growth and Security

Here is the opening on this interesting report from Bloomberg:

Italy is seeking an expansionary push for growth in the European Union as the bloc forges a new course after the U.K. voted to leave, Prime Minister Matteo Renzi’s junior minister for European affairs said.

Undersecretary Sandro Gozi, speaking ahead of an Aug. 22 informal meeting of Renzi, German Chancellor Angela Merkel and French President Francois Hollande, called for a wide-ranging agreement to boost cooperation on security and defense as well as an expansionary economic policy to boost European growth.

“We need to increase and reinforce EU action on security and defense, including rapidly launching the European policing of its external borders,” Gozi said in a telephone interview. “Also as a reply to the terrorist threat, some EU countries should be able to work on joint initiatives in the security, policing or military fields if they wish to do so.”

In the wake of the Brexit referendum, and with the Italian economy unexpectedly stalling in the second quarter, Renzi has stepped up calls for a departure from what his government sees as German-inspired austerity policies. Renzi is preparing for a referendum on constitutional reform, expected to take place in November, on which he has staked his political future.

David Fuller's view -

I think Renze will get what he wants from France and also Germany, albeit reluctantly.  Following Brexit, Italy is now the EU’s third largest economy and it is in trouble, as you can see from this weekly 10-year chart.  If Renzi loses his referendum on constitutional reform in November, the EU could face an even bigger problem than Brexit because other Southern European countries are similarly disillusioned with the Euro. 

Meanwhile, there are plenty of successful, hard working Italians in London and I have yet to meet one who wants Italy to remain in the EU.  



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August 17 2016

Commentary by David Fuller

Fed Officials Split in July on Whether Rate Hike Needed Soon

Here is the opening of the latest report on this topical issue, following the release of July’s Fed notes:

Federal Reserve officials were divided in July over the urgency to raise interest rates again, with some preferring to wait because inflation remained benign and others wanting to go soon as the labor market nears full employment.

"Several suggested that the committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis," according to the minutes of the central bank’s July 26-27 policy meeting released in Washington on Wednesday.

“Some other participants viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that the recent progress in reaching the committee’s inflation objective would continue, even with further steps to gradually remove monetary policy accommodation,” the minutes also showed.

At the July meeting, the Federal Open Market Committee left the benchmark interest rate in a range of 0.25 percent to 0.5 percent and noted that “near-term risks to the economic outlook have diminished.”

A number of Fed policy makers have suggested in public comments since the last meeting that it will probably still be appropriate to raise interest rates at least once this year, with some indicating a move could come as soon as the FOMC’s Sept. 20-21 gathering.

Investors will listen closely for additional clues on timing when Fed Chair Janet Yellen will speak Aug. 26 at an annual symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming. They put the probability of a rate increase this year at roughly 50 percent, according to the prices of federal funds futures contracts.

David Fuller's view -

It is not difficult to make a case for or against a rate hike before yearend.  Those favouring a hike in September cite ‘near full employment’, although on average these are not high-paying jobs.  They also maintain that a rate increase would help savers and the banking sector.  Those favouring a further delay before the next rate hike point to very low inflation.  They are (or should be) more concerned about upward pressure on the USD in the event of a rate hike while economies in other developed countries remain generally weaker. 

Of course there are a few other minor factors which some have mentioned but the key point, I believe, is that Fed Chairman Janet Yellen will have the most influential vote.  I see no evidence that she is about to change her cautious stance, but we will know more when she speaks on 26th August, during an annual symposium at Jackson Hole hosted by the Kansas City Fed.    

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August 17 2016

Commentary by David Fuller

Modi Sends Warning Shot to China, Pakistan on Territory Spat

From the sandstone walls of the 17th-century Red Fort in India’s capital, Prime Minister Narendra Modi sent a warning shot this week to his counterparts in Islamabad and Beijing.

Modi’s reference to disputed territories on Monday during his annual Independence Day speech -- his most high-profile appearance of the year -- signaled that India would become more aggressive in asserting its claims to Pakistan-controlled areas of Kashmir. The region is a key transit point in the $45 billion China-Pakistan Economic Corridor known as CPEC that will give Beijing access to the Arabian Sea through the port of Gwadar.

"This is a recalibration" after Modi’s overtures to Pakistan and China failed to yield results, says Harsh V. Pant, a professor of international relations at King’s College London. It’s also a message to China: "You may be investing a lot in Pakistan, and think that CPEC is a done deal, but without India’s approval you might find it difficult to follow through."

A more vocal India threatens to raise tensions in a region rife with deep-seated historical animosity that has made South Asia one of the world’s least economically interconnected regions. Various insurgents and militant groups threaten both China’s investments in Pakistan and progress in India-controlled Kashmir, where recent violence has killed about 60 people.

While India is more likely to redouble efforts on developing transport links with Iran and Afghanistan than sabotage China-Pakistan projects, the saber-rattling may deal a setback to investor confidence in the region, according to Michael Kugelman, senior associate at the Woodrow Wilson Center in Washington.

“The bottom line is that in a volatile region like South Asia, you don’t need actual aggressive actions to cause economic consequences," he said. “Mere threats can have a very real effect on the economic state of play as well."

In a bold rhetorical move on Monday, Modi overtly referred to the region of Balochistan, a resource-rich, insurgency-riven Pakistani province that is home to the strategic deep-water port of Gwadar. He also mentioned Gilgit, a Pakistan-administered region that borders China and Afghanistan -- the northernmost edge of the planned economic corridor.

David Fuller's view -

Unlike China’s rhetoric over its territorial expansion in the South China Sea, Narendra Modi’s remarks do not amount to sabre rattling, in my opinion.  Nevertheless, the rapid economic growth of large nations such as India and particularly China over a number of years also encourages military build-ups, enabling leaders to project their interests with greater confidence.  When big nuclear powers are involved, even a whiff of territorial disputes can unsettle investors. 

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August 17 2016

Commentary by David Fuller

Sinking Coast In Louisiana Is a $100 Billion Nightmare for Big Oil

Here is the opening of this informative article from Bloomberg:

From 5,000 feet up, it’s difficult to make out where Louisiana’s coastline used to be. But follow the skeletal remains of decades-old oil canals, and you get an idea. Once, these lanes sliced through thick marshland, clearing a path for pipelines or ships. Now they’re surrounded by open water, green borders still visible as the sea swallows up the shore.

The canals tell a story about the industry’s ubiquity in Louisiana history, but they also signal a grave future: $100 billion of energy infrastructure threatened by rising sea levels and erosion. As the coastline recedes, tangles of pipeline are exposed to corrosive seawater; refineries, tank farms and ports are at risk.

“All of the pipelines, all of the things put in place in the ’50s and ’60s and ’70s were designed to be protected by marsh,” said Ted Falgout, an energy consultant and former director of Port Fourchon.

Louisiana has an ambitious -- and expensive -- plan to protect both its backbone industry and its citizens from this threat but, with a $2 billion deficit looming next year, the cash-poor state can only do so much to shore up its sinking coasts. That means the oil and gas industry is facing new pressures to bankroll critical environmental projects -- whether by choice or by force.

“The industry down there has relied on the natural environment to protect its infrastructure, and that environment is now unraveling,” said Kai Midboe, the director of policy research at the Water Institute of the Gulf. “They need to step up.”

Every year in Louisiana, more than 20 square miles of land is swallowed by the Gulf. At Port Fourchon, which services 90 percent of deepwater oil production, the shoreline recedes by three feet every month. Statewide, more than 610 miles of pipeline could be exposed over the next 25 years, according to one study by Louisiana State University and the Rand Corporation. Private industry owns more than 80 percent of Louisiana’s coast.

The land loss exacerbates another natural threat: storm-related flooding, like that affecting Baton Rouge now. As days of heavy rainfall caused water to overrun levees along several tributaries this week, Exxon Mobil Corp. began shutting units at its Baton Rouge refinery, the fourth-largest in the U.S. About 40,000 homes in southeastern Louisiana have been affected by the devastating flooding, and at least 11 people have died.

In Louisiana, marshes, swamps and barrier islands can mitigate flooding, soaking up rainfall like a sponge and reducing storm surge. But as the land erodes, storms advance without a buffer, and Louisiana's flood protection systems become less effective. The state estimates that damage from flooding could increase by $20 billion in coming years, if the coastline isn't reinforced.

David Fuller's view -

This is an interesting and somewhat worrying article, well worth reading for three perspectives: 1) climate change (they don’t mention it but I would stay well clear of floodplains; 2) oil refiners which are at risk because their processing plants are in coastal areas; 3) the state of Louisiana, with the help of the US Government, really took careless BP to the cleaners over their drilling accident.  This has set a precedent which other governments with needy regions will be tempted to emulate.      



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August 17 2016

Commentary by David Fuller

August 16 2016

Commentary by David Fuller

Theresa May Tells China She Wants Stronger Trade Ties, Amid Hinkley Dispute

Theresa May has written to Chinese President Xi Jinping insisting she wants stronger trade and cooperation between the UK and China, amid a row over her decision to delay the Hinkley Point nuclear deal.

The UK "looks forward to strengthening cooperation with China on trade and business and on global issues", Mrs May said in the letter, according to a statement from the Chinese foreign ministry.

Tensions between the two countries have risen since Mrs May's surprise decision last month to delay approval of the £18bn nuclear plant amid security concerns over the involvement of Chinese state nuclear companies, which are due to fund one-third of the project.

China's ambassador Liu Xiaoming responded last week by warning that Sino-British relations were at a "crucial historical juncture", urging the UK to "keep its door open to China" and give the go-ahead to Hinkley as soon as possible. 

The new intervention by the Prime Minister, who has been tight-lipped over her decision to review Hinkley, was disclosed by Alok Sharma, the Asia minister, during a meeting with Chinese foreign minister Wang Yi in Beijing.

Ahead of the meeting, Mr Sharma also issued a statement insisting that Britain was "open for business and an attractive destination for international investors, including from China".

"The UK’s relationship with China relationship is strong, growing and delivering benefits for both our countries," he said. 

Chinese investment in Hinkley Point was warmly welcomed by former Prime Minister David Cameron and former Chancellor George Osborne, who hailed the start of a "golden era" of relations between the countries.

Beijing has made clear it sees Mrs May's reticence over Hinkley as calling this new era into question. 

David Fuller's view -

Theresa May was right to put the proposed Hinkley Point nuclear power project on indefinite hold, prior to a diplomatic cancellation. 

It never made economic sense because the estimated building cost from EDF (Électricité de France) starts at £18 billion for this untested reactor technology, which is already significantly over-cost where it is being built in Finland and also France.

This item continues in the Subscriber’s Area where two other relevant articles are also posted, plus a PDF of The Telegraph article.  



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August 16 2016

Commentary by David Fuller

The Equity View: Growth Is Where the Value Is

My thanks to Doug Sandler for his informative letter published by RiverFront Investment Group. Here is a brief sample:

One great example of this extreme level of risk aversion can be seen when comparing the valuations of a historically “certain” sector like Utilities to a historically “uncertain” sector like Technology.  Today, investors are paying more for the future earnings of the average utility company (17.7x) than they are willing to pay for the future earnings of the average technology company (17.6x) despite the fact that the average tech company has grown its earnings nearly four times faster (11%) than the average utility (3%) over the past ten years.  Furthermore, unlike their technology peers, the future earnings growth for many utilities is limited by their geographic reach and the rates they are allowed to change, both of which are set by Federal and state regulators.  

David Fuller's view -

This is an extremely interesting point, although I am not sure what an average technology company is.  Perhaps that was part of the problem, as cautious investors were uncertain as to how technology companies should be valued.  Also, the big winners among tech companies were fashionable momentum plays with nosebleed valuations, while the laggards underperformed for lengthy periods.  I also think it can take up to a generation for once burned investors to forget the trauma of the 2000 collapse in tech shares.

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August 16 2016

Commentary by David Fuller

After Brexit, Can the UK Build Its Trade Ties With Latin America?

On the day of the opening ceremony of the Rio Olympics, UK trade minister Lord Price issued a rallying cry. “The Rio Games reminds us that sport unites everyone as equals. And business can unite us too,” he told an audience at British House at the foot of the statue of Christ the Redeemer. Lord Price wanted Brazilian investors to know that, post-Brexit, the UK was “open for business”. In May, before the referendum result was known, he led the UK’s first trade mission to Argentina in 10 years, saying: “The growing economies of Latin America offer huge opportunity for British business.”

The charm offensive is a sign of the Government’s willingness to look at new regions for British trade, especially Latin America. The UK exported £7bn in goods and services to South America in 2015, down somewhat from its peak of £8.8bn in 2013. Can Britain push that number higher once again? And can Latin America make up for any economic shortfall as the UK disentangles itself from the European Union?

David Fuller's view -

The short answer to the headline above is yes, and it is a welcome challenge in terms of governance to achieve trade ties with a great many countries following Brexit. 

Moreover, the timing is propitious in terms of Central and South America.  Governance has often been a challenge within the region but is certainly on an upswing following recent changes in government for Brazil and Argentina. 

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August 16 2016

Commentary by Eoin Treacy

Dudley Says September Hike Is Possible, Markets Too Complacent

This article by Matthew Boesler for Bloomberg may be of interest to subscribers. Here it is in full:

The Federal Reserve could potentially raise interest rates as soon as next month, New York Fed President William Dudley said, warning investors that they are underestimating the likelihood of increases in borrowing costs.

“We’re edging closer towards the point in time where it will be appropriate, I think, to raise interest rates further,”

Dudley, who serves as vice chairman of the rate-setting Federal Open Market Committee, said Tuesday on Fox Business Network.

Asked whether the FOMC could vote to raise the benchmark rate at its next meeting Sept. 20-21, Dudley said, “I think it’s possible.”

Investors only expect about one rate hike between now and the end of next year, according to federal funds futures contracts. Dudley said such estimates are too low and that “the market is complacent” about the need for rate hikes. With Treasury yields low, the bond market “looks a little bit stretched,” he said.

“We are looking for growth in the second half of the year that will be stronger than the first half,” Dudley said. That should be enough to support sturdy job gains and keep the Fed’s outlook intact, he added.

 

Eoin Treacy's view -

Dudley has been quite adamant that the Fed’s intention to raise rates cannot be dismissed. However, the performance of the Dollar and low bond yields suggest market participants are sceptical. 

12-month yields are trading at just under 54 basis points suggesting the bond market is in no hurry to price in imminent rates hikes. The rationale being that the Fed is unlikely to want to influence the outcome of the Presidential election not least because the event itself is a source of uncertainty that can have economic consequences. 

 



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August 16 2016

Commentary by Eoin Treacy

Gas Glut Upends Global Trade Flows as Buyers Find Leverage

This article by Tsuyoshi Inajima for Bloomberg may be of interest to subscribers. Here is a section:

Historically, LNG has been sold on long-term contracts that guaranteed buyers supply and helped producers finance liquefaction plants at a time when less of the product was shipped. Now, a gas glut is causing LNG importing countries to support renegotiating existing deals that can run 20 years or more while suppliers offer more flexible terms to lock up customers spoiled for choice.

India already is encouraging importers to rework long-term accords to better align costs with spot market prices. Japan, the world’s largest LNG importer, may soon join them. That country’s Fair Trade Commission is in the process of probing resale restrictions in longer deals in an effort that could mean the renegotiation of more than $600 billion in contracts and boost the number of shorter-term agreements.

“There will be 40 million to 50 million tons of homeless LNG by 2020, which can go anywhere or doesn’t have any fixed customers,” said Hiroki Sato, a senior executive vice president with Jera Co., a fuel buyer that plans to increase spot and short-term LNG deals. “Homeless LNG will provide a great opportunity to improve liquidity in Asian and global markets.”

 

Eoin Treacy's view -

The evolution of a global transportation network for natural gas is creating the impetus to divorce pricing from long-term oil contracts. While Russia floated the idea of creating a natural gas equivalent of OPEC a few years back, as a way of preserving it pricing power, it was unable to reach critical mass. 

The reality today is that a substantial number of new entrants to the market, not least Australia, the USA and developing east Africa, all have a vested interest in capturing market share. Meanwhile major consumers like Japan, India and China would understandably like to avail of lower prices. The expansion of the Panama Canal also boosts the viability of US exports to Asia. 

 



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August 16 2016

Commentary by Eoin Treacy

Tackling the fungi that could wipe out the world's banana supply within a decade

This article by Michael Irving for Gizmag may be of interest to subscribers. Here is a section:

The most common type of banana the western world eats is the Cavendish, which is produced through vegetative reproduction – instead of growing from seeds, cuttings of the plant's shoots are replanted and cultivated, making all Cavendish bananas essentially "clones" of one specific plant. Without genetic variety, as diseases gain a foothold over the fruit, they're equipped to potentially take out the entire worldwide crop.

"The Cavendish banana plants all originated from one plant and so as clones, they all have the same genotype – and that is a recipe for disaster," says Ioannis Stergiopoulos, plant pathologist at UC Davis.

Currently, close to 120 countries produce about 100 million tons of bananas each year, but 40 percent of the yield is spoiled by Sigatoka, a fungal disease complex comprised of three strains: yellow Sigatoka, black Sigatoka and eumusae leaf spot. To combat the ever-present threat, farmers need to apply fungicide to their crops 50 times a year, which isn't only costly, but can pose a threat to the environment and human health.

"Thirty to 35 percent of banana production cost is in fungicide applications," says Stergiopoulos. "Because many farmers can't afford the fungicide, they grow bananas of lesser quality, which bring them less income."

 

Eoin Treacy's view -

The susceptibility of bananas to bacterial attack, due to their lack of genetic diversity, puts me in mind of the Irish potato famine where reliance on a single breed of tuber left the population bereft of a major portion of their diet when blight destroyed the crop. Of course no one is as heavily reliant on bananas yet they do form a constituent part of many people’s diet globally. It should be possible, given today’s technology, to protect the crop from infection and potentially even enhance yields which could flatter profitability for major producers.   



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August 15 2016

Commentary by David Fuller

Vast National Gamble on Wind Power by Britain May Yet Pay Off

Wind power has few friends on the political Right. No other industry elicits such protest from the conservative press, Tory backbenchers, and free market economists.

The vehemence is odd since wind generates home-made energy and could be considered a 'patriotic choice'. It dates back to the 1990s and early 2000s when the national wind venture seemed a bottomless pit for taxpayer subsidies.

Pre-modern turbines captured trivial amounts of energy. The electrical control systems and gearboxes broke down. Repair costs were prohibitive.

Yet as so often with infant industries, early mishaps tell us little. Costs are coming down faster than almost anybody thought possible. As the technology comes of age - akin to gains in US shale fracking  - the calculus is starting to vindicate Britain's vast investment in wind power.

The UK is already world leader in offshore wind. The strategic choice now is whether to go for broke, tripling offshore capacity to 15 gigawatts (GW) by 2030.  The decision is doubly-hard because there is no point dabbling in offshore wind.  Scale is the crucial factor in slashing costs, so either we do it with conviction or we do not do it all. My own view is that the gamble is worth taking.

Shallow British waters to offer optimal sites of 40m depth. The oil and gas industry knows how to operate offshore. Atkins has switched its North Sea skills seamlessly to building substations for wind. JDR in Hartlepool sells submarine cables across the world. Wind power is a natural fit.

We live in a world that has just signed the COP21 climate deal in Paris. That implies a steadily rising penalty on carbon emissions. It also implies that those dragging their feet on renewables will ultimately be punished, as the Chinese have grasped.

David Fuller's view -

Many of us opposed wind farms well over a decade ago because they were expensive, nosy, inefficient eyesores and a devastating Cuisinart for birds.  Yes, costs are coming down rapidly due to size, mass production and especially accelerating technological innovation, unfolding before our very eyes.   

You would not want to live anywhere near these increasingly massive War of the Worlds machines, but they are now considerably more efficient.  Moreover, the evolution of batteries will largely resolve intermittency problems over the next five years.  Celebrate the increasingly important source of renewable energy from wind power but spare a thought for the birds lost and also the disturbance of sea mammals by offshore wind farms.   

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



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August 15 2016

Commentary by David Fuller

Is the Wild Ride In Commodities Over?

Congratulations if you called the path of commodity prices this year. You’re probably also among the 0.0001pc of people who guessed Leicester City would win the Premier League. And of course, you predicted Brexit.

In a topsy-turvy world, metals have shown surprising strength. After cratering in 2015, a basket of major commodities has soared in price this year, from the remarkable 36pc climb of iron ore, to the stellar performance of precious metals, with gold and silver up 25pc and 43pc respectively. Zinc, a mineral used to galvanise other metals to stop them rusting, has chalked up a 41pc rise.

One of the few analysts to call iron ore’s recovery was Jason Schenker, of Prestige Economics, who now thinks the metal – used to make steel – will probably extend its rally into the second half, averaging $55 a tonne. Some of the FTSE 100 miners would probably bite your arm off if you offered them iron ore at that price. BHP Billiton, Rio Tinto and Anglo American all produce the metal at far below that level, meaning they can comfortably bank cash at $55 a tonne and get on with paying down debt.

David Fuller's view -

We should never forget that the key fundamental variable in commodity prices is always supply.  Moreover, supply is notoriously volatile because miners produce all they can when metal prices are high.  That window eventually closes because expensive metals inevitably reduce demand.  As prices plummet, producers first try to sell even more to maintain revenue.  When that becomes counterproductive, marginal producers are forced to reduce supplies and even low-cost producers eventually realise that metal in the ground will be worth more to them if they reduce refined supplies.  Demand eventually increases for industrial commodities when prices remain low.  As they begin to recover a bull market emerges if commodity producers are slow to increase supplies and GDP growth strengthens.   

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



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August 15 2016

Commentary by David Fuller

August 15 2016

Commentary by Eoin Treacy

Emerging Markets Are Hot, Except for China

This article by Mia Lamar and Rachel Rosenthal for the Wall Street Journal appeared in Saturday’s edition but the authors might have wished they waited another day before publishing. Here is a section:

The wariness partly reflects how unnerved global investors remain by markets that have proved exceptionally unpredictable, even by emerging-market standards. After surging 60% in the beginning of last year, Chinese stocks tipped into a selloff that sent Shanghai’s benchmark index down as much as 41% from June to August. The index rebounded briefly last fall, then plunged 23% in January. The yuan, meanwhile, logged a 5% loss against the dollar in 2015, following an unexpected devaluation one year ago that helped to spur enormous outflows of money as panicked Chinese sent cash abroad.

Many investors say they are disturbed by steps China has taken to tame market convulsions, from heavy-handed currency intervention and the buying of shares by state-backed funds, to allowing widespread trading suspensions of shares and blaming “malicious” forces for stock-price falls.

Others say they remain concerned about China’s economic slowdown, and suspect conditions may be worse than official figures suggest.

Chinese officials have stressed measures by Beijing to address the concerns of global investors, and played down concerns about growth. “The Chinese economy is a ‘stability anchor’ for the global economy,” Premier Li Keqiang said last month. “Prophecy of China’s economy heading for a hard landing is rarely heard now.

Eoin Treacy's view -

Many of the limitations imposed on the Chinese market have been aimed at inhibiting speculation following a particularly tumultuous period in 2015. That is a condition which is in sharp contrast to the environment on a number of other international indices. 

Chinese regulators messed up the launch of options trading, and timing its debut with the opening of the Shanghai – Hong Kong connection only exacerbated the short term mania. In trying to avoid a crash they threw every measure available to stem the decline and there is plenty of evidence over the last six months that the 3000 level on the CSI300 is being defended. 



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August 15 2016

Commentary by Eoin Treacy

Give us EU visa freedom in October or abandon migrant deal, Turkey says

This article by Michelle Martin and Humeyra Pamuk for Reuters may be of interest to subscribers. Here is a section: 

Asked whether hundreds of thousands of refugees in Turkey would head to Europe if the EU did not grant Turks visa freedom from October, Cavusoglu told Bild: "I don't want to talk about the worst case scenario - talks with the EU are continuing but it's clear that we either apply all treaties at the same time or we put them all aside."

Visa-free access to the EU - the main reward for Ankara's collaboration in choking off an influx of migrants into Europe - has been subject to delays due to a dispute over Turkish anti-terrorism legislation, as well as the post-coup crackdown.

Brussels wants Turkey to soften the anti-terrorism law.Ankara says it cannot do so, given multiple security threats which include Islamic State militants in neighboring Syria and Kurdish militants in Turkey's mainly Kurdish southeast.

European Commissioner Guenther Oettinger has said he does not see the EU granting Turks visa-free travel this year due to Ankara's crackdown, which has included the round-up of more than 35,000 over alleged involvement in the coup.

Cavusoglu said the migration deal with the EU stipulated that all Turks would get visa freedom in October, adding: "It can't be that we implement everything that is good for the EU but that Turkey gets nothing in return."

 

Eoin Treacy's view -

It is a bit disingenuous of Turkey to say they get nothing in return when the EU is paying a multi-billion euro stipend to contain migrants in Turkey, instead of having to deal with them within the borderless EU. However the Turkish administration is understandably on edge and feeling defensive following the foiled coup and is probably looking for a win, internationally, to bolster confidence in its ability to govern successfully. 



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August 15 2016

Commentary by Eoin Treacy

China's Latest Leap Forward Isn't Just Great It's Quantum

This article by Josh Chin for the Wall Street Journal may be of interest to subscribers Here is a section:

“We’ve taken all the good technology from labs around the world, absorbed it and brought it back,” Mr. Pan told Chinese state TV in an interview that aired on Monday.

With state support, Mr. Pan was able to leapfrog his former Ph.D. adviser, University of Vienna physicist Anton Zeilinger, who said he has tried since 2001 to convince the European Space Agency to launch a similar satellite.

“It’s a difficult process, which takes a lot of time,” said Mr. Zeilinger, who is now working on his former student’s satellite.

Neither Mr. Pan nor the Chinese Academy of Sciences, which is directing the project, responded to requests for comment. The European Space Agency and the U.S.’s National Science Foundation, which provides federal funding for basic American science research, also didn’t respond to requests for comment.

China’s investment in the field is likely being driven in part by fear of U.S. cyber capabilities, said John Costello, a fellow at Washington, D.C.-based New America specializing in China and cybersecurity, pointing to 2013 disclosures that the U.S. had penetrated deeply into Chinese networks. He also noted that U.S. institutions are researching how to build powerful quantum computers theoretically capable of shattering the math-based encryption now used world-wide for secure communication. “The Chinese government is aware that they are growing particularly susceptible to electronic espionage,” Mr. Costello said.

However, quantum communication is defensive in nature, he noted, and wouldn’t benefit from what the U.S. has identified as China’s state-sponsored hacking program.

Quantum encryption is secure against any kind of computing power because information encoded in a quantum particle is destroyed as soon as it is measured. Gregoir Ribordy, co-founder of Geneva-based quantum cryptography firm ID Quantique, likened it to sending a message written on a soap bubble. “If someone tries to intercept it when it’s being transmitted, by touching it, they make it burst,” he said

Eoin Treacy's view -

Protecting quantum data from corruption from outside influences such as radio waves, light and electromagnetic fields represents a significant challenge to creating working prototypes. The result is that a great deal of research is going into different ways of using light to transport information. The launch of a satellite using quantum data is an interesting proposition and if it does indeed work it would represent a proof of concept for additional research which does have cybersecurity uses. 



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August 15 2016

Commentary by Eoin Treacy

Email of the day on bonds versus equities

Having read John Authers FT.com column today, I confess to a bit of confusion. Listening to your outstanding audios over past weeks and months (for which, many, many thanks), I had formed the impression that when the bond markets turns, it would be good for equities on the basis that money has to go somewhere, and it would flow in a large part to equities. Authers seems to be saying the opposite - see his last 3 paras today:

"Look at the chart of the S&P and this looks like a peak, and a bad time to buy. Look at the chart of how stocks have performed relative to bonds, and it looks like stocks should be ready to shine. This illustrates the paradox that has also lasted for years that stocks look expensive by almost any sensible historical measure — except when compared to bonds, when they look cheap. 

But there is a nasty problem with this. If bonds finally go into reverse, rates will rise, the support for stocks will be removed and the risk is more that stocks will start to fall. The bond market rally is extraordinary, it has gone on for a long time, defeating predictions by many (myself included) that yields had become unsustainable. US Treasury yields have been falling steadily for more than three decades. 

If bonds can somehow continue this, then stocks will probably continue to prosper (although they may fail to outstrip bonds). If bonds go into reverse, it would be bad news for both stocks and bonds. And either way, the record in the S&P 500, which has created genuine wealth for those who hold it, is a sideshow besides what is happening in bond markets."


Can you comment please and perhaps remove my confusion?

Thanks as always

Eoin Treacy's view -

Thank you for this topical email and snippet from John Authers’ article. Here is a pdf of the full article. 
If you had asked me a couple of years ago, before just about every central bank in the world was engaged in quantitative easing, I would have said that a peak in the bond market would have helped act as fuel for an additional rally in equities. However I’m not so sure now. 

 



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August 12 2016

Commentary by Eoin Treacy

Global Equity Strategy Who sells where in 2016

Thanks to a subscriber for this heavyweight 118-page report from HSBC covering the international exposure of major companies on a global basis. Here is a section:

 

European equity markets are by far the most global, more than their economies, and are most exposed to Emerging Markets (EM)

US equity market is the most closed of the Developed Markets (DM), a key ingredient to the US’s relative ‘safer-haven’ status

Japanese overseas revenues have grown sharply in recent years, but are now threatened by yen strength

EM stock markets are the most closed, accounting for the bottom seven countries in our ranking
Economies are not stock markets. DM and EM have similar exports/GDP levels, but DM stock markets are twice as global

Chinese corporates going abroad, but only generate 10% overseas today. Brazil corporates only 20% overseas after commodity slump 

Italy and India have ‘globalized’ the most in recent years

IT is the most global US sector; Healthcare the most global European sector. Utilities and telecom are respectively the most local

Overall overseas revenue contribution has stalled (at 44%) the last three years, as globalization has come under pressure

Looking at indices based on revenue rather than domicile transforms the investment universe: EM much larger, whilst US a lot smaller

 

Eoin Treacy's view -

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

With the growth of the global consumer base we began to pay attention to large international businesses that dominate their respective sectors from about 2011. I developed the list of Autonomies by looking at data similar to that compiled in this report; using it to identify companies that have global businesses. In perusing the report veteran subscribers will no doubt be familiar with many of the names. 



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August 12 2016

Commentary by Eoin Treacy

Theresa May may become one of the most radical western leaders of the century

Thanks to a subscriber for this article by Lawrence Solomon for the Financial Post which may be of interest to subscribers. Here is a section:

Under May’s approach, shale gas royalties that would ordinarily go to governments and quasi-governmental agencies will instead be directed to the residents in the communities hosting the developments. The BBC estimates individual households will be receiving as much as £10,000 ($16,800) under May’s plan; other estimates arrive at higher sums – as much as £65,000 per household lucky enough to be near large shale gas deposits. May’s plan is now expected to wash away local opposition to fracking and unleash the development of Britain’s massive shale gas resources, estimated by the British Geological Survey at 1,300 trillion cubic feet of shale gas, equivalent to a 500-year supply at current gas consumption levels.

This torrent of energy will benefit more than the local residents who until now saw only drawbacks to shale gas development in their community. The abundant supply of gas will lower energy costs throughout the country, relieving residential and business consumers alike and convincing British industries – which have been leaving Britain due to its high energy costs – to not only stay but also to expand their operations in the U.K.

The May approach isn’t limited to shale –  it will apply to developments of all kinds, whether other resource developments, industrial complexes or airport expansions. Through what she calls her blueprint for development projects, May will be converting the development delayer known worldwide as NIMBY (Not In My Back Yard) into PIMBY (Please In My Back Yard), a development accelerator. Residents will effectively become pro-development lobbyists whenever they determine a development personally benefits more than discomforts them.

 

Eoin Treacy's view -

By voting for change the UK has an unparalleled chance to literally throw out the rule book and adopt policies that would have been anathema to the Brussels bureaucracy. Royalties for landowners close to extractive industries has been a major enabler for the growth of the US energy sector and could have a transformative effect on the UK economy, not least because a great deal of its shale is in the north of the country which was particularly hard hit by the closing of collieries. 



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August 12 2016

Commentary by Eoin Treacy

Macy's is closing another 100 stores

This article from Money.com may be of interest to subscribers. Here is a section: 

Macy's closures come amid a sixth-straight quarterly decline in sales. However, sales fell less than feared and the company said it's "encouraged" by recent sales trends. Wall Street applauded the dramatic store closures, sending the stock surging 17%, its best day since 2008.

Macy's said its new strategy is to concentrate its financial firepower and talent on its best-performing locations. The department store plans to invest in strong stores by highlighting new vendors, increasing the size and quality of its staff and investing in new technology.

"We operate in a fast-changing world, and our company is moving forward decisively to build further on Macy's heritage," Macy's CEO Terry Lundgren said in a statement.

Macy's said the store closures could result in the loss of about $1 billion in sales, even after accounting for shoppers who would go online and to other Macy's locations. The company plans to offset that loss in sales by cutting costs, even beyond shutting down these stores.

It's not clear how many jobs will be impacted by these moves. Macy's told CNNMoney it won't detail layoffs until it finalizes its store closure list.

 

Eoin Treacy's view -

Macys, and a number of other big box retailers, have two problems. They rely on physical locations which tend to have a boring feel and their products are too expensive. Nevertheless they command sizeable, albeit shrinking shares of the consumer market and have impressive real estate holdings which have appreciated considerably since the credit crisis. 



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August 11 2016

Commentary by David Fuller

Dow, S&P500, Nasdaq Close at Records on Same Day for First Time Since 1999

Here is the opening of tonight’s interesting comparative report from The Wall Street Journal

Major U.S. stock indexes set records again Thursday, the first time since Dec. 31, 1999, that the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite have hit those milestones on the same day.

The rally was sparked by higher oil prices and earnings reports from U.S. retailers that weren’t as weak as feared.

Consumer-discretionary and energy stocks led broad gains across the market. The Dow industrials rose 118 points, or 0.6%, to 18614, above its previous record close of 18595 hit July 20. The S&P 500 gained 0.5% and topped its Aug. 5 record. The Nasdaq Composite added 0.5%, surpassing its previous high set at Tuesday’s close.

Investors are “into stocks because there’s nowhere else to go,” said Tim Rudderow, president of Mount Lucas Management, which oversees $1.6 billion.

Shares of Macy’s rose 17% as the department-store operator reported better-than-expected sales and said it plans to close 100 stores. Kohl’s gained 16% after reporting a surprise increase in profit even as it cut its earnings forecast for the year.

The two retailers were the S&P 500’s best performers Thursday, but they were still among the worst over the past 12 months. Retail-store owners have been hit in part by the growth of Internet-based competitors, and even Macy’s well-received results included a sharp drop in quarterly profit and another period of declining sales.

David Fuller's view -

Yearend 1999 was not the most auspicious time for Wall Street.  Veteran subscribers may recall that it was the beginning of the end of the last secular bull market.  However, the S&P 500 and the Nasdaq Composite carried higher into 2Q 2000 before commencing their bear market.

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



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August 11 2016

Commentary by David Fuller

Holy Grail of Energy Policy in Sight as Battery Technology Smashes the Older Order

Here is the opening and also a latter section of this informative article by Ambrose Evans-Pritchard for The Telegraph:

The world's next energy revolution is probably no more than five or ten years away. Cutting-edge research into cheap and clean forms of electricity storage is moving so fast that we may never again need to build 20th Century power plants in this country, let alone a nuclear white elephant such as Hinkley Point.

The US Energy Department is funding 75 projects developing electricity storage, mobilizing teams of scientists at Harvard, MIT, Stanford, and the elite Lawrence Livermore and Oak Ridge labs in a bid for what it calls the 'Holy Grail' of energy policy.

You can track what they are doing at the Advanced Research Projects Agency-Energy (ARPA-E). There are plans for hydrogen bromide, or zinc-air batteries, or storage in molten glass, or next-generation flywheels, many claiming "drastic improvements" that can slash storage costs by 80pc to 90pc and reach the magical figure of $100 per kilowatt hour in relatively short order.

“Storage is a huge deal,” says Ernest Moniz, the US Energy Secretary and himself a nuclear physicist. He is now confident that the US grid and power system will be completely "decarbonised" by the middle of the century.

And more on Hinkley Point:

Perhaps the Hinkley project still made sense in 2013 before the collapse in global energy prices and before the latest leap forward in renewable technology. It is madness today.

The latest report by the National Audit Office shows that the estimated subsidy for these two reactors has already jumped from £6bn to near £30bn. Hinkley Point locks Britain into a strike price of £92.50 per megawatt hour - adjusted for inflation, already £97 - and that is guaranteed for 35 years.

That is double the current market price of electricity. The NAO's figures show that solar will be nearer £60 per megawatt hour by 2025. Dong Energy has already agreed to an offshore wind contractin Holland at less than £75.

Michael Liebreich from Bloomberg New Energy Finance says the Hinkley Point saga will be taught for generations as a case study in how not to run a procurement process. "The obvious question is why this train-wreck of a project was not killed long ago," he said.

Theresa May has inherited a poisonous dossier, left with the invidious choice of either offending China or persisting with a venture that no longer makes any economic sense. She may have to offend China - as tactfully as possible, let us hope - for the scale of the folly has become crushingly obvious.

Every big decision on energy strategy by the British government or any other government must henceforth be based on the working premise that cheap energy storage will soon be a reality.

This country can achieve total self-sufficiency in power at viable cost from our own sun, wind, and waters within a generation. Once we shift to electric vehicles as well, we will no longer need to import much oil either. Rejoice.

David Fuller's view -

Modern energy industries are among the biggest beneficiaries of the accelerated rate of technological innovation.  The primary incentive is ‘needs must’.  For this reason the US Energy Department is currently, albeit belatedly, funding approximately 75 projects dedicated to improving electricity storage capacity.  Other countries with developed research capabilities are following a similar path.  Electricity storage costs are plummeting and forecast to reach $100 per kilowatt hour before long.  This will largely remove the ‘intermittency’ problem which is currently still the main downside for solar and wind power. 

Against this background, governments should reconsider proposals for 20th century energy programmes, of which the UK’s Hinkley Point project is a classic example.  It was hastily proposed on the basis that energy costs could only move higher - a dubious premise as we now know.  In fact, energy prices will plummet in the years ahead, for countries which develop modern and increasingly efficient energy policies including solar, modern nuclear and also natural gas which is readily available via fracking in many countries and the least polluting fossil fuel by far.  

The Hinkley Point project, far from providing a helpful source of energy, would saddle the UK with uncompetitive energy costs for at least 35 years, damaging economic prospects in the process.

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



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August 11 2016

Commentary by David Fuller

The Strategic View: Not Too Hot, Not Too Cold

My thanks to Michael Jones, Chairman and Chief Investment Officer of RiverFront for his latest interesting report.  Here is a brief sample from the opening:

Last week witnessed a flurry of policy announcements and economic data releases.  We believe that on balance, the news from last week supports continued upward momentum in US, European and emerging market equity prices, accompanied by relatively stable interest rates.  In contrast, we believe that the Bank of Japan (BOJ) has made yet another policy mistake, and absent a stronger-than-expected fiscal stimulus package, Japanese equities could give back much of their recent gains.

David Fuller's view -

There are some interesting graphics in this report, from “Contributions to GDP growth” and “Crude Oil Production and Prices – US”.  RiverFront thinks the US economy is stronger than numbers indicate, particularly in terms of consumer spending.

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



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August 11 2016

Commentary by David Fuller

August 11 2016

Commentary by Eoin Treacy

Investment demand for gold jumps to all-time high

This article by Frik Els for mining.com may be of interest to subscribers. Here is a section:

Juan Carlos Artigas, ?Director of Investment Research at the WGC, told MINING.com, the continued strong investment was  fuelled by increasing global economic and political uncertainty which was only exacerbated by the unexpected outcome of the UK referendum, looming elections in the US.
Worries about the impact of negative interest rates, ultra-loose monetary policies in many developed economies and the delays to the normalization of the interest rate regime in the US also drove investors to gold.

"Pent up demand among investors who have been looking for a way back in, found the necessary catalyst"

Artigas said the dollars flowing into investment products weren't necessarily "new money"  but much of it represented asset managers simply increasing existing allocations or re-entering the gold market. He believes these ETF investment are likely to be "sticky":

‘While there is some evidence of momentum buying, investors are primarily initiating or rebuilding strategic, long-term holdings after the wash-out of positions since early 2013.

"Pent up demand among investors who have been looking for a way back in, found the necessary catalyst to do so this year."

Artigas said gold ETF inflows are split about half-half among retail and institutional investors. In that sense ETF investment is "democratic" – whether you're an individual or large-scale hedge fund you pay the same price and are charged the same fees

 

Eoin Treacy's view -

No one knows what the eventual repercussions of negative interest rates or even helicopter money are likely to be but it appears sensible to have at least some form of hedge against an unruly outcome. 

So far we have evidence that quantitative easing is not particularly effective at boosting economic growth but it does wonders for asset prices namely stocks, bonds and property. Gold tends to perform more as a hedge against the debasement of currency on a grand scale or perhaps more accurately against government manipulation of markets. Therefore there is a clear argument for having at least some gold in one’s portfolio considering the political and monetary environment we now reside in.  

 



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August 11 2016

Commentary by Eoin Treacy

"Speedfactories" to the US

This article by Stu Robarts for Gizmag may be of interest to subscribers. Here is a section: 

Group executive board member at Adidas Eric Liedtke acknowledges that the firm has been producing goods in Asia "for years," helping it to keep costs down. He explains, however, that a new business model based on the Speedfactories will allow it to "decentralize" production to regional locations – in this case the US.

“We're fueling design at the ground level of creativity in Brooklyn and reinventing manufacturing with the first adidas Speedfactory in Atlanta," says Liedtke. "This allows us to make products for the consumer, with the consumer, where the consumer lives in real time, unleashing unparalleled creativity and endless opportunities for customization in America."

New customization options brought to consumers will include fit, comfort and look. The facilities will also allow Adidas to source materials and produce goods locally, helping to reduce transport emissions.

 

Eoin Treacy's view -

Automation and full customisation are likely to represent an important part of the future of the garment industry and companies like Adidas and Nike are leading the way for sporting goods. For every person that can wear whatever they wish, there must be ten more that find it difficult to find clothing that fits just right. Customisation together with 3-d scanning will fix that issue and, from speaking with some of the people developing robot seamstresses, it could be with us in as soon as 3 years. 



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August 11 2016

Commentary by Eoin Treacy

Won Drops From 14-Month High as BOK Signals Room for More Easing

This article by Jung Park for Bloomberg may be of interest to subscribers. Here it is in full:

South Korea’s won fell from the strongest in more than a year after the Bank of Korea Governor signaled policy remains accomodative.

The dollar’s slide this week amid speculation U.S. borrowing costs will stay unchanged in 2016 has boosted emerging-market currencies. The Korean currency is the top performer in Asia this month after the Taiwanese dollar. The BOK held its interest rate at a record low as forecast by economists and Governor Lee Ju Yeol said the central bank “still has monetary, fiscal policy room.”

“Governor Lee’s comment that the BOK still has policy room reaffirmed its accommodative stance and the possibility of a rate cut in the near future,” said Chung Sung Yoon, a currency analyst at Hyundai Futures Corp. in Seoul. “The longer term direction will probably be determined by the policy stance of global central banks, particularly the U.S. and the Bank of Korea.”

The won dropped 0.5 percent to 1,099.72 per dollar at the 3:30 p.m. close of trading in Seoul. It snapped five days of gains that sent the currency to its strongest level since May 2015.

The currency’s level has become burdensome following the rally, Hyundai Futures’s Chung said, adding that speculations of a “government intervention” in the market “near 1,090 right before the close” on Wednesday fueled concerns over another one.

South Korean bonds were little changed, with yield on three-year note at 1.23 percent, and 10-year note at 1.40 percent.

 

Eoin Treacy's view -

The South Korean Won has been among the strongest currencies regionally so far this year but the Dollar has developed a short-term oversold condition and potential for a reversionary rally has increased.  



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August 11 2016

Commentary by Eoin Treacy

Alibaba's revenue beats estimates; mobile revenue soars

This article from Reuters may be of interest to subscribers. Here is a section: 

Alibaba's total revenue rose to 32.15 billion yuan, or $4.84 billion, in the quarter ended June 30 from 20.25 billion yuan a year earlier. Analysts on average had expected revenue of 30.17 billion yuan, according to Thomson Reuters I/B/E/S.

Mobile revenue from the company's China commerce retail business increased 119.3 percent to 17.51 billion yuan, while monthly mobile active users increased 39 percent.

"We passed an important milestone this quarter in achieving higher monetization of mobile users than non-mobile users for the first time," Chief Financial Officer Maggie Wu said.

The company said its gross merchandise volume (GMV) - the value of transactions carried out by third-party sellers on the company's platforms - rose 24.4 percent to 837 billion yuan.

Alibaba said in June it would in the future only release GMV figures on an annual basis. The change followed the disclosure that the U.S. Securities and Exchange Commission was looking into the company's accounting practices. 

 

Eoin Treacy's view -

Mobile is quickly becoming the dominant force in internet search, retail and advertising not least because of the heavy focus users of social media have on their handheld devices. That trend is even more pronounced in emerging markets; where many consumers first experience of the internet is via their mobile device. That represents a significant growth trajectory for companies that have dominant positions in the respective social media and mobile advertising markets. 



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August 10 2016

Commentary by David Fuller

Rare Brexit Optimist Calls for Pound to Climb Back Toward $1.50

Here is the opening and also a latter section from this topical article from Bloomberg:

The pound trading at $1.50 may seem like a distant memory, yet a few voices see it fully recovering from the Brexit sell-off.

A weaker pound will support growth and restore balance in the U.K. economy, while the country will be able to strike a deal in exit talks with the European Union that maintains its competitiveness, said Stephen Jen, chief executive of investment company Eurizon SLJ Capital Ltd. The pound may take a couple of years to return to a pre-Brexit level, he said.

“We will not lose sight of this view,’’ said Jen, a 20-year veteran of foreign exchange markets. “The U.K. is going to perform very well outside the European Union, but this is a long term view. Brexit could be a very interesting journey for the two parties involved.”

And:

U.K. Prime Minister Theresa May will face an array of demands from EU nations in negotiating Britain’s future relationship with the bloc, according to a Bloomberg analysis of the region’s 27 other members. Jen said the City of London did not attain its status because of the U.K.’s EU membership, but for its rule of law, transparency, use of English and labor market flexibility.

“How can Paris become a financial center if you can’t fire anyone there?” Jen said.

David Fuller's view -

I will quibble with the “Rare Brexit Optimist” opening in the headline above.  There are many Brexit optimists although they recognise the need for good governance in dealing with near-term challenges of uncertainty and also assisting the UK’s long-term GDP growth potential. 

As for Sterling’s performance, it is understandably acting as a safety valve during Brexit uncertainty.  Next year and beyond, its performance will vary against other currencies in line with relative economic expectations.

This item continues in the Subscriber’s Area.



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August 10 2016

Commentary by David Fuller

Even London Green Spaces Are Not Safe From Air Pollution

Here is the opening of this disturbing article from Bloomberg:

London is famous for its numerous parks and gardens, but even those green spaces aren’t safe from pollution.

The air in many city parks surpass legal limits for nitrogen oxide set by the European Union, according to data websiteAsiopendata.com. The pollutant is largely from vehicle exhaust.

The finding’s support Mayor Sadiq Khan’s effort to keep the issue at the top of the political agenda as officials in the central government’s Department for Environment, Food & Rural Affairs have sought to slow the pace of implementing EU pollution limits. The government has said it’s unable to meet 2010 rules until at least 2025.

“It’s shocking to learn that even in London’s supposedly green spaces, the air we breathe is unsafe,” said Sophie Neuburg, a campaigner at Friends of the Earth. “No-one suspects that when they have a summer picnic, they are actually breathing in fumes which are linked to heart disease and cancer.”

The issue is the most serious in central London, the website’s map showed, even in larger green areas such as Hyde Park, Green Park and Regent’s Park. High concentrations of nitrogen oxide also extend to an area bordered by Holloway to the north, Brixton in the south, Shepherd’s Bush westward and Blackwall to the east.

David Fuller's view -

Nitrogen oxide surged in the UK when poor research persuaded the government that diesel was a green fuel.  Numerous people switched to diesel vehicles because the fuel was cheaper over long distances and supposedly helped the environment.  In recent years we have learned that diesel poses a serious health hazard which will persist until the government reduces the supply of dies el vehicles on the road. 

I have certainly been affected by diesel and notice the improvement in my throat, lungs and ability to sleep comfortably when I head to Devon.  I worry far more about our grandchildren in London. 

The pollution problem can be considerably reduced at home or in an office with an air purifier.  I purchased a Dyson’s Pure Cool Link Purifying Desk Fan recently and leave it on most of the time.  It is too big to use on a desk so I keep it on the floor, mostly in our main bedroom at night and in the drawing room during the day.  However, it obviously cannot help when one steps outside. 

  See also this informative item from Wikipedia: Diesel exhaust.



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August 10 2016

Commentary by David Fuller

Email of the day

On negative interest rates:

Dear David, At a meeting with my banker last week he informed me that his bank has to pay 0.4% on all cash that customers hold at his bank. He said that the directors of the bank are thinking about charging customers for holding cash on their accounts.

David Fuller's view -

Thanks for mentioning this and many more savers will be in this position, as you know.

This item continues in the Subscriber’s Area. 



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August 10 2016

Commentary by David Fuller

August 10 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 9th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on the nuclear sector:

Many of the nuclear power plants that were built in the 1960s and 1970s are now approaching the end of their commercial lives. The challenge is that nuclear power plants have the potential for very long operating lives, often on the order of 80 years, meaning that those older plants might have an additional 20 or 30 years of operating life remaining. The issue is that over their very long lives, these nuclear plants require extensive and costly periodic upgrades and repairs. In order to finance these modifications, the plants must generate significant profits during their operating lives. Low coal and now low natural gas prices have undercut the price of nuclear power, often making these plants the highest cost fossil fuel plants in utility company portfolios. These economic challenges ignore the fact that nuclear power plants have the highest operating ratios of all power plants, meaning that they produce power when people need it and that the power output is carbon-free. 

And

Low natural gas prices have seriously undercut the power prices for the nuclear power plants upstate, to the point that the owners – Exelon (EXC-NYSE) and Entergy – have threatened to shut down the plants. If that were to happen, New York State’s plan to have half its power coming from clean energy sources by 2030 would be doomed. In fact, the state has determined that if the nuclear power plants were shut, local utilities would have to rely on power from power plants fueled by dirty gas and coal. That would detract from the governor’s clean energy goal. That goal is why Gov. Cuomo has fought the use of hydraulic fracturing in the state to tap greater supplies of locally produced natural gas. Natural gas, although cheaper than the governor’s favored three sources of clean energy, would have released more greenhouse gases, but it is likely that the cost to consumers would have been less than what will happen in the future. Gov. Cuomo has championed a plan that was embraced by New York’s Public Service Commission and will force utility customers in the state to pay nearly $500 million a year in subsidies designed to keep the three upstate nuclear power plants operating. The Indian Point plant will not receive any subsidy funds because downstate power prices are sufficiently high that the plant can earn a profit.

According to the Public Service Commission, starting in 2017, the subsidies will cost utility ratepayers in New York State $962 million over two years. However, the overall cost of the clean energy program to utility customers would be less than $2 a month, according to the Public Service Commission. The chairman of the commission said that state officials had calculated the social and economic benefits of the program, including the reduction of carbon emissions, lower prices for electricity and more jobs in the electricity generation business, and that these benefits would be greater than the cost of the subsidies. Environmental groups are fighting back, claiming that while they supported the governor’s plan to mandate the purchase of renewable energy by utilities, they viewed the magnitude of the subsidies that could amount to several billion dollars over the 12 years to 2030 as a mistake. Exelon, the owner of two of the three up-state nuclear power plants applauded the Public Service Commission announcement and pledged to invest $200 million in the plants next year if the plan is approved.

Environmentalists who are serious about clean energy should pay attention to the comments of Michael Shellenberger, the president of nonprofit research and policy organization Environmental Progress. He said that nuclear power plants produce so much more energy than other forms that they can be more environmentally friendly than even renewables when all the mining, development and land disturbances are taken into account. As Mr. Shellenberger put it, “from the whole life-cycle analysis, it’s just better.” Of course, on the other side of the issue is someone such as Abraham Scarr, director of the Illinois Public Interest Research Group, a consumer advocate group, who said, “We should be building the 21st century energy system and not continuing to subsidize the energy system of the past.”

Eoin Treacy's view -

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

The above paragraphs highlight just how much of an influence low natural gas prices have had on the utility sector and the broader energy mix. Closing down nuclear plants because the cost of upgrades and repairs cannot be justified when competition with natural gas is so intense suggests demand for the commodity is going to intensify in coming years if nuclear is not subsidized. 



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August 10 2016

Commentary by Eoin Treacy

Palladium at Year High, Driving Precious Metals on Chinese Cars

This article by Eddie Van Der Walt and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Palladium is up 19 percent in the past month, the best performing commodity. Chinese vehicle sales in July gained the most in 17 months, data showed this week. A weaker dollar since late July has also spurred precious metals.

That “highlighted a generally supportive backdrop to palladium demand, exacerbated by ongoing concerns that output from top producers Russia and South Africa may be under threat,” said Jonathan Butler, a precious metals strategist at Mitsubishi Corp. in London. “We could see a bit of profit taking from here, but the $700 level seems to have been recaptured convincingly.”

 

Eoin Treacy's view -

Chinese car sales coming in well ahead of expectations has been positive for palladium prices due to increased demand for catalytic converters but has also been a contributing factor in the outperformance of the German DAX Index.



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August 10 2016

Commentary by Eoin Treacy

Brazil's Messy Impeachment Drama Almost Over. Markets Can't Wait

This article by Isabel Gottlieb for Bloomberg may be of interest to subscribers. Here is a section:

After taking over in May, Temer has yet to drive through any major policy proposals amid concern that painful spending cuts or unpopular reforms could weaken Senate support for his administration ahead of the impeachment vote. His economic team is expected to propose changes to social-security laws immediately after the ruling, and support for that and other measures will be an important indicator of whether Brazil’s world-beating currency, bond and stock rallies have staying power.

Optimism about political change in Brazil “is somewhat being reflected in year-to-date momentum, but it’s not completely priced in,” said Sean Newman, a senior portfolio manager for emerging markets at Invesco Advisers in Atlanta.

Investors will likely remain bullish on Brazil’s corporate and government debt throughout August, and credit default swaps may extend this year’s gains once Rousseff is removed for good, he said. In the swaps market, the cost to hedge against losses on Brazil’s bonds has fallen by almost half since February. The currency, meanwhile, has rallied 26 percent against the dollar, the most in the world, and the benchmark Ibovespa index’s 68 percent increase in dollar terms in 2016 outperforms all other major benchmarks.

 

Eoin Treacy's view -

Foreign investors had been waiting for a catalyst to re-enter the Brazilian market and the prospect of a new reform minded president has seen the Real surge and the iBovespa challenge a six-year progression of lower rally highs. The big question is to what extent these rallies have already priced in much of the good news since none of the expected fiscal reforms have yet been passed.



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August 09 2016

Commentary by David Fuller

Negative Interest Rates Will End Badly

Here is the opening of this interesting speech by James Grant at the New York Society of Security Analysts’ (NYSSA) Annual Benjamin Graham Conference:

Negative interest rates are unsustainable, and once investors decide to stop paying for the privilege of holding government debt, a banking crisis could result, says James Grant.

The founder of Grant's Interest Rate Observer was one of several speakers at the New York Society of Security Analysts' (NYSSA) Annual Benjamin Graham Conference to remark on the ramifications of unprecedented loose monetary policy.

Central banks are treading in uncharted waters. Sidney Homer and Richard Sylla, the authors of A History of Interest Rates, found no instance of negative rates in 5,000 years. Now there are $11.7 trillion invested in negative-yield sovereign debt, including $7.9 trillion in Japanese government bonds and over $1 trillion in both French and German sovereign debt.

Grant posed a tongue-in-cheek question: "If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC?"

This is not a bad economy by most measures. Household wealth in the United States has grown steadily since the Great Recession. If these gains were the result of greater productivity, interest rates would not need to stay at historic lows. Grant says they are "a sign of someone's thumb on the currency." Negative rates are propping up risk assets. He critiqued US Federal Reserve chair Janet Yellen's touting of the bull market in equities as a sign of prosperity by alluding to Brexit voters.

"Asset prices have failed to pacify the world's unprofitable voters," Grant said.

Investors have fallen into the trap of thinking that the future will be like the past, Grant says. The period of falling yields and rising bond prices that began in 1981 is entering its 35th year. He noted that a 35-year bear market preceded this. Yet the yield curve for Swiss bonds is sub-zero for the next 30 years, thereby implying that investors expect negative rates to persist for a long time.

Another reason to think rates must begin to rise: Bonds with negative yields are worse investments than cash. That has always been the reason for zero lower bound in monetary policy. So far, investors have been willing to pay for the convenience and security of storing wealth in banks and bonds, but if yields become sharply negative, some savers will no longer be able to accept guaranteed compounded losses. Then, conventional wisdom says, they will hoard cash, which returns 0%.

David Fuller's view -

The symmetry of a 35-year bull market for government bonds since 1981, following a 35-year bear trend, ought to be a wakeup call for bond investors.  However, one of the hardest investment decisions to make concerns when to sell a profitable position of many years duration, especially while it is still in form. 

Psychologically, a long winning streak creates overconfidence.  It also causes the holder to trust reassuring views for why the profitable trend should continue indefinitely, especially as many value investors and Cassandras will have turned bearish way too early.  Bubbles often inflate beyond rational expectations. 

This item continues in the Subscriber’s Area where a link to the article above and a very helpful chart for bond investors is also posted.  



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August 09 2016

Commentary by David Fuller

These Are the Red Lines Europe Will Not Cross in Brexit Talks

Here is the opening of this topical article from Bloomberg:

U.K. Prime Minister Theresa May faces a daunting array of demands from European Union nations when the time comes to negotiate Britain’s future relationship with the bloc, an analysis of the region’s 27 other members shows.

The Bloomberg survey, based on responses from ministries, public comments from government officials and interviews with policy makers, reveals European leaders are laying down their own red lines as May’s team weighs what it wants to seek in the Brexit talks.

The result is a complex patchwork of priorities -- from fishing to shipping, an insistence on freedom of movement to the sovereignty of Gibraltar -- that may run counter to what the U.K. wants to achieve. May will still have to seek to satisfy at least some of them if she is to meet her commitment of making a success of Britain’s withdrawal from the EU.

“Clearly there are going to be different issues raised by all the different sides,” said Stephen Booth, co-director of Open Europe, a London-based research group. “The EU is ultimately a compromise of national interests so whatever the U.K. gets in the end will be that.”

Seven weeks since voters in the U.K. chose to quit the EU, Bloomberg News reporters in each of the region’s capitals have compiled the first comprehensive look at the main topics the 27 other governments want to raise in the negotiations. Two years of formal talks won’t begin until May invokes Article 50 of the bloc’s Lisbon Treaty.

David Fuller's view -

The EU’s remaining 27 countries all have different views on Brexit and the equivalent of their own shopping lists for negotiations.  That is obviously a recipe for chaos. 

I hope the UK government decides to leave the EU quickly, in line with Patrick Minford’s views which I posted on Monday.  If Theresa May can avoid a row with Lords, I think she would then have a much stronger hand in dealing with the EU.  



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August 09 2016

Commentary by David Fuller

Britain Faces a Nasty Shock When the Global Energy Cycle Turns

Here is a middle section of this timely and informative article by Ambrose Evans-Pritchard for The Telegraph, which I managed to see while on holiday:

The BGS [British Geological Survey] thinks there are 1,300 trillion cubic feet (TCF) of gas resource in the Bowland, enough in theory to replace the North Sea and profoundly change British fortunes.

"Four or five years ago the recovery rate in the US was 10pc and now they are moving towards 20pc. I don't see why we can't do that in the Bowland," Stephen Bowler, the chief executive of IGas. Anything like that would be enough to meet Britain's entire annual consumption of 2.7 TCF through the 21st Century.

IGas is in partnership with Total, GDF Suez, and INEOS, expects initials flows in the Bowland in early 2017, building up to commercial output within two or three years.

Those on the cutting edge are exasperated by the static critiques of the hydraulic fracturing, typically five years out of date. The gains in technology, seismic imaging, computer data, and smart drills are moving at lightning speed.

New methods allow for three, six, or even ten wells to be drilled from the same pad,  greatly reducing disruption. Walking rigs move on the next spot without the need for the vast fleets of vehicles that bedevilled the early years of shale. Fracking remains 'dirty', but less than a decade ago. The BGS says that most early stories of water contamination have been false alarms.

British geologists are better prepared. They have already pre-collected readings on methane levels that will enable them to detect any leakage from fracking wells. "They never had that data in the US so we will have a much better handle," said Mr Gatliff.

Burning gas emits CO2 of course - albeit half as much as coal - but fracking is still a net plus for global warming if it displaces imports of liquefied natural gas (LNG) from places like Qatar. LNG must first be frozen to minus 160 degrees Centigrade and then shipped across the world. A study by Cambridge Professor David Mackay concluded that LNG's carbon footprint is 20pc higher than shale gas.

David Fuller's view -

The title of the article above would be redundant if Britain moved swiftly and competently to develop its fracking potential.  BGS is cautious to a fault in its forecasts for the UK’s shale gas recovery capability, but we know there is plenty of this important resource underground.  It would be madness not to use it, given the rapid development in fracking technology over the last ten years. 

See also: Britain Must Seize the Benefits of Fracking, an editorial from The Telegraph which I posted yesterday.    

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



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August 09 2016

Commentary by Eoin Treacy

Email of the day on cybersecurity threats

This article in the Guardian, on line, clearly demonstrates the sense in your focus over many articles and audios, on cyber security and why we need to pay attention to it - both for our own security and for the potential of a growth market.

If the cyber experts and hacker communities are worried, maybe we should very very scared - most of us are only suspicious, wary of ghosts in the cupboard because we are not really sure - these guys should know - and they are worried!

Take heed, and, maybe take profit! - following your advice from several comments in the last months at the very least.

 

Eoin Treacy's view -

Thank you for this interesting article but there is not a great deal that is new in its content. Ransomware is a growing global threat and the number of small businesses being targeted is expanding exponentially. The criminals concerned have a particular penchant for targeting hospitals and police departments because they have access to public cash and can’t function without their databases not least because lives are literally on the line. However they are also going after smaller targets. 



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August 09 2016

Commentary by Eoin Treacy

You're About to Find Out How Much Sugar is Added to Your Food

This article by Deena Shanker for Bloomberg may be of interest to subscribers. Here is a section: 

The U.S. Food and Drug Administration recently ordered up new nutrition labels for cereal boxes, candy bars, and every other packaged food item in the supermarket.

Soon, they will list not just how much sugar is inside, but whether that sugar was naturally occurring, as in raisins, or added later, as on the flakes that come with them. 

Though this additional information won’t be required until next year, health advocates predicted that such legally mandated disclosure would deliver less-sugary foods in its wake. They were right. 

Four Twizzler strawberry twists have the same sugar content as an apple, but clearly the fruit is a better choice—in no small part because it comes with fiber and Vitamin C. The FDA decision recognized that the source of sugar matters, and that listing “Sugars” alone doesn’t reflect that. The agency decision attempts to outsmart food manufacturers that commonly call added sugar ingredients by other names, such as high fructose corn syrup, agave, and fruit juice. Current-ingredients lists and nutrition-facts panels, the FDA was saying, can be surprisingly deceptive. 

Experts in both health and the food industry predicted that the new labels would lead to reformulated products, with those marketed as “healthy” likely to be the first to get makeovers.

Now that manufacturers would have to show in no uncertain terms how much sugar was being added, they would cut it, just as they did with trans fats when their disclosure became required.

 

Eoin Treacy's view -

This is a welcome development from the Food and Drug Administration not least because the number of ways sugar is defined on ingredient lists is dizzying to say the least. For school lunches my girls had been eating Clif bars until we realised brown rice syrup is the largest ingredient and is essentially 100% glucose. I make my own oatmeal bars now so I know what goes into them and blessedly my kids like them. 



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August 09 2016

Commentary by Eoin Treacy

August 09 2016

Commentary by Eoin Treacy

Email of the day- on financial repression

I just came across this article which was published a week ago by Bloomberg.   So, money market funds will become less safe for storing cash than they have been. One could see this as the US government wanting to attract billions into its own coffers by issuing 2 month bills that attract the money. Or maybe it's concern over the solvency of large money market funds if things go haywire during another crash. I wondered if you have any insights on this change.

Eoin Treacy's view -

Thank you for this article which highlights the continued trend of financial repression where governments, and not just the USA’s, are creating markets for their paper. They have little choice considering the quantity of debt that has been issued over the last decade and the outsized debt to GDP ratios we are presented with. The simple fact is investors are going to help out with the problem like it or not. I covered this issue in relation to another article focusing on the changes to money market fund holdings on August 2nd 



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August 08 2016

Commentary by David Fuller

To Save US All Time and Money, We [the UK] Should Walk Away From the EU Now

At the heart of the matter is our future trade framework; on it depends how far the UK can pursue the road of self-government – the control of laws and borders demanded by the Brexit majority. It is good to see Liam Fox getting off to a strong start negotiating draft free trade agreements, FTAs, with countries around the world. These countries will then lower their tariffs and trade barriers against us, and we ours against them.

Contrary to what is generally thought, however, the gain that we get from this does not come from their lowering their barriers against us.  No, the gain we get from these FTAs is that we lift our tariffs and other trade barriers on them; this means that our consumers pay less and so enjoy a rise in their standard of living.

Once these high-visibility trade agreements are signed we should make sure that we trade freely with all the rest of the world, however we can arrange it. Our ultimate aim should be to achieve unilateral free trade with all countries of the world. As this implies, we could actually short circuit all these FTAs [free trade agreements] and simply go at once to unilateral free trade, as has been done by countries such as New Zealand and Singapore; even China has unilaterally brought down its tariffs to aid its development.

It is this that lies at the heart of our EU trade relationship. The EU single market is highly protectionist, which of course is why there has been so much fuss about being outside it. This protectionism raises the prices of both food and manufactures by around 20 per cent to UK consumers, implying an 8 per cent rise in their overall cost of living. While this is nice for farmers and manufacturing firms, who make higher profits, the losses of consumers are far greater. When we leave the EU, protected prices will be replaced by world prices. This generates healthy competition which pushes up productivity, forcing firms to go “up the value chain” towards more hi-tech methods. We can also help our manufacturers enter the EU single market at zero cost by refunding them EU tariffs, which average some 2 per cent and cost some £2 billion.

The gain in GDP and living standards according to my standard world trade model is about 4 per cent; on top of that there are the gains from replacing EU regulation with our own and from regaining control of mass unskilled immigration, which is costly to the economy and politically toxic.

As for the City, it too will gain greatly from having its regulations made in free-market London instead of a Brussels hostile to “Anglo-Saxon finance”. The City fears EU protectionism but it need not worry. Suppose Brussels withdraws “passporting” and the ECB declares that euro-bonds must be cleared in Frankfurt – the result will be that, just as with an FTA, the City will sell less in the EU and more elsewhere.

The implication of all this is that the main remaining task of Brexit policy is for the Ministry of Brexit under David Davis to withdraw us from the single market and take us to unilateral free trade, to reap these huge gains from eliminating EU protectionism and regulation. Mr Davis would like to sign some broader FTA with the EU; I would like to wish him luck but the bald truth is that, as David Cameron found out, the EU has virtually no flexibility when each of 27 countries wields a veto. Mr Davis, and ultimately Theresa May, should save us all time and policy delays by simply walking away from the EU, lock, stock and barrel.

David Fuller's view -

The UK exercised its democratic right to leave the EU on Thursday 23rd June 2016, primarily because we wish to be an independent sovereign nation, rather than a state in Europe’s journey to become a federal nation. 

Following the Brexit vote, some bureaucrats have claimed that negotiations with the EU would be tortuous and could drag on for a decade, encountering obstacles from any of the other 27 countries able to veto innumerable points not perceived to be in their general interest.  This is both a fantasy and a bluff to deter other EU countries from following the UK’s lead.  Why should the UK accept this expensive and masochistic route? 

This item continues in the Subscriber’s Area, where there is a PDF of Patrick Minford’s column and a further article. 



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August 08 2016

Commentary by David Fuller

Is Now the Time to Switch British Mix of Economic Policies?

Listening to Mark Carney last week, you could be forgiven for thinking that the UK economy is in danger. In reality, we know remarkably little about what is now happening.

The GDP data for the second quarter, when businesses and consumers should have been suffering from the greatest Brexit uncertainty, turned out to be surprisingly strong.

Surveys have recently suggested marked weakness, but since these were conducted post-referendum, they may well be picking up a knee-jerk effect, as well as a reaction to the apparent paralysis of government, which has since been swiftly ended by Mrs May’s coronation. Admittedly, it is also possible that the economy is weakening. We simply don’t know.

Bear in mind, though, that after the pound’s ejection from the ERM in 1992, it was some time before Black Wednesday became referred to as Golden Wednesday. Although today’s circumstances are different, I think there is a pretty good chance that something similar will happen. This is not to say that last week’s package of measures from the Bank of England was wrong. On balance, I support it. But when it comes to the future, it is not clear that there should be more of the same.

First, the Bank should wait for information about the state of the economy. Thereafter, although it might make sense, in due course, to extend quantitative easing, the same does not necessarily apply to reductions in interest rates.

David Fuller's view -

I assume Mark Carney felt it was more important to err on the side of support for the UK economy in the face of Brexit uncertainty.  Additionally, the challenge of dealing with a deflationary Japanese-style slump - probably not more than a 20% risk - would be more difficult once it occurred than slowing inflation at a later date.    

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



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August 08 2016

Commentary by David Fuller

August 08 2016

Commentary by David Fuller

Britain Must Seize the Benefits of Fracking

Here is the opening of this editorial from The Telegraph:

For a country as reliant upon imported energy as Britain, the discovery of substantial deposits of shale gas might seem a godsend. In America, the exploitation of shale has been transformative, with the country set to become self-sufficient in energy by 2020.

Here, by contrast, nothing much has happened beyond the drilling of a number of test wells, every one greeted by objections from green campaigners and local residents.

The Government recognises the potential and has offered favourable tax treatment to shale gas producers and a fast-track planning procedure to get projects under way. But the biggest barrier to a commercial fracking programme remains public opposition. In order to counter this, wealth funds from the proceeds of fracking were proposed, to pay for new community amenities in affected areas.

David Fuller's view -

The UK economy would be a lot stronger in future decades if we had cheaper energy.  This would benefit just about every household in the country.  Yes, the extraction process is messy but fracking is considerably safer, cleaner and more efficient than ten years ago.  The government is right to reward households in the regions subject to fracking as compensation for any inconvenience.

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



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August 08 2016

Commentary by Eoin Treacy

The surplus cash will go to shareholders

This interview with DRD gold’s CEO Niel Pretorius may be of interest to subscribers.

Eoin Treacy's view -

Gold miners are increasingly focusing on free cash flow. As the gold price recovers and they demur from massive expenditures on expansion. the potential for dividends to increase is a major positive development for investors and is contributing to the positive performance of related shares. This is particularly noteworthy when interest rates are so low and investors are hungry for yield. 



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August 08 2016

Commentary by Eoin Treacy

Bond Market's Big Illusion Revealed as U.S. Yields Turn Negative

This article from Bloomberg may be of interest to subscribers. Here is a section:

It’s been a “no-brainer since forever,” said Sekiai, a money manager at Tokyo-based DIAM Co., which oversees about $166 billion.

That truism is now a thing of the past. Last month, yields on U.S. 10-year notes turned negative for Japanese buyers who pay to eliminate currency fluctuations from their returns, something that hasn’t happened since the financial crisis. It’s even worse for euro-based investors, who are locking in sub-zero returns on Treasuries for the first time in history.

That quirk means the longstanding notion of the U.S. as a respite from negative yields in Japan and Europe is little more than an illusion. With everyone from Jeffrey Gundlach to Bill Gross warning of a bubble in bonds, it could ultimately upend the record foreign demand for Treasuries, which has underpinned their seemingly unstoppable gains in recent years.

“People like a simple narrative,” said Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock Inc., which oversees $4.6 trillion. “But there isn’t a free lunch. You can’t simply talk about yield differentials without talking about currency differentials.”

 

Eoin Treacy's view -

With interest rates so low there is very little cushion left in a foreign investment dependent on harvesting low yields. Therefore it is unsurprising that Japanese and Euro denominated investors are losing money on investments in Treasuries. With Euro/Dollar volatility at 18-month lows, the low return for Euro investors on investing in Treasuries is truly a testament to how low rates are.



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August 08 2016

Commentary by Eoin Treacy

Biotechnology update

Eoin Treacy's view -

I spent a few hours last night greatly increasing the number of shares in the biotechnology section of the Chart Library so it would be easier for subscribers to examine the commonality evident within. 

Clicking through the constituents, the return to outperformance of immuno-oncology related shares was something that caught my attention. 

 



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