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September 21 2016

Commentary by Eoin Treacy

September 20 2016

Commentary by David Fuller

How Women Won a Leading Role in China Venture Capital Industry

My thanks to a subscriber for this fascinating article by Shai Oster and Selina Wang for Bloomberg.  Here is the opening:

The largest venture capital fund ever raised by a woman isn’t in Silicon Valley or even the U.S. It's in Beijing and is run by a former librarian who keeps such a low profile that she’s a mystery in her native China. Chen Xiaohong rarely attends industry conferences or events. She hadn’t given a media interview in more than a decade until agreeing to break her silence this summer. “I don’t like being part of a club,” said Chen during a four-hour discussion at her firm's headquarters. “I believe in staying independent, making your own decisions.”

Chen, 46, is part of an unusual group of female investors who have risen to the top of the venture business in China and helped fuel the country’s technology boom. They’ve backed some of China's most successful startups and their influence is growing as they raise more money, recruit other women and seed the next generation of technology companies.

Chen and her peers have become part of the mainstream in China in a way that's proven elusive in the U.S. American venture firms have faced accusations of sexism and discrimination for years, including in an unsuccessful lawsuit filed by a female partner against storied Kleiner Perkins Caufield & Byers. Despite the criticism, the firms have made little progress in promoting women. Among the top U.S. venture firms, women make up about 10 percent of the investing partners and only half of the firms have any women of that rank. China is already more balanced: About 17 percent of investing partners are female and 80 percent have at least one woman.

An increasing number, like Chen, lead their firms. Kathy Xu is founder of Shanghai's Capital Today Group, which has $1.2 billion under management and was an early backer of the e-commerce company JD.com Inc. Anna Fang is CEO of ZhenFund, one of the most influential angel investors in China. Ruby Lu, Chen’s partner at her firm H Capital until this month, previously co-founded the China business for DCM Ventures. 

Their success is bringing more women into China's technology industry. The Chinese government estimates females found 55 percent of new Internet companies and more than a quarter of all entrepreneurs are women. In the U.S., only 22 percent of startups have one or more women on their founding teams, according to research by Vivek Wadhwa and Farai Chideya for their book ‘Innovating Women: The Changing Face of Technology.’ 

Chen and her colleagues are building on a tradition of opportunity for women in China that dates back to before the days when Mao Zedong declared they held up “half the sky.” Women worked out of necessity in fields and factories when the country was poor, and fought alongside men during the country's civil war. By comparison, collaborating in an office is simple. Lu’s mother, who served in the People’s Liberation Army, laughed when she heard about her daughter’s diversity training at Goldman Sachs Group Inc. “She said ‘That’s ridiculous. What’s your job got to do with women or men?’ ”

The country is hardly free from discrimination. Men still hold most positions of power in politics and business, and there's plenty of crude sexism in technology. But China has quietly become one of the best places in the world for women venture capitalists and entrepreneurs. Chen raised a new $500 million fund, the biggest ever by a woman, according to Preqin, and increased her assets under management to about $1 billion. The largest women-led fund in the U.S. was about half that size, according to Preqin’s data.

“China is fundamentally different,” said Gary Rieschel, an American who founded the China-based Qiming Venture Partners, where four of the nine investing partners are female. “The venture capital industry in the U.S. has been a private men’s club. It has been much more of a meritocracy for women in China.” 

David Fuller's view -

This speaks well for China and its long-term economic potential – an important point given its current problems in the transition from a predominantly manufacturing based developing economy, to the developed economic model led by consumer industries. 

Veteran subscribers may recall my comments over the years that one could predict the long-term potential of economies by the emancipation of their women.  After all, they hold up “half the sky”, which is surely one of Chairman Mao’s more sensible quotes. 

Countries which subjugate their women, no matter how it is rationalised, are invariably hampering their economic and social development.  It should be an obvious point as women are half the population and educated women have the additional advantage of emotional intelligence. 

How will China resolve its current economic problems?

This item continues in the Subscriber’s Area.   



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September 20 2016

Commentary by David Fuller

Theresa May has Called a Wall Street Summit to Reassure US Banking Giants in the Aftermath of Brexit

Prime Minister Theresa May is to go on a charm offensive with US banks, holding a summit with some of the biggest institutions in a bid to reassure them over potential repercussions of Britain's vote to leave the EU.

Wall Street heavyweights invited to attend the special summit later today include JP Morgan Chase investment banking chief executive Daniel Pinto, Blackrock chief executive Larry Fink, Goldman Sachs chief financial officer Harvey Schwartz and Morgan Stanley president Colm Kelleher.

It is understood that the American executives want assurances that the rights of their employees based in Britain will be protected once the UK leaves the EU.

The prime minister, who is attending the United Nations General Assembly in New York, has sought to meet them amid concerns that they could be preparing to move their European headquarters out of the UK in the wake of the Brexit vote.

She has also invited the likes of technology behemoths Amazon and IBM, as well as bosses from engineering firms Aecom and United Technologies, and Sony Pictures. Several of these firms are currently engaged in large inward investment into the UK.

The meeting will represent the government's first major interaction with US investors since May came to office earlier this summer.

As well as seeking to reassure the Wall Street giants, May is holding a trade and investment event where she is hoping to encourage around 60 “current and expanding” firms to boost their investment in the UK.

Foreign secretary Boris Johnson is also expected to hold a meeting with business representatives on Wednesday.

Tonight, May also addressed the United Nations General Assembly, where she sought to build a global consensus on measures to tackle human trafficking, as well as entering talks on migration where she defended the right to limit the movement of people.

"We need to be clear that all countries have the right to control their borders and protect their citizens and be equally clear that countries have a duty to manage their borders to reduce onward flows of illegal and uncontrolled migration," May said.

David Fuller's view -

This is very positive, essential work by the PM, not least as only she can really speak for Britain today.  I am sure she will be effective. 

Theresa May also has the intelligence and strength of character to negotiate effectively with the EU.  Unlike her predecessor, the message will not be a version of: I want to stay in the EU but please give me some concessions so that I can gain support at home.    

Instead, I think she will make it very clear that Britain will accept nothing less than favourable terms for Brexit, which will also be in the EU’s interests.  This will only be considered if Angela Merkel understands that the UK is prepared to walk away from the European single market, without further negotiations or delay.  

Behind Europe’s angry bluster, the reality is that the EU needs the UK more than the UK needs the EU.  Mrs Merkel will lose further political support if German businesses find that they have to renegotiate trade terms with a UK that has already withdrawn from the EU.  Nevertheless, she may decide to accept this risk, if only for the sake of consistency, knowing that she is near the end of her career.

The biggest risk for the UK, including the Conservative Party, would be the unproductive masochism of a tortuous and expensive multi-year negotiation, with a destructive organisation determined to deter others from abandoning its sinking ship.  



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September 20 2016

Commentary by David Fuller

Email of the day

On the EU and Islam:

From your comment yesterday: “The EU is a club which European democracies can join, but apparently not leave of their own free will when the rules change, as they certainly have.” 

It just struck me that this is similar to Islam in that you are encouraged to join, required not to question and to subsume personal freedom to the will of the Almighty and woe be onto him who turns to apostasy. Little wonder they are welcoming in millions of Middle Eastern migrants with wide open arms. 

David Fuller's view -

Thanks for your original comparison, which is certain to amuse and appal subscribers, as it did for me.   



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September 20 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should also have some interesting discussions, not least over refreshments following the three presentations.  



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September 20 2016

Commentary by Eoin Treacy

Banks Are Now Too Scared to Even Make Money

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

In both cases, those shifting money across borders want to avoid foreign exchange risk, so they hedge using basis swaps. These involve swapping yen or euros in exchange for dollars, which will be swapped back at the end of the contract at the forward rate, typically a year or more later. Meanwhile they pay each other interest at the Libor rate for their currency, plus (or minus) the basis, which moves with demand.

Without banks willing to take the other side of the trade, the basis has blown out to levels usually only seen when the financial system is in meltdown, as in 2008-9 after Lehman or in 2011-2 as the euro seemed to be failing.

Most investors care as much about basis swaps as they do about cash-settled butter futures, but the shifts in the basis have already had highly visible effects. U.S. companies now have little reason to issue bonds in euros, because the basis cost has risen so much it almost entirely offsets the benefit of issuing at a lower yield in Europe. Japanese investors have no reason to buy U.S. Treasurys, as the extra yield they earn would all be eaten up by the basis when they hedge.

In short, the world’s banks aren't doing what they should be doing to grease the flows of money between countries. They’re too regulated and too scared of the risks, slight as those are.

We should welcome the fact that banks now try to price such risks, rather than the precrisis practice of simply ignoring them, but perhaps they are going too far the other way.

 

Eoin Treacy's view -

The reorientation of the money markets funds sector due to take place on October 14th has been a contributing factor in the uptick in LIBOR rates seen over the last couple of months. As the above article highlights it is not the only factor. 

Cross Currency Basis Swaps represent one of the most expedient ways of hedging currency exposure to interest rates and therefore are a hedged carry trade. LIBOR rates breaking out may be considered one of the unintended consequences of negative interest rates. 

 



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September 20 2016

Commentary by Eoin Treacy

Tesla Wins Massive Contract to Help Power the California Grid

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

Tesla Motors Inc. will supply 20 megawatts (80 megawatt-hours) of energy storage to Southern California Edison as part of a wider effort to prevent blackouts by replacing fossil-fuel electricity generation with lithium-ion batteries. Tesla's contribution is enough to power about 2,500 homes for a full day, the company said in a blog post on Thursday. But the real significance of the deal is the speed with which lithium-ion battery packs are being deployed. 

"The storage is being procured in a record time frame," months instead of years, said Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance. "It highlights the maturity of advanced technologies like energy storage to be contracted as a reliable resource in an emergency situation."

 

Eoin Treacy's view -

Tesla is essentially a battery company which also happens to produce electric cars. It has been my argument for quite some time that the only way solar can achieve grid parity is if it is used in conjunction with batteries. As long as solar power is subject to intermittency which forces utilities to maintain excess capacity it will not be taken seriously as a viable alternative to fossil fuels. 



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September 20 2016

Commentary by Eoin Treacy

Performance and valuations of junior gold companies

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

As shown in Exhibit 1, the GDXJ index of smaller cap gold companies (up 129% YTD) is holding near highs of the year despite a recent pull back in the gold price, and since May has outperformed the GDX index of larger cap names, which has risen by 89% YTD. Similarly, junior gold companies we track are currently trading at an average EV/oz valuation of $64/oz versus the YTD high of $74/oz seen in mid- August, the highest level since the $70/oz observed in 2011 and well above the $20–30/oz range of the 2013–2015 trough (Exhibit 2). We believe these valuations are in part due to a scarcity of higher quality gold projects, and we would expect a pick-up in M&A activity and the junior gold companies to continue to post strong relative returns during the remainder of 2016.

Eoin Treacy's view -

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

Precious metal prices have been confined to a reaction and consolidation, of this year’s impressive early gains, for the last few months with many instruments having already completed reversions to the mean. With the Fed and BoJ meetings tomorrow it is reasonable that investors are not rushing to initiate long positions with so much debate about what exactly central banks have planned and the headwind higher rates would pose for precious metal related instruments. 



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September 20 2016

Commentary by Eoin Treacy

The Andalusian 2016 World Cup

Eoin Treacy's view -

This event showcasing the skill and grace of Lusitanos (Iberian horses) in a display of working equitation at South Point in Las Vegas takes place on the 23rd. If you would like to attend this event, as my  and Nevada Trust Company’s guest please RSVP to [email protected]



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September 19 2016

Commentary by David Fuller

Earnings Miracle Needed to Get S&P 500 Values Out of Clouds

The Federal Reserve is looking for any excuse to raise interest rates, global growth is slowing, and yet stock analysts are predicting the fastest earnings expansion since the bull market began. They better be right.

Hitting forecasts for next year would require S&P 500 Index companies to increase profits by 13 percent, something that hasn’t happened since 2011. Failing to do so would risk inflating equity valuations that at 20 times annual income are already the highest since the financial crisis.

While the confidence of analysts helps explain the stock market’s resilience, such profit growth is lately the one thing investors have been conditioned not to expect. They’ve just endured a five-quarter stretch where every prediction for higher earnings fell apart just as reporting season arrived.

“You’d have to have a lot of things working in unison to achieve that number, a lot of things would have to go correctly,” Peter Andersen, chief investment officer at Fiduciary Trust Co. in Boston, said by phone. His firm manages more than $11 billion. “You’ll have areas where growth will be quite strong, like certain technology areas, but other industries like financials will never have that kind of growth through 2017.”

While the U.S. equity market has sidestepped threats in the past ranging from Europe’s sovereign-debt crisis to the prospect of a government shutdown, it’s had much less success thriving in the absence of expanding earnings. Through 2014, both the price of the S&P 500 and the annual income of its members posted six consecutive years without a decline -- but that ended in 2015, when the index slipped 0.7 percent and profits dropped 3.1 percent.

The trend has worsened in 2016, with annual income earned by companies in the S&P 500 falling to $106 a share last quarter from a high of $113 in September 2014. Quarterly profits in the S&P 500 are headed for a sixth straight decline in the third quarter, matching the longest earnings recession on record, according to data compiled by Bloomberg.

Wall Street analysts have continued to push back the turning point. A survey of estimates as recently as July pointed to S&P 500 companies returning to profit growth in the third quarter of this year. Those same analysts now see a decline of 1.4 percent.

Hope springs eternal for the fourth quarter and analysts still predict annual income will increase 10 percent from now to $117 per share by the end of 2016. The projected expansion for the next 12 months is even loftier: to get to $124 a share at this point next year, profits would have to expand another 16 percent, a rate of growth that is twice the historical average.

David Fuller's view -

Well, they would say that wouldn’t they, to paraphrase Mandy Rice-Davies, if they and their clients are enjoying the benefits of a rising stock market. 

This item continues in the Subscriber’s Area and includes an informative video.



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September 19 2016

Commentary by David Fuller

The EU Still Has Not Understood That it is a Totalitarian Institution

Here is the opening and also the memorable final paragraph of this informative column from Janet Daley of the Sunday Telegraph:

There you have it: a perfect summary of the European Union philosophy. In comments which were presumably made without embarrassment, a clutch of senior EU officials last week provided the Telegraph with a concise summing up of how this thing works. The UK, they said, will be forced to give up on Brexit when faced with “the bureaucratic nightmare” in which it will be entrapped by the most vindictive (sorry, the toughest) negotiations that could be devised.

If I hadn’t long passed the point of being shocked, I would find this breathtaking. Here it is, laid out in the most blithe, confident terms: the shameless contempt for a clear expression of democratic will, and the blatant use of the power of an unelected bureaucracy to undermine the intentions of a national government. Not to mention the utter, imperturbable belief in their own righteousness which justifies what might seem to the benighted oiks who think there is some sort of virtue in self-government, like an outrage.

And:

When some future Gibbon comes to chronicle the decline and fall of this modern European empire, it will be clear enough what went wrong: they enforced uniformity instead of trying to understand difference, and in the end, they revived exactly the hateful forces they had hoped to extinguish.

David Fuller's view -

The EU is a club which European democracies can join, but apparently not leave of their own free will when the rules change, as they certainly have. 

This additional article: Elected, yet strangely unaccountable, from The Economist provides further insights.   

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



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September 19 2016

Commentary by David Fuller

Email of the day 1

On “Are Risks Increasing or Decreasing for Stock Markets”:

September 19 2016

Commentary by David Fuller

Email of the day 2

On the Hinkley Point decision:

I was shocked to read that Theresa May had agreed to go ahead with Hinkley Point. Electricity is highly likely be available at a small fraction of the cost from other clean sources for the lifetime of this white elephant. And reports of construction delays, massive cost increases, and safety concerns at EDFs other construction sites are troubling. We taxpayers are being lumbered with a big bill far into the future. And UK industry will be lumbered with high energy costs and reduced competitiveness. This is the kind of decision-making I had hoped we would escape on leaving the EU (if we do!)

David Fuller's view -

Well said, and thanks for your thoughts. This was obviously a political rather than an economic decision. I believe Ambrose Evans-Pritchard had said Mrs May had no choice. I do not know all the background facts so I do not want to be too critical but Mrs May found herself in an invidious position over Hinkley Point, which she had not created.



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September 19 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should also have some interesting discussions, not least over drinks following the three presentations.  



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September 19 2016

Commentary by Eoin Treacy

Long-Term Asset Return Study An Ever Changnig World

This report from Deutsche Bank adopting a Eurocentric approach to global growth may be of interest to subscribers. Here is a section: 

We don’t think it’s a coincidence that asset prices were historically very depressed in 1980 (see Figure 2) and arguably at all time lows in valuation terms. 35 years later and traditional asset valuations in major DM countries have never been higher due to the themes unique to the 1980-present day period.

Extraordinary central bank buying of assets post the global financial crisis has obviously contributed to high asset prices in recent years but the reasons they have had to intervene also stems from the trends originating around 1980 that will be further discussed in this report. 

Another related feature of the post 1980s landscape has been 'globalisation'. Economic activity across the planet has become more integrated as the heavy protectionism that started in the inter-war period and the heavy financial repression/regulation following WWII were swept away. Globalisation has also caused great upheaval in many of the largest developed countries on the planet with many of these themes coming to a head in recent years. 

Income inequality has been a big consequence of globalisation, not necessarily at a global scale but within individual countries as the gains have not been evenly distributed. The chart that perhaps reflects this better than any other is the so called 'elephant' graph (Figure 15) constructed by Lakner and Milanovic which has become a popular addition to the academic economic literature in recent times.

Eoin Treacy's view -

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

There are very obvious challenges faced by Europe that look increasingly likely to be resolved in a messy fashion as a result of a some political upheaval with the rise of populism in a number of Eurozone countries. The increasing activism of a significant cohort of disenfranchised voters who favour populist solutions represents a significant threat to the status quo. With elections in the USA, Germany, France and Italy all scheduled within the next 12 months there is ample potential for additional bouts of volatility. 



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September 19 2016

Commentary by Eoin Treacy

Taiwan Stocks Jump Most in a Year as Apple Suppliers Lead Surge

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

Taiwanese shares jumped the most in a year amid speculation Apple Inc.’s latest iPhone model will prove popular, boosting earnings for the island’s suppliers.

The Taiex index advanced 2.8 percent at the close, its biggest gain since September 2015. Taiwan Semiconductor Manufacturing Co., a major Apple supplier, posted its biggest gain in a year, while Hon Hai Precision Industry Co., the main assembler of iPhones, added 3.9 percent. Apple has jumped 6.5 percent since Taiwan’s markets last traded on Wednesday amid holidays. The island’s dollar strengthened by the most since Aug. 1 against the greenback.

“It’s the Apple story again,” said Michael On, president of Beyond Asset Management in Taipei. “There’s a revived optimism that Apple will increase orders for Taiwanese suppliers after better-than-expected sales of the iPhone 7.”

T-Mobile US Inc. and Sprint Corp. said they’d received almost four times as many orders for the iPhone 7 as previous models, fueling speculation that the new product is off to a faster start than usual. Expectations for the iPhone 7 line had been muted before it was unveiled in San Francisco this month amid slowing growth in global smartphone sales.

 

Eoin Treacy's view -

As the world’s largest company Apple outsources all of its manufacturing which means it has a vast ecosystem of suppliers that are responding favourably to the release of the company’s new products as well as to the relative difficulties being experienced by Samsung. 



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September 19 2016

Commentary by Eoin Treacy

SunEdison's TerraForm Units Both Say They're Seeking Buyers

This article by Tiffany Kary and Christopher Martin for Bloomberg may be of interest to subscribers. Here is a section:

Multiple companies have expressed interest in TerraForm Power. Golden Concord Holdings Ltd., a Chinese clean-energy group, is planning to bid for SunEdison’s controlling stake in the company, people familiar with the plans said in August. That would challenge a joint offer from Canada’s biggest alternative- asset manager, Brookfield Asset Management Inc., and billionaire David Tepper’s Appaloosa Management LP hedge fund.

TerraForm Power said in August that it was considering plans to set up an auction to sell itself, according to people familiar with the matter. SunEdison, which has been selling off assets in Chapter 11, said earlier this month that it had reached an agreement with the two non-bankrupt yieldcos over when and how they would bring claims as part of the bankruptcy.

The process may not lead to a deal, according to Swami Venkataraman, an analyst at Moody’s Investors Service.

If the bids “highly undervalue” TerraForm Power and its assets, “they may choose to operate as an independent company for some time,” Venkataraman said in an e-mail Monday.

The case is SunEdison Inc., 16-10992, U.S. Bankruptcy Court, Southern District of New York (Manhattan)  

 

Eoin Treacy's view -

SunEdison’s financial engineering resulted in the company’s bankruptcy with the yieldcos into which it poured all of its productive assets are now the subject of investor interest. For companies seeking to pick up clean energy assets at a discount in order to benefit from the cash flows they throw off and/or to bolster their green credentials Terraform Power and Terraform Global represent potentially attractive targets. 



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September 16 2016

Commentary by Eoin Treacy

How the sugar industry bought out scientists for decades, and how to stop it from happening again

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

According to a report just published in the Journal of the American Medical Association, a delegation from the Sugar Research Foundation paid off Harvard scientists to produce reports that falsely downplayed the role of sugar in coronary heart disease.

Yep. Sugar contributes to coronary artery disease, more than we have been led to believe.
Reports had linked both dietary sugar and dietary fat to heart disease as early as the mid-50s; by 1960 we knew that low-fat diets high in sugars still resulted in high cholesterol levels. So in 1964, the director of the SRF proposed that the group “embark on a major program” to dispute the data as well as any “negative attitudes toward sugar.” They found a group of Harvard nutrition scientists who would take their money, and started making plans.

Complete with a codename, Project 226 was designed to protect the interests of the sugar industry by “recapturing” the 20% of American calorie intake they expected to lose once this whole sugar-isn’t-great-for-your-heart thing percolated through into public awareness. It resulted in a two-part review published in the prestigious and influential New England Journal of Medicine, which hand-waved away huge swathes of research pointing out the risks of dietary sugar.

The authors went to absurd lengths to discount studies that didn’t tell the story the Sugar Research Foundation wanted to tell. For example, to get the results they wanted, they had to throw out all the studies done on animals, because not a single animal study supported the conclusion they wanted. But after they finished their work, they reported that epidemiological studies showed a positive association between high dietary sugar consumption and better heart disease outcomes. The review concluded that there was “no doubt” that the only way to avoid heart disease was to reduce saturated fat.

How did this get past the sanity check at NEJM? The authors were experts, respected in their fields, and they were at least consistent cherry-pickers. They also conveniently failed to report that the Sugar Research Foundation funded their “study.” NEJM didn’t start requiring authors to report conflicts of interest until 1984, and by then the sugar industry had floated comfortably on their 1964 precedent, funding study after study supporting their pro-sugar narrative “as a main prop of the industry’s defense.”

Nobody knows how many reviewers they paid to endorse the conclusions of their faux science.

 

Eoin Treacy's view -

The role of sugar in contributing to coronary heart disease is now being hotly investigated as consumers become progressively more involved in controlling their nutrition. Inflammation is the new buzz word and the fact that pursuing a diet where processed sugars are limited results in a trimmer figure and lower cholesterol is an additional incentive for many. The sugar lobby has been enormously successful in avoiding the kind of health warnings that have been imposed on the tobacco sector. However it is looking increasingly likely the tide is turning; in the West at least. 



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September 16 2016

Commentary by Eoin Treacy

Delivering Alpha Conference Notes 2016: Singer, Dalio, Chanos, Miller & More

Thanks to a subscriber for this list of quotes from the recent CNBC & Institutional Investor’s Delivering Alpha Conference. Here is a section:

Jim Chanos (Kynikos Associates):  Still short Alibaba (BABA), says they're "buying anything that's for sale, just burning cash."  He's also still short Tesla (TSLA) and SolarCity (SCTY).  Says the two companies combining basically puts TSLA on a path to potential bankruptcy.

And

Barry Sternlicht (Starwood):  Real estate in New York City is "a disaster" with rents at the high-end down 15%.  Noted the problem many investors face: "you have to invest in something, you can't just sit in cash."  On Tesla, says he loves the car but would probably be short the company.  Questioned Pinterest's valuation, arguing it seemed like a lot of money for a bulletin board.  Said Doppler Labs could be like the next Oculus Rift.

Mary Erdoes (JPMorgan):  "They're called crowded trades when they don't work and momentum trades when they do work."  Says it's time to weed out the stock pickers who aren't the best.  

 

Eoin Treacy's view -

Tesla produces cars many people aspire to own which is a major accomplishment for the USA’s first new car company in a century. However the company is under pressure to continue to accelerate the pace of innovation to help justify its aggressive valuation. 



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September 16 2016

Commentary by Eoin Treacy

Deutsche Bank to fight $14 billion demand from U.S. authorities

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

Deutsche Bank (DBKGn.DE) said it would fight a $14 billion demand from the U.S. Department of Justice to settle claims it missold mortgage-backed securities, a shock bill that raises questions about the future of Germany's largest lender.

The claim against Deutsche, which is likely to trigger several months of talks, far exceeds the bank's expectations that the DoJ would be looking for a figure of only up to 3 billion euros ($3.4 billion).
The demand adds to the problems facing Deutsche Bank's Chief Executive John Cryan, a Briton who has been in the job for a year.

The bank only scraped through European stress tests in July and has warned it may need deeper cost cuts to turn itself around after revenue fell sharply in the second quarter due to challenging markets and low interest rates.

 

Eoin Treacy's view -

The repercussions of the housing bubble that accompanied lax, or indeed no, lending standards in the USA which climaxed in the credit crisis continue to rattle through the courts. However I wonder does anyone else see a similarity in the fine handed down to Deutsche Bank with that handed down to Apple by the EC. Both are in the region of $14 billion and represent punitive reprisals from governments expressing frustrations against foreign rather than domestic owned companies. 



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September 16 2016

Commentary by Eoin Treacy

Essence of Decision

This article by Ben Hunt for Epsilon Theory may be of interest to subscribers. Here is a section:

It’s always really tough to predict one equilibrium over another as the outcome in a multi-equilibrium game, because the decision-making dynamic is solely driven by characteristics internal to the group, meaning that there is ZERO predictive value in our evaluations of external characteristics like Taylor Rule inputs in 2016 or US/Soviet nuclear arsenals in 1962. (I wrote about this at length in the context of games of Chicken, like Germany vs. Greece or the Fed vs. the PBOC, in the note “Inherent Vice”). But my sense — and it’s only a sense — is that the “Hike today and then delay” equilibrium is a more likely outcome of the September meeting than “No hike today and then no more delay”. Why? Because it’s the position both a hawk like Fischer and a dove like Bullard, both of whom are high-reputation members, would clearly prefer. If one of these guys stakes out this position early in the meeting, such that “Hike today and then delay” is the first mover in establishing a “gravitational pull” on other members, I think it sticks. Or at least that’s how I would play the game, if I were Fischer or Bullard.

Eoin Treacy's view -

This represents an interesting perspective on the bureaucratic and institutional psychology of the Fed. Considering how much political capital has been expended on pursuing extraordinary monetary policy the decision to hike rates is a major endeavour on all fronts. 



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September 15 2016

Commentary by David Fuller

Bond Yields Are Surging Despite Deflation, and that is Dangerous

The growth rate of nominal GDP in the US has fallen to 2.4pc, the lowest level outside recession since the Second World War.

It has been sliding relentlessly for almost two years, a warning signal that underlying deflationary forces may be tightening their grip on the US economy.

Given this extraordinary backdrop, the violent spike in US and global bonds yields over the last four trading days is extremely odd. It is rare for AAA-rated safe-haven debt to fall out of favour at the same time as stock markets, and few explanations on offer make sense.

We can all agree that oxygen is thinning as we enter the final phase of the economic cycle after 86 months of expansion. The MSCI world index of global equities has risen to a forward price-to-earnings ratio of 17, significantly higher than on the cusp of the Lehman crisis.

"We think that too much complacency has crept in," says Mislav Matejka, equity strategist for JP Morgan.

"After seven years of having a structural overweight stance on global equities, we believe the regime has fundamentally changed. We think that one should not be buying the dips any more, but use any rallies as selling opportunities," he said.

The correlation between bonds and equities has reached unprecedented levels, and that has the coiled the spring. The slightest rise in yields now has a potent magnifying effect across the spectrum of assets. Hence the angst over what is happening to US Treasuries.

Yields on 10-year Treasuries - the benchmark borrowing cost for international finance - have jumped 19 basis points to 1.72pc since the middle of last week. The amount of global government debt trading at rates below zero has suddenly fallen from $10 trillion to $8.3 trillion, with parallel effects for corporate bonds.

You would have thought that inflation was picking up in the US and that the Fed was about to slam on the brakes, but that is not the case. The markets are pricing in a mere 15pc chance of a rate rise next week, and the figure has been falling. 

If anything, the US inflation scare has subsided. There were grounds for worrying earlier this year that Fed would have to act. In February, core CPI inflation was steaming ahead at a rate of 2.9pc on a three-month annualized basis. This has since dropped back to 1.8pc. Other core measures are lower.

David Fuller's view -

The rise in 10-year government bond yields is definitely a warning short across the bows for investors (see also my review of these markets on Tuesday 13th September). 

However, while I would not minimise the risks, there are some reasons for the sharp rise in government bond yields, which subscribers may wish to consider.

This item continues in the Subscriber’s Area, where a PDF of AE-P's article is posted.



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September 15 2016

Commentary by David Fuller

Are Risks Increasing or Decreasing for Stock Markets?

David Fuller's view -

Perceptions will vary among investors but in terms of the overall crowd consensus, extreme optimism is a well-known contrary indicator.  It occurs when investors are fully long, making money and talking their book, and no one is more bullish than a converted bear.  Their heroes will be those who are long and leveraged, and making the most money while the market is still rising.  Value investors will be temporarily viewed as contrary indicators because they turn bearish too early during manias.  

Conversely, extreme pessimism is evident following a crash, and there is no one who is more bearish than a recently converted bull.  The last thing they want is the double humiliation of hanging on grimly before finally throwing in the towel and selling, only to see the market rally sharply.  Their heroes will be the super-bears forecasting Armageddon.  Value investors will be temporarily viewed as contrary indicators because they turned bullish too early during the panic.

Where are we today in terms of overall market sentiment?

This item continues in the Subscriber’s Area.     



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September 15 2016

Commentary by David Fuller

Hinkley Point C: Prioritising the Politically Sexy Over the Economically Rational is a Waste of Money

Here is the opening of this article by Tom Welsh for City A.M:

The new nuclear plant at Hinkley Point, which has finally been approved by EDF’s board, will be the most expensive power station anywhere in the world. Beset by delays (first proposed in 2006, it was meant to come online in 2017), it won’t be operational until 2025 and EDF will still receive its enormous £30bn subsidy even if Hinkley generates nothing until 2029.

Some were hoping the new government would junk the project and instead shore up UK energy security by incentivising a constellation of lower-cost, smaller schemes. But despite the unexpected delay in approving the scheme, the signs are that the energy secretary will persist with George Osborne’s nuclear folly, locking consumers into massively higher prices for decades.

Hinkley highlights a significant problem with Theresa May’s renewed focus on industrial strategy, essentially a greater role for the state in guiding the economy. Politicians will pursue schemes beyond the limits of reason, first, because they’re betting with other people’s money, but also because of a lack of imagination about the alternatives and a hope that the prestige of such grand projects will somehow rub off on them.

David Fuller's view -

I am disappointed with the Hinkley Point approval, not because of China’s involvement or the French EU connection, but because everything that we have seen so far with similar projects on Finland’s Olkiluoto Island and France’s own Flamanville project on the Cotentin Peninsula, has been woeful to date, including absurdly expensive. 

(See: Britain Should Leap-Frog Hinkley and Lead 21st Century Nuclear Revolution, plus my comments)



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September 15 2016

Commentary by David Fuller

September 15 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should have some interesting discussions, not least over drinks following the three presentations.  



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September 15 2016

Commentary by Eoin Treacy

U.S. Stocks Rise on Apple Rally as Oil Advances; Bonds Mixed

This article by Oliver Renick and Jeremy Herron for Bloomberg may be of interest to subscribers. Here is a section: 

U.S. stocks rose from a two-month low as Apple Inc. extended a rally, while a rebound in crude boosted shares of energy producers. The selloff in longer-dated bonds eased amid data showing the American economy is on uneven footing.

The S&P 500 Index jumped as Apple pushed its four-day gain past 11 percent. The index slipped toward its 100-day moving average before pushing higher as the level held for a fourth day. Industrial production contracted more than forecast and retail sales unexpectedly slid, sending the odds for a rate increase next week below 20 percent. The dollar was little changed after initially turning lower on the sales data.

Sterling slid after the Bank of England said another rate cut this year is possible. Oil erased gains to fall back below $44 a barrel. 

Equities continued to whipsaw investors after Friday’s rout jolted markets from a two-month torpor and wiped almost $2 trillion in value from stocks amid concern that central banks would deliver smaller doses of stimulus even as the global economy sputters along. Apple’s advance has buttressed U.S. equity indexes, as consumers snapped up the new iPhone model.

 

Eoin Treacy's view -

Apple still has the world’s largest market cap at $620 billion so its underperformance over the last year has represented a drag on the wider market. In fact the drag has been compounded by the impact Apple’s decline in sales growth has had on its suppliers. 



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September 15 2016

Commentary by Eoin Treacy

September 15 2016

Commentary by Eoin Treacy

Obama Lifts Myanmar Sanctions as Suu Kyi Visits White House

This article by Chris Blake and Toluse Olorunnipa for Bloomberg may be of interest to subscribers. Here is a section:

President Barack Obama said he would lift economic sanctions on Myanmar after meeting at the White House on Wednesday with the country’s de facto leader, Aung San Suu Kyi, a former political dissident whose government took power in March.

"The United States is now prepared to lift sanctions that we have imposed on Burma for quite some time. It’s the right thing to do," Obama said after the meeting, calling the country’s ongoing transition to democracy a "good news story."

U.S. companies have been watching closely for any sign they’ll get more access to the fast-growing Southeast Asian nation, known as Burma before its former military rulers changed the name to Myanmar in 1989. Business groups in the U.S. have complained that sanctions hinder them from competing with major rivals in an economy that the Asian Development Bank projects will expand 8.4 percent this year and 8.3 percent in 2017, making Myanmar Asia’s best performer.

"We are very interested in successful businesses" entering Burma, Suu Kyi said after the White House meeting. "We think our country is ready to take off."

She said that U.S. sanctions helped drive the country’s military junta to surrender power, but that the time had come to lift them.

 

Eoin Treacy's view -

Myanmar is a resource rich country with a number of unique attributes not least in jadeite, rubies and rosewood in additional to oil and gas. With a clear trend of improving governance the argument for dropping sanctions and internationalising the economy is a compelling one not least as the US needs as many allies in the region as it can get. 



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September 14 2016

Commentary by David Fuller

Sir James Dyson Exclusive: I Would Trigger Brexit Now, and Negotiate Trade Deals Over Time

Here is the opening of this fascinating interview with one of the contemporary world’s most successful inventors, conducted by Alan Tovey for The Telegraph:

Sir James Dyson leans back in his chair, places his hands behind his head and looks out through the glass wall of his office, out across the huge open-plan interior of his company’s Wiltshire headquarters.

He’s considering the referendum result, having campaigned for Britain to leave the European Union.

“I thought it would be very close,” he says, his voice languid. “But I had absolutely no idea. In a way, I thought I was supporting the losing side, but I thought our arguments were better – and ultimately I was proved right.”

It’s the first time he has spoken since the Brexit vote and, although not gloating over his side’s victory, he is confident about the UK’s future.

“Absolutely I’m delighted to be out and don’t think we have to negotiate anything,” he says, when asked what happens next on the road to Brexit. “I know exactly what I would do if I was running the country. I would leave and then, over a period of time, I would negotiate things.”

He’s all for a quick exit and blow the consequences, having previously said that, despite the free movement of labour, EU nations aren’t supplying the highly skilled engineers his company needs. Instead, the company has to negotiate laborious red tape to source the brainpower it needs from the rest of world.

And commercially, Sir James – who is best known for his range of vacuum cleaners – doesn’t expect Brexit to deliver much of an impact.

“They are going to want to have a free trade deal with us more than the other way round,” he says of European soon-to-be-ex-partners.

“The imbalance of trade is £100bn so, even if we have to pay an import duty, it’s not much and it’s far less than currency swings.”

He pours scorn on the idea that the EU is single market anyway. “It is not. There are different languages, boxes, plugs, marketing and so on, different psychology, different laws. There’s a lot of cost involved.”

He also reveals that, in the confused days following the referendum, he was approached by David Cameron’s office to take a role in helping shape Britain’s exit from the EU, which he turned down.

“I sort of think I’ve done my bit,” says Sir James. “I was on a Prime Minister’s advisory group for five years. I’ve got a business to run and a lot of other things to do. I’m a practising engineer, not just a company owner. I am with my engineers all the time. My time is enormously taken up doing that.”

But he’s no Little Englander. Sir James employs 7,000 staff, about half of them in the UK, mainly at the company’s technology centre in Malmesbury, Wiltshire. The bulk of the remainder are in the Far East where Dyson does its manufacturing, but also some R&D work.

The latest phase of the Malmesbury centre officially opens on Wednesday and Sir James is keen to talk about that, but there’s one more thing to discover about his support for Brexit. Why would the owner of a £3bn global business want to weaken, rather than strengthen, international links?

“Sovereignty is the most important reason,” he says. “And I would say that, wouldn’t I? I started my own business. I wanted to be independent as a business. I don’t want to be part of a conglomerate.

“I see huge strength in independence, making your own decisions and choosing the people who run your own enterprise. Being subservient to Europe, having to do what Europe says, is entirely not in this country’s interest.”

David Fuller's view -

Sir James Dyson’s reasons for not only favouring Brexit but also leaving quickly, in his own words: “I know exactly what I would do if I was running the country.  I would leave and then, over a period of time, I would negotiate things.”

That is fine for Dyson and no doubt many other UK businesses.  However, the UK is much more international than the EU.  The City has more overseas banks than any other financial centre in the world.  They like conducting business in London, which they also use as a gateway to Europe.  Many of these firms are not taking a longer-term view.  They want the convenience, immediate certainty and professionalism of London, with unrestricted access to the EU. 

Some other overseas firms, mostly non-financial, will feel similarly.  Notably, this includes Japanese automobile manufacturers as this service reported recently.  There is a good chance that the UK will be able to protect their access to EU markets, not least as German automobile manufacturers will not want any restrictions on their exports to the UK.  Moreover, as James Dyson also points out, the EU exports approximately £100bn more to the UK than we export to the EU. 

However, while there are many possibilities and even probabilities, there are few certainties today regarding future negotiations with the EU.  This is a challenge for Mrs May’s government.  It may also be an even bigger challenge for the EU. 

A PDF of this interview is posted in the Subscriber's Area.  

 

Please note: Due to a lengthy appointment today, my review of leading stock markets will commence on Thursday.  



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September 14 2016

Commentary by David Fuller

Civil Service Fills 80% of Key Brexit Jobs, Says Heywood

The two government departments created to take Britain out of the EU have filled 80 per cent of their senior posts, the head of the civil service said on Wednesday, calming fears that civil servants are reluctant to work on Brexit.

Sir Jeremy Heywood, the cabinet secretary, told MPs that some 65 senior jobs had been filled at the Department for Exiting the EU led by David Davis and the ministry for International Trade led by Liam Fox.

He said the speed with which the posts had been filled showed that the civil service was “mobilising very quickly” to face what many see as its biggest challenge since the second world war.

Theresa May has been criticised for setting up the two new departments by some mandarins and Whitehall experts, who argue that it would have been better to implement a more modest reshuffling of the Whitehall furniture.

Some civil servants would have preferred an expansion of the Cabinet Office and the Foreign Office to deal with Brexit.

But Sir Jeremy said that the enthusiasm with which civil servants were queueing up to join the two new ministries was encouraging.

“We have so many people who want to work in these departments that we have to make sure that all the other important policy priorities of the new prime minister can be properly staffed,” he told MPs on the public administration and constitutional affairs committee.

Sir Jeremy also said the civil service was being inundated by applications from “many, many hundreds” of external consultancies, accountancy firms and project management specialists who want to work with the government on the Brexit agenda.

At a time of public spending restraint, he said the civil service needs to think carefully about when was the right time to hire external expertise. He said there was no point hiring expensive talent in areas like trade negotiations “until we are starting that process.” He added: “Having lots of expensive and capable people on our books in advance of need is something to be avoided.”

Pressed over whether the civil service could have done more contingency planning for Brexit before the referendum, Sir Jeremy said he and his colleagues had done “a significant amount of thinking and all that work is extremely valuable now.”

He said the main difference from the preparation that Whitehall does before a general election was that David Cameron had prevented civil servants from talking to the Leave campaign. But he said that discussions with the leading Leave campaigners would not have made much difference to the civil service’s preparations, given the absence of a clear blueprint for Brexit.

David Fuller's view -

There are two interesting points here.  1) The Dickensian fantasy of innumerable legal experts pouring over the endless minutiae of intertwined regulations was created by the EU to deter any country from attempting to leave its clutches.  2) From the penultimate sentence above: “… David Cameron had prevented civil servants from talking to the Leave Campaign.”

Was David Cameron planning to succeed the unsteady Jean-Claude Junker as President of the European Commission?  We know that George Osborne was planning to become Prime Minister after Cameron left the office well before the next general election in 2020.

“There is no gambling like politics. Nothing in which the power of circumstance is more evident.”  Benjamin Disraeli (1804 – 1881) 



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September 14 2016

Commentary by David Fuller

Why Did the UK Enter the EU in the First Place?

My thanks to a subscriber for this link to Mish Talk, from Mike Shedlock's interesting summary which is partly quoted below.  No further comment is required from me, other than don’t miss the hilarious video.

Today the EU primarily serves a tone-deaf bureaucratic and political class, which lives a high life on the back of people it nothing but aggravates. But surely not everything is bad? Indeed, the EU is looking after us….one might well ask, what would we do without it? I give you a few random examples of the great things the EU does for us citizens:

1. We sleep like babies:

There are 109 EU regulations concerning pillows, 5 EU regulations concerning pillow cases, and 50 EU laws regulating duvets and sheets.

2. You shall have shiny teeth, citizen!

Our toothbrushes are regulated by 31 EU laws.

3. Best apples in the world, man – the Class 1 EU regulated apple – no-one will ever manage to deceive you again about the color of the apple he’s trying to sell you:

In order to class a “Red Variety” apple as “class 1”, 50% of its surface must be red. To class a “Mixed red coloring variety” of apple as a “class 1” apple, 33% of its surface must be red, and so it goes for the 3 quality classes and 287 individually named apple varieties. The only slight drawback: due to the protectionist agricultural policies of the “free market supporting” EU, that class 1 apple costs at least 40% more than it otherwise would. The same goes for every other fruit and vegetable you buy.

David Fuller's view -

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September 14 2016

Commentary by David Fuller

September 14 2016

Commentary by Eoin Treacy

There's a $300 Billion Exodus From Money Markets Ahead

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

The transformation of the money-fund industry, where investors turn to park cash, is a result of regulators’ efforts to make the financial system safer in the aftermath of the credit crisis. The key date is Oct. 14, when rules take effect mandating that institutional prime and tax-exempt funds end an over-30-year tradition of fixing shares at $1. Funds that hold only government debt will be able to maintain that level. Companies such as Federated Investors Inc. and Fidelity Investments, which have already reduced or altered prime offerings, are preparing in case investors yank more money as the new era approaches.

And

A major repercussion of the flight from prime funds is that there’s less money flowing into commercial paper and certificates of deposit, which banks depend on for funding. As a result, banks’ unsecured lending rates, such as the dollar London interbank offered rate, have soared. Three-month Libor was about 0.85 percent Wednesday, close to the highest since 2009.

Libor may stabilize after mid-October because prime funds may begin to increase purchases of bank IOUs, although the risk of a Federal Reserve interest-rate hike by year-end will keep it elevated, said Seth Roman, who helps oversee five funds with a combined $3.2 billion at Pioneer Investments in Boston.

“You could picture a scenario where Libor ticks down a bit,” Roman said. But “you have to keep in mind that the Fed is in play still.”

 

Eoin Treacy's view -

The transition from fixed NAVs to floating NAVs in the money market fund sector, where only government paper will be eligible to be supported at $1, is a major contributing factor in the surge that has taken place in LIBOR rates this year. With so much uncertainty about how the new system will function investors are understandably skittish about leaving money in the system ahead of the implementation. 



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September 14 2016

Commentary by Eoin Treacy

Gloom Descends on Luxury-Goods Industry

This article by Corinne Gretler and Thomas Buckley for Bloomberg may be of interest to subscribers. Here is a section:

Shares of both companies slid, dragging other luxury stocks down with them. The industry is grappling with another year of waning demand as China’s campaign against extravagant spending is compounded by a drop in tourism after terrorist attacks in France and Belgium, a situation Rupert characterized as a “fiasco.” Richemont’s revenue slid 13 percent, excluding currency shifts, in the five months through August, missing analysts’ estimates.

“The warnings show that macro and geopolitical uncertainties put near-term volume growth in question,” said Zuzanna Pusz, an analyst at Berenberg. “The challenges facing the luxury industry are not over yet.”

 

Eoin Treacy's view -

While in Hong Kong for a day earlier this year I was surprised by the willingness of luxury brands to bargain on price with discounts of over 10% readily available. At least part of the reason for this was because despite the fact there were large numbers of mainland Chinese tour groups milling around few appeared to be carrying shopping bags. The continued “anti-corruption” drive coupled with slowing economic activity have acted to curtail conspicuous consumption at home but terrorist attacks all over Europe are an additional headwind. 



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September 14 2016

Commentary by Eoin Treacy

Copper Rises Most in 3 Months on Signs of Better Chinese Growth

This article by Yuliya Fedorinova and Joe Deaux for Bloomberg may be of interest to subscribers. Here it is in full:

Copper posted the biggest gain in almost three months as strong economic data from China fueled speculation that demand will strengthen in the Asian nation, the world’s largest metals consumer. An index of global mining stocks advanced for the first time in six days.

China’s broadest measure of new credit exceeded estimates in August, rebounding from a month earlier and bolstering evidence that growth is stabilizing. Chinese reports this week on factory output, investment and retail sales all exceeded economist estimates.

“The Chinese data is improved,” Michael Turek, the head of base metals at BGC Partners Inc. in New York, said in an e-mail.

“Credit has been easier. That enables manufacturing to operate more smoothly and profitably and reduces bankruptcies.”

Copper for delivery in three months rose 2.6 percent to $4,771.50 a metric ton ($2.16 a pound) at 5:50 p.m. on the London Metal Exchange, the biggest increase since June 15.

The Bloomberg World Mining index of producers added 0.4 percent, heading for its first gain since Sept. 6.

Users, including power-wiring companies, are stepping up purchases of copper ahead of China’s autumn festival after prices fell, Xu Maili, an analyst with Everbright Futures Ltd., said by phone from Shanghai. The three-day Chinese holiday starts Thursday.

 

Eoin Treacy's view -

The Chinese market is closed tomorrow and Friday for the Mid-Autumn Festival and the annual golden week holiday will be between October 2nd and 7th inclusive. Therefore there is some merit to the argument that stockpiling ahead of the holidays may have contributed to recent firming in copper prices. 



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September 14 2016

Commentary by Eoin Treacy

September 13 2016

Commentary by David Fuller

Mario Draghi of the ECB Has Run Out of Magic as Deflation Closes in

Large parts of the eurozone are slipping deeper into a deflationary trap despite negative interest rates and one trillion euros of quantitative easing by the European Central Bank, leaving the currency bloc with no safety buffer when the next global recession hits.

The ECB is close to exhausting its ammunition and appears increasingly powerless to do more under the legal constraints of its mandate. It has downgraded its growth forecast for the next two years, citing the uncertainties of Brexit, and admitted that it has little chance of meeting its 2pc inflation target this decade, insisting that it is now up to governments to break out of the vicious circle.

Mario Draghi, the ECB’s president, said there are limits to monetary policy and called on the rest of the eurozone to act “much more decisively” to lift growth, with targeted spending on infrastructure. “It is abundantly clear that Draghi is played out and we’re in the terminal phase of QE. The eurozone needs a quantum leap in the nature of policy and it has to come from fiscal policy,” said sovereign bond strategist Nicholas Spiro.

Mr Draghi dashed hopes for an expansion of the ECB’s monthly €80bn (£60bn) programme of bond purchases, and offered no guidance on whether the scheme would be extended after it expires in March 2017. There was not a discussion on the subject. 

“The bar to further ECB action is higher than widely assumed,” said Ben May from Oxford Economics.

The March deadline threatens to become a neuralgic issue for markets given the experience of the US Federal Reserve, which suggests that an abrupt stop in QE stimulus amounts to monetary tightening and can be highly disruptive.

David Fuller's view -

Panic and anger grip the EU and the ECB is in the firing line.  The article above observes: “Public trust in the ECB has collapsed in several countries and the mood in Germany has turned toxic.” 

No doubt but in fairness to Draghi, he saved the EU from an earlier collapse, while repeatedly calling for fiscal spending and investment.  Unfortunately, Herbert Hoovers in the Bundesbank were having none of it.  Meanwhile, Brussel’s contribution was the creation of more regulations.  This is the burning barn that disappointed UK Remain voters wish to run back into.  Some of them like the EU’s unions, employment laws and the 30 to 35-hour week.

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



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September 13 2016

Commentary by David Fuller

Bond Markets Hit Another Ukrainian Chicken Moment

Two European companies -- French drugmaker Sanofi and German household products maker Henkel -- last week became the first firms to persuade investors to pay them to borrow euros. By selling bonds yielding minus 0.05 of a percentage point, they may well have signaled the bond market's peak, delivering this decade's equivalent of the "Ukrainian Chicken Farm Moment."


It was massively oversubscribed. A few weeks later, bird flu broke out in Hong Kong. The chicken farm was uninsured. The market immediately discounted the notes and the price crashed 30 percent or more. That moment of supreme belief when anything is possible in the new issues market will always be remembered as "The Ukrainian Chicken Farm Moment."

An investor who buys some of Sanofi's 1 billion euros ($1.12 billion) of bonds and holds them until they're repaid in three years is guaranteed to lose money. The same goes for owners of Henkel's 500 million euros of two-year notes. It's the equivalent of lending a dollar and five cents to your neighbor, knowing that you'll only be repaid a dollar. It's further evidence, if it were needed, that the negative interest-rate policies being pursued by policy makers, including the European Central Bank, are making areas of the financial markets look increasingly similar to conditions prior to the financial crisis of almost a decade ago. Then, as now, investors trying to boost returns in a low-yield environment loaded up on risk. Today's negative-yielding bonds are the equivalent of the highly-leveraged derivatives that were all the rage in the middle of the last decade.

David Fuller's view -

These are moments which we can all look back on some time later and see that investors’ behaviour was totally irrational. 

This item continues in the Subscriber’s Area.



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September 13 2016

Commentary by David Fuller

Draghi: EU Must Redistribute Wealth and Strengthen Borders to Save the Union

 

The European Union will grind to a halt in a mire of ever-worsening unpopularity if it fails to tackle inequality, tighten external borders and co-ordinate defence policies,according to European Central Bank President Mario Draghi.

Anti-globalisation forces are closing borders and reversing progress made in recent years, he said, with policies which “have at times been reminiscent of the interwar period: isolationism, protectionism, nationalism”.

The message is a stark warning from the ECB’s chief, who has taken a new tack to push politicians to act. He has spent several years telling governments that they should use the breathing room granted by low interest rates to reform their economies to boost employment, productivity and growth.

But little of that has happened, forcing Mr Draghi to resort to stronger language to describe economic problems as a threat to the political project’s viability.

“The more recent years of the European project have been characterised by growing dissatisfaction,” Mr Draghi said, noting the Brexit vote.

“For some EU countries, these years have entailed the most serious economic crisis since the war, with unemployment, especially among the young, reaching unprecedented levels and welfare states constrained by low growth and stretched public finances.”

Combined with the fall of the Soviet Union, terrorism, climate change, new technologies and mass migration, “these factors have, in a short period of time, interacted with the economic consequences of globalisation and intensified feelings of insecurity, especially in a world that was inattentive to how the extraordinary benefits of that globalisation were being distributed”.

If the EU wants to serve its citizens and continue to bring its members closer together, he said, then politicians should listen to voters and address their concerns.

“The integration process needs to be guided towards outcomes that are more efficient and more directly aimed at the people, their needs and their fears,” he said in a speech as he received the De Gasperi award – a prize named for one of the EU’s founders and given to leaders who promote a more united Europe.

David Fuller's view -

Well said Mario Draghi, although too many arrogant leaders may not listen.  



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September 13 2016

Commentary by Eoin Treacy

Gold Sags in Longest Slump Since June as Demand Ebbs on Dollar

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

“You have rising expectations that there is the possibility of a rate increase this year,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “A December rate hike is a distinct possibility that’s hurting the gold market.”

Gold futures for December delivery fell 0.1 percent to settle at $1,323.70 an ounce at 1:44 p.m. on the Comex in New York. The losing streak is the longest since June 23.

Precious-metals traders have been in thrall to contrasting comments from Fed officials before the Fed’s policy meeting next week. Boston Fed President Eric Rosengren said Friday that the economy may overheat if the bank waits too long.

Eoin Treacy's view -

Gold does best when people are most worried about the integrity of their respective currency; when it is being eroded by negative interest rates in response to deflation or purchasing power is being destroyed by inflation. However between those extremes gold needs an additional catalyst to rally and if the Fed is going to gradually raise interest rates that represents a headwind. 



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September 13 2016

Commentary by Eoin Treacy

Dairy Farmers Think Almond Milk Is Bogus But Americans Love It

This article by Leslie Patton and Lydia Mulvany for Bloomberg may be of interest to subscribers. Here is a section:

Almond milk is boosting the nut’s popularity, too. Last year, Americans bought $890 million of the stuff, three times the amount of soy milk’s $286 million, according to IRI. By contrast, consumers bought $9.2 billion of lowfat and skim milk. Retailers have caught on to the trend. Starbucks Corp. is adding almond milk to its lineup of non-milk alternatives, which already includes coconut and soy milk. And as of last month, Dunkin’ Donuts offers it in all its stores.

Milk alternatives have faced scrutiny for not containing very many nuts or natural ingredients. WhiteWave Foods Co.’s Silk brand of almond milk, for example, also contains sugar, salt, gellan gum and sunflower lecithin.

A lawsuit filed last year against Blue Diamond Growers, which supplies Dunkin’ Donuts, said its almond milk contained just 2 percent almonds. Blue Diamond’s U.K. website confirms the product’s almond content. Water and sugar are listed as ingredients before almonds. Alicia Rockwell, a company spokeswoman, declined to comment.

Among the biggest almond-milk sellers are WhiteWave and Blue Diamond, along with retailers like Target Corp. and Aldi Inc. that have private-label brands. Niche companies are also riding the wave, like NüMoo Nut-Milks, which makes an organic, cold-milled chocolate almond milk.

 

Eoin Treacy's view -

Almond milk with its low fat / high protein / low glycemic index credentials tends to tick a lot of boxes for the current trend of health conscious diets. As a result it is boosting demand for the nut amidst what has already been a growth trend in Asian consumption. In a battle of marketing against regular milk it is winning and gaining market share. A clear health scare or drop in Asian demand would likely be required to check that trend. 



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September 13 2016

Commentary by Eoin Treacy

Libor's Reaching Point of Pain for Companies With Big Debt Loads

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

Companies that took out floating-rate loans knew they would have to pay more to borrow once rates started rising, but they haven’t experienced real increases for years. Even when the Federal Reserve started hiking rates in December, many companies did not have to pay higher rates on their loans until Libor breached key levels, because of the way their floating rates are calculated. Rising interest payments would only add to pain for U.S. borrowers that are already suffering from falling profits and higher default rates. And Libor could rise further-- JPMorgan Chase & Co. strategists recently forecast it could reach 0.95 percentage point by the end of this month.

There will be some companies “for which it might become an issue," said Neha Khoda, a high-yield credit strategist at Bank of America Corp. With Libor having risen above key levels like 0.75 percentage point, many issuers have to think about how they will pay the extra interest, she said. Three-month Libor now stands at 0.86 percentage point, and has been rising as new money market fund rules curb investor demand for companies’ short-term debt. 

Interest rates on loans in the leveraged loan market are calculated by starting with a benchmark borrowing rate like three-month Libor and adding a margin known as a "spread." About $230 billion of the loans in the market have a minimum benchmark level, or "floor," equal to 0.75 percentage point, meaning that even if Libor has fallen below that level, the borrower must pay the minimum plus the spread. Most of the debt in the $900 billion leveraged loan market has Libor floors, which is often set around 1 percent.  

 

Eoin Treacy's view -

High yield issuers of floating rate notes are at an obvious disadvantage as the prospect of short-term rates rising is priced in. That represents an important consideration because floaters are one of the primary destinations for bond investors seeking to hedge their exposure to rising interest rates since they would avail of higher yields.



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September 13 2016

Commentary by Eoin Treacy

Bugs on Screen

This article by Ekaterina Pesheva for the Harvard Medical School may be of interest to subscribers. Here is a section:

Over two weeks, a camera mounted on the ceiling above the dish took periodic snapshots that the researchers spliced into a time-lapsed montage. The result? A powerful, unvarnished visualization of bacterial movement, death and survival; evolution at work, visible to the naked eye.

The device, dubbed the Microbial Evolution and Growth Arena (MEGA) plate, represents a simple, and more realistic, platform to explore the interplay between space and evolutionary challenges that force organisms to change and adapt or die, the researchers said.

“We know quite a bit about the internal defense mechanisms bacteria use to evade antibiotics but we don’t really know much about their physical movements across space as they adapt to survive in different environments,” said study first author Michael Baym, a research fellow in systems biology at HMS.

The researchers caution that their giant petri dish is not intended to perfectly mirror how bacteria adapt and thrive in the real world and in hospital settings, but it does mimic more closely the real-world environments bacteria encounter than traditional lab cultures. This is because, the researchers say, in bacterial evolution, space, size and geography matter. Moving across environments with varying antibiotic strengths poses a different challenge for organisms than they face in traditional lab experiments that involve tiny plates with homogeneously mixed doses of drugs.

 

Eoin Treacy's view -

There are encouraging advances occurring in the development of antibacterial medicines using new kinds of antibiotics, phages and genetics. Considering the rates at which bacteria can mutate we are going to need them all. 

 



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September 12 2016

Commentary by David Fuller

Six Reasons Why Post-Brexit Britain Can be Like Others That Thrive Outside the Single Market

So much of the current discussion about our future relationship with the EU is about access to the single market. If we could have all the benefits of belonging to the single market without being obliged to obey its rules, be able to make our own laws, control our own borders, abolish the EU’s tariffs on our imports, make no contributions to the EU budget and make our own trade deals around the world, then I would support being a member. But such a package is unobtainable.

Of the realistic options, some people have argued that we should seek a deal like Norway’s or Switzerland’s. We should want neither of these. Rather, we should seek to be like all other countries in the world, that is to say, outside the single market but trading extensively with it. In realising this vision, our officials and ministers need to bear in mind six key points.

Single market membership is not the be-all and end-all

First, contrary to the propaganda, membership of the single market is not of overwhelming importance. If it were, how would it be possible for non-member countries from all around the world to sell to it so successfully, and why would its members be doing so badly? Why haven’t single market member countries been carried forward on a wave of prosperity created by the mutual recognition of standards and the absence of border checks?

The benefits of the single market have been sufficiently small that they have been outweighed by other factors: the macroeconomic disaster that is the euro and the micro-economic disaster that is the web of regulations, laws and interferences that reduce market efficiency across the union.

Tariffs might be a price worth paying 

Second, tariffs are not a big issue. By all means, let’s try to get a deal under which our exports to the EU face no tariffs. But this is not worth paying much for – or enduring much of a delay for. If our exporters end up having to pay the EU’s common external tariff this would not be a killer blow. The average tariff on manufactured goods is about 4pc.

If it comes to it, even the 10pc tariff on cars would be more than compensated by the lower exchange rate for the pound. And if the City loses passporting rights, that isn’t a killer blow either. The key requirement is to be outside the EU’s icy regulatory embrace. In the long term, securing this would be well worth enduring some short-term loss.

David Fuller's view -

Roger Bootle’s analysis make sense to me.  However, we can expect international banks and many other City firms to take a somewhat different view.  They may only be lobbying in their perceived best interests, but we hear plenty of talk about partial moves to various regions of the EU.  Some of that may be inevitable but Mrs May’s Government will need to remain diplomatic and in close contact with these firms, while also holding its line on a reasonably swift and complete exit from the EU. 

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



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September 12 2016

Commentary by David Fuller

Parliament Calls for Carbon Capture to Revive British Industry and Slash Climate Costs

A high-level Parliamentary inquiry has called for a massive national investment in carbon capture to revive depressed regions of the North and exploit Britain's perfectly-placed network of offshore pipelines and depleted wells.

Lord Oxburgh's cross-party report to the Government has concluded that the cheapest way to lower CO2 emissions from heavy industries and heating is to extract the carbon with filters and store it in the North Sea oil.

The advisory group said the technology for carbon capture and storage (CCS) is ready to go immediately and should cut costs below £85 per megawatt hour by the late 2020s if launched with sufficient conviction and on a large scale, below the strike price for the Hinkley Point nuclear project. 

It could be fitted on to existing gas plants or be purpose-built in new projects, and could ultimately save up £5bn a year compared to other strategies. Unlike other renewables CCS does not alter with the weather or suffer from intermittency. It can be “dispatched” at any time, helping to balance peaks and troughs in power demand. 

“I have been surprised myself at the absolutely central role that CCS has to play across the UK economy,” said Lord Oxburgh, a former chairman of Shell Transport and Trading.

“We can dramatically reduce our CO2 emissions, create tens of thousands of jobs, and give our domestic industry a great stimulus by making use of technologies which are now well understood and fully proved,” he said.

No other country is likely to take the plunge first since few have the magic mix of industrial hubs, teams of offshore service specialists, and cheap, well-mapped, sea storage sites all so close together. “CCS technology and its supply chain are fit for purpose. There is no justification for delay,” says the report, to be released today.

Lord Oxburgh said the state must take the lead and establish the basic infrastructure in the early years.

The report called for a government delivery company modelled on Crossrail, or the Olympics Authority, taking advantage of rock-bottom borrowing costs. It could be privatised later once the CCS has come of age.

The captured CO2 is potentially valuable. Some could be used for market gardening in greenhouses, to produce biofuels, or for industrial needs.

Most CCS in North America is commercially exploited to extract crude through enhanced oil recovery by pumping CO2 into old wells, a technology that could give a new lease of life to Britain’s depleted offshore fields. “We could keep North Sea production going for another hundred years,” said Prof Jon Gibbins from Sheffield University.

David Fuller's view -

In this exciting new, varied and fast changing era of energy, tech-savvy nations should way outperform over the longer term.  What energy systems will they have?

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



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September 12 2016

Commentary by David Fuller

An Allocation Only a Mother Could Love

GMO’s Jeremy Grantham and Lucas White came out with a report entitled An Investment Only a Mother Could Love this past week laying out the prospects for natural resource equities. Here’s the executive summary of their findings and thoughts:

  • We believe the prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources.
  • Public equities are a great way to invest in commodities and allow investors to:
    • Gain commodity exposure in a cheap, liquid manner
    • Harvest the equity risk premium
    • Avoid negative yields associated with rolling some futures contracts
  • Resource equities provide diversification relative to the broad equity market, and the diversification benefits increase over longer time horizons.
  • Resource equities have not only protected against inflation historically, but have actually significantly increased purchasing power in most inflationary periods.
  • Due to the uncertainty surrounding, and the volatility of, commodity prices, many investors avoid resource equities. Hence, commodity producers tend to trade at a discount, and they have outperformed the broad market historically.

The team from GMO makes some good points here. If you’re looking to gain long-term exposure to commodities, it rarely makes sense to invest directly in the commodities themselves. You’ll get cash-like returns with stock-like volatility.

I wanted to look back at the performance history of these stocks to check out their other claims. The longest running fund I could find is the Vanguard Precious Metals & Mining Fund (VGPMX). It may not be a perfect match with what GMO is doing but it has a performance history going back to 1985.

David Fuller's view -

I have long held Jeremy Grantham in high regard and I maintain that we have only seen this year’s initial recovery for industrial commodities and precious metals.  However, I question this opening bullet point:

We believe the prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources.

This item continues in the Subscriber’s Area.



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September 12 2016

Commentary by Eoin Treacy

What Samsung's Disastrous Galaxy Note 7 Recall Means for Apple

This article by Chris Nolter for TheStreet may be of interest to subscribers. Here is a section:

The announcement of the iPhone 7 and 7 Plus was "lackluster," in the view of Gartner analyst Tuong Nguyen, who expressed skepticism that the problems with Samsung's flagship smart phone will lead to an outflowing of customers to Apple.

"We've chosen our battlegrounds already," Nguyen said, suggesting that U.S. users are mostly either in the Android an iOS camps. Shifting from one to the other is "at the least annoying" and involves relearning the quirks of a new platform and accounting for apps that have been bought or downloaded.

"I feel it's more likely that the Samsung incident will push people towards other Android makers like LG more so than towards Apple," Nguyen said. Shifts to a new platform could be more pronounced in emerging markets with burgeoning middle classes who may not have been able to afford iPhones before.

 

Eoin Treacy's view -

The app ecosystem of various platforms represents a significant hurdle to moving from an iOS based phone to Android. That represents a major incentive for companies like Apple and Google to encourage as many programmers as possible to develop apps for their respective languages. Google’s announcement in July that it plans to fund education for up to 2 million programmers in India is a direct reflection of that theme.



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September 12 2016

Commentary by Eoin Treacy

Thailand

Eoin Treacy's view -

The majority of ASEAN markets have benefitted from increasing international investor flows over the last few months and Thailand is no exception. It has received net inflows of nearly $16 billion year-to-date but this has done little to support the stock market in currency adjusted terms. Just about every Asian market pulled back today but Thailand has been leading on the downside. 
 

 



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September 12 2016

Commentary by Eoin Treacy

N.Z.â's Key Says Don't Break Out Champagne for Parity Party Yet

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

New Zealand Prime Minister John Key speaks at post-cabinet press conference in Wellington on Monday.

Says NZ dollar’s recent gains generally reflect economic fundamentals of New Zealand
On prospect of NZD reaching parity with Australian dollar,     says “just before people break out the champagne for a parity party, we’ve been there many times before and not quite got over the finishing line”

Most New Zealanders would prefer NZD “was a little bit lower”

“With dairy prices recovering, that’s the thing I think that’s actually underpinning the exchange rate now”: Key says his view on currency intervention is it’s “not a terribly effective tool”

 

Eoin Treacy's view -

The New Zealand Dollar has not traded above parity against the Australian Dollar in at least 30 years so it represents a psychological Rubicon for investors and a potent threat to the competitiveness of Kiwi exports to its largest neighbour. The rate has contracted steadily over the last month and a break in the short-term progression of lower rally highs, currently near NZ$1.04, will be required to signal Australian Dollar demand is returning to dominance. 



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September 12 2016

Commentary by Eoin Treacy

September 09 2016

Commentary by Eoin Treacy

Global Economics and Strategy Day

Thanks to a subscriber for this report from Morgan Stanley covering a number of macro topics. Here is an important slide highlighting how economists compute productivity figures:

Eoin Treacy's view -

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

I’m sure I’m not the only one to puzzle over how our opinion of future productivity growth and that of many economists can differ so widely and thought the above chart was highly instructive.

To my mind technological innovation is sharply deflationary but it also contributes to productivity gains by ensuring that every worker can produce more. However the decline in Multifactor Productivity questions that hypothesis. Therefore we have to ask the question whether the deflationary impact of technology on the velocity money, which is a symptom of the wider disintermediation of the internet, is reducing the multifactor contribution to how productivity in measured. 

 



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September 09 2016

Commentary by Eoin Treacy

Turning Points

Thanks to a subscriber for this link to Jeff Gundlach’s most recent presentation. Here is one of the more interesting slides:

Eoin Treacy's view -

More than any other chart this gives us a graphic illustration for why Wall Street continues to trade close to historic highs. If earnings do in fact rebound then valuations will retreat and investors will have some rational justification for paying all-time high prices. 

Of course the flip side is that if earnings do not rebound in nearly the same fashion as expected. That would contribute to a great deal of navel gazing mong investors and would lead to less appetite for shares at these prices. 
 

 

 



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September 09 2016

Commentary by Eoin Treacy

September 09 2016

Commentary by Eoin Treacy

Gold Investors Brace for Lower Prices on Interest-Rate Outlook

This article by Luzi Ann Javier for Bloomberg may be of interest to subscribers. Here is a section:

More than 2,500 lots exchanged hands Friday for a put option giving owners the right to sell October futures at $1,300 an ounce, making it the most-traded option for the second straight day. The most active contract on the Comex slipped as much as 0.6 percent to $1,334.10. Holdings in exchange-traded funds backed by gold fell for a second day on Thursday.

There’s reason to be worried. Federal Reserve Bank of Boston President Eric Rosengren, who shifted his stance in recent months in favor of monetary tightening, warned Friday that waiting too long to raise interest rates risks overheating the economy. Higher rates make bullion less competitive against interest-bearing assets. The comments come a day after the European Central Bank played down the prospect of an increase in asset purchases.

“The markets are quite nervous that an interest-rate hike might actually happen this month,” Phil Streible, a senior market strategist at RJO Futures in Chicago, said by telephone.

“Investors and traders know that gold futures have held above $1,300 and this looks like a key level of support. It’s rational for investors to be looking at protective put options at $1,300 in the event a surprise interest rate increase occurs.”

 

Eoin Treacy's view -

Total Known ETF Holdings of Gold have not been affected by the pullback witnessed in precious metals markets this week suggesting the action is more driven by traders than investors. 



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September 08 2016

Commentary by David Fuller

US Recession Jitters Stoke Fears of Impotent Fed and Fiscal Paralysis

Here is the opening and a latter section from this interesting column by Ambrose Evans-Pritchard for The Telegraph:

An ominous paper by the US Federal Reserve has become the hottest document in high finance.

It was intended to reassure us that the world's hegemonic central bank still has ample firepower to overcome the next downturn. But the author was too honest. He has instead set off an agitated debate, and rattled a lot of nerves.

David Reifschneider's analysis - 'Gauging the Ability of the FOMC to Respond to Future Recessions' - more or less concedes that the Fed has run out of heavy ammunition.

The Federal Open Market Committee had to cut interest rates by an average of 550 basis points over the last nine recessions in order to break the fall and stabilize the economy. It could not possibly do so right now, or next year, or the year after. Quantitative easing (QE) in its current form cannot compensate, and nor can forward guidance. They are largely exhausted in any case.

"One cannot rule out the possibility that there could be circumstances in the future in which the ability of the FOMC to provide the desired degree of accommodation using these tools would be strained," he wrote.

This admission is painfully topical as a plethora of data suggest that the US economy may have hit a brick wall in August. The ISM gauge of manufacturing plunged below the boom-bust line to 49.4, and the services index dropped to a six-year low, with new orders crashing nine points.

My own tentative view is that these ISM readings are rogue surveys. The Atlanta Fed's 'GDPNow' tracker points to robust US growth of 3.6pc in the third quarter. The New York Fed version is coming in at 2.8pc. 

Yet the US expansion is already long in the tooth after 87 months, and late-cycle chemistry is notoriously unpredictable. Warning signs certainly abound. Corporate profits have been slipping for six quarters, the typical precursor to an abrupt slump in business spending. "The only thing keeping the US out of recession is the US consumer. If consumption stalls then we really are in trouble," says Albert Edwards from Societe Generale.

I am willing to bet against him for now. The M1 money supply - often a good leading indicator - has picked up after a weak patch earlier this year and is now surging at a rate of 10.1pc. This pace would normally signal a burst of torrid growth a few months later. It is in stark contrast to the monetary contraction before the Lehman crisis.

My presumption is that the day of reckoning has been pushed well into 2017, but in the dead of the night I have a horrible sweaty feeling that Mr Edwards may be right. It is not a time to be chasing stock markets already at vertiginous levels.

And:

History will judge that those nations best able to weather the next global downturn are those that grasp the essential character of our desperate deflationary age, and can cast aside deeply-ingrained and totemic beliefs about debt. The losers will be those spooked by shadows on the wall.

The winners - or survivors - will be those most willing to seize on the cheapest borrowing costs in history to fight back, preferably combining fiscal and monetary in a radical fashion. Call it helicopter money if you want, or 'overt monetary financing' of deficits. The accounting terminology is irrelevant.

Since no country can risk watching its precious national stimulus leak away to free riders in the austerity camp - at least in a crisis - this may imply some degree of calibrated protectionism. The twin liberal pieties of progressive public policy and global free trade may ultimately come into conflict. That is tomorrow's battle.

David Fuller's view -

Yes, the Fed would like a cushion in terms of higher interest rates as a defence for limiting the next recession.  However, we do not live in an economic environment which would make that possible at this time.  Moreover, we can only guess as to when and to what extent circumstances are likely to change in future.  So far, the Fed has wisely held off on raising rates, which could make a soft economy even weaker, particularly if the Dollar Index rose, as it most likely would.

However, it would be mistaken to think that the Fed is in charge of the economy, beyond its role as the regulator of US monetary policy.  The traditional three engines of economic growth are consumer, corporate and government spending. 

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



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September 08 2016

Commentary by David Fuller

EU Retreat From US Trade Deal Leaves the Field to Britain

They’ve managed it. The naysayers have succeeded in killing off what would have been the first trade deal signed between the world’s two biggest economic blocs.

“TTIP”, or the Transatlantic Trading and Investment Partnership between the EU and the US, was meant to be part of the plan for a renewed, competitive Europe, helping its indebted economies to carry the deadening weight of the euro. Instead, it is becoming a potent symbol of EU dysfunction.

After years of protests, petitions and successful peddling of terrifying myths about the deadly threat this deal posed to rights, democracy, safety and the environment, European politicians are capitulating. EU mandarins are trying to keep it together in the face of a tough US stance and competing demands by 27 countries but, in the crystal clear estimation of French trade minister Matthias Fekl, the deal is “dead”.   

The Eurocrats will continue to insist that, like a convalescent dictator, it is very much alive and well. But to be sure, it is simply resting! Taking the air! But they know as well as anyone else that TTIP - and the useful €120 billion boost they said it would bring the EU economy - is at best being put into a long, deep freeze.

The good news, of course, is that this clears that enormous “queue” for trade deals with the US that Barack Obama was warning us about when he visited Britain before the EU referendum. A post-Brexit UK, he said, would be “at the back” of this queue, and at the G20 last week, he again declared that a UK-US deal won’t be a priority. With TTIP dead, however, there is no queue. Saying that Britain is at the back of it is rather like saying that Mr Obama is at the back of the queue of lame duck US presidents leaving office: he’s also at the front of it.

Any decision on trading terms between the US and its allies will be down to Mr Obama’s successor. Pessimists argue that the anti-globalisation mood taking hold across the pond will preclude any deal making. Donald Trump has demonised trade and even Hillary Clinton has gone lukewarm. But although there is a worrying rise in such hostility, there are reasons to think that Brexit Britain can slip around this roadblock.

The multilateral, sprawling agreements currently running into problems, like TTIP and its Pacific equivalent, are totemic, regional pacts with explicitly geopolitical aims. They are agreed only after torturous negotiations between dozens of countries with different cultures and priorities. They establish remote – and therefore scary-sounding – new regulatory and legal systems and the backlash against them feeds on the idea of a faceless, nationless technocratic class taking over the levers of power at the expense of citizens.

By contrast, a single-country deal with a reliable ally, whose legal system and economy already have much in common with the US, is a less threatening prospect and is unlikely to worry former car workers in Detroit. That is one of the reasons that Mr Trump can insouciantly declare that Britain would certainly not be “at the back of the queue” for a deal, as he did in May.

Mr Trump might not be the most reliable ally. But there are geopolitical reasons why it would make sense for the US to consider a deal, especially if Mrs Clinton wins. It would signal that the UK, a useful US ally in Europe, is not out in the cold. It would help, in a less ostentatious way than TTIP, to expand the sway of economic relations based on the rule of law and regulations, rather than the rule of might favoured by Russia and China. It would also establish a framework to which the EU would hopefully be added in future decades.

David Fuller's view -

The global region of greatest uncertainty right now is in the EU.  It gives me no satisfaction to point this out but the EU’s leaders have brought it on themselves, although the real cost is borne by the citizens of their countries, particularly in the Mediterranean nations.

Today, we can forget all about forecasts of tortuous Brexit negotiations over several years, designed to ensure that the EU was an alliance which countries could join but never leave.  The EU’s political programme to create ‘a United States of Europe’ has been derailed because it had no popular support.  The absence of border controls in Europe seems like a nice idea but makes no sense in a world where traffickers will swamp countries by bring the world’s poor from different cultures to richer democratic nations.  A political backlash is underway, not least within Germany and France.

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



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September 08 2016

Commentary by David Fuller

The Weekly View: The Danger of Looking Back: Lessons From Lost Decades

My thanks to Rod Smyth for his ever-interesting letter, published by RiverFront Investment Group.  Here is the opening paragraph:

Our industry’s most ubiquitous disclaimer, “Past performance is no guarantee of future results,” is good advice.  Despite this advice, many investors make decisions based on the emotional journey of past performance – money follows performance.  US investors are now pulling money out of international stocks following a decade of flat returns and 6 years of underperformance relative to US stocks; meanwhile, at RiverFront, we are adding to our international holdings.  

David Fuller's view -

Rod Smyth is a very good contrarian thinker.  This is a fascinating issue – a collector’s item for students of stock markets. 

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

 

Please note: I will be away on Friday.



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September 08 2016

Commentary by Eoin Treacy

Draghi Dialing Down the Drama May Mark Wane of Monetary Activism

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

Take European Central Bank President Mario Draghi, who on Thursday talked up the effectiveness of his institution’s stimulus policies to date, but damped expectations that he’ll load up with fresh asset-buying soon. His only new announcement after again downgrading euro-area growth forecasts was that officials will look into how to ensure the current program overcomes a worsening scarcity of bonds.

Even with the scheduled end of the 1.7 trillion-euro ($1.9 trillion) plan just six months away, Draghi said policy makers meeting in Frankfurt haven’t yet discussed what they’ll do when that day comes. If a new laissez-faire tone is creeping in to replace years of hyperactivity, it may be a signal that the division of labor between central banks and governments in providing economic support is shifting.

“Draghi doesn’t sound like a central banker who’s in any hurry to ease further,” said Tim Graf, head of European macro strategy at State Street in London. His stance “fits in with the G-20 statements about using all actors to support growth, including the fiscal side. Taking ever-easier monetary policy for granted is becoming less valid.”

 

Eoin Treacy's view -

The ECB faces a number of obstacles to employing a US style quantitative easing program within its jurisdiction. Among these are the relative depths of the respective markets. The ECB has self-imposed rules about how much of any particular issue it can own and how much debt of any one country it can purchase. Additionally, the EU’s corporate bond and asset backed markets are not nearly as liquid as their US equivalents, which represent a challenge for the size of purchases the ECB needs to make to have an influence on the market.



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September 08 2016

Commentary by Eoin Treacy

Duterte Outbursts Taking Toll as Philippine Stock Losses Mount

This article by Ian C Sayson for Bloomberg may be of interest to subscribers. Here is a section:

“The latest incident raises concern that President Duterte’s unpredictable behavior in politics will be disruptive and could eventually spill into economics and business,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc., the Philippines’ biggest lender. It’s “further weakened a market that’s already been made vulnerable by uncertainty over U.S. interest rates, elevated valuations and overseas fund withdrawals,” he said.

The Philippine index is trading at 18.3 times 12-month estimated earnings. While that’s down from 19.6 in July, it’s still the highest in Asia and at a 32 percent premium to the MSCI Asia Pacific Index. The country’s economy expanded 7 percent last quarter from a year earlier, after 6.8 percent growth in the first three months of 2016.

Investors may be better off holding cash in the near term as the index could test its 7,500 support level, said BDO Unibank’s Ravelas. The gauge could fall as low as 7,330 in the next two months over concerns the budget deficit will rise when taxes are cut and spending raised, April Lee-Tan, head of research at COL Financial Group Inc. in Manila, said Monday.

“Smart investors should take advantage of the weakness and accumulate because this is all sentiment-driven," said Rizal’s Palma Gil. “Other than incendiary statements and killings related to the drug war, investors like Duterte’s economic and fiscal policies or at least what has been communicated so far,” he said, adding that he expected the index would go back up to 8,000.

 

Eoin Treacy's view -

Duterte was elected on a law and order and anti-corruption ticket and admitted in his inaugural address that his methods were unorthodox and would not be approved of by many observers. Here is a link to a video of that address. 



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September 08 2016

Commentary by Eoin Treacy

Email of the day on bitcoin prices

Regarding Bitcoin, after a summer lull it looks like it is coming into form once again - would welcome another update on the charts/ medium term view which hopefully is of interest to other subscribers. I must say it does have elements that remind me of the 90's tech bubble (volatile, illiquid, devoted followers etc) and I have been following it closely. Many thanks

Eoin Treacy's view -

Thank you for this reminder that Bitcoin is a market where fully committed advocates contrast sharply with those who doubt it will ever become a viable medium of exchange. The blockchain foundation on which the market for bitcoin rests has significant potential in recording transactions and reducing the cost and inefficiency of banking, accounting and record keeping over the next few years before it is eventually superseded by quantum computing. 



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September 08 2016

Commentary by Eoin Treacy

GW Pharmaceuticals Jumps on Report It May Be Acquisition Target

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

GW Pharmaceuticals Plc jumped after Reuters reported that the company had hired Morgan Stanley as an adviser after being approached by several drugmakers interested in an acquisition.

GW gained 20 percent to $101.47 at 3:31 p.m. in New York trading, its biggest intraday gain since March. Reuters cited people familiar with the matter in its report.

The U.K. company, with a market value of $2.56 billion, develops drugs derived from cannabis. Its leading asset is an experimental treatment for epilepsy, and it’s also working on candidates for cancer, type 2 diabetes and schizophrenia. GW has one approved drug, Sativex, which is used to control involuntary muscle spasms from multiple sclerosis.

Insys Therapeutics Inc., which develops drugs based on synthetic cannabis, rose 5 percent to $15.67.

GW, based in Cambridge, England, isn’t currently interested in a sale, Reuters reported, citing people familiar with the matter. A representative for GW declined to comment.

 

Eoin Treacy's view -

Cannabis is increasingly being recognised for its uses as a pain reliever and mood stabiliser; confirming what millions of users in the illicit market have testified to for decades. With the tide of public opinion turning there is a race on to secure interests in the sector as companies bet on the potential for further legalisation to be approved in the USA, not least during the November ballot. 



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September 07 2016

Commentary by David Fuller

Apple Introduces iPhone 7: Water Resistant, Faster, New Camera

Apple Inc. unveiled new iPhone models Wednesday, featuring a water-resistant design, upgraded camera system and faster processor, betting that after six annual iterations it can still make improvements enticing enough to lure buyers to their next upgrade.

First Look at the New iPhone 7 and iPhone 7 Plus

The iPhone’s main improvement revolves around the new camera. Past models have had only one lens on the back, but the new version features a dual-lens system on the larger iPhone 7 Plus. The technology allows for sharper, brighter photos with better ability to zoom without degrading quality. Apple released a few details about the new phone on its Twitter account while Chief Executive Officer Tim Cook was giving a presentation at an event at San Francisco’s Bill Graham Civic Auditorium. 

Even as iPhone demand has waned in recent quarters, partly due to the lull between product launches, the device continues to be the biggest source of Apple’s revenue. The iPhone is at the center of an ecosystem of products from Apple TV to the Apple Watch that are designed to function in connection with it. The new models will be critical to the holiday quarter, and the world’s most valuable company is counting on them to prop up sales ahead of an expected overhaul of the line in 2017, the iPhone’s 10th anniversary.

David Fuller's view -

There are clearly a number of improvements but will it be enough to top Samsung? Many of us will be interested in the reviews, not least from Which Magazine as far as I am concerned.  It definitely preferred Samsung’s phone a few months ago but Apple clearly has some significant improvements. 

This item continues in the Subscriber’s Area and includes a discussion of Apple’s stock market prospects relative to Samsung.



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September 07 2016

Commentary by David Fuller

EU Fiscal Stimulus Is Just a Rule Change Away

Here is the opening of this topical article from Bloomberg:

The European Central Bank is expected to extend its quantitative easing program further during the meeting of its governing council this week. The irony is that while the ECB has various options for continuing a program that isn't working, national governments have relatively few options for embarking on one that most agree is sorely needed. As Mario Draghi and others have said on multiple occasions, the ECB cannot deliver on its own. It needs governments to use fiscal levers to help stimulate spending and growth.

What prevents European governments from doing that right now is ostensibly the Maastricht deficit and debt limits (3 percent and 60 percent of gross domestic product respectively). While the European Commission has said that it would not count some investment spending in those limits, the rules are unclear and make it difficult for countries in breach to invest. What is needed is a change that brings national accounting more in line with reality and the sound principles used in the private sector.

Infrastructure investment in Europe is currently counted as an expense that gets added to (already bloated) national budgets. That fails to account for any multiplier effect the measures might have or the increase in productivity that is unleashed when, say, digital infrastructure is expanded or new transport links are created.

An investment, rather, should be amortized over the period it will be used for, just as it is in the private sector. A company that invests in new machinery, for example, amortizes it over many years. The same could even be true for R&D spending, which can deliver many gains in a knowledge economy. 

David Fuller's view -

The EU’s political leadership, mainly self-appointed by Germany and France, has tried to align what were 28 separate nations before Brexit occurred.  They sought to do this with one-shoe-fits-all rules.  These have not worked very well and any attempt to enforce them had been the equivalent of trying to herd 28 cats. 

Europe may have more success with fiscal spending, which many financial observers have long said was overdue, including Mario Draghi, president of the European Central Bank.

If GDP growth is weak and monetary policy near zero percent is harming savers and banks, while benefiting only stock markets, fiscal spending to assist economies looks like a logical and necessary response.  To the extent that it helps GDP growth, it may also cushion the next stock market downturn.       



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September 07 2016

Commentary by David Fuller

Japan Demand for Seamless Brexit is a Timely Warning Against Hubris

It [Japan] wants continuation of the ‘single passport’ system for financial services, and clearing of euro transactions in London. “If Japanese financial institutions are unable to maintain the single passport obtained in the UK … they might have to relocate their operations from the UK to existing establishments in the EU,” it said.

The task force insists on mutual recognition of ‘Authorized Economic Operators’, which could not occur if Britain fell back to the minimalist terms of the World Trade Organisation. If the UK fails to retain the European Medicines Agency, Japanese pharmaceutical companies might shift research and investment to mainland Europe.

It wants guaranteed “access” for EU and UK nationals to work in each other’s country, which is not the same thing as free movement of labour or benefit rights. While the paper stresses that Japan “respects the will of the British people”, it cleaves to the status quo. “The message is essentially that nothing should really change,” said Raoul Ruparel from Open Europe.

The wish-list could perhaps be achieved through a halfway house such as entry into the European Economic Area, the ‘Norwegian model’. It is totally incompatible with the hardline demands of the Brexit triumvirate.

The task force paper is probably music to the ears of 10 and 11 Downing Street, and its release during the G20 summit may have been co-ordinated. It strengthens Theresa May’s hand as she tries to steer through treacherous waters, and pushes within the cabinet for a compromise soft Brexit - or a “seamless Brexit” as Tokyo calls it.

Japan’s demarche should not be read as a threat to Britain. The document is equally addressed to the EU, making it clear that the EU’s own credibility is on the line and that any attempt to ‘punish’ Britain would be intolerable.

It urges the EU to recognize that Britain cannot on its own deliver these terms, and that EU officials must “heed the voices of Japanese businesses to the fullest extent and to do their utmost to cooperate in taking the necessary measures to advance the Brexit negotiations,” it said.

David Fuller's view -

AEP’s article is more cautious than The Telegraph’s other article regarding Japan which I posted on Tuesday.  A lot is in play right now and the EU is likely to change radically over the lengthy medium term, as I have said before.  However, the more immediate question is - might it actually concede to the UK a separate deal in terms of autonomy and sovereign rights, including control over its own borders?  There is currently no precedent for this, although it would be in the sensible interests of European trade with the rest of the world.  Alternatively, the UK may have no other option but to go for full Brexit, in its best long-term interests.  In other words, leave the EU, lock, stock and barrel. 

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



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September 07 2016

Commentary by David Fuller

Why London will be an economic powerhouse after Brexit

London has retained its crown as the leading global city of opportunity and will remain a top destination for years to come despite the UK’s decision to leave the EU, according to PwC.

The Big Four accounting firm said the capital’s status as an economic powerhouse and magnet for innovation had helped it to “pull away” from global rivals this year.

Its report, which ranks the world’s 30 leading cities via a series of measures including ease of doing business, economic clout and liveability, put London at the top for the second straight year, ahead of cities including Singapore and Toronto.

PwC said London’s dynamism meant it would remain “agile and resilient” in the face of the Brexit vote, helping it to take advantage of “opportunities” and overcome challenges in the years ahead.

PwC’s research was conducted well before UK’s decision to leave the EU on June 23. However, it said the prospects for London remained bright.

“We cannot predict what Brexit may mean to the future of London as a pre-eminent world city, we do know it is today one of the world’s most cosmopolitan and well balanced cities, as shown by our research.

"Any effects Brexit may have on London will take place in a process that will evolve over time and not overnight,” it said in a report.

Sadiq Khan, the Mayor of London, said he was confident that London would continue to be “the best place in the world to do business”.

David Fuller's view -

PwC is certainly an influential firm but surely this is a very subjective article and rating.  The important assessments of Britain post Brexit will come several years from now.  Personally, I am very optimistic about the UK’s prospects but they will require good governance and hard work, just like any other important achievements in the histories of countries. 

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



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September 07 2016

Commentary by David Fuller

Email of the day

On the post Brexit future for Britain:

David, I have the impression that City AM is running a series of articles to raise spirits in the City in this first week back from the holidays. Well, not a bad thing to do in comparison with the post-Brexit stuck-in-the-mud approach of some other papers I won't name. I particularly like this article in today's edition of city AM.

This is a truly uplifting article. It makes so may good points it is hard to choose one or two (though I know you will agree that London is the coolest place to live on the planet). Its main point is that wages in China have increased 5 fold in 3 years and at the same time, after one region in the USA, "the next most competitive location is the British Midlands from Birmingham to Manchester and beyond, plus the High Tech triangle that runs between King’s Cross, Cambridge and Oxford." I travel the world a lot and my impression is exactly as recorded in this article. I am very excited about the post Brexit future for Britain.

 

David Fuller's view -

Thanks for a very interesting and enthusiastic email of general interest.  (Note for subscribers: I have attached the two links which came with this email so that you can access them without leaving the Fuller Treacy Money site.)

There is certainly no harm in raising spirits in the City or anywhere else, with genuine good will and realistic optimism. What those of us who favour Brexit need to avoid is hubris – a repellent and destructive state of mind.  There are big, exciting challenges ahead, requiring a realistic can-do spirit. We also need to encourage rather than alienate disheartened Remain voters.  The UK needs their energy and constructive input.  Personally, I remain very optimistic about Brexit, but I do not underestimate the challenges. 

Incidentally, Pippa Malmgren, who wrote the article for City A.M. above is an interesting contributor.  An American and successful businesswoman, she was a financial advisor to President George W Bush, before moving to London where she now lives and works.  Similarly, the author of this email is a key participant in the High Tech triangle which runs between King’s Cross, Cambridge and Oxford.   



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September 07 2016

Commentary by Eoin Treacy

Flows vs. Fundamentals the upside risk to EM EPS

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

The EM equity rally continued in July and August (+8%), albeit at a slower pace than the furious January-March rally (+20%), with MSCI EM sitting at 898 currently, or 2% off the cycle highs from two weeks ago. EM FX has corrected a bit more sharply in recent days, and our EM FX index currently sits just 0.5% above its March 31 close. Although sovereign credit spreads remain near cycle-tight levels, EM credit and local bonds have softened their rally as well in recent days (USD debt +4%, local debt +1% since end-June). As we discussed earlier this summer, an EM-friendly environment with equity being the strongest performer tends to occur during a ‘growth up, rates up’ phase of the cycle, and this has indeed been the macro backdrop (see EM Cross-Asset Strategy Part 1: Identifying ‘EM Risk’).

Much of the discussion surrounding the EM rally has focused on flows and positioning, but EM fundamentals have shown signs of a tepid improvement. EM GDP growth accelerated sequentially in the first quarter of 2016, and monthly data (such as Industrial Production) continued to improve in 2Q (see Exhibit 1). This is not the first time that EM growth has picked up since the global financial crisis – we have seen a few oscillations in sequential growth momentum and the bounce came off a low base in 4Q 2015. However, perhaps more importantly, the differential of EM vs. DM growth has improved in the past two quarters, a development we have not seen since early 2012 (see Exhibit 2).

We have long argued that an improvement in the EM growth outlook is the essential  ingredient in adopting a positive outlook on EM equity – both in absolute and relative terms. Consequently, while we are unsurprised that the EM rally coincided with improving growth earlier this year, we have remained sceptical on the rally for two mains reasons: (1) the GDP acceleration did not drive EM EPS higher, and (2) EM growth picked up off a very low base and amid a sharp rise in commodity prices (oil and metals) in late Q1 and Q2, something we do not expect to continue in 2H. Below, we discuss the upside risk

 

Eoin Treacy's view -

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

Negative yields in some of the world’s largest developed markets has set off a global search for yield which has burnished the allure of many emerging markets. Meanwhile the rebound in commodity prices may have provided the bullish catalyst required to stoke interest in the asset class and is likely to remain a tailwind for the sector as long as prices are rallying. 



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September 07 2016

Commentary by Eoin Treacy

Enbridge May Have Just Touched Off a 'Supermajor' Race for Pipes

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

With Enbridge Inc. planning a $28 billion takeover of Spectra Energy Corp., some investors say the industry’s in store for more deals as pressure mounts on the likes of Enterprise Products Partners LP and Kinder Morgan Inc. to follow suit. The biggest pipeline deal of the year foreshadows a feeding frenzy as those companies that survived the collapse in oil and natural gas prices step up the hunt for bargains. TransCanada Corp. got the ball rolling with the $10.2 billion purchase of Columbia Pipeline Group Inc. earlier in the year.

“We’ve just come through a very tumultuous period,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas. “Being able to survive the trough in the energy cycle, especially one like this last one that was so long, means you have to be bigger, faster, stronger.”

Enbridge’s deal would vault the Calgary-based company into North America’s largest energy pipeline and storage player. It could also mark the beginning of the "supermajor" era for the industry, according to Rebecca Followill, head of research at U.S. Capital Advisors, since it might “light a fire in the bellies” of the larger pipeline players, setting off a wave of consolidation that could accelerate through the end of 2016.

“Enterprise Products Partners is the other big 800-pound gorilla out there,” Toudouze said. “This puts a little more pressure on them to try to do something in the space.”

 

Eoin Treacy's view -

The MLP sector, which is heavily weighted by pipelines, crashed lower with oil prices. The high leverage employed in the business models of pipeline companies was a major contributing factor in this underperformance. However with increased evidence that oil prices have hit medium-term lows, the relative resilience of North American economic growth and continued low interest rates, it is a natural time for companies to think about acquisitions. 



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September 07 2016

Commentary by Eoin Treacy

Bond Traders Pare Fed Wagers as Goldman Reverses September Shift

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

"With slightly softer data and less ‘time on the clock,’ a rate increase this year now looks a bit less certain," Jan Hatzius, chief economist at Goldman, wrote in a note to clients Tuesday. "While this is just one indicator, the surprise was meaningful, and there may have been some Fed officials feeling lukewarm on a September hike to begin with."

The central bank meets Sept. 20-21 after officials have stood pat on rates this year and twice pared projections for the path of increases. San Francisco Fed President John Williams on Tuesday said the U.S. economy is “in good shape and headed in the right direction” without indicating whether he was leaning one way or another regarding a rate increase.

 

Eoin Treacy's view -

With a wall of debt that needs to be either retired or refinanced coming due in the next few years the Fed is understandably cautious about raising rates without robust economic growth to swell government coffers. In fact since monetary easing has not quite achieved the growth rates envisioned by central bankers, the case for fiscal stimulus is growing, regardless of the potential for it to create a bigger problem later. 



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September 07 2016

Commentary by Eoin Treacy

September 06 2016

Commentary by David Fuller

Japan Threat to Cut Investments in the UK Would Hurt but is Unlikely to Come True

Japan’s companies could flee the UK post-Brexit, the country’s government has warned, if Britain is cut off from Europe and the world.

The bold statement does not reflect the public aims of Britain’s leaders nor those of the EU, but Japan’s warning reflects worries over the potential shock to global trade if ties with other nations are severed altogether.

“Japanese businesses with their European headquarters in the UK may decide to transfer their head-office function to continental Europe if EU laws cease to be applicable in the UK after its withdrawal,” the government said in a statement at the G20.

The document handed a list of demands to the UK and EU, warning that tariffs on international trade “could suppress the revenues of businesses” while burdensome red tape on trade between the UK and EU would “increase the costs of logistics operations, which would have a significant impact on business operations”, and that retaining and banking passport is vital.

In plain English, it is a threat of less investment and fewer jobs.

Japan is certainly a major investor in the UK. Almost 1,000 UK firms are owned by Japanese investors, with a combined turnover of £72bn last year and gross value added to the economy of £14.5bn, according to the Office for National Statistics.

Foreign direct investment into the UK from Japan totalled a net £2.2bn in 2014, with the UK receiving half of the country’s investment into the EU, seeing Britain as a gateway to Europe.

The Japanese ambassador estimates 10,000 Japanese firms operate in the UK, employing 140,000 people.

The impact of a wholesale shift away from the UK by any large firm could be significant, particularly when companies focus in one particular region.

Nissan and Hitachi are both big Japanese manufacturers with major operations in the North East of England – Nissan’s car plant in Sunderland employs 6,100 staff, and claims that more than 24,000 jobs are created in the wider supply chain supporting the factory.

David Fuller's view -

This is an informative article, well worth reading.  I hope the headline above is correct, but am concerned that it may be overly optimistic.  Japan will not want to move any of its expensive plant and it already has good, reliable labour in the north of England and elsewhere within the UK. 

However, some EU countries have long hoped that they could attract business away from the UK.  Brexit reopens covetous instincts.  Nevertheless, is the insistence that the UK maintain open borders (an increasingly unrealistic and unpopular policy within the EU) more important than mutually beneficial free two-way trade with the UK?  I don’t think so but more importantly Mrs Merkel still does.  She may also be in the twilight of her political career, apparently determined to tell her public which way to vote rather than listen to their concerns.

Is there a hint of hypocrisy in all this?  See also: Germany braces itself for invasion of Polish workers as it follows EU immigration rules.  Published by The Telegraph in May 2011, you may find it interesting.  My thanks to Eoin for providing it.

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



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September 06 2016

Commentary by David Fuller

Quantum Computers Are Coming. The World Might Not Be Ready.

Quantum mechanics, Carl Sagan once observed, is so strange that "common sense is almost useless in approaching it." Scientists still don't understand exactly why matter behaves as it does at the quantum level. Yet they're getting better at exploiting its peculiar dynamics -- in ways that may soon upend the technology business.

One of the most interesting applications is in computing. In theory, quantum computers could take advantage of odd subatomic interactions to solve certain problems far faster than a conventional machine could. Although a full-scale quantum computer is still years off, scientists have lately made a lot of progress on the materialsdesigns and methods needed to make one.

And that could have some striking benefits. Quantum computers could simulate how atoms and molecules behave, to the great advantage of chemists and drug designers. They could solve optimization problems -- say, how to efficiently route airplane traffic -- far faster than current technology can. They could speed advances in artificial intelligence, improve sensors, and lead to the design of stronger and lighter industrial materials.

Unsurprisingly, then, investment in the field is surging. IBM,Microsoft and Google are all building quantum research labs. Startups are gearing up. Banks are very interested indeed. Governments see applications for space explorationmedical research and intelligence-gathering. America's National Security Agency, in fact, has been quietly trying to build a quantum computer for years, in the hope that it would make an unstoppable code-breaker.

And that suggests a looming problem. To simplify a bit, the cryptographic tools commonly used to protect information online rely on very hard math problems, such as factoring large integers, that normal computers can't solve in a reasonable time frame. Quantum computers, though, could probably make quick work of such equations.

As a result, they could undermine the security of everything from mobile phones to e-commerce to cloud computing. Within two decades, by some estimates, quantum computers may be able to break all public-key encryption now in use. "The impact on the world economy," says the nonprofit Cloud Security Alliance, "could be devastating."

David Fuller's view -

For computer security specialists, this is the equivalent of: ‘… and just when you thought it was safe to go back into the water.’

For instance, quantum computers should have no problem in outsmarting the latest, albeit not fully developed, blockchain security system.  And how will quantum computers hold up against self-programming artificial intelligence?

We live in increasingly interesting times. 

This item continues in the Subscriber’s Area and includes charts.



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September 06 2016

Commentary by David Fuller

Can More Bad Times Be Ahead for EM?

My thanks to Bernard Tan for his ever interesting and original research, illustrated with lots of graphs which you may not have seen.  Here is the opening:

 

It has become increasingly popular to turn bullish on Emerging Markets (EM). I am not a believer.

The biggest EM market is China. But the most important driver of China’s economy, the M2 monetary aggregate, has turned down again.

Already with each passing quarter, the Chinese economy is generating less GDP for every dollar of M2. And now, M2 growth is decelerating sharply.

There’s no big recovery ahead for China. Just more drift and struggle.

Meanwhile after rising relentlessly since 2010, the US inventory to sales ratio for various sectors like retail, wholesale and manufacturing have begun to fall, starting from Apr 2016.

David Fuller's view -

This is further evidence that stock markets are borrowing from the future by floating higher on a cushion of liquidity, which the current economic data and corporate profits do not support.  Stock markets can be lead indicators but if the fundamentals do not catch up reasonably soon, investors will start to wonder if they have run off a cliff.  We can expect more anxious calls for fiscal spending. 

 Bernard Tan’s report is posted in the Subscriber’s Area.



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September 06 2016

Commentary by Eoin Treacy

China's Productivity Growth is the Worst Since the Asia Crisis

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

Labor productivity in the world's second-largest economy increased 6.6 percent last year to $7,318 per person, National Bureau of Statistics and International Labour Organization data show. The level, calculated as average inflation-adjusted gross domestic product per employed person per year, measures the efficiency of workers economy-wide.

China kicked off a big surge in efficiency in the early 2000s after entering the World Trade Organization, implementing aggressive reforms to streamline state corporations and allowing more of a private real estate market. But even after those gains it still lags far behind more productive economies in Europe, Japan and the U.S.

 With a shrinking working-age population already hurting economic growth, China must boost the value created by each worker if it is to join the ranks of the world's wealthy economies.  The hope is that upgraded machinery, services sector advances and a shift up the value chain will help make workers more efficient--and maybe even shorten the  badminton lunches.

 

Eoin Treacy's view -

At over $7000 per person China is squarely in the middle income bracket of global economies. However that figure is distorted by the inequality evident within a population of over 1 billion where extraordinary wealth contrasts with profound poverty in the hinterland. If China is going to march towards continued standard of living improvements then productivity growth will need to continue and that will be contingent on government appetite for economic reform. 



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September 06 2016

Commentary by Eoin Treacy

Rupee Jumps to 4-Month High as Patel Begins Innings as RBI Chief

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

Indian sovereign bonds also advanced on Tuesday. Urjit Patel assumed charge as the Reserve Bank of India’s 24th governor on Sept. 4, succeeding Raghuram Rajan. Patel’s first test will come Oct. 4 -- a scheduled monetary policy review -- where investors will gauge if governorship reduces his traditional reticence.

“An interest-rate increase by the Fed is unlikely,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “Inflows into stocks remain strong and that’s supporting the rupee.”

The rupee climbed 0.5 percent to 66.5250 a dollar at the close in Mumbai, according to prices from local banks compiled by Bloomberg. It rose to 66.49 earlier, the strongest level since May 9. Tuesday’s gain reduced the currency’s 2016 loss to 0.6 percent, Asia’s worst performance after China’s yuan. RBL Bank expects the rupee to appreciate to 66.40 a dollar in the near term should equity flows sustain their momentum, Lasrado said.

“We don’t expect a change in the RBI’s foreign-exchange management under the new leadership,” he said. “They will love to buy dollars at dips and refrain from intervening should the rupee weaken in line with Asian fundamentals.”

 

Eoin Treacy's view -

The RBI engaged in a reserve accumulation policy which put pressure on the Rupee between mid-2014 and early this year when the currency tested its spike lows against the US Dollar. However it has stabilised over the last six months with the 6.5% base rate looking increasingly attractive in an environment where so many government bonds are trading on negative yields. 



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September 06 2016

Commentary by Eoin Treacy

Brent Oil Declines as Saudi-Russia Deal Falls Short of a Freeze

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

"The failure of Russia and Saudi Arabia to take any steps to support the market is sending us lower," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "The Saudi oil minister actually talked the market lower, which is going to cost his country billions." 

Brent rose the most in three weeks on Friday after President Vladimir Putin said he’d like OPEC and Russia to agree to an output freeze, speaking before he traveled to China to meet Saudi Deputy Crown Prince Mohammed bin Salman. Oil had rallied in August on speculation that members of the Organization of Petroleum Exporting Countries and other producers would agree to cap output when they meet informally in Algiers later this month. A similar proposal was derailed in April over Saudi Arabia’s insistence that Iran participate. 

 

Eoin Treacy's view -

Russia, more than most countries, must want to see oil trading at higher prices. It’s by far their most important export and is responsible for funding not only public services but the country’s adventurism in Eastern Europe and The Levant. Saudi Arabia on the other hand has deliberately used oil as a policy tool in its attempt to deprive Iran, against whom it is engaged in open conflict in Syria, Yemen and Iraq, from deriving any advantage from the loosening of sanctions. If Saudi Arabia were to agree to Russia’s terms without a commensurate move from Iran it would be an admittance of failure which would be hard to countenance at this stage. 



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September 05 2016

Commentary by David Fuller

As the EU Undermines Ireland Over Apple and Tax, Britain is in the Right Place to Benefit

Here is part the opening and also the conclusion of this powerful column by Janet Daley for The Telegraph:

We are getting out in the nick of time. The keepers of the European Union’s dying project have gone beyond the denial phase of mourning and are now utterly deranged. A historic bridge was crossed last week when the European Commission, in the person of its competition commissioner Margrethe Vestager, announced that Apple’s tax arrangements with Ireland were illegal and, as a consequence, the company would have to pay £11 billion pounds in back taxes to the Irish government – which it does not want. Indeed, so adamant is the Irish coalition government on this point that it is now appealing against the EU ruling.

And:

Ironically, the great explosion of technological enterprise from which Ireland has hitherto been in a position to benefit will now be quite likely to shop for a new home – and the UK will be a perfect candidate with the same advantages of transatlantic connections and English language that Ireland had. But the kind of bilateral trade deals with us which Ireland, as a small independent economy, might once have enjoyed will not be possible so long as it remains an EU member.

There will be limitless opportunities for an industrious, entrepreneurial country no longer bound by the parochialism of the EU with its obtusely outdated post-war view of economics. An infinitely adaptable tax structure and a frankly competitive approach to encouraging investment – perhaps with a serious cut in corporation tax and a further lowering of National Insurance contributions for start-up businesses – could allow partnerships to be formed with eager, equally adaptable, emerging powers as well as the possibility of instantaneous response to new technologies and markets. If ever there was a moment to throw off hidebound assumptions and ideological restrictions, this is it.

Talk of adopting the Norway (or the Swiss) model is absurdly self-limiting. Our circumstances as a large, variegated and flourishing economy are unique. Without the encumbrance of Brussels protectionism and perverse anti-competitiveness, our new arrangements can be bespoke and endlessly flexible – surely the keys to survival in a globalised economy.

The dream of a European union was seen from the outset as a way of undermining the nation state with its dangerous tendency to evoke febrile nationalism. The war crimes of the 20th century were to be repudiated forever by deconstructing that demonic vision. Almost entirely forgotten has been the lesson of an earlier century: that the concept of self-governing nationhood, with a government accountable to its own people and free to set its own economic goals, was one of the most progressive ideas in human history. 

It may be time for the British to offer a new version of that model which was once their gift to the world.

David Fuller's view -

This column, which I commend to subscribers, shows Janet Daley at her best.  Exceptionally perceptive regarding the EU, she is also well aware of the excitement felt by the 17.5 million who voted for Brexit.  Their ranks are growing by the day as many marginal Remain voters are encouraged by the prospect of a fully independent United Kingdom, leaving the EU much sooner than previously feared, pursuing global interests with a free-market economy, while also maintaining strong but separate alliances with our friends and allies in Europe.

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September 05 2016

Commentary by David Fuller

Summer Holidays Are Over. It is Time to reassess the World Economy

This is the week when the world of work returns to normal. It is often also when economists and financial markets reassess how things are after the summer break. This weekend the leaders of the G20 countries have been making their assessment at a meeting in Hangzhou in China.

How does the world economy look now?

A year ago the markets were in a funk about the Chinese stockmarket and, by extension, the Chinese economy.  I argued at the time that the stockmarket weakness was nothing to write home about and, although the Chinese economy had slowed, this was not extraordinary and would not lead to anything like a hard landing.

A year on, this view now seems to be widely accepted. The Chinese stockmarket is roughly flat over the past year, and it looks as though the Chinese economy has grown by 7pc according to the official data, and in reality by perhaps 4.5pc.

Of course, China is not going to be able to grow at the rate it managed a few years ago, but something like 5pc to 6pc is eminently achievable.  Moreover, given the scope for effective policy action if the growth of aggregate demand falters, something like these rates of growth should be realised.

In Japan it looks as though Shinzo Abe’s ambitious plans to raise the country out of its torpor are not succeeding. Japan will probably grow by only about 0.5pc this year.  Mind you, because of a contracting workforce, this is probably about all the economy is now capable of. Admittedly, this is poor, but the world has had to get used to weak Japanese growth for many years.

Meanwhile, most of the rest of Asia has recently experienced an acceleration in growth.  More importantly, worries about the fragility of the US economy have not been vindicated. It will probably grow by about 2pc this year, and employment is still increasing at a decent, although unspectacular, pace, as confirmed by the jobs figures on Friday.

 Interest rates are likely to rise soon, perhaps even later this month, although more probably in December. But the pace of increases over the next two years is likely to be moderate. For much of the past year the markets have also been concerned about the global effects of low oil prices.

This seemed paradoxical, because previously low oil prices were thought to be a good thing for the economy, and for a number of countries they have indeed been good this time round. But the markets were worried about the adverse effects of low oil prices on oil producers, including in the United States and, of course, on a large number of countries whose prosperity is heavily dependent upon oil.

In recent months, however, these worries have been, to some extent, allayed. The oil price is off the bottom and seems to have stabilised at about $50 a barrel. Meanwhile, there are signs of stabilisation, if not quite improvement, in some of the countries that the markets have been worried about, particularly Russia.

To my mind, the biggest source of legitimate concern is the eurozone. By its own low standards, recent economic performance in the zone has actually not been bad. Over the past year, the eurozone as a whole has grown by about 1.5pc. Even the Italian economy has managed to perk up a bit.

David Fuller's view -

The global economic news has been a little better than widely feared earlier this year.  Liquidity from QE remains abundant; interest rates are near record lows; everybody says bonds are in a bubble phase, including me.  They are; in fact, how could they not be?  However, the Merrill Lynch Treasury 10-Yr Future Total Return Index remains in an orderly uptrend, so the bubble has yet to burst. 

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September 05 2016

Commentary by David Fuller

Britain Can Leave EU and Still Thrive, Says Stiglitz

Here is a latter section of this interview from The Telegraph:

Stiglitz, a one time adviser to the Scottish government on independence and briefly a member of Jeremy Corbyn’s now disbanded economic advisory panel, has been in the UK to promote his new book, The Euro, and its Threat to the Future of Europe.

In it he argues that the root cause of Europe’s political and social ills lies in the creation of the euro, which rather than driving convergence among nations as intended has resulted in politically and economically destabilising divergence.

“The Brexit referendum was a shock”, he concludes.

“My hope is that the shock will set off waves on both sides of the Channel that will lead to a new, reformed European Union.”

Europeans were finally waking up to the idea that there is not going to be a euro without a crisis on the doorstep”, he told the Telegraph, “and that’s a gloomy prospect” likely to drive “a political backlash against the establishment standing behind the euro.”

However, the euro is not the only thing that has gone wrong in the European Union, Stiglitz argues.

“There were other mistakes. It is fairly clear that the EU has imposed more regulatory harmonisation than is necessary, and that this excessive enthusiasm for regulatory harmonisation is one of the things that has gotten the EU into trouble with the British”.

David Fuller's view -

Joseph Stiglitz is saying what most people in the UK who have been following EU developments over the years already know.  However, perhaps the international reputation of this Nobel Prize winning economist will open some political eyes from the USA to Japan, where people have been seeing what they want to see.  The EU is a political and economic train wreck, as its own long-suffering citizens know better than anyone else.    

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September 05 2016

Commentary by David Fuller

Email of the day

On Joseph Stiglitz:

Dear David and Eoin. 

I guess you saw this article. 
http://www.telegraph.co.uk/business/2016/09/04/britain-can-leave-eu-and-still-thrive-says-stiglitz/

Joseph Stiglitz makes some good points. He says:
"There are two scenarios. If Europe adopts the Juncker approach, which is to say we’ll cut off our nose to spite our face and punish Britain for leaving, then that’s not so good."

“But it really wouldn’t be in Europe’s interests to do this. The US is actively engaged in Europe, in manufacturing, services and finance, and our trading relationship with Canada, where we have a free trade agreement, but no single market and no free movement, works well, actually really well, for Canada.

“So you should be no worse off than Canada is with the United States. I find it quite hard to believe that you [Britain] would be treated worse by Europe than the US or Canada, or Canada is by the US. This would be hard to justify”.

David Fuller's view -

Thank you for your email, plus the article link and quotes.  Yes, I did see it because I read The Telegraph before anything else.  I had posted the article in my copy above, along with my own brief comments. 

I think Junker has been marginalised because there is no appetite right now for ever ‘more Europe’ within the EU.  However, plenty of EU politicians are understandably, disappointed, frustrated and angry about the economic and political morass in which they find themselves.  A few of them are lashing out although Brexit is a symptom rather than the problem.  Privately, my guess is that the UK is admired more than disliked for leaving the EU. 

 



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September 05 2016

Commentary by David Fuller

September 02 2016

Commentary by David Fuller

AEP: Dollar Hegemony Endures as Share of Global transactions Keeps Rising

The US dollar is tightening its grip on the global financial system at the expense of the euro, entrenching American hegemony and rendering the US Federal Reserve more powerful than at any time in history.

Newly-released data from the Bank for International Settlements (BIS) show that the dollar’s share of the $5.1 trillion in foreign exchange trades each day has continued rising to 87.6pc of all transactions.

It is the latest evidence confirming the extraordinary resilience of the dollar-based international order, confounding expectations of US financial decline a decade ago.

Roughly 60pc of the global economy is either in the dollar zone or closely tied to it through currency pegs or ‘dirty floats’, and the level of debt issued in dollars outside US jurisdiction has soared to $9 trillion.

This has profound implications for monetary policy. The Fed has become the world’s central bank whether it likes it or not, setting borrowing costs for much of the global system.

The BIS data shows that the volume of transactions in which the euro was on one side of the trade has slipped to 31.3pc from 37pc in 2007. The dollar share has ratcheted up to 87.6pc over the same period.

It is much the same picture for the foreign exchange reserves of central banks, a good barometer of global trust. The dollar share has recovered to 63.6pc, roughly where it was a decade ago.

The euro share has tumbled over the last eight years from 28pc to 20.4pc, and is barely above Deutsche Mark share in the early 1990s.

 “There are no foreseeable rivals to the dollar as a viable reserve currency,” said Eswar Prasad from Cornell University, author of “The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance”.

“The US is hard to beat. The US has deep financial markets, a powerful central bank and legal framework the rest of the world has a great deal of trust in,” he said.

The eurozone is crippled by the lack of a unified EU treasury, joint bond issuance, and a genuine banking union to back up the currency. It would require a change in the German constitution to open the way for fiscal union, an unthinkable prospect in the current political climate.

David Fuller's view -

There is much to ponder in the section above and also in the remainder of this column, which I commend to subscribers.  While the article is mostly about Dollar hegemony, which will certainly increase over the next few years, part of the flip side is the unravelling of the eurozone which is now underway. 

A surprisingly large proportion of geopolitical commentators and politicians do not recognise or understand this, partly because they want and even need to believe in the eurozone.  They include plenty of intelligent people in the USA.  Knowing that two World Wars in the first half of the last century started in Europe, they have long viewed post-WW2 reconciliation by European nations as a ‘noble experiment’, and they would be alarmed by its failure.  

Arguably, it was a noble experiment, at least until the Maastricht Treaty of 1993, which I commented on yesterday.  However, governance is everything, as this service never tires of saying.  I am convinced that future historians will cite the EU as a textbook example of how not to create a large, successful federation consisting of a number of states.  The first and widely predicted blunder was the conversion to a single currency before a fiscal union has been established, assuming this could have occurred, which I doubt.  Currently, it would require a change in the German constitution to salvage the eurozone, an all but unthinkable development given present circumstances, as the article above points out.

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September 02 2016

Commentary by David Fuller

It Is Time to Repeal the New EU Corn Laws

Every so often, one single number can change an entire political conversation. So here, dear reader, is my candidate for this weekend’s game-changing fact, which reveals why it is desperately important that Brexit be used to negotiate a much better deal for British shoppers.

On average, prices paid by EU consumers are 6pc higher than the prevailing world price; in many cases, prices are much higher than average, with EU consumers paying 31pc more for beef and veal, for example; two hugely important products.

It’s the real and entirely unacceptable cost of living in the EU; a far greater problem than the membership fee that richer countries must pay to Brussels

The reason for such rip-off prices? Europe’s protectionism, though lack of competition doesn’t help either (and is related to barriers to trade with the rest of the world). As ever, it is the poor who are hit the hardest: they spend a higher share of their income on essential products such as food.

The figures, from the OECD, were unearthed by Andrew Tyrie, the Tory MP, who has just written an interesting report on Brexit published by Open Europe. I disagree with some of Tyrie’s broader arguments, but his paper is well worth reading.

My point is this: there are, of course, costs as well as benefits to Brexit. The Government’s great, historic task is to maximise the upside while minimising the downsides. To deliver the best possible solution, it will be key to tackle the absurdity of consumers having to pay such elevated prices, and push through policies that bring these down to global, free-market levels as soon as possible.

A 6pc drop in prices would represent an immense gain in welfare terms: it is one of the great pots of gold at the end of the Brexit rainbow, with the added benefit of truly existing. There are many other gains to be had, but lower prices are the most immediately tangible benefit.

David Fuller's view -

I agree, and the benefits of Brexit should not be postponed by years of tortuous negotiations.  The best course, in my opinion, is to invoke Article 50, leave with minimal or even no negotiations, and very closely thereafter, simply declare unilateral free-trade.  The UK would save a considerable amount of money and hassle by doing this.  Thereafter, using our membership of the World Trade Organisation, we would find Germany and many other EU countries all too happy to recommence trade agreements with Britain.  

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September 02 2016

Commentary by David Fuller

Email of the day

On selecting dividend stocks

Firstly thank-you for the excellent service you have provided over the years. I am wondering at these somewhat turbulent times as to what proportion of "dividend stocks" one would be advised to include in one’s investment portfolio. Would it be possible to comment on whether or not these should be weighted in terms of denomination of currency or if of an international trading base, preferred region of trading? I have looked through the chart library and found it quite difficult to identify individual aristocratic dividend stocks.

David Fuller's view -

Thank you for your thoughtful comments and topical question of general interest.

First, I would go to the Chart Library ‘Selections’ in the grey bar above lists and charts, and click on ‘International Equity Library’.  At the top of the left-hand column, you will see ‘Autonomies’ – a list of over 180 large, leading multinational companies, approximately half of which are headquartered in the USA.  Most of these pay dividends.  Immediately below Autonomies, you will see ‘Dividend Aristocrats’, which has a number of sub-sections.  Personally, I would not look any further if you are seeking a diversified, international portfolio of sector leaders and also dividend aristocrats, so called because they have raised dividends every year for a specified number of years. 

The next point I would consider is timing.   

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September 02 2016

Commentary by David Fuller

Clive Hale: Market Commentary

My thanks to the experienced author for his Albemarle Market Commentary: September 2016. Here is the opening, which starts with a Bill Gross quote:

"I and others, have, for several years now, suggested that the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models – those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost “commonsensically”, cannot function well at the zero bound or with a minus sign as a yield." Bill Gross – Janus Capital Group

Not always the most consistent of commentators, but there is no denying that his latest epistle carries more than a hint of truth. Markets are broken and trying to divine an investment strategy is more akin to going through the card at Newmarket; the odds at the race course will be a lot fairer than the ones currently on offer in bond world. Savers in search of income are being forced into areas which from a risk perspective they wouldn’t normally touch; high yield bonds, emerging market debt, equities and property all of which stand close to all-time highs and are seriously “expensive”, beset with liquidity issues or provide little or no downside cushion.

Worse still, the pensions industry still clings to heroic assumptions about growth rates in all manner of markets. Underfunding has been an issue for many a year but if realistic growth rates were factored in the shortfall would be catastrophic for insurance companies and pension fund trustees alike. In the US the American Academy of Actuaries and the Society of Actuaries has scrapped its long time joint Pension Task Force and banned the dissemination of its paper highlighting this dilemma, under threat of legal action against would be transgressors. As one pensions expert put it, “an inferno in the making, but without the benefit of Dante’s poetry.”

David Fuller's view -

What follows from Clive Hale is a sensible review of global asset classes which subscribers may find refreshing and helpful for the perspective it provides. 

I will address the opening quote with my further thoughts on this report.  It was the mild mannered academic Ben Bernanke who first introduced QE in our era.  For a refresher on this subject, it is worth re-reading the FT’s article: US Federal Reserve: The Bernanke years, published on December 15, 2013. 

Bernanke was appointed to lead the Fed in 2005, because he was an expert on the Great Depression and had promised to never allow another one to occur.  As fate would have it, he was soon challenged in 2008 when US banks could have caused a depression with their ‘liar loans’, leveraged many times by some firms. 

Bernanke’s series of QE programmes over several years were intended to lift the stock market sufficiently to boost confidence, preventing a depression mentality from persisting and cushioning the economy.  Bernanke succeeded in achieving this, although he was widely criticised by many financial commentators for ‘stoking future inflation’, which has yet to appear because of all the deleveraging which followed 2008.

Critics also said that by preventing a much sharper but probably shorter economic collapse, Bernanke had prevented the economy’s self-clearing mechanism from occurring (a euphemism for crash and burn) which in agricultural terms is soon followed by green shoots of recovery.  I disagreed, having heard from my parents about the Great Depression and also having seen how my mother never really got over that experience.  However, we will never really know how a supposedly benign neglect approach would have played out over the years following 2008. 

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September 02 2016

Commentary by Eoin Treacy

The Credit Strategist

Thanks to a subscriber for receiving permission to post this edition of Michael Lewitt’s ever interesting report. Here is a section on junk bonds:

Junk bonds may be rallying but it has little to do with corporate credit quality, which keeps deteriorating. As of the end of August, 113 companies had defaulted on their debt in 2016, already matching the total number of defaults from 2015. The year-to-date default count was also 57% higher than a year earlier. In case anyone is paying attention (it appears they are not), the last time defaults were this high was in 2009 when 208 companies failed during the financial crisis. Standard & Poor’s is now projecting that the annual default rate will hit 5.6% by June 2017 with 99 junk-rated companies expected to default in the 12 months ending June 2017. That would significantly exceed the 79 U.S. companies that defaulted in the previous 12-month period ending June 2016, which resulted in a 4.3% default rate. While low oil prices are a major contributor to this ugliness, energy companies only accounted for 57% of the defaults in the 12 month period ending in June 2016. That means that there is plenty of distress to go around

Even more disturbing is the fact that defaults are rising rapidly while many leveraged companies continue to enjoy low borrowing costs courtesy of the Federal Reserve. If interest rates were remotely normalized, the default rate would already be well above 5% and heading to the high single digits. None of this appears to bother investors, who are chasing yield in the rare places they can find it, which is always in all the wrong places. As a result, the normal spread-widening that occurs when defaults spike is not occurring, which is a very unhealthy phenomenon because it signals high levels of risk-taking and complacency on the part of investors. 

The history of the modern junk bond market teaches that most returns are earned in compressed periods after the market suffers a sharp sell-off. The rest of the time, investors are pushing water uphill as they invest in securities that offer poor-to-mediocre risk-adjusted returns until the point when the bottom falls out and they suffer catastrophic losses. There is good reason why very few credit hedge funds or other large investors made any money in junk since mid-2014, when the market began a sharp sell-off that coincided with the slide in oil prices and the slowdown in China. This sell-off ended early this year when the market began to rally based on the realization that the Federal Reserve lacks the intellectual capacity to understand the consequences of its own policies or the moral courage to change them. But investors are chasing zombies because numerous companies are not generating enough cash flow to reduce their debts or repay them when they mature. Instead, they are just living on fumes and waiting for the day of reckoning when their debt matures and they can’t pay it back. More of them will hit the wall when their debt comes due and they can’t refinance it at a reasonable interest rate because they are financially infirm. Standard & Poor’s is telling us that more of these companies are heading to the boneyard. Investors should be selling rather than buying this risk.

Eoin Treacy's view -

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

I don’t think there is any argument that central bank measures to inflate asset prices through, previously unimaginably, low interest rates and outright purchases of bonds have had a distorting effect on asset prices. In fact that was the whole purpose of the policies in the first place. After-all quantitative easing was conceived to avoid an even more calamitous crash and succeeded on many fronts.  The problem is that we are now more than seven years into an era of extraordinary monetary policy and the self-sustaining robust growth that could upend dire warnings of overvaluations has been slow to appear. In fact because much of the G7 is contending with weak growth the extent of the dislocation in valuing bonds has increased. 



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September 02 2016

Commentary by Eoin Treacy

Mosquitoes Are Deadly, So Why Not Kill Them All?

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

Aedes aegypti is high on the hit list of more scientists now that Zika has spread from Brazil to Miami , spawning an epidemic that has left hundreds of babies with devastating birth defects.
The same type of mosquito caused dengue to proliferate from Southeast Asia through tropical regions world-wide during the last quarter of the 20th century. The dengue virus infects an estimated 390 million people a year, killing thousands of them.

Aedes aegypti also is a carrier of chikungunya, a crippling disease that causes lasting joint pain, and yellow fever. In southern Africa, officials are struggling to contain a large outbreak of yellow fever, which can lead to fatal liver disease.

“Aedes aegypti is literally probably the most dangerous animal in the world,” says Omar Akbari, a molecular biologist and assistant professor of entomology at the University of California, Riverside. His conclusion is based on the number of infections to which the mosquito is linked.

 

Eoin Treacy's view -

Commerce and shipping ensured the Aedes aegypti followed humans from its roots in Africa to just about every warm wet climate region in the world. The fact mosquitoes proliferate most aggressively where people are least equipped to combat the threat they pose testifies to the fact economic growth is the most effective way of dealing with the many problems facing humanity. Gene editing, bacterial infection and radiation treatment all have a role to play in combating the significant health threat posed by mosquitoes. 



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September 02 2016

Commentary by Eoin Treacy

Solid Hiring Without Wage Jump Tests Fed Hopes for Inflation

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

The August employment report released Friday will sharpen the debate. The figures showed a monthly net gain of 151,000 jobs, an unemployment rate holding at 4.9 percent and a slowdown in wage growth. There’s ammunition in the latest data for officials who want to delay a rate increase as they look for signs of continued tightening in the job market. A critical component in Fed officials’ forecast is a rise in wages that boosts demand and drives prices higher.

“Nobody understands the inflation process, including the Fed,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “When we are near full employment, why has inflation been so incredibly well-behaved?”

After the report, traders trimmed their bets on a rate hike at the Sept. 20-21 FOMC meeting to a roughly 14 percent chance, according to federal funds futures contracts.

The mystery of weak wage growth is troubling, for the short run and the longer-term. If Yellen and the FOMC majority are wrong, inflation could remain stuck below their target, setting the economy up for lower rates of inflation in the next downturn.

 

Eoin Treacy's view -

Wages are one of the most important figures to watch to decipher what the direction of Fed policy is likely to be because it cannot simply be headoniced out of the data. For example unemployment is a factor both of how many people are unemployed but also how many are looking for jobs. Lower participation rates flatter unemployment. You can’t do that with wages and because wage demands rise when workers feel they need more money to meet their liabilities they act as a barometer for inflation. 



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September 02 2016

Commentary by Eoin Treacy

September 01 2016

Commentary by David Fuller

Apple Travesty is a Reminder Why Britain Must Leave the Lawless EU

Europe's Competition Directorate commands the shock troops of the EU power structure. Ensconced in its fortress at Place Madou, it can dispatch swat teams on corporate dawn raids across Europe without a search warrant. 

It operates outside the normal judicial control that we take for granted in a developed democracy. The US Justice Department could never dream of acting in such a fashion.

Known as 'DG Comp', it acts as judge, jury, and executioner, and can in effect impose fines large enough to constitute criminal sanctions, but without the due process protection of criminal law. It misused evidence so badly in pursuit of the US chipmaker Intel that the company alleged a violation of human rights.

Apple is just the latest of the great US digital companies to face this Star Chamber. It has vowed to appeal the monster €13bn fine handed down from Brussels this week for violation of EU state aid rules, but the only recourse is the European Court of Justice. This is usually a forlorn ritual. The ECJ is a political body, the enforcer of the EU's teleological doctrines. It ratifies executive power.  

We can mostly agree that Apple, Google, Starbucks, and others have gamed the international system, finding legal loopholes to whittle down their tax liabilities and enrich shareholders at the expense of society. It is such moral conduct that has driven wealth inequality to alarming levels, and provoked a potent backlash against globalisation.

But the 'Double Irish' or the 'Dutch Sandwich' and other such tax avoidance schemes are being phased out systematically by the G20 and by a series of tightening rules from the Organisation for Economic Co-operation and Development (OECD). The global machinery of "profit shifting" will face a new regime by 2018.

We can agree too that Apple's cosy EU arrangements should never have been permitted. It paid the standard 12.5pc corporate tax on its Irish earnings - and is the country biggest taxpayers - but the Commission alleges that its effective rate of tax on broader earnings in 2014 was 0.005pc, achieved by shuffling profits into a special 'stateless company' with its headquarters in Ireland. 

"The profits did not have any factual or economic justification. The “head office” had no employees, no premises and no real activities," said Margrethe Vestager, the EU competition chief.

This may be true but that does not empower the Commission to act arbitrarily, retroactively, and beyond the rule of law. What is really going on - as often in EU affairs - is a complex political attack on multiple fronts. It is a reminder of why Britain must remove itself entirely and forever from the clutches of this Caesaropapist construction.

Apple's chief executive, Tim Cook, has a €13bn axe to grind, but he is almost certainly right in arguing that Mrs Vestager is making up state aid rules as she goes along, and has yet to produce evidence that Dublin granted Apple a sweetheart deal on taxes. "This claim has no basis in fact or in law," he said.

"The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe," he said.

David Fuller's view -

The EU’s contempt for democracy among its unelected officials and even its elected politicians has long been obvious to anyone paying attention.  The horrendous precedent for today’s flailing and foundering EU was the Maastricht Treaty in 1992, which I last mentioned in yesterday’s lead article.  This project led by Helmut Kohl and François Mitterrand, basically scrapped the successful European Economic Community (EEC) and the European Free Trade Association (EFTA).  They were replaced by the European Union (EU), which the German and French leaders largely controlled. 

This remains the case today – Germany and France are the inner core of EU power, although it is clearly not an equal weighting in terms of economic influence.  Little countries such as Ireland have minimal influence within the EU.  This is why it has been smacked down by Europe’s Competition Directorate for the entrepreneurial audacity of its tax haven policies towards Apple and other US Autonomies.    

The USA is obviously not pleased by the prospect of losing potential tax revenue from American companies, should the EU charges prove successful.  The USA’s most effective bargaining chip is its funding for NATO.  I suspect that Putin is smiling in the Kremlin.    

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September 01 2016

Commentary by David Fuller

A New Low Tax Economy Can Both Liberate US and be Socially Just

We should all be grateful to Brussels for showing us, yet again, why we are right to be leaving the European Union, an entity now irrevocably set on a course of long-term decline.

There have always been two tendencies at work in the EU: one pro-competition, pro-market and pro-individual freedom; the other collectivist, centralising and madly interventionist. The latter faction won, spectacularly so.

The EU’s proposed trade deal with America is dead, demolishing the argument that remaining in the EU would have been the best way for Britain to deliver global free trade; and now the European Commission is waging war on tax competition. Forget about the technicalities of the Commission’s allegations against Apple and Ireland: the intent is to preserve the high-tax, high-spending social democratic model, and that means crushing those smaller, weaker nations with the temerity to seek to make themselves more attractive to potential job-creators.

As the EU shrinks after Brexit and globalisation proceeds apace, this is the economic equivalent of a new Maginot line, a doomed attempt at bucking international competition.

But its ineffectiveness at propping up a discredited model ought to be the least of Europe’s worries. By retroactively changing the rules, it has introduced immense uncertainty into corporate decision-making, and not just for American firms. Many other investors are realising they could be next, they too could suddenly be landed with an entirely unpredictable, postdated tax bill. Contracts between companies and nations are being reopened; promises torn up, not by those who made them but by an unelected, unstoppable bureaucracy.

Inevitably, Brexit implies temporary uncertainty, rattling the nerves of many big firms (consumers, by contrast, are pretty upbeat). The good news for UK Plc is that what little fleeting advantage the EU had gained as a result has now vanished. If Britain gets its act together, our kind of uncertainty – rebooting our society, politics and economics – will soon be seen as the good sort, while Europe’s will be understood as purely negative. How many City firms would, under such circumstances, still mull relocating anything more than a trivial number of their staff to Ireland or Luxembourg? At some point, the penny will also drop that France, Italy and Spain all exhibit high and rising geopolitical risk.

David Fuller's view -

Remember David Cameron?  He held the Brexit referendum at an early date – June 23rd, because he feared the EU’s refugee crisis would worsen over the summer.  That was not a difficult forecast and he was right.  Moreover, I cannot think of anything that has happened in the EU since June 23rd which would not have hurt the Remain cause.  Most significantly, the EU’s retroactive tax on Apple this week will hurt Ireland far more than the successful company currently run by Tim Cook.  If the referendum had been scheduled for tomorrow or anytime thereafter, I think the Leave majority would have been significantly larger.  

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



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September 01 2016

Commentary by David Fuller

September 01 2016

Commentary by Eoin Treacy

September 01 2016

Commentary by Eoin Treacy

Zinc, Lead, Tin Reach Highest Since 2015 on China Factory Data

This article by Joe Deaux and Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

Zinc, lead and tin climbed to the highest in more than a year after China’s official factory gauge unexpectedly rose last month, signaling improved demand from the world’s top metal user.

The manufacturing purchasing managers index rose to 50.4 in August, near a two-year high, the statistics bureau said Thursday, up from July’s 49.9 and compared with the 49.8 median estimate of economists surveyed by Bloomberg. The pickup strengthens the case that China’s economic stabilization remains intact even as credit growth slows and the central bank refrains from cutting interest rates. Copper was little changed in New York as traders assessed the prospect of strikes at two mines in Chile, the biggest copper-producing nation.

“Metals largely post gains as elements of Chinese manufacturing data display some improvement,” Michael Turek, the head of base metals at BGC Partners Inc. in New York, said in an e-mail. “Continuing Chilean labor unrest could become more pertinent for copper.”

 

Eoin Treacy's view -

Positive factory output figures from China represent a welcome development for the industrial resources sector which has been plagued by fears that the Chinese economy is in serious decline. Perhaps better economic data is a reflection of the fact that continued government support in the form of loose monetary and fiscal stimulus are having the desired effect on demand. 
 

 



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September 01 2016

Commentary by Eoin Treacy

IBM's Watson supercomputer creates a movie trailer

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

But perhaps the most beguiling, and subversive, aspect of Watson's trailer was how much it de-emphasised the monstrous nature of the human/nanotech hybrid. The irony of this entire project is that we have a film where a form of AI turns violent and kills humans, but the AI tasked with making the film's trailer ends up playing down that entire facet of the narrative.

Aside from being a fun experiment in computer-generated creativity, this project also proposes a speedy alternative to a generally costly and time-consuming process. The construction of a film trailer is usually an intensive practice taking several weeks to produce, but this trailer took only 24 hours to construct, from Watson "watching" the film to a human editor delivering the final product.

Making a good film trailer is a delicate balance between art and commerce. If anything this experiment still goes to show that a strong human hand is necessary even when producing what many would determine to be a disposable advertisement. Still, I wouldn't mind getting Watson's perspective on a few sci-fi films that vilify artificial intelligence. Maybe there is a Terminator trailer on the cards that sympathizes with Skynet or a view on 2001: A Space Odyssey where HAL 9000 is the film's hero?

 

Eoin Treacy's view -

IBM is in the midst of redeploying its knowhow from a company that delivered hardware to one almost entirely focused on software/computing as a service and Watson represents a big part of that. Meanwhile IBM is also advancing the development of quantum computers where it already has a 5-qubit prototype that it hopes to offer third party access too shortly. 



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August 31 2016

Commentary by David Fuller

Brexit Britain Could Be New Sweetheart After EU-US Relations Soured by Apple Tax Ruling

My thanks to a subscriber for this informative article by Lynsey Barber for City A.M.  Here is the opening:

Souring relations between the US and Europe in the wake of the EU competition watchdog ordering Apple to pay a record multi-billion pound tax bill could hand the UK a post-Brexit boost.

Britain could be the big winner from the tax feud between Europe and the US after the EU competition commission ruled Apple should pay a record €13bn in back taxes.

It could position itself as a more attractive destination in the region than Ireland, the Netherlands and Luxembourg, where the majority of the biggest US tech companies are headquartered, away from the growing stranglehold of state aid laws and EU Commission, which Ireland accused of trying to influence tax policy.

Apple slammed the ruling by competition commissioner Margrethe Vestager after a two year investigation which concluded it paid an effective tax rate of less than one per cent in 2014, amounting to state aid and compelling Ireland to collect a decade’s worth of back taxes. Both Apple and Ireland will appeal the decision, a process which is expected to take several years to make its way through the courts.

Apple finance chief Luca Maestri called the ruling "devastating" for the European economy while chief executive Tim Cook essentially accused the commission of moving the goal posts.

"Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed," he said, adding that it remained committed investing in Ireland.

The US Treasury said the ruling would "undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the US and the EU" after last week warning the commission of the “chilling effect” it was likely to cause to investment.

Apple is also among a group of top Silicon Valley firms to have warned the Netherlands that changes to its tax regime would risk foreign investment and jobs.

ETX Capital analyst Neil Wilson said: “This is building into a tussle between the EC and US companies, but it’s also a turf war between US and European regulators. For Apple and others like it, this could be a watershed. Caught between an aggressive EC and the Obama regime’s clampdown on tax inversions, it’s looking increasingly tough for multinationals to avoid paying the going tax rate.

“Britain could benefit. If Ireland cannot offer sweetheart deals within the EU, the City of London can perhaps offer something more appealing outside the bloc.”

David Fuller's view -

“Those whom the gods wish to destroy they first make mad.”  When historians rake over the ashes of the EU, they will marvel over the absence of good governance.  How could it have happened when there was so much goodwill among the world’s democracies for this historically interesting and cultivated region but too often a war-torn continent? 

Actually, it started well with the European Economic Community (EEC) created by the Treaty of Rome in 1957.  The EEC’s initial aim was economic integration among the six founding members: Belgium, France, Italy, Luxembourg, the Netherlands and West Germany.   Three years later the European Free Trade Association (EFTA) was formed in 1960, consisting of Iceland, Liechtenstein, Norway and Switzerland.  

The two links above will provide further details but the EEC and EFTA worked rather well, leading to an enlargement in 1973 when Denmark, Ireland, the United Kingdom.  Then Greece, Spain and Portugal joined in the 1980s. 

Arguably, these sensible economic arrangements became problematical with the Maastricht Treaty in 1992.  Its main architects were Helmut Kohl and François Mitterrand, creating a much closer political alliance called the European Union (EU).  The Euro was introduced in 2002.      

This was a triumph of political ambition over economic common sense.  There was certainly no groundswell of public opinion in favour of a Federal Europe, consisting of widely diverse cultures.  Consequently, democracy was compromised in the push for ‘more Europe’, meaning a single European state.  However the tragic mistake, which many people with economic backgrounds realised, was to introduce the single currency way before there was any realistic prospect of, let alone agreement for a Federal European state. 

The consequences have been apparent for years – a moribund economic performance within the Eurozone, compounded by largely socialist policies, leading to tragically high unemployment in the EU’s Southern regions, increasing political tensions within many of the EU states, and an unelected and increasingly powerful European Commission which in this latest instance has retrospectively trampled over what used to be the sovereign rights of Ireland.  It has also created a row with the US government, angered Apple and no doubt some other American Autonomies.  The EU’s Federalist train is derailed. 

Returning to the article above, I would encourage PM May to have all of the government’s departments ready with clear plans for post-Brexit action.  In fact, this is what she is probably doing.  There is no need to follow the EU’s untested script, which is just a web of details requiring endless ratifications, as a means of deterring countries from leaving.  It worked with poor, demoralised Greece but the UK is another matter. 

Once PM May thinks her government is ready, I assume she will declare Article 50, hopefully in January 2017 at the latest.  Article 50 means that the country would then have two years to negotiate, but why should it take that long?  The UK requires full-Brexit to regain its sovereignty.  There is nothing to negotiate; we are leaving the EU lock, stock and barrel. 

(See also: The Apple fiasco shows why corporation tax is an outdated anachronism, by Allister Heath of The Telegraph)



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August 31 2016

Commentary by David Fuller

We Should Seize the Benefits of Brexit Sooner Rather Than Later

The new trade department has exciting scope for free-trade agreements. For 43 years trade has been the ''exclusive competence’’ of the EU. During the referendum we were told that no one would want to do deals. But countries are queuing up.

The most worthwhile agreements are with fast-growing emerging economies that have high tariffs. As long as we remain in the EU there is no chance of deals with the two biggest countries – India ended talks with the EU in frustration at 28 member states demanding exclusions and China will not accept the EU’s political conditions for talks. But China has a deal with Switzerland, and India is negotiating one. Both would be keener still for one with us. Deals involving 28 countries take forever but bilateral trade deals typically take less than two years. And we can ensure they cover crucial UK industries such as services, which many EU deals exclude.

And:

Every week that we delay Brexit costs the British taxpayer nearly £200 million in membership fees. So both the Treasury and Health (which will have first call on extra spending) should be pushing for a speedy exit.

Although we will still be able to recruit EU nurses if we wish, leaving should be a stimulus to the NHS and our universities to expand training. At present we turn away up to three quarters of British applicants for nursing courses.

The new Department for Business, Energy and Industrial Strategy will want to incorporate all EU law and regulations into UK law to give business certainty and enable it to prune, amend and replace items which are unnecessarily burdensome. Assuming the UK retains the Climate Change Act commitment to reduce emissions by 80 per cent it will be able to reduce the cost of doing so by scrapping EU renewable targets.

David Fuller's view -

Full-Brexit will be the most promising step the UK has taken in decades.  Mrs May’s government will lower taxes to confirm to the world that we are open for business and the most entrepreneurial economy in Europe, with the world’s leading international financial centre. 

What about our current trade partners in the EU?  In the days immediately following full-Brexit we should not be surprised if Germany and our other trade partners within the EU signal that they remain open for business. 

(See also: May Spells Out Immigration Limits as the First Brexit Red Line, reported by Bloomberg)



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August 31 2016

Commentary by David Fuller

This Is Your Company on Blockchain

You don’t have to be an expert on digital currencies like bitcoin to be intrigued by the potential of the technology underlying them.Blockchain, as it’s called, is something new in computing. It mashes up cryptography and peer-to-peer networking to create what amounts to a shared database of transactions and other information—which can be open to all, controlled by no one. It’s not just for securely recording payments in crypto-coinage; a blockchain can handle complex transactions, even entire contracts. True believers say blockchain could reduce the need for businesses to organize as companies, which get work done via command and control. Using blockchain, they say, collaborators will be able to work together as free agents instead of under a hierarchy of bosses.

“Imagine for a moment if people could coordinate themselves in a much more organic and distributed manner, just like ants. But without giving up on the complexity and the free will that is characteristic of human societies. We can do that,” blockchain researcher Primavera De Filippi said in a TEDxCambridge talk last year.

The poetic vision of a blockchain society is a flock of starlings at dusk: decentralized yet perfectly coordinated. Blockchainers like to show video clips of murmurations—those enormous clouds of birds that pivot and wheel, climb and dive, split and merge with amazing grace. Blockchain, in this vision, could replace gobs of bankers, accountants, and lawyers, as well as escrow accounts, insurance, and everything else that society invented pre-21st century to verify payments and the performance of contracts.

David Fuller's view -

That last sentence hooked me.  While still a work in progress, Blockchain has the potential to be far more efficient and reliable than any system previously invented.   



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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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