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December 16 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally.  Since timing is everything, here are two trends which are just beginning to signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



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December 16 2016

Commentary by Eoin Treacy

December 16 2016

Commentary by Eoin Treacy

Asian Markets 2017

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

We are positive on Indonesia in the regional context. We continue to regard Indonesia as one of the prominent structural growth stories in the region and the recent equity market correction is a good buying opportunity. The combination of a tax amnesty, a build out of much-needed infrastructure and the roll-out of a healthcare scheme should support growth going into the New Year. With regards to the tax amnesty programme and repatriation, approximately 29% of funds have been repatriated to Indonesia by the end of November, implying that more is to come 

These repatriated funds will be put to work in 2017, allowing for funding of government infrastructure projects. Looking ahead, the equity market’s performance may hinge on a stronger earnings outlook and continuation of the positive earnings revision ratio trend 

Some have pointed at rising political risk following demonstrations against the Jakarta mayor, a Christian who had made some comments on Islam. While this might have little to do with government policies, the mayor is a close ally of President Joko Widodo. The removal of the mayor in upcoming elections in February could have an impact on support for the president and his policies.

Based on the macro-environment, we see consensus forecast for 11% EPS growth for 2017 as quite reasonable. We are expecting a pick-up in economic activity due to greater and more efficient fiscal spending, stronger commodity prices and resilient consumer spending 

Infrastructure investment remains a key theme for the market, as Indonesia looks to modernise its road-rail network. In addition, our banks’ analysts expect the asset quality concerns to peak out by end 2016, which means credit cost should at the very least stabilize in 2017. This should benefit Indonesian banks.

Eoin Treacy's view -

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

Widodo has not been blessed with Modi’s large majority and as a result has had a more difficult route to implementing reform and cleaning up cronyism. Nevertheless progress has been made and the currency stabilised from last year. 

The weakness of the currency boosted the nominal performance of the stock market which has been largely rangebound since 2013. Foreign currency funds offer a truer perspective on the performance of the market when the Rupiah is accounted for.  



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December 16 2016

Commentary by Eoin Treacy

U.S.'s ICE Backs U.K. in Battle to Keep Euro Clearing in London

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

Intercontinental Exchange Inc., the world’s third-biggest clearinghouse, has taken sides in the tussle between the U.K. and some European Union leaders over a key corner of the financial industry.

The U.K. is the world’s largest hub for clearing euro interest-rate derivatives, a vital activity that ensures buyers and sellers of the contracts get paid. London also accounts for 75 percent of euro derivatives trading, some $574 billion a day.

“There is no reason why this should change as a result of Brexit,” ICE said in a document seen by Bloomberg. “Given that the euro is the world’s second-largest reserve currency and as such provides significant benefits for member states, the wider EU and companies trading overseas, any such protectionist move could severely damage confidence in the currency within the global economy.”

The paper comes as the Financial Times, citing an unnamed French central bank official, said Thursday that the EU’s executive arm should change the rules on euro-denominated interest-rate derivatives even before U.K. leaves the bloc. The ICE paper was circulated to EU member states.

Since Britain’s vote to leave the EU, clearing has become a focal point for those aiming to chip away at London’s role as the continent’s financial center. Leaders in France and Germany want the City’s profitable clearing business, arguing that any clearing of euro derivatives should take place within the bloc.

 

Eoin Treacy's view -

Continental Europe has long looked with longing eyes on the City and wondered how they could create a similar ecosystem in Paris, Frankfurt or Rome. The bad news is there is no easy answer. 



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December 16 2016

Commentary by Eoin Treacy

Mexico's Trump-Fueled Rout Belies Latin America Markets Bonanza

This article by Ben Bartenstein, Aline Oyamada and Isabella Cota for Bloomberg may be of interest to subscribers. Here is a section: 

“Latin America will recover more than other regions in GDP terms and do more reforms,” said Dehn, a London-based head of research at Ashmore Group, whose top pick is Brazil.

President Michel Temer’s push to pass spending and pension overhauls is another reason investors remain bullish on Brazil.

The real has jumped 19 percent this year, the second-largest advance in the world, helping bolster returns in local bonds. It will soar another 10 percent by the second-quarter of 2017 before weakening to 3.4 per dollar by year’s end, according to Gustavo Rangel, the chief Latin American economist at ING Financial Markets LLC and the region’s top currency forecaster last quarter, according to Bloomberg rankings.

While Brazil’s prospects continue to improve, Mexico’s outlook is more mixed. Trump’s pledges to rip up the North American Free Trade Agreement and build a wall along the southern border have unsettled investors in assets from the region’s second-biggest economy, with the peso plunging 16 percent this year. Mexico sends almost 80 percent of its exports to the U.S.

 

Eoin Treacy's view -

For almost a decade the Dollar trended consistently lower against the currencies of commodity producers and emerging markets. That ended a few years ago and currency market volatility now plays an important role in any consideration of when and whether to invest in these markets. 



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December 15 2016

Commentary by David Fuller

How Trump Courted Sandberg, Cook and Bezos

Here is the opening of this topical report from Bloomberg:

Tech executives summoned to meet with Donald Trump in New York Wednesday had reason to suspect they were being lured into a trap. In the run-up to the election, the President-elect clashed with industry bellwethers over such issues as immigration, manufacturing and smartphone security. Many in Silicon Valley’s upper ranks made no secret of their support for Hillary Clinton, some expressing disdain for her opponent. And Trump himself excoriated media executives in a similar summit three weeks ago and has used the bully-Twitter-pulpit in recent weeks to criticize other industries, using 140 characters or less to drag down companies’ stocks.

But concerns that the new administration would similarly use the Trump summit to browbeat big tech evaporated not long after the industry elite made their way through Trump Tower lobby, surrounded by reporters, security and enormous shining Christmas wreaths. Seated at a long conference table, near Facebook’s Sheryl Sandberg, Apple’s Tim Cook, and Amazon’s Jeff Bezos, Trump laid the compliments on thick.

"This is a truly amazing group of people," Trump told a group that included Tesla founder Elon Musk, Microsoft Chief Executive Officer Satya Nadella, Alphabet CEO Larry Page and IBM’s Ginni Rometty. "We want you to keep going with the incredible innovation. There’s nobody like you in the world. There’s nobody like the people in this room."

Inside the 25th-floor conference room, once cameras were ushered out, the tone of the conversation was amiable and conciliatory, according to people who attended or were briefed on the meeting. Trump was engaged, and he listened more than he spoke, said the people, who asked not to be identified discussing a private meeting. The executives spoke freely, introducing themselves to a group that included Vice President-elect Mike Pence; Trump’s three eldest children; Gary Cohn, the former Goldman Sachs president and Trump’s top chief economic policy adviser; and Peter Thiel, a PayPal co-founder and Trump transition team member, who helped orchestrate the summit.

"Very good to be here," Cook said, according to a transcript. "And I look very forward to talking to the President-elect about the things that we can do to help you achieve some things you want.” Oracle CEO Safra Catz said, "we are looking forward to helping you." Happiness abounded for Cisco CEO Chuck Robbins, who exclaimed, "We’re happy to be here and happy to help and happy to work with you.”

David Fuller's view -

If Trump can produce a tax deal which makes it worthwhile for tech CEOs to repatriate their $billions held overseas, he will have done more for the industry and the US economy generally than anything from the previous administration over the last eight years.  



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December 15 2016

Commentary by David Fuller

World Energy Hits a Turning Point: Solar That Is Cheaper Than Wind

Here is the opening of this interesting article from Bloomberg:

A transformation is happening in global energy markets that’s worth noting as 2016 comes to an end: Solar power, for the first time, is becoming the cheapest form of new electricity. 

This has happened in isolated projects in the past: an especially competitive auction in the Middle East, for example, resulting in record-cheap solar costs. But now unsubsidized solar is beginning to outcompete coal and natural gas on a larger scale, and notably, new solar projects in emerging markets are costing less to build than wind projects, according to fresh data from Bloomberg New Energy Finance

The chart below shows the average cost of new wind and solar from 58 emerging-market economies, including China, India, and Brazil. While solar was bound to fall below wind eventually, given its steeper price declines, few predicted it would happen this soon.

“Solar investment has gone from nothing—literally nothing—like five years ago to quite a lot,” said Ethan Zindler, head of U.S. policy analysis at BNEF. “A huge part of this story is China, which has been rapidly deploying solar” and helping other countries finance their own projects.

This year has seen a remarkable run for solar power. Auctions, where private companies compete for massive contracts to provide electricity, established record after record for cheap solar power. It started with a contract in January to produce electricity for $64 per megawatt-hour in India; then a deal in August pegging $29.10 per megawatt hour in Chile. That’s record-cheap electricity—roughly half the price of competing coal power. 

“Renewables are robustly entering the era of undercutting” fossil fuel prices, BNEF chairman Michael Liebreich said in a note to clients this week.

David Fuller's view -

It is entirely logical that technology will continue to lower the cost of solar power, until it is the cheapest source of energy by far.  After all, it neither has to be discovered and then extracted, nor does it need refining.  It is free energy, arriving every day from the largest nuclear reactor within our solar system - by far.  The means of capturing solar energy are multiplying at a rapid rate, particularly within urban areas where it is most needed.  Storage of solar energy is limited but this too will change, now that it is a priority.   

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



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December 15 2016

Commentary by David Fuller

Email of the day

On reducing the delay over Brexit:

David

I hope our PM reads this article and acts accordingly. She may need a reshuffle early in 2017 to remove some remoaners. 

David Fuller's view -

Thanks for your comments and the link to a sensible article by John Mills.  Here is a brief section:

There is clearly a case for getting the Brexit negotiations concluded as soon as possible. The only significant economic downside to the EU referendum vote so far has been some signs of a fall-off in investment for which uncertainty must be part of the cause.

As long as we are in the EU, we run up costs of £250m a week, which obviously we must avoid if we can. So we need to get negotiations completed within the two year period, which may well mean within 18 months, allowing for a period of time for ratification. What can we do to make sure this happens?

First, having a relatively tight deadline will concentrate the minds of the negotiators. The longer the time available, the longer it will take. This will not make problems easier to solve. It will just provide an excuse for putting off tackling the difficult issues.

Second, we need to ensure that negotiations on the arrangements over our leaving the EU run concurrently with discussing what will happen after we have left. It makes no sense to run these two aspects of Brexit consecutively, wasting time which is in no one’s interest.

Third, we need to keep it as simple as we can, building on well-established existing trade arrangements instead of creating new ones, unless, in a few cases, these are absolutely essential. If – as will probably happen – we finish up outside the Single Market but with a free trade deal, all the necessary alignments of standards, for instance, will already be in place.

Theresa May is not the problem, in my opinion.  Nevertheless, she needs genuine support and sensible council from those who favour a swift, Clean Brexit. 

I assume she has contingency plans if Brexit is held up by either the Supreme Court or remainers in both Parliament and the House of Lords. 

(See also Roger Bootle’s article and my reply to it, posted on Tuesday 13th December.)



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December 15 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally.  Since timing is everything, here are two trends which are just beginning to signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



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December 15 2016

Commentary by Eoin Treacy

December 15 2016

Commentary by Eoin Treacy

The worst of both worlds

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

Australia’ economy shrunk by 0.5% in 3Q16. Typically in such a situation a cut in official interest rates can ease the pain. While the RBA may choose to lower interest rates, its impact on customers’ borrowing costs may be limited. In fact mortgage rates could rise again soon.

Why? The RBA only controls the cost of borrowing overnight. The longer the term of the bond, the more the market sets its yield. As the marginal investor in the A$ bond market is from overseas what happens in the global market place drives our longer term bond yields.

Just as Australian home loan borrowers could do with some relief interest rates are edging up. The reason is Australian banks raise insufficient deposits to fund their loan book. The balance of funds comes from the bond market. Should the cost of borrowing for our “AA” rated banks rise further customers will likely get more hikes on their mortgage rates.

A concern Spectrum has is if the U.S continues to grow at near its current 3% run rate both U.S and Australian bond yields could rise further. Borrowing while rates were falling was easy 

Since the 1980’s Australian households have piled on the debt. Much of this has gone into residential real estate. The continuous fall in interest rates and rising property prices created a re-affirming inducement to borrow more. Today, Australian households have world beating debt levels. This makes parts of the sector hyper-sensitive to rate rises. Should the cost of borrowing rise notably from here wide-spread financial stress within Australian households looks set to follow.

 

Eoin Treacy's view -

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

Australian 10-year bond yields last traded above the trend mean in 2013 when rates were 2.5% or 100 basis points above today’s level. The yield is closing in on the 3% level more in sympathy with US Treasuries than any particular hike in Australian inflation expectations. 



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December 15 2016

Commentary by Eoin Treacy

China Halts Trading in Key Bond Futures as Panicky Investors Sell Securities

This article by Yifan Xie and John Lyons for the Wall Street Journal may be of interest to subscribers. Here is a section:

Some of these bubbles have burst dramatically over the last 18 months, with the crash in China’s stock markets last summer the most notable example. On Thursday, the pain spread to China’s $9 trillion bond market, which remains overwhelmingly driven by domestic investors, despite some opening up to foreigners this year. The yield on 10-year government bonds had reached as low as 2.6% in August.

“People woke up to the fact that the bond bubble is too large,” said Hao Hong, co-head of research at Bocom International, which is owned by Hong Kong’s Bank of Communications. “The bond market in China is under severe pressure, across the board.”

The U.S. Federal Reserve’s decision to raise interest rates helped trigger the selloff. Chinese investors believe it increases the chance China will guide its own rates higher to stem the yuan’s recent decline against the dollar and heavy capital outflows from the country.

But the bond market slump also exacerbates the policy dilemma facing China’s central bank. It has tightened short-term lending in recent weeks in an effort to make it harder for speculative investors to borrow money. The problem is that such tightening moves—along with any future rate rises—could provoke market plunges and panics as liquidity dries up.

 

Eoin Treacy's view -

One of the greatest challenges the Chinese administration has is that many of its capital markets are dominated by individual investors rather than institutions. Coupled with a wide spread between the lending and deposit rate speculation is rife and that tends to encourage manic periods of both buying and selling. 



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December 15 2016

Commentary by Eoin Treacy

Euro-Area Maintains Momentum as Weaker Currency Helps Factories

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

The latest signs that the economy is growing at a steady -- if not spectacular -- pace come a week after the European Central Bank’s decision to prolong its asset purchases through 2017, while lowering the monthly amount starting in April.

With euro-area inflation still low, President Mario Draghi said the central bank will have a presence in markets “for a long time.” He also warned of potential uncertainty ahead linked to national votes in 2017.

“There is clearly the potential for political uncertainty to derail growth as elections loom in the Netherlands, France and Germany, and Brexit discussions begin,” said Markit Chief Economist Chris Williamson.

Williamson said the intensification of inflationary pressures was the “most significant development” this month and something that will “please ECB policymakers.”

In Germany, the region’s largest economy, the composite PMI was at 54.8 this month after a reading of 55 in November, capping the strongest three-month period since the second quarter of 2014. France’s index rose to 52.8 -- an 18-month high-- from 51.4.

 

Eoin Treacy's view -

The Euro broke decisively below $1.05 today to extend its medium-term downtrend following an almost two-year long distribution. That will enhance the competitiveness of all Eurozone companies versus their non-Eurozone opposition but will do nothing to ameliorate Germany’s advantage relative to the periphery.



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December 15 2016

Commentary by Eoin Treacy

The Chart Seminar 2017

Eoin Treacy's view -

We are currently in the planning stages for choosing venues for The Chart Seminar next year.

Right now we will certainly have a London seminar in November.

Based on positive subscriber feedback we will have a seminar in Singapore towards the end of the 2nd week of April. The CFA Institute has once more agreed to co-host this event and I will also provide certificates for continuous professional development to anyone who wants one.

I now also have some copies of the Mandarin edition of Crowd Money so please specify which version you would like to receive at the seminar when booking. 

If you are interested in either of these venues or would like to suggest a venue please contact Sarah at [email protected]  I would be more than happy to plan a US based seminar next year if we have the critical mass to make it viable and I will likely be stopping off in Japan on the way back from the seminar if there is any interest for an event in Tokyo. 



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December 14 2016

Commentary by David Fuller

Putin Game Is to Neuter and Divide the West, and He Is Succeeding

And now your goal, as Mr Putin, is nothing less than European impotence. You want to make it impossible for them to pursue hostile actions such as sanctions on your cronies, expanding Nato or refusing to build new gas pipelines. If that can be achieved, your regime will be richer financially, safer politically, and seen at home as the tough and effective leadership that helps the average Russian to ignore the parlous long‑term state of the country. 

With the election of Mr Trump, there is a path to fulfilling this goal, provided it is done with care and cunning. First it involves consolidating the position of Bashar al-Assad in Syria, regardless of how much violence has to be unleashed before Trump’s inauguration. That opens the way to offering the new US administration an end to the war in Syria on Russia’s terms, with Mr Assad in power in most of the country, and the whole world able to see that you can count on Russia as an ally, but never trust the support of the West. 

Having dealt with that early in 2017, the next step is to use it as the basis for a rapprochement with America, but cautiously, so that congressional critics of Mr Trump are not given too much ammunition. A good way to disarm suspicion is to offer to go back into one or two of the international agreements – on arms control and nuclear facilities – recently abrogated by Moscow. There will be some relief and even praise in the Western media, hailing a “new era” in relations and analysing Mr Putin’s good diplomacy and return to responsibility. 

Simultaneously, the extraordinary success and skill being developed by Russia in manipulating Western elections will offer rich pickingsin 2017. The universal assumption for many years that social media and the internet would be agents of freedom has left most people slow to grasp that new technologies can be turned into powerful means of authoritarian power – for the first time reaching deep into other nations and societies. 

Mr Trump has already disavowed the CIA’s findings that Russian hacking was designed to promote his victory. That the president-elect of the USA refuses to believe well-founded research by his own agencies is an unmitigated triumph for Moscow. Such tactics can now be used to promote the election of pliable candidates across Europe, with the scope to fund them as well. 

The French National Front has already borrowed €9 million from a Russian bank. A combination of donations and social media operations can help to push disorientated European voters the right way. Recent months have seen a pro-Russian president elected in Bulgaria, and a new government friendly to Moscow in Moldova. The Netherlands rejected the EU treaty with Ukraine in a referendum, and growing parties like the Five Star Movement in Italy have Russian ties. 

Add a bit of military intimidation and internal agitation in the Baltic States – one third of Latvians are ethnic Russians – and another part of Europe will feel weakened. Then subtly help opposition parties in Germany’s autumn elections to undermine Angela Merkel. Manipulate politics in Montenegro so it doesn’t want to join Nato. Hug Serbia and keep Bosnia paralysed by the same techniques. Keep pushing up the price of oil by deals with the Arabs, so that Russian gas is sought-after. 

Do all these things and soon the EU, particularly without the UK, will lack the will to challenge Russia. In foreign affairs and energy policy, Europe is only as strong as its weakest link, and soon this strategy will make sanctions impossible, western security weaker and buying Russian energy impossible to resist. Mr Putin will be able to do as he wishes, with whom he wishes.

Mr Trump is a great advocate of doing deals. The first step in doing a good deal is to have your eyes open to the strategy of the other side. Europeans certainly need to spend more on defence. 

But America needs to see what could be about to unfold: under cover of better relations, the division, weakening and neutering of the West. 

David Fuller's view -

‘Once a KGB operative, always a KGB operative’.  This old adage certainly applies to Putin, who had a rough two years following the collapse of crude oil prices in 2H 2014.  Naturally, Russian citizens did far worse. 

However, Putin is in a somewhat stronger position today.  Brent Crude oil is trading above $50 following the belated decision to reduce supplies somewhat, in line with OPEC.  For Russia, this is probably no more than the reality that it will see another reduction in output due to the harsh Siberian winter.  Having invested heavily in military equipment, Russia has also increased the sale of weapons to Iranians and other regimes which are either unable to buy from the West or disinclined to do so.  At home, Moscow’s constant stream of daily propaganda, along with Putin’s ‘heroic’ ability to see off evil doers, continues to embellish his tough guy patriot image.  So far, this is just enough to keep a lid on protests at home, although this may not always be the case. 

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



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December 14 2016

Commentary by David Fuller

Kissinger at 93 Expounds on Rex Tillerson, One-China and Trump

Henry Kissinger, the 93-year-old foreign policy guru to world leaders, isn’t slowing down. On Wednesday he weighed in on Donald Trump’s pick of Exxon Mobil Corp. chief Rex Tillerson as the top U.S. diplomat, the importance of the ‘One-China’ policy and the president-elect’s decision to take a phone call from Taiwan’s leader.

Speaking to the Committee of 100, a non-profit that works on improving U.S.-China relations, Kissinger dismissed criticism that Tillerson’s work winning contracts with Russia for Exxon disqualifies him for the State Department job.

“I pay no attention to the argument that he is too friendly to Russia," Kissinger said. "As head of Exxon it’s his job to get along with Russia. He would be useless as the head of Exxon if he did not have a working relationship with Russia.”

Citing his acquaintance with Tillerson from serving together on the board of a Washington-based think tank, Kissinger praised Trump’s selection and added that "we should not think about these relationships as the personal relationship of individuals."

David Fuller's view -

What a wise old gentleman and an inspiration for us all. The third paragraph above, which I have placed in bold, is the key one to note given all the comment on Tillerson’s cordial relationship with Putin.



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December 14 2016

Commentary by David Fuller

Fed to Step Up the Pace of Interest Rate Rises Next Year

The US Federal Reserve has signalled that it will step up the pace of interest rate rises next year as a robust jobs market and stronger growth prompted the central bank to raise rates for only the second time in a decade.

Janet Yellen, the Fed’s chairman, described the increase as a “vote of confidence in the economy”, as officials unanimously opted to raise its Federal funds target range to between 0.5pc and 0.75pc, from 0.25pc to 0.5pc.

Ms Yellen said expectations of fiscal stimulus following Donald Trump’s US presidential victory had been one of “several” factors influencing changes to the Fed’s projections, as ­policy­makers in­dic­ated three  more hikes next year.

“Job gains have been solid in recent months and the unemployment rate has declined”, Fed officials said in a statement.  Economic activity was expanding at a “moderate pace” while some measures of inflation expectations had increased “considerably”.

The dollar jumped against the euro and pound and US Treasury yields climbed after policymakers upgraded their growth and interest rate forecasts and projected a further fall in the unemployment rate. The Dow Jones Industrial Average came within 40 points of a record high of 20,000 shortly after the interest rate decision , though the index closed down 0.6pc at 19,792.53.

The world’s biggest economy is now expected to grow by 2.1pc in 2017 and by 2pc in 2018, compared with previous forecasts in September for growth of 2pc per year. The Fed’s growth projection for 2019 was also revised up, to 1.9pc from 1.8pc. Unemployment, which fell to a nine-year low of 4.6pc in October, is  now predicted to drop to 4.5pc next year, where it is expected to remain for the next three years.

The Federal Open Market Committee (FOMC), which sets interest rates, signalled that they could rise to around 1.4pc by the end of 2017, suggesting three further  increases of 0.25 percentage points over the coming year if the economic outlook evolves as anticipated. Its so-called “dot plot”, where policymakers indicate their expectations for the likely rate path over the medium term, showed policymakers  predicting rates will rise to around 2.9pc by the end of 2019 .

David Fuller's view -

I am glad to say that Fuller Treacy Money never took the overly gloomy groupthink view that the world would remain stuck for many more years in a disinflationary or deflationary environment of minimal GDP growth, with negligible inflation and record low interest rates. 

Instead, focussing on the world’s largest economy, I forecast back in 2009 and many times thereafter, that the severe credit crisis recession would require at least 5 to 7 years of convalescence, and possibly somewhat longer before recovering. Today, it is just under 8 years since the US economy bottomed. 

This was not a lucky guess on my part.  Instead, it was based on the average of what we saw following other credit crisis recessions over the last 100 or more years. 

The key factors behind this lengthy convalescence were deleveraging by both corporations and consumers, which considerably lowered government tax revenues.  Extreme caution followed.  The result was an economy in stall, as were so many others around the globe, with the central bank providing the main stimulus. 

Following nearly eight years of minimal GDP growth, I think the US economy is now showing clear signs of recovery, led by consumer spending.  This is greeted with considerable relief but confidence is still low, not least among forecasters.  The Fed’s forecasts for GDP growth over the next two years are 2.1% in 2017 and 2% in 2018.  That is very conservative and could be correct, depending on circumstances, although we can only guess.  However, my view is that surprises will be on the upside, for GDP growth, inflation and interest rates. 

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



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December 14 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers are managing to make the most of the Trump bull market rally.  Since timing is everything, here are two trends which will eventually signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



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December 14 2016

Commentary by Eoin Treacy

December 14 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 13th 2016

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

From GM’s viewpoint, it needs to generate sufficient ZEV credits to avoid sharp fines or being shut out of the California market entirely. One analysis went as follows: In 2015, GM sold 219,962 vehicles in California. To avoid fines, it needs state-awarded ZEV credits equal to 14% of the units sold, or 30,794. That can be achieved by selling 7,698 Bolts that earn GM four credits each, or 10,082 Chevy Volt plug-in hybrids, or a combination of the two. What GM understands is that ZEVs are compliance vehicles, so pricing the Bolt to both achieve its ZEV credit needs and take market share from other auto manufacturers can be a smart strategy, even if they are losing so much money per unit. If GM can earn more ZEV credits than it needs, those can be sold to other manufacturers who are falling behind their ZEV credit goals. This is all part of the clean air gambit in which companies that are “doing more than they need to” in meeting certain thresholds find that they hold pieces of paper that increase in value over time and can be successfully monetized. Selling $139 million of excess ZEV credits was what enabled Tesla Motors (TSLA-Nasdaq) to achieve third quarter profits on a GAAP basis. 

But what are the economics of electric vehicles for buyers? The Associated Press’ automobile writer recently test drove the GM Bolt and interviewed the executive in charge of marketing it. Virtually everyone acknowledges that the car lacks outstanding design, but the word the GM exec uses to describe the Bolt is “practical.” For tech-savvy Millennials that sounds more like their grandma’s car. However, the Bolt is the first electric vehicle to get over 200 miles per charge (238 miles, exactly). It does have lots of interior space, a near-silent ride and emits no tailpipe emissions. Moreover, the Bolt can go from zero to 60 miles per hour in 6.5 seconds, out-muscling some muscle cars. Even more important, the Bolt is now at showrooms in California and Oregon, while its prime competitor – the Tesla Model 3 – will not be available until the end of 2017.

The problem for the Bolt is its cost. The list price is $37,495 including shipping. After the federal tax credit of $7,500, the purchase price drops to $29,995, to which you need to add roughly $1,200 for a 240-volt home charging station, bringing your out of pocket expense to own a Bolt to $31,195. For comparison, a comparably equipped, gasoline-powered Chevy Cruze compact hatchback with automatic transmission costs $23,670 with shipping, a difference of $7,525. 

Eoin Treacy's view -

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

For a car GM is losing $9000 on, the price of $37,500 is still steep even if someone is dedicated to the ideal of an emission free future. That cost is going to have to come down if predictions of widespread uptake are to prove credible. The pace at which the energy density of batteries is doubling (around 5 years) is too slow to suggest the cost is going to come down quickly through technology alone. That is part of the reason Tesla is investing so heavily in economies of scale when building its battery manufacturing capacity. 



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December 14 2016

Commentary by Eoin Treacy

SWIFT confirms new cyber thefts, hacking tactics

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

The messaging network in a Nov. 2 letter seen by Reuters warned banks of the escalating threat to their systems, according to the SWIFT letter. The attacks and new hacking tactics underscore the continuing vulnerability of the SWIFT messaging network, which handles trillions of dollars in fund transfers daily.

"The threat is very persistent, adaptive and sophisticated – and it is here to stay," SWIFT said in the November letter to client banks, seen by Reuters.

The disclosures provide fresh evidence that SWIFT remains at risk of attacks nearly a year after funds were stolen from a Bangladesh Bank account at the Federal Reserve Bank of New York. The unprecedented cyber theft prompted regulators around the globe to tighten bank security requirements, amidst a global investigation by the FBI, Bangladesh authorities and Interpol.

Banks using the SWIFT network, which include both central banks and commercial banks, have been hit with a "meaningful" number of attacks - about a fifth of them resulting in stolen funds, since the Bangladesh heist, Stephen Gilderdale, head of SWIFT’s Customer Security Programme, told Reuters in an interview on Thursday.

 

Eoin Treacy's view -

Much of the global economy is already online and the internet represents a major opportunity for emerging countries to skip several steps of economic development. Therefore we can anticipate the trend of digitisation to persist well into the future. However, most people’s passwords are woefully inadequate and tend to be replicated across platforms, for expediency’s sake, which makes it all too easy for criminals to acquire personal data. 



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December 14 2016

Commentary by Eoin Treacy

Namibia's new uranium mine to boost growth, make it worl's third producer

This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section:

The massive project, said to be the third largest uranium-only mine in the world, will boost domestic production from 2,900 tonnes in 2016 to 5,800 tonnes next year, according to BMI estimates.

Output will be gradually increased to reach the installed capacity of 50-million tonnes of ore a year, Swakop's chief executive Zheng Keping said in September.

Based on data from Namibia’s central bank, production of uranium will increase 63% this year and 90% in 2017.

Currently, the African nation is the world’s sixth biggest uranium miner, behind Kazakhstan, Canada, Australia, Niger and Russia.

 

Eoin Treacy's view -

China has long-term ambitions of cleaning up its toxic air and nuclear represents a big part of the anticipated solution. That is the primary reason the country has been so aggressive in securing uranium deposits wherever it can get a significant stake. 



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December 13 2016

Commentary by David Fuller

Good Idea From Trump Could Work In Australia, Too

Here is the latter section of this common sense article by Nick O’Malley for the Sydney Morning Herald, which is also amusing, not least in its opening:

But among the commitments was an intriguing proposal that appears to have been lifted from a law passed in Canada in 2012, a law that according to its supporters has already had a remarkable effect on the nation's business and public life.

Designed to cut through red-tape, the so-called One-for-One rule mandates that for every new regulation the government seeks to pass, it must first remove an existing one.

In Trump's pledge at Gettysburg, this promise was amped up to become a "a requirement that for every new federal regulation, two existing regulations must be eliminated".

At present it is hard to predict which of his promises Trump intends to stick to – throughout his campaign he proved agile enough to adopt two sides of several issues. But since his victory he has returned again to deregulation, raising the one-in, two-out rule specifically. A concerted attack on business regulation would also be one of the areas in which the Trump agenda is actually in accord with the business and establishment base of his own party, which so far appears to be as nervous as it enthused about his agenda.

When the former conservative government in Canada decided to introduce a similar law it decided to strip it of its ideological teeth by exempting environmental, health and safety regulations. It eventually passed Parliament with the support of socialists and the Greens, 245 votes to one.

According to the Canadian government's most recent scorecard, 20 federal regulations have been abolished as a result, saving businesses 344,000 hours of labour. This might not seem a lot until you consider that in normal circumstances regulatory creep proceeds with the grim inevitably of carbon emissions. Holding it steady is worth celebrating, reducing it seems near miraculous.

In its analysis Forbes magazine noted that such laws are beneficial because they impose a constant vigilance on the accumulation of regulation which would otherwise proceed unobserved, though it noted that removing regulation can be as legally tricky as introducing it.

Given the success of Canada's experiments it is not that surprising that the idea is spreading. The Netherlands has embraced a similar model, as has Britain, which recently upped the stakes to one-in, three-out in an effort to cut red-tape costs by £10 billion ($16.8 billion).

Even Australia has taken steps in this direction in our own quiet, wordy, bureaucratic way.

A federal government guide to regulation introduced early this year included the principal that, "the cost burden of new regulation must be fully offset by reductions in existing regulatory burden".

The principle is good, though since we are almost unique in the world in being protected and guided by three arms of government perhaps it is an idea that could benefit from the simple and direct language of, say, Donald Trump.

David Fuller's view -

Overregulation is almost as bad as no regulation, and the heavy hand of bureaucracy has certainly been evident since 2008.  Therefore the recent discipline for reducing at least one regulation for every new one proposed by federal government is most welcome.  Since The Netherlands has embraced this policy there might even be some hope for the EU, which is surely the most overregulated region of the planet. 

Elsewhere, President-elect Trump has appointed a number of highly experienced and successful business people to his Cabinet.  This can only be good for US GDP growth, which has had minimal support from the national government over the last eight years.  Trump’s proposed policies and Cabinet nominations have been enthusiastically endorsed by the US stock market since his surprise election victory on 8th November.     

(See also: Bill Gates Compares Trump To JFK After Phone Conversation: “Leadership Through Innovation”, from RealClear Politics)

This item continues in the Subscriber’s Area.



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December 13 2016

Commentary by David Fuller

It Is Not Too Early To Start Planning For the End of the EU

Financial markets are remarkably myopic. Faced with a choice between paying attention to the risk of nuclear war next year and the prospect of the US non-farm payroll number, out at, say, 1.30 tomorrow, the non-farm payroll number wins hands down every time.

This is not altogether daft. How should you cope with things utterly uncertain? The markets do it either by ignoring them altogether or by adopting a conventional assumption – usually the comfortable continuation of the status quo.

History tells us that most of the time things do indeed continue much as they were before. Yet sometimes big things happen. The US stock market did crash in 1929; the Second World War did break out in 1939; the Soviet Union did break up in 1991; there was a financial crisis in 2008; and the UK did vote to leave the EU in June of this year.

It should not come as a surprise that the markets barely reacted to the result of the referendum on Mr Renzi’s proposed constitutional reforms for Italy and his subsequent resignation. After all, even the opinion polls called this result correctly and the financial markets foresaw it more clearly.

That does not mean, though, that they are right to be sanguine. The prospect of an Italian euro exit is now much closer. Barring a miracle, the best that can be hoped for the Italian economy is that it will stagger on with minimal growth and continued high levels of unemployment. But if it were to suffer a serious shock, deriving from either the domestic banking sector or the world economy, then the country would be plunged back into recession.

David Fuller's view -

I commend the rest of Roger Bootle’s column to you for it contains some bold but also credible forecasts.

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



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December 13 2016

Commentary by David Fuller

The Left Are Being Sore Losers and Democracy Is the Poorer For It

If 2016 has taught us anything it is that people define democracy as getting what they want. If they win an election, it was fair. If they lose, it was rigged. Democracy is in crisis, says the Left, because, from America to Britain to Italy and beyond, the people keep making the wrong choices.

Take the United States. Donald Trump’s victory was a surprise – we get that. It was narrow, for sure. And it was controversial – no doubt. But it happened. What ought to obsess the Democrats and the media is what he intends to do next. His cabinet choices suggest Trump will govern the way he ran, from the Right, and that he isn’t afraid of confronting the consensus on everything from climate change to relations with Russia. There’s so much to scrutinise.

Unfortunately, the Democrats and the media would prefer to engage in a ceaseless critique of his victory in the hope that it’ll go away. The latest claim is that Moscow swung the election. The CIA has apparently concluded that Russia hacked into Democratic email accounts with the specific intention of embarrassing Clinton and helping Trump win. Many liberals are convincing themselves that the election was fixed. The debate was distorted by “fake news”. 

The Republicans stole votes in the rust belt. And Clinton actually won the national popular vote – so can we re-run the election?! The answer is no, of course; but that won’t prevent millions from refusing to regard Trump as the genuine democratic choice.

The Republicans have every right to be angry about this. Perhaps Russia did try to affect the election, and that ought to be investigated and exposed. But there’s no evidence that they succeeded. WikiLeaks did not play a big role in 2016 – its revelations were small fry. 

The FBI, which resurrected claims that Hillary did something wrong with her email account, had far greater impact. And all that WikiLeaks and the FBI did was reinforce decades-old suspicions that Clinton is a liar. Her approval rating in October 2015 was about -19 per cent. By election day it was about -13 per cent. The scandals had very little impact.

Also, didn’t the Democrats employ a few dark arts themselves? Did they not stack the primary process to Hillary’s advantage? It’s surprising, too, that the Democrats suddenly care so much about the transparency of the voting process, having rejected Republican warnings about potential fraud for years.

But the Left isn’t big on self-awareness. Consider the campaign of Jill Stein, the Green presidential candidate, to recount votes in the states that swung it for Trump on the rather rude assumption that because he won he must have cheated. 

Trump won Wisconsin by a margin of about 27,000 votes; Stein got 30,000 votes there. Trump took Michigan by 11,000; Stein got 50,000. So there are at least two states that arguably were lost not because of a conspiracy by the Right but because of divisions on the Left. It was an old-fashioned political cock-up.

The militant Remainers are playing a similar game in the UK. They question not only the referendum result but the referendum itself. It doesn’t count, they say, because the Leave campaign lied. Leave would dispute that – but so what if they did? Have you ever known an election in which a politician didn’t fib? It’s up to the voters to play detective, and most of them are smart enough to sort the fact from the fiction. I have yet to meet the sucker who voted Leave to save the NHS.

David Fuller's view -

I think Tim Stanley makes a number of interesting points in this article.  I also wonder why the democratic process is so frequently challenged.  Is it due to slow GDP growth and the disparities between incomes?  Is the political process being undermined by insufficient term limits and too much lobbying?  Or to sound like an old fogey, do we have too much social media?  If subscribers have any additional thoughts on this, I welcome your views.       

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



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December 13 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers are managing to make the most of the Trump bull market rally.  Since timing is everything, here are two trends which will eventually signal increasing risks – US 10-year Treasury yields and the US Dollar Index.



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December 13 2016

Commentary by Eoin Treacy

December 13 2016

Commentary by Eoin Treacy

Email of the day on luxury goods companies

Hello I’ve noted that high level luxury looks pretty bad, but medium level luxury have interesting graphs. Tods Safilo and Luxottica seem to be basing, Tods is high quality but not flashy for example 

Piquadro has stopped going down IT0004240443

Ferragamo I can’t figure out the graph yet but it is to watch as well 

Yoox looks bad to me, the site is awful compared to mytheresa.com 

LVMh has broken out too it seems 

I’m asking because I thought that with the dollar so strong , Asians would lower consumption, buy maybe they are buying less Prada and more sober brands I haven’t figured it out yet I read Dolce and Gabbana are going badly 

Saluti!

 

 

Eoin Treacy's view -

Thank you for this thoughtful email and I think it is the right time to be looking at some of Italy’s exporters rather than focusing on the melodrama of politics which is likely to remain tortuous for the foreseeable future. A weaker Euro, or even the remote near-term possibility of a new Florin, both represent bullish potential outcomes for nominal Italian share prices.  



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December 13 2016

Commentary by Eoin Treacy

Investors Can Clean Up With Italy's Biggest Bank

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

The target is for returns on tangible equity above 9% in 2019. For that to make sense, the bank has to drive its cost of equity down below 10%, which means slashing risks.

That is where Jean Pierre Mustier, chief executive, is being most radical. He will use most of the money raised to pay for a deep clean of its balance sheet and restructuring. It will cut 14,000 jobs and close nearly 1,000 branches, mostly in Italy.

UniCredit will take €12.2 billion of charges including a whopping €8.1 billion of losses on its worst bad loans. That prices bad loans for sale, cutting their average net value to just 25.5% of face value, which compares with an Italian average of about 40%. The bank is selling a near €18 billion chunk of its worst loans to vehicles backed by U.S. fund managers Fortress and Pimco.

Action like this, and that being taken by Italy’s most troubled lender, Banca Monte dei Paschi di Siena, will put pressure on other Italian banks to clean house.

By 2019, UniCredit will have cut net bad loan exposures by almost €20 billion through sales and write downs, reducing the value of nonperforming loans to a respectable 4% of total loans.

The bank is assuming a weak economy where nothing in Europe gets much better and interest rates remain negative. That presents a challenge. With interest income under pressure, it will need to grow lending to maintain roughly flat net revenues.

 

Eoin Treacy's view -

€13 billion is a sizeable equity raising for a company with a market cap of £17 billion following this week’s rally to date. Nevertheless, the fact that the bank is willing to commit to writing down bad loans in an attempt to clean up the balance sheet, in addition to the fact that Italy only represents about a third of revenue suggests the potential for a recovery cannot be ruled out. That is of course assuming it is successful in raising the capital required to fulfil the plan. 



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December 13 2016

Commentary by Eoin Treacy

Trump Gives New Volatility to Defense Stocks in 140 Characters

This article by Richard Clough and Julie Johnsson for Bloomberg may be of interest to subscribers. Here is a section:

With 140-character broadsides aimed at Lockheed Martin Corp.’s F-35 fighter and Boeing Co.’s Air Force One makeover, the president-elect has introduced new volatility to the normally staid sector. While drugmakers and Ford Motor Co. have also felt his wrath, the outburst against the world’s largest defense company and “out of control” costs for its marquee program underscored the new risk looming in a bull market for weapons-makers.

“The president-elect seems ready to attack any industry that displeases him,” said Loren Thompson, an analyst with the Lexington Institute. “Military contractors who think they can count on a program plan have to wonder what all this impulsive behavior by the president-elect portends for the future.”

Military budgets from Europe to Southeast Asia are rising as nations bolster their defenses to counter the growing influence of Russia and China. While U.S. defense spending is poised to grow under Trump, margins for contractors are hovering near 60-year highs, leaving them susceptible to “simplistic criticisms on the overall levels of cost,” Carter Copeland, an analyst at Barclays Plc, wrote in a note to clients Tuesday.

 

Eoin Treacy's view -

We do not know much about what kind of President Trump is likely to be but we do know he is a tough negotiator who ran on the promise to cut out wasteful spending. With margins at defence contractors so high, military spending might increase but they are likely to be asked to deliver more for less on a per item basis. Of course that is a potential US position but is unlikely to represent a change from the build-up of military materiel in response to an increasingly tense geopolitical atmosphere. 



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December 12 2016

Commentary by Eoin Treacy

China Warns Trump Against Using Taiwan for Leverage on Trade

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

China warned Donald Trump against using the One-China policy regarding Taiwan as a bargaining chip in trade talks, a swift response that indicates Beijing is losing patience with the U.S. president-elect as he breaks with decades of diplomatic protocol.

“Adherence to the One-China policy is the political bedrock for the development of the China-U.S. relationship,” Foreign Ministry spokesman Geng Shuang told reporters in Beijing at a regular briefing on Monday. “If it is compromised or disrupted, the sound and steady growth of the China-U.S. relationship as well as bilateral cooperation in major fields would be out of the question.”

Trump said in an interview broadcast on Sunday that his support for the policy --- which has underpinned U.S. behavior toward Taiwan since the 1970s -- will hinge on cutting a better deal on trade. He has repeated his accusations against China since election day, telling a crowd in Iowa last week that China would soon have to “play by the rules.”

Policy makers in Beijing initially had a more subdued response after Trump departed from diplomatic convention earlier this month and spoke by phone with Taiwan’s president. Now things are getting more serious: The official Xinhua News Agency warned that world peace hinges on close and friendly ties between the U.S. and China.

“For China, there is no balancing of trade and Taiwan,” said Wang Tao, head of China economic research at UBS AG in Hong Kong. “Taiwan is considered the utmost core interest of China, not for bargaining.”

 

Eoin Treacy's view -

China has been flexing its military muscle in the South China Sea for the last few years to the alarm of its neighbours but with very little push back from the rest of the world. Additionally it has been steadily increasing what it is spending on arms, with the total soaring from $123 billion in 2010 to an expected $233 in 2020. 



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December 12 2016

Commentary by Eoin Treacy

Hong Kong's Squeezed Money Market Sends a Sell Signal on Stocks

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

"Even with two expected U.S. rate hikes next year, the rate gap with Hong Kong won’t be wide enough to spur significant outflows," said Thomas Shik, acting chief economist at Hang Seng Bank Ltd. Investors also like Hong Kong because of its currency peg with the strong greenback and Asia’s higher growth potential, he added.

There are money market concerns on both sides of the Hong Kong-mainland border. The Shanghai Composite Index retreated the most in six months on Monday as concern about dwindling liquidity was exacerbated by a regulatory crackdown to insurers’ stock investments and Donald Trump’s remarks about the U.S.- China trade relationship.

Currency weakness, along with concern mainland assets are overpriced, has driven Chinese investors to put their cash in Hong Kong equities and homes. China is now stepping up restrictions on outflows to defend the yuan, including tightening curbs on its citizens buying insurance in Hong Kong.

The city has also raised its stamp duty to rein in its world- topping home prices. “Inflows from China may slow because of recent measures," said Steven Leung, Hong Kong-based executive director at UOB Kay Hian. "Hong Kong hasn’t seen outflow pressure, but next year it will be more obvious."

 

Eoin Treacy's view -

HIBOR rates has been depressed for a long time but are rising in line with LIBOR as the island’s peg with the US Dollar will force an interest rate hike next week. That will represent a change for the property market which has soared as a leveraged bet on easy Fed monetary policy. 



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December 12 2016

Commentary by Eoin Treacy

Email of the day on Eurozone governance:

A few thoughts after a rather intense week on the Euro area markets:

1/ The Italian Referendum was very different from Brexit: the vote had no immediate and material economic consequences, the result was not unexpected, there was no anti-globalization or anti-immigration angle to be taken in the debate. Crucially, it was not the "amateur hour" exercise witnessed in the UK that we will hopefully see mended by the Supreme court in January.

2/ Populists are growing in Italy: M5S and Northern League together make probably 35% of electorate and, yes, they use anti-Euro rhetoric, attract the young and - M5S - make very good use of social media. However the country remains committed to the Euro (not to mention the EU), and the return to the Lira seen as unnecessary and even catastrophic by the great majority of people, especially those in businesses/entrepreneurs... in other words, those who rejected the constitutional reforms just did that: rejected the reform. 

3/ The vote will help the cause of the Brexiteers and anyone who thinks can profit from some EU bashing; however it also heightens the probability that the EU will have interest of making an example of the UK. 

4/ BRRD: interesting test for the directive, as finally the inevitable seem to be happening to BMPS (unless they really manage to find an anchor investors). There isn't much uncertainty re what will take place, the legal framework is clear, moral hazard is being curbed, dodgy political connections have been removed, competition guaranteed. Total of needed interventions is not particularly big. I guess the main point here will be guaranteeing swift compensation to those investors who were missold subordinate bonds (under the watch of the Italian authorities, not the EU).

5/ On top of the elections in the Netherlands, 2017 will also see elections in France and Germany, and almost certainly in Italy too... then a few years to focus on solutions to problems. I bet there will be elections in UK too. 

6/ Italy still needs proper reform of governance, but it especially needs to improve public finances. There is very ample room to cut costs and lower taxes, and Renzi paid for not focusing more on economic reform.

 

Eoin Treacy's view -

Thank you for this email which may be of interest to others. I can’t say I agree with referring to the UK’s democratic right to debate EU membership as amateur hour but there is no debating that the UK has long had a Eurosceptic grouping while that is only a recent phenomenon in on continental Europe.



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December 09 2016

Commentary by Eoin Treacy

December 09 2016

Commentary by Eoin Treacy

Ford leads automakers in patents for 2016

This article by Greg Gardner for Detroit Free Press may be of interest to subscribers. Here is a section:

We are living the innovation mind-set in all parts of our business across the globe,” Nair said in a news release. “Our employees are delivering exciting new technologies for our customers at record levels.

The Dearborn automaker was granted 1,700 more patents in other countries, bringing the total to more than 3,100 patents granted worldwide this year.

One of those patents was granted to engineers Tony Lockwood and Joe Stanek for an invention that equips autonomous vehicles with drones.

The system deploys a drone from an autonomous vehicle to map the surrounding area beyond what vehicle sensors can see. Passengers can control the drone using the car’s infotainment or navigation system.

 

Eoin Treacy's view -

Just about all car companies are exploring the autonomous vehicle market while at the same time they are investing in electric vehicles. After all, software is a lot cheaper to develop than hardware. 
This week Apple also had to lay out for regulators some of what it has planned for the transportation market. Here is a section from a story from USA Today

"The company is investing heavily in the study of machine learning and automation, and is excited about the potential of automated systems in many areas, including transportation," Kenner wrote in the letter of Apple's ambitions.

Kenner said Apple supports a proposal that companies share "de-identified" data from crashes or near-misses to help improve self-driving technology, but warns the policy must take consumers' privacy into account.

"Data sharing should not come at the cost of privacy," said Kenner. "Apple believes that companies should invest the resources necessary to protect individuals’ fundamental right to privacy."

 



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December 09 2016

Commentary by Eoin Treacy

South Africa's Sibanye Gold to Buy Stillwater Mining for $2.2 Billion in Latest Platinum Push

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

The moves illustrate the tectonic shifts recalibrating the global mining industry after the commodities bust. The Stillwater purchase is Sibanye’s first foray outside of Southern Africa and its latest bold move to diversify beyond gold mining.

The acquisition is also a vote of confidence in the platinum group of metals, which includes platinum and palladium, most commonly used in the auto industry to reduce engine emissions, in addition to a strategic diversification away from the often-difficult operating environment in South Africa.
Sibanye has a long and storied history in the mining industry. It was spun off in 2013 from three aging South African mines held by Gold Fields Ltd., a company founded by colonial pioneer Cecil John Rhodes.

In a press release Friday, Stillwater, of Littleton, Colo., which has two mines in Montana and Colorado, said its board approved the deal. The $18-a-share bid represents a 23% premium to Stillwater’s closing price on Dec. 8. The two largest shareholders of Johannesburg’s Sibanye have confirmed their support of the deal.

Eoin Treacy's view -

Platinum is trading close to historic lows relative to the gold price. Part of the reason for this is because diesel has taken a hit from the Volkswagen emissions cheating scandal. Meanwhile the rise of electric vehicles represents an additional challenge since they do not require catalytic converters. These are important considerations but there is the additional fact that platinum is a small market, supply is limited and the cost of extraction is high. 



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December 09 2016

Commentary by Eoin Treacy

The Marketscope

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

Global headwinds and domestic uncertainties prevail in Nov’16
November’16 was a perfect storm for India, as rising US bond yields, a strengthening USD, and EM risk aversion, coupled with an unprecedented demonetization drive in India, led to a significant decline in Indian assets. MSCI India was down 5.3% during the month – underperforming MSCI EM/Asia by ~300bps. While equity markets underperformed MSCI EM/Asia for a fourth month, INR performed better than many EM currencies. INR depreciated by 2.4% in the month while other EM currencies such as TRY, MXN, BRL, and IDR depreciated by 4%-10%.

Sectors relatively immune to demonetization were clear outperformers 
The sectoral performance during the month was clearly driven by the market’s assessment of the likely impact of the demonetization drive. Sectors with a global orientation or that saw significant cash inflows after demonetization were outperformers. Accordingly, BSE Metals, BSE Power, BSE IT, BSE Oil & Gas and BSE Healthcare were the outperforming sectors. On the other hand, given the disruptive ramifications of demonetization for (i) consumption sentiment, (ii) the operations of businesses with a meaningful reliance on cash transactions, (iii) the wealth effect and (iv) expectations of further follow-up action on unaccounted wealth, BSE Realty, BSE Consumer Durables and BSE Auto were the biggest underperforming sectors, with the respective indices declining by 18%/13%/9% during the month. 

Tale of two investors: 8-year-high selling by FIIs matched by record DII buying 
The flows of domestic and foreign investors touched multi-year records, albeit in different directions. Driven by hardening US bond yields and generic risk aversion towards EMs, foreign institutional investors [FIIs] were net sellers of Indian equities at US$2.6bn – the highest monthly outflows since the global financial crisis eight years ago. However, sharp FII outflows were matched by equally robust inflows from domestic institutional investors [DIIs], which net bought US$2.7bn – the highest since at least 2007 and most likely the highest ever monthly inflows. The sharp surge in DII inflows could be attributable to (i) strong inflows into mutual funds in the preceding months, (ii) a likely continuation of strong inflows into MFs in Nov’16, (iii) lower valuations for stocks hit by demonetization, (iv) a sharp surge in buying by insurance companies (at US$687mn) after eight months of net outflows/anemic inflows.

Eoin Treacy's view -

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

The Dollar surged to test its high against the Rupee following Trump’s election success and the demonetisation announced soon afterwards. It has unwound much of the It unwound much of that advance over the last 10 sessions as optimism about the success of Modi’s strategy to legitimise large parts of the economy improved. The concurrent release of 4G mobile services is an additional tailwind since it opens up whole new avenues for growth that did not exist a month ago, not least for mobile banking and payments.  



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December 08 2016

Commentary by Eoin Treacy

December 08 2016

Commentary by Eoin Treacy

Euro Slides With Bonds on ECB Stimulus Signal; U.S. Stocks Mixed

This article by Stephen Kirkland and Lukanyo Mnyanda for Bloomberg may be of interest to subscribers. Here it is in full:

The euro tumbled with bonds as Mario Draghi signaled he stood ready to add to stimulus if a proposed reduction in the current level of asset purchases fails to shore up the economy. U.S. stocks fluctuated near all-time highs.

The European Central Bank’s pledge to cut bond buys while extending quantitative easing until the end of 2017 initially sent the euro higher. The currency reversed after the president kept the option open to add purchases. European stocks rallied with emerging-market equities. Yields on sovereign debt across Europe climbed and Treasuries fell. Oil advanced above $50 a barrel in New York.

“They’ve left themselves a degree of wiggle room between now and the end of March to say that if conditions are sufficient” they will maintain the current stimulus, said Jeremy Stretch, head of

Group-of-10 foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “There was clearly a degree of surprise in terms of the reference” to the cut from April, he said.

The euro slumped 1.1 percent to $1.0631 as of 10:15 a.m. in New York. The Stoxx Europe 600 Index jumped 1 percent, while the yield on 10-year Italian bonds climbed 11 basis points to 2 percent.

German two-year notes gained the most in more than two weeks as Draghi said the ECB will be buy assets yielding less than the deposit rate. The yield fell five basis points to minus 0.72 percent, the biggest decline since Nov. 22.

The S&P 500 Index slipped 0.1 percent after closing on Wednesday at a record high.

Eoin Treacy's view -

As I try to keep track of what is a swiftly evolving situation I am put in mind of fiddlers on the deck of the Titanic as it went down. The ECB has a clearly defined mandate to target inflation but without fiscal stimulus which is controlled by governments it has proven near impossible to foster in the manner they can measure. Meanwhile the political fabric that has held the currency union together is fraying and the ECB has no choice to continue to inject additional liquidity and to continue to buy the bonds of countries than may no longer be in the currency union a year from now. To do otherwise would only hasten the currency unions eventual demise but additional liquidity is unlikely to avert a crisis. 



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December 08 2016

Commentary by Eoin Treacy

Credit Outlook Q4 2016: As Benign Environment Ends, Bank Portfolios Suggest Future Stress

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

Even as the yield on Treasury and agency benchmark has risen, spreads for investment grade and high-yield securities have remained stable and even declined, suggesting that investors do not yet see the prospect of a Trump administration as heralding a bear market in corporate debt. Our colleague Fred Feldkamp, who has spent decades tracking the relationship between corporate bond spreads and economic performance, believes that the movement in the Treasury benchmarks is a leading indicator. “Remembering the Carly Simon song ‘Anticipation,’” Fred notes, “a widening of long-short Treasury spreads is often associated with eventual corporate spread expansion. This time I think the word is simple inflation.”

In the Treasury bond market, at least, investors are certainly anticipating an increase in inflation compared with previous levels seen over the past decade. This change in the cost of funding and inflation expectations has not yet translated into elevated corporate spreads or default rates, although a number of observers have postulated that credit costs must rise after the lengthy period of FOMC market intervention.

The latest data from the Federal Deposit Insurance Corporation for U.S. banks bears out this idea, with default rates generally continuing to fall in many asset classes other than commercial loans, but other indicators suggesting that the increase in asset prices has distorted these same markets. While overall revenue for the U.S. banking system rose almost 10% to $47 billion in Q3 2016, net interest margins fell under the continued downward pressure of the FOMC’s low interest rate policy regime. Yet as we note in our Rating Outlook for US Banks, credit performance continues to be stable at most U.S. banks.

Eoin Treacy's view -

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

The banking sector has exploded higher on the steeper yield curve, the prospect of looser regulation, greater economic growth, lower taxes and investor enthusiasm they may be able to return to growing dividends in a more aggressive manner. At least some of these expectations will need to be achieved by the incoming US administration if the breakouts are to be sustained. 



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December 08 2016

Commentary by Eoin Treacy

In mammoth task, BP sends almost three million barrels of U.S. oil to Asia

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

While BP's operations are currently the most sophisticated, others have also begun developing U.S./Asia trade.

China's Unipec, the trading arm of Asia's largest refiner Sinopec (600028.SS), is shipping about 2 million barrels of WTI to China this month, while trading house Trafigura is also exporting some 2 million barrels of U.S. oil to Asia.

Incentives to bring U.S. crude into Asia have risen after the Middle East-led producer club of the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut output, encouraging refiners across the region to seek alternatives to offset potential supply shortfalls.

"OPEC is putting U.S. shale oil to the test... (and) we will truly see what it can deliver," said Bjarne Schieldrop, chief commodity analyst at SEB. He predicted 2017 would be a "shale oil party" with a surge in U.S. exports after the OPEC production cuts.

The operation to send the oil, worth around $150 million, to Asia-Pacific buyers lasted four months and involved BP traders in the United States and Singapore, while colleagues from London were responsible for ship chartering, the sources said and data showed.

BP took advantage of arbitrage between cheaper U.S. West Texas Intermediate (WTI) CLc1 crude and the global benchmark Brent LCOc1.

The deal was aided by cheap tanker rates and a price/time curve, where future oil deliveries are more expensive than those for immediate discharge, making sourcing oil from as far away as North America profitable.

Eoin Treacy's view -

The US has just started exporting crude oil for the first time in decades and if the Keystone pipeline is finally permitted in 2017 if would give Canadian heavy crude an outlet to Texas’s refining and shipping infrastructure that would allow even greater volumes to be exported.

The expanded Panama Canal raises the prospect of a short-cut to Asia from Texas. That is of course once ships have been retrofitted to be tugged through the new canals which is taking somewhat longer than originally anticipated



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December 08 2016

Commentary by Eoin Treacy

Browning Newsletter

The authors of the Browning Newsletter which, veteran subscribers will be familiar with, are embarking on a new project directed at the Australian market. Their aim is to product a quarterly letter and the attached white paper is the first one, aimed at testing the waters so to speak. Here is a section:The authors of the Browning Newsletter which, veteran subscribers will be familiar with, are embarking on a new project directed at the Australian market. Their aim is to product a quarterly letter and the attached white paper is the first one, aimed at testing the waters so to speak. Here is a section:

With good water availability and good precipitation, the Australian grazing regions in South Australia, the Northern Territory and Queensland will be plentiful, the grazing regions along Western Australia will grow from IOD-created rainfall in the northern part of the province but will be poor in the southern part. Flood risks will lower mining yields along the northern part of Western Australia as well as create a higher property risk and insurance claims along the eastern shores. Finally the eco-friendly infrastructure in South Australia and Victoria have taken damage from recent flash floods. Look for the country to pursue investment opportunities into updating the infrastructure technology to handle more severe weather after repairs have been made.

Eoin Treacy's view -

One of the reasons the value investors get interested in stocks following a big decline is because it is relatively easy for a share to double from a very depressed level. The next doubling is usually when awareness has increased and new investors come in with a view to pushing prices higher overall.

The mining sector went through a deep correction where companies were forced to cut exploration and development budgets in order to manage their exposure to a falling price environment. The result is that they are going to be shy about spending a lot of money for the next few years and therefore cashflow should improve. That is part of the reason share prices have been rallying so strongly this year. As economic growth picks up that could well continue into next year before additional new supply comes on line.

Weather events like floods have the capacity to affect iron-ore production in particular, since so much global supply emanates from Pilbara. Nevertheless substantial damage would need to be inflicted to do more than temporary damage to infrastructure. 



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December 07 2016

Commentary by David Fuller

Italy Rebel Economist Hones Plan to Ditch the Euro and Restore the Medici Florin

The once-unlikely and remote prospect of an anti-euro government in Italy is suddenly becoming a real possibility, threatening to rock the European Union to its foundations within weeks. 

Events in Italy are moving with lightning speed. Key figures in the Democrat Party of premier Matteo Renzi have joined the chorus of calls for snap elections as soon as February to prevent the triumphant Five Star Movement running away with the political initiative after their victory in the referendum over the weekend.

Mr Renzi has not yet revealed his hand but close advisers say he is tempted to gamble everything on a quick vote, betting that he still has enough support to squeak ahead in a contest split multiple ways and that his opponents are not ready for the trials of an election. 

It could easily spin out of his control, opening a way for a tactical alliance of Five Star, the Lega Nord, and a smattering of small groups, all critics of 

The man tipped as possible finance minister of any rebel constellation is Claudio Borghi, a former broker for Merrill Lynch and Deutsche Bank, and now a professor at the Catholic University of Milan.

"We are coming to the point where Italy must make the real decision: are we for Europe or are we against it?" he told the Telegraph.

"What is emerging is a list of four parties or groups who all have one thing in common. We all agree that nothing is possible until we leave the euro."

"Europe has brought us a depression worse than 1929. It has led to entire peoples being broken and humiliated, like the Greeks, all for the sake of preserving the infernal instrument of the euro. This whole disaster has been adorned by a chain of lies, shouted ever louder because they are afraid that the colossal damage they have done will be discovered," he said.

Dr Borghi said the landslide 59:41 result in the referendum is a shock to Italy's powerful vested interests, or "poteri forti". "They are absolutely scared because none of their tools of control are working any more," he said.

"They invested huge prestige in the campaign. Confindustria [Italy's CBI], the chambers of commerce, and all of Italy's big employers were for the 'Yes' side. They said the banks would collapse, that we would lose all our savings, and that we would all go to Hell if we voted 'No', but it didn't work. It was Brexit reloaded," he said.

Professor Borghi said withdrawal from the euro would be messy but there are ways of mitigating the effects, first by creating parallel liquidity and letting it seep into daily life.

"The Italian treasury has €90 billion (£76 billion) in arrears on contracts. These could be paid with treasury bonds issued for as little as €50, €20, €10, or even €5, giving us time to create a second currency.

"When the time comes we can then switch to this new currency. It can be done electronically. We don't even need to print paper," he said.

Prof Borghi said the cleanest option is for Germany to leave the eurozone. If that is impossible Italy can pass a law to convert its debt obligations into lira overnight - or the 'florin' as he prefers to call it, harking back to the days of Florentine ascendancy under the Medici.

"The losses would shift to the national central banks through the Target2 system," he said. This means the Bank of Italy would repay €355bn on liabilities to eurozone peers (chiefly the Bundesbank) in devalued lira. The Bundesbank would face instant paper losses on its credits - effecting €700bn in the likely event that an Italian exit would lead to a general return to sovereign currencies.

The sums are in one sense an accounting fiction. The trial run was the collapse of the Swiss franc peg against the euro in January 2015. The Swiss National Bank suffered vast theoretical loses on its holdings of eurozone debt when the franc revalued, but life went on regardless.

The gamble is that large sums held by Italians in accounts in London, New York, Paris, or Munich, or held in safe-deposit boxes in Switzerland, would flow back into the system as soon as the boil is lanced, and once Italy has returned to exchange rate viability. Foreign investors would view Italy as a far more competitive prospect. 

"I don't see any disaster. There is no way to smash our currency since we have a trade surplus. If we had a weaker exchange rate we would have an even bigger surplus," he said.

For Italy's eurosceptics a return to the lira would be a liberation after fifteen years of economic decay that has hollowed out the country's manufacturing core. Industrial output has fallen back to the levels of 1980. Real GDP per capita is down 13pc from its peak.

A report this week from the statistics agency ISTAT said the numbers at risk from poverty and social exclusion last year rose to 28.7pc, and a fresh high of 46.4pc in South, and 55pc in Sicily - the epicentre of the 'No' vote in the referendum.

A study by Mediobanca found that Italy's growth rate tracked that of Germany almost exactly for thirty years. The pattern changed with the advent of the euro, which precluded devaluations and led to a slow but fatal loss of labour competitiveness  - like a lobster being boiled alive. 

David Fuller's view -

Eurocrats remain in isolated arrogant denial.  Since the 1990s, numerous people have pointed out that no currency union in history has ever survived without fiscal union.  Having ignored this historical evidence in the interests of ‘discipline’, they have succeed in impoverishing countries which were certainly not bankrupting themselves as members of the post WWII alliance known variously as the European Common Market and the European Free Trade Association.  In fact, they were doing rather well, managing their own currencies in line with their economic performance. 

However, once they entered the European Exchange Rate Mechanism, the initial benefit of lower interest rates was eroded by the loss of control over their own currencies.  Economies known primarily for their agricultural products and tourism can be prosperous, not least Italy which has an industrial core, but their currencies seldom match those of the primarily manufacturing nations over the longer term.   

Without fiscal union, which understandably has even less appeal for the electorates in EU countries today, the currencies have to change.  Either Germany leaves the Euro returns to the Deutsche Mark, or the Southern European countries leave the Euro.  Germany will not want a stronger currency but Southern European nations would welcome an orderly return to their former currencies.  It is in everyone’s interests that this be done in a non-punitive manner, but wise leadership has not been a characteristic of Euroland.  

(Note this prescient advice from AEP nearly 6 years ago: Self-righteous Germany must accept a euro-debt union or leave EMU)



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December 07 2016

Commentary by David Fuller

Like the House of Bourbon, the Euro Will Eventually be Broken on the Anvil of Popular Insurrection

There have been many other things that Europe has got wrong, but the overarching one is monetary union. From this original sin flows so many of our current difficulties. We know this to be true because countries in the EU but outside the single currency, such as Britain and Sweden, have fared much better than those in it.

So how come the euro hasn’t already collapsed under the weight of its own contradictions? And with populist, nationalistic insurgency in the ascendant across western economies, are we finally approaching the end game?

The euro is virtually unique in the history of monetary economics in being a currency without a government. Rather it is a shared, or common currency, in which each member notionally has some sort of a say. Europe’s founding fathers knew that monetary union couldn’t be made to work without a high degree of accompanying fiscal and political union, but cynically regarded it as a means of achieving that end. A United States of Europe would be forged in crisis, they figured, driving through the goal of political union against the centuries old instincts of Europe’s many tribes.

And in theory it could indeed be made to work. But in a confederation of proud nation states which finds it virtually impossible to agree even common deposit insurance, let alone a proper banking or fiscal union, it seems ever less likely.

No monetary union can last for long without a unified system of deposit insurance. It would be unthinkable, for instance, for London to refuse to participate in  deposit insurance for the country as a whole because there is a bank in Yorkshire which it fears might go bankrupt. 

Yet that’s precisely what happens in the eurozone; Germany refuses common deposit insurance with Italy because it fears being left on the hook for essentially insolvent banks such as Monte Dei Paschi Di Siena. Similarly, it would be unthinkable for the citizens of Edinburgh to be made wholly responsible in extremis for bailing out the whole of Royal Bank of Scotland. Fiscally, it would break them beyond redemption. But that's essentially how it works in Europe.

The eurozone pretends to be a fully fledged monetary union while behaving as if it were still a collection of siloed nation states. 

David Fuller's view -

In financial terms, EU officials are likely to be the last to accept that they are on the wrong side of a bad trade.  Too much uncertainty and anger are being felt right now.  Also, all those unelected and pampered EU bureaucrats in Brussels will prioritise keeping the EU show on the road, whatever the cost.

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



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December 07 2016

Commentary by David Fuller

Email of the day

On the Milken Institute London Summit:

Yesterday I attended the annual Milken Institute London Summit. I was invited by the organizers as a non-paying guest I am glad to say in view of the high registration fee. It was a great day, the organizers did a superb job, and  I have extensive notes  from several sessions that I am sure will be of interest to you and Eoin. I have attached a pdf containing my notes on the opening plenary which was a panel discussion on Brexit. I wrote this up first because I thought it would interest you. It was particularly thought-provoking and entertaining, as you can read! The video of the 1 hour panel is available today online at the Milken Institute website and I have added the URL within the pdf. If you think subscribers would be interested, then please feel free to post the notes in your daily update. Please feel free to name me as the contributor if you wish.

Other sessions I attended were about finance, investment, healthcare and new technologies. I will send more summaries in coming days.

David Fuller's view -

Thank you, David, and I am sure subscribers would be interested to hear your further notes on topics of interest from the Milken Institute Summit.  However, having read your droll summary of the first session, which I would call the mostly anti-Brexit panel notes, I was very glad that you did not have to pay the “high registration fee”. 

I hope you were able to ask questions of the panel members, or at least throw fruit.  I would have liked to ask Anton Muscatelli why he thought the negative impact in loss of GDP for the UK by 2030 was going to be 2.7%-9.5%, rather than perhaps 2.8%-9.6%.

I like Niall Ferguson and find him somewhat abrasive but always interesting and generally well informed. I am sure he saved the panel as an event, although they appeared to ignore his sensible challenges.  They were frightened and rude, it seems.

Good point on the Russian chief economist of the European Bank for Reconstruction and Development, who sounds like an EU propagandist.       

Roland Rudd’s quip about “the great lesson of the referendum is you have to be mad to hold one”, is amusing but also suggests that he does not really believe in democracy.  After all, what could be more democratic than a referendum, with a straightforward In or Out vote?

I thought Ferguson’s follow-up challenge was most apt and I’m not surprised that they ignored him for saying, correctly in my view, that they were condescending and patronising. 

The chair’s concluding statement: “Does Democracy only work in a society of intelligent people?” – is indeed stunning.  We hear some of that from Remainers, and many Democrats have uttered very similar comments following Trump’s victory. The President-elect’s apt, unstated riposte is the stunning new all-time highs on Wall Street following two or more year long trading ranges for most US stock market indices.   

(Note: the email and Brexit panel notes are from Dr David Brown who will be the guest speaker at our next Markets Now on 16th January. David’s fascinating topic will be: “Our new Industrial Revolution”.  I can’t wait.)    



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December 07 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Here is Iain Little’s excellent presentation, delivered on 28th November.  Unfortunately, I am unable to post Clive Burstow’s timely presentation on Global Resources for reasons of compliance, including some of the proprietary material covered. 

 

Please note: I will be otherwise engaged on Thursday & Friday, but will resume my commentary on Monday, including an Audio.    



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December 07 2016

Commentary by Eoin Treacy

December 07 2016

Commentary by Eoin Treacy

Chinese-Korean group to build $2 billion lithium batteries plant in Chile

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

Lithium, frequently referred to as "white petroleum," drives much of the modern world, as it has become an irreplaceable component of rechargeable batteries used in high tech devices.

The market, while still relatively small — worth about $1bn a year — is expected to triple in size by 2015, according to analysts at Goldman Sachs

That should be great news for Chile, as the country contains half of the world’s most “economically extractable” reserves of the metal, according to the US Geographical Survey (USGS). It is also the world’s lowest-cost producer, thanks to an efficient process that makes the most of the country’s climate.

Chile is essentially “the Saudi Arabia of lithium,” according to Marcelo A. Awad, executive director of the Chilean brand of Wealth Minerals, Canadian company that also has interests in Mexico and Peru.

The country, he noted in a recent interview, is perfectly positioned, with ports across the Pacific from the world’s largest car market, China, which is expected to increase electric vehicles production in years to come. There, lithium is also used to manufacture rechargeable ­batteries that power hundreds of millions of smartphones, digital cameras and laptops.

The challenge for foreign investors, particularly the Asian conglomerate, is to persuade Chilean authorities of making the leap from exporting the white metal to producing lithium batteries at the point of extraction.

Estimates from the group’s advisors believe opening the proposed plant would make the value of the product 35 times higher than what it could be obtained by just selling it as lithium carbonate

Eoin Treacy's view -

Elon Musk might be one of the world’s great promotors but there is no denying that he has upended the automotive sector with just about every major auto manufacturer planning to release a range of electric vehicles within the next few years. 



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December 07 2016

Commentary by Eoin Treacy

Electric Cars May Take an OPEC-Sized Bite From Oil Use

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

Wood Mackenzie’s view echoes the International Energy Agency, which last month forecast global gasoline demand has all but peaked because of more efficient cars and the spread of EVs. The agency expects total oil demand to keep growing for decades, driven by shipping, trucking, aviation and petrochemical industries.

That’s more conservative than Bloomberg New Energy Finance’s forecast for EVs to displace about 8 million barrels a day of demand by 2035. That will rise to 13 million barrels a day by 2040, which amounts of about 14 percent of estimated crude oil demand in 2016, the London-based researcher said. Electric cars are displacing about 50,000 barrels a day of demand now, Wood Mackenzie said.

 

Eoin Treacy's view -

There is the world of difference between predicting that electric vehicles will account for an increasingly large portion of the global automobile market and predicting that aggregate demand for crude oil will decline meaningfully.  



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December 07 2016

Commentary by Eoin Treacy

Outlook for 2017: Better times ahead

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

According to a joint study by Thomson Reuters GFMS and the Silver Institute, the global silver market will record a supply deficit this year for the fifth year in succession. However, at 52.2 million ounces (1,623 tons), this is less than half what it was last year (chart 7). Silver demand should have fallen by 9% to a 4-year low of 1,064.6 million ounces (33,109 tons), while silver supply should fall by “only” 3% to 1,012.4 million ounces (31,486 tons). The biggest drag on the demand side is a 24% decline in demand for coins and bars. Jewellery demand is also expected to dip by nearly 8%. Industrial demand, which accounts for around half of total demand for silver, also declines, albeit only slightly. A steeper fall has been prevented by the rise in photovoltaics which is projected to have risen by 11% to a record level.

On the supply side, 2016 should see the first – albeit slight – fall in global mining production for 13 years (chart 8, page 5). This is because, following the closure of numerous zinc and lead mines, less silver is produced as a by-product. Due to liquidation of hedging positions (dehedging) by mining producers, additional supply has been withdrawn from the market. The supply of scrap silver, however, remained virtually unchanged. Owing to a significant rise in demand for silver ETFs – GFMS assumes net inflows of 71.4 million ounces (2,220.5 tons) for 2016 – and almost as large an increase in exchange-registered stocks, the broader market deficit has increased to 185.5 million ounces (5,769 tons). This is the highest figure since 2008.

The deficit should turn out somewhat lower due to recent large ETF outflows, though.
For 2017, Thomson Reuters GFMS and the Silver Institute except silver demand to decline by a further 3% to 1,035.0 million ounces. The supply of silver on the other hand should rise by around 1% to 1,024.8 million ounces. All demand components apart from jewellery are expected to decrease, with coins and bars once again falling the most, dipping by 9%. Industrial demand should fall by 2%, as demand from the photovoltaic sector – in contrast to the previous year – is also expected to decline, meaning that it can no longer compensate for persistent weakness in other sectors. Industrial demand would thus shrink for the seventh year in a row (chart 9). The increase in the supply of silver is almost entirely due to a larger supply of scrap silver, which should rise by 11% in response to higher prices. This will largely compensate for the accelerated decline in mining production by around 2% compared with the previous year. At the same time, de-hedging by silver producers will decline next year, meaning that less supply will be withdrawn from the market. Consequently, the deficit on the physical silver market is expected shrink to only 10.2 million ounces. This would be the smallest deficit since the last surplus year of 2012. ETFs are expected to record inflows of 40 million ounces. The broader market deficit would thus amount to 50.2 million ounces, a reduction of more than 70% compared with 2016.

Eoin Treacy's view -

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

The bond market has priced in the return of some inflation, at least the kind central banks measure. However it has yet to appear in official statistics with the result that real interest rates have posted a rather large move. Precious metals tend to do best when inflation is outpacing interest rate increases (negative real interest rates) which is not currently the case. There is ample potential for inflation to pick up if fiscal stimulus is implemented next year which suggests there is scope for precious metals to regain some of their lost lustre next year. 



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December 06 2016

Commentary by David Fuller

The Euro Has Trapped Poor Countries Like Italy In a Failed Experiment. It Must Give Them an Exit, or Collapse

Helmut Kohl brushed aside all arguments against the single currency. President Chirac invited me to the Elysee Palace to hear the virtues of monetary union. Seventeen years later, the question is whether their successors will have the vision to dismantle their monumental mistake, now a prime cause of unemployment, stagnation and populist fury. 

Those of us who were sceptical of the euro argued that a monetary union would inevitably require a political union, centralising decisions about tax and public spending, and that we didn’t want to be part of that.

While we were right about that, we actually underestimated the problem – the euro has become so damaging and divisive that public opinion within it will not tolerate a political union. So not only was the cart put before the horse, but the horse will not now contemplate even following the cart at a distance.

The second respect in which the euro has exceeded our worst fears is that it has made some countries, like Italy and Greece, poorer while others get richer.

We always maintained that forcing many countries to have the same interest rates and exchange rate would be a problem: some would have booms followed by big busts, as has happened in Ireland, Portugal and Spain. The enthusiasts told us that this would be temporary and “convergence” of all the members would follow. 

Again we sceptics were right. But we could have gone further. Not only are eurozone economies not converging, they are conspicuously diverging. The per capita income of Italians is lower now than in 2000, which is why they are – not surprisingly – getting increasingly restive. In the meantime, the German economy has kept on growing, and the average German is about 20 per cent better off over the same period.

Why is this? Because the euro is a cheaper currency than Germany would have if it still had the deutschmark, while it is more expensive than Italy would have if it still used the lira. Germans therefore keep exporting easily and running up a surplus, while the Italians struggle and go deeper in to debt.

Furthermore, the freedom of movement of capital in Europe probably makes this worse – why would you put your euros in an Italian bank when you can invest them in Germany?

Membership of the euro has thus put the Italians on a permanent path to being poorer. Unless Mr Renzi was going to enact such extraordinarily bold reforms as to raise the productivity of Italian workers to the same level as their German counterparts, there was nothing he could do to stop this.

His defeat has not made the eventual break-up of the euro more certain, because that is coming anyway. It has simply made it more obvious.

Leaving the euro, however, is a far more difficult problem than leaving the EU. As everyone now knows, Article 50 provides for leaving the latter. It may be a vague and inadequate rule, on which our Supreme Court is now deliberating at length, but it is nevertheless a rule that provides for getting out.

The eurozone has no such rule. This is a burning building you are never meant to leave. What is more, you are barricaded in. If you contemplate leaving, you have to face not having any notes and coins of your own; the need to default on debts that will be even bigger when your new currency goes down in value; and the collapse of your banks because being in the eurozone means they were able to borrow money they should never have been lent. 

Tens of millions of people in southern Europe will increasingly find that they cannot tolerate staying in the euro, but nor can they leave it without great cost.

Their anger and resentment will only intensify. The question now is whether Europe’s leaders will cling to a project that has failed even more spectacularly than its critics imagined, or have the statesmanship to provide a way out for those who conclude they have to go.

The euro is going to need a financial Article 50 – a way of providing for exit, which shares the costs of leaving and gives international help to those departing a scheme they should never have joined. Of course, the mere admission that such thinking is necessary would damage confidence in the single currency.

It would mean going back on the dream of the 1990s. That is why no one in authority in the eurozone will want to admit that they need to invent an orderly exit. It is anathema to them – the collapse of their beliefs. But those who have trapped entire countries in a vast, failed experiment have a responsibility to help them get out.

David Fuller's view -

In the long, sad history of bad ideas, one of the worst was the creation of a single currency without having first created a fiscal union with a central government.  This should have been able to smooth out differences in economic growth and development, with more prosperous states subsidising weaker ones via the transfer of capital and developmental projects. 

Anyone with a basic understanding of economic history knew this, and many said so, often repeatedly.  However, Germany and France did not want a fiscal union of very different nations, with long and often rivalrous histories in the post-WWII environment.  Similarly, there was little support for a superstate of Europe among the various European populations.  It was, however, a political ambition of many European leaders. 

Europe’s best idea during the recovery following WWII was the creation of the European Common Market.  What could be better than an economic zone in which citizens of the new European democracies were able to travel and trade freely with each other? It worked well in terms of GDP growth and a reassuring harmony among the region’s populations.  It also had the blessings of other democracies around the world, but it was not a global power. 

Convergence first started to go wrong in the exchange rate mechanism (ERM) introduced in 1979, misguidedly intended to reduce currency swings and create monetary stability in Europe.  ERMs will reduce currency differentials but at the cost of growth in less competitive economies which are required to keep their currencies within specified boundaries and no longer have the freedom to devalue.  This was made tighter when it became the European Currency Unit (ECU) in 1995.

The introduction of the euro in 1999 has been a disaster for all but Germany, as most people now know.  The EU has consistently underperformed economically and the unemployment levels in Southern European Countries are obscene.  The headline above describes Italy as a poor country.  Yes, it is today but Italy was quite prosperous prior to the European ERM, the ECU and now the Euro.

The important question today, emphasised by William Hague above, is whether the EU’s leaders from Germany, France and the unelected Brussels bureaucracy have the statesmanship to assist Italy and any other countries which wish to leave the Euro, to do so without suffering unnecessarily punitive damages.    

(Please note: I emboldened a paragraph in the portion of William Hague’s article above.)

(See Also: It’s time Blair, Major and Clegg spared us their patronising guff on Brexit, by Allison Pearson of The Telegraph)

PDFs of the two articles are posted in the Subscriber's Area.



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December 06 2016

Commentary by David Fuller

The Trump Bump In the Markets Is Powered By a Welcome Cut In Corporate Taxes

A wave of new technologies led by robotics and artificial intelligence; the opening up of China’s equity markets, with all that country’s vast potential, to global investor; recovery of global trade; or a boom in mergers and acquisitions as companies revive their appetite for dealmaking – there are plenty of forces which could give this bull market fresh impetus, drive equities higher throughout 2017, and make it one of the longest upturns in stock prices since records began.

But here is one that few people have noticed: corporate tax cuts. On Wall Street, the “Trump Bump”, to use the term traders have latched upon for the way Wall Street surged ahead since Donald Trump found his way into the White House, has been largely driven by his promise to reform the United States’ crazily high corporate taxes.

But it is not just the US that is cutting the amount companies have to pay. In this country, corporation tax is being driven down to historic lows; the Swiss are cutting canton by canton; and the Japanese have already started edging rates down.

As corporate taxes are reduced around the world, some of that money will go to staff in higher wages, some to consumers in lower prices. But in the first instance, it will translate into higher profits and dividends, and that is inevitably going to push every major index upwards.

In the run-up to the US presidential election, it was widely assumed that the steady, experienced, if slightly dull Hillary Clinton would usher in a rally on Wall Street, while the wild, unpredictable, protectionist Trump would trigger a wave of panic selling. As it happened, much like Britain’s vote to leave the European Union back in the summer, it did not work out like that.

Instead, after initial nervousness, the main markets are all up strongly. The S&P 500 slumped to 1,800 after the election, but has since bounced back to 2,200, while the Dow has broken through its all-time high and is closing on the 20,000 barrier.

The explanation? Trump turned out not to be quite as completely unhinged as he sometimes appeared on the campaign trail, and he has assembled an economic team with plenty of Wall Street experience. But one of the main reasons has been his pledge to significantly reduce the rate of corporation tax.

At 39pc, once state and federal taxes are combined, the US has one of the highest corporate rates in the world – only the United Arab Emirates and Chad take more from businesses. It was so high that companies were starting to move abroad.

Clinton’s only answer to that was to impose heavy “exit taxes” on anyone impudent enough to leave – the kind of thing the East German Politburo might have come up with on a bad day. Trump by contrast has promised to dramatically slash it, taking it all the way down to 15pc. Whether he can get that through Congress remains to be seen. But there can be little doubt the bill is going to come down significantly.

David Fuller's view -

This is a very upbeat article by Matthew Lynn, as he extrapolates the initial response to President-elect Trump’s plans for a bold programme of economic stimulus led by dramatic cuts in corporate taxes.  Markets also like the Wall Street leaders who will be Trump’s advisors. 

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



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December 06 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  



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December 06 2016

Commentary by Eoin Treacy

December 06 2016

Commentary by Eoin Treacy

"Serenity Now"

Thanks to a subscriber for this report by Jeffrey D.Saut for Raymond James which may be of interest. Here is a section:

To be sure, all of this fits with our thesis the equity markets are transitioning from an interest rate-driven to an earnings driven secular bull market. To that point, many of y’all know we are on an email “string” with folks like Arthur Cashin, David Kotok, Dennis Gartman, Bob Pisani, etc. It is a freewheeling exchange of thoughts that provides very interesting insights. Last Thursday, the savvy Bob Pisani wrote this: 

President-elect Trump's proposed nominee for U.S. Treasury Secretary, Steven Mnuchin, said on our air yesterday that the administration was still targeting a reduction in the corporate tax rate from 35% to 15%. The current 2017 estimate for the entire S&P 500 is roughly $131 per share. Thompson estimates that every 1 percentage point reduction in the corporate tax rate could "hypothetically" add $1.31 to 2017 earnings. So do the math: if there is a full 20 percentage point reduction in the tax rate (from 35% to 15%), that's $1.31 x 20 = $26.20. That implies an increase in earnings of close to 20%, or $157. What does that mean for stock prices? The S&P is currently trading at a multiple (PE ratio) of 17, high by historical standards. Applying that 17 multiple to earnings of $157, we get a price on the S&P 500 of roughly 2,669 for 2017. That is 469 points or roughly 20% above where it is today.

Our sense is the new administration will not be able to get the corporate tax rate down to 15%, but even at a 25% rate, it implies an additional $13.10 to the S&P 500’s bottom up operating earnings number ($1.31 x 10 = $13.10). Using Bob’s same math produces an earnings estimate of $144.10, and at 17 times earnings, it renders a price objective of roughly 2450 for the S&P 500.

 

Eoin Treacy's view -

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

A successful transition from an almost total reliance on easy monetary policy to an expansion predicated on improving profitability can be considering the best possible scenario. With corporate margins at record highs cuts to corporate taxes could well be what is required to lend an additional boost to justify higher equity prices. 



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December 06 2016

Commentary by Eoin Treacy

Email of the day on sell the rumour, buy the news

I am intrigued by the move in the Euro, moving stronger when all sense says the Italian referendum vote is a negative and the Austrian Presidential vote is an escape (the winner is still a fringe candidate). I have copied a quote from Reuters report this evening. The bounce was chiefly down to over-extended bets against the euro, traders said, with investors choosing to cash in gains and lighten their short positions ahead of Thursday's European Central Bank policy meeting. "I think the euro is going to strengthen a lot now. I think it is way oversold," said Nick D'Onofrio, chief executive at London-based hedge fund North Asset Management. My question, did the charts show an over extension or is this reverse logic to explain the unexplainable reaction? With uncertainty one might expect the dollar to continue to strengthen and gold to go with it for the risk haven, first reaction to the Italian vote followed this path then as Europe opened, then US, all changed. Is this "go figure" or was it all in the charts! Yours Confused

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. As a veteran subscriber you will have seen us comment about bear markets before and may recall this maxim: A crisis needs to be seen to be getting worse for it to continue to have an increasingly bearish impact on prices. The Italian referendum highlights the disaffection of the Italian electorate with Mario Renzi but since there is not going to be an election that is about all we can say. That was already priced in with the Euro falling from $1.10 to $1.05 over the last month and the situation did not get worse immediately after the vote. 



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December 06 2016

Commentary by Eoin Treacy

Wall Street as Landlord: Blackstone Going Public with a $10 Billion Bet on Foreclosed Homes

This article by Ryan Dezember may be of interest to subscribers. Here is a section:

“We’re no longer trying to convince the investment world this is a legitimate business,” Fred Tuomi, Colony Starwood’s chief executive, said in an interview. “We’re not in this to simply fix and flip. We’re in this for the long-term, steady and growing income stream.”

Though the chance has passed to acquire thousands of houses at steep discounts, Colony and its competitors are still buying individual homes here and there as well as groups of homes bundled by other investors during the crisis, Mr. Tuomi said. Colony, he said, could manage about 100,000 homes without having to invest much more in the systems it built to manage them.

Economic factors have helped the stocks in the sector. Home prices have risen above their 2006 peaks in much of the country, boosting the value of these firms’ holdings. That and rising interest rates have pushed homeownership out of reach for many. Lately, the homeownership rate has hovered around its lowest level in at least 50 years, according to U.S. Census data.

Meanwhile, rental vacancies, including apartments, are at their lowest level in at least a decade at 6.8% in the third quarter. Rents are up, particularly in single-family homes, where rents are growing faster than at apartments, according to Green Street Advisors LLC.

 

Eoin Treacy's view -

Large funds are betting big on the inability of a large demographic that will never be able or inclined to afford a home. Record student debt, underemployment of highly educated workers and rising living costs have all fed into the conclusion that millions of Americans will not be able to save enough to pay for a down payment. 



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December 06 2016

Commentary by Eoin Treacy

Parkinson's May Actually Originate From Microbes in the Gut

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

Mice bred to develop Parkinson’s were put in cages that were either sterile or non-sterile. The mice in the germ-free cages manifested less motor degeneration, and their brains had reduced tangling of the protein a-synuclein. They had “almost normal performance” in motor tasks. The researchers injected gut bacteria from human Parkinson’s patients into these mice, and they deteriorated quickly. This effect did not occur with bacteria taken from healthy humans.

The mice in the normal, non-sterile cages developed the expected symptoms of Parkinson’s. When treated with antibiotics, their symptoms were reduced, suggesting effectiveness in a microbial approach to the disease.

Gut bacteria taken from healthy people didn’t have the same effect.

 

Eoin Treacy's view -

There are more nerve endings in your gut than your brain so in one sense you gut is smarter than you think. That makes intuitive sense considering the work that goes into breaking down everything we put into our mouths into useable fuel and waste. The microbiome living in each of our gut’s has an inordinate effect on both health and mood. With advances in genetics it represents a rapidly evolving field of study we are sure to hear more about in 2017. The more I read about the subject the better my diet has become, you really are what you eat. 



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December 05 2016

Commentary by David Fuller

Stakes Are High In Showdown for British Future Energy Strategy

Here is the opening of this topical article from The Telegraph:

It is high noon for Britain’s fledgling energy policy. Years of failed interventions, arbitrary green targets and damaging subsidies will come to a head in this week’s capacity auction, when we will either see investors commit to building desperately needed new power plants or simply walk away. 

The stakes could not be higher, for the Government and for those policymakers who believed they had designed a credible strategy to keep the lights on.

How have we got here and why does so much in this sector now hang on a complicated and little-known auction process? 

The overriding issue remains the urgent need to replace old coal-fired power stations, which have served the UK since the 1960s, with new plants that burn natural gas to generate electricity. At this stage, we can forget Hinkley C, as it will not be ready in time.

These gas-fired power stations,  known as CCGTs, can be built relatively quickly, are much cheaper than new nuclear plants, and are 50pc cleaner than coal; however, they are years behind schedule, because of a failure by government to deliver the right investment landscape.

David Fuller's view -

Very few economies are relatively strong without competitive energy costs.  The UK has not been in this position since North Sea oil revenues from approximately 1981 through 2003 went into significant decline thereafter, leading to increased energy import dependency from 2004 onwards (see graph which Telegraph subscribers can access via the link above).  

Thereafter, inadequate long-term planning by successive UK governments, combined with EU group think on leadership in emissions control.  Unfortunately, this was achieved at the cost of future energy supplies.  Until this problem is adequately addressed by the government, commencing with extensive fracking, UK energy costs will remain higher than necessary and supplies will be barely adequate. 

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



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December 05 2016

Commentary by David Fuller

Ailing Banks in Italy Now Have to Wade Through the Referendum Quagmire to Secure a Rescue

Italy's Matteo Renzi thought the "silent majority" would save him, if only he could chivvy enough of them to polls. The prime minister misjudged disastrously.

The voters certainly turned out. They smashed through the 60pc threshold that Mr Renzi thought would secure him victory in the constitutional referendum, but only to register their silent anger  - with him, with his government, with Brussels, and with an Italo-European establishment that has run the Italian economy into the ground.

"I didn't realise they hated me so much," he confessed before his resignation, the wunderkind of European politics no more. 

Markets have reacted with insouciance to the epic scale of Mr Renzi's defeat, betting that the Italian political class will somehow put together a new caretaker government and that business will carry on as usual.  "It's not a psycho-drama," said the EU economics commissioner, Pierre Moscovici.

The reflex of traders after Brexit and the Trump shock is to "buy the dip" on political upsets, but it is far from clear whether the tumultuous events unfolding in Italy have anything in common with Anglo-Saxon episodes, or indeed with any other episode in modern Italian history. 

The European Central Bank has bought calm for now by intervening in the bond markets, holding down yields on 10-Italian debt to 2pc. This in turn has steadied the currency markets. The euro has risen slightly against the dollar. 

But the ECB is effectively "front-loading" purchases of Italian bonds on a short-term basis, which means it will have to buy less early next year since it cannot alter the total volume under its €80bn programme of quantitative easing each month.

"I am worried about what is going to happen in February when the Italian treasury has to redeem €49bn of bonds. The ECB may not be able to remain aggressively in the markets that long," said Professor Erik Jones, director of European studies at Johns Hopkins University in Bologna.

The ECB cannot legally step in as a lender-of-last resort for Italian bonds unless Rome requests a formal bail-out under the European Stability Mechanism (ESM), and this requires votes in the German and Dutch parliaments, among others. 

The terms would be draconian. Italy would lose even more control over its budget. It would amount to a Troika-style take-over of the economy, or a "commissariato" in the horror parlance of Italian politics. "If Europe humiliates Italy and puts the government under a tight rein, then you really will see a popular insurrection," said Professor Jones.

Belying the apparent calm, the Italian authorities are scrambling to prevent the collapse of their intricate rescue plan for banks, knowing that failure would set off a dangerous chain-reaction. 

David Fuller's view -

Mario Draghi calmed the markets by purchasing more Italian Government bonds with his £80bn a month programme.  However, troubles lie ahead, from Italy’s need to redeem €49bn of bonds in February to a possible request from Rome for a formal bail-out, as AEP points out above. 

Matteo Renzi would still be in office, for better or worse, had he not made a tactical error in thinking a referendum was similar to a general election.  In the referendum, he was on his own and lost with approximately 40% of the vote.  As one of several candidates in a general election, he would have won with the same 40%.  His age is only 41 and he has some charisma, so we may see him run again at some stage.  However, unless Brussels and Germany tread softly in dealing with Italy’s financial problems, which they may not, Beppe Grillo’s Five-Star Movement could succeed with an anti-Euro campaign.      

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



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December 05 2016

Commentary by David Fuller

Email of the day

On Tony Blair’s ‘logic’:

Following Tony Blair's 'logic', this is what should have happened when he was elected in 1997. The losers in the general election should have demanded another vote until voters 'get it right', when of course no more voting would be allowed. What a pity we did not do that to the man who inherited the best economy the UK had in a century and who then proceeded to make the country bankrupt - while stuffing his own pockets.
Sorry if this is blunt, but the dishonesty and deviousness of the man is shocking. I guess he still aches to lead the EU, and is so full of himself that he cannot see they will never consider him.

David Fuller's view -

 

"Blunt", yes but I am glad you said it and I think many subscribers will agree with you.

The build-up to Blair was also depressing because the Conservatives had lost their way. After forcing out Margaret Thatcher - the best Prime Minister I have ever seen - the Tories were divided and had a weak government led by John Major who unwisely joined the EU's Exchange Rate Mechanism. 

In 1997 Labour's Tony Blair appealed as a fresh-face and politically middle-of-the-road candidate. Following 9/11 in 2001, he became much closer to George W Bush (perhaps to escape from power-hungry Gordon "big clunking fist" Brown?). When Blair was eventually pushed aside by Brown in mid-2007, the new Prime Minister opened the financial taps even wider, encouraging more leveraged borrowing and a bigger house price bubble, heading into the Crash of 2008.

Let’s hope those mistakes are not repeated in the next few years.   



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December 05 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  



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December 05 2016

Commentary by Eoin Treacy

December 05 2016

Commentary by Eoin Treacy

Euro Gains With Stocks as Italy Vote Absorbed in 'Three Minutes"

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

The common European currency rose against the dollar even as Italy slid into political limbo after Italian Prime Minister Matteo Renzi’s resignation opened the door to fresh elections. The euro earlier fell to its weakest in 20 months. European shares headed for the biggest gain three weeks, while the cost of insuring Italian bank bonds against default jumped. Gold headed for the lowest close since February, Treasury 10-year yields rose to 2.42 percent and a gauge of equity-market volatility slid.

Political risk from Italy hasn’t spread beyond its borders as markets were correctly positioned for the anti-establishment mood sweeping around the world. This was a departure from the Brexit referendum and Donald Trump’s surprise election, when traders were caught out by populist votes.

“After Brexit, it took three days for markets to shake it off, with Trump it took three hours, with Italy it took three minutes,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. His firm oversees $260 million. “The outcome was not as much of a surprise as many expected it to be -- markets learned their lesson.”

 

Eoin Treacy's view -

The Italian decision to vote No on the referendum was widely anticipated with the risk residing in whether a snap election would be called. With that option being swept aside soon after the decision, some of the shorts on the Euro were closed in what is a classic example of “sell the rumour, buy the news”. 



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December 05 2016

Commentary by Eoin Treacy

Information Gaps and Shadow Banking

This article by Kathryn Judge from Columbia University School of Law may be of interest to subscribers. Here is a section:

This article argues that information gaps—pockets of information that are pertinent and knowable but not currently known—are a byproduct of shadow banking and a meaningful source of systemic risk. It lays the foundation for this claim by juxtaposing the regulatory regime governing the shadow banking system with the incentives of the market participants who populate that system. Like banks, shadow banks rely heavily on short-term debt claims designed to obviate the need for the holder to engage in any meaningful information gathering and analysis. The securities laws that prevail in the capital markets, however, both presume and depend on providers of capital playing the lead role performing these functions. In synthesizing insights from diverse bodies of literature and situating those understandings against the regulatory architecture, this article provides one of the first comprehensive accounts of how the information related incentives of equity and money claimants explain many core features of both securities and banking regulation.

The article’s main theoretical contribution is to provide a new explanation for the inherent fragility of institutional arrangements that rely on money claims. The literature on bank runs typically focuses on either coordination problems among depositors or information asymmetries between depositors and bank managers to explain bank runs. This article provides a third explanation, one which complements the established paradigms. It shows how information gaps increase the probability of panic by increasing the range of signals that can cast doubt on whether short-term debt that market participants had been treading like money remain sufficiently information insensitive to merit such treatment. It further examines how information gaps also impede the market and regulatory responses required to dampen the effects of a shock once panic takes hold. Evidence from the 2007-2009 financial crisis is consistent both with the article’s claims regarding the ways shadow banking creates information gaps and how those gaps contribute to fragility.

Eoin Treacy's view -

The shadow banking sector has benefitted inordinately from quantitative easing because the cost of leverage has been so low and access to the sea of liquidity issued by central banks has been limited to a relatively small number of market participants. That fact alone has contributed to the rise of populist movements, but the prospect of rising interest rates in response to proposed fiscal stimulus represents a challenge for the shadow banking sector. 



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December 05 2016

Commentary by Eoin Treacy

New efficiency record for large perovskite solar cell

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

"Perovskites came out of nowhere in 2009, with an efficiency rating of 3.8 percent, and have since grown in leaps and bounds," said Anita Ho-Baillie, a Senior Research Fellow at the UNSW's Australian Centre for Advanced Photovoltaics. "I think we can get to 24 percent within a year or so."

The solar cells are made from crystals grown into a particular structure called perovskite. Smooth layers of perovskite with large crystal grain sizes allow the cells to absorb more light. The technology has been advancing fast and attracting plenty of attention thanks to its ease of production and low cost compared to silicon cells.

"The diversity of chemical compositions also allows cells be transparent, or made of different colors," said Ho-Baillie. "Imagine being able to cover every surface of buildings, devices and cars with solar cells."

Perovskite cells do have downsides like much less durability, something Ho-Baillie and her team say they're confident they can improve, while also shooting for higher levels of efficiency.

Eoin Treacy's view -

Perovskite is a development stage technology that is likely to play an important role in the future of solar cells but it could be a decade before it reaches commercial utility. The primary argument supporting perovskite is the relative cost of producing the crystals versus the panels used today. That enhances the technology’s competitiveness so that cells do not need to be as efficient because they are so much cheaper. However what do need to be overcome are the issues described above regarding durability which are non-trivial.



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December 05 2016

Commentary by Eoin Treacy

Singapore must remain open, even as rest of world turns inwards: PM Lee

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

The changes around the world will have major consequences especially for small, open countries like Singapore, said Mr Lee. 

“We have always depended on open trade, making friends around the world, looking for opportunities to cooperate with others,” he said. “We have relied on a secure, peaceful Asia, an international order where countries big and small cooperate and compete according to rules which are fair to all; where small countries have a right to their place in the sun.” 

“That is how we have prospered these last 50 years.” 

He added: “Yes, we worked very hard, and earned our success. But we were also very lucky to enjoy this international environment. We attracted foreign investments, negotiated FTAs, worked with other countries, expanded our exports, traded, prospered.” 

But now, said Mr Lee, other countries are flexing their muscles and becoming increasingly assertive. 

“Nobody can tell how relations between the big powers will develop,” he admitted. “If US-China relations grow tense, Singapore is going to be in a very difficult spot, because we regard both as our friends and do not want to have to choose between them.

 

Eoin Treacy's view -

As a major centre for asset management and private banking Singapore has no choice but to remain open and neutral, as competition between much larger countries increases. There has been a great deal of internal debate about the role of foreigners in pushing up the price of real estate and the rising cost of living and it is probably these points the PM is referring to in his statement. Negotiating a path forward during what is likely to be a time plagued by higher political uncertainty all over the world is going to take a deft hand and strong governance. Against that background Singapore is in a positive position.  



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December 02 2016

Commentary by David Fuller

A New Age Beckons for the Special Relationship

In January 2009, Barack Obama began his presidency by removing a bust of Winston Churchill from the Oval Office. Eight years later, President-elect Trump will likely bring it back, in a symbolic gesture that will speak volumes. America’s hard-fought presidential election will have far-reaching consequences for the  Special Relationship, the most important bilateral partnership in the world. For the first time in a quarter century, conservatives are in charge on both sides of the Atlantic, offering a historic opportunity to re-energize the alliance. 

Under Barack Obama the relationship was critically weakened. The White House showed little enthusiasm for it, preferring instead to cultivate ties with Angela Merkel’s Germany, François Hollande’s France, and a decaying European Union. His first Secretary of State, Hillary Clinton, was happy to knife Britain in the back, standing shoulder to shoulder in 2010 with Cristina Kirchner in Buenos Aires, when the Argentine President called for UN-brokered negotiations over the sovereignty of the Falkland Islands, a British Overseas Territory whose 3,000 inhabitants overwhelmingly voted to remain British in a subsequent referendum. And President Obama himself eagerly proclaimed that America has no “stronger ally” than France when then President Nicolas Sarkozy came to call in 2011, at a time when British troops were fighting and dying in large numbers alongside their American allies in Afghanistan. 

A deep-seated Eurofederalist mindset was pervasive throughout the Obama years, with Vice President Joe Biden even proclaiming that Brussels had a legitimate claim to be the “capital of the free world” in a speech before the European Parliament. It culminated in President Obama’s decision not only staunchly to oppose Britain’s exit from the EU, but also directly to intervene in the domestic debate. Just weeks before the EU referendum he warned the British people, in front of Downing Street, that they would be at the “back of the queue” for a free trade deal with the United States if they dared vote to leave it. 

Similarly, Hillary Clinton spoke out against Brexit during the presidential campaign, believing it to be a dangerous development for Europe. Her opponent had no such qualms  declaring on British soil the day after the referendum that Britons “basically they took back their country.” Trump saw the vote as a momentous victory for sovereignty in the face of supranationalism. Unlike his Democrat rival, he prefers the idea of working with nation states over negotiations with multilateral organisations.

The Brexit vote was a shot across the bow of not only the EU elites but also the Obama presidency. For the next US administration, Brexit is not a threat but an opportunity for the United States, a country with a huge economic stake in the UK. As the Congressional Research Service notes, there are $5 trillion of US corporate assets in the UK, representing 22 per cent of total US corporate overseas assets. Britain is America’s largest foreign direct investor, and roughly a million US jobs depend on British companies based in America. 

A Trump administration should make a US-UK free trade deal a foreign policy priority, riding a wave of momentum on Capitol Hill. There are already no less than five pieces of Congressional legislation calling for an Anglo-American free trade deal, the most prominent being the United Kingdom Trade Continuity Act, introduced in the Senate by Mike Lee of Utah and Tom Cotton of Arkansas, both rising stars in the Republican Party. It is also the view of Paul Ryan, the pro-British Speaker of the House of Representatives and a long-standing admirer of Churchill, that America must pursue a trade agreement with the UK. As he puts it, “we need to emphasise that they are our indispensable ally.”

David Fuller's view -

Everyone has an opinion of Trump, and I personally think I need to keep reassessing my view, not least as the President-elect is not the same as the presidential candidate.   

While the Trump campaign certainly had a wacko element, I like his initial economic policies more than those of President Obama over eight years, or anything suggested by Hillary Clinton.  Wall Street seems to have a similar view.  

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



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December 02 2016

Commentary by David Fuller

Leave Voter Patience is Starting to Wear Thin as They Fear Betrayal

Just get on with it! That is the consistent message from Leave voters up and down the country. For such people, it’s simple: “There was a vote, the Leave side won and now the UK has to leave the EU. No ifs or buts”. It’s an instruction that our MPs would do well to heed, and one that permeates all of the findings from a fascinating series of focus groups that I have been shown. 

Change Britain, a new Eurosceptic campaign, has been speaking to voters in Yorkshire, in the Midlands, in the North East and North West. One of the most striking findings is the complete absence of any buyers’ remorse. Those who voted to quit the EU are happy; their frustration stems purely from the stalling of the Brexit process, and the return of finger-wagging, preachy Remainers telling them that it can’t be done.

Many have been supportive of Theresa May, who is saying many of the right things, but patience is wearing thin. As one Leaver put it last week: “Now I want to see something. You have said it, now do it. They seem to get there and it fizzles out like a Roman candle.” Many are demanding “a plan” and some “action”. Plenty are upset at the lack of communication, smelling a rat. “They asked us to make a decision. We’ve done what we were asked to do. They should let us know what’s happening.” There is a widespread suspicion that a deeply untrustworthy establishment is preparing to sell them out, that “there’s obviously some wheeling and dealing going on”.

The tragic, explosive reality is that “ordinary Leave voters”, as they are often called by London-based commentators, are right: the Brexit process is on the verge of going badly wrong, even though the economy has been astonishingly resilient since the vote.

The Remainers are on the march, with Tony Blair and his vast financial and human resources returning to the fray; the legal complications relating to Article 50 are becoming ridiculously onerous; and foreign leaders are making the most of our divided, unsettled establishment to humiliate Britain as often as possible. 

Barack Obama’s infamous intervention ahead of the referendum backfired; it is a fair bet that reading about the Maltese prime minister who wants the UK to “be worse off” or the Polish foreign minister who said that we may never leave the EU will have driven many into an even greater rage.

Angela Merkel’s decision to block any fast-track deal over European expats was a seminal moment this week, as was the news that some lawyers believe that the Supreme Court could yet allow Scotland or even the European Court of Justice to have the final say over Article 50. 

The reason why so many Remainers now feel able so openly to undermine Brexit is because the government has allowed itself to portray Britain as a supplicant, a divided, rudderless country. To European diplomats, it looks as if our government’s heart is not really in this, and that our strategy is purely defensive, a bid to retain as close links to the EU as possible

David Fuller's view -

Allister Heath makes some very good points, although I hope he has overstated risks regarding the eventual outcome following the Brexit vote.  I also think that Prime Minister May is trying to juggle all the various commercial and private interests regarding Brexit, while also attempting to do the right thing on behalf of the UK in leaving the EU while also remaining a close and valuable ally. 

Not all of this is likely to be possible at this time, with the EU showing signs of imploding in an atmosphere of shock, anger and disillusion.  That is a problem which Mrs May has neither caused nor which she can effectively address, let alone resolve.  The EU has been deteriorating since the single currency was launched in 1999, without the federal union which none of the participating states actually want. 

Meanwhile, Mrs May’s cautious approach to Brexit is worrying her supporters among Leavers, while emboldening Remainers who neither accept the democratic result of Britain’s Referendum, nor appear to understand the speed with which the EU is now unravelling. 

It is very unlikely that Brexit can be negotiated successfully in line with the EU’s ‘Rules’, which exist solely to deter countries from leaving.  Additionally, Brexit is now a side issue on the Continent because Mrs Merkel has lost electoral support and faces a difficult fourth term challenge.  The woeful Hollande has already withdrawn from France’s election which is an open race between several widely different candidates.  Italy is in a similar state of turmoil and may even seek its own version of Brexit. 

It is highly risky for Mrs May to hold back during the EU’s chaos and assume that she can declare Article 50 at some point in mid-2017 and commence a rational process of withdrawal from the EU.  She should focus her Brexit efforts on the swiftest exit from the EU which is possible. 

Yes, this would almost certainly occur without any long-term agreements with the EU in place.  More importantly, Mrs May should focus on a trade agreement with President-elect Trump, because that could be achieved both quickly and successfully.  Whether the EU survives in its current state or not during 2017, the leading European economies will have every interest in negotiating mutually beneficial trade deals with an independent UK which is not part of the EU.    

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



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December 02 2016

Commentary by David Fuller

Trump Turns to Schwarzman, Dimon for White House Jobs Panel

Here is the opening of this interesting article from Bloomberg:

President-elect Donald Trump turned to some of Wall Street’s biggest names to create a panel of business leaders that will give him strategic advice on the economy after he takes office, including two financiers with deep Democratic roots.

Blackstone Group LP Chief Executive Officer Steve Schwarzman will chair the President’s Strategic and Policy Forum, which will begin meeting with Trump in February, according to a statement Friday from his private equity firm. JPMorgan Chase & Co. CEO Jamie Dimon and BlackRock Inc. CEO Laurence Fink, major donors to Democratic politicians, will also sit on the panel.

“This forum brings together CEOs and business leaders who know what it takes to create jobs and drive economic growth,” Trump said in a statement issued by Blackstone. “My administration is committed to drawing on private sector expertise and cutting the government red tape that is holding back our businesses from hiring, innovating, and expanding right here in America.”

Presidents traditionally turn to business leaders for advice on the economy. President Barack Obama named CEOs from companies including Xerox Corp. and Dow Chemical Co. to an advisory committee on international trade, while Schwarzman has partnered with the current administration on efforts to hire veterans.

Trump asked him to pick the group’s members, Schwarzman said Friday in a Bloomberg Television interview, recounting his discussions with the president-elect and adding that the executives are hopeful their advice will benefit the country.

“He said, ‘It’s really for me to learn what people have to say in an unconstrained way: they don’t report to me, they’re independent, and I want to know what they know,’” said Schwarzman, 69, a billionaire who has historically backed the Republican Party’s presidential nominee but didn’t publicly voice support for Trump during the campaign. “It was nice to see people put aside narrow interests.”

David Fuller's view -

This is a good move.  It shows that Trump is sufficiently secure to want advice from very successful business people, whether they supported him during the election or not.  Partisan politics are no longer relevant now that he is President-elect.  He wants to be a successful President.   



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December 02 2016

Commentary by Eoin Treacy

December 02 2016

Commentary by Eoin Treacy

China's Central Bank Is Facing a Major New Headache

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

People’s Bank of China Governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eight-year low. He could have an even bigger one next month.

That’s when a $50,000 cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise. If just 1 percent of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion -- more than the estimated $620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year.

Middle class and wealthy Chinese have been converting money into other currencies to protect themselves from devaluation, exacerbating downward pressure on the yuan. Outflows could intensify if Federal Reserve interest-rate hikes fuel further dollar appreciation.

That leaves Zhou in a bind identified by Nobel-prize winning economist Robert Mundell as the “impossible trinity” -- a principle that dictates nations can’t sustain a fixed exchange rate, independent monetary policy, and open capital borders all at the same time.

"At a moment like this, you have to compare two evils and pick the less-worse one," said George Wu, who worked as a PBOC monetary policy official for 12 years. "Capital free flow may have to be abandoned in order to maintain a relatively stable currency rate."

 

Eoin Treacy's view -

The $50,000 limit of foreign transfers is per person, so a family with two parents, one child and four grandparents can send $350,000 overseas with no need to resort to more sophisticated methods of transferring funds. There are of course many alternative routes to sending money overseas. So far rules aimed at controlling flows have focused on corporations and purchases of foreign real estate in the order of $1 billion but the flow of retail funds on aggregate represents a very large figure overall. 



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December 02 2016

Commentary by Eoin Treacy

Food bars for astronauts' most important meal of the day

Thanks to Mrs. Treacy for this article by David Szondy for Gizmag. Here is a section:

The cramped crew capsule hasn't nearly as much room as the ISS, and because it's designed to operate in deep space, its payload weights are much tighter. Still, it needs to carry enough food for the crew as they spend weeks or even months in long-range missions but cannot be resupplied from Earth, nor can it dump its rubbish until it returns home.

To cut down on space and weight, NASA wants astronauts to substitute breakfast for food bars. The bar has to provide enough calories as well as a carefully balanced diet, need no special storage or cooking facilities, and leave no waste beyond its minimal packaging. In addition, it needs to lightweight and have a shelf life of several years.

Commercial breakfast bars are designed for relatively sedate people who have easy access to other foods. There aren't any food bars that meet NASA's requirements and no one wants to use lifeboat rations, so NASA had to take on the task of designing it in house.

What it is working on is a breakfast bar that provides 700 to 900 calories and balanced nutrients to act as a meal substitute. The goal is to provide flavors like orange cranberry or barbecue nut to have enough taste and variety to keep morale high and the astronauts wanting to eat them even after weeks in space – though what the final bars will ultimately look and taste like has yet to be decided.

 

Eoin Treacy's view -

We had a good laugh about this story this morning because I’ve been making my own breakfast bars for a year and personally have been very happy with the results. The fact NASA is getting in on the game is a testament to how large the sector for purportedly healthy snack foods has become. 



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December 02 2016

Commentary by Eoin Treacy

As Schultz Steps Down, Next Starbucks CEO Brings Tech Savvy

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

Starbucks’ digital and technology prowess has put it ahead of its peers, allowing it to serve more customers faster. Same- store sales rose 5 percent in the Americas region in the most recent quarter. Mobile payments accounted for about 25 percent of U.S. transactions in that period.
     
Starbucks built on its tech leadership with an order-ahead feature, which lets customers select and pay for drinks in advance. They then can pick up the beverages at a shop without waiting in line.

Since Johnson became operating chief, Starbucks has rolled out mobile ordering across the U.S. and even tested delivery.

The Seattle-based company also is boosting spending on digital ventures, including taking its app and rewards platform to countries such as China.

Though shares of Starbucks tumbled immediately after the announcement, they recovered some of that ground during extended trading. As of 9:53 a.m. in New York on Friday, the stock was down 2.4 percent to $57.11

Eoin Treacy's view -

Starbucks sells coffee and snacks, technology might ensure the lines are shorter but unless it has ambitions on selling that technology to a wider market the business is unlikely to change much. Losing Schulz as a figurehead is a blow and investors are likely to want to see improving sales if the new CEO is to be given the benefit of the doubt. 



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December 02 2016

Commentary by Eoin Treacy

People Power Fails to Stem Lira Rout As Erdogan Calls Turks to Action

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

The lira has weakened faster than that of any fellow emerging market's this year except Argentina, as a failed coup — and the crackdown that's followed — spooked foreign investors, exacerbating the effects of the stronger dollar that's greeted the election of Donald Trump. 

After a 25 basis point rate hike to the central bank's overnight lending rate last month failed to prevent the rout, clamors for householders to risk their savings have grown. The odds are stacked against them. Turkish central bank data show that banks worldwide trade $17 billion liras every day; a volume which every adult in Turkey would have to change more than a daily $300 dollars to overpower.

Still, the efforts of those fighting the fallout have taken varied forms. While some businesses are rewarding those dumping dollars, farmers in the central Anatolian province of Aksaray staged a symbolic protest at one of the country's largest livestock markets on Wednesday, burning bills "in retaliation at the U.S. and Europe," according to Ihlas news agency. 

“Europe and America now want to realize economically the coup that they failed to carry out with tanks, rifles and F-16s on July 15,” Ihlas cited Hamit Ozkok, chairman of Aksaray Commerce Exchange, as saying. He was referring to the date of the failed putsch earlier this summer, in which hundreds lost their lives. While Erdogan blames a former political ally, Fethullah Gulen, for instigating the coup, the cleric resides in Pennsylvania, and Turkey has sparred with the U.S. about his extradition. Gulen has denied the allegations.

"I think there's a failure to appreciate that some of the rhetoric smacks of desperation," said Paul McNamara, a fund manager at GAM Ltd in London who oversees around $5 billion in assets. He said only a strong increase to central bank borrowing costs can halt the currency's declines.

 

Eoin Treacy's view -

Local currency five-year bonds yield over 10% while US Dollar denominated bonds yield half that. Brazil’s local currency bonds have a higher yield while its US Dollar debt is lower. Both countries face challenges but Turkey is receiving more attention because it is much less politically stable. 



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December 01 2016

Commentary by David Fuller

The Greatest Danger for Italy is the Looming Loss of the ECB Shield

The painful saga of Italy is by now well-known. The country is stuck in a depressionary debt trap. Trend growth is below zero. GDP is still 9pc below its pre-Lehman peak. Industrial output is back to levels reached thirty-five years ago.

The contours are worse than the 1930s. It is a lost decade turning into a second lost decade. No large developed country in modern times has ever suffered such a fate.

Italy is the victim of a vicious cycle of labour hysteresis as economic stagnation and weak productivity reinforce each other. Its exchange rate is overvalued by 20-30pc against Germany.

How easily we forget that Italy used to run a big trade surplus with Germany in the old days of the lira, and its real growth rate tracked German growth almost exactly with the help of devaluations. Each country was true to its political anthropology.

Italy cannot now deflate its way back to viability since this shrinks the underlying base of nominal GDP and automatically steepens the debt trajectory. It is impossible task for a country with a public debt ratio of 133pc of GDP, and is self-defeating in mechanical terms.

Reform is a beautiful word, but is almost meaningless at this juncture. There is no plausible way out for Italy within the current contractionary structure of monetary union. Only ECB bond purchases forever can keep the lid on this pressure cooker.

Yet it is patently obvious that QE is nearing political, legal, and technical limits. The ECB already faces a lapidary attack by Otmar Issing, its founding chief economist and a figure of towering authority in Germany.

He accused the bank of sliding down a "slippery slope", straying from genuine monetary policy and instead rescuing bankrupt states in violation of the treaties. "The no bailout clause is violated every day," he said.

The ECB has so far bought €1.4 trillion of bonds. Its balance sheet will reach 35pc of eurozone GDP by the end of the year at the current torrid pace, much higher than it ever reached in the US. Mr Issing said QE is nearing the point where the ECB may not be able to extricate itself without disastrous losses.

The inevitable taper battle is now raging within the ECB's governing council, with the two German members leading a swelling mutiny before the next meeting on December 8. Any suggestion that the programme will not be rolled over in full when it expires in March risks a financial storm. Italy will be the epicentre.

The context is fundamentally more dangerous than the events leading up  to the US taper tantrum in May 2013, when the Federal Reserve first began to talk tough.

It invites the perennial question whether Italy, Portugal, and perhaps others, can fund themselves at all in the capital markets, given that the eurozone has done almost nothing since the debt crisis of 2011-2012 to put monetary union on workable foundations.

There is still no fiscal union, no shared debt issuance, no banking union worth the name, and no expansionary New Deal to lift the economy off the reefs once and for all.  All it has done is to tighten surveillance, hoping somehow that it can muddle through by riding on world demand.

So Europe's taper tantrum - when it comes - ineluctably turns into a fresh stress test of monetary union itself. "The feeling once again is that the eurozone is not entirely safe," said David Owen from Jefferies.

David Fuller's view -

The EU is unravelling at an accelerating pace.  This both saddens and disgusts me, because these are obvious, self-inflicted wounds, caused by an arrogant and corrupt Brussels bureaucracy.  I won’t vent further today, because I have so often been critical of the EU, not least since the Brexit vote.  Subscribers know my views.

However, here are 38 short Comments published by The Telegraph in response to Ambrose Evan’s Pritchard’s column.  I have copied them exactly as they appeared and deleted none.  They are varied and mostly interesting on the EU.  A few fret about AEP’s erudite and multilingual vocabulary.  I enjoy it and welcome the addition of new words or phrases.   



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December 01 2016

Commentary by David Fuller

Will the French Left Gift Le Pen the Presidency?

So there you have it. Next year’s French presidential election will be contested between the hard Right and the far Right; between the no holds barred free-marketeer Francois Fillon, who has just won the republican nomination, and the Neo-Fascist Marine Le Pen. It is a catastrophe of democracy, an argument for the withdrawal of the franchise from the plebs, who have proved themselves utterly unworthy of the vote, stupid racists that they are.

That is the narrative that is now being spun in some quarters in France, where a demoralised Socialist party – its leader ridiculed, its support in tatters – is looking for answers to its great collapse. But the story they are telling themselves could not be more wrong.

For a start, it features traditional characters cast in a traditional plot – where politicians of Left to Right slug it out against each other until their champions from the centre ground vie for victory. Not this time.

This time the fringes are flourishing. Jean-Luc Mélenchon, who has just been endorsed by the Communist Party, is predicted handsomely to beat François Hollande, France’s centre-Left president, in the first round of next year’s presidential polls – if Hollande even stands. Fillon himself will get less support than Le Pen before the two of them go head-to-head in the second, decisive round of voting.

Mélenchon is often described as Marine Le Pen’s “rival”, as though the pair were locked in some Newtonian experiment, in which any political action by the one leads to an equal and opposite reaction by the other. This may be comforting for those on the “progressive” Left, for whom Le Pen is the very devil. But it is not true. Mélenchon is fiercely anti-free market, cherishing the rights and welfare of those in what he calls his “workers movement”. Marine le Pen too is a heartfelt protectionist promising to defend workers benefits. Both loathe the EU.

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

David Fuller's view -

I don’t think many French citizens will miss Hollande

France is the military power within the EU’s ruling alliance with Germany.  However, in every other aspect of this relationship, France is now more than ever the junior partner due to its weak economy. 

Angela Merkel’s influence within the EU is theoretically stronger than ever.  Nevertheless, given the populist outrage sweeping across the West, her prospects for a fourth consecutive election victory are far from certain.  In fact, they may be decided by events currently unfolding in Italy and France.  Merkel will not escape blame for the EU’s failure.    



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December 01 2016

Commentary by David Fuller

Email of the day 1

On Clive Burstow’s bullish comments on Copper at Monday’s Markets Now:

Clive mentioned that the Trump build program will hit in 2018 just as copper runs into a multi-year deficit (it is balanced in 2016-7) but, if anything, this pending shortfall is being "dragged forward". He also stated in the lithium conversation that the issue facing Govs in their EV infrastructural support build-out is that "the biggest bottleneck they face is not being able to get enough copper out of the ground for all this"............

 As you know, his favourite metal is zinc and when I asked how he would play that he mentioned Boliden, (approx 45% zinc / 55% copper). Boliden absorbed Outokumpu in 2003 to create, I believe, the 4th largest zinc company in the world (at a time when I was visiting both companies for our on-line bulk shipping logistics management system). 

David Fuller's view -

Thanks for this follow-up.  You certainly know more about these companies than I do, but looking at this chart of Boliden, I think it is at least temporarily very overbought after this year’s move from an oversold decline to Swedish Krona 100 to a high this week of 252.30.  You can keep an eye on it in the Chart Library and I think it would look more timely following the next shakeout which probably moves temporarily below the rising 200-day (40-week) MA.  



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December 01 2016

Commentary by David Fuller

Email of the day 2

On last Monday’s Markets Now:

Dear Sarah

Could you please pass on my thanks to David for providing a thoroughly thought provoking evening? To confirm what the gentleman said from Cumbria it was well worth the effort of travelling down from the North.

I wish you all well and look forward to attending again in the New Year.

Good health

David Fuller's view -

Thank you so much for this thoughtful email. It was a treat to see you.  The enthusiasm and interest of subscribers is what makes these sessions so enjoyable for me.



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December 01 2016

Commentary by David Fuller

Trump Business Empire Is Not Just an Ethical Disaster

President-elect Donald J. Trump said on Wednesday that he would separate himself from his businesses before he enters the White House. More details about the arrangement will be announced in mid-December, but it sounds as if he plans to step away from only the management of his business, which presumably will be turned over to his children, while retaining ownership.

This is not enough. There has been much discussion of Mr. Trump’s business dealings’ putting him in violation of the Emoluments Clause of the Constitution, which prohibits government officials from accepting gifts and payments from foreign governments or corporations controlled by foreign governments. But there are other conflict-of-interest issues that have gotten less attention and could cause Mr. Trump — and America — much trouble as well. To prevent this, he must sell or give away his ownership interest in his global business empire as soon as possible.

One of Mr. Trump’s most lucrative initiatives has been the licensing of the Trump brand — and name. There are Trump-branded properties like towers and hotels in some 20 countries. .

This first presents an ethical problem: No president should allow his name to be put on commercial properties in return for payment. The presidency is not a branding opportunity. President Trump can’t do this unless he wants to create the impression that he is being paid off.

But it also presents a global security risk. A building branded with the name of an American president — any president, but perhaps especially Mr. Trump — would be a tempting target for terrorists and other enemies of the United States. Who is going to protect the buildings? Will the Trump organization hire a security firm to do the job, or will the American taxpayer be on the line for the bill? Will foreign governments offer to pay to secure the properties — a subsidy of the Trump organization that would probably violate the Emoluments Clause? If a terrorist attack, a botched security operation or some other tragedy happens on a Trump property, the United States could easily get drawn into a conflict abroad. And our adversaries know this. This is one of the most dangerous aspects of Mr. Trump’s conflict-of-interest problem.

Then there is the litigation risk. In Clinton v. Jones, the Supreme Court ruled that the president can be sued in his personal capacity and required to testify in depositions and at trial. Sexual misconduct is a litigation magnet; extensive business operations are another. If Mr. Trump owns his businesses while he is president, it will be a lot easier for plaintiffs’ lawyers to sue him on behalf of customers, counterparties, investors and others, and to require his testimony under oath.

David Fuller's view -

Whatever one thinks of President-elect Donald Trump, and I imagine he will always be a highly controversial figure, I think it would be a shame if an international real estate developer, or any other businessperson, was discouraged or prevented from becoming president because of assets held in his or her name. 

I do not think that any democracy is improved by governance which is led primarily by career politicians.  Yes, the situation regarding successful outsiders running for top office is more complicated in a global economy.  Nevertheless, their perspectives, experience and commercial skills can be worthy attributes.    

This menacing paragraph from the NYT does not help:

“This problem does not go away because someone else is managing the business. It is still his money, and if he is president, he can’t take it. The only remedy for a serious violation of the Emoluments Clause is impeachment.”

This ‘solution’ obviously does not help the president-elect, and I doubt it helps the country. 

 



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December 01 2016

Commentary by Eoin Treacy

December 01 2016

Commentary by Eoin Treacy

OPEC Meeting Review

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

OPEC has just decided a headline cut of 1.2 million b/d

We calculate that compared with October secondary sources in the OPEC report, the net OPEC cut from the 11 participating countries in the deal is 0.982 million b/d

Angola was allowed to use September output as the base instead of October

The cartel will use secondary sources to monitor output reductions
Indonesia, Libya and Nigeria is not part of the deal

Since the cartel has distributed quotas to the different countries, have organized a monitoring committee and are using secondary sources, the deal is very bullish to the oil price

 

Eoin Treacy's view -

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

Brent crude oil hit a new recovery high today and upside follow through tomorrow would confirm a return to demand dominance beyond what has been an impressive two-day rally. Considering the fact that the price has been rangebound for the last six months the potential for a breakout that is outsized relative to the amplitude of the congestion area cannot be discounted. 



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December 01 2016

Commentary by Eoin Treacy

Jeremy Siegel Why Long-term Investors Should Own Stocks: Bonds are 'Dangerous'

Thanks to a subscriber for this common sense article which may be of interest. Here is a section:

Last year you expected “some increase” in the 10-year Treasury yield. On November 30 of last year it was at 2.21% and on Friday it closed at 2.34%, so your forecast was accurate. What is your forecast now for interest rates? Have we finally seen the end of the 35-year secular downtrend in rates? 

Rates took a huge jump after the Trump election. They are going to work their way higher. Again, there is a lot of uncertainty about what policies will be enacted, but I would not be surprised to see the ten year between 2.5% and 3% by the end of next year. That is a rate that should not be threatening for equities. If rates move well above 3% without a corresponding big increase in economic growth, it’s a problem. If there’s a big increase in economic growth, a move above 3% could still be all right. But if there is an inflation problem, the Fed will fight by increasing rates even more. That certainly would be a challenge to the equity market. 

President-elect Trump has criticized the Fed for being too dovish. Would he be wise to appoint a new chairperson or governors who are more hawkish? 

Janet Yellen’s term doesn’t end until January 2018. Vice Chair Stan Fischer’s term ends about six months after that. Trump has given no indication that he’ll ask either to step down now, although he has definitely said that he wants to replace Yellen when he becomes president. 

Yes, Trump has criticized the Fed for keeping interest rates down too much. After accusing the Fed of trying to help Clinton and Obama by keeping rates low, Trump might have to welcome low rates if he wants to implement the infrastructure program that he desires. In fact, I believe the Fed is going to move with the 10-year rate next year. If the 10-year Treasury continues to rise to 2.5%, 2.75% or 3% or more, you are going to see two or three Fed rate hikes. We are certainly going to see one in December. That’s a slam dunk. But there could be anywhere from two to three hikes next year depending on how high that 10-year rate goes. 

It’s one thing to finance infrastructure at a near-zero rate, which is where short-term rates are. But if short rates rise to 1.5% and the long rates approach 3%, it is going to be more of a challenge. Trump may not appoint someone who is very hawkish, such as John Taylor, and maybe we’ll find that Yellen’s dovishness will be welcome at a later date. 

I should mention that for quite a while there have been two openings on the Board of Governors of the Federal Reserve and the Board wants them filled. They want to be at full strength. There are only five governors now and there should be seven. Trump will have the opportunity to appoint two new governors very early in his term.

 

Eoin Treacy's view -

US 10-year Treasury yields surged again today and have now comfortably broken the progression of lower rally highs evident since the yield peak that accompanied the taper tantrum. This move is amicably being referred to as the Trump tantrum. There is some weight to the argument it will be temporary since many investors have been conditioned to buy-the-dip and the Presidential inauguration will not be until January 20th. 



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December 01 2016

Commentary by Eoin Treacy

Email of the day on technology shares underperforming

Any idea why NASDAQ 100 dropped 50+ points yesterday?

Eoin Treacy's view -

This has been a spectacular year for some technology shares, with companies like Nvidia performing beyond the expectations of even the most ardent bulls. However the prospect of rising interest rates is potentially an issue for companies that are reliant of cheap financing to fund growth. 



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November 30 2016

Commentary by David Fuller

OPEC Said Close to Deal on First Oil Supply Cut in Eight Years

Here is the opening of this topical article from Bloomberg:

OPEC is near an agreement to cut production for the first time in eight years, sending oil prices surging on optimism a deal will start to drain record global inventories.

Under the terms being discussed by ministers in Vienna, the group would cut production by 1.4 million barrels a day, equivalent to about 1.5 percent of global production, according to a delegate. In addition, oil producers outside OPEC, including Russia, would contribute cuts of about 600,000 barrels a day, they said.

The outlines of the deal emerged as ministers on their way into the meeting struck a markedly more optimistic tone than in recent days, signaling the group’s three largest producers -- Saudi Arabia, Iran and Iraq -- have overcome differences on how to share the burden of cuts. It appears Iran will be able to raise production as it recovers from sanctions on its oil industry.

“I am very optimistic we’re going to come up with very fruitful results,” Iraqi Oil Minister Jabbar al-Luaibi said, before sitting down for the final ministerial meeting. “There will be a cut, yes, definitely."

Benchmark Brent oil futures rose as much as 8.8 percent in London trading, the biggest gain since February, to $50.45 a barrel.

David Fuller's view -

Potentially, a credible deal to cut up to 1.5% of global production would enable Brent Crude Oil to range above $50 a barrel for an indefinite period.  However, there has long been a credibility issue with OPEC announcements, and we should really be talking about OPEC plus Russia.   

An understandably cynical market will monitor developments for this OPEC ‘deal’ very closely.  They know that it could just be another ruse to lift crude prices for long enough so that producers can hedge up to a year forward at higher prices in this contango market.  For instance, Brent crude for December 2017 is reasonably liquid and trading over $3 higher than the shortest duration contract which is now February 2017. 

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November 30 2016

Commentary by David Fuller

Mark Carney warns EU faces financial drought if it cuts off UK overnight

Here is the opening of this realistic assessment by the BoE Governor, recorded and reported by The Telegraph:

The European Union desperately needs finance from Britain and will face severe knocks to its economy if  member nations do not agree to a transitional period to give banks and finance firms time to adapt to Brexit, Mark Carney has warned.

The Governor of the Bank of England wants a smooth changeover when Britain leaves the EU, to give companies time to adapt to the new setup, and avoid any wrenching change in the economy or in the financial markets.

That means Britain would not necessarily switch overnight from one regime to another when leaving the EU, which is expected to take place in early 2019.

“Banks located in the UK supply over half of debt and equity issuance by continental firms, and account for over three-quarters of foreign exchange and derivatives activity in the EU,” Mr Carney said.

“If these UK-based firms have to adjust their activities in a short time frame, there could be a greater risk of disruption to services provided to the European real economy, some of which could spill back to the UK economy through trade and financial linkages.”

That potential disruption comes from Britain’s status as the EU’s major global financial hub.

“The UK is effectively the investment banker for Europe,” Mr Carney said, noting that funds are raised by British-based banks from British-based investors, to fund economic activity.

“These activities are crucial for firms in the European real economy, and it is absolutely in the interests of the EU that there is an orderly transition and there is continual access to those services.”

The Governor has been criticsed for his interventions on Brexit in the past, facing accusations that he wanted the UK to remain in the EU and tried to sway the debate.

Presenting the Bank of England’s financial stability report, he sought this time to align himself with Theresa May.

“As the Prime Minister has said, it is preferable that the process is as smooth and orderly as possible,” he said.

“It is preferable that firms know as much as possible about the desired end point [of the Brexit negotiations] and as much as poss as soon as possible about the potential path to that end point.”

That should mean businesses on both sides of the Channel are able to prepare for Brexit when it takes place, minimising any disruption.

David Fuller's view -

Some more common sense and leadership from Mark Carney, now that he no longer feels a debt of loyalty to David Cameron and George Osborne.  He is wise to direct these comments in the EU’s direction because one can hear the degree of panic and uncertainty coming from their officials.

Whether or not Italy actually pulls out of the Euro, as I think it should, or just struggles on in the manner of Greece, I would not be surprised to see the EU breaking apart in 2017.  How might that affect stock markets?

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November 30 2016

Commentary by David Fuller

Email of the day

On Monday’s Markets Now

Iain, David

Thank you for an all-encompassing evening on Monday - I really enjoyed all your presentations and was particularly captivated by Clive's input which I found "doubly" interesting as I found myself on the same page as him across the very extensive subject matter that he so diligently covered. (I now also consider myself enlightened as to the possibilities with lithium, which I had so far interpreted as being a potentially dangerous sector to be involved in - having been rather let down by none-too-dissimilar "possibilities" with graphite a couple of years back).

 Clive does seem to take a somewhat innovative approach to the way he looks at the commodity sector and I found myself deeply absorbed in his content. In this respect it was well worth my London "overnighter" from Cumbria in order to attend!

 This was my first time at the CC for a MN and, as David was highlighting, what a thoroughly "civilized" place it is (it makes the EI Club look a bit "pokey" by comparison!). Having a late dinner upstairs was an unexpected privilege and I can't conceive that I will ever spend a better £25 for such rewarding culinary input!

 Well done to you all and I wish you well on your extensive travels, Iain.

 Please find below some commentary on lithium, "The Race for White Oil Is Heating Up" (Agora), together with some stock suggestions. 

David Fuller's view -

Many thanks for your comments on the Markets Now and also The Caledonian Club. I thought Clive Burstow, introduced by Iain Little, was a great addition to our list of speakers. I particularly enjoy the chats after presentations.  The dinner was unplanned but a relaxing, spontaneously arranged event and a nice conclusion to the evening.  Thanks also for the commentary on lithium.  I would like to have a look at those shares and aim to post it later this week.  

First notice: our next Markets Now will be held on Monday evening 16th January, also at the Caledonian Club.  Dr David Brown will be our guest speaker, discussing technology.  The brochure for this event will be available before the end of next week.  



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November 30 2016

Commentary by David Fuller

Goldman Says Trump Presidency Will Benefit Stocks in Almost Every Sector

Here is the opening of this topical article from Bloomberg:

After years of slowing earnings growth and little in the way of excitement for many Wall Street analysts, many are now hopeful that President-elect Donald Trump will finally make things interesting.

When collating data for the Goldman Sachs Group Inc. Analyst Index — a proprietary measure of growth across different sectors of the S&P 500 — the firm included a question this month on what the election of Donald Trump will mean for the industries covered by those surveyed. Turns out, they are rather optimistic. 

"This month, we asked analysts to comment on how the results of the U.S. election will affect companies in their respective sectors," the team led by Avisha Thakkar writes in the new note. "While their responses suggest that there is still uncertainty about the sector-level impact, the majority of sectors are anticipating favorable effects," they say, adding that expectations of lower tax rates and economic stimulus are among key reasons for the favorable outlook.

Goldman certainly isn't the first to hail the potential benefits of a Trump presidency. Dubravko Lakos-Bujas and Marko Kolanovic, quantitative analysts at JPMorgan Chase and Co., also wrote that many of Trump's policies would be "pro-growth," even while uncertainty about specifics remains high.

They wrote this week that if the campaign promises that have the potential to stimulate growth get implemented, the S&P 500 could see as much as $20 in additional earnings-per-share growth over the next few years. 

David Fuller's view -

The US stock market has been very enthusiastic about President-elect Trump’s stimulative programme, discounting a considerable amount of good news well before he takes the Oath of Office and becomes president on 20th January.  Some consolidation of these gains is likely before that date.

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November 30 2016

Commentary by Eoin Treacy

November 30 2016

Commentary by Eoin Treacy

After Brexit and Trump, It's Italy's Turn to Keep Traders Awake

This article by Chiara Albanese , Stefania Spezzati , and Charlotte Ryan for Bloomberg may be of interest to subscribers. Here is a section:

Renzi, 41, has staked his political future by suggesting he would resign if he were to lose, and the first projections of the result are due just before midnight Rome time.

“You have to ask how much the market will react to something they are expecting,” said Andy Soper, head of Group of 10 foreign-exchange options at Nomura in London. "The difference this time is that it might be less about the result and more about how the vote is won or lost. There are a lot of unknowns.”

 

Eoin Treacy's view -

If you look back at history you don’t often see old revolutionaries. The leaders might be mature adults but the people on the streets doing the fighting tend to be young, idealistic, ready for anything, and glorying in the freedom they have suddenly been allowed to grasp. 

A big part of the reason Europe has not had more social unrest is because it simply does not have a large population of young people. We’ve all seen the headlines talking about youth unemployment but the reality is that the 18-25 year old bracket is small relative to the massive aging populations in Spain and Italy.

 



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November 30 2016

Commentary by Eoin Treacy

Top Ten Market Themes For 2017: Higher growth, higher risk, slightly higher returns

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

8. Inflation: Moving higher across DM
‘Reflation’ is the theme du jour following Donald Trump’s unexpected emphasis on infrastructure spending in his acceptance speech on election night. Since then, market participants have been hard at work trying to figure out the policy agenda that Trump the president might pursue (distinct from the rhetoric of Trump the candidate). What seems clear to us, as argued above, is that economic issues, notably tax cuts, infrastructure spending and defense spending, are high on the agenda — a recipe for reflation.

There was a strong case for rising inflation in the US even before Trump’s victory. Our call for higher rates in long bonds this past year was premised more on a repricing of inflation risk and inflation risk premia than on a rise in real rates. And, globally, we expect rising energy prices to push up headline CPI across the major advanced economies in early 2017. After years of deleveraging and highly accommodative monetary policy, we expect inflation to gain momentum in 2017 just as many countries are shifting their policy focus to fiscal instruments. For example, we are forecasting large boosts to public spending in Japan, China, the US and Europe, which should fuel inflationary pressures in those economies. Moreover, having had to work so hard for so long to get inflation even to the current low levels, the major central banks in developed markets sound increasingly willing to let inflation run above 2% targets

Eoin Treacy's view -

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

As recently as early this month a significant number of investors were betting the discount rate was never going to go up. That has definitely changed with the bond markets rapidly pricing in the potential for inflation to pick up as fiscal stimulus is expected to kick in. 



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November 30 2016

Commentary by Eoin Treacy

A China recovery is coming

Thanks to a subscriber for this article by Simon Hunt in copperworldwide.com. here is a section:

China’s economy is recovering. Accommodating monetary policy is being augmented by expanding the fiscal deficit which might include tax cuts. Construction is beginning to recover since total surplus inventory has fallen to the key seven-month level. The NDRC has released 25 infrastructure projects most of which were frozen earlier this year because cases of corruption were detected. Both wages and consumer spending continue to increase. In some key manufacturing sectors inventories have been reduced. Many private sector companies are now managing cash flow appropriately so are improving profitability. Investment will follow in 2017. Against this background real consumption of metals has begun recovering and will gather pace in 2017.

Eoin Treacy's view -

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

One of the reasons China has been going through such a difficult time is because many of the markets it sends exports to have been in difficulty. The US credit crisis, the EU’s sovereign debt and banking crisis and the collapse of commodity prices all hit demand for China’s exports.   



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November 29 2016

Commentary by David Fuller

Italy needs reform and a euro exit is inevitable

As in just about every other notable case, the way to get on top of the Italian debt problem is through economic growth. It would help if there were a return to positive rates of inflation, rather than the stuttering deflation that currently envelops the country. In many ways, though, these financial problems are less serious than the underlying economic weakness. Some readers may remember that in the 1950s, 1960s and 1970s Italy was a powerhouse of economic growth. At one point its GDP passed the UK’s, an event trumpeted by the Italians as “Il Sorpasso”.

But recently it has been a very different story. It is common to compare the performance of the world’s major economies since the onset of the financial crisis in the first quarter of 2008. All industrial countries suffered a loss of output in the first few years, but most then managed to recover. Since the beginning of 2008, the US and the UK are currently registering output up by about 12pc and 8pc respectively. Over the same period, Italy’s GDP is down by 8pc.

If this comparison seems pretty stark, then you should reflect on Italy’s performance since the euro was established in 1999. You may recall that this bold monetary construct was supposedly going to unleash a wave of prosperity across Europe, including Italy. Britain, which stood aside from the single currency, risked being left behind, mired in comparative poverty. Staying out of the euro was the Brexit of its time. The warnings of looming under-performance, accompanied by forebodings of the imminent departure of key Japanese and American firms, were its version of Project Fear.

To put it mildly, the outturn has been somewhat different. Since the beginning of 1999, the UK economy has grown by almost 40pc, against about 25pc in Germany and France. But Italy’s performance is in a different league. Over the last 17 years it has managed to grow by less than 6pc. In other words, since the formation of the euro, Italy’s economy has essentially stagnated. Along with this stagnation has come an employment disaster. Unemployment now stands at about 12pc of the workforce.

Nor is the long-term outlook very promising. The Italian birth rate is running at about 1.4 per woman. The United Nations projects that by 2035, Italy’s population will have fallen by about 2pc. Quite apart from what that would do directly to reduce the size of the Italian economy, this is not exactly an environment in which Italian businesses will be galvanised into investment.

It is pretty clear what would bring a revival of the Italian economy and ease many of its financial problems, if not solve its population crisis. Italy needs a much lower exchange rate. While it is in the euro, of course, it does not have a currency of its own to depreciate, and the exchange value of the euro is determined more by the performance of its Teutonic neighbours.

Not that a weaker currency would solve all problems. Italy needs fundamental reform, and not only to the powers and practices of parliament. But if it could enjoy a boost to competitiveness of 20 to 30pc through a lower exchange rate, this would lead to a surge in net exports and higher economic growth, with corresponding gains to employment. In such an environment, it might be easier to get through some of the many reforms that Italy needs.

You may think that a referendum on the powers of the Italian Senate does not promise to be anything like as exciting as the Brexit vote or the US Presidential election. But it is well worth keeping an eye out for the result of Sunday’s vote. Among other things, it may set Italy on the path to leaving the euro. Whatever the outcome on Sunday, though, I have come to believe that this is not a matter of if but when.

David Fuller's view -

Italy’s economic decline since its considerably more prosperous 1950s, 1960s and 1970s, mentioned by Roger Bootle above, is shocking.  It may be tempting to blame this on the Italian political system, and not without some justification.  However, the decline also asks questions? 

Why have most EU nations declined during what has been largely a peacetime era in Europe?  Also, why has this decline become precipitous since 1999, when individual currencies were abandoned in favour of the Euro?

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November 29 2016

Commentary by David Fuller

Email of the day

On Trump’s protectionism having negative consequences for Autonomies:

 Dear David,

Among the various consequences of the Trump victory suggested by the author of this article is that the protectionism that the new USA administration will apply will have negative consequences of multinational firms - i.e. our favourite Autonomies. What do you think about this hypothesis? Regards

David Fuller's view -

Many thanks for the interesting article and your topical question relevant to many of us.

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November 29 2016

Commentary by David Fuller

Solar-Panel Roads to Be Built on Four Continents Next Year

My thanks to a subscriber for this fascinating article from Bloomberg.  Here is the opening:

Electric avenues that can transmit the sun’s energy onto power grids may be coming to a city near you.

A subsidiary of Bouygues SA has designed rugged solar panels, capable of withstand the weight of an 18-wheeler truck, that they’re now building into road surfaces. After nearly five years of research and laboratory tests, they’re constructing 100 outdoor test sites and plan to commercialize the technology in early 2018.

“We wanted to find a second life for a road,” said Philippe Harelle, the chief technology officer at Colas SA’s Wattway unit, owned by the French engineering group Bouygues. “Solar farms use land that could otherwise be for agriculture, while the roads are free.”

As solar costs plummet, panels are being increasingly integrated into everyday Materials. Last month Tesla Motors Inc. surprised investors by unveiling roof shingles that double as solar panels. Other companies are integrating photovoltaics into building facades. Wattway joins groups including Sweden’s Scania and Solar Roadways in the U.S. seeking to integrate panels onto pavement.

To resist the weight of traffic, Wattway layers several types of plastics to create a clear and durable casing. The solar panel underneath is an ordinary model, similar to panels on rooftops. The electrical wiring is embedded in the road and the contraption is topped by an anti-slip surface made from crushed glass.

A kilometer-sized testing site began construction last month in the French village of Tourouvre in Normandy. The 2,800 square meters of solar panels are expected to generate 280 kilowatts at peak, with the installation generating enough to power all the public lighting in a town of 5,000 for a year, according to the company.

For now, the cost of the Materials makes only demonstration projects sensible. A square meter of the solar road currently costs 2,000 ($2,126) and 2,500 euros. That includes monitoring, data collection and installation costs. Wattway says it can make the price competitive with traditional solar farms by 2020.

David Fuller's view -

Theoretically, this is an interesting idea and an ambitious challenge.  I hope it can be perfected although the overall cost, safety and susceptibility to damage may be too great for existing technologies.  Nevertheless, it shows the incredible adaptability of solar technology, in terms of projects both great and small.   

The sun is the greatest source of energy with which we have any personal experience.  The number of manmade products exposed to sunlight, which can be captured and turn into energy, is practically unlimited.  



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November 29 2016

Commentary by David Fuller

The Markets Now

A very interesting and enjoyable Monday evening.

David Fuller's view -

Here is my presentation from Monday’s Markets Now. 

It was another lively, enjoyable session and The Caledonian Club is proving to be one of the better venues.

A new guest speaker, Clive Burstow of Barings, gave an extremely interesting, timely and informative talk on The Global Mining Sector.  I hope to provide his presentation shortly, in addition to Iain Little’s latest update on favoured Investment Trusts.  



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November 29 2016

Commentary by Eoin Treacy

November 29 2016

Commentary by Eoin Treacy

Musings From the Oil Patch November 29th 2016

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

You read it here first – tomorrow the members of the Organization of Petroleum Exporting Countries (OPEC) will announce an agreement to limit its output. You will have to wait for the details, and more importantly you will have to wait to see whether OPEC members actually do what they say they will do. For those of us who have seen this show before (often with even greater drama/showmanship), the issues with every OPEC agreement are the details and then its execution. Often the details and the execution are not what the public is led to expect at the time of the announcement. 

OPEC has little choice at this point but to attempt to salvage some degree of respectability, especially following the debacle of the Doha meeting last spring at which a preconceived agreement blew up at the last minute. We are not going to debate the viability of OPEC as a cartel – to us it has always been an excuse to travel to Vienna and Europe for shopping and partying. On the other hand, OPEC does play an important role in helping to corral a number of important crude oil producers into supposedly one voice, although the power of that voice has been diminished by the evolution of energy markets over the last 25 years, and especially in the last few years. 

The key factor for the oil market that OPEC understands is that it is in a recovery mode. That is not due to a miracle, or can be attributed to the efforts of anyone in particular. Rather, it is the result of economic discipline being restored to the oil market. Fewer uneconomic prospects are being drilled. Assets are moving from weak hands into stronger hands – hands that don’t necessarily have to drill in order to generate revenue to attempt to keep the doors of the companies open. 

Additionally, companies are figuring out how to operate more efficiently – fewer employees, more efficient operations and employing greater technology. Producers at the moment have benefited from destroying the pricing structure of the oilfield service industry, enabling the producers to lower operating costs. The producers have driven oilfield service company prices down to levels that are not sustainable for the long-term. Short-term gains for producers will have to yield to higher oilfield service prices if the producers wish to have the equipment, technology and employees that deliver the field services that they need. The question becomes how quickly oilfield service prices rise and how much of those increases can be offset by further efficiency gains. 

Eoin Treacy's view -

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

This is a logical argument. If OPEC cannot act in unison to fulfil its role as a swing producer then what purpose does the group have as anything more than a talking shop? If they fail to announce a deal it will signal the group’s increasing irrelevance so they have little choice but to announce something. Quite whether they can succeed in implementing anything is another subject entirely. 



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November 29 2016

Commentary by Eoin Treacy

How Apple Lost China to Two Unknown Local Smartphone Makers

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

“Oppo and Vivo are willing to share their profit with local sales. The reward was an extremely active and loyal nationwide sales network,” said Jin Di, an IDC analyst based in Beijing. While they declined to detail their subsidy program, she estimates the two were the top spenders in the past year. “They’re doing something different -- they do local marketing.”

China had for years driven Apple’s and Samsung’s growth. The U.S. company generated almost $59 billion of sales from the region in fiscal 2015, which was more than double the level just two years earlier. During that time its shares surged more than 60 percent. At its peak, Greater China yielded almost 30 percent of its revenue and Apple was neck-and-neck with Xiaomi for the mantle of market leader as users clamored for the larger iPhone 6 models. Even as the domestic economy began to sputter, Chief Executive Officer Tim Cook spent a good chunk of an earnings call last year talking up the country’s promise, saying Apple’s investing there “for the decades ahead.”

 

Eoin Treacy's view -

Mobile devices is an increasingly competitive market. The speed with which new companies seem to come and go is alarming from an investors’ perspective because no sooner does one seem to have conquered the world than they are being supplanted by an even more revolutionary start up. 



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November 29 2016

Commentary by Eoin Treacy

DB Today Global Macro

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

European Equity Strategy - Weekly Fund Flows - Andreas Bruckner Over the course of last week, DM investors remained energized by heightened expectations of a regime change from monetary to fiscal policy. DM bond funds lost $3bn of assets, which is somewhat lighter than the previous week’s $8bn of outflows, but keeps DM bond fund redemptions on the fastest pace since the 2013 taper tantrum. Meanwhile DM equities garnered $7bn, which showed more constraint than the record-setting $33bn of the week prior, but still accentuated the rotation from bond funds to equity funds that has characterised investor flows since Donald Trump’s election victory on Nov 8. To put this in perspective, DM bond funds have seen $750bn more inflows than DM equity peers since 2007 ($1tn versus $250bn). Looking at the year on year changes of this ‘over-allocation’ since 2004, it seems to be primarily driven by the yearly changes in the US 10-year Treasury yield.

Eoin Treacy's view -

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

The sell-off in bonds will have sparked the interest of investors who have been conditioned to buy the dip. That is exactly what happened following the taper tantrum and on every other occasion when bonds sold off during what has been one of the most persistent bull markets in history. 



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