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June 06 2017

Commentary by Eoin Treacy

Buyers Scooping 50-Cent VIX Calls Again After Stock Tumult Ebbs

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

A trader purchased a block of almost 75,000 July $18 calls on the CBOE Volatility Index on Monday for 50 cents apiece, echoing buying previously associated with a personage dubbed “50 Cent.” That followed similar trading on Friday, when 100,000 July $19 calls were bought, also at a price in the neighborhood of half a dollar per contract.

Investors like 50 Cent are choosing to hedge as the S&P 500 Index reaches fresh records despite concerns ranging from politics to Federal Reserve tightening. Traders have been using VIX contracts like never before this year, with daily call volume outpacing puts by almost threefold on average. The number of options outstanding protecting against a resurgence of volatility is now at its highest level since the week before Donald Trump’s election, relative to bets for quieter days ahead.

50 Cent, a buyer or buyers of near-month VIX calls, is hardly the only trader taking a view on future stock swings.

With the index grinding lower, a more profitable trade this year has been to sell volatility, not buy it. Even the 46 percent VIX surge of May 17 was quickly erased when the gauge fell for seven straight days.

The blocks of July 18 and 19 calls of the last two sessions represented by far the highest single-day volume in either strike’s history, though they weren’t enough to push overall calls past historical averages.

As was the case before, the trading was in options that would require a lot of equity turbulence to be exercised. At 18, the lower of the two has a strike of more than 40 percent above the level of the monthly July VIX futures. Even the 373-point Dow Jones Industrial Average rout in mid-May wasn’t enough to push the volatility index above 16.

 

Eoin Treacy's view -

Buying near-month VIX options in size suggests hedging activity against a large long position in equities. Volatility is an important consideration for quantitative strategies because it plays a significant role in how positions are sized. If you wished to run a long portfolio where occasional bouts of intraday volatility didn’t mess with positions sizing, the answer might be to hedge Vega (volatility). That may explain why traders are willing to continue to bet on losing options positions with little time value. 



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June 06 2017

Commentary by Eoin Treacy

Top Risks 2017: The Geopolitical Recession

Thanks to a subscriber for this report by Ian Bremmer and Cliff Kupchan for Eurasia Group may be of interest. Here is a section:

It’s been six years since we first wrote about the coming G-Zero world—a world with no global leader. The underlying shifts in the geopolitical environment have been clear: a US with less interest in assuming leadership responsibilities; US allies, particularly in Europe, that are weaker and looking to hedge bets on US intentions; and two frenemies, Russia and China, seeking to assert themselves as (limited) alternatives to the US—Russia primarily on the security front in its extended backyard, and China primarily on the economic front regionally, and, increasingly, globally.

These trends have accelerated with the populist revolt against “globalism”—first in the Middle East, then in Europe, and now in the US. Through 2016, you could see the G-Zero picking up speed on multiple fronts: the further deterioration of the transatlantic alliance with Brexit and the “no” vote on the Italy referendum; the end of America’s Asia pivot with the collapse of the Trans-Pacific Partnership and the Philippine president announcing a break with the US; the Russian victory in Syria after backing President Bashar al Assad through nearly six years of war.

But with the shock election of Donald Trump as president of the US, the G-Zero world is now fully upon us. The triumph of “America first” as the primary driver of foreign policy in the world’s only superpower marks a break with decades of US exceptionalism and belief in the indispensability of US leadership, however flawed and uneven. With it ends a 70-year geopolitical era of Pax Americana, one in which globalization and Americanization were tightly linked, and American hegemony in security, trade, and promotion of values provided guardrails for the global economy.
In 2017 we enter a period of geopolitical recession.

This year marks the most volatile political risk environment in the postwar period, at least as important to global markets as the economic recession of 2008. It needn’t develop into a geopolitical depression that triggers major interstate military conflict and/or the breakdown of major central government institutions. But such an outcome is now thinkable, a tail risk from the weakening of international security and economic architecture and deepening mistrust among the world’s most powerful governments. 

 

Eoin Treacy's view -

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

We live in an increasingly multipolar world where there is not one centre of gravity but a number and these are focused on major population centres or large geographical areas. Part of the reason is because of demographics. With large aging populations that require greater commitment of resources domestically there simply isn’t the appetite for global hegemony on the same scale as previously in the USA, Europe and Japan. Of course that doesn’t mean there won’t be competition. In fact it probably means we can expect even greater adversarial conditions because power vacuums will inevitably be filled by someone. 



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June 06 2017

Commentary by Eoin Treacy

Email of the day on the investment repercussions of the UK election

UK Election 9/6/17
What happens to UK shares in the event of:
ONE// Increased Tory majority
TWO// Hung parliament
THREE// Labour victory/ coalition with e.g. SNP?

 

Eoin Treacy's view -

Thanks you for these questions which represent some interesting potential outcomes from the upcoming election. The Pound is perhaps the best arbiter for what investors believe the potential outcome is likely to be. 



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June 06 2017

Commentary by Eoin Treacy

June 05 2017

Commentary by David Fuller

Trump is Correct: German Surplus is Bad News for Everybody Else

Over the past week it has been easy to believe that the most important economic issues have their roots in politics. I will discuss the impact of this week’s general election on things economic next week, once the result is known. But amid all this hullabaloo, some other developments have taken a worrying turn, especially the evident strain that has developed in US/German relations, most recently over climate change, but before that over trade. Put climate change to one side. Does Donald Trump have a point on trade?

The United States runs deficits on its external accounts, that is to say, it buys more from abroad than it sells abroad. In the process, it exports employment and profit possibilities to other countries. Germany does exactly the opposite. It is running a surplus on its current account (broadly speaking, exports minus imports) of over 8pc of GDP. This is what lay behind President Trump’s recent outburst at the G7 summit in Taormina, Sicily, describing German trade practices as “very, very bad”.

Yet most Germans are proud of their surplus and suggest that other countries would be better if they copied Germany, seemingly oblivious of the fact that in order for Germany to be able to have a surplus, someone else has to have a deficit.

The problem now extends beyond Germany. The workings of the single currency have turned the whole eurozone Teutonic. The eurozone’s external surplus now exceeds the combined surpluses of China and Japan. Germany and the euro are the source of the world economy’s greatest imbalance.

Interestingly, there has been support for the German position on trade from some economists. They say that the US’s external deficit is not connected with trade practices in Germany or any other country but is rather the inevitable outcome of the imbalance between American savings and investment. In short, Americans collectively do not save enough.

This argument completely misses the point. Of course, it is true that the US is under-saving or, if you like, over-spending. Indeed, if a country is running an external deficit, this is true by definition. But things that are true by definition are completely empty with regard to what they say about behaviour.

David Fuller's view -

Here is a key sentence:

“The workings of the single currency have turned the whole eurozone Teutonic.”

It will be very interesting to see how this is resolved.  The other EU states want Germany to relax the stance of its fiscal policy, best achieved by turning the EU into a fiscal union, as I have mentioned previously.  However, Germany remains opposed to this and the strategy has never been popular with EU citizens who do not want to lose more of their independence.  This is the main reason why the UK voted for Brexit.

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



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June 05 2017

Commentary by David Fuller

2017 is the Worst Year Possible for Britain to Experiment with Corbyn-omics

massive hike in corporation tax. Higher taxes for anyone earning more than £80,000. A Robin Hood tax for the City, a hefty rise in the minimum wage, and the abolition of tuition fees. The Labour manifesto is big on old-style tax and spending policies.

Hardly a day goes by without Jeremy Corbyn or his shadow chancellor John McDonnell promising a tax rise on something or other, along with a “fully-costed” splurge on some wheeze that might attract a few more votes.

They have not quite gotten around to creating a higher tax band for anyone with an MBA or a one-off levy on Ocado deliveries. But, heck, tomorrow is only Tuesday, and there will still be over 24 hours to go before voting begins. Anything could happen.

A General Election that looked safely in the bag for the Conservatives when the prime minister Theresa May announced it six weeks ago now looks dangerously in the balance.

The polls are all over the place, and they have called so many votes wrong in the last three years that no one trusts them anymore. There is a chance – a slim chance but a chance all the same – that Labour might actually get elected.

Its policies would be bad for the economy at the best of times. But one important point has been widely missed. They would be especially catastrophic at the same time as we are negotiating our exit from the EU.

You can argue about how much impact Brexit will have, and whether it will be for the better or worse. What you can’t really dispute is that the UK will go through a period of adjustment as it lessens its dependence on Europe – and that will require a mix of lower taxes and lighter regulation to remain attractive to global business.

In truth, 2017 will be just about the worst year possible for Britain to try an experiment in the economics of the radical Left.

David Fuller's view -

Theresa May has her strengths but campaigning has not been among them.  This is the worst Tory general election campaign that I have ever seen.  The blame for this lies directly at the feet of the Prime Minister. 

Arrogantly, she has insisted on dominating the entire campaign.  Her persistent tactic has been to criticise her main opponent. Bullying is always an unattractive characteristic and it has led to sympathy for Jeremy Corbyn, particularly among the youngest voters.  Tactically, Corbyn has played his exceptionally weak hand very skilfully.

Fortunately, bookmakers still show a comfortable lead for the Conservative Party, although they are certainly not infallible.  A change in government at this time would be a disaster for the UK economy, undermining its chances of being a leading free-trade economy attracting international support.   

A PDF of Matthew Lynn's column is posted in the Subscriber's Area.



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June 05 2017

Commentary by David Fuller

Tech That Takes the Controls from Terrorists

Governments ought to offer less generic reactions to the forms terror is taking. Of the three U.K. attacks this year, two started as attempts to mow people down with vehicles. This is an increasingly frequent terrorist practice, which has recently yielded gory results in Nice, Columbus and Berlin as well.

At least this part of the attacks (though not the subsequent knifings) could have been prevented or at least mitigated by modern technology known as autonomous emergency braking. This is generally a life-saving technology that has been shown to reduce rear-end collisions by 38 percent, and that, in its current forms, will stop a vehicle before it hits a pedestrian. In Berlin, the truck used by Anis Amri to plow into a Christmas market last December was equipped by an AEB system; it ultimately stopped the vehicle, preventing more deaths than the final casualty count of 12. The reason it didn't stop earlier is that the driver can ignore the system's initial warning, overriding it for a short while; in such a scenario, brakes are only applied after the collision.

The European regulation, adopted in 2012, required that all new vehicles come equipped with AEB starting in 2015. It decrees that the driver should be able to shut off the automatic braking function. The latter wasn't a problem in Amri's case -- he apparently didn't even consider whether the Polish-owned truck he had commandeered was equipped with the anti-collision system. But regulators would clearly make life much harder for terrorists planning to weaponize vehicles if they required that the systems couldn't be manually overridden when a collision with a human is imminent. That wouldn't make cars more dangerous: Current technology allows the vehicle to "see" the full range of options in a dangerous situation more effectively than a human driver can.

The EU regulation was a major step forward (in the U.S., automakers have agreed with regulators they would equip every new car with AEB only by 2022). Before it entered into force, only some 32 percent of new cars sold in the Netherlands, 25 percent in Germany and 21 percent in the U.K. came with autonomous emergency braking. Banning manual overrides would be another useful step.

David Fuller's view -

With or without increased terrorist attacks Autonomous Emergency Braking (AEB) systems seem like an inexpensive partial solution to loss of life due to runaway vehicles.  



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June 05 2017

Commentary by David Fuller

Email of the day

On dark chocolate may cut risk of irregular heartbeat:

June 05 2017

Commentary by Eoin Treacy

June 05 2017

Commentary by Eoin Treacy

Email of the day on the Dollar's reserve status

Thank you for your excellent service. Can you please share your views about the US Dollar’s reserve currency status and future in view of the fact that the US seems to want to isolate itself from the world? How likely do you think they will indeed isolate themselves, and what would be the consequences to the status of the USD as a reserve currency. Thanks in adv. best regards.

Eoin Treacy's view -

Thank you for this question which is sure to be of interest to other subscribers.  The Dollar is the world’s reserve currency for a number of reasons. It is backed by the strength of the world’s largest economy. It is backed by the world’s most well-funded military. Oil prices are denominated in Dollars but more important that any of these factors is that its reserve status is backed by the consumption of the USA’s population. 



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June 05 2017

Commentary by Eoin Treacy

In gold we trust

Thanks to a subscriber for the 11th annual edition of Ronald-Peter Stöferle and Mark J. Valek’s trademark report on the gold market for Incrementum. Here is a section:

Moreover, the ratio of real assets to financial assets is currently the lowest since 1925.5 In a study worth reading, Michael Hartnett, chief strategist at Bank of America Merrill Lynch, recommends to “get real”, i.e. to reallocate investments from financial assets into real assets.

"Today the humiliation is very clearly commodities, while the hubris resides in fixed-income markets" as Hartnett explains. Gold, diamonds, and farmland show the highest positive correlation with rising inflation, whereas equities and bonds are negatively correlated with increasing prices, a finding that we have pointed out repeatedly. The political trend towards more protectionism and stepped-up fiscal stimuli will also structurally drive price inflation.6

In the past years, rate cuts and other monetary stimuli have affected mainly asset price inflation. Last year, we wrote: “Sooner or later, the reflation measures will take hold, and asset price inflation will spill over into consumer prices. Given that consumer price inflation cannot be fine-tuned by the central banks at their discretion, a prolonged cycle of price inflation may now be looming ahead.” 2016 might have been the year when price inflation turned the corner. However, the hopes of an economic upswing due to Trumponomics and the strong US dollar have caused inflation pressure to decrease for the time being. Upcoming recession fears resulting in a U-turn by the Fed, and the consequential depreciation of the US dollar would probably finalise the entry into a new age of inflation. This will be the moment in which gold will begin to shine again.

Low interest rates combined with the pressure to invest and FOMO, have nurtured a treacherous sense of carelessness within many market participants. Scenarios such as significantly higher inflation or a recession are currently treated like black swans, although history shows that these events do occur at regular intervals.

Many signals suggest that we are about to face a big shift within the financial and monetary system. Nobody can foresee what it will look like. But an early look at such scenarios creates a good opportunity to come out stronger at the other side of this transition. As Roland Baader brilliantly summed it up: “In the middle of the boisterous summer party, the sensitive ones start feeling the chills.”7 To some degree, we find ourselves in this quote.

Eoin Treacy's view -

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

2-year yields at a shade under 1.3% signal bond investors are unwilling to anticipate Fed action beyond the next quarter. They’ve probably been punished too much for making that mistake over the last few years when the Fed has overpromised and under delivered on rate hikes. 



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June 05 2017

Commentary by Eoin Treacy

Why Diplomacy Is Unlikely to Solve the Korean Crisis

Thanks to a subscriber for this article by George Friedman at his new venue Geopolitical Futures. Here is a section:

All of this raises the question of whether China is acting in good faith. By cooperating, China might gain economic concessions from the United States, but it’s unclear how long they would last. And China might actually welcome a United States obsessed with a North Korean ICBM aimed at the U.S., since this might divert U.S. focus in East Asia from China to North Korea permanently. Finally, while common sense would suggest that China has significant leverage with North Korea, that should not be overstated.

Economically, North Korea is relatively self-sufficient. It has chosen poverty over dependence. The economic sanctions China can impose, such as blocking North Korean coal exports, have already been used in previous crises. The North Koreans, moreover, haven’t trusted China since the Korean War, when China made no attempt to intervene until the U.S. threatened to cross the Yalu River into China. Absent that, the Chinese, having encouraged North Korea to invade the South, were willing to see North Korea fall. Using China as a negotiator might seem logical, but China has few chips to play and a history of betrayal.

Mattis presented this issue in an interesting way in Singapore. On the one hand, he expressed confidence in China on North Korea. On the other hand, he ripped into Chinese policies in the South China Sea as violating international law. The message was that nothing China does in North Korea will make the U.S. concede the South China Sea, which was a relief to the audience in Singapore. But Mattis also conveyed the message to China and others that the U.S. is not confident in finding a diplomatic solution to this crisis.

 

Eoin Treacy's view -

North Korea achieving the technological and physical capabilities to develop an intercontinental ballistic missile represents a significant issue for the US military. That’s because unlike “the line in the sand” that use of chemical weapons in Syria represented, this would have direct geopolitical implications for the continental USA. 



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June 02 2017

Commentary by Eoin Treacy

June 02 2017

Commentary by Eoin Treacy

Gold remains expensive insurance

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

Expensive by any number of measures…
At the current spot price of USD1,260 – 1,265/oz, gold screens as expensive against almost all other metrics. The average of nine metrics suggests that the fair value for gold is USD1,015/oz. At the bottom end of the range G7 per capita income (gold’s affordability) would suggest a fair value of USD735 – 740/oz. At the upper end of the range and the only measure whereby gold looks cheap is treating gold as a reserve currency. Here the size of the big four central bank balance sheets (ECB, BoJ, PBoC and Fed) would suggest a fair value of USD1,650/oz. As a blunt gauge of relative value, this approach is okay, but the spread is too wide to be of any real use as a serious forecasting tool. Instead, we prefer to synthesize the main price drivers into a four factor regression model.

The current gold price suggests that heightened risk perceptions persist
Although the correlation coefficient on our model is 87%, there are very discrete periods when gold trades above the model forecast as well as below. Our interpretation is that when gold trades above, the market is going through a period of heightened risk perceptions, be it the expectation of a collapse in the global financial system or rampant inflation. Over the past 10 years, we have had an extended “bull market” period lasting 3 and half years and an equivalent “bear market” of 3 and a half years. Our model suggests that gold should be trading at USD1,185/oz, 6% below the current spot price. The current “premium” period for gold started in February 2016. We expect this environment to continue into 2018. Nevertheless, we retain our cautious to neutral view on gold with the Deutsche Bank house view on the model inputs pointing to a year end price of USD1,150/oz even when factoring in further political and financial uncertainty. Our Q4 price forecast is USD1,230/oz, which already incorporates a risk premium.

A short term insurance policy for those who want it
Although gold screens as expensive, there is a short term scenario (3 month) which would justify gold trading higher, in our view. In the near term, our US rates economist Dominic Konstam sees scope for the US 10-year bond yield to fall to 2% (before rising to 2.75% by year-end), as falling excess liquidity points to softer US growth momentum ahead. If we apply a US 10 year bond yield of 2%, a USD 2% weaker from current levels (not our FX strategist view) and the S&P500 down 5% from current levels, our fair value model points to a gold price of USD1,320/oz.

 

Eoin Treacy's view -

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

Many fundamental investors think gold is a barbaric relic because it is impossible to value on a dividend discount model metric. So are zero coupon bonds and yet the market has found a way to value those. That highlights what might be considered a blind spot for an asset that has been considered a store of value of millennia. 



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June 02 2017

Commentary by Eoin Treacy

Monte Paschi Wins EU Backing on Revamp, Paving Way to Rescue

This article by Aoife White and Sonia Sirletti for Bloomberg may be of interest to subscribers. Here is a section:

The EU will now work with Italy on details of Monte Paschi’s final restructuring plan. Italy will need to formally notify the EU of the plan, including commitments on the restructuring. The EU will then move to adopt final approval for the recapitalization.

Monte Paschi’s senior management will have their salary capped at 10 times the average salary of bank workers as part of measures “to substantially increase its efficiency."

While subordinated bondholders will have to contribute to the costs of the restructuring, Monte Paschi will compensate retail junior bondholders who weren’t properly informed of the risk they were taking on that bonds might be converted to equity, according to the statement. The bank will buy the converted equity from those investors and pay them in “more secure senior instruments."

Eoin Treacy's view -

The political need to avoid the mess of thousands of retail holders of subordinated debt and reverse convertibles being wiped out was the reason rules were bent, reinterpreted and even changed to avoid Banca Monte dei Paschi di Siena SpA being wound up. 



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June 02 2017

Commentary by Eoin Treacy

U.S. Won't Change Efforts to Cut Emissions Post-Paris: Tillerson

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

Secretary of State Rex Tillerson says the U.S. won’t change “ongoing efforts" to reduce greenhouse gas emissions in the future, despite pulling out of the Paris climate accord.

U.S. “has a terrific record on reducing our own greenhouse gas emissions It’s something I think we can be proud of and that was done in the absence of a Paris agreement," he tells reporters before meeting at State Dept with Brazilian Foreign Minister Aloysio Nunes Ferreira

 

Eoin Treacy's view -

The revolution in unconventional supply has contributed more to the USA’s ability to combat emissions than any form of renewable energy because it has made coal uncompetitive. The evolving argument for the development of fracking techniques to develop geothermal energy sources is another reason why the USA is likely to meet its emissions targets without being party to an international agreement. The energy intensity of the countries like China and India is still in its major growth phase and the question of global emissions rests on their ability to innovate. 



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June 01 2017

Commentary by Eoin Treacy

June 01 2017

Commentary by Eoin Treacy

U.K. Pollsters See May Upping Majority Even as Lead Shrinks

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

May is set for a healthy majority of at least 50 seats which could become a landslide of as many as 200. “In this type of election, which has switched back to two-party politics, once you start polling in the 40s you can win big.” Tony Blair won his landslide in 1997 with 43 percent of the vote. The "numbers behind the polls” -- such as the relative ratings of the leaders and who’s best to manage the economy -- all still favor May.

Joe Twyman, head of political polling at YouGov
May should get a majority of 40 to 60 seats. “A lot could still happen. The Tories have not had a good campaign. Labour have had a better one, but started from a low base. Turnout will be crucial given how age is now such an important social cleavage in Britain.”

Adam Drummond, senior research manager at Opinium
May is on course to win a majority of 72, based on the latest data. Even if the Tory lead narrows further, she should still have a majority of 50 to 70, partly because the party’s so far ahead of Labour among older voters "who always go out to vote."

Eoin Treacy's view -

Flip flopping on policy initiatives in the middle of an election campaign does not make for good optics. Unfortunately when a party goes into an election as the presumed leader it is hard to campaign with the same ferocity and leaves open the potential for opposing parties to improve on their position. That still won’t result in Jeremy Corbyn becoming Prime Minister but is has created uncertainty. 



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June 01 2017

Commentary by Eoin Treacy

How Long Can the Fed Keep the Boom Going?

Thanks to a subscriber for this article by Thorsten Polleit for the Mises Institute. Here is a section:

To keep the boom going, the central bank must keep interest rates below their natural levels. It cannot raise them back to “normal.” First and foremost, higher interest rates would make the boom collapse. The credit market would collapse, stock and housing prices would tumble, and the financial system and the economy as a whole would go into a tailspin.

One may ask: Why is the Fed then raising rates then? Perhaps the Fed’s decision-makers think that the US economy has overcome the latest crisis and higher interest rates are economically justified. Others might wish to tighten policy for getting the short-term inflation adjusted interest rate out of negative territory.

Be it as it may, the disconcerting truth is this: Fed rate hikes will close the gap between the natural interest rate and the actual interest rate level. This, in turn, amounts to putting a brake on the boom, bringing it closer to bust. It is impossible to know with exactitude at what interest rate level the US economy would fall over the cliff.

One thing is fairly certain, though: The US economy, and with it the world economy, is caught between a rock and a hard place. Maybe the Fed’s current rate hiking spree will bring about the bust. Or the Fed refrains from raising rates further and keeps the boom going a little bit longer.

Eoin Treacy's view -

The big question is how can the Fed raise interest rates and shrink its balance sheet at the same time, without having an adverse effect on the economic expansion it has worked so hard to achieve. 



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June 01 2017

Commentary by Eoin Treacy

Japan Business Investment Rebounds as Corporate Profits Jump

This note by Connor Cislo and Maiko Takahashi for Bloomberg may be of interest to subscribers. Here it is in full:

Capital spending in Japan topped estimates during the first quarter of the year as the tightest job market in more than two decades drove investment in labor-saving technologies.

Highlights

Capital expenditure rose 4.5 percent in the first quarter of 2017 from a year earlier (estimate +4 percent).Corporate profits climbed 26.6 percent. Company sales rose 5.6 percent.

Key Takeaways

A moderate economic recovery and a labor shortage have created a favorable environment for business spending, prompting companies to invest in technology. Today’s figures will be used to revise first-quarter growth, with the result due to be released next week. The preliminary reading showed an annualized expansion of 2.2 percent.

Economist Views

* “Non-manufacturers are taking the lead” as they try to save manpower to deal with the labor shortage, said Takeshi Minami, chief economist at Norinchukin Research Institute. “That’s a good trend. It’s long been said that old production systems are weighing on productivity.”

* “The business-spending figure in the GDP report may be revised up slightly” after the data, said Hiroaki Muto, chief economist at Tokai Tokyo Research Center in Tokyo. “With corporate profits rebounding a lot, companies are probably making investments to renew their old facilities and equipment or to boost productivity.”

Other Details

* Spending minus software rose 5.2 percent from a year earlier (estimate +4.1 percent).

Eoin Treacy's view -

Japan is growing at a G-7 beating 2.2%. That’s not something we hear very often for a country that has been mired in deflation for what feels like forever. The fact it is occurring against a background of full employment and an increasing labour shortage suggests companies will be investing more in technology, automation and may as a last resort have to raise wages. 



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May 31 2017

Commentary by Eoin Treacy

May 31 2017

Commentary by Eoin Treacy

Musings from the Oil Patch May 30th 2017

Thanks to a subscriber for this edition of Allen Brooks’ report which has a number of particularly interesting items this week. Here is a section on the pace of technology adoption: 

When the pace of adoption of technologies is examined, there are a number of interesting questions that bear on the projections of how quickly EVs and AEVs, as well as on-demand ride services, will be accepted. Are they going to be adopted as consumer technology items or truly revolutionary technologies and labor-saving devices? As shown in Exhibit 10, proponents of rapid technology adoption point to the cellphone, which took about a decade to go from zero to 60% penetration. That was about the same time span as the internet, but maybe only slightly longer than the VCR. On the other hand, the telephone needed nearly 50 years, while electricity needed only about 25 years, to reach the 60% penetration level. However, maybe we should look at these vehicle technologies as akin to those that brought significant lifestyle changes such as the stove, the clothes washer and the dishwasher, which needed between 35 and 50 years to reach 60% of American homes.

Our best guess is that the adoption rate will be somewhere between the cellphone and electricity, 10 to 25 years, but with a bias toward the longer timeframe. Why do we say that? It is important to understand that vehicles play an important role in family evolutions, something that hasn’t changed over generations. The hyped concern about millennials not getting married, starting families and buying homes, which was very popular during the years immediately following the global financial crisis of 2008, is disappearing. We now see millennials coming out of their parents’ basements, getting married, starting families and buying homes – although maybe not of the same size or in the same locations as their parents. These millennials are, however, continuing the generational pattern of societal evolution, although they are taking longer than previous generations to take some of the steps down that road. Given the pace of this phenomenon’s development, it is important to remember that automobiles remain the second largest purchase after homes for families. These purchases are not made frequently, they usually require significant research and time to reach a decision, and the decisions are often based on economic considerations involving all aspects of families’ lives and not just social concerns, such as climate change.

Given the factors involved in new car purchases, those forecasting the demise of petroleum must explain how those with limited incomes and wealth will voluntarily give up their perfectly functioning fossil fuel vehicle for an expensive EV, which because of battery technology may not get anywhere close to the advertised performance due to the climate where they reside. Their lives will become more complex until electric charging stations are as ubiquitous as gasoline stations, since they may not be able to afford the wait for battery recharges nor the cost of an installed charger in their home, if that option even exists for them.

There is also the question of what happens to the economics of EVs versus ICE cars when the values of used ICE cars go essentially to zero? In that case, unless gasoline and diesel fuels are banned, which may be the next target of environmental activists, it will be much cheaper to own and operate ICE cars than EVs.

There is also the question of how quickly the fleet of American vehicles can be converted to EVs or AEVs. For the past several years, Americans have purchased 17 million or slightly more new vehicles each year. At that pace, it will take 15 1/3 years to completely replace the approximately 260 million vehicles currently on America’s roads. To reach the magic 60% penetration rate, Americans must buy 17 million new EVs every year for more than nine years. Despite the high number of EVs in the fleet, it still leaves 104 million ICE vehicles on the roads burning fossil fuels.

Eoin Treacy's view -

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

Something that has always been at the back of my mind when reading comparisons about the pace of adoption of technologies is whether it is appropriate to compare adoption rates over more than a century. The pace of life has accelerated considerably in only the last decade so that we find it hard to imagine how anyone lived without the benefit of wifi or indeed indoor plumbing more than a century ago. My kids for example can’t imagine a world without iPhones, iPads and YouTube.



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May 31 2017

Commentary by Eoin Treacy

Trouble Brews for OPEC as Expensive Deep-Sea Oil Turns Cheap

This article by Serene Cheong, Sharon Cho and Dan Murtaugh for Bloomberg may be of interest to subscribers. Here is a section:

The falling costs make it more likely that investors will approve pumping crude from such large deep-water projects, the process for which is more complex and risky than drilling traditional fields on land. That may compete with OPEC’s oil to meet future supply gaps that the group sees forming as demand increases and output from existing wells naturally declines.

Saudi Arabia’s Al-Naimi left his post shortly after his speech targeting high-cost producers, and his successor Khalid Al-Falih organized production cuts by OPEC and some other nations that are set to run through March 2018. In a speech in Malaysia this month, Al-Falih bemoaned the lack of investment in higher-cost projects and said he fears the lack of them could cause demand to spike above supply in the future.

Warnings from OPEC of a looming shortage are “overstated and misleading,” Citigroup Inc. said in a report earlier this month. The revolution in unconventional supplies like shale is “unstoppable” unless prices fall below $40 a barrel, and deep- water output could grow by more than 1 million barrels a day by 2022, according to the bank.

Royal Dutch Shell Plc in February approved its Kaikias deep-water project in the U.S. Gulf of Mexico, saying it would break even with prices below $40 a barrel. That followed BP Plc’s decision in December to move forward with its Mad Dog Phase 2 project in the Gulf, with costs estimated at $9 billion compared to $20 billion as originally planned.

Over the next three years, eight offshore projects may be approved with break-even prices below $50, according to a Transocean Ltd. presentation at the Scotia Howard Weil Energy Conference in New Orleans in March. Eni SpA could reach a final investment decision on a $10 billion Nigeria deep-water project by October.

Eoin Treacy's view -

Oil producers spent a decade investing in additional supply and while they went right on investing until prices declined, the reality is that a lot of that investment was in new technology which is now being used to drive prices down while exploration has been abandoned. 



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May 31 2017

Commentary by Eoin Treacy

The End of Cheap Chocolate? Cocoa Futures Surge Most on Record

This article by Marvin G Perez for Bloomberg may be of interest to subscribers. Here is a section:

Ivory Coast growers have sold 950,000 tons of cocoa beans from the 2017-18 main crop as of May 27, according to a person familiar with the matter. The main crop, which starts Oct. 1, is the larger of the country’s two annual harvests.

“That’s a pretty big upfront sale, and it’s probably the reason why prices are rallying,” Jack Scoville, vice president for Price Futures Group in Chicago, said in a telephone interview.

Some growing regions in Ivory Coast and Ghana, the second-largest producer, have been dry and need moisture to aid early crop growth, according to Gaithersburg, Maryland-based MDA Weather Services. Trees are also stressed from a lack of moisture in Indonesia’s Sulawesi region.

Eoin Treacy's view -

There has been a great deal of diversity in the performance of individual commodities but weakness in the agricultural sector has been a primary contributor to the underperformance of the Continuous Commodity Index. The abrupt decline in energy prices has been a more recent factor. Nevertheless there is now some diversity coming into the agricultural sector which suggests they need to be treated on their individual merits. 



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May 30 2017

Commentary by Eoin Treacy

May 30 2017

Commentary by Eoin Treacy

We'll Live to 100 How Can We Afford It?

Thanks to a subscriber for this report from the World Economic Forum. Here is a section:

In Japan, which has one of the world’s most rapidly ageing populations, retirement can begin at 60. This could result in a retirement of over 45 years for those who will live to the current life expectancy of 1071 (see Figure 2). What is the impact of a population that will spend 20%-25% more time in retirement than they did in the workforce? How do we rethink our retirement systems that were designed to support a retirement of 10-15 years to prepare for this seismic shift? 

One obvious implication of living longer is that we are going to have to spend longer working. The expectation that retirement will start early- to mid-60s is likely to be a thing of the past, or a privilege of the very wealthy.  

Absent any change to retirement ages, or expected birth rates, the global dependency ratio (the ratio of those in the workforce to those in retirement) will plummet from 8:1 today to 4:1 by 2050. The global economy simply can't bear this burden. Inevitably retirement ages will rise, but by how much and how quickly demands urgent consideration from policy-makers. 

Given the rise in longevity and the declining dependency ratio, policy-makers must immediately consider how to foster a functioning labour market for older workers to extend working careers as much as possible. Employers also have a key role to play in helping workers reskill and adapt their work styles to support a longer working career. 

This paper focuses on the sustainability and affordability of our current retirement systems. To protect against poverty in old age, we believe that retirement systems should be designed to provide a level playing field and equal opportunity for all individuals. A well-designed system needs to be affordable for today’s workers and sustainable for future generations to ensure that all financial promises are met. 

Healthy pension systems contribute positively towards creating a stable and prosperous economy. Ensuring that the public has confidence in the system, and that promised benefits will be met, allows individuals to continue to consume and spend through their working and retired years. If this hard-earned confidence is lost, there is a significant risk that retirees will moderate their spending habits and consumption patterns. Such moderation would have a negative impact on the overall economy, particularly in countries where the size of the retired population continues to grow. 

Action is needed to realign our existing systems with the challenges of an ageing population. Those who take proactive steps will be better equipped in the years ahead.

Eoin Treacy's view -

Here is a link to the full report.

I’m 40 so according to this report I have a 50% chance of living to 94. The Chart Seminar is in its 48th year in 2017 so you never know I might manage to get it to the century because we are all going to be working a lot longer. It’s a good thing I’m doing something I enjoy and perhaps that is the best advice. You are going to be working for an awfully long time so be prepared to change jobs, adapt and enjoy what you do. 



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May 30 2017

Commentary by Eoin Treacy

The rise of the QR code and how it has forever changed China's social habits

Thanks to a subscriber for this article from the South China Morning Post which may be of interest. Here is a section:

Chen said what seems like disruptive technology today eventually will be diffused into society and become an element of normal life tomorrow.

“The younger generation in China will grow up in a world full of two-dimensional barcodes,” he said. “They may develop a new understanding of money.”

“Maybe, in their eyes, money [will be seen as] not just a means to purchase commodities and services, but also socialise.”

Mobile payments began to grow in China as people increasingly used social media platforms such as WeChat to distribute the red money envelopes known as hongbao in Mandarin, or lai see in Cantonese, to friends and relatives in the traditional Spring Festival. Last year, the average WeChat user sent out 28 packets of hongbao every month, according to the platform. Much of the money was used to compliment a well-taken photo or well-written post.

Such behavioural changes are poised to profoundly affect the Chinese economy, according to Chen.

“When the credit card emerged, consumers were found to spend more than when they used cash. The QR code is even more convenient than the credit card, so we have good reason to expect it will increase consumption,” he said.

 

Eoin Treacy's view -

One of the reasons QR codes have not taken off in the West is because of the security concerns they represent. Any link can be embedded in a QR code so the potential for malicious codes to be used alongside commercial ones represents a significant security risk. Nevertheless the evolution of digital wallet solutions is undeniable and cash is increasingly looked on as an inconvenience. 



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May 30 2017

Commentary by Eoin Treacy

Email of the day on North Korea

First of all: thank you for a terrific service! It is an indispensable part of my day! There is an increasing tension around North Korea, this article from Zero Hedge is an example: I wonder: what is going to happen if the situation blows up? What are the threats, and what are the opportunities in your opinion?  

Eoin Treacy's view -

Thank you for your kind words and support. In just the same way that Hezbollah is a proxy for Iran on the Mediterranean coast or Ukraine’s Russian population is a proxy for Russia we can draw parallels with the increased assertiveness of China on the geopolitical stage with the uptick in North Korea’s sabre rattling. 



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May 26 2017

Commentary by Eoin Treacy

May 26 2017

Commentary by Eoin Treacy

Minutes of the Federal Open Market Committee

This transcript may be of interest to subscriber. Here is a section on how the balance sheet will be run down: 

Participants continued their discussion of issues related to potential changes to the Committee's policy of reinvesting principal payments from securities held in the SOMA. The staff provided a briefing that summarized a possible operational approach to reducing the System's securities holdings in a gradual and predictable manner. Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month. As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve's securities holdings would become larger. The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.

Nearly all policymakers expressed a favorable view of this general approach. Policymakers noted that preannouncing a schedule of gradually increasing caps to limit the amounts of securities that could run off in any given month was consistent with the Committee's intention to reduce the Federal Reserve's securities holdings in a gradual and predictable manner as stated in the Committee's Policy Normalization Principles and Plans. Limiting the magnitude of the monthly reductions in the Federal Reserve's securities holdings on an ongoing basis could help mitigate the risk of adverse effects on market functioning or outsized effects on interest rates. The approach would also likely be fairly straightforward to communicate. Moreover, under this approach, the process of reducing the Federal Reserve's securities holdings, once begun, could likely proceed without a need for the Committee to make adjustments as long as there was no material deterioration in the economic outlook.

Eoin Treacy's view -

Over $4 trillion is still a lot of money, even in the bond markets and how the Fed succeeds in shrinking that number is going to have a significant effect on both the markets and the economy. The ECB embarked on a similar policy between 2012 and 2014; taking €1 billion off its balance sheet so we have a template for what effect that might have on other asset classes.  



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May 26 2017

Commentary by Eoin Treacy

VW's Diesel Defeat Devices Finally Located, Cracked Wide Open

This article by Joel Hruska for EmtremeTech may be of interest to subscribers. Here is a section:

But making those rules public does have a downside: It means companies know precisely how to cheat. Here’s how the Jacobs School describes the situation:

During emissions standards tests, cars are placed on a chassis equipped with a dynamometer, which measures the power output of the engine. The vehicle follows a precisely defined speed profile that tries to mimic real driving on an urban route with frequent stops. The conditions of the test are both standardized and public. This essentially makes it possible for manufacturers to intentionally alter the behavior of their vehicles during the test cycle. The code found in Volkswagen vehicles checks for a number of conditions associated with a driving test, such as distance, speed and even the position of the wheel. If the conditions are met, the code directs the onboard computer to activate emissions curbing mechanism when those conditions were met.

But VW didn’t stop there. The researchers who examined Volkswagen’s work pulled 964 separate versions of the Engine Control Unit (ECU)’s code from various makes and models of Volkswagens. In 400 of those cases, the ECU was programmed with defeat devices.

Now, you might be thinking that a single code model couldn’t possibly compare all the variables in play between various test facilities, and that some cars should have shown a fault simply due to random chance. But VW was aware of that possibility and took steps to prevent it. Their defeat device had ten separate profiles to allow it to detect various permutations in test scenarios.

Not all the defeat devices were sophisticated. The Fiat 500X (not manufactured by VW) has a much simpler defeat device. The vehicle’s emission control system runs for 26 minutes and 40 seconds after you first start the car, period. That’s long enough to pass most emission tests, and it doesn’t try to detect if the vehicle is being tested. But VW’s work was extremely sophisticated, it evolved over time, and the company’s claims that this was all instituted by a few rogue engineers are more farcical than ever.

Eoin Treacy's view -

The fact that it has taken this long to figure out just how the diesel defeat mechanisms function highlights the fact that Volkswagen and Bosch have not been entirely forthcoming with investigators. The emerging reality is that defeating emissions testing was a long-term highly orchestrated endeavour that must have required the efforts of teams of engineers and years of work to achieve such impressive results. 



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May 26 2017

Commentary by Eoin Treacy

Kik App Debuts Digital Currency Amid Bitcoin Boom

This article by Gerrit De Vynck for Bloomberg may be of interest to subscribers. Here is a section:

Kik, based in Waterloo, Canada, unveiled plans for an “initial coin offering,” a process by which it sells tokens that can be used to buy services on its platform. The idea is that as more and more people use Kik, the value of those tokens, called “Kin”, will rise in value.

Interest in coin offerings is high, thanks to surging prices of bitcoin and other virtual currencies. Called ICOs, they give a wide range of people the chance to invest in a company or any other endeavor early on. While unregulated, they have proved popular, with investors spending around $330 million on tokens over the past year, according to data compiled by cryptocurrency blog The Control. Earlier this month, cloud-storage startup Storj raised almost $30 million in five days via an ICO.

Kik, which has raised about $120 million (in real money) from investors including Tencent Holdings Ltd., could serve to add a new layer of legitimacy to the process.

“Kik will be the largest install base of cryptocurrency users in the world,” Chief Executive Officer Ted Livingston said. “Kin, on day one will be the most-used cryptocurrency in the world.”

Eoin Treacy's view -

Tech startups have cottoned onto the fact that cryptocurrencies are based on reasonably easily repeatable strings of code so they can create their own. Monero, Dash, NeosCoin, MaidSafeCoin, SysCoin, SIBCoin, Couterparty, ShadowCash, Storjcoin X, Nexus, Potcoin, Synereo, NAV Coin and Stellar Lumens, to name a few, have all been created in the last two years and that’s leaving out the large ones like Ethereum and Ripple.  



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May 25 2017

Commentary by David Fuller

The Quants Run Wall Street Now.

Further to yesterday’s Email of the day 1 on Quants, my thanks to a contributor for this article by Gregory Zuckerman and Bradley Hope for The Wall Street Journal.  Here is a middle section:

Up and down Wall Street, algorithmic-driven trading and the quants who use sophisticated statistical models to find attractive trades are taking over the

investment world. On many trading floors, quants are gaining respect, clout and money as

investment firms scramble to hire mathematicians and scientists. Traditional trading strategies, such as sifting through balance sheets and talking to companies’ customers, are falling down the pecking order.

“A decade ago, the brightest graduates all wanted to be traders at Wall Street investment banks, but now they’re climbing over each other to get into quant funds,” says Anthony Lawler, who helps run quantitative investing at GAM Holding AG . The Swiss money manager last year bought British quant firm  Cantab Capital Partners for at least $217 million to help it expand into computer-powered funds. Guggenheim Partners LLC built what it calls a “supercomputing cluster” for $1million at the Lawrence Berkeley National

Laboratory in California to help crunch numbers for Guggenheim’s quant investment funds, says Marcos Lopez de Prado, a Guggenheim senior managing director. Electricity for the computers costs another $1 million a year.

Algorithmic trading has been around for a long time but was tiny. An article in The Wall Street Journal in 1974 featured quant pioneer Ed Thorp. In 1988, the Journal profiled a little-known Chicago options-trading firm that had a secret computer system. Journal reporter Scott Patterson wrote a best-selling book in 2010 about the rise of quants.

Prognosticators imagined a time when data-driven traders who live by algorithms rather than instincts would become the kings of Wall Street. That day has arrived. In just one sign of their power, quantitative hedge funds are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013, according to the Tabb Group, a research and consulting firm in New York.

Quants have almost caught up to individual investors, which outnumber quants and collectively have 29% of all stock-trading volume.

At the end of the first quarter, quant-focused hedge funds held $932 billion of investments, or more than 30% of all hedge-fund assets, estimates HFR Inc. In 2009, quant funds held $408 billion, or 25% of all hedge-fund assets.

Quants got $4.6 billion of net new investments in the first quarter, while the overall hedge-fund business saw withdrawals of $5.5 billion.

David Fuller's view -

Quants certainly appear to be a more varied and ethical business model than high frequency trading (HFT), where firms were spending fortunes trying to get slightly faster access to the markets so that they could pre-empt other orders.  HFT appears to be far less popular than a decade ago.  

The performance of Quants varies but they are much less susceptible to the go for broke gambles which we have seen too frequently in recent years from various hedge fund managers.

Will Quants succeed and if so for how long?

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



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May 25 2017

Commentary by David Fuller

The U.S. Intelligence Ship Is Too Leaky to Sail

On Tuesday, former CIA Director John Brennan testified to the House Intelligence Committee that he had concerns, without citing specific evidence. “I encountered and am aware of information and intelligence that revealed contacts and interactions between Russian officials and U.S. persons involved in the Trump campaign that I was concerned about,” he said.

That’s the really important matter to investigate. If Putin and Trump -- or people working for them -- actually made a deal to swing a U.S. election, that calls for impeachment and treason charges. If Trump was complicit in such a plot, he shouldn’t be president. If he tried and failed to shut down investigations that later revealed collusion by his underlings without his knowledge, it’s a more complicated matter.

For now, the public case against Trump appears to be about his clumsy interactions with U.S. intelligence officials, not about any evidence of collusion. This threatens to further chill delicate and extremely important relations between the U.S. and Russia for petty political reasons. I also fear that Russian people will be stigmatized in the U.S. regardless of whether they have anything to do with Putin’s Kremlin. If Trump is undone by this secondary, derivative scandal, soon no one will remember exactly what happened and the collusion story may be validated by default, as far as most Americans are concerned.

I hope Mueller’s investigators will remember what they’re investigating, and I hope they do an honest job.

David Fuller's view -

This is an undistinguished chapter in the history of US intelligence and Trump has obviously not helped the situation.  Nevertheless, I think this is inexperienced bungling rather than a treasonable offence. 

Former FBI Director Robert Mueller has been appointed as special prosecutor and is highly regarded by both political parties for his experience and integrity.  



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May 25 2017

Commentary by David Fuller

Modi's Idea of India

Three years after he was elected, Prime Minister Narendra Modi looms over India’s political scene like no other leader in the country’s recent history. And his critics must explain why his mass appeal seems unimpaired, despite his increasingly authoritarian ways and growing failures.

Modi is far from realizing his promises of economic and military security. Pakistan-backed militants continue to strike inside Indian territory. The anti-Indian insurgency in Kashmir has acquired a mass base; Maoist insurgents in central India attack security forces with impunity. Industrial growth, crucial to creating jobs for the nearly 13 million Indians entering the workforce each year, is down, at least partly due to Modi’s policy of demonetization.

That gambit was, as the economist Kaushik Basu writes, “a monetary policy blunder,” which “achieved next to nothing, and inflicted a large cost on the poor and the informal sector.” Yet Modi’s Bharatiya Janata Party subsequently swept elections in Uttar Pradesh, India’s politically most significant state. He looks almost certain to be reelected as prime minister in 2019.

Many commentators assumed that once in office, Modi would downplay his ideological commitment to remaking India into a Hindu nation for the sake of economic development. Today, Modi seems to mock such aspiring fellow-travellers, choosing a virulently anti-Muslim Hindu priest as Uttar Pradesh’s chief minister and maintaining an eloquent silence as Hindu vigilantes, aiming to protect the sacred cow, lynch anyone suspected of selling or eating beef.

Ascendant in both new and old media, Twitter as well as radio, television, and the press, Modi is moving India away from debate, consensus-building and other democratic rituals. He is presiding over what Mukul Kesavan, a sharp observer of Indian politics and culture, calls an “infantilization of Indians.” “Instead of being proud, equal, adult members of a republic,” Kesavan writes, they “are reduced to being the wards of an all-seeing parent.”

Certainly, Hindu chauvinists, intolerant of minorities and indeed anyone who can be identified as a “liberal,” seem determined to replace the secular and democratic principles outlined by Jawaharlal Nehru, India’s first prime minister, with the creed of Hindu nationalism.

To such accusations, Modi might respond that the founding “idea of India” was always open to radical revision by the will of the people. France, where the language of secular republicanism was invented, has experimented with several republics since its revolution in 1789 launched the earth-shaking experiment in democracy. Most of these were authoritarian in nature, hospitable to repressive leaders and acclaimed by citizens.

The French thinker Claude Lefort once described how “democracy inaugurates the experience of an ungraspable, uncontrollable society in which the people will be said to be sovereign, of course, but whose identity will constantly be open to question.” Modi has understood this dynamic aspect of democracy better than those who cling to Nehru’s idea of India.

David Fuller's view -

Any strong-willed politician who is economically savvy and also charismatic, as we see with Narendra Modi, is bound to have some critics. I read and decided to post this column because I want to be objective. Readers with an interest in India may feel the same.

Personally, I think Narendra Modi is the most impressive national leader currently in office.  He is also strong-willed, and he needs to be because to successfully lead a huge, sprawling, widely diversified emerging market with the world’s second largest population is a daunting task.

So far, India’s strong GDP growth rate, leading stock market and enthusiastic support for their Prime Minister speak volumes in favour of Narendra Modi. 



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May 25 2017

Commentary by David Fuller

May 25 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for our session on Monday 12th June at London’s Caledonian Club.  

David Fuller's view -

This seminar is over half full so don’t delay if you are interested; another sell-out is likely.  

Meanwhile, can you think of a more interesting investment environment?  Volatility has increased somewhat recently and I am hoping it results in a sufficient setback for some high-flying tech shares to create another buying opportunity. Currently, they are short-term overbought but supported by the continued inflow of cash. 

 

Please note: I will be on a family holiday until Monday 5th June.



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May 25 2017

Commentary by Eoin Treacy

May 25 2017

Commentary by Eoin Treacy

May 25 2017

Commentary by Eoin Treacy

OPEC, Allies to Extend Oil Cuts for Nine Months to End Glut

This article by Nayla Razzouk, Golnar Motevalli and Laura Hurst for Bloomberg may be of interest to subscribers. Here is a section:

"The market seems to be a bit disappointed as there is no ‘something extra,’” said Jan Edelmann, a commodity analyst at HSH Nordbank AG. “It seems as though OPEC fears letting the stock-draw run too hot.”

The Organization of Petroleum Exporting Countries agreed in November to cut output by about 1.2 million barrels a day.

Eleven non-members joined the deal in December, bringing the total supply reduction to about 1.8 million. The curbs were intended to last six months from January, but confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged.

OPEC agreed earlier Thursday to prolong their own output cuts by nine months. Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, Kuwait’s Oil Minister Issam Almarzooq said after the meeting.

That deal gave the Islamic Republic room to increase output to a maximum of 3.797 million barrels a day.

 

Eoin Treacy's view -

The oil markets rallied ahead of today’s OPEC announcement on the expectation that the production cuts would be extended. The fact the announcement came in line with expectations has resulted in a clear “buy the rumour sell the news” response. Oil prices pulled back sharply today to confirm the progression of lower rally highs with a downside key day reversal. 



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May 25 2017

Commentary by Eoin Treacy

Some reflections on Japanese monetary policy

This article by Ben Bernanke for The Brookings Institute may be of interest to subscribers. Here is the conclusion:

If all goes well, the BOJ’s current policy framework may yet be sufficient to achieve the inflation objective. We’ll have to wait and see. If not, there are relatively few options available. The most promising possibility—should we get to that point—is more explicit coordination of monetary and fiscal policies. Monetary policy that is aimed at limiting the impact of fiscal expansion on the government’s debt could both make fiscal policymakers more willing to act and increase the impact of their actions. The BOJ may be reluctant to take such a step. In the possible future state that I am contemplating, however, there would be no real alternative other than to abandon the fight to raise inflation and, perhaps, even to accept a new bout of deflation. After such a long and valiant effort to end deflation and raise interest rates from their effective lower bound, that would be a most disappointing outcome.

Eoin Treacy's view -

Japan has had modest success with attempting to foment inflation but so far has failed to embed the belief prices are going to rise among the populace. The deflationary forces of technological innovation and lower energy prices have particular meaning for Japan quite apart from the fact the yield curve is flat and at nominally low levels. 



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May 25 2017

Commentary by Eoin Treacy

Are Cryptocurrencies Becoming a New Asset Class?

Thanks to a subscriber for this article by Mark Chandler at Brown Brothers Harriman for FinancialSense. Here is a section:

The volatility also does not lend itself to being a store of value (another agreed upon function of money). Consider that it is not unusual in recent days for the price of the Bitcoin to change by 2%-3% a day. The US dollar, in contrast, rarely moves one percent a day, and while the Bitcoin has appreciated by nearly 50% over the past month, the Dollar Index has fallen 2.3%.

Crypto-currencies appear easy to buy but are more difficult to liquidate. Reports suggest that even modest amounts take days to complete. It appears that a small part of the float actually trades, and the supply is limited. There are around 16.3 mln Bitcoins and 1800 new ones a day.

The rising price for crypto-currencies and new interest does not alter our assessment. These are not currencies in any meaningful sense. To the extent that some retailers accept them is a bit of a novelty and marketing fluke. Some of the larger businesses, like Virgin, who previously indicated a willingness to accept Bitcoins as payment, reportedly convert such payments into hard currencies. It is a gimmick, not confirmation of its currency status.

Leaving aside questions on the origin of money, under conditions of modernity, money facilitates exchange and is used to pay taxes and settle debts. When crypto-currencies can be used to pay taxes, and/or are generally accepted to retire debt, then their money status needs to be reviewed. Under present condition, none of the functions of money are met by crypto-currencies. They are hardly used as a means of payment. They are poor stores of value. They are not units of account.

People can still make and lose money trading them. They are part of the universe of paper assets, with their own niche rules governing supply. One can use some crypto-currencies to conceal transactions, but do not expect the taxman, the landlord or grocer to accept them anytime soon. They are currencies to the extent that contacts on Facebook are friends and that "grande" means medium at Starbucks.

 

Eoin Treacy's view -

Bitcoin has been discovered by US investors. At least that is what the flow on fiatleak.com tells me. When I was looking at the website in March, China accounted for the vast majority of traffic but today US volumes outpaced China by 5:1. The other largest buyers are the EU, Russia, Brazil and South Africa. 



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May 25 2017

Commentary by Eoin Treacy

May 24 2017

Commentary by Eoin Treacy

May 24 2017

Commentary by Eoin Treacy

The Big Green Bang: how renewable energy became unstoppable

Thanks to a subscriber for this article by Pilita Clark for the FT which may be of interest. Here is a section: 

“I have been early twice in financing the low carbon energy transition,” says Bruce Huber, cofounder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

One reason for his optimism is what he calls the “tectonic plateshifting” in the car industry that is driving down the cost of energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

Could this lead to a China-led glut like the one that helped drive solar industry writeoffs and crashing prices after the global financial crisis?

“It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company.

The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

Eoin Treacy's view -

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

The main objections to renewable energy are focused on intermittency and their reliance on subsidies. However economies of scale and the application of technology represent reasons for why we should be optimistic these can be overcome over the medium term. That represents a significant challenge for both the established energy and utility sectors. 

Right now we are talking about a time when solar and wind will be able to compete without subsidies on an increasing number of projects. However if we continue on that path there is potential for the sector to be a victim of its own success because the lower prices go and the more fixed prices are abandoned the greater the potential for volatility in energy pricing. 



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May 24 2017

Commentary by Eoin Treacy

Global gold study: Find your 'safe place'

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

In a volatile macro environment, follow the cash flow & avoid the debt laden 
The USD gold price has rallied +10% this year, following a sustained sell-off post the U.S. election in Nov 2016. Markets remain focused on global growth prospects (and U.S. rate hikes), but rising tensions in the Middle East and Asia, along with concerns around U.S. policy disappointment & the Chinese property market pose risks to the pro-growth trade. We believe the global gold sector presents a compelling investment thesis despite our neutral outlook on gold. Costs have fallen across the sector, lifting free cash flow (average FCF yield of 6% this year), while debt levels are falling (average net debt/EBITDA now 1.2x). The sector is trading on an undemanding 7.6x EV/EBITDA, but we believe the companies best positioned to manage price volatility are still those with the highest quality portfolios. Evolution (13% FCF yield), Barrick Gold (12%) & St. Barbara Mining (10%) are the best cash generators. Newmont (8% FCF yield) has the best balance sheet amongst the majors (0.6x net debt/EBITDA), is trading on 0.8x P/NPV, and is our top pick amongst global majors. 

Divergent trends amongst the global large-cap, mid-cap and small-cap sectors
Global gold majors remain focused on reducing costs, increasing cash flow and repairing balance sheets. Gearing amongst majors remains elevated (29% average), offsetting appealing cash flow metrics; we believe the majors will continue to progress longer term growth options while retaining free cash to pay down debt. Mid-cap gold miners are in better positions, with stronger balance sheets & internal growth options. The mid caps are trading on 7.6x EV/EBITDA (8.5x for global majors), highlighting the discount applied by the market for lower reserves. Small cap golds provide compelling value opportunities, with strong cash flow (St Barbara 10% FCF yield, Regis 9%) and the best 3-year production growth prospects across the sector. OceanaGold (Hold) has a clear growth mandate, while Alacer Gold & Dacian Gold (both 0.5x P/NPV) are building new projects, are fully-funded and screen deep value. 

 

Eoin Treacy's view -

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

The lack of free cash flow yield was one of the reasons the gold mining sector was unable to perform when gold prices were closer to $1900 because they were investing so much of their revenue and indeed borrowing against it to fund new supply. That all changed when prices declined. Investment was cancelled and a major process of rationalisation ensued. The result is that the gold mining sector generally has sounder balance sheets today than when prices for their products were considerably higher. 



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May 24 2017

Commentary by Eoin Treacy

China's Markets Get a Double Dose of Caution From Moody's, MSCI

This article by Chris Ansley and Enda Curran for Bloomberg may be of interest to subscribers. Here is a section: 

Moody’s Investors Service unveiled a surprise downgrade of China’s sovereign credit rating, citing concerns about its continued buildup of debt. Earlier, the head of one of the world’s top stock-index compilers suggested China had more work to do to get its onshore stocks into emerging-market gauges. With a June 20 deadline looming, “there’s still a lot of issues to resolve,” MSCI Inc. Chief Executive Officer Henry Fernandez said.

Underlying the critique from both: issues stemming from the Chinese leadership’s preoccupation with control. Few analysts expect painful reforms to be unleashed ahead of the Communist Party’s leadership reshuffle due later this year. While officials preach the need to rein in credit, ensuring the economy hits a 6.5 percent growth target remains the top priority.

Moody’s highlighted that policy makers’ are fixated on economic growth targets, meaning already-high leverage will continue to build. For MSCI, concerns include authorities placing restrictions on financial products abroad that would incorporate Chinese stocks.

 

Eoin Treacy's view -

Trying to lean on the shadow banking sector, while also stimulating the economy is a tough goal while also achieving an outsized growth rate. However it is also worth considering that only about 12% of China’s debt is held externally. The caveat of course is that a good portion of that has been raised by property developers recently through US Dollar bond issuance. 



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May 23 2017

Commentary by David Fuller

Brussels Prepares 'Grand Bargain' to Save Broken EU Project

The European Commission is to unveil radical plans for a eurozone fiscal union, pushing for an embryonic treasury with powers to fight economic recessions and to cope with shocks in hard-hit regions.

The EU budget authority will be backed by a joint eurozone unemployment fund, akin to social security in the US. The proposal entails an unprecedented level of shared risk among the EU eurozone states and marks a profound shift in thinking after years of rigid austerity and lack of investment.

Valdis Dombrovskis, the EU commissioner for the euro, said there would be a 'stabilisation fund' with resources to help blighted areas escape downturns. "We will give a bigger role to the aggregate fiscal stance of the whole eurozone in setting policy," he said at the European Business Summit in Brussels.

It is a belated admission that the narrow focus on debt-reduction during the eurozone debt crisis led to a contractionary bias, drawing the whole currency bloc into a deflationary vortex that ended in a 'Lost Decade' and proved counter-productive even in its stated goal of controlling the debt trajectory.

"This is something that will set alarm bells ringing in Northern Europe," said Guntram Wolff, director of the Bruegel think-tank in Brussels.

"However you design this, it will lead to fiscal transfers. All forms of insurance lead to moral hazard and then you have to deal with it," he said.

The Commission's long-awaited 'Reflection Paper' on how to relaunch monetary union on a better footing - due in early June - will call for a “fund for the protection of public investment during recessionary phases”, according to leaked papers obtained by the Frankfurter Allgemeine.

It would come under the "democratic oversight" of the European Parliament, giving it crucial legitimacy at federal level. This would rein in the over-mighty Eurogroup that effectively runs the eurozone today and acts as a law unto itself, operating in total secrecy and answering to no elected body.

While the new fund would not exactly be an EU treasury or finance ministry, it would be a major step in that direction if ever accepted by Germany and the northern creditor powers.  

Mr Dombrovskis was careful to stress that the 'grand bargain' is not a fiscal give-away to improvident high-debt states. "Every member state is responsible for guaranteeing the stability of its public finances. Where there is risk sharing, there must also be risk reduction," he said.

Yet the plan is a major shift in policy. It is similar to proposals made by French president Emmanuel Macron during France's election campaign and suggests that the policy elites in Brussels are lining up behind him, as are the Italians and Spanish.

German Chancellor Angela Merkel must now move with care. She has refused to countenance 'eurobonds' or shared liability for legacy debt - and once said they would only happen over her dead body - but has now opened the door slightly to some sort of joint issuance for future debt. 

David Fuller's view -

A visionary 39 year old President of France has shocked Angela Merkel and other senior EU politicians by attempting to open the door to fiscal union.  It is a logical step, assuming Germany actually wants the EU to become a Federal State.

Theoretically, it may have at some early stage of thinking. However, judging from Angela Merkel’s ‘over her dead body’ comment immediately above, she would sooner hold hands with Donald Trump than her European neighbours.  

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



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May 23 2017

Commentary by David Fuller

Email of the day 1

On Quants:

I thought about your move to London and starting CAL nearly 50 (!) years ago...as I read this article from Varchev Financial Services about Quants. In my mind Chart was a forerunner to the latest craze, and, again, the computer has transformed yet another industry

David Fuller's view -

Well remembered! Chart Analysis Limited helped to popularise the use of price charts, if only to see what was actually going on in markets, and to also make behavioural assumptions based on the price action. We received plenty of leg pulling 50 years ago but the efficiency and weight of money logic behind price trends soon made Technical Analysis indispensable for traders.

However, it is certainly a quantum leap (pun intended) to compare Behavioural Technical Analysis (BTA) to Quants.  They have little in common. BTA monitors crowd action.  Some Quants try to manipulate crowd action, which they can do with sufficient funds in leveraged markets. 

This makes leveraged trading more dangerous for everyone else. Within a decade or two, I think artificial intelligence will wipe out Quants, because it will know so much more about market action than the teenage Russian-born software engineer mentioned by Varchev. 



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May 23 2017

Commentary by David Fuller

Email of the day 2

On India’s uptrend:

Is the following trend likely to reduce the regularity of 20% market corrections?

David Fuller's view -

Thanks for your question and also the Bloomberg article.

Following Narendra Modi’s landslide victory in the May 2014 General Election India’s Mumbai Sensex Index has only experienced one significant correction of approximately 26%, falling throughout 2014 before bottoming with a decisive Type 1 of three endings as taught at The Chart Seminar in 1Q 2016. 

This item continues in the Subscriber’s Area.



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May 23 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for our session on Monday 12th June at London’s Caledonian Club.  

David Fuller's view -

This seminar is over half full so don’t delay if you are interested; another sell-out is likely.  

Meanwhile, can you think of a more interesting investment environment?  Volatility has increased somewhat recently and I am hoping it results in a sufficient setback for some high-flying tech shares to create another buying opportunity.  Don’t miss Dr David Brown on this topic.



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May 23 2017

Commentary by Eoin Treacy

May 23 2017

Commentary by Eoin Treacy

Global cyberattack 'highly likely' linked to North Korea group

This article by Sherisse Pham for CNN may be of interest to subscribers. Here is a section:

But here's the puzzling thing -- Symantec says that despite the links to Lazarus, "the WannaCry attacks do not bear the hallmarks of a nation-state campaign."

Cyberattacks backed by governments "are usually impeccable, they don't make rookie mistakes," said Thakur. "In the case of WannaCry, we saw some of those mistakes."

For example, early versions of WannaCry had a bug in the code that prevented victims from paying the ransom.

While it's possible Lazarus thought they could make a lot of money with WannaCry, "they totally botched it up and got almost nothing," Thakur said.

The ransomware has so far collected about $108,000 in ransom. Security researchers and government agencies advised businesses not to pay the ransom.

 

Eoin Treacy's view -

The latest global ransomware attack might have been botched but that didn’t stop it from causing a great deal of inconvenience for consumers not least in the UK where trains didn’t run and hospital appointments were cancelled. The problem of course is that even if this attempt was not as successful as the originators hoped if will act as inspiration for ambitious criminal organisations to get it right next time. 



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May 23 2017

Commentary by Eoin Treacy

Euro Area Warned That Shock-Proof Markets Won't Be Forever

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

For a start, Britain’s Brexit vote prompted a quick response from the nation’s central bank, which cut the key interest rate, revived asset purchases and pledged to act again if needed.
“In the U.K., the Bank of England responded strongly to the outcome of the referendum, averting a tightening in financial conditions.”

In the U.S., the financial shock stemming from Trump’s election came amid an economic upturn that cushioned the blow, and the expectation that however uncertain his policies might be, they would probably be good for companies.

“The rally in U.S. risky asset prices reflected the strong situation of the U.S. business cycle, reinforced by expectations about business and financial sector-friendly policies from the new administration.”

The study follows other theories over why volatility is so low, and concludes with a look at what this might mean for the euro area, should an avowed opponent of the single currency gain power, or should the debt crisis in a member country heat up again.

“The main lesson to be learned from a euro-area financial stability perspective is that similarly large economic-policy uncertainty shocks could, in the absence of offsetting shocks, seriously tighten domestic financial conditions and raise risk premia.”

So far this year, the currency bloc has managed to avoid anti-euro politicians coming to power in the Netherlands and France. If anything though, the region’s history has shown that the next crisis is always just around the corner. The next focal point could come as early as Monday, when euro-area finance ministers meet in Brussels to try yet again to break an impasse on lightening Greece’s debt burden.

 

Eoin Treacy's view -

“Monetary policy beats most other factors most of the time” is an adage David developed decades ago and it is no less true today. Negotiations about how to grant Greece’s next tranche of bailout funds without losing face, the Dutch election, French Election (presidential and parliamentary), the German election and Brexit negotiations all represent considerable sources of political and market uncertainty for the Eurozone.  



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May 23 2017

Commentary by Eoin Treacy

Noble Group 'Fighting for Its Life' as S&P Sees Default Risk

This article by Jasmine Ng and Denise Wee for Bloomberg may be of interest to subscribers. Here is a section:

The Hong-Kong based trader’s troubles are deepening after two turbulent years that have been marked by losses, asset sales, and accusations of improper accounting that it has denied. Since surprising investors two weeks ago with a quarterly loss, the shares have tumbled to multiyear lows and the price of its bonds has fallen by more than half. S&P’s warning follows downgrades from Moody’s Investors Service and Fitch Ratings Ltd. in recent days.

There’s “potential that the company will face distress and a nonpayment of its debt obligations over the next 12 months,” S&P said in a statement late Monday as it cut the company’s ratings by three steps to CCC+. “The company’s capital structure is not sustainable,” S&P said.

The shares plunged as much as 32 percent to 40 Singapore cents, and were at 42 cents as the halt kicked in after just 36 minutes of trade on Tuesday morning. The stock has lost 75 percent this year, following a 44 percent drop in 2016 and 65 percent plunge the year before. The company’s 2020 bonds sank to an unprecedented 39.4 cents on the dollar.

Eoin Treacy's view -

Investment banks concluded the commodity bull market is over a few years ago as they shuttered or sold-off trading operations en masse and largely exited the business. Noble Group is a major commodity trader, at least for the moment. Its current difficulties beg the question whether market participants are taking positions at odds to the company’s best interests in an effort to initiate a forced sale. 



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May 22 2017

Commentary by David Fuller

Trump Flees Washington Knives to Relax Among Sunni Kings

David Fuller's view -

In the last two weeks we have seen the worst and the best of President Donald Trump.  He appeared unhinged before leaving the country for the Middle East. Impeachment talk was rife. Even Republicans were fed up with the annoying tweets, his self-pitying narcissism and amateurish, unilateral changing of policies on an almost daily basis. 

Has any previous US President ever manage to irritate so many people from the two branches of government with whom he must be able to work?  I doubt it and Trump was fortunate to be leaving Washington on his first overseas trip with a large entourage from his Cabinet. 

Trump was clearly relaxed on arrival in Saudi Arabia to meet first with King Salman bin Abdulaziz, who presented him with an impressive bit of bling - the Collar of Abdulaziz Al Saud Medal, the kingdom’s top civilian honour, at the Royal Court in Riyadh.

In fairness to Trump, the self-described ‘greatest dealmaker in history’, he did sign the single largest arms deal with Saudi Arabia, worth possibly $350bn over 10 years.  Similarly, the visit to Israel was also a success with Trump being appropriately presidential.  These moves should temporarily dampen criticism in Washington, but I am sure Trump is already thinking about his next overseas trip.  

 

Apologies for Login problems which delayed the posting of this copy.



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May 22 2017

Commentary by David Fuller

Donald Trump's Path-Independent Theory of Mind

Here is this interesting article on the President’s state of mind by Cathy O’Neil:

People have been discussing how Donald Trump interacts with other humans, guessing at the extent to which he is capable of anticipating or understanding how they think. Some believe he has no such "theory of mind." I disagree: He has one, but it’s path-independent.

Remember when he thought people would like the fact that he’d fired FBI Director James Comey? Or the multiple times when he changed his story on why he did something? Those are the tell-tale signs.

Most people, when they try X as an explanation, won’t try “not X” afterwards, for the simple reason that they know their audience will know they were either lying before or they’re lying now. But Trump will try stuff until one of his attempts “works,” defined as eliciting approval. He's path-independent, in the sense that he's completely unconstrained by his previous words and actions. If neither "X" nor "not X" works, he'll assume that it's his audience that is being irrational.

In a prior column, I discussed the notion that Trump behaves like a machine learning algorithm. Well, his path-independent theory of mind fits perfectly into that metaphor.

When Google is trying some new shade of blue in the background of their ads, they will perform what’s called an “A/B test” to see what generates more clicks. If more people go for the ad with a lighter shade of blue, they will stick with it. What they won’t do, critically, is consider the possibility that their audience liked the light shade of blue only because it came after the darker shade. They will assume that the audiences are independent of each other, constantly refreshed and “new."

The same approach might have worked well for Trump as a businessman. He probably would have encountered a wide range of scenarios: For every deal that went through, dozens might have failed. So trying X one day and Y the next would be like a real science experiment. Over time, he might develop pattern recognition, figuring out which tactic works best in certain kinds of situations. I assume that’s where he learned to put pressure on business partners for unreasonable terms and to demand oaths of loyalty from his employees.

Similarly, when Trump was campaigning, he actually did have a fresh audience on a daily basis. He could try out new things while re-using things that worked previously in similar situations, honing his craft with the direct and immediate feedback that he craves. His audience, in the context of a rally, was being refreshed constantly, just like Google’s ad customers.

I’d argue that Trump's path independence operates on multiple levels. It's evident at a meta-political level when he takes a stab at sweeping campaign promises that he never intends to fulfill. It's also visible at the micro level, even within a given sentence: In his very strange recent interview with The Economist, for example, he kept attempting to adjust his message to obtain approval from his interviewers. He keeps things vague, and then pokes his way into a given explanation, but leaves himself room to change direction in case he senses disapproval.

It doesn’t always work for him. That said, he probably can’t act any other way. Consistency has no attraction for him, because he is fundamentally principle-free.

Trump's problem now is that the audience isn’t refreshing. It’s all of us, nationwide and globally. We remember what he said and did yesterday. We notice when he changes his story, and we’re not amused. Meanwhile, he’s left truly confused as to why things aren’t working out in his favor.

David Fuller's view -

This is a fascinating and quite possibly logical analysis of Trump’s “path-independent” personality.  It is also a little scary but so are many things about politicians, not least insufficient levels of competence.  



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May 22 2017

Commentary by David Fuller

After Her Election Victory, Theresa May Must Develop an Economic Programme

Just as the Labour Party has recently moved to the left, so Mrs May has moved, at least presentationally, towards the centre, and in some respects to the left of centre. This seems curious, unless you give importance to the ambition of supplanting the Labour Party as the natural party of government in just about all parts of the country. But what is the point of supplanting the Labour Party if in order to do this you have to become the Labour Party?

I am suspending judgment. We are in an electioneering phase, when politicians are liable to say extraordinary things. Mrs May would be well advised to keep her economic and financial policy prognostications as vague as possible. In particular, she should avoid making expensive spending promises that use up fiscal room for manoeuvre, and she should avoid restricting the Chancellor of the Exchequer’s options on tax by making pledges not to raise one sort of tax or another.

In that regard, last week’s manifesto was just about acceptable, despite some continuing guarantees on the state pension, the re-affirmation of “free at the point of use” for the NHS, and the pledge not to raise the rate of VAT.

But some ideological issues need to be straightened out. There seems to be a presumption in Mrs May’s circle that government intervention is good for “the many”, whereas markets are good only for “the few”. This presumption is completely wrong. When markets work well they work for everybody, especially for people at the bottom end of the income distribution, who lack the contacts and sharp elbows to further their interests in a system dominated by controls and rationing. Markets give them power and choice.

Of course, markets do not always work well. And this should provide the defining theme of Mrs May’s new government. But there are many parts of the economy where what we need is not less of the market but more, including in the provision of health and education services, especially for the “JAMs”, the “Just About Managing”.

David Fuller's view -

In attempting to seize Labour seats, Mrs May should not be alienating her most loyal constituency.  She will need their support and energy in the post-Brexit environment.  To succeed in the manner every current supporter of Brexit wishes, the UK economy will need to be very attractive, not least to entice inward investment from other countries and their companies.

There are two advantages which can be achieved immediately following the June 8th General Election: 1) Lower taxes for individuals and also corporations; 2) Competitive employment policies to increase the talent available for 21st Century industries. The UK should be a beacon for talent, much of it home grown but with Companies free to import the skills sets which they may not be able to find locally.  It is ludicrous for the Government to impose a tax on talent from overseas of £2000 per annum per person as it is currently doing. 

(See also: UK companies to pay £2,000 a year for each non-EU worker, from Quell)

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



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May 22 2017

Commentary by Eoin Treacy

May 22 2017

Commentary by Eoin Treacy

RBI Board Members, Rating Agencies To Advise On Resolution Of Large Accounts

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

On 5 May, 2017, the President of India cleared an ordinance proposed by the central government amending the Banking Regulation Act, giving the RBI greater powers to deal with stressed assets. The amendment was considered to be necessary to help resolve nearly Rs 10 lakh crore in stressed loans in the Indian banking sector. Through the Ordinance, the RBI hopes to speed up decision making which has been stuck due to the reluctance of bankers to take tough calls.

Immediately after the government’s ordinance was released, the RBI too released guidelines to allow the use of S4A and strategic debt restructuring (SDR) schemes as part of the corrective action plan (CAP) devised by joint lender forums (JLFs). The regulator also revised the minimum threshold to approve a CAP to 60 percent by value of the loan and 50 percent by the number of banks in the JLF. Banks that did not want to adhere to the JLF decisions were asked to leave the JLF by selling their loan exposure.

The framework released on Monday will likely be followed by operational guidelines. Key to these guidelines will be triggers used to invoke a specific course of action such as initiating bankruptcy proceedings.

Creating committees and expanding the size and scope of the OC seem like good measures. However, we must remember that the OC is only a group that checks for compliance. The key is still resolution, for which the RBI needs to come out with a clear strategy.

Eoin Treacy's view -

India is in something of a sweet spot right now. Nevertheless, the issue most institutional investors are worried about are valuations and the bad loans sitting on bank balance sheets. 



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May 22 2017

Commentary by Eoin Treacy

If you bought $100 of bitcoin 7 years ago, you'd be sitting on $75 million now

This article from CNBC highlights the current spate of excitement about bitcoin. Here is a section:

On May 22, 2010, Hanyecz asked a fellow enthusiast on a bitcoin forum to accept 10,000 bitcoin for two Papa John's Pizzas. At the time, Hanyecz believed that the coins he had "mined" on his computer were worth around 0.003 cents each.

Bitcoin mining involves solving a complex mathematical solution with the miner being rewarded in bitcoin. This is how Hanyecz got his initial coins.

The cryptocurrency has many doubters as it continues to be associated with criminal activity, but it has still seen a stunning rally. Here are two facts, on Bitcoin Pizza Day, however, that highlight this:

While being worth $30 at the time, Hanyecz pizzas would now cost $22.5 million at current bitcoin prices.

If you bought $100 of bitcoin at the 0.003 cent price on May 22, 2010, you'd now be sitting on around $75 million.

A number of factors have been driving the rally:

Recently passed legislation in Japan that allows retailers to start accepting bitcoin as a legal currency has boosted trading in yen, which now accounts for over 40 percent of all bitcoin trade

Political uncertainty globally has driven demand for bitcoin as a safe haven asset

A debate within the bitcoin community about the future of the underlying technology behind bitcoin known as the blockchain has been taking place. There was fear at one point this could lead to the creation of two separate cryptocurrencies but those worries have largely subsided with an alternative, more palatable option now being put forward. 

Eoin Treacy's view -

At the Tech Symposium I spoke at in London last week Charlie Morris made a number of important points about bitcoin which I found very educative. The most important of these was his point relating to the fact that bitcoin is a digital asset rather than a currency so it is a misnomer to describe it as a cryptocurrency. The best way to value bitcoin is in the strength of the network supporting it and therefore it is a barometer for the prevalence and acceptance of blockchain. 



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May 22 2017

Commentary by Eoin Treacy

Macro Morsels on China

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

Chinese authorities are attempting to delever their excessive levels of DEBT, which is causing a lack of credit at the short end of the curve, which in turn is driving up the cost of borrowing money at the short end.

Hence , short rates are higher than long rates.

However, unlike in the West, where an Inverted Yield curve signals trouble to the economy and to equities, having an Inverted Yield Curve is NORMAL in China.

This Inverted Yield Curve has been the situation for the majority of the last decade.

The red shaded area shows the times when 3 Month SHIBOR has been above 10 year government yields.

Currently the 3 Month SHIBOR is at 4.44%, higher than the 10 year at 3.61%

The AA 5 year rates have moved quite dramatically since last Oct, from a yield of 3.6% to 5.6% now.

This rise in their cost of debt should be negative for Equities.

Equities (SHCOMP) have indeed broken their uptrend and will remain an avoid until they can regain the 3200 level. 

Eoin Treacy's view -

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

China’s wide divergence between lending and deposit rates as well as the de facto state control of the banking system tend to skew financial conditions so that while an inverted yield curve is an omen of stress in the West, it is apparently less of a factor in China. 



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May 19 2017

Commentary by Eoin Treacy

May 19 2017

Commentary by Eoin Treacy

CAD Software Firm Autodesk Soars On Quarterly Earnings Beat

This article by Patrick Seitz for Investor’s Business Daily may be of interest to subscribers. Here is a section:

Analysts were modeling Autodesk to lose 15 cents a share on sales of $488 million.

Autodesk's annualized recurring revenue rose 18% year over year to $1.74 billion in the first quarter because of strong sales of subscription plans.

"Broad-based strength across all subscription types and geographies led to another record quarter for total subscription additions and a fantastic start of the new fiscal year," Amar Hanspal, Autodesk co-CEO and chief product officer, said in a statement. "Customers continue to embrace the subscription model, and we're expanding our market opportunity with continued momentum of our cloud-based offerings, such as BIM 360 and Fusion 360."

 

Eoin Treacy's view -

Subscription models have some pretty impressive advantages for companies not least because they get steady streams of income, do not have to worry about how well the next softward update is going to sell and have less pressure to discount. Consumers pay less upfront costs, have better ability to plan their expenditure and are always guaranteed to have the latest product so it is a win-win relationship.



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May 19 2017

Commentary by Eoin Treacy

China successfully mines flammable ice from the South Sea

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

During the mining trial done at a depth of 4,153 feet, engineers extracted each day around 16,000 cubic metres of gas, with methane content of up to 99.5%, Minister of Land and Resources Jiang Daming said.

The new energy source, while revolutionary, is not exempt of risks. The release of methane into the atmosphere as permafrost melts is regarded for those who believe in climate change as one of the worst potential accelerator mechanisms for it. Methane hydrate is also hard to extract, which makes the cost of producing it high.

Test drillings have also taken place in the US, Canada and Japan, with the latter announcing earlier this month that it was successful at producing the natural gas on the pacific coast and will continue mining it for around three to four weeks.

Sources of methane hydrate are so large that the US Department of Energy has estimated the world's total amount could exceed the combined energy content of all other fossil fuels.

 

Eoin Treacy's view -

Methane hydrate is uneconomical using today’s methods of extraction and current prices However, its existence highlights the important fact that any argument referring to peak oil must be prefaced with details of costs of production and timeframes. There is no shortage of natural gas or fossil fuels for that matter. Their supply is limited only by a combination of technological innovation and price. Technology is improving all the time so it is inevitable that major important countries like China and japan will continue to work on how to bring down the cost of methane hydrate.



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May 19 2017

Commentary by Eoin Treacy

Bullard Sees Weak Data Contradicting FOMC's Rate-Hike Path

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

Since March, “longer-term yields have declined, inflation expectations have weakened, and market expectations of the policy rate path have declined,” Bullard said Friday in St. Louis. “This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance.’’

Fed officials left interest rates unchanged at their meeting earlier this month, indicating that a disappointing start to the year wouldn’t stop them from raising rates twice more in 2017 following a hike in March.

In their statement, policy makers described as “transitory” a slowdown in first-quarter growth, while emphasizing that inflation was running close to their 2 percent goal and the labor market continued to strengthen.

Bullard, who does not vote on the FOMC this year, is one of its most dovish officials. In March he projected just one hike in the target range for the federal funds rate until end-2019.
The median estimate among his colleagues is for two more hikes this year and for the benchmark rate, currently 0.75 percent to 1 percent, to be 3 percent by the end of 2019. His argument is that the U.S. economy has been saddled with persistently low growth, so there is little need to raise rates by much.

 

Eoin Treacy's view -

The Dollar experienced another sharp decline today to cap off the week as one of its worst in a number of years. It is falling for a number of reasons but two stand out. The bond market and at least some at the Fed believe the pace of interest rates will not be as aggressive as had been priced in earlier this year by the stock market. The second is that the uptick in political uncertainty is an additional factor because of the jeopardy talk of an impeachment puts the Republican’s legislative agenda in. 



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May 18 2017

Commentary by David Fuller

Macron's Youthful France to Storm Ahead of Ageing Germany

France is on the cusp of an economic 'golden age'. The country will overtake Germany in the 2020s, emerging as the driving force of a Gallic-led eurozone and the engine of a revived Franco-German axis.

That is the bold prediction of the German bank Berenberg. It is not as far-fetched as it sounds.

The theme running through the work of Nobel Economist Robert Shiller is that cultural narratives are a powerful catalyst for financial cycles. They stir the animal spirits of a nation. Societies talk themselves into malaise, and talk themselves out again.

As narratives go, the Napoleonic ascent of a 39-year-old counter-populist on the ruins of a shattered party system is as close to a 'positive shock' as you are ever likely to see in the realm of political economy.

This child of the digital age - yet steeped in Nietzsche - is surrounded by a cabinet of youth. His prime minister is barely older. Berlin looks stale, almost fossilized.

The eternal Wolfgang Schauble still growls at the finance ministry with his budget and trades surpluses, captive of the pre-Keynesian 'household fallacy' in economics. Chancellor Angela Merkel is more flexible. It is not her fault that she rose from the East German Communist youth league, yet her Weltanschauung seems other-worldly as she marches towards a fourth term.

Germany's Achilles Heel is a 'hive collapse' and the corrosive psychology of ageing. The demographic dividend is turning overnight into deficit as baby boomers retire. The European Commission's Ageing Report (2015) says the working-age cohort will contract by 200,000 a year for the rest of this decade, and by 400,000 annually in the early 2020s.

The old age dependency ratio will jump from 34pc today, to 39pc in 2020, 52pc in 2030, and 65pc in 2060. By then those deemed 'very elderly' (80 plus) will be 41.5pc of the German people. The population will shrink below 71m.

David Fuller's view -

I would not underestimate Macron, as I have said previously, but Robert Shiller’s report needs to be taken with a grain of salt, in my opinion.  I wish France well but let’s see how Macron’s regime is able to function over the remainder of this year. 

Meanwhile, there is a naiveté among liberal, establishment Americans regarding the EU’s prospects, possibly due to wishful thinking, which has not been supported by results with the exception of Germany.

Macron could hardly do worse than his establishment predecessors.  Nevertheless, a key test of his potential will be revealed by the number of entrepreneurial French families that he can attract back from London.  They favoured François Fillon in the recent election.

Meanwhile, Germany remains the EU’s biggest success but also its difficult problem without the federal system which most Europeans continue to resist. 

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



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May 18 2017

Commentary by David Fuller

Would You Let Trump Run Your Company?

In Washington, people struggling to come to terms with all the details of James Comey’s sacking and the claim that Donald Trump asked him to drop the FBI’s investigation into Michael Flynn have reached back to Watergatefor comparison. But in many ways the more appropriate perspective is through a business lens: The immediate issue is whether a boss tried to halt embarrassing revelations about his company; the underlying one is whether he knows how to run it.

Of course, running a country is not the same as running a company. A president is both more constrained (by Congress, the press, and voters) and less so (chief executive officers, as a rule, can’t bomb their opponents). And Trump is not the first incoming president to have boasted of his corporate experience; remember George W. Bush, the first MBA president? But Bush had also run Texas. No president has tried to claim the mantle of CEO-in-chief as completely as Trump.

On the campaign trail, he cited his business experience all the time, contrasting his decisiveness, managerial skills, and shrewdness as a negotiator with the amateurish stumbles of Barack Obama and Hillary Clinton (not to mention several generations of U.S. trade representatives). Many of his first supporters knew him only as the archetypal “You’re fired” boss on The Apprentice. He rushed to bring in figures from the corporate world, luring Rex Tillerson from Exxon Mobil Corp. to run the State Department and a string of Wall Streeters. The stock market initially boomed. Trump’s message to business has been simple: Finally you have an executive in charge of the executive branch. “In theory I could run my business perfectly and then run the country perfectly,” he boasted to the New York Times shortly after his election. “There’s never been a case like this.”

So out of all the ways in which Trump might want to be measured, judging him as a chief executive would seem to be the fairest to him. Forget about ideology, his political agenda, or whether you voted for him; just judge him on whether he has been a competent executive. Would you want to leave him in charge? Or would you be calling an emergency board meeting?

The Comey fracas is the latest in a long list of apparent transgressions for which a normal CEO might lose his job. In the last week, Trump stood accused of having passed on intelligence secrets to the Russians. Any business chief who invited a competitor into the boardroom and then disclosed sensitive information would be in peril. (Klaus Kleinfeld lost his job at Arconic Inc. merely because he wrote an unauthorized stroppy letter to a truculent shareholder.) Appointing inexperienced relatives to important positions is not normally seen as good corporate governance. Jes Staley is currently in trouble at Barclays Plc just for allegedly protecting a friend. The White House was made aware that Flynn had lied to the vice president on Jan. 26, but he didn’t hand in his resignation to Trump until Feb. 13. Any board would want an explanation for that delay. Finally, any CEO who says something that is manifestly untrue in public or on his résumé is in hot water. Those who refuse to correct themselves quickly and satisfactorily often have to go—as happened to the bosses at Yahoo! Inc. and RadioShack.

David Fuller's view -

I regard this as a sensible, balanced article and commend it to you.



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May 18 2017

Commentary by David Fuller

Email of the day

On Trump’s crisis:

You might be right David, you often are. BUT if he threatened to drain the swamp you can be sure there will be many alligators trying to stop him. He's an unusual character for President but I think we need also to read the alternative press because mainstream is certainly gunning for him.

David Fuller's view -

Many thanks for your interesting thoughts on Trump.

The prospect of draining the swamp of Congressional fiefdoms has its appeal.  However, Trump is no inspiring reformer.  Instead, his combative personality, irritating Tweets and tendency to shoot from the hip have probably made more enemies than any other President at this early stage of their career. 

Democrats are out to get Trump and they probably have sufficient material to commence impeachment proceedings.  That is a difficult process but Democrats are not trying to remove Trump, at least not before the mid-term elections in November 2018.  Instead, they want to ensure that he is a lame duck, unable to govern.

Republicans are increasingly disillusioned with Trump.  Many now regard him as more of a risk than an asset.  They would have the most to gain if Trump could be removed from office well before the mid-term elections.



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May 18 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for our session on Monday 12th June at London’s Caledonian Club.  

David Fuller's view -

This seminar is over half full so don’t delay if you are interested; another sell-out is likely.  

Meanwhile, can you think of a more interesting investment environment?  Volatility has increased this week and I am hoping it results in a sufficient setback for some high-flying tech shares to create another buying opportunity.



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May 18 2017

Commentary by Eoin Treacy

May 18 2017

Commentary by Eoin Treacy

Brazil crisis deepens with probe of president, top senator

This article by Peter Prengaman and Mauricio Savarese for the Associated Press may be of interest to subscribers. Here is a section:

Brazil's political crisis deepened sharply on Thursday with corruption allegations that threatened to topple the president, undermine reforms aimed at pulling the economy from recession and leave Latin America's largest nation rudderless.

Stocks plunged, both chambers of Congress cancelled sessions and President Michel Temer's office canceled his planned activities Thursday in the wake of a Globo newspaper report that he had been taped endorsing bribery of a former lawmaker.

Protests were planned in several cities and opposition politicians took to Twitter and local news channels to call for Temer to resign or be impeached, arguing his government no longer had legitimacy

"I can't see how Temer survives this," said David Fleischer, a political science professor at the University of Brasilia. "There are just too many people against him now."

 

Eoin Treacy's view -

Brazil has been plagued by corruption on both sides of the political divide and the fact that Lula Da Silva has said he intends to re-enter the public arena will only add to uncertainty and lack of faith in public institutions. The unfortunate fact is that it is hard to believe anyone can survive long in Brazilian politics without being corrupt in one way or another. That was ignored during the boom years but with a recession biting that kind of behaviour is less acceptable. 



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May 18 2017

Commentary by Eoin Treacy

Japan GDP Grows 2.2%, Longest Growth Streak in 11 Years; Asian Stocks Slide

This article by Robert Guy for Barron’s may be of interest to subscribers. Here is a section quoting Barclays:

The 0.5% q/q growth in Q1 reflected positive contributions from both net exports (0.1pp) and domestic demand (0.4pp). Notably, the heavily weighted private consumption component increased 0.4% q/q, resulting in the large contribution for domestic demand. This reflected an upturn in spending on semi-durables, together with the recovery in durables since last year. Private consumption was also up for services, but down for non-durables. That said, the strength of consumption in the Q1 GDP data may largely reflect an upswing in demand-side data and slightly overstate the underlying trend, setting the stage for a slowdown in Q2.

In other areas of domestic demand, private capex increased 0.2% q/q (Q4: 1.9%), a second consecutive gain. Also, housing investment rose 0.7% q/q, sustaining positive growth. Meanwhile, public fixed capital formation (public investment) fell 0.1% q/q in Q1 (Q4: -3.0%), a third consecutive decline. However, we expect such investment to turn positive in Q2 as the effects of the FY16 second supplementary budget materialize. At the same time, real exports increased 2.1% q/q and real imports rose 1.4% q/q. For real exports, this marked a third consecutive quarter of growth (Q3 16: 1.9%; Q4 16: 3.4%). This reflects the ongoing recovery in demand from overseas, especially Asia.

 

Eoin Treacy's view -

European and US politics as well as the meltdown in confidence in Brazil’s administration are making headlines. In fact they are obscuring the more important news that global growth is generally on an upward trajectory and this has been the case for at least 12 months already. The Japanese economy has been in and out of recession on a number of occasions over the last few years but the uptick in activity in Asia is having a positive influence in conjunction with efforts to stoke domestic demand. 



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May 18 2017

Commentary by Eoin Treacy

Miningball

Thanks to a subscriber for this well-argued report by Tyler Broda and colleagues at RBC making the case for a bull market in industrial commodities because they are still cheap and prices are likely to rise. Here is a section:

The data shows, unsurprisingly, that the sector is cyclical. What we find fascinating is that the downturn from 2012-2016 was so intense that most of the data sets are now showing extreme cyclical levels. As we have anecdotally pointed out at numerous times, the behaviours of the mining management has changed (for now). Starting with the success from cutting excess thermal coal and zinc production, Glencore was able to take leadership in focusing on meeting market demand rather than “maximising” sunk capital utilization. This has spread to the iron ore industry where Rio Tinto’s “Value over Volume” mantra is  noticeable shift in strategic culture following the change of CEO. We are seeing more rationality in production across the board and financing remains sparse for greenfield projects. Investors are demanding discipline and management teams are largely delivering.

Although the rhetoric suggests that this time is different, and an appropriate level of skepticism is advised, the data does back up the above anecdotal trends. In our view, the sector has rarely been positioned in as constructive a position as it is now and will take time to unwind with the inflexibility of certain data sets (for instance, total production is likely to fall over the medium term if expansion capex is nearing zero) as well as vastly improved cash situations (free cash flow yields have never been higher).

Total copper equivalent production has stayed relatively flat through the 2013-2016 period as the initial impacts of slowing capex levels began to reduce growth trends. Additionally, the removal of production has reduced the production base (either via some small divestments or by closure due to lower prices). This should increase the productivity of the remaining assets as it would be presumed these are better assets and there is more management focus that can be applied where it matters.

The rolling 3-year production growth is now down to sub-2% growth rates and we would not expect (beyond a copper and iron ore led production uptick in 2018) that this will be able to grow with such low levels of planned expansion capex and the lead times that it takes from project start to finish.

Eoin Treacy's view -

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

Mining has long been known as a highly cyclical sector. In fact, because investing in new supply is so capital-intensive it requires evidence that can be brought to creditors so they will make the money available to break ground. That takes time and everyone is waiting for the same data so when one company gets the wherewithal to expand so do many more. That means the capital intensive nature of the extraction business ensures its cyclicality because new supply often comes to market at the same time. 



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May 17 2017

Commentary by David Fuller

Trump Faces Deepest Crisis of Presidency With Comey Memo

Here is the opening of this fascinating article from Bloomberg:

Donald Trump is facing the deepest crisis of his presidency after contents of a memo written by James Comey when he was FBI director surfaced Tuesday, alleging that the president asked him to drop an investigation of former National Security Adviser Michael Flynn.

The White House was already on the defensive over the president’s firing of Comey a week ago and over a report Monday that Trump disclosed sensitive intelligence to Russian officials. Then another political bombshell exploded Tuesday night.

After a conversation Comey had with Trump in February, a day after Flynn was ousted for what the White House said were misleading accounts of his conversations with Russia’s U.S. ambassador, the FBI director wrote a memo documenting the Oval Office meeting. In it, Comey said the president asked him to abandon the Flynn investigation, according to a person who was given a copy of the memo and spoke on condition of anonymity.

“I hope you can let this go,” Trump told the FBI director, according to the memo as cited by the New York Times, which first reported its existence. The contents of the memo have subsequently been confirmed by other news organizations, including Bloomberg, although the memo itself has not yet surfaced publicly.

The revelation raised questions about whether the president sought to influence the FBI at the same time the agency is investigating Russian interference in the 2016 election and possible collusion with Moscow by Trump associates. The memo’s emergence, after Trump fired Comey, had congressional Democrats raising the specter that the president engaged in obstruction of justice, an impeachable offense.

David Fuller's view -

If Trump is proven to have committed an impeachable offence, and preliminary evidence suggests he may have, Republicans should join Democrats and remove him from office without further delay.

Trump is the problem because he creates his own crises in the manner of an impulsive, unreliable and unpredictable king, rather than the President of the United States.  This is obviously bad for America and also Democracy in the eyes of all those who look to the USA for positive leadership.

I don’t think this problem will blow over, even if James Comey’s testimony proves to be inconclusive.  Trump is unlikely to change and even his Cabinet will have lost confidence in him. 

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May 17 2017

Commentary by David Fuller

Impeachment Talk May be Premature, but it isn't too soon to Discuss the Legal Standards for Removing a President

As soon as Donald Trump was elected, some of his critics argued that he should be impeached. Those arguments were reckless and irresponsible, and an insult to the many millions of Americans who voted for him. Impeachment is a singularly grave act -- a remedy of last resort. Those who think that they favor impeaching any president should ask themselves this question: If I strongly supported his policies, would I still think that there were sufficient grounds for impeachment?

If that is the right question, then talk of the possibility of impeachment is beginning to look less reckless, and less irresponsible, than it did a few months ago.

To be sure, legitimate grounds for impeachment have yet to be established. But the dismissal of FBI Director James Comey, possibly because of his investigation into alleged connections between Russia and the Trump campaign, alongside the apparent leaking of classified information to Russian officials, makes it appropriate to inquire into the legal standard -- and to probe some of our majestic Constitution’s unresolved mysteries.

The founding document says that the president can be impeached for “Treason, Bribery, or other high Crimes and Misdemeanors.” The first two words are not obscure. But what are “high Crimes”? And what are “Misdemeanors”?

The Constitutional Convention provides some answers. At a late stage in the Constitution’s drafting, treason and bribery were the exclusive grounds for impeachment. George Mason offered a strong objection, arguing that the president should be impeachable if he engaged in “many great and dangerous offenses” that did not count as treason or bribery. To include those offenses, he moved to add the words “or maladministration” after bribery.

After the motion was seconded, James Madison responded that that term was so vague that it would mean, in practice, that the president would serve at the pleasure of the Senate. Mason himself agreed. He withdrew his motion and substituted the words “high Crimes and Misdemeanors.” Apparently he believed that the new words would cover “many great and dangerous offenses” -- and thus have the requisite latitude.

For us, then, a central question is how to understand “high Crimes and Misdemeanors” in a disciplined way, so that they do not mean “maladministration.” It is tempting to say, as many people do, that the Constitution authorizes impeachment only when the president has committed a horrible crime -- a violation of the law of the same magnitude as treason or bribery.

But it can’t be right to say that impeachment is available only in cases of crimes. Suppose the president flies to Moscow and proclaims that he will spend 2018 there, studying the works of Lenin and Marx, and doing presidential business only when he can find the time. Or suppose he announces, in advance, that he will pardon anyone who kills a political opponent or a member of the press. Or suppose he reports that Martians have started to communicate with him, and that he has vowed to follow their guidance.

In all of these cases, impeachment would be legitimate. The president may have committed no crime -- but he has committed a “misdemeanor,” understood as an exceedingly bad act.

David Fuller's view -

This is an excellent opinion and I commend the rest of it to you.



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May 17 2017

Commentary by David Fuller

Trump Should Worry: Comey Memo Describes a High Crime

If President Donald Trump asked FBI Director James Comey to stop investigating National Security Adviser Mike Flynn and his ties to Russia, that’s obstruction of justice. But let’s be clear: It’s the impeachable offense of obstruction. It’s probably not the criminal version of that act. With the evidence now available, it’s extremely unlikely that an ordinary prosecutor could convict Trump.

This is an outstanding example of a crucial distinction that Americans badly need to keep in mind. High crimes and misdemeanors, to use the Constitution’s phrase, aren’t the same as ordinary crimes. What makes them “high” is their political character. High crimes and misdemeanors are corruptionabuse of power, and undermining the rule of law and democracy. They don’t have to satisfy all the technical aspects of an ordinary crime. And this act of Trump’s, as described in a memo written by Comey first reported Tuesday by the New York Times, probably doesn’t.

Start with the federal obstruction statute, 18 U.S.C. Section 1503. The first part of the law has to do with trying to influence jurors in the course of a trial; we can ignore it for our purposes.

The second part of the law punishes anyone who “corruptly or by threats or force, or by any threatening letter or communication, influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice.”

On a close reading, this isn’t a great fit with the president asking the director of the Federal Bureau of Investigation if he can let a probe go because the target is “a good guy.” Remember, as a constitutional matter, the director of the FBI, like the attorney general and the rest of the machine of federal law enforcement, works for the president.

Although there has been a strong tradition of separating investigation and prosecution from the president -- a tradition grossly violated by Trump’s request -- it’s still just a tradition, not a legal requirement.

Thus, as a constitutional matter, Trump has the authority to propose ending an investigation. If he wanted to, Trump could just order the investigation to be brought to an end. He wouldn’t even have to exercise his pardon power, another way to put a preemptive stop to investigations. He could just direct his subordinates to cease.

To be sure, Comey probably would have resigned had this order been given. The point is that Trump could have given it, legally speaking.

Given Trump’s inherent constitutional authority to end the Flynn investigation himself, it’s pretty hard to say that he was “corruptly” obstructing or impeding “the due administration of justice.” It’s within prosecutorial discretion to decide not to go after someone because he’s a good guy. The target’s character and career of public service are legitimate factors to consider in the course of the investigation and decision of whether to bring charges.

It’s not that the president can never be guilty of the crime of obstruction. He can. It would be a federal obstruction crime for the president to lie to or to mislead investigators. It would be an obstruction crime for the president to hide evidence of a crime. But those examples are fairly different from the president exercising authority over investigations.

The one credible legal argument that could be made by a prosecutor seeking to charge Trump would be that he was indeed acting “corruptly” if his true intent was to protect himself and his administration, not just give Flynn a break.

Suppose a president owed a favor to an organized crime leader and asked the FBI director to drop the investigation. That would presumably count as a corrupt act, and would count as obstruction.

It’s not at all clear how you could prove Trump’s intent here, except maybe by taped conversations where he says he wants to protect Flynn to protect himself. Nor is it at all clear that acting “corruptly” under the statute would include saving himself from embarrassment. The upshot is that I don’t think Trump could be prosecuted for a crime on the basis of this report, and I am not at all sure that he actually committed a federal crime, legally speaking.

Impeachment is another matter. Using the presidential office to try to shut down the investigation of a senior executive official who was also a major player in the president’s campaign is an obvious and egregious abuse of power. It’s also a gross example of undermining the rule of law.

This act is exactly the kind that the Founding Fathers would have considered a “high crime.”

And it’s a high crime the president could perform only by virtue of holding his office.

Practically, it still seems unlikely that a Republican House would impeach the president, much less that two-thirds of the Senate would vote to convict and remove him from office.

But a Democratic House would have more than enough material now to start the impeachment process -- including the revelation of the request to Comey. And the House could choose to impeach even if it calculated that the Senate probably wouldn’t convict.

The act of impeachment would have tremendous symbolic ramifications. And it would include the detailed investigative oversight that so far has been lacking in Washington.

Trump’s firing of Comey now looks pretty different in the light of this news. Right around now, the president is probably asking himself whether firing the FBI director was the right decision. And if he isn’t, he should be.

David Fuller's view -

This seems like a logical analysis to me.  If it is correct, it may be difficult to impeach Trump.  The worst possible outcome for Wall Street would be either a stalled or at least severely handicapped US Administration for a lengthy period.  Against that background we could expect a bigger correction on Wall Street, not least since plenty of investors have been buying and holding on because they were waiting for Trump’s tax cuts to boost corporate profits.

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May 17 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for our session on Monday 12th June at London’s Caledonian Club.  

David Fuller's view -

This seminar is over half full so don’t delay if you are interested; another sell-out is likely.  

Meanwhile, can you think of a more interesting investment environment?  Trump’s self-inflicted wounds certainly roiled the markets today.  I am hoping this results in a sufficient setback for some high-flying tech shares to create another buying opportunity.



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May 17 2017

Commentary by Eoin Treacy

May 17 2017

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on Saudi Arabia’s motivations in the oil market:

 

The analysts’ takeaways were that the Saudi Arabian economy was healthier than many thought, thus pressure for the country to lead the OPEC charge to substantially higher oil prices was soon dissipated. The headlines also helped explain King Salman’s willingness earlier to reverse the salary and benefit cuts for ministers and to grant salary bumps for the military and air force pilots. With the shrinking budget deficit and the ability of the kingdom to tap global debt markets twice in the last six months, the government felt comfortable it could increase spending without necessarily needing higher oil prices. Further comfort in its spending decision was provided by the point about non-oil revenue in the first quarter exceeding the government’s expectation. That latter point is important and helps explain why MBS says that Saudi Arabia’s debt will not exceed 30% of GDP. This is in contrast to many countries where total government debt equals or exceeds the country’s GDP. The shifting economic condition in Saudi Arabia is a long-term dynamic at work within the global oil market, and requires that analysts reassess their view of the kingdom’s strategy toward higher oil prices in the future. The last pillar supporting the significantly higher oil price forecast is the requirement for a favorable oil price backdrop in order to launch the initial public offering of Saudi Aramco, the state oil company. 

Crude oil prices are likely to remain highly volatile in the near-term as the shoulder months for oil demand and the restarting of refineries from the heating oil to gasoline turnarounds is creating inventory fluctuations. Many of these inventory fluctuations are not being accurately captured in the average analysts’ weekly inventory change forecasts, setting the oil market up for weekly surprises between the data and estimates. A key driver over the next few weeks will be people trying to guess the outcome from the May 25th OPEC meeting, but the outcome seems preordained. A negative surprise will be if the OPEC members fail to extend the production cut agreement as assumed by conventional wisdom. A positive surprise might be an increase in the production cut volumes, or an extension of the production cut agreement into 2018. Either or both of those actions will likely be viewed skeptically as greater volumes and longer time horizons create an environment that encourages increased cheating by OPEC members. If there has been a surprise from the current production cut it is the high compliance by the OPEC member countries. Is that a reflection of desperation or a true commitment to greater output discipline? 

Eoin Treacy's view -

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

The Saudi Aramco IPO will be a major event and the price of oil is an obvious consideration in the valuation that will be achieved. However the broader question for Saudi Arabia, in a market which is concerned both with equilibrium and increasing geopolitical tensions, is to ensure it affects an aura of stability and a lack of overt unilateral price manipulation strategies. That suggests they have no choice but to negotiate for concerted efforts to support prices, however successful those might be. 



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May 17 2017

Commentary by Eoin Treacy

There's a Big Technical Reason for Low Volatility in Stocks

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

Large dealer banks that buy or sell the S&P 500 to hedge exposure to U.S. equities are helping to suppress realized volatility and keep the VIX low, the Deutsche Bank analysts say.

By their estimates, dealers would have to buy $14 billion if the S&P 500 fell by 1 percent. It’s all about "gamma" -- the third Greek letter.

“When dealers are long gamma they sell equities when equities are rising, but buy them when they’re falling,” write Deutsche Bank analysts led by Rocky Fishman. “The primary reason" for the VIX index being so low is the multi-decade low in fluctuations in the market itself, according to the team. And the long gamma positions of dealers "is a contributing factor to the ongoing low-realized vol,” they wrote.

While the hedging needs of big banks have helped keep a lid on volatility by providing a backstop to moves in U.S. equities, the analysts note, the rebalancing requirements of the plethora of exchange-traded products now tied to the VIX could pose a risk to that stability. Such ETPs typically buy VIX futures as the underlying index rises, and sell futures as it declines, creating a so-called ‘short gamma’ position."

Eoin Treacy's view -

Options trading offers cost efficient leverage, hedging and variety and it has grown exponentially over the last decade to dominate the derivatives market. The fact that options are predominately used by traders to hedge long equity positions has resulted in the VIX trading at historic lows as mega-caps like Google/Alphabet and Amazon surged to new highs.  



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May 17 2017

Commentary by Eoin Treacy

Glencore: 'Electric vehicle revolution is happening faster than expected'

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

Vehicles with conventional internal combustion engines typically contain about 20 kilograms of copper. For electric vehicles the copper load is up to 80 kilograms (and increased quantities of cobalt, nickel, manganese).

Bloomberg reports Ivan Glasenberg, CEO of Glencore, the world's third largest producer of copper, told investors at an industry meeting in Barcelona “the electric vehicle revolution is happening and its impact is likely to be felt faster than expected.”

Almost all carmakers are increasing investment in electric vehicles as governments adopt tighter emissions targets, he added.

In a recent report consultants McKinsey forecast that barring large-scale substitution by aluminum and other materials or a significant increase in recycling, primary copper demand could potentially grow to 31 million tonnes by 2035 as per capita usage rates in emerging markets, particularly in China, approach levels in developed economies. The prediction represent more than 40% growth from today's annual demand levels of around 22 million tonnes.

Eoin Treacy's view -

Electric vehicles are on a major growth trajectory as the cost of batteries trends lower while the cost of regulatory compliance for car manufacturers increases. That represents a significant change for the automotive sector which Tesla has benefitted enormously from. The question for the company is whether it can prosper when subsidies eventually expire and when more battery factories open up in South Korea, Japan and China. 



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May 16 2017

Commentary by David Fuller

How Theresa May Is Recruiting an Army of Hard Brexit Backers

Here is the opening of this revealing article from Bloomberg

U.K. Prime Minister Theresa May is packing her Conservative Party with an army of Euroskeptic candidates for next month’s election as she seeks reinforcements for her battle to deliver a hard Brexit.

Bloomberg News surveyed the views of the Tory candidates standing in 60 of the most winnable seats for May’s party and found a clear majority voted a year ago to pull Britain out of the European Union. Of the 52 candidates in this group -- whose views could be verified by public statements or interviews -- 34 backed Brexit last June, 17 wanted to stay in the EU and one abstained.

The almost two-to-one margin in favor of leaving the EU shows how the June 8 election could herald a dramatic shift in May’s parliamentary party, with more Brexit-supporting lawmakers in her team than ever.

This outcome would give May greater power at home to pursue a divorce that is focused on reclaiming control of lawmaking and immigration, rather than fostering trade. The analysis also damps speculation that May might soften her approach if she secures the crushing majority polls are predicting.

“The overall balance of Parliament looks like it will lean toward the harder side of Brexit than had May not called the election,” said Mujtaba Rahman, managing director at the Eurasia Group.

More lawmakers who backed Brexit early on would make it easier for May -- who only had a majority of 17 in the previous Parliament -- to pass legislation related to the split and secure approval of the final deal she negotiates. After becoming premier last July some of her own side challenged her Brexit strategy.

Bloomberg studied candidates in the 12 seats where a sitting Tory lawmaker stepped down and the 48 seats the Conservatives lost most narrowly in the 2015 election. In the latter, 27 candidates voted for Brexit, 13 against it and one couldn’t decide. The rest wouldn’t comment or couldn’t be reached.

Fresh Blood

The results suggest an influx of new Tory lawmakers who are more biased toward Brexit than either the country as whole, or the previous House of Commons.

Britain split 52 percent to 48 percent in last June’s referendum and an analysis by the ConservativeHome website at the time found 185 Tory lawmakers were Remainers while 128 were Leavers: a 56 percent versus 39 percent divide.

A YouGov poll released this week suggested 68 percent of the electorate now believes the government has a duty to deliver Brexit.

David Fuller's view -

Theresa May has always indicated that she favoured a mutually beneficial Brexit.  However, unless it is a monumental bluff, EU leaders still want to ‘punish’ Britain.  If so, that would lead to a quick, hard Brexit by Theresa May.  This would cause some short-term confusion and uncertainty but benefit Britain over the medium to longer term.



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May 16 2017

Commentary by David Fuller

Email of the day 1

More on the length of time before we see “the end of petrol and diesel cars”:

Dear David, Following your post "The End of Petrol and Diesel Cars? All Vehicles Will be Electric by 2025, Says Expert", you may find interesting an opinion of Mark Schwartz, global head of analytics from S&P Global Platts, whom I interviewed recently. In particular, he says that it will take decades for EVs to make their way first into new car sales, and then to become a significant part of the entire car fleet. And that's why oil is here to stay for a while, in his view. We also talk about 'peak oil demand' theory being discussed now and I recollect 'peak supply' claims back in 2007. Video can be seen here -  or at our Facebook page -  It's in English (with Russian subtitles). Best regards, Mikhail

David Fuller's view -

My thanks to Mikhail Overchanko for his long-term interest in the FTM service and also his interview with Mark Schwartz, which is in English.

Obviously no one knows how quickly EVs will replace those which are petrol driven, or even if that will ever occur.  I think it will happen because of the understandable concern over air pollution.  Even more importantly, mass market EVs will be much cheaper to build and less costly to run because they have far fewer moving parts. 

I said on Monday, in response to AEP’s article, that in citing 2025, I thought Professor Seba was forecasting a rate of change which may be technologically feasible but impossible in terms of practicalities.  After all, most petrol stations are owned and operated by oil companies.  I think it will take at least another five to ten years, beyond 2025, before EVs count for a majority of the market.

Mark Schwartz says it will take decades for EVs to become a significant part of the market.  I disagree and note that he was speaking in a country which is a major oil producer.    



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May 16 2017

Commentary by David Fuller

Email of the day 2

On a clear majority of UK citizens now favouring Brexit:

You were right David when you said that the majority favouring Brexit has grown. According to this YouGov poll,  "A total of 68 per cent of respondents would like to see Britain withdraw from the EU, the latest YouGov figures "A total of 23 per cent described as Re-Leavers“ said that they voted Remain last year, but now believe the government has a duty to carry out the will of the British people."

David Fuller's view -

Thanks and I think most of us were aware that support for Brexit had increased considerably since the UK’s referendum, not least because of the EU’s hostility and attempted intimidation.  



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May 16 2017

Commentary by David Fuller

Despite Emmanuel Macron's Election, the Eurozone Isn't Out of the Woods

As things stand, Merkel’s hands are tied unless and until she wins re-election in September. But even after that she is unlikely to give much ground to Macron. The thing about the German establishment, which is so easy to under-estimate, is that they really believe the guff they espouse about the need for fiscal restraint and the virtue of current account surpluses. Macron may be set for a honeymoon period over the summer. But things will not look so good come the autumn if his domestic reform agenda has hit difficulties and Merkel is refusing to make concessions.

Meanwhile, thanks to higher inflation, the European economic environment will become more testing later this year, and perhaps more so next year and beyond, if and when the current global upswing starts to stall. Plenty of observers think that the next US downturn may not be far away.

Admittedly, some European commentators think that the eurozone economy will receive a boost from Brexit as foreign investors shift money from the UK to the continent, and various businesses, including financial ones, leave London for Frankfurt or Paris. But I think this view is misguided. The exodus of businesses, people and capital from London will probably be minor.

Indeed, Brexit may pose a threat to the eurozone if and when it becomes clear that the UK has managed Brexit well and is continuing to outperform its continental neighbours. Of course, this is not an immediate prospect. First the UK has to leave and then it will be some time before it becomes clear how well the country is faring.

All along, though, I have thought that the weakest link in the euro chain was Italy, where elections are due by May next year at the latest. It is striking that all of Italy’s opposition parties are now eurosceptic. The Five Star Movement, led by Beppe Grillo, leads in the opinion polls. Grillo’s party, although quirky, is not like Marine Le Pen’s National Front. It does not have the same protectionist agenda and does not have to fend off accusations that it is tinged with racism and anti-semitism. Moreover, despite the current slight upturn in its economy, Italy remains deeply depressed. Grillo could easily deliver the shock that Marine Le Pen did not.

So do not be fooled by the appearance of calm. There is an almighty task facing the governments of Germany and France to forge the necessary institutions to make the euro system sustainable. What recent political and economic developments have done is to provide a reprieve, but no more than that. Failure by Macron to introduce radical reform, a major row with Germany over the course of its policy and reform to the eurozone, or the election of a eurosceptic government in Rome could all deal the euro a fatal blow.

One way or another, the euro does not make sense. It is only a matter of time.

David Fuller's view -

I would not underestimate Macron, as I have said before, and we should not overlook Super Mario Draghi’s considerable contribution to euroland’s survival and modest recovery to date. 

Nevertheless, remember that Europe last prospered when it was a free trade region of independent nations, before the euro was introduced in 1999. Without fiscal union, which Germany and most other EU countries resist, the euro remains fatally flawed. 

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



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May 16 2017

Commentary by David Fuller

May 16 2017

Commentary by Eoin Treacy

May 16 2017

Commentary by Eoin Treacy

Third Well to Help Meet Demand for Geothermal Heating in Boise, Idaho

This article by Parker O’Halloran for thinkgeoenergy.com may be of interest to subscribers. Here is a section

According to Colin Hickman, a spokesman for Boise Public Works, “We’re getting to a place where the amount of space downtown that we’re heating we felt it was the right time to bring on the third well to ensure that we have redundancy, in case something happens during the winter months, during our peak season so we have some back up for the customers on geothermal heating,”

Interestingly, a third well was dug in 1982, however, it has been not in use. Hickman says this third well is needed. These particular wells in Boise have geothermal water that is approximately 177 F (80 C) degrees when it comes out of the ground and is then pumped in insulated pipes to the downtown locations where the water heats the buildings.

“The buildings will basically take the heat out of that water, use it for their heating purposes in their building, and then that water goes back to Julia Davis Park, and there’s an injection well there that puts that water back into the earth,” Hickman said.

Hickman adds that Boise should be proud of its geothermal system as it eliminates the use of fossil fuels, it’s renewable and it’s an economic driver that will bring businesses in that are interested in this type of renewable energies to the Boise area.

Geothermal energy use in Boise dates back to the 1890s.

Eoin Treacy's view -

Geothermal energy has been around for a long time but has been totally reliant on the confluence of shallow heat vents and abundant water. However, it occurs to me that with the advances in hydraulic fracturing and horizontal drilling there is potential for cross pollination between the oil services and renewable energy sectors. 



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May 16 2017

Commentary by Eoin Treacy

Inflation, El Nino, and Fishmeal

Thanks to a subscriber for this report from Jeffrey D.Saut for Raymond James. Here is a section:

Some inflation numbers were reported last week. They read: April PPI jumped 0.5% month/month, +2.5% year/year; +2.2% year/year was expected. Meanwhile, core PPI increased by 0.4% month/month, +1.9% year/year; +0.2% month/month and +1.6% year/year were expected. The inflation report reminded us of something Pippa Malmgren (a policy consultant to numerous presidents) said to us at a recent national conference. She opined that when inflation goes from 1% to 2.5%, or maybe even 3.0%, it’s a really big deal; and we agree. Shortly after parsing those inflation figures I read something about the El Niño that is expected to “hit” in the back half of 2017. As paraphrased from the eagle-eyed David Lutz’s blog “What Traders Are Watching,” (Jones Trading):

The headline read, “Full-Fledged El Niño Increasingly Likely in Second Half 2017.” The U.S. government’s Climate Prediction Center (CPC) last month forecast El Niño conditions would prevail by the end of the northern hemisphere summer, but put the probability at only 50 percent. Most El Niño indicators have strengthened since then so the probability is likely to be revised higher when the CPC issues its next forecast later in May. Aussie’s wheat crop could see further drought damage. Sugar cane will also be impacted. Dryness in Southeast Asia could depress harvest levels of crops including rice and sugar in Thailand, Robusta coffee in Vietnam, and will add stress to rubber and palm oil trees in Indonesia and Malaysia. El Niño has also been linked to a weaker Indian monsoon and lower than average rainfall could affect crops including rice, wheat, cotton, and sugar. Indian farmers are large buyers of gold, and analysts at UBS last year raised concerns that a potential weak monsoon could hit purchases of the precious metal. El Niño has tended to impact cocoa production in West Africa. Meanwhile, Peru’s anchovy catch is almost always affected by the weather event, and is the main ingredient for fishmeal. Interestingly, this “fishmeal” inference made me recall that a severe El Niño was responsible for the term "core inflation," which excludes food and energy prices in its inflation figures for those of you who don't eat or drive.

Eoin Treacy's view -

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

Inflation has been largely absent from official figures for what feels like a long time and the bond market is still of the opinion that it is not about to make a comeback anytime soon. However there are increasing signs that wage demands are rising and that can’t but contribute to the official inflation figures eventually. 



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May 16 2017

Commentary by Eoin Treacy

Email of the day on the yield curve spread and Plato:

I tried to find in the chart library the last chart you should on Friday's Video. That is the difference between the US 10 & 2 year. This Friday's long term outlook was different but I liked it; even got myself a copy of Plato to read

Eoin Treacy's view -

Thank you for a question which may be of interest to subscribers. The yield curve spread is the difference between the 10-year and 2-year Treasury yield. I created this video to discuss both how to create the chart and save it as a preset template for when you want to find it later. 



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May 15 2017

Commentary by David Fuller

Oil Price Indicators Flash Buy as OPEC Expectations Grow Bigger

Price curve? Check. Technical markers? Check. The oil market just got bullish and that’s left OPEC with little room for maneuver when it meets in Vienna next week.

After the energy ministers of Saudi Arabia and Russia talked up the potential for the Organization of Petroleum Exporting Countries and other nations to extend output cuts into early 2018, the crude market took off. OPEC’s preferred market structure returned, with nearer contracts at a premium further along the curve, with Brent and West Texas Intermediate crude rising above their key 200-day moving averages in intraday trading.

“Now they have to deliver,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “You could argue that an awful lot of positive news has been priced in and they need to deliver for that to be sustainable.”

coalition of OPEC nations and allies including Russia last year agreed to cut output by about 1.8 million barrels a day, starting in January. After the move initially boosted prices, concerns that it wouldn’t be sufficient to counter-act surging U.S. production pushed WTI below $44 a barrel. Producer nations, acknowledging they won’t achieve their target of returning global inventories to their five-year average by the time the original deal expires at the end of June, look likely to agree an extension at a meeting in Vienna on May 25.

As traders in Europe hit their desks on Monday morning, Brent crude jumped above its 200-day moving average. Early in May, a break below that marker sparked a sell-off with prices at their lowest since the last OPEC meeting at the end of November. The global benchmark also broke on Monday above another key technical marker, the 50-day moving average, for the first time since April 19.

“If you were short you cover, if you were flat you start acquiring length and if you were long you add to or keep those positions,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London. “If there’s going to be a rollover longer than the second half of this year, I think the market will strengthen even after the meeting.”

David Fuller's view -

Interestingly, the press has been full of stories about how large long-term holders of the big multinational oil companies have been selling these top income producers since the beginning of 2017.  They were eventually joined by short sellers, forcing Brent Crude prices sharply lower in the second half of April. 

This item continues in the Subscriber’s Area where two other articles are also posted. 



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May 15 2017

Commentary by David Fuller

The End of Petrol and Diesel Cars? All Vehicles Will be Electric by 2025, Says Expert

No more petrol or diesel cars, buses, or trucks will be sold anywhere in the world within eight years. The entire market for land transport will switch to electrification, leading to a collapse of oil prices and the demise of the petroleum industry as we have known it for a century.

This is the futuristic forecast by Stanford University economist Tony Seba. His report, with the deceptively bland title Rethinking Transportation 2020-2030, has gone viral in green circles and is causing spasms of anxiety in the established industries.

Prof Seba’s premise is that people will stop driving altogether. They will switch en masse to self-drive electric vehicles (EVs) that are ten times cheaper to run than fossil-based cars, with a near-zero marginal cost of fuel and an expected lifespan of 1m miles.

Only nostalgics will cling to the old habit of car ownership. The rest will adapt to vehicles on demand. It will become harder to find a petrol station, spares, or anybody to fix the 2,000 moving parts that bedevil the internal combustion engine. Dealers will disappear by 2024.

Cities will ban human drivers once the data confirms how dangerous they can be behind a wheel. This will spread to suburbs, and then beyond. There will be a “mass stranding of existing vehicles”. The value of second-hard cars will plunge. You will have to pay to dispose of your old vehicle.

It is a twin “death spiral” for big oil and big autos, with ugly implications for some big companies on the London Stock Exchange unless they adapt in time.

The long-term price of crude will fall to $25 a barrel. Most forms of shale and deep-water drilling will no longer be viable. Assets will be stranded. Scotland will forfeit any North Sea bonanza. Russia, Saudi Arabia, Nigeria, and Venezuela will be in trouble.

It is an existential threat to Ford, General Motors, and the German car industry. They will face a choice between manufacturing EVs in a brutal low-profit market, or reinventing themselves a self-drive service companies, variants of Uber and Lyft.

They are in the wrong business. The next generation of cars will be “computers on wheels”. Google, Apple, and Foxconn have the disruptive edge, and are going in for the kill. Silicon Valley is where the auto action is, not Detroit, Wolfsburg, or Toyota City.

The shift, according to Prof Seba, is driven by technology, not climate policies. Market forces are bringing it about with a speed and ferocity that governments could never hope to achieve.

David Fuller's view -

In the accelerating rate of technological innovation which this service has long forecast, many of the most important changes occur much more quickly than expected.  Nevertheless, I think Professor Seba is forecasting a rate of change which may be technologically feasible but impossible in terms of practicalities.  My guess is that it will take at least five to ten years longer before his views are confirmed. 

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



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May 15 2017

Commentary by David Fuller

How North Korea Managed to Defy Years of Sanctions

DANDONG, China — As the end of the fashion season approached, and the suits and dresses arrived in her company’s warehouses here in the Chinese border town of Dandong, the accountant crammed about $100,000 into a backpack, then boarded a rickety train with several co-workers.

She asked to be identified only by her surname, Lang, given the sensitivity of their destination: North Korea.

After a six-hour journey, she recalled, they arrived at a factory where hundreds of women using high-end European machines sewed clothes with “Made in China” labels. Her boss handed the money to the North Korean manager, all of it in American bills as required.

Despite seven rounds of United Nations sanctions over the past 11 years, including a ban on “bulk cash” transfers, large avenues of trade remain open to North Korea, allowing it to earn foreign currency to sustain its economy and finance its program to build a nuclear weapon that can strike the United States.

Fraudulent labeling helps support its garment industry, which generated more than $500 million for the isolated nation last year, according to Chinese trade data.

North Korea earned an additional $1.1 billion selling coal to China last year using a loophole in the ban on such exports, and researchers say tens of thousands of North Koreans who work overseas as laborers are forced to send back as much as $250 million annually. Diplomats estimate the country makes $70 million more selling rights to harvest seafood from its waters.

China accounts for more than 80 percent of trade with North Korea, and the Trump administration is counting on Beijing to use that leverage to pressure it into giving up its nuclear arsenal. The Chinese government took a big step in February by announcing that it was suspending imports of coal from the country through the end of the year.

But China has a long record of shielding North Korea from more painful sanctions, because it is afraid of a regime collapse that could send refugees streaming across the border and leave it with a more hostile neighbor.

In addition, Beijing now has a sympathetic ear in South Korea, whose newly elected president, Moon Jae-in, echoes its view that sanctions alone will not be enough to persuade Pyongyang to abandon its nuclear program.

While North Korea remains impoverished and dependent on food aid, its economy appears to be growing, partly because of a limited embrace of market forces since its leader, Kim Jong-un, took power more than five years ago.

David Fuller's view -

If (when?) North Korea is eventually reunited with South Korea, the reunification of Germany is probably an apt model.  In other words, we could expect ten to fifteen years of difficult transformation, before a united Korea emerged as an important superpower.   

Reunification would be best for Korea over the longer term.  A problem is that China still prefers the status quo, despite the increasing recklessness of Kim Jong Un. 

(See also: Political transitions in South Korea and Washington give Kim Jong Un opening, from USA Today)



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May 15 2017

Commentary by David Fuller

May 15 2017

Commentary by Eoin Treacy

May 15 2017

Commentary by Eoin Treacy

Cyberattack Is Blunted as Governments, Companies Gain Upper Hand

This article by Jordan Robertson and by Rebecca Penty

Governments and companies around the world began to gain the upper hand against the first wave of an unrivaled global cyberattack, even as the assault was poised to continue claiming victims this week. 

More than 200,000 computers in at least 150 countries have so far been infected, according to Europol, the European Union’s law enforcement agency. The U.K.’s National Cyber Security Centre said new cases of so-called ransomware are possible “at a significant scale.”

"For now, it does not look like the number of infected computers is increasing," said a Europol spokesman. "We will get a decryption tool eventually, but for the moment, it’s still a live threat and we’re still in disaster recovery mode."

At Germany’s national Deutsche Bahn railroad, workers were laboring under "high pressure" Monday to repair remaining glitches with train stations’ electronic departure boards, a spokesman said.

Eoin Treacy's view -

I don’t know how you feel about Wikileaks and Edward Snowdon. Personally I’m conflicted because the USA’s NSA has known about weaknesses in the global tech infrastructure for a long time and has used them for its own purposes while at the same time accepting that cybercriminals were also using them to achieve profits. I’m angry because if they were aware of the risk why wasn’t more done to protect it? Nevertheless, I’m sympathetic with the need for surveillance in an increasingly connected world where there are groups that challenge my personal security. However, that is largely beside the point now since these events have already happened and the potential for more cyberattacks and more intense attacks, not to mention during war, are inevitable. 



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May 15 2017

Commentary by Eoin Treacy

Brace for Chaos If U.S Expands Airline Laptop Ban

This article by Justin Bachman and Michael Sasso for Bloomberg may be of interest to subscrib ers. Here is a section:

While companies won’t abandon trans-Atlantic trips, an electronics ban may dampen corporate travel when combined with other recent regulations that have made traveling more onerous, said Michael McCormick, executive director of the Global Business Travel Association. When faced with having to part with their computers—potentially putting sensitive corporate information at risk—some companies may tell employees to leave their computers at home.

“I think business travelers would be far more willing to accept a far more rigorous screening at the airport, rather than having to part with their tools when they travel,” McCormick said.

The threat of laptop loss—be it theft, damage, or misplacement as checked luggage—is likely to make some companies consider whether some meetings can be conducted via Skype or other virtual methods, said Andrew Coggins, a management professor at Pace University’s Lubin School of Business. “People don’t want to let their laptops go,” he said.

That may be bad news for airlines who count heavily on business travel for profitability.

Eoin Treacy's view -

Since business travel costs around three times more than an economy seat for what is probably an area twice as large, the potential hit to revenues is considerable. I know for me, I wouldn’t be writing today unless I could have taken my laptop on the plane on Saturday and the question of course will be how do we define a laptop in an era when smartphones are probably more accurately described as phablets. My Microsoft Surface for example has a detachable keyboard and looks for all the world like a large iPhone..



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May 12 2017

Commentary by Eoin Treacy

May 12 2017

Commentary by Eoin Treacy

Amazon Makes Major Push Into Furniture

This article by Brian Baskin and  Laura Stevens for the Wall Street Journal may be of interest to subscribers. Here is a section: 

The online retail giant is making a major push into furniture and appliances, including building at least four massive warehouses focused on fulfilling and delivering bulky items, according to people familiar with Amazon’s plans.

With that move, the Seattle-based retailer is taking on the two companies that dominate online furniture sales— Wayfair Inc. W -5.95% and Pottery Barn owner Williams-Sonoma Inc. Furniture is one of the fastest-growing segments of U.S. online retail, growing 18% in 2015, second only to groceries, according to Barclays. About 15% of the $70 billion U.S. furniture market has moved online, researcher IBISWorld says.

But even the biggest players in online furniture are struggling to get the market right. Unlike established categories such as books and music or even apparel, retailers are still hammering out basic concepts like how much variety to offer on their sites and the most efficient ways to deliver couches and dining sets to customers’ homes.

While Amazon has been selling furniture for years, it has lately decided to tackle the sector more forcefully.

“Furniture is one of the fastest-growing retail categories here at Amazon,” said Veenu Taneja, furniture general manager at Amazon, in a statement. He said the company is expanding its selection of products, with offerings including Ashley Furniture sofas and Jonathan Adler home décor, and it is adding custom-furniture design services. Amazon is also speeding up delivery to one or two days in some cities, he adde

Eoin Treacy's view -

Free returns and secure transactions make online shopping risk free and painless from the perspective of consumers. Amazon is employing that strategy in an increasing number of sectors but most particularly in furniture and fashion. The number of brands Amazon now carries as well as sporting its own designs represent not only a direct threat to Williams Sonoma but to departments stores generally. 



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