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September 01 2022

Commentary by Eoin Treacy

Entering The Superbubble's Final Act

Thanks to a subscriber for this article by Jeremy Grantham. Here is a section:

My theory is that the breaking of these superbubbles takes multiple stages. First, the bubble forms; second, a setback occurs, as it just did in the first half of this year, when some wrinkle in the economic or political environment causes investors to realize that perfection will, after all, not last forever, and valuations take a half-step back. Then there is what we have just seen – the bear market rally. Fourth and finally, fundamentals deteriorate and the market declines to a low.

Let’s return to where we are in this process today. Bear market rallies in superbubbles are easier and faster than any other rallies. Investors surmise, this stock sold for $100 6 months ago, so now at $50, or $60, or $70, it must be cheap. Outside of the late stage of a superbubble, new highs are slow and nervous as investors realize that no one has ever bought this stock at this price before: so it is four steps forward, three steps back, gingerly exploring terra incognita. Bear market rallies are the opposite: it sold at $100 before, maybe it could sell at $100 again.

The proof of the pudding is the speed and scale of these bear market rallies.
1. From the November low in 1929 to the April 1930 high, the market rallied 46% – a 55% recovery of the loss from the peak.
2. In 1973, the summer rally after the initial decline recovered 59% of the S&P 500's total loss from the high.
3. In 2000, the NASDAQ (which had been the main event of the tech bubble) recovered 60% of its initial losses in just 2 months.
4. In 2022, at the intraday peak on August 16th, the S&P had made back 58% of its losses since its June low. Thus we could say the current event, so far, is looking eerily similar to these other historic superbubbles.

Eoin Treacy's view -

Have we seen the secular peak in this market? That’s the only real question investors need to concern themselves with. The above statistics are certainly compelling, but the size of the rebounds should also be considered relative to the size of the initial declines from the peaks. Let’s round out that data.

1. The Dow Jones Industrials Average accelerated to the peak on September 3rd 1929. It fell 47.87% to the initial low on November 13th
2. The peak in 1973 was a failed upside break from a range that had been forming since 1966; with the Dow failing at the psychological 1000 on several occasions. That failed upside break resulted in a deeper pullback than any (25% & 36%) posted during the ranging phase. The failed downside break in 1974 resulted in a 75% rebound. It was another six years before a breakout to new highs was sustained.
3. Between March 10th and May 26th 2000 the Nasdaq Composite fell 40.72%.
4. Between January 7th and the low on June 17th the S&P500 declined 24.52%.



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September 01 2022

Commentary by Eoin Treacy

Email of the day on the impact of quantitative tightening

With regard to increasing the pace of QT, the past attempts were undertaken during periods of much lower inflation. With inflation currently much higher, dare I say it, might this time be different?

Eoin Treacy's view -

Thank you for this question which is highly relevant since the Federal Reserve will be doubling the pace of balance sheet run-off to $95 billion a month within weeks. We only have two examples of significant balance sheet contraction by central banks. That was the ECB between 2012 and 2014 and the Fed between 2018 and 2019.



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September 01 2022

Commentary by Eoin Treacy

Metals Rout Deepens as China Lockdowns Add to Growth Fears

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

Investors are “panicking” about the potential impact of  fresh lockdowns and Covid flareups across the country, said Jia Zheng, a trader with Shanghai Dongwu Jiuying Investment
Management Co.

The hawkish drumbeat from central banks, which spurred gains in the dollar, will also continue to put more pressure on commodities. Cleveland Fed President Loretta Mester reiterated the need to raise the US benchmark rate above 4% by early next year and said she doesn’t anticipate cuts in 2023.

Concerns over demand are outweighing continued challenges on the supply side. Chile, which accounts for more than a quarter of the world’s mined copper, reported an 8.6% decline in production in July from a year earlier. In China, Shanghai’s two-month lockdown earlier this year is still rippling through
the economy, with businesses struggling with a sluggish recovery and stalled demand.
 

Eoin Treacy's view -

I don’t think most investors fully comprehend how large China’s copper demand is. China’s infrastructure and manufacturing sectors consume more than half of all copper supply. The cessation of residential construction is having a significant knock-on effect for prices.



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August 31 2022

Commentary by Eoin Treacy

August 31 2022

Commentary by Eoin Treacy

GDP Jumps in 2Q, But Masks Sequential Slowdown

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

India’s GDP growth vaulted higher in the second quarter, primarily aided by a low base as the second virus wave cratered output in the year-ago period. The data, however, masks a sequential slowdown. Quarter-on-quarter output contracted at a larger pace than the typical seasonal drop, while year-on-year growth was sharply lower than the Reserve Bank of India’s forecast, suggesting the central bank might be nearing the end of rate hikes.

GDP growth jumped to 13.5% year on year in 2Q 2022, up from 4.1% in 1Q. That was lower than both the Bloomberg Economics forecast of 14.0% and consensus estimate of 15.3%.

Growth in gross value added -- which strips out tax and subsidy transfer payments -- came in even lower at 12.7% year on year, below both our forecast of 13.3% and the consensus estimate of 14.0%.

Eoin Treacy's view -

Double digit GDP growth in a major economy is a standout event even if the headline figure was below expectations. There are not many countries where outsized growth is achievable and it is exceptionally unusual that Indian inflation is lower than either the US or EU at present.



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August 31 2022

Commentary by Eoin Treacy

Email of the day on European electricity prices

I wonder if it's possible to add the French and German electricity contracts in the chart library? thanks!

Eoin Treacy's view -

Thank you for this suggestion. European energy has certainly become topical this year. Historically we have only updated prices for Nordpool contracts because so many Danish and Swedish electricity traders have come to The Chart Seminar. I do hope they remember acceleration is a trend ending. 



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August 31 2022

Commentary by Eoin Treacy

A substantial stratospheric cooling event is now being observed over the Southern Hemisphere following a massive injection of water vapor

This article from Severe-weather.eu maybe of interest. Here is a section: 

The submarine Hunga Tonga volcano in the South Pacific erupted violently on 15 January 2022. Tonga produced a massive volcanic plume that briefly reached 58 km (36 miles), touching the mesosphere. Below we have infrared satellite imagery of the eruption. We can see the warmer (green-yellow) cloud in the stratosphere and the colder (black-white) cloud in the troposphere.

And

Like sulfur, water vapor has a cooling effect, but not at the surface. Instead, it actually cools the stratosphere because it reflects the incoming solar radiation. It also prevents the heat from escaping, thus actually warming the surface.

So how much water was injected into the stratosphere? Based on observations and measurements, the normal amount of water in the stratosphere is around 1560 Teragrams.

Following the eruption of Hunga Tonga, the total amount of water increased to over 1700 Teragrams, which is a 10% increase in total stratospheric water vapor content. This is a large amount, coming from just one event.

And

The image below was made by Simon H. Lee and also shows the July 2022 mid-stratosphere temperature anomaly. The cross markings in the southern hemisphere mark the record minimal temperatures, which span in a belt around the whole southern hemisphere.

And

A negative NAO pattern means higher pressure over the north Atlantic and Greenland and lower pressure to the south. The image below shows the temperature pattern of a negative NAO winter season. You can see colder temperatures over the northern and eastern half of the United States and Europe.

Eoin Treacy's view -

This Tonga volcanic eruption is likely to have a multi-year effect on the weather. The southern hemisphere is already experiencing a colder than normal winter. If that translates into a colder winter for Europe it will contribute to even more volatile energy pricing. 



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August 31 2022

Commentary by Eoin Treacy

Greenland ice melt has already locked in 10 inches of sea level rise

This article from NewAtlas may be of interest. Here is a section:

 

To understand how this melting ice will impact sea levels around the world, scientists use computer models of ice flow and complex climate interactions. According to the authors of this new study, this approach has shortcomings in that they are imprecise and don't account for a number of factors scientists are observing in the field. These include more rain that is accelerating the melting of surface ice, an influx of tropical ocean currents into Greenland's fjords, and the darkening of the sheet surface that causes it to absorb more heat.

"We’re observing many emerging processes that the models don’t account for that increase the ice sheet’s vulnerability," study author Alun Hubbard, Professor of Glaciology at University of Tromsø, writes in an accompanying piece for The Conversation.

Eoin Treacy's view -

So if we change shorten the average from 40 years to 20 years and then linearly project that higher number forward, we get a headline grabbing doomsday prediction.

The problem with making such bombastic predictions is the capacity of the general population to sustain a feeling of terror is not infinite. Eventually people settle down into a fatalistic emotional state where they just don’t care anymore. Sea levels rising 10 inches by 2100 is not going to put food on the table today.

​It surprises me that there is still no widespread acceptance that improving living standards are the solution to just about every social or environmental problem.
When people are better educated and have solid working conditions, they have more regard for luxuries like a safe, clean environment. Take care of people and everything else takes care of itself.



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August 30 2022

Commentary by Eoin Treacy

Video commentary for August 30th 2022

August 30 2022

Commentary by Eoin Treacy

The UKs ã12 Billion UK Call May Be About to Jolt Inflation's Path

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

Deutsche Bank estimates that subtracting the rebate will reduce the Retail Prices Index, which determines payments on UK inflation-linked debt, by about 2.7 percentage points. That would lower the debt interest bill by around £14 billion this year, according to Bloomberg calculations based on Office for Budget Responsibility data. RPI is also tied to some consumer products, such as mobile phone tariffs.

Such savings would be welcomed by the government, which is under intense pressure to spend even more in response to the surge in energy costs. A similar reduction in the Consumer Prices Index, and a potentially lower path for interest rates as a result, could also save the government billions.

Based on CPI, UK inflation is already above 10%. The Bank of England forecasts that it will top out just above 13%, although a surge in gas prices in recent weeks mean officials will almost certainly have to increase that forecast. That means the ONS decision may impact the peak rate this winter, but not change the direction of the outlook for prices. 

Eoin Treacy's view -

Persistent inflation has a long tail. The longer it lasts, the greater the effects for government finances in future. Index-linked pensions, tariffs and utilities all push higher with a lag from a current bout of inflation. That’s both a near-term headache and medium-term challenge for most governments. That greatly increases potential for government intervention. It is starting with subsidies and will quickly transition to price caps if prices fail to decline.  



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August 30 2022

Commentary by Eoin Treacy

The 2022 euro area supply crisis

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

The price of Germany’s electricity over the next year has climbed over $1000pb in Brent oil energy equivalent terms. This is far from normal. It’s a crisis that stems not only from restrained energy supply from Russia but a series of unfortunate issues elsewhere too. In addition to energy restraints, the euro area is facing the full brunt of climate change with flash floods and record droughts, combined with slowing trade with China and US recession risks. However, we think the bigger challenge Europe will face this winter is not inflation, but stagflation. Altogether it’s why we expect EUR/USD to fall to 0.90 this winter, inflation to climb further to multi-decade highs before peaking, GDP to decline over the coming year and the ECB to first raise rates in response to higher inflation, and then cut next year as the energy-induced recession continues. Will Germany run out of gas? Probably not. That's due to LNG supply, but even more due to falling industrial demand. High prices and falling demand of an essential such as energy is not good for growth, but it gives hope that blackouts in Germany won't be the story of early 2023.

Eoin Treacy's view -

This report shares the downbeat consensus view that Europe is going to endure a profound winter of discount. There is no doubt the challenges are immense but so have been the efforts to overcome them. For example, the EU has reached its November target for natural gas reserves. That suggests some slowdown in demand following indiscriminate buying over the last few months.



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August 30 2022

Commentary by Eoin Treacy

Copper and Aluminium Pace Metals Retreat on China Lockdown Fears

Copper and aluminium futures tumbled along with other industrial commodities on concerns that virus lockdowns in China will hurt demand and as supply constraints in the Asian powerhouse eased.

Beijing’s ongoing battle to contain virus outbreaks is damaging confidence in the nation’s economy, with the Covid Zero policy causing many US companies to delay or cancel investments. That’s on top of a property crisis that’s taken a hefty toll on metals demand in the top consumer. 

Prices of copper, seen as a bellwether for economic growth, have wavered in recent weeks after recovering from a 20-month low in July as traders weigh supply constraints against a darkening outlook for demand. Outside China, Europe’s energy crisis is set to undercut consumption, while higher US Federal Reserve interest rates are pressuring non-yielding assets like metals.

Eoin Treacy's view -

Predictably, China is having just as much difficulty containing the new more transmissible strains of COVID-19 as everywhere else. There are lockdowns in place in every Chinese province at present. Meanwhile the Communist Party Congress is now slated for mid-October. Between now and then we can expect much tighter controls on movement which will have a knock-on effect on the wider economy.



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August 29 2022

Commentary by Eoin Treacy

August 29 2022

Commentary by Eoin Treacy

Iran May Drain Offshore Oil Cache If Nuclear Deal Reached

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

About 93 million barrels of Iranian crude and condensate are currently stored on vessels in the Persian Gulf, off Singapore and near China, according to ship-tracking firm Kpler, while Vortexa Ltd. estimates the holdings at 60 to 70 million barrels. In addition, there are smaller volumes in onshore tanks.

“Iran has built up a sizable flotilla of cargoes that could hit the market fairly soon,” said John Driscoll, chief strategist at JTD Energy Services Pte. Still, it may take “a bit of time” to iron out insurance and shipping issues, as well as spot and term sales post-sanctions, he said.

And

The focus for diplomats is the revival of a multinational accord that limited Iran’s nuclear program in exchange for the lifting of related sanctions, including on oil flows. The original deal collapsed after then-President Donald Trump abandoned it. Last week, the US sent its response to the latest proposal, boosting speculation an agreement may soon be struck, although Tehran said Sunday that exchanges will now drag on into September.

Iran’s offshore crude hoard compares with average daily global supply this year of about 100 million barrels a day, according to an estimate from the International Energy Agency. In the US, President Joe Biden has been releasing about 180 million barrels from the SPR over a six-month period.

And

Longer term after any deal is struck and the offshore cache is drained, Iran would seek to rebuild production and step up overseas sales. Goldman Sachs Group Inc., which is skeptical about a breakthrough in the near term, said even if a deal is reached, these wouldn’t begin until 2023, according to a note.

Eoin Treacy's view -

Bringing Iran’s oil supply onto the market is desirable for consumers faced with restricted supply from Russia. The price is re-admitting the biggest state sponsor of terrorism back into the global market. That’s obviously controversial for countries across the GCC and Israel. It’s a high price to pay for boosting supply in the near-term. Spending more on developing alternative assets should really be taking priority.



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August 29 2022

Commentary by Eoin Treacy

Fed Hits Stocks but the Larger Risk Remains Earnings, Not Rates

Thanks to a subscriber for this report from Mike Wilson for Morgan Stanley. Here is a section:

Eoin Treacy's view -

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

Stock prices are a major component of how financial conditions are measured. That is a less well understood characteristic of what is often considered a fixed income dominated metric. The challenge at present is the Fed is deliberately targeting the excess liquidity that is supporting demand and consumption.



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August 29 2022

Commentary by Eoin Treacy

ECB's Lane Urges 'Steady Pace' of Rate Hikes to Minimize Risks

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

Officials attending the Federal Reserve’s Jackson Hole gathering signaled the ECB is prepared to at least repeat the 50 basis-point hike enacted in July, with some not excluding an even larger increase. Executive Board member Isabel Schnabel urged “strong determination to bring inflation back to target quickly.”

While Lane didn’t spell out whether he’d oppose a 75 basis-point step, his comments suggest officials would need to see the need for a higher “terminal rate,” or high point of the current hiking cycle, for him to support such a move.

The Irish official said a “multi-step adjustment path towards the terminal rate also makes it easier to undertake mid-course corrections if circumstances change.” If new data called for a lower terminal rate, “this would be easier to handle under a step-by-step approach,” he said. 

Among the more cautious voices on the Governing Council is Executive Board member Fabio Panetta, who said last week that policy maker must tread carefully as a significant economic slowdown would ease inflationary pressure. 

Eoin Treacy's view -

The ECB has one of the most out of control inflation problems in the world. The pressure being exerted on the region from Russia’s energy war is not about to disappear. However, the successful filling of gas storage facilities ahead of schedule will moderate the risk of shortages this winter.  



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August 26 2022

Commentary by Eoin Treacy

August 26 2022

Commentary by Eoin Treacy

Powell Talks Tough, Says Rates Likely to Stay High for Some Time

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

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”

He said restoring inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.

“Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he said.

Eoin Treacy's view -

In very simple terms, the Fed has two mandates, price stability and full employment. Right now, they have full employment and robust business capital investments. They don’t have price stability or anything approaching it. That’s a recipe for tighter monetary conditions and higher rates until downward pressure on employment becomes problematic. 



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August 26 2022

Commentary by Eoin Treacy

Email of the day on when gold does best:

Your stated position on Gold, is that it did well in a low interest rate environment but is struggling now in the face of rising interest rates and strong US Dollar.

But surely with inflation hard wired into system, we are still in a relatively low interest rate environment, as interest rates should be around about 11% to effectively reduce inflation.

I have bought more gold today, regardless of outcome of the FED meeting today.

Eoin Treacy's view -

Thank you for this email which may be of interest to the Collective. My stated position is gold does well in a negative real interest rate environment and when the Dollar is trending lower. Incidentally, that is also when the emerging markets also tend to do best.



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August 26 2022

Commentary by Eoin Treacy

Truss, Sunak Under Pressure to Clarify UK Energy Bills Support

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

With just 10 days to go until Boris Johnson’s successor as premier and Conservative Party leader is announced, neither candidate has detailed how much assistance they’ll provide to families and businesses who face soaring energy costs, despite Chancellor of the Exchequer Nadhim Zahawi conceding that the current support package is “not enough.”

Whichever candidate wins the Tory leadership contest, addressing the impact of rocketing energy bills will be at the top of their in-tray after Ofgem said on Friday that a price cap on average annual energy bills would rise to £3,549 ($4,206) in six weeks’ time. That’s 178% higher than last winter and 80% more than at present. 

Eoin Treacy's view -

The only questions considered are how much support to provide. Fiscal discipline is out of favour at present. With inflation and energy prices hitting living standards so aggressively, the UK government is under extraordinary pressure to ease the pain.



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August 25 2022

Commentary by Eoin Treacy

Video commentary for August 25th 2022

August 25 2022

Commentary by Eoin Treacy

War and Industrial Policy

This report from Zoltan Pozsar at Credit Suisse may be of interest. Here is a section:

More broadly, the three “moments” of reckoning we discussed above mean that global supply chains, whether they produce military or civilian goods, are facing a Minsky Moment – a Real Minsky Moment. Paul McCulley’s term referred to the implosion of the long -intermediation chains of the shadow banking system that marked the onset of the Great Financial Crisis. Today, we are witnessing the implosion of the long -intermediation chains of the globalized world order: masks, baby formula, chips, missiles, and artillery shells, for now. The triggers aren’t a lack of liquidity and capital in the banking and shadow banking systems, but a lack of inventory and protection in the globalized production system, in which we design at home and manage from home, but source, produce, and ship everything from abroad, where commodities, factories, and fleets of ships are dominated by states – Russia and China – that are in conflict with the West.

Inventory for supply chains is what liquidity is for banks. In 2007 -08, big banks ran on “just -in -time” liquidity: the dominant form of liquidity was market liquidity, for which you could always sell assets into a deep market without moving prices, so you did not have to have liquidity reserves at the central bank. Similarly, big corporations today run “just -in -time” supply chains for which they assume that they can always source what they need without moving the price. But not really: the U.S. military has to wait a little bit as Raytheon “will take a little while”; Taiwan and Saudi Arabia have to wait as well until the conflict in Ukraine is over; and if your washing machine broke recently, you’ll have to wait a bit too until defense contractors are done buying them up to rip chips out to make missiles.

Eoin Treacy's view -

In propagating the Belt and Road Initiative, China has long complained that the USA’s policy towards it is one of containment. That has become more much overt since 2016. Sanctions on chip manufacturing capacity are an escalation. The rationale for such moves is obvious. The USA and Europe need time to rebuild domestic manufacturing capacity.



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August 25 2022

Commentary by Eoin Treacy

China Adds 1 Trillion Yuan More of Stimulus to Rescue Growth

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

The State Council also said the economy won’t be flooded with excessive stimulus, and that China won’t “overdraw” on the room it has to take more policy action to protect longer-term growth -- reiterating the relatively cautious stance officials have taken toward stimulus this year.

The meeting sent a signal: “Don’t expect massive additional stimulus,” according to Bruce Pang, head of research and chief economist for Greater China at Jones Lang LaSalle Inc. He added that the language used in the announcement suggested “the possibility of adopting extraordinary tools such as special sovereign bonds or increasing official budget deficit has decreased.”

The property slump and China’s stop-start reopening from Covid lockdowns have put the government’s official gross domestic product growth goal of “around 5.5%” well out of reach. Officials have downplayed the target in recent months as they stick to the Covid Zero policy of eliminating infections, with economists polled by Bloomberg projecting growth of less than 4% this year.

Eoin Treacy's view -

It’s truly a reflection of how large the Chinese economy has become, and how deep the dependence of leverage is, that CNY1 trillion in fresh spending is not deemed to be aggressive enough to support growth. However, more stimulus is certainly better for markets than less.



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August 25 2022

Commentary by Eoin Treacy

Peloton Gives Gloomy Forecast in Sign Comeback Is Still Far Off

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

The outlook follows a similarly dire fourth quarter, when sales plunged 28% to $678.7 million and the adjusted loss was $288.7 million. On a net basis, the loss was $1.2 billion -- about four times the size of the company’s loss a year earlier.

The numbers suggest that a turnaround plan under Chief Executive Officer Barry McCarthy still has a long way to go. He took the reins in February and slashed expenses – cutting thousands of jobs and shuttering operations -- but the company is facing sluggish demand and a buildup of inventory. On
Wednesday, Peloton announced plans to begin selling its bikes and accessories on Amazon.com Inc.’s site, aiming to broaden its distribution.

The Amazon news gave a boost to shares, but they remain down nearly 90% over the past year. After the company published its outlook on Thursday, the stock dropped 6.5% in premarket trading before markets opened in New York. 

Eoin Treacy's view -

I was rather puzzled at Peloton’s strength yesterday. News they are about to start selling on Amazon was greeted with enthusiasm by investors. However, Amazon takes a fee from prime of anything between 30-40%. If there is not going to be a massive price disparity, Peloton will need to eat that cost.



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August 24 2022

Commentary by Eoin Treacy

Video commentary for August 24th 2022

August 24 2022

Commentary by Eoin Treacy

Heard on the Street: Tesla Rival Finds Its Lane

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

BYD is scouting lithium mines to protect itself from surging prices of the essential battery metal. Despite rapid sales growth, BYD's margins were hammered last year due to high raw material prices. Net margins fell to 1.4% in 2021 from 2.6% a year earlier, according to FactSet. That compares with Tesla's 10.3%.

There is some hope of that reversing however, as commodity prices retreat again and new, pricier models hit showroom floors: The models in BYD's launch pipeline are twice as expensive as prior ones, according to Goldman Sachs. The bank expects BYD's net margin to expand to 2.2% this year and 2.5% in 2023.

BYD has paid down debt rapidly in recent years and as of December had more cash and short-term investments on hand than debt according to FactSet -- a reverse of the situation as recently as June last year.

In the downside scenario of a nasty Chinese recession, that could prove to be an important cushion.

One obvious challenge at home will be getting buyers to pony up for pricier cars with China's economy, potentially at least, deep in the doldrums. But for now at least, the company seems confident. BYD, which reports on Aug. 29, said in July that first-half net income could climb as much as 207% to 3.6 billion yuan, equivalent to about $528 million.

Sustaining such heady numbers will be a challenge but with strong, cost-effective technology, an integrated supply chain and Beijing's determination to dominate the sector, it would be a mistake to count BYD out.

 

Eoin Treacy's view -

Chinese lithium carbonate prices are still close to CNY500,000 a tonne. Significant investment and political will are being devoted to boosting supply of the metal but that is a medium-term objective. Meanwhile, nickel, copper, cobalt and manganese have all retraced much of their initial price spikes. That’s more about less demand than a sudden increase in supply.  



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August 24 2022

Commentary by Eoin Treacy

Coffee Lovers Set for Price Pain as Vietnam Reserves Shrink

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

The slump in Vietnamese inventories pushed domestic robusta prices in Dak Lak province, which accounts for about one-third of the country’s harvest, to a record high of 49,100 dong ($2.10) a kilogram last week. 

Carryover stockpiles are seen at 200,000 tons at the start of the new season on Oct. 1, compared with an estimated 400,000 tons a year earlier, according to the survey. Output may fall 6% to 1.72 million tons in 2022-23, the survey showed. The robusta variety accounts for about 90% of Vietnam’s coffee output.

A drop in the planting area for “profitable” fruit trees and a rise in fertilizer prices will probably affect production in 2022-23, said Do Ha Nam, Intimex Group’s chairman, and the Vietnam Coffee and Cocoa Association’s deputy head.

Citigroup Inc. has trimmed its projection for coffee production in Vietnam this year and the next as local crop surveys indicated cherry development had suffered from the lack of fertilizer usage this year. “This poses substantial risk to the prospect for the upcoming planting season,” it said in a report earlier this month. 

Eoin Treacy's view -

This is a stark example of how the rising cost of fertiliser has eaten into the ability of farmers to boost yields and improve the quality of their crops. There is no easy way out of this conundrum.  



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August 24 2022

Commentary by Eoin Treacy

Rechargeable aluminum: The cheap solution to seasonal energy storage?

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

Researchers from Switzerland's SPF Institute for Solar Technology have been studying aluminum redox cycles for many years now, and with funding from the EU's Horizon Europe program and the Swiss government, they've just kicked off a research project called Reveal, drawing in nine different partners from seven European countries, to develop what looks like a very promising idea.

As a 2020 report from the SPF team states, a single, one cubic meter (35.3 cu ft) block of aluminum can chemically store a remarkable amount of energy – some 23.5 megawatt-hours, more than 50 times what a good lithium-ion setup can do, or roughly enough to power the average US home for 2.2 years, on 2020 figures. That's by volume – going by weight, aluminum holds a specific energy of 8.7 kWh per kilogram, or about 33 times more than the batteries Tesla uses in its Model 3.

Big fat blocks like that aren't exactly practical to work with, though, so the Reveal team proposes using 1-mm (0.04 in)-diameter balls of aluminum instead. Naturally, you lose some volumetric density here, but you're still coming out over 15 MWh per cubic meter.

Eoin Treacy's view -

Redox flow batteries where the electrolyte transports free electrons during the reduction and oxidation reactions have been in the works for years without gaining critical mass.



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August 23 2022

Commentary by Eoin Treacy

Video commentary for August 23rd 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Brazilian inflation trending lower folllowing wide positive real rates, Dollar eases and gold steadies in response, oil stable at $100, natural gas eases, stock markets extend retreats and bond yields extend advances. 



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August 23 2022

Commentary by Eoin Treacy

Australia's Pensions Suffer Worst Year Since Financial Crisis

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

Australia’s pensions posted their worst annual performance since the global financial crisis as markets were roiled by central banks’ aggressive rate hikes and the war in Ukraine.

Guardians of the world’s fifth largest pension pot shed A$92.8 billion ($64 billion) on investments in the fiscal year through June 30, the biggest loss for the period since 2009, according to Australian Prudential Regulation Authority data released Tuesday. That saw the pool of savings fall to A$3.3 trillion, wiping out a year’s growth. 

The performance was largely due to a A$140 billion loss in the June quarter as equity markets were roiled by fears of a slowing global economy. The funds had boosted their stocks allocations toward the end of last year, before global equity markets slumped following Russia’s war in Ukraine and central banks’ efforts to stamp out rampant inflation. 

Australia’s pensions are bracing for more volatility in anticipation that the global economy could be heading into recession. They’ve lifted their holdings of fixed income and cash, while their stock allocations are now at the lowest level since December 2020.
 

Eoin Treacy's view -

Australia’s pension system is the envy of anyone who cares to look at such things. However, that does not insulate it from the universal challenge of bonds and equities falling in tandem. That’s something every pension fund has had to contend with this year. The biggest question by far is whether this is an anomaly or something we should be prepared to deal with for much of the next decade?



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August 23 2022

Commentary by Eoin Treacy

Saudi Arabia Makes a Push for $100 Oil

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

For long, Saudi Arabia pretended it didn’t target oil prices. The job of OPEC+ was all about matching supply with demand. Focus on fundamentals, and leave prices to the market, it used to say.

On Monday, in an unusual intervention, Saudi Energy Minister Prince Abdulaziz bin Salman indicated he didn’t like the yo-yo pricing he saw in the oil market. The problem, he said in a written interview with Bloomberg News, is that the physical and financial markets have “become increasingly more disconnected.”

Left unsaid, but clearly implied, is the real concern: oil prices were getting too low – and in the view of Riyadh, for no good reason.

With Brent falling toward a six-month low of $90 a barrel last week, Prince Abdulaziz said “cutting production at any time” was an option for OPEC+. The Saudi royal is a veteran policymaker, who knows very well the impact of those words. If there was any doubt, when the state-run Saudi Press Agency published its own version of the interview, it elevated the “cutting production” remark into the headline.

Eoin Treacy's view -

The release from the USA’s strategic reserve began in March and is due to end in early October; less than six weeks from now. On Monday, the reserve hit its lowest level since 1985. That suggests ability of OPEC+ to influence the market will improve soon and the USA will need to buy a lot of oil when prices are cheaper to rebuild the reserve.



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August 23 2022

Commentary by Eoin Treacy

Brazil Central Bank Sees Slower 2022 Inflation, More Price Falls

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

Brazil central bank President Roberto Campos Neto expects consumer prices to fall for three consecutive months through September and close the year with a smaller increase than most economists forecast.

“Inflation this year will be around 6.5%, perhaps a bit lower,” he said Tuesday at an event organized by Moneda Asset Management in Santiago de Chile. 

Brazil posted in July its biggest monthly drop in consumer prices in over four decades, as President Jair Bolsonaro pushed for tax cuts to lower fuel prices that were eroding his popularity ahead of October’s election. Economists surveyed by the central bank estimate inflation at 6.82% this year and 5.33% in 2023. 

While prices regulated by the government are providing some inflation relief, services costs are still going higher, according to Campos Neto. 

“There’s still a very hard job to do,” he added, to bring inflation near the bank’s targets of 3.5% and 3.25% for this year and next, respectively. 

Eoin Treacy's view -

If Brazil’s inflation rate drops to 6.5% by the end of the year, it will have the strongest real rates in the world. That leaves ample scope for interest rate cuts which would boost the outlook for the financial sector and support demand growth in the economy.



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August 22 2022

Commentary by Eoin Treacy

Video commentary for August 22nd 2022

Eoin Treacy's view -

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

Some of the topics covered include: correlation between bond and equity weakness reasserts, Dollar surges, oil reverses intraday weakness, Europe natural gas looks exhausted as storage fills up. most stock markets pulling back from their respective 200-day MAs. 



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August 22 2022

Commentary by Eoin Treacy

August 22 2022

Commentary by Eoin Treacy

Hawkish Jackson Hole Surprise Will Pop Credit's Summer Bubble

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Any sign from this week’s Jackson Hole symposium of more aggressive rate hikes to come will whack credit markets, which have already started to give back summer gains. Misplaced optimism about the US inflation and economic outlook squeezed spreads to unsustainably tight levels, leaving debt vulnerable to a fall that will be exacerbated by dwindling liquidity.

US high-grade bonds got overbought as fund inflows chased better returns, despite a barrage of issuance which will likely resume in September. The high-duration debt stands to lose most from a more hawkish Fed.

Spreads have almost 25 bps to go before hitting the July wide at 160 bps, but investors are keeping powder dry for a move back to May 2020 levels above 180 bps. That would be a fairly extreme move for a market that tends to move in 1-2 bps daily increments, but pre-Labor Day lack of liquidity provides scope to gap out.

Junk’s summer gains were led by the riskiest bonds, which would be battered most by a higher rates/lower growth environment. Some are waiting for a pummeling to 800 bps -- from 432 bps currently -- before buying in.

Eoin Treacy's view -

The biggest factor in the underperformance of portfolios from the beginning of the year had been the strong correlation between bonds and equities. They both fell at the same time and played havoc with the 60/40 portfolio set up. That relationship stopped working from early this month. Treasury prices resumed falling but stock prices rebounded.



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August 22 2022

Commentary by Eoin Treacy

China Seeks to Stabilize Property Crisis as PBOC Urges Lending

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

The special loans for developers would be the biggest financial commitment yet from Beijing to contain the crisis. The funds will be channeled through China Development Bank and Agricultural Development Bank of China, according to the people, who asked not be identified discussing private information.  

The PBOC also cut its one-year loan prime rate on Monday, lowering it by a smaller-than-expected 5 basis points to 3.65%, the first decline since January. The drop in the LPRs followed the central bank’s surprise move last week to lower the rate on its one-year policy loans by 10 basis points.

“We’ve already reached the point where the central government really needs to step in,” said Hyde Chen, head of strategy and asset management for Haitong International, in an interview with Bloomberg TV. With the housing market contributing around 20-30% of gross domestic product, it’s become an “elephant in the room.”

“They really need to provide a backstop, to provide confidence that a housebuyer can say, ‘OK, the house I bought can be delivered’,” he added.

Eoin Treacy's view -

The property sector is a vital component of the Chinese economy. The one thing property investors have bet on over the decades is every effort to reduce leverage has resulted in more stimulus being provided as soon as weakness threatens growth. So far, the quantity of liquidity supplies has been relatively small but the pace of provision is accelerating.



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August 19 2022

Commentary by Eoin Treacy

August 19 2022

Commentary by Eoin Treacy

Email of the day on getting it wrong:

With all due respect Albert Edwards has been bearish his whole career, he has made a career out of being wrong, so I struggle to believe much of what he writes. Make no mistake, I am very concerned about the economic backdrop and confess to find it challenging to distinguish between what is happening in the U.K. (a complete mess) to what is happening in the States. We only have to go back a few months though to your view (a view I shared at the time), that the Fed would be "one and done", because they had little to no precedent of being anything other than dovish. The government's balance sheet has enormous liabilities and as discussed by you months ago, they can ill afford to roll this over at much higher rates. That dynamic has not changed.

Eoin Treacy's view -

Thank you for raising this important point. In defense of Albert Edwards, he has been wrong about the stock market more often than not but was right about yields failing to break out on multiple occasions over the last decade. I was wrong in opining the Fed’s interest rate policy would be one and down. I underestimated the lag between tighter policy and its effects on government finances. I also addressed these issues in the Service when I started shorting the Nasdaq in March.



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August 19 2022

Commentary by Eoin Treacy

Larry Summers on Inflation and 'the New McCarthyism'

This interview has some interesting nuggets. Here is a section on male employment:

We have a large number of people who are estranged from our economy. In 1960, 5% of men were not working between the ages of 25 and 54. Today it’s more like 15%. If 15% of men are not working at any point in time, then a quarter of the people will have been out of work for a year or more over a four or five-year period. That’s destructive to the economy's productive potential. It’s destructive to their families. It’s destructive to the areas in which they live. It’s destructive to the moral fabric of our national life.

Eoin Treacy's view -

I recently finished reading Coming Apart by Charles Murray. It’s a harrowing account of how the polarization in the economy is manifested in a growing rift between the privileged, insulated upper class and a benefits-dependent underclass.  



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August 19 2022

Commentary by Eoin Treacy

Gazprom to Halt Nord Stream Gas Link for Three Days for Works

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

“Upon completion of the work and the absence of technical malfunctions of the unit, gas transport will be restored to the level of 33 million cubic meters per day,” Gazprom said.

The gas flow after works is equivalent to 20% of capacity. The pipeline can normally carry about 167 million cubic meters per day.

The Portovaya compressor in Russia, where the pipeline begins, is designed to operate six major and two smaller turbines. While one turbine is stranded in Germany after its maintenance in Canada, others that are still in Russia need repairs either in Canada or at the venue.

Eoin Treacy's view -

Germany’s efforts to refill storage tanks to 80% by October 1st appear to be on track. It comes at an enormous cost and is potentially crowding out Germany’s neighbours from the market. Storage is designed to compensate for outsized demand during winter, not a cessation, or a significant reduction in supply.



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August 18 2022

Commentary by Eoin Treacy

August 18 2022

Commentary by Eoin Treacy

Email of the day on bear market rallies or a sustainable low

Eoin, why do you believe that we are seeing no more than a continuation of a short covering rally. Surely you must concede from a pure technical perspective that the charts in the US in particular look very encouraging. The high valuation names largely stopped falling in May, and trended sideways for the better part of two months, and since then have seen a succession of higher lows and higher highs in a fairly consistent pattern.

The Nasdaq, S&P and Dow bottomed later but have very similar looking chart patterns, and all of these broke through their 50 day moving averages, and then successfully tested them before marching higher.

They have all retraced approximately 50% of their losses now. Inflation looks to have peaked, and while that does not suggest it goes straight back down again, surely does the market more good than harm.

Having sat on my hands when this last deep correction came and went, I am impatiently biding my time to get involved again, but I am starting to doubt whether the opportunity will come.

Eoin Treacy's view -

Thank you for this email which raises some important points about the strength of the rebound. I started closing out my shorts in July because I was expecting a rebound. I sold out completely on the Nasdaq’s move above 13,000 because there was significant scope for profit erosion on my initial sale price close to 15,000. Deep short-term oversold conditions result in short covering rallies. Sustainable lows need macro conditions to support bargain hunting.



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August 18 2022

Commentary by Eoin Treacy

Layoffs Are in the Works at Half of Companies, PwC Survey Shows

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

That’s a key finding from a survey released Thursday by consultant PwC, which last month polled more than 700 US executives and board members across a range of industries. Half of respondents said they’re reducing headcount or plan to, and 52% have implemented hiring freezes. More than four in ten are rescinding job offers, and a similar amount are reducing or eliminating the sign-on bonuses that had become common to attract talent in a tight job market. 

At the same time, though, about two-thirds of firms are boosting pay or expanding mental-health benefits. The most common move: making remote work permanent for more people.

Eoin Treacy's view -

The primary argument being used to say a recession has not already begun is the Purchasing Manager’s Index and the low unemployment rate. It is reasonable to say a recession is not underway if companies are buying more on a month over month basis and unemployment is close to a record low.



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August 18 2022

Commentary by Eoin Treacy

Email of the day on Iran oil and gas supply

I wonder about the state of their infrastructure & would assume it will take some time for them to ratchet up production assuming an agreement is reached.  Additionally, does Iran have LNG facilities?

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. First off let’s break the potential for exports down into the oil and gas. When the sanctions were relaxed in 2015, Iranian oil exports jumped by 1.5 million barrels a day within 12 months. Exports have dwindled since sanctions were reimposed and currently sit at only 290,000 barrels. In the event sanctions are again relaxed, it is reasonable to expect at least an additional million barrels of supply within a short period of time.



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August 17 2022

Commentary by Eoin Treacy

Video commentary for August 17th 2022

August 17 2022

Commentary by Eoin Treacy

There Were Hawkish Bits in the Minutes, Too

This note from Cameron Crise at Bloomberg may be of interest to subscribers.

While the market has reacted as if the minutes were dovish, I am not sure if that’s the right interpretation. To be sure, they did repeat the line that a slower pace of tightening would likely be appropriate in the future, and of course there was the line about the risk of over-tightening.

But here’s the thing-- the minutes acknowledge that growth momentum is fairly weak and the economy will expand below trend in the second half. They even note that the headline labor market data may not represent the true state of the economy. But for now, the Fed doesn’t care. Below-trend growth is a feature, not a bug, of the current policy setting, because it is required to get demand more in line with supply to curb inflation. And while the uncertainty of the data does indeed make over-tightening a risk, the possibility of high inflation becoming entrenched was a “significant risk” if the public didn’t accept the Fed’s resolve to tighten appropriately.

In other words, fading the Fed’s commitment to tighten makes it more likely that they will fulfill it. Oh, and there is a nice bit about the need to regulate crypto as well, so perhaps the Wild West mentality of that market might find that its days are numbered.

Eoin Treacy's view -

In a bull market buying the dip always works. When it stops working, that’s about the clearest signal we have that a lengthier medium-term correction is unfolding. The majority of stock markets have rebounded over the last couple of months and sparked a lot of enthusiasm that the correction is over and new highs will be seen before Christmas.



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August 17 2022

Commentary by Eoin Treacy

Largest Bitcoin Miners Lost Over $1 Billion During Crypto Crash

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

While the shares of crypto-mining companies have enjoyed a respite in recent weeks, they are still deep in the red this year. The miners had to shift from their Bitcoin-hoarding positions and sell coins as they struggled to repay debt and cover operational costs in the recent quarter. That continued into the third quarter.

“Public miners are still dumping their Bitcoin holdings at a higher rate than their production rate,” Jarand Mellerud, an analyst at Arcane Crypto, wrote in a research note. “Public miners sold 6,200 coins in July, making July the second highest BTC selling month in 2022.”

Eoin Treacy's view -

The primary argument for supporting bull markets in crypto is limited supply. The really big bullish trends have then coincided with surging demand, fuelled by massive increases in money supply.



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August 17 2022

Commentary by Eoin Treacy

UK Inflation Hits Double Digits for the First Time in 40 Years

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

“UK CPI inflation surged in July amid rising food prices that helped lift the rate above market expectations. The peak is still likely come in October, when energy prices are due to be increased again -- we see annual CPI moving to a little below 13% at that point. With inflation now more than five-times the Bank of England’s target, the question isn’t whether the central bank will tighten, it’s by how much? Today’s reading makes it more likely than not that the BOE lift rates by 50 basis points in September -- our baseline ahead of the data release was for a 25-bp move.”

Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not due to rising cost pressures. The BOE expects a recession to start in the fourth quarter, lasting into the early part of 2024.

The central bank expects inflation to surpass 13% later this year when regulators allow energy bills to rise again. That would mark the worst reading since September 1980, when Margaret Thatcher’s government struggled to bring a wage-price spiral under control.

 

Eoin Treacy's view -

In the normal course of events UK inflation should have peaked already. Money supply growth peaked on a year over year basis 18 months ago and on a month over month basis is now negative. At the same time the Bank of England has been raising rates, albeit modestly, for the last eight months and is now also talking about reducing the size of its balance sheet.



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August 16 2022

Commentary by Eoin Treacy

Video commentary for August 16th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: possible Iran deal puts downward pressure on oil, stocks quiet, China bond yields now below Treasuries putting downward pressure on the Renminbi, gold pauses below $1800. carbon credits firm, crytocurrencies pause. 



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August 16 2022

Commentary by Eoin Treacy

Email of the day on delisting Chinese shares from the US

Any opinion of BABA US delisting or Chinese Tech Stocks delisting and impact to their stock performance in HKEX

Eoin Treacy's view -

Thank you for this question which raises an important consideration. This article from Reuters on August 1st may also be of interest. Here is a section: 

The Holding Foreign Companies Accountable Act (HFCAA) is intended to address a long-running dispute over the auditing compliance of U.S.-listed Chinese firms.

It aims to remove foreign companies from U.S. exchanges if they fail to comply with American auditing standards for three consecutive years.

Alibaba on Monday said being added to the list meant it was now considered to be in its first 'non inspection' year.



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August 16 2022

Commentary by Eoin Treacy

Zinc Surges as Trafigura-Owned Smelter to Halt Production

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

The decline in European zinc production has seen local LME stockpiles fall close to zero this year, while global inventories remain near the lowest in more than two years. 

“There will be a bit of capacity juggling going on,” said Tom Price, an analyst at Liberum Capital. “If the EU needs their metal, they will probably have to import more semi-refined material or the metal itself.”

Supply concerns are still being balanced by the impact of the energy crisis on demand, which has caused many economists to predict a recession in Europe. Economic data on Monday from China, the world’s top metals consumer, added to those fears as the nation struggles to mitigate the impact of Covid-19 curbs, the property slump and the recent heat waves.

China is also facing an energy crunch which could hit metals output. Soaring temperatures are stretching power supplies and drying up water for hydro-electricity, forcing key aluminum-hub Sichuan to vow it will prioritize electricity production for residential use.
 

Eoin Treacy's view -

The soaring cost of natural gas in Europe is contributing to demand destruction as well as impacting the ability of companies to supply products. That’s a recipe for a great deal of volatility.



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August 16 2022

Commentary by Eoin Treacy

Carbon Capture Could Get $100 Billion in Credit from US Climate Bill

This report from Bloomberg New Energy may be of interest to subscribers. Here is a section:

The new legislation raises the credits for captured CO2 that is used and stored to $60/tCO2 and $85/tCO2 respectively. However, project owners must meet prevailing wage and apprenticeship requirements in order to qualify. If they do not, they will be paid a lower credit than the existing 45Q payment. Projects must be under construction by the end of 2032 to receive the credit

A new, much higher credit is available to direct air capture (DAC) projects. DAC currently costs around $600/tCO2. The credit pays $130/tCO2 for gas that is used, say, for enhanced oil recovery or to make synthetic fuels, and $180/tCO2 for CO2 that is stored permanently.

 

Eoin Treacy's view -

Regulatory arbitrage will ensure that some areas will continue to benefit from having less strict regulations than either North America or Europe. Meanwhile there is little to be gained from arguing about the sense behind carbon credit trading. We can only deal with the reality provided by the market. The regulatory regime continues to support taxes on emissions. 



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August 15 2022

Commentary by Eoin Treacy

Video commentary for August 15th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: China recession risk rising, Renminbi, copper, oil, nickel lower, Dollar firms and weighs on gold and silver, European natural gas surges to new high, Brazil has relative strength and Wall Street extends rebound. 



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August 15 2022

Commentary by Eoin Treacy

Beijing Faces 'Liquidity Trap' as Lending Collapses

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

Three things we learned last week: 

1. Shockingly weak Chinese credit growth shows that monetary policy is pushing on a string. Friday’s data showed aggregate financing, a broad measure of credit, was almost half of what economists expected. Bank loan growth slowed to 11%, near the historical low. That’s occurring at a time when the financial markets are flush with cash and interbank interest rates are falling well below the central bank’s benchmark.

In other words, money is aplenty, but no one wants it. It reflects weak confidence among businesses and households amid the housing slump and the Covid restrictions. It’s “a classic sign of a liquidity trap,” Craig Botham at Pantheon Macroeconomics remarked.

What’s more, Beijing is facing a fiscal cliff as the local governments have pretty much used up their special bond-issuance quota for the year. Unless Beijing makes more funding available, the fiscal support may be waning.

Eoin Treacy's view -

China’s exporters are feeling the pain from slowing demand in Europe and North America. That’s adding to the downward pressure on the economy from the emerging real estate crisis. The PBoC signaled last week they are keen to avoid the inflationary problems other major economies are dealing with. Over the weekend, political priorities led to the Medium-Term Lending rate being shaved by 10 basis points while the central bank withdrew liquidity to sanitise it.



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August 15 2022

Commentary by Eoin Treacy

Germany Slaps Levy on Households to Spread Pain of Gas Surge

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

“The levy is a consequence of Putin’s illegal war of aggression against Ukraine and the artificial energy shortage caused by Russia,” Economy Minister Robert Habeck told reporters in Berlin. The government is working on a compensation package for consumers, because the levy presents a “challenge“ to them, Chancellor Olaf Scholz said in Oslo after a meeting with Nordic counterparts. 

The levy comes as Europe shifts its focus to curbing consumption in the face of a worsening energy crisis. German power prices climbed to a record amid mounting concerns the region may struggle to generate enough electricity this winter. That has pushed up inflation rates and threatened the industry.

Habeck said the levy -- which runs through April 1, 2024 -- would cost an average single household about 97 euros a year, a couple would pay about 194 euros more and a 4-person household would bear extra costs of about 290 euros.

Eoin Treacy's view -

The Netherlands natural gas future was up another €10 today as it extends the acceleration. The measures underway to ensure Europe has enough gas for the winter are totally dependent on Russia continuing to supply the region. It is in their interests to pick the most inconvenient time possible to turn off the tap. With the war in Ukraine finely balanced, Russia will be keen to gain whatever benefit they can from asymmetric tools.



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August 15 2022

Commentary by Eoin Treacy

Brazil's Economy Grows More Than Forecast Before Relief Plan

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

Brazil’s economy has shown signs of dynamism, with the labor market performing better than expected, even after the central bank increased its key interest rates by 11.75 percentage points since March 2021, to 13.75%. Recently-implemented measures to ease the pain of inflation are expected to further support domestic demand. 

Permanent Aid
Ahead of October’s presidential election, President Jair Bolsonaro got the green light for a multibillion social program that raised monthly cash handouts to the poor by 200 reais until the end of the year. He has promised to maintain that extra payment if re-elected, and so has his main challenger, former President Luiz Inacio Lula da Silva. 

Central bank chief Roberto Campos Neto expressed concern about the possible extension of emergency social measures for an indefinite amount of time. 

“There’s a well-known saying: nothing is more permanent than a temporary government program,” he said at an event organized by Millennium Institute, a local think tank, after the data was released. “That certainly worries us.”

Eoin Treacy's view -

Bolsonaro is behind in the polls and Lula is promising a raft of goodies if he is re-elected. That’s a recipe for an attempt by Bolsonaro to “buy” the election and improving economic activity will certainly aid his aspirations.



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August 12 2022

Commentary by Eoin Treacy

August 12 2022

Commentary by Eoin Treacy

Email of the day on the big question

Q: Are we in a bear or a bull?

Eoin Treacy's view -

Thank you for voicing the question I believe everyone is asking. The short answer is yes, the long answer is more nuanced. Let’s frame this discussion in terms of the yield curve spread. The 10-year – 2-year is sharply negative. The 10-year – 3-month and the 10-year – Fed Funds Rate have both accelerated lower but are not yet negative. All three point toward significant monetary tightening. That is before the impending acceleration in the contraction of the Fed’s balance sheet is 



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August 12 2022

Commentary by Eoin Treacy

How Normal Am I?

This exercise created by the EU may be of interest. It purports to show you how attractive you are from an AI’s perspective but then concludes by sharing some insights about you. (I won’t spoil the surprise).

August 12 2022

Commentary by Eoin Treacy

Illumina Falls Most Since May on Outlook for Demand, Grail Costs

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

Illumina has been embroiled in a costly prolonged battle over its acquisition of Grail. In an unusual move, Illumina finalized the Grail purchase in August 2021 despite complaints from regulators in both the US and Europe. Illumina and Grail were warned last month that they risk “hefty fines.” In its earnings report, Illumina said it recognized $609 million in legal contingencies, including an accrual of $453 million during the second quarter for a potential fine.

“The $8 billion Grail purchase has shifted the story, with multiple antitrust challenges that will play out in 2022,” Bloomberg Intelligence analyst Jonathan Palmer wrote. “These have raised the stakes and shaken confidence.”

On a call with investors, Chief Executive Officer Francis deSouza gave no indication of backing down from the purchase. Meanwhile, the company expects reduced revenue growth from its core business in the second half of the year. 

Piper Sandler analyst David Westenberg said the most concerning factor behind Illumina’s guidance cut was deferred lab investments by some users of the company’s DNA sequencing machines, and customers holding less inventory.

“Some customers experienced supply chain pressures that delayed their lab expansions,” deSouza said on the call. Those who planned to launch new labs or expand existing ones were stymied by supply chain issues, while others are managing capital “more conservatively,” he said. 

Eoin Treacy's view -

Illumina is the dominant supplier of genetic sequencing machines. The purchase of Grail was about gaining entry to the blood diagnostics market with a particular focus on early cancer diagnosis. It’s a potentially high growth and complimentary market. If the purchase remains intact, it should deliver a dominant position in both markets.



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August 11 2022

Commentary by Eoin Treacy

Video commentary for August 11th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: copper continues to rebound but China beginning to restrict liquidity, UK electricity prices close to breaking higher, bond yields rebound everywhere, stocks begin to feel the effects of higher borrowing costs. 



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August 11 2022

Commentary by Eoin Treacy

Bond Traders Dismiss Stock-Market Rally as Misguided Euphoria

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

Strategists at Citigroup Inc., using a mix of spot and forward curves to help construct a predictive model, now say that there’s a greater than 50% chance of a recession over the next year. 

“It’s a perfect storm now with both sides of the curve causing the inversion, and making it likely to continue,” said Jason Williams, a strategist at the New York-based bank. “Given the strength of the labor market and still high inflation, there’s no reason for the Fed to slow down it’s hiking.”

Eoin Treacy's view -

Investors have been conditioned to expect the “Fed put” because they have underwritten the stock market following every significant decline since the 1987 crash. The challenge today is inflation is way above the Fed Funds rate and also outstripping wage growth. Providing the normal liquidity surge into that environment is counterproductive to ensuring stable prices.



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August 11 2022

Commentary by Eoin Treacy

Email of the day on surging electricity prices

I know you have consistently highlighted the challenges that UK households will experience in relation to their energy bills, and just today they are saying that "typical" households could be paying nearly £600 in January, money that most just can't find. Already consumers are a collective £1.3 billion in arrears on their bills, with an expected 86% hike in the energy cap expected on 1 October.

But far less is said of the impact on businesses, and on this I can shed some very specific light. I own a small business, an indoor children's play centre. On 1 December last year I renewed my energy supply contract, and faced with an increase then from 15p/kwH to 20p/KwH I opted to take just a 1 year renewal, with gas prices fairly stagnant until then as you know.

I have been informed today that when I come to renew once more on 1 December, I am going to staring at a tariff of anywhere between 50p/kwh to as much as 89p/kwh. I was also told in no uncertain terms by the 'sales' person at my current supplier, that they are trying to migrate away from small and medium business in this environment, and are deliberately pricing us away. the daily fixed standing charge will move from £83 per month, to potentially as much as £1,000.

For context, my own energy bill is going to shift from £20k per year to closer to 60k-£70k. This is going to be catastrophic for U.K. businesses, as many will be left in dire straits, unable to keep the lights on, and customers cool (in summer) or sufficiently warm in the winter. So many businesses in the hospitality sector especially are saddled with the burden of Covid "bounce back loans", delayed VAT repayments, and of course huge inflation on input costs with a consumer at breaking point. Business closures = higher unemployment...it is looking particularly dire here in the U.K.

Eoin Treacy's view -

Thank you for sharing this visceral experience of price increases business owners are experiencing. The challenges are significant and options to raise prices are inhibited so many businesses will close. The strike action in the UK which has been building for months and will escalate further. They are a symptom of how much living standards are being impacted by the rising cost of living.



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August 11 2022

Commentary by Eoin Treacy

BHP talk offtakes with OZ Minerals, returns with $8.4b bid

This article from the Australian Financial Review may be of interest. Here it is in full:

The companies' top brass only spoke last Friday, when BHP shot across its non-binding and indicative bid to OZ's Adelaide offices, and asked for six-weeks' due diligence and a friendly board recommended deal.

Instead of being flattered by the attention, OZ Minerals' board is playing it cool and defensive.

OZ Minerals' board, advised by Macquarie Capital and Greenhill, is understood to be staunchly against giving BHP a look at its books at a $25 a share offer, reckoning it's both invasive and disruptive to the business. It has said as much to investors in recent days.

Analysts who have spent the past few days canvassing the OZ Minerals register said the shareholders were on the same page as the board.

But at what price OZ would be willing to grant BHP due diligence, is pretty much anyone's guess at this point. Citi and Barrenjoey are in BHP's corner.

What's OZ Minerals worth

The approach and the retreat were so swift that investors haven't had time to think what the company's worth to a bidder.

But they are taking heart from three things: that OZ smacked the $25 a share bid really hard (so BHP must be way off mark) and that the two had been talking about offtakes (so BHP's interest isn't just tyrekicking).

Investors reckon they still need a week or so to come up with a number they reckon would be fair, and OZ's half-year results are due about the same time. But early talk is any suitor wanting to unlock OZ's data room would have to present it with a low-thirties bid.

The offtake revelations have also revived investors' early read of the approach: that BHP's after better performance for Olympic Dam and its copper operations, but is also thinking strategically about securing nickel concentrate for its WA smelters.

Eoin Treacy's view -

Building new mines is expensive and time consuming. Those challenges are becoming more burdensome as regulations tighten. OZ Minerals has the benefit of producing resources in a politically stable area, in relatively close proximity to existing mines so additional infrastructure requirements are minimal. That should command a premium and if BHP can get away with paying less than peak values it’s a good buy.



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August 10 2022

Commentary by Eoin Treacy

Video commentary for August 10th 2022

It came to my attention today that the August 9th video was not available for European users but seemed to work fine for me. I believe this was due to system maintenance at our server provider which is now complete.  

August 10 2022

Commentary by Eoin Treacy

Cooler Inflation Takes Fed's Rate-Hike Size "Down to the Wire"

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

“This is a necessary print for the Fed, but it’s not sufficient,” Pond said. “We need to see a lot more. You can think about this print as sort of like the weather -- it’s better today than it has been over the past few days. But it’s still summer. There’s still a lot of humidity out there. It’s not great. So it’s in the right direction. But we’re certainly not there yet.” 

For Diane Swonk, the chief economist at KPMG LLP, the Fed is now hedging against risk of future supply shocks as well as combating current inflation and will likely favor a 75 basis-point increase.

“The Fed is no longer willing to rest on their laurels on a one-month move,” she said. “The greater risk for the Fed is to stop too soon than stop too late. It will take a lot more cooling than this for the Fed to shift its decision rule, although in this economy, September seems an eternity away.”

Eoin Treacy's view -

The big question for investors is whether the Federal Reserve will focus on core or non-core items in how much they decide to raise rates in September. Commodity price inflation is less urgent today than earlier this year. Lumber prices have made a full round trip. Wheat has fully unwound the Ukraine invasion surge. Palm Oil is steadying in the region of the 2008, but the price has almost halved from the peak level. 



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August 10 2022

Commentary by Eoin Treacy

China Orders Surprise Audit of $3 Trillion Trust Industry

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

These investors have joined homebuyers and bond fund managers in feeling the pain of a liquidity crisis that’s driven dozens of developer defaults and frozen construction of hundreds of projects across the country.

China’s trust industry, after at least six rounds of restructuring since its inception in 1979, combines characteristics of commercial and investment banking, private equity and wealth management. Firms in the sector pool household savings to offer loans and invest in real estate, stocks, bonds, commodities, and even bottles of sorghum liquor. No other firms in the financial industry operate across all these asset classes.

Trusts were once a popular avenue of funding for the property sector. Until recently, trust products were seen by wealthy Chinese individuals and institutions as a safe place to park their money.

Eoin Treacy's view -

The trust sector in China is dominated by wealthy families which benefitted enormously from the growth of the economy over the last forty years. In many cases that was achieved through relationships with government officials that ensured preferential access to markets or property ventures. The fact many trust clients are members of the establishment themselves can be taken for granted. Therefore it is particularly noteworthy that it is not the subject of investigation.



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August 10 2022

Commentary by Eoin Treacy

Global Supply Chains of EV Batteries

This report from the IEA may be of interest. Here is a section:

Pressure on the supply of critical materials will continue to mount as road transport electrification expands to meet net zero ambitions. Demand for EV batteries will increase from around 340 GWh today, to over 3500 GWh by 2030 in the Announced Pledges Scenario (APS). Cell components and their supply will also have to expand by the same amount. Additional investments are needed in the short term, particularly in mining, where lead times are much longer than for other parts of the supply chain – in some cases requiring more than a decade from initial feasibility studies to production, and then several more years to reach nominal production capacity. Projected mineral supply until the end of the 2020s is in line with the demand for EV batteries in the Stated Policies Scenario (STEPS). But the supply of some minerals such as lithium would need to rise by up to one-third by 2030 to satisfy the pledges and announcements for EV batteries in the APS. For example, demand for lithium – the commodity with the largest projected demand-supply gap – is projected to increase sixfold to 500 kilo tonnes by 2030 in the APS, requiring the equivalent of 50 new average-sized mines.

Eoin Treacy's view -

If the quantity of metal required from mining operations needs to increase 10-fold to meet projected demand there is going to have to be a serious reckoning between expectations and reality. Either we are going to have a mining boom larger than anything seen since the days of the California gold rush or expectations for the energy transition and decarbonisation will need to be scaled back/adapted in a very big way.



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August 10 2022

Commentary by Eoin Treacy

August 09 2022

Commentary by Eoin Treacy

August 09 2022

Commentary by Eoin Treacy

Europe Energy Supply Takes Another Hit as Russia Oil Pipe Halts

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

In the first days of August, before the halt, Russia sent just over 24,000 barrels a day to the Czech Republic and the same volume to Slovakia through the Druzhba, according to industry data seen by Bloomberg. Flows toward Hungary zero due to planned maintenance at the country’s processing facilities, the data showed.

Ukrtransnafta JSC, which operates Ukraine’s oil pipeline network and oversees the transit of crude via the southern leg of the Druzhba link, “stopped providing oil-transportation services” through its territory on Aug. 4, Transneft said in a statement on Tuesday. There was no immediate comment from Ukrtransnafta.

The contract between Transneft and Ukrtransnafta requires 100% prepayment for transit flows. While the Russian pipeline operator paid the August transit fee on July 22, it received the money back on July 28, Transneft said. Slovak crude-pipeline operator Transpetrol, in a separate statement, confirmed Transneft’s payment failed to go through and was returned to the company by the bank.

The European banks involved in the transaction are not authorized to make their own decisions on cross-border payments from Russia due to sanctions and need approvals from their national regulators, according to Transneft. 

The Russian oil-pipeline operator said it has appealed “to an authorized bank for further transfer of information to the European regulator in order to obtain permission to conduct settlements under an agreement with Ukrtransnafta.” It is also looking at alternative ways to transfer funds. 

Eoin Treacy's view -

There is a lot of commentary in the media about how successfully the HIMARs artillery have offset Russia’s offensive capability in Ukraine. Time will tell how true that is, but Russia has every reason to exercise its influence over the European energy sector. Choking off supply of oil and gas to Europe is all part of Russia’s playbook to ensure Europe has a very uncomfortable winter.



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August 09 2022

Commentary by Eoin Treacy

Micron's Warning Adds to Evidence of Collapsing Chip Demand

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

The Boise, Idaho-based company is the latest to reveal just how quickly demand for electronic components is declining, following a warning by Nvidia Corp. on Monday and weak reports by Intel Corp. and other chipmakers this earnings season. The majority of the pain is being felt by companies that make chips for personal computers. Consumer demand for those devices is drying up rapidly as pandemic lockdowns end and household budgets are hammered by inflation.

Highlighting the speed with which demand is evaporating, Micron said orders deteriorated since the company last gave an update just over a month ago. Crucially, it’s not just PC makers that are cutting back.

“Compared to our last earnings call, we see further weakening in demand because of adjustments broadening outside of just consumers to other parts of the market including data centers, industrial and automotive,” Chief Executive Officer Sanjay Mehrotra said in an interview with Bloomberg Television.

The prospects for the chip industry are dimming on a day that was supposed to herald a renaissance in semiconductor manufacturing in the US with President Joe Biden signing the Chips and Science Act. That $52 billion stimulus package is designed to make it cheaper for companies to build domestic factories and help counteract the loss of the crucial skill set to Asia. Shortages during the pandemic inspired US and European politicians to prioritize the creation of additional plants locally to create a more robust supply chain.

Eoin Treacy's view -

The chip sector has always been highly cyclical and nothing has happened to change that fact. The pattern of behaviour has repeated in several cycles. The cyclicality is driven by how capital intensive the sector is.



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August 09 2022

Commentary by Eoin Treacy

Recession Watch Spreads as Global Curves Follow Treasuries Trend

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

Bond investors in New Zealand are not as sanguine. Yields on two-year debt are just two basis points below 10-year rates, the narrowest gap since 2015 when the curve last inverted. The difference between Australia’s 10- and three-year bond futures stands around 17 basis points.

Much of the fears in Australia and New Zealand are centered on concerns about the housing market, which experienced a post-pandemic boom when borrowers piled in to take advantage of record-low interest rates. The two central banks have indicated that borrowing costs will continue to rise.

“The Australian economy is already showing some cracks -- weak consumer sentiment, falling dwelling prices, cooling consumer spending -- and New Zealand’s economy is showing more,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “Australia will slide into recession in the second quarter of next year under the weight of recent and prospective RBA rate hikes, which will expose Australia’s Achilles’ heel, an extended housing market and highly leveraged consumers.”

Australian consumer confidence dropped for a ninth straight month in August to reach a two-year low, according to a report released Tuesday by Westpac Banking Corp.

Eoin Treacy's view -

The yield curve spread (10-year – 2-year) is a reliable lead indicator for US recessions. It does not have nearly the same strong record of predicting recessions for other countries. That is probably because other countries do not rely so heavily on their banks for credit creation. 



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August 08 2022

Commentary by Eoin Treacy

Video commentary for August 8th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: stocks fail to rally on passing of new energy/medicare bill in US, NVidia surprises on the downside, major indices at first area of resistance, gold steady, dollar eases, oil firms, natural gas weak, 



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August 08 2022

Commentary by Eoin Treacy

Ambani Says Green Push to Outshine Other Reliance Businesses

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

Reliance Industries Ltd., which pledged to spend $76 billion on green energy, will scale up investments in the area as its billionaire owner, Mukesh Ambani, seeks a strong foothold in the sector where competition is heating up.

“Over the next 12 months, our investments across the green energy value chain will gradually start going live, scaling up over the next couple of years,” Ambani, Reliance’s chairman, said in the annual report for the financial year that ended March 31. “This new growth engine holds great promise to outshine all our existing growth engines in just 5-7 years.”

Ambani is steering Reliance’s pivot toward renewable energy and diversifying away from its traditional crude oil refining and petrochemicals businesses. The tycoon has a track record of implementing business transformations and has morphed Reliance from being an energy giant to a consumer services behemoth in the last decade.

Ambani and another Indian billionaire, Gautam Adani -- Asia’s richest person who also has ambitious plans for the renewable sector -- have announced plans to invest more than $140 billion in green projects. India, the world’s third-biggest polluter, is relying on the two billionaires as it chases the pledge to be net carbon zero by 2070. 

“India and Reliance will aim to play a leading role in the world’s transition to clean energy,” Ambani said. Reliance’s share price jumped as much as 1.5% on Monday after the annual report was published.

Eoin Treacy's view -

Reliance’s investments in green energy are primarily focused on developing offshore gas resources (KG-D6), developing syngas production from its existing refineries, and then investing in solar and fuel cells.



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August 08 2022

Commentary by Eoin Treacy

Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022

Thanks to a subscriber for this report from Moody’s. Here is a section:

Lawmakers appear close to passing into law the Inflation Reduction Act of 2022. The legislation is born out of the Build Back Better agenda that President Biden proposed more than a year ago. It raises nearly $750 billion over the next decade through higher taxes on large corporations and wealthy individuals and lower Medicare prescription drug costs, to pay for nearly $450 billion in tax breaks and additional government spending to address climate change and pay for lower health insurance premiums for Americans benefiting from the Affordable Care Act (see Table 1). The remaining more than $300 billion goes to reducing the federal government’s future budget deficits (see Chart 1). Broadly, the legislation will nudge the economy and inflation in the right direction, while meaningfully addressing climate change and reducing the government’s budget deficits.

Eoin Treacy's view -

The renewable energy sector rebounded emphatically on the prospect of additional subsidies last week. Removing the limitation on EV rebates so every buyer gets a $7500 discount and reinstating the 30% tax credit for solar installations are both stimulative for their respective sectors.



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August 08 2022

Commentary by Eoin Treacy

Gold Edges Higher With Lower Yields as Traders Eye US Rate Path

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

Gold inched higher as Treasury yields pared their recent surge, with traders temporarily looking beyond the Federal Reserve’s aggressive interest-rate hike path. 

Bullion rose as much as 0.8%, rebounding from the worst daily loss in two weeks in the previous session. On Friday, a stronger-than-expected US jobs report added to the case for more Fed monetary tightening, pushing up the dollar and bond yields while crushing gold since it pays no interest and is priced in the greenback. 

Still, a bigger rate hike isn’t a done deal, and investors are now waiting for a US inflation report later this week to gauge how hawkish the Fed may be at its September meeting. That allowed a pause for Treasury yields and the dollar, lifting gold prices on Monday.

A hike of 75 basis points at next month’s Fed policy meeting “is far from locked in,” TD Securities commodity strategists led by Bart Melek said in a note. For now, “the yellow metal has been able to hold firm.”

The precious metal has rallied for the last three weeks, as concerns over a global recession and heightened US-China tensions boosted demand for the haven asset.

Holdings of bullion in exchange-traded funds have remained under pressure, however, falling for an eighth straight week.

Spot gold rose 0.7% to $1,788.34 an ounce as of 10:49 a.m. in New York. The Bloomberg Dollar Spot Index and the 10-year Treasury yield edged lower. Silver, palladium and platinum all advanced. 

Eoin Treacy's view -

I spent a lot of time thinking about gold over the weekend. I’m not happy with how my trading of the metal has gone over the last year. Despite significantly offsetting my loss with success in other trades, I still feel the pang of failure in gold more acutely than with other instruments. This is the 2nd time in four years I have sold at the wrong time, so I am resolved to do better in future.



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August 08 2022

Commentary by Eoin Treacy

August 05 2022

Commentary by Eoin Treacy

August 05 2022

Commentary by Eoin Treacy

Treasury Yields Leap as Jobs Data Spur Bets on Bigger Fed Hikes

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

Yields on two-year Treasuries surged in response to the jobs report, a reflection of the expected Fed rates over that period. Market pricing indicated a 75 basis-point increase to the Fed’s key rate is now seen as a more likely outcome in at the central bank’s September meeting than 50 basis points.

Powell has described the labor market as “tight to an unhealthy level,” and has been seeking a moderation to help bring demand for products and services more in line with supplies that have been constrained by Covid-19 disruptions. He and other Fed leaders are worried about the potential for a wage-price spiral, with higher wages feeding into inflation in a cycle that is hard to break.

“This number is so comprehensively strong with a pretty significant uptick in wages,” said Mark Spindel, chief investment officer at MBB Capital Partners LLC in Chicago. “Companies are paying up for labor. Income matters most. When you look at the breadth of the employment report, and the earnings, this is an enormous tailwind for income.” 

Eoin Treacy's view -

It has been widely reported that the USA has missed out on 2 million immigrants following the isolationist policies adopted by President Trump’s administration. At least 1 million of those would have been highly educated/skilled individuals.



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August 05 2022

Commentary by Eoin Treacy

Moller-Maersk delivers 'exceptional' profits and ups share buyback despite weaker demand

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

AP Møller-Mærsk has posted record profits for Q2 2022. According to Mærsk, revenue increased by 52% and earnings more than doubled compared to the same quarter in 2021

The Danish containership giant netted revenue of US$21.7Bn and said the financial performance was above its prior expectations.

CEO Søren Skou attributed the profits to “strong contract rates in ocean, rapid profitable growth in logistics and continued solid performance in terminals".

"Volumes in ocean were softer as congestion continued and the war in Ukraine weighed on consumer confidence, particularly in Europe,” Mr Skou said.

In the box shipping segment, revenue grew to US$17.4Bn and EBIT increased to US$8.5Bn over the second quarter. Higher freight rates were partly offset by 7.4% lower volumes and by higher fuel, handling, and network costs. Total EBITDA and EBIT sat at US$10.3Bn and US$8.9Bn, respectively, while free cash flow rose to US$6.8Bn.

Maersk noted that although spot rates have softened from their peak earlier in 2022, contracts have continued to be agreed at rates above previous annual averages, given the strong demand and continuing global supply chain congestion.

In its logistics segment, Mr Skou said AP Møller-Maersk “grew volumes above the market”, resulting in revenue growth of 36%, notching up the sixth quarter in a row of more than 30% growth.

Strong import demand from the United States and above market growth in Asia has helped drive revenue from the company’s terminals segment to US$1.1Bn with EBIT rising to US$316M.

Eoin Treacy's view -

I was at one of the Dallas customs warehouses this morning picking up Mrs.Treacy’s container of inventory for the holiday season. 



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August 05 2022

Commentary by Eoin Treacy

Email of the day on the difference between spot and futures prices

I hope you are well. Please add the “NYMEX GOLD CHART “TO THE London Gold chart. The price difference sometimes is significant like yesterday. The Nymex close was approx.. US$ 20 higher.

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. The London Gold fixing reflects spot prices whereas the futures prices are traded on NYMEX. The current on the run futures point at December so it is not unreasonable to expect a difference in pricing.



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August 04 2022

Commentary by Eoin Treacy

Video commentary for August 4th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: gold rebounds, stocks steady, bonds pause, oil weak, copper steady, investors price in scope for a hiking peak sooner than later without considering the implication for lower earnings as a resutl of a recession. 



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August 04 2022

Commentary by Eoin Treacy

BOE Gives a Lesson in Honest Central Banking

This article by Mohamed El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

The Bank of England is reminding the world what a politically independent central bank can and should do: act as a “trusted adviser,” willing to share analytically honest views that other more politically sensitive institutions are either unable or unwilling to do.

Of course, this is not a risk-free approach. Such honesty — rather than catalyzing appropriate responses from policy-making agencies that lead to better economic and social outcomes — can provoke household and corporate behaviors that accelerate the bad outcomes. Yet the risks involved are worth taking, especially when the alternative is a central bank that loses institutional credibility, sees the effectiveness of its forward policy guidance erode and becomes even more vulnerable to political interference.

It should also be noted that the UK’s situation differs in some important way from those of other countries. The country’s economic challenges are complicated not only by the energy price catch-up but also by the political transition and the changing nature of the country’s relations with its trading partners.

Eoin Treacy's view -

In the last six weeks gilt yields have pulled back aggressively from 2.75% to test the region of the trend mean around 1.75%. This is the first area of potential resistance and is the point at which traders will begin to question how likely a long-term low interest rate environment is.  



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August 04 2022

Commentary by Eoin Treacy

Oil Falls Below $90 for First Time Since War as Demand Slows

This article from Bloomberg may be of interest to subscribers. Here is a section:https://www.livemint.com/news/world/oil-falls-below-90-for-first-time-since-war-as-demand-slows-11659629203283.html

Prices falling below $90 a barrel “is quite remarkable given how tight the market remains and how little scope there is to relieve that,” said Craig Erlam, senior market analyst at Oanda. “But recession talk is getting louder and should it become reality, it will likely address some of the imbalance. Just not in the way we’d like.”

Crude has now given up all the gains triggered by Russia’s invasion of Ukraine in February. Since peaking at more than $130 a barrel in March, the US benchmark has been dragged lower by signs that Moscow is still getting its cargoes onto the global market and escalating investor concerns that a global slowdown will erode energy consumption. 

Despite the recent price weaknesses, Saudi Arabia raised its oil prices for buyers in Asia to a record level, a sign the world’s largest exporter sees the region’s market remaining tight. OPEC+ agreed to boost supply by a meager 100,000 barrels a day in September, while issuing a stark warning on “severely limited” spare capacity. 

Eoin Treacy's view -

I have been at pains to highlight the fact analysts often make the mistake of treating demand as a constant. That conclusion works most of the time. Oil demand has tended to rise with living standards, so it is reasonable to predict a constant growth rate in demand. The challenge is demand is much more volatile at major market peaks. That’s when the adage the cure for high prices is high prices becomes most relevant.



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August 04 2022

Commentary by Eoin Treacy

Hermes Leathers Issue Less Worrying as Other Units Bounce

This note from Bloomberg may be of interest.

RECENT EVENT REACTION: Hermes 1H sales and earnings beat raises our confidence for sales growth ahead of the 10% expected by consensus for 2023-25, driven by outperformance in all regions and most categories, where pace of demand appears an ample offset to production capacity constraints at Leather Goods (43% of sales.) A 42.1% operating margin, up 140bps, suggests margin strengthening is widespread. (07/29/22)

1. Hermes Demand Is Stronger as Supply Poses Test: Company Outlook

THESIS: Demand for Hermes' exclusive products and categories is gaining momentum globally and seems unlikely to be held back by an inflation-fueled consumer spending squeeze. Sales and profit growth are pinned to new production sites for Leather Goods, its highest margin contributor, while building its volume-restricted brand across other categories, and that's proving a success. A new leather production facility is due each year in 2022-26, adding 4-5% in volume capacity annually. Solid investment supports accelerated growth in other categories.

A burgeoning cash balance adds to Hermes' ability to pay dividends, buy back shares, expand store size and explore new categories. (07/29/22)

Eoin Treacy's view -

I thought this was a particularly interesting development because there are widespread reports of the luxury watch market peaking. Possible reasons for the divergence is there are a lot more watches in circulation than Hermes bags, the second hand market is more mature and watches tend to last longer than leather goods.



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August 03 2022

Commentary by Eoin Treacy

Video commentary for August 3rd 2022

August 03 2022

Commentary by Eoin Treacy

Remember QT? It's About to Get a Lot More Interesting

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

Based on $47.5 billion of QT this month and a monthly rate of $95 billion thereafter, the Fed’s balance sheet is slated to shrink by some $475 billion through the rest of the year. Here’s the thing,
though: the Treasury expects to rebuild its cash balances by some $85 billion through year-end.

In other words, instead of more than offsetting the impact of QT on bank reserves and the RRP, the TGA will start amplifying it. That in turn raises the question of where the brunt of what will effectively be $560 billion of QT will be felt. The Treasury’s latest quarterly refunding announcement offered up the prospect of only modest increases in bill issuance, which suggests that balances in the RRP facility will remain elevated. That in turn implies that there will be a sharp drop in bank reserve balances.
 

All of this is fairly well-understood by money market specialists, though perhaps it’s not appreciated quite as much by QT tourists. Thus far, bank liabilities have remained fairly steady -- there hasn’t been a significant drop in deposits. This is important because as the column linked above notes, it is when bank reserves as a percentage of liabilities drop below 11% or so that we should expect to see non-linear upward pressure on funding rates -- and thus calls for QT to end.
 

Eoin Treacy's view -

Banks shares have not been performing particularly well. The sector has been assailed by multiple issues such as inverted yield curves, the evaporation of refinancing demand for mortgages, and the need to set aside more reserves to allow for the possibility of a recession. Quantitative tightening will accelerate that process. In turn that will increase the chances of an issue developing in the money markets, similar to the repo surge in 2019.



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August 03 2022

Commentary by Eoin Treacy

An Update from Our CIOs: Transitioning to Stagflation

This blog post from Bridgewater may be of interest to subscribers. Here is a section:

Today, our indicators suggest an imminent and significant weakening of real growth and a persistently high level of inflation (with some near-term slowing from a very high level). Combining this with what is discounted, the difference between what is likely to transpire in the near term and what is discounted is the strongest near-term stagflationary signal in 100 years, shown below. Longer term, as we play it out in our minds, we doubt that policy makers will be willing to tolerate the degree of economic weakness required to bring the monetary inflation under control quickly. More likely, we see good odds that they pause or reverse course at some point, causing stagflation to be sustained for longer, requiring at least a second tightening cycle to achieve the desired level of inflation. A second tightening cycle is not discounted at all and presents the greatest risk of massive wealth destruction.

Eoin Treacy's view -

The pendulum analogy gels rather well with the above view. The current effort to unwind inflationary forces, arising from excessive money supply growth, is going to result in a growth shock.



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August 03 2022

Commentary by Eoin Treacy

Here Are All the Ways China's Hitting Back Against Pelosi's Trip

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

Before Pelosi landed, China banned food imports from more than 100 Taiwanese suppliers. On Wednesday morning, China’s Ministry of Commerce halted natural sand exports to Taiwan, without elaborating, and customs officials added boycotts to some fish and fruit imports.

Separately, Chinese organizations, companies and individuals were banned Wednesday from dealing with Taiwan companies including Speedtech Energy and Hyweb Technology, China’s state-run CCTV reported.

China is Taiwan’s largest trading partner, with bilateral trade of $328.3 billion last year, giving Beijing a strategic advantage. Still, China must tread carefully as it needs Taiwan for semiconductors. 

Eoin Treacy's view -

The military actions expected around Taiwan over the next few days will grab headlines but are unlikely to do much more than that. The impending economic countermeasures are more likely to have an effect on stock prices.

Apple and Tesla are two obvious subjects of consumer boycotts. Neither of their shares exhibit any recognition that this is a possible threat. That’s because these issues have not generally lasted very long in the past. The issues Japanese companies have had in China have made a lot of headlines, but did prove to be the causal factor in either long-term success or failure for their shares.  



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August 02 2022

Commentary by Eoin Treacy

August 02 2022

Commentary by Eoin Treacy

Treasury Yields Surge as Fed Officials Quash Policy Pivot Talk

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

Bond yields rebounded after San Francisco Fed President Mary Daly said the central bank is “nowhere near” being almost done in fighting the hottest inflation in four decades. Chicago Fed President Charles Evans signaled that the central bank needs to keep raising rates next year to contain price pressures. Over the weekend, Minneapolis Fed President Neel Kashkari said that there’s “a long way away from” achieving the central bank’s target.

Eoin Treacy's view -

PMI figures were surprisingly firm and that suggests the slowdown in the economy is not as pronounced as feared. That’s a signal to the Fed that the lagged effect of tightening policy has not yet been felt. They have no reason to stop tightening until they have clear evidence of an impact on growth and employment.



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August 02 2022

Commentary by Eoin Treacy

Fertilizer Giants Say Supplies Will Remain Tight Amid War

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

Fertilizer exports from Russia have largely returned to normal as trade flows have adapted, Bert Frost, CF’s senior vice president of sales, said in a quarterly call Tuesday. But there’s one exception: ammonia.

“The global nitrogen market is likely to be short the fertilizer it needs if product prices do not incentivize greater production in high-cost regions,” Frost said.

CF’s cost of natural gas used for production has more than doubled from last year, according to the statement. The company expects its own production to be down in the third quarter due to scheduled maintenance.

Mosaic Co., a major phosphate and potash company, sees both nutrients staying in short supply. Sanctions on Belarus, a top potash producer, have wreaked havoc on the market. And China has been restricting phosphate exports to keep supply in country.

The company expects Belarusian potash exports to be down 8 million tons this year, Chief Executive Officer Joc O’Rourke said in a quarterly call Tuesday. Belarus normally exports about 10-12 million tons annually, according to Green Markets data.

Eoin Treacy's view -

The natural gas crisis in Europe highlights just how vital the commodity is to all manner of industries as well as how spoiled we were by a decade of depressed prices. The creation of a globally fungible market for the commodity, as LNG export/import capacity is built out, suggests an active trading environment in the commodity over the next decade. That will last as long as it takes for wide arbitrages to be eventually ironed out.



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August 02 2022

Commentary by Eoin Treacy

Pelosi's Roundabout Flight to Taiwan Shows China's Long Reach

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

Instead of traveling northeast from Kuala Lumpur directly across the South China Sea -- a journey that might have brought her jet close to Chinese military facilities built on reclaimed land on islets and reefs including in the Spratly Islands -- Pelosi’s plane flew southeast over the Indonesia part of Kalimantan, or Borneo, before turning north and then to the east of the Philippines, according to imagery provided by Flightradar24. 

Eoin Treacy's view -

Accidents happen when an abundance of care is abandoned. As great power politics unfolds and gels with domestic priorities in both China and the USA, there is potential for a crisis inducing accident. The heavily choreographed travel plans of politicians are less likely to provide a catalyst because of the size of the potential repercussions.  



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August 02 2022

Commentary by Eoin Treacy

August 01 2022

Commentary by Eoin Treacy

Video Commentary for August 1st 2022

Eoin Treacy's view -

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

Some of the topics discussed include: crude oil backwardation contracts, natural gas remains strong, Dollar at first support, stocks and gold at the first resistance, yield curve continues to extend inversion, short-term lows for stocks could easily be retested on geopolitical stress. 



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August 01 2022

Commentary by Eoin Treacy

Shale Profits Finally Blossoming After Decade of Steep Losses

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

US shale drillers are expected to post record second-quarter profits in coming days, reversing nearly a decade of debt-fueled losses. 

The top 28 publicly traded US independent oil producers generated $25.5 billion in free cash flow in the three months to June 30, according to estimates compiled by Bloomberg. In that space of time they’ll have made enough cash to erase one-fourth of what they lost over the previous decade. 

Fracking revolutionized global energy markets by enabling American drillers to harvest shale resources that had previously been untouchable. In the space of just over 10 years, the US went from a declining crude producer to the world’s dominant oil and gas source, but at an astronomical cost: the 28 companies lost about $115 billion in the decade leading up to the Covid-19 pandemic.

Eoin Treacy's view -

Nothing about unconventional supply is cheap but it is a lot more cost effective than it used to be. The continual need for drilling and the quick abundant payback initially led to excessive enthusiasm. The business model has more recently evolved to be more sensitive to the cost of production, oil prices and economies of scale. That has finally translated into profits for the sector.



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August 01 2022

Commentary by Eoin Treacy

From Profits to Pay, JPMorgan's Gold Secrets Spill Out in Court

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

JPMorgan holds tens of billions of dollars in gold in vaults in London, New York and Singapore. It is one of four clearing members of the London market, where global gold prices are set by buying and selling metal held in a few London vaults -- including JPMorgan’s and the Bank of England’s.

JPMorgan is the biggest player among a small group of “bullion banks” that dominate the precious metals markets, and internal documents presented by prosecutors provided a glimpse of just how dominant a role the bank has played. 

In 2010, for example, 40% of all transactions in the gold market were cleared by JPMorgan. 

And

Another set of important clients were central banks, which trade gold for their reserves and are among the biggest players in the bullion market. At least ten central banks held their metal in vaults run by JPMorgan in 2010, according to documents disclosed in court. 

Eoin Treacy's view -

With such a large position in the gold market, JPMorgan has both significant information and motive to swing prices in the interests of its trading desks on an intraday basis. That’s not quite the same as saying they have the capability to depress pricing over a prolonged period. That kind of overt manipulation would quickly attract the attention of other market participants and opposing positions aimed at pressuring the bank would be taken.



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August 01 2022

Commentary by Eoin Treacy

India's GDP can grow to $40 trillion if working-age population gets employment: CII report

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

“The golden period of 30 years between 2020-50 where our working age population will bulge can be an important horizontal enabler to bolster growth, even as the developed world including China ages,” the report notes.

The report adds that over the years, India has experienced rising literacy rates, but level of vocational training/skilling is low, which gets reflected in the high unemployment rate among the educated. “Closing the skill gaps of its qualified workforce will be critical, as India depends more on human capital than its peer countries that have a similar level of economic development,” it said, adding that skilling and reskilling require a coordinated response from the government, industry, academia even as COVID continues to cause structural changes to the workplace.

“The reversal in India’s structural transformation back toward agriculture is a sign of fall back to subsistence employment. Enhanced safety nets through PM-KISAN and the MGNREGA will be critical investments needed to ensure that incomes of small and marginal farmers are protected and their basic needs are met… But manufacturing and services will still have to be the two key growth engines going forward,” it said.

Eoin Treacy's view -

Given the trajectory of emerging market development over the decades, it is stating the obvious that India needs to do whatever is necessary to improve employment opportunities for its millions of young people. The fact the conversation is taking place is at least a good starting point.



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July 29 2022

Commentary by Eoin Treacy