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July 29 2016

Commentary by Eoin Treacy

Platinum takes limelight from gold with best month in four years

This article by Eddie van der Walt and Ranjeetha Pakiam appeared in Mineweb. Here is a section:

The two lesser-known precious metals, used in devices that control toxic car emissions, are benefiting from better auto sales in China, concern over labour in South Africa and loose monetary policy from central banks around the world.

“Platinum and sometimes palladium occasionally get dragged along by gold, but here we’re also seeing internal market dynamics playing in their favour,”  David Wilson, an analyst at Citigroup in London, said by phone.

Analysts have speculated that stricter legislation on vehicle pollution in China will raise demand in the long term. On the supply side, miners in South Africa, one of the biggest producers of the metals, are in wage talks with unions. In the past, labour strikes in the country curbed output.

Platinum rose 0.9% to $1 146.40 an ounce by 11:59am in London, touching the highest in more than a year. It now leads gold for the year with a 29% gain compared with bullion’s 26%.

Palladium added 0.1% to $702.15 an ounce on Thursday. It has risen in all but one of the last 17 sessions.

Net-long positions held by managed money on the Comex exchange have climbed for at least the past three weeks in both metals, exchange data showed as of last Friday.

Eoin Treacy's view -

Platinum hit a medium-term low near $800 in January and has rallied impressively since, to at least partially close an historic undervaluation relative to gold. Platinum is denser than gold which helps to explain why platinum jewellery is more expensive; you need more of it to create the same piece. The fact it is rarer than the yellow metal also contributes to its appeal. 



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July 29 2016

Commentary by Eoin Treacy

Email of the day on the investment outlook for the Eurozone

The failings of the IMF described in this article read as if an unfriendly journalist is lashing out, but the criticisms were made by the IMF's own oversight committee. Here are some extracts: "The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory." "This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis.." and "the whole approach to the eurozone was characterised by ‘groupthink’ and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the Eurozone” or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen." None of this surprises me and I guess many subscribers living outside the eurozone will have the same reaction. I/we do not expect any better from the IMF when the next Eurozone crisis strikes the continent. So what do we do to protect ourselves? Here are my thoughts For those living within the eurozone some form of currency hedge would appear wise (gold, other currencies, other stock markets). I live and invest outside the eurozone (thankfully) so I am wary of eurozone stocks for currency loss reasons and I am rather expecting money to flow to the US dollar and US stocks in coming years (and maybe UK to some extent). But that is speculation so I watch the charts carefully. I would love to know, if you had foresee the future is your thinking very different?

Eoin Treacy's view -

Thank you for this educational article. When I first became interested in crowd psychology 20 years ago the aspect that most intrigued me was crowds become more emotional and less rational as they grow and as a result are tolerant of contradiction. I think if we are honest with ourselves each of us has had a self-destructive episode at some point in our lives. We might even have been aware of it at the time and yet we do it anyway. 



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July 29 2016

Commentary by Eoin Treacy

Kuroda Leads BOJ to a Policy Crossroads as Pressures Intensify

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

Governor Haruhiko Kuroda, 71, and his colleagues declared it was time to assess the impact of their policies, which have variously spurred strong criticism from bankers, bond dealers and some lawmakers and former BOJ executives. The next gathering, on Sept. 20-21, offers a chance to either provide greater evidence that the current framework should continue, head further into uncharted territory, or scale back.

Regardless of the decision, this isn’t where one of the world’s most aggressive central bankers wanted to be in his fourth year in office. In early 2013, he expressed confidence the BOJ had the power to ensure its 2 percent inflation target could be reached within about two years. This year, with the shock adoption of a negative interest rate policy backfiring through a welter of warnings from commercial banks, there’s a growing perception monetary policy is losing effectiveness.

Eoin Treacy's view -

The Bank of Japan signalled today that they accept the conflict between the inflation bias of increasing money supply and the deflationary bias of negative interest rates. A rethink of their strategy is truly required but we do not yet know if they have the appetite for a helicopter money strategy which would surely create the inflation they desire. If Japan does indeed go down that route, it will likely offer a template for the ECB to follow a similar project. 



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July 29 2016

Commentary by Eoin Treacy

Colombia Is Charting a New Path Forward After a Brutal Civil War

This article by Jean Friedman-Rudovsky for Bloomberg may be of interest to subscribers. Here is a section:

There’s also politics. What set the stage for the peace negotiations was, in part, the creation of the office of land restitution. The nation has always had a drastically unequal distribution of land, and displacement exacerbated that trend. Today, less than 1 percent of the Colombian population owns more than 60 percent of the land, one of the world’s most inequitable ratios. When the government showed a willingness to address this issue, FARC came to the negotiating table.

The government now says that giving back their land may make its citizens less restless, less inclined to support radical forces. This stability would help attract foreign investment. Unlike other Latin American countries, Colombia has been a loyal U.S. ally and reliably market-friendly. “What’s held back development has been the security situation. The war made many parts of the country ungovernable and, thereby, untapped,” Colgate University’s Ballvé says. With a peace agreement forthcoming, that will change. “The country has vast mineral and oil reserves in areas that will be newly coming online—in part, thanks to initiatives like the land restitution program.”

Although land restitution is key to long-term stability, it’s causing turmoil in the short term. Leading international human-rights organizations have documented intimidation campaigns targeted at those trying to return home. Families going back to their land have received death threats, and in 2015, 105 activist leaders were killed, a 35 percent increase from the previous year. Judges who issue land restitution decisions are given personal security details, says Sabogal, the director of the government office. Colombia’s landed elite used to employ right-wing paramilitaries to enforce their claims. Now they’re colluding with drug trafficking groups.

Eoin Treacy's view -

The evolution of chemically based narcotics such as fentanyl might be the best news to hit countries like Peru and Colombia in years. The cultivation of coca for processing into cocaine helped fuel civil unrest and funded rebel groups like FARC. With the increasingly legal availability of cannabis and the ability of Mexican cartels to manufacture both opioids methamphetamines the market for cocaine must be evolving. 



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July 28 2016

Commentary by Eoin Treacy

Biotechnology

Eoin Treacy's view -

This sector was the darling of the investment community until about a year ago when Biogen had a disappointing quarter, Valeant’s business model blew  up shortly afterwards and despite the fact it is not a biotech company, the sector was hit by the same selling pressure. When politicians took aim at the high charges of drugs and new treatments, it contributed to additional selling pressure. 



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July 28 2016

Commentary by Eoin Treacy

3 Trends in Wastewater Treatment

Thanks to a subscriber for this article by Ralph Exton at GE. Here is a section:

It is critical that we seek to spur increased adoption of water reuse – a strategy that allows the world to take advantage of a water source constantly replenished every day regardless of drought or climate change. Treated municipal wastewater is a virtually untapped resource. In North America, 75 percent of wastewater is treated (16 trillion gallons of water every day), but less than 4 percent of that water is reused. It’s a gap that needs to be closed.

The vast majority of treated municipal effluent is discharged into a local receiving stream. Technology exists to take this wastewater and treat it to a quality suitable for other, non-potable purposes: agricultural needs, groundwater recharge, industrial applications. In fact, wastewater can be treated to a quality suitable for drinking (if we can get past the “ick” factor of the toilet-to-tap water recycling concept).

Historically, policy has focused on effluent quality, pushing for discharge limits to protect the environment. This is important – and necessary. However, policy and regulation need to catch up with the growing acceptance of water reuse and begin to structure guidance around its implementation. It’s starting to happen in several corners of the world. For example, Saudi Araba increased its water tariff to encourage water reuse. The United Arab Emirates is opting for stronger conservation and reuse rather than investing in desalination technologies, which are effective but expensive.

Eoin Treacy's view -

Fresh water is a precious commodity and, as with any naturally occurring resource, is unevenly dispersed globally. Nevertheless it is an expensive resource to develop infrastructure for and, because of its integral role in fostering life, the care that needs to go into making it potable means water represents a cost for the majority of households. 



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July 28 2016

Commentary by Eoin Treacy

Macau's Chief Sees 2017 Economy Returning to Growth on Casinos

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

“Macau’s gaming industry and the whole economy will continue to adjust, but the decline may shrink to 7.2 percent this year and even resume growth in 2017,” Chief Executive Fernando Chui said in a televised session of the city’s legislature Wednesday. “It’s a good time for Macau to re-position after a 25-month gaming revenue drop.”

Gross domestic product in Macau declined 20.3 percent in 2015, worsening from the 0.9 percent drop the year before, as the world’s largest gambling hub was hurt by China’s anti-corruption campaign that scared off high-rollers. The casino industry, which accounts for half of Macau’s GDP, is in the midst of a casino building boom to boost revenue from mainstream gamblers and tourists.

Recreational Gamblers
Macau’s government is working with its six casino operators to “improve synergies” between gaming and non-gaming pursuits, Chui said. The city is trying to reduce its reliance on gambling and is targeting to raise the proportion of casinos’ non-gaming revenue to 9 percent by 2020 from 6.6 percent in 2014.

 

Eoin Treacy's view -

The outlook for the gaming sector and China are inextricably linked. Macau represents a much larger gambling market than even Las Vegas and that city also depends on the largesse of Chinese high rollers to drive profitability. With the outlook for growth improving in Macau that may be an initial sign that the Chinese tourist market is still healthy. 



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July 27 2016

Commentary by Eoin Treacy

PM Abe's plan for $265 billion stimulus puts pressure on BOJ to ease

This article by Leika Khara and Stanley White for Reuters may be of interest to subscribers. Here is a section: 

Japan's prime minister unveiled a surprisingly large $265 billion stimulus package on Wednesday to reflate the world's third-largest economy, adding pressure on the central bank to match the measures with monetary stimulus later this week.

The earlier-than-expected announcement to boost the flagging economy sent Japanese and other Asian stock markets higher while it weighed on the safe-haven yen, but lacked crucial details on how much of the package would be direct government spending.

The size of the package, at more than 28 trillion yen ($265.30 billion), exceeds initial estimates of around 20 trillion yen and is nearly 6 percent the size of Japan's economy. It will consist of 13 trillion yen in "fiscal measures," which likely includes spending by national and local governments, as well as loan program.

"We need to take steps to support domestic demand and put the economy on a firmer recovery path," Shinzo Abe said in a speech in southern Japan on Wednesday. "I want to use various measures to increase our escape velocity from deflation."

The market expects the Bank of Japan to produce some fire power of its own at its rate review ending on Friday.

Eoin Treacy's view -

In last night’s Audio I discussed the likelihood that the ¥100 represents something of a Rubicon for the Japanese as they decide how next to try and re-instil an inflation bias in economic activity. Today’s announcement of fresh fiscal stimulus is likely to be accompanied by additional measures from the BOJ; in a further iteration of the fiscal/monetary partnership that is the primary attribute of Abenomics. 



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July 27 2016

Commentary by Eoin Treacy

Email of the day on the importance of a global perspective

I want to say thanks for all your interesting charts from all over the world. You both give us a fantastic view from around the globe! Some examples, Valeant, Kinder Morgan, Orocobre and metals. They have all recently helped me pay my expenses and more. And last but not least, Thank you for not bringing Brexit up every day, I suppose you have a lot of customers living outside England and Wales and a few of us do not think Brexit is the center of the world. A Swedish Citizen, and FM for more than 25 years. (With an international portfolio.) Keep up your good work.

Eoin Treacy's view -

Thank you for your kind words and congratulations on seizing opportunities as they have presented themselves. It’s a big world out there and while the political ramifications of Brexit remain a major topic of conversation, not least in the UK and Europe, I believe we have a responsibility to focus on the investment ramifications of the event and also the fact that there are a great many asset classes for which the referendum has been a non-event.



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July 27 2016

Commentary by Eoin Treacy

Musings From the Oil Patch July 26th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which contains an interesting discussion on the longevity of products but here is a section on the liquefied natural gas market:

In recent months, two LNG cargoes from Cheniere Energy’s (LNG-NYSE) Sabine Pass export terminal in Louisiana have been delivered to Kuwait and Dubai. So far, since it began shipping LNG in February, Cheniere has sent cargos to seven countries, including Argentina, Chile, Brazil, India, Portugal, Dubai and Kuwait. The shipments to the Middle East reflect the soaring demand for energy in these countries. (As a testament to the nation’s energy demand issue, Saudi Arabia recently disclosed it has been drawing on its domestic oil inventories to meet the summer energy demand surge and to avoid having to further boost oil production above the country’s current 10.5 million barrels a day rate.) As all he countries in the Middle East have rapidly growing populations, their domestic demand is growing and tends to soar during the hot summer months. Most of these countries have large natural gas resources, but other than Qatar, which is currently the world’s largest LNG exporter, they are less developed. We expect the rest of the countries in the region will step up the pace of their natural gas resource development.

In order to appreciate the market potential for cheap U.S. natural gas, Kuwait’s LNG imports exploded from one million tons in 2012 to 3.04 million tons last year, according to the Middle East Economic Survey. We know that Saudi Arabia has been ramping up its drilling for natural gas in order to power more of the country’s water desalination plants and electricity generators. By using more domestic natural gas, Saudi Arabia will be able to reduce the volume of crude oil burned to power these facilitates. That will enable Saudi Arabia to have more of its crude oil output available for export and to generate income for the government, rather than burning it under utility boilers. For the meantime, we expect more U.S. LNG cargos will find their way to the Middle East. Those LNG exports will help to tighten the domestic gas market and send natural gas prices higher as we move into 2017, but we are not sure that the Middle East will become a long-term U.S. LNG export market. But the industry will take whatever demand it can find it now.

Eoin Treacy's view -

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

For much of the last century natural gas was in such abundance that it had no economic value and was burned off as a by-product of oil drilling. With increasing demand for less polluting, but energy dense resources, to provide heating, cooling and cooking natural gas has experienced a renaissance. 



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July 27 2016

Commentary by Eoin Treacy

Security Landscape Continues to Evolve

Thanks to a subscriber for this report from Level 3 Communications which may be of interest. Here is a section:

431 million new malware variants seen in 2015, an increase of 36% Source: Symantec Internet Security Report, April 2016

The mean number of days to resolve cyber-attacks is 46, with an average cost of $21,155/day (global, standardized into U.S. dollars) Source: Ponemon 2015 Global Cost of Cyber Crime Study, October 2015

9 breaches in 2015 with more than 10 million identities exposed: a total of 429 million exposed Source: Symantec Internet Security Report, April 2016

The mean annualized cost of cybercrime to global organizations is $7.7 million/year (standardized into U.S. dollars) Source: Ponemon 2015 Global Cost of Cyber Crime Study, October 2015

Eoin Treacy's view -

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

The growth of cybercrime is nothing short of exponential not least because it is comparatively cheap to develop, it is global in nature, prosecution rates are woefully low and the rewards are highly attractive. Combatting the threat requires a war footing to be adopted by corporations and outside of the high tech sector many companies have proven ill-equipped to deal with the challenge. 



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July 26 2016

Commentary by Eoin Treacy

Gold miners back in the game

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

Our favourable view of gold is based on the following factors:

Challenging global economic growth;

Prevailing low to negative interest rates and easy monetary policies. Central banks with negative deposit rates incl. ECB, Japan, Switzerland, Denmark and Sweden. Correlated against the US 2-year real rate (r2 is 0.73), the implied gold price is ~$1460/oz (Figure 2);

Lingering uncertainty in the Eurozone since the Brexit vote;

Risks associated with China’s debt and debt: GDP ratio at ~$30 trillion and >200% which could force the People’s Bank of China to mobilize selling additional US treasuries to support the yuan and reduce capital outflows; and

Risks to the US dollar as balanced with the upside from potential modest rate hikes offset by potential instability post US elections. Call this the Trump factor! Although the US dollar is broadly inversely correlated with gold (r2 is 0.54), the (inverse) correlation with real rates is a better predictor for gold.

The conditions noted above have driven investors back to gold as an alternative safe-haven with no opportunity holding cost when compared to almost one third of global sovereign bonds trading at negative yields. Global ETF holdings are at a level last seen in May 2013 (Figure 4). In addition, COMEX net speculative positions in gold are at a multi-year high, which poses some risk of sell-off liquidations (Figure 5).

It is worth noting that the recent pullback in gold from this year’s near-term high of $1,360 is due to a certain level of political stability in Britain, but more importantly stronger US economic data triggering a reversal in bond yields and US dollar. Gold initially shrugged off the strong June employment data but last week’s manufacturing and retail sales data led to an acceleration in expectations of a fed funds rate hike by December (currently 45%). Nonetheless, we see this pullback as healthy and would look to accumulate gold equity exposure on weakness.

Eoin Treacy's view -

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

The gold mining sector is offering leverage to the gold price for the first time in a decade following a painful process of rationalisation that squeezed management expansion plans and forced a return to a focus on cash flow. It is being helped by the fact that gold and gold miners are among the few sectors not hitting new all-time highs and therefore represent relative value and potentially catch up potential. 



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July 26 2016

Commentary by Eoin Treacy

US to create nationwide network of EV charging stations

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

The US government has announced "an unprecedented set of actions" to pump up the country's plug-in electric vehicle market, including US$4.5 billion in loan guarantees to create a nationwide network of commercial scale and fast charging stations. The initiative to push for greater electric car adoption calls for a collaboration between federal and state agencies, utilities, major automakers and other groups.

The initiative will identify zero emission and alternative fuel corridors across the country, to determine the best locations to put in fast charging stations, as part of the Fixing America's Surface Transportation (FAST) Act.

As part of a partnership between the US departments of energy and transportation, a 2020 vision for a national fast charging network will be developed, with potential longer-term innovations that include up to 350 kW of direct current fast charging. According to the administration, a 350 kW DC system could charge a 200-mile-range battery in less than 10 minutes. For comparison, Tesla just boosted some of its Superchargers' power capacity to 145 kW, which is claimed the fastest currently available.

Eoin Treacy's view -

Governments are getting behind the need for a jump in the efficiency of batteries. If electric vehicle range anxiety is truly to be overcome batteries that can power a car all day, with the air conditioning on, while charging my phone and iPad as I listen to the radio are required. Many people feel they need a workhorse that can fulfil just about any task rather than just commuting. Continued high demand for light trucks is testament to that which is probably why Elon Musk gave a nod to heavier vehicles when announcing his latest growth plan last week. 



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July 26 2016

Commentary by Eoin Treacy

Pension Returns Slump, Squeezing States and Cities

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

“Many states and local governments may be facing difficult choices if investment returns remain low,” said Keith Brainard, research director at the National Association of State Retirement Administrators. “The money has to come from somewhere.”

Connecticut now allocates 10% of its budget to pay down unfunded pension liabilities that more than doubled in size over the past decade. Chicago’s $20 billion pension-funding hole prompted its credit rating to tumble to junk, a rare low mark for an economically diverse city.

A reminder of how long-term fortunes have turned came last week as two pension bellwethers reported their worst results since the 2008-09 financial crisis.

Weak annual gains for the California Public Employees’ Retirement System and California State Teachers’ Retirement System dropped their 20-year returns below 7.5% investment targets, to 7.03% and 7.1%, respectively. The two funds, known as Calpers and Calstrs, are the largest public pensions in the U.S. by assets and oversee a combined $484 billion for 2.6 million public workers and retirees.

Eoin Treacy's view -

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

The underperformance of public pensions that invest primarily in bonds highlights the difference in returns between playing the market from a momentum perspective versus a yield-to-maturity buy-and-hold strategy. Pension funds tend to manage duration by reinvesting maturing bonds because that helps to marry future liabilities to predictable returns but in an environment where yields are low the premium paid for new issues is so high that long-term returns are impugned. 



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July 25 2016

Commentary by Eoin Treacy

Brexit is already proving to be a huge victory for global free trade

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

Canada has long wanted free trade with the United Kingdom, a fellow G7 country that became the world’s fifth-largest economy in 2014 after overtaking France. According to the Centre for Economics Business and Research, a premier U.K. consultancy, the fast-growing U.K. will overtake Germany over the next two decades to become Europe’s largest economy and the world’s fourth largest.

But until Brexit, Canada was shut off from this economic powerhouse, our only path to profitable U.K. trade wending through the EU bureaucracy in Brussels, which controls trade access to every EU country. And as a frustrated Canada knows only too well from almost a decade of interminable, ongoing jockeying in aid of sealing a Canada-EU trade deal, the EU is the world’s largest closed shop. No one gets to trade with the EU on preferential terms without either joining the union or trading away national sovereignty for the privilege.

Now the world, Canada included, is beating a direct path to the United Kingdom. U.S. Secretary of State John Kerry, after talks this week with U.K. Prime Minister Theresa May, declared it was imperative that the U.S. move “as fast as possible” to “maximize the economic opportunities” of Brexit. Kerry’s views echoed those of Australian Prime Minister Malcolm Turnbull who, after his own discussions with May, stated: “So as Britain leaves the EU, what we will need to do is negotiate direct arrangements with Britain … we need to get moving on that quickly.”

 

Eoin Treacy's view -

It’s an awfully big world out there. While the EU represents a powerful trading bloc and affluent internal market, the price of abiding by the rules necessary to gain access to it means that trade with much of the rest of the world needs to be ignored. By choosing to plot a new path the UK has the potential to revitalise the Commonwealth as a trade network in a way that has not been possible for decades. In fact that would be much more in keeping with the country’s global ambition and history as a major trading nation. 



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July 25 2016

Commentary by Eoin Treacy

Thought Leadership

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

The real problem I believe for the European Union is the banks. If we compare Bank of America stock performance leading up the credit crisis and Deutsche Bank stock performance from July 2013 through last week, we see a very similar situation where the performance is very stable, slightly appreciating and then a total collapse. Deutsche Bank has really accelerated to the downside, not at $14. When it gets into single digits you’re going to see a similar concern about the European baking system. We have seen talk from Italian officials about the need for a bailout and eve n from German officials saying there may be a EUR150 billion bailout required to get the German bank in order. The response to these banking insolvencies will probably be things that are bond unfriendly in terms of inflationary or fiscal pressure and will catch most people by surprise. It could completely change the game. 

The need for real stimulus in either bank bailouts , helicopter money or large fiscal stimulus will be deemed to be massive. And this will be a preferable solution, based upon negative interest rate experiments which have not worked. In fact they have produced the opposite of the desired effect. They have not helped stock markets and have weakened the currencies both the Yen and the Euro are stronger now than when their central banks first went negative. 

 

Eoin Treacy's view -

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

The European banking sector has not had the write downs that were such a prominent feature of the USA’s response to the credit crisis and as a result remain considerably weaker than might otherwise have been the case. The USA learned from the Savings & Loan crisis in the early 1990s that the cost of delaying the write-off and recapitalisation process multiplies the eventual cost rather than reduces it. Europe would appear to be experiencing a similar problem today. The question remains whether they will learn from it. 



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July 25 2016

Commentary by Eoin Treacy

Macro Morsels

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

Another important change in recent years involves the creation of municipal bond markets and the expansion of a debt swap program that allows localities to trade costly, fast-maturing outstanding loans for cheaper, slower-maturing bonds. The program reduces the risk of local government debt defaults in the near term by pushing back the maturity date for outstanding debts and lowering borrowing costs. In addition, it marks a first step toward giving local governments greater autonomy (and responsibility) over financing and making the process by which local governments raise capital more transparent and easier to measure.

Local governments in China pay for upward of 90 percent of all infrastructure construction while taking home a much smaller fraction of tax revenue. In the past, local governments covered the cost through a combination of land sales and loans taken out on their behalf by poorly regulated private entities called local government financing vehicles.

In 2015, after the rise of bond markets, local governments issued bonds worth 3.5 trillion yuan, nearly all of which took the form of debt swaps that cut local government interest payments by some 200 billion yuan, according to a government report released in March. The government plans to expand municipal bond issuance to as much as 6 trillion yuan by 2017 and 15 trillion yuan before 2020.

Neither those changes nor other ones underway in China's financial system amounting to the broad and ambitious reforms long promised by the country's leadership. These are tools for managing a crisis, not reconfiguring an economy. As such, they are sure to disappoint observers in and outside China who hoped that President Xi Jinping would move boldly to reduce the economy's dependence on the state. But given the scale of debt accumulated during the struggle to maintain macroeconomic stability in the past eight years, and considering the complex knot of political interests that exacerbated the excesses of that period, the financial tools and the policy approach they represent are reasonable and unsurprising. After all, their goal is not to produce a "rational" economy per se, but to preserve the state, even if doing so means accruing innumerable and perhaps insurmountable economic "irrationalities" in the meantime.

 

Eoin Treacy's view -

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

The stability of the economy and by extension, the stock market, remain both political and financial objectives of the Communist administration. Considering the ambitions China has on the international stage it is no exaggeration that domestic stability also has geopolitical characteristics. 



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July 22 2016

Commentary by Eoin Treacy

Hong Kong Bears Pile Record Short Bets on China Consumer Stocks

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

Chinese consumer stocks are in the cross- hairs of Hong Kong’s short-sellers.

Bearish bets on Tingyi (Cayman Islands) Holding Corp. and Want Want China Holdings Ltd. soared to record highs since May, data compiled by IHS Markit Ltd. show. The instant noodles and snacks manufacturers, together with sanitary-napkin maker Hengan International Ltd., make up three of the four most-shorted stocks on Hong Kong’s benchmark index. Hengan this month spun off its food business into a separately listed unit that’s down 27 percent from its first close through Thursday.

Bears are betting that China’s shift toward an economy driven by middle-class spending will leave some consumer stalwarts behind. Even after valuations on Tingyi and Want Want fell to all-time lows at the start of the year, the stocks are still too expensive as Internet retailing helps foreign brands grab market share in China, according to Ample Capital Ltd.

Shoppers are showing a preference for healthier food, UOB Kay Hian Holdings Ltd. says. “Consumers have been changing their pattern to more nutritional products so their business growth is declining,” said Johnson Hu, a Shanghai-based analyst at UOB Kay Hian. “We don’t see that changing in the foreseeable future.”

Short interest in Want Want and Tingyi has risen to 7.6 percent and 4.9 percent of their outstanding shares as of Tuesday, Markit data show. Bearish bets in Tingyi surged to a record level this month, and those in Want Want are close to all-time highs last seen in May. The average of similar wagers for the 50 Hang Seng Index members was about 1.3 percent.

 

Eoin Treacy's view -

The evolution of online retail has had a dramatic effect on the ability of bricks and mortar stores in North America and now that pattern is likely to be repeated elsewhere as the convenience of online shopping trumps the toil of driving and walking to a store only to have to carry home the goods afterwards. The additional fact that diabetes is a major problem in both China and India suggests the potential for concerted drives to eat healthier more nutritious foods is more likely than not. 



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July 22 2016

Commentary by Eoin Treacy

Apple Watch Sales Fall 55% in Second Quarter, IDC Report Says

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

Apple Inc. sold 1.6 million watches in the second quarter of this year, down from 3.6 million units a year earlier, IDC said. Global smartwatch sales fell 32 percent to 3.5 million units.

While Apple held on to its position as the industry leader, with 47 percent of the market, it was the only company in the top five to see a decline. Samsung Electronics Co. saw its market share more than double to 16 percent.

“Consumers have held off on smartwatch purchases since early 2016 in anticipation of a hardware refresh, and improvements in WatchOS are not expected until later this year, effectively stalling existing Apple Watch sales," IDC analyst Jitesh Ubrani wrote in the report. “Apple still maintains a significant lead in the market and unfortunately a decline for Apple leads to a decline in the entire market.”

Apple Watch is the company’s first new hardware product since the iPad’s 2010 debut and is a key part of Chief Executive Officer Tim Cook’s strategy to find new areas of growth as sales of the iPhone slow. Apple is expected to introduce an updated operating system and an Apple Watch 2 this fall, promising new features and better performance.

IDC said despite Apple’s sharp drop it expects growth in 2017, as continued development appeals to a broader market.

“Every vendor faces similar challenges related to fashion and functionality, and though we expect improvements next year, growth in the remainder of 2016 will likely be muted,” said Ubrani.

 

Eoin Treacy's view -

Smart watches can measure steps, constantly record heart rate, display text messages, alert us to incoming calls and act as payment mechanisms when we don’t have our wallets. While each of these functions might have been the preserve of a single company when they were debuted most providers now offer some variation on all of them. That suggests the premium price point commanded by Apple Watch isn’t justified not least as a widely expected reboot of the product is expected later this year. That is likely to at least include enhancements to battery life that might allow for some of the more ambitious health related apps to be introduced.



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July 22 2016

Commentary by Eoin Treacy

Fracklog in the Biggest U.S. Oil Field May All But Disappear

This article by Ryan Collins and Meenal Vamburkar for Bloomberg may be of interest to subscribers. Here is a section:

Crude in the $40- to $50-a-barrel range may wipe out most of the fracklog in Texas’s Permian Basin and as much as 70 percent of the inventory in its Eagle Ford play by the end of 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove. While bringing them online is the cheapest way of taking advantage of higher prices, the wave of new supply also threatens to kill the fragile recovery that oil and gas markets have seen so far this year.

“We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone,” Cosgrove said in an interview Thursday. “You’ll start to see U.S. production flat lining.”

Drillers that expanded operations in U.S. shale fields found that sidelining wells was the easiest way to cut costs when oil and gas prices plunged. Since then, these wells have been “just sitting around, basically waiting for a better price to come along,” said Het Shah, an analyst at Bloomberg New Energy Finance.

U.S. oil producers extended the biggest shale drilling revival since last summer as rigs targeting oil and gas in the U.S. rose by 7 to 447 last week, according to Baker Hughes Inc. Dave Lesar, chief executive officer of Halliburton Co., the world’s largest provider of hydraulic-fracturing work, said Wednesday that the market in North America has turned and that he expects a “modest uptick” in drilling in the second half of the year.

 

Eoin Treacy's view -

Unconventional wells are much more expensive than conventional wells but come with some interesting advantages that protect producers from volatility. They have very prolific early production rates which helps to quickly pay off the multi-million dollar cost of setting them up. They then enter a period of time when production falls precipitously. If prices are not high enough to invest in boosting production through fresh drilling then it drillers have the luxury of time as they wait for prices to recover, after all the oil isn’t going anywhere. 



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July 22 2016

Commentary by Eoin Treacy

Speech by Rabbi Lord Jonathan Sacks on Receiving the 2016 Templeton Prize

Thanks to a subscriber for this educative and common sense speech which may be of interest to subscribers. Here is a section:

There is, though, one form of outsourcing that tends to be little noticed: the outsourcing of memory. Our computers and smartphones have developed larger and larger memories, from kilobytes to megabytes to gigabytes, while our memories, and those of our children have got smaller and smaller.

In fact, why bother to remember anything these days if you can look it up in a microsecond on Google or Wikipedia?

But here, I think, we made a mistake. We confused history and memory, which are not the same thing at all. History is an answer to the question, “What happened?” Memory is an answer to the question, “Who am I?” History is about facts, memory is about identity. History is his-story. It happened to someone else, not me. Memory is my story, the past that made me who I am, of whose legacy I am the guardian for the sake of generations yet to come. Without memory, there is no identity. And without identity, we are mere dust on the surface of infinity.

Lacking memory we have forgotten one of the most important lessons to have emerged from the wars of religion in the sixteenth and seventeenth century and the new birth of freedom that followed. Even to say it sounds antiquarian but it is this: A free society is a moral achievement. Without self-restraint, without the capacity to defer the gratification of instinct, and without the habits of heart and deed that we call virtues, we will eventually lose our freedom.

That is what Locke meant when he contrasted liberty, the freedom to do what we ought, with licence, the freedom to do what we want. It’s what Adam Smith signalled when, before he wrote The Wealth of Nations, he wrote The Theory of Moral Sentiments. It’s what Washington meant when he said, "Human rights can only be assured among a virtuous people.” And Benjamin Franklin when he said, “Only a virtuous people are capable of freedom.” And Jefferson when he said, “A nation as a society forms a moral person, and every member of it is personally responsible for his society.”

 

Eoin Treacy's view -

Another killing, this time in Munich, is part of a litany of terrorist attacks which directly target civilians and expose the soft underbelly of European and US security. This tactic is taken straight from the terrorist playbook which is to keep control of the domestic population through strong arm tactics and instil fear in the target population through ferocious and seemingly random attacks. Liberal democracies in the West face an identity crisis and some means of addressing both internal and external challenges. The rise of populism is a direct response to this development not least since established parties have failed to so far address these issues. 



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July 21 2016

Commentary by David Fuller

Draghi Signals ECB May Boost Stimulus Later This Year

Here is the opening of this report from Bloomberg:

Mario Draghi signaled that the European Central Bank will consider adding fresh stimulus later this year when it has a clearer picture of the economic impact from the U.K.’s vote to leave the European Union.

“Over coming months, when we have more information including staff projections, we will be in a better position to assess the underlying macroeconomic conditions,” the ECB president told reporters in Frankfurt on Thursday after a meeting of the Governing Council. “If warranted to achieve its objective, the Governing Council will act by using all instruments available within its mandate.”

The risk for the euro area is that its recovery might prove too fragile to cope with any downturn in trade and investment as a consequence of the Brexit vote. Even so, after calming market volatility with pledges of liquidity, officials have bought themselves time to judge how much further they can push their unprecedented easing, especially in the absence of more support from government policies.

David Fuller's view -

This is another sobering assessment by the European Central Bank (ECB) president.  In mentioning Brexit, he also comments on the lack of both structural reforms and fiscal spending in the EU.  We have heard this before and Mario Draghi remains the prime source of stimulus within the EU, while frequently mentioning in previous discussions that the ECB’s efforts, on their own, are insufficient to revive GDP growth.  In the Audio within Bloomberg’s article above, Draghi also says: “Risks to the Euro area growth outlook remain tilted to the downside”.

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July 21 2016

Commentary by David Fuller

July 21 2016

Commentary by David Fuller

Can Republic of Turkey Survive Erdogan Purge?

Here is the opening of this sobering report by Bloomberg Business Week, posted without further comment:

On the afternoon of May 6 the Turkish journalist Can Dundar was speaking to a television reporter outside Istanbul’s Caglayan courthouse when he noticed a man with a mustache and a navy-blue windbreaker walking toward him, holding a handgun. Dundar (pronounced DOON-dar) is editor-in-chief of the newspaper Cumhuriyet, one of the few Turkish media outlets still openly critical of the government. He and Cumhuriyet colleague Erdem Gul were awaiting their sentences after a month’s long criminal trial. Dundar’s bodyguard had remained inside during the court’s recess. Seeing the gun, the TV reporter said, “Run.”

The man with the mustache fired two shots, shouting, “Traitor!” Dundar hopped to one side, his shoulders hunched, and ducked behind his interviewer, who moved to shelter him. Dundar’s wife, Dilek, grabbed the assailant’s right arm, and a parliamentarian who had been standing nearby bear-hugged the man from behind. Dundar ran a few steps off, then slowed and looked back. He was unscathed, though one bullet had grazed the leg of the TV reporter. Seconds later the attacker was kneeling, with the guns of three plainclothes police officers and the cameras of more than a dozen TV crews trained on him. Then Dundar and Gul went back into the courthouse to receive their sentences: five years in prison for Gul, five years and 10 months for Dundar. (They remain free while their case is on appeal.)

A trim man with a broad face and a springy mane of gray hair, Dundar, 55, becameCumhuriyet’s editor-in-chief in February 2015. His conviction this May—Dundar says he’s the defendant in so many concurrent cases he’s all but lost track—was the result of a story he published a year earlier detailing how Turkey’s national intelligence agency smuggled weapons into neighboring Syria, most likely for Islamic rebels fighting the forces of President Bashar al-Assad. After the story came out, Turkey’s president and former prime minister, Recep Tayyip Erdogan, went on television and promised that the parties responsible for the story “will pay a heavy price.” Six months later, Dundar and Gul were charged with aiding a terrorist organization, attempting to overthrow the government, espionage, and revealing state secrets. So far, the two have been convicted only of the last offense. They’ve already spent three months in pretrial detention, inhabiting adjoining cells in Istanbul’s Silivri Prison until Turkey’s constitutional court ordered their release.

Turkey has never had a truly free press. It has a long tradition of censorship, especially around the combustible politics of its religious and ethnic minorities. And that was before the bloody coup attempt of Friday, July 15, which began with fighter jets buzzing Ankara and military units in Istanbul closing both bridges across the Bosporus. Battles among civilians, police officers, and soldiers left 290 dead and 1,400 wounded. The putsch also showcased the courage of Turkish journalists: The staff at CNN Turk defied a helicopter full of putschist soldiers who showed up to take over their studios, and a photographer for the pro-government daily Yeni Safak was shot dead in the street.

David Fuller's view -

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July 21 2016

Commentary by David Fuller

Email of the day

On Brexit and 'the Osborne pivot':

Dear David I thought this was a rather good article. It's fascinating to now hear so many who threatened they would leave the UK now sounding a different tune after Brexit is now a reality. Maybe we could call it 'the Osborne pivot'. I hope someone soon publishes an even more detailed account of the costs for businesses in the EU centres vying to steal UK business. Let's have a detailed comparison of labour laws, employment costs to companies, taxes to individuals, limitation on earnings and bonuses, corporation tax, inability of companies to let staff go etc etc. The reality is beginning to strike home!

David Fuller's view -

Thank you for this good article by Paul Blanchard, with which many of us will agree, and I like 'the Osborne pivot'.

How we fare, as I have said before, depends on top-down governance in the UK.  We are very fortunate to have Theresa May at the helm and the Conservatives in charge for the next several years, because there will be plenty to do.  We do not need a Lib/Dem coalition or any variation of Labour trying to emulate the EU’s ‘progressive socialism’. 

I wish Europe well but the EU has yet to prove that it can save itself.  



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July 21 2016

Commentary by Eoin Treacy

Email of the day on Chinese international acquisitions

Have a look at this deal:    

My son is COO of this business.  Keith is 35 years of age with a PhD in Molecular Biology plus a number of years at Merrill Lynch.

I understand the sale price was very sweet. Seems to be yet another example of many eager buyers when "money has no cost". I am told the Chinese are eager to access Genesis IP. The buyers are also discussing ambitious new business targets for Genesis going forward.  I understand these new business opportunities have already been identified.    

This deal is not one of our Prime Minister's new sexy IT business opportunities.  A message our PM incessantly preaches to the electorate. Perhaps our PM should stop trying to pick winners. There are many areas of the local economy where Australia demonstrates very competitive global business skills.  This includes but is not exclusive to medical services. Sadly this message from our business leaders has been repeatedly and firmly ignored by both the Canberra bureaucracy and our nation's political elite.

 

Eoin Treacy's view -

Thank you for this email and congratulations to your son on playing a pivotal role in such a successful company. I agree we would likely all be better off if politicians left running companies to the companies themselves rather than assuming they have specialist knowledge in areas they have no experience of. 



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July 21 2016

Commentary by Eoin Treacy

Komatsu Signals Mining Optimism in $2.9 Billion Joy Takeover

This article by Simon Casey, Masumi Suga and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

The deal creates a competitive landscape with two matching global peers, Stephen Volkmann, a New York-based analyst at Jefferies LLC, said Thursday by phone.

“This deal allows Komatsu to compete toe-to-toe everywhere with Caterpillar,” Volkmann said. “There’s just two major players and each one basically does everything.”

Joy is the largest independent maker of underground-mining equipment and has long been viewed as a potential target for Komatsu, which manufactures dump trucks and large excavators for companies such as Rio Tinto Group. Komatsu looked at Joy as recently as 2012 but rejected a deal after concluding there were few cost savings.

Conditions in the mining industry have deteriorated since then. Tumbling metal and coal prices spurred producers to cancel projects and rein in spending, reducing demand for everything from underground tunneling kit for copper mining to big shovels used to extract coal. Joy has posted a net loss in each of the last three quarters and its share price is down by more than half over the last five years.

The pullback contrasts with the mining-machinery industry’s boom during 2000-2010 on the back of surging commodity prices.

Back then, miners complained of shortages and long lead times to secure equipment. Companies such as Joy were able to raise prices, benefiting from both increased demand and higher margins.

 

Eoin Treacy's view -

Low interest rates and the potential for additional monetary stimulus have boosted M&A activity right around the globe and with rebounding commodity prices the resources sector is ripe for similar activity. 

Komatsu’s takeover of Joy Global is opportunistic but gives it the potential to compete in sectors that were not previously open to it. Whether it is successful will depend largely on the continued relative strength of the commodity sector. 



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July 21 2016

Commentary by Eoin Treacy

Started from the Bottom Now We're Here

Thanks to a subscriber for this report from Clarus Securities. Here is a section: 

POSITIONING FOR BETTER PRICES: We are of the opinion that we have seen the worst of both the crude oil and natural gas markets and that prices should further improve as we enter 2017. We are currently forecasting ~US$50/bbl WTI for H2/16, which is a level where most producers fail to grow on a per share basis. In our updated growth tracker, we now expect average production per share to decline by 8% (-12% growth on a median basis); this compares to our estimates of -3% (median -8%) and 5% (median -3%) during Q2/16 and Q1/16, respectively. The decline in per share growth has been a result of dispositions to reduce debt, equity financings without concurrent M&A, or some combination thereof. Ultimately, only a few select companies are able to generate consistent per share growth. Most are natural gas operators but some oil-weighted names, chiefly RRX and SPE, continue to grow on a per share basis. 

IMPLIED OIL PRICES: Despite the ~US$5/bbl pullback in WTI prices, there has not been panic selling of the equities. This benign response is attributed to the belief that the worst is behind us and that any weakness in oil prices will be short lived. However, with equities not pulling back, it is important to estimate the implied oil price by name. We looked at each company’s historical multiple relative to its current trading level in order to back out the oil price needed. Based on our analysis, very few names are pricing in US$50/bbl oil, with most between US$55/bbl and US$65/bbl. Companies with cheaper implied pricing generally possessed higher than average debt, which weighed on valuation. 

IMPLIED GAS PRICES: Using the same methodology with the gas weighted names results in implied prices mostly ranging between $2.25/mcf to $3.50/mcf. The valuation for the gas names is generally a bit more difficult to assess because some producers are promising very high rates of growth which may be difficult to achieve (versus oil producers, where growth profiles are much lower and more manageable). Regardless, we see some opportunities for investors who are bullish on natural gas going into H2/16.

 

Eoin Treacy's view -

Optimism about a recovery in oil prices has improved following an almost 100% rally since January. This is despite the fact higher prices ensure a great deal of marginal production is now approaching economic viability. At the lows it was difficult to impress upon anyone that a rally was possible. Now that marginal supply can once more be produced economically many analysts anticipate additional upside. 



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July 20 2016

Commentary by David Fuller

The Future of Big Oil? At Shell, It Is Not Oil

Here is the opening of this interesting article from Bloomberg:

At Australia’s Curtis Island, you can see Big Oil morphing into Big Gas. Just off the continent’s rugged northeastern coast lies a 667-acre liquefied natural gas (LNG) terminal owned by Royal Dutch Shell, an engineering feat of staggering complexity. Gas from more than 2,500 wells travels hundreds of miles by pipeline to the island, where it’s chilled and pumped into 10-story-high tanks before being loaded onto massive ships. “We’re more a gas company than an oil company,” says Ben van Beurden, Shell’s chief executive officer. “If you have to place bets, which we have to, I’d rather place them there.”

Van Beurden is betting on gas projects such as Curtis Island to address the central challenge facing all oil giants: how to survive in a world moving ever faster toward new ways of producing and consuming energy. A crucial element of Shell’s pivot toward gas was its $54 billion takeover of BG Group. The deal, which closed in February, gave the company Curtis Island, other massive LNG plants, and gas fields from the U.S. to Kazakhstan. It now has a 20 percent share of the global LNG market, scores of giant gas tankers prowling the seas, and double the production capacity of its closest competitor, ExxonMobil.

David Fuller's view -

People of my generation grew up with the seemingly secure ‘miracle’ of cheap and abundantly available crude oil.  However, from the mid-1970s onwards this vision faded into increasing anxiety over finite resources which were rapidly being depleted.  We were told by visionaries, energy experts, scientists, religious leaders, political parties and national governments that we faced a grim future in which the lights would go out against a background of declining GDP growth and economic collapse.  These views were still widely held beyond the turn of the century.    

This 20th century version of Malthusian catastrophe theory is no longer credible today, thanks to our accelerating rate of technological innovation which is arguably mankind’s greatest achievement. 

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July 20 2016

Commentary by David Fuller

Email of the day 1

On George Osborne and pensions:

Dear David Re: George Osborne Whatever else you may think about him, I and many others will be eternally grateful to him for abolishing the compulsory purchase of annuities at age 75. In 1998, when he was Shadow Chancellor, I wrote to him asking what his view was about compulsory purchase. I received a courteous reply saying it was his intention to abolish the requirement, which of course he did shortly after coming into office and just in time for my 75th birthday ! I wrote a similar letter to the then Chancellor, Ed Balls, and got no reply. But in a later speech he scornfully referred to it as a problem that only concerned "a few rich people" ( his exact words ) !

David Fuller's view -

Well, you are certainly one of my heroes for having had the foresight to write to George Osborne in 1998.  Many of our generation remember worrying about the insanity of compulsory purchase of annuities at the age of 75.  His reply was gracious and Labour Shadow Chancellor at the time, Ed Balls, replied in a manner all too familiar.  



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July 20 2016

Commentary by David Fuller

Email of the day 2

On a missing PDF for Tuesday’s leader:

In yesterday's copy, the lead article on IMF growth forecast doesn't have the link to the full article mentioned by David in his opening comment. Is it possible to send it to me?

Many thanks.

David Fuller's view -

My apologies, and thanks for letting me know.  The PDF for Tuesday’s leader article from The Telegraph has now been posted.



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July 20 2016

Commentary by David Fuller

Britain Needs A Can-Do Attitude revolution, With Solutions Rather Than Whining

The challenge for the optimists is to reunite the two Britains. They need to inspire and assuage the angry Remainers, showing all but the most die-hard that the future can be rosy; and they must reach out to those Leavers who feel that they haven’t benefited enough from globalisation.

All groups in society have a responsibility to take part in this project to rebuild Britain for a post-Brexit 21st century. Entrepreneurs and firms need to propose the reforms they believe are required to allow our economy to prosper outside of the EU: we need to hear solutions, not whining, from business. The same is true of other professionals, from university administrators to architects to the police forces, as well as from the charitable sector. Britain needs a “can‑do” revolution, with as many positive ideas as possible from all quarters and perspectives. The question is no longer whether or not to Brexit – it’s how to make it work as well as possible for the whole country.

The Government, for its part, needs to unveil a three-fold programme to woo the sceptics. The first pledge should be to turn Britain into the nation that is the most open to trade of any Western economy in five years’ time. To reach this target, the Government would seek to limit the reimposition of tariff or non-tariff barriers with the EU, while urgently pursuing as many free-trade deals as possible with faster-growing economies worldwide.

The second pledge should be to make the UK the most entrepreneur-friendly country in the West by 2020. This would include tearing up red tape, cutting tax, making it easy for tech firms to continue to hire skilled migrant talent, and encouraging universities to become incubators for start-ups.

Last but not least, the Government should make an explicit promise to Britain’s poorer groups and regions that their opportunities will drastically improve. The free school programme should be turbo-charged by allowing for-profit companies to open new ones, starting in the north of England and Wales before being rolled out nationally; new selective schools should be opened, as part of an extension of parent choice; much more land should be made available for building in the south of England; and expensive green energy rules should be ditched. Britain is also in desperate need of several low-tax, low-regulation new enterprise zones near universities in poor parts of the North and Wales, with a vision and management structure similar to London’s Canary Wharf.

David Fuller's view -

Governance is Everything, as this service never tires of saying.  Britain is fortunate to have a Prime Minister as intelligent, experienced and increasingly respected as Theresa May.  There are also plenty of other successful leaders, some in Parliament and many more from all professions and backgrounds across the country.  Britain has a proud history of entrepreneurial spirit and will relish the independence that Brexit promises.   There is no external obstacle in the path of this country’s future success.

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



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July 20 2016

Commentary by Eoin Treacy

Brazil Real's Volatility Falls to One-Year Low on Temer Optimism

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

Volatility in Brazil’s real dropped to the lowest level in a year as the central bank acts to limit gains in the world’s best-performing currency amid speculation that a new government will pull the nation from its deepest recession in a century.

Three-month implied volatility on the real declined 0.05 percentage point to 16.78 percent, the lowest level since July 22, 2015, at 12:25 p.m. in Sao Paulo. The currency advanced 0.3 percent to 3.2393 per dollar.

Brazilian assets have led gains globally this year amid speculation that Acting President Michel Temer will trim a budget deficit, end credit-rating downgrades and restore confidence. Concern that the currency’s rally would hamper exports at a time when Latin America’s largest economy already faces its worst recession in a century has led the central bank to sell almost $50 billion of reverse swaps to stem gains. While the offerings are unlikely to change the direction of the real, they can mute volatility, Morgan Stanley strategists led by Gordian Kemen wrote in a report published last week.

“The domestic reform narrative in Brazil is an important qualifier for the currency and for the decrease in its volatility," said Mike Moran, the head of economic research for the Americas at Standard Chartered Plc in New York.

Eoin Treacy's view -

The Brazilian Real is the best performing currency this year; gaining over 30% year to date. The chronic mismanagement of the economy that prevailed under Dilma Rousseff’s administration is now in the past and the new government has the opportunity to introduce unpalatable reforms early in its tenure so that it might benefit from the results by the time the next election needs to be called. Whether that eventually translates into improving governance and a sustained reduction in corruption and graft is an altogether different question, but we can conclude that at least for now governance is improving from a low base.

 



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July 20 2016

Commentary by Eoin Treacy

TerraForm Global Rises amid Talks with SunEdison to Sell Stake

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

TerraForm Global and SunEdison are in talks regarding “a jointly managed sales process and accompanying protocol for managing the marketing process,” according to a presentation posted on TerraForm Global’s website Tuesday. SunEdison is currently involved in the biggest ever sale of clean energy assets after filing for bankruptcy protection in April with $16.1 billion in liabilities. It has not announced a process for selling its controlling stake in TerraForm Global or its sister yieldco TerraForm Power Inc.

TerraForm Global, a yield company formed by SunEdison to buy clean power plants built by SunEdison outside of the U.S., owns 917 megawatts of solar and wind energy plants, mostly in southeast Asia and South America. The company had revenue of as much as $52 million in the first quarter, according to the presentation.

It also reported preliminary losses of as much as $350 million for the second half of last year, and a preliminary loss of as much as $8 million for the first quarter of this year.

TerraForm Global has not filed results since the third quarter because it relies on SunEdison for some accounting systems, and the parent company’s results are also delinquent.

Eoin Treacy's view -

Financial engineering contributed to SunEdison’s demise because it divested itself of income producing assets while holding onto liabilities. That worked fine while oil prices were high, demand for solar plants was surging and credit was easy to come by. The decline in oil, natural gas and particularly coal prices questioned the profitability of solar plants and the share collapsed. 



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July 20 2016

Commentary by Eoin Treacy

Email of the day on the Dollar and Yen

I very much enjoyed last Friday's and yesterday's audio recordings. I think too that we are close to entering the final phase for this bull run notwithstanding a potential pull-back first. The expected further liquidity injections by the global central banks has intensified the hunt for yield. Emerging markets should do well as they offer both yield and the potential for large capital gains. Incidentally, if as David suggests, the $ index (developed markets) rises towards 100 again, will the EM currencies also weaken? Or as they have already fallen substantially in recent years, the dollar's rise against the developed market currencies will not impact EMs much? Your thoughts would be appreciated. I'm also interested in your views on $/Yen on a medium term basis.

 

Eoin Treacy's view -

Thank you for your kind words and I agree the strength of the Dollar is a major consideration in assessing the outlook for global markets.

It is worth considering that the Dollar Index is composed of Euro (57%), Yen (13.6%) and Pound (11.9%), none of which one is likely to consider a strong currency at present. 



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July 20 2016

Commentary by Eoin Treacy

July 20 2016

Commentary by Eoin Treacy

Email of the day on acronyms

I am a pre-subscriber, but wish to raise a point which I am sure will resonate with at least some of your regular subscribers. I get very frustrated when a jargon acronym is used in an article, and I cannot fathom out what it stands for. I don't really wish to be subjected to an IQ test (it is too embarrassing!). I realise that this is a topic that applies to financial and commercial sites generally, but as a highly-enlightened example of the genre, Fuller Treacy Money might be prepared to make some adjustments in this direction?! A recent example was AR, in an article extract on the latest video-gaming technology. It has me stumped. Perhaps a glossary might be provided? (I realise this would be (rightly) inaccessible to pre-subscribers). I remember in a "communications course" many years ago being told we should never ASSUME (prior knowledge in an audience or listener), as it makes an "ass" of "u" and "me"! (Please forgive the u/c, as it seems as if I am shouting - but I do not have the luxury of using italics for emphasis.) I have been reminded of that on so many occasions since. I am a private tutor, and it is very relevant in that area of work.

Eoin Treacy's view -

Thank you for this note and we take a great deal of care to avoid acronyms in our own copy for exactly the reasons you outline. I hope you will understand that we post snippets from a wide variety of both institutional and retail sources and have no control over how they impart their information. Composing a glossary of all acronyms is beyond our capability I’m afraid but in this case AR stands for augmented reality while VR is virtual reality. 

 



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July 19 2016

Commentary by David Fuller

IMF Slashes UK Growth Forecasts After Brexit but Britain Will Still Outstrip Germany, France and Italy

Here is the opening of this topical article by Peter Spence for the Daily Telegraph: 

The International Monetary Fund (IMF) has slashed its forecasts for UK growth following the vote to leave the European Union, yet the British economy is still expected to grow faster than that of Germany, France and Italy next year.

UK GDP growth is now expected to slow to 1.3pc in 2017, some 0.9 percentage points below what had been pencilled in in the IMF's previous round of forecasts. With the exception of Nigeria, the UK’s 2017 growth forecast received the sharpest downgrade of any of the 16 economies assessed by the IMF.

Maury Obstfeld, the IMF’s chief economist, said that the UK’s decision to withdraw from the EU had added “downward pressure to the world economy at a time when growth has been slow”.

He said that “the direct effects specifically due to Brexit are greatest in Europe, especially the UK”.

Despite the downgrade, economic growth in Britain will still outstrip Germany and France, whose economies are expected to expand by 1.2pc next year. The UK will also beat Italy, where GDP is forecast to rise just 1pc.

The figures were part of a wider IMF report on the global economy. The fund's economists said the result of the EU referendum would contribute to slower global growth both this year and next. Economists now anticipate world GDP growth of 3.1pc this year, and 3.4pc in 2017, having shaved 0.1 percentage points off both estimates.

David Fuller's view -

IMF forecasts have the virtue of being frequently revised.  Nevertheless, this opening premise above makes sense to me.

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



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July 19 2016

Commentary by David Fuller

Email of the day 1

On George Osborne:

I agree with you David. It's easy today in this relatively benign environment to forget how it felt in 2010. The bond market was waiting: if Gordon Brown had been elected I strongly suspect that UK government debt would have been a 'sell' on a huge scale. The ramifications for government spending, for debt, for interest rates and the pound would have been devastating. The economy was on the edge and George Osborne's reassuring words (perhaps as much as his actions) stabilised the country and prevented economic disaster. What a pity he threatened so foolishly over Brexit. A reputation ruined.

David Fuller's view -

Yes, I will remember George Osborne as an excellent Chancellor until he let political ambition blind him during the Brexit debate. However, politics at the top is a difficult, stressful occupation and so many go a bit mad towards the end. I wish Osborne well but am happy to have a new Chancellor.



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July 19 2016

Commentary by David Fuller

Email of the day 2

On the ways to invest in gold:

Just to add to David's comment, bullion can be held and traded conveniently through Bullionvault which provides allocated and audited bullion held in a choice of locations around the world. This is 'physical' gold but able to be traded in small quantities electronically around the clock. I have used the service for a number of years but obviously do your own due diligence.

David Fuller's view -

Thank you.  This is a welcome addition to what I wrote yesterday.



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July 19 2016

Commentary by David Fuller

Email of the day 3

On the sale of ARM Holdings:

As a local Cambridge 'hi-tech' person I am sad this has happened. But I do fully agree with you David that intervention to prevent the sale would be a huge step in the wrong direction for the UK. There is a constant discussion in the Cambridge Cluster between those who want us to build large world-champion companies and those who are OK with sell-outs and recycling of the proceeds to fund new start-ups. It's a difficult one. On balance though I am with the 'sell and recycle' side of the argument. A couple of experiences persuade me in this direction. Cambridge was about the only place in the UK to barely notice the 2007-9 financial crisis. We had full employment throughout and only one local shop closed down (Borders). At the research campus I chaired at that time we pruned our budget in preparation for losing a number of start-up companies during the downturn, but it did not happen, they sailed through.There are no large private employers here in Cambridge (though we have two large public funded employers, the University and the local council). With no large companies in financial trouble there were no large lay-offs. Yes, small small start-ups do fail but with the critical mass of SMEs and skilled people that we have here in Cambridge it is relatively easy for employees to find another start-up newly funded and looking for staff. Some of the proceeds from sale of ARM will serve the same function now. Another experience that showed me the relative stability of the SME model over large employers was a decade of consulting work for the EU on hi-tech businesses. Under one contract we analysed 16 hi-tech clusters around the world, and advised on the Critical Success Factors. Presence of large companies was not one of them . Neither was protecting national companies from sale to over-seas buyers. Finally, isn't it true that the whole direction of our new industrial revolution is towards smaller more fluid companies and innovation driven by recycling of skilled and experienced people between companies rather than locking them up in behemoths all their career?

David Fuller's view -

Thank you very much for these insights which I am sure are of interest to many of us.

I will just follow up here some of what I mentioned yesterday: I think where ARM Holdings operates is more important than who owns it.  It is not being moved and is unlikely to be raided.  Instead, ARM will remain in Cambridge and with a promise from SoftBank to introduce potential business contracts and increase the number of engineers employed over the next five years.  If so, that should be good for ARM and good for Cambridge.   



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July 19 2016

Commentary by Eoin Treacy

Ireland Hits Brexit Alarm in Biggest Foreign Crisis in 50 Years

This article by Dara Doyle and Marc Champion may be of interest to subscribers. Here is a section: 

Sensing a shock, the head of IDA Ireland, the state agency charged with winning investment, returned to Dublin from New York a day early. During the flight, he sent a steward to the cockpit to check the emerging results. Before the vote, the IDA had pitched Ireland to companies including Standard Chartered Plc. Within hours of the result, the agency contacted thousands off clients, Shanahan said. “We were well prepared,” he said.

The plan now is for an advertising drive in Europe and the U.S. to underline Ireland’s advantages. Yet, even that’s not straightforward. The U.K.’s withdrawal from the EU could eat away one of Ireland’s key advantages for overseas investors -- it’s 12.5 percent corporate tax rate. A 15 percent rate in the U.K. has been mooted by the government to help offset the economic impact of Brexit.

Elsewhere, too, the loss of a key member of what one Irish official calls the “Northern liberal club” will be felt keenly. The U.K. and Ireland have led opposition to EU efforts to harmonize tax laws.

 

Eoin Treacy's view -

When pitching the country as an investment destination, Ireland’s development authority leads with the argument that not only do multinational corporations get access to an English speaking educated workforce, but they can also avail of the one of the lowest corporate tax rates in Europe. The prospect of the UK adopting a similar rate represents a significant threat to that model not least if it succeeds in negotiating a relationship similar to Norway’s with the EU. 



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July 19 2016

Commentary by Eoin Treacy

The Singapore Fix

This report from Maybank may be of interest to subscribers. Here is a section: 

Too much property; curbs could turn permanent 
Unless property prices plunge suddenly and dramatically, we think that property-cooling measures may not be lifted. Singapore households have SGD840b of capital or 209% of GDP tied up in residential property. This has resulted in lower disposable income which has impeded consumer spending and muzzled entrepreneurship. Another less obvious implication of property “overinvestment” is that home-price appreciation fuels wage inflation, reducing Singapore’s cost competitiveness. We think turning property-cooling measures permanent could be an effective way to steer investments away from this asset class to more productive uses in the long run, which may be what the government is contemplating. As this would put developers at the losing end, we turn less bullish on the residential property sector and downgrade it to NEUTRAL. Wing Tai and CityDev are most exposed to Singapore’s residential market. Additionally, given the knock-on effects on loan demand, continue to sell banks, which are already grappling with asset-impairment risks and likely fewer lending opportunities. OCBC and DBS are least preferred. 

Wage pressures: we think government will step in 
Short-term relief to wage pressures is required, in our view, as wage growth has outpaced productivity gains. Wages now hit 43.4% of GDP. Historically, such levels preceded a recession, as in 1985, 1997 and 2000. Without intervention, retrenchments could rise. Although cutting CPF rates can offer a direct reprieve, it runs counter to concerns about retirement financial security and may be politically unpalatable. We think that the ideal solution may be for the government to co-pay wages and increase social spending. Businesses could receive a shot in the arm, especially those with high labour content. 

Boost consumption! 
At 37% of GDP, Singapore’s household consumption is one of the lowest among developed countries. What’s more, it has been declining. If a diversion away from property investments and wage relief are successful, we foresee a consumption boost. Such domestic-led growth should be more desirable amid rising anti-globalisation sentiment in parts of the world. Consumer staples could offer the best exposure to this, we believe. We recommend Sheng Siong.

Eoin Treacy's view -

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

Singapore has seen living costs rise precipitously over the last decade with the result the island economy has seen its competitiveness come under pressure. Enhancing standards of living has allowed the PAP to stay in power since 1959 because it has not shied away from central planning supported by world class management of public resources. It will need to continue to deliver on succeeding in making tough decisions that deliver long-term positive results if its record is to be sustained through what is a difficult environment for its major trading partners. 



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July 19 2016

Commentary by Eoin Treacy

Poorer than their parents? A new perspective on income inequality

Thanks to a subscriber for this article by Richard Dobbs and colleagues at McKinsey. Here is a section:

The economic and social impact is potentially corrosive. A survey we conducted as part of our research found that a significant number of those whose incomes have not been advancing are losing faith in aspects of the global economic system. Nearly one-third of those who are not advancing said they think their children will also advance more slowly in the future, and they expressed negative opinions about free trade and immigration.

If the low economic growth of the past decade continues, the proportion of households in income segments with flat or falling incomes could rise as high as 70 to 80 percent over the next decade. Even if economic growth accelerates, the issue will not go away: the proportion of households affected would decrease, to between about 10 and 20 percent—but that share could double if the growth is accompanied by a rapid uptake of workplace automation.

The encouraging news is that it is possible to reduce the number of people not advancing. Labor-market practices can make a difference, as can government taxes and transfers—although the latter may not be sustainable at a time when many governments have high debt levels. For example, in Sweden, where the government intervened to preserve jobs during the global downturn, market incomes fell or were flat for only 20 percent of households, while disposable income advanced for almost everyone. In the United States, lower tax rates and higher transfers turned a decline in market incomes for four-fifths of income segments into an increase in disposable income for nearly all households. Efforts such as these—along with additional measures such as encouraging business leaders to adopt long-term thinking—can make a real difference. The trend of flat and falling real incomes merits bold measures on the part of government and business alike.

 

Eoin Treacy's view -

With so many voters, internationally, expressing dissatisfaction with the economy and their role within it, there is already evidence this is going to become an election issue in almost all upcoming elections whether in the USA or Europe. 

The populist answer to inequality is to support protectionism and there are already signs of electorate unease with additional international trade harmonisation. However despite likely support for protectionism the march of automation means these types of policies are unlikely to result in significant additional jobs in developed economies. It is no exaggeration that China and other Asian counties are engaged in the equivalent of an arms race to boost automation in order to make sure the jobs that moved there in search of lower labour costs stay there as wages rise. 

 



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July 18 2016

Commentary by David Fuller

ARM Sale Shows the Limits of British Patriotism

Anyone who cares about Europe's technology scene will be sad to see ARM Holdings become a unit of Japanese conglomerate SoftBank.

As for the U.K., it seems odd (to put it mildly) that it appears content to cede control of arguably its lone tech champion, a week after new prime minister Theresa May professed her distaste for foreign takeovers of science-rich British companies. True, it's hard to characterize SoftBank as a wicked asset stripper in the vein of U.S. drugmaker Pfizer. The Japanese have promised to keep the headquarters in Cambridge and double the number of British jobs over five years.

But it's hard to swallow the spin about this showing a Britain that remains open to business after last month's cataclysmic Brexit vote. As Gadfly colleague Chris Hughes predicted before the vote, ARM has been put in reach of overseas purchasers precisely because the post-vote sterling slump makes expensive deals look slightly less forbidding. SoftBank may well end up a benign owner with no need for dreaded synergies, but future investment decisions will probably be made in Japan, not the U.K.

And if you ever wanted an example of the kind of brains-heavy British success story that May seemed to have in mind, ARM would be tough to match. Although tiny compared to U.S. or Asian tech rivals, it's a symbol of how Europe can compete against bigger, better funded players. Born in the early 1990s, it crafted a smart business model that relies on the intellectual brilliance of about 4,000 engineers to come up with chip designs that are licensed to makers of smartphones, tablets and other gadgets.

David Fuller's view -

As with marriage, one seldom knows in advance how a takeover or merger will work out over time.  However, I think this article is overly pessimistic and any thought of rejecting Masayoshi Sone of SoftBank’s offer would reflect a type of patriotism I do not favour.

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



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July 18 2016

Commentary by David Fuller

Email of the day 1

On the best way to hold gold in the UK:

David / Eoin 

I trust you are both well. Thank you very much for an excellent and insightful service. 

I should appreciate your assistance.  What in your view is the best way to hold gold, in the UK, for the medium to longer term other than physically or on IG Index? Your insight into this would be much appreciated.

Kind regards

David Fuller's view -

Thanks for your kind words and a question of general interest.

This item continues in the Subscriber’s Area.



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July 18 2016

Commentary by David Fuller

Email of the day 2

On UK defence capabilities and Brexit:

Dear David,

Interestingly, at a 50th birthday party a month or so before the referendum, I asked a group of fathers with whom I was chatting, whether, on a percentage scale, they thought their children would have any chance of being ‘called up’ to serve in the defence of their country. To a man they said ‘0%’… not 5% or 8%, but 0%... that, to me, was staggering. None of them have any military background, are professional, successful and, in my view, hugely complacent. If nothing else, history teaches us that these things are cyclical. There are many renegade leaders and renegade ideologies in the world today, while our defence capabilities have never been so weak. Do I sound like a rabid nationalist? I hope not.

As an aside, I voted ‘Out’. To me, it’s about democracy and sovereignty.

Best wishes,

David Fuller's view -

I hope your friends are right but I agree with you.  We need to upgrade Trident, with USA help, and also modernise and increased the size of our conventional armed forces.  I believe Mrs May is committed to this. 

Re Brexit, I agree and the most important issue for me, was whether we should continue on the journey to a single European state, or return to self-government.
 



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July 18 2016

Commentary by David Fuller

Will Osborne Success Remain Clouded By His Obsession With Cutting the Deficit?

Here is the opening of this topical column by Roger Bootle, published by The Telegraph:

I hadn’t expected to be assessing George Osborne’s legacy quite so soon. But, to put it mildly, the past week has been full of surprises. To give him his due, Mr Osborne began with a pretty awful inheritance. The economy had been sent into the worst recession since the 1930s by the financial crash and subsequent global meltdown.

Although the previous Labour government had announced plans to reduce the deficit, when Mr Osborne took over as chancellor in 2010, it was running at over 10pc of GDP. Moreover, there was no sign of economic recovery on the horizon.

During his six years in office, the deficit has come down to 4pc of GDP, the economy has recovered and 2.4m jobs have been created. All in all, that is a pretty robust achievement.

Over and above this, Mr Osborne made serious strides in reducing corporation tax. Moreover, when a shortage of funds precluded large immediate reductions, he made some impact by pre-announcing future reductions. He even continued with this policy in his last few days as chancellor after the Brexit vote suggested the corporate sector might need some reassurance.

But there was no equivalent achievement on personal taxation. Admittedly, he took many low earners out of tax altogether, but this was paid for by increased taxes on people with higher incomes. And although he reduced the top 50p rate of tax to 45p, Mr Osborne continued with this 45p rate which, for a Conservative chancellor, should be an abomination.

More importantly, he did nothing to hold out hope for much lower personal taxation across the board, and nothing to simplify the tax system, nor to facilitate the long-overdue fusing of income tax and national insurance. If a chancellor is serious about doing the latter, he has to have a long-term plan for personal tax, and not just for the deficit.

Overall, despite his achievements on the deficit and corporate tax, I doubt whether history will deliver a particularly favourable judgement on Mr Osborne. All chancellors face a mixture of duties, temptations and distractions. The role naturally involves quite a bit of theatre and is inherently deeply political. Yet the great chancellors have concentrated on the detailed slog and the agenda for reform. The records of four successful Conservative chancellors – Howe, Lawson, Lamont and Clarke – provide a guide and a yardstick.

The greatest defect of Mr Osborne’s chancellorship was his excessive involvement in politics and his devotion to issues concerning the management of the government and his own future.

David Fuller's view -

I thought George Osborne was an outstanding Chancellor until the Brexit debate, when he allowed his personal ambition turn him into a bullying alarmist.  His wild forecasts have done the economy no favours in the short to medium term and cost him his political career. 

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



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July 18 2016

Commentary by Eoin Treacy

US shale is lowest cost oil prospect

Thanks to a subscriber for this article by Ed Crooks from the Financial Times which may be of interest. Here is a section: 

US shale regions that two years ago were in the middle of the cost curve for future oil supplies are now down towards the lower end.

Investments in the Eagle Ford shale of south Texas on average need a Brent crude price of $48 a barrel to break even, on Wood Mackenzie’s calculations, while projects in the Wolfcamp formation in the Permian Basin in west Texas need $39.

“There are more opportunities to invest in the US, and that’s where the investment will take place,” said Mr Flowers.

“If your investment options are in deep water, you’ve got quite a task on your hands. You might be asking: ‘Should we be getting into tight [shale] oil?’”

Brent was trading at $47.59 per barrel on Wednesday.

US companies that have shale oil reserves, including Chevron and ExxonMobil, have stressed the flexibility of those assets, which are developed with many wells costing a few million dollars each, rather than the multibillion dollar projects often required for offshore production.

On Wood Mackenzie’s calculations, Brazil’s deepwater oilfields are so large that some will be commercially viable, but higher cost regions could struggle to attract investment.

The number of large projects being given the go ahead by oil and gas companies averaged 40 a year between 2007 and 2013 but dropped to just eight last year, according to Angus Rodger, also of Wood Mackenzie. 

 

Eoin Treacy's view -

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

Anyone who has ever bought a boat knows how expensive it is to run any operation on the sea versus on land. The USA has a major advantage in the fact that shale and tight oil is domestic and land based rather than in the deep water off of Africa and Latin America. The ease with which these resources can be brought on line, and potentially even refracked, means it is only a matter of time before prices get to a level which justifies the cost of renewed activity.   



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July 18 2016

Commentary by Eoin Treacy

Erdogan's real opportunity after the failed coup in Turkey

This article by Kemal Kirisci for the Brookings Brief may be of interest to subscribers. Here is a section:

Clearly, Turkey’s democracy has taken a severe blow—cushioned only by the unequivocal stance of the opposition leaders and the media against the coup. Once again, the nation managed to break this pattern of ten-year coups. This offers the country a matchless opportunity for reconciliation. Granted, Erdogan has had an exceptionally rough weekend and his frustration with those responsible for or implicated in the coup is understandable. He is correct in calling “for their punishment under the full force of the law of the land.” It will, however, now be critical that he ensure that the rule of law is upheld and rises to the challenge of winning the hearts and minds across a deeply polarized nation. He has the tools for it in his repertoire and had successfully wielded them in the past—especially between 2003 and 2011, when he served as prime minister. In hindsight, this period is often referred to as AKP’s “golden age,” when the economy boomed, democracy excelled, and Turkey was touted as a model for those Muslim-majority countries aspiring to transform themselves into liberal democracies.

As he steers the country from the brink of civil war, Erdogan needs to rise above a majoritarian understanding of democracy and do justice to the aspirations of a public that heeded his call by pouring into the streets and squares to defeat the coup attempt. This is the least that the Turkish public deserves. This would also be a move in the right direction for Turkey’s neighborhood, which desperately needs a respite from the turmoil resulting from the war in Syria, the instability in Iraq, Russia’s territorial ambitions and now Brexit. This is the moment when a stable, democratic, transparent, accountable and prosperous Turkey needs to come to the fore on the world-stage. The United States needs it too. As much as the White House declared its faith in the strength of Turkey’s democracy and its support for the elected leadership, there is a clear chance for forging closer cooperation between the two countries. The first step in cooperation should be in bringing to justice the perpetrators of this coup, followed by measures to enhance Turkey’s capacity to address and manage the many challenges facing Turkey and its neighborhood.

 

Eoin Treacy's view -

With mass killings in Europe, civil unrest becoming a factor in the US election cycle, wars in Syria, Iraq and Yemen, an increasingly expansionary geopolitical attitude in Russia and China exhibiting an adventurous proclivity it is easy to conclude standards of governance are deteriorating. Yet we should not forget that Argentina has a new reform minded president, India and Indonesia are led by reform minded administrations and even Nigeria is making strides towards improving conditions albeit from about the lowest base imaginable. 



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July 18 2016

Commentary by Eoin Treacy

Email of the day on the Autonomies

July 18 2016

Commentary by Eoin Treacy

Email of the day on a transcript of the last portion of my Friday audio:

I may previously have referred to my age and poor hearing. At the very end of today’s audio you referred to being long but retain... discipline.  Could you please repeat the important word(s) between retain and discipline?

I must say that the whole audio is a brilliant summary of the present situation.

 

Eoin Treacy's view -

Thank you for your kind words and I’m delighted your enjoyed the Audio. The portion of the talk leading up to this piece had been discussing the yield curve spread and how it has contracted significantly but is still a fair way from becoming inverted, suggesting a US recession is not imminent. For context I thought I had better reproduce a transcript of the entire last minute of the recording.



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July 18 2016

Commentary by Eoin Treacy

Did Lenovo and Google Tango just hit an AR jackpot with this Pokemon Go phenomenon?

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

Put the two together and you have an amped-up version of Pokémon Go, where the monsters you're chasing know their environments. If people walk in front of the monsters, the people stay in the foreground; if the people walk behind them, the people go in the background. If there's a table in the middle of the room, the monster will walk around it instead of through it, and they'll also move around lampposts, signs or any other obstacles.

You get the idea ...

When Lenovo announced the Phab2 Pro, we thought it was an incredibly bold phone with a somewhat niche focus: things like seeing how a new couch will look in your living room, measuring objects from distance or playing with virtual pets. After Pokémon Go exploded and took over the world this week, though, this phone suddenly has the potential to go from niche to the hottest property around.

Of course this would require developer support from Pokémon Go creators Nintendo and Niantic, Inc. It isn't a stretch to imagine such a partnership, with a common connection: Until last year, Niantic was a company living under the Google umbrella (then known as Niantic Labs), and Google also creates the Tango tech that makes this AR mapping possible inside the Phab2 Pro. Surely the lines of communication have already been open on this, no?

 

Eoin Treacy's view -

Video games are often viewed by parents as the antithesis of a productive use of a child’s time. They sit motionless, while absorbed in whatever is happening onscreen and when doing something else only want to go back to playing the game. The additional sight of young people sitting side by side and texting each other rather than speaking is often something older people have great difficulty understanding. 



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July 15 2016

Commentary by Eoin Treacy

Italy Slowly Moves Toward Comprehensive Bank Rescue

Thanks to a subscriber for this report from Kroll Bond Agency focusing on Europe. Here is a section:

One of the major sources of public anxiety is the fact that the EU nations have not followed established rules for dealing with troubled banks in a consistent and transparent fashion. EU officials also have refused to consistently “bail in” bond holders of EU banks by converting debt to equity, a partial solution to the solvency problem that apparently is politically unacceptable. The fact of a bail-in, however, while reducing debt service expenses, does not provide the financial institution with significant new cash. Because the EU lacks a federal fiscal agency with receivership powers similar to the Federal Deposit Insurance Corporation in the US, the community is essentially in the position of the US prior to 1933. Before the FDIC was created in that year, bank insolvencies were dealt with by receiverships overseen by the courts of the individual states. This arrangement made it problematic, for example, for the Federal Reserve System to lend to banks because the state courts would not give preference to the security interest of the central bank for discount window loans.

In the case of Italy, over the past decade the country’s banking system has moved from institutional funding sources to selling junior bonds to retail investors. As a result, the political system’s reaction to growing problems in the nation’s banks is one of growing alarm. Italian Prime Minister Renzi says he wants urgent bank reform but does not say how it should be accomplished. Significantly, the Bank of Italy has called for a ban on the sale of subordinated bank debt to private individuals. Such a ban would effectively cut off the remaining funding source for Italy’s banks.

Authorities ranging from Bank of England Governor Mark Carney to Deutsche Bank chief economist David Folkerts-Landau have called for a direct bailout of some $150 billion, but KBRA believes that this figure is inadequate and represents merely a down payment on a full solution to the crisis. Meanwhile, EU officials refuse to consider direct infusions of capital from the governments of the member states. Dutch Finance Minister Jeroen Dijsselbloem has stated that he is not "particularly" worried about Italian banks:

“The only thing that to me is very important is that we respect what we have agreed between us, because otherwise everything will be questioned in Europe… There have always been and will always be bankers that say ’we need more public money to recapitalize our banks.... and I will resist that very strongly because it is, again and again, hitting on the taxpayer… the problems with the banks need to be sorted out in the banks and by banks.”
Bail-In vs. Bail Out

Under EU rules requiring the “bail in” of debt holders in the event of bank , Italy faces the prospect of wiping out millions of retail investors. Estimates of the total amount of money that is potentially subject to a bail-in easily exceed €1 trillion, or twice the amount of bad loans admitted in official statistics. The pressures building on elected officials in the EU are intense and have caused Renzi to publicly attack ECB head Mario Draghi for not doing enough to help Italy’s banks. These striking developments have gone largely unnoticed by investors, media, and policy makers outside the EU.

For years now, the ECB has been pouring liquidity into the Italian banking system, in part because the banks are funding the debt issuance of the Italian government. As one well-placed EU analyst told KBRA last week, “the priority during the 2008 financial crisis was for the banks to fund the state, and for the private sector to fund the banks.” The liquidity provided by the ECB ran right back out the door, however, as retail and institutional investors frequently have been bailed out and the insolvent banks have been supported with government guarantees and inflows of fresh funds from new retail investors.

 

Eoin Treacy's view -

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

Considering the relative strengths of the UK economy it remains highly likely Brexit will represent a greater challenge for the Eurozone than it does for the UK. The decision to leave for an island nation with its own currency is orders of magnitude less troubling than the inability of highly indebted governments to directly recapitalise banks while operating within the limits of a central bank focused on big picture pan European questions rather than national priorities.  

In the early 2000s while at Bloomberg I was asked to give a talk to clients in Milan. While chatting with some of the delegates afterwards it came to light that the big sales push going on at the banks they worked for was to sell reverse convertibles to retail clients. 

For the issuer, a reverse convertible is attractive because it comes with an embedded put so the principal can be converted into equity. For the creditor they often get an attractive face yield but the embedded put option held by the issuer means the rating on the bond is meaningless as it can be converted to equity at any time. 

 



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July 15 2016

Commentary by Eoin Treacy

Samsung in Talks With BYD to Buy Stake in Electric-Car Maker

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

BYD said Samsung has been actively pushing forward talks about buying its shares in a private placement. Talks are still underway, the Chinese company said, denying a report by the Korea Economic Daily that an agreement was reached to acquire a 4 percent stake.

Samsung is pursuing the investment after its affiliate was among foreign battery makers left off a list of suppliers approved by China, where sales of electric vehicles are surging and the government has sped up construction of charging points.

The talks with BYD also add to the global trend of technology companies and automakers collaborating as car buyers increasingly demand more advanced powertrains and features that improve connectivity and safety.

“It puts Samsung into the electric-vehicle subsystem supply chain for a key Chinese electric vehicle and battery manufacturer,” said Bill Russo, a Shanghai-based managing director at Gao Feng Advisory Co. “BYD gets a technology innovation pipeline partner with a reputable brand.”

 

Eoin Treacy's view -

China is the world’s largest car market. With a concerted government backed push into electric vehicles any company seeking to ride the wave to emerging automotive technology cannot afford to lose access to the market. Therefore BYD represents an attractive avenue for foreign investors. While in the USA Tesla sets the pace for what other companies are expected to provide, China’s state mandated vision for zero emissions represents an even more important influence on the market. Car companies have to try and build products for a global audience in order to keep costs under control. Therefore any company seeking to compete globally needs to have a foothold in China. 



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July 15 2016

Commentary by Eoin Treacy

Supermarkets

Eoin Treacy's view -

There has been a surge in defensive assets on the basis they offer competitive yields supported by strong cash-flows. Utilities, telecoms and consumer staples shares all fall into this category but the supermarket sector has experienced a much more mixed performance. Part of the reason for this is because it is considerably more segmented, there is more competition from private labels particularly in Europe and while everyone has to eat there is a wide variety in what people are prepared to pay. On top of that online interlopers Google and Amazon represent existential threats to all but the most efficient businesses.  



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July 14 2016

Commentary by David Fuller

Theresa May Has Proved She Is Serious About Brexit. Here Is What She Must Do to Deliver

Brexit is an idea, an intellectual vision for Britain, a 10- or 20-year journey to reshape our economy and society, reinvigorate our democracy and reinvent ourselves as truly global, high-wage, high value-added trading superhub.

It matters little who begins to deliver this, as long as our withdrawal from the EU is executed in the best possible way: the referendum was about changing our destiny, not about making any specific pro‑Brexit individual our next prime minister.

We were voting for an idea, not a gang; this was a referendum, not an election. Ideas both predate and outlive individuals, and Euroscepticism is no different: the mark of true ideological victory is when erstwhile opponents implement a policy that they used to oppose and hire their former enemies to assist them in the task.

Capitalism triumphs when ex-socialists privatise industries, deregulate and cut taxes; Euroscepticism truly wins when an ex‑Remainer takes us out of the EU.

This is why all Brexiteers should welcome Theresa May as our new Prime Minister. She has pledged that Brexit means Brexit, as has Philip Hammond, our new Chancellor, and said that there will be no going back. She should be taken at her word.

The fact that she has appointed Boris Johnson as Foreign Secretary, in an inspired move, confirms that this is now a certainty. The same is true for the vital jobs given to David Davis and Liam Fox, two veteran Outers.

Appointing Boris was an excellent idea: he believes in Brexit but is pro-European; he wants additional controls on migration but is pro-immigrant. His appointment will help cement Brexit as a liberal, pro-globalisation project. 

David Fuller's view -

David Cameron was a good prime minister in many respects, not least in his moderate, one-nation approach. 

His biggest failure, shared by Chancellor George Osborne, was the attempt to muscle the Brexit referendum result.  Many of us thought that after calling the referendum, they should have said that while they personally favoured Remain, it was for the electorate to decide, adding that they would work with either result.  This would have led to a much less divisive and contentious campaign.  Having campaigned so vigorously, Cameron understandably felt that he had to resign.

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


 


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July 14 2016

Commentary by David Fuller

Enemies of Boris Johnson Will be Furious but Foreign Secretary is the Perfect Job for This Cosmopolitan Liberal

The howls of outrage at Boris’s appointment as Foreign Secretary were barely quieter than they were at the prospect, two short weeks ago, of his becoming our next prime minister.

Where does the Boris hatred come from? If it’s rooted in his belated support for Brexit, that seems rather short-sighted. Britain is, after all, about to leave the EU, so it makes perfect sense to put the most high profile Brexiteer in charge of the Foreign Office. The new prime minister, in promoting Boris, has sent a very clear and unambiguous signal to our foreign allies: it’s happening, get used to it.

So is commentators’ hostility to the Foreign Secretary based on his being a particularly Right-wing sort of Tory? That would make some sense if there were any substance to the accusation. But Johnson isn’t easily associated with any particular wing of the party – perhaps that’s a source of irritation too. If anything, his political instincts seem to be fairly socially liberal (notwithstanding his various attempts at humorous buffoonery, with unwise references to“piccaninnies” and “watermelon smiles”).
Perhaps the most serious criticism is of his failure, thus far in his career, to have actually run anything. As mayor, he was famously prone to delegate the running of London to others, preferring the publicity, the flag-waving and the zip wire act (at which he was very well suited).

Prime minister May might have been tempted to test his abilities to the limit by offering him a genuinely tough post like health or transport, forcing him to deliver in actual, measurable outcomes. But why waste Boris’s strengths and this opportunity? A genuine cosmopolitan intellectual, it’s already hard to imagine him as anything other than the Secretary of State for Foreign and Commonwealth Affairs.

I think this is another very sensible choice by Prime Minister May.  Boris is a high-profile maverick, with a shrewd brain behind the colourful presence.  People in other countries will be curious about him and he will attract media interest.  This is very different from the dry, understated and almost invisible Foreign Office officials during and after WWII, and so be it.  

David Fuller's view -

Harried EU officials, who don’t know whether to keep bailing or jump ship, are annoyed and distracted by Boris’ appointment, although the experienced David Davis will do most of the hard Brexit negotiating.

These two columns from The Observer are amusing and revealing. 



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July 14 2016

Commentary by David Fuller

Why Is the Gold Price Rising? Five Forces Driving the Precious Metal

Hoarding gold is a centuries-old reaction to times of crisis, and the aftermath of the EU referendum vote is no different.

The yellow metal has soared in value since Britain voted to leave the European Union as investors shoot towards traditional "safe haven" assets. Prices have reached a three-year high as Brexit worries intensify.

An ounce of gold is now worth $1,327 (£1,003), up from $1,257 on June 23. However, the spike follows a sustained rally in the gold price throughout the year. The metal is now worth a quarter more an ounce than it was at the end of 2015.

But there's a dilemma: is the rally already over, or would it be foolish not to buy gold?

1. The Brexit effect

Gold has rallied since the Brexit vote, but there are signs calm is returning.

The FTSE 100 has recovered its poise following the installation of Theresa May as Prime Minister, allaying fears of political instability.

BullionVault, an online gold and silver marketplace, said its users traded a record £30m in gold on the Friday the Brexit result was revealed, but the market has since calmed.

"The private-investor market for gold and silver is well balanced, not panicked, after the Brexit price surge," said Adrian Ash, head of research at BullionVault.

"New interest in gold has turned sharply higher, led by US investors perhaps finding a warning of volatility in the Brexit vote ahead of November's presidential election."

David Fuller's view -

Gold experienced a cyclical bear trend of over four years, creating preconditions for the current recovery. 

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



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July 14 2016

Commentary by David Fuller

July 14 2016

Commentary by David Fuller

July 14 2016

Commentary by Eoin Treacy

Email of the day on the UK and FTSE-100

Good to have met you in Singapore last year and I hope this email finds you and your family in fine fettle in the US of A. I returned to Japan in 2003, and in my area I would have guessed that circa 30% of the cars here were foreign, mostly European, BMW, Mercs, VW, Porsche and Audis. I would now guess that the total is around 50% minimum, still dominated by the Germans but the number of Minis, Jaguars and Range Rovers I see on my local streets and Tokyo in general if duplicated globally must indicate at least a mini industrial revolution taking place in the UK !!!

I believe that the Mini is under German management, and that Jaguar/Rover is under Indian management but that production of all still takes place in the UK. I also heard that Nissan has plans to produce its luxury line, the Infinity, at an extended plant in the north east. All this was happening before BREXIT and the decline of the Pound Sterling. Is Brexit combined with a weaker pound combined with a mini industrial revolution going to be the catalyst that finally moves the FTSE 100 up out of its 16 year trading range and into a new generational bull market like the US in 2013??

Food for thought !!

 

Eoin Treacy's view -

Thank you for this on-the-ground report from Tokyo where the strength of the Yen has acted as a support for imports for much of the last decade. You are correct that most of BMW’s Minis are manufactured in the UK and Tata Motors continues to manufacture Jaguars, Land Rovers and Range Rovers in the UK. The strength of these individual franchises is a testament to the durability of the brands following major management and ownership reshuffles. However the loss of most of Ford’s manufacturing was a blow which the arrival of Nissan might help to soften. 



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July 14 2016

Commentary by Eoin Treacy

Nest's new outdoor camera is smarter at spotting people

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

Talking and listening functions are built-in, too, so you can chat with the postman or listen to the pitch of a door-to-door salesman without leaving your chair.

At the same time, Nest is upgrading its Nest Aware service, the cloud subscription plan available as an optional extra if you buy one of the company's indoor or outdoor cameras. While the free Nest app lets you tune into a camera at any time and get basic motion and sound alerts, Nest Aware (starting at US$10/month) enables you to also look back through several days of recorded footage saved to the cloud, and set up "zones" in the camera's field of view.

If you do decide to subscribe to Nest Aware, you'll be able to take advantage of the new Person Alerts feature. Nest says it uses advanced, cloud-based algorithms (presumably borrowed from parent company Alphabet/Google) to more accurately tell the difference between actual people and everything else (like dogs or a cars).

 

Eoin Treacy's view -

Intelligent home security and monitoring functionality is a big business. Anyone who has ever had a quote for a home security system to be installed will be familiar with how the agent can ramp up costs depending on how much they believe you have available to spend. It was eye opening for me when we had quotes ranging from $300 to $1500 for installation with an embedded commitment to a monthly subscription for monitoring.



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July 14 2016

Commentary by Eoin Treacy

Taiwan Dollar Climbs to 11-Month High as Equity Inflows Quicken

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

Global funds have injected a net $1.4 billion into the territory’s stocks this week through Wednesday, the most among eight Asian markets tracked by Bloomberg. Developing-nation currencies are recovering this month after plunging in the aftermath of the U.K.’s vote to leave the European Union in June. Futures are now pricing in less than even odds of a Fed rate increase in 2016.

“The market thought that, after Brexit, funds would leave Europe and go to the U.S., but it seems some are entering emerging markets because U.S. rate hikes will be delayed," said Cary Ku, an economist at Jih Sun Securities Co. in Taipei.

"Taiwan stocks’ higher yield also attracts foreign investors."

 

Eoin Treacy's view -

Despite the fact the Chinese Renminbi remains in a consistent, though somewhat oversold, downtrend against the Dollar, the majority of ASEAN currencies found medium-term support last year. For example the Indonesian Rupiah hit a low in October, the Thai Baht in October and the Taiwan Dollar in January and that was following multi-year declines in all cases. 



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July 13 2016

Commentary by David Fuller

May Draws Line Under Cameron Era as Johnson Named to Brexit Team

 

 

Theresa May announced her team to negotiate Britain’s withdrawal from the European Union and promised to build a more socially just country as she became the U.K.’s new prime minister.

May took over from David Cameron less than three weeks after Britons voted to leave the EU. She promised a “bold new positive role” for Britain abroad and less “burning injustice” at home, drawing lessons from last month’s bitter referendum and making a pitch for the center-ground of politics where U.K. elections are traditionally won.

Among her first actions, May fired George Osborne, the chief strategist of Cameron’s administration and the architect of his flagship austerity policies, as finance minister. She replaced him with Philip Hammond, the former foreign secretary.

Prominent conservatives who campaigned to get Britain out of the EU were given the task of seeing the job through, starting with former London Mayor Boris Johnson, who was named foreign secretary, in the day’s most surprising move. Working with him will be David Davis, who was assigned the task of overseeing Brexit negotiations, and Liam Fox, who will have to negotiate new trade deals.

“The domestic-facing portfolios are Remain and the outward facing ones are Leave,” Steven Fielding, a professor of political history at the University of Nottingham, said by phone. “If the Brexit negotiations don’t go as people would like, then it’s the Leave people who’ll take the blame.”

 

David Fuller's view -

We are accustomed to hearing new Prime Ministers talk of inclusiveness in their first speeches.  Nevertheless, Theresa May went further and struck the right note in my opinion.

You can judge for yourself in listening to her brief speech of 4:19 minutes, found in the article above.    

 



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July 13 2016

Commentary by David Fuller

How Theresa May Will Face Down the European Union

Theresa May has become British Prime Minister, succeeding David Cameron after a brief audience with Queen Elizabeth II at Buckingham Palace.

Speaking outside Number 10 Downing Street after taking office, she stressed her commitment to the union and issued a call “to make Britain a country that works for everyone.”

Her government will fight against “burning injustice” and will prioritize ordinary people over the interests of the wealthy, she said.

“Together we will build a better Britain,” she said.

David Fuller's view -

Sensibly, the selection of a new Prime Minister was brought forward to prevent uncertainty about the next government from persisting.  Theresa May proved to be the best candidate in terms of both experience and leadership. Britain is back in business and here is my favourite quote from the new Prime Minister:

“Ken Clarke Says I am a bloody difficult woman.  The next man to find that out will be Jean-Claude Junker.”

July 2016

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



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July 13 2016

Commentary by David Fuller

Email of the day 1

On Brexit a Wake-up Call:

David,

Nice to meet you again last night and I attach the article I spoke about. It was published in the Irish Times last Saturday.

Please don’t feel under any pressure to put it on your website, I just think it’s a different angle.

Regards

David Fuller's view -

Thank you so much for forwarding your apt article (posted above) and for your interesting contributions to the Markets Now discussions on Monday. 

I agree with you that “the risk of a Eurozone split have increased if politicians refuse to see the obvious”, and subscribers are probably tired of hearing me carp on about this.  I wish European citizens well but feel that we will see more creative destruction within the mismanaged EU, not least as the consequence of its fast and loose policies regarding democracy.   

I certainly share your view that capitalism is the best economic model.  And to paraphrase Winston Churchill’s: “Democracy is the worst form of government, except for all those other forms that have been tried from time to time”, we can say the same about capitalism. 

In other words, many people have also pointed out that capitalism is the worst economic system, apart from all the rest. Capitalism has to be managed with considerable wisdom, which is too often ephemeral.  At the risk of pedantry, I do not blame capitalism for 2008.  The mismanagement in terms of governance at that time, not least at too many US investment banks, was palpable.  It is a reoccurring phenomenon as part of the human condition.      



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July 13 2016

Commentary by David Fuller

Email of the day 2

On whether or not RDSB can maintain its dividend:

Dear David

 I have been a subscriber to your excellent service for several years and I know that you have a significant holding in Royal Dutch Shell B (RDSB). Personally I do not think the prospects for RDSB over the medium term are very good and I have just sold my holding for the following reasons.

 RDSB has enjoyed a good bounce recently on the back of rising oil prices plus the £GBP’s devaluation following the UK’s EU referendum vote. Also, on the face of it, it has a generous forecast dividend yield of 5.5%.  However, the results for the last year (Dec 2015) plus the forecast results for the next three years (see attached Sharescope Results sheet for RDSB) show that the actual and forecast eps growth over this period are fairly flat and insufficient to cover the dividends proposed. Indeed the eps over this period would need to be grow by 76% for 2015, 66% for 2016, 34% for 2017 and 16% for 2018 to ensure that the proposed dividends for these years are fully covered.

 The above forecast results suggest to me that RDSB will have to cut its dividend significantly in the near future which is likely to result in a slump in the share price.

 May I ask for your thoughts on the prospects for RDSB’s over next few years.

Regards

David Fuller's view -

Thank you for sharing your research on RDSB with us. 

This item continues in the Subscriber’s Area.



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July 13 2016

Commentary by David Fuller

The Markets Now Follow-Up

David Fuller's view -

We had a full room for Monday’s three presentations and discussions, which included an open session on Brexit for the first 30 minutes.  I found it interesting, not least for the comments of experienced subscribers, and enjoyable with one exception.  The East India Club’s projector, which was OK in the past but had clearly seen better years, made it impossible to see the carefully prepared slides in any clarity.  It may have been that the bulb was failing but they had no spare.

Iain Little and I agreed that we should make a Brexit to the Caledonian Club for future Markets Now sessions, with the next session planned for early September.

Here is my presentation and I will post David Brown’s and Iain Little’s on Thursday and Friday.   



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July 13 2016

Commentary by Eoin Treacy

Jeffrey Gundlach on Stocks, Trump, and Gold

Thanks to a subscriber for this transcript of an interview from Barron’s. Here is a section:

How much lower could yields on Treasury bonds go? Could we see a 1% yield? 
We just passed the all-time low on the 10-year yield of 1.39%, which we saw in July 2012. It is no surprise the 10-year has been strong after Brexit. I’m not at all convinced that we are going to see much lower yields in the U.S. But even if we do, you’re talking about a de minimis profit. Even if the 10-year yield drops another percentage point, how much will you make? Less than 10%. There are better ways to speculate. 

Such as? 

Gold miners have a very high probability—if you bought them today and were disciplined—of making 10%. One of the things driving markets lower is a declining belief in—and enthusiasm for—central-planning authorities and the political establishment. In this environment, gold is a safe asset. There’s an 80% chance of making 10% in gold; the probability of a 10% gain on Treasuries is 20% at best. I’ve never seen a worse risk-reward setup. 

That doesn’t make for a very exciting portfolio. 

Our portfolios are high-quality bonds, gold, and some cash. People say, “What kind of portfolio is that?” I say it’s one that is outperforming everybody else’s. I mean, bonds are up more than 5%, gold is up substantially this year [28%], and gold miners have had over a 100% gain. This is a year when it hasn’t been that tough to earn 10% with a portfolio. Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.

Eoin Treacy's view -

With yields well below the dividend on the S&P 500 Treasuries are relying on momentum to boost returns. Like any market, when prices are accelerating higher, it will look like the strongest thing in the world until it turns. Then the repercussions of running a momentum strategy will become painfully obvious for those not also running a tight money control exit strategy such as trailing stops and diligent position sizing. Quite when that is likely to happen is another question entirely. 



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July 13 2016

Commentary by Eoin Treacy

Email of the day on what is helicopter money

What is helicopter money?

Eoin Treacy's view -

Thank you for this question which I’m sure will be of interest to the Collective. Last month a subscriber very kindly sent through a report from National Australia Bank laying out in detail what forms helicopter money might take. I posted it in Comment of the Day on June 10th and here is a link to the report. 



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July 13 2016

Commentary by Eoin Treacy

Oil Tumbles After U.S. Fuel Stockpiles Unexpectedly Increase

This article by Mark Shenk for Bloomberg highlights the nuanced picture evident in the crude oil market. Here is a section: 

U.S. gasoline demand dropped 0.9 percent to 9.67 million barrels a day last week as refiners produced 10.2 million barrels a day of gasoline a day.

"The gasoline data is very bearish," said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida.

"Gasoline production is outstripping demand by more than 500,000 barrels a day." Stockpiles of distillate fuel, a category that includes diesel and heating oil, surged 4.06 million barrels, the most since January.

Gasoline futures for August delivery dropped 4.2 percent to $1.37 a gallon. August diesel tumbled 5.2 percent to $1.3865 after earlier touching $1.3782, a two-month low.
Seasonal Highs

U.S. crude supplies fell 2.55 million barrels to 521.8 million last week, EIA data show. Inventories remain at the highest seasonal level in at least a decade. Analysts surveyed by Bloomberg had forecast a 3 million barrel decline. The industry-funded American Petroleum Institute said stockpiles climbed 2.2 million barrels last week.

"Crude supplies are down a little, but it doesn’t change the overall picture," Finlon said. "They remain at historic highs for this time of the year."

 

Eoin Treacy's view -

Efforts led by Saudi Arabia to knock higher cost competitors out of the market have been partially successful with the result US production has decreased while the fire in Alberta has been an additional headwind for Canadian supply. However economic growth has yet to be spurred by this development with the result stockpiles are higher than might otherwise have been expected. 



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July 12 2016

Commentary by David Fuller

China Has No Historic Rights in South China Sea, Rules Hague Tribunal

An international tribunal on Tuesday ruled against China's territorial claims in the South China Sea, after the Philippines challenged Beijing's right to exploit resources across vast swathes of the strategic waters.

In a 497-page ruling that risks stoking further tensions in South-East Asia, a Hague-based arbitration court said there was no legal basis for China to claim historic rights over the waters of the South China Sea and that it had breached the Philippines' sovereign rights with its actions.

China immediately said it would defy the decision, which it described as “null and void” with “no binding force”.

“China neither accepts nor recognises it,” the foreign ministry said.

Beijing had refused to take part in the tribunal proceedings, with officials saying the tribunal had "no juristiction".

China claims almost all of the energy-rich waters in the South China Sea, through which about $5 trillion (£3.8 trillion) in ship-borne trade passes every year. 

Neighbours Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

The panel said there was no legal basis for China to claim historic rights to resources within its so-called nine-dash line, a boundary that is the basis for its claim to roughly 85 per cent of the South China Sea.

It said China had interfered with traditional Philippine fishing rights at Scarborough Shoal, one of the hundreds of reefs and shoals dotting the sea, and had breached the Philippines' sovereign rights by exploring for oil and gas near the Reed Bank, another feature in the region.

None of China's reefs and holdings in the Spratly Islands entitled it to a 200-mile exclusive economic zone, it added.

Beijing responded by saying the Chinese government would not accept “third party dispute settlement” with regards to territorial issues.

“China's territorial sovereignty and maritime rights and interests in the South China Sea shall under no circumstances be affected by those awards,” the foreign ministry said in a statement.

The ruling also said China had caused permanent harm to the coral reef ecosystem in the Spratlys, charges China has always rejected.

David Fuller's view -

This situation is now as dangerous as China chooses to make it, and Xi Jinping’s regime may have already gone too far.  Markets are sensibly adjusting to a less alarming Brexit situation, at least so far as Great Britain is concerned, but now face a potentially serious problem in the South China Sea.

This item continues in the Subscriber’s Area and contains a number of share reviews, plus a PDF of the article.  



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July 12 2016

Commentary by David Fuller

What is the Correct Fiscal Policy Now We Want Out?

What is the right fiscal policy? People differently placed on the politico-economic spectrum will give you radically different answers.

At one extreme, you have the hairshirt fiscal purists who think government borrowing is always wrong and who won’t be happy until all that debt has been repaid. At the other, you have the Keynesian fundamentalists who believe that the Government can carry on borrowing until the cows come home.

A lifetime in economics has taught me that the right fiscal policy changes with circumstances. And ours have been through a revolution.

When the Coalition government took office in 2010, although we hadn’t reached the stage of absolute panic about the public finances, there was a distinct danger on the horizon of things running out of control.

After the financial crisis of 2007-8, not only had GDP fallen significantly but there was also no assurance that it could soon recover and, what’s more, it was widely believed that if and when it did recover, the potential growth rate would be much lower.

Across the world, the financial markets were anxious about the stability of the public finances in umpteen countries. The UK faced a real risk of seeing its debt classed with some of the most worrying cases.

So, there was a strong argument for seeking to bring the debt ratio down soon, by radically reducing the gap between government spending and tax revenues.

The only real issues were about the optimal speed of this reduction and where the financial pain should fall. Although I had some doubts about the details, I was broadly in sympathy with the Coalition’s plans for deficit reduction.

In practice, though, government borrowing fell more slowly than envisaged. Indeed, it ended up higher even than it had been under the plans of the previous Labour chancellor, Alistair Darling. Wisely, in my view, George Osborne did not seek to reduce the deficit more quickly by imposing further fiscal stringency.

After the return of a Conservative government in 2015, however, Mr Osborne still had the stabilisation of the public finances as his overwhelming objective. He actually tightened fiscal policy by setting an objective for the budget, including investment spending, to be running a surplus by 2020. He even enshrined it in law that in normal times the public finances should be in surplus.

Would it be too cynical to believe that this objective was driven less by a careful consideration of economic imperatives and more by Mr Osborne’s political ambitions?

So the current stance of fiscal policy may well have been seriously inappropriate before the Brexit vote upset the apple cart. But if it was inappropriate then, it is doubly so now. Because of widespread fears about the consequences of Brexit, there is a realistic danger of substantially weaker GDP growth in the near term.

Meanwhile, the costs of a less restrictive fiscal policy have sharply diminished. The prospect of lower interest rates sustained for a long time has reduced the cost of borrowing.

David Fuller's view -

I could not agree more with Roger Bootle’s conclusion.  The UK government needs to encourage bold, entrepreneurial policies.  These would help to reunite the country, cushion a near-term economic downturn and then lead to stronger GDP growth.  This could reduce the UK’s deficit before the next general election in 2020.

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



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July 12 2016

Commentary by David Fuller

U.S. Presses China to Be Responsible Power After Maritime Ruling

Here is the opening of another article on this inflammatory topic, published by Bloomberg at 10:19pm BST: 

The U.S. pressed China to abide by an international tribunal’s rejection of its claim over much of the South China Sea, framing the ruling as an opportunity for Beijing to show it’s the “global power it professes itself to be.”

In unusually strong comments Tuesday after the decision by the Permanent Court of Arbitration in The Hague, State Department spokesman John Kirby said the world was watching to see whether China would obey the decision over a waterway that hosts about $5 trillion in trade a year. The country’s leaders have already said they won’t accept the ruling in the case, brought by the Philippines but followed closely by nations across Southeast Asia.

“This is a legally binding decision and it’s our expectation and, you know, frankly it’s the world’s expectation, it’s not just the United States -- the world is watching now to see what these claimants will do,” Kirby told reporters. “The world is watching to see if China is really the global power it professes itself to be and the responsible power that it professes itself to be.”

Kirby’s comments reflected U.S. efforts to frame the ruling not as a discussion of the individual claims -- several countries claim sovereignty over parts of the South China Sea -- but as a matter of international law and order. The U.S. military has repeatedly sent ships near disputed waters as part of what it calls “freedom of navigation” maneuvers. The U.S. has also made clear it opposes China’s land reclamation and installation of military facilities on reefs and shoals there.

David Fuller's view -

China has recklessly painted itself into this corner and some people may be wondering why? 

Unfortunately, it is a technique often used by authoritarian regimes: if their economy is weak, increase military spending and deflect domestic criticism by blaming problems on foreign interference.  This is a dangerous situation, not least because of China’s military power. 

This item continues in the Subscriber’s Area.  



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July 12 2016

Commentary by Eoin Treacy

The Solid Ground

Thanks to a subscriber for this note from Russell Napier which may be of interest to subscribers. Here is a section: 

Investors seem to have no doubt that Mrs Merkel will indeed endorse an end to fiscal austerity in the Eurozone and, in the process, further breach the constitution of the ECB and ignore the ghost of Herr Haverstein (Germany’s Weimar/hyperinflation central banker). These are truly existential decisions for any Chancellor of Germany to make and it is too dangerous to invest clients’ hard-earned savings on a bet that The Chancellor will sacrifice everything for the political union project.

Time is ticking away and a decision will have to be made within weeks if a European recession, which will raise severe questions about the survivability of the European political union, is to be averted. We will know soon enough just how large the ghost of Herr Haverstein still looms in Germany, as a failure to endorse helicopter money within a few weeks most likely means Germany is ultimately backing away from the European political union project. This is amongst the most important political decisions of the 21st century and one full of pain for global equity investors if Germany decides not to act. Early clues as to which way The Chancellor might swing are to be found in Italy.

The Solid Ground has been warning for well over a year that the introduction of the Bank Resolution and Recovery Directive (BRRD) would undermine the stability of European banks and, if actually implemented, would cause bank-runs across Europe. The collapse in European bank share-prices since January does suggest that bank stability has been undermined. Now we face the prospect of a BRRD implementation in Italy and the biggest public policy error since Hank Paulson allowed Lehman Brothers to fail.

Eoin Treacy's view -

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

Here is a link to the text of the European Commission’s Bank Resolution and Recovery Directive dated June 12th 2014. I’ve highlighted one of the more relevant sections below.  

If that facility were guaranteed by a State, an institution accessing such a facility would be subject to the State aid framework. In order to preserve financial stability, in particular in the case of a systemic liquidity shortage, State guarantees on liquidity facilities provided by central banks or State guarantees of newly issued liabilities to remedy a serious disturbance in the economy of a Member State should not trigger the resolution framework provided that a number of conditions are met. In particular, the State guarantee measures should be approved under the State aid framework and should not be part of a larger aid package, and the use of the guarantee measures should be strictly limited in time. Member States guarantees for equity claims should be prohibited. When providing a guarantee for newly issued liabilities other than equity, a Member State should ensure that the guarantee is sufficiently remunerated by the institution. Furthermore, the provision of extraordinary public financial support should not trigger resolution where, as a precautionary measure, a Member State takes an equity stake in an institution, including an institution which is publicly owned, which complies with its capital requirements. This may be the case, for example, where an institution is required to raise new capital due to the outcome of a scenario-based stress test or of the equivalent exercise conducted by macroprudential authorities which includes a requirement that is set to maintain financial stability in the context of a systemic crisis, but the institution is unable to raise capital privately in markets. An institution should not be considered to be failing or likely to fail solely on the basis that extraordinary public financial support was provided before the entry into force of this Directive. Finally, access to liquidity facilities including emergency liquidity assistance by central banks may constitute State aid pursuant to the State aid framework.

I believe it would be a mistake to think the European Commission would be willing to impose the kind of solution on the Italian banking sector that it did on Cyprus for a number of reasons. Perhaps the most important is that the Eurozone’s creditor nations have a great deal to lose by imposing such a resolution while they were relatively immune to the fallout from Cyprus’ collapse. Italy is a founding member of the EU and its demise would represent a truly existential risk which the EC will attempt to avoid.



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July 12 2016

Commentary by Eoin Treacy

Game Makers Everywhere Salivate Over Pokemon Go Phenomenon

This article by Selina Wang and Jing Cao for Bloomberg may be of interest to subscribers. Here is a section: 

Game developers around the world watched in astonishment as Pokemon Go, a mobile version of the beloved 1990s game from Nintendo Co., became an instant hit -- rocketing to the most downloaded app on both Apple and Android phones.

It’s too soon to say if its success will reshape the $25 billion mobile gaming industry, but this much is certain: The surprise hit will inspire copycats.

“You’re going to see other developers potentially changing their pipeline to incorporate augmented reality or location-based technology,” said Mike Olson, an analyst at Piper Jaffray Cos. “Those plans are probably being put in place right now.” He said he wouldn’t be surprised if Activision Blizzard Inc. added such functionality to Skylanders, its role-playing game featuring toys.

Pokemon Go has been released only in the U.S., Australia and New Zealand so far, and already nimble developers are making lookalike apps for places where the game isn’t available. A few cashing in on the craze have topped mobile-download rankings from Germany and Spain to Singapore and Sweden, according to market researcher App Annie. The game Citymon Go -- led by a character with a striking resemblance to Pokemon’s Pikachu -- became China’s most downloaded Apple iOS game in the past few days. Go Pikachu, a board-game populated with cartoon monsters, is now one of the 20 most-downloaded games on wandoujia.com, an Android app store.

 

Eoin Treacy's view -

I took my daughters to Anime Expo last weekend. They were delighted to dress up as their favourite computer game characters and were amazed at the intricacy of other peoples’ costumes. The one major disappointment was our failure to get to the Pokemon event quick enough to queue up for a seat. The line for access to the 350 seat venue filled up immediately following the conference doors opening. What was perhaps most bemusing but in retrospect predictable were the people seeking to attend likely played the 1990s version of the Pokemon Go game when it originally came out. 



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July 12 2016

Commentary by Eoin Treacy

Losing AAA Matters for $1.2 Trillion Australian Mortgage Holders

This article by Ruth Liew and Narayanan Somasundaram for Bloomberg may be of interest to subscribers. Here is a section:

The biggest losers after Prime Minister Malcolm Turnbull scraped through to win Australia’s fractious elections could be homebuyers facing higher costs on their A$1.6 trillion ($1.2 trillion) in mortgages.

The price to protect bonds issued by the nation’s banks climbed seven basis points last week after S&P Global Ratings cut its outlook on Australia’s AAA grade to negative on concern government deficits will persist without “more forceful” decisions to rein in shortfalls. It also put the nation’s biggest lenders on notice. Moody’s Investors Service said Monday that it could be a “credit negative” if Turnbull can’t win agreement from the split upper house for plans to improve the government’s finances.

“An increase in funding costs relating to a ratings downgrade will impact bank margins, but banks may choose to offset this via loan pricing,” said Anthony Ip, a credit sector specialist at Citigroup Inc. in Sydney, adding that any increase in funding costs will be significant but manageable. “At the end of the day it’s still a competitive lending market.”

Australia’s largest lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd.and Westpac Banking Corp. -- rely on offshore bond markets for a fifth of their funding requirements, central bank data show. If their rankings were lowered after a sovereign downgrade, that would increase borrowing costs as much as 20 basis points, prompting them to slap mortgagees with higher interest rates, according to Citigroup.

 

Eoin Treacy's view -

Losing an AAA rating has not represented a challenge for either the USA or UK so it is questionable whether Australia will experience meaningful repercussions not least when its currency continues to enjoy a positive interest rate differential with that of other OECD countries. 



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July 12 2016

Commentary by Eoin Treacy

The Chart Seminar 2016

Eoin Treacy's view -

Thank you to everyone who has expressed interest in The Chart Seminar this year. Our plans are to hold a webinar sometime in June and I will share details of this as we firm up how best to conduct it. The timing of the seminar will be catered to where the majority of delegates sign up from but we’ll try to pick a time when the most possible people can tune in live. 

We also plan to hold two seminars in physical locations this year. From some subscriber feedback I was thinking of holding one in Los Angeles during the summer and another in London during the fourth quarter. If you would like to express interest in any of our events please message Sarah Barnes at [email protected]



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July 11 2016

Commentary by Eoin Treacy

Email of the day on the decision to go long

Is it time to now throw in the towel and go long stocks, hang all our fears (of which there are many!)?

Eoin Treacy's view -

Thank you for a question which will likely be to the front of everyone’s minds as the S&P500 closes at a new all-time high for the first time in more than a year. 

As George Eliot (Mary Ann Evens) wrote in Middlemarch “Our deeds still travel with us from afar and what we have been makes us what we are”. How one feels about this event will in large part be dictated by how you have interacted with the market over the last few months. 

 



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July 11 2016

Commentary by Eoin Treacy

South Africa girding for another platinum strike

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

In what seems like an annual event, platinum mining companies in South Africa are bracing for what could be another year of labour unrest.

The firms that mine the precious metal and the labour unions that represent their workers are in talks next week, trying to hammer out a deal that could avert a strike of similar magnitude to 2014.
That year, a strike led by the Association of Mineworkers and Construction Union (AMCU) forced major producers Amplats (LSE:AAL), Implats (OTCMKTS:IMPUY) and Lonmin (LSE:LMI) to shed over 70,000 jobs. The strike lasted 21 weeks, cost the industry R24 billion, and resulted in 1.3 million ounces of lost production – about a third of global output. South Africa and Russia combined account for close to 80% of global supply of palladium and 70% of platinum output which are mainly used to clean emissions in automobiles.

BDLive, via Reuters, reports the AMCU is demanding a pay rise of 56%, in line with a "living wage", while the National Union of Mineworkers is asking for a 20% wage hike – well over the 6.1% rate of inflation. The mining companies say they can't afford the pay increases, arguing that last year they were forced to tap shareholders to raise cash, and that the unions' demands are unrealistic:

 

Eoin Treacy's view -

Labour unrest in South Africa’s mining sector is, as the above article highlights, an almost annual occurrence. Negotiations with unions, for what can only be described as inflated pay demands, must be irksome for management but the reality is mining companies are in better positions this year than last. 



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July 11 2016

Commentary by Eoin Treacy

Google Plans to Train 2 Million Indian Developers on Android

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

Google launched a program to train 2 million developers in India for its Android platform as its fires up a race with Apple Inc. for the country’s developers to create innovative mobile apps.

The Android Skilling program will be introduced for free across hundreds of public and private universities and training schools through a specially designed, in-person program this year. The program would also be available through the government’s National Skills Development Corporation of India, the company said in a statement.

India is expected to have the largest developer population with 4 million people by 2018, overtaking the U.S., but only a quarter are building for mobile, said Caesar Sengupta, vice president of product management at Google.

“We believe India is uniquely placed to innovate and shape the internet experience of billions of users who are and will come online on the mobile platform,” he said in the statement.

Google plans to make the curriculum accessible to millions for free to help make India a global leader in mobile development.

 

Eoin Treacy's view -

Silicon Valley technology companies have been vocal in their desire to see more people take up coding as a profession and most particularly with a focus on their own operating systems. Google’s decision to facilitate more people learning how to code apps in Android is a direct attempt to challenge Apple’s dominance of the App market. Considering how much each of us use apps on a daily basis, and the insights they offer into the various facets of our lives, growth among operating system developers like Google, Apple and Microsoft is likely predicated on continued dominance of their niche within the wider technology sector and the high barrier to entry it offers.   



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July 08 2016

Commentary by David Fuller

Allister Heath: My 10-Point Plan to Kick-Start the Economy After the Referendum

This is more like it. At long last, some people in government are acting as if they are actually in charge. Sajid Javid in particular has begun to shine again in recent days: he is going to start preliminary trade talks in Delhi, has instructed his civil servants to start talking to as many countries as possible and wants to start hiring negotiators.

As for George Osborne, he too has started to act to shore up confidence, even if much more is required. He has met the main investment banks in London, and they have all agreed to work together to make sure that the City remains the world’s pre-eminent global financial hub.

Osborne has finally said what he should have argued the day after the referendum: “every measure will be deployed to constructively safeguard and protect” the City; the banks said they would like to keep as much of their workforce as possible in London, and JP Morgan’s boss Jamie Dimon confirmed separately that there would be no change at all were the financial services passport retained.

It may not be, of course, but there are also other ways to protect the City, be it by negotiating a global passport or through so-called regulatory equivalence.

With the right negotiations and domestic reforms, the UK economy could be larger than it would otherwise have been under a Remain scenario in just a few years’ time, going on to demolish all the gloomy predictions of Project Fear. But it is key to shore up the short term: the economy was always going to be hit by volatility, but sadly the Brexiteers’ failure to seize the moment and the Government’s lack of a plan have shattered confidence. The economy probably grew by 0.6pc in the first quarter, but a lot of this growth will be clawed back in the third. We will suffer a nasty, utterly unnecessary hit that will cost jobs. This must be addressed as soon as possible; here’s my 10-point plan.

1. The Chancellor must hold more summits with other industries, getting carmakers and others to express their support for the UK. In ordinary circumstances, this would be dismissed as a gimmick, as mere verbiage: but this is a crisis of confidence.

David Fuller's view -

These are sensible policies from Allister Heath.  After a vacuum in terms of governance following the vote for Brexit, there is no shortage of goodwill and determination to get the economy moving once again.  I am sure all voters will welcome the bold, entrepreneurial plans under discussion, which will give the British economy a vitality and international reach which was not possible within the EU. 

A PDF of Allister Heath’s 10-Point plan is posted in the Subscriber’s Area.



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July 08 2016

Commentary by David Fuller

UK Startups Can Shine In a Post-Brexit World

Matt Clifford is the co-founder and chief executive of Entrepreneur First, the five-year-old UK accelerator program, which has produced 75 startups since launch. One of their companies, Magic Pony was sold to Twitter for $150m just last month.

It is just the kind of company you might think would suffer in the immediate aftermath of last month's vote by the UK to leave the European Union. But apparently not. In fact, he had closed three seed investment deals since the result was announced. 

Two weeks on from the referendum results, tech startups are swamped by uncertainty. The overwhelming majority – roughly 87pc according to a recent survey – were opposed to Brexit.

But European investors like Index Ventures and Local Globe insist they are remain bullish on London as a tech hub and will continue to actively invest there because of tax benefits, strong technical universities such as Cambridge, Oxford and Imperial College, and the UK’s large English-speaking market – a combination that’s tough for other European cities to beat.

The persistent “We are open for business” refrain might seem hollow to some, particularly in light of the tech sector’s unequivocal Europhilia. But anecdotal evidence suggests that unexpected windows of opportunity are slowly opening up.

For instance, many agree that there could be unexpected opportunities for financial services disruption that fintech startups are best placed to grab. But first, let’s examine the major concerns being raised about the state of the UK tech sector.  

David Fuller's view -

In an ideal world, the UK economy would have moved smoothly into the post-Brexit era.  However, ideal worlds have usually been pipe dreams.  Therefore, it is better to have started in chaos and panic, to which people are now responding with some sensible, promising ideas, than the other way around.   

Governance is everything has long been a mantra of this service.  I would not underestimate the sense of energy and opportunity that can now be inspired by good leadership, from the top down, backed by appropriate incentives.  The UK will have a rough third quarter, for understandable reasons.  Thereafter, it should be improving, regardless of what happens to the EU.

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



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July 08 2016

Commentary by David Fuller

U.K. to Add 300 Staff to Negotiate Post-Brexit Trade Ties

The U.K. government plans to add as many as 300 specialist staff to its trade team in an effort to build new relationships outside the European Union, Business Secretary Sajid Javid said.

Javid announced the plans ahead of a trade visit to India Friday. He will meet officials in New Delhi to push for an agreement between the two countries by the time Britain officially leaves the EU. Chancellor of the Exchequer George Osborne is due to visit China this month to press his commitment to a “golden era” in relations with the country.

"Following the referendum result, my absolute priority is making sure the U.K. has the tools it needs to continue to compete on the global stage," Javid said in a statement. "Over the coming months, I will be conducting similar meetings with other key trade partners, outlining the government’s vision for what the U.K.’s future trade relationships might look like."

Prime Minister David Cameron is stepping down in September, leaving the task of leading negotiations to take Britain out of the EU to his successor, who will be either Home Secretary Theresa May or Energy Minister Andrea Leadsom. She will have to decide when to trigger the formal start of two years of exit negotiations with the EU, manage the trade-offs involved and lead efforts to establish new commercial relationships with countries around the world.

David Fuller's view -

This is a positive move by Sajid Javid who is wasting no time in negotiating Britain’s new trade deals with the world’s growth economies and also former Commonwealth nations. 

Two years to leave the EU sounds very arbitrary and an awfully long time to leave a failing association.   



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July 08 2016

Commentary by David Fuller

S&P 500 Nears Record as Rally With Bonds Rewrites History

Here is the opening of this interesting article from Bloomberg:

That U.S. stocks were able to erase their Brexit trauma and pull within inches of a record Friday was impressive enough. That they did it on a day bonds yields were flirting with all-time lows was unprecedented.

Shares tracked by the S&P 500 Index briefly rose above a closing high that has stood for 13 months, helped along by the strongestemployment report since October. At the same time, yields on 10-year Treasuries slid within mere basis points of their all-time intraday low set this week.

It isn’t supposed to happen that way -- in fact, it never has. At no time in history have government bonds and U.S. equities, generally viewed as risk-on/risk-off complements, ended the same trading session this close to their respective records, according to data compiled by Bloomberg.

That it’s happening now is testament to the forces splintering sentiment in markets fixated on the pace of global growth and Federal Reserve policy. Stocks have been on a particularly violent roller coaster, erasing two 10 percent corrections in 10 months and restoring $1.4 trillion lost in the Brexit aftermath in just eight sessions.

“The stock market and bond market are expressing very different opinions,” said Jack Ablin, the Chicago-based chief investment officer of BMO Private Bank, which oversees about $66 billion. “It seems, at least on the surface, to be incongruous. Obviously I’m happy for the bulls, but I get the sense that there’s something dysfunctional going on.”

David Fuller's view -

The only way I can rationalise this is to say that investors from all over the world want to be in US assets.  No to be frivolous but US markets are winning the global beauty contest.  All the more remarkable with a political system that has enjoyed better days and insane gun laws for a developed country. 

My other point is thank heavens for technical analysis.  Provided we have the humility to look at price trends rather than tell markets what to do, they will at least show us where the big money is flowing, in moves which can be as emotional as they are logical. 

This item continues in the Subscriber’s Area, were current action is analysed.



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July 08 2016

Commentary by David Fuller

The Markets Now

Monday 11th July at the East India Club, 16 St James's Square, London SW1Y 4LH

David Fuller's view -

Given the importance of Brexit and its influence on markets, We could have a short interactive discussion on this topic before the scheduled presentations commence, if delegates favour this suggestion.

Thereafter, could we have a more interesting markets background to discuss on 11th July?  I doubt it and am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Note: Monday’s Markets Now seminar is sold out.  We will be testing a video recording of the seminar, focusing on presenters and their slides.



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July 08 2016

Commentary by Eoin Treacy

Insights

Thanks to a subscriber for this edition of Gary Shilling’s report which is well worth taking the time to read, not least for the details of how many populist movements are gaining traction globally. Here is a section on Treasuries: 

As for Treasurys, we believe that what we dubbed “the bond rally of a lifetime” 35 years ago in 1981 when 30-year Treasurys yielded 15.2% is still intact. This rally has been tremendous, as shown in Chart 33 (page 38), and we happily participated in it as forecasters, money managers and personal investors. Chart 33 uses 25-year zero-coupon bonds because of data availability but the returns on 30-year zeros were even greater.

Even still, $100 invested in that 25-year zero-coupon Treasury in October 1981 at the height in yield and low in price and rolled over each year to maintain its maturity or duration was worth $29,096 in May of this year, for a 17.9% annual gain. In contrast, $100 invested in the S&P 500 index at its low in July 1982 is now worth $4,608 with reinvested dividends. So the Treasurys have outperformed stocks by 6.3 times since the early 1980s. And as we’ve often said, most investors believe Treasurys are only suitable for little old ladies and orphans. 

Most investors only look at the yield on Treasurys and say it’s now far too low to be of interest. But we’ve never, never, never bought Treasurys for yield. We couldn’t care less what the yield is as long as it’s going down—so prices are rising. We’ve always bought Treasurys for the same reason most investors buy stocks: appreciation. 

We’ve discussed in detail in past Insights the many reasons that equity investors, investment bankers, Wall Street analysts and even institutional bond managers are negative on Treasurys and have been throughout this marvelous 35-year rally. The current disdain was expressed in the June 10 edition of The Wall Street Journal: “The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise. The longer the maturity, the more sharply a bond’s price falls in response to a rise in rates. And with yields so low, buyers aren’t getting much income to compensate for that risk.” Since then, the 30-year Treasury yield has dropped from 2.48% to 2.15% as the price has risen by 6.5%.

Then, the July 1 Journal wrote: “Analysts have warned that piling into government debt, especially long-term securities at these slim yields, leaves bondholders vulnerable to the potential of large capital losses if yields march higher.” Since then, the price of the 30-year Treasury has climbed 3.1%.

But what if instead of rising, Treasury yields fall, as they have this year, returning 14.1% on the 30-year Long Bond compared to 3.9% for the S&P 500? And we believe there's more to go. Over a year ago, we forecast a 2.0% yield for the 30-year bond and 1.0% for the 10-year note. If yields fall to those levels in a year from the current 2.14% and 1.38%, respectively, the total return on the 30-year coupon bond will be 5.1% and 4.9% on the 10-year note. The returns on zero-coupon Treasurys with the same rate declines will be 4.2% and 3.8% (Chart 34).

Eoin Treacy's view -

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

A big question right now is whether the stock market is rallying because investors believe the liquidity on which asset price inflation has been predicated over the last six years is going to get another big infusion. The Fed is unlikely to raise rates while global growth is mixed at best because of the upward pressure that would put on the Dollar. 



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July 08 2016

Commentary by Eoin Treacy

Nvidia's GTX 1060 is VR-ready and affordable

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

The GTX 1060 is also fully VR-ready, meaning you can expect a smooth experience using it with the Oculus Rift or HTC Vive. The card is also a lot more energy efficient for VR gaming, consuming just 120 watts of power during use.

Perhaps the biggest news is the price point of the GTX 1060, which is set at US$249 – less than half the $549 launch price of the performance-comparable GTX 980.

Alongside rival AMD's just-launched RX 480 GPU, the cost of building a VR-ready PC is significantly lower than it was at the launch of the Rift and Vive, dropping from roughly $950 to around $800 or less. That's still a hefty sum, but it'll likely make VR more appealing for PC gamers who have been holding off until now.

 

Eoin Treacy's view -

Virtual reality applications require major upgrades in both graphics cards and processing power. Gaining access to the enhanced sensory experiences on offer therefore means spending on new phones for a basic version or new computers and other hardware for the best in class. 



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July 08 2016

Commentary by Eoin Treacy

Barrick Says Becoming Debt-Free Within a Decade Is in Reach

This article by Danielle Bochove and Scott Deveau for Bloomberg may be of interest to subscribers. Here is a section: 

Barrick Gold Corp., the largest miner of the metal, could be free of debt within a decade on bullion-price gains, cost cuts and asset sales, President Kelvin Dushnisky said.

The Toronto-based miner had about $9 billion in debt in the first quarter, down from a peak of $15.8 billion in the second quarter of 2013. Dushnisky said debt could fall to $5 billion in three years and zero within 10 years.

“That’s not unreasonable,” Dushnisky said in an interview on Bloomberg TV Canada. "Yet again, it’s gold-price dependent.

We’ve been very clear, Barrick was the only company with an A- rated balance sheet for the longest time. Our intent is to be strong investment grade, and we’d like to be in the position where we have no corporate debt.”

Barrick has set a target of paying down $2 billion in debt this year after exceeding its $3 billion debt-reduction goal in 2015. Dushnisky said the company had already achieved 40 percent of that goal by the end of the first quarter and, if the tailwinds continue, it may exceed those targets.
"We certainly could. We’re staying with our $2-billion target for now," he said during a separate interview in Toronto.

 

Eoin Treacy's view -

Gold miners have found religion. Most have given up their profligate ways, stopped carousing with M&A advocates, shed administrative and marketing staff and now espouse a more upright business model of only indulging in spending when it can be afforded and justified by the geology and cost structure. The result has been transformative for shares prices many of which have doubled this year; offering a high beta play on the gold price.  



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July 07 2016

Commentary by David Fuller

Ignore the Prophets of Doom. Brexit Will Be Good For Britain

“We have had no end of a lesson: it will do us no end of good!” So said Rudyard Kipling of the Boer war, and he might well say the same today. David Cameron’s wild European gamble has failed. He and the British establishment took democracy for granted. They lined up all the toffs and boffins, the chief executives, tycoons and clever-clogs in the (south of the) land, and asked the nation to pat them on the back. The invitation to a punch in the face was too good to miss.

Now, with blood barely dry on their lips, project fear has mutated into project stupid-idiots. I find it staggering that the remain minority can accuse the Brexit majority of not knowing truth from lies – unlike in all elections? – and could not have meant its vote. It should therefore be asked to vote a second time, and show due respect to its elders and betters. What planet are these people on? I would guess the leavers in a second vote would soar to 60%, out of sheer fury.

Brexit is starting to deliver. British politics was constipated and has now overdosed on laxative. It is experiencing a great evacuation. It has got rid of a prime minister and is about to get rid of a leader of the opposition. It will soon be rid of a chancellor of the exchequer and a lord chancellor. It is also rid of two, if not four, Tory heirs apparent. Across the spectrum the left is on the brink of upheaval and perhaps historic realignment, if only the Liberal Democrats have the guts to engineer it. The Greens and Ukip have both lost their leaders. An entire political class is on the way out. As Oscar Wilde said of the death of Little Nell, it would take a heart of stone not to laugh.

During the referendum I was persuaded neither by project fear nor by Brexit’s projected sunny uplands. I thought, and still think, time and compromise will eventually stabilise Britain’s relations with the EU as not so different from today. Whether the stabiliser is joining the European Economic Area (within the letter, if not the spirit, of Brexit) or some other arrangement – who knows? I voted remain because I felt Europe’s future to be so precarious as desperately to need Britain’s more forceful presence. I feel that more strongly after the news that the European parliament leader, Martin Schulz, wants to move the EU swiftly to a “one government” federal constitution.

David Fuller's view -

For the UK, Brexit negotiations may feel like a one horse race at the Grand National – exciting, not without risk, endurance required, and a big prize for winning.  The EU would be wise to lower the fences on this course, for the sake of their 27 economies.  If not, our soon to be elected female jockey may prefer to move slowly given next year’s French election, which may produce a surprise.  We are also likely to see a new chancellor for Germany after next year’s election.



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July 07 2016

Commentary by David Fuller

Post-Brexit, the Real Risk Is Europe Could Fail

Here is the opening of this topical article from Bloomberg:

While the short-term economic consequences of Brexit are not to be dismissed, it is the impending failure of the European project that should provoke the bigger sense of concern.  The EU's two biggest achievements since the establishment of the single market -- the euro and border-free travel -- are both under threat. These implosions would be a magnitude more painful than the British vote.

The two are closely linked. European governments realized in the 1980s that competitive currency devaluations were hindering the single market, which was supposed to bring more industrial specialization and economies of scale. A single currency, they hoped, would put an end to that game, bring low German interest rates to all and enable national governments to reduce deficit and debt levels, as enshrined in the Maastricht criteria.

But there would be a cost: Respecting these rules would create political pain as parts of the labor force were displaced. That is where the 1985 Schengen Agreement came in. The pain of fiscal restraint and adjustment would be eased by promoting free movement. People might lose their jobs in Fiat, but they could go and work in the Ruhr. The single market had already enshrined this freedom, but Schengen made it truly palpable by removing border controls.

Over time, cross-border trade, tourism and labor mobility increased markedly as a result. The freedom to retire, go on holiday or study in another EU country created important political constituencies in support of Europe. As Eurobarometer polls consistently showed, border-free travel was hugely popular. Both the euro and Schengen are now on life support.

David Fuller's view -

It has long been basic economics 101 that you do not introduce a single currency before creating a federal state, which of course, the vast majority of citizens in Europe have never wanted.  The EU’s political founders and followers ignored this reality by introducing the Euro, bankrupting Southern European countries in the process.  The EU will never recover from this in its present form.

Europe can still have freedom of movement with travel and residency agreements between consenting countries.  I do not see why countries could not reintroduce their former currencies, over which they would regain full control.  While travelling, they could use the Euro like Bitcoin for expenses within other European countries, if they did not want to convert currencies every time they entered another European country, as in the pre-Euro era. In other words, the Euro would no longer be a national and regional reserve currency.  Instead, it would just be a commercial currency which anyone could buy, sell or hold, should they wish to do so.



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July 07 2016

Commentary by David Fuller

July 07 2016

Commentary by David Fuller

Sterling Slide Is Painful But What We Need In a Global Deflation Crisis

Here is the conclusion from another astute column by Ambrose Evans-Pritchard for The Telegraph:

It is often said that a safe exit into the European Economic Area is a non-starter because it comes with obligatory free movement of EU migrants. This is not true. The EEA council approved immigration controls for Liechtenstein in 1997 and these later evolved into a quota system. The legal precedent exists.

This is purely a political issue. If Britain and the EU wish to resolve the dispute, they can do so easily, either with the Liechtenstein model or the Ukraine association model, which allows for much the same thing. All else is posturing.

What is imperative is that Conservative Party quickly dispels the narrative propagated by the entire global media that Britain is succumbing to reactionary nativism and turning its back on the post-war international order. Both the New York Times and the Washington Post ran stories after the vote deeming it to be the death of liberal globalisation. Variants of this corrosive theme have taken hold everywhere.

It is a little irritating since all we have done is to take back our sovereign self-government from a deeply dysfunctional organisation that has over-reached badly, plays fast and loose with democracy, and is itself a major cause of the crisis engulfing Europe. 

Britain is the first country to volunteer to lead one for the four NATO battalions being formed to defend the EU's eastern border in Poland, Lithuania, Latvia, and Estonia, and the Royal Air Force patrols the Baltics, two of many commitments that are a little too lightly overlooked.

Professor Alan Riley from the Institute for Statecraft says Britain should go further to demonstrate with absolute clarity to Washington and every European capital that the country is resiling from nothing and is an ally to be reckoned with.

He wants three British armoured divisions deployed in Germany or beyond, a Royal Navy squadron in the Baltic, with a boost in defence spending to 3pc of GDP to silence all talk of retreat and entirely change the strategic balance in what is now a disarmed and paralysed Europe. I agree. We need this anyway because the world is turning more dangerous by the day.

Sir John Holmes, a veteran diplomat and EU expert, told a forum at Chatham House this week that Britain could turn Brexit into a golden era of relations with Europe "if we play our cards right and in the right spirit".

"Paradoxically, it may be easier to work together once we are free of our own paralysing fear of supranational institutions and of abandoning our sovereign right to our own policy. Once the divorce is complete, we should be able to escape the endless wrangling," he said.

Sir John asked whether anybody really believes that the status quo ante was acceptable, or whether a narrow victory for Remain would ever have resolved the matter. The answer is obviously not, and if that is the case, what conclusions do you draw?

The task for the next prime minister is to convince EU leaders that it is better for everybody to have a good British neighbour rather than a truculent British tenant. She go to Brussels with a nuclear-armed smile.

David Fuller's view -

The best part of this article, in my opinion, is the conclusion above, which I will comment on in a moment.

First, I hope that the third paragraph of the full article (see link above or PDF in the Subscriber’s Area) is an exaggeration.  There is a considerable amount of positive deflation (increased output at lower costs leading to higher profits and stronger growth), due to the accelerated rate of technological innovation.

The problem is that technological innovation is also highly disruptive, at least initially.  Consider Amazon, reaffirming its overall upward trend, or Google which needs to break its progression of lower rally highs to reaffirm demand dominance.  See also a list of other Autonomies mentioned by Eoin below. 

This item continues in the Subscriber’s Area where a PDF of AE-P’s column is also posted.



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July 07 2016

Commentary by David Fuller

The Markets Now

Monday 11th July at the East India Club, 16 St James's Square, London SW1Y 4LH

David Fuller's view -

Given the importance of Brexit and its influence on markets, We could have a short interactive discussion on this topic before the scheduled presentations commence, if delegates favour this.

Could we have a more interesting markets background to discuss on 11th July?  I doubt it and am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Note: Next Monday’s Markets Now seminar is sold out.  We will be testing a video recording of the seminar, focussing on presenters and their slides rather than delegates.



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July 07 2016

Commentary by Eoin Treacy

Global bond burn from Brexit may now force fiscal response

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

To be sure, fiscal policy has been loosening gradually this year across the major economies, according to HSBC. Growth in government spending globally in 2016 was already set to be the fastest since 2009's coordinated G20 push even before June 23.

"One way or another, we suspect fiscal policy will likely have a larger role to play in many countries from here," wrote HSBC's Global Chief Economist Janet Henry. "But not just any fiscal stimulus will do."

Henry warned that governments had to make sure budget adjustments either made long-lasting structural reforms or that they led to higher public investment that would then raise productivity and encourage the private sector to follow

Otherwise, "they will never meet the long-term nominal growth rates required to start to lower debt burdens". The combination of "higher debt-to-GDP ratios and persistently higher taxation would be a permanent drag on growth," she said.

JP Morgan economist Jan Loeys reckons the economic and political rationale for fiscal stimuli is now compelling.

"Growth remains at snail’s pace. It is not making voters happy; they are clamoring for better," he wrote. "Monetary policy has done a heroic job keeping the world economy afloat, but it does not have much left to give. It is probably time to pass on the baton to fiscal policy."

 

Eoin Treacy's view -

We are all well aware of the fact central banks favour inflation in order to make the job of paying down debt a less burdensome process. In the same way politicians anxious to hold onto their jobs often resort to spending their way out of the problem regardless of whether that contributes to potentially larger issues later. 



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July 07 2016

Commentary by Eoin Treacy

Putin's Military Buildup in the Baltic Stokes Invasion Fears

This article by Henry Mayer may be of interest to subscribers. Here is a section: 

“NATO could not have militarily prevented a determined Soviet effort to overrun West Berlin, nor can it militarily prevent a determined Russian effort to overrun the Baltic states. But if the Soviets had overrun West Berlin, that would have meant war with NATO,” said Thomas Graham, a senior White House aide at the time the three countries joined the alliance more than a decade ago. “In theory, the same thing should hold true if the Russians made an effort to overrun any Baltic state.”

To help dispel doubts about its commitment, NATO this week will approve plans to deploy four battalions to rotate through the region. But though bigger than what the military bloc has ever placed there before, the units will still be dwarfed by Russia’s forces on the other side of the border.

The Kremlin, which is spending 20 trillion rubles (about $313 billion) on an ambitious defense upgrade through 2020, argues that it’s just responding to NATO’s encroachment toward Russian borders. In May, Russia announced plans to put two new divisions in the Western region and another in the south. That could be about 30,000 troops, compared to 4,000 in NATO’s plan.

 

Eoin Treacy's view -

There is a Chinese proverb to the effect that when the snipe and the clam fight the fisherman wins. With the UK’s decision to leave the EU, Western European political elites are scrambling to put together a response. At the very minimum it says to the rest of the world that the EU is vulnerable due to a lack of internal cohesion suggesting outside parties have an advantage. As a military strategist Putin may well view this is as an opportunity. 



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July 07 2016

Commentary by Eoin Treacy

Danone To Acquire WhiteWave Foods In $10 Billion Milk Merger

This article by Maggie McGrath for Forbes may be of interest to subscribers. Here is a section: 

It’s a match made in milk heaven: Danone, the French dairy giant behind brands like Activa, Oikos and Dannon yogurt, announced Thursday morning that it will buy Silk Soy Milk maker WhiteWave Foods in a deal worth $10 billion.

Danone said Thursday that it will pay $56.25 per share to acquire WhiteWave, a price that marks a 24% premium to WhiteWave’s average closing price ($45.43) over the last 30 days. Including debt and other WhiteWave liabilities, the companies are valuing the deal at $12.5 billion. The deal is expected to close by the end of the year, pending all customary shareholder and regulatory approvals.

The acquisition is expected to be fully financed with debt. Danone said that it has received commitment from its banks for this debt, and that it expects to maintain a “strong” investment grade rating.

While the companies are calling the merger a “perfect match of vision, culture, and business,” the financial benefits are even more compelling: the acquisition will serve to almost double the size of Danone’s U.S. business, taking its North American footprint from 12% of Danone’s overall portfolio to 22%. Danone also said that merging with WhiteWave will make it one of the top 15 food and beverage producers in the U.S.

The companies are projecting $300 million in synergies by 2020, and Danone is saying that the merger will be accretive to its earnings within the first year of the deal’s closing.

 

Eoin Treacy's view -

Danone, despite being listed in France, has been relatively unaffected by the travails that have affected the majority of Eurozone shares this year. It is helped considerably by the fact that the vast majority of its revenue is sourced outside the EU and this acquisition brings its operations improved diversity. The result will be that about a third of revenues will come from the Americas, Asia and Europe respectively. 



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July 07 2016

Commentary by Eoin Treacy

July 06 2016

Commentary by David Fuller

Government Must Start Talking Up the UK Economy

What is wrong with the government? The fact that it has been destroyed by the referendum doesn’t mean that it should no longer govern. It has a duty to keep the show on the road, and that includes demonstrating that Britain remains open for business. It needs to reassure, not simply shrug.

The campaign is over. The government may not like the way the vote went, but its duty is to urgently reprogramme itself and to make the most of the situation. Project Fear should not turn into a self-fulfilling Project I told You So. Sadly, it has, at times, felt as if the Prime Minister no longer really cares, and is refusing to take simple steps to stabilise the situation. All political careers end in failure, but sulking is never right.

The Chancellor has been little better, but at least he has unveiled a proposal to slash corporation tax to 15pc, a move which may well be enough to (for profitable firms) cancel out any freshly-imposed tariffs, were we ever to get to that. We need far more of this kind of thinking to cancel out the broken animal spirits in the City, and to paint a picture of a pro-growth economy.

The most outrageous, unacceptable and economically damaging failure of the past 12 days is the way EU residents who reside and work in Britain have been left in the lurch. The Leave campaign explicitly stated that all such people would be allowed to live here when we leave the EU; the only people making an issue and claiming that this wouldn’t be true were certain elements of the Remain side. The issue was put to rest when Leave firmly pointed out that this wasn’t its policy, and it cited - convincingly, in my view, the fact that international agreements such as the Vienna Convention on the Law of Treaties mean that acquired rights (to reside, in this case) don’t suddenly vanish if the underlying treaty is repealed. Under the Charter of Fundamental Rights, which would still bind the rest of the EU post-Brexit, “collective expulsions are prohibited”.

David Fuller's view -

A degree of confusion and paralysis among failed politicians following a momentous and at the last minute, unexpected result such as the vote in favour of Brexit is a concern.  It certainly adds to uncertainty at a time when people are looking for leadership, and this has a negative economic impact over the medium term. 

Politicians expecting or hoping to be part of the next government may feel inhibited before actually taking on the power of office.  Fortunately, Governor of the BoE Mark Carney and Chancellor of the Exchequer George Osborne have been sensible since the referendum outcome. 

Theresa May remains the clear favourite to be UK Prime Minister following a strong first round performance.  Moreover, the two lagging candidates dropped out and pledged their support to Mrs May.  Two other candidates remain but only Andrea Leadsom has a slim chance of overhauling May in Thursday’s second round election.  Michael Gove will be out of the running following that vote and most likely throw his support to Andrea Leadsom.  The two candidate race will be opened to paid-up members of the Conservative Party who will elect the first woman Prime Minister since Margaret Thatcher.  I wish that vote could take place before September but at least the candidates will be free to focus on the UK’s exciting medium to longer term potential.    

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



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