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January 08 2019

Commentary by Eoin Treacy

Delay Brexit? Ireland would not stand in the way

This article by Guy Faulconbridge, Conor Humphries for Reuters may be of interest to subscribers. Here is a section:

The Telegraph newspaper cited three unidentified EU sources as saying British officials had been “putting out feelers” and “testing the waters” on an extension of Article 50, which sets out the conditions for leaving the EU.

Brexit Secretary Stephen Barclay denied the report and said London would not seek to extend the divorce while German Foreign Minister Heiko Maas said it was not time to discuss such a course. Ireland, though, said it would not stand in the way if Britain made such a request.

“Certainly from an Irish perspective, if such an ask happens, we won’t be standing in the way on that,” Irish Foreign Minister Simon Coveney told journalists after a meeting with Maas in Dublin.

“If it is the case that at some point in the future that the British government seeks an extension of Article 50, then that is something that will have to get consideration at an EU level,” Coveney said.

Ireland’s economy would be hit hard by a disorderly Brexit and the most contentious part of May’s deal is an insurance plan aimed at preventing a hard border between the Irish Republic and Northern Ireland.

Eoin Treacy's view -

May is said to intend to “move swiftly” if her deal is voted down in parliament, as seems likely. The UK is due to leave the EU on March 29th so 80 days from now. One is reminded of Phileas Fogg’s race around the world but perhaps the more appropriate literary comparison is with Don Quixote and tilting at windmills, but this time in the Low Countries.



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January 07 2019

Commentary by Eoin Treacy

Video commentary for January 7th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Dollar testing important support againsts the Euro, select emerging market currencies breaking out led by the Rupiah. China steady, oil firm, gold steady, sugar firms, grains and beans have base formation characteristics, high yield spreads start to contract.



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January 07 2019

Commentary by Eoin Treacy

Email of the day on the bond markets and labour market

I thought you may find this interesting. If we think we have a LT top on bond prices, the Powell put and fiscal excesses may just cause the next bull move and the move to higher inflation. I thought this FT chat on labor market was interesting ..best   

Eoin Treacy's view -

Thank you for this email which is timely considering the extent of the rally we have seen in bond prices over the last few months. The Merrill Lynch 10-year Treasury Futures Total Return Index has rallied impressively and is now testing the sequence of lower rally highs evident since the middle of 2016. A short-term overbought condition is now evident and this is a natural area where resistance might be expected.



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January 07 2019

Commentary by Eoin Treacy

The rhetoric is changing, but Xi Jinping is staying the course

This article by George Magnus for the Financial Times may be of interest to subscribers. Here is a section:

The 40th anniversary of Deng Xiaoping’s opening up of the Chinese economy, and the end-of-year Central Economic Work Conference last month, suggest that Mr Xi is prepared to accede to change but not to anything that threatens China’s core interests. He cannot risk caving in to US pressure. Foreign companies and SOEs will still be required to buy and prioritise locally. Local governments and tech companies are bound to support the security, innovation, and industrial transformation of the state. Industrial policy designed to boost China’s technological and military capacity is not up for negotiation. Changes to intellectual property laws are aimed more at small businesses rather than SOEs and big technology companies. Changes in foreign ownership caps and technology transfer will have to go some way for foreign companies to back away from reconsidering supply chain strategies. So, while we can anticipate some flexibility in the optics of Mr Xi’s negotiating stance, no one really doubts that he is firmly in control, and remains committed to both the Made in China and Belt and Road strategies, which are enshrined in the party’s constitution.

Eoin Treacy's view -

Liu He, Xi’s top economic advisor, turned up at the talks between the US and China today despite the fact they were to be led by mid-level officials. That’s a signal China is taking these negotiations seriously.

The simple fact is that if China wants to achieve its ambitions of becoming a global super power in a military, economic, technological, political and cultural sense it needs to placate the USA today so that it can show its true strength later. That, in fact, was exactly the strategy Deng followed when he advised the Party to hide its strength and just play along with the global economy in opening up.



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January 07 2019

Commentary by Eoin Treacy

Indonesia Signals Return as Asia's Emerging Market of Choice

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

Indonesia is often seen as an emerging market bellwether with its high yields, strong economic growth and a reformist government, with foreign investors holding about 40 percent of local-currency bonds. The direction of its markets may provide clues as to whether the stress that swept developing nations last year may be coming to an end.

Federal Reserve Chairman Jerome Powell’s comments on Friday indicating a possible pause in rate hikes, an easing in China’s monetary policy, and hopes of improvement in trade tensions between Beijing and America have all combined to boost emerging markets on Monday.

“The rupiah looks to be on that nice catch-down trade given the Goldilocks’ moment that markets are reveling in,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Fed’s Powell humming all the right notes out of the markets song book has gone a long way” in boosting the rupiah, he said.

Eoin Treacy's view -

Indonesia is a commodity exporter, has a large young population, an evolving manufacturing sector, and while now an energy importer is still an oil producer. With a reform minded administration it has exhibited relative strength this year not least because it got its currency devaluation done in 2015.



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January 04 2019

Commentary by Eoin Treacy

January 04 2019

Commentary by Eoin Treacy

Powell Pledges Flexible Fed Policy, Won't Quit If Trump Asks Him

This article by Jeanna Smialek and Rich Miller for Bloomberg may be of interest to subscribers. Here is a section:

Federal Reserve Chairman Jerome Powell said the central bank can be patient as it assesses risks to a U.S
economy and will adjust policy quickly if needed, but made clear he would not resign if President Donald Trump asked him to step aside.

“With the muted inflation readings that we’ve seen, we will be patient as we watch to see how the economy evolves,” Powell said Friday on a panel with his predecessors Janet Yellen and Ben Bernanke at the American Economic Association’s annual meeting in Atlanta.

“We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track,” he said, adding “there is no pre-set path for policy.”

Eoin Treacy's view -

The financial markets have been busying pricing out the potential for additional rate hikes this year in the aftermath of the last Fed meeting. That was a clear message to policy makers that they were making a mistake in signaling a willingness to persist in raising rates and running off the balance sheet concurrently.

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

 



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January 04 2019

Commentary by Eoin Treacy

Email of the day on a list of the autonomies

Is there a link to your updated list of Autonomies? I searched on site but could not find. Thank you and Happy New Year to you and David!

 

Eoin Treacy's view -

Happy New Year and thank you for this question which may be of interest to other subscribers. We have a section in the International Equity Library devoted to the 168 autonomies. What become obvious over the last decade is capitalism trends towards consolidation and there has been a continuing trend of mergers between the world’s largest companies. The result is that it has been a relatively dynamic list. 



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January 04 2019

Commentary by Eoin Treacy

Oil Set for Biggest Weekly Gain Since 2016 on Saudi Supply Cut

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

“Underpinning this wave of buying is mounting evidence that Saudi Arabia has taken an axe to its oil production,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd. Oil’s positive start to 2019 follows its worst quarter in four years and a 20 percent annual loss driven by panic over a growing glut of crude. While OPEC’s output plunged by the most in almost two years last month and producers have pledged to curb supplies through the first half of 2019, concerns about oversupply prevail as stockpiles at America’s main storage hub show signs of swelling.

And

The majority of oil executives surveyed by the Dallas Fed are still planning to boost spending in the next year, even after a plunge in prices. Saudi Arabia raised pricing for most crude grades to Asia and for all blends to buyers in the U.S. for delivery in February as the world’s biggest exporter cuts output to clear a global oil glut. As the new year begins, the oil market looks set to be dominated by big shifts in production. A few months ago, investors were struggling to comprehend just how much cash the largest oil companies were about to dump on them. Those mountains of money have now been reduced to mere hills.

Eoin Treacy's view -

Saudi Arabia following through and cutting supply is a positive development but the declining economic activity in Texas is also an important consideration since the unconventional supply is a big part of the reason for the glut which has seen prices decline so swiftly.



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January 04 2019

Commentary by Eoin Treacy

Will Winter of Discontent Make Summer of Slowdown?

Thanks to a subscriber for this report from Douglas Porter for BMO focusing on the Canadian market. Here is a section:

In normal times, it’s Canada’s turn to shine at this later stage in the cycle—typically benefitting from rising commodity prices and still-solid global growth. But the TSX was bludgeoned this year (down double-digits) by trade tensions, a housing slowdown and weak domestic oil prices. Next year’s growth outlook is dulled by oil production cuts, slower U.S. spending, slipping auto sales and the overhang of record consumer debt. Providing a mild offset will be the new LNG project, mildly stimulative fiscal policy in the lead-up to the October federal election, as well as (presumably) some certainty on the North American trade front. But with the big interest-sensitive sectors still gearing lower, we look for 2019 Canadian GDP growth to simmer down to a 1.8% pace following this year’s as-expected 2.1% advance. With population growth recently clocking in at 1.4% y/y, this points to quite modest per capita gains.

Even this more restrained GDP growth will tighten the labour market further, producing the lowest unemployment rate seen in Canada since the early 1970s. This will be the key ingredient convincing the Bank of Canada to tighten further in 2019, tempered somewhat by Governor Poloz’s view that there is still some hidden slack in job markets—surprisingly sluggish wage growth recently lends serious credence to that opinion. Overall, we look for the Bank to hike rates two times (50 bps) in 2019, following a year when policy actually met expectations to a T. Curiously, 10- and 30year Canadian bond yields are now only slightly above year-ago levels, and the GoC curve is even flatter than the flat Treasury curve; bonds clearly expect cooler Canadian growth next year as well. That view also appears to be built into the Canadian dollar, which spent most of the year on the defensive amid trade tensions and wobbly WCS prices. We look for only a mild recovery in 2019 for the loonie amid firmer oil prices and if/when the USMCA is ratified.  

Eoin Treacy's view -

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

Alberta is talking about secession. It’s never going to happen but the fact the province is even talking about it tells a tale of the ignorance the Ottawa government has for what helped Canada become a globally significant economy.



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January 04 2019

Commentary by Eoin Treacy

Email of the day on bank excess reserves

Happy New Year to you and your family in California

Thank you for responding to my question, directly on the daily commentary .

In that commentary you said that banks still prefer to hold a reserve at the FED in their balance sheet rather than holding Treasuries (as a result of the balance sheet reduction) , although both have same credit rating (i.e. the credit rating of the US government)

I don’t understand the last point. Why should banks prefer holding a lower yielding reserve asset  than a higher yielding Treasury bond, if we isolate the duration difference between the 2?  I am struggling to understand why balance sheet reduction is so bad a thing for banks (as liquidity providers as you point out) if they exchange one asset for the other. Their lending power is not impaired as a consequence. Or am I wrong? actually lending activity by commercial banks in the US has been picking up until end of 2018 notwithstanding the equity markets gyrations

Btw. I am attaching a link of chart showing the increase of Treasuries and Government agency papers + MBS by commercial banks in US. They are picking up.  They have accelerated in December so much that the new 10 years yield now discounts only one rate hike for 2019.  Very bearish an implicit scenario.

Eoin Treacy's view -

Thank you for this follow-up question. (The original was posted in the Comment of the Day on December 21st  )


The money the central bank pay banks for parking reserves is guaranteed but Treasuries change in value from day to day and therefore have more volatility. Any volatility represents more risk than none and therefore more uncertainty



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January 04 2019

Commentary by Eoin Treacy

Cuts Banks' Reserve Ratio to Ratchet Up Support for 2019

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

This may in part be a reaction to the bad PMI data and the equity market sell-off we have seen," said Michelle Lam, a greater China economist at Societe Generale SA in Hong Kong.

“They’re trying to restore market confidence and need to ease credit conditions to boost lending to the private sector and because of high seasonal demand for cash.” China’s manufacturing purchasing managers index fell into the contraction territory last month, the weakest since early 2016. Early indicators for December signal the economic slowdown is deepening, after official data showed industrial production growth was the weakest in a decade and industrial profits fell
for the first time in almost three years in November.

Stimulus Pledge
Chinese financial stocks surged Friday as Premier Li Keqiang visited the nation’s biggest banks and pledged more support for the economy. Li said China will strengthen the scale of its counter-cyclical adjustments of macro policies and further cut taxes, while urging banks to take full advantage of tools including reserve ratio cuts, and to support private and small businesses’ financing needs.

“How much can this help the economy remains to be seen,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “The central bank has been handing liquidity to the banks, but the banks are unwilling to lend. This is a classic case of banking disintermediation amid the
down cycle.”

Eoin Treacy's view -

China’s bank reserve requirements have been cut significantly over the last few years with little sign just yet that the banks are willing to voluntarily take on more risk. That is particularly true for the corporate sector now that defaults are a reality.



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January 03 2019

Commentary by Eoin Treacy

Video commentary for January 3rd 2019

January 03 2019

Commentary by Eoin Treacy

January 03 2019

Commentary by Eoin Treacy

Surge, Algos Set Off 'Flash-Crash' Moves in Currency Market

This article by Ruth Carson and Michael G. Wilson for Bloomberg may be of interest to subscribers. Here is a section:

“It looks more like a liquidity event with the move happening in the gap between the New York handover to Asia,” said Damien Loh, chief investment officer of hedge fund Ensemble Capital Pte., in Singapore. “It was exacerbated by a Japan holiday and retail stops getting filled on the way down
especially in yen crosses.”

As a result, the yen surged against every currency tracked by Bloomberg, and was up 1 percent against the dollar at 107.78 by 9:30 a.m. in London.

The haven asset has strengthened against all its major counterparts over the past 12 months as concerns over global economic growth mounted and stocks tumbled. It rose 2.7 percent against the dollar last year, the only G-10 currency to gain versus the greenback.

“Yen strength has been omnipresent since mid-December, cementing the status of the yen as the only true safe haven these days amid political risks elsewhere,” said Christin Tuxen, head of currency research at Danske Bank A/S.

Eoin Treacy's view -

The quiet time around the holidays is when algos have a particularly good opportunity to trigger stops and to enact outsized moves which have the scope to set the stage for trading for months afterwards.



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January 03 2019

Commentary by Eoin Treacy

Brazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

This article by Mario Sergio Lima and David Biller for Bloomberg may be of interest to subscribers. Here is a sectionBrazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

In a speech at his swearing-in ceremony in Brasilia on Wednesday, Guedes promised a sweeping overhaul of the country’s state apparatus and business environment to unleash corporate potential and free future generations from debt.

"Private-sector pirates, corrupt bureaucrats and creatures from the political swamp have conspired against the Brazilian people," he said. "Excessive spending has corrupted Brazil." Bolsonaro has tapped Guedes, a graduate of the University of Chicago, to manage economic policy in a country hamstrung by rising debt, a gaping fiscal deficit and slow growth. Bolsonaro won the October election by a wide margin as part of a popular backlash against crime, corruption and economic malaise.

In his comments Wednesday, Guedes highlighted the urgency of the task ahead. "Our business class is chained down by interest rates, high taxes and labor costs," he said, adding that he believed the ideal tax burden would be around 20 percent of gross domestic product, rather than the current rate of 36
percent.

Earlier in the day, the new energy minister, Bento Albuquerque, said Brazil would deliver on plans to capitalize Eletrobras, prompting shares in the state-run company to jump as much as 9.7 percent. He added that he would seek a lower tax burden and few subsidies in the electricity sector.

Eoin Treacy's view -

Markets tend to reward the efforts of right-wing populists because they promise to streamline bureaucracy, cut regulation and boost economic growth; all of which tend to improve sentiment towards asset prices. Bolsonaro’s decision to appoint a University of Chicago economist as his finance minister is a signal, he has growth and employment as his first set of priorities and that is likely to be appreciated by investors.



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January 02 2019

Commentary by Eoin Treacy

Video commentary for January 2nd 2018

January 02 2019

Commentary by Eoin Treacy

Quality Equities: The Solution to Today's Equity Conundrum

Thanks to a subscriber for this report by Tom Hancock for GMO. Here is a section:

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

When David and I came up with the idea of the Autonomies back in 2010 we were thinking of companies that could perform come hail or shine in the evolving secular bull market. There are three fundamental strands to that belief and one technical.

The rise of the global consumer is a euphemism for the spread of capitalism and improving standards of governance which have historically delivered improving standards of living and higher consumption of goods and services. As long as capitalism continues to spread and governance improves millions of people are likely to be lifted out of poverty and into the middle classes. Asia and Africa are ground zero for that trend to persist in the coming decades



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January 02 2019

Commentary by Eoin Treacy

Italian Lender Carige Put Under Administration Over Capital Woe

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

The latest boardroom exits were prompted by the rejection of its rescue plan, Carige said. Its top management were replaced in late 2018 after Malacalza won a board battle to pursue a capital-raising rather than a merger.

Italy’s finance ministry is studying a plan under which Carige is bought for a symbolic price, possibly by UniCredit SpA, La Stampa reported Wednesday, without saying where it got the information. Such a deal might mirror Intesa Sanpaolo SpA’s takeover of two Veneto-based banks with state support in 2017.

Eoin Treacy's view -

The painful contraction and rationalisation of the Italian banking sector continues with Carige representing the latest in a litany of failed lenders which have been unable to write off loans despite the fact they have no chance of being paid back. The result is Italy will be left with a handful of large institutions and the rest will be allowed to fail which will further concentrate risk and strengthen the ties between the state and the banking sector.



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January 02 2019

Commentary by Eoin Treacy

Hong Kong Stocks Have the Worst Start to a Year Since 1995

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

Further evidence of slowing Chinese growth weighed as a closely-watched manufacturing gauge had its lowest reading since May 2017.

“There are a lot of uncertainties lying ahead,” said Banny Lam, head of research at CEB International Investment Corp. “The markets will likely be stuck in a downtrend over the next few
weeks.”

Property stocks were among Wednesday’s biggest decliners on the Hang Seng Index, with China Resources Land Ltd. and Country Garden Holdings Co. both falling more than 6 percent.

“Some funds are readjusting their positions for the new year and may be dumping stocks in sectors with an uncertain outlook like property and health care,” said Linus Yip, a Hong Kong-based strategist with First Shanghai Securities Ltd. “That’s why we’re seeing a sell-off.

Eoin Treacy's view -

Hong Kong has some of the highest property prices in the world which are a function of extraordinarily low interest rates, abundant and persistent demand from well-heeled mainland residents. Tightening liquidity is a significant threat to that trend persisting while ebbing demand from Chinese residents amid downward pressure on the domestic economy is also a concern.



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December 31 2018

Commentary by Eoin Treacy

December 31 2018

Commentary by Eoin Treacy

Best and Worst of 2018

Eoin Treacy's view -

The big drawdown that began in January represented a major inconsistency for what had previously been an impressively consistent trend. The subsequent ranging belied the churning that was taking place inside the major Wall Street indices as leadership narrowed to focus on the mega-cap technology companies.  Facebook peaked in the summer and Apple in October and that was one of the causal factors in the ensuing sell-off as large cap underperformance weighed on ETFs.



The fact that Advanced Micro Devices was the best performing share on the S&P500 this year is a testament to the extraordinary volatility we have seen in single stock names. The share opened in January at $10.42, peaked in September at $34.14 and closed today close to $18.32.



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December 31 2018

Commentary by Eoin Treacy

Email of the day on a China slowdown

Many thanks for another great year of top-class service. All the very best for 2019 and beyond. The following article in today's Observer gives on-the-ground evidence of the slowdown in the Chinese economy. 

Eoin Treacy's view -

Thanks for your well wishes, your kind words of encouragement and Happy New Year!

Here is a section from the article:

“People have started to reduce or even stop spending money because they don’t expect the economy will perform well,” said Ye Tan, an independent economist based in Shanghai. “Companies and individuals are wary about the economy.”

Going into 2019, China faces not just a slowing economy but also a protracted trade war with the US, a pile of debt that threatens the world economy along with the Chinese financial system, and a populace demanding better environmental, labour, and health protections.

Next year, China’s leaders face some of the most difficult policy decisions they have had to make in years. Analysts say they are confronting a choice between pushing headline growth through Beijing’s traditional levers of infrastructure spending funded by debt, or painful reforms that lower financial risk but raise the possibility of unemployment, and ultimately social instability.

Officially, China’s economy is humming along. Economic growth is expected to slow to 6.3% next year, after reaching 6.6% in 2018. The economy expanded by 6.5% in the third quarter, the country’s slowest quarter since 2009.

Yet economic indicators from auto sales to manufacturing activity are all flashing red. In November, growth in China’s manufacturing sector stalled for the first time in more than two years. Annual auto sales in the world’s largest car market are on track to contract for the first time since 1990.



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December 31 2018

Commentary by Eoin Treacy

Gold Barrels Into 2019 as Growth Concerns Spur Demand for Haven

This article by Jake Lloyd-Smith and Krystal Chia for Bloomberg may be of interest to subscribers. Here is a section:

Gold gained ground this quarter as world equities plunged and doubts stacked up about the pace of economic growth in 2019. A weakening dollar in December aided the rally amid expectations the Federal Reserve will dial back the pace of rate increases next year. That’s also helped to boost holdings in gold-backed exchange-traded funds.

“For gold prices, I think there is upside to be seen in 2019,” Jingyi Pan, market strategist at IG Asia Pte., told Bloomberg TV on Monday, citing prospects for fewer tightening moves from the U.S. central bank. “It does look like one where we will see a slackening of expectations in Fed hikes.”
 

Eoin Treacy's view -

The big picture is the world’s governments have a lot of debt and the rise of populism is burnishing the attraction of fiscal stimulus. That is likely to put downward pressure on fiat currencies, with no country wanting a strong one. For a monetary metal that cannot simply be lent into existence that’s potentially very good news.

 



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December 28 2018

Commentary by Eoin Treacy

December 28 2018

Commentary by Eoin Treacy

Email of the day on Target 2 imbalances

Merry Christmas to you and your family. Thank you for all the hard work you have put in 2018 to produce such a valuable service. I'm sure that the Euro's travails are the last thing on your subscribers' minds this festive season but this YouTube video may be of interest to the Collective. It is a lecture given in fluent English) by German economist Dr. Oliver Hartwich last July, entitled 'Target 2 and the Euro Crisis'. He explains this arcane subject with great clarity and humour. 

Eoin Treacy's view -

Thank you for your kind words and this enlightening video which as you say offers a very useful exposition of the internal transfer mechanism that makes up the Euro. The simply fact is that the Euro was designed to be the currency of a pan European federal super state and has the transfer mechanisms appropriate for that objective without it in fact existing.



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December 28 2018

Commentary by Eoin Treacy

Corporate Bond Spreads Keep Widening as Investors Yank Cash

This note by Christopher DeReza for Bloomberg may be of interest to subscribers. Here ii is in full:

U.S. credit spreads widened to the highest levels since the summer of 2016 as funds saw outflows even as major American equity indexes posted a second day of gains.

Investment-grade bond spreads widened 2 basis points to 152 basis points on Thursday. The index has widened every day since Dec. 14 and most trading sessions this quarter

The junk bond index also rose Thursday, although the move was less pronounced. The index widened 1 basis point to 531 basis points, the highest level since Aug. 4, 2016. It’s risen 113 basis points this month
 

Investment-grade funds saw outflows of $4.4 billion for the week ended Dec. 26, the most since December 2015, according to Lipper. Junk bond funds registered the biggest outflows since October.

Eoin Treacy's view -

The stock market is short-term oversold and we have evidence of a short covering rally that began on the 26th. However, credit markets have not been the subject of bargain hunting and spreads continue to widen.



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December 28 2018

Commentary by Eoin Treacy

Gold in different currencies

Eoin Treacy's view -

Gold is a monetary metal and therefore attracts the most interest when it is appreciating against most currencies. We have added charts for Gold in US Dollar, Euro, British Pounds, Japanese Yen, Australian Dollars, New Zealand Dollars, Swiss Francs, Indian Rupees, Chinese Renminbi, South African Rand, Brazilian Real, Turkish Lira, Swedish Krona, Singapore Dollars. These can be found using the Bloomberg ticker for gold XAU in the search or in the Metals section of the menu.



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December 27 2018

Commentary by Eoin Treacy

December 27 2018

Commentary by Eoin Treacy

To Help Put Recent Economic & Market Moves in Perspective

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

For all of the previously described reasons, the period that we are now in looks a lot like 1937.

Tightenings never work perfectly, so downturns follow.  They are more difficult to reverse in the late stage of the long-term debt cycle because the abilities of central banks to lower interest rates and buy and push up financial assets are then limited.  When they can’t do that anymore, there is the end of the long-term debt cycle.  The proximity to the end can be measured by a) the proximity of interest rates to zero and b) the amount of remaining capacity of central banks to print money and buy assets and the capacity of these assets to rise in price.  

The limitation in the ability to print money and make purchases typically comes about when a) asset prices rise to levels that lower the expected returns of these assets relative to the expected return of cash, b) central banks have bought such a large percentage of what there was to sell that buying more is difficult, or c) political obstacles stand in the way of buying more.  We call the power of central banks to stimulate money and credit growth in these ways “the amount of fuel in the tank.” Right now, the world’s major central banks have the least fuel in their tanks since the late 1930s so are now in the later stages of the long-term debt cycle.  Because the key turning points in the long-term debt cycle come along so infrequently (once in a lifetime), they are typically not well understood and take people by surprise.  For a more complete explanation of the archetypical long-term debt cycle, see Part 1 of “Principles for Navigating Big Debt Crises” (link).

So, it appears to me that we are in the late stages of both the short-term and long-term debt cycles.  In other words, a) we are in the late-cycle phase of the short-term debt cycle when profit and earnings growth are still strong and the tightening of credit is causing asset prices to decline, and b) we are in the late-cycle phase of the long-term debt cycle when asset prices and economies are sensitive to tightenings and when central banks don’t have much power to ease credit.

Eoin Treacy's view -

Both the Dow Jones Industrials and the S&P500 posted large upside key day reversals yesterday to signal lows of at least near-term significance. Neither followed through on the upside today but they did hold the moves. Considering just how much they fell since early this month there is certainly scope for a rebound but the true test of whether more than near-term support has been found will be in the extent to which they hold their lows.



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December 27 2018

Commentary by Eoin Treacy

China says direct trade talks with U.S. in January, pledges more opening

This article by Yawen Chen and Ryan Woo for Reuters may be of interest to subscribers. Here is a section:

China has also said it will suspend additional tariffs on U.S.-made vehicles and auto parts for three months starting on Jan. 1, adding that it hopes both sides can speed up negotiations to remove all additional tariffs on each other’s goods.

Bloomberg, citing two people familiar with the matter, reported on Wednesday that a U.S. trade team will travel to Beijing the week of Jan. 7 for talks.

A person familiar with the matter told Reuters last week that talks were likely in early January.

In yet another reconciliatory sign, China issued on Tuesday a so-called negative list that specifies industries where investors - domestic or foreign - are either restricted or prohibited.

The unified list is seen as another effort to address concern among Western investors that there is no level-playing field in China. Investment in key Chinese sectors, however, is still prohibited.

Gao said China would “comprehensively” remove all market access restrictions for foreign investors by the end of March, in areas not included in a foreign investment “negative” list published in June.

Eoin Treacy's view -

China has a lot more to lose from a trade war than the USA. While it is difficult to get accurate statistics on the health of the economy the simple fact that car sales are declining at a rather rapid pace is a clear signal the Chinese consumer is at least holding off on making purchases. Here is a link to an article from the Wall Street Journal covering the story and here is a section: 

In the frenzy, some companies became complacent, assuming growth would be endless and easy to capture, according to Mr. Gong and other analysts. Then the growth evaporated. Sales grew 3% in 2017 and declined 2% in the first 11 months of 2018.

China now has enough factories to build 43 million cars but will produce fewer than 29 million this year, according to consulting firm PwC. While foreign and domestic auto makers alike find themselves under pressure, the slowdown has hit those that misread the market hardest of all.



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December 27 2018

Commentary by Eoin Treacy

Email of the day on European banks

Hope you are enjoying a well-earned Christmas break with lots of gourmet eating!

I have a very simple question.  What happens to the Euro banking index if Deutsche Bank gets nationalised?

Eoin Treacy's view -

Thank you for the well wishes. We enjoyed an eclectic mix of fare on Christmas Day foregoing a bird in favour of a 5lb lobster cooked Cantonese Style and complimented with a honey glazed ham. We washed it all down with Fortnum and Mason’s English Mint Tea which I can’t recommend highly enough. This was a landmark year for the family since my ten-year old has finally developed a taste for Mahjong so we had the requisite four to play for hours after dinner to much shouting, laughter and banter.  



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December 21 2018

Commentary by Eoin Treacy

December 21 2018

Commentary by Eoin Treacy

December 21 2018

Commentary by Eoin Treacy

Top Economic Meeting Ends With Pledges of 'Greater' Tax Cuts, 'Reasonably Ample' Liquidity

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

The leaders pledged to cut taxes and fees “on a greater scale,” increase the issuance of special-purpose local government bonds by “a relatively large margin,” and strike a balance between monetary tightening and easing to ensure “reasonably ample liquidity,” as they promised to continue to take measures to address the financing difficulties faced by private and small companies. The measures are part of official efforts to “strengthen counter-cyclical policy adjustments,” which refers to government support to boost economic growth, according to Xinhua. Proceeds from sales of special-purpose local government bonds are often used to fund infrastructure investment, a key driver of economic expansion.

They noted that the world is facing a “once-in-a-century” change that entails both crisis and opportunities. They urged the nation to “turn crisis into opportunities” by improving its technology and innovation capabilities, deepening reforms and opening up further, participating in global economic governance system overhaul, and speeding up a transition to high-quality growth, the report said.

Eoin Treacy's view -

China has been weighing on the shadow banking sector for much the last two years in a bid to contain the risk that has been building in the regional banking sector. That curtailment of access to liquidity and enforcement of rules that have previously been ignored has been a major contributor to slowing growth.



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December 21 2018

Commentary by Eoin Treacy

Email of the day on Fed balance sheet contraction and liquidity

I understand the problem about reducing the FED balance sheet and raising rates at the same time.

The impact on liquidity is however less intuitive to me. While the effect of interest rate hikes is clearer, the effect of a Balance Sheet reduction is less so.

Am I wrong to assume that what technically happens when the FED reduces i.e. sell bonds is that the private sector, through the banking system, receives these bonds? In exchange banks reduce the account balance that they hold at FED.

If banks get Treasuries in their book, they also receive more interest income (coupons) that goes into the system. This money was blocked in the book of the FED until then.

Why is this necessary bad?

Eoin Treacy's view -

Thanks for this question which I’m sure others have an interest in. Since the financial crisis banks have been paid interest on the excess reserves, they hold at the Fed. Against an uncertain environment in the real world they therefore had an incentive to park vast sums at the Fed. In return they received interest income on that money in line with the Fed’s Funds rate. 



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December 21 2018

Commentary by Eoin Treacy

Hedge Fund Pain Compounded as Surprise Tax Hit Awaits Investors

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

“The rules create the worst possible situation,” said David Miller, a tax lawyer at Proskauer Rose LLP.

The impact on hedge funds is among the curve balls taxpayers are dealing with as the one-year anniversary of the tax overhaul nears and the IRS issues thousands of pages of regulations implementing the law. The cap also represents another hit for the industry from the GOP tax law. The overhaul eliminates the deduction for management expenses investors previously qualified for, and many New York managers are hurt by the new cap on state and local tax deductions.

Eoin Treacy's view -

Just what people owe on their taxes is going to become apparent when tax returns start to get turned in next year and it’s not going to be good news for the millions of people living in the USA’s highest population, highest taxed states California and New York.



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December 21 2018

Commentary by Eoin Treacy

Indian Stock Market Leapfrogs Germany's as Economy Booms

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

India’s ascent on the global stage has claimed another victory after its stock market overtook Germany to become the seventh largest in the world.

The Asian giant edged past the equity market of Europe’s largest economy for the first time in seven years, according to data compiled by Bloomberg. That means, after the U.K. leaves the European Union in March, the bloc would have only one country -- France -- among the seven biggest markets.

The move reflects India’s positive returns this year as companies’ reliance on domestic demand enabled them to avoid the meltdown in other emerging markets spurred by Federal Reserve tightening and a trade war between the U.S. and China. It also highlights the challenges facing the EU, including its future relationship with the U.K., a standoff with Italy over budget allocations and separatist clashes in Spain.
 

Eoin Treacy's view -

India is benefitting right now from the decline in oil and other commodity prices as well as the fact its absence of a big export-oriented manufacturing sector insulates the economy from strife abroad.



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December 20 2018

Commentary by Eoin Treacy

Video commentary for December 20th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: stock markets remain weak and while increasingly oversold a lot of technical damage has been sustained with an increasing number of completed top formations. Dollar and Treasuries ease, gold and yen strong, India and Indonesia exhibiting relative strength. 



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December 20 2018

Commentary by Eoin Treacy

Dow Theory

December 20 2018

Commentary by Eoin Treacy

Dollar Weakness Is Coming, or Is It? A Familiar Call Returns

This article by Austin Weinstein and Katherine Greifeld for Bloomberg may be of interest to subscribers. Here is a section:

If you look at outlooks published by the sell-side, I think that 80-85% percent of what I read is looking for a weaker dollar,” said Ed Al-Hussainy, currency strategist at Columbia Threadneedle Investments. “And in my experience, when all the forecasts are looking the same way, the currency generally doesn’t behave the way these forecasts predict it will.”

The narrative for dollar bears is roughly as follows: The U.S. can’t keep up its better-than-everyone-else economic performance. America’s growth rate will get closer to the rest of the world, the Fed will stop or slow interest-rate hikes and the advantage an investor gets from holding dollars will diminish.

However, this story of global growth convergence may sound familiar to those who have seen it trip up forecasters before.

Around this time last year, the prevailing view was bearish on the dollar for similar reasons, and the median forecaster in a Bloomberg survey thought the greenback would slide to $1.21 against the euro from $1.18, the spot price at the time.

Instead, the dollar rallied to $1.14. (For the record, Norddeutsche Landesbank and Sumitomo Mitsui Trust Bank predicted a move to $1.14 late last year.)

Eoin Treacy's view -

The Fed thinks it is going to be able to raise rates twice next year and continue on its balance sheet run off. That is the primary reason to be bullish of the Dollar. The stock and bond markets are signaling investors are unwilling to give much credence to that view.



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December 20 2018

Commentary by Eoin Treacy

U.S. Accuses China of Broad Economy Espionage as Tensions Simmer

This article by Tom Schoenberg, Chris Dolmetsch and Jennifer Epsteinfor Bloomberg may be of interest to subscribers. Here is a section:

Secretary of State Michael Pompeo and Homeland Security Secretary Kirstjen Nielsen said in a statement they were “concerned” that the alleged operation violated a 2015 agreement China made with the U.S. to stop supporting cyber theft of intellectual property and trade secrets.

The indictments against the two, unsealed in federal court in Manhattan on Thursday, underscore one of the primary U.S. grievances in the ongoing trade fight between the Trump administration and Beijing: the systematic theft of U.S. intellectual property and forced technology transfers from companies doing business in China.

Those complaints are a central issue in negotiations U.S. and China are working under a 90-day deadline President Donald Trump and Chinese President Xi Jinping set after agreeing Dec. 1 to halt additional tariffs and trade penalties. Since July, the two countries have imposed tariffs on a combined $360 billion in each other’s imports, a bruising conflict could undermine the global economy at a time when growth is leveling off.

The hackers, known in the cybersecurity community as Advanced Persistent Threat 10, stole information from companies in an array of industries, including banking and finance, telecommunications, biotechnology, automotive, health care and mining, according to the indictment.

The group hacked the U.S. Navy, making off with the personal data of more than 100,000 personnel, and successfully infiltrated computers linked to NASA’s Jet Propulsion Laboratory, the indictment said. Zhu and Zhang were indicted in abstentia.

Eoin Treacy's view -

Industrial espionage has been a major part of China’s technological evolution policy for the last decade and longer. In fact the data collection underway has been on a scale that dwarfs that of any other country with the possible exception of the USA itself. Here is a link to an article from the New York Times highlighting how China has been listening to European diplomatic communications for years. Here is a section:

Unlike WikiLeaks in 2010 or the Russian hack of the Democratic National Committee and other Democratic Party leaders in 2016, the cyberattack on the European Union made no effort to publish the stolen material. Instead, it was a matter of pure espionage, said one former senior intelligence official familiar with the issue who spoke on the condition of anonymity.

It also displayed the remarkably poor protection of routine exchanges among European Union officials after years of embarrassing government leaks around the world.

In this case, the cables were exposed after a run-of-the-mill phishing campaign aimed at diplomats in Cyprus pierced the island nation’s systems, said Oren Falkowitz, the chief executive of Area 1.

“People talk about sophisticated hackers, but there was nothing really sophisticated about this,” Mr. Falkowitz said. After getting into the Cyprus system, the hackers had access to passwords that were needed to connect to the European Union’s entire database of exchanges.

Area 1’s investigators said they believed the hackers worked for the Strategic Support Force of the People’s Liberation Army, part of an organization that emerged from the Chinese signals intelligence agency that was once called 3PLA.



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December 19 2018

Commentary by Eoin Treacy

Video commentary for December 19th 2018

December 19 2018

Commentary by Eoin Treacy

Here is the text of a bulletin from Bloomberg on today's Fed Meeting.

Here are the Key Takeaways from today's FOMC events:

The FOMC hiked rates a fourth time this year to a decade high, ignoring President Trump’s criticism, and lowered its outlook to two hikes from three next year.

Powell specifically endorsed the dots, citing them in his press conference as a guideline for the committee and a useful tool.

The committee tweaked its guidance to ``some further gradual increases’’ -- a more hawkish development compared with the alternative of dropping the guidance.

Powell said all meetings are live for possible moves next year, but gave no strong hints as to when the Fed would raise next.

There was unanimous support for the hike.

Powell said that Trump's comments had no impact on policy and that the Fed is committed to doing what it thinks is best.

Powell said financial conditions caused a slight downgrade in 2019 forecasts but no real change in the outlook.

Markets took FOMC and Powell as hawkish, with the yield curve flattening and stocks falling.

Eoin Treacy's view -

The dot plots suggest two interest rate hikes next year but Jay Powell basically said they are going to be data dependent next year. The one thing that stood out to me from the press conference was that no one asked questions about the pace of balance sheet run off. That says a lot.



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December 19 2018

Commentary by Eoin Treacy

The Revenge of the Chart Watchers

This article by Richard Teitelbaum for Institutional Investor may be of interest to subscribers. Here is a section:

What prompts investors to chuck Graham and Dodd for a bucket of sheep entrails? More than a couple of factors, including the proliferation of easy-to-use charting functions on Thomson Reuters and Bloomberg terminals, Yahoo Finance, and Google charts.

Most obvious is the burgeoning success of passive investing. In 2007 index funds accounted for 15 percent of ETF and mutual fund assets, according to the Investment Company Institute. In 2017 that number was 35 percent.  

As recently as last year, fewer than one in ten active large-capitalization U.S. stock managers had beaten the S&P 500 during the previous 15 years. 

Accordingly, active money managers today are on a somewhat desperate quest for new ideas, trading strategies, or tactics — anything to narrow the gap between their own performance and that of the big indexers. It is, after all, a struggle for their own survival. 

“Wall Street is neither fundamental nor technical,” say MIT’s Lo. “They are opportunistic.”

Indeed, the problems bedeviling fundamental research feed into the rising popularity of technical analysis. “One reason people gravitate toward technical is they get frustrated with fundamentals,” says Stovall. “Price is never readjusted. Earnings are often readjusted. GDPs are often readjusted.”

Eoin Treacy's view -

Part of being a chartist is being contrarian. The reason price action appeals to many of us is precisely because it is not well understood by the masses. Therefore, when I read articles like this, extolling the benefits of technical analysis and trend following, I can’t help but feel cautious rather than vindicated.



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December 19 2018

Commentary by Eoin Treacy

Low Coffee-Bean Prices Brew Trouble for Farmers

This article by Julie Wernau and Robbie Whelan for the Wall Street journal may be of interest to subscribers. Here is a section:

“When the price is good, we have work, but when it isn’t, we have no money to pay the rent, no money for food, no money for the doctor,” said Ms. Poló, 56, standing on the side of the road in Baja California state, where the bus she was riding had broken down about three hours from the border.

Coffee prices have been stuck below the cost of production for the longest stretch since the global financial crisis, leading some producers to abandon crops and some to migrate for new jobs. The shift is being driven by currency fluctuations that are encouraging sales and production in Brazil, the world’s largest coffee producer, spurring a record crop that is driving down prices for other coffee-growing nations.

“We’re now back in real terms to where we were 20 years ago, when farmers abandoned land because they couldn’t make ends meet,” said Paul Rice, president and chief executive of Fair Trade USA, which works with 1 million coffee producers in 42 countries.

A 2017 study by Cornell University for Fair Trade USA placed the average cost of coffee production at $1.40 a pound. Coffee prices have been below that price for 20 straight months, the longest stretch since 2008, according to FactSet data.

Eoin Treacy's view -

When commodity prices fall below the cost of production supply destruction takes place and the lowest cost producer gains market share. For Robusta coffee the question is whether central America can remain competitive with larger producers like Vietnam and Brazil for Arabica.



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December 18 2018

Commentary by Eoin Treacy

Video commentary for December 18th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: analysis of the total number of stocks outstanding in China, Europe, the UK and USA. stock market steady ahead of the Fed meeting tomorrow, Big tech exhibiting relative strength over the last week, gold stead, safe havens firm, Treasury prices breaking out. 



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December 18 2018

Commentary by Eoin Treacy

The Late Cycle Lament: The Dual Economy, Minsky Moments, and Other Concerns

Thanks to a subscriber for this report from GMO by James Montier which may be of interest. Here is a section:

December 18 2018

Commentary by Eoin Treacy

Xi's Speech Gives No Hope for Stock Traders as Asia Markets Sink

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

Expectations that Xi’s speech would give stocks a boost (or at least, prevent a sell-off) were thwarted, and since “nothing special” was announced, Asian shares are following the overnight sell-off in the U.S., said said Castor Pang, head of research at Core Pacific-Yamaichi International HK.

Francis Lun, chief executive officer of Geo Securities, agreed. Investors were disappointed by the speech as they had been expecting some comments on economic stimulus or the further opening-up of the Chinese economy, he said. “But he didn’t mention it. That’s why A shares dropped 1 percent and also dragged down Hong Kong stocks.”

Eoin Treacy's view -

Xi Jinping doused hopes he would be a reformer by denouncing Deng’s policy of hiding the nation’s strength and playing nice with the international community. Instead he has asserted China’s intention to be more assertive internationally, to become independent of the Dollar’s patrimony and to become independent technologically.



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December 18 2018

Commentary by Eoin Treacy

Oil Crashes to 1-Year Low as Dark Clouds Envelop Demand Outlook

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

“Oil has gotten caught up in all the panic you’re seeing,” said Bill O’Grady, chief market strategist at Confluence Investment Management LLC in St. Louis. “This is all about fears of a recession. It’s risk-off everywhere.”

A U.S. government report Monday forecast surging shale-oil production, adding to worries about a glut. In Moscow, Russian Energy Minister Alexander Novak said production is rising, although the country is preparing to implement output curbs to conform with an OPEC+ accord.

Crude’s mired in a bear market amid growing skepticism that cuts by the Organization of Petroleum Exporting Countries and its allies will be deep enough to prevent a surplus in 2019. The group’s efforts to balance the market have been undermined by the relentless growth in U.S. shale, which veteran crude trader Andy Hall said is making it harder to predict global supplies.

Eoin Treacy's view -

It’s all well and good to talk about the relentless growth of US shale but West Texas Intermediate at $46 is uneconomic for a substantial proportion of shale drillers. The response is going to be less drilling as soon as any hedges on supply run off. That is the great strength of unconventional wells. They are more capital intensive to bring online but their supply is elastic because continuous drilling is required to sustain production after initial prolific period. That give companies the ability to more closely match supply to demand than conventional wells.



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December 17 2018

Commentary by Eoin Treacy

December 17 2018

Commentary by Eoin Treacy

Email of the day on simultaneous monetary and interest rate tightening

In a mid-year commentary, which I cannot locate, you presented a strategy for coping with the customary October seasonal downturn.  Implementation of that advice will have saved subscribers many years of subscriptions.  Thank you for those invaluable comments.

More recently you have devoted much time discussing the dual impact of rising interest rates and Fed balance sheet reduction.  The attached article (a bit long) states that the US Fed, being excessively influenced by equity markets, but ignoring an already slowing real economy has tightened excessively and, because of lags in the effect of monetary policy, will not now succeed in reversing the economic downturn already underway.

Trying to second guess the Fed while anticipating an inevitable slowing economy is making portfolio management even more difficult than usual.

Eoin Treacy's view -

Thank you for this kind email and I am delighted you are getting value from the service. There are two Fullerisms I have been ruminating on recently. The first is “monetary policy beats most other factors most of the time” The second is “the Fed has killed off more bull markets than all other factors combined”.

Here is a section from the conclusion of the article you included:

The Federal Reserve has pushed monetary policy too far. It makes sense that the market is rapidly pricing out future monetary tightening. There is a high probability that if the Fed raises rates in December, this will be the last hike of the economic cycle.

Even if no rate hike occurs, balance sheet reductions will still be running in the background, reducing excess reserves, putting further strain on the banking sector and perpetuating a deceleration in economic growth.

The Federal Reserve has already pushed too far.



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December 17 2018

Commentary by Eoin Treacy

The equity chief at $6.3 trillion BlackRock weighs in on the trade war, a possible recession, and offers her best investing advice for a tricky 2019 landscape

This article by Joe Ciolli and Jack Houston for Business Insider may be of interest to subscribers. Here is a section:

Moore: We think we're in the later stage of the cycle. So, let's be clear, our barbell approach doesn't mean just hold an anchor in high quality, which we think you should, and then just swing for the fences and lower quality assets that seem to be de-rated.

That would be great if we didn't have any worries about policy — both the monetary side as well as the trade policy to consider. But what we think people should be focused on are companies that have excellent balance sheets, that have business models, that are sustainable through all parts of the cycle.

That's where we're not expecting to see huge amounts of earnings volatility, even if we continue to have a sequential economic growth slowdown. Although again, still above-trend, so still pretty good.

But also think about what areas of the market, whether it's industries or assets, have really fallen out of favor, like emerging markets this year. Places where the fundamentals haven't deteriorated, and be willing to take a bet on some higher-volatility, slightly riskier assets as well. So, this barbelled approach, don't take risk entirely off. But if you need to sleep at night a little bit better, make sure that there's big quality nut to rest on.

Ciolli: We keep talking about the possibility of an economic recession, but it does not seem like it's in your base case for 2019. However, you do mention that the table may be set for something in 2020. Can you outline your recession view and what, if anything, people can do next year to prepare for that if it does transpire in 2020?

Moore: I think actually it's consensus at this point that 2019 is not the year that we have the US-led recession.

I also just want to note something here. A lot of times when we talk about recession in our outlook, and then also talk about recession in the market, it does tend to be a little US-focused. And that we need to recognize that different regions and countries and markets are at different points in their cycle. I think about this a lot as an equity person. The profit cycle is really different, region from region. And we had seen some profits recessions in non-US markets, even while the US continued to make new highs.

So, that aside, in 2020 and onwards, we think that recession probability increases for the US. Part of that is because we are just at the later stage of the cycle. We also know that it takes some time for tighter monetary policy to really play out in the economy and have an impact. It's possible that we'll see a slowdown in activity at that point, or greater inflationary pressure, frankly, from higher wages feeding through. It's not our base case at this moment, but it's a non-zero probability.

We recognize that investors need to be positioned for that eventual slowdown, well in advance. As you know, equity markets tend to price in these changes in economic growth far before we would actually get the data. We just want to have quality portfolio construction and make that a significant thing that we're focused on in 2019. So that we don't get to 2020, when the economic data starts to soften a little bit, and find ourselves flat-footed.

Eoin Treacy's view -

There has been a clear rotation out of the most aggressively priced portion of the market and into clearly defensive sectors. Talking about the clear benefits of investing in high quality balance sheets is a hard sell when growth stocks are powering ahead. However, when the lustre comes off the shiniest new economy names investors rediscover cashflows and dividend discounting.



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December 17 2018

Commentary by Eoin Treacy

Europe's Retail Apocalypse Spreads to Online From Stores

This article by William Mathis and Katie Linsell for Bloomberg may be of interest to subscribers. Here is a section:

Europe’s retail crisis is spreading from bricks-and-mortar stores to e-commerce as Asos Plc plunged the
most in 4 1/2 years after warning that Christmas shopping got off to a disastrous start.

The gloomy update from a U.K. online retailer that competes with Amazon.com Inc. and has furnished fashions to the likes of Meghan Markle shows that retail weakness is widespread in the runup to the holidays.

Asos fell as much as 43 percent Monday in London, wiping more than 1.4 billion pounds ($1.8 billion) off the market value. The news dragged down other online retailers like Boohoo Group Plc and Zalando SE, as well as store operators like Marks & Spencer Group Plc and Next Plc.

“This goes against the script,” said Stephen Lienert, a credit analyst at Jefferies. “It was supposed to be bricks and mortar that’s dying and online is the future, but that headline gets ripped up today.”

Eoin Treacy's view -

Brick and mortar and online retailers share one common factor. They both rely on consumers to be ready to buy what they are selling. That works well when the economy is doing well but Europe’s economies are under pressure at just the same time the ECB has ended its quantitative easing program.



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December 14 2018

Commentary by Eoin Treacy

December 14 2018

Commentary by Eoin Treacy

What a Big Deficit You've Got There, Mr. President

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

It’s also important to note that the natural tendency in a growing economy, absent any tax changes, is for revenue to rise. Real revenue dropped in 2016, but that was because of the mini- recession that had started the year before. Revenue has risen during every other year of the current recovery. This year the economy is growing at what may turn out to be the fastest pace since the 2000s, around 3 percent, yet revenue is down. Some of that economic growth is surely due to the tax cuts and to this year’s spending increases, but it’s clear that the Tax Cuts and Jobs Act has so far displayed none of the magical revenue-increasing properties that some of its supporters claimed for it last year. If we take last year’s revenue growth of 1.1 percent as the — very conservative — baseline, it would seem instead to have so far resulted in a revenue decline of 3.5 percent, or $109 billion.

Federal spending, meanwhile, is up an inflation-adjusted 2.9 percent so far this year. That’s bigger than the revenue decrease but smaller than last year’s 3.5 percent increase. Overall, my read of the two charts above is that the overall shift since 2015 from shrinking deficits to rising ones has been mainly about rising spending, but the increase in the deficit this year has been mainly about the tax cuts.

Eoin Treacy's view -

It is generally accepted that counter cyclical policies are the most appropriate for any economy. You loosen when the going is tough and tighten when the going is good and that is expected to keep growth relatively steady with less aggressive peak to trough swings.



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December 14 2018

Commentary by Eoin Treacy

Platinum price gets $6 billion shot in the arm

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

Korean carmaker Hyundai on Tuesday announced a $6.7 billion program to raise production of fuel cells 200-fold going from 3,000 this year to 700,000 per annum by 2030.

The hydrogen society is probably further into the future than its promoters want you to believe, and detractors are plentiful 

Toyota was the first to back the technology for passenger vehicles, launching its Mirai – "future" in Japanese – back in 2015. Honda is bringing the Clarity back to its line-up and Hyundai’s Nexo SUV is launching in North America next year. Hyundai also inked a collaboration on fuel cells with Volkswagen in June.

The hydrogen society is probably further into the future than its promoters want you to believe, and detractors are plentiful. (Elon Musk was not only talking his book when he called fuel cell cars "extremely silly".)

Alongside Hyundai's announcement, the Korean government also made a commitment to roll out a fuel cell fleet and charging stations. But Canada, for example, got its first and so far only public hydrogen fuelling station only in August and California’s years long backing for fuel cell cars have hardly moved the needle on consumer and business uptake.

Nevertheless, the impact on platinum could be enormous.

There’s a simple reason – today's fuel cell cars need a full ounce of platinum versus a 2 – 4 grams PGM loading for your average gasoline (primarily palladium) or diesel vehicle.

Eoin Treacy's view -

The automotive sector has been investing in fuel cell technology for years so one of the reactions to the collapse of demand for diesel engines has been the acceleration of commercialisation efforts. The other factor in the development of fuel cells is dependent on ready availability of hydrogen. The low natural gas price, particularly in the USA is a major enabler of that evolution.



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December 14 2018

Commentary by Eoin Treacy

Behind the Brexit Chaos: A Faulty U.K. Negotiating Strategy

This article by Stephen Fidler and Laurence Norman for the Wall Street journal may be of interest to subscribers. Here is a section:

The U.K. also anticipated it could appeal to traditional allies in Northern Europe, like Sweden, Denmark and the Netherlands. Inside the EU they had together championed the values of free markets and open trade. But once the U.K. left, a different dynamic took over.

One issue the U.K. missed was that some of these governments were also faced with euroskepticism and political concerns about EU overreach.

In the turmoil immediately after the 2016 Brexit referendum, Mark Rutte, prime minister of the Netherlands, one of the most like-minded countries, said the U.K. had just “collapsed: politically, monetarily, constitutionally and economically.”

Mr. Rutte, facing the political fight of his life against the right-wing populism of Geert Wilders, had a fundamental political interest in ensuring that Brexit turned out to be an anti-model for how to handle angst about Brussels. The Dutch leader echoed that point on Thursday.

“If anyone in the Netherlands thinks Nexit is a good idea, look at England and see the huge damage it’s done,” he said.

The U.K. also missed that it would come to be seen as a rival. Some Northern European countries have many cutting-edge small exporters who worried that an U.K. outside the EU would undercut them in international markets and in the EU if Britain retained easy access to the bloc’s markets.

Mrs. May’s so-called Chequers proposal in July 2018, which aimed at keeping the U.K. in the EU’s single market for goods but able to sign free-trade agreements with the U.S. and others, was viewed on the continent as a blueprint for the U.K. becoming an EU offshore-manufacturing assembly platform.

“It’s always going to be a relationship now of tension and not just partnership, because our interests are diverging from theirs and we are seeking to derive deliberate advantage from having left,” Mr. Rogers said. “We can’t expect them not to react.”

Eoin Treacy's view -

Lord Palmerston’s “England has no eternal friends, England has no perpetual enemies, England has only eternal and perpetual interests” is as true today as ever but it does not just apply to England. The EU has displayed a better understanding of that maxim than the UK has over the last few years. If you are setting up outside the club then you can’t logically expect help from the people you are now intending to compete against. Respect, yes, but assistance, no.



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December 14 2018

Commentary by Eoin Treacy

Virgin Galactic SpaceShipTwo Reaches Space for the First Time

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

Virgin first unveiled the VSS Unity in 2016 and has flown it (with the rocket engine) four times now. Each test pushed the altitude a little higher: 16.0 miles, 21.7 miles, 32.3 miles, and now 51.4 miles. Unity replaced the VSS Enterprise, which broke apart in 2014 because its “feathering” airbrake system was accidentally deployed too early. That accident killed co-pilot Michael Alsbury and injured pilot Peter Siebold. Virgin took steps to make sure the same thing can’t happen on new versions of its SpaceShipTwo design.

Safety is of higher importance than ever as Virgin Galactic nears its ultimate goal of taking passengers into space. For a mere $250,000, a person can ride up to the edge of space aboard one of Virgin’s spacecraft. The trip won’t be long, but they’ll get a few minutes of weightlessness before the craft heads back down for a landing. Virgin Galactic started pre-selling tickets several years ago and says it has sold all available seats through 2021.

Eoin Treacy's view -

Space tourism looks likely to be a significant growth sector in future but it is another example of an industry that exists today because we have had a decade of incredibly low interest rates which has made funding available for just anything anyone could imagine.



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December 14 2018

Commentary by Eoin Treacy

December 13 2018

Commentary by Eoin Treacy

December 13 2018

Commentary by Eoin Treacy

Markets Conclude U.S. Is Riskier Than China

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

They would be pricing in various economic realities: the slowing rate of U.S. economic growth, the U.S. government's exploding debt, the diminished Treasury revenue caused by the 2017 tax cuts, and the Fed's pursuit of a monetary policy keeping rates well above their average for the decade.

Investors see growth slowing, and it shows. Extreme fluctuations in the stock and bond markets the past month reflect investor anxiety over the transition from a brightening economy to the creeping sense that the best of this cycle has come and gone.

U.S. government debt is also moving in the wrong direction. Since 2016, when the federal budget deficit as a percentage of gross domestic product declined to a decade-low of 2.2 percent from more than 10 percent in 2009, the deficit nearly doubled to almost 4 percent. GDP increased to a record $19.39 trillion at the end of 2017 as the annual rate climbed to 2.2 percent from 1.8 percent in 2007. But U.S. growth will deteriorate to an annualized 1.9 percent by 2020, according to economists surveyed by Bloomberg, putting more pressure on the widening deficit. Revenue isn't stepping in to close that gap. The Trump tax cuts are estimated to increase these deficits by $1 trillion during the next 10 years.

Eoin Treacy's view -

China can borrow at cheaper rates than the USA right now. Is that a big contrary indicator or is it the shape of things to come?



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December 13 2018

Commentary by Eoin Treacy

Uranium price: best performer of 2018 set for more gains

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

Struggling French nuclear giant Areva (rebranded as Orano this year) slashed production more than a year ago. In August Paladin put its Langer Heinrich mine in Namibia on care and maintenance, although this week the Sydney-based miner said it's working on a possible restart of operations with vanadium as a byproduct (vanadium is trading at record highs and the only metal outperforming uranium).

In a research note on Kazatomprom, BMO Capital Markets says the production discipline from top miners will break the trend of rising global uranium inventories following the Fukushima nuclear disaster in Japan in 2011 and prompt the first production deficit in more than a decade.

And

China has 42 operating nuclear reactors, 16 reactors under construction and a further 43 planned. At the end of November, the country's national uranium corporation bought control of the Rossing uranium mine in Namibia. China is also behind the only sizeable uranium mine to come into production in the past few years, the Husab mine in Namibia, although ramp there has been slow.

Eoin Treacy's view -

Japan is steadily firing up its shuttered nuclear plants and considering China’s demand for clean energy it is unlikely to be deterred from continuing its construction program. Meanwhile when the world’s major producers find it more cost effective to buy in the spot market than produce the metal themselves then we know prices are depressed.



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December 13 2018

Commentary by Eoin Treacy

Bank of France Trims Growth Forecasts as Protests Drag

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

Still, the central bank said 1.5 percent growth was a level that would help the country close a gap with euro-area peers. It expects consumers to drive growth next year thanks to a rise in spending power, supported by tax cuts.

“French growth should remain above its average of recent years: That is still a rather favorable economic situation,” Villeroy said.

The central bank’s forecasts do not take into account Macron’s planned tax cuts. But it said the measures could also support consumer spending next year.

In the Les Echos interview, Villeroy also commented on the European Central Bank’s decision to end its net asset purchases. He said a “gradual normalization” of policy is justified by euro-area figures, but the central bank remains flexible in uncertain times and has powerful instruments available.

Eoin Treacy's view -

Countries on the periphery of the EU got the message loud and clear that the EU has one set of rules for large countries and quite another for small countries when depositors were bailed-in during Cyprus’s troubles but were rescued when Banca di Monte Paschi di Siena was going under.



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December 13 2018

Commentary by Eoin Treacy

Review of recession lead indicators

Eoin Treacy's view -

The yield curve spread has been in the news lately and with good reason considering how much of a move we have seen in the last week and because it has such an impressive record as a lead indicator for future recessions. With volatility on stock market increasing and perhaps more importantly some stress becoming evident in the credit markets I think it is timely to spend some time to do a thorough review of lead indicators for future recessions.



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December 12 2018

Commentary by Eoin Treacy

Video commentary for December 12th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: Theresa May survives, Pound bounces, Wall Street steadies but not dynamically, precious metals firm, Dollar eases, oil weak, uranium outperforming, Bonds likely to unwind short-term overbought condition. 



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December 12 2018

Commentary by Eoin Treacy

DoubleLine Webcast

I tuned into Jeff Gundlach’s webcast yesterday afternoon and as usual he had a number of interesting charts and observations.

Eoin Treacy's view -

The first observation I drew is that he was keen to point out the lead indicators for future recessions he employs and how many of them are positive versus negative. Of course, some of these have longer lead-times to a signal than others which is not a point he made. The clear conclusion was that there are certainly challenges emerging and that quantitative tightening is a headwindf for stock markets. The clear message here is that if the Federal Reserve continues to remove liquidity and the ECB holds to its commitment to end purchases that is likely to continue to represent a headwind for asset prices.



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December 12 2018

Commentary by Eoin Treacy

The Fed and monetary Policy

Thanks to a subscriber for this note by Leon Tuey which may be of interest. Here is a section:

Few months ago, Jerome Powell, the Fed Chairman expressed the desire to smooth out past wild swings in the economy by fine-tuning its monetary policy.  Those are not mere words, but the Fed is already putting it into practice.  Note the statements made by the various Fed members. 

In the past, after the election, the Fed would slam the brakes to clean out the excesses.  After the Mid-term election, it would start to stimulate the economy.  Hence, the “Four-Year Cycle”.  The Fed has been tapping on the brakes instead of slamming them.  Hence, the slowing in the economy.  Many, however, are jumping to the conclusion that a recession will take place next year.

The Fed’s new goal is not easy to achieve, but if successful, the U.S. will experience a period of unparallel prosperity and the stock market will continue to climb to heights no one ever believe possible.

Despite its importance, few paid attention to Powell’s announcement.

Eoin Treacy's view -

One of David’s clearest lessons is monetary policy beats most other factors most of the time. Last year I was writing about the fact that the Fed was asking for trouble by planning to reduce the size of the balance sheet and raise interest rates concurrently. They have delivered a medium-term correction in stocks the big question now is what’s next?



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December 12 2018

Commentary by Eoin Treacy

2019 Precious Metals Outlook: Fundamentals matter

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

Eoin Treacy's view -

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

Rather than ask whether fundamentals matter of what the outlook is, perhaps it is better to ask whether precious metals are an uncorrelated asset? The answer to the first group of questions is obvious yes, fundamentals do matter and the relative cost of production coupled with demand profiles are important to the market. However, the relative cheapness of the precious metals, excluding palladium, makes them attractive for investors seeking to hedge exposure to increasing volatility in other asset classes.



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December 11 2018

Commentary by Eoin Treacy

December 11 2018

Commentary by Eoin Treacy

Will UK economy be turbocharged by sterling fall?

Thanks to a subscriber for this article by Chris Giles for the FT may be of interest to subscribers. Here is a section:

The impact of sterling’s depreciation has been underwhelming for a few reasons. For one thing, firms are locked into global supply chains and rely heavily on foreign inputs. Half the components in a “British-made” car come from abroad. If exports rise, so do imports.

The economy is also highly geared towards high-value-added stuff like pharmaceuticals. Buyers of these goods and services are insensitive to price changes. Not all industries fit this mould, notably tourism. Dollars buy more rides on the London Eye than before. In June visits by foreigners (including businesspeople) were up by 7% year on year. Yet visitors seem to be economising: their overall spending in real terms is no higher than before.

Optimists maintain that the benefits of a depreciation take a long time to filter through. Firms need to get finance together and seek out new markets to exploit their new competitive advantage.

The case of Dr Fox’s ice-cream industry, however, suggests that exporters are in no rush. Though export revenues have risen, this largely reflects the fact that with a weaker pound a given quantity of foreign-currency sales leads to higher sterling revenues. In the first half of 2017 firms exported about the same quantity of ice cream (600m scoops, by our reckoning) as in the same period the year before. Firms seem to be using sterling’s weakness simply to bank bigger profits, rather than to move into new markets.

It is a similar story across the private sector. Profitability is near record highs yet investment is stalling. Last year non-financial firms stuck an extra £74bn ($96bn) in their bank accounts, by far the largest figure on record. Firms’ tentative behaviour should be a wake-up call for ministers, who expect them to lead the charge of a reorientation of British trade away from the EU after Brexit.

Eoin Treacy's view -

All other factors being equal a depreciating currency boosts the prospects for exporters because they gain competitiveness. The bigger the domestic export sector the more immediate the boost. In the UK’s case the domestic manufacturing sector has been in decline for decades, so not only will it take time to rebuild confidence enough so that entrepreneurs become more ambitious but the devaluation would need to persist.



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December 11 2018

Commentary by Eoin Treacy

Top India Official Who Oversaw Cash Ban Is New RBI Chief

This article by Siddhartha Singh and Anirban Nag for Bloomberg may be of interest to subscribers. Here is a section:

India named a former bureaucrat who oversaw Prime Minister Narendra Modi’s controversial cash ban program as its new central bank chief, a day after Urjit Patel abruptly quit following disagreements with the government.

Shaktikanta Das, 63, who often sought a cut in interest rates during his time at the Finance Ministry, was appointed for a three-year tenure, according to a statement on Tuesday from the Personnel Ministry. He will be the 25th governor of the 83-year-old monetary authority.

And

Das will take charge of the six-member monetary policy committee, which left interest rates unchanged last week after two hikes earlier this year. With inflation undershooting the central bank’s forecasts, there are growing expectations that the RBI will shift to a neutral policy stance from its current tightening bias, which could set the stage for a rate cut.

“There was a disconnect between the government and the central bank and the market now expects a less hawkish stance under the new regime,” said Aashish Sommaiyaa, chief executive officer at Motilal Oswal Asset Management Co. in Mumbai.

Eoin Treacy's view -

The RBI has been rather aggressively targeting the bad loans in some of the India banks, most particularly those in private hands rather than the politically connected state-owned institutions. The decline in oil prices has been a meaningful event for India and that will be used as an argument for adopting a more dovish monetary policy.



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December 11 2018

Commentary by Eoin Treacy

Leveraged Loans Take a Much-Needed Breather

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

It’s crucial for the long-term health of leveraged loans, which have already surpassed junk bonds in magnitude, to allow investors to be more discerning. One of the most appealing parts of loans is that they’re supposed to have priority over traditional securities. But as Bloomberg News’s Sally Bakewell and Kelsey Butler wrote last week, heavily levered companies have been tapping the loan market over and over again, securing $100 billion of so-called incremental debt this year because money managers were willing to acquiesce to almost all issuers’ demands. On top of that, a larger share of companies have loans as their only form of debt, which doesn’t do lenders any good if they go under.

It’s pretty obvious that this sort of behavior won’t end well. That’s why it might be a blessing in disguise that the market has taken a breather. “There’s no need to chase new issues,” Michael Nechamkin, co-chief investment officer at Octagon Credit Investors, told Butler and Jeannine Amodeo. The ones who pull back, they note, are those that aren’t desperate for financing but were hoping to lock in cheap borrowing costs in the once-hot market. As for those who can’t afford to drop out? They pay up — restoring some balance between buyers and sellers.

Eoin Treacy's view -

With over $7 trillion in negative yielding debt investors have been willing to forgo covenants to capture yield. That has been most acutely evident in the leveraged loan market where corporations have been binging on debt in order to fund buybacks and pay dividends. The logic goes that will reduce the weighted average cost of capital and therefore strengthen the balance sheet. However, that only works as long as business is going well. In times of stress dividends can be cancelled but loans need to be paid back which can be a problem when liquidity is tight.  



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December 10 2018

Commentary by Eoin Treacy

December 10 2018

Commentary by Eoin Treacy

U.K. Assets Roiled as Delay on Brexit Vote Sparks No-Deal Fears

This article by Charlotte Ryan, John Ainger and Shoko Oda for Bloomberg may be of interest to subscribers. Here is a section:

The delay in the vote means an EU summit later in the week will be the next focus for markets. Traders had been planning to stay late at the office Tuesday in anticipation of significant price swings on the vote. May said she would try to address concerns over the Irish border and step up preparations for a no-deal scenario.

“This is very strong risk-off move,” said John Wraith, head of U.K. macro rates at UBS Group AG. “The market clearly believes she will not get anything material enough from the EU to turn that scale of opposition around, so even if the vote is delayed it’s going to end in the same way -- with a big defeat for the government, and the end of the Withdrawal Agreement -- but now it will happen even closer to the date of the cliff edge.”

Eoin Treacy's view -

The EU has said they have nothing left to offer and will not negotiate further. However, that is not exactly true. If the UK does in fact leave the EU without a deal, then negotiations on a trade deal will probably begin immediately. For the UK, that will probably only be one of many deals it will need to negotiate.  

The last thing the EU needs is a major economy, like the UK, on its doorstep with a devalued currency and an incentive to be as competitive as possible. Quite whether those in power in the UK realise that is another story.



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December 10 2018

Commentary by Eoin Treacy

Yield Curve Inversion Is Inconclusive. Our 2650-2800 Range Holds

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

Eoin Treacy's view -

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

As the above report highlights the yield curve has not yet inverted but at 13 basis points it is very close to inverting. There is definitely some chatter about the near inversion in 1994 and how that presaged the evolution of the bubble in the late 1990s.



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December 10 2018

Commentary by Eoin Treacy

The IPO Race for Uber and Lyft Isn't Against Each Other

This article by Shira Ovide for Bloomberg may be of interest to subscribers. Here is a section

After a relative tech IPO dry spell of 2015 and 2016, there’s less of a stock feeding frenzy around each new tech listing now. Snapchat’s valuation has moved from outlandish at its IPO to tame.(1) Most other tech companies that went public in the last couple of years also trade relatively in line with their older peers. That shows investors have grown more discriminating about when to pay a rich price for fast-growing companies. I think that temperance will carry over to IPOs for Lyft and Uber. 

Ultimately, though, Uber and Lyft have more to worry about than IPO order. Uber in particular has yet to prove its basic business model makes sense after 10 years of history. Economic and market conditions are deteriorating. In the U.S., people are openly talking about the “R-Word” — recession. Those are all good reasons to hurry and go public. But Uber and Lyft shouldn’t overthink the advantages of hitting the stock market first.  

Eoin Treacy's view -

At The Chart Seminar we ask this question; when is the best time to sell your company? The answer is simple when you think about it. When you can get more for it than you think it is worth. The founders and early investors in multi-billion Dollar unicorns have a clear incentive to diversify exposure by seeking to sell when the going is good, because it will obviously be a more difficult prospect when the going is bad.



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December 07 2018

Commentary by Eoin Treacy

December 07 2018

Commentary by Eoin Treacy

One Fed official suggested on Friday delaying a December rate hike, the first to do so

This note by Thomas Franck for CNBC may be of interest to subscribers. Here is a section: 

St. Louis Federal Reserve President James Bullard reportedly said on Friday that the central bank could consider postponing its widely anticipated December rate hike because of an inverted yield curve.

“The current level of the policy rate is about right,” Bullard said in a prepared presentation to the Indiana Banker’s Association, according to Reuters.

Bullard is the first member of the Fed to speak publicly about a delay in December. The Fed president — while not a Federal Open Market Committee voter in 2018 — will be able to participate in rate hike decisions in 2019.

Eoin Treacy's view -

10-year Treasury yields dropped below the trend mean this week and despite a short-term overbought condition on the futures, a meaningful catalyst is now likely required to check the rally.



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December 07 2018

Commentary by Eoin Treacy

The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years

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

The shift to net exports is the dramatic result of an unprecedented boom in American oil production, with thousands of wells pumping from the Permian region of Texas and New Mexico to the Bakken in North Dakota to the Marcellus in Pennsylvania.

While the country has been heading in that direction for years, this week’s dramatic shift came as data showed a sharp drop in imports and a jump in exports to a record high. Given the volatility in weekly data, the U.S. will likely remain a small net importer most of the time.

“We are becoming the dominant energy power in the world,” said Michael Lynch, president of Strategic Energy & Economic Research. “But, because the change is gradual over time, I don’t think it’s going to cause a huge revolution, but you do have to think that OPEC is going to have to take that into account when they think about cutting.”

 

Eoin Treacy's view -

It feels like yesterday when we first started talking about unconventional gas, and later oil, as being gamechangers for the energy sector. Looking back at the archives it was 12 years ago. The shift in US production from what looked like terminal decline to virtual energy independence is something the market is still coming to terms with.



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December 07 2018

Commentary by Eoin Treacy

2019: More thematic instability

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

Eoin Treacy's view -

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

Australia and New Zealand are in an awkward bind. The deteriorating relationship between one of their biggest allies and the buyer of a large proportion of their exports is weighing on sentiment. The one redeeming quality is China doesn’t have a ready supply of iron-ore, coking coal or natural gas that is in such close proximity but it’s slowing economy is shifting perceptions of demand growth.



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December 06 2018

Commentary by Eoin Treacy

Video commentary for November 6th 2018

December 06 2018

Commentary by Eoin Treacy

Email of the day on Crowd Money, late cycle moves and credit

As you have repeatedly mentioned in recent audios, we are at a very interesting time in markets. The coming weeks may potentially offer us a guide as to whether markets are pricing in a recession in late 2019/2020 or whether this maybe further delayed by the Fed and the US administration setting a looser policy tone sooner rather than later.

As David has always urged “don’t fight the Fed”.

Being away from my desk enjoying the delights of the Caribbean, I have taken the time to re-read your most illuminating book Crowd Money which you published back in 2013 and I read back in 2014 (again in the Sunny Caribbean).

I have to mention that a good many of your observations have come to pass and my holdings in a number of Autonomies who are also Dividend Aristocrats have been a core holding of my balanced personal portfolio. I have noted with interest the recent late cycle outperformance of these holdings compared to previously sexy growth stocks.

I would recommend to the collective to take the opportunity to read or re-read Crowd Money at a time when market strategy is in flux.

You have also made reference to the possibility of GE corporate debt being downgraded to junk. I attach a link to the UK Investment Manager M&G ‘Bond Vigilantes’ website and their comments relating to the US corporate debt market and with specific reference to GE’s strategy to deleverage and preserve their IG status.

Hope this is of interest.

Eoin Treacy's view -

Thanks for the link your kind words and I agree there is nothing quite like a good dose of sun in December. It is enormously gratifying that you are enjoying Crowd Money. I’m working on another book to try and put the emerging state of flux in context but it’s a hard slog. I’m reviewing late cycle phenomena in the following piece so I would like to focus on the credit market.

Here is a section from the article:

The Fallen Angel figure, of course, could balloon if one of these Angels happens to be a company with a large capital structure. One of the businesses that has lost its public single-A rating lately is US industrial giant General Electric – the 87th biggest company within the S&P 500 index, holding c. $50bn of notional debt – the majority of which could enter the HY market if multiple notches of downgrades occur. How immediate is this risk for investors?

GE downgrade fears are still speculative. The company is trying to shore up its cashflow and balance sheet, and may well retain its IG badge after all. Since liquidity, usually investors’ No. 1 concern, seems ample, the company is now focusing on improving its free cash flow and balance sheet structure. Companies at the lower end of the IG spectrum are indeed strongly incentivized to retain their credit ratings as a cut in long-term ratings from BBB- to BB+ materially lifts borrowing costs as some investors are prevented from holding Non-Investment Grade companies.

GE, however, still holds a BBB+ rating with stable outlooks from all three major credit rating agencies, leaving this flagship industrial group still a long way from junk. What will matter over the coming quarters is GE’s new CEO delivering on a promise of accelerated deleveraging, alongside turning around the structurally challenged power division. All of this amidst a backdrop of ongoing Department of Justice and SEC investigations, as well as some shareholder litigation.



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December 06 2018

Commentary by Eoin Treacy

Riding in Waymo One, The Google Spinoff's First Self-Driving Taxi Service

This article by Andrew Hawkins for the Verge may be of interest to subscribers. Here is a section:

Over the course of three separate trips in Chandler, the trained drivers in my Waymo vehicles never take control. I’ve ridden in a Waymo vehicle without a human being in the driver’s seat once before, but it was not on public roads. I was fully prepared to experience a fully driverless ride while in Chandler, but, alas, Waymo rejected my request.

The rides are uneventful, but it is exciting to experience the little flourishes that have been added for ride-hailing customers. The minivans still smell new, or at least recently cleaned. The screen on the back of the driver’s headrest features a large blue “start” button that I could press to initiate the ride. (There’s also a physical button in the headliner of the vehicle that performs the same task.) After pressing the button, a musical chime sounds and a robotic-sounding woman’s voice says, “Here we go.”

As I said, I’m an experienced Waymo rider — three trips and counting — but this one feels more mature. Before, it felt like you were being driven by your half-blind grandmother, but now, riding feels… mostly normal. The car slows down for speed bumps, accelerates for lane changes, and handles a number of difficult maneuvers like unprotected left turns. And it even surprises me a couple of times, like when it ended up braking too far into the crosswalk at an intersection, and then reversed back a few inches to make room for pedestrians. Of course, it probably shouldn’t have stopped so abruptly in the first place, but it is still comforting to see the car correct its mistakes in real time.

Eoin Treacy's view -

This is perhaps the biggest news this week, even though the arrest of Huawei’s CFO and the tightening of liquidity are what are making global headlines.

Waymo are going slow on rolling out autonomy because they are very aware of the damage road deaths by semiautonomous vehicles have caused to companies like Uber and Tesla. However, the important point is riders are reporting the cars are delivering smoother rides and fewer unexpected stops where the car has to pause and figure out what to do next.



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December 05 2018

Commentary by Eoin Treacy

Video commentary for December 5th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: discussion of the failure of social democracy it's effect on the rise of populism in europe and elsewhere, China's relative quiet, emerging markets gaining a position of relative strength, gold and oil steady, Bunds ease.



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December 05 2018

Commentary by Eoin Treacy

France Tops OECD Table as Most Taxed Country

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

Economists say such consumption taxes that reduce pollution and other harmful effects are an efficient way for the government to raise revenue. But the planned move sparked the worst riots to hit Paris in decades on Saturday, leaving the city’s shopping and tourist center dotted with burning cars and damaged storefronts. Protesters vandalized the Arc de Triomphe, rattling Mr. Macron’s administration and the country.

The rise in French tax revenues was in line with a longstanding trend across wealthy countries. The average tax take across the organization’s members edged up to 34.2% of GDP in 2017 from 34% in 2016 and 33.8% in 2000 as governments continued efforts to narrow their budget gaps and limit the rise in their debts that followed the global financial crisis.

Of the 34 countries for which 2017 figures are available, 19 saw a rise in tax revenues relative to the size of their economy, with Israel reporting the largest increase. Mexico continued to record the lowest tax take at 16.2% of GDP, down from 16.6% in 2016.

Eoin Treacy's view -

Social democracy is broken when a non-progressive tax like putting duty on fuel is considered a good idea by an administration that is made up of ex-socialists. Transportation is as much a necessity for the majority of people as clothing and food so why should it be singled out for oppressive taxes? The powers that be, will argue it is aimed at cutting pollution but the reality for most people is simply less money left over at the end of every month. Meanwhile, the well-off, who have luxury of having to commute less or can afford electric vehicles don’t pay the tax.



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December 05 2018

Commentary by Eoin Treacy

Email of the day on trillion Dollar valuations and tops

Do you remember how I asked you in June or July about the prospects of Apple reaching $1 trillion capitalisation and you told a story of a US Customs officer asking you in April who, in you view, would reach $1 trillion first, Apple or Amazon?

At that time, it struck me since it looked like a bubble signal, a story in the vein of a classic legend of a Wall Street financier and a shoe cleaning boy, asking the former for investment advice ahead of the market crash in October 1929. Truly, it took another six-months for the market and especially Apple to begin to deflate, and before that both it and Amazon had reached $1 trillion mark. And probably Apple stock isn’t a bubble per se, but since October 3 peak it fell 23.9% while Nasdaq Composite, just 10.8%.

As we all know, it’s almost impossible to catch the ultimate peak or trough in the market, but your customs officer story seems to be another interesting story in behavioural finance and a warning of troubles ahead, isn’t it?

Eoin Treacy's view -

Thank you for this email and, yes, I remember the discussion. Here is a link to Comment of the Day on June 7th



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December 05 2018

Commentary by Eoin Treacy

China's State Media Offers Some Clarity on U.S. Trade Deal

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

There’s still no official statement from Beijing that the deal reached Saturday to not raise tariffs is only for a 90-day period and is dependent on the outcome of talks. China’s government has been slow to formulate its response to the summit as senior officials were still out of the country with Xi,
Bloomberg News reported.

The Global Times is affiliated with the state-run People’s Daily, and published a separate Chinese-language editorial on Tuesday noting that the U.S. had made no mention of Beijing’s “Made in China 2025” plan in any statements after the Xi-Trump meeting, nor criticized China’s industrial policy. China’s government has yet to issue official comment on those details.

The day after Xi and Trump met, the WeChat account of the People’s Daily’s overseas edition published an article detailing some of what was discussed at their talks. The article was by Mei Xinyu -- a researcher at a think tank under the Ministry of Commerce -- and cited a White House statement.

It explained that China and the U.S. had agreed to work together on issues including widening market access, protecting intellectual property rights, avoiding forced technology transfers and jointly fighting against cyber theft.

The China Daily also published a commentary on Tuesday noting the 90-day period, explaining it was a truce and saying the U.S. would likely escalate the trade war if no permanent deal was achieved.

Eoin Treacy's view -

If we look at history, all emerging economies have engaged in some form of industrial espionage. China is bigger than other emerging market in terms of both population and market scope and likewise its concerted effort to acquire know-how by any means necessary has been epic in scale. A true signal China has all it needs in terms of technology expertise, as well as having the confidence that it can innovate on its own quickly, would be if did in fact start to uphold intellectual property rights. Quite whether that would be good or bad news is something I suspect has not yet been debated in government circles.



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December 04 2018

Commentary by Eoin Treacy

Video commentary for December 4th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: yield curve spread continues to contract, golds steady, Wall Street and other stock markets pull back from previous areas of resistance to unwind short-term overbought conditions. oil eases, copper weak, palladium at a new all-time high. Dollar steady against the Euro but emerging market currencies strengthening. 



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December 04 2018

Commentary by Eoin Treacy

2020 Rate Cuts, Unimaginable Last Month, Show Up in Bond Market

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

 

“What is the most striking aspect of this move is the extent of it in just two days and how the acceleration came out of nowhere right after a supposed amicable meeting between the U.S. and China,” Peter Boockvar, chief investment officer of Bleakley Financial Group, said in a note. “It’s almost as if the bond market screamed out, ‘It’s too late, the growth slowdown underway can’t be reversed.”’

The curve is flattening because even though cuts have moved on to traders’ radar screen the year after next, the Fed is still expected to lift rates this month and tighten further next year. Inversion has preceded every U.S. recession for the past 60 years.

Eoin Treacy's view -

The spread between the 10-year and the 2-year contracted by another 3 basis points today to take the measure down to 11 basis points. This compression is being delivered by a substantial move in the 10-year and the relative inert trading in the 2-year.



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December 04 2018

Commentary by Eoin Treacy

May's Brexit Agreement Is a Betrayal of Britain

This article by former Bank of England governor, Mervyn King, may be of interest to subscribers. Here is a section:

 

Leaving the EU is not the end of the world, any more than it will deliver the promised land. Nonetheless the country is entitled to expect something better than a muddled commitment to perpetual subordination from which the U.K. cannot withdraw without the agreement of the EU. 

Many MPs will argue that “we are where we are,” that it’s too late to change course, and that May’s deal is the only deal available. But remember, this is a political not an economic crisis. If Blair and Johnson, from opposing political viewpoints, can see the fatal weaknesses of this proposed deal, politicians of all hues should try to do the same. This deal will not end the divisiveness of the debate about Britain’s relationship with the EU. The Remain camp will continue to argue, correctly, that to align the country indefinitely with laws over which it has no influence is madness, and a second referendum is vital to escape from this continuing nightmare.

And the Leave camp will argue, also correctly, that it is intolerable for the fifth largest economy in the world to continue indefinitely as a fiefdom.

If this deal is not abandoned, I believe that the U.K. will end up abrogating it unilaterally — regardless of the grave damage that would do to Britain’s reputation and standing. Vassal states do not go gently into that good night. They rage. If this parliament bequeaths to its successors the choice between a humiliating submission and the abrogation of a binding international treaty, it will not be forgiven — and will not deserve to be.

Eoin Treacy's view -

It’s hard to see how Theresa May’s minority government is going to survive the Brexit vote on December 11th. Without the DUP and the unity of her party she is going to need a mass defection from the opposition which is unlikely if that event would shore up her government. Being forced by Parliament today to release the details of the legality of the deal is a further sign of her weak position.



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December 04 2018

Commentary by Eoin Treacy

Palladium Sets Fresh Record as Metal Clashes With Gold

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

Palladium jumped for a second day as it tussled with gold for designation as the most valuable metal.
Parity between the two last happened in 2002. Palladium has surged in the past four months on speculation there isn’t sufficient supply to meet increasing demand for the metal used in vehicle pollution-control devices.

Drivers

Holdings of exchange-traded products backed by palladium are at their lowest since February 2009 as investors pull the metal and offer the commodity for lease to users scrambling for supply. The cost to borrow palladium for a month surged to a record 22%, more than seven times higher than the 10-year Treasury yield.

While palladium keeps rising, it’s a different story for platinum. Palladium’s premium to its sister metal is at the biggest since 2001. Platinum is used mostly in autocatalysts for diesel vehicles, where demand has slipped. The outlook for gold remains positive with Goldman Sachs expecting inflows to gold ETFs next year as investors seek an alternative portfolio diversifier.

Prices

Palladium futures for March delivery +1.3% to settle at $1,180.20/oz at 1:01pm on Nymex in N.Y. Spot palladium +2.4% to $1,234.29/oz; earlier climbed as high as $1,240.01/oz, a fresh record. Gold rises as much as 0.9% to $1,241.97/oz, highest price intraday since Oct. 26

Market Commentary

“Palladium continues to steal the show from all other precious metals,” say Commerzbank analysts including Daniel Briesemann“ The high price premium on palladium is not justified in our opinion because car sales have been fairly weak on all key markets of late” Gold prices are supported “as the U.S. dollar index has backed off,” Jim Wyckoff, senior analyst at Kitco Metals, says in note to clients.

Eoin Treacy's view -

Palladium has surged higher since the August low and a short-term overbought condition is now evident. However, a break in the sequence of higher reaction lows, currently near $1100, would be required to question momentum beyond a pause.



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December 03 2018

Commentary by Eoin Treacy

Video commentary for December 3rd 2018

Eoin Treacy's view -

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

Some of the topics discussed include: predictable outcome to the G-20 meeting, stock markets initially bounce but need to hold the move amid short-term overbought conditions, oil steadies, dollar steady, yield curve tightens sharply, Treasuries testing the region of the trend mean, 



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December 03 2018

Commentary by Eoin Treacy

G-20 Gives Markets a Short-Term Respite

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

For the economic reasons discussed here, the most likely outcome was in the middle of that range: a cease-fire with a pathway to a more decisive de-escalation of tensions – or, to use a recent historical parallel, an agreement similar to the one that followed the White House visit of EU President Jean-Claude Juncker in July. And that is what materialized, with the important addition of a three-month deadline for progress.

At the end of almost three hours of what the White House called “highly successful” discussions, the U.S. agreed to refrain for 90 days from implementing additional tariffs on $200 billion of imports from China. In return, China promised to use the time to make progress in three areas of concern to the U.S. and other countries: relaxing an array of nontariff barriers, including joint-venture requirements, that result in forced transfers of technology, operational models and other proprietary information and business practices; combatting intellectual property theft and other cyber interferences; and reducing the bilateral trade surplus by importing “very substantial” quantities of certain goods from the U.S.

Eoin Treacy's view -

The G-20 ended as expected with smiles all round but with not a great deal to report other than a hiatus in the trade war and commitment to go back to talks. There is a little chance of China making anywhere close to the concessions demanded of the USA so it is quite likely the market will be back on tenterhooks by the time late January comes around.



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December 03 2018

Commentary by Eoin Treacy

Email of the day on my central bank total assets chart:

You have mentioned that the graph showing central bank assets is one of the most important. Consequently, I wondered how the fact that they are reducing this tied in with your moderately optimistic views on the stock market. Do you think the US Fed Reserve will continue to reduce its balance sheet given recent market turmoil?

Eoin Treacy's view -

Thank you for this question which I believe is of general interest and is something I have also been pondering. There are two reasons the chart has been contracting since March. The first is because the Federal Reserve is reducing the size of its balance sheet and other central banks are reducing infusions. The second is the strength of the Dollar has flattered the contraction by reducing the relative value of other currencies held on global central bank balance sheets.



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December 03 2018

Commentary by Eoin Treacy

Oil Jumps Most Since June on Saudi-Russian Pact, Trade War

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

“There’s going to be a cut, I think it’s going to be more than people expected, and I think the market realized that today,” said Bob Iaccino, chief market strategist at Chicago-based Path Trading Partners.

For a time, oil pared gains on Monday after an OPEC advisory panel was said to make no recommendation for action and people familiar with negotiations said Russia and the Saudis still haven’t agreed on details of a cut. Iranian OPEC Governor Hossein Kazempour Ardebili, meanwhile, raised doubts about whether producers can reach unanimity in Vienna.

 

Eoin Treacy's view -

The big news from the oil market has been the decision by Alberta to reduce supply by 385000 barrels a day. That’s a direct response to the plummet in Western Canada Select from a peak near $60 to $13 last week. This also highlights how it is marginal suppliers reliant on high prices for profitability are most at stress in the evolving secular bear market.



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November 30 2018

Commentary by Eoin Treacy

November 30 2018

Commentary by Eoin Treacy

The Big Picture

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

Eoin Treacy's view -

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

By this stage subscribers much be wondering why I am posting so many reports that express a bearish view. The simple fact of the matter is I am reposting these reports in an effort to highlight the fact that the last time my inbox was so filled with bearish reports was in the immediate aftermath of the credit crisis.

It seems that the one thing every analyst has learned from the credit crisis is to be hyper alert to any sign of trouble lest they miss out on calling the next big decline. It occurs to me that the investment community is falling into the trap of fighting the last war all over again, even though we are now in uncharted territory in terms of both monetary policy and the quantity of debt outstanding.



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November 30 2018

Commentary by Eoin Treacy

One Section of the U.S. Yield Curve May Invert as Soon as Today

This article by Katherine Greifeld and Emily Barrett for Bloomberg may be of interest to subscribers. Here is a section:

While a December rate increase is still seen as a done-deal, Fed Chairman Jerome Powell’s comments that interest rates are “just below” the so-called neutral range changed the 2019 outlook. The spread between December 2018 and December 2019 eurodollar futures -- a measure of how much tightening traders expect next year -- is currently just 23 basis points, the equivalent of less than one Fed hike.

The 3-year to 5-year spread is not the only one nearing inversion. The gap between 2-year and 5-year Treasury yields fell to an 11-year low of 1.9 basis points on Friday as 5-year Treasuries added to their weekly gain.

To be sure, the richness of the 5-year sector on the curve has enticed sellers, who Thursday carried out a series of futures block trades betting the sector will cheapen relative to the 10- and 30-year points.

Eoin Treacy's view -

We tend to pay attention to the 10-year – 2-year spread as one of the primary arbiters of tightness in the monetary system. The basic rationale is banks make money by borrowing short-term and lending long-term. When the spread is inverted it reflects a time when that trade no longer works so banks restrict lending which tightens credit conditions in addition to the tightening which is already underway from the Fed.  I can see the rationale for using a longer-dated spread like the 3-month to 30-year as Jeffrey Saut recommends, but why would anyone look at the 3 to 5-year spread?



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November 30 2018

Commentary by Eoin Treacy

India Seeks to Ease Biggest Hurdle for Factories With New Policy

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

Under the new plan, a company need not purchase land or equipment but could lease them on long-contract basis helping lower costs and cut down time on setting up operations, secretary to the Department of Industrial Policy and Promotion Ramesh Abhishek said in an interview. Units located in
industrial clusters may be able to share infrastructure.

“We have to be competitive,” said Abhishek, who’s ministry has been working on the plan for over a year. “For this we need to upgrade our technology, lower costs, improve logistics, skill our labor. The industrial policy will bring all things together and will come out with recommendations on what needs to be done.”

Prime Minister Modi’s administration has been struggling to fulfill one of his key campaign pledge -- creating 10 million jobs a year-- that propelled him to power in 2014 elections. As the country heads to poll due early 2019, the main opposition Congress party is moving to cash in on the disenchantment over unemployment and rising social tensions.

The reform measure, likely to be one of the last few before the Modi seeks re-election, attempts to attract over $100 billion in investments into the country and kick start the economy. Quarterly growth is expected to have slowed in the three months ended September even as a liquidity crunch at its banks hurts business sentiment before state elections.

Eoin Treacy's view -

I’ve often made the point that China has what India needs and vice versa. At a time when the rest of the world is facing demographic decline India stands out as the one remaining mega-population centre that has yet to industrialise. India has long had a vibrant domestic economy and its companies are already competing effectively internationally. It also has a solid-knowledge based economy focusing on the healthcare and outsourcing sectors. 



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