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July 11 2016

Commentary by Eoin Treacy

Email of the day on the decision to go long

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

Eoin Treacy's view -

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

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

 



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July 11 2016

Commentary by Eoin Treacy

South Africa girding for another platinum strike

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

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

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

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

 

Eoin Treacy's view -

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



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July 11 2016

Commentary by Eoin Treacy

Google Plans to Train 2 Million Indian Developers on Android

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 08 2016

Commentary by David Fuller

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

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

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

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

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

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

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

David Fuller's view -

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

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



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July 08 2016

Commentary by David Fuller

UK Startups Can Shine In a Post-Brexit World

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

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

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

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

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

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

David Fuller's view -

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

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

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



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July 08 2016

Commentary by David Fuller

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

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

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

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

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

David Fuller's view -

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

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



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July 08 2016

Commentary by David Fuller

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

Here is the opening of this interesting article from Bloomberg:

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

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

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

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

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

David Fuller's view -

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

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

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



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July 08 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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

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

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



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July 08 2016

Commentary by Eoin Treacy

Insights

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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July 08 2016

Commentary by Eoin Treacy

Nvidia's GTX 1060 is VR-ready and affordable

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

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

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

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

 

Eoin Treacy's view -

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



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July 08 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 07 2016

Commentary by David Fuller

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

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

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

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

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

David Fuller's view -

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



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July 07 2016

Commentary by David Fuller

Post-Brexit, the Real Risk Is Europe Could Fail

Here is the opening of this topical article from Bloomberg:

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

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

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

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

David Fuller's view -

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

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



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July 07 2016

Commentary by David Fuller

July 07 2016

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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



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July 07 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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

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

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



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July 07 2016

Commentary by Eoin Treacy

Global bond burn from Brexit may now force fiscal response

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 07 2016

Commentary by Eoin Treacy

Putin's Military Buildup in the Baltic Stokes Invasion Fears

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

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

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

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

 

Eoin Treacy's view -

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



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July 07 2016

Commentary by Eoin Treacy

Danone To Acquire WhiteWave Foods In $10 Billion Milk Merger

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 07 2016

Commentary by Eoin Treacy

July 06 2016

Commentary by David Fuller

Government Must Start Talking Up the UK Economy

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

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

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

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

David Fuller's view -

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

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

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

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



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July 06 2016

Commentary by David Fuller

The Weekly View: Tactically Cautious

My thanks to Rod Smyth and Kevin Nicholson for this excellent service published by RiverFront Investment Group.  Here is a brief sample from the opening:

At RiverFront, we look at market opportunities both strategically and tactically.  Communicating our views is easiest when both are aligned and most challenging when they are at odds, as is currently the case.  Last week, we implemented a second round of risk reduction trades in our portfolios.  This trade involved selling international stocks and buying long-maturity Treasury bonds.  Our Price Matters discipline continues to highlight the long-term value offered by international stocks and the low long-term yields offered by bonds.  Despite this, we believe there is sufficient risk in stocks and adequate opportunity in Treasury bonds in the coming months to move temporarily away from our strategic stance, so these trades were based on our tactical view.

David Fuller's view -

OK, fair enough and RiverFront has been very successful for many years.  I assume that they will eventually move out of Treasuries and back into equities, taking advantage of lower prices and higher yields.  Far be it from me to criticise RiverFront, but the firm has apparently chosen not to buy 2016’s red hot contra cyclical recovery sector – commodities, currently led by precious metals. 

Perhaps precious metals are regarded as too speculative for their customers, but is that really true?  After all, gold and silver have been hard money for centuries; they were arguably oversold in January after approximately four years to the downside, and interest rates remain at record lows. 

Additionally, many commodities and significant commodity shares have been recovering from exceptionally low levels this year and the latter often have excellent yields.  This is not an unusual development since commodities often attract investor interest when bull markets in stocks are long in the tooth and losing upside momentum, as I have frequently mentioned this year.    

A PDF of The Weekly View is posted in the Subscriber's Area. 



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July 06 2016

Commentary by David Fuller

French Plot to Topple City of London is Foolish Bluster

French leaders are openly plotting to peel off large chunks of the City’s financial industry as soon as Britain leaves the EU. This might prove much tougher than they imagine.

The plans conflict with far more important economic and strategic objectives of the EU, and some of the stated intentions violate existing EU law.

France is rolling out the red carpet for putative refugees from Canary Wharf, hoping to capture the lion’s share of the estimated €600bn to €1 trillion market for clearing in euro-denominated transactions. Some German officials are also eyeing the City, but more discreetly.

"There is a power play going on. It is very clear France and Germany will do everything they can to damage the City and get the business for themselves," said Professor Athanasios Orphanides, a former member of the European Central Bank's governing council.

"But I don't think anybody can kill the City that easily. The EU itself is so messed up right now and the eurozone is so fragile that any shock could tip them over the edge, and when it happens it is going to be non-linear," he said.

French President François Hollande has been notably combative, telling Les Echos that Britain will lose its vital right to commercial passporting “completely” the moment it steps out of the club.  This clashes head on with France's parallel policy of intimate defence ties with Britain.

He has also stated categorically that Europe will stop the City carrying out clearing operations in euros, adding for good measure that the Referendum result is irreversible. It is almost as if he welcomes the result for his own internal motives within the French political system.

Prof Orphanides, now at the Massachusetts Institute of Technology,  said neither Paris nor Frankfurt have the skills or outlook to run an international financial centre of global scale.

"Whatever they try to do, they'll end up shooting themselves in the foot and driving the businesses out Europe. The EU regulations are so costly that I think the City could actually see long-term benefits from leaving," he said.

The City is ranked number one in the Global Financial Centres Index, ahead of New York, Singapore, Hong Kong, Tokyo, and Zurich.  None of the EU's other hubs come close. Luxembourg is 14, Frankfurt is 18, and Paris lags far behind at 32,  behind Calgary or Dalian in China.

The great unknown is whether London's incumbency advantage is 'sticky' in the fluid world of global finance. Chris Cummings from the industry lobby TheCityUK says it is hard to replicate a deep and established market.

David Fuller's view -

Most of the City’s financial institutions voted for Remain in line with their short-term profits.  However, their longer-term potential should be greater under British regulation and the lower corporate taxes mention last week by current Chancellor George Osborne.

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



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July 06 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Note: Given the importance of Brexit and its influence on markets, I suggest we commence with a short interactive discussion on this topic before the scheduled presentations commence, if delegates agree.

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



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July 06 2016

Commentary by Eoin Treacy

UK listed gold miners

Eoin Treacy's view -

Last year the Rand collapsed but gold prices were reasonably steady. With the fall in energy prices corporate profits of South African gold miners improved and with returning investor interest the Johannesburg Gold Miners Index turned to outperformance early this year.

The Index failed to sustain the break below 1000 in August then surged higher from early January and continues to improve in line with the breakout in gold prices. While that is in nominal terms, it is an impressive performance nonetheless. 

 



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July 06 2016

Commentary by Eoin Treacy

First Solar Quits TetraSun in Shift to All Thin-Film Panels

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

When First Solar acquired TetraSun, it was producing cadmium-telluride panels with maximum efficiency rates of 13.3 percent, the amount of energy in sunlight that’s converted to electricity. TetraSun had 21 percent efficiency at the time and the potential for improvement.

The company’s latest cadmium-telluride cell reached a record 22.1 percent efficiency in a laboratory. That’s higher than the best multicrystalline polysilicon cell at 21.3 percent, according to data from the National Renewable Energy Laboratory.

SunPower Corp., which uses a purer form of silicon, has the most efficient panels, with 24.1 percent.

“First Solar has achieved surprisingly good results for its thin-film technology,” Jenny Chase, an analyst at Bloomberg New Energy Finance, said in an e-mail. “First Solar may have felt there was little point in competing in an area where they have no unique advantage over other silicon manufacturers.”

 

Eoin Treacy's view -

The above story highlights how solar panel companies can become the victims of their own success. By purchasing Tetrasun, First Solar was hedging its development of a new product but it is arguable whether that would have worked since there are other cost effective manufacturers of those panels, not least in China. In such a highly competitive market, where the risk of new technologies evolving outside a company’s internal ecosystem is nontrivial, companies might be better off having conviction in their own products than competing on legacy technology. 



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July 06 2016

Commentary by Eoin Treacy

U.S. Stocks Advance Amid Drug Maker Rally as Caution Subsides

This article by Anna-Louise Jackson and Bailey Lipschultz for Bloomberg may be of interest to subscribers. Here is a section: 

“There was a big flight to safety trade earlier and a lot of that has reversed,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “You’re looking at a market that’s lacking direction right now. The primary driver for concern is what it always is -- a slow growth backdrop. We’re in a no-man’s land before the next Fed meeting and the kick-off of earnings next week.”

American equities shook off declines in global markets, which fell as knock-on effects of Britain’s vote start to materialize. Anxiety has increased over the potential for instability to spread after at least five asset managers froze withdrawals from U.K. real-estate funds following a flurry of redemptions, while data on Wednesday showed German factory orders were unchanged in May, disappointing forecasters who had called for an increase.

Before yesterday’s decline, the S&P 500 capped its strongest weekly rise since November, boosted by assurances that central banks are prepared to loosen monetary policy to limit the fallout from Brexit. The benchmark is trading at 16.6 times estimated earnings, a higher valuation than the MSCI All-Country World Index and above its own three-year average.

 

Eoin Treacy's view -

10-year Treasury yields steadied today in the region of 1.38% amid a deep overextension relative to the trend mean. Some consolidation in this area is looking likely but with absolute levels so low there has been a surge into assets with the prospect for a higher dividend yield or dividend growth.  



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July 05 2016

Commentary by Eoin Treacy

What Really Drives White Metals Prices

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

Silver supply drivers
While overall silver stocks are high globally, over the last few years silver has experienced what is known as a “supply deficit,” as annual production has been less than the demand for the metal, gradually eating away at current stocks. What many investors may not realize is that only 25% of silver production is derived from silver mines; the rest—roughly 75%—is a byproduct of mining for other metals, most notably lead, zinc, copper, and gold. As of year-end 2015, as mining capital expenditures for these other metals has been scaled back in response to relatively low prices, silver production has correspondingly fallen.

Silver demand drivers
Although it may not be the first thing that comes to investors’ minds when they think of silver, industrial applications are a significant demand driver, accounting for more than half of the precious metal’s usage worldwide. Silver’s unique characteristics include its outstanding thermal and electrical conductivity, along with its ductility, malleability, optical reflectivity, and antibacterial properties. These features make the precious metal invaluable as an input in myriad industrial applications including electrical components, batteries, photovoltaics (solar panels), auto parts, pollution abatement technology, ethylene oxide (an important chemical precursor), as well as brazing alloys and solders. 

Of the white metals, silver also tracks gold most closely, boasting a correlation of 0.8 over the past five years. Since gold is seen as a defensive asset in times of expanded bank balance sheets or quantitative easing programs by central banks, monetary policy tends to have a “shadow impact” on silver—far less so than gold, but still noticeable. Lastly, albeit accounting for just 20% of silver use worldwide, it’s worth noting that jewelry demand has held more or less stable over the past decade. 

Looking forward 
Deep capital expenditures cuts in the industrial metals space is likely to have a significant effect on silver supplies, as the majority of silver is mined as a byproduct of zinc and copper. In the context of weakening global demand, especially from China, low commodity prices have reduced production incentives. Looking forward, as the global growth outlook improves, demand for commodities, including silver, is likely to rise.

 

Eoin Treacy's view -

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

If “the cure for high prices is high prices” is one of the oldest adages in the commodity markets then it also works in reverse. Industrial metal prices trended lower for four years and the LME Metals Index more than halved in the process. That forced miners to cut back on spending, cancel expansion plans, hold off on acquisitions, fire workers, especially administrative staff, and become much more conservative with their expectations for growth. 



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July 05 2016

Commentary by Eoin Treacy

A Prime Minister, a Referendum and Italy's Turn to Get Worried

This article by Chiara Albanese and John Follain for Bloomberg may be of interest to subscribers. Here is a section: 

It’s now a familiar refrain: A European prime minister calls a referendum, his job could be on the line and markets are getting worried.

This time it’s not Britain’s David Cameron but Italy’s Matteo Renzi, who has called a vote on an ambitious overhaul of the political system aimed at ending the country’s unstable governments. If he loses, Renzi has promised to quit, an outcome that Citigroup Inc. called probably the biggest risk in European politics this year outside the U.K.

The vote is expected in October, though it is already spooking investors and Italian bonds are once more under-performing their Spanish peers. The yield on 10-year Italian securities overtook those on similar-maturity Spanish debt for the first time in almost a year on June 27, a day after Spain’s Acting Prime Minister Mariano Rajoy defied opinion polls to consolidate his position in a general election.

A public opinion poll by Euromedia Research said that 34 percent of Italians would vote against Renzi’s plan, with 28.9 percent in favor, 19.4 percent undecided on which way to vote and 17.7 percent undecided on whether to vote. The poll based on 1,000 interviews was conducted on July 1. No exact date for the referendum has been set.

 

Eoin Treacy's view -

If one were to look at the yield on Italian government bonds (BTPs) it would be hard to discern whether Italy had any problems at all. With a yield of 1.26% Italy has close to the lowest borrowing costs it has ever enjoyed not least because the ECB is actively buying across a whole swathe of maturities. 



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July 05 2016

Commentary by Eoin Treacy

Blackstone Tenants Get a Shot at Buying Their Rental Houses

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

Selling rental homes to tenants is a way for investors to make more money than they would selling in bulk, and saves them the costs of renovating and carrying the properties until they sell on the open market. It’s also a way to help people stay put, keep their kids in the same schools and stabilize neighborhoods, according to Bartling.

“This is an important part of the maturation of the industry and for Invitation Homes as we grow over time,” he said in an interview.

About 25 percent of Invitation Homes renters who move out each year are leaving to become buyers, according to the company. That’s similar to what the industry’s other large firms are experiencing. Colony Starwood Homes has reported losing about 23 percent of departing tenants to homeownership, and American Homes 4 Rent has said its figure is about 30 percent.

American Homes 4 Rent, the No. 2 single-family landlord, with about 48,000 houses, didn’t respond to requests for comment about whether it would be selling homes to tenants. Colony Starwood, the third-largest, with about 31,100 homes, declined to comment, spokeswoman Caroline Luz said.

 

Eoin Treacy's view -

Investors amassed significant inventory of houses during the peak of the foreclosure process more than five years ago. The fact that a number of REITs were listed in the last couple of years and that some are now reducing inventory suggests both they are taking profits and that the market has moved on from the distressed opportunity is represented following the credit crisis. 



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July 04 2016

Commentary by David Fuller

Businesses Bemoaning Brexit Welcome Osborne Tax-Cut Proposal

Multinational businesses may not be happy about Brexit, but U.K. Chancellor George Osborne’s proposal to slash corporate taxes to 15 percent offers small comfort in a period of uncertainty as the fallout from a vote to leave the EU weighs on prospects for doing business in Britain.

In a bid to signal that Britain is "open for businesses," Osborne said in an interview with the Financial Times that he wants to slash corporation taxes from the current 20 percent rate. Business groups say it is just one of many steps they would like to see from the government to maintain and lure investment as the U.K. negotiates its exit from the EU.

"It’s one of a number of measures that would reassure those businesses that are concerned in the aftermath of the referendum,” said Stephen Herring, head of taxation at Institute of Directors, a U.K. organization for professional leaders with 34,500 members. “It’s another way to give a nudge to foreign investors."

Osborne’s vision of post-Brexit Britain as a "super competitive economy" stands in stark contrast to the warnings he made before the referendum that he would be forced to raise taxes and cut spending if the U.K. voted to leave. As five fellow Conservative Party members of parliament mount bids to replace David Cameron as Prime Minister, it’s unclear if Osborne will even be around to push through his proposed tax cut.

David Fuller's view -

This is a welcome return to responsible policies by the Chancellor of the UK Treasury.  Following an abundance of heated commentary following the Referendum, people need to be reassured of the UK’s competitive potential.  



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July 04 2016

Commentary by David Fuller

S&P Scoffs at Armageddon Warnings for Britain

Here is the opening of this rebuttal to exaggerated claims, reported by Ambrose Evans-Pritchard for The Telegraph:

Britain will scrape by without a full-blown recession over the next two years as a weaker pound cushions the Brexit shock and panic subsides, Standard & Poor’s has predicted.

“We’re not in the Armageddon camp,” said Jean-Michel Six, the rating agency’s chief economist for Europe.

“Devaluation acts a shock absorber. It stimulates exports and makes the London Stock Exchange more attractive to foreign investors,” he said.

The UK economy should muddle through with growth of 1.5pc this year, 0.9pc in 2017, and 1pc in 2018, shielded from the storm by fiscal largesse and monetary stimulus a l’outrance.

The benign outcome assumes that the Bank of England will cut interest rates to zero and relaunch quantitative easing, buying £100bn of bonds in each of the next two years.

It also assumes that Britain joins the European Economic Area – the "Norway model" – or a close equivalent that safeguards full access to the single market and preserves the City’s passporting rights for financial services.

“If that does not happen, it could be extremely negative,” said Mr Six. A hostile EU divorce could push the housing market into a downward spiral as an exodus of migrants compounds the damage from an economic slump.

The agency warned that devaluation has its drawbacks but the net effect in these specific circumstances is positive. “Down the road, by the end of the year or early next year, the inflation effect will hit real incomes and weigh on consumption,” it said.

David Fuller's view -

The UK may favour a version of the “Norway model” for the UK, on the basis of national unity, as the 52 to 48 referendum result was clear but not overwhelming.  Meanwhile, lengthy, perhaps acrimonious negotiations with the EU would be in no one’s interests and probably only increase support for Brexit within the UK, and perhaps also some other countries within the EU.     

A PDF of this article is posted in the Subscriber’s Area, and you may be interested in the closing comments on Italy.



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July 04 2016

Commentary by David Fuller

Email of the day 1

On my Audios, from a veteran subscriber:

David Having been an avid follower for 35 years I have missed your insight as you have hardly done any audios recently Great today [30th June] though.  My subscription is due for renewal so can I have your assurance that you will continue with the audios as often as possible?

David Fuller's view -

Thank you so much for your long-term interest in this service, which I trust justifies your renewal.  I enjoy doing Audios but as I mentioned on 30th June, they can become stale and too predictable if done continuously.  Eoin also has a following, as you know, not least for the range of his coverage.  I think we have complementary skills and I trust most subscribers will agree.  We would both prefer to provide value rather quantity.  



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July 04 2016

Commentary by David Fuller

Roger Bootle: Britain Needs a Singapore Sling Into the Post-EU Era

Who stabbed who in the back is a fascinating basis for novels, plays and political biographies, but given the serious issues now at stake it is really a sideshow. Nor does it much matter who is prime minister, as long as he or she leads Britain out of the current impasse to honour the choice made by the British people in the referendum and to realise fully the economic opportunities unleashed by Brexit. 

The single market is the centre of this issue. There are different questions concerning goods and financial services. (For other service activities, the single market effectively doesn’t exist). As far as financial services are concerned, I have written about “passporting rights” before. The demise of these would cause some loss of business to the City but this is likely to be minor. And there is an offsetting advantage – being able to operate our own regulatory regime, thereby escaping from the madcap rules of Brussels.

For goods, the general presumption is that to have access to the single market a country must be a member. Yet most countries in the world do not belong to the single market, but export large amounts to it. If we were in their position, we would encounter two hurdles, plus one possible problem and one non-problem. The first hurdle is that exporters pay the EU’s common external tariff. The average for manufactured goods is about 4pc. This is a pretty small obstacle. Since the referendum, the pound has fallen by 8pc, following an earlier fall of about 6pc. This has already more than wiped out any future tariff burden for most of our exporters.

The second hurdle is paperwork and border checks, which may cause delays and increase costs. Yet the fact that many non-EU countries manage to export so successfully into it suggests that this barrier cannot be very significant.  The possible problem involves deliberate discrimination against UK exports “in revenge” for the UK leaving the EU. Some of this will happen, but it is surely likely to be minor. It would be against the self-interest of both businesses and consumers on the Continent. 

David Fuller's view -

I have the upmost respect for Roger Bootle, developed over decades, and being able to operate our own regulatory regime makes sense to me.  However, would the loss of “passporting rights” into the EU single market really only cause some minor loss of business for the City?

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



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July 04 2016

Commentary by David Fuller

Email of the day 2

On good health and an appreciating pension:

With ref to yesterday's [Thursday’s] email no 3, and having achieved the age of 75 yesterday, I thoroughly agree with all that your correspondent said regarding the service. (I can remember the hard copy days) I am now happily retired in South Africa where I have made a point of reconnecting with the natural world. Long walks in the safer areas of bush and sitting on my veranda with a glass of wine observing the birds in my garden. I am pleased to report that my pension fund has done spectacularly well this year by being overweight commodities esp gold which your service identified some months ago. Hoping we both remain reasonably healthy for many more years.

David Fuller's view -

Happy Birthday and thank you so much for this email.  As a veteran subscriber you had the experience to recognise the recovery potential in gold and other commodities early this year, and the wisdom to invest in the face of the crowd’s extreme pessimism.  May you continue to enjoy your reconnection with the natural world, from long walks in safer areas of the bush to observing South Africa’s spectacular bird life from your garden.  I was delighted to see a largely white barn owl at dusk over a nearby uncultivated field on Saturday in North Devon.  May we long enjoy these experiences.   



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July 04 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Note: Given the importance of Brexit and its influence on markets, I suggest we commence with a short interactive discussion on this topic before the scheduled presentations commence, if delegates agree.

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



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July 01 2016

Commentary by Eoin Treacy

Stocks Climb With Bonds, Gold on Policy Bets After Brexit Storm

This article by Inyoung Hwang and Bailey Lipschultz for Bloomberg may be of interest to subscribers. Here is a section: 

Statements from the European Central Bank and the Bank of England that they stand ready to loosen policy to deal with the aftermath of Brexit helped halt a two-day rout in markets. Odds that the Federal Reserve will raise borrowing costs this year as planned have fallen to less than 10 percent. Data today showed U.S. factory activity expanded in June at the fastest clip in more than a year, underscoring optimism in the strength of the world’s largest economy as investors look to data for clues on the trajectory of interest rates.

“Central banks coming out and reinforcing that they were a backstop gave investors the confidence that they would have enough support to keep making moves,” said Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates LLC in South Carolina. “That and the timing of the quarter-end played into it and helped the rally start and the market really rebound.”

And

“As bad as things have gotten, central banks have talked about new types of easing -- that’s going to keep a bid under equities,” said Andrew Brenner, head of international fixed income at National Alliance Capital Markets in New York. “The worse things get, the more potential there is for quantitative easing and the better that is for equity markets.”

 

Eoin Treacy's view -

UK Gilt yields touched a new multi-decade low this week. US 10-year Treasury yields also hit a new multi-decade low yesterday. More than half of all sovereign bonds globally have negative yields. With central banks talking seriously about employing fresh extraordinary measures to stimulate asset prices there is little potential for policy to tighten. The question then is how likely is it that UK yields will turn negative amid BoE stimulus and at what level US Treasury yields are likely to stabilise. 



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July 01 2016

Commentary by Eoin Treacy

China to tolerate weaker yuan, wary of trade partners' reaction

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

China's central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year's record decline of 4.5 percent, policy sources said.

The yuan is already trading at its lowest level in more than five years, so the central bank would ensure any decline is gradual for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions.

Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.
The economists and advisers are not directly briefed on policy by the People's Bank of China (PBOC), but they have regular meetings and interactions with central bank officials and they provide policy recommendations. They said the central bank would tolerate a further weakening of the yuan this year to between 6.7-6.8 per dollar.

"The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control," said a government economist, who requested anonymity due to the sensitivity of the matter.

 

Eoin Treacy's view -

China is engaged in a massive rationalisation of the basic resources sector with cement, steel, coal, aluminium all subject to challenges. With millions of jobs at stake the country needs a weaker currency to take some pressure off the manufacturing sector so it may be able to absorb some displaced workers. 



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July 01 2016

Commentary by Eoin Treacy

ASEAN Perspectives, Politics to set the tone

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

At the beginning of the year, Vietnam installed a new Prime Minister, replacing a candidate widely viewed as having spearheaded reforms over the past decade. The Philippines also elected a new President in May, but he is widely viewed as taking a hard-line stance on issues such as crime and domestic and foreign policy (Washington Post, 10 May 2016).

By contrast, and perhaps more reassuringly, over in Indonesia the pro-reform ruling coalition has been benefiting from shifting political allegiances, and its initial minority presence in parliament has now turned into a majority. Then there’s Malaysia. Despite the troubles with sovereign wealth fund 1MDB, the results of a state election and two federal by-elections suggest that the ruling coalition remains in a strong position ahead of general elections in 2018. Last but not least, there’s Thailand, which will vote in a referendum on the draft constitution in August. If approved, this could lead to an election in 2H 2017, potentially paving the way for the country to emerge from over two years of military rule.

What will the above political shifts mean for structural reforms and the longer term economic outlook? In the following sections, we look at the reform agenda of each country in detail, and how the recent or upcoming political changes might impact these. Some of the desired reforms, such as the need for greater investment and in particular, infrastructure, recur across the region. Government balance sheets in some places will also need to be kept in check, and trade liberalization pursued. But policymakers are approaching all of these issues in their own unique ways, and change is afoot.

Eoin Treacy's view -

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

The ASEAN region is unlikely to escape unscathed if European and UK demand for its exports deteriorates. However the majority of ASEAN companies do not have large investments in Europe and are more leveraged to the demand growth stories that continue to benefit from improving standards of governance at home. 



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June 30 2016

Commentary by David Fuller

Was Brexit Fear a Giant Hoax Or Is This the Calm Before the Next Storm?

Yet it should be dawning on European politicians by now that the economic fates of the UK and the eurozone are entwined, that if we go over a cliff, so do they and just as hard, and therefore that their bargaining position is not as strong as they think. They cannot dictate terms.

Few seem to grasp this, much like the wishful thinking in September 2008 when so many supposed that Lehman posed little danger to them. Britain has "collapsed politically, monetarily, constitutionally and economically,” said Dutch premier Mark Rutte, almost seeming to enjoy the flourish of his own words. Our great ally William the Silent would not have been so frivolous.

Morgan Stanley says they need to wake up. It warns that the eurozone will suffer almost as much damage as Britain in a 'high stress scenario', and so do others. Danske Bank says the UK and the eurozone will both crash into recession later this year. 

If so - and that is not yet clear - it is hard to see how the eurozone could withstand such a shock, given the levels of unemployment and the debt-deflation dynamics of southern Europe, and given the intesity of political revolt in Italy and France.

Contrary to the supposition of Mr Rutte, the fall in sterling is a blessing for the British economy, and a headache for the eurozone. The exchange rate is acting as a shock-absorber, just as it did in 1931, 1992, and 2008,  all bigger falls, and all benign.

Devaluation strikes no fear in a chronic deflationary world where almost every major country is trying to push down its currency to break out of the trap, and largely failing to do so. It would facetious to suggest that Britain has pulled off this trick. Crumbling investor confidence is never a good thing. But the UK has stolen a march of sorts, carrying out a beggar-thy-neighbour devaluation by accident.

The pound needs to fall further. It is still too strong for a country with a current account deficit running consistently above 5pc of GDP. The International Monetary Fund said just before Brexit that sterling was 12pc to 18pc overvalued, and may have to fall more than this to force a lasting realignment of the British economy. 

This cure has hardly begun. As of today, sterling is 5pc below its trading range for the last month against the euro and the Chinese yuan. It is weaker against the US dollar but the dollar is on steroids, much to the horror of the US Treasury.

The more sterling falls, the greater the net stimulus for the British economy. The reverse holds for the eurozone. It is a further deflationary shock at a time when Europe is already in deflation, when inflation expectations are in free-fall and bond yields are collapsing below zero, and when the ECB is running out of options.

There are two dangers for the world economy. One is that China is exporting deflation with alarming intensity. Morgan Stanley estimates that China's trade-weighted devaluation is running at an annual rate of 11pc, and factory gate deflation adds another 2pc. This is a tsunami coming from the epicentre of global overcapacity.

The other danger is that British and European politicians fail to understand what is coming straight at them from Asia. Britain's Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error. 

US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or "start ginning up scatter-brained or revengeful premises." 

Nobody seemed to heed his words at the EU's imperial summit in Brussels, an exercise in righteous anger but not much else. The markets may yet speak in harsher language.

David Fuller's view -

Markets are now assuming that Brexit negotiations will be stretched out over at least two years.  Moreover, that Britain and Europe may be able to form a new agreement which gives the UK financial community “passporting” rights and also control of its own ‘Australian style’ immigration policy. Britain will always allow in plenty of immigrants but select them on the basis of what is best for the country, selected not only from the EU but also from the other 93% of the global population.      

Meanwhile, plenty of uncertainty remains.  Policy agreements which gave the UK much more autonomy in terms of governance within the EU would largely satisfy both the Remain and Brexit sides of this decisive debate.  Of course there is no certainty that the EU would agree to this, and it would lead to similar demands from many other of the 28 countries, but this would be democracy in action.  It could also save the EU from a catastrophic breakup. 

Uncertainty within Europe is unlikely to go away anytime soon. Nevertheless, devolution of real powers to EU countries would have a favourable outcome.   



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June 30 2016

Commentary by David Fuller

Three Hours That Turned Boris Johnson From Winner to Also-Ran

Here is a section from this topical article from Bloomberg

Gove had lost patience with Johnson in the days after the shock Brexit vote, according to a person familiar with the justice secretary’s thinking, speaking on condition of anonymity. Efforts to get him to win over other key players in the Tory Party failed, leading to a much wider field than expected. Energy Minister Andrea Leadsom was among those that Gove had hoped Johnson could win to his team. After meeting Johnson, she decided to run against him.

“We were striving and struggling not just for a dream ticket, but a dream team,” Raab told the BBC. “Putting together a really strong unifying team was an absolute condition. When that fell away, I think that Michael felt things had changed.”

Gove’s announcement came just as Home Secretary Theresa May was preparing her own 9:30 a.m. launch. It could not have been timed better for her. While the former allies were knifing each other, unable to say what leaving the EU was going to look like, May appeared to announce, in the words of Johnson’s biographer Andrew Gimson, that here was “the grown-up candidate.”

May, who supported Cameron’s campaign to stay in the EU, had a plan. Her speech showed commitment to follow the vox populi. She said that there would be no second referendum, no early election, and she sounded like she meant it. She made serious points at Johnson’s expense, saying the country needed “strong leadership and a clear sense of direction,” and she made jokes at Johnson’s expense: “The last time he did a negotiation with the Germans, he came back with three nearly new water cannon.” Weighty, firm, funny -- the many male Tory lawmakers in the room could have been forgiven for thinking of a previous Conservative leader, Margaret Thatcher.

David Fuller's view -

There are plenty of surprises in this Brexit drama of rapidly changing events.  I thought Boris Johnson could have won but as the leader of Brexit he might have had a difficult time healing the Conservative rift.  Politics within the Party can be ruthless but I take the many candidates for PM as a healthy sign. 

Theresa May is the current frontrunner and a likely unifier, so there would be no need for an early general election.  



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June 30 2016

Commentary by David Fuller

Email of the day 1

On Israel & Turkey, the UK & EU, from Israel:

Dear David, Yesterday [27th] Israel and Turkey signed an agreement to end their 6 year confrontation and diplomatic rupture. During that period trade between the two countries has tripled from 2 billion dollars a year to 6 billion. This shows that the UK, or what remains of it after Brexit, can continue to trade in a mutually beneficial way with the rest of the EU after last week's referendum vote.

David Fuller's view -

That is an interesting perspective.  I do not know the details of Israel’s trade with Turkey but if you produce useful products and services, especially in the high-tech field as Israel certainly does, many countries will want to trade with you. 

I hope you are right about the UK and EU but I think negotiations will be difficult, with lots of brinkmanship. EU negotiators from Germany and France may feel spurned and wish to hurt the UK and help themselves by syphoning away lucrative financial business from the City. Therefore “passporting”, important for the UK financial industry, may be difficult to gain.  However, I think the EU faces more regional fires, metaphorically speaking, so the ticking clock may actually strengthen the UK’s hand.  



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June 30 2016

Commentary by David Fuller

Email of the day 2

On Europeans contributing to research projects at Cambridge University:

For your information, message on Brexit from the Vice Chancellor at Cambridge University.

Let's wait and see,

You will be aware of the referendum result in favour of leaving the European Union, and I appreciate that this is likely to be of concern to many within the University.

 Many staff and students will have specific questions about how this affects them and their work. It is, at the moment, too early to say, and the implications of a withdrawal from the European Union are likely to take several years to work through.

 The University will monitor developments closely, and maintain strong dialogue with the Government. It will consider and handle key issues, and provide guidance to different groups as soon as possible.

 Further information will come from the Pro-Vice-Chancellors for Research, Institutional and International Relations, and Education, and will also be posted to prominent sections of the University website.

 In the meantime we will continue to work together in our EU partnerships, and find the best way ahead so that our globally important research continues to tackle the issues we face today and in the future.

 As details become available we will continue to update you and let you know where you can find further information.

David Fuller's view -

Thanks for forwarding this and I understand the concern. 

Brexit was about regaining the UK’s sovereign rights. It was certainly not about preventing European students from attend Cambridge University, or impeding European researchers and scientists from participating in vibrant corporate start-ups such as you represent.

I am delighted to hear that “the University will monitor developments closely, and maintain strong dialogue with the Government.”  I am sure the Conservative Government will only have encouragement and reassurances for Cambridge University’s ecosystem which is supporting accelerating entrepreneurship and innovation.   



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June 30 2016

Commentary by David Fuller

Email of the day 3

On Wednesday’s Audio and salsa dancing:

Hi David

So nice to hear your honeyed tones on the airwaves again.  No matter how good Eoin is, we miss you!

I presume that your absence is because you have decided to retire from that part of the job, and are doing it now because Eoin is on holiday?  If so, what can I say but that it comes to us all. I can't remember your age, but quite a bit younger than mine I seem to remember. And it's a very long time since you first tried to get somebody else to do the chart seminar instead of you. I remember a woman who only stayed a short while, then you took it over again.

Yes we all get on.  I'm 77 and have been taking it easy for many years now.  But we're all so different. When I see a 74 year old Bernie Sanders trying to run for President, with all the workload that involves, it just staggers me.  And what staggers me even more is that so many Americans were happy to let him be president until he is 79.  Crazy in my view.  Yes I know popes keep on forever, but do they do a good job when they're so old?

Anyway I do hope that you are in good health and will be able to enjoy life for many more years. I certainly intend to.  I'm out dancing salsa 3-4 times a week and spent 2-3 months each winter travelling. No sense in staying home and watching TV!

Good luck and thanks for the continued brilliant service you and Eoin provide.

David Fuller's view -

Thank you for this delightful email.

Re Audios and many other tasks, I think one can become stale and too predictable in a job.  Eoin will do most of the Audios but I enjoyed recording my thoughts on Wednesday evening.  As for the Chart Seminar, mine had a theatrical element, which was fun, but I was becoming a caricature of myself.   

Re age, I am a little older than Bernie Sanders and he obviously thrives on the performance.  You only have one life so why hold back.  The salsa sounds fun and is obviously good for you. 

I am in  good health, touch wood.  After all our adult years in cities, Mrs Fuller and I are planning more outdoor activities, from wild swims to kayaking and plenty of walks in the fresh air.  



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June 30 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Note: Given the importance of Brexit and its influence on markets we will commence with a short interactive discussion on this topic before the scheduled presentations commence?

Here is the Brochure.  There are two seats left in the Seminar room. 

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

 

Please note: I will be away this Friday.



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June 30 2016

Commentary by Eoin Treacy

In Gold we Trust 2016

Thanks to a subscriber for this edition of Ronald Peter Stoeferle and Mark Valek’s comprehensive 144-page report on gold for Incrementum AG. Here is a section:

Gold is back! With the strongest quarterly performance in 30 years, the precious metal in Q1 2016 emerged from the bear market that had been in force since 2013. A decisive factor in this comeback is growing uncertainty over the recovery of the post-Lehman economy. After years of administering high doses of monetary painkillers, will the Fed succeed in discontinuing the practice? Or is the entire therapy about to be fundamentally challenged?

Generating growth and inflation remains the imperative of monetary policy. The systematic credit expansion required for this just doesn't want to get going. Even the ECB, which initially acted with restraint after the financial crisis, is nowadays stuck in a perennial loop of monetary improvisation and stimulus. General uncertainty has now increased even further after the surprise outcome of the Brexit referendum.

After years of pursuing low interest rate policies, central banks have maneuvered themselves into a lose-lose situation: Both continuing and ending the low interest rate regime harbors considerable risks. In an attempt to finally achieve the desired boost to growth, a monetary Rubicon has been crossed in several currency areas with the imposition of negative interest rates. Gold is increasingly attractive in this environment. It used to be said that gold doesn't pay interest, now it can be said that it doesn't cost interest.

As a last resort, even the radical measure of helicopter money is considered these days. As the flood of liquidity has hitherto primarily triggered asset price inflation, newly created money is now supposed to be injected into the economy by circumventing the banking system in order to boost aggregate demand. It seems realistic to expect that such a windfall would indeed ignite the much-coveted price inflation. Whether it will be possible to put the genie back into the bottle once it has escaped is a different question.

An exit from the Fed's monetary emergency programs has been announced for years in the US. This, together with the perception that the economy was recovering, led to a strengthening US dollar in recent years. Commodities and gold weakened as a result. So far, the actual extent of the normalization of monetary policy consists of the discontinuation of QE 3 and a single rate hike by 25 bps.

 

Eoin Treacy's view -

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

Brexit has been a big event and just about everyone it still talking about it, but how it has affected the precious metals markets is a little more nuanced than one might expect on first blush. With the German sovereign bond market now trading at negative yields out to maturities in excess of 10 years more than half of all sovereign bonds in the world have a negative yield. That’s an awful lot of money tied up in an investment that is entirely dependent on momentum to generate a profit. 

Put simply if anyone who has bought in the last month holds to the maturity of the bond they are guaranteed to lose money. The only way to make a profit will be to sell to someone else willing to take a bigger risk before the bonds mature. It is the epitome of the bigger fool theory. The simply answer to why precious metals, particularly gold and silver, have been rallying is because they cannot simply be printed into existence. Unlike bonds or fiat currency the supply of gold and silver is limited. 

 



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June 30 2016

Commentary by Eoin Treacy

Email of the day on oil prices and their effect on commodity prices more generally

David has often referred to the out-performance of commodities in the latter stages of a bull market.  You have reinforced that message with regular reference to the consistency of the crude oil chart (see below).To this observer, that chart is looking very tired.  Doesn’t the chart, and the threat of the return of supply dominance, suggest that future oil price rises will be limited, even as other commodities are strong?

Eoin Treacy's view -

Thank you for this question which raises a number of relevant points. We have both highlighted how the outperformance of the resources sector following a large decline is generally a confirmation that the medium-term bull market is entering its latter stages which can last for a couple of years. We can expect the resources sector to be among the last to peak and as such is unlikely to be a lead indicator but rather could act as a relative and absolute performer even as leading sectors roll over. 



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June 30 2016

Commentary by Eoin Treacy

Brexit wins: British stocks will prove winners, too

Thanks to a subscriber for this article by Donald Coxe for Pensions & Investments. Here is a section: 

The European Central Bank and the Brussels bureaucrats are in shock. Radical parties in France, Italy, Holland, Poland and Hungary — which protest the immigrant tide, the powers of the ECB and the Brussels committees, and cheered for Brexit — now call for their own version. The euro might soon move back into the emergency ward, putting more upside pressure on the dollar.

The European Union has been China's biggest customer. No surprise that Xi Jinping, president of China, toured Europe encouraging a good outcome in the Brexit debate, meaning a ringing defeat of Brexit. This setback comes at a time when the Chinese economy is being buffeted by bad news from so many directions — external and internal. Time for distraction: China is stepping up activities in the South China Sea with the West bedeviled by Brexit.

Investors should expect more turmoil in global financial markets, and even more issuance of negative-yield bonds from the ECB and other European authorities. Chances of a global recession increase when there are, in the short term, so many economic losers from the shock of l'Affaire Anglaise, with Europe still in the recovery ward from the crash of 2008.

The Fed's chance for a rate rise vanished with the voting result.

 

Eoin Treacy's view -

The number of things to worry about has increased and as a result so has central bank intervention. With news today that the Bank of England expects to lower interest rates and stimulate the economy, the Pound declined but stocks continue to rebound not least because of the improving competitiveness globally oriented companies will derive from these developments. 



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June 29 2016

Commentary by David Fuller

Allister Heath: Radical Change Is Never Without Risk. But I Truly Believe That History Will Thank US for Brexit

Here is the conclusion from this thoughtful column from The Telegraph:

Am I nervous? Absolutely, but I always knew what I was signing up to when I voted Leave. Self-government comes with massive potential upsides as well as huge potential downsides. Being able to choose a different path implies the possibility of doing better as well as that of doing worse.

I have been saddened beyond words by the fact that so many Remainers, including many close friends, not only cannot see any of this but are actually still refusing to accept the outcome. Such people are now explicitly post-democratic: they no longer believe in majority rule, just as they no longer accept the idea that there should be no taxation without representation or even, in the case of many younger people, that speech should be free. Their rejection of liberal democratic culture extends to no longer feeling able to give their political opponents the benefit of the doubt. They believe themselves to be part of the forces for good, and that their opponents are not just wrong but also obviously, unarguably evil. Many lead relatively gilded lives yet have allowed themselves to embrace a shameful snobbery that was supposed to have died out last century. 

Apart from insulting working-class and non-urban voters, their analysis of the referendum, which pins the responsibility for Leave entirely on northern Labour voters, is deeply faulty: 61 per cent of Tories, including in the shires, voted leave, as did 40 per cent of Londoners, far more in absolute numbers than voted for Sadiq Khan.

I hope that this poison at the heart of our democratic culture hasn’t spread too far, and that political pluralism will still be able to thrive in Britain. We cannot become like America where Democrats and Republicans can no longer even be friends.

The magnitude of the challenge is the real reason why Johnson and Gove looked so sombre on Friday morning: with victory comes huge, almost unbearable responsibility. Only the greatest of men and women will be up to the task ahead. We need determination, discipline, cool under extreme pressure, grit and seriousness; we also need a national leader who can inspire the country and hopefully reunite the centre‑Right political family. Above all we need a speedy decision so that our next prime minister can begin to execute the voters’ instructions in a way that maximises our economic opportunities.

David Fuller's view -

Wise words.  I wish more people could see them, and not just in the UK.

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



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June 29 2016

Commentary by David Fuller

2016 star sectors: commodity shares and commodities, remain all but bullet proof

Here are some samples, including a number which are in my personal portfolio:  

June 29 2016

Commentary by David Fuller

Janet Daley: Voters Today Are Crying Out for Sincere Opinions and Authentic Personalities

In all the excitement you may have missed one of the more telling moments of Friday morning’s news coverage. Interviewed on the Today programme, Peter Mandelson made a particular point of praising the splendid “professionalism” of the Stronger In campaign and its director, Will Straw – as if the fact that they had lost, and utterly misjudged the feelings of the electorate, was purely incidental. It was like a television critic lauding the production values of a programme that had totally flopped with the viewing audience.

What matters in politics apparently is not the verdict of the voters but the quality of the message delivery. Suddenly it was possible to see with luminous clarity all the absurdity of modern political strategy and the terrible end to which it has come.

This defeat for Remain is about much more than the country’s dislike of the EU. When politics became a branch of the advertising industry, it was just a matter of time before it lost touch entirely with the point of the democratic process: it became at least as important to run a “professional” (slick, controlled, flawlessly manipulated) campaign as to represent the views of real people.

Or even to listen to them. Because if anybody in that sinister alliance of mainstream parties had bothered to listen they would have gathered that what had alienated the public most was precisely what political strategists call “professionalism”.

What the voters want – as they have now made stunningly clear – is unprofessionalism: genuine, spontaneous responses from people who may sometimes look amateurish and flawed but who appear to have sincere opinions and authentic, idiosyncratic personalities.(Cue Boris Johnson?)

There was a time when British political life was full of such people. Jim Callaghan, George Brown, Norman Tebbit and Ken Clarke are names that drift inevitably into memory: they had wildly differing opinions and degrees of effectiveness but they were alike in their authentic humanity, and were often popular with people who disagreed with them.

Then they were replaced by homogenised androids whose messages were honed and performances strictly managed – and now we are where we are: with a population so furious and disillusioned that it does not believe a word that its national leaders utter.

It is important to understand who it is exactly that is so angry and disgusted with the super-professional management of politics. There is a dangerous myth being reinforced in the post-mortem discussion that the result of this vote was entirely attributable to the anger of the “white working class” (code for “reactionary bigots”).

This is certainly not true. The real white working class, as opposed to the demonic one that suits the purposes of cosmopolitan liberals, is a now a shrinking minority of the population. It could not, by itself, have accounted for the fact that every single region of England apart from London, voted for Leave.

There aren’t that many white van men and disgruntled low-paid workers in Surrey and Berkshire. If affluent Home Counties and economically successful Midlands towns went for Brexit then there is something more going on here than the condescending cosmopolitans of London like to tell themselves and each other (because they speak only to each other).

David Fuller's view -

Well said, although I wish she had included Margaret Thatcher in that list.  It has been fashionable to vilify her in recent decades but she put the UK economy back on an economically competitive course by reigning in the UK’s equivalent of the French unions.

I commend the rest of Janet Daley’s column to you; it is one of her best.

(See also Janet Daley’s prescient column: If the Era of Democracy is Over in Europe, It Is Time for Britain to Get Out, posted on September 29 2015.)

A PDF of Janet Daley’s latest article is posted in the Subscriber’s Area.
 



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June 29 2016

Commentary by David Fuller

June 29 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Note: Given the importance of Brexit and its influence on markets, how about a short interactive discussion on this topic before the planned presentations commence?

Here is the Brochure.  There are only a few seats left in the Seminar room. 

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



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June 28 2016

Commentary by David Fuller

Now the Vote Is Over, Let Us Move On With Six Steps to a Bright Future

It is easy to see what a messy, bad Brexit looks like. The UK gets shut out of a huge market. Inward investment gets put on hold amid months of uncertainty. The trade deficit starts to blow out, the pound keeps sinking, and joblessness rises as the economy tanks. But what does a good Brexit look like? Here are six key demands business should make of new prime minister as he or she negotiates with Brussels, Berlin and Paris.

First, don't obsess about access to the Europe market. In the first instance, Britain should go for the Norwegian model, with full access to the single market, in return for accepting most of its rules, and paying a more modest financial contribution to Brussels. But if Angela Merkel and François Hollande want to be difficult about that, then forget it. Our trade with the EU has been sinking like a stone for the last decade - down from 55pc of our exports to 44pc over the last 10 years. The very worst that can happen is the EU imposes tariffs of roughly 4pc on our goods. But since the pound has just devalued by around 8pc, companies exporting to Europe can easily absorb that and still cut prices. The most important move is to get the new trading arrangement sorted quickly and to start focusing on the rest of the world.

Two, let's prepare our application to join other trade blocs. We are on the North Atlantic, so there is no reason we shouldn't join the United States, Canada and Mexico in Nafta (its combined GDP is $3 trillion more than the EU, by the way). There is no reason why the rules shouldn't be tweaked to allow us to join the new Trans Pacific Partnership as well. Switzerland has signed a free trade agreement with China, and why shouldn't we - surprise, surprise, but Swiss exports to that country have quadrupled in a decade. The sooner we build alternatives to the EU market and forge our own trade agreements with economies that are growing far faster, the quicker the world will be convinced Brexit doesn't matter much.

Thirdly, push through a wave of deregulation. The Left will hate it, but Britain's economic future is now clear. We will be a free-wheeling offshore state that acts as a bridge between Europe and the rest of the world. Think Singapore, except bigger and with worse weather.

We should scrap EU-mandated labour market regulations and social protections as fast as possible. There is no reason why we should accept European limits on how many hours people do in the office - so long as we have a minimum wage in place, which we do, then it is up to every individual how long a shift he or she wants to put in. Issues such as parental leave can be freely agreed between companies and staff. Employers who want to hire lots of young women, the best educated, most skilled part of the workforce, will be generous; others less so. But business can decide for itself.

Fourthly, drop specific taxes. The City faces a huge challenge in adjusting to Brexit. There is no point denying that a lot of mainstream corporate business will start to move to Frankfurt. One move that would help it a lot would be scrapping the bank levy - it is currently forecast to bring in more than £900m a year, cash the industry could use to get it through a difficult period. Next, we should scrap energy taxes and rules that have made power more than twice as expensive in Europe as it is in the United States. That will help the manufacturing industry as it battles with the potential loss of some orders from Europe. The more help we can give to specific sectors of the economy, the faster it will recover.

Fifthly, upgrade our infrastructure. The cost of government borrowing has dropped to record lows and the Bank of England may need to print more money to stimulate the economy. We should relax on austerity and spend some money on better transport links and rebuilding roads, water and power systems. A flash new London airport would make us far more open to the world than anything the EU has done in the last decade - and send out a great signal that the UK was still open to international business.

David Fuller's view -

These are positive suggestions for not only economic recovery but also prosperity.  Matthew Lynn is correct to start with saying we should not be obsessing over access to the EU market.  Some EU leaders may be difficult to negotiate with, not least Jean-Claude Juncker whose appointment as European Commission President was opposed by David Cameron.  Junker strongly favours ‘more Europe’, if only to deter member countries from pushing for their own versions of Brexit.  However, the EU has far more to gain from keeping trade terms open with the UK, given the trade imbalance.  Germany’s automobile manufacturers would be among the most aggrieved if they did not.

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



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June 28 2016

Commentary by David Fuller

Parliament Must Decide What Brexit Means in the Interests of the Whole Kingdom

Here is a latter section of this topical column by Ambrose Evans-Pritchard for The Telegraph:

The cacophany of voices from EU capitals is hard to filter.  A joint paper by the French and German foreign ministers is calling for a great leap forward to "political union", but neither have the support of their own leaders - let alone the Dutch, Nordics, Poles, Czechs, and others. The proposal seems surreal at a time of rising eurosceptic revolt everywhere.

Jean-Claude Juncker, the Commission's president, is clearly bitter. "Brexit is not a friendly divorce, but then it was never a roaring love affair," he said.

"Whatever Juncker and a few federalist diehards in Brussels may think, most EU governments have woken up to the reality that the more Europe the push, the more euroscepticism they get," said Charles Grant from the Centre for European Reform.

"The knee-jerk reaction of the Commission is always to try to seize on any crisis to try to push for more Europe and closer integration, but they can dream on this time," he said. 

German Chancellor Angela Merkel matters most and she has held out an olive branch to London, calling for patience - within limits - and talks conducted in a civil manner. "There is no need to be nasty," she said.

In essence, EU policy will be forged by an emerging "directorate" of Mrs Merkel, French leader Francois Hollande, and Italy's Matteo Renzi. But they are at odds with each other. The French and Italians want a radical shift in economic policy in response to Brexit, calling for a reflation blitz to break out of the low-growth trap. Germany will hear none of it. 

What is clear is that two cardinal objectives of post-Brexit policy are hard to reconcile: the EU cannot impose a harsh settlement on the UK, to prevent a "domino effect", while at the same time nursing the eurozone economy back to health. 

Failure to mend fences with London risks an economic crisis that would expose the long-festering pathologies of monetary union.  "There is a cocktail of factors that could lead to disintegration," said Pier Carlo Padoan, Italy's finance minister. "We face a double reaction from Brexit: financial and political." 

David Fuller's view -

David Cameron, in discussions with the leaders of 27 other EU countries, has attributed his inability to lead Remain to victory in the referendum, to Europe’s failure to control the migrant crisis. Cameron may have felt that was the most tactful criticism.  However, Brexit was the eventual response to myriad EU policies which stealthily removed national sovereignty over several decades.

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



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June 28 2016

Commentary by David Fuller

The European Elite Forgot That Democracy Is the One Thing Britain Holds Most Dear

Here is the opening of this thoughful column by Charles Moore of The Telegraph, posted without further comment:

A friend in Oxford was puzzled to receive a last-minute leaflet which said: “Don’t let someone else decide your future: Vote Remain.” He obeyed the first demand, and not the second, since it flatly contradicted the first. He voted Leave.

If, like me, you feel a bit numb this morning, it is because we British actually have decided our own future. We have not been allowed to do this since 1975. It is a slightly frightening, wonderful feeling – that the people can, through the ballot box, set their country free.

More people – 17,410,742 – voted Leave on Thursday than have ever voted for anything in British history. As David Cameron wisely and firmly acknowledged in his resignation speech yesterday, the result, with its very high turnout, is decisive: our decision must be enacted.

The Leave campaign was assailed for scorning the advice of experts. Experts should, of course, be respected for their expertise. But no one is an expert where democracy is concerned. Each of us is worth only one vote. It took enormous courage for the majority to refuse to be cowed by bankers and archbishops, prime ministers and presidents, scientists and economists, the BBC and the CBI, Richard Branson, Peter Mandelson and David Beckham, but it was not rash to do so. It was the mass assertion of a right which, over the years, we had been losing.

Democratic self-government – parliamentary democracy – is what the modern British nation is founded on. As Boris Johnson put it yesterday, in his restrained and generous speech, it is also “the most precious thing” we offer to the world. It was slipping away from us. Now we have reclaimed it. The Vote Leave campaign began and ended with the slogan “Take Back Control”. This – not “the economy versus immigration” – is what our decision is about.

 

David Fuller's view -

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



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June 28 2016

Commentary by David Fuller

Email of the day

On keeping in touch:

I've been on a global walkabout with my wife for the past three and a bit years, and just trying to settle down, not easy!

Throughout, I've kept in touch with the world via your fine service, for instance, albeit a staunch Brexiteer (my out vote was my first UK vote in 11 years of being expat, but I felt compelled to vote for change in Europe and my duty to participate), FullerTreacy publication of balanced Articles and comment helped me to understand more, think a little deeper and placed a solid scaffold around my existing uneducated beliefs.

So thanks for that.

Long may you continue.

 

David Fuller's view -

Thank you for this thoughtful email.

I imagine that your “global walkabout” has been an interesting further education, increasing your global perspective.  I am sure that if you ever wrote about your travels, or just recalled a few memorable experiences and locations, I would not be the only person interested in your views.  



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June 28 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.  There are only a few seats left in the Seminar room. 

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



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June 28 2016

Commentary by Eoin Treacy

A Not So Cheery Cheerio as the UK Votes to Leave the EU, Yet the Outcome a Marked Positive for our Precious Metal Co's

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

…While the S&P/TSX Gold Index closed up 7.3%... with upside. Importantly, the repercussions of the LEAVE vote present a notable benefit for our Au and Ag co’s beyond a higher gold price. That is, a further improvement in the outlook for operating costs on currency weakness (CAD -2%; MXN -4% and poised to weaken further per the updated forecasts of NBF’s Economics and Strategy team) and on weaker pricing for key input such as steel and oil. With operating margins, FCF, and balance sheets poised to get a lift, the net effect should broaden consideration and application of multiples more typical of tailwind periods rather than inappropriate comparison to the last four years where the industry was mired in persistent headwinds. Consistent with prior benchmarking exercises, we point to the 2007 to 2011 period and corresponding valuations as a guide to the upside. We do not subscribe to the idea that all companies warrant valuations typical of this period since the complexion of the industry is now one of unavoidable production declines for many whereas before the majority of co’s offered production growth or the impression thereof. That being said, for the time being and until cost pressures trigger heightened differentiation we expect even our growth-challenged producers to benefit from heightened interest in the space. This will likely continue until cost pressures start to bite or valuations approach benchmark levels. Bottom line, the benchmarking exercise highlights that most of our Au co’s (less so Ag equities) offer significant upside to 2007 to 2011-type valuations even with scaling back benchmarks to capture scenarios with production declines.

 

Eoin Treacy's view -

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

The response of gold prices to the Brexit vote was knee-jerk but understandable considering the desire for safe haven assets that have a history of performing during times of market stress. Of course Brexit is not the only reason gold prices have been rallying. The intensification of the negative yield environment that resulted from the vote is perhaps a better explanation of the surge that took place last week but the relative lack of supply is also important.



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June 28 2016

Commentary by Eoin Treacy

UK homebuilders

Eoin Treacy's view -

The homebuilders sector has reacted more violently to the UK’s referendum result than just about any other sector. The conclusion many have jumped to is that with the decline of the Pound and, seeming inevitability of recession, demand for UK housing will plummet and may in fact act as a catalyst to high priced London property finally rolling over. 



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June 28 2016

Commentary by Eoin Treacy

Everything Just Changed

Thanks to a subscriber for this report by Anatole Kaletsky for Gavekal Research which may be of interest. Here is a section:

Finally, and perhaps most disturbingly, the British referendum has produced an extremely fractured and polarized society—with huge majorities for Brexit among elderly and poor voters and in relatively under-developed rural regions vehemently opposed by almost equal majorities that supported EU membership among young and highly educated voters and in the prosperous cities—not only London, but also Manchester, Bristol, Newcastle and the whole of Scotland. This extreme polarization on a national issue of existential importance would raise risks of social and political tension even in benign economic conditions. If, as is likely, Britain now suffers some kind of financial crisis and recession, the people who voted for Brexit will discover that leaving the EU has not resolved any of the economic problems and social grievances that provoked their protest against the political establishment. If this happens, public anger will presumably intensify, rather than calm down. A similar disillusionment is likely in other countries whose voters decide simply to overthrow political elites and dismiss the analysis of economic “experts”, without having any serious alternatives to put in their place.  

Eoin Treacy's view -

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

Populist nationalism is a theme which is gaining adherents all over the world. Xi Jinping’s appeal to nationalism in order to inspire support for economic reform and to sustain the Communist Party’s monopoly on power is an example in China. While I personally support the UK’s decision to leave the EU, because of the democratic deficit evident within the political union, there is no doubt that there was a populist tone to the rhetoric that presaged the decision. The growth of similar movements in the Netherlands, Finland, Denmark, France, Italy and Spain suggests this is not simply a UK phenomenon. The surprisingly large support base both Donald Trump and Bernie Sanders appealed to in their respective campaigns for Presidential nominations are also evidence of populist nationalism in the USA. 



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June 27 2016

Commentary by David Fuller

Boris Johnson: I Cannot Stress Too Much That Britain is Part of Europe, and Always Will Be

Here are two sections of today’s article from the former London Mayor, leader of the Brexit campaign and probable next prime minister, published by The Telegraph:

This EU referendum has been the most extraordinary political event of our lifetime. Never in our history have so many people been asked to decide a big question about the nation’s future. Never have so many thought so deeply, or wrestled so hard with their consciences, in an effort to come up with the right answer.

It has been a gruelling campaign in which we have seen divisions between family and friends and colleagues – sometimes entirely amicable, sometimes, alas, less so. In the end, there was a clear result. More than 17 million people voted to leave the EU – more than have ever assented to any proposition in our democratic history. Some now cast doubt on their motives, or even on their understanding of what was at stake.

It is said that those who voted Leave were mainly driven by anxieties about immigration. I do not believe that is so. After meeting thousands of people in the course of the campaign, I can tell you that the number one issue was control – a sense that British democracy was being undermined by the EU system, and that we should restore to the people that vital power: to kick out their rulers at elections, and to choose new ones.

I believe that millions of people who voted Leave were also inspired by the belief that Britain is a great country, and that outside the job-destroying coils of EU bureaucracy we can survive and thrive as never before. I think that they are right in their analysis, and right in their choice. And yet we who agreed with this majority verdict must accept that it was not entirely overwhelming.

There were more than 16 million who wanted to remain. They are our neighbours, brothers and sisters who did what they passionately believe was right. In a democracy majorities may decide but everyone is of equal value. We who are part of this narrow majority must do everything we can to reassure the Remainers. We must reach out, we must heal, we must build bridges – because it is clear that some have feelings of dismay, and of loss, and confusion.

I believe that this climate of apprehension is understandable, given what people were told during the campaign, but based on a profound misunderstanding about what has really taken place. At home and abroad, the negative consequences are being wildly overdone, and the upside is being ignored.

And:

We should be incredibly proud and positive about the UK, and what it can now achieve. And we will achieve those things together, with all four nations united. We had one Scotland referendum in 2014, and I do not detect any real appetite to have another one soon; and it goes without saying that we are much better together in forging a new and better relationship with the EU – based on free trade and partnership, rather than a federal system. 

I cannot stress too much that Britain is part of Europe, and always will be. There will still be intense and intensifying European cooperation and partnership in a huge number of fields: the arts, the sciences, the universities, and on improving the environment. EU citizens living in this country will have their rights fully protected, and the same goes for British citizens living in the EU. 

British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down. As the German equivalent of the CBI – the BDI – has very sensibly reminded us, there will continue to be free trade, and access to the single market. Britain is and always will be a great European power, offering top-table opinions and giving leadership on everything from foreign policy to defence to counter-terrorism and intelligence-sharing – all the things we need to do together to make our world safer. 

The only change – and it will not come in any great rush – is that the UK will extricate itself from the EU’s extraordinary and opaque system of legislation: the vast and growing corpus of law enacted by a European Court of Justice from which there can be no appeal. This will bring not threats, but golden opportunities for this country – to pass laws and set taxes according to the needs of the UK. 

David Fuller's view -

I commend the rest of Boris Johnson’s article to all who visit this site.  Yes, it is upbeat and so it should be, given the need to reunite and also re-energise people following a gruelling and too often contentious referendum campaign. 

Passions ran high, understandably, given the importance of this vote.  However, there was far too much negative campaigning, not least ‘Project Fear’ from the Remain side.  This alarmed younger and vulnerable voters while angering the more experienced.  Tactically, it was a huge mistake by David Cameron and George Osborne, all but ending their often distinguished careers.  It revealed a distrust of democracy, which we have long seen from the EU, where many decisions are viewed as too important to be decided by elections.  Instead, tell people what to do and threaten them into submission.  Alternatively, if local governance makes the ‘wrong’ decision, bureaucracies in failing democracies often reverse policies they do not favour a short while later, as we have seen with the EU.  This drains nations of their vitality and eventually leads to rebellion, as we have just seen.

If Cameron and Osborne had put constructive leadership before political ambition, they could have outlined the pros and cons of the Remain/Brexit debate as objectively as possible, some weeks ago.  They could have expressed their own views while adding that it was for the electorate to decide the outcome of this unique referendum, by which they would abide. 

This item continues in the Subscriber’s Area, where a PDF of Boris Johnson’s views from The Telegraph are also posted. 



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June 27 2016

Commentary by David Fuller

Roger Bootle: We Have Our Independence, Now Let the Pound Fall and Boost Exports

Here is the opening and a latter section of another informed column by this economist, published by The Telegraph:

Now that the campaign is over, it is time for the consequences. What will they be? And how should economic policy respond? 

Despite the warnings of disaster from the Remain campaign, at first, nothing very much is going to change.  David Cameron has suggested that it will be three months before we invoke Article 50 of the Lisbon Treaty, which lays down a period of up to two years of negotiations between the departing country and the EU. But there is no reason why this period should necessarily be three months. 

There is a strong argument for making it as long as possible, effectively doing pre-negotiations before the legal process starts. This would avoid the loss of bargaining power that would follow from being boxed into the Article 50 timetable. Meanwhile, Britain’s trading relationships would continue unaffected. 

And:

One major consequence of Brexit that could have a significant impact on the economy is what has happened to the pound. This has been widely portrayed as some sort of disaster. The truth is exactly the opposite. The lower pound will help to improve Britain’s trade balance, and that will boost our GDP, thereby encouraging investment. 

Given this, and given the current extremely low rate of inflation, the Bank of England should not make any attempt to protect the pound. Indeed, the greatest policy challenge it will face over the next year or two is how to keep the pound down to its new competitive level. It should be prepared to reduce interest rates and even to restart the QE programme, if necessary. 

What’s more, under no circumstances should the Chancellor embark on a renewed bout of fiscal tightening. Of course, if the economy performs just as well as before, or even better, helped by the low pound, then there is no reason for the public finances to deteriorate. But if the economy does slow markedly and the government deficit widens, the Chancellor should simply accept this. 

There is a case for fiscal action – but of a very different sort. As well as a programme of deregulation, we now also need a plan for even lower corporate tax rates. Both of these will take time to be developed, but there is a lot to be gained by announcing soon the direction of travel. 

David Fuller's view -

No offence to drama queens but markets often fit that description better than anything or anyone else. 

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



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June 27 2016

Commentary by David Fuller

June 27 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.  There are only a few seats left in the Seminar room. 

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



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June 27 2016

Commentary by Eoin Treacy

Brexit Shock May Have Silver Lining for Bruised Asian Investors

This article by Kana Nishizawa, Jonathan Burgos and Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:

The victory of the “Leave” campaign stunned many investors who’d put wagers on riskier assets over the past week as bookmakers’ odds suggested the chance of a so-called Brexit was less than one in four. MSCI’s Asian measure dropped 3.7 percent on Friday, led by losses in Japan, South Korea, Australia and Hong Kong. A gauge of Asian currencies weakened the most since China devalued the yuan in August.

“This is just a knee-jerk reaction,” said Tony Chu, a Hong Kong-based money manager at RS Investment Management, which oversees about $17 billion. “Most stocks we look at in Greater China have little to do with the U.K. or the European economies.

We still like Internet-related stocks, consumption and health- care stocks. That’s where we see relatively better earnings prospects.”

The Shanghai Composite Index slid 1.3 percent on Friday, while volume increased less than other major Asian benchmark gauges. Foreign investors are limited by quotas from buying and selling mainland Chinese equities, with local individuals accounting for about 80 percent of trading.

Most Asian markets advanced on Monday. The Topix index rebounded 1.8 percent at the close, as the Shanghai gauge climbed 1.5 percent. Australia’s S&P/ASX 200 Index added 0.5 percent. Hong Kong’s Hang Seng Index dropped 0.2 percent, trimming an earlier loss of 1.4 percent.

To be sure, in the short term, fund managers are girding for higher volatility and a flight out of all but the safest assets. Asia can’t escape a global deterioration in risk sentiment, Harvest Global Investments Ltd. says.

 

Eoin Treacy's view -

Europe, and most particularly the Eurozone, represent the epicentre of global risk. The UK certainly represents a lightning rod for bearish sentiment and that pressure is falling primarily on the Pound. However, potential future issues reside with how the EU will deal with what is an existential threat. 



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June 27 2016

Commentary by Eoin Treacy

Email of the day two different perspectives on Brexit

http://www.ft.com/cms/s/2/b1a2d66e-3715-11e6-9a05-82a9b15a8ee7.html
The Financial Times publishes this [“Five consequences of the UK’s exit from the EU”], living up to its highest "standards" of political elitism. Let's just take a moment to review a few key points in this article: 

(1) "they [EU countries] will be in no mood to offer generous post-Brexit [trade] deals for Britain" - complete bullshit; they will fall all over themselves to get the best possible deals with Britain, because it is in their economic best interest to do so.

(2) “The outlook for Portugal, which is ruled by a shaky coalition of the moderate and radical left, is unsettling investors. The deep-seated troubles of Greece have never gone away. In Spain, which holds a general election on Sunday, the prospects for stable government and economic reform are clouded by a fragmented political party system and Catalan separatism.” – And this has exactly what to do with Brexit? As a global investor, I am not one whit more worried about these (very real) issues than I was before – I was worried before, and still am, not more or less so because of Brexit. On the other hand, I am now far more optimistic about British business, especially the British-based autonomies.

(3) “What does this mean for populist insurgents?” – since when are VOTERS who do not share the current-government-approved point of view “insurgents”? This is the poorest standard of journalism I have yet to see from the FT. I’m guessing new lows will be set shortly.

(4) “the EU will be under pressure to develop proposals for closer integration” – I’d say the EU will be under pressure to reform the unelected bureaucratic nightmare it has morphed into. Not that we should expect such a miracle. If anything, Brexit will invigorate those voters across the EU who believe that it is time to throw off the yoke of the unelected super-government. Power to them!

(5) “Brexit will disrupt the EU’s internal equilibrium.” As if the EU had internal equilibrium to start with. Unless of course one imagines that equilibrium can be achieved while the EU Empire is crumbling. 

Brexit is not the cause of the failure of the EU – the EU has been failing since at least 2008. The EU is failing because it is a ruinous socialist (and ultimately totalitarian) experiment. Huzzah for the British voters. Huzzah for democracy in action.

Versus

Let's have a look at what we have achieved with the Referendum results this week: 
1/ The GBP fell sharply; and this has been one of its sharpest losses ever; 
2/ The reputational damage to the UK has been crystallised and is very material;
3/ The most immediately threatened Union now is not the EU, but the UK;
4/ Great political uncertainty, and an almost newly elected parliament is being deprived of its powers and significance;
5/ Great economic uncertainty;
6/ Great geopolitical uncertainty;
7/ Reduced influence in the EU;
8/ Alienated EU citizens.

The GBP?
The reaction of the GBP on Friday is a clear indication that the Brexiteers must still get the financial markets on their side, and a great deal of explanation is very urgent indeed. 

This devaluation is a shock-absorber for the short term only, but will not help the country to increase productivity, will not revert the promise of increased minimum wages (the final nail in the coffin of the economy of the north?), will do nothing to improve the budget deficit, nor the high level of leverage, and it definitely won't help the still part-nationalized banking system. Hopefully the UK government bonds will continue to function as a safe haven, but can we rule out that we may see the knee jerk reaction of Friday undone? Stocks in domestically operating companies in the meanwhile tumbled (see e.g. the banks and the homebuilders, in EUR or USD). 

Last: a weaker pound will also mean that people will have fewer opportunities for travelling, which is bad for an already inward looking population.

Reputational damage
Hopefully it is now clear to everyone why a referendum was the wrong way to go, and how dilettantishly the whole process has been managed: 51.9% is not the qualified majority you would expect to see to take such an important decision for so many people. Especially if out of a 72.2% turnout, and with a significant part of resident/taxpayers/stakeholders not being given the opportunity to vote. This is the reason why there will not be - and there have not historically been - similar referenda in Europe, whatever some uninformed and/or intellectually dishonest press is suggesting in these hours. 

All this comes on top of the exorbitant number of lies which have been used to manipulate the public, and that are now already emerging (this is tragicomic, but on all media in Europe and worth watching https://www.youtube.com/watch?v=cA3XTYfzd1I). 

The referendum had also a divisive effect as - generally speaking - the old voted the young out of the EU; as a result, not only young people are thrown in economic uncertainty, but also their opportunities have been restricted as presumably the job market of nearby Europe will not be as easily accessible going forward. 

On the other hand all those that "rotated" into the UK as it was regarded a safe haven guaranteeing good governance, a careful management of the economy and of its currency will now reconsider their stance. A simple example: all those Southern Europeans which sustained the property market during the Euro crisis may now realise this country is no safe heaven.

The Union?
Nicola Sturgeon has clearly signalled a new referendum for Scotland independence is possible, so we are back to square one on that front. Given that Scotland has shown it is generally in favour of remaining in the EU, we can assume the SNP may be successful this time. An alternative and a lot more benign scenario is that the Scottish government may also completely bloc the Brexit process, although this is unclear at the time of writing. 

As for the EU, as many were ready to predict its immediate demise: 
1/ Within the EU, no other country is planning to leave;
2/ it is clear and logical to expect that ruling parties across Europe will be keen to make an example of the UK.

Also: the situation in which pro-Brexit movements managed to put this country is that of a trader being forced to unwind a leveraged position - and a complex one, built over 40 intense years - with a counterparty only (the EU), which means that inevitably the unwind will be expensive.

Political uncertainty?
The general feeling I think any observer has had over the last 48 hours or so is of most political parties across being caught off-guard and unprepared, as if they had discounted Brexit never to happen. This is alarming, as we need the best this country can offer to sit down with the EU and sort out what could otherwise become a "pasticcio", a mess. Hopefully Boris Johnson, Micheal Gove and Nigel Farage planned this is detail, they are great statists and Machiavellian geniuses and know exactly what they're doing. A 1-year old parliament in the meanwhile - at least until now - has been defrauded of its function, an absolutely extraordinary and alarming scenario which has taken to a debate and a vote that have absolutely nothing to do with democracy. A bad experiment never to be repeated again.

Geopolitical uncertainty
I have this image of Putin rolling on the floor and laughing that I just cannot get away from my head. A nuclear power, permanent member of the UN security council, significantly weakened its and its partners' position. The front of liberal democracies in the world is substantially weakened. 

Reduced Influence
Reduced influence and a greatly impoverished EU. The resignations of the Commissioner for Financial Services Jonathan Hill means that the UK loses influence - traditionally overwhelmingly high - in the definition of financial services regulation. Presumably UK representative in the European parliament will lose credibility and influence too. Disastrous for the UK and for the EU, and a material change in the balance of powers within the continent.

Alienated EU citizens
Rarely in my life I have seen so many people so upset and feeling let down as over the last few hours talking to friends and family members. 

I have been blessed to be part of an EU, and never felt - never once - like an immigrant, here, in Stockholm where I have spent some of my time studying, in Baden Wuttenberg which I have many times visited for personal reasons, nor anywhere else within Europe. Free movement has always been a given; protection of my rights of EU citizen as well. 

In London, more than 60% of the population voted to remain in the EU. The truth is that the population of this great city includes many EU citizens who could not vote. Hence the percentage of residents in favour on the EU is much much higher. 

I still think this situation can be somehow fixed, but a much better prepared, morally stronger, more humble and less opportunistic political class is a pre-requisite for considering the UK again the place to invest and make plans for the future.

 

Eoin Treacy's view -

These two emails are representative of the wide differences between the Remain and Leave camps and while one might argue that a first past the post allotment is not the best way to decide such a momentous event the reality is that the people have spoken and it is now up to the ruling class to follow through on it. 



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June 27 2016

Commentary by Eoin Treacy

Musing from the Oil Patch June 27th 2016

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

This inverse relationship between the value of the U.S. dollar and the price of crude oil has been very clear for most of this century. Will it continue in the future? More than likely it will, partly because, while the relationship is logical, it has become a short-term trading indicator. In the past several weeks, after WTI reached and surpassed the $50 a barrel threshold, one could virtually answer the question of what happened to oil prices each day if you were told what happened to the value of the U.S. dollar that day.

After watching this ying and yang of oil price movements and the value of the U.S. dollar, we were interested in the two-page chart on the profits of the Fortune 500 companies by sector over the past 20 years. We cut out the pages and scanned the chart (Exhibit 7 below), shrinking it to fit on one page. Unfortunately, we lost the 1995-1996 part of the chart, but the visual impact of the chart remains relevant.

What struck us while looking at the chart was the huge bulge in energy profits during 2005-2012 before they started contracting and then collapsed after oil prices dropped at the end of 2014. The Energy sector profits during that period were driven by high oil prices - $80-$100+ per barrel, even after adjusting for the 2008-2009 financial crisis and recession. As Energy profits mushroomed during the era of high oil prices and the shale revolution, it was easy for Wall Street to convince investors to throw money at exploration and production and oilfield service companies who were leading America to the promised land of energy independence. The Energy stocks were soaring as analysts and investors fell in love with the shale revolution that married horizontal drilling with massive hydraulic fracturing to produce huge volume of natural gas, natural gas liquids and tight oil. Remember that it was during this era that we were assured that we had hundreds of years of cheap natural gas supply. One Wall Street firm even wrote a report explaining how this revolution was turning us into ‘Saudi America.” 

The chart shows clearly what happens when an ill-founded boom collapses. As you scan the lower right hand corner of the chart, it is very difficult to see the thin black line reflecting current Energy sector profits, or what is left of the thick line that existed throughout most of the 2000s. In fact, if oil prices hadn’t climbed back to $50 recently, it is possible that the thin line would become impossible to see as there wouldn’t be any profits. Many investing in Energy today are hopeful that one day in the foreseeable future that thin black line will once again become a thick black line. We are comfortable is saying the line will be thicker, we just don’t know how thick it will eventually grow and when that will be.

Eoin Treacy's view -

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

The Dollar Index failed to sustain the move below 92.5 in May and has now bounced back above the 200-day MA. Considering the size of the upward dynamic a retest of the upper side of the 18-month range, near the psychological 100 is now looking more likely than not. 



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June 27 2016

Commentary by Eoin Treacy

June 24 2016

Commentary by Eoin Treacy

Apres le vote, le deluge

Eoin Treacy's view -

I recorded an additional Audio last night to share my initial impressions following the vote to leave the EU because I wanted to have something for UK subscribers to listen to when the market opened, not least because it was a very panicky environment. 

The betting couldn’t have got it more wrong in assuming people would fall into the place behind business and politicians. As an avowed libertarian I’m excited that the UK is still a democratic state where Whitehall will listen to the will of the British people to retake control of their economy and political fate.   

I believe the UK will be better off in the medium to long-term but there are obviously challenges in the short-term. 

 



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June 24 2016

Commentary by Eoin Treacy

June 24 2016

Commentary by Eoin Treacy

Click Through

Eoin Treacy's view -

Every day I clicked through a lengthy list of charts comprising just about every country’s primary stock markets index, all traded commodities, bond futures and a large number of currency pairs. Following last night’s surprise result just about all markets pulled back while typical safe haven assets rallied in a knee-jerk fashion. Following the initial move most bounced but a small number did not. It is reasonable to assume that markets which have failed to bounce represent where investors deem there to be most risk. 



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June 24 2016

Commentary by Eoin Treacy

Email of the day on big UK listed international companies with attractive dividends

Thank you so much for taking the time to do the additional audio last night. I appreciated it very much. You did mention that some of the UK autonomies would probably be very attractive. Could you please share with us a few of the companies that you think are specifically attractive besides RD Shell that you mentioned. Thanks again.

Eoin Treacy's view -

Thank you for your kind email and I’m glad you found the additional audio commentary of use. It looks like I was not the only person coming to the conclusion that the UK stock market would benefit from the devaluation of the Pound, at least in nominal terms, and that the foreign profits of major corporations would be inflated by being repatriated. 



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June 24 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.  There are only a few seats left in the Seminar room. 

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



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June 23 2016

Commentary by Eoin Treacy

June 23 2016

Commentary by David Fuller

Solar Power to Grow Sixfold as Sun Becoming Cheapest Resource

Here is the opening of this topical article from Bloomberg:

The amount of electricity generated using solar panels stands to expand as much as sixfold by 2030 as the cost of production falls below competing natural gas and coal-fired plants, according to the International Renewable Energy Agency.

Solar plants using photovoltaic technology could account for 8 percent to 13 percent of global electricity produced in 2030, compared with 1.2 percent at the end of last year, the Abu Dhabi-based industry group said in a report Wednesday. The average cost of electricity from a photovoltaic system is forecast to plunge as much as 59 percent by 2025, making solar the cheapest form of power generation “in an increasing number of cases,” it said.

Renewables are replacing nuclear energy and curbing electricity production from gas and coal in developed areas such as Europe and the U.S., according to Bloomberg New Energy Finance. California’s PG&E Corp. is proposing to close two nuclear reactors as wind and solar costs decline. Even as supply gluts depress coal and gas prices, solar and wind technologies will be the cheapest ways to produce electricity in most parts of the world in the 2030s, New Energy Finance said in a report this month.

“The renewable energy transition is well underway, with solar playing a key role,” Irena Director General Adnan Amin said in a statement. “Cost reductions, in combination with other enabling factors, can create a dramatic expansion of solar power globally.”

David Fuller's view -

My guess is that even these optimistic forecasts will be significantly exceeded by 2030, as the solar power industry becomes progressively more efficient.  Moreover, the accelerated rate of technological innovation will lead to new forms of solar power which are all but unimaginable today.

This item continues in the Subscriber’s Area.



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June 23 2016

Commentary by David Fuller

The Weekly View: Positioning Portfolios Ahead of UK Referendum on Europe

My thanks to Rod Smith and Kevin Nicholson for this latest edition of their excellent letter, published by RiverFront Investment Group.  Here is a brief sample from the opening:

When the facts on the ground change, our risk management process mandates a response.

As active managers, we need the courage to make judgements about the future of market returns and the humility and processes to manage the size of our positions.  Currently, we are positive about stocks and corporate bonds relative to cash, and we believe non-US stocks offer better risk-reward strategically and tactically, (i.e. over the next five to seven years, and also over the next year). Risk management is often about increasing or reducing the size of a position because the odds have changed, even if one still believes the outcome will remain the same. Last week, we responded to a change in the odds of the UK remaining in the EU by reducing overall portfolio risk and our exposure to Europe specifically.  Following our trades, we still believe our portfolios are still positioned to benefit if the UK remains in the EU.  Thus, we have chosen to go into the vote with less riding on the outcome.

David Fuller's view -

What a difference a few days can make in the odds of an important election.  I would not be surprised if RiverFront has added some additional market exposure in the last few days, although perhaps not in the UK and EU, having reduce those positions last week.

Today’s Referendum vote looks like a comfortable victory for Remain, judging from betting odds, the strength of GBP/USD which touched 1.4947 this morning, plus the continued strength of UK and EU stock markets this week.  Is this a case of buy the projected Remain victory expectations and sell the news next week? 

A PDF of The Weekly View is posted in the Subscriber’s Area.



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June 23 2016

Commentary by David Fuller

The Brexit Contagion: How France, Italy and the Netherlands Now Want Their Referendum Too

Voters in France, Italy and the Netherlands are demanding their own votes on European Union membership and the euro, as the continent faces a “contagion” of referendums.

EU leaders fear a string of copycat polls could tear the organisation apart, as leaders come under pressure to emulate David Cameron and hold votes.

It came as German business leaders handed a considerable boost to the Leave campaign by saying it would be “very, very foolish” to deny the UK a free trade deal after Brexit.

Markus Kerber, the head of the BDI, which represents German industry, said that 1970s-style trade barriers would result in job losses in Germany.

“Imposing trade barriers, imposing protectionist measures between our two countries – or between the two political centres, the European Union on the one hand and the UK on the other – would be a very, very foolish thing in the 21st century.”

In Italy, the anti-establishment Five Star movement on Tuesday declared it would demand a referendum on the euro. The party wants the euro to be split – one for the rich north and one for the south. 

Beppe Grillo, the party’s leader, has called for a full referendum on EU membership. He said: “The mere fact that a country like Great Britain is holding a referendum on whether to leave the EU signals the failure of the European Union.”

Five Star won 19 out of 20 mayoral elections on Sunday, including in Rome and Turin, in a major blow to Matteo Renzi, the Prime Minister.

In France, Marine Le Pen, the Front National leader, last night called for France to have its own referendum on the “decaying” EU. “I would vote for Brexit, even if I think that France has a thousand more reasons to leave than the UK,” she said.

In the Netherlands, polls show a majority of voters want a referendum on membership, and voters are evenly split over whether to stay or go.

David Fuller's view -

The call for these referendums confirms that there is little public support within the EU for the grandiose vision of an empire called Europe.   

 

Please note: I will be away on Friday.



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June 23 2016

Commentary by Eoin Treacy

Pound Reaches 2016 Peak as Traders Await U.K. Referendum Result

This article by Lukanyo Mnyanda and Netty Ismail for Bloomberg may be of interest to subscribers. Here is a section:

The pound climbed to the strongest level this year as British voters cast their ballots in a referendum on the nation’s European Union membership.

A gauge of sterling advanced for a second day, while the currency headed for its best week since 2009 against the dollar as two polls conducted before Thursday showed a lead for the campaign to keep Britain in the European Union.

Still, a measure of implied overnight price swings versus the dollar climbed to the highest level on record, as traders sought protection from outsized price swings. Voting began at 7 a.m. London time and ends at 10 p.m.

The pound has acted as a barometer of sentiment since the start of the campaign in February, rising or falling depending on which side of the debate was gaining momentum. Sterling has climbed about 8 percent since sliding to a seven-year low of $1.3836 on Feb. 29, about a week after the date of the vote was announced, and has rallied from as low as $1.4013 last week.

 

Eoin Treacy's view -

The Pound hit a medium-term peak near $1.72 in 2014 and was trading closer to $1.57 when the Conservatives won the election last year. It then trended lower for the remainder of the year before finding support in the region of $1.40 which also represents the lower side of a long-term range. 



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June 23 2016

Commentary by Eoin Treacy

The Brexit hoopla has diverted our attention from the real problem

This article by Elena Holodny may be of interest to subscribers. Here is a section:

"There is an argument that global investors have overly focused on Brexit at the expense of other more important macro events, "the perma-bear wrote in a recent note to clients.

"We believe China's ongoing stealth devaluation of the renminbi is far more important for the global economy."

The renminbi has been pretty stable against the US dollar this year, so many have missed that it.
Yet China's trade-weighted currency basket has dropped by about 10% since right before the August, which you can see in the chart shared by Edwards below.

(For what it's worth, Julian Jessop of Capital Economics pointed out the same interesting detail back in May, arguing that the "stealth devaluation" was an "important nuance that many have missed.")
As for what the significance of this is, here's Edwards again:

"The Wall Street Journal has reported that this is a deliberate shift in policy link. China is now exporting its deflation, and my goodness it has a lot of deflation to export. In the Ice Age world, countries need to devalue to avoid deflation. So if sterling slumps in the aftermath of a Brexit vote there may be at least one silver lining outside the EU if the UK economy manages to avoid the quagmire of outright deflation."

 

Eoin Treacy's view -

This is a tumultuous week and many markets have been subject to a great deal of volatility but next week will bring us back to the debate of central bank liquidity and how well it offsets concerns about corporate profitability. 



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June 23 2016

Commentary by Eoin Treacy

Rebel 'Romance' Means Gold and Cocaine to Flow After Peace Deal

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

“The FARC are looking at their Plan B, and their obvious Plan B is the ELN,” he said by phone from Medellin. “Certainly in the 60-odd municipalities where they co-habit, we think it’s very likely that there will be a transfer of these criminal economies, gold and coca, to their revolutionary cousins.”

The Colombian government and the ELN announced the start of a formal peace process on March 30, although negotiations have yet to start. The ELN has no intention of sitting down to talk until first seeing how the FARC agreement pans out, Builes said.

Eoin Treacy's view -

The ability of Mexican drug cartels to import the raw materials for fentanyl directly from China and manufacture pills either in Mexico or the USA, therefore bypassing Colombia entirely, represents a major threat to the latter’s business model. More than any other factor that may have played a role in the FARC’s decision to agree to talks. Nevertheless, the market for cocaine might not be growing as quickly as it once did but it still represents a multibillion Dollar business. Logically, someone will ensure it keeps going regardless of deals with the government. This article by also be of interest. 



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June 23 2016

Commentary by Eoin Treacy

IBM to deliver 200-petaflop supercomputer by early 2018

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

More supercomputer news this week: The US is responding to China’s new Sunway TiahuLight system that was announced Monday, and fast. First, the Department of Energy’s (DOE) Oak Ridge National Laboratory is expected to take delivery of a new IBM system, named Summit, in early 2018 that will now be capable of 200 peak petaflops, Computerworld reports. That would make it almost twice as fast as TaihuLight if the claim proves true. (We had originally reported in 2014 that both Summit and Sierra would achieve roughly 150 petaflops.)

TaihuLight (pictured below) now sits at number one on the twice-yearly TOP500 list of the fastest supercomputers in the world, with a Linpack benchmark score of 93 petaflops and a claimed peak of 124.5 petaflops. The latest TOP500 announcement Monday caused a bit of a stir. Not only is TaihuLight roughly three times faster than China’s Tianhe-2, the prior champion, but it also uses no US-sourced parts at all for the first time, as it’s powered by Sunway 260-core SW26010 processors that are roughly on par with Intel Xeon Phi, as well as custom proprietary interconnect.

 

Eoin Treacy's view -

Supercomputers might be a somewhat esoteric topic but the fact China has developed the fastest computer in the world without requiring US sourced components is a major testament to the technological competence it has achieved. In turn that should help Chinese researchers to further develop artificial intelligence and big data projects. 



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June 23 2016

Commentary by Eoin Treacy

June 22 2016

Commentary by David Fuller

UK and Europe Face Mutual Assured Destruction if They Botch Brexit

Here is the opening of another excellent column by Ambrose Evans-Pritchard for The Telegraph:

Whatever the result of Britain's referendum on the EU we can be sure of one thing: there will not be a global financial crisis the next day.

Nothing dreadful will suddenly happen. The US Federal Reserve, the European Central Bank, the Bank of Japan, and the Olympian fraternity of money printers will stand with the Bank of England,ready to flood the international system with liquidity.

The central banks have had months to prepare, and they have prepared. Currency swap facilities are in place to cover the dollar funding needs of UK-based banks, and many of these are well-insulated branches of American, European, Asian, and Mid-East banks in any case.

The circumstances are nothing like the collapse of Lehman Brothers in September 2008, a Black Swan event that caught the world off guard and metastasized only because the US authorities unwisely choose to make an example of the hapless bank and let the debacle occur. Nobody will fret piously about moral hazard this time.

Central banks have learned the lessons of Lehman and of Europe's debt crisis: that events can spin out of control if they fail to an act as a lender-of-last resort in moments of extreme stress.

Yes, we must heed the warnings of experts, so long as they are acting in their expert capacity, and this is where the British government and its allies in the global nomenklatura have badly muddied the waters. The Treasury's claims of a 3.6pc to 6pc crash in output are patent propaganda - intended to frighten people - since they start from the political premise that Britain's authorities will entirely abdicate their fiscal and monetary responsibilities.

More worthwhile are comments from George Soros, the speculator turned philanthropist, and a man I admire for his humanitarian campaigns, as well as for his heroic role in liberating Britain from Europe's Exchange Rate Mechanism in 1992.

Mr Soros tells us that Brexit will not be as benign as 1992 when the Bank of England was able to slash interest rates, end recession, and head off a collapse of the housing market. This time we will suffer all the pain of devaluation - 15pc, or 20pc, or more - without the cuts in rates.  And we have enemies.

"Today, there are speculative forces in the markets that are much bigger and more powerful. They will be eager to exploit any miscalculations by the British government or British voters," he said.

This cannot pass. We are not in recession, and we do not need rate cuts. If sterling really fell by 20pc, it would be painful for eurozone exporters but a net economic stimulus for Britain in strict macro-economic terms.

David Fuller's view -

I certainly respect George Soros but I do not think Sterling would fall anything like 20% in the event of a majority Brexit vote, which neither the betting shops nor the markets are indicating on the eve of this historic referendum. 

However, if I am wrong and the Remain vote is defeated on Thursday, I think an exaggerated plunge by sterling would be a matter of now-you-see-it-now-you-don’t, due to thin volume (unusual for reserve currency markets) and the aggressive speculators which he mentions.  In fact, I think whatever the outcome of the referendum, volume on Friday will be dominated by high-frequency trading programmes.  We have previously seen how easily and quickly they can generate momentum in either direction and many markets will be in play.     

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



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June 22 2016

Commentary by David Fuller

Email of the day

On Russell Napier’s interview in Barron’s and tomorrow’s Brexit vote:

Hi David, I thought this was interesting although somewhat gloomy and your comments will be appreciated.

Best wishes

David Fuller's view -

Many thanks.  I remember Russell Napier from his CLSA days, although I do not think we ever actually met.  He is a thoughtful, academic man, and yes, inclined to be bearish.  This is perhaps not surprising given all the problems and uncertainties over many years, although the money flows have been positive more often than not.  Here is the opening of his interview with Barron’s:

Barron’s: Britain will vote on June 23 on whether to leave the European Union. How do you expect the so-called Brexit vote to go?

Napier: It is too tight to call. The most important thing is that the move to a federal Europe is a massive constitutional change, which at some stage will need to be endorsed by the people of each sovereign state, usually by referendum. It is silly to believe this issue is just a United Kingdom thing. Look at polls all over Europe. People are voting for anybody who, whether on the extreme left or right, wants to maintain the sovereignty of that particular state within the European Union. That is completely contrary to the ability to have a functioning euro.

This is round one. The most important referendums will be those in the euro countries. I expect referendums in places like Finland, the Netherlands, and even Italy. European legislation is forcing Italy into a form of bank recapitalization, which won’t work and is bad for the Italian economy. Italy will move up the agenda quickly.

 

These are astute comments.  Many people all over Europe are dissatisfied with the EU, which is currently a burning barn in terms of economic underperformance.  This has resulted in widespread dissatisfaction, compounded by undemocratic policies and the EU’s privileged, political oligarchy. 

I hope Russell Napier is right about future referendums in Euro countries.  That would be democracy in action but I fear this will be resisted by governments on behalf of the EU bureaucracy.    



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June 22 2016

Commentary by David Fuller

India Loses Its Vital Central Banker

In few countries would a central banker’s decision to step down at the end of his term be cause for national and even global anxiety. Raghuram Rajan is no ordinary central banker, however, and his just-announced departure demands an extraordinary response from India’s government.

The government has the right to choose the head of the Reserve Bank of India, and no individual -- not even an international financial superstar such as Rajan, who said he plans to return to academia when his term ends in September -- is bigger than the bank itself. At the same time, the circumstances of Rajan’s departure have left global investors with a few unfortunate impressions. It’s important for the government to dispel these as quickly as possible in order to shore up its credibility and the bank’s.

The first is the ugly implication that Rajan was eased out because he wasn’t “fully Indian,” in the words of Subramanian Swamy, an upper-house legislator from the ruling Bharatiya Janata Party. Rajan, of course, despite spending most of his career at the University of Chicago, is an Indian citizen; his real sin appears to have been to criticize the government obliquely in a widely publicized speech decrying rising intolerance.

The government has already signaled that this criticism is invalid -- the shortlist of replacements for Rajan reportedly includes at least one economist who’s spent much of his career in the U.S. More important, the government should make clear that whoever gets the nod will have the freedom to speak critically and pursue an autonomous RBI policy, unbound by political considerations.

David Fuller's view -

India previously benefitted from the generally high regard in which Narendra Modi and Raghuram Rajan were held.  The Prime Minister will have to move quickly in appointing another highly qualified central bank governor, who needs to be seen as independent.  Modi should also confirm that controlling India’s inflation remains a priority, while also endorsing Rajan’s policies regarding India’s banks, also mentioned in the editorial above and in Bloomberg’s additional article below.    



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June 22 2016

Commentary by David Fuller

Rajan Says India Should Finish Banking Cleanup in Policy Defense

Here is the opening of this article from Bloomberg:

Indian central bank Governor Raghuram Rajan said government-run banks were to blame for a slowdown in credit growth, not high interest rates.

Rajan, who announced on Saturday that he would step down in September, called for improved governance and more capital injections into state-run banks. It was his second speech this week defending his policies after he called on Monday for his successor to keep up his fight against inflation.

“To the question of what comes first, clean up or growth, I think the answer is unambiguously ‘Clean up!’" Rajan said in Bengaluru, according to a text of his remarks. “Indeed, this is the lesson from every other country that has faced financial stress. It is important, therefore, that the clean-up proceeds to its conclusion, without any resort to regulatory forbearance once again."

To read more on Rajan’s efforts to clean up the banking system, click here.

Rajan’s exit has spurred concerns that his successor may abandon his March 2017 deadline for banks to clean up more than $100 billion of stressed assets on their balance sheets. With bad loans at a 15-year high, the project is a crucial step toward reviving credit growth and bolstering India’s $2 trillion economy.

David Fuller's view -

Surely Rajan’s programme of requiring the banking sector to be cleaned up through a combination of write-offs, mergers and closures before pursuing stronger GDP growth is correct.  The US economy benefitted from doing this following 2008/9, while the EU did not, resulting in a banking sector which is still relatively weak today.     



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June 22 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.  There are only a few seats left in the Seminar room. 

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



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June 22 2016

Commentary by Eoin Treacy

California's Last Nuclear Plant Is Closing, Edged Out by Renewables

This article by Jim Polson and Jonathan Crawford for Bloomberg may be of interest to subscribers. Here is a section: 

Economics have achieved what environmentalists have sought for years: the shutdown of California’s nuclear power plants.

PG&E Corp. is proposing to close two reactors at Diablo Canyon in a decade that would end up costing more to keep alive as California expands its use of renewable energy, Chief Executive Officer Tony Earley said Tuesday. They won’t be needed after 2025 as wind and solar costs decline and electricity from the reactors becomes increasingly expensive, he said.

Diablo Canyon became California’s only operating nuclear power plant after Edison International three years ago shut its San Onofre plant north of San Diego after a leak. Tuesday’s announcement follows decisions this month to retire three other U.S. nuclear plants struggling to make money amid historically low power prices and cheap natural gas.

“It’s going to cost less overall as a total package than if you just continued to operate Diablo Canyon,” Earley said. “It’s going to operate less because of the energy policies that are in place.”

 

Eoin Treacy's view -

Nuclear in North America and Europe suffers from a boy who cried wolf problem. By over promising on cost and production and under delivering, particularly on safety, public ambivalence has grown substantially. That’s an unfortunate development because new nuclear technologies really do hold the potential to fulfil earlier promises, but they are unlikely to be built in either North America or Europe. China is now the primary bastion of support for developing nuclear technology and is already exporting its designs to other countries. 



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June 22 2016

Commentary by Eoin Treacy

Musk's Solar Lifestyle Idea Has One Big Flaw

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

The commercial success of Musk's vertical integration idea hinges -- in terms of turning a profit rather than generating a high market capitalization -- on battery technology that would have mass rather than niche appeal. The assumption upon which Musks' concept -- and Tesla's $32.3 billion market capitalization -- is built is that Tesla is betting on the right battery technology and no one will come up with a much better one. That is the big hole in the donut: The assumption is far from safe.

Cheap and reliable energy storage is central to the idea of an off-the-grid, solar-powered household. Such a home needs energy at night, when the sun isn't shining: It has fridges, air conditioners and other appliances running, and a Tesla charging in the garage. So it needs a good battery, and Tesla's Powerwall doesn't necessarily fit the bill -- if only because the cost of the energy it supplies, including amortization, is higher than grid prices. Because of this, and given the high price of Tesla cars, the lifestyle on offer is an expensive statement. In terms of cost and convenience, it's not competitive with the traditional grid-and-fossil fuel model.

 

Eoin Treacy's view -

Let’s call Tesla Motor’s acquisition of SolarCity what it is; a bailout. The tide of highly attractive subsidies for solar has turned. NV Energy, Warren Buffett’s Nevada utility, successfully argued that it should not have to bear the full cost of the electrical grid when solar producers get to use it for free and get preferential rates on the electricity they supply. That represented a major upset for SolarCity in particular but also highlighted a deeper challenge for the solar leasing business model which has contributed to increased scepticism among investors about the prospects for related companies. The big question is whether other states, particularly in the sun-belt will announce similar charging structures. 



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June 22 2016

Commentary by Eoin Treacy

Panama Canal ushers in new era of international trade and megaships

This article from the Panama Perspective may be of interest to subscribers. Here is a section:

More than 100 years ago when the SS Ancon sailed into the history books as the first ship to transit the Panama Canal, the waterway was a display of American ingenuity and the Panama Canal Zone was firmly in U.S. hands.

But the ship making the first official trip through the newly expanded canal next Sunday will be a Chinese megaship. The United States completely withdrew from the canal on Dec. 31, 1999, and there was barely any U.S. participation in the $5.5-billion canal project, which will allow the world’s bigger ships to transit Panama’s “highway of the sea.”

The United States remains the most important user of the canal and canal officials say it will be for the foreseeable future, but world trade patterns have shifted in the past century and China has become the world’s largest trading nation.

Between 6 a.m. and 7 a.m. on June 26, China COSCO Shipping’s recently renamed 984-foot-long Panama will approach the new Agua Clara locks on the Atlantic side of the 50-mile long canal to begin the first official voyage through the expanded canal. It won the honor in a drawing among the canal’s top customers.

Although the new locks — tall as an 11-story building — are an engineering marvel and the expansion is expected to double the canal’s capacity, it’s been a long slog. The project is being delivered nearly two years behind schedule and various claims by the Grupo Unidos por El Canal (Group United for the Canal), the international consortium that built the expansion, could push the price for the project even higher. The Panama Canal Authority also has its own counter-claims. Arbitration on the first unresolved claim gets underway in Miami in July.

But now —110-million man hours, 292,000 tons of structural steel, 1.6 million tons of cement and 5 million cubic meters of concrete later —the project is finished. Panamanian voters approved it in a 2006 referendum.

 

Eoin Treacy's view -

The extension to the Panama Canal was approved during the commodities boom when vast quantities of raw materials needed to make their way from Brazil and Venezuela to China. Despite cost overruns and political scandals, (former President Martinelli is still holed up in Miami fighting extradition) the expansion of the canal is a major enabler to trade by reducing both the cost and time on shipping on major routes. 



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June 22 2016

Commentary by Eoin Treacy

June 21 2016

Commentary by David Fuller

Remain Models Are Built On Poor Foundations

In this, my last column before D-Day, I want to discuss some key features of the case for Brexit that, in my view, have been misrepresented or ignored.

The Treasury, and some other bodies, have subjected the Brexit option to trial by macro-economic model. Various assumptions were fed into a series of equations which, on the basis of past experience drawn from a number of countries, are supposed to embody wisdom about how the key economic variables will respond. The model whirred and then spewed out forecasts for our post-Brexit future.

These methods are unsuitable for assessing the impact of such a seismic politico-economic event. Moreover, the assumptions that have been plugged into the models have typically been bizarre. For instance, the Treasury study assumed no regulatory changes. 

Equally, it assumed we would not be able to do any new trade deals with the EU or anyone else. Nevertheless, we would continue to impose the EU’s tariff on imports from the rest of the world. No wonder this exercise concluded Brexit would cause an economic loss from reduced trade.

This conclusion derives further loss from lower investment and even weaker productivity growth. But if trade does not fall, there is no reason for these effects to occur. 

To these trade-related effects is added the impact of uncertainty, which will supposedly persuade people and companies to defer spending. Yet if there is a loss of confidence after Brexit, the responsibility for this will rest with the Prime Minister and Chancellor for spreading pessimism about our prospects outside the EU. 

In fact, a loss of confidence could be addressed by an appropriate policy response. Admittedly, the Chancellor has warned that interest rates would have to go up. But the City is assuming that the Bank of England would reduce interest rates. I know who I would rather believe.

Meanwhile, a Brexit-inspired fall of the pound is being portrayed as a disaster, just as it was before our ejection from the ERM in 1992. In fact, just as happened then, this is exactly what the economy needs. 

Forget the Government’s attempts to scare you – focus on five key issues. First, over the past two decades, the EU’s average growth rate has been low by comparison with almost all other developed countries. The most important reason is the introduction of the euro, which has devastated the economies of southern Europe. But even Germany has not grown strongly and France is weaker. The euro was not an accident. It was introduced as part of “the European project”. Heaven knows what further delights Team Europe has in store.

David Fuller's view -

I have known Roger Bootle for the better part of four decades.  He is an independent thinker with the best track record and most international perspective of any living economist that I am aware of. 

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



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June 21 2016

Commentary by David Fuller

AEP: Rockstar Central Banker of India Defeated as Modi Revolution Stalls

Mr Rajan is a former chief economist for the International Monetary Fund, famed for warning that the US subprime debt bubble was out of control long before the Lehman crisis blew up in 2008.

While Mr Rajan said he wished to return to his academic home and the “realm of ideas” at the University of Chicago, it is an open secret in India that he can no longer work with Mr Modi’s Bharatiya Janata party (BJP). He will step down in early September after just three years.

Mr Rajan’s ‘tough love’ policies are widely credited for averting a currency crisis and an inflationary blow-off during the emerging market ructions three years ago, when the country was shunned as one of the ‘fragile five’ most at risk as the US Federal Reserve began to wind down monetary stimulus. He became the pin-up central banker of the emerging world, a symbol of a new age.

His orthodox policies beefed up India’s financial defences but led to constant clashes with the BJP party. The government’s Keynesian economic guru Subramanian Swamy accused him of a “willful and deliberate attempt to wreck the Indian economy” through deflationary overkill.

Bad loans and restructured loans have reached 14.5pc of the balance sheets of the banks, but this has been festering for a long time and the causes pre-dates Mr Rajan.  The RBI says the banks need a $30bn recapitalization by 2018.

Ed Smith from Rathbones said Mr Rajan has taken exactly the right line. “The quickest way to restore the health of the banks is to crystallize the bad loans, and get everything out in the open. Unfortunately it is sill to be finished,” he said.

The government’s reform agenda is coming off the rails, despite the rhetoric. While it has overhauled the archaic bankruptcy laws, a ‘big bang’ effort to cut through the nightmare of different tax rates has come to little. Plans to end bottlenecks in transport and infrastructure have been paralyzed by land procurement problems.

“All the reforms seem to have stalled. Indian equities are trading at a premium to emerging market peers and we’re running out of reasons to see why this is justified,” said Mr Smith.

India outpaced China last year with stellar growth of 7.5pc but analysts have lost trust in the GDP data, suspecting that the growth rate may have been massaged upwards.

In any case, the boom belies a host of deep structural problems, and is unsustainable without a radical overhaul of the economy. “Modi is not a Thatcherite. He is a conservative who wants to make the old system work better,” said Lord Desai.

Mr Modi does not control the upper house of parliament, so gridlock is built into the system. The 29 states are pulling in different directions. “India has the same governance pathologies as the eurozone,” said one IMF veteran.

David Fuller's view -

This last paragraph above touches on a major obstacle in India’s development path.  Its bureaucracy is probably even worse than the EU’s because it has been in place for much longer and therefore is regarded as less unacceptable by many Indians. 

Narendra Modi’s herculean task of making India’s economy more efficient and bringing it into the 21st Century is in danger of stalling.  He has approximately two years left before he loses his overall majority, or worse, at the next general election assuming that he wishes to remain prime minister.

Modi’s association with loose cannons such as the BJP’s emotional Subramanian Swamy will not reassure overseas investors.  Worse still, pushing the internationally renowned Raghuram Rajan from the RBI will alarm investment managers who assess markets as if they are candidates as in a global beauty contest.  The replacement of Rajan will be viewed a serious blemish, which can only be mitigated if he is replaced by someone generally regarded as of similar calibre.  This will not be easy and governance is everything.

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

(See also my comments in response to Monday’s lead article.)



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June 21 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.  There are five seats left in the Seminar room. 

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



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June 21 2016

Commentary by Eoin Treacy

Robots on Track to Bump Humans From Call-Center Jobs

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

Industry insiders say the outlook depends on whether the incoming government of President-elect Rodrigo Duterte can help develop enough of the tailored education programs needed to produce skilled for a more sophisticated range of tasks.

Climbing the value ladder won’t be easy. TaskUs, a U.S.-based outsourcing with operations here, is among those that are trying. Innovation is the key to survival, said Bryce Maddock, chief executive of the company, which provides a range of back-office functions for tech startups, including the mobile dating site Tinder and the message service Whisper.

“We’re trying to ‘un-call center’ the call center,” said Mr. Maddock, who tries to battle the endemic turnover in industry hotspots like Manila by offering a modern workspace modeled on the casual vibe of Silicon Valley.

He says just a tenth of the company’s 5,000 employees are actually answering phones. Most are managing content on websites or handling customer relations via online chat.

The shift reflects an industrywide trend. TaskUS reflects an industrywide trend. A decade ago, nearly all Philippine outsourcing work was phone-based. Now, it’s just 60%, a figure that’s bound to keep declining, outsourcing executives say, even as the industry as a whole continues to expand.

 

Eoin Treacy's view -

It takes a village to run a successful ecommerce site so while automated systems are increasingly taking over the phone lines we still need humans to conduct search engine optimisation (SEO) and manage website content. These tasks are still heavily labour dependent so demand for call centre operatives is likely to remain on an upward trajectory but the sophistication of the work is likely to increase. 



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June 21 2016

Commentary by Eoin Treacy

RBA Sees Positive Economic Data Outweighing CPI for Now

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

Australia’s central bank hailed recent positive economic data while reiterating inflation would remain low, in minutes of its June meeting where interest rates were left at 1.75 percent and no policy guidance was provided.

The expansion “over the year had increased to be a bit above estimates of potential growth, reflecting a stronger expansion in non-mining activity,” the Reserve Bank of Australia said Tuesday in the minutes. “Nevertheless, inflation was expected to remain low for some time.”

Australia’s economy is showing a split picture: recession- level wage growth and record-low inflation on the one hand; and economic growth close to its 30-year average and unemployment below its 20-year mean on the other. The central bank, meanwhile, appears content to stand pat for now as the country heads toward a July 2 election and international events like Britain’s vote on leaving the European Union play out.

“The board judged that leaving the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” the minutes said. The Australian dollar rose to 74.81 U.S. cents at 11:34 a.m. in Sydney from 74.65 cents before the minutes were released.

Eoin Treacy's view -

The Australian economy is a clear outperformer when compared to other OECD countries and with the New South Wales economy reporting a substantial surplus today the domestic economy is benefitting from improved competitiveness following the 36% decline in the Australian Dollar from its peak. With low inflation it is unlikely the RBA is going to hike rates any time soon but the interest rate differential and recent stability of the currency represent attractive characteristics from the perspective of international investors. 



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June 21 2016

Commentary by Eoin Treacy

Japan Won't Intervene in FX Lightly, Finance Minister Aso Says

This article by Yoshiaki Nohara for Bloomberg may be of interest to subscribers. Here it is in full:

Finance Minister Taro Aso signaled that Japan’s government won’t intervene to stem the yen’s strength without due consideration, saying the markets have already somewhat taken into account the potential impact of a vote in favor of Brexit.

“Speaking of FX intervention, we won’t do it lightly,” Aso said at a press conference in Tokyo on Tuesday. “The G-7 and G-20 have agreed that abrupt moves are not desirable and we aim for stability. We will take action in line with that agreement.”

Aso’s comments came as the yen has surged more than 5 percent versus the dollar in June as global markets await the outcome of Britain’s June 23 referendum on European Union membership. The vote and its effect on the global economy has boosted the yen’s demand as a safe-haven currency.

The finance minister said the market has already taken into account Brexit to some degree, limiting upward pressure on the yen. Aso last week voiced strong concern about one-sided, abrupt and speculative moves in the foreign exchange market. The yen traded at 104.03 per dollar as of 12:49 p.m. in Tokyo.  

 

Eoin Treacy's view -

Negative interest rates inhibit the BoJ’s ability to weaken the currency since it is inherently deflationary and therefore reduces rather than increases the quantity of currency in circulation. The question therefore is at what point the strength of the Yen is likely to pressure officials to try something new? 



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June 20 2016

Commentary by David Fuller

Why Wall Street Is Worried About the End of Rajan Reign

The Indian rupee slumped as investors reacted to the news that Reserve Bank of India Governor Raghuram Rajan will return to academia in early September.

At India's central bank, the former International Monetary Fund chief economist not only oversaw a revolution in the conduct of monetary policy but also pushed for structural reforms and commented on fiscal policy, often drawing the ire of lawmakers in the process.

Rajan, along with Bank of England's Mark Carney, is one of the two 'rock star' central bankers of this generation. At the Jackson Hole symposium in 2005, he famously warned of excessive and growing imbalances in the financial system that manifested in the crisis of 2008.

A government official highlighted five possible successors for Rajan, but for now, analysts are scrambling to get a handle on what the governor's departure means and how markets are likely to be affected.

David Fuller's view -

Governance is everything has long been a mantra at this service.  Confidence in the governance of countries and corporations leads to relative outperformance by attracting more investors whose interest and participation increases valuations.  For evidence, just look at Asia’s two giants. 

There are too many questions over governance in China, following the excessive monetary bubble just over a year ago.  Now China’s stock market languish despite comparatively low valuations for the Shanghai Stock Exchange Composite Index (SHCOMP) (p/e 15.92 and yield 2.12%), compared to the S&P BSE Sensex Index (SENSEX) (p/e 20.29 and yield 1.48). 

This item continues in the Subscriber’s Area.



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June 20 2016

Commentary by David Fuller

Clive Hale: The View from the Bridge

My thanks to the author for his interesting report on Brexit and the EU’s seven sins.  Here is a brief sample:

Deadly Sin 1: Currency Manipulation:

“For a small, open economy like Cyprus, euro adoption provides protection from international financial turmoil.” A quote from Jean-Claude Trichet, then President of the European Central Bank, in January 2008. After the provision of a number of emergency loans to Cyprus throughout 2012/13, on the 25th March 2013 a €10bn ECB bailout of the entire Cypriot banking system was undertaken. To fund part of the bail out savers deposits (above €100,000) were seized and used to bail out the bankrupt banks. To this day, capital controls, restricting the amount of money that can be taken out of Cyprus, are still in place. Contrary to Mr Trichet’s comments, adoption of the euro has simply been an economic disaster for Cyprus. And the worst part of this story; it was all entirely predictable. Why? All rational economic justification for the EU went out of the window the minute that the single currency became a fact of life. Currencies act as the pressure valve for an economy. They weaken when economies are weak, thus encouraging increased capital inflows and inwards investment, therefore cushioning the economic fall, and eventually promoting recovery. The opposite is also true for booming economies, where currencies appreciate and ultimately dampen the euphoria, before the boom ‘overheats’ and becomes too destructive. The minute you block that pressure valve, by artificially fixing the value of currencies, as the advent of the euro has done in Europe, internal pressures begin to build. History is littered with examples of financial crises where official currency manipulation is a major symptom. Arguably, there has never been a totally successful currency union anywhere in the world, as the internal pressures always result in unbearable economic and/or social distortions. The euro is clearly no different; today social discontent and expanding economic disparities are plain to see and they are getting worse. When will the pressure become too great? And when will that valve blow?

David Fuller's view -

Today, the world’s financial markets are telling us that Brexit will not occur.  Global stock markets are soaring; government bond yields are mostly rising; and British Sterling has rallied sharply.  Most of this, I believe, is short covering because for most of last week the opposite was occurring as polls showed that support for Brexit had gained momentum.  The pendulum has now swung in favour of Remain.

I will be voting for Brexit on Thursday, because to quote from Abraham Lincoln’s Gettysburg Address on November 19th 1863, I favour “government of the people, by the people and for the people”.  Instead, we British citizens will increasingly be ruled by an unelected, unaccountable bureaucracy from the EU.  That is neither good for democracy, responsibility, or economic growth and prosperity, in my opinion. 

However, I think this will continue to be less bad for Britain than for our European neighbours, mainly because the UK has not suffered from the Euro straightjacket.  Moreover, it is increasingly recognised within the EU that it is a grandiose, oligarchical scheme heading for the rocks.  Bureaucrats in Brussels and Strasbourg may be the last to accept this but the political unrest and uprisings tell another story.  Economic underperformance for the entire EU region, plus the tragedy of scandalous unemployment levels in Southern European countries, will force root and branch changes over the next ten years, in my opinion.  



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