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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). 

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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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June 20 2016

Commentary by David Fuller

OPEC Chasm of Doom

Here is the opening of this informative article from Bloomberg:

OPEC's members are divided by many things: language; size; politics; sometimes outright war.

And money. Don't forget money.

If you want to understand why OPEC has responded to its current crisis with all the cohesion of cat herding, some numbers in the Energy Information Administration's "OPEC Revenue Fact Sheet," published on Tuesday, provide some important clues. First up, estimated revenue, adjusted for inflation:

Tight Oil

OPEC's real net oil export revenue is expected to be the lowest since 2003

The estimate for this year, $337 billion in real terms, is barely a third of 2012's peak -- and, uncannily, exactly the same as the consensus forecast for the combined revenue of Exxon Mobil and Chevron in 2016. Of course, those two only have to pay their employees, creditors and shareholders. OPEC's members have about 700 million people to answer to, roughly double the amount in 1980. So, on a per capita basis, those numbers look worse:

David Fuller's view -

Note the charts in this article, including: “The gap between OPEC’s haves and have-nots in terms of oil export revenue.  



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June 20 2016

Commentary by David Fuller

June 20 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.  The seminar room is now three-quarters full. 

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 20 2016

Commentary by Eoin Treacy

Email of the day on Brexit and a federal Europe

Thank you for posting the link to Jacob Rees-Mogg's referendum speech. I thought it was calm, clear and thorough. In particular, it homed in on the central question - do we want to live in a democracy? If I may, I'd like to draw your attention to a shorter video that I believe covers an oddly overlooked part of the debate - the history of the EU:  The initial two minutes of graphics and information are followed by five minutes summing up that history. I can see it's drawn heavily from the well-researched Booker and North book mentioned at the end. My feeling is that it should be compulsory viewing for anyone intending to vote so that they know what they're voting for. I thought they handled such a dry topic extremely well. I've found that that video leads very well into Jacob Rees-Mogg's, and have included both links in emails to interested friends. My very best wishes and thanks to you all. 

Eoin Treacy's view -

Thank you for this instructive piece. The democratic issues raised by the Brexit campaign and the history of the European Federalist agenda are important considerations. However it is looking increasingly unlikely that the vote in a few days will result in the UK leaving the EU and markets are responding accordingly. 



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June 20 2016

Commentary by Eoin Treacy

June 20 2016

Commentary by Eoin Treacy

U.S. Gasoline Demand Is Likely to Slide

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

Even the low end of the forecast by Wood Mackenzie, which provides in-depth analysis for a wide range of clients including large oil companies, utilities and banks, is a more bullish outlook for electric-car adoption than many oil-and-gas companies have espoused.

Spencer Dale, the chief economist of energy company BP PLC, said last week in Houston that while he expects electric cars to start gaining traction, the internal-combustion engine still has significant advantages over electric alternatives and widespread adoption won’t happen in the next two decades.

“It will still take some time,” Mr. Dale said. “Electric vehicles will happen. It is a sort of when, not if, story.”

The electrification of the automobile has evolved more slowly than some expected, in part thanks to low fuel prices and limited battery life that meant drivers had to recharge every 100 miles. But more capable cars are coming to market as tightening air-pollution regulations in places such as Europe and China force auto makers to engineer better electric vehicles.

The U.S. market today remains tiny, with pure electric cars amounting to less than 1% of total sales so far this year. But Tesla’s decision to build cars with sizable batteries that can run for more than 200 miles before recharging has led a number of competitors to double down on their own electric-car designs.

 

Eoin Treacy's view -

Tesla remains the standard bearer for electric cars because, more than any other company, it has succeeded in marketing a car people aspire to own. However it is not the only, or even the biggest company manufacturing electric vehicles. In fact Tesla’s success ensures it will deal with a lot more competition as incumbent manufacturers release their own models. 



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June 20 2016

Commentary by Eoin Treacy

IEX Sees Winning Enough Volume to Muscle Into Top Exchange Ranks

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

Now that IEX Group Inc. has the same coveted regulatory status as the New York Stock Exchange, Nasdaq Inc. and Bats Global Markets Inc., the company’s chief executive officer plans to steal a significant chunk of business from them.

As a dark pool, IEX handles less than 2 percent of U.S. stock trading; NYSE, Bats and Nasdaq each process roughly 20 percent. But the Securities and Exchange Commission on Friday gave IEX a regulatory upgrade, clearing the way for it to open a new stock market, called the Investors Exchange, in August.

“There are limits to how big dark pools can grow, and we no longer have a limit to how large we can grow,” IEX Chief Executive Officer Brad Katsuyama said Monday in a Bloomberg Television interview. “It will take some time, but we are confident that we can become one of the largest markets.”

IEX pitches its platform’s 350-microsecond speed bump on orders as an antidote to speed-driven trading strategies it views as predatory. It’ll be the only U.S. stock exchange with an intentional delay.

The company may attempt to bring its business model to other asset classes and countries, though for now it’s focused on U.S. stocks, Katsuyama said during the interview. He declined to identify those other areas. “There’s a void of trust in different markets,” he said.

 

Eoin Treacy's view -

IEX is not publicly traded, yet, but it represents a major challenge to the profitability of established exchanges. Leasing space in data centres has been big business for exchanges who have been courting high frequency trading groups. However it has been a challenge for funds and pensions who have seen liquidity improve but slippage costs have increased as computer programs pre-empted trades. The imposition of a speed bump is very attractive for the buy side which has led to the growth of IEX’s venue and could represent a continued growth model. 



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June 20 2016

Commentary by Eoin Treacy

Rajan Defends Inflation Fight, Says India Should Stay Course

This article by Sandrine Rastello and Unni Krishnan for Bloomberg may be of interest to subscribers. Here is a section:

“We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor. What is happening today is truly revolutionary – we are abandoning the ways of the past that benefited the few at the expense of the many."

“Indeed, the fact that inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply." 

“If a critic believes interest rates are excessively high, he either has to argue the government-set inflation target should be higher than it is today, or that the RBI is excessively pessimistic about the path of future inflation. He cannot have it both ways, want lower inflation as well as lower policy rates."

“At the same time, the RBI does not focus on inflation to the exclusion of growth."

“The bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle."

“Decades of studying macroeconomic policy tells me to be very wary of economists who say you can have it all if only you try something out of the box. Argentina, Brazil, and Venezuela tried unorthodox policies with depressingly orthodox consequences."

Eoin Treacy's view -

Rajan has done an admirable job as Governor of the RBI so the big question for investors will be to what extent policy continuity can be achieved when his successor will be a political appointee. The decision will be a fresh test of Modi’s commitment to reform and long-term growth rather than short-term solutions. 

 



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June 17 2016

Commentary by David Fuller

Expect Much Higher Oil Prices As the Cycle Comes To an End

In my last article for OilPrice.com (May 16, 2016), I laid out my reasoning for a prediction that the Global Oil Markets would soon be back in balance. Picking an exact date when an oil cycle will end is difficult, but they do call them “cycles” for a reason. This cycle is no different than all of the others that came before it. Oil producers and consumers respond to price changes, which brings supply & demand back into balance, just like they always do.

The last six major oil price cycles lasted an average of two years. This one started in July, 2014.

On June 14, 2016 the International Energy Agency (IEA) issued their monthly Oil Market Report. In the report the IEA revises their first quarter increase in global demand forecast from a 1.4 to 1.6 million barrel per day year-over-year increase. They are also forecasting a big spike in demand of 1,270,000 barrels per day from the 2nd quarter to the 3rd quarter. Since demand ALWAYS spikes in the 3rd quarter, this was not a surprise to anyone.

Since this cycle has been so severe, I predict that it will not end well for speculative traders that continue to short oil futures. If some of you purchased a gas guzzling SUV because you believed the talking heads that said oil would never sell for $100/bbl again, you may want to consider a smaller second car.

• Global oil production in May was 590,000 barrels per day less than it was a year ago.

• Nigeria’s oil sector is under attack and the situation seems to be getting worse

• OPEC production fell by 110,000 barrels per day as increases in Iranian production were more than offset by big losses in Nigeria, Libya and Venezuela

• Global demand is up 1,600,000 barrels per day year-over-year as Chinese demand has held up and demand from India is very strong

Canadian wildfires at their peak took 1,500,000 barrels per day off the market. This production should be restored in the 3rd quarter. The situations in Nigeria, Libya and Venezuela are much worse. Inf fact, there is now concern that the government in Venezuela may collapse under the debt load created by low oil prices.

The direction of the oil market should now be crystal clear to everyone. Demand growth is relentless. The products refined from oil are essential to a high standard of living on this planet. We will all complain when gasoline is back over $3.00/gallon, but we will continue to pay for it. Within 6 to 9 months, demand for oil should exceed production. High storage levels provide a cushion, but oil prices will continue to ramp higher.

David Fuller's view -

Dan Steffens is correct in saying that there is always an oil cycle.  In fact, commodities have long been among the most cyclical of all markets.  He is also right in saying that demand for oil is clearly rising – have a look at the graph in his report.  Yes, production of oil is falling as demand is rising.  That is what happens in a cyclical commodity market. 

However, Dan Steffens is also overlooking some important factors, one of which is even more important than all of his bullish points combined. 

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June 17 2016

Commentary by David Fuller

Email of the day

What a Brexit vote might or might not mean:

Cameron’s failure to renegotiate and / or provoke treaty change is at the heart of this.

 An exit vote is not binding on the government and doesn’t mean that as of 24th June we are out of the EU. It just means that the government has been mandated by the people to extricate us from Europe. No time frame for doing so, no immediate trade barriers, no immediate change to status quo. The stock markets will probably take a large fall, as will sterling, and the already evident collapse in high-end real estate will be more widely recognised, but these are asset price changes, not changes to the underlying economic machine (with the exception of a sterling fall – which should help exporters).

How will Europe react to an exit vote by Britain? By engaging with the government (Cameron Boris, whoever) to try and turn this around. Renegotiation, treaty change if necessary, addressing the concerns currently being voiced in several countries. The objective will be a second referendum (we have seen this three times: Denmark -Treaty of Maastricht 1992 / 1993, Ireland - Treaty of Nice 2001 / 2002, and Ireland - Treaty of Lisbon 2008 / 2009). Different circumstances, but a precedent nevertheless. Best outcome for all is a second referendum backed by real concessions of the fundamental issues.

 So an “In” vote commits Britain to the status quo, while an out vote may allow a future decision to remain in a better EU, but requires some real brinksmanship. An actual exit is probably just as undesirable as the status quo. All very tactical.

 What the Scots do in the meantime is anyone’s guess.

 Come the revolution.....

David Fuller's view -

Many thanks for this very interesting and quite possibly realistic summary, and I enjoyed your conclusion.

EU officials are not unaccustomed to breaking their own rules and making policies on the hoof.  However, in the event of Brexit, I am not sure that Cameron is capable of brinkmanship.  It would require a political Rottweiler.  



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June 17 2016

Commentary by David Fuller

June 17 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.  The seminar room is now three-quarters full. 

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 17 2016

Commentary by Eoin Treacy

Chart Library Updates

It has come to our attention that the majority of equities did not update since the 14th. Nothing has changed on our end but we are liaising with Bloomberg to find out why they did not inform us of changes they made in how they supply data. We expect this issue to be resolved very early next week.

June 17 2016

Commentary by Eoin Treacy

Jacob Rees-Mogg MP Speaks on Brexit

Thanks to a subscriber for sending a link to this erudite speech making what I consider to be the most well-reasoned argument for Brexit I have seen so far. 

Eoin Treacy's view -

"No taxation without representation” might be an old catchphrase but it encapsulates the argument for why the European Union and especially the European Commission and parliament are in urgent need of reform. If decision makers are not subject to the polity for the laws they implement then we can only conclude that standards of governance are in decline which raises the risk premium attached to markets. 

The Brexit vote is a major flashpoint and highlights the increasing polarisation in the political establishment. This is a phenomenon increasingly present across Europe and the USA. On one hand the feeling of many people that they have been left behind by the recovery from the credit crisis and that governments no longer represent their needs is a motivation for supporting change. On the other the inability of governing elites to translate lofty ideals into improving standards of living for their voters represents a significant challenge. A lack of imagination and reliance on polling rather than vision appears to continue to distance politicians from their constituencies.  

 



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June 17 2016

Commentary by Eoin Treacy

Email of the day on Bremain

I guess no one has the will to talk about Brexit after yesterday's tragic events, hence I am assuming you will not publish this email. 

For your benefit only then, I thought it may be useful to give a tangible example of what abandoning the EU may mean for London. 

As you know the business I work for is an investment manager, relatively small in size (manages around EUR 200mil). We are now - and in fact I have spent some of this week time at work doing this - planning to relocate. 

The reason for this is that there is uncertainty about whether we will be able to operate for EU clients was England to decide to leave (i.e. If passporting will be possible). This uncertainty will continue for months, if not years, were Brexit to win.

Bear in mind this company - along with many others - was set up in the UK for the sole reason that its Swiss shareholders would not be able to operate in EU from Switzerland; despite the confederation efforts to comply to EU regulations, passporting is not possible for Swiss companies. You can clearly see then how a Brexit will mean London will lose its role of preferred city to operate into the EU. 

Multiply this for all non EU companies wanting to access the EU market (one of the world's largest even without the UK), and you'll see things may look grim very quickly. Unnecessarily, given the already low commitment and favourable terms with which the UK is part of the EU. Just imagine how many vacuum cleaners Mr Dyson would have to sell to replace all the business lost in this way! 
Where to relocate? There is of course plenty of choice, from Paris to Dublin, from Milan to Malta. Everybody will be eager to get hold of this business, thank you very much, offering lower costs and above all more stable and better government. 

At this point I think only a strong victory of Bremain and definitive capitulation of the Brexiteers (i.e. their disappearance from the UK political scene) can give confidence back to non EU operators to invest in London.

 

Eoin Treacy's view -

Thank you for a reasoned email raising important points for the City of London. This helps to explain why many politicians have been campaigning so vehemently to stay inside the EU, since the City is a major source of tax revenues and the UK needs to do whatever it can to protect it. I too am appalled by the murder of Jo Cox but the questions at stake are important so I did not hesitate to publish your valuable perspective. 



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June 17 2016

Commentary by Eoin Treacy

Email of the day on the reasons for bitcoin's rally

By the way great call on Bitcoin - unfortunately I did not allow enough for the volatility and got stopped out but still looking at it. Any update would be most welcome. Keep up the excellent work and best wishes to you and David

Eoin Treacy's view -

Thank you for your kind words. As far as I understand it bitcoin is rallying for two primary reasons. The first is the reward for minting bitcoins, through solving blockchain equations, is due to halve within the month. That means the cost of production will double so the supply of bitcoins will be reduced.  



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June 17 2016

Commentary by Eoin Treacy

Oil Pares Biggest Weekly Drop Since April as Dollar Declines

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

“There is some rebalancing, and I believe the oil price will be in the region of $50, maybe $55 for the rest of the year,” Paolo Scaroni, deputy chairman at NM Rothschild & Sons and former chief executive officer of Eni SpA, said in a Bloomberg television interview. “I personally believe there is a cap. If prices go beyond $60, shale oil producers will start all over again.”

Rigs targeting crude in the U.S. rose by 9 to 337 this week, capping the first three-week gain since August, Baker Hughes Inc. said Friday. Explorers have dropped more than 1,000 oil rigs since the start of last year.

 

Eoin Treacy's view -

Crude oil accelerated to its January low and has since staged in an impressively consistent rally which has seen prices almost double. This has resulted in energy companies being a major contributor in the ability of the wider market to rally from the January lows. For example the majority of the top 10 best performers on the S&P500 year-to-date are energy/resources related. 



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June 17 2016

Commentary by Eoin Treacy

BASF Joins Chemical Deal Rush in $3.2 Billion Albemarle Deal

This article by Andrew Marc Noel and Phil Serafino for Bloomberg may be of interest to subscribers. Here is a section:

For Albemarle, the deal is a means to pay down debt from its acquisition of Rockwood Holdings Inc. for $6 billion in 2015. It bought Rockwood’s lithium business to take advantage of demand for the lightweight metal used in rechargeable batteries in smartphones and electric cars.

"The sale of Chemetall reflects Albemarle’s continued commitment to maximizing shareholder value by investing in the future growth of our high priority businesses, reducing leverage and returning capital to shareholders,” Albemarle CEO Luke Kissam said in the statement.

The transaction value may be reduced for underfunded and unfunded pension obligations and other reasons, Albemarle said. Bank of America Merrill Lynch is advising Albemarle while Shearman & Sterling LLP is legal adviser. BASF worked with Citigroup, with legal help from Morgan, Lewis & Bockius.

 

Eoin Treacy's view -

BASF will gain an important foothold in North America through this acquisition but the price it is paying would appear to be rather expensive and is a further testament to the asset price inflation ultra-low interest rates have contributed to. 



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June 16 2016

Commentary by David Fuller

How Europe Pushed Britain Towards the Door

Here is a latter section of this topical article for Bloomberg:

The starting point for the campaigns -- the reason Cameron proposed a referendum in the first place -- was longstanding disaffection with the European project, lately amplified by fears over uncontrolled immigration. Cameron judged that this sentiment couldn't be ignored, partly because it threatened to split his party. He thought he could quell it by negotiating new terms with the EU and by promising to put the deal to voters.  

Europe's other leaders could and should have helped him. They should have recognized him as an ally -- and in doing so would have strengthened the European project. Certainly, to judge by Tusk's comments, they recognize their interest in keeping Britain in. And they surely understand that Europe as a whole needs to change – that anti-EU sentiment is on the rise in many other countries.

Yet they sent Cameron away from his vaunted renegotiation with too little. And the tone of their response was even more damaging than the lack of substance. The message came through loud and clear: It isn't Britain's place to tell Europe how to change.  

Polls can be wrong. There are still enough undecided voters to give Cameron the win he's staked his career on, so long as they split disproportionately in his favor. They probably will, because undecideds usually play it safe. The betting markets, unlike the polls, still expect a vote to stay, though less confidently than before. Nonetheless, it's finally dawning on people that Brexit could happen.

David Fuller's view -

This is overly kind to Cameron, and incorrect.  He only called for the referendum as a political move to stem the number of voters who were drifting to Nigel Farage’s UKIP, prior to the UK’s General Election on 7th May 2015.  It was a shrewd political tactic and it worked. 

Subsequently, campaigns by the two leaders of the Remain campaign – David Cameron and George Osborne – have been widely regarded as disgraceful.  I agree, and they have greatly exaggerated the long-term risks of Brexit for the UK economy, to put it mildly. 

After months of personal indecision, I decided several weeks ago to vote for Leave, mainly because I favour the sovereignty of Parliament and would like to see the UK free to establish its own trade agreements within the global economy. In reaching my personal decision, I am largely in agreement with the Brexit views of Roger Bootle, Ambrose Evans-Pritchard and Sir James Dyson, which I have posted on this site. 

However, I suspect Remain will win.  While a week can be a long time in politics, bookmakers’ odds have shown Remain to be in front throughout the campaign to date.  Bookmakers' odds are usually more accurate than polls, although certainly not infallible.  



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June 16 2016

Commentary by David Fuller

U.S. Stocks Recover, Pound Erases Drop as Odds on Brexit Decline

Here is a brief section of this report from Bloomberg:

The S&P 500 Index wiped out all of a 1 percent decline, while futures on the Euro Stoxx 50 gauge advanced amid a steady, day-long easing in bookmakers’ odds on the U.K. exiting. The pound ended little changed after sliding as much as 1.3 percent. Campaigning for the referendum was suspended by both sides Thursday after Labour Party lawmaker Jo Cox was murdered as she met constituents in her district. Treasuries gave up most of their gains, while oil tumbled to a one-month low amid a selloff in industrial and precious metals.

David Fuller's view -

Over the last week or more many markets have been moving in kneejerk response to Brexit polls, a few of which may have been misleading.  The Remain versus Leave debate was always likely to be passionate, given the importance of this referendum, and it was becoming increasingly divisive.  The brutal tragedy of MP Jo Cox’s murder earlier today is understandably have a sobering effect on the campaign.  Hopefully, this continues through next week’s referendum. 

Meanwhile, many short-term trends in the markets are overextended. 



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June 16 2016

Commentary by David Fuller

Royal Dutch Shell: Largest Ship in the World Floated for the First Time

Here is the opening of this informative article from Gizmag:

A hull longer than the Empire State Building is tall has been floated out of dry dock in Geoje, South Korea. Measuring 488 m (1,601 ft) long and 74 m (243 ft) wide, the hull belongs to Shell's Prelude floating liquefied natural gas (FLNG) facility, which upon completion will be the largest floating facility ever built.

Intended to allow production of natural gas, the processing of it into liquefied natural gas (LNG) and finally the transfer directly to transport ships, all while at sea, the Prelude will weigh more than 600,000 tonnes (661,400 tons) fully loaded and is expected to produce around 3.6 million tonnes (3.9 million tons) of LNG per year. Its total storage capacity is over 430 million liters (114 million US gal), or equivalent to around 175 Olympic swimming pools.

The Prelude FLNG will operate in a remote basin around 475 km (295 miles) northeast of Broome, Western Australia for around 25 years. The area's cyclone season runs from late November to April, but the Prelude is designed to remain onsite all year-round in all weather conditions.

It has been designed to withstand a category 5 cyclone and will be secured in place by one of the largest mooring systems in the world. This consists of a 93-m (305-ft) high turret, (which is large enough to house the Arc de Triomphe) that runs through the Prelude and is anchored to the seabed by four groups of mooring lines.

David Fuller's view -

Royal Dutch Shell’s floating natural gas plant is on schedule to commence production in 2017, northeast of Broome, Western Australia.  The first big challenge for Prelude is likely to be the region’s cyclone season from November to April.  With a personal long-term investment in RDSB, I will be watching with interest, hoping that earnings from this project will help to underpin the share’s current yield of 7.36%.

Shell’s video on this ambitious project is interesting.   



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June 16 2016

Commentary by David Fuller

June 16 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.  The seminar room is now three-quarters full. 

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 16 2016

Commentary by Eoin Treacy

Negative bond yields

Eoin Treacy's view -

Bond traders have been enjoying a very profitable time with central banks doing just about everything to make sure they make money, provided of course they are long. On the other hand bond investors are not happy. With close to 50% of all outstanding sovereign bonds and quite a few highly rated corporates now yielding less than zero the ability of bond investors to cover their liabilities, namely pensions, is far from ensured. 

The problem is not today with prices surging higher and the price component of total return more than making up for the negative yield. The issue comes for those rolling out of maturing bonds, into negative yields with a view to holding to maturity. Valued on that basis one is sure to lose money even if price do not fall and yet that is not the primary issue to consider. 

 



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June 16 2016

Commentary by Eoin Treacy

Yen Surges to Strongest Since August 2014 as BOJ Holds Fire

This article by Anooja Debnath and Kevin Buckland for Bloomberg may be of interest to subscribers. Here is a section: 

“100 is a serious risk that’s growing by the day,” said Cliff Tan, the East Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ in Hong Kong. “Both domestic and foreign investors are giving up on the idea the government can do much to revive Japan.”

The yen’s jump comes after about a quarter of analysts surveyed by Bloomberg had predicted additional BOJ stimulus today. More than half forecast action at the July meeting.

“Further easing is still on the cards,” said Kohei Iwahara, director of economic research at Natixis in Tokyo. “The yen is already stronger than most companies feel comfortable with, and a dovish Fed could strengthen the yen further.”

Projections released by the Federal Open Market Committee Wednesday showed the number of officials who see just one rate increase in 2016 rose to six from one in the previous forecasting round in March. The U.K.’s June 23 referendum was also “one of the uncertainties that we discussed and that factored into” the decision, Fed Chair Janet Yellen said.

 

Eoin Treacy's view -

The Japanese remain committed to their negative interest rate policy, the net effect of which is to remove currency from the system rather than add it. To increase the bank’s purchases of bonds while they are at negative yields would ensure it makes a loss. It would appear the BoJ is not yet ready for outright helicopter money but that could change at any time as the impact of a stronger currency takes a toll on the economy.  



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June 16 2016

Commentary by Eoin Treacy

June 16 2016

Commentary by Eoin Treacy

China's Wealthy Switch to Nike and Adidas for Inconspicuous Consumption

This article by Bruce Einhorn may be of interest to subscribers. Here is a section: 

For Beijing resident Alex He, the cost of a trip to the mall can easily top $3,000. He, 29, works in the finance industry and while he doesn't regularly go shopping for clothes, “when I do shop,” he said in an interview, “I buy a lot.”  Recent purchases include several pairs of Adidas shoes that he found at an outlet mall. He also fancies Under Armour shorts and shirts. “I used to buy a lot of luxury brands but in the last year or so I've been purchasing more of the sports brands because they are more comfortable and more fashionable,” said He.

Chinese consumers like He, who want to make statements when they go shopping, are turning more to Western sports brands. President Xi Jinping's multi-year campaign to reduce conspicuous consumption of luxury goods by public officials has hurt sales of Pernod Ricard, Hugo Boss and BMW. Even as sales of luxury fashion, cars and other prestige products suffer, sportswear brands are robust. Nike's Greater China sales are strong, with orders from September to April up between 27 and 35 percent. On June 6, the company announced it will work with the Chinese Ministry of Education to train up to 7,000 physical education teachers. “Today's generation is the least physically active in history and we can help change that,” Nike President and CEO Mark Parker said in a statement.

 

Eoin Treacy's view -

With one of the highest rates of diabetes in the world China is finally warming up to physical fitness. The service oriented nature of providing gyms and personal trainers also gels well with the government’s aim of fostering the domestic economy. The comparatively high cost of Adidas, Nike and Under Armour clothing relative to domestic brands acts as a diversifier between the well-heeled upper middle class and those for whom such outlays are too expensive. 



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June 15 2016

Commentary by David Fuller

U.S. Stocks Retreat Amid Tepid Growth Outlook, Brexit Concerns

Here is a brief sample from Bloomberg’s report on today’s action:

“We’ve had Yellen and other Fed officials speak to us about the strength of the economy since the April meeting, and if you read the release today, they basically pushed the spaghetti around the plate -- the strengths and weaknesses in the economy just shifted,” said Anna Rathbun, director of research for CBIZ Inc.’s retirement-plan services unit in Cleveland. “This isn’t good news, this is status quo. So the rate hike not coming means we haven’t gone anywhere, and as an investor, I don’t find that encouraging.”

Equities have retreated this week as the potential fallout from Britain’s June 23 referendum spooked investors, just days after optimism over low rates and moderate economic growth buoyed the S&P 500 to an almost 11-month high.

David Fuller's view -

Anne Rathbun’s comment that the Fed “basically pushed the spaghetti around the plate”, summarises the lack of enthusiasm which snuffed out today’s modest rally on Wall Street.  With the UK’s influential Brexit Referendum on the 23rd, buyers for any reason other than short covering have an excuse for sitting on the sidelines, at least until they see the result.   

What are investors likely to buy post Brexit?

This item continues in the Subscriber’s Area.



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June 15 2016

Commentary by David Fuller

Watch These Synthetic Leaves Suck CO2 Out of the Sky

Here is the opening of this interesting article from Bloomberg on reducing a problem which is contributing to climate change:

We’ve added more than half a billion tons of carbon to the air since the industrial revolution. This device could help clean it up.

What about all the carbon we've already poured into the atmosphere? If only there were a device that could take some of it back out.

Researchers at Arizona State University’s Center for Negative Carbon Emissions are working on one. They discovered a commercially available resin that can grab carbon dioxide at low concentrations when the material is dry and release it when the material is moist. The CO2 it collects could be stored underground, used in greenhouses, or fed to algae for biofuel production.

"Right now, we are taking carbon out of the ground. We then convert the energy into something useful. Then there’s a third step that we ignore—namely, to clean up after ourselves," said Klaus Lackner, the center’s director.

Technology can solve all manmade atmospheric problems and it is obviously in our interests to do so.  The process described in the article above will be unobtrusive in the process.  Scientific developments which help the planet are a no brainer and will most likely eventually make a profit in the process. 

David Fuller's view -

The accompanying video is more informative than the article.   



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June 15 2016

Commentary by David Fuller

June 15 2016

Commentary by David Fuller

Islamic State Is Just an Umbrella Brand for Hate

Islamic State grew out of al-Qaeda and its leader, Abu Bakr al-Baghdadi, started out within that organization. Yet the newer group threw all the rules out the window. IS is like a young marketer who, frustrated with the bureaucracy and slowness of a Fortune 500 company, leaves to set up his own firm and sell the same product, but with more sophisticated social media marketing and a bolder, younger, more in-your-face image. 

Indeed, Islamic State seems to be more about marketing than planning. It’s pushing an umbrella brand for malcontents, an alternative to government-supported attitudes. The more Western governments try to quash IS, the more eagerly it claims credit for every miscreant with a gun. Political scientist Ethan Bueno de Mesquita wrote in 2005 that highly publicized government crackdowns tend to mobilize terrorist sympathizers. In a 2010 article, another political scientist, Aaron Hoffman, suggested that the more governments crack down, the more terror groups are motivated to take credit so they can show their supporters they are successfully fighting back. (Not cracking down at all may have a similar effect, though, as terrorists claim the West has capitulated.)

Those attracted to the IS brand are drawn by the idea that they can wreak havoc on societies that have rejected them in some way but claim allegiance to something bigger than themselves -- a moral or religious authority to absolve them, a link to turn them from criminals into martyrs. 

Orlando shooter Omar Mateen fit this type. The night of his attack on the Pulse nightclub, he called the police to pledge allegiance to Islamic State, and after the attack made headlines everywhere, the terror militia claimed credit, saying one of its fighters had done it. Yet again, there were no details to establish a credible connection.

As it turns out, he had frequented Pulse, the gay nightclub in Orlando that he shot up last weekend. He had come there to drink, sometimes turning aggressive, and he messaged another regular for a year on a gay chat app. Given Islamic State’s known aversion to alcohol and homosexuality, this was clearly not a model fighter. 

David Fuller's view -

 

The paragraph I reproduced in bold above best summarises the appeal of IS for various miscreants in the West and elsewhere.  Easy access to assault weapons compounds the problem.  



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June 15 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.  The seminar room is now three-quarters full. 

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 15 2016

Commentary by Eoin Treacy

The Changing Investment Climate: Higher Correlation Risks as QE Benefits Fade

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

The long-term effects of these purchases have, over time, whittled down the fundamental component of an asset’s valuation, leaving what is left over, the risk premia, to become more prominent. The unintended consequences are higher volatility, increased correlations, and decreased value of risky assets. This, in turn, ends up reducing the value of risky assets—an attenuation of QE policy that produces the opposite effects of its original design. We refer to this change in the investment climate as QE policy attenuation, a new dynamic risk factor that investors need to account for in their allocations by adding strategies that reduce correlation risks in order to balance their portfolios.  

In addition to QE policy attenuation, additional structural risk factors have arisen from financial market regulation that has reduced liquidity and adversely impacted an economic transfer of risk. This promotes a rise in idiosyncratic uncertainties that increases volatility, or risk for fixed income asset returns, which creates anxiety for investors who expect bonds to be a more stable investment. We find that all these structural risk factors compound and manifest in the risk premia component of an asset’s valuation. Risk premia, once a small part of an asset’s overall valuation, thus now has a larger influence on asset price changes. This presents a challenge to investors as changes in risk premia are highly unpredictable, difficult to calculate and tend to have the characteristic of highly correlating asset prices.

 

Eoin Treacy's view -

With greater than $10 Trillion in debt now with a negative yield it is a bit of an understatement to say that extraordinary monetary policy has had a distorting effect on bonds markets. Nevertheless, as with any momentum move that exhibits acceleration the market will look like the strongest asset in the world until it turns. 



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June 15 2016

Commentary by Eoin Treacy

A Circular Reference: Ushering In A New Era For Natural Gas

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

Previously a commodity with volatile price swings due to a domestic market that was short supply, the outlook for natural gas through 2020 shows a well supplied market capable of delivering to growing demand sources. There will be s-t dislocations (weather / infrastructure constraints) and the introduction of LNG exports will re-couple the U.S. to the global economy, but we see an emerging theme of natural gas entering a range bound period of $3-3.50/mmbtu. The 5 year build up in demand (2013-18) now looks to be meeting up with the 10 year buildup in supply (2005-15), creating a period of price equilibrium with upward and downward pressures on both sides.

Demand – Focus On The Known Drivers
After a 15 year period of stagnant consumption (1995-2009), demand for natural gas has enjoyed consistent growth over the past 5 years (2-3Bcfpd annually), a trend we expect to pick up through 2020. The drivers of growth are visible – power generation, industrial use, and Mexico exports – and will provide a base level of consumption growth. The reemergence of natural gas on the global scene via LNG exports has also long been a theme and will be additive to demand, though the quantifiable impact is tough to point to as capacity utilization will vary based on global prices and supply. We estimate ~6Bcfpd of export demand in 2020 in our base case, which is needed to balance the S/D outlook. In total, we see demand growth approaching ~98Bcfpd by 2020 (ex pipeline imports) up from ~78Bcfpd in 2015.

Supply – Filling Demand Needs…Just Need More Pipeline Capacity
U.S. supply has increased ~50% over the last 10 years to ~75Bcfpd, a rate of growth not witnessed since the 1960-1970s and following a brief pause in 2016/17, we anticipate growth to resume in 2018. We see four key trends from our supply forecast: 1) Supply is ~2Bcfpd below demand (weather normalized) in 2016/17 but ~3Bcfpd oversupplied in 2018, 2) Northeast supply growth increases by ~9Bcfpd in 2018, driven by the pipeline build out, 3) The bull case for supply by 2H18 is based on demand as the Northeast has excess pipeline capacity, and 4) The Northeast isn’t the only source of growth as we anticipate the Haynesville and Associated Gas Basins to return to growth by 2018, and implementing new technology could support growth elsewhere. Our forecast grows to meet demand and fills storage with enough deliverability in 2018, creating a more range bound environment with equal s/d pressures.

 

Eoin Treacy's view -

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

The natural gas market was the original recipient of the innovations that led to the boom in unconventional supply. Since then it has offered an object lesson in the ramifications of how that is likely to play out for other commodities where supply is surging not least oil. The greatest beneficiaries have been consumers who have seen prices for essential energy commodities decline to levels not preciously imaginable. That has also resulted in demand increasing not least from substitution which has also benefitted consumers in other sectors. 



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June 15 2016

Commentary by Eoin Treacy

MSCI Rebuffs Chinese Equities for Third Time in Blow to Xi

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

“The MSCI decision signals that China remains a closed emerging economy that uses market techniques like freezing the market and making it illegal to short, using government funds to buy shares -- techniques that are not welcome among global investors,” Paul Christopher, head global market strategist at Wells Fargo Investment Institute, said by phone. “There are a number of market reforms in progress, but these are the decisions MSCI would want to wait for and examine.”

MSCI’s ruling won’t affect the nation’s capital market reforms, Deng Ge, a spokesman for the China Securities Regulatory Commission, said in a statement on the regulator’s website. Indexes that don’t contain A shares are incomplete, according to the statement.

 

Eoin Treacy's view -

The fact Chinese indices both on the mainland and in Hong Kong had been declining ahead of the decision suggests investors were not pricing in the possibility that MSCI would decide in China’s favour. However what does appear to have happened today is that support was provided to the Chinese market in order to forestall any additional selling pressure in response to the announcement. 



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