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November 27 2018

Commentary by Eoin Treacy

Email of the day on Europe and the UK

Glad you had a good meeting in London the week before last. Would have been there, but still recovering from breaking a femur in June.

Two things that might interest you.

First, from a John Mauldin letter:

Quick anecdote from my time in Frankfurt. I spoke for fund manager Lupus Alpha to approximately 250 pension fund managers, representing most of Germany’s retirement monies. I asked for a show of hands on whether they liked being part of the European Union. Almost everyone raised their hands. I then asked if they thought participating in the euro was a good thing. Probably 80% raised their hands. When asked who doesn’t like the euro, maybe 10% of the hands went up.

Then the money question. I asked if they would be willing to take Italy’s debt and all the debt of every eurozone member and put it on the European Central Bank balance sheet, with caveats about controlling national budgets. Fewer than 20% of the hands went up.

I then engaged the audience further, saying, the last two questions were essentially the same. If you want to keep the euro, you’ll have to do something about the imbalances between the countries and debts. No monetary union in history has ever survived without becoming a fiscal union as well. Even reminding them that failure to do this might cause the euro to break up and bring back the Deutschmark didn’t seem to change many opinions. I reminded them that a Deutschmark would mean a serious recession/depression in Germany as it would raise the price of all German exports by at least 50%. Mercedes and BMWs are expensive enough for Germany’s customers, let alone at a 50% price hike.

This audience should have easily accepted the argument for putting all European debt on the ECB balance sheet. Imagine if I asked the typical German voter, especially those in rural areas. That tells me Europe could have a bumpier future than I thought.

Second, a piece from the FT (as an attachment) about whether property is still a long-term bet for retirement. Conclusion: it's not.

Thanks for all great recent pieces. I really liked the Ray Dalio discussion.

Have a great Christmas.

Eoin Treacy's view -

Thank you for this informative email and I am delighted you are enjoying the Service. The simplest way to summarise the contradiction at the heart of the Eurozone question is “you can’t be half pregnant” The EU is heading towards federalism or it will break up. The status quo is already being challenged and it will continue to be challenged as a long as millions of people endure lower standards of living.



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November 26 2018

Commentary by Eoin Treacy

Video commentary for November 26th 2018

November 26 2018

Commentary by Eoin Treacy

RBC Wealth Management 2019 Investment Stance

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

Eoin Treacy's view -

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

US Corporate Profits spent about four years ranging between 2012 and the end of 2016 and then broke out on the upside. The measure is reported in arrears with a one quarter lag so we will not have another reading until the end of this year and that will reflect the third quarter.



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November 26 2018

Commentary by Eoin Treacy

The Chinese scientist who claims he made CRISPR babies is under investigation

This article by Antonio Regalado for the MIT Technology Review may be of interest to subscribers. Here is a section:

He said the girls had been conceived using IVF but that his team had added “a little protein and some information” to the fertilized eggs. That was a reference to the ingredients of CRISPR, the gene-editing technology he apparently employed to delete a gene called CCR5.

The claim set off a wave of criticism in China and abroad from experts who said the experiment created unacceptable risks for a questionable medical purpose. Feng Zhang, one of the inventors of CRISPR, called for a moratorium on its use in editing embryos for IVF procedures.

Documents connected to the trial named the study’s sponsors as He along with Jinzhou Qin and said it was approved by the ethics committee of HarMoniCare Shenzhen Women and Children’s Hospital.

On Sunday, the Shenzhen City Medical Ethics Expert Board said it would begin an investigation of He’s research and released a statement saying that HarMoniCare “according to our findings … never conducted the appropriate reporting according to requirements.” The former medical director of the private hospital, Jiang Su-Qi,  told Southern Capital News he had no recollection of approving He’s research while he was on its ethics committee.

“These two children are the guinea pigs. They will go through their whole maturing process having not understood the risks ahead of time,” said Liu Ying of Peking University’s Institute of Molecular Medicine.

Eoin Treacy's view -

Has He been suspended because he went ahead with live human experiments of CRISPR gene editing or because he went public with the news? I have never doubted that China would be the first country to embrace a no-holes-barred approach to genetic editing, including in humans.



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November 26 2018

Commentary by Eoin Treacy

The frontier market that top rival managers agree on

This article by Sam Benstead for CityWire may be of interest to subscribers. Here is a section:

Bannan agreed and said the current macro environment is very strong, with high rates of GDP growth, low inflation and a large trade surplus.

‘The government has undertaken a lot of reforms over the last decade to open up the economy and encourage investment in vital infrastructure.

'This has allowed Vietnam to industrialise and attract huge amounts of FDI with a lot of production relocating from Northern Asia to Vietnam,’ said Bannan.

'As the Vietnamese move from virtually subsistence existence in rural areas, where 65% of the population still live, to work at these FDI invested factories there is a monumental shift in household wealth. I have experienced these developments first hand, having spent 5 years living in Saigon.'

Eoin Treacy's view -

Vietnam is a beneficiary of reshoring from China regardless of the outlook for deteriorating trade relationships with the USA because wages are so much cheaper there. The nation’s Communist Party is more akin to China’s thirty years ago than the organisation today and with a large young population Vietnam is hungry for growth.



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November 23 2018

Commentary by Eoin Treacy

November 23 2018

Commentary by Eoin Treacy

2019 US Equity Outlook: The Return of Risk

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

Eoin Treacy's view -

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

At The Chart Seminar we talk about how the majority of people predict markets. The simple answer is we tend to predict what we see. Over the course of the last eight weeks a very notable rotation into higher quality companies has been underway. Interest rate sensitive businesses have been the big decliners while those angled towards the consumer, with long records of dividend increases have been the clearest outperformers. Since that is what has been working it is the easiest prognostication to think it will persist.



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November 23 2018

Commentary by Eoin Treacy

BP Starts Production at Massive North Sea Oil Development

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

Clair Ridge is expected to reach a production plateau at a peak of 120,000 barrels of oil a day and is designed to run for 40 years. The companies are currently evaluating the potential for a third project within the field to expand output even further.

It’s BP’s sixth new project to start production this year, the latest marker of the company’s return to growth after years of retrenchment in the wake of its fatal blowout in the Gulf of Mexico. To pay for the 2010 disaster, which killed 11 people and caused the worst offshore oil spill in U.S. history, BP was forced to sell off billions of dollars of assets, shrinking its production.

But a string of new developments that started up over the past two years is reversing that trend, and BP is closing in on its ambition to regain its former size. The company’s production averaged 3.6 million barrels a day in the first nine months of the year, up nearly 3% compared with the same period in 2017. Output will receive a further boost from its recent $10.5 billion acquisition of BHP Billiton Ltd’s shale assets.

Eoin Treacy's view -

Saudi Arabia pumping at capacity is one factor in the decline of oil prices and speculation is rife whether that is a quid pro quo for President Trump’s assistance in Khashoggi assassination scandal.



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November 23 2018

Commentary by Eoin Treacy

An Evolve-or-Die Moment for the World's Great Investors

This article by Adam Seessel for Fortune.com may be of interest to subscribers. Here is a section:

As these platform companies create billions in value, they are simultaneously undermining the postwar ecosystem that Buffett has understood and profited from. Entire swaths of the economy are now at risk, and investors would do well not only to consider Value 3.0 prospectively but also to give some thought to what might be vulnerable in their Value 2.0 portfolios.

Some of these risks, such as those facing retail, are obvious (RIP, Sears). More important, what might be called the Media-­Consumer Products Industrial Complex is slowly but surely withering away. As recently as 20 years ago, big brands could use network television to reach millions of Americans who tuned in simultaneously to watch shows like Friends and Home Improvement. Then came specialized cable networks, which turned broadcasting into narrowcasting. Now Google and Facebook can target advertising to a single individual, which means that in a little more than a generation we have gone from broadcasting to narrowcasting to mono-casting.

As a result, the network effects of the TV ecosystem are largely defunct. This has dangerous implications not only for legacy media companies but also for all the brands that thrived in it. Millennials, now the largest demographic in the U.S., are tuning out both ad-based television and megabrands. Johnson & Johnson’s baby products, for example, including its iconic No More Tears shampoo, have lost more than 10 points of market share in the last five years—an astonishingly sharp shift in a once terrarium-like category. Meanwhile, Amazon and other Internet retailers have introduced price transparency and frictionless choice. Americans are also becoming more health conscious and more locally oriented, trends that favor niche brands. Even Narragansett beer is making a comeback. With volume growth, pricing power, and, above all, the hold these brands once had on us all in doubt, it’s appropriate to ask: What’s the fair price for a consumer “franchise”?

To be sure, some of the digital-disruption rhetoric is overdone. Cryptocurrency replacing the bank system? Not likely. David Einhorn’s bearish calls on Tesla and Netflix may well be right, not because the stocks are expensive but because they face rising competition. And for all the hype about autonomous vehicles, they’re not anywhere close to being here—yet. But a lot can change in half a generation. If you google “Easter Day Parade, New York City 1900” and then “Easter Day Parade, New York City 1913” and look at the pictures that appear, you will see that the former has nearly 100% horse-drawn carriages while the latter has nearly 100% horseless carriages—i.e., automobiles. And when driverless cars do arrive, what happens to the auto industry? What happens to the auto-insurance industry—that cuddly, capital-intensive commodity business that value investors love to talk about at cocktail parties?

Eoin Treacy's view -

The bane of value investors lives are value traps. A company that looks cheap on paper may be about to go under because its market is disappearing. Hanesbrands is the classic example because it is still cash generative but its products are so easy to copy and new digital sales channels so accessible that it is facing an uphill battle to compete.



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November 23 2018

Commentary by Eoin Treacy

Japan's Inflation Stalls at 1% as Risks to Price Gains Gather

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

Slow but steady improvement in Japan’s core inflation gauge has come to a halt as a host of forces gather that could see price gains begin to slow.

Consumer prices excluding fresh food rose 1 percent in October from a year earlier, as expected by economists. That’s just half way to the Bank of Japan’s 2 percent target with the prospect of falling energy costs and lower charges from mobile-phone carriers pointing to weaker price growth ahead.

Eoin Treacy's view -

The decline in oil prices is a significant benefit for consuming nations like Japan, India and China. In that regard it is disinflationary rather than an outright drag on the economy. Nevertheless, Japan needs inflation so companies can regain pricing power and promote more dynamism in the economy.



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November 22 2018

Commentary by Eoin Treacy

Video commentary for November 22nd 2018

November 22 2018

Commentary by Eoin Treacy

The Brexit Declaration on Future Ties: A Guide to What It Says

There is a great deal of commentary at the moment about Brexit so let’s look at what has been proposed in the draft agreement. Here is a section:

Customs
The declaration opens up the prospect of adopting technological solutions to facilitate "the ease of legitimate trade" - including across the Irish border - calling for the
use of "all available facilitative arrangements and technologies".

"Facilitative arrangements and technologies will be considered in developing any alternative arrangements for ensuring the absence of a hard border on the island of Ireland on a permanent footing," it says.

It envisages "a spectrum of different outcomes" in terms of the practical implementation of checks and controls on  movements across borders.

Financial services
The declaration calls on both sides to start assessing  one another's regulatory frameworks as soon as possible after Brexit, with a view to being able to declare them "equivalent" before the end of June 2020.

Freedom of movement
The principle of freedom of movement of people between  the EU and the UK will no longer apply. The two sides will aim to provide through their domestic laws for visa-free travel for
"short-term visits".

They will also consider future conditions for entry and stay for purposes such as research, study, training and youth exchanges.

Eoin Treacy's view -

The title of an article by Matt Chorley for The Times “It is time to shoot the Brexit unicorns” reflects the UK government’s attempts to convince ideological purists that this is the only option available to them.

It’s only a matter of time before someone starts quoting the Rolling Stones. You can't always get what you want

You can't always get what you want
You can't always get what you want
But if you try sometimes you just might find
You just might find
You get what you need, oh yeah



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November 22 2018

Commentary by Eoin Treacy

Beijing to Judge Every Resident Based on Behavior by End of 2020

Thanks to a subscriber for this article from Bloomberg news which may be of interest to subscribers. Here is a section:

China’s plan to judge each of its 1.3 billion people based on their social behavior is moving a step closer to reality, with Beijing set to adopt a lifelong points program by 2021 that assigns personalized ratings for each resident.

The capital city will pool data from several departments to reward and punish some 22 million citizens based on their actions and reputations by the end of 2020, according to a plan posted on the Beijing municipal government’s website on Monday. Those with better so-called social credit will get “green channel” benefits while those who violate laws will find life more difficult.

The Beijing project will improve blacklist systems so that those deemed untrustworthy will be “unable to move even a single step,” according to the government’s plan. Xinhua reported on the proposal Tuesday, while the report posted on the municipal government’s website is dated July 18.

Eoin Treacy's view -

Anyone who has ever attempted to teach anything to anyone will be familiar with the experience that what you think of as important may not gel with what your presumed student thinks. As a teacher you never really know if you are getting your point across.

I was thinking about that while in Singapore last month. The country has had unparalleled success in turning a backwater into a private banking powerhouse through a commitment to improving standards of governance and rule of law. However, Singapore has also been the subject of much criticism for the strict social control policies they pursued on the way to prosperity. China has long regarded Singapore as a case study so what did they learn?



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November 22 2018

Commentary by Eoin Treacy

Email of the day on central bank balances sheets

On the Morgan Stanley research document, you posted on Monday, there was "the most important chart in the world" as you describe it (QE globally). The "6-month rate of change" scale on LHS caught my attention. Recently, this QE tightening "rate of change" has moved upwards. Is this an early sign that CBs are starting to shy away from their QE tightening? If so, this is bullish for an equity market discounting future tightening. Maybe the tea leaves are not clear, but they must be monitored.

Eoin Treacy's view -

Thanks for this email which as you highlight raises the very important question of whether central banks have had enough of tightening after taking $1.5 trillion out of circulation since March.



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November 21 2018

Commentary by Eoin Treacy

Video commentary for November 21st 2018

Eoin Treacy's view -

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

Some of the topics discussed include: Wall Street continues to test its lows, credit spreads are widening faster in China than the USA but they are all widening, change of leadership in tech and the wider stock market is the driver behind this correction, oil prices steady but not enough to matter yet, gold steady, Japan steadies.



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November 21 2018

Commentary by Eoin Treacy

Stock Market Is Even Worse Than You Think It Is

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

The good news is that drops in valuations tend not to last long, especially big ones like the one this year. In a report last week, UBS strategist Keith Parker pointed out that on average the market has returned 16 percent in the year after one in which P/E ratios have dropped significantly. In fact, going back to World War II, there have been only two years in which the market has dropped after a more than 1 percentage point drop in valuations the year before. Parker predicts that the S&P 500 will rise to 3,200, or more than 20 percent, by the end of 2019.

On top of the valuation drop, he points to a high consumer savings rate, a rebound in companies investing in the U.S. and rising productivity as reasons the market will climb next year. But there are also reasons to believe the traditional rebound won’t materialize this time. First of all, while down, the absolute level of stock market valuations are not that low. For instance, the P/E ratio dropped to 12.8 in late 2008 before the market rebounded the next year. The P/E ended at a lower point than it is now in six of the 10 years in which there were big valuation drops.

Eoin Treacy's view -

This is another example of an extremely bearish article which, despite highlighting the tendency of markets to rise after big declines, goes on to conclude “So, no, you’re not wrong that the market is looking shaky. The bad news is that it could still get worse.”

 



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November 21 2018

Commentary by Eoin Treacy

Natural Gas Climbs as Record Cold Seen Draining U.S. Stockpiles

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

Gas volatility has soared this month as bulls betting on winter supply constraints clash with bears expecting record production to overwhelm demand for the fuel. Prices soared more than 20 percent on Wednesday before tumbling the most on record the following day. Though output from shale basins is at an all-time high, exports have climbed as domestic consumption rises, leaving stored supplies at a 15-year seasonal low.

“We haven’t had this kind of weather in a long time where it gets cold right out of the block in November,” said Tom Saal, senior vice president of energy trading at INTL FCStone Financial Inc. in Miami. “That puts the industry on notice that we are going to need a lot of gas this winter. We could see a lot volatility.”

Eoin Treacy's view -

The question is not whether there is enough gas to go around but rather how much of it can get to market in a timely manner. That points to a lack of pipeline infrastructure rather than a lack of basic resources.



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November 21 2018

Commentary by Eoin Treacy

India Capital Fund Letter

Thanks to a subscriber for this report from which includes a great deal of data which may be of interest. Here is a section:

Eoin Treacy's view -

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

It occurs to me that the rise of the global consumer is predicated on the rising standards of living of billions of people who have never experienced that condition before. Most people think about China when we talk about the rise of the global consumer but China’s consumers are already middle class; or most of them are. India is the world’s most populous nation and its drive towards improving sanitation, access to electricity, the introduction of the digital economy and growing the manufacturing base are tomorrow’s story and therefore should command our attention today.



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November 20 2018

Commentary by Eoin Treacy

Video commentary for November 20th 2018

Eoin Treacy's view -

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

Some of the topics covered included: Interest rate sensitive sectors (technology and credit) remain under pressure but are very oversold. oil prices accelerating lower, Dollar firms, gold stable, Brazil steady, Wall Street testing its sequence of higher reaction lows. A lot of bearishness being expressed by analysts.



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November 20 2018

Commentary by Eoin Treacy

Ray Dalio Discusses Major Financial Crises (Podcast)

I found this interview of Ray Dalio to be very educational and recommend it to subscribers.

Eoin Treacy's view -

Veteran subscribers who have been listening to the Long-Term audios/video over the last 18 months will be familiar with my refrain that the rise of populism is not an isolated incident but a symptom of a much wider global change where the centre is breaking.
 
That challenge to the status quo is resulting in demand for an alternative which is leading to an exploring of legitimacy by what once would have been considered fringe elements. The very fact people still consider this a battle between the left and right is a testimonial to how engrained centrism has become in the public discourse and how useless it is today as a narrative for evolving socio-economic conditions.
 
Three points Dalio makes are that he believes the closest parallel to today is 1937, the long-term debt cycle is in its 7th (of 8) innings and that expectations for future returns should be very low going forward. That begs the question what did the market do in 1937 and in the decade subsequently.
 
Incidentally, his Principles for Navigating Big Debt Cycles is available for free download here: https://www.principles.com/big-debt-crises/



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November 20 2018

Commentary by Eoin Treacy

The end of the beginning

This presentation by Benedict Evans on what to expect from technology over the coming decade may be of interest. Here is a section from the summary:

Close to three quarters of all the adults on earth now have a smartphone, and most of the rest will get one in the next few years. However, the use of this connectivity is still only just beginning. Ecommerce is still only a small fraction of retail spending, and many other areas that will be transformed by software and the internet in the next decade or two have barely been touched. Global retail is perhaps $25 trillion dollars, after all.

Meanwhile, as companies address more and more of this with software and the internet, they do it in new ways. We began with models that presumed low internet penetration, low speeds, little consumer readiness and little capital. Now all of those are inverted. So, we used to do apartment listings and now Opendoor will buy your home; we used to do restaurant reviews and now you can get a hot meal delivered to your door. Tech is building different kinds of businesses, and so will take different shares of that opportunity, but more importantly change what those industries look like. Tesla isn’t interesting because of what it does to gasoline, but because of what it does to the car. Netflix changes TV, but so does Twitch.

Finally, as we think about the next decade or two, we have some new fundamental building blocks. The internet began as an open, ‘permissionless’, decentralized network, but then we got (and indeed needed) new centralised networks on top, and so we’ve spent a lot of the past decade talking about search and social. Machine learning and crypto give new and often decentralized, permissionless fundamental layers for looking at meaning, intent and preference, and for attaching value to those.

Eoin Treacy's view -

Uber is now offering a service to retailers so that they can have customers picked up and ferried to stores to make purchases. At the same time it is also reaching out to restaurants and telling them what other meals they can produce which are in demand from takeout customers at its UberEats service.



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November 20 2018

Commentary by Eoin Treacy

Oil Legend Andy Hall Weighs Crude's Chance of Recovery on OPEC

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

 

“The balance of risk at this point favors some sort of recovery,” the trader once known as ‘God’ in the industry due to his lucrative trades, said in a phone interview Friday. “It’s quite likely OPEC will come through with some sort of cut in the next month or two.”

Demand has taken a downturn probably because of a stronger dollar against emerging market currencies, or on concern the trade war between the U.S. and China is beginning to curb economic growth, according to Hall. West Texas Intermediate crude is in a bear market after plunging from a four-year high in October and is trading near $57 a barrel following the biggest gain in U.S. stockpiles in 21 months.

“When you know you’ve got prices in 2020 and beyond for WTI down below $60 a barrel, almost down to the mid-$50s further along the curve, I think that is essentially at the bottom,” said Hall.

Eoin Treacy's view -

Brent crude oil prices have been unable to sustain a rally of more than $3 since early October. Seven consecutive weeks on the downside have unwound the commodity’s entire advance for the year and in the process a deep short-term oversold condition has evolved. That suggests potential to a bounce and reversionary rally back towards the mean is improving.



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November 19 2018

Commentary by Eoin Treacy

November 19 2018

Commentary by Eoin Treacy

Don't Trade a Bear Like a Bull; Reality Check for Earnings is Good

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

Eoin Treacy's view -

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

​Leverage is quickly being squeezed out of the “new economy” shares which were among the best performers over the last 18 months. That is certainly going to lead to earnings revisions for the companies like Nvidia, Align Technologies and Netflix.

It also holds out the prospect of a lengthier period of underperformance for the segment of the technology sector which has been most aggressively bought by investors over the last few years.



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November 19 2018

Commentary by Eoin Treacy

Technology Megatrends Leading to the Disruption of Transportation 2020-2030

Thanks to a subscriber for this presentation by Tony Seba which may be of interest.

Eoin Treacy's view -

Perhaps the most interesting part of the discussion focuses on the rate at which the cost of producing batteries is accelerating to almost 20% per annum.
 
That holds out the prospect of batteries becoming commoditised in the same way as solar cells when production comes on lines. For the shares of battery producers that is likely to represent a challenge but not quite yet considering the supply inelasticity argument that still prevails within the market.



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November 19 2018

Commentary by Eoin Treacy

Bid to Topple May Falters as Tory Lawmaker Revolt Struggles

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

“My expectation is that the number will be reached and there will be a vote at some point,” Crispin Blunt said in an interview in his House of Commons office under a full-size union flag. “One could argue that it would be better that that vote comes after the vote on the deal. If one were to sequence this properly: one would wait until we had the vote on the deal and then have the vote on the prime minister’s position as leader of the Conservative Party.”

Parliament is due to debate May’s Brexit deal in early December, and politicians across the chamber say they will vote it down.
 

Eoin Treacy's view -

Theresa May is surviving for the moment for the simple reason no one else is willing to take the job with so much uncertainty still outstanding. It is politically much more expedient to have May in place so that blame can be heaped on her administration so that whoever takes over will get a chance to start afresh. Therefore, it is very likely that once the bill has been debated in Parliament, and there is greater visibility on which two of the myriad options are most likely to be the outcome, that pressure on May’s ouster will prevail.



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November 19 2018

Commentary by Eoin Treacy

India and Its Central Bank Signal Truce After Marathon Meet

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

India’s central bank signaled a compromise with the government by agreeing to study a demand for sharing a part of its capital -- an issue that had triggered a public spat between the monetary policy makers and their political bosses.

The Reserve Bank of India will form a panel to consider the funds transfer to the government, the central bank said in a statement after the board meeting that lasted a little over nine hours. It, however, did not immediately yield to demands for easing lending norms for weak banks while retaining capital buffers for banks at 9 percent.

“Both the RBI governor and the finance ministry walked the extra mile,” Sachin Chaturvedi, a member of the board said in an interview to Bloomberg. “They were flexible on several issues.”

The government and the RBI have been sparring over how much capital the central bank needs and how tough its lending rules should be. For a nation that relies on imported capital to fund investment, the reaching of a middle ground is key to retaining investor confidence in the world’s fastest-growing major economy.

Eoin Treacy's view -

The RBI has been attempting to rein in overly aggressive lending practices in the banking sector. While necessary to tackle the bad loans issue, it has set up conflict with the government who are keen to see credit growth to boost the economy particularly with an election next year.



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November 16 2018

Commentary by Eoin Treacy

November 16 2018

Commentary by Eoin Treacy

Brexit scenarios

Eoin Treacy's view -

It’s good to be home, back at my desk and assessing the markets. The Chart Seminar this week in London was as much an educative experience for me as I hope it was for the delegates. One of the clearest impressions I got from people in the UK is just how sick they are of discussions of Brexit and just wish it was all over. Unfortunately, that prospect is unlikely to be in sight anytime soon.

Let us set aside for a moment who will be prime minister next week because the potential choices available will be no different even if there is an election. However, an election is likely, because without the DUP Theresa May does not have a majority without relying on the good graces of the Labour Party who mush surely smell blood in the water.



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November 16 2018

Commentary by Eoin Treacy

China Is Giving the World's Carmakers an Electric Ultimatum

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

The world’s biggest market for electric vehicles wants to get even bigger, so it’s giving automakers what amounts to an ultimatum. Starting in January, all major manufacturers operating in China—from global giants Toyota Motor and General Motors to domestic players BYD and BAIC Motor—have to meet minimum requirements there for producing new-energy vehicles, or NEVs (plug-in hybrids, pure-battery electrics, and fuel-cell autos). A complex government equation requires that a sizable portion of their production or imports must be green in 2019, with escalating goals thereafter.

The regime resembles the cap-and-trade systems being deployed worldwide for carbon emissions: Carmakers that don’t meet the quota themselves can purchase credits from rivals that exceed it. But if they can’t buy enough credits, they face government fines or, in a worst-case scenario, having their assembly lines shut down.

Eoin Treacy's view -

China is the world’s largest market for automobiles so what they decide is permissible within their market is likely to shape the plans of manufacturers for the globe. One of the primary reasons companies have been announcing plans for lots more electric and hybrid vehicles over the coming years is because of the Chinese mandates. That is the primary driver behind the capacity build in the battery sector which needs to ramp up substantially if the demand growth profile is to be reached.



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November 16 2018

Commentary by Eoin Treacy

Nvidia Targets Slashed, Outlook Sparks Worst Day in a Decade

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

Goldman removed Nvidia from its conviction list, writing that it had underestimated both a channel inventory build and a correction in the company’s gaming division.

“While we view the inventory correction in Gaming as a one-time reset as opposed to a change in the long-term growth profile, we believe it could take a few quarters before the market regains confidence in the growth trajectory of the business, especially given the weak economic backdrop.”

Goldman maintains its buy rating, writing that Nvidia still “has access to one of the best growth opportunity sets in Semis,” along with a “sustainable competitive lead.” but cuts its price target to $200 from $283. The average price target is around $239, according to data compiled by Bloomberg.

Eoin Treacy's view -

Nvidia was the best performing share on the Nasdaq in both 2016 and 2017 but the impressively steep trend began to lose consistency at the beginning of this year when breaks failed to be sustained. That suggested the vacuum of supply above the range, necessary for breakouts to occur, was not forming. The break below the trend mean ended the medium-term uptrend and the decline has been unrelenting since.



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November 16 2018

Commentary by Eoin Treacy

Email of the day on US real estate

I have noticed that you had not shared any insight into the US real estate sector. Will you mind sharing into this sector from the macro angle and the stocks outlook

Eoin Treacy's view -

Thank you for this suggestion which other subscribers may have an interest in. Real estate is a major asset class which has been the subject of price appreciation as a result of quantitative easing just like bonds, equities and art. However, property’s immovable qualities will always mean location and local supply will be essential features to valuations.



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November 15 2018

Commentary by Eoin Treacy

Video commentary for November 15th 2018

November 15 2018

Commentary by Eoin Treacy

2019 Markets Outlook: Something wicked this way comes?

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

Eoin Treacy's view -

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

The big question at The Chart Seminar this week was whether the condition that has developed on the stock market in 2018 is a medium-term correction in a secular bull market or whether this is the end of the bull market that began in 2009 on Wall Street.



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November 15 2018

Commentary by Eoin Treacy

After the Fork: How Competing Bitcoin Cash Blockchains Might Wage War

This article by Rachel Rose O'Leary for Coindesk may be of interest to subscribers. Here is a section:

In effect, Wright sees the upcoming split in terms of bitcoin’s longest chain rule – the underlying bitcoin consensus mechanism that defaults to the longest chain in the event of multiple blocks being found simultaneously.

When applied to a blockchain split, what this means essentially means is a fight to the death between the competing chains, where the last one standing would be considered the “true” bitcoin cash by nodes.

For example, both implementations have declined to add so-called “replay protection,” or code that allows funds to be safely spent when a split occurs.

“Neither Bitcoin SV nor Bitcoin ABC have implemented transaction replay protection, as the intention is for only one chain to survive,” nChain, the software company behind Bitcoin SV, wrote in a press release published earlier this month.

This means that without special precautions, users could lose funds while transacting on a split chain. Similarly, hackers can exploit the vulnerability to extract funds from exchanges.

“Users potentially stand to lose money because of this decision,” Chris Pacia, a developer for OpenBazaar, told CoinDesk, adding: “Not adding replay protection is a dick move.”

And there are other ways that the two blockchains could continue to wage war following the fork – especially if one camp continues to dominate the hash power.

At the time of writing, the prevailing hash rate is showing a preference for the SV side. If the preference continues, there’s a host of ways that Bitcoin SV could try to keep ABC from operating.

Eoin Treacy's view -

I’m not going to pretend I have a clear understanding of what is being discussed in the above article. I certainly could not explain it to a dispassionate third party. However, there is one clear conclusion we can reach, an attack is underway on the confidence people have in bitcoin and that is being reflected in the price.

 



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November 15 2018

Commentary by Eoin Treacy

China's Growth Engines Lose $32 Million a Minute as Markets Sink

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

Nonstate companies have lost at least $992 billion in market value since mid-June, or about $32 million for every minute of trading, according to data compiled by Bloomberg and WisdomTree Investments Inc. In October their shares tumbled at the fastest pace in more than three years relative to companies with government ownership. Local corporate borrowers, almost all of them privately owned, defaulted on a record $6.6 billion of debt in the third quarter. At least 57 nonstate businesses have accepted government bailouts in 2018. Such a wave of quasi nationalizations would have been unthinkable just a few years ago.

The pain has been felt at companies large and small—from internet behemoth Tencent Holdings Ltd. to Jiaxing Linglingjiu Electric Lighting, a producer of thermal bulbs whose owner is weighing whether to ditch the business to go farm a plot of land in China’s rural northeast. “When we meet with fellow factory owners, we don’t ask, ‘How’s business?’ like in previous years,” says Xu Xihong, who started Jiaxing Linglingjiu in 2009 after moving into a factory abandoned by a bankrupt state-run manufacturer of electric fans. “Now it’s ‘Do you think you will make it through the year?’ and ‘When are you going to get evicted?’ ”

Donald Trump’s tariffs and the Federal Reserve’s interest-rate hikes have played a role, but the biggest triggers have been local. By far the most important: the Chinese government’s almost two-year campaign to rein in the country’s $9 trillion shadow banking industry—financial companies that aren’t regulated like traditional lenders. While the clampdown was designed to make China’s financial system safer and more transparent, it’s crimped a key funding channel for private-sector companies that lack access to state-run banks. Faced with a drying up of credit and the country’s weakest economic expansion since 2009, more small businesses are defaulting on debt or liquidating.

Eoin Treacy's view -

The availability of credit and how it is disbursed throughout the economy has been a point of contention in China for decades. The simple fact is that the government and banks do not make enough available but then impose tough growth targets on the regions to meet which encourages credit expansion by any means necessary.



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November 14 2018

Commentary by Eoin Treacy

Video commentary for November 14th 2018

November 14 2018

Commentary by Eoin Treacy

EU Unveils No-Deal Brexit Plans to Avert Financial-Market Chaos

This article by Silla Brush and Alexander Weber for Bloomberg may be of interest to subscribers. Here is a section:

The EU executive also responded to industry warnings about Brexit’s threat to data flows between the EU and the U.K. A “broad toolbox for data transfers to third countries” is available under existing regulations, such as securing explicit consent from clients, so the commission said it’s not planning to issue the kind of “adequacy decision” that British lawmakers have called for.

No contingency measures will be needed for non-cleared “over-the-counter” derivative contracts or insurance policies, the commission said. U.K. regulators have been warning for more than a year that a disorderly Brexit with no transition period could put such financial contracts at risk.

The commission promised to issue an equivalence decision covering U.K. central security depositories, which settle trades in equities. Ireland has relied on a U.K.-based firm called Crest to settle trades since the 1990s.

Eoin Treacy's view -

The timing of the EU announcing its willingness to deploy contingency plans in the event of the UK leaving the EU without an contingency agreement, the same day that they released the jointly agreed text, is a testament to the risk that the May government will fail in getting it through parliament.  



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November 14 2018

Commentary by Eoin Treacy

Email of the day on tobacco stocks and accelerating trends:

As you rightly point out defensive stocks tend to outperform towards the end of the cycle, especially those that consistently pay a high dividend. I, like I suspect others in the collective hold BATs shares. Yesterday the price got hammered on a rumour that the FDA is proposing to ban menthol cigarettes. Wonder if you have any thoughts on what has happened ? Any crumbs of comfort to be had ?

Eoin Treacy's view -

Thank you for this question and I suspect you are not alone in holding a share that has accelerated lower of late. At The Chart Seminar yesterday for example we had a discussion about British America Tobacco exhibit is accelerating downtrends. As you will remember acceleration is a trend ending characteristic;, albeit of unknown duration.



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November 14 2018

Commentary by Eoin Treacy

GE Surges on $4 Billion Plan to Speed Cut to Baker Hughes Stake

This article by Brendan Case and David Wethe for Bloomberg may be of interest to subscribers. Here is a section:

“We like seeing GE’s new CEO Larry Culp hasten the pace of the company’s portfolio breakup to generate sale proceeds to de-lever the balance sheet,” Deane Dray, an analyst at RBC Capital Markets, said in a note to clients. “This is consistent with GE’s messaging that it has roughly $60 billion of potential sources of liquidity.”

Culp took over six weeks ago from John Flannery, who succeeded Immelt in August 2017.

GE was among Bridgewater’s new buys in the third quarter

GE advanced 7.8 percent to $8.61 at the close in New York, the biggest gain in more than four months. The shares had tumbled 54 percent this year through Monday, the third-biggest drop on the S&P 500 Index.

Eoin Treacy's view -

General Electric has been accelerating lower and that also means that the issues assailing the company are becoming progressively better understood. The yield of the 5% junior subordinated perpetual bond have surged higher over the last week to 15%. That is a very accelerated decline so a lot of bad news has already been priced in. 



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November 14 2018

Commentary by Eoin Treacy

Biogen CEO Sees Room to Pursue Two Similar Alzheimer's Hopefuls

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

Both compounds target beta amyloid, a protein consistently found in clumps in the brains of people with Alzheimer’s disease. Both are being tested in patients with very early signs of the disease, following a hypothesis that drugs might work best before Alzheimer’s advances. The companies are still talking with regulators about how to proceed, the CEO said.

Vounatsos, like others researching ways to fight the disease, said it may become necessary to combine different treatments, or give one after the other. “Alzheimer’s disease is so complex that a single silver
bullet will not solve the complexity of the disease for all patient types during the continuum of the evolution of the disease,” he said.

Before companies can engineer combinations, they need to find one that works. Biogen won’t disclose when it expects the final-stage study for its potential blockbuster aducanumab to finish, but it enrolled the last patient over the summer. The trial is planned to be about 18 months long.

Eoin Treacy's view -

As the number of people living into their dotage increases, the need to contain the cost of healthcare is increasingly urgent. Alzheimer’s is a scourge for any family afflicted by its long slow ebb of critical faculties so any progress is developing a cure or even a partial treatment are to be welcomed. Progress is being made in early diagnosis but so far there is nothing that resembles a cure. Therefore the first company to come up with a solution, however effective, is likely to benefit considerably since doctors currently have nothing they can prescribe.



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November 13 2018

Commentary by Eoin Treacy

November 13 2018

Commentary by Eoin Treacy

US Equity Strategy

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

The Rolling Bear Market took out the last holdouts - Tech, Discretionary, and Growth Stocks - in October. The Rolling Bear Market has morphed into a Chopping Bear Market and we think the rest of 2018 will be a bumpy ride.

We prefer Value over Growth; Value outperformed Growth in October’s sell off. We think that was the beginning of a longer lasting leadership change. 

Third quarter earnings results have been strong; we think this quarter will likely represent a peak in year over year earnings growth. The fourth quarter will get much harder as we lap numbers that received a boost from hurricane and tax reform related spending.

Eoin Treacy's view -

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

The rotation out of highly interest rate sensitive sectors and into dividend growth companies remains a significant factor in this market. The underperformance of the extended FANG sector is a significant issue because just about all of its constituents have lost uptrend consistency and, as a group, they represent significant weightings in the major stock market indices.



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November 13 2018

Commentary by Eoin Treacy

Midterm Results Point to a New Divide in Politics: Education

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

When Bill Clinton entered the White House a quarter-century ago, the parties evenly divided the top 30 districts. Republicans since then have gained in working-class and rural areas, and among white voters without bachelor’s degrees.

The result is an America divided in a new way. “The new cultural divide is education,” says Bill McInturff, a Republican pollster.

Education helps explain some of Tuesday’s results that might seem like outliers in solid-Republican states.

In South Carolina, voters last sent a Democrat to Congress from the Charleston, S.C., area in 1979. In Georgia, a Democrat raised $30 million last year to compete in an Atlanta-area district—and lost. On Tuesday, the party carried both seats.

Both those districts—South Carolina’s 1st and Georgia’s 6th—are in the top half among all House districts for educational attainment. Both also have some of the largest shares of college-educated adults in their states.

Eoin Treacy's view -

There is one view that people who have been to university have more experience of life and the world, so they are better placed to arbitrate between arguments and are therefore more rational than people with less formal education. That’s a very nice narrative which will lead a lot of people to think that if they vote a certain way then you must be smart.



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November 13 2018

Commentary by Eoin Treacy

Microsoft President Warns Of '1984' Facial Recognition Future

This article by Dan Robitzski for Futurism.com may be of interest to subscribers. Here is a section:

“For the first time, the world is on the threshold of technology that would give a government the ability to follow anyone anywhere, and everyone everywhere. It could know exactly where you are going, where you have been and where you were yesterday as well. And this has profound potential ramifications for even just the fundamental civil liberties on which democratic societies rely. Before we wake up and find that the year 2024 looks like the book ‘1984,’ let’s figure out what kind of world we want to create, and what are the safeguards and what are the limitations of both companies and governments for the use of this technology.”

Eoin Treacy's view -

It is already possible to track a person’s movements with their phone. Governments can track spending habits from credit card statements and companies already tailor marketing to the way in which we use the internet. In order to follow a person around a city with cameras, a lot more are going to need to be installed but one has to question whether that will even be necessary. 



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November 12 2018

Commentary by Eoin Treacy

Big Picture Long Term Audio November 9th 2018

Eoin Treacy's view -

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

Some of the topics covered include: Apple breaks below $200, Banks underperforming, Semiconductors continue to have completing top formation characteristics. Defensives continue to break out, Dollar strong, oil weak, gold weak, copper off its lows



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November 12 2018

Commentary by Eoin Treacy

Presidential Cycle today?

Eoin Treacy's view -

I’ve been thinking a lot recently about where we are in the stock market cycle and I’m not alone in that. After a significant loss of momentum this year and two aggressive stabs on the downside there are a lot of people asking questions about the market’s condition.
 
The bond market has been grudgingly nudging yields higher for the last few years as the Fed has persisted in raising rates. At 2.92% right now that is pricing an average of 2 and a bit more interest rate hikes by November 2020. Since the next one is due in a month that’s not a terribly ambitious forecast which suggests fixed income investors do not believe the Fed can continue indefinitely on this current path. It occurred to me over the weekend that something which has not gotten a lot of mention recently is the US Presidential Cycle.



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November 12 2018

Commentary by Eoin Treacy

Pressure Mounts on Theresa May to Abandon Brexit Proposal

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

Getting any divorce deal through a bitterly divided Parliament was always going to be May’s biggest challenge. But as the various factions who oppose May’s approach step up their warnings, it’s looking even trickier than her whips may have calculated.

Pro-Brexit Conservative lawmakers joined forces on Sunday with the Northern Irish party that props up May’s minority government. They threatened to reject the deal she’s working on, even if she persuades the Cabinet to approve it in the coming
days.

“If the government makes the historic mistake of prioritizing placating the EU over establishing an independent and whole U.K., then regrettably we must vote against the deal,” Steve Baker, a former Conservative minister, and Sammy Wilson, Brexit spokesman for the Democratic Unionist Party, wrote in the Sunday Telegraph.

Eoin Treacy's view -

Did the chances of a Brexit people thought they were voting for end when Theresa May went into government with the DUP?

The easy answer to the customs union is to cut Northern Ireland loose. However politically untenable that solution was before May lost her majority, it is virtually impossible when a loyalist Northern Irish party holds the balance of power in her administration.



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November 12 2018

Commentary by Eoin Treacy

A Fifth of China's Housing Is Empty. That's 50 Million Homes

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

Soon-to-be-published research will show roughly 22 percent of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes, he said.

The nightmare scenario for policy makers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral. The latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation -- considered by leaders a key threat to
financial and social stability -- are coming up short.

“There’s no other single country with such a high vacancy rate,” said Gan, of Chengdu’s Southwestern University of Finance and Economics. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood.”

Eoin Treacy's view -

China does not have a property tax so the cost of speculating on property is almost zero. The vast majority of residential units are delivered as empty shells because developers know consumers will want to fit out the apartment to their own specifications. However, that also means there are large numbers of apartment buildings that are vacant and are left to rot because investors are holding them for appreciation purposes rather than ever intending for anyone to live in them.



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November 12 2018

Commentary by Eoin Treacy

The 49th year of The Chart Seminar

Eoin Treacy's view -

The next Chart Seminar will be held on 12 and 13 November 2018 at The Army and Navy Club in London.

If you have an interest in attending an online Chart Seminar please contact Sarah and we will arrange times based on the time zones of those who wish to attend.

I am also in initial discussions with a potential partner about organising a New York Seminar.

If you would like to attend or have a suggestion for another venue please feel to reach out to Sarah at sarah@fullertreacymoney.com.  

The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). Subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.



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November 09 2018

Commentary by Eoin Treacy

November 09 2018

Commentary by Eoin Treacy

November 09 2018

Commentary by Eoin Treacy

China Has More Distressed Corporate Debt Than All Other EMs

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

China’s debt, both distressed and otherwise, account for a quarter of all securities included in the gauge, which tracks about 660 dollar notes with a par value of at least $500 million. The Asian nation is home to the developing world’s biggest bond market.

The jump in China’s distressed bonds helped fuel an increase in borrowing costs for emerging-market companies to the highest level in more than two years. The impact of the trade war on the Asian nation has compounded pressure on developing assets, already reeling under the strain of higher U.S. interest rates and Treasury yields.

 

Eoin Treacy's view -

In markets with well-developed corporate bond markets we can come to some estimation of what to expect from the default rate. It’s going to be based on history and may or may not be accurate but at least there is some historical context. China is a country with no history of defaults because everyone always got bailed out.



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November 09 2018

Commentary by Eoin Treacy

The Dollar Is a Haven in Sea of Uncertainty

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

Trump has the upper hand since the U.S., the primary buyer in a world of ample supply, has the advantage over the seller, China. Besides, where else could China sell $534 billion in products it sent to the U.S. last year? The pragmatic Chinese will no doubt import more U.S. products, demand less technology transfers as the price American firms pay for operating in China and steal fewer U.S. trade secrets.

That will reduce the chronic U.S. trade and current-account deficits. The $500 billion current-account deficit is the number of dollars the U.S. pumps into foreign hands. Some 87 percent of all global transactions involve the U.S. dollar. So a lower deficit will result in a global dollar shortage and a higher value for the greenback will no doubt result.

Meanwhile, the Federal Reserve is shrinking its balance sheet assets at an accelerating pace. One byproduct of the Fed’s decision to cut its holdings of Treasuries and government-related securities is that it absorbs dollars from domestic and foreign investors, further reducing the supply of greenbacks.

Eoin Treacy's view -

One of David’s maxims that is most memorable in this currency market environment is “No country wants a strong currency, but some need a weak one more than others” President Trump has made no secret of his desire to have a weaker currency but Europe and China need weaker currencies more.



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November 09 2018

Commentary by Eoin Treacy

Taimide Tech Jumps on Expectations of Foldable Phones Boost

This note by Cindy Wang may be of interest to subscribers.

Taimide Tech jumps as much as 9.9% on market expectations that company may benefit from trend of foldable phones after Samsung Electronics showed off a new model, according to Concord Securities.
Market speculates that the polyimide film maker could supply its products to manufacturers of foldable phones, Concord Securities assistant vice president Allan Lin says, adding that polyimide film is a key component for such phones

Eoin Treacy's view -

Phones are getting bigger because so much of what we use them for has northing to do with speaking to another person. The problem today is that phones are becoming so large that they are becoming unwieldy to put in one’s pocket. Samsung’s solution is to design folding phone.



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November 08 2018

Commentary by Eoin Treacy

November 08 2018

Commentary by Eoin Treacy

OPEC Considers 2019 Oil Production Cuts in Yet Another U-Turn

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

Earlier in the summer, prices began to surge as the risk of production shortfalls from sanctions on Iran and Venezuela’s economic collapse rattled the market. Losses from those two OPEC members threatened the biggest supply disruption since the start of the decade and Brent crude eventually peaked above $86 a barrel last month.

Since then, big things have happened on the other side of the supply equation. OPEC has been in “produce as much as you can mode” to reassure consumers, according to Saudi Energy Minister Khalid Al-Falih. The kingdom has lifted output close to record levels, while Libya is pumping the most in five years. Unexpected waivers for buyers of Iranian crude have blunted the impact of U.S. sanctions.

Then there’s the small matter of American production growing at the fastest rate in a century, just as fuel demand is at risk from the slowdown in emerging economies and the U.S.-China trade war.

Eoin Treacy's view -

The Brent Crude price trended higher in a consistent manner for more than half of 2017 with each $5 range being one above another. Then the price pulled back by $10 in 2018 before rallying $20 from the low, pulled back by $10 and if consistent would have been expected to rally $20. However, the rally did not quite manage to extend its breakout by that much and has now experienced a much larger reaction. Additionally, the price is back below the trend mean. A deep short-term oversold condition is now evident but a clear upward dynamic will be required to check supply dominance.



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November 08 2018

Commentary by Eoin Treacy

'Fed Is in Denial': How a $4 Trillion Dilemma Could Get Ugly

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

The trouble is, post-crisis rules enacted to curb risk-taking, like Dodd-Frank and Basel III, have prompted banks to use much of those same reserves -- upwards of $2 trillion worth -- to meet the more stringent requirements. It’s those forces that are, in effect, creating the scarcity of reserves that has banks -- mainly the smaller ones at this point -- scrambling for short-term dollar funding. Since the Fed started shrinking its assets, reserves have fallen by more than a half-trillion dollars, according to Fed data from Barclays.

“The current backdrop is one that is dominated by the regulatory landscape,” said Jonathan Cohn, the head of interest-rate trading strategy at Credit Suisse. He estimates excess high-quality liquid assets (which include reserves) at the eight U.S. globally systemically important banks have fallen by more than 15 percent since the Fed began its unwind. “Banks are in a decent position right now, but over time this will begin to weigh” on them.

Eoin Treacy's view -

The pace of the Fed’s balance sheet unwind is picking up and that is beginning to make considerations of what that means for related markets more urgent.  A balance of $900 billion before the credit crisis is the base line but if we add the $2 trillion of bank reserves to that figure, we get close to $3 trillion. The Fed’s balance sheet is now $4.13 trillion and trending lower. That is not a particularly large buffer particularly when a good proportion of the remaining part of the balance sheet is comprised of mortgage bonds with questionable liquidity.



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November 08 2018

Commentary by Eoin Treacy

Volvo Cars Rips Up Production Plans, Citing U.S.-China Trade War

This article by Keith Naughton and Gabrielle Coppola for Bloomberg may be of interest to subscribers.

Volvo Cars is shaking up production plans for much of its lineup in an effort to dodge tariffs the U.S. and China have slapped on auto imports.

The Swedish automaker owned by China’s Zhejiang Geely Holding Group Co.has canceled plans to export S60 sedans from its first U.S. plant to China, just months after starting production. Volvo also will stop importing XC60 sport utility vehicles and dramatically reduce shipments of S90 sedans from China to the U.S.

Volvo will pivot to mostly exporting S60s from its factory near Charleston, South Carolina, to focus mostly on supplying the American market, according to Anders Gustafsson, the president of the carmaker’s U.S. unit.

“We’ll go at this change not with a smile, but we know what we need to do,” Gustafsson said. “We have a global manufacturing structure that helps us maneuver in these tough waters.”

Eoin Treacy's view -

Volvo is a Chinese company so the next step will be to deprioritise investment in US based production and to make big decisions about which models to sell where. The automotive industry has long depended on the ease of access to a global supply chain and the ability to manufacture cars in one country and sell them somewhere else. The prospect of the trade war persisting is likely to shape corporate decisions well into the medium term.



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November 08 2018

Commentary by Eoin Treacy

Glencore's radioactive news may help give cobalt its buzz back

This article appeared in mining.com and may be of interest to subscribers. Here is a section:

Glencore plans to stockpile cobalt supplies until the middle of next year, while it builds a special plant to remove radioactivity. Caspar Rawles, an analyst at Benchmark Minerals, described the timing of the announcement as "opportunistic" because Glencore is currently negotiating 2019 supply deals.

Glencore-controlled Katanga Mining Ltd. would have produced about 30,000 tons of cobalt next year, roughly 25 percent of global supply, according to RBC Capital Markets. Holding this off the market should tighten supplies and support Glencore’s other mine in Congo, which also produces cobalt.

“Assuming there are no uranium issues that this uncovers elsewhere, this production will benefit from any positive price impact,” RBC said.

Katanga boasts one of Congo’s biggest reserves of copper and cobalt, but the mine has underperformed for decades. In 2015, Glencore suspended operations to address the problems and upgrade the facilities. Production restarted in December and the mine is scheduled to hit 300,000 tons of copper next year, when it will account for about a fifth of Glencore’s global production.

Eoin Treacy's view -

Cobalt went up in a straight line until its peak in the summer and has since experienced a significant correction. The metal is essential in the designs of all batteries currently in the market but the demand growth argument is predicated on that condition persisting. Considering how insecure global supplies of cobalt are, a race is on to use less of it, substitute it and to develop additional sources of supply from less politically insecure areas.



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November 07 2018

Commentary by Eoin Treacy

Video commentary for November 7th 2018

November 07 2018

Commentary by Eoin Treacy

Email of the day on the bearish perspective

I have been a subscriber for almost a decade and enjoy listening to your video presentations and reading the comments. No hurry, but would be great if you can spare your time to offer your thoughts on Dr. John Hussman's comment, link here: 
 

Eoin Treacy's view -

Thank you for your support and for this article which may be of interest to the Collective. Here is a section:  

It’s important to recognize that despite its discomfort, the market decline we observed in October is only a drop in the bucket toward normalizing valuations. I’ll say this again, because it is important. Over the completion of the current market cycle, I fully expect the S&P 500 to lose close to two-thirds of its value from the recent peak. We don’t require this outcome as a precondition for adopting a bullish market stance, as an improvement in market internals alone would encourage a neutral or even constructive market outlook (though with a safety-net given present market extremes). The problem is that there is no market cycle in history, even at the 2002 low, that ended at market valuations greater than half the level they established at the recent peak.

This is clearly not a favorable outlook for passive investors. While investors have embraced passive strategies as a result of strong backward-looking returns, this popularity represents little but performance-chasing at the most extreme valuations in history. At the recent market peak on September 20, we estimate that the prospective 12-year total return from a conventional passive asset mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills reached a low of just 0.48%. There is only one instance in history when these estimates were lower, which was in the 3 weeks immediately surrounding the 1929 market peak. Given that most pension funds assume future returns in the range of 7% annually, it implies that the coming years are likely to include a rather widespread pension crisis.

Shorter-term, remember that bear markets regularly include scorching advances from oversold conditions, each time prompting dip-buyers to exclaim “New highs, here we come. Am I a genius or what?” and encouraging long-term investors to breathe “Phew, I’m glad that’s over.” A typical bear market includes several waterfall declines, along with multiple interim recoveries approaching even 10-20%.



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November 07 2018

Commentary by Eoin Treacy

Hermes shakes off China worries with sales rise

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

On a call with reporters, Hermès executive chairman Axel Dumas dismissed fears about a slowdown in China, which analysts and investors are concerned may come from a trade war with the US. “We are still strong all across the board in China,” said Mr Dumas. “We don’t see any change of pace at this stage.” Comparing the slightly slower third-quarter performance of Asia-Pacific to the overall figures for the region in the first nine months of the year, he said that “the differences for me are not material.”

Earlier this month luxury rival LVMH said that Chinese border authorities are stepping up searches on travellers, looking for luxury items brought back from cities like London and Paris. Mr Dumas said he believes that fluctuations in the euro have a greater impact on Chinese tourists shopping in Europe than fears about tighter border controls.

This month Hermès followed in the footsteps of Louis Vuitton and Gucci by launching its own ecommerce website in China, as the group seeks to increase its exposure to the world’s largest and fastest-growing market for luxury sales.

Eoin Treacy's view -

It is interesting that the company has reported it is seeing now lack of demand for its products in China but the price fell anyway. That is a clear example of the market being a discounting mechanism since what investors probably wanted to hear was that demand was growing strongly.



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November 07 2018

Commentary by Eoin Treacy

Trump's Trade War a Win for Fertilizer If Farmers Seed More Corn

This article by Jen Skerritt and Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section:

The feud between the U.S. and China that’s withered sales for American soybeans will probably result in farmers shifting acres to corn, said Chuck Magro, chief executive officer of Nutrien Ltd., the world’s top crop-nutrient supplier. Corn acres require about twice the amount of fertilizer and crop chemicals than soybeans, he said.

“The corn acres are worth more to companies like us,” Magro said in a telephone interview. “This could be actually a short- term win for us. It depends on what actually gets planted next year.”

The last time the U.S. saw a dramatic surge in corn acres was a decade ago after Congress approved the Renewable Fuels Standard, which expanded the mandate to blend ethanol into gasoline. That season, the corn area rose by more than 15 million acres, according to U.S. Department of Agriculture data.

Eoin Treacy's view -

The trade war is having a number of knock-on effects for a whole host of markets from iron-ore demand to copper and fertilisers. Since China is a major consumer of just about all commodities the outlook for its economy has a significant impact on demand. The potential for more corn plantings because reduced soy planting is a potentially an important catalyst for agricultural shares which have until recently been quite depressed.



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November 06 2018

Commentary by Eoin Treacy

November 06 2018

Commentary by Eoin Treacy

A War Beyond Trade

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

Eoin Treacy's view -

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

The value of any contract is heavily dependent on the values of the counterparties signing it and the authority of an agreed party to enforce the terms. When the signees are countries then enforcement and the legal wrangling around differing interpretations of what is entailed can take years and, even then, if one party decides not to accept a ruling there is not much that can be done. The USA’s bipartisan institutional realization that China is a not a reliable contract counterparty now represents a significant obstacle to more than a cursory trade agreement being negotiated.



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November 06 2018

Commentary by Eoin Treacy

Esports vs. pro sports: Jeremy Lin is betting on both

This article by Jeremy Lin for Quartz may be of interest to subscribers. Here is a section:

The barrier to entry for esports is also so much lower than pro sports. You don’t need to wait for open-hours at your YMCA gym and hope that enough people show up and pay their membership to shoot some hoops. You don’t need another nine people in the same place at the same time with the same skillset—you don’t even have to wait until the sun’s up at the local park or stop playing when it goes down.

Esports is therefore democratizing entertainment. It’s free, and all you need is a good internet connection to play. Mobile gaming was a game changer for this accessibility: You don’t need an expensive console to play anymore, and some of the best games are literally in your hand.

Because of its truly global nature, you’re also being exposed to people who come from different cultures and countries and religions than your neighborhood ball court. It gets you out of your bubble. The tournaments bring people from all over the world together—professional sports only do that during the Olympics or events like the World Cup. Teams are often made up of players from all around the world who have to learn how to work together and get along; there were 24 countries represented at The Dota 2 International last year.

Eoin Treacy's view -

Gaming companies control the games and therefore own the intellectual property on which eSports are based on. They have the scope to control the evolution of the esports sector in a way that was never open to conventional sports. That represents two important revenue vectors. The first is that the shelf-life of games is extended. Historically games have been discounted within about 12 months of release and once a player gets about 40 hours of game time they set the title aside. However, with an eSport constantly boosting visibility the legacy game has the potential to continue to attract new players well after its release date.



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November 06 2018

Commentary by Eoin Treacy

No More Junk in the Trunk

This note from Riverfront Investment Group may be of interest to subscribers. Here is a section:

As the high yield market has continued to strengthen, credit spreads have tightened to 381 basis points, which is near a 10-year low (credit spreads measure the extra amount of income required to compensate investors for default risk and are a common gauge for the overall health of the economy).

There are two ways to look at the current level of credit spreads. The first is an optimistic view which would suggests the bond market is not signaling any stress in the economy. Historically, tight credit spreads (smaller premium for default risk) have reflected economy strength and a reassurance that a recession in the near-term was unlikely. In previous recessions, credit spreads have widened prior to equities falling and have therefore been an informative leading indicator for the economy.

On the other hand, it’s easy to see why some investors have a more pessimistic view regarding tight credit spreads. Without lower coupon payments, there is a smaller margin of safety for default risk. In other words, investors aren’t protected as much in the event of a recession. Furthermore, with credit spreads near a 10-year low, it might seem like there is only one way for them to go, which is higher!

Eoin Treacy's view -

US high yields spreads have been inert for 18 months but in that time Treasury yields have risen quite considerably. What that tells us is the yield on junk bonds is also rising and the coupon demanded to attract investor interest is also higher.



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November 06 2018

Commentary by Eoin Treacy

Oil Heads For 8-Month Low as Specter of Global Shortage Fades

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

“Oil prices don’t have any real reason to rally significantly,” said Phil Streible, senior market strategist at R.J. O’Brien & Associates LLC in Chicago.

Crude has tumbled about 20 percent since touching a four-year high last month as bearish supply signals around the globe crowded out concerns about disrupted exports from Iran and Venezuela. The waivers announced this week by U.S. Secretary of State Mike Pompeo apply to China, India and six other nations.

“The U.S. has for now given a lifeline to Iran,” said Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland. “The end result of the sanctions is softer than expected. The final outcome of the sanctions also confirms the political fear of high gasoline prices.”

 

Eoin Treacy's view -

By issuing exemptions to tariffs to China and India, Iran can now import equipment and material from those countries to try and boost production. That essentially hands the Iranian oil market over the Asia and pretty much re-establishes the status quo that existed before the liberalisation agreement was put in place.



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November 05 2018

Commentary by Eoin Treacy

Video commentary for November 5th 2018

Eoin Treacy's view -

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

Some of the topics covered include: rotation underway in the major indices, they need to push back above their MAs but that might take a while, China eases, India firms, Australia somewhat oversold, Europe needs to hold its lows, Dollar eases, gold and oil quiet. 



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November 05 2018

Commentary by Eoin Treacy

Martin Spring's On Target

Thanks to the author for this edition of his wide-ranging report which may be of interest to subscribers. Here is a section on the outlook for stock markets.

There are no signs yet of imminent recession. Morgan Stanley says: “Consumer
confidence remains high and spending on services remains healthy.” There’s no significant weakness yet in “early-cycle” industries such as advertising or casinos.

We can expect the Fed to err on the side of caution in raising interest rates. Future earnings growth of around 10 per cent sounds fine to me. And nearly all commentaries about Trumpian policies are infested with emotion and ignore positive outcomes.

The fundamentals of the world economy remain sound. The US remains the world leader in the new technologies that drive much of the growth. China, we’re told, is “slowing down”… but to an incredible 6.2 per cent a year. India is doing even better. Europe, despite its crazy politics, doesn’t seem to face any credible major threats to its prosperity and abundant welfare systems.

All of which suggests that what the markets have been experiencing is nothing more than a major correction. Sentiment has been shocked by the speed and dimensions of the trend reversal. Those with lots of cash will hold back and not recommit till they see positive news. This suggests the probability that markets will soon stop falling, but they’re not likely to bounce back strongly for a while, and to trade in a range for some months to come.

But what if I’m wrong with my relative optimism? What if the current stock-market weakness is not merely a correction, a pause for consolidation after years of excitement, but an ominous signal of something much worse to come?

The Economist recently ran a speculative report on the subject of The Next Recession. Its big fear is that governments won’t be up to the job of taking swift action to deploy the many policy tools available to underpin economic growth and to drive recovery.

The traditional stimulus policy of easing credit won’t be available because interest rates are already too low, while going to the extreme of negative ones – charging interest on bank deposits or bonds -- is (probably correctly) viewed as too dangerous.

Eoin Treacy's view -

Personally, I’m not convinced by the argument that central banks will not be able to ride to the rescue the next time we have a recession because interest rates are already too low. The simple fact is that when you control the money supply, and hold vast swathes of the bond market there is no limit to the number of extraordinary monetary and fiscal levers that can be deployed if the need arises. As we have learned over the last decade, just because it has never been done before does not mean it can’t be.



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November 05 2018

Commentary by Eoin Treacy

Hedge Fund Three Bays to Close After Poor Performance

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

Value investing, which was pioneered by Benjamin Graham and Warren Buffett, has struggled since 2015 as so-called growth stocks beat out their inexpensive brethren. Sidman joins a growing list of managers that have given up on the strategy. In the last week alone, Bloomberg has reported plans by both Chieftain Capital Management and SPO Partners & Co. to return client money. John Griffin closed Blue Ridge Capital last year. Another long-time value investor, Eddie Lampert, has been flailing after his bet on Sears Holdings Corp. went awry.

Eoin Treacy's view -

Value strategies work best after a really big decline because they are oriented towards identifying the mispricing of individual stocks relative to their intrinsic value. However, they are prone to selling too early as prices advance for exactly the same reason.



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November 05 2018

Commentary by Eoin Treacy

Which individuals may be impacted by the ALP franking credit proposal?

This article by Dr.Don Hamson for Livewire may be of interest to subscribers. Here is a section:

Mrs H was a fully self-funded retiree, owning a modest home in the outer northern suburbs of a capital city, living off the income from a portfolio of direct shares and some bank deposits. Her assets, other than the home, totalled $650,000, with $50,000 in non-income bearing assets. Of her investments, $500,000 are invested in fully franked dividend paying Australian companies and $100,000 invested in term deposits and cash. Mrs H is ineligible for a part aged pension, since her assets exceed the maximum assets test level (currently $564,000 for a single homeowner).

Mrs H currently has a taxable income of $30,571. The $100,000 in deposits only earns $2,000 in interest, while the share portfolio yielded an average 4% cash dividend providing $20,000. Importantly the dividends were all fully franked, receiving $8,571 in franking credits (these are included in taxable income). With no tax payable due to the Seniors tax offset, Mrs H received a full refund of her franking credits, considerably boosting her cash income from $22,000 to $30,571.

Since Mrs H is not eligible for any pension entitlements, she would no longer receive those franking credits under the ALP proposal. The loss of $8,751 would reduce Mrs H’s income by 28%, reducing her weekly income by $165, from $588 per week to just $423 per week.

This means her income would actually fall below the full aged pension for a single homeowner ($23,889 p.a. or $916.30 per fortnight /$458.15 per week).

Eoin Treacy's view -

Full franking on dividends is the number one topic of conversation that comes up when I have conducted The Chart Seminar in London. It has been one of the primary factors in Australian investors tending to favour their domestic market’s dividend paying stocks. Significant changes to the tax structure for dividends and pension could have a significant knock-on effect for the banks in particular because so many investors own them for income.



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November 05 2018

Commentary by Eoin Treacy

Planned Obsolescence: The case for designing services with limited shelf life

This article by Paul Taylor included this interesting graphic which I thought may be of interest to subscribers.

Eoin Treacy's view -

Obsolescence by design is a major component of the business plans for just about all manufacturing companies. A friend of ours is the world’s largest manufacturer of the sensors in elevator doors. He has stated on more than one occasion that the business would not exist if the sensors did not fail after approximately 15 months, so that is how they design their products. It’s what keeps cashflow moving.



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November 02 2018

Commentary by Eoin Treacy

November 02 2018

Commentary by Eoin Treacy

Trump Said to Ask Cabinet to Draft Possible Trade Deal With Xi

This article by Jenny Leonard, Saleha Mohsin and Jennifer Jacobs for Bloomberg may be of interest to subscribers. Here is a section:

President Donald Trump wants to reach an agreement on trade with Chinese President Xi Jinping at the Group of 20 nations summit in Argentina later this month and has asked key U.S. officials to begin drafting potential terms, according to four people familiar with the matter.

The push for a possible deal with China was prompted by the president’s telephone call with Xi on Thursday, the people said, requesting anonymity to discuss internal deliberations.

Afterward, Trump described the conversation as “long and very good” and said in a tweet that their discussions on trade were “moving along nicely.”

Trump asked key cabinet secretaries to have their staff draw up a potential deal to stop an escalating trade conflict, the people said, adding that multiple agencies are involved in drafting the plan. It was unclear if Trump was easing up on U.S. demands that China has resisted, and reaching any accord still faces significant hurdles.

 

Eoin Treacy's view -

The mid-term elections are on Tuesday so it is hard to view any political utterance as anything other than noise until that event has passed. The decision to write a draft proposal for a trade agreement does not mean it will be something the Chinese can sign without conceding defeat in the trade war so this is far from a settled topic. Nevertheless, even a word of encouragement for beaten down Chinese shares was enough to pressure shorts.



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November 02 2018

Commentary by Eoin Treacy

China cracks down on foreign currency transfers for property deals

This article by Michael Smith for The Australian Financial Review may be of interest to subscribers. Here is a section:

The decision to publish the cases, which involved millions of dollars in fines, is seen as a warning that the government is less willing to tolerate what is considered a grey area in the country's capital control rules. Liu Xuezhi, an economist at China's Bank of Communications, said this showed Beijing's crackdown on offshore commercial deals was being extended to individual investors.

"The government regulation on foreign currency is becoming more thorough. They are extending supervision from corporates to individuals," he told The Australian Financial Review.

"The tight control on foreign capital will be maintained for the next one or two years. This would bring an impact to the Chinese investors who are planning to buy properties overseas, including Australia."

Zong Liang, a senior researcher with the Bank of China, said he expected the move to more closely monitor transactions would stay in place for the next five years and weaken the appetite for Chinese investors in Australian property.

Eoin Treacy's view -

China needs to control capital flight if it is to have any hope of navigating a future of lower leverage, higher defaults and modest growth. Chinese people have been most active in getting money out of the country by buying property which is a significant outlay and is coming under increasing scrutiny with potentially worrying repercussions for international property markets.



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November 02 2018

Commentary by Eoin Treacy

Email of the day on the merits of buy-to-let

Regarding your piece yesterday on balancing one's portfolio and finding safety, I would add a somewhat personal view. As I am in the finance industry myself, the restrictions on investing in listed securities is quite a burden and I'm finding traditional buy-to-let investing more and more compelling. It should work reasonably well also as an inflation hedge, since the rent can be adjusted with inflation and the real value of the principal generally moves with inflation. Of course this equation depends on things like whether your area has population growth and the yield curve of your respective currency, but at least in EUR the FIXED financing costs are so ridiculously low that it is hard to see how one can lose money on a say 60-70 percent financing over a 15-20 year horizon. A practical issue is that there is a (modest) amount of work when finding a new tenant, for example. For me, this also provides a nice additional retirement income, since the tenants have paid off the bank loans roughly at the same time as I'm about to leave the workforce, so that the rents become cash flow to me. Just a personal thought here, it may not be the best choice for everyone.

Eoin Treacy's view -

Thank you for this informative email and I agree that the potential for raising rents is an attractive inflation hedge, not least because property prices, as fixed assets, tend to rise with the inflation rate. However, it is also worth considering that property prices have been boosted by quantitative easing and the ridiculously low funding levels that you speak of have been available to everyone for a decade already. The key, as you mention, fixing financing costs, low leverage and attractive capitation rates.



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November 02 2018

Commentary by Eoin Treacy

Email of the day on the platinum/gold ratio:

Thanks a lot for a very informative comment of the day today. Can you please share your opinions on platinum/gold at your convenience. Thanks in adv. best rgds.

Eoin Treacy's view -

Thank you for this question which is topical considering the recent turn to outperformance by the precious metals sector.

Platinum is trading at a substantial discount to gold which is unprecedented in the last 35 years.



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November 01 2018

Commentary by Eoin Treacy

Video commentary for November 1st 2018

Eoin Treacy's view -

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

Some of the topics covered include: value returning with some deep oversold conditions, strong cashflow business continue to outperform, Wall Street continues to exhibit relativel strength, Dollar weakens, precious metals and copper rebound, crude oil weak.



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November 01 2018

Commentary by Eoin Treacy

Email of the day on balancing a portfolio

Yesterday’s article in The Wall Street Journal raises an interesting issue that may be interesting for discussion (see attached and the link - https://www.wsj.com/articles/octobers-market-rout-leaves-investors-with-no-place-to-hide-1540978259 ).

“Adding to the stock market’s anxieties has been a rare simultaneous drop in bond prices that has pushed yields near their highest levels in years. The dual breakdown in stock and bond prices has upended investors’ traditional safety tool kit of buying Treasurys during periods of volatility, leaving many with losses.”

Traditional investment portfolios of 60% equities and 40% bonds lost more than 3% in October and are down 1.2% this year, on pace for a rare annual loss that was last seen in 2008, as well as during volatile periods in 1990, 2001 and 2002, said Luca Paolini, chief strategist at Pictet Asset Management, which manages $191 billion. Even investors who are heavier on fixed income would still be in the red, with allocations of 75% bonds and 25% equities falling more than 2% this month to drag their performance down 1.1% for the year… Declines in bond prices, meanwhile, have exacerbated investors’ pain. Annualized losses among U.S. Treasurys and investment-grade bonds are at 9.7% and 4%, respectively, the third-steepest declines since 1970, according to a recent Bank of America Merrill Lynch report.”

Portfolio with 60% equities and 40% bonds allocation has been the most traditional advice for individual investors for decades. But I just thought, those were decades of the secular, almost 40-year bull trend in the bond market. If, as you and David often say, we are now witnessing the beginning of the secular bear market in bonds, then this 60-40 allocation represents troubles ahead. Bonds will probably stop being the same safe haven they were in the past. Yes, they will continue to provide some stability to a portfolio in a sense that they won’t fall 10% as equities but instead of rising in times of turmoil, they will also slump.

If this is the case, how allocation can be changed and where investors will look for safe heavens?

As always, it would be interesting to know your view.

Eoin Treacy's view -

In a period of disinflation or deflation fixing the interest rate you receive works wonderfully because its value increases over time. That has been one of the primary tailwinds for fixed income portfolios for decades. If on the other hand you are looking at a time of rising interest rates and rising yields then floating rate instruments become more attractive.



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November 01 2018

Commentary by Eoin Treacy

What is most oversold?

Eoin Treacy's view -

At a Halloween party last night, I was talking with a couple of brokers who were celebrating the end of what has been a difficult month for the financial sector. More than a few were praying for a Santa Claus rally which might help flatter what have been rather unimpressive results this year. That set me to thinking about where the most oversold conditions are evident in the S&P 500 because following such a big decline there is must be value to be found.



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November 01 2018

Commentary by Eoin Treacy

Dollar Hits Wall at 17-Month High, Set for Worst Day Since July

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

“We’re thinking more broadly that this is another peak in the dollar, and we’re going to see it drifting lower in the next year,” Mark McCormick, head of North America FX strategy at TD, said in an interview. “The market has priced in an excessive amount of global stress.”

The S&P 500’s nearly 7 percent drop in October likely fueled rebalancing flows back into U.S. stocks, which are now reversing, McCormick said.

But yuan strength is also a factor, he said, after China’s leadership signaled more stimulus measures are being planned to shield the economy from repercussions of U.S. trade protectionism. And Brexit developments may lift the euro and the pound, which are undervalued relative to their cyclical drivers, TD says. The dollar, meanwhile, is more than 3 percent rich to the bank’s global factor model.
 

Eoin Treacy's view -

The Euro found support today in the region of its August low and posted its largest rebound in months to check near-term supply dominance. However, a sustained move above $1.18 will be required to question the medium-term downward bias.



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October 31 2018

Commentary by Eoin Treacy

Video commentary for October 31st 2018

October 31 2018

Commentary by Eoin Treacy

Equity and Quant Hedge Funds Hit Hardest by Stock Market Rout

This article by Saijel Kishan and Suzy Waite for Bloomberg may be of interest to subscribers. Here is a section:

The selloff underscores the perils that funds face when they pile into the same stocks. Equity funds suffered after the top 10 stocks they’re most “crowded” in underperformed the S&P 500 Index by almost 3 percent on Oct. 29, the worst day since 2010, Morgan Stanley said. In addition, the top 10 stocks that funds bet against outperformed the index by more than 1 percent.

Funds that use computer-driven models to follow big market trends were whiplashed as price volatility spiked. Among the casualties: Leda Braga’s BlueTrend hedge fund, GAM Holding AG’s Cantab unit and Man Group Plc’s AHL unit. Other quant models that lost money include Renaissance Technologies’ U.S. equity fund.

Eoin Treacy's view -

Never mistake a bull market for brains is one of the most important pieces of advice anyone can receive when momentum strategies in all their forms are the most fashionable investment vehicles. If all algorithms are taught to do is remember the trend is your friend then automatic sell signals go in at the first failure of the price at the moving average. Meanwhile indices are generally market cap weighted so that ETF passive investing is essentially a momentum strategy biased towards mega-caps. Nevertheless, a crisis has to be seen to be getting worse in order to continue have a deleterious effect on markets and there is increasing evidence of volatility abating. 



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October 31 2018

Commentary by Eoin Treacy

China Says More Aid Coming as Downdraft From Trade War Rises

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

The signal of increasing urgency came just hours after purchasing manager reports showed an across-the-board deterioration that risks spilling into a broader drag on global growth. The world’s second largest economy is being damaged by its trade war with the U.S. and a domestic debt cleanup.

With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding.

“Accepting slower growth has long been a challenge for Beijing, but now the rate of slowdown is firmly out of the comfort zone,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “In recent years the balancing act has been addressing risks in the financial system against pressure to stabilize economic growth. It appears the latter is again more of a priority.”

Eoin Treacy's view -

Major rallies in Chinese mainland stocks tend to be state sponsored. It’s the Communist Party’s equivalent of a central bank put and it’s something investors have tended to wait for before committing to a rally.



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October 31 2018

Commentary by Eoin Treacy

The Opportunity in Criss-Border E-Commerce

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

Cross-border e-commerce1 has developed into a large, quickly growing ecosystem – and has become a great success story for many e-tailers, meaning retailers and manufacturers selling their products over the Internet directly to end consumers.

This success can be shown in real numbers: in 2015, the cross-border e-commerce market accounted for USD 300 billion GMV2, about 15% of e-commerce overall. This rapid growth, however, has just begun and will continue: the cross-border market is expected to grow by about 25% annually until 2020 – nearly twice the rate of domestic e-commerce and a growth rate that most traditional retail markets would dream of achieving. In 2020, it is expected to account for about USD 900 billion GMV, translating into a roughly 22% share of the global e-commerce market. This growth momentum yields unrivaled opportunity for retailers and manufacturers. As this report will show, crossborder e-commerce is not an e-commerce giant story – all types of manufacturers and retailers will be able to successfully go global.

Even beyond 2020, all evidence shows that demand for products from abroad is not going to recede. That said, considering the patterns according to which e-commerce companies expand their regional footprint today, one could assume that every e-commerce purchase will eventually become a local purchase. This is mainly due to the higher cost efficiencies that localized fulfilment and the quicker shipments that shorter distances naturally promise at first glance. However, even e-commerce giants such as Amazon, Alibaba, and Zalando, which already operate local distribution centers in several countries, ship a significant part of their sales cross-border. This is driven by, for instance, the enormous number of stock-keeping units (SKUs) offered by some of these players. But having slow-turning SKUs sitting in inventory everywhere – a prerequisite for pure local fulfilment – is much more costly than shipping a certain share of orders cross-border. And in order to fulfill consumers’ wishes for faster delivery, many e-tailers offer premium international shipping options to their customers, e.g., for a surcharge. This is testimony that cross-border is not a passing phase or trend, but rather a significant staple in the e-commerce market that requires premium shipping.

Eoin Treacy's view -

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

The global postage and shipping industry represents a number of competing trends right now. On the one hand you have companies like Amazon which is prevailing on its largest sellers to expand internationally by making their products available in countries like Canada, Mexico, UK, Germany, France and Spain. That requires bulk shipping of inventory to its international fulfilment centres and often requires an increased compliance cost to manage multiple sales tax regimes.



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October 30 2018

Commentary by Eoin Treacy

Video commentary for October 30th 2018

October 30 2018

Commentary by Eoin Treacy

Update on Positioning

Thanks to a subscriber for this snippet of a report from JPMorgan. Here is a section:

Eoin Treacy's view -

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

The VIX Index has not spiked on this occasion by nearly as much as the move we saw in February because the market fell more slowly this time than last. That also highlights the fact that the bulk of selling pressure has taken place in the highly leveraged part of the technology sector.



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October 30 2018

Commentary by Eoin Treacy

Copper Going Ballistic

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

Unlike metals like Zinc/Lead and Nickel, there was some copper development during the downtime (e.g. Las Bambas, Constancia etc) but this is not sufficient to replace mines that have exited or reduced production and deal with even conservative forecasts of growth in consumption.

Now that the uptime has arrived (came and went and is coming again) the small to medium projects that are dependent on gold credits (or vice versa) are having a tougher time gaining traction (or even attention as gold’s prospects look so murky). That leaves the larger projects to attempt to fill the gap in the pipeline caused by so many years of the Copper price being in the dumpster. 

It was surprising to recently review a listing of the top twenty western copper mines and see that two date back to the 19th century and more than half of the large producing mines date back to pre-1950s. On the next page we list the major projects that could make a difference to the copper supply situation though with the caveat that most are potentially only replacing existing production that is declining or being shuttered.

The list of upcoming mines of size by its very nature is exclusively composed of projects that are in the multi-billion dollar capex category. This means that they tend to be the hands of majors or will ultimately have to gravitate to majors to ever get off the starting blocks. 

Eoin Treacy's view -

The Chinese copper stockpile has been a significant overhanging concern for the price for most of this year. It was accumulated to preserve the economy from the potential for higher prices. The broader issue is that many investors regard copper as a barometer of the global economy because it is used in every country in the world and is integral to infrastructure and technology build out. The fact that prices have been falling over the last six months has shaded perceptions of the health of the Chinese economy and questions the wisdom of building up a stockpile in the first place.



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October 30 2018

Commentary by Eoin Treacy

Brazil Super Minister Shoulders Weight of Bolsonaro Economy

This article by David Biller, Cristiane Lucchesi and Rachel Gamarski for Bloomberg may be of interest to subscribers. Here is a section:

More long nights lie ahead. Brazil’s nascent recovery from the worst recession in history hinges on his success, and the nation’s benchmark index has climbed 13 percent since mid-September -- close to its all-time high -- on optimism Bolsonaro would win, giving Guedes a chance to implement business-friendly policies. They include dozens of privatizations, a massive reform of the pension system and a revamp for the nation’s byzantine tax code.

Bolsonaro, who’s admitted he has only a “superficial understanding” of economics, has said he’s placing full control over the nation’s finances in the hands of Guedes, who was trained at the University of Chicago and founded both a private equity firm and a think tank for liberal economic theories. Yet for all that success, he’s had zero experience in implementing public policy.

“One thing’s for certain: Guedes is the guarantor of Bolsonaro’s alleged conversion to liberalism, and if for any reason he leaves the government, there will be an earthquake in markets,” said Ricardo Lacerda, chief executive officer of Sao Paulo-based boutique investment bank BR Partners.

How big an earthquake? One top market analyst said Brazil’s benchmark stock index could tank as much as 40 percent, reaching levels not seen since the 2016 impeachment of Brazil’s former president, Dilma Rousseff. While that’s probably overstating things, it’s the kind of hyperbole that’s characterized Brazil’s election rhetoric ever since polls made it clear in recent months that Bolsonaro was heading to victory.

 

Eoin Treacy's view -

It’s a truism but the market likes market friendly administrations. The potential for Bolsonaro to tackle engrained corruption, grant the central bank independence and streamline regulations have resulted in the Real rallying to test the region of the trend mean. Investors are probably now likely to wait and see what the new administration’s program for government will be before getting more bullish.



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October 29 2018

Commentary by Eoin Treacy

Video commentary for October 29th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: Interest rate sensitive sectors continue to lead lower but are increasingly oversold in the short term. strong cash flow generators outperforming, Value has improved following this decline and increasing evidence of climactic action but clear upward dynamics will be required to check supply dominance. 



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October 27 2018

Commentary by Eoin Treacy

October 27 2018

Commentary by Eoin Treacy

Kyle Bass Speaks with CNBC's David Faber

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

BASS: You know, the Chinese are in the worst financial situation they’ve been in, in the last 17 years because they operated domestic economy where they control the printing press, they control the press narrative, they control the price level and they control their people as we’ve seen them detain over a million of them in Jingjang for their religious preference. So they can change a lot of things domestically, but their -- the arbiter of the Chinese plan is their cross rate or their exchange rate with the rest of the world. China Inc.’s working capital account is now going South because they’re running what we believe to be a structural and more permanent deficit on the current account. And so, i.e., their working capital, their dollar balance whether it’s dollars, euros, yen or pounds, it’s mostly dollars. And their dollar balances is headed south. And so, the U.S. is in a very particularly interesting negotiating position today. We are in the strongest negotiating position we’ve ever had against China. They’ve kind of leveled the playing field a little bit more with their, let’s say, subversion of WTO rules, their intellectual property theft and basically everything they’ve done to take advantage of the U.S. over the past 15, 17 years.

Eoin Treacy's view -

China has the domestic economy on lock down and has an epic local government debt issue. It also has some of the largest deposits of any banking sector as well as large sovereign reserves. The only clear way to match liabilities with assets while also depreciating the currency, to support the export sector, is to avoid capital flight.



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October 27 2018

Commentary by Eoin Treacy

Argentina Economic Outlook 4Q18

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

The global environment remains positive, although growth is moderating due to the poorer performance of emerging economies. The impact of protectionism is so far limited

In Argentina, a new round of capital flight and currency depreciation in August led to a further fiscal adjustment, the revision of the agreement with the IMF and the abandonment of the inflation target regime, which means an end to the economic program of President Macri’s first two years

The new monetary-exchange rate scheme seeks to control FX volatility by absorbing all surplus liquidity in pesos and targets holding the nominal monetary base constant until June 2019 setting up broad bands within which the FX can float, with limited intervention by the Central Bank outside this band

In 2019 the government will attain primary fiscal equilibrium with spending cuts and a new tax on exports, and the programme with the IMF ensures that the financial programme can be met with limited roll-over

The currency crisis and the new monetary and fiscal tightening lead us to revise our forecast for GDP growth in 2018 and 2019 downwards and our estimates of inflation upwards. The sharp real depreciation of the peso and the recession will result in rapid correction of the current account deficit

Eoin Treacy's view -

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

When is the best time to buy into an emerging market? That is a question I think a lot of people will be contemplating at the moment because emerging markets are trading at a substantial discount to developed markets and particularly Wall Street.



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October 27 2018

Commentary by Eoin Treacy

Email of the day on California from an entrepreneur

Well, we have now sold our CA ranch overlooking Silicon Valley after 24 years of making it a better and better home. While the home got better, the political and economic climate just kept getting worse and worse. When we moved to CA (back in '81, several homes ago), it was still a land of opportunity and a bastion of free enterprise. Startups were everywhere, and engineers came in droves to work on exciting new technologies that made a real and important difference in the world. I came to Silicon Valley to work on some of the most exciting technologies, and to participate in building companies that made cool products for happy customers.

Gradually the atmosphere changed, with more and more socialist governments at every level, and. as happens with all socialist systems, a gradual move to a more fascist environment with more and more rules and less and less tolerance for opposing views. As governments at every level continued to grow, taxes grew. But at least as important were the increases in the costs of local services, and the costs of public utilities which were forced to use "green" energy despite the substantially higher costs. "Green" businesses (like Tesla) were increasingly subsidized by ever increasing taxes. All the while the state has become less and less business-friendly.

Meanwhile respect for individual rights, respect for our constitution, and respect for our country declined, with local and state politicians and many of our representatives to the federal government taking actions and making statements that would be considered treason in almost all other countries around the world. These people preach hatred, condone violence against those who disagree with them, and seek to destroy the foundations of our Republic. These people have poisoned the atmosphere of California.

We are sad to leave our many friends here in Silicon Valley. And the food...

However, with each ending, there is a new beginning.

Our new beginning is in the high country of Arizona, where we start a new chapter in our lives. We are blessed that our daughter is moving with us, and also blessed with having found a new home that promises to continue our legacy of creating a great place to live. High on a ridge overlooking mountains and valleys, we start anew with optimism and a renewed love of the land and nature, in a place where our political views are welcome, and do not make us the enemy - love of freedom, respect for the constitution, honor for our real history, a firm belief in free enterprise and capitalism, steadfast commitment to individual rights, property rights, and the rule of law, and real love for our great country.

Eoin Treacy's view -

Thank you for sharing your perspective and good luck in building a new life in Arizona.

At The Chart Seminar, we define ranges as explosions waiting to happen but I am increasingly of the belief that this conclusion is not limited to markets but is applicable to all situations where crowds are present.

The breaking of the status quo, which is represented by debt-fuelled social democracy, has resulted in support for more extreme views. That has variously led to support for both extreme dictatorial and free market solutions. That imbalance between the political belief systems has resulted in a trend of polarisation that shows no sign of ending.



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October 25 2018

Commentary by Eoin Treacy

October 25 2018

Commentary by Eoin Treacy

Japan's Record Shorts Hint Stocks Have Finally Bottomed

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

Japanese stocks may have finally bottomed after the ratio of short bets on shares trading on the Tokyo Stock Exchange climbed to a record high. Spikes in bearish bets indicate extreme pessimism and can lead to a short squeeze if stocks rebound, driving up prices further. When the ratio reached near current levels in March, it marked the start of a 9 percent rally over the next two months for the Topix index. The gauge has since lost all those gains and is trading near a one-year low amid growing concerns over upcoming corporate earnings and a slowdown in China’s economy.

Eoin Treacy's view -

The Nikkei-225 broke below the trend mean in a dynamic manner this morning in sympathy with the wider corrective phase evident on major stock markets globally.



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October 25 2018

Commentary by Eoin Treacy

What's Wrong With the 2 Percent Inflation Target

This article by Paul Volcker may be of interest to subscribers. Here is a section:

Only once in the past century, in the 1930s, have we had deflation, serious deflation. In 2008–2009 there was cause for concern. The common characteristic of those two incidents was collapse of the financial system.

We can’t expect to prevent all financial excesses and recessions in the future. That is the pattern of history with free markets, financial innovation, and our innate “animal
spirits.”

The lesson, to me, is crystal clear. Deflation is a threat posed by a critical breakdown of the financial system. Slow growth and recurrent recessions without systemic financial disturbances, even the big recessions of 1975 and 1982, have not posed such a risk.

The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end, be what brings it about.

That is the basic lesson for monetary policy. It demands emphasis on price stability and prudent oversight of the financial system. Both of those requirements inexorably lead to the responsibilities of a central bank.

Eoin Treacy's view -

It has been a very long time since Paul Volcker was the head of the Fed and there has been a distinct change of culture since then. The Fed is now a serial bubble blower and the decision to adopt quantitative easing has created massive excesses in the global economy, which the market is now exploring.



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October 25 2018

Commentary by Eoin Treacy

Mystery of Missing U.S. Pigs, Swine Fever Spark Hog-Price Surge

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

For weeks now, traders have been expecting U.S. slaughter rates to jump as the government has consistently reported a swelling domestic herd this year. Hurricane Florence hit North Carolina, one of the top hog states, in mid-September, slowing down processing operations. But that bottleneck should have cleared by now, and analysts were expecting a sudden rush of hogs to market. Instead, slaughter rates have stayed low, raising questions about whether the animals were ever really there, said Rich Nelson, chief strategist at Allendale Inc. in McHenry, Illinois.

The lower-than-expected U.S. slaughter is coming at a time when a highly contagious, pig-eradicating virus is spreading through China, the world’s top pork consumer. African swine fever continues to spread in the country, with several new outbreaks reported this week. The combination of supply woes sent hog futures in Chicago up by the exchange limit of 3 cents on Wednesday to settle at 57.525 cents a pound. Prices have surged 11 percent this week.

“We don’t have this backup in market hogs like we expected,” Nelson said, adding that U.S. Department of Agriculture estimates for rising animal inventories may have been miscalculated.

Eoin Treacy's view -

This sounds like a case of supply inelasticity meets rising demand.



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