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June 14 2016

Commentary by David Fuller

Sir James Dyson: So if we leave the EU no one will trade with us? Cobblers

Dyson exports far more to the rest of he world (81 per cent) than Europe (19 per cent). “We’re very pleased with the European market – we’re number one in Germany and France – but it’s small and the real growing and exciting markets are outside Europe.”

He says the much-trumpeted single market isn’t really a single market at all. “They have different languages which, for an exporter, means that everything from the box to the instruction manual has to be in a different language. The plugs are different. The laws are different. It’s not a single market. The only communality is that there’s no tariff, but the pound going up against the euro is far more damaging than any tariff. If the pound rises, £100 milion is quickly wiped off.”

The problem with the EU’s free movement of people is that it doesn’t bring Dyson the brilliant boffins he needs. “We’re not allowed to employ them, unless they’re from the EU. At the moment, if we want to hire a foreign engineer, it takes four and a half months to go through the Home Office procedure. It’s crazy.”

He produces another staggering fact. “Sixty per cent of engineering undergraduates at British universities are from outside the EU, and 90 per cent of people doing research in science and engineering at British universities are from outside the EU. And we chuck them out!” He gives a trodden-puppy yelp.

So hiring a low-paid barista from Bratislava is no problem, but a prized physicist from Taiwan is a logistical nightmare. The Government claims that, if a non-EU citizen gets a job within two months of finishing their research, then they can stay here for two years. “The point is that it’s completely mad not to welcome them,” he says, “why on earth would you chuck out researchers with that valuable technology which they then take back to China or Singapore and use it against us?

Softly spoken, Dyson’s Home Service Received Pronunciation tones become incensed when he talks about what he sees as our disloyalty to Commonwealth countries. “They fought for us in two world wars. So that particularly upsets me. We’re missing out on all those people who have helped us and with whom we have a great affinity, often a common language.

"Culturally, it’s all wrong. We’re not only excluding them from our country, we’re charging them import duty because we’re forced to by the EU. And the food’s cheaper, too.”

His views on Brussels have been shaped by bitter experience. Dyson sits on several European committees. “And we’ve never once during 25 years ever got any clause or measure that we wanted into a European directive. Never once have we been able to block the slightest thing.”

David Fuller's view -

Sir James Dyson is one of the most successful inventors and entrepreneurs on the planet.  I regard his views on the EU as more important than most of what we have heard during the Referendum debate.    

A PDF of his interview is posted in the Subscriber's Area.



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June 14 2016

Commentary by David Fuller

In the Event of Brexit, First 100 Days Promise Chaos, Fear, Damage Limitation

Here is the opening of this topical article from Bloomberg:

There’s no road map for European authorities facing the prospect of a British exit from their 28-nation union -- by design.

Officials in Brussels are under orders not to commit any scenarios to paper to avoid alarmist leaks, according to a senior official from one European government tasked with making preparations.

Given the potential political and financial shockwaves surrounding a Brexit vote, it’s not clear a map would do much good. Global markets are already sputtering as anxiety mounts about the impact on the world economy. EU President Donald Tusk goes so far as to say that it could spell the end of “western political civilization itself.”

Tusk’s exaggeration highlights the task in self-preservation awaiting European officials as they confront the potential departure of a country from the EU -- something that was inconceivable when the union was established. The mechanism for an exit was only written into law in 2009.

The first 24 hours

Before dawn on June 24, if an exit vote becomes clear, the EU’s top brass from Berlin to Brussels will be forced into damage control. In echoes of the Greek debt crisis, euro-area finance ministers may hold an emergency meeting as soon as that evening. Wild swings in the pound, more aggressive interventions by the Swiss National Bank and a ratcheting up of global instability rank as likely market reactions.

Currency markets haven’t priced in the U.K.’s exit from the EU, so if it happens, “a crash is pretty likely,” Lothar Mentel, chief executive officer of Tatton Investment Management in London, said on Bloomberg Television. “We would have to brace ourselves for quite a rough awakening on that Friday.”

David Fuller's view -

Obviously no one knows precisely what markets will do at any given time of fear and uncertainty but they are a recipe for volatility.  Extreme forecasts, however over the top such as EU President Donald Tusk’s comment about the end of “western political civilization itself” (had he been listening to David Cameron?) are regarded as newsworthy.  I am sure Mr Tusk is sincere but it is probably a personal statement about his fears for his job, the EU and his country Poland.

There is also a degree of mischief about extreme forecasts from high-profile investment managers.  They are ‘talking their book’ and if short, have a vested interest in frightening other people so that they do not buy and perhaps even sell.  Conversely, in overextended bull trends they will talk up markets in pursuit of further profits.  

Additionally, a degree of chaos and intraday volatility is ideal for many high speed computer trading programmes which may account for most of the actual volume.      

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June 14 2016

Commentary by David Fuller

Cameron Slammed in Sweden as EU Rancor Over Brexit Vote Mounts

Here is the opening of this revealing article from Bloomberg:

U.K. Prime Minister David Cameron got a taste of the sort of reaction that awaits him in Europe’s capitals if Britain votes to quit the European Union next week.

Sweden’s EU Minister, Ann Linde, slammed the British premier as an opportunist who has put the 28-nation bloc at risk for his own domestic political purposes, signaling that talks that would follow a Brexit vote are likely to be acrimonious.

“I don’t want to burn any bridges,” Linde told journalists Tuesday in Stockholm. But I’m hearing “great bitterness toward Great Britain.”

That rancor counters the optimism of that pro-Brexit economists and politicians in the U.K., who have said Britain would maintain access to the single European market and manage the departure from the EU without significant downside.

At the same time, neither the U.K. nor the EU is prepared for negotiations that would follow a vote to leave on June 23, according to Henri de Castries, chief executive officer of Axa SA, France’s largest insurer.

They will face “a true landscape of uncertainties,” de Castries said at a conference in Paris.

In Stockholm, Linde expressed concern that a Brexit vote could throw Sweden back to the debate of the early 1990s, when Swedes voted to join the 28-nation bloc.

David Fuller's view -

The comments above are revealing in terms of EU politics.  Sweden’s Ann Linde is criticising David Cameron for promising the Brexit vote before the last UK General Election on May 7th 2015, so that he could prevent an even bigger drift of Conservative voters towards UKIP.  Apparently, Ms Linde was not speaking alone, adding that she was hearing “great bitterness toward Great Britain”.  Apparently, other politicians in EU countries did not want this democratic referendum, in case a Brexit win incited similar referendums in other EU countries. 

Politics is a funny old business.  David Cameron is an appropriately moderate and inclusive Conservative Prime Minister.  He has also been lucky, winning the last election against a weak opponent stridently backed by Nicola Sturgeon of the SNP.  Labour’s current leader lacks national appeal. 

David Cameron seemed unchallenged following the last General Election.  However, he is now in danger of being ‘hoist with his own petard’.  If Brexit wins on the 23rd, Cameron’s tenure as Prime Minister will be tenuous.  Perhaps worse still, at least for the PM, his chance of succeeding Jean-Claude Junker or one of the EU’s other four presidencies which he could handle (the fifth is held by Mario Draghi of the ECB) would vanish. 

In politics, the transformation from hero to anti-hero occurs all too frequently and quickly.  Of course Cameron could still be lucky if his increasingly desperate Remain campaign actually succeeds in next week’s election.     

This item continues in the Subscriber’s Area and discusses markets.



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June 14 2016

Commentary by David Fuller

June 14 2016

Commentary by Eoin Treacy

Email of the day on the outlook for stock markets

Hello Eoin, I am particularly enjoying listening to your audio recordings as markets are so interesting. I was a little confused by something you said in Friday's audio compared to the previous Friday. In the latest audio, you were saying that there was a lot a bullishness amongst analysts on Wall Street and that this was a contradictory indicator which is how I would interpret it after a strong move up in markets. But if I remember correctly, the previous week you sounded very bullish yourself and seemed to be suggesting that the US indices were more likely to break out to the upside. I was left with the distinct impression that you felt this was imminent. Have I read you correctly? Even before Europe's swoon over the past few days, the US markets were looking a bit tired.

Eoin Treacy's view -

Thank you for this email which may be of interest to the Collective. My comment on Friday was in relation to the fact that sentiment was extraordinarily bearish at the low in February while more recently there have been a number of high profile analysts predicting an imminent breakout. This suggests they were already positioned for such an outcome, so we can conclude there were less people with available cash to buy new highs. Scope for a pullback increased as a result and there was evidence at the end of last week that it was underway. 



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June 14 2016

Commentary by Eoin Treacy

Musings from the Oil Patch June 14th 2016

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

As electricity is gaining importance in the nation’s energy mix, the role of electric vehicles is being promoted by environmentalists who see them as a way to end the use of petroleum. These same groups are pushing electric cars as the perfect vehicle for autonomous vehicles that are envisioned as a way to reduce the number of cars needed in future economies, with concomitant less use of petroleum fuels. As they build their case, we have been overwhelmed by articles praising the increase in the number of electric vehicles in today’s vehicle stock and how they will (need to) grow in order to fulfil the UN climate change agreement. 

A recent electric car article offered the chart in Exhibit 3 (next page) showing how the number of these vehicles in the world have grown. The chart reflects the cumulative total between 2010 and 2015, showing dramatic growth. Because it is cumulative, the growth is deceiving. More important is the penetration rate of electric vehicles into the world vehicle fleet. 

As the chart shows, the global industry has over 1.2 million electric vehicles on the world’s roads – but that is out of an estimated one billion vehicles. The point is that for all the dramatic growth (which presentation charts can make look impressive) in the number of electric vehicles on the roads, they barely register as a component of the global vehicle fleet total.

An interesting area for research into the success of electric cars is to see how many of them are owned by governments – federal, state and municipal – along with ones purchased by utility companies in an effort to demonstrate their environmental sensitivity. Our guess is that in the U.S. these buyers would account for the largest portion of the electric vehicles on the road. That would suggest that real consumers – not those motivated by making political statements – are not embracing electric vehicles, despite the concerted efforts of governments to promote them through mandates and financial

If we look at the dark green portion of each bar that represents the number of electric cars in the United States, the country has gone from a minimal number in 2010 to 400,000 vehicles in 2015. Yes, that is dramatic growth, but the 2015 number is less than half the number President Barack Obama called for to be on America’s roads. More telling is the difference between the height of the dark green portion of the bar in 2014 and 2015, showing that the industry added slightly over 100,000 vehicles. That number comes in a year when the U.S. auto industry produced and sold over 17 million vehicles. The penetration of electric cars into the American vehicle stock is paltry as 400,000 units barely registers in a fleet of about 300 million vehicles on the road. 

Eoin Treacy's view -

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

Electric vehicles (EVs) are on an exponential growth curve. However we are still in the very early stages of that growth where big numbers do not equate to large numbers of vehicles on the road. For example Tesla’s orders for more than 400,000 Model 3s is equivalent to the entire US fleet of EVs on the road today. With that kind of growth rate it’s important to keeps one’s feet grounded in reality. 



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June 14 2016

Commentary by Eoin Treacy

Roaring demand for pigs in China fires up rally in Chicago hog futures market

This article from the South China Morning Post may be of interest to subscribers. Here is a section:

A robust appetite for cuts like pig feet, ears and snouts in the world’s biggest pork-consuming nation is fueling a rally for hogs in Chicago. Investors last week increased their bets on a hog rally by the most since January, and the number of contracts outstanding has jumped to the highest in two years.

Inflated corn costs in China forced the country’s farmers to cull herds and shrink pork output, spurring demand for more imports. The nation could buy as much as 5 per cent of US production this year, according to Dermot Hayes, an agricultural economist at Iowa State University in Ames, Iowa. Hog futures are trading near the highest since 2014, the year prices reached a record because of a piglet-killing disease.

“If you have a specific product that China as a culture eats and has demand for, that adds value,” Randy Spronk, president and co-owner of hog producer Spronk Brothers III, said in an interview last week at the World Pork Expo in Des Moines, Iowa. “Looking forward, if they shrink the sow herd or increase per-capita consumption, the potential that’s there is phenomenal.”

 

Eoin Treacy's view -

The Pork Bellies contact was retired a few years ago because the market is so heavily controlled by producers that also act as processors so there was no longer a need for hedging future production. That gives us an indication of how closely held the pig market is. Pork is the primary protein in Chinese cooking so as incomes improve, per capita consumption can be expected to continue to rise. 



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June 14 2016

Commentary by Eoin Treacy

June 13 2016

Commentary by David Fuller

Brexit Vote Is About the Supremacy of Parliament and Nothing Else: Why I Am Voting to Leave the EU

Here is a brief sample from this informative column by Ambrose Evans-Pritchard for The Telegraph:

… the EU as constructed is not only corrosive but ultimately dangerous, and that is the phase we have now reached as governing authority crumbles across Europe.

The Project bleeds the lifeblood of the national institutions, but fails to replace them with anything lovable or legitimate at a European level. It draws away charisma, and destroys it. This is how democracies die.

"They are slowly drained of what makes them democratic, by a gradual process of internal decay and mounting indifference, until one suddenly notices that they have become something different, like the republican constitutions of Athens or Rome, or the Italian city-states of the Renaissance," says Lord Sumption of our Supreme Court.

It is a quarter century since I co-wrote the leader for this newspaper on the Maastricht summit. We warned that Europe's elites were embarking on a reckless experiment, piling Mount Pelion upon Mount Ossa with a vandal's disregard for the cohesion of their ancient polities.

We reluctantly supported John Major's strategy of compromise, hoping that later events would "check the extremists and put the EC on a sane and realistic path."

This did not happen, as Europe's Donald Tusk confessed two weeks ago, rebuking the elites for seeking a “utopia without nation states" and over-reaching on every front.

“Obsessed with the idea of instant and total integration, we failed to notice that the citizens of Europe do not share our Euro-enthusiasm,” he said.

If there were more Tusks at the helm, one might still give the EU Project the benefit of the doubt. Hard experience - and five years at the coal face in Brussels - tells me others would seize triumphantly on a British decision to remain, deeming it submission from fear. They would pocket the vote. Besides, too much has happened that cannot be forgiven.

David Fuller's view -

Subscribers with a vote on this important subject will make up their own minds, and I suspect we will all be relieved when the referendum is over.  My policy with this service has always been to share what interests me, including articles and reports, while also commenting on related market prospects.  

This item continues in the Subscriber’s Area and is followed by a number of links to articles from The Telegraph  which interested me while I visited the Hay-on-Wye Festival and mostly enjoyed being outdoors during two glorious, sunny weeks in the beautiful Brecon Beacons.



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June 13 2016

Commentary by David Fuller

June 13 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.  The seminar room is now three-quarters full. 

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

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.  



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June 13 2016

Commentary by Eoin Treacy

Bitcoin Surges to Two-Year High as Supply Seen Shrinking in July

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

Profits from mining bitcoins will be reduced in July, a process that’s written into the code to limit supply, according to Chinese exchanges OKCoin and Huobi. Increased attention from venture capitalists and banks on blockchain, the technology of digital ledgers, has boosted bitcoin’s legitimacy, Jack C. Liu, chief strategy officer at OKCoin, said in Hong Kong.

"The halving of the supply of Bitcoin is attracting many retail investors," Liu said. "More broadly, we continue to see follow-through from the blockchain hype cycle translating to interest in bitcoin the asset."

The price of bitcoin has mostly recovered following a steep decline to less than $200 in January of last year from more than $1,000 in December 2013.

Bitcoin’s rebound is coinciding with weakness in the yuan, which fell the most in two months on Monday in Shanghai. Losses have accelerated in recent weeks as the dollar strengthened and China’s economic outlook deteriorated. Data Monday showed industrial output rose 6 percent in May from a year earlier, while fixed-asset investment increased 9.6 percent in the first five months of 2016, missing all 38 economist forecasts.

"What we’ve seen over the weekend is more of the same: Chinese fear of a slowing economy and the yuan potentially looking to make another move lower," said Ryan Rabaglia, head of wholesale product management at ANX International in Hong Kong.

"Each time we see yuan weakening we tend to see a triggering of capital outflows out of China, and bitcoin has been on the winning end of that."

 

Eoin Treacy's view -

China represents approximately 80% of bitcoin trading activity. This graphic of live bitcoin trades helps to illustrate just how much on an influence Chinese buying has on demand. With the halving of the reward for minting new bitcoins expected to occur sometime between now and July interest in the cryptocurrency is increasing. 



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June 13 2016

Commentary by Eoin Treacy

Microsoft to Buy LinkedIn in Deal Valued at $26.2 Billion

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

The deal is the largest under the tenure of Microsoft CEO Satya Nadella, who has been reshaping Microsoft since taking over in 2014 to appeal more to business customers with cloud-based services and productivity tools. LinkedIn isn’t an obvious fit in the ongoing restructuring, but gives Microsoft the biggest global social network for professional that’s used by job seekers, recruiters and human resources teams. In a statement, Nadella said the acquisition could drive growth for LinkedIn as well as Microsoft’s Office 365 and Dynamics services.

“Just as we have changed the way the world connects to opportunity, this relationship with Microsoft, and the combination of their cloud and LinkedIn’s network, now gives us a chance to also change the way the world works,” Weiner said in the statement.

 

Eoin Treacy's view -

It is very questionable whether Microsoft will get their money back following such a large outlay on a company like LinkedIn and the valuations on the sector generally are not exactly cheap. With the notable exception of Facebook social media/new economy services companies have been underperforming for quite some time. Today’s announcement of a major takeover in the sector has the potential to revitalise perceptions subject to sound fundamentals. 



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June 13 2016

Commentary by Eoin Treacy

Batteries Storing Power Seen as Big as Rooftop Solar in 12 Years

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

The spread of electric cars is driving up demand for lithium-ion batteries, the main technology for storage devices that are attached to utility grids and rooftop solar units.

That’s allowing manufactures to scale up production and slash costs. BNEF expects the technology to cost $120 a kilowatt-hour by 2030 compared with more than $300 now and $1,000 in 2010.
That would help grid managers solve the intermittency problem that comes with renewables -- wind and solar plants don’t work in calm weather or at night, creating a need for baseload supplies to fill the gaps. Today, that’s done by natural gas and coal plants, but the role could eventually be passed
to power-storage units.

The researcher estimates 35 percent of all light vehicles sold will be electric in 2040, equivalent to 41 million cars.

That’s about 90 times the figure in 2015. Investment in renewables is expected to rise to $7.8 trillion by then, compared with $2.1 trillion going into fossil-fuel generation.

“The battery industry today is driven by consumer products like computers and mobile phones,” said Claire Curry, an analyst at Bloomberg New Energy Finance in New York. “Electric vehicles will be the driver of battery technology change, and that will drive down costs significantly.”

The industry still has a long way to go. About 95 percent of the world’s grid-connected energy storage today is still pumped hydro, according to the U.S. Energy Department. That’s when surplus energy is used to shift large amounts of water uphill to a reservoir so it can be used to produce electricity later at a hydropower plant. The technology only works in areas with specific topographies.

There are several larger-scale battery projects in the works, according to S&P Global. They include a 90-megawatt system in Germany being built by Essen-based STEAG Energy Services GmbH and Edison International’s 100-megawatt facility in Long Beach, California.

“Utility-scale storage is the new emerging market for batteries, kind of where electric vehicles were five years ago,” said Simon Moores, managing director at Benchmark Mineral Intelligence, a battery researcher based in London. “EVs are now coming of age.”

 

Eoin Treacy's view -

Innovation in the chemistry that supports batteries has been a lot more difficult to achieve than the Moore’s law related enhancements that have been commonplace in chip manufacturing and increasingly in solar technologies. Nevertheless as the requirement for storage grows increasingly urgent, the capital expended on R&D is expanding and innovations are being achieved. In the meantime economies of scale through larger manufacturing plants are helping to drive efficiencies. 



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June 10 2016

Commentary by Eoin Treacy

Currency Outlook

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

The GBP was the second best performing G10 currency in May. The outperformance coincided with a shift in the betting markets which, at their lowest, suggested only a 20% chance of a “Leave” vote in the EU referendum, down from around 35% in late-March. There have also been a number of polls showing an increased lead for the “Remain” campaign.

But the rally was not as aggressive as might have been expected given the large shift in implied probabilities around the referendum outcome. All else being equal we might have expected GBP-USD to have traded around 1.50 rather than 1.46.

However, the probability of a “Leave” vote is not the only factor influencing the value of GBPUSD.

There have been two main forces dominating GBP recently:
1. Politics: GBP pulled up by a larger probability of a “Remain” vote
2. Economics: GBP pushed down by lower UK-US interest rate differentials
However, in our view, politics is now taking centre stage again. The weak non-farm payrolls release on 3 June saw a significant re-pricing of the likelihood that the Fed would hike at its 15 June meeting. The chances of a June hike implied in the rates futures market fell from 22% to 4% after the release. This softer data was also accompanied by various comments by members of the FOMC which hinted that there was too much uncertainty to hike rates in June. With a June Fed hike now off the table, this means politics can once again take centre stage for GBP-USD.

What political risk is priced into Cable?
Before 2016, GBP-USD tracked expected interest rate differentials remarkably closely (Chart 2). However, this year the market has been focused on the EU referendum in the UK and the price of GBP-USD has remained noticeably lower than the level which would be suggested by the historical relationship with interest rate differentials. We estimate the degree of political risk priced into Cable by the gap between the current spot rate and that suggested by the relationship in Chart 2. This now suggests that if the political risk is resolved (after a vote to “Remain”) that GBP-USD would rally by only around 5% from here. 

The closing of the gap in charts 1 and narrowing gap in chart 2 suggest that GBP-USD is at the right price today. However, we believe that GBP-USD will rise further after the EU referendum.
This is because the uncertainty around the referendum has an impact not only on financial markets but also on the real economy.

“Remain” – increasingly in the price but not yet in the data 
Why do we see GBP moving significantly higher from here? Even if the betting markets were to shift to a 100% chance of a “Remain” vote, it would only suggest a move of 5%. The currency market has largely priced in the significant change in sentiment around the referendum In contrast, it is likely that the soft economic data seen recently has been subdued by uncertainty around the UK’s political future. If so, upcoming data will start to factor in the increasing likelihood of a vote to remain. For example, the recent release of UK GDP for Q1 2016 showed a further softening in business investment (down 0.5% q/q, following a 2.0% q/q drop in Q4 2015). The slight uptick in May’s consumer confidence data could be an early sign of this realignment taking place.

Eoin Treacy's view -

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

The uncertainty relating to the outcome of the Brexit vote in less than two weeks is beginning to take a toll on stock markets as investors begin to hedge their exposure. 

As the above piece highlights, the most common view among commentators is that the vote is similar to that taken in Scotland last year where there was a great deal of emotional debate ahead of the decision but ultimately voters decided to go with the devil they know. 

This piece written by the 22-year old nephew (Tiernan Lean) of a subscriber highlights some of the most pressing arguments espoused by the leave campaign. These are legitimate considerations and even in the event the UK decides to stay the issues relating to democratic accountability, sovereignty and immigration policy raised in this debate will need to be addressed if the EU is ever going to realise its ambition of a united Europe. 

 



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June 10 2016

Commentary by Eoin Treacy

Energy in 2015: A year of plenty

Thanks to a subscriber for this edition of BP’s annual report by Spencer Dale which may be of interest. Here is a section:

The increasing importance of renewable energy continued to be led by wind power (17.4%, 125 TWh). But solar power is catching up fast, expanding by almost a third in 2015 (32.6%, 62 TWh), with China overtaking Germany and the US as the largest generator of solar power.

The older stalwarts of non-fossil fuels – hydro and nuclear energy – grew more modestly. Global hydro power increased by just 1.0% (38 TWh), held back by drought conditions in parts of the Americas and Central Europe. Nuclear energy increased by 1.3% (34 TWh), as rapid expansion in China offset secular declines within mainland Europe. This gradual shift of nuclear energy away from the traditional centres of North America and Europe towards Asia, particularly China, looks set to continue over the next 10-20 years.

And

The key lesson from history is that it takes considerable time for new types of energy to penetrate the global market. Starting the clock at the point at which new fuels reached 1% share of primary energy, it took more than 40 years for oil to expand to 10% of primary energy; and even after 50 years, natural gas had reached a share of only 8%.

Some of that slow rate of penetration reflects the time it takes for resources and funding to be devoted in scale to new energy sources. But equally important, the highly capital intensive nature of the energy eco-system, with many long-lived assets, provides a natural brake on the pace at which new energies can gain ground.

The growth rates achieved by renewable energy over the past 8 or 9 years have been broadly comparable to those recorded by other energies at the same early stage of development. Indeed, thus far, renewable energy has followed a similar path to nuclear energy.

The penetration of nuclear energy plateaued relatively quickly, however, as the pace of learning slowed and unit costs stopped falling. In contrast, in BP’s Energy Outlook, we assume that the costs of both wind and solar power will continue to fall as they move down their learning curve, underpinning continued robust growth in renewable energy.

Indeed, the path of renewable energy in the base case of the Energy Outlook implies a quicker pace of penetration than any other fuel source in modern history. But even in that case, renewable power within primary energy barely reaches 8% in 20 years’ time.

The simple message from history is that it takes a long time – numbering several decades – for new energies to gain a substantial foothold within global energy.

 

Eoin Treacy's view -

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

The evolution of renewable energy technology represents a major paradigm shift for the energy sector not least because the cost of production continues to decrease independently of the oil price and environmental concerns result in a compelling case for adoption. In tandem with wind and solar, the rollout of electric vehicles is a related but separate development which is likely to represent a continued headwind for demand growth.



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June 10 2016

Commentary by Eoin Treacy

A Guide to Helicopter Money

Thanks to a subscriber for this report from National Australia Bank. Here is a section:  

Unlike ‘QE’, Helicopter Money has an explicit fiscal element. Moreover, in a Helicopter Money operation the central bank commits to making any asset purchases permanent and to not paying interest on the resulting bank reserves. It differs from a normal fiscal stimulus as it is not financed by interest paying debt (a bond issued to the public) but by money creation by the central bank. 
Introducing Helicopter Money will potentially affect existing monetary policy goals and tools. For example, it might require a change to the inflation target and changes to the system of interest on reserves. It could also complicate how monetary policy will operate in circumstances when the central bank seeks to tighten monetary policy. 

The key channels through which it is expected to work are increased demand for goods & services (either by government or households) and by raising inflation expectations, thereby lowering real interest rates. Proponents also argue it gets around possible problems with normal fiscal stimulus – crowding out (though higher interest rates) and households increasing savings as they perceive a future higher tax burden. 

In theory Helicopter Money should result in some combination of inflation and real economic growth. Exactly what the mix will be is harder to determine, and it is even possible for inflation to be rising while real activity goes the other way. How individuals and business react to Helicopter Money, and how it changes their expectations of the future, will be an important determinant of its effectiveness. 

While a central bank money financing government spending is not new, there are good reasons why it is considered a ‘taboo’. There are many cases where too much money printing has led to hyperinflation, with disastrous consequences. 

What this points to is the need for credible institutions and the need for any Helicopter Money program to be consistent with the inflation goals of the central bank. An open question is whether credible arrangements could be put in place given political realities. 

Legal and political obstacles to Helicopter Money vary by country. Of the major advanced economy central banks, the European Central Bank is the one facing the greatest possible constraints, given legal prohibition of (direct) money financing of governments by the ECB, the lack of a central fiscal agency and the difficulty of getting agreement amongst member states. 

 

Eoin Treacy's view -

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

With an increasing quantity of the global bond market now yielding less than zero, the ECB accepting just about anything counterparties wish to lodge as collateral and negative deposit rates at a handful of central banks, speculation is understandably turning to what central banks might next try to achieve their inflation goals. Negative rates represent something of a Rubicon for bond investors so helicopter money, which was once inconceivable, is now openly being discussed as a possibility. 



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June 10 2016

Commentary by Eoin Treacy

June 09 2016

Commentary by Eoin Treacy

Are the Robots Taking Over? The Emergence of Automated Digital Wealth Management Solutions

The heavyweight report from Financial Technology partners may be of interest to subscribers. Here is a section: 

With the advent of Automated Digital Wealth Management solutions (aka robo advisors), the traditional wealth management industry is facing perhaps its most disruptive threat since low-cost online stock trading emerged in the mid 1990’s

The combination of highly credible digital wealth management solutions, the Millennial generation’s predisposition to “do-it-yourself-through-an-app” and the pending transfer of trillions of dollars of wealth to and eventually from Baby Boomers is forcing participants across the wealth management industry to reevaluate their product and distribution strategies

Already suffering from the relative shift in appetite towards ETFs and other passive investment vehicles, the mutual fund industry in particular appears further threatened by digital wealth management solutions since most of the solution providers utilize ETFs as their underlying investment vehicles; this movement may force firms that have traditionally only focused on providing financial services products to focus on providing scalable advice as well – the new Department of Labor rules around fiduciary duty for retirement service provides will likely exacerbate this trend

At a minimum, all wealth managers should be highly focused on “digitizing” their businesses as consumers of all ages and demographics will increasingly expect an “Amazon and Uber-like” experience from all of their financial service providers

Similar to the online trading playbook, new consumer brands are emerging in the digital wealth management industry (such as Betterment, Wealthfront and Personal Capital) while traditional firms are striking back by either offering their own in-house solutions (such as Charles Schwab and Vanguard) or partnering or acquiring to speed time to market

Recent M&A includes BlackRock’s acquisition of FutureAdvisor, Invesco’s acquisition of Jemstep and Northwestern Mutual’s acquisition of LearnVest

A handful of different business models have materialized in the digital wealth management space including 1) new direct-to-consumer brands with limited advisor assistance, 2) new direct-to-consumer brands with heavier advisor assistance, 3) traditional firms with in-house digital wealth management solutions, 4) business-to-business and white label providers enabling others to offer their own digital wealth management solutions and 5) retirement specific providers including both direct-to-consumer and business-to business providers

Similar to other recent FinTech innovations, digital wealth solution providers are quickly emerging around the globe – in fact, we have identified more international direct-to-consumer players than in the U.S.

As capital continues to flow into the digital wealth management space and traditional investment management firms evaluate their strategies, we expect to see a notable increase in partnership and M&A activity in the space
over the next 12-18 months

A number of newer firms are likely to be acquired by larger organizations that are looking to add or deepen their digital wealth management capabilities while only a relatively small number of new consumer brands are likely to achieve the level of scale (and funding) they need to survive on their own over the long-ter

Eoin Treacy's view -

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

The risk of litigation for financial advisors means the majority of investors are presented with what might be described as a plain vanilla 60/40 bonds to equities blend for their portfolios. Depending on whether the investor is categorised as conservative or risk tolerant that basic formula might be altered somewhat but the long-term nature of the strategy means the majority of clients will be invested in the model portfolio. 



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June 09 2016

Commentary by Eoin Treacy

Email of the day on viruses representing a greater risk than bacteria

I remain interested in your commentary on health issues, in part because that is the area in which I work. I do not share your fear that antibiotic resistance will be a black swan event, capable of disrupting markets. Bacterial pathogens are nowhere near as transmissible as respiratory viruses; transformation of viral pathogenicity is a far greater concern than bacterial multi drug resistance as a game changer, mainly because of the rate of spread of viral infection such as influenza, Ebola etc. Witness the influenza pandemic of 1919 which killed more people than WW1. We have had multidrug resistant TB in countries such as Indonesia for many years, yet no markets have collapsed. There is less risk of catching the latter for one. MDR bacteria are more a risk to patients in hospital; yet when there are outbreaks, they are usually contained by better contact precautions. From a QI perspective we should not be complacent about bacterial antibiotic resistance, yet in contrast with AB therapy for many bacterial infections, we have very few effective antiviral agents, a situation that has changed little for ages. One bright light though is nanotechnology (seems to be a catchier name than molecular biology). Nanoviricides is one company in that space. Their product line is preclinical trial but getting close. Are you aware of any others with similar potential?

Eoin Treacy's view -

Thank you for this informative email and I agree that a new virus would have an instant effect relative to the slowly developing problem of antibiotic resistance. The threat from the latter is not that we have a pandemic like influenza in 1919 but rather that bacteria become a future threat that saps growth potential because people stay sicker for longer or die because the drugs to treat them do not exist. In that scenario it could be a slow burn crisis that would drag on economic potential and is a particular risk to high population emerging markets. 



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June 09 2016

Commentary by Eoin Treacy

Brazil Frost Risk Highest in South Parana Cane Area, MDA Says

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here it is in full: 

Southeastern fringes of Parana cane and coffee areas face coldest threat on morning of June 12, Kyle Tapley, meteorologist at MDA Information Services in Gaithersburg, Md., says in telephone interview

Temperatures also to fall below freezing in Santa Caterina, Rio Grande so Sul

“The whole weekend will be pretty cold” with temperatures gradually rising by middle of next wk

NOTE: Parana suffered sugar-cane losses from frost in 2013

Most of threat this weekend remains south of Center-South w/temperatures forecast to drop below avg into 30s degree Fahrenheit, not low enough to hurt coffee, cane or oranges

Citrus trees can be damaged if temps. drop below 28 degrees F (minus 2 Celsius) for several hours w/ coffee at greatest risk below 32 F, and “I certainly don’t see that happening”

NOTE: In recent decades, coffee farms in Parana were moved norrthward, away from high frost-risk prone areas.

 

Eoin Treacy's view -

The risk of frost to crops that depend on warm temperatures is a non- trivial consideration and helps to explain the recent run up in prices for sugar, coffee, orange juice and soybeans. Perhaps the more important point is to highlight how dependent the global soft commodity sector has become on bumper crops. The after effects of the El Nino and the potential for a La Nina to develop could continue to exacerbate volatility in these markets.



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June 08 2016

Commentary by Eoin Treacy

ECB "Monetary Amphetamine" Propels Gold to Best Start Since '79

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

In the U.S., traders are pricing a zero percent chance of an interest-rate increase in the Federal Open Market Committee’s meeting next week, and the odds of such a move stay below 50 percent until December, according to Fed-fund futures. The Bloomberg Dollar Spot Index dropped as much as 0.6 percent to the lowest since May 5.

Gold probably has bottomed and will be supported by risks surrounding a U.K. vote on whether to leave the European Union, U.S. monetary policy and elections in the U.S. and Spain, according to Clive Burstow, who helps manage $35 billion at Baring Asset Management Ltd. in London. 

 

Eoin Treacy's view -

At the last count $7.8 trillion in sovereign bonds was yielding less than zero and with the German 10-year at around 4 basis points it might not be too long before an even larger swathe of the global debt market is in the same condition. The ECB begins its corporate bond buying program today which is likely to depress yields further. 

Against that background it is hard for the Fed to raise rates because the resulting upward pressure on the Dollar would be counterproductive. Equity markets have been quite steady over the last month, taking their cue from the bond markets, and the near-term conclusion is that interest rate hikes will be modest at best and we might have to wait for them. That suggests the liquidity on which the market has been dependent will remain in place and that is positive both for financial assets and the price of items that cannot simply be loaned into existence. 



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June 08 2016

Commentary by Eoin Treacy

Unconventional future: man vs. machine

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

Mining costs: labour, electricity drive continuing inflation at conventional mines
You may have opened this expecting a sci-fi/marvel-esque drama, instead, it is about cost history of PGM producers we cover. Cost inflation has run at around 9% p.a over the past five or so years. We estimate conventional mines unit costs are 20-25% above mechanised, & may continue to increase at around 10% p.a. without stringent cost control. Around 70% of their costs are labour & electricity. Mechanised mines have a balanced cost composition & could limit increases at mid-to-high single digit percentages. We adjust our cost inflation expectations & valuations for longer-term cost inflation rates. With a shift to lower costs, AMS is our top pick: Buy. Lonmin is our least preferred: Sell.

Unit costs and inflation by mining method: conventional disadvantage to widen 
Each mine faces different circumstances and each company has different cost disclosure. However, we are able to draw some broad industry conclusions. Conventional mines have c.25% higher unit costs relative to mechanised operations. Conventional mines’ inflation rates have been c.10% p.a. or higher over the last 5 to 6 years, driven by electricity and wages (making up c.70% of costs) and we think this cost-pressure is likely to continue. Mechanised mines’ costs have a greater proportion of contractors and stores/materials than conventional mines and are relatively light on labour costs. While mechanised mines have also faced strong cost inflation, some operations have managed to keep inflation to mid single digit CAGR percentages.
Composition of costs by mining method and cost inflation of categories

Labour costs (c.60% of conventional costs) as a category have increased c.9 to 12%p.a. over the past 5-6 years. Utilities, c.8-10% of conventional on-mine cash costs, have increased at between 11 to 20%p.a. Stores/materials have increased at c.5.5% to 6.5% p.a. and are approximately 25 to 30% of costs. 

 

Eoin Treacy's view -

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

Platinum’s scarcity, the high cost of extraction and an increasingly uncertain situation in South Africa are long running considerations the market is familiar with. The growth of the electric vehicle market is a new development that needs to be considered because with no catalytic converters they don’t need platinum. That is one of the primary reasons platinum producers are so keen to promote fuel cell technology because they use the metal and electric car batteries don’t. That represents a hurdle for platinum entering a sustained bull market but it is rallying in sympathy with the other precious metals at present. 



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June 08 2016

Commentary by Eoin Treacy

Email of the day on antibiotic resistance

I agree totally Eoin. Which is why (apart from my investing activities) trying to solve the problem takes much of my time. Two years ago we founded a charity (non-profit) named Antibiotic Research UK. (www.antibioticresearch.org.uk) to bring together national experts to find solutions. Just as we have the well-known charity Cancer Research UK, we now have Antibiotic Research UK. Why? Well, the predictions from the UK Government's AMR Review indicate that bacteria will soon be killing more people than cancer. The AMR review papers are worth reading at http://amr-review.org/ Lord Jim O'Neill was of course ex Chair of Goldman Sachs Asset Management, and he was able to call on all global experts when compiling his review conclusions. If his review is even half correct, the horrible truth is that a good percentage of readers of these words are likely to die eventually from bacterial infection.

I am a founding Trustee of Antibiotic Research UK and also chair of the Science and Technology Advisory Committee. You can see the other members on the website. It is a highly expert group. Some of my ideas on how to beat the resistance problem were published last year by the leading science publisher Nature (Antibiotic resistance breakers: can repurposed drugs fill the antibiotic discovery void? URL http://www.nature.com/nrd/journal/v14/n12/full/nrd4675.html. On request, I can send a pdf to any reader interested). We have raised a bit of money from donations from the public, and are now just beginning the experimental work to test the ideas. Initial results should be available by end 2016. 

Fingers crossed, as we need to save our antibiotics. This was brought home to me the hard way in March this year when my father died from antibiotic-resistant MRSA infection. 5 antibiotics failed to save him. Frankly, even with my expertise, if I had caught MRSA from him I could not be sure which antibiotics to choose to treat myself. The situation is getting serious very quickly. 

I am speaking at Markets Now on July 11, and I will use my hour for investment discussions, but if anyone wants to discuss antibiotic resistance in the bar afterwards I will be there. And if anyone has any good ideas, I will gladly buy them a drink!

 

Eoin Treacy's view -

Thank you for sharing your expertise and please accept both my and the Collective’s condolences on the death of your father. Your presentations are always well received at the Markets Now events and I suspect more than a few will take you up on your offer to chat in the bar afterwards. 



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June 08 2016

Commentary by Eoin Treacy

Oil Climbs to 10-Month High as U.S. Crude Stockpiles Decline

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

Oil producers in Nigeria are facing a renewed wave of violence in the delta region that accounts for most of the country’s crude. Nigeria’s output dropped to the lowest in almost three decades as armed groups intensified attacks to rupture pipelines in recent months. Total volume of crude shut due to the attacks range from 700,000 to 800,000 barrels per day, according to the state-owned Nigerian National Petroleum Corp.

Eoin Treacy's view -

The weakness of the Dollar against commodity producing currencies and continued supply disruptions in both Nigeria and Canada are helping to boost demand among traders for the most important commodity and are at least partially offsetting the boost in supply from Iran since sanctions were lifted. 



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June 07 2016

Commentary by Eoin Treacy

Asean economies to outperform rest of Asia

This article The Edge in Singapore, quoting a report from Nomura, may be of interest to subscribers. Here is a section: 

Southeast Asian countries, with the exception of Thailand and Singapore, have better economic prospects than the rest of Asia, according to Nomura Holdings.

In a Tuesday media briefing, senior Nomura economists and researchers say that the countries they are positive about – Malaysia, the Philippines, and Indonesia -- are strong structurally and have the right policies in place.

Euben Paracuelles, Nomura’s Senior Economist on Southeast Asia, says they have a neutral outlook on Malaysia, but is positive overall noting the sentiments around the country.

“The economy is really quite resilient despite this combination of shocks from low commodity prices, fiscal consolidation [and] the political noise… because there was quite a bit of diversification in the economy in the last couple of decades,” Paracuelles says. 

He says Malaysia’s manufacturing sector is doing well because it has a competitive currency and the right product mix that can cater to the current US consumer demand and their recovering housing market.

With manufacturing making up 60% of the export sector, and commodities making up 30%, the manufacturing gains is enough to offset the loss in commodity profits, he adds.
For the Philippines, Paracuelles noted that the new president, Rodrigo Duterte, would “take a very pragmatic approach [for the economy].”

He says that it is unlikely for Duterte to reverse the current economic reforms, and the eight-point agenda he released after his win highlighted that policy continuity is key.

 

Eoin Treacy's view -

China is Asia’s regional heavyweight so when the Renminbi found at least short-term support in the region of the January low on Friday it removed some pressure from its neighbours and competitors to seek weaker currencies to maintain their relative positions. 

The Asia Dollar Index formed an upside weekly key reversal last week to confirm support above the January low and has followed through to the upside so far this week. A sustained move back below 106 would be required to question potential for additional upside. 

 



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June 07 2016

Commentary by Eoin Treacy

New antimicrobial material joins fight against antibiotic-resistant bacteria

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

"Our unique material can kill bacteria rapidly and inhibit the development of antibiotic-resistant bacteria," says IBN Group Leader, Dr Yugen Zhang. "Computational chemistry studies supported our experimental findings that the chain-like compound works by attacking the cell membrane. This material is also safe for use because it carries a positive charge that targets the more negatively charged bacteria, without destroying red blood cells."

The team's compound was developed as an alternative to triclosan, a common ingredient in hygiene products like soap and toothpaste which has been shown to aid antibiotic resistance. The team says the new material, which takes the form of a water-soluble white powder, could be a viable replacement in these applications and could be used in alcoholic sprays used for sterilization in homes and hospitals.

"The global threat of drug-resistant bacteria has given rise to the urgent need for new materials that can kill and prevent the growth of harmful bacteria," says IBN Executive Director, Professor Jackie Y. Ying. "Our new antimicrobial material could be used in consumer and personal care products to support good personal hygiene practices and prevent the spread of infectious diseases."

 

Eoin Treacy's view -

If you had to name one black swan event that could derail the trajectory of global growth it is antibiotic resistance. It’s not a challenge to growth right now but there is an inevitability to the problem which gives urgency to the search for a solution. I’m an optimist so I believe a solution will be found but I tend to read every article I see on the subject because the stakes are high and the potential rewards for both companies and society are very large. 



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June 07 2016

Commentary by Eoin Treacy

Sushi Robots and Vending-Machine Pizza Will Reinvent the Automat

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

“I get it. But this is not a vending machine, it’s an automated restaurant,” he said. “There are real humans making the burritos. Everything is handmade.”

No, those humans are not super-small and no, they don’t toil in the machines. The burritos are made in kitchens that also supply restaurants, sometimes flash-frozen, and then shipped to the boxes. They’re defrosted before going into the machines. An employee checks the boxes once a day to make sure there’s fresh inventory.

The vending machines harken back to the Automat, a 20th- century fast-food restaurant that featured cubbyholes with food items behind glass doors. Put coins in a slot and the door would open for a gratuity-free snack or meal.

The bright orange Burritoboxes are higher tech. They have a touch screen, mobile-phone charging station and live-chat customer service in case there’s an issue. It takes about 90 seconds to heat a complete meal, including Cinnabon-brand gooey bites for dessert. Customers can watch music videos on the touch screen while waiting.

Unlike Burritoboxes, the pizza machines are unbranded so local pizzerias and packaged-food companies can label and fill the machines with their own pies. Pizzerias in Sarasota, Florida, and Chicago are experimenting with them. Each one holds 108 slices and reheats them in a conveyor oven in about one minute and 40 seconds.

Lynnie Cook, 65, the founder of 24/7 Pizza Box, said he has orders for more than 100 of the $29,920 machines. He expects to sell 2,500 in 2017.

“Our time is getting more precious,” Cook said. “You’re going to have people bringing food to where the businesspeople are working, or just making it more convenient.”

Robotics have made their way into the back of restaurants.

Sushi Station, a conveyor-belt-style sushi restaurant in Elgin, Illinois, has two sushi-roll makers from manufacturer Autec. Add rice paper, press a button, add a filling, and voila. The robot costs $19,000. There’s also a machine that makes perfectly shaped rice for nigiri. The robotics help the restaurant supply the roughly 1,000 rolls it sells each day.

 

Eoin Treacy's view -

On Star Trek everybody just went to the hole in the wall to order whatever they wished from the replicator. Vending machines defrosting burritos and pizzas isn’t quite on that level but the convenience of obtaining snack foods without having to spend time inside the restaurant will have appeal for a broad swathe of the population. 



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June 06 2016

Commentary by Eoin Treacy

World's Workshop Goes Dark as Robots Take Over

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

“Replace humans with robots,” added his successor, Hu Chunhua, 53, one of the youngest members of the Politburo, in a 950 billion yuan ($144 billion) plan to upgrade 2,000 companies in three years, the official Guangzhou Daily reported in March 2015, adding that the move is not expected to cause heavy layoffs.

Dongguan replaced 43,684 workers with robots in 2015, cutting costs at those factories by nearly 10 percent, according to the local government.

Lu Miao, a vice general manager of Lyric Robot in Guangdong’s Huizhou city, said the government pays as much as 50,000 yuan to Lyric’s customers for each robot they use to replace workers.

“The government at all levels in Guangdong has been encouraging companies to replace human workers as rapidly as possible,” said Lu. “I can see our business increasing more than 50 percent this year.”

The ultimate result is so-called “dark factories” that don’t need lighting because only robots work on the production line. TCL has such a plant making LCD displays, Li said in an interview at the company’s headquarters in Huizhou, about an hour’s drive from Dongguan.

“For society at large, some workers will be laid off,” said Huizhou Mayor Mai Jiaomeng. “But it’s good for companies to improve their competitiveness.”Washed out

Local officials say the layoffs are under control, but are reluctant to provide details on how many plants have shut or moved away. A municipal report from Shenzhen in January said that the city has “washed out” or “transformed” more than 17,000 low-end factories over the past five years.
Instead, officials point out how Guangdong province is attracting new businesses, especially entrepreneurs, and building campus-style high-tech parks that are a far cry from the pollution-choked factories of the region’s industrial heyday 

 

Eoin Treacy's view -

I was in Dongguan, Guangzhou and Shenzhen last October and the message coming from manufacturers was that business never really recovered from the loss of the US market after the credit crisis. The collapse in oil prices was affecting the Middle Eastern market while the broad commodity slowdown had affected emerging market demand. The strength of the Yuan during the same period in tandem with higher wages conspired to exaggerate this effect.



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June 06 2016

Commentary by Eoin Treacy

Megacaps Are Now S&P 500's Curse as Smart Beta Gets Payback

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

The reversal of fortunes holds a bullish signal at a time when few can be found, marking a restoration of breadth in a market that saw some of its narrowest gains on record last year.
Beneficiaries include the large swath of smart beta funds that seek to neutralize the impact of megacaps, a strategy that saw outflows in the last four months after stumbling in 2015.

“Due to the S&P 500’s market-cap construction, looking back over the last 12 to 24 months, large companies masked a lot of the pain that’s been borne by the more common share price,” said Eric Wiegand, senior portfolio manager at the Private Client Reserve of US Bank in New York, which oversees $128 billion. “Beginning to see that broaden out sets a much healthier undertone.”

Wider gains are part of a subtle normalization in the U.S. stock market after its worst start ever, evidenced by a loosening in relative valuations among companies and greater dispersion in price returns. Correlations with oil and currencies have unwound as big-picture concerns such as the global economy, China and the Federal Reserve eased.

Diminished breadth not only crushed size-agnostic strategies in 2015 but meant that megacaps obscured the market’s fragility. Fewer stocks went up, with the 10 biggest by market value rising more than 20 percent while the rest of the S&P 500 fell 3.5 percent on average, the biggest gap since 1999.

 

Eoin Treacy's view -

The lack of breadth in the wider market was a topic of concern last summer ahead of the August drawdown and was also a factor in the steep decline in January. However with so many shares pulling back in January the subsequent bounce has been broad-based which has contributed to the outperformance of the equal weighted index of late. Additionally the outperformance of most of the top-10 largest cap shares last year suggested they were unlikely to be capable of turning in a similar performance this year. 



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June 06 2016

Commentary by Eoin Treacy

Could Blockchain Have Prevented Bangladesh's Central Bank Hack?

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

In the case of Bangladesh’s central bank, hackers used the Swift system to send messages to the New York Federal Reserve, instructing it to move the Bangladeshi bank’s cash into accounts in the Philippines. They impersonated bank officials to send the messages.

Skulduggery
Hackers also used malware to compromise the bank’s records, covering their tracks. That type of skulduggery, blockchain advocates say, would be immensely difficult using the encrypted ledger.
With blockchain, the statement of transactions is not kept in one place. Instead, the information is held on a network of computers that verify the data and keep each other honest.

Hackers would have to break into the majority of computers on the network to cover their trail rather than just exploiting a single computer. For the biggest blockchains, such as bitcoin’s, that would mean hacking thousands of computers.

Swift has insisted that its core messaging service is secure and that the vulnerabilities are on the machines that interface with the network. Those computers are its members’ responsibility, the bank-owned cooperative says. Swift says its data center’s “golden copies” of transactions remained intact and could have been used to verify what had gone missing from the Bangladesh central bank.

 

Eoin Treacy's view -

The Bangladesh central bank hack was possible because sophisticated actors were able to take advantage of a comparatively unprepared institution to gain access to a global network of banks. It’s a classic Trojan strategy just on a much larger scale. 



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June 03 2016

Commentary by Eoin Treacy

Gold Surges Most in 11 Weeks as Payrolls Data Quashes Fed Bets

This article by Luzi Ann Javier for Bloomberg may be of interest to subscribers. Here it is in full: 

Gold futures headed for the biggest gain in 11 weeks after the U.S. economy added fewer jobs in May than forecast, weakening the case for the Federal Reserve to raise interest rates.

The addition of 38,000 workers, the fewest since September 2010, followed a 123,000 advance in April that was smaller than previously estimated, a Labor Department report showed Friday.

The increase in May was less than the most pessimistic forecast in a Bloomberg survey.

Bullion is coming off of its biggest monthly loss since November after signs of an improving U.S. economy spurred speculation that the Fed could tighten monetary policy as soon as this month. Higher rates curb bullion’s appeal against interest-bearing assets. Those bets retreated on Friday, with the odds of a June rate rise dropping to 4 percent, from 30 percent a week ago, according to Fed funds futures.

“It’s a pretty bad number,” Bob Haberkorn, a senior market strategist at RJO Futures in Chicago, said in a telephone interview, referring to the jobs report. “It takes the Fed rate increase pretty much off the table for June.”

Gold futures for August delivery jumped 2.1 percent to $1,238.30 an ounce at 8:48 a.m. on the Comex in New York. A close at that price would mark the biggest gain since March 17.

Last week, Fed Chair Janet Yellen suggested an increase in rates would be appropriate if economic growth picks up and the labor market continues to improve.

Eoin Treacy's view -

Today’s weak jobs number suggest the Fed may have to pause and wait for more data before raising rates. This is particularly true since today’s number is so much less than expected. A point Jeff Gundlach made at his talk last week was that every central bank that has tried to raise rates since the financial crisis has had to reverse course and it is too early to say whether the Fed will have to do the same. 



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June 03 2016

Commentary by Eoin Treacy

June 03 2016

Commentary by Eoin Treacy

Email of the day on corn

Regarding the price chart for corn: I have been watching this with interest for a few months after seeing that for at least the past 4 years there have been relatively large price movements in June/July. Not knowing much about corn, presumably this is related to crop information? With the price ranging in quite a tight pattern for 2 years now I wonder if you have any thoughts as to what this could indicate for the coming month or two. Thanks

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. The majority of US corn is planted in April and May so by June and July farmers have a reasonable idea of how the crop is coming along but it is heavily dependent on just the right amount of rain around this time of year to support rather than damage the crop. There are also a number of major USDA reports that come out in June/July that give some insight into stockpiles, exports and crop health which tend to have an effect on price.



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June 03 2016

Commentary by Eoin Treacy

Banks Bear Brunt of U.S. Stock Reversal in Tumble Few Saw Coming

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

Expectations for higher rates this summer tumbled after the jobs report. Based on Fed funds futures, traders are now pricing in a 31 percent chance of a Fed boost by July, down from 55 percent earlier, while odds for a June hike have fallen to 4 percent from 20 percent.

The selloff was deepest among banks and insurers, with all but 15 of 92 members in the S&P 500 Financials Index retreating. Goldman Sachs Group Inc. and JPMorgan Chase & Co. fell at least 2.1 percent, while brokerages E*Trade Financial Corp. and Charles Schwab Corp. sank more than 5 percent.

Eoin Treacy's view -

Banks have been labouring under tight margins with the low interest rate environment. The potential for interest rates to rise would help improve the prospects of profiting from money market funds and other short-term interest rate products they offer and would have increased margins on loans. With sentiment once more ebbing and the potential for a series of rate rises currently looking less likely, that source of profitability looks a little more distant. 



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June 02 2016

Commentary by Eoin Treacy

A Cautionary Tale from the '80s for Today's Loan Participations

Thanks to a subscriber for this article by Christopher Whalen for the American Banker. Here is a section: 
 

 

Since 2013, the federal regulatory agencies have been warning banks and investors about the potential risks in leveraged lending. These warnings have been both timely and prescient, particularly in view of the ongoing credit debacle in the energy sector. In addition to the well-documented credit risk posed by leverage loans, we believe that the widespread practice of selling participations in leveraged loans represents a significant additional risk to financial institutions and other investors from this asset class.

While regulators have appropriately focused on the credit risk component of leveraged loans held by banks and nonbanks alike, the use of participations to distribute risk exposures to other banks and nonbank investors also raises significant prudential and systemic risk concerns. The weakness in oil prices, for example, has caused investors to cut exposure to companies in the energy sector. This shift in asset allocations caused by the decline in oil prices has negatively impacted prices for leveraged loans and high yield bonds. In some cases, holders of these securities are attempting to exit these exposures by securitizing the participations.

The investor exodus away from leveraged loans with exposure to the petroleum sector brings back memories of the 1970s oil bust, an economic shock that led to the failure of Penn Square Bank in 1982, the subsequent failure of Seafirst Bank later in that year, followed by Continental Illinois Bank in 1984. Before its failure, Penn Square technically continued to "own" — and service — loan interests held by other banks with participations. As receiver for the failed bank, the Federal Deposit Insurance Corp. deemed those investors to be nothing more than general creditors of the failed bank's estate. Those participating banks lost their entire investment.

 

Eoin Treacy's view -

Leveraged loans issuance overtook the 2007 peak a couple of years ago. That fact is bemusing to many people who remember claims that bankers would never again engage in such activity. Yet with interest rates so low and the demand for yield so high the rationale for issuing to less than optimal borrowers is hard to resist. 



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June 02 2016

Commentary by Eoin Treacy

The Deepening Deficit That Makes Zinc One of 2016�s Top Bets

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

The Chinese smelters that churn out more than 40 percent of the world’s zinc may cut production for the first time in four years because they can’t get enough raw material, further lifting prices of one of this year’s strongest-performing commodities.

Zinc, used for rustproofing steel in everything from auto bodies to suspension bridges, has surged as much as 25 percent in 2016 to the highest since July as miners supply less of the ore concentrate that’s refined to produce the metal, just as to Macquarie Group Ltd. see further gains, while Glencore Plc, the biggest miner of the metal, says structural deficits are back.

 

Eoin Treacy's view -

$1800 represented the lower side of a five-year range in zinc prices, so when it broke below that level in August sentiment understandably turned bearish. However the rally that has been underway since the beginning of the year has not only taken the price back up into the overhead range, but zinc has rallied enough so that the drop below $1800 can be considered a failed downside break. A sustained move below $1800 would now be required to question potential for additional upside.



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June 02 2016

Commentary by Eoin Treacy

Mobius Bets on India's Small-Cap Stocks to Tap Growing Economy

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

Mark Mobius is betting on shares of smaller Indian companies to profit from expansion in the world’s fastest-growing major economy.

“If you factor in the reforms that are taking place and the impact they can have on company earnings, it tells us that India is on the cusp of an interesting opportunity,” Mobius, executive chairman of Templeton Emerging Markets Group, said in an interview to Bloomberg Quint in Mumbai. The money manager has $2 billion in Indian stocks, of which more than $600 million is invested in shares of small companies, he said.

The S&P BSE SmallCap gauge of 762 small companies has fallen 5.4 percent this year, compared with the 2.8 percent advance in the S&P BSE Sensex, as some of the worst-performing stocks on the benchmark index last year rebounded in 2016. The smaller companies are likely to climb after trailing the rally in the biggest shares as benefits from Prime Minister Narendra Modi’s growth-boosting measures take hold, Mobius said.

 

Eoin Treacy's view -

Progress in reforming the Indian economy is slow but it is happening and one of the highest economic growth rates in the world is a testament to the benefits improving governance can deliver. Continued speculation about whether Rajan will seek or indeed receive another term as governor of the RBI is likely to become more important as the urgency of the decision increases but in the meantime India represents a bright spot on the global tapestry of markets. 



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June 02 2016

Commentary by Eoin Treacy

Email of the day on autonomous rail

What puzzles me is if autonomous vehicles are such a "no-brainer", then why haven't all phases of rail movement not been fully automated? Compared to rail traffic the open road seems like a free-for-all!

Eoin Treacy's view -

Thank you for a relevant question and this is something I have also been pondering. This article from Wired.com tackles the issue and their answer comes down to line of sight, unions and lack of desire to upset the status quo rather than any particular deficiency in the technology. . 



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June 02 2016

Commentary by Eoin Treacy

'What Makes A Financial Bubble?'

Thanks to a subscriber for this article highlighting academic research that confirms what we knew all along; crowds are irrational. Here is a section:

What’s the bottomline? Experienced traders investing in a market with inexperienced traders may be better served by buying early in a trend, riding the momentum for longer than expected, and carefully planning an exit. While tricky, this approach may better serve the “rational” investor relative to a more intuitive approach of selling an investment the minute it moves a penny beyond fundamental value.

Eoin Treacy's view -

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June 01 2016

Commentary by Eoin Treacy

OPEC Meeting Preview

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

We agree that the market is fixing itself. The headline on our presentation that we bring to customer meetings has since the start of this year been “Non-OPEC to painfully balance the market by moving from record growth in 2014 to production declines in 2016.” We still believe this is the correct way of looking at this market and we never factored in any production limiting help from OPEC in our supply-demand balance despite being bullish to oil prices since January. In our report from January 13 we forecasted Brent prices of 50 $/b for Q2 this year. This was then way above consensus as Brent then traded at 30 $/b. We argued that one can be bullish to oil prices without production limiting policies from OPEC. We are now seeing the signs that the Saudi strategy is working and it has mainly to do with swings on the supply side rather than changes to demand. We can mention that the growth in global oil supply was 2.3 million b/d in 2014 and 2.7 million b/d in 2015, but moving into Q2-2016 the growth in global oil supply (also including OPEC of course) is gone and will probably turn net negative for the rest of the year. Our own global supply-demand balance is suggesting that global oil supply will not grow in 2016, despite OPEC supply growing 0.7 million b/d. This is the key to the rebalancing. 

May 2016 is the first month since December 2013 that our global supply-demand balance is in a deficit. The market has been helped to reach this deficit quicker than what we thought at the beginning of this year particularly due to large unplanned outages in Nigeria and Canada. Canada has during May lost about 0.9 million b/d in production due to the wild fires while Nigeria has lost about 0.5 million b/d due to force majure on Forcados, Escravos, Bonny Light and Qua Iboe. All but Qua Iboe has been caused by sabotage against oil facilities executed by militant groups where The Niger Delta Avengers is the most famous. Canadian production will likely be back to prior levels by July after ramp up through June, but Nigerian output will be slow to return as militants are set to continue to attack facilities through the rest of this year. 

 

Eoin Treacy's view -

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

The oil market remains in a state of flux because oil producers have been forced to take a hard look at their business models. The response to low prices has been to cut investment to the bone and simply pump what is most expedient. The result is that US production has begun to decline while the Nigerian and Canadian outages have added to the near-term bullish case for oil. 



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June 01 2016

Commentary by Eoin Treacy

Musings from the Oil Patch June 1st 2016

Thanks to a subscriber for this edition of Allen Brooks' energy report for PPHB. Here is a particularly interesting section on autonomous trucking: 

The new topic being opened by efforts such as Otto and the platooning demonstration in Europe is the impact on fuel and labor costs within the trucking industry. In the United States, trucks drive 5.6% of all vehicle miles and are responsible for 9.5% of highway fatalities, according to Department of Transportation data. Because heavy-duty trucks have a significantly lower fuel-efficiency performance, they account for a larger share of diesel fuel consumption than diesel cars or other types of equipment. Because diesel fuel is included in distillates, we cannot determine the exact weekly volumes. However, we know that for the week ending May 20, distillate volumes of slightly over 4 million barrels a day represented 20% of total fuel supplied in the U.S. By examining the latest inventory data, distillates are broken down by the amount of sulfur in the fuel. Diesel fuel for vehicle use needs to be low sulfur – 15 parts per million or less. That fuel category accounted for 88% of all the distillate in storage, therefore we would think this is a reasonably close approximation of the highway quality diesel fuel being supplied to the U.S. market. If 62% is used by over-the-highway trucks, then the daily consumption is approximately 2.2 million barrels. Improved fuel savings from autonomous technology could eventually account for upwards of 200,000 barrels a day in savings. 

Autonomous vehicle technology is being hailed as a way to reduce the number of accidents. The largest impact of the technology, however, may be on the employment of truck drivers. There are more than three million truck drivers in this country. According to the American Trucking Associations, the truck industry accounts for one of every 15 jobs in the United States. By eliminating the need for second drivers on many trucks due to the ability of the primary driver to fulfill his rest obligations while the truck drives itself, there will be a negative employment impact from autonomous technology. 

Although perceived as a negative, autonomous technology might actually become a positive as the trucking industry deals with an aging workforce and a less-than-attractive employment career as long-haul driving can be tedious and keeps drivers away from home for extended time periods. While younger drivers enjoy the first and last miles of truck driving, they wish to avoid the boring portion, which autonomous technology would eliminate. In the U.S., according to consultant Oliver Wyman, by 2023 it is projected that there will be shortfall of 240,000 drivers, or approximately 8% of the estimated current number of truck drivers. 

Canada has a similar employment outlook for its highway trucking industry. According to the Canadian Trucking Alliance there are about 300,000 long-haul truck drivers. Similarly, the Canadian Trucking Alliance estimates that the Canadian industry will have a shortfall of 48,000 drivers by 2024 — about 15 per cent of the total driving force – due to an aging workforce and a less-attractive employment career. 

Another impact of autonomous technology for trucks is that vehicles can be kept on the highway for more hours per day. That could not only reduce the need for additional drivers, but it could also reduce the cost for transporting goods, further contributing to deflationary forces in the economy. 

All of these considerations influenced our previous article’s conclusion that autonomous trucks were more likely to be on the roads before autonomous cars. That may be why Mr. Levandowski left Google. He said that his decision to leave was motivated by being eager to commercialize a self-driving vehicle as quickly as possible. At Google, he was responsible for drafting legislation to permit self-driving vehicles, which ultimately became law in Nevada. While certain states such as California have motor vehicle regulations that would prohibit the idea of trucks traveling on the freeway with only a sleeping driver in the cab, other states currently do allow it. “Right now, if you want to drive across Texas with nobody at the wheel, you’re 100 percent legal,” said Mr. Levandowski. Stay tuned for self-driving trucks on a freeway near you. 

Eoin Treacy's view -

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

The technology behind autonomous vehicles is progressing towards greater utility and it makes sense that haulage vehicles represent the primary source of demand considering the high cost of fuel, personnel and regulations. It represents an additional example of the deflationary role technology has and the benefits that accrue to consumers as a result. 



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June 01 2016

Commentary by Eoin Treacy

China Buying Sparks Bitcoin Surge

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

Huobi and OKCoin, two Chinese exchanges, now collectively account for some 92% of global trading in bitcoin.

The surge in bitcoin buying this weekend could be the latest sign of how Chinese investors are moving money between asset classes quickly in search of high returns. In the past year, equities, bond and commodities markets in China have in turn seen massive surges of new investing, often followed by a collapse in prices as funds have moved elsewhere.

“There’s a lot of hot money in China that has to go somewhere,” says Du Jin,chief marketing officer at Huobi. Huobi has seen a surge of new registrants in the past one month, he said.

Expectations that new supply of the virtual currency will decrease next month could also be behind the latest price surge. The creation of bitcoin via a complicated computing process called “mining” gets more challenging over time, thanks to a mechanism that cuts the number of bitcoin that can be created in half every four years in order to limit supply.

 

Eoin Treacy's view -

I highlighted the reweighting of Bitcoin in December and as the limit approaches speculation in the cryptocurrency is increasing. The nitty gritty of the process is that in order to inhibit inflation the reward for solving a bitcoin problem halves every four years or, more specifically, every time 210,000 blocks are created. That suggests some time in July will represent the next reweight. Supply will decrease so the value of bitcoins in existence may increase in anticipation of that event. 



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May 31 2016

Commentary by Eoin Treacy

MSCI Optimism Revives China Stocks With Biggest Gain Since March

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

Chinese stocks were shaken out of their May torpor after Goldman Sachs Group Inc. said it was likely the nation’s shares would be included in MSCI Inc.’s global benchmark indexes.

The Shanghai Composite Index jumped 3.3 percent at the close for its biggest increase in almost three months. The gains were accompanied by a pick up in turnover, which had fallen to levels last regularly seen in 2014, while brokerages surged. The rally was uninterrupted by a sudden plunge in stock-index futures, which fell by the 10 percent daily limit before snapping back in less than a minute.

The odds of Chinese stocks winning MSCI inclusion have increased to 70 percent from 50 percent just last month, thanks to new rules aimed at curbing trading halts and a clarification by the regulator about beneficial ownership rules, Goldman Sachs said Tuesday. The Shanghai gauge still dropped 0.7 percent in May, extending the world’s worst performance this year, amid concern the economic slowdown will hurt earnings and as the yuan heads for its biggest monthly loss since August’s devaluation.~

“The market is expecting that mainland shares will have a pretty high chance of joining the MSCI’s global indexes next month,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co.

 

Eoin Treacy's view -

The prospect of MSCI membership was one of the contributing factors in the spike experienced by mainland Chinese shares last year. When the decision was to wait and see rather than approve membership the market was robbed of a potent source of demand and the leverage that had built up with the introduction of options trading was put under pressure. 



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May 31 2016

Commentary by Eoin Treacy

Consumer Spending in U.S. Rises Most in Almost Seven Years

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

“There was a lot of presumably pent up spending given that the last few months were quite soft for consumption,” said Michelle Meyer, deputy head of U.S. economist at Bank of America Corp. in New York, whose forecast for spending was among the closest in the Bloomberg survey. “The consumer should be a fairly bright spot for the economy.”

“You definitely want to see that pickup in April to fit into the story of a second-quarter rebound,” Sophia Kearney- Lederman, an economic analyst at FTN Financial in New York, said before the report. Supporting the increase, “we have seen strong payrolls and incomes coming up, we’ve seen vehicle sales rebound, and we saw housing had a pretty good month.”

Eoin Treacy's view -

The Fed can only take heart from this news that they are correct to continue in their efforts to very gradually normalise monetary policy. 12-month yields are now testing the upper side of the six-month range and some steadying in this area is to be expected which would at least partially unwind the short-term overbought condition. 



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May 31 2016

Commentary by Eoin Treacy

Pound Drops as New Brexit Poll Shows "Leave" Camp Taking Lead

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

The question now is whether the results should be seen as an outlier following a raft of polls showing the ‘Remain’ camp in the lead, or whether it marks the start of a broader shift toward the ‘Leave’ campaign. Whatever the outcome, the drop in the pound shows just how sensitive investors are to shifts in public opinion, highlighting the risk of more volatility with just over three weeks of the campaign left to go.

“The market has moved to reprice in higher risk of Brexit,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “But so far it is only one poll’s result. If repeated in other polls it would result in a more significant decline for the pound.”

The pound dropped 0.9 percent to $1.4511 as of 5:37 p.m. London time, the biggest drop since May 3. It weakened 0.9 percent to 76.79 pence per euro. A gauge of the pound’s one-month volatility versus the dollar climbed to 19.25 percent, the highest since 2009.

 

Eoin Treacy's view -

The likelihood of whether the UK stays or leaves the EU rests not so much on the rationale behind it but on the ability of the exit camp to make their case for why the UK would be clearly better off outside the union. It’s going to be an interesting few weeks with the vote to take place on June 23rd. 



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May 27 2016

Commentary by Eoin Treacy

May 27 2016

Commentary by Eoin Treacy

Strategy and Timing

Thanks very much to a subscriber for arranging an invitation to yesterday’s DoublieLine presentation by Jeff Gundlach which was something of a victory lap for the firm as they are now within striking distance of $100 billion under management. 

Eoin Treacy's view -

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

Mr. Gundlach’s opinion, and I agree, is that negative interest rates are inherently deflationary. How could they not be, you deposit money and get less back. He was quick to point out however that central banks don’t appear to have realised that yet and are likely to push the policy further before abandoning it and trying something else. He believes it is only a matter of time before some form of helicopter money policy is employed somewhere. That helps explain his medium-term bullish view on gold. 
 



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May 27 2016

Commentary by Eoin Treacy

Indonesia Sailing Toward Upgrade as Last Major Asian Junk Debt

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

Indonesia’s status as Asia’s last major economy without a full-investment grade may be near an end, boosting the appeal of the region just as other emerging markets such as Brazil and Poland suffer downgrades.

State-Owned Enterprises Minister Rini Soemarno said in Jakarta on Wednesday she expects an S&P Global Ratings upgrade in June, after the finance minister said May 11 the firm’s officials were impressed during a visit. Indonesia’s international bonds returned 10.1 percent this year, while its domestic bonds advanced 10 percent, both the best in emerging Asia, JPMorgan Chase & Co. indexes show. The cost to protect sovereign debt against non-payment dropped the most in Asia after Vietnam, sliding 41 basis points to 194 basis points.

Schroder Investment Management Ltd., Aberdeen Asset Management Plc and Natixis Asset Management are all predicting an upgrade as President Joko Widodo seeks to pay for better infrastructure by cutting fuel subsidies. Philippine peso sovereign debt rallied 7.7 percent this year as an incoming government sought to defend its full investment grade status, Bloomberg indices show. Bonds in Brazil delivered losses this month as its rating was cut, while the Polish zloty tumbled after the nation was downgraded in January.

“Once you become fully investment grade, it triggers a certain category of clients who were really excluded,” said Rajeev De Mello, who oversees about $10 billion as head of Asian fixed income at Schroder Investment in Singapore. “When we saw other countries move into that situation it usually had an impact.”

Eoin Treacy's view -

Indonesia’s local currency 10-year yield is 7.85% which is well above what is of offer from just about every other investment grade government bond. Indonesia hasn’t been upgraded just yet but there is potential for some contraction in sovereign spreads if that does in fact go ahead considering the search for yield that continues to characterise the market. 



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May 27 2016

Commentary by Eoin Treacy

Argentina Offers Tax Amnesty on Missing $500 Billion

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

The funds will pay a tax of between zero and 15 percent depending on the amount and when they are brought back into the country, the government said in a statement. The government needs to raise 47 billion pesos ($3.4 billion) to pay legal sentences awarded to pensioners, and another 75 billion pesos a year to pay higher pensions in future.

“Today with this law we’re sending to Congress we’re seeking to repair years of injustice because we’ve found lots of situations where pensioners have made legal claims, won judgments and yet the state persists in seeking any trick to avoid paying,” Macri said in a televised speech.

Macri will have to overcome people’s mistrust of the Argentine authorities for the amnesty to be a success. During the default of 2001, the government restricted bank withdrawals and converted people’s dollar savings into pesos during a period in which the local currency collapsed 75 percent. Still, an international tax sharing agreement that begins in 2017 will make it much more difficult for Argentines to continue hiding funds abroad, Finance Minister Alfonso Prat-Gay said.

The tax amnesty “is the first that rewards those who were up-to-date,” Prat-Gay said Friday. “We’re offering this last opportunity because from January the tax agency will have all the instruments it needs to search for that money in any part of the world.”

 

Eoin Treacy's view -

The Macri administration had to move fast to get as much done as possible before the honeymoon period of his tenure expires. Trying to encourage Argentines to repatriate funds from overseas is no small undertaking but would certainly help to replenish government coffers and stock economic growth. 



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May 26 2016

Commentary by David Fuller

Europe Short-Term Visas Target the Wrong Countries

The spat between the European Union and Turkey over visa-free travel is heating up. President Recep Tayyip Erdogan of Turkey is demanding the abolition of visas for his citizens, or else he'll renege on a deal that has reduced the flood of refugees to the EU to a trickle. European Commission President Jean-Claude Juncker told Erdogan that won't get him anywhere. 

This public fight is futile. Europe could safely cancel visas for Turkey and many other countries: The benefits would far outweigh the costs. 

The EU struck its deal with Turkey in March. Erdogan agreed that his country would take back undocumented immigrants who arrive in Europe by the Balkan route, which was used by more than 1 million people last year. In return, he demanded 6 billion euros ($6.7 billion) in aid and an end to short-term Schengen zone visas for Turks by the end of June. The Europeans promised the money and agreed to expedite visa liberalization "provided that all benchmarks have been met." 

Erdogan appears to have missed that caveat. On Wednesday, he said the immigrant readmission agreement wouldn't pass the Turkish parliament if visa-free travel wasn't granted. "Turkey is supposed to fulfill criteria? What criteria are these I ask you?" he fumed

Juncker's reply was prompt and equally sharp. "We do expect that Turkey will stick to its commitments -- and threats are not the best diplomatic instrument you can use," he said. "So one should stop to use them, because they will produce no effect whatsoever."

There are 72 criteria that Turkey is supposed to meet, and further work is needed on only five of them, according to a May 4 document from the European Commission. These are, however, the hardest to implement: They concern anti-corruption legislation, police and judicial cooperation with the EU, personal data protection to EU standards and, most importantly to Erdogan, changes to legislation that now allows him to persecute journalists and academics for "terrorist propaganda."

Erdogan's repression of dissent is deplorable. One might wonder, however, what this has to do with 90-day tourist visas to the EU. After all, if someone needs to escape persecution, the need to get a visa is a serious barrier.

David Fuller's view -

I commend the rest of this article to you.  Leonid Bershidsky’s intelligent analysis has certainly influenced my views on the subject. Allowing Turkish citizens to visit Europe without visas, for tourism rather than job seeking, would boost tourist spending.  Also, as educated middleclass Turks see more of the free world, the less likely they will be to favour Erdogan’s undemocratic authoritarian policies back home.  



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May 26 2016

Commentary by David Fuller

Germany and the U.S. Have Different Ideas About Energy

Here is the opening of this topical article from Bloomberg:

The share of Germany's electricity generated from renewable sources has tripled during the past decade, to 30.1 percent. That's impressive, especially when compared with what has happened in the U.S.

On the other hand, the percentage of Germany's electricity generated by burning coal isn't all that much lower than it was a decade ago, and is higher than it was in 2010. In the U.S., coal's share has been falling a lot in recent years.

Both countries are going through major shifts in how they keep the lights on, but they're very different shifts. Germany is in the midst of a large-scale, government-driven energy transition toward renewables (the "Energiewende"). The U.S. has also favored renewable energy with tax incentives and other subsidies, but the effort has been modest compared with Germany's. Here, the big news has been rising natural gas production thanks to fracking, plus pressure on utilities from the government and private groups to shut coal-fired power plants.

So which country is doing a better job of shifting its energy mix? It depends on your priorities. The Germans have long been uncomfortable with nuclear power, and in 1998 made plans to phase out its use by 2022. There was some hemming and hawing in subsequent years, but after the 2011 Fukushima reactor accident in Japan, the government recommitted to the 2022 phase-out. Since 1998, nuclear power has gone from supplying 27.5 percent of German electricity to 18.1 percent.

David Fuller's view -

The article above does not address critical point regarding average costs of electricity in Germany, the USA and a number of other countries. 

However, another article from OVO Energy shows three separate bar graphs for average energy costs in over a dozen countries, based on: “How much does electricity cost”, and “Electricity prices relative to purchasing power”.  On average, electricity prices are almost 200 percent higher in Germany than in the USA.  That is why heavy manufacturing firms have been moving some of the factories out of Germany and other European countries, and moving them to the USA and other nations which have lower energy costs. This will continue to be reflected by comparative GDP for countries over the longer term.  



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May 26 2016

Commentary by David Fuller

Saudi Arabia Has a Plan B to Try to Stop Iran Economic Rise

Here is a latter section of this informative article from Bloomberg:

“Oil policy was one of the instruments,” said Mustafa Alani, head of defense and security department at the Gulf Research Center. “The other thing is to counter Iranian investment in the region. Under King Salman it has become a clear-cut policy. There is no hesitation.”

Also last month, Saudi Arabia banned Iran’s Mahan Airline from flying through Saudi airspace. Shipping insurers and brokers have been advising clients since February that ships carrying Iranian crude will not be permitted to enter Saudi or Bahraini waters, according to an April report by Control Risks. It said ships that have been to Iran as one of their last three points of entry must also receive special approval.

Saudi rulers are complementing those efforts with attempts to deepen Iran’s political isolation in the Middle East.

Last month, Jordan recalled its ambassador to Iran shortly after a visit by the Saudi deputy crown prince. Ten days later, it signed an accord that could pave the way for multi-billion-dollar Saudi investments. In February, the kingdom scrapped a $3 billion deal to supply much-needed weapons to the Lebanese military, citing the rising influence of Hezbollah, a militant group backed by Tehran.

The Saudi moves take place against the backdrop of cooler ties with the U.S., in part because of the Iranian nuclear deal. In interviews published by The Atlantic magazine, President Barack Obama said the Saudis must “share” their region with Iran, and was reported describing the U.S. relationship with the kingdom as “complicated.”

The Saudi push is a “patchwork campaign,” Shashank Joshi, a senior research fellow at the Royal United Services Institute in London, said by phone. The Saudis can’t do much to block Iran at the global level, he said, but they’re “applying pressure on Iran wherever they are able to do so, to limit its political and economic influence.”

But one hurdle for the Saudis is that the other Gulf Cooperation Council states, key to the effort, may not be totally on board.

Bahrain was the only other country in the six-member GCC to follow the Saudis in cutting diplomatic ties this year. Kuwait recalled its ambassador to Tehran in January ans the United Arab Emirates reduced its diplomatic representation to the level of charge d’affaires.

The U.A.E has more at stake than the kingdom: Iran was its third largest trading partner in 2015, after India and China.

“We still see pretty substantial disagreements within the GCC,” Joshi said. “Iran is already integrated into the Gulf economic systems, and I don’t think anything Saudi Arabia can do can seriously disentangle that.”

David Fuller's view -

We have long had religious wars in the Middle East and now we have oil wars as well.  The region’s two biggest powers – Saudi Arabia and Iran – are at the centre of this conflict, which can too easily rumble on for many more years.  It should remain largely regional, although as we know from 9/11 and the more recent Daesh brutality, this is not always the case.  

This item continues in the Subscriber’s Area.



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May 26 2016

Commentary by David Fuller

Everything You Wanted to Know About Brexit but Were Afraid to Ask

This is my own tongue-in-cheek headline and here is Bloomberg’s title for this compilation of 50 articles: Britain’s Brexit Question.

David Fuller's view -

I will try to ensure that this is my last pre-referendum posting on Brexit because I imagine we have all heard enough.  I certainly have, in what I think has been a generally low quality debate among politicians offering opinions on this important subject.

However, I will leave you with Brexit the Movie, kindly forwarded by a subscriber. I found it interesting, informative and even amusing.



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May 26 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.  The seminar room is now half full.

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.  



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May 26 2016

Commentary by Eoin Treacy

The Little-Known Alibaba Unit That Prompted an SEC Probe

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

One issue for the SEC appears to be how Alibaba accounts for Cainiao’s financial performance. Alibaba includes results from Cainiao using the equity method, which counts profits and losses as a proportion of an investment. Considering Alibaba’s high ownership and control over the logistics business, regulators may be asking whether Alibaba should completely consolidate Cainiao into its results, said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management.

In 2015, Cainiao posted a net loss of 617 million yuan ($94 million) on sales of almost 3.1 billion yuan, Alibaba said. That year, Alibaba recorded its percentage of the loss on its books, $46 million. At the same time, the e-commerce company reported a $128 million gain on investments in Cainiao and other entities.

The gain, which helped offset the operating losses, was probably due to the higher valuation that Cainiao fetched in its latest funding round, according to Sanford C. Bernstein & Co. In March, Cainiao announced its first round of external fundraising, with financing from investors including Temasek Holdings Pte, GIC Pte and Khazanah Nasional Bhd. That gave the delivery network a valuation of about $7.7 billion, Caixin reported, citing people familiar with the matter

Eoin Treacy's view -

The issue is not so much with the size or performance of Alibaba’s logistics subsidiary but rather in the opacity with which the company deals with its shareholders. Alibaba is not alone in this regard. Google’s reorganisation and issuance of C shares and Facebook’s reorganisation to ensure Zuckerberg’s control both exemplify a trend toward less shareholder oversight of management decisions. Against that background Alibaba’s governance issues are non-trivial but arguably they are already in the price. 



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May 26 2016

Commentary by Eoin Treacy

Email of the day on the value of the Subscriber's Audio

I note the recent compliment paid to the audio commentary and definitely agree.

But, when you are trying to promote your service you offer only the comments of the day

I am a relatively new subscriber and did have a break of a year while I was in Norway and very busy. At that time I had not developed the discipline of listening to the audio. I think that is why I left you.

The real benefit of the service, to me at least, is the informative, level and rational audio. I swing between preferring to hear Eoin to missing David. Both styles are valuable.

I think by not offering limited access to the audio "guests" will not grasp the full scope of the service. I know I didn't when I didn't listen much in the first year. Now it's the most informative part.

 

Eoin Treacy's view -

Welcome back to the Service and I’m delighted you discovered the audios. From our analytics we see that about 70% of subscribers listen to the audios on a reasonably regular basis. Many Australian subscribers tell me they listen to it with breakfast or on the commute to work while subscribers in the UK generally wait until the next morning to listen while in the USA it acts as a market wrap which synthesises the day’s action. 

David and I both enjoy the expedience and, dare I say, intimacy of recording the audio. The result is both a shorter production time than writing and a more direct message. I agree we should market the benefits of the various parts of the service better and will endeavour to do so. 

 



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May 26 2016

Commentary by Eoin Treacy

Oil Erases Gains After Exceeding $50 for First Time This Year

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

Brent for July settlement decreased 12 cents to $49.62 on the London-based ICE Futures Europe after. The contract earlier climbed as much as 1.6 percent to $50.51. The global benchmark crude was at a 15-cent premium to WTI.

"We’re seeing a steady decline in U.S. production, which is going to continue, and outages around the world," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion. "This doesn’t mean we’re going to continue going higher; a lot may be priced in. It was a lot easier being bullish oil with sub-$40 prices than it is near $50."

U.S. crude production dropped for an 11th week to 8.77 million barrels a day, the Energy Information Administration reported Wednesday. Crude inventories slid by 4.23 million barrels last week, exceeding an expected drop of 2 million. Stockpiles at Cushing, Oklahoma, the delivery point for WTI and the nation’s biggest oil-storage hub, fell by 649,000 barrels.

 

Eoin Treacy's view -

Brent Crude Oil has posted an orderly rebound from its January low and has almost doubled in the process. A progression of higher reaction lows is evident with reactions of between $5 and $6 constituting entry opportunities along the way. A reaction of greater than $7 would be required to question the consistency of the advance. Nevertheless the round $50 area represents a psychological level for many investors so it would not be surprising to see prices pause in this area. 



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May 26 2016

Commentary by Eoin Treacy

Miner Sees Silver Price Surging Ninefold as Global Gadgets Boom

This article by Natalie Obiko Pearson for Bloomberg may be of interest to subscribers. Here is a section:

While long coveted for use in jewelry, coins and utensils, silver is increasingly in demand for its industrial applications. Last year, about half of global silver consumption came from such use, including mobile phones, flat-panel TVs, solar panels and alloys and solders, according to data compiled by GFMS for the Washington-based Silver Institute.

“Silver is not a precious metal, it’s a strategic metal,” Neumeyer said in an interview in Vancouver, where the company is based. “Silver is the most electrically conductive material on the planet other than gold, and gold is too expensive to use in circuit boards, solar panels, electric cars. As we electrify the planet, we require more and more silver. There’s no substitute for it.”

Industrial demand is set to increase, driven by rising incomes and growing penetration of technology in populous, developing nations, as well as thanks to new uses being found for silver’s anti-bacterial and reflective properties in everything from hospital paints to Band-Aids to windows.
“Over the next 10 or 20 years, more and more people are going to be using these devices, and silver is a very limited commodity,” Neumeyer said. “There’s just not a lot of it around.”

Use of silver, including investment demand, coin sales and what goes into inventories to settle trades, has outstripped annual supply of the metal in every year since 2000, according to data from GFMS, a research unit of Thomson Reuters Corp.

Still, not everyone agrees that the world is headed for a shortage of the metal.

“I would tend to disagree that silver is rarer than thought,” David Lennox, a resource analyst at Fat Prophets in Sydney. “Silver cannot be easily substituted but there’s been no need as it’s in abundance. I’d expect the search for silver would intensify and the search for substitutions would happen long before silver got to” $140 an ounce.

 

Eoin Treacy's view -

The uses for silver in the high technology sector are likely to increase over time but the quantity of silver used in each item is likely to decrease. Production efficiencies and the evolving nanotechnology sector where silver will have a great deal of utility help to explain that view. Therefore to postulate prices are going to $140 any time soon would appear wildly ambitious. 



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May 25 2016

Commentary by David Fuller

Stocks Gain With Emerging Markets as Fed Seen Pulling Off Hike

Here is the opening of this topical article from Bloomberg:

Don’t fear the Fed is the new mantra for global markets.

Equities rose to a two-week high amid increasing investor optimism that the world economy can withstand higher interest rates from the Federal Reserve. Gold fell amid a retreat in the dollar, while oil maintained gains after a government report on crude inventories.

U.S. shares looked for consecutive climbs after alternating between gains and losses for seven sessions, European equities jumped and emerging-market stocks rose the most in six weeks. South Korea’s won led currencies higher even as China set the yuan’s reference rate at the weakest level since 2011. Crude pared gains after climbing above $49 a barrel as gold slid for a sixth day. Greek bonds increased, pushing the 10-year yield below 7 percent for the first time since November.

Improving confidence in financial markets is tempering anxiety over the Federal Reserve’s plans to raise U.S. interest rates, potentially as soon as next month. Recent polls show growing support for the U.K. to remain in the European Union, the rally in commodities is damping the risk of deflation, and a measure of economic surprises in the world’s largest economies hit its highest level this year. Still, faith in global growth prospects has been easily shaken, with global equities failing to make any gains in 2016.

“U.S. data is supporting the view that if we don’t see stellar growth, at least we don’t see a recession, and that’s a good thing,” said Michael Woischneck, who oversees about 300 million euros ($335 million) at Lampe Asset Management in Dusseldorf, Germany. “If the Fed has the chance to hike again then it should take this opportunity as the market is very prepared. We also have a deal for Greece that has helped perceptions change in the European market.”

David Fuller's view -

 

We have seen a breakout in optimism this week.  This suggests that investors feel less uncertain.  Behaviourally, when the investor crowd is nervous, negative concerns need to be increasing to sustain pessimism.  However, this week polls have indicated that the risk of Brexit uncertainty is diminishing.  Additionally, mildly more favourable economic data indicates that the risk of US recession and deflation is waning, making a rate hike in June or probably July less worrying.  This mood change may prove to be ephemeral but it has steadied stock markets. 

This item continues in the Subscriber’s Area.  



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May 25 2016

Commentary by David Fuller

Hold On a Moment: the European Corpse May be Rising From the Slab

Here is a middle section from this encouraging column by Jeremy Warner for The Telegraph:

Yet largely unnoticed amid the cut and thrust of the Brexit debate, something remarkable is happening; the corpse is showing unmistakable signs of life. These may be no more than last gasp death throes, and in any case are far too late, and as yet too small, to have any meaningful effect on Britain’s referendum vote. Nobody is pretending that the Eurozone has solved its problems and is about to rebound into rude economic health.

All the same, something is plainly stirring. In the first quarter of this year, Eurozone growth was markedly higher than both the US and the UK. Job creation too has been substantially better in recent months. That the Eurozone is finally beginning to play catch-up should come as no great surprise to close observers of economic events, for the main reason for this bounce is that belatedly policymakers have begun to apply some of the same therapies as their Anglo-Saxon counterparts. Indeed, the real surprise is that the scale of the recovery has not been greater.

Early on in the banking crisis, both the US Federal Reserve and the Bank of England sought to underpin the financial system with massive asset purchase programmes. These were bold, and substantially untried measures at the time which may still carry a quite destructive long term cost. For instance, they have discouraged people from saving while simultaneously forcing money into higher risk investment, thereby incubating financial instability for the future. Yet they broadly worked in calming the storms and preventing economic calamity.

The European Central Bank, by contrast, held back. German intransigence over anything that looked like a transfer prevented the ECB from acting like a proper central bank and monetising government debt accordingly. As a confederation of separate sovereign nations, the Eurozone seemed incapable of acting to save itself as any sensible single country would. The Eurozone had to get to the very brink of collapse before Germany and its Northern neighbours would relent. Had the ECB been allowed, like its US and UK counterparts, to apply “quantitative easing” at an earlier stage, much of the Eurozone’s existential crisis could have been avoided, or at least would have worked its way out in an entirely different way. The moment Mario Draghi, the ECB president, said he would buy government bonds without limit, the financial crisis, together with the threat of immediate break-up, began to ease.

Since then, the Eurozone recovery has followed almost exactly the same trajectory as the UK and the US. As with these earlier recoveries, growth is heavily focused on household consumption and the industries that service it. Just recently, Draghi announced he was doubling up again on measures to revive the European economy. The past year has also seen the fiscal straightjacket of the Eurozone’s initial response to the government debt crisis progressively loosened. Faced with open rebellion from the likes of Italy and Spain, Brussels has been forced to trim its demands. Fiscal targets have either been extended or abandoned altogether, so much so that this year should be mildly expansionary from a fiscal perspective, for the first time since the crisis began.

David Fuller's view -

Any improvement in the economies of EU countries is obviously good news for Europeans and also the global economy.  The credit for this, I maintain, is largely due to the intelligence and persistence of Mario Draghi, against considerable opposition, mainly from Germany.  Draghi, however, only has an 8-year term which expires at the end of October 2019.

A PDF of Jeremy Warner's column is posted in the Subscriber's Area.

(See also: Was Draghi Correct After All? – by Bernard Tan)



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May 25 2016

Commentary by David Fuller

Email of the day 1

On the Markets Now in September:

Hello David, I am planning to be in London late September (from Melbourne).
Will you be doing an East India Club session in September by chance?

David Fuller's view -

Many thanks for your interest. I would be delighted if you could join us and we are planning to hold a Markets Now seminar in late September.  They are held by general consent on Monday evenings, so would you be able to attend on either Monday 19th or 26th September?



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May 25 2016

Commentary by David Fuller

Email of the day 2

On migrants in Europe:

David, don't you think the influx of migrants has stopped the slide in European population and sewn the seeds for solid long term consumption growth? Some businesses in Europe selling to these people must be jumping for joy.

David Fuller's view -

Most of the migrants arriving from the Middle East and North Africa, spent their last savings on the journey, so they need to be subsidised.  That will cause some extra spending, providing a small boost for EU economies.   

No doubt some of these mostly young migrants will be highly intelligent and able to create careers for themselves in Europe.  However, the cultural differences are considerable.  Therefore it will be a considerable challenge for European countries and also the migrants, to ensure that they are successfully integrated.  This has not always worked well in the past, as we have seen most notably and recently with Belgium and France. 

The current migrant situation is awkward, to put it mildly.  Few countries want to accept a large influx of migrants which they did not invite.  Most developed countries accept at least a small number of immigrants every year, preferably those who they believe will contribute to their national wellbeing.      



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May 25 2016

Commentary by David Fuller

May 25 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the Brochure.

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.  



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May 25 2016

Commentary by Eoin Treacy

ECB credit buying to start small, betting on issue boom

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

Investment-grade corporate bonds issued in euros are the latest addition to a growing list of assets the ECB is buying as part of its 1.74 trillion euro effort (1.33 trillion pounds) to boost economic growth in the euro zone via lower borrowing costs.

The difficulty is that the 600 billion euro market for such notes is largely limited to big corporations in France and the Netherlands that already enjoy easy access to credit.

The ECB, however, is hoping its money will eventually trickle down to smaller borrowers across the euro zone for whom funding is still a problem. Since this is likely to take time, the ECB will increase the pace of its purchases only gradually and refrain from setting a monthly target, conversations with seven sources in or near the ECB's decision-making body revealed.

"There could be big fluctuations in buys but if we succeed in inducing issuance, that would naturally smooth out the market," one sources said. Another source said there might be months when purchases will be in the region of just 1 billion euros.

 

Eoin Treacy's view -

A great deal of concern has been expressed at the record debt issuance by the US corporate sector which has been used to fund buybacks, dividend increases and to retire older more expensive debt. However Europe has an altogether different environment. Securitization is not nearly as developed while the corporate bond market is not as liquid as the USA’s. This has meant the ECB has been inhibited in what it can do because the market for the operations it wants to conduct is not large enough to accept the size of interventions envisaged. That represents a greenlight for any bank wishing to set up a securitisation or origination desk in the Eurozone because the ECB will buy just about anything they issue. 



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May 25 2016

Commentary by Eoin Treacy

U.K.'s Undecideds Moving Against Brexit

This article by Michael McDonough, Jamie Murray and Dan Hanson for Bloomberg may be of interest to subscribers. Here is a section: 

The latest developments suggest the gap in the polls has widened not just because voters are abandoning the leave campaign, but because undecided voters are making up their minds against Brexit. As the lead for remain widens, the key uncertainty on the day will be turnout -- recently undecided voters may feel less compelled to show up at the polls.

Eoin Treacy's view -

Regardless of how one feels about what is a deeply divisive topic, there is little doubt that markets abhor uncertainty. With a vote to leave the EU representing a threat both to the status quo within and outside the region, the declining prospect of such an eventuality can only be viewed as positive from a short-term market perspective. 



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May 25 2016

Commentary by Eoin Treacy

U.S. new homes sales hit eight-year high, point to firming economy

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

New U.S. single-family home sales recorded their biggest gain in 24 years in April, touching a more than eight-year high as purchases increased broadly, a sign of growing confidence in the economy's prospects.

Tuesday's report from the Commerce Department, which also showed a surge in new home prices to a record high, offered further evidence of a pick-up in economic growth that could allow the Federal Reserve to raise interest rates soon.

"Consumers are taking the leap and buying the biggest of big ticket items of their lives and this speaks to confidence. The Federal Reserve can raise rates at their June meeting without fear the economy is going to slow," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

 

Eoin Treacy's view -

Home affordability has contracted since its peak in 2012 but is not back to where the previous norm was in the decades prior to the housing boom and subsequent bust. The role of ultra-low interest rates in bolstering affordability is seldom discussed and yet it represents a significant influence not least became wage growth did not improve until very recently.  

The S&P/Case-Shiller Composite 10 has rallied by a third since 2012 and homes in desirable locations took out their historic peaks more than a year ago. 



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May 24 2016

Commentary by David Fuller

Saudi Arabian New Oil Plan Makes OPEC Redundant

Here is the opening of this informative article from Bloomberg:

Saudi Arabia, one of the founders of OPEC, is sounding the group’s death knell.

The world’s biggest crude exporter has already undermined OPEC’s traditional role of managing supply, instead choosing to boost output to snatch market share from higher-cost producers, particularly U.S. shale drillers, and crashing prices in the process.

Now, under the economic plan known as Vision 2030 promoted by the king’s powerful son, Deputy Crown Prince Mohammed bin Salman, the government is signaling it wants to wean the kingdom’s economy off oil revenue, lessening the need to manage prices. Moreover, the planned privatization of Saudi Arabian Oil Co. will make the nation the only member of the Organization of Petroleum Exporting Countries without full ownership of its national oil company.

“The main take-away from Saudi Vision 2030 is that there’s just no role for OPEC,” Seth Kleinman, head of European energy research at Citigroup Inc. in London, said by phone on May 16. “Or, you can have an OPEC without Saudi Arabia, which just isn’t much of an OPEC.”

The first change of oil ministers in more than 20 years may also recast the country’s relationship with OPEC. The group’s 13 members, which contribute about 40 percent of the world’s supply, gather in Vienna on June 2.

King Salman on May 7 replaced Ali al-Naimi, the most influential voice in OPEC and the architect of current Saudi oil policy. While there’s likely to be considerable continuity, his replacement, Khalid Al-Falih, is an ally of Prince Mohammed, who scuppered a plan al-Naimi had supported for capping production. When producers considered freezing output to curb a global glut in April, the young royal’s view that no deal was possible without Iran prevailed, and talks collapsed.

“We don’t care about oil prices,” Prince Mohammed said in an April 25 interview in Riyadh. “$30 or $70, they are all the same to us. We have our own programs that don’t need high oil prices.” Benchmark Brent crude was trading at $48.11 a barrel on Tuesday at 11:23 a.m. in London.

David Fuller's view -

OPEC will not be missed.  Cartels are power arrangements for maximising profits at everyone else’s expense. 

Oil prices will remain volatile but the current surplus of supply will prevent the strong recovery that some commentators have forecast.  Even as the global economy eventually recovers and the record amounts of crude in storage are gradually reduced by consumption, the advance of technology has enabled more conventional oil to be produced than was imaginable less than a decade ago.  Supplies may be finite but there are also vast quantities of shale oil, largely untouched.   

Meanwhile, technology will continue to hasten declines in costs for renewable forms of energy, led by solar.  Most countries now have the capacity to lower their energy costs.  However, energy prices paid by business and consumers will vary considerably among nations, subject to their willingness to utilise all forms of available energy, plus their individual taxation policies on these vital resources.    

(See also: OPEC Brings Oil Price War Home in Pursuit of Asia Cash - Oct 20, 2015)



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May 24 2016

Commentary by David Fuller

Massive Bailout Needed in China, Banking Analyst Chu Says

Here is the opening of this interesting article from Bloomberg:

Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy.

Speaking eight days after a Communist Party newspaper highlighted dangers from the build-up of debt, Chu, a partner at Autonomous Research, said she was yet to be convinced the government is serious about deleveraging and eliminating industry overcapacity.

She also argued that lenders’ off-balance-sheet portfolios of wealth-management products are the biggest immediate threat to the nation’s financial system, with similarities to Western bank exposures in 2008 that helped to trigger a global meltdown.

The former Fitch Ratings analyst uses a top-down approach to calculating China’s bad-debt levels as the credit to gross domestic product ratio worsens, requiring more credit to generate each unit of GDP.

While Chu is on the bearish side of the debate about the outlook for China, she’s not alone. In a report on Monday, Societe Generale SA analysts said that Chinese banks may ultimately face 8 trillion yuan ($1.2 trillion) in losses and a bailout from the government, citing the scale of soured credit within state-owned enterprises.

Interviewed in Hong Kong last week, Chu estimated as much as 22 percent of all China’s outstanding credit may be nonperforming by the end of this year, compared with an official bad-loan number for banks in March of 1.75 percent.

David Fuller's view -

Anyone interested in China will want to read the Q & A interview with Charlene Chu, which comprises about two thirds of this article.  Her views are certainly credible and other China specialists have expressed similar views in recent years.  A relevant question is: can China grow its way out of this problem without widespread disruption?

This item continues in the Subscriber’s Area.



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May 24 2016

Commentary by David Fuller

Monsanto Rejects $62 Billion Bayer Offer, Open to Further Talks

Here is the opening of this report from Bloomberg on the latest information regarding this takeover attempt:

Monsanto Co. rejected a $62 billion takeover offer from Bayer AG as too low, while saying it remains open to further deal talks, putting pressure on the German company to raise a bid that has already sent its stock tumbling.

“We believe in the substantial benefits an integrated strategy could provide to growers and broader society, and we have long respected Bayer’s business,” Monsanto Chief Executive Officer Hugh Grant said in a statement Tuesday.

“However, the current proposal significantly undervalues our company and also does not adequately address or provide reassurance for some of the potential financing and regulatory execution risks related to the acquisition," he said.

Bayer will likely come back with a higher bid, Jonas Oxgaard, an analyst with Sanford C. Bernstein & Co. in New York, said Tuesday in a note, adding that an offer below $135 per share would be “challenging” for Monsanto to agree to.

Buying Monsanto would create the world’s biggest supplier of farm chemicals and seeds. Monsanto is the largest seed supplier and a pioneer of genetically modified crops, which two decades on from their introduction have come to account for the majority of corn and soybeans grown in the U.S. Monsanto also sells seeds in foreign markets including Latin America and India.

David Fuller's view -

This is clearly a friendly reply by Monsanto, suggesting that it would welcome the merger takeover at a higher price. 

This item continues in the Subscriber’s Area.



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May 24 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the current Brochure.

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.    



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May 24 2016

Commentary by Eoin Treacy

Email of the day on secular bull markets

I was just listening to your big picture round-up from last Friday.

You mentioned a point that I have heard a number of variations on over the last year, from Fuller Money ..... and that is that we (I think you are taking of US shares) are near the beginning of a major secular bull market (in US shares).

I think the argument you made in last Friday's big picture round-up went something along the lines of:

That US shares have had a long period (16 years) of ranging after the peak in 2000 ....... and that  this is roughly the length of time that US shares ranged sideways in the period from the late 1960s until 1982 ....... when US share commenced it last major secular bull market.

Like you, I am very happy to acknowledge that I do not know the future.

BUT this is what makes me wary of your view that US share might be near the beginning of a major secular bull market:-

The Shiller cyclically adjusted P/E for US shares is above 25 .... which is an extremely high valuation. I am not aware of any example in history, where there have been good real returns for shares over the following 20 years. Shiller's research would suggest the next 20 year share returns would be more like something closer to 0%pa real.

The historically large debt bubbles in the West (but USA in particular) also warns of bad times ahead for investors. Most debt bubbles are followed by economic depression. I am aware of only 1 debt bubble where this has not occurred, namely Japan post 1989 ...... but the 19 years following 1989, delivered horrible returns for Japanese shares and property.

So you are saying I think, "This time is different".  As you know, these are some of the most dangerous words for investors. For US shares to embark on a major secular bull market, would be truly unique in history - at least from what I have found in my very long-term market research.

Your thoughts please?

 

Eoin Treacy's view -

Thanks for this question which in my opinion is of fundamental importance for investors. As you point out, we believe major breakouts from long-term ranges are generally a signal something has changed in how supply and demand are interacting. Provided the breakout is to the upside, this can lead to a new long-term or secular bull market. The possibility of a new secular bull market on Wall Street has been a persistent topic of conversation at this service since we observed large companies with global businesses (Autonomies) breaking out of long-term bases as early as 2011. We are already four years into a secular bull market. .



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May 24 2016

Commentary by Eoin Treacy

Hedge funds are betting big against Australian banks

This article by Vera Sprothe for the Wall Street Journal appeared in the Australian and may be of interest to subscribers. Here is a section: 

Many have failed to call correctly an end to an Australian housing price boom that has led to some of the country’s sleepiest towns becoming less affordable than New York. One investment manager’s experience underscores the high stakes involved. In 2010, Jeremy Grantham, co-founder of Boston-based hedge fund GMO and famous for predicting bubbles, found traction among short sellers when he said Australia’s property market was a bubble ready to burst. Instead, housing prices continued to climb.

This year, investors shorting Commonwealth Bank, the nation’s largest lender, would have made a profit, as the stock has plunged as much as 18 per cent since January 1. However, the shares have started rebounding in recent days. If they continue to rise, short sellers would be at risk of losses when they buy back the stock and return it to the original investor at a higher price.

The banks are benefiting from expectations the Australian central bank will further cut its benchmark rate this year from a record-low 1.75 per cent. This has helped to allay market concerns about intensifying mortgage distress among Australian households, which are among the most indebted in the world. Home loans account for the majority of Australian bank assets.

“It’s a tough trade,” Andrew Macken, a fund manager at Montgomery Global Investment Management in Sydney, said. “Australia’s major banks don’t make good shorts. Even if their profit prospects may look weaker than in the past, they’re still some of the most profitable in the world, competition is limited and they enjoy an implicit government guarantee.”

 

Eoin Treacy's view -

Is there a bubble developing in Sydney and Melbourne housing? Very probably. Is it at risk of popping? With the RBA cutting rates at least there is a monetary tailwind to support prices. What about the banks?



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May 24 2016

Commentary by Eoin Treacy

European Shares Rise as Euro Falls, Investors Weigh Fed Talk

This article by Alan Soughley and Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section

European stocks jumped the most in six weeks as the euro slid and investors assessed the implications of a possible Federal Reserve interest rate increase as early as June.
The Stoxx 600 added 2.2 percent to 344.12 at the close of trading. All industry groups climbed, with insurers and banks leading. The euro has dropped close to a two-month low against the dollar amid an increasing probability of higher borrowing costs in the U.S. this year, favoring European companies that export overseas. The region’s firms generate about half their sales abroad, more than the U.S. and Japan, according to Morgan Stanley.

Federal Reserve Bank of Philadelphia President Patrick Harker said late yesterday that he could see two to three rate increases in 2016 and that if the U.S. economy shows sufficient strength, a June raise would be appropriate. San Francisco Fed President John Williams earlier said two to three hikes this year are “about right.”

“A rise in the dollar would be a big help for European stocks,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn, Germany. “People are testing whether the market has found a bottom, and there’s plenty of money sitting on the sidelines. Maybe investors are finally ready to get back in. I wouldn’t say we’re in a bullish market, but we’ve had pretty calm, sideways trading this month even with another Fed rate hike looking more likely.”

 

Eoin Treacy's view -

The Eurozone has enough to worry about with having to deal with a strong currency so the Dollar’s resurgence is welcome news. This is especially true since European shares experienced a much deeper reaction than their US counterparts and have been in need of a catalyst to reignite investor interest. 



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May 23 2016

Commentary by David Fuller

Why China Is Having So Many Problems Ramping Up Wind Power

China holds the record as the world’s top wind installer, accounting for about a third of the total global installed wind capacity. The United States trails in second place, accounting for just more than 17 percent. But despite its higher total capacity, China still isn’t putting out as much wind-generated electricity as the United States. In other words, it has built the technology, but it just is not able to use it to the max.

New research, published Monday in the journal Nature Energy by researchers from Tsinghua University in Beijing, Harvard University and other U.S. and Chinese universities, examines a handful of factors thought to be responsible for the discrepancy, using a mathematical approach to evaluate the relative importance of each.

Wind turbines can produce only as much energy as the wind provides — so the researchers were interested in whether differences in wind flow could account for some of China’s problems. But they found that these differences played a relatively small role. Although the United States tends to get superior winds nationwide, the researchers point out that China has approached this issue by promoting more development in the regions with the best wind resources, mostly to its north and northeast.

Instead, the findings suggest that the primary challenges to wind power in China involve lower turbine quality, delayed connections to the grid and grid operators failing to transmit wind power to users in favor of other energy sources, such as coal — all of which play about equally important roles.

These issues are capable of putting a substantial dent in China’s wind electricity output, it turns out. The researchers noted that in 2012, China’s wind-generated electricity was 39.3 terawatt-hours less than that of the United States.

“This is a large number — larger than the total amount of wind power generated in the United Kingdom in 2015, which can power around 8 million UK homes,” wrote Joanna Lewis, an associate professor and expert on China’s energy landscape at Georgetown University, in a comment on the new study, also published Monday in Nature Energy.  

To evaluate the quality of turbines in China — which, the authors note, has not been done in previous studies — the researchers used the output from a specific type of wind installation (the GE 2.5 megawatt turbine) as a standard for comparison, concluding that overall turbine quality in the United States is higher than in China. They chalked up the quality issues to a need for “technology catch-up” in domestically produced turbines, which account for most of the installations in the country. The fix in this case is relatively simple: The authors recommend a short-term switch to more international suppliers, while focusing on domestic research and development efforts and technology transfer agreements with other nations in the long term.

David Fuller's view -

Credit to China for being the world’s fastest developing economy, even as it struggles with monumental transformational challenges, which it is also attempting to resolve in record time. 

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May 23 2016

Commentary by David Fuller

Bernard Tan: Was Draghi Correct After All?

My thanks to this experienced, independent analyst for his latest report.  Here is a brief sample from the introduction, and you will want to see all the graphics which are posted in the Subscriber’s Area:

Growth in European imports, measured in USD, has been accelerating from deep negative towards zero.

Another way to think about it is to ask how much Eurozone buys from the rest of the world compared to the US i.e. how much of global output does it consume relative to the US.

I find the above chart interesting. We are used to thinking of the US as the big buyer of goods for the export economies around the world but in fact, until 2014, the Eurozone bought more than the US! The crisis brought demand down drastically but the chart shows we could be emerging from the worst of the Eurozone crisis.

David Fuller's view -

My view, frequently stated, is that the EU’s economic performance would have been far worse if Super Mario Draghi had not been President of the European Central Bank since November 2011.  He is arguably the outstanding central banker of his generation and also has the most challenging job.  Assuming Mario Draghi stays until his eight-year term expires at the end of October 2019, his replacement will most likely come from Germany.  At least that is what some within the German government are lobbying for. 

Bernard Tan's report is posted in the Subscriber's Area. 

 



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May 23 2016

Commentary by David Fuller

Bayer Beware: Monsanto Bid Is Not the First Big Risk the Company Has Taken

There is a different potential problem with the proposed deal. Bayer's recently appointed chief executive, Werner Baumann, ought to recall the history of the firm which he joined fresh out of university in 1988. 

In 1898, Bayer made a commercial bet on a substance invented 24 years before by a British chemist -- diacetylmorphine, originally thought to be a non-addictive alternative to morphine. The company found it was also highly effective as a cough medicine for tuberculosis, bronchitis and asthma patients, a less toxic replacement for codeine. Bayer branded it "Heroin" because its employees, on whom the drug had been tested, reported feeling "heroic" after taking it. Almost 200 clinical works about the wonder drug were published in its first years of sales, most of them favorable. Heroin came to account for 5 percent of Bayer's profits.

The American Medical Association approved it for use in 1906, already knowing that it was habit-forming. By 1913, though, Bayer decided to pull heroin off the market because its proven addictiveness didn't justify its use -- and because by then it had a different cash cow, the truly harmless aspirin.

An overwhelming majority of scientists -- as opposed to members of the general public, who hold the opposite opinion -- say they believe genetically modified foods are safe. A report released this month by a special expert committee of the U.S. National Academy of Sciences features pretty much the same conclusion after the committee studied pretty much every shred of scientific evidence available. The conclusion, of course, is qualified: It's next to impossible to give a definitive answer to the question of whether a certain product will shorten a person's life if consumed for years. Yet, for all practical purposes, the use of genes from one organism to impart certain qualities to another one, which is grown for food, doesn't appear to make it harmful to humans. 

Science in the 21st century is rather more advanced than it was 110 years ago. Scientists, however, are even now engaged in a dispute -- acknowledged in the Academy of Sciences report -- about the use of a weed-killer that makes it necessary to genetically modify many crops in the first place -- glyphosate, marketed by Monsanto as "Roundup," the most widely-produced herbicide in the world.

Most currently produced GM seeds are resistant to glyphosate. The idea is to make it possible for farmers to spray the crops liberally with the substance so that the weeds die but the crops do not. Last year, the International Agency for Research on Cancer (IARC), an arm of the World Health Organization, warned that there is "limited evidence" of glyphosate's "carcinogenicity in humans for non-Hodgkin lymphoma" and "convincing evidence" that it could cause cancer in animals.

David Fuller's view -

I will be surprised if Bayer succeeds in its takeover of Monsanto, give the hostility to GM foods in not only Germany but also most of Europe. Additionally, as a leader in its industry, Monsanto is likely to resist a takeover. If the deal is called off, I assume that we will see a partial recovery by Bayer and a selloff in Monsanto.   

Personally, I am relaxed about most GM products, but poisonous herbicides and pesticides are another matter, and logically cannot ever be without some element of risk.   Monsanto’s “Roundup” may be one of the best but comments from the International Agency for Research on Cancer (IARC) are cause for thought.     

(See also Eoin’s comment below.)



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May 23 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the current Brochure.

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.    



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May 23 2016

Commentary by Eoin Treacy

China and the world: New Frontiers, Fresh Connections

Thanks to a subscriber for this report from HSBC highlighting the increasingly important role played by the Chinese economy in spurring global growth. Here is a section:

The story now is that China has been increasingly moving up the value chain. In 1995, labour-intensive products such as toys and shoes (grey line in chart 13) accounted for 36% of China's overall exports. By 2015, this share was down to 26%. Meanwhile, the share of machinery and transport equipment (blue line) increased from 21% to 46% over the same period. Soon this transition was starting to have a global impact. Chart 13 shows China's world share by product. Although China's world market share had increased quite steadily for most categories of products, it is the improvement in machinery and transport equipment that is the most striking. In two decades, China's global market share rose from a mere 4% to 17%. Incidentally, this is how China has increasingly earned more in terms of trade surplus vis-à-vis the rest of the world (Chart 14).

In more recent years, a decrease in China’s commodity exports has become another noticeable trend. Chart 15 shows China's declining dominance in the exports of primary commodities and metal products and an improving market share in manufactured goods such as lighting, telecoms, etc.

So, where might China's trade go from here? On most metrics, China's export industry still has much room for improvement. China has recognised that it needs innovation to move up the value chain. It needs to differentiate its products through advances in technology, design or other attributes. The recent five-year plans have included elements related to innovation, R&D and even intellectual property rights. The transition from a low-cost producer to one that increasingly makes more value-add is a longer-term trend that has just begun and it is by no means an easy one. Greater openness to foreign investment, as well as domestic reforms, will help make this process a smoother one.

And for other emerging markets, China moving up the value chain creates opportunities. Countries in parts of Africa and Asia with lower costs of production will likely benefit from a production shift away from China and towards even lower cost bases. China's rise up the ladder may pull a few countries with it. 

Eoin Treacy's view -

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

China has come a long way and for much of its hinterland the performance of its economy exerts a leash effect in much the same way Wall Street does for the USA’s largest trading partners. It is for that reason we tend to pay such close attention to what is happening In China’s stock and currency markets as well as the political machinations of what is still a highly orchestrated market. 



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May 23 2016

Commentary by Eoin Treacy

Email of the day on the Subscriber's Audio

“Just a note to tell you that I've really appreciated your audios over the past couple of weeks. Your analysis has been superb and your comments on crowd psychology well worth taking to heart. Most of us will never be Warren Buffets but if we can identify, and ride appropriately, the main market currents we should be able to make a decent living and avoid going broke. At 77, I only need to keep going for a relatively short time, but nevertheless it remains essential to consider the likely impact of known (and probable) short to medium term events and circumstances while planning and making dispositions for the longer term. You audios provide a remarkable guide (and stimulant) to the process. Best wishes”

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you are enjoying the audios. Taking the perspective of a naturalist when observing the crowd is often the most fruitful way to interact with the market and I hope you will be doing so for many more years to come. 



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May 23 2016

Commentary by Eoin Treacy

Email of the day on governance and South Africa

Governance in South Africa. I agree fully with your current assessment of the deterioration of governance in this country. My wife and I retired to St. Lucia, KZN some 14 years ago when Rand to GBP was 11, now almost 23. The present ANC administration under Jacob Zuma in the opinion of most thinking South Africans has been little short of disastrous. At the present time we have a power struggle going on in which the internationally respected finance minister is in danger of losing his job. We are also seeing a disturbing trend where sections of the population are fire bombing educational institutions. 27 schools in Limpopo province were torched a fortnight ago. In the face of this criminal behaviour the police seem unwilling or unable to take decisive action

And

Governance in South Africa Post Script Both India and South Africa held general elections 2 years ago. One just needs to look at the chart for INR/ 1ZAR to see how the two countries have diverged in terms of governance in that time

 

Eoin Treacy's view -

Thank you for sharing your perspective. I have had a warm regard for South Africa since holidaying in KZN in 2000 and again in 2002. Minority shareholder rights, a free press and an independent judiciary are all important considerations when considering what the status of governance is in a country. Black empowerment introduced a question about the continuity of South Africa’s standards of governance, albeit for laudable reasons, and the country has required closer attention to political events since. 



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May 23 2016

Commentary by Eoin Treacy

Monsanto Trading Below Bayer Bid Shows Regulatory Risk Concerns

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

While the combination of Bayer and Monsanto makes sense operationally, it’s not clear yet how regulators will view this or other deals in the industry, said James Govan, a fund manager at Baring Investment Services Ltd. in London, who manages about 60 million pounds ($87 million) of agricultural and food-related stocks, including Monsanto shares. If they focus on the size of overall market share, as opposed to individual product categories, it may be harder for the deals to go through, he said in an interview Monday.

St. Louis-based Monsanto has yet to respond to Bayer’s offer. It’s not unprecedented for a target company to trade at less than an offer before the deal is later completed successfully. The current premium of Bayer’s offer to Monsanto’s share price is the 21st-biggest among 143 live deals tracked by Bloomberg.

Bayer’s offer is probably less than Monsanto’s valuation of itself, as the U.S. company expects significant growth between 2020 and 2025, said Jonas Oxgaard, an analyst with Sanford C.Bernstein & Co. in New York. Oxgaard said he expects an offer of $135 to be more palatable. Even then, he said, Monsanto would be reluctant to agree on a deal.

“Monsanto doesn’t want to be bought,” Oxgaard said by phone. “They have a history of being a standalone company, very focused long term, and they consider themselves the best company in the industry. It rankles a bit to be the best and then be acquired.”

 

Eoin Treacy's view -

Bayer and Monsanto represent two of the world’s largest seed producers and due to regulatory headwinds offer two very different ways of achieving more productive and bug or drought resistant plant strains. Monsanto is the world leader in genetically modified products while Bayer relies on bombarding seeds with radiation to induce mutation. A tie-up between the European and US leaders in seed technology represents a powerful proposition but it is unlikely to come cheap and regulators will undoubtedly have caveats. 



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May 20 2016

Commentary by Eoin Treacy

The Endgame

Thanks to a subscriber for this transcript of a very bearish speech given by Stan Druckenmiller. Here is a section: 

Look at the slide behind me. The doves keep asking where is the evidence of mal-investment? As you can see, the growth in operating cash flow peaked 5 years ago and turned negative year over year recently even as net debt continues to grow at an incredibly high pace. Never in the post-World War II period has this happened. Until the cycle preceding the great recession, the peaks had been pretty much coincident. Even during that cycle, they only diverged for 2 years, and by the time EBITDA turned negative year over year, as it has today, growth in net debt had been declining for over 2 years. Again, the current 5-year divergence is unprecedented in financial history!

And if this wasn’t disturbing enough, take a look at the use of that debt in this cycle. While the debt in the 1990’s financed the construction of the internet, most of the debt today has been used for financial engineering, not productive investments. This is very clear in this slide. The purple in the graph represents buybacks and M/A vs. the green which represents capital expenditure. Notice how the green dominates in the 1990’s and is totally dominated by the purple in the current cycle. Think about this. Last year, buybacks and M&A were $2T. All R&D and office equipment spending was $1.8T. And the reckless behavior has grown in a non-linear fashion after 8 years of free money. In 2012, buybacks and M&A were $1.25T while all R&D and office equipment spending was $1.55T. As valuations rose since then, R&D and office equipment grew by only $250b, but financial engineering grew $750b, or 3x this! You can only live on your seed corn so long. Despite no increase in their interest costs while growing their net borrowing by $1.7T, the profit share of the corporate sector peaked in 2012. The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness. And we are paying 18X for the asset class

Eoin Treacy's view -

Links to both the transcript and slides associated with the above presentation are posted in the Subscriber's Area. 

The points discussed by Stanley Druckenmiller above echo those discussed in the Subscriber’s Audio and in Comment of the Day over the last number of weeks and months but this fleshes out some of our concerns with hard figures. .



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May 20 2016

Commentary by Eoin Treacy

Mapping the World's Prices 2016

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

world. Zurich leads the way, followed by Sydney, London, Milan, Stockholm, Copenhagen, NYC, San Francisco, Amsterdam and Madrid. Tokyo is amongst the most expensive cities on most measures but surprisingly cheap hotel rooms (more akin to EM prices) help push it below many others. Our cheap date index sees Zurich, Copenhagen, Tokyo, Stockholm and Amsterdam as the most expensive cities to woo a partner. One might choose to settle down at a younger age in these countries or risk expensive courtships. London has dropped 2 places this year and out of the top 5. At the other end of the scale, cities in Malaysia, India and South Africa are the cheapest for a weekend away and around a third of the cost of the most expensive places. For those wanting a real cheap ‘cheap date’, India, Indonesia, the Philippines and South Africa are the places to go. Indeed in all of these places you can have at least 4 dates for the price of one in Zurich but please don’t tell the other 3 people! 

Don’t lose your phone while away in Brazil, India, Sweden, Denmark or Italy as a new iPhone is most expensive there. The US remains the place to buy a new one, followed by HK and Japan. Interestingly there are signs that perhaps Uber is making its mark on the world as taxi prices in many places are falling sharply. Indeed in San Francisco (where Silicon Valley resides), taxi prices have fallen more than anywhere in the DM world over the last 12 months (-30%). 

Bad habits cost you most in Melbourne, Singapore, Auckland, NYC and London as our ‘sin index’ of cigarettes and beers suggests. Singapore and Copenhagen really don't want you to own new cars as prices are nearly 4 times and 2 times the cost of NYC here. Buying a new car in India is half the price of NYC if you can find a way of driving it home. In addition to the aforementioned items this report also looks at the cost of various goods and services across the world. The index page provides the full list.

Eoin Treacy's view -

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

Scrolling through the constituents of this index, the same group of countries crop up at the top and bottom of the most and least expensive. Part of the reason for this is because of relative states of economic development but the declines in many emerging market currencies is another consideration and helps to highlight how much competitiveness can be gained from a prolonged period of currency devaluation. 



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May 20 2016

Commentary by Eoin Treacy

What you should know about China's new energy vehicle (NEV) market

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

About two-thirds of Chinese cities exceed the air pollution limits specified by the Environmental Air Quality Standards, according to China’s State Information Center. Rapid increase in internal combustion engine (ICE) vehicle ownership and the consequent traffic congestion, especially in large Chinese cities, are perceived to contribute significantly to carbon dioxide and other harmful gas emissions, and the level of inhalable particulate matter (PM). This makes China one of the most polluted countries in the world.

To curb environmental pollution and improve air quality, various countries have implemented or tightened policies to gradually reduce fuel consumption and/or harmful gas emission. China also has tightened requirements for emission and fuel consumption. Since the country had a slower start in emission controls (Figure 6), it should be one of the fastest to tighten emission controls to catch up with developed countries (e.g. the EU and Japan) (Figure 7).
While countries have multiple means to lower auto emission, e.g. diesel adoption and using conventional hybrid engine technologies, China has placed a greater emphasis on using electric vehicle (EV) or plug-in electric vehicle (PHEV) technologies. To this effect, the State Council in 2012 issued a roadmap for China’s NEV industry development, The 2012-2020

Development Plan for Fuel-efficient and New Energy Vehicle Industry. 
According to the plan, the government targets an accumulated NEV (including EVs and PHEVs) sales volume of 500k units by 2015 and 5m units by 2020E, with an annual NEV production capacity of 2m units by 2020E. Despite rapid growth in NEV sales volume in 2012-14, the absolute sales volume was meager in China, making up less than 0.2% of its vehicle sales during the period and falling way short of its 2015 target ownership level. However, NEV sales catapulted in 2015 at a 3.4x YoY growth rate and made up 1.3% of China vehicle sales (Figure 8). Aggregate NEV sales also approached closer the 2015 target NEV fleet size. In our view, soaring demand for NEVs in China is fueled by massive government subsidies and policy support (to be discussed in the next section).

 

Eoin Treacy's view -

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

China has a massive pollution problem and perhaps more importantly it is now a political liability as an increasingly vocal middle class demand a healthier standard of living. Additionally China’s geopolitical considerations are never far from the minds of its leadership. The fact China does not have the domestic energy resources necessary to fuel its economic growth represents a challenge for policy markets. 



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May 19 2016

Commentary by David Fuller

China Communist Party Goes Way of Qing Dynasty as Debt Hits Limit

Here is the opening of this powerful, incisive column by Ambrose Evans-Pritchard for The Telegraph:

Nobody rings a bell at the top of the credit supercycle, to misuse an old adage. Except that this time somebody very powerful in China has done exactly that. 

China watchers are still struggling to identify the author of an electrifying article in the People's Daily that declares war on debt and the "fantasy" of perpetual stimulus. 

Written in a imperial tone, it commands China to break its addiction to credit and take its punishment before matters spiral out of control. If that means bankruptcies must run their course, so be it. 

Fifteen years ago such a mystery article would have been an arcane matter, of interest only to Sinologists. Today it is neuralgic for the entire global - and over-globalized - financial system. 

China's debt is approaching $30 trillion. The fresh credit alone created since 2007 is greater than the outstanding liabilities of the US, Japanese, German, and Indian commercial banking systems combined. 

Moody's warned this month that China's state-owned entities (SOEs) have alone racked up debts of 115pc of GDP, and a fifth may require restructuring. The defaults are already spreading up the ladder from local SOE's to the bigger state behemoths, once thought - wrongly - to have a sovereign guarantee.

To put matters in context, leverage rose by roughly 50 percentage points of GDP in Japan before the Nikkei bubble burst in 1990, or in Korea before the East Asia crisis in 1998, or in the US before the subprime debacle. This gauge is an almost mechanical indicator of a future credit crisis. 

As we all know, China is in a class of its own. Debt has risen by 120 to 140 percentage points. The scale of excess industrial capacity - and China's power and life and death over commodity markets - mean that any serious policy pivot by the Communist Party would set off an international earthquake. 

Hence the fevered speculation about this strange article published on May 9 in the house journal of the Politburo. It was no ordinary screed.

The 11,000 character text - citing an "authoritative person" - was given star-billing on the front page. It described leverage as the "original sin" from which all other risks emanate, with debt “growing like a tree in the air”.

It warned of a "systemic financial crisis" and demanded a halt to the "old methods" of reflexive stimulus every time growth falters. "It is neither possible nor necessary to force economic growing by levering up," it said.

It called for root-and-branch reform of the SOE's - the redoubts of vested interests and the patronage machines of party bosses - with an assault on "zombie companies".  Local governments were ordered to abandon their illusions and accept the inevitable slide in tax revenues, and the equally inevitable rise in unemployment.

If China does not bite the bullet now, the costs will be "much higher" in the future. "China’s economic performance will not be U-shaped and definitely not V-shaped. It will be L-shaped," said the text.  We have been warned.

David Fuller's view -

Xi Jinping himself or his right-hand man Liu He.  I do not think Xi Jinping could or even would have written it, although it may have his tacit approval.  It is certainly an informed, candid article and also a serious warning for China’s local governments. 

China is a remarkable country, having developed more rapidly than any other nation in history.  However, it faces an exceptionally difficult transition from a developing, metal bashing and export-led economy to a developed, consumer oriented and technology-led nation.  This transition is well underway but the obvious economic speedbumps include rampant corruption in a rigid communistic political system, now compromised by spiralling debts, not least among China’s state-owned entities (SOEs).

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



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May 19 2016

Commentary by David Fuller

Freakish Diamond Pulled From Sub-Arctic Ice Is About to Go on Sale

Here is the opening from this interesting story from Bloomberg:

Even in the world of rare stones, Foxfire is a freak.

It was buried in a place where big gem-quality diamonds aren’t supposed to exist. A Rio Tinto Group ore processor was configured to discard it. And what saved the diamond’s 187.7 carats from being pulverized was a fluke: Its unusual, elongated shape allowed it to slip sideways through a filtering screen.

“It really is a miracle that it was found,’’ said Alan Davies, chief executive officer of diamonds and minerals for Rio Tinto, the operator of Canada’s Diavik mine, Foxfire’s former home. “It’s a rare find, a really rare find.”

That’s the company’s marketing line as it shows Foxfire to prospective suitors on a worldwide tour and promotes it as the largest gem-quality diamond ever found in North America. Luckily for Rio Tinto, rare diamonds are hot, much hotter than bog-standard rough stones. Sales of those fell 18 percent last year, while their uncommon cousins rack up records. Lucara Diamond Corp. just sold an 813-carat jewel named the Constellation for $63 million, making it the most expensive of its kind—$77,649 a carat. Next month, Sotheby’s will offer one that could fetch more, the Lesedi la Rona, which at 1,109 carats is the size of a tennis ball.

David Fuller's view -

I remain an unabashed bling fan, although fortunately never wishing to wear it myself. 

This item continues in the Subscriber’s Area.



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May 19 2016

Commentary by David Fuller

Leaving Europe Is a Risk the U.K. Should Not Take

The British electorate does not need Americans to tell them how to vote in the June 23 referendum, and I wouldn’t dare try. I have always had great admiration for the British people -- and great respect for the country’s democratic traditions. But from across the Atlantic, we Yanks are watching the campaign closely -- and many of us who have deep personal and business ties to the U.K. can’t help but take a close interest.

The special relationship between the U.K. and U.S. holds a special place in my heart, and not just because I had the great privilege of being named an honorary Knight of the British Empire by the Queen in 2014. I consider London my second home, my daughters hold British passports (thanks to their British mother), the company I founded employs nearly 4,000 people here, and we have long supported some of London’s world-class cultural institutions.

David Cameron and Boris Johnson, while on opposite sides of the debate, are both good friends and have assured me that no matter what the outcome of the vote, thanks to the Freedom of the City of London I was awarded in 2008, I will still have the right to herd sheep and cattle over London Bridge, and to carry a sword around Piccadilly Circus or anywhere else. Thank goodness for that!

Of course, there is so much more at stake in next month’s referendum, economically and politically -- first and foremost for the British people, but also for Americans and the world. I recognize that, as in most political campaigns, some of the rhetoric on both sides has been wildly exaggerated. But there is no disputing one fact: Given the uncertainty of Brexit’s potential impact, a vote to leave is a risk. The question is: Is the risk worth taking?

I should note: I’ve never been averse to taking risks. In 1981, I started a company to create a product that had no demand, with technology that didn’t exist. Twenty years later, I ran for mayor of New York when no one thought I had even the slightest chance of winning. Against the odds, both decisions turned out better than I could have ever dreamed of. But over the course of my career, there are certain risks that I have refused to take (including running for U.S. president this year) after weighing the evidence and concluding that they were likely to produce more harm than good. Some risks are just not worth it.

As the founder of a business that specializes in financial data, news and analysis, I have carefully evaluated the question of Brexit and concluded that the risks involved are troubling. No one can say for certain if an “Out” vote would shrink the financial services industry, which accounts for about 12 percent of the U.K.’s economic output and the bulk of our customer base. But in my conversations with chief executives of banks and other industry leaders, with rare exceptions, they see Brexit as a serious complication that could lead some jobs to shift to the continent over time. Some in Frankfurt and Paris are rooting for Brexit for this reason.

David Fuller's view -

This is one of the best articles that I have read and also posted on the subject of Brexit. 

Personally, I am less worried about the UK’s long-term prospects outside of the EU but I think this decision is too important internationally for it to be taken entirely on the basis of what fellow UK citizens think is best for our country.  While no one can be certain of what the future holds, I do think Brexit would be extremely divisive.

As for Michael Bloomberg, I regard him as one of the most successful entrepreneurs of my generation, and also the best Mayor of New York that I have seen.  He is probably also one of the best presidents that the USA will never have.     



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May 19 2016

Commentary by David Fuller

May 19 2016

Commentary by David Fuller

Genetically Modified Salmon Approved for Sale as Food in Canada

Here is the opening of this enlightening article from CBC News:

The first genetically modified food animal has been approved for sale in Canada.

At a news conference in Ottawa on Thursday, Health Canada and the Canadian Food Inspection Agency announced AquaBounty's genetically modified salmon has been approved for sale as food in Canada.

A final round of thorough and rigorous Canadian scientific reviews found that AquAdvantage Salmon is as safe and nutritious as conventional salmon, according to technical briefing documents provided by Health Canada.

The same conclusion was reached by the U.S. Food and Drug Administration in 2010, but it took until November 2015 for the agency to approve the fish for sale as food in that country. That decision is being challenged by a group of environmental, consumer, and commercial and recreational fishing organizations.

AquAdvantage Salmon was developed by Massachusetts-based AquaBounty Technologies.

The fish grow twice as fast as conventionally farmed Atlantic salmon because of the addition of genes from a Chinook salmon and an eel known as an ocean pout.

David Fuller's view -

Some people will always carp (no pun intended) about genetically modified fish, or anything else.  However, we have been happily consuming innumerable GM foods, commencing with Mendel’s peas, for decades and often without knowing it.

Yes, there could theoretically be risks such as potential food allergies or more importantly, losses of nutritional value.  Also, fisheries can always improve their ability to lower the risks of pollution and the escape of farmed fish into the open seas.

We may never achieve perfection with all GM foods but mankind’s ability to improve on nature is a great scientific and technological achievement.  As with any other vital industry GM foods also need to be carefully and knowledgeably regulated. 

The best of GM foods will be in our future, and a very good thing too.  The advantages of reducing starvation and undernourishment, by raising higher-yielding crops or not entirely emptying the seas of all fish, considerably outweigh the risks. 

Today I undoubtedly eat more farmed salmon and genetically modified vegetables and fruit than anything else.  Thank heavens they are available and affordable.   

 



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May 19 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Here is the current Brochure.

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.    



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May 19 2016

Commentary by Eoin Treacy

Conviction themes for a fat and flat market; equities to N over 12m

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

Markets have been calmer and cross-asset correlations with oil have fallen since our last GOAL on March 21. Declines in bond yields, owing to a continued dovish Fed, a weaker dollar and stronger commodity prices, have been the key cross-asset moves. This has lifted bond and credit returns, but equities have not benefited much. Global earnings growth revisions have been negative and equity valuations remain high, with the equity risk premium a less useful predictor of returns owing to uncertainty over trend growth and normalisation of bond yields (see GOAL – Global Strategy Paper No. 18: Valuation investigation: Varying signals for the ERP, May 3, 2016).

We stick with our ‘fat and flat’ view for equities. After the rebound from the trough on February 11, and with the S&P 500 at the upper end of its recent range, we downgrade equities to Neutral over a 12-month horizon, in line with our 3-month view. Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels. Our equity strategists have become more defensive, owing to heightened drawdown risk and growth scarcity (see US Weekly Kickstart, May 13, 2016 and Strategy Expresso, May 16, 2016). While we see some upside to equities in local currency (particularly Japan), we expect the dollar to strengthen (see FX Views, May 13, 2016), resulting in poor USD returns over the next 12 months (Exhibit 1).

We prefer to implement the divergence theme via FX rather than equities; equities are generally more volatile than FX and, while the equity/FX correlation for Europe and Japan remains negative, it has increased recently (Exhibit 2) (see GOAL: Lost in translation, October 2, 2015). For Europe, equity/FX correlations could become even less negative as political risks in Europe intensify. We also move to Neutral across equity regions on a 12-month basis (in line with our 3-month basis) alongside these effects.

 

Eoin Treacy's view -

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

Corporate Profits have come in below expectations in the first quarter which makes it harder to justify valuations at where they are right now. 

Companies are not spending as much on buybacks and what they are spending is buying less because prices have gone up so much already. Quite apart from that buybacks inflate earnings per share which has a knock-on effect that compresses P/E ratios. 

 



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May 19 2016

Commentary by Eoin Treacy

Email of the day on Vietnam:

I would also be grateful for an update of your view on the Vietnam market, which has broken out above its 200 day MA and is approaching the top of a multi-year trading range.  The government has announced the merger of the Hanoi and HCM stock exchanges as well as other market friendly initiatives which could perhaps be behind the recent outperformance of Vietnam vs other Asean indices.

Eoin Treacy's view -

Vietnam’s Communist Party is attempting to improve the governance of the economy and has been through a painful period where inflation has been running ahead of expectations. The Dong took the brunt of selling pressure but has been reasonably steady so far this year. Nevertheless, a sustained move below the MA would be required to question medium-term Dollar dominance. 



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May 19 2016

Commentary by Eoin Treacy

Email of the day on the Philippines

Yep All good here thanks. I hope same for you. 

Regarding the new President Duterte, for now it's a wait and see till his final team composition is made.

If he eradicates crime that's already a good thing. I don't think minor crimes (drugs, small crimes) are the major issue in the Philippines, but he made a big emphasis on this during his campaign. And if he really includes corruption into that terminology (I believe he does), then it'll be even better! President Aquino made a lot of improvements on the corruption issues, but it's still a very big challenge. I guess Duterte will make "no joke" on this topic. So I hope for the best. 

For the other economy aspects (a lot is linked to corruption though), especially large infrastructures in my opinion, we hope for a strong economic team, but anyway he pretty much said he'd continue the economic  policies of Aquino, so hopefully it's at least as good as before. 

I know he was called the Trump of Asia and is believed to have human right issues. A lot seems (hopefully!) to be overdone, it was during the campaign which had to be "fun" like the Filipinos like it.

We are in the "hope" phase then...,

 

Eoin Treacy's view -

Thank you for sharing this perspective; which is that of a generous French expat in the Philippines.   



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May 19 2016

Commentary by Eoin Treacy

Buy Robot. Silicon Valley Misses a Trick as China Nabs Kuka

This article by Chris Bryant and Nisha Gopalan for Bloomberg may be of interest to subscribers. Here is a section: 

Adding robotics exposure makes sense, as rising Chinese labor costs are expected to drive a big increase in factory automation there. At present, China uses much less automated manufacturing than more developed economies such as South Korea and Germany. 
China's robot sales rose 16 percent last year, according to the International Federation of Robotics, which predicts that by 2018 it will account for more than one third of industrial robots installed worldwide. 

So you can see the strategic sense of a Kuka deal. But it still begs the question: why didn't Silicon Valley jump in here? Midea's offer values Kuka's equity at 4.5 billion euros ($5 billion), chump change for the likes of Google, Apple or Amazon.

And yes, that whacking great premium is surely designed to see off any potential white knights, but -- just like China -- the U.S. tech giants aren't restricted by the usual rules of corporate finance.

There's been a lot of big talk there about robotics, but besides Amazon's clever acquisition of Kiva, which makes robots that whizz around its logistics centers, we've seen little fruitful action. In March, Google beat a partial retreat by putting its Boston Dynamics unit up for sale.

Of course, the U.S. reigns supreme in software, increasingly central to the success of robotics. But if you want to own the future, you'll have to marry that expertise to intelligent hardware. And it's here where Kuka excels.

The German company has branched out beyond its car-plant robot roots to other sectors, including electronics and medical applications. It's taking a run at the so-called "internet of things" by making its machines easier to program. Its lightweight model called the iiwa is a technological wonder that can work side-by-side with humans, without a safety cage.

 

Eoin Treacy's view -

China is investing heavily in automation because having achieved the moniker “workshop of the world” it intends to hold onto it as labour costs rise. However there is another reason China Inc. is on such a buying spree; acquiring everything from luxury hotels and food companies to robotics in the last year. 



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May 18 2016

Commentary by David Fuller

Most Fed Officials Saw June Hike Likely If Economy Warrants

Most Federal Reserve policy makers in April said an interest-rate increase would be appropriate in June if the economy continued to improve, but were divided over whether those conditions were likely to be met in time.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June,” according to minutes of the Federal Open Market Committee’s April 26-27 meeting released Wednesday in Washington.

“Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting,” the minutes stated.

Referring to the June meeting, officials “generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision” based on how the economy evolves, the minutes said.

After a weak first quarter, more recent indicators show a rebound in the second. A bump in inflation reported this week lifted investor expectations for the path of rates this year, though odds of a June hike remained low, at about 14 percent, based on federal funds futures pricing.

Consumer Prices

The consumer price index rose by the most in more than three years in April. Recent data on housing and consumer spending have also indicated signs of growth. Gross domestic product in the second quarter is on pace to expand 2.5 percent, according to the Atlanta Fed’s GDPNow gauge. That’s a pickup from 0.5 percent growth in from January through March.

David Fuller's view -

The Fed clearly hopes that it will be able to raise rates in June or more likely July.  If it could do so without fearful hesitation, and that is a big ‘IF’, the strategy of a gradual move towards 2% for the Federal Funds Rate would provide it with some insurance for the medium to longer term.  That would give the Fed more flexibility in dealing with the next recession, whenever that may occur. 

Additionally, the Fed would like to be able to raise rates in the knowledge that the US economy is actually improving.  This would be generally recognised as a validation of the Fed’s cautious strategy to date. 

This item continues in the Subscriber’s Area.  



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May 18 2016

Commentary by David Fuller

Interesting Charts of the Day

David Fuller's view -

These charts are related.  First, look at the Dollar Index, which has failed to maintain its recent downward break.  I maintain that this pattern since DXY initially completed its multiyear base formation in the second half of 2014 and rallied to 100 in March 2015, is a very lengthy consolidation following the first upward step of a secular bull market recovery.  The Fed will still want to restrain the Dollar, because in the upper side of this range, let alone should it sustain a break above 100 this year, it would once again become a strong headwind for the US economy.  

This item continues in the Subscriber’s Area.



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May 18 2016

Commentary by David Fuller

Earth Relentless Warming Just Hit a Terrible New Threshold

Here is the opening and a brief latter section from this sobering report:

The number of climate records broken in the last few years is stunning. But here's a new measure of misery: Not only did we just experience the hottest April in 137 years of record keeping, but it was the 12th consecutive month to set a new record.

It's been relentless. May 2015 was the hottest May in records dating back to 1880. That was followed by the hottest June. Then came a record July, August, September, October, November, December, January, February, March—and, we learned from the National Oceanic and Atmospheric Administration on Wednesday—the hottest April. In an age of rising temperatures, monthly heat records have become all too common. Still, a string of 12 of them is without precedent.  

Perhaps even more remarkable is the magnitude of the new records. The extremes of recent months are such that we're only four months into 2016 and already there's a greater than 99 percent likelihood that this year will be the hottest on record, according to Gavin Schmidt, who directs NASA's Goddard Institute for Space Studies.  

The chart below shows earth's warming climate, measured by land and sea, dating back to 1880. 

And

To be sure, some of this is the result of a monster El Niño weather pattern lingering in the Pacific Ocean. El Niño may finally be coming to an end, shifting this summer to a cooling La Niña by the time Arctic ice coverage reaches its nadir, according to NOAA's Climate Prediction Center. The agency gives a 75 percent chance of a La Niña pattern developing this year. 

Beyond these cyclical changes, however, there seems no escaping the larger trend that we live on a planet that's warming rapidly. Coastal cities are flooding more regularly, wildfires are starting early, and the world is in the midst of the most prolonged die-off of the ocean's coral ever witnessed.

Perhaps most worrisome, if recent trends are any indication, is that it won't be long before this record-hot year looks cool, compared with what's to come. 

David Fuller's view -

This trend has been clear for a long time, although many people have not wanted to acknowledge it for understandable reasons.  Also, global warming has been good for some of us… so far.  I enjoy London’s mild winters, with a few garden plants blooming throughout the year.  Northern agriculture has been a net beneficiary of milder winters and increased moisture, leading to longer growing seasons.  A slightly wetter climate also relieves drought problems in some arid areas. 

Nevertheless, these gains are very likely to be more than offset by the trend of increased warming which is not only global but also accelerating.  Potential risks for countries closer to the equator are severe.  Unless the rate at which global temperatures are rising is checked, either naturally or with our help, coastal cities will be increasingly susceptible to flooding, with considerable consequences for GDP in those regions.       



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May 18 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.    

The new Brochure will be released shortly but you can reserve your seats immediately by contacting Sarah Barnes on this email: [email protected]

 

Please note: This copy was delayed by an overnight loss of online connection.

 



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