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October 06 2022

Commentary by Eoin Treacy

Video commentary for October 6th 2022

October 06 2022

Commentary by Eoin Treacy

PGIM Sees No-Brainer in Betting Against Another Fed Pivot Trade

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

Investors counting on a Federal Reserve pivot any time soon are bound to get burned again, according to PGIM Fixed Income.

“We’ve seen this movie time and time again,” said Greg Peters, co-chief investment officer at the Newark-based firm, in an interview. “The market gets hyped up on different narratives between inflation releases. I’ve been surprised by it, and we’ve been using it as an opportunity to sell into.”

The firm, which manages assets of $790 billion, sold US Treasuries after a rally earlier this week sparked by speculation the Fed was about to turn more dovish. The market move proved short lived, backing its view that there’s still not enough evidence to suggest policy makers will rein in aggressive interest-rate hikes.

The speculation -- fueled by a smaller-than-expected rate hike in Australia -- drove action across global markets in the first two days of this week, driving down two-year Treasury yields by nearly 30 basis points at one point to below 4%.

Eoin Treacy's view -

Neel Kashkari, who has historically been viewed as a dove, was quoted today as saying "more work to do" on bringing down inflation, and is "quite a ways away" from being able to pause its aggressive interest-rate hikes.



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October 06 2022

Commentary by Eoin Treacy

LNG Market Supply to Remain Tight for Years, Top Producers Say

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

Liquefied natural gas will be in short supply in the coming years as production lags behind surging demand from Europe, according to the world’s top producers of the fuel.

Global LNG demand is unlikely to peak for another 20 to 30 years, Qatar Energy Minister Saad Al-Kaabi said at the Energy Intelligence forum in London. Meanwhile, supply will remain “structurally short” until there’s significant new production capacity, which will be 2026 at earliest, Meg O’Neill, chief executive officer of Australia’s Woodside Energy Group Ltd., said at the event.

Their comments add to a growing chorus warning that Europe’s worst energy crisis in decades is unlikely to end soon. While the continent looks set to cope this winter, it’s next winter when the supply shortage will really bite as Europe tries to replenish its stockpiles without Russian imports.

“Next winter is going to be the problem,” Al-Kaabi said. “It doesn’t look like it’s getting better.”

Eoin Treacy's view -

The opinion that Europe will cope this season is implied in prevailing prices of natural gas. It is not reflected in media coverage which continues to paint a dire picture of what this winter will feel like for many consumers.



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October 06 2022

Commentary by Eoin Treacy

Thyssenkrupp may have just cleared the path to bulk green steelmaking

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

German steel giant Thyssenkrupp is investing US$1.9 billion in a hydrogen-powered direct-reduction system that can create high-quality steel without needing the rare, high-grade iron ore required by most green steel processes. This could open the floodgates.

But the technology to make green steel is well understood and already in use. You stop using fossil-fired blast furnaces to release the oxygen from iron ore, and you stop using baked coal, or coke, as a reductant to add the critical small percentage of carbon to your iron. Instead, you use green hydrogen in a direct reduction process, both as your reductant and to power an electric arc furnace to supply the heat. Instead of tons of carbon dioxide, this process emits water.

Eoin Treacy's view -

Electric arc furnaces require scrap steel to function so there is a heavy reliance on recycled supply. Using hydrogen to make the process more efficient and to avoid buying costly carbon credits is a bonus if it can be achieved effectively.



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October 06 2022

Commentary by Eoin Treacy

Tilray, Other Marijuana Stocks Rise After Biden Says He Will Pardon Federal Offenses of Simple Possession

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

"No one should be in jail just for using or possessing marijuana," Biden said in a post on Twitter (TWTR). "Today, I'm taking steps to end our failed approach."

Biden said he will pardon all previous federal offenses of simple marijuana possession.

"There are thousands of people who were previously convicted of simple possession who may be denied employment, housing, or educational opportunities as a result. My pardon will remove this burden," he said.
The president also said he is asking Health Secretary Xavier Becerra and Attorney General Merrick Garland to review how marijuana is scheduled under federal law.

"We classify marijuana at the same level as heroin -- and more serious than fentanyl. It makes no sense," Biden said.

Eoin Treacy's view -

The are clear arguments in favour of freeing individuals for cannabis offenses when cannabis possession and consumption is legal in many states. The potential for reclassification of cannabis is a potentially significant development for the sector.



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October 06 2022

Commentary by Eoin Treacy

October 06 2022

Commentary by Eoin Treacy

The Chart Seminar London November 21st and 22nd 2022

Eoin Treacy's view -

We are living through fast moving markets so the next venue for The Chart Seminar will be November 21st and 22nd this year in London.

In the meantime, if you have any questions, would like to attend, or have a suggestion for another venue please feel to reach out to Sarah at [email protected] 

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



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October 06 2022

Commentary by Eoin Treacy

October 05 2022

Commentary by Eoin Treacy

Video commentary for October 5th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: high yield spread continues to march higher, the yield curve is still inverted, crude oil and oil stocks extend advance, dollar bounces, Treasury yields bounce but stock market steady. If the preceding trends remain intact, that spells trouble for the stock market. 



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October 05 2022

Commentary by Eoin Treacy

KKR's Debt Deal Shows How Ugly Things Are Getting for Lenders

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

Such maneuvers had been a decade in the making. Easy money after the global financial crisis made debt investors hungry to buy loans and bonds that provided higher yields. Funds began to agree to weaker protections in their creditor agreements. Loan and bond documents riddled with loopholes and imprecise language gave borrowers more flexibility in times of stress.

The documents didn’t explicitly allow future creditors to grab collateral. But they left just enough ambiguity, sometimes called “trap doors,” for lawyers with a bit of ingenuity and a lot of motivation to move assets to new entities and give dying companies some fresh capital. Because of these often-overlooked provisions, some creditors were surprised to discover they’d been left with almost worthless loans and bonds after struggling companies restructured.

“Loose documents have become the norm rather than the exception,” says Damian Schaible, co-head of restructuring at Davis Polk & Wardwell. “If we go into a real recession, we are going to see more and more borrowers and sponsors seeking to exploit document loopholes to create leverage against and among their creditors.”

Eoin Treacy's view -

Covenant light debt issuance has dominated the post Global Financial Crisis bond markets. That hasn’t mattered until now. Default rates were low, successive waves of new money ensured rates stayed low, and credit remained abundant. 



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October 05 2022

Commentary by Eoin Treacy

OPEC+ Tries to Keep Oil Above $90 With Large Production Cut

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

Earlier on Wednesday, US officials were making calls to counterparts in the Gulf trying to push back against the move to cut production, according to people familiar with the situation. President Biden has long been pushing OPEC+ to boost output, visiting Saudi Arabia earlier this year in search of lower pump prices for Americans ahead of midterm elections in November.

The White House’s national security adviser, Jake Sullivan, and National Economic Council Director Brian Deese said in a statement after the OPEC+ meeting that the US would release another 10 million barrels of oil from the Strategic Petroleum Reserve in November, and that “the president will continue to direct SPR releases as appropriate to protect American consumers and promote energy security.”

Real Cuts
The cut of 2 million barrels a day will be measured against the same baseline as the previous OPEC+ agreements, Amir Hossein Zamaninia, OPEC governor for Iran, told reporters in Vienna after the meeting. Shared pro rata between members, that would require just eight countries to curb actual production and deliver a real reduction of about 900,000 barrels a day, according to Bloomberg calculations based on September output figures.

OPEC+ will no longer hold monthly meetings, Zamaninia said. The group’s Joint Ministerial Monitoring Committee, which oversees implementation of production cuts, will meet every two months, he said. 

Eoin Treacy's view -

Moving meetings to every two months suggest this cut to production is not a short-term measure. OPEC ministers are obviously worried about the prospect of lower demand and above all do not wish to re-experience the 2020 plunge in prices because they were not prescient enough to reduce supply.



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October 05 2022

Commentary by Eoin Treacy

Ice Age - End In Sight

Thanks to a subscriber for this report from Morgan Stanley focusing on Asia. Here is a section:

Upgrade from Cautious to Attractive: No one knows exactly when this downturn will end and we find it difficult to get ahead of macro events, but we see signals that suggest we should no longer be overly pessimistic: (1) the cyclical sell-off has already been punitive in an historical context; (2) the magnitude of the valuation correction (YoY) is approaching extremes relative to the last two decades; (3) earnings risks are now well understood and it is surprises that will drive stocks from here; (4) green shoots are emerging while some consumer parts of tech are close to bottoming; (5) we are upgrading our top down EM strategy view on IT, Korea, and Taiwan; these are set-up for a reversal in returns in the coming weeks. What is not understood is cycle turns and the market's willingness to increasingly look through this late stage of the downturn and, hence, our focus on the other side of the cycle.

An inflection is near and we see reasons to be constructive on a 2H23 recovery. (1) Macro headwinds are fading with the bulk of the Fed’s heavy lifting likely to be done by year-end and benefits from China’s reopening; (2) demand elasticity and replacement cycles will be driven by the sharp fall in pricing, especially consumer products; and (3) supply adjustment is accelerating via significant production and capex cuts that are underway. We have clearly worked through the slowdown in the consumer and are most positive on 'first-in, first out' exposure in LCD panels bottoming now, followed by memory in 4Q22, while the trough for foundry, auto and semicap should come with a lag in 1H23.

Eoin Treacy's view -

As the fourth quarter begins and investors position for how they hope to salvage returns for 2022, questions are already arising about the prospects for 2023. There is no doubt, steep declines in asset prices, particularly within the tech sector, have improved valuations. In normal circumstances that would be sufficient to create attractive entry points. Therefore, the question is whether this is a normal correction following the excesses of the pandemic or the end of the cycle. 



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October 04 2022

Commentary by Eoin Treacy

Video commentary for October 4th 2022

October 04 2022

Commentary by Eoin Treacy

Email of the day on looking at lots of charts

Dear Eoin, In the 1960s and 1970s subscribers to the David Fuller Chart Service received a booklet containing hundreds of charts each week or each month. I used to come into the office at 6a.m. and complete the point and figure charts each day. Thanks to this work, I gained a reputation among my colleagues for being the first one to spot changes in the long-term trends of both overall markets, sectors and individual shares. As of this morning, I am getting up one hour earlier and I will start by looking at all the daily charts of the Autonomies in the Chart Library. Let's hope that this will produce the same result. This morning's work show very small blue upward marks in almost every chart. These are tiny upward movements in the year-long major decline in all these share prices. This "summer's swallow" has not yet started chirping. Regards,

Eoin Treacy's view -

Thank you for this account. David was still having chartbooks printed in 2003, when we began working together. By that stage they were a very niche product that had become obsolete with the development of charting software. Nevertheless, the practice of looking at lots of charts is as useful today as it has ever been.

In following your program of activity, I would suggest taking one day to look at point and figure charts. They will give you clear confirmation of a change of trend.



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October 04 2022

Commentary by Eoin Treacy

The Freeport LNG Paradox

This article from Goehring & Rozencwajg may be of interest to subscribers. Here is the conclusion:

With the announcement that Freeport will likely resume exports in October, much sooner than originally planned, combined with low inventories and a gas supply that has shown little in the way of growth, we believe the risk of a Q4 price spike in North American natural gas is once again high.

Natural gas has quickly gone from relative obscurity to geopolitical lynchpin. In the summer of 2020, seaborn LNG reached a low of $1.90 per mmcf while oil prices turned negative. Together, this represented the lowest energy costs in human history. Two short years later, LNG has risen 30-fold to $58 per mmcf, representing the highest energy costs in human history. Such is the result of a decade of underinvestment. Given the fragility of the world’s energy supply, it is no wonder tyrants and despots are moving to weaponize fuel sources. We do not expect this trend to stop and recommend investors position themselves accordingly. We remain extremely bullish on North American natural gas and recommend investors continue holding their natural gas related equities.

Eoin Treacy's view -

Some of information quoted in this report is not accurate. For example, Rhine river levels could approach normal depths this week, and France changed the rules on nuclear power heating of river water in August. European coal prices peaked in March and continue to unwind an overbought condition.
 



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October 04 2022

Commentary by Eoin Treacy

UK Seeks 20-Year Gas Deal With Norway to Avoid Winter Blackouts

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

The UK is in talks with Norway to secure a natural gas contract of potentially 20 years in a bid to stave off the risk of winter blackouts, a person familiar with the matter said.

Ministers are discussing a price with their Norwegian counterparts, according to the person, who asked not to be named discussing sensitive matters. The business department didn’t immediately respond to a request for comment.

Because of the length of contract under discussion, there’s a risk that locking in long-term gas contracts now might leave the UK exposed to high costs in years to come. Current volatility means producers could demand higher prices to guarantee strong profits as it’s unclear how much money they could make by selling on the spot market in the future instead.

Eoin Treacy's view -

Forced buyers are never going to get the best price regardless of how amicable the relationship is between Norway and the UK. However, if that is the only way to ensure security of supply over the coming couple of years, it may be a price worth paying.



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October 03 2022

Commentary by Eoin Treacy

October 03 2022

Commentary by Eoin Treacy

Some of Truss's Top Team Say Her UK Project May Already Be Over

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

Speaking on the sidelines of the Tories’ annual conference in Birmingham, the ministers predicted she will survive to fight the next election, due in about two years, because there isn’t enough time to replace her. The result, they said, is likely to be more rebellions from Tory MPs pushing around a lame duck premier, just like the one that forced her into a humiliating U-turn on Monday morning. 

The stark view suggests the “new economic deal for Britain” launched by Truss and her Chancellor of the Exchequer Kwasi Kwarteng may be dead in the water before it has even got going. The policy calls for a major program of deregulation in areas such as housebuilding and childcare alongside tax cuts.

One former Cabinet minister predicted Truss will be gone within a year to allow the party time to regenerate before the general election, which must be held by January 2025 at the latest. They said local votes in May, 2023, would provide a clear indication of how badly Truss is doing and predicted that her successor would have to come from outside the current Cabinet.

Eoin Treacy's view -

Reversing the 5% cut to the top rate of tax was essential to avoid significant public protest. The biggest challenge for the Truss administration is their inability to fathom that the era of profligate spending with no concern for funding ended when inflation surged and forced rates higher. The reality is high rates force a reappraisal of value and in turn a questioning of values is inevitable.



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October 03 2022

Commentary by Eoin Treacy

Brazilian Assets Soar as Presidential Race Goes to Runoff

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

Brazilian assets jumped after President Jair Bolsonaro secured his way to a runoff election against Luiz Inacio Lula da Silva as investors cheered on the incumbent’s better-than-expected showing and bet his leftist challenger will be forced to moderate his stances in the second stretch of the race.   

Lula, as he is universally known, took 48% to Bolsonaro’s 43%, Brazil’s electoral court said, with almost all votes counted.

That tally left Lula without the simple majority needed for an outright victory, as some opinion polls had suggested, and set the two up for a bruising face off in what has already been a divisive election campaign.

Eoin Treacy's view -

The Brazilian iBovespa is the only major global index in positive territory this year; in both nominal and currency adjusted terms. 13.75% short-term interest rates, up from 2% in March 2021 have successfully got inflationary pressures under control. The central bank expects to be cutting rates by the end of the year or early in 2023. 



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October 03 2022

Commentary by Eoin Treacy

JPMorgan Is Worried About Who's Going to Buy All the Bonds

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

Even if new buyers step into purchase these bonds, they’re likely to demand a higher yield for doing so — potentially adding to government deficits and mortgage rates at a time when they’re already soaring.

“All this points to a somewhat higher resting level for the mortgage/Treasury basis—and potentially for other related assets like IG corporates, which finally caught up with some of the mortgage widening over the past few days,” the analysts conclude.

Eoin Treacy's view -

2-year yields at over 4% are sufficient incentive to drag cash into the sovereign markets. When the alternative is to lose double digits in the stock market and see cash eroded by inflation, the allure of a guaranteed 4% is reason enough to invest.



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October 03 2022

Commentary by Eoin Treacy

China Offers Rare Tax Rebate to Spur Home Purchase in Crisis

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

China’s central government offered a rare tax incentive for residential purchases, ramping up support for the country’s embattled real estate sector. 

Residents who buy new homes within one year after selling old homes will enjoy refunds for personal-income tax on the sale, according to a statement on the finance ministry website. The tax refunds will take effect from October till the end of 2023. 

The novel tax policy comes after a yearlong slump in the housing market. To spark a turnaround, the central government is allowing nearly two dozen cities to lower mortgage rates for purchases of primary residences, while the central bank vowed to speed up delayed homes with more special loans. 

“The measure may help restore some confidence,” said Xu Xiaole, a property analyst at Beike Research Institute. “It’s another demand-side policy targeting homebuyers after mortgage rate cuts.” 

The tax break suggests the central government is ramping up support for people seeking to upgrade their homes. Previously, most incentives focused on first-time buyers, echoing President Xi Jinping’s mantra that “houses are for living in, not for speculation.”

Unless the person has held on to the home for at least five years, most big cities charge personal tax income on property sales when there’s a gain in value, usually 1% of the full amount or 20% of the gain. 
Under the new policy, people who buy more expensive apartments will enjoy a full refund in this area. The tax break only applies to home upgrades in the same city.  

Eoin Treacy's view -

The range of measures China is putting in place to support the housing market continue to increase. That’s good news for the domestic property sector and commodity demand in general. By limiting the tax cut to those also selling a property, the government is attempting to avoid stimulating property speculation but more money for the sector is certainly a positive.



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September 30 2022

Commentary by Eoin Treacy

September 30 2022

Commentary by Eoin Treacy

CIOs Waiting for Cloud Investments to Pay Off

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

Roughly 67% of 1,000 senior technology leaders at U.S. firms across industries said they are still waiting for cloud investments to pay off, KPMG said Thursday in its annual technology survey. Why the wait? Blame insufficient skills among tech teams, added requirements, and a misalignment on expected outcomes, says Barry Brunsman, a principal in KPMG’s CIO Advisory group.

Tech leaders take note. Diane Comer, chief information and technology officer at Kaiser Permanente, said that when the healthcare provider is working on a new initiative, it will price it out and compare an on-premises solution against one in the cloud. “You really do need to not just take it for granted that cloud is where you should head,” she said.

Eoin Treacy's view -

Companies boost their valuations by making claims about the size of the total addressable market (TAM) in their corporate presentations. The logic is simple enough. We might only make a couple of hundred million today, but the size of the market is so much larger, that we can grow quickly to capture sizeable market share.



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September 30 2022

Commentary by Eoin Treacy

Message From Stock Market Is Clear: Fed Put Is Getting Closer

This article from Bloomberg, focusing on the options market, may be of interest. Here it is in full:

The price of deeper out-of-the-money insurance in equities is falling, implying lower demand for
crash insurance. This suggests the market believes the Fed put is getting closer.

A conundrum all year has the been the relatively low level of the VIX despite equity markets being in a bear market. The VIX has been low relative to implied volatility, relative to longer-term volatility, and remains low compared to cross-asset volatility. Most notably, though, the VIX has been low -- and
continues to fall -- versus at-the-money volatility.
 
This is due to the price of further out-of-the-money put options falling by more than options that are less out of the money. We can see this by looking the difference in volatility between 80% and 90% out-of-the­-money put options and see it has been falling.

As the VIX is a weighted average of all S&P options with approximately 1-month to expiry and that have a non-zero bid, the lower price of these deeper out-of-the-money options is keeping the VIX lower relative to at-the-money volatility than it otherwise would be.

Puts have still been in demand though. The put/call volume ratio has been rising, showing that investors are buying more puts relative to calls. But the put/call price ratio has been falling, showing that investors have been paying relatively less for those puts.

Investors have therefore not been paying up as much for crash insurance, and buying puts that are less out of the money. The Fed is now well into its hiking cycle, and the market is inferring it believes the Fed put is getting nearer.

Certainly, current oversold conditions suggest a short-term bounce is at hand. But while excess liquidity remains depressed, it will be hard for the market to make new highs. The Fed put may be closer, but that does not mean the bear market is over.

Eoin Treacy's view -

No two crises are the same and yet the temptation to think “this time is different” has been proved wrong on so many occasions that the term is a cautionary tale. The Bank of England intervened to support the domestic pension system this week. Several schemes required £100 million in additional capital each and others were looking at closing. The central bank had no choice but to wade in and provide some stability. The ramifications of this move raise more questions than answers.



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September 30 2022

Commentary by Eoin Treacy

Illumina Unveils DNA Sequencing Machine Delivering a $200 Genome

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

Many consumers have been introduced to their DNA through relatively low-cost tests like those marketed by 23andMe Holding Co. that analyze small snippets of the genome for clues to disease risk and ancestry. Whole-genome sequencing can provide a far clearer, more accurate view of patients’ genetic makeup that doctors can use to precisely identify some diseases, including certain forms of cancer and heart disease. However, the price of performing the tests, along with their interpretation, has been a barrier for many patients that companies have been trying to bridge.

More efficient machinery and materials reduce customer cost to sequencing one genome, or the complete set of genetic material, Illumina said, adding that costs would range from less than $200 per genome, with discounts for bulk use, to $240 for a higher-quality analysis. Slashing the price of reading DNA could allow the practice to move into the mainstream, where it might be used to better tailor medications or treatments to people or have other health benefits.

“This will be a huge force in terms of significantly increasing accessibility to genomics in a number of ways,” deSouza said in an interview ahead of the announcement. “It will democratize access to genomics by allowing sequencing to be offered to hospitals and researchers at much lower prices.”

Eoin Treacy's view -

Illumina is a highly cyclical business. They are the clear leader in developing machines for genetic sequencing. Every few years they bring out a new machine that delivers more efficient and cheaper sequencing. That kickstarts an upscaling cycle among its customers which boosts sales over the next 18 months. 



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September 29 2022

Commentary by Eoin Treacy

Video commentary for September 29th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Dollar easing supports gold but weighs on stock markets. Nasdaq-100 testing the June low and is below the 1000-day MA for the first time in a decade. It needs to bounce soon to avoid a break of the secular trend. Bonds pause amid yield curve control speculation, oil steady. 



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September 29 2022

Commentary by Eoin Treacy

Email of the day on UK pension fund leverage

I've spent some long days and nights this week on this very subject (work as an investment actuary in DB [Ed. Defined Benefit] pension fund space)...

Fiscal policy context: mini-budget, with expected energy price cap but surprise revenue cuts (tax, NI, duty, etc.); cost of the latter might be in the vicinity of c£40bn pa (without OBR numbers its hard to say though).

Monetary policy context: TBC regarding rate hikes from November MPC meeting; QT expected to be of the order of c£80bn over next 12months, in an effort to combat inflation. So we have fiscal loosening amid a longer term aim from the BoE to tighten.

As above, the surprise cuts cost, and the DMO has therefore had increase it's expected gilt issuance significantly. This huge increase in supply led to an increase in gilt yields, which move inversely vs price and hence inversely vs relative demand. But, that was only the start...

DB pension schemes facing substantial deficits post-GFC typically have portfolio divided into two parts:

one part seeks excess return in order to make good the deficit
the other part "hedges" the liabilities, which behave like typically long duration bonds (insomuch as they have interest and inflation sensitivities) - their long duration makes them susceptible to quite large changes in value (e.g. 20y duration with a 1% increase in rates at that duration would lead to a 20% fall) - it's therefore a good idea to minimise risk, but you need to minimise risk relative to your specific liabilities (i.e. jurisdiction, duration, realness, etc.)

But, if you're trying to hedge 100% of your liabilities (or even something less) with <100% of your assets (in practice this number is often in the 25-50% range), then you need to use leverage. Two (not exhaustive) ways of gaining exposure to interest rates and inflation using leverage are: 

To enter into swaps whereby I agree with you that I'll pay you x% each period and you'll pay me whatever a floating interest rate or inflation is. I haven't actually bought anything in doing so and therefore haven't actually used any money = leveraged exposure

Another option is that we use a "repo". I sell you my gilt on the understanding that I'll buy it back on a known future date at a specified future (higher) price. In other words, I am paying to borrow over the period whilst still exposed to the price move of the asset repo'd. With that borrowing I can go and buy another gilt. I've therefore effectively doubled my exposure to gilt price moves = leveraged exposure.

In practice, to ensure that these synthetic hedges don't pose excessive credit risk either way, you are usually required to maintain a pool of collateral (the gilt in the repo, or a pool of assets backing a swap portfolio).

With both these techniques, if rates rise/fall, then the value of my liabilities falls/rises. So too do my assets. If I had used these synthetic techniques to ensure my asset sensitivity = liability sensitivity then the move will be similar on both sides, so my deficit won't have changed.

So, what's the problem? As yields rise, the value of my gilts fall. So, when I close out the positions on a repo for example: I make a loss on the second gilt; I then can't repay the lender in the repo arrangement. You can see how this ends if I hadn't repo'd once, but more...

That means then that when yields rise people are forced to close out positions and you end up with a load of gilts sold. Those additional sales push the price down further (DB funds are massive players in the gilt markets - less so in other risk asset markets - so move prices materially). This forces those next up the chain to close out, pushing the price down further. Repeat. You end up in a spiral that collapses pretty spectacularly and pretty quickly.

The only way to avoid having to close out in such situations is to keep posting more collateral. But, that means selling those assets you're using to seek excess returns. Can you do that quickly enough, allowing for settlement times and the necessary transfer of cash over to your leveraged gilt portfolio? Normally yes when markets are moving gradually, but not in the last week and certainly not in a fully fledged spiral sell-off.

So far, it's not a pension fund solvency issue - just a liquidity one - they have the cash/liquid assets but can't put them to work in time. But, you really don't want to be the last one out in these spirals as you come out at the worst price without much ability to get back in for the ride back down (in yields/up in prices). You either want to be out from the start or in all the way and still in at the top. If you do end up closed out in the spiral, then you most likely will struggle to buy back in before yields fall. And that is where the long term damage is done: when yields fall back down, the value of your liabilities is going back up, but you no longer have the hedging assets to match that rise, so your scheme funding worsens.

In this week's episode, we eventually saw the BoE step in. Probably a day late and after much pressure, but understandable given to calm things they are committing to buying gilts to whatever extent is necessary - effectively QE, and the opposite of what they are trying to do medium term to curb inflation. But, their purchase has calmed things substantially, so that's good. It's just unfortunate that there will have been some casualties on the way - we'll find out over the coming days. There will be large variation: those that were "underhedged" a month ago will have won big time; those that were forced sellers immediately before the BoE statement will be big losers; others will be somewhere between.

Here's the 20y nominal gilt yield. You can very clearly see when the budget was and when the BoE stepped in around 11am this morning. Worth also flicking to "all" to see quite how sharp this is in historical context. 

Eoin Treacy's view -

When people talk about how central banks have distorted the fixed income markets this is a perfect example. Pensions need reliable returns to meet their obligations. That’s especially true of defined benefit programs which occupied 45% of the UK market in 2019. The alternative to goosing returns with leverage or moving further out the risk curve into private assets.

The price of refusing to take these risks would be to demand much higher contributions to cover the shortfall and nobody wants to do that. Faced with the possibility of angry retirees, at the prospect of not receiving their dues, or relying on the central bank to bail them out, the answer is always going to be the latter.  Quantitative easing introduced significant moral hazard and yesterday Bank of England action, while necessary, compounded it



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September 29 2022

Commentary by Eoin Treacy

Have we entered the final crisis of the Euro?

This article by Charles Gave (original in French) for the Institute of Liberties may be of interest to subscribers. Here is a section: 

Let's do a little rule of three.
Debt service is now at about three percent of GDP per year and the ECB can no longer manipulate Italy's rates downward, to keep Italy's head above water, since the US is raising its rates.
On today's growth figures (which will fall), and with interest rates rising over the next five years, debt servicing will rise to six percent of GDP, which means that the standard of living of every individual will fall by at least three percent, which is impossible.
And there is no solution as long as Italy remains in the Euro, and everyone in Italy knows this.              
And Italy can easily get out because it has a primary budget surplus and a trade surplus. It does not need the financial markets to make ends meet, unlike France.
In any case, make no mistake: the Italian elections are about one thing and one thing only: the euro. "Always think about it, never talk about it" seems to be the watchword in Italy.
And so, the more "right-wingers" are elected, the higher the probability that Italy will abandon the euro.

Eoin Treacy's view -

Yield curve control is the topic of the moment. The UK has just introduced it, so the logical question is which jurisdiction will deploy it next. In this regard, Japan’s refusal to abandon its program looks particularly inspired. Another way to frame this question is what will Germany do to ensure everyone continues to use the Euro? So far, the answer has been whatever is necessary.



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September 29 2022

Commentary by Eoin Treacy

CarMax's Huge Earnings Miss Sends Warning Signal on US Consumer

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

“CarMax has reminded Wall Street that parts of the economy are already in a recession,” said Ed Moya, senior market analyst at Oanda Corp. The “affordability challenges” highlighted by the company as the main reason for the big miss suggests it is “only going to get worse as Fed tightening starts to impact the economy,” Moya added.

And

“When you combine these results with the story from yesterday that demand for iPhones is weak, it raises the question about the consumer as we move toward the holiday selling season,” said Matt Maley, chief market strategist at Miller Tabak + Co. “If the consumer is weak, you can take a soft landing off the table.”     

And

“The story of CarMax’s second-quarter is clear: demand destruction,” said Morgan Stanley analyst Adam Jonas. “High used car prices and rising rates are causing a buyers’ strike.”

Eoin Treacy's view -

Let’s not forget it takes between six to nine months for tighter monetary policy to show up in the real economy. The Fed started raising rates in March and added 300 basis points to the base rate since then.



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September 28 2022

Commentary by Eoin Treacy

Video commentary for September 28th 2022

Eoin Treacy's view -

A link to today's video commentary. 

Some of the topics discussed include: Bank of England wades in to support Gilt market and is interpreted as a risk on move. gold, oil copper, stocks rebound, Dollar pulls back and yields contract. Medium-term it is a monetisation of the debt and is likely to exacerbate inflationary pressures. 



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September 28 2022

Commentary by Eoin Treacy

Email of the day on the Bank of England's support action

I just read the article below, and am surprised that pension funds take (or are allowed to take) leveraged positions. If the positions are for hedging, then should they not have the full cash to take delivery? Your views would be invaluable.

An interesting chart is attached. The extent of loss on a 40-year UKT issued last year!

It's been a long time since I first started listening to your amazing Daily Commentary. Now it is mandatory for me to hear your comments so that I can put whatever else I hear elsewhere into perspective.

Thank you for your valuable service, and I hope that your readers will have your guiding words for many decades to come. 

Eoin Treacy's view -

Thank you for this informative email and the chart of the 40-year Gilt. The fact I received this same chart from several sources today is an indication of how momentous it is for a developed country long-dated bond to trade at 20p on the pound. Last year was a great time to issue a 40-year bond so kudos to the Treasury department. The measures announced by the Bank of England to backstop the market were necessary but come at a significant cost.



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September 28 2022

Commentary by Eoin Treacy

Biogen, Eisai Surge as Alzheimer's Drug Shows Promise in Trial

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

“There is an important cautionary note however: the magnitude of the delay – which was a slowing of decline – was small,” he said. “We can only hope that the benefit is durable and could grow with time. Those long-term properties are unknowable at this time.”

The medicine was originally licensed from Sweden’s BioArctic AB, whose shares more than doubled on the news. 

The Alzheimer’s Association welcomed the results, saying they were the most encouraging findings to date from drugs aimed at treating the underlying causes of the disease. Lecanemab has the potential to change the course of the disease and help people in the earliest stages retain their abilities, remain independent and fully participate in daily life, the group said.

Pharmaceutical and biotechnology analysts were equally bullish. “We finally have what we believe to be a clean win in Alzheimer’s disease,” Evan David Seigerman, an analyst at BMO Capital Markets, wrote in a note to clients. “The top-line data are clear to us — lecanemab slows the rate of cognitive decline.”

The trial met every goal that was set, including other measures of mental function and the ability to perform daily activities, the companies said. 

 

Eoin Treacy's view -

The biotechnology/pharmaceuticals sector is endlessly productive. It is one of the few where there is genuine potential for new products to meet unmet needs. That means there is clear scope for value creation that can contribute to both better living standards and rising productivity. 



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September 28 2022

Commentary by Eoin Treacy

Fertilizer Maker Mosaic Says Some Florida Sites Evacuated

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

Fertilizer maker Mosaic Co. has evacuated some of its Florida operations as Hurricane Ian prepares to make landfall.

All of our Florida locations have been secured with some “fully evacuated,” Mosaic spokesman Bill Barksdale said Wednesday in an email. The state is home to Mosaic’s phosphate rock assets, where they mine product, and to facilities where they turn that rock into crop fertilizers.

Ian’s current trajectory has it passing near Tampa, through the bulk of Mosaic’s facilities. The facilities are expected to remain closed for at least a week due to the hurricane, a hit that could see third quarter revenue fall by $240 million to $300 million, Bloomberg Intelligence said Wednesday in a note. Ammonia imports from Yara International and CF Industries at Tampa may also slow. 

The storm is on a path similar to Hurricane Irma in 2017, when Mosaic lost about 400,000 metric tons of finished phosphate products, according to Bloomberg Intelligence.

Eoin Treacy's view -

One of Mosaic’s primary phosphate mines is between Tampa and Orlando. There is clear  flooding risk in the region. The defining characteristic of recent hurricanes has been slow movement and elevated rainfall totals. The supply chain for fertilisers is already under stress so this hurricane is unlikely to be good news.



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September 27 2022

Commentary by Eoin Treacy

September 27 2022

Commentary by Eoin Treacy

House Sales Collapse as UK Lenders Withdraw Mortgage Offers

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

Deals for house purchases are collapsing after lenders pulled mortgage offers in response to soaring interest rates.

Smaller lenders such as Kensington, Accord Mortgages and Hodge were among those to say they were withdrawing products Tuesday. That follows the decision by Lloyds Banking Group Plc -- the UK’s biggest mortgage provider -- on Monday to halt some offers, while Virgin Money UK Plc temporarily stopped offering home loans to new customers.

Major firms weighed in later Tuesday. HSBC Holdings Plc told brokers it was removing new mortgage products for the rest of the day while Nationwide Building Society announced that it was increasing rates across product ranges starting Wednesday. Banco Santander SA said it was removing some products and increasing rates on many others.

Jessica Anderson, a 33-year-old who works in publishing, was set to buy a house in Walthamstow, east London, with her husband until the seller pulled out last week.

“We’re in an uncertain position where we’re not sure whether it still stands,” she said, regarding the couple’s mortgage offer. “Since the approval there have been two interest rate increases.”

Eoin Treacy's view -

The UK housing market is at a significant point of peril because of interest rate uncertainty. Fixed rate loans typically trade at a 100-basis point premium over the 5-year government yield. At present that implies a mortgage rate of 5.7%.



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September 27 2022

Commentary by Eoin Treacy

Putin Raises Gas Pressure as He Moves to Annex Ukraine Regions

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

Russia threatened to cut off the last gas pipeline to Ukraine’s European allies and moved to annex a large chunk of Ukrainian territory amid a string of military setbacks in the seven-month-long war.

Eoin Treacy's view -

Battlefield setbacks for Russia increase potential for them to cut off supplies of gas to all of Eastern Europe. That’s much more likely that the nuclear option.



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September 27 2022

Commentary by Eoin Treacy

Bitcoin Turns Lower as US Stock Selloff Extends Into Sixth Day

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

Cryptocurrencies failed to hold onto gains Tuesday as US stocks also faltered and extended losses for a sixth straight session.

Bitcoin, the world’s largest digital asset by market value, fell as much as 1.2% to trade around $18,878, failing to sustain an earlier advance. Ether, the second-largest cryptocurrency, also dropped. Most major digital assets were posting declines as of 1:45 p.m. in New York. 

The downturn occurred as US stocks turned lower, with the S&P 500 on pace for a sixth session of losses. Global financial markets have been gripped by volatility as central banks continue to promise that they’re going to keep raising interest rates to fight inflation that’s proven stickier than many had thought. 

“BTC did seem to pick up the risk selloff once again today. Followers of the ecosystem have been excited to see correlations with risk-assets begin to break, meaning the ‘fast-money’ speculative crowd may be losing their influence on the space,” said Stephane Ouellette, chief executive of FRNT Financial Inc. “With today’s move, it doesn’t seem like we’re quite there yet -- but consolidation at these levels continues to move in a bullish direction where loose hands sell BTC to the near cult-like ‘hodler’ community.”

Eoin Treacy's view -

At one point this morning bitcoin was up over $1000. That was clear evidence of the buy the dip instinct is still alive and well. Unfortunately for the bulls the early enthusiasm was not sustained through the close and bitcoin finished in negative territory.



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September 26 2022

Commentary by Eoin Treacy

Video commentary for September 26th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Pound rebounds from intraday low but Gilt yields close at their highs, pressure mounting on the Bank of England to act. gold weaker as the Dollar strengthens, Renminbi tests its lows, Treasury yields breaking out. stocks susceptible to further weakness as corporate profits and leveraged loans come under pressure. 



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September 26 2022

Commentary by Eoin Treacy

Email of the day on batteries and the challenge of commodity supply

Congrats on your opinion on a larger correction and acting on it with put purchases.

Last week Double Line presentation  had a chart that showed the performance of equity and the different credit subclasses, Ags., EM, HY, ClOs and so forth. Showed  the large move by equities compare to credit over the same time period. It made me wonder how much further the equity correction can go.

You often follow interesting companies, you mention EQNR from Norway. have you ever looked a Freyr. It is also Norwegian and is involved in batteries. During  the last days because of a report on its possible growth it had a huge move , but during this correction it may be a good opportunity, let me have your thoughts. Based on your comments  how much the market has already priced in the EVs maybe it is not a good idea.

The move on copper is not a good signal  

Trust all is well for you  and your family

Eoin Treacy's view -

Thank you for these well wishes and questions which may be of interest to the Collective. Of my nine different long-dated put positions, the only one not in profit is Tesla and yet that is the one I have the greatest hopes for. They all have maturities in 2024, but I expect the point of maximum pessimism will arrive while they still have some time value.



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September 26 2022

Commentary by Eoin Treacy

Email of the day on Apple's ability to outperform

Many thanks for the latest weekly video, which sets out the bearish case for investment at the moment. In today's FT there is an article about Apple's latest iPhone. The author claims that sales projections for the latest Pro version of the iPhone suggest that the company will earn record -breaking revenues from its sales , which account for 50% of its business. In addition, it suggests that there might be a future monthly package that combines the iPhone, Apple Music and iCloud. Could Apple stand out against the overall bear market?

Eoin Treacy's view -

Thank you for this topical question which may also be of interest to other subscribers. Just ask yourself how often you change your phone? For me at least, it is when the battery starts losing charging capacity. That’s usually every 3 years.

The new iPhone 14 costs $999 and the Pro version costs $1099. If amortised over 2 years, it works out at around $45 a month which can be lowered further if you have an old phone to trade in. So, for many people it will be a question of whether the new phone has sufficiently enhanced features to justify the added monthly expense.



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September 26 2022

Commentary by Eoin Treacy

Keep Calm and Carry On?

This article from Allegra Stratton at Bloomberg may be of interest. Here is a section:

Traders, analysts and politicians looking for a soothing balm had been surprised on Sunday to hear Kwarteng’s commitment “more is to come.” Sterling dropped further and then, while the UK was sleeping, its currency tumbled in Asian markets — to £1.03 to the dollar, something former Treasury officials I know didn't think they’d ever see.

And so, even though the pound pared its losses slightly, the Bank of England came under huge pressure to do something. Anything.

A likely whopping 100 basis-point hike in November was already priced in. By Monday this climbed to 200 basis-points — four times the size of its last hike — and a call for an extraordinary extra session hastily arranged for this week. By lunchtime, there was a rumour of a BOE statement within hours, possibly including a extra bonus rate hike.

In the end this didn’t materialise and all we got was the emollient tweet featured at the top of this email. Most agree the Bank will raise rates again — hammering household mortgage repayments in a period already billed as the worst winter in living memory (something former minister Jim O’Neill weighed in on today, calling the Budget “naive.”)

Eoin Treacy's view -

The Pound is accelerating lower so it is reasonable to question when it will find a sustainable low. The tail on today’s candle suggests a low of at least near-term significance so we may get some steadier action. However, the question of how the downtrend will eventually end is unanswered.



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September 23 2022

Commentary by Eoin Treacy

September 23 2022

Commentary by Eoin Treacy

UK's Biggest Tax Cuts Since 1972 Trigger Crash in Pound, Bonds

This article from Bloomberg may be of interest to subscriber's. 

Liz Truss’s new British government delivered the most sweeping tax cuts since 1972, slashing levies on rich households and companies in a bid to boost economic growth in a move that triggered a massive market selloff in UK assets.

Chancellor of the Exchequer Kwasi Kwarteng announced a series of tax cuts and regulatory reforms that will cost £161 billion over the next five years. That fanned concerns about inflation, already near a 40-year high, and about a spiraling government debt burden. 

The pound crashed below $1.11 for the first time since 1985, sliding 2% in addition to declines earlier in the week. Borrowing costs on five-year government bonds jumped the most for a single day on record as traders dumped UK assets.

“It is extremely unusual for a developed market currency to weaken at the same time as yields are rising sharply,” said George Saravelos, global head of foreign exchange research at Deutsche Bank AG. He warned the UK currency is “in danger” and suggested markets were treating it like a developing economy. 

The package was more ambitious than expected, with a big giveaway for the UK’s wealthiest households and plans to tear up planning rules and reform financial regulations. 

Kwarteng scrapped the 45% additional rate of income tax, paid by only the richest earners, leaving the top rate at 40%, and cut the basic rate from 20% to 19%. He paid only lip service to concerns about rising public debt, reiterating a pledge to “reduce debt as a percentage of GDP over the medium term.”

The Conservative administration hopes its program of lower taxes and deregulation will turbo-charge the economy, staving off a recession that the Bank of England says has already begun and shaking the UK out of a decade of weak growth.

 

Eoin Treacy's view -

In case it needs to be said, these are not Conservative policies. Cutting taxes and embarking on an historic fiscal stimulus while inflation is raging is not sound policy. It is only going to make the job of the Bank of England even more difficult and taxes will inevitably have to rise in future to fund these measures.



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September 23 2022

Commentary by Eoin Treacy

Brookfield plans 12-16 gigawatts of India renewables over next decade

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

Brookfield is looking to multiply its current 4 GW renewable portfolio by 3 to four times in India within the next decade in generation as well as help corporates make the transition to decarbonise and invest in building large scale supply chain in the country, said a top executive.

The renewables current assets under management is approximately $1 billion.

Earlier this year, Brookfield Asset Management announced that it raised a record $15 billion for its inaugural Global Transition Fund. This marks the world's largest private fund dedicated to the net zero transition, signaling that investors are still committed to establishing cleaner portfolios. Brookfield is the single largest sponsor of the fund having deployed $2 billion itself.

Brookfield deals with state utilities but sees incremental green power demand coming from corporates who are increasingly becoming bulk consumers. For example, as part of its road map to achieve 100 per cent dependence on renewable energy by 2025. Amazon on Wednesday announced its first utility-scale projects in India — three solar farms located in Rajasthan. These include a 210-megawatt (Mw) project to be developed by India-based developer ReNew Power, a 100 Mw project to be developed by local  developer Amp Energy India, and a 110 Mw project to be developed by Brookfield Renewable Partners.

Eoin Treacy's view -

Brookfield is the name that comes up in almost every conversation I have with investors. The name is treated reverentially because the team so artfully plotted a route through the Global Financial Crisis and the subsequent boom.



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September 23 2022

Commentary by Eoin Treacy

Email of the day on attending The Chart Seminar:

Thanks to what we discussed at the seminar in June, I am feeling comfortable after having applied our conclusions to our investments. I see that you are organising another seminar in London in November. While appreciating the fact that "events are moving rapidly", do you think that it is really necessary for members like me to come to London again?

Eoin Treacy's view -

Thank you for this question and I want to thank you for being among the subscribers who have attended the seminar on multiple occasions already.

The first seminar I led, was in Dublin for a group of volunteers in 2008. That was right before a major crash. Banks were rolling over, miners had just begun to fade and the tone was complacent and only mildly cautious.

The second, for paying delegates, was in November 2008 and was immediately after the crash. That seminar offered a great opportunity to talk about what bottoming would look like, how to identify the candidates for a new bull market.

If I had guess, this year might be a repeat of that experience. The risk of a crash is rising.



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September 22 2022

Commentary by Eoin Treacy

Video commentary for September 22nd 2022

September 22 2022

Commentary by Eoin Treacy

Japan Intervenes to Support Yen for the First Time Since 1998

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

“The government is concerned about excessive moves in the foreign exchange markets, and we took decisive action just now,” Kanda said late afternoon. “We’re seeing speculative moves behind the current sudden and one-sided moves in the foreign exchange market.”

The intervention, ordered up by the Ministry of Finance, comes with risks if it fails to scare off speculators. Hedge funds have been adding to bearish bets on the currency, with Goldman Sachs Group Inc. warning it may decline all the way to 155.

“At best, their action can help to slow the pace of yen depreciation,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. “The move alone is not likely to alter the underlying trend unless the dollar, US Treasury yields turn lower or the BOJ tweaks its monetary policy.”

BOJ Governor Haruhiko Kuroda insisted at a briefing in the Tokyo afternoon there were no rate hikes in the works and guidance on future policy would not be change for the time being, even for as long as two or three years in principle. Still, his influence over policy will fade next April when he steps down.

“Today’s outcome strengthens my view that the chance of policy change is almost zero under Kuroda’s governorship,” said Masamichi Adachi, chief Japan economist at UBS Securities.

Kuroda’s stance sets him apart from other central banks that had also previously had negative rates, with the European Central Bank and the Swiss National Bank all hiking to deal with surging inflation.

Eoin Treacy's view -

The Yen has been selling off aggressively over the last year and inflationary pressures are rising in the economy as a result. However, inflation in Japan is nowhere near the rates being posted in North America and Europe.



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September 22 2022

Commentary by Eoin Treacy

Unless Rents Rise, Housing Is Set Up for an Epic Crash

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

But then the yellow dots happened. Home valuations increased as rates increased, just as in the housing bubble. Perhaps that is turning around now, as housing prices are beginning to decline (typically before we see large price declines we see softening markets — fewer buyers and sellers, longer delays between listing and sales — as have been happening in the last few months) and the Fed is raising rates. But looking at the data so far, it looks like a bubble.

Maybe you shouldn’t pay much attention to what I think now, since I was exactly wrong two years ago. But I’m still not panicking about a housing crash. I expect valuations to revert to long-term mean because rents will continue to increase rapidly, meaning no dramatic drop in home prices is necessary. I base that on expectations for more legal immigration and legalization of existing undocumented immigrants and lifestyle changes — mainly more working from home — triggered by the pandemic, but not reverting to past practices. 

Eoin Treacy's view -

The big difference between the housing bubble in 2005 and 2021 is consumer leverage. In the mid-2000s lending standards disappeared. People were buying houses with little more than a signature and never intended to pay the mortgage. Today, 20% down payments are still the norm in the USA. That is beginning to change with Bank of America floating zero down options but it is not commonplace.



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September 22 2022

Commentary by Eoin Treacy

Email of the day on elevated valuations:

on today's video you highlighted the virtues of the NOBL Dividend Aristocrat index, but on closer inspection the yield on this is just 2%. A year ago, that was 4x the yield on short term treasuries in the US, but with 1 and 2- year treasuries yielding 4% now, double that of NOBL, there seems to be far less support from those seeking out yield.
The TINA approach is fast coming to an end. With that in mind, and with the Sterling continuing to take strain, what investment vehicles are available to us in the UK to invest in 3M, 1Y an 2Y US Treasury paper?

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. There is of course a big difference between capturing a high yield now and buying with the expectation of dividend increases in future. It is essentially the difference between current yield and yield to cost.



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September 22 2022

Commentary by Eoin Treacy

September 21 2022

Commentary by Eoin Treacy

Video commentary for September 21st 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Fed is going to cause a recession to get inflation under control. Wall Street reverses early gain, Treasuries stable, Dollar firm, Asia to open weak, Renminbi breaking lower. Another downleg in asset prices appears likely. 



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September 21 2022

Commentary by Eoin Treacy

Unspoken Rules

Eoin Treacy's view -

I have been thinking a lot about the aspects of the market we all tend to take for granted. The types of conclusions we have been conditioned to draw, because that is always how markets work. It strikes me as a big question because we should be asking if these market norms are the result of the decades-long process of disinflation or are they rules that transfer between big secular themes.

The basic working hypothesis of the markets is the Fed will rescue its stock market. The EU will rescue its bond market and China will rescue its property market. The rationale for all three is the same. That’s what they have always done because those are the biggest asset classes owned by consumers in all three jurisdictions.



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September 21 2022

Commentary by Eoin Treacy

OPEC, SPR May Make $80 the New $60 for Oil

This note from Dow Jones may be of interest.

Tightly managed supplies by the OPEC-plus group and signs Washington will start restocking crude siphoned off from its Strategic Petroleum Reserve if oil falls to $80 suggests oil prices will stay relatively high despite a global economic slowdown, BofA Global Research says. "As spare capacity dwindles and capex lags, we think $80/bbl is now the new $60 for Brent crude oil," it says in a note. "Said differently, the 'OPEC-plus put' on average oil prices is higher today." It adds that a recent signal by OPEC-plus to reduce production even as oil traded above $90 was unprecedented, and a good indication it'll do what it takes to keep a floor on prices.

Eoin Treacy's view -

The USA is now an energy exporter. It no longer has a vested interest in permanently lower prices. Viewed from that perspective, the Norwegian policy suite comes into sharper focus.

Norway relies on hydro for most of its electricity production. That option is not open to the USA but domestic demand for natural gas will increasingly have to compete with global demand as LNG becomes a globally fungible commodity. That will be doubly true as new exporters become less reliant on fixed term contracts. Afterall, that was the practice more than a decade ago when consumers needed to be convinced of the need to build the necessary infrastructure. Today, the need is self-evident.



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September 21 2022

Commentary by Eoin Treacy

Top Banks Pull Back From China Metal Financing After Crises

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

JPMorgan Chase & Co. and ICBC Standard Bank Plc are cutting back on financing to China’s troubled metals trade, adding pressure to a sector already hit hard by a struggling economy. 

At least three Chinese metal trading companies have had credit lines frozen or reduced by either of the banks in recent weeks, according to people familiar with the matter. The lenders have pulled back after a liquidity crisis emerged at top copper trader Maike Metals International Ltd., said the people, who asked not to be identified discussing private information. 

Both JPMorgan and ICBC Standard Bank have financing relationships with Maike. It’s not clear whether the banks’ pullback from the Chinese metals market is a temporary freeze while they assess their situation, or a more permanent retreat. 

Maike’s admission last month that it asked for government help with liquidity issues is further shaking confidence in the industry, coming after the nickel short squeeze that almost bankrupted Tsingshan Holding Group Co. in March, and two recent cases of missing metal used as collateral for financing deals.

Eoin Treacy's view -

Copper is a difficult market. We have clear narrative on the case for growth in demand over the next decade. What we do not have is clear visibility on current demand. China’s economy is slowing down and demand growth is unlikely to return to its pre-economic reorientation trajectory anytime soon. That suggests more weakness now and a possible stiff recovery later.



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September 20 2022

Commentary by Eoin Treacy

Video commentary for September 20th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: distopian predictions gaining traction around the world but efforts are well underway to avoid them. The greatest pressure is being felt in currencies and bonds while equities are still under pressure. gold extends decline and bitcoin remains weak which signal tightening liquidity. 



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September 20 2022

Commentary by Eoin Treacy

Truss Warns of Unpopular Policies as UK May Scrap Bonus Cap

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

Truss has made a slew of expensive promises including a plan to freeze household bills that could reach 130 billion pounds ($148 billion), as well as a package to help businesses with their energy bills that could cost £40 billion. On top of that, she’s promised more than £30 billion in tax cuts. Asked how she can afford her plans, Truss told Channel 5: “The UK has one of the lowest levels of debt as a proportion of GDP of G7 nations so we are doing well on that metric.”

Eoin Treacy's view -

Politicians made big promises about what the future would be like after Brexit. Then Liz Truss made even bigger promises to ensure she won the leadership contest. Now the pressure is on to deliver and the answer is to spend, spend, spend.



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September 20 2022

Commentary by Eoin Treacy

Beyond Meat COO Arrested for Biting Man's Nose After College Football Game

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

His arrest is the latest blow to the plant-based protein company, which last month slashed its revenue outlook for the year and said it would cut 4% of its workforce.

Eoin Treacy's view -

The irony of a vegetarian food company executive taking bites out of unwary civilians put me in mind of Soylent Green. Afterall, the movie might have been released in 1973 but it is set in 2022. Here is a section from the Wikipedia description:  

By 2022,[3] the cumulative effects of overpopulation, pollution and an apparent climate catastrophe have caused severe worldwide shortages of food, water and housing. In New York City alone, there are 40 million people, and only the city's elite can afford spacious apartments, clean water, and natural food. The homes of the elite are fortified, with private security and bodyguards for their tenants. Usually, they include concubines (who are referred to as "furniture" and serve the tenants as slaves). The poor live in squalor, haul water from communal spigots, and eat highly processed wafers: Soylent Red, Soylent Yellow, and the latest product, far more flavorful and nutritious, Soylent Green.



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September 20 2022

Commentary by Eoin Treacy

Email of the day on graphene

Excellent reflexions in this long term view.

Have you ever talked about investing in the Graphene potential?

I have a friend convinced that the cost of producing it will come down with some innovation. And it could substitute or complement copper supply.

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. I have been thinking a lot about the genesis of bull market themes. Good ideas often don’t come from nowhere. It takes a long time for product ideas to reach fruition.

For example, Mark Cuban’s first venture was Broadcast.com in 1998. Then Enron signed a deal with Blockbuster video to begin a video on demand service in 2001. Both ventures failed in epic fashion.

Netflix began by mail ordering in 1997 and only adopted streaming in 2007. That was nine years between the first attempt at streaming and the big success story everyone is familiar with. However, the model was only possible because of the growth of the internet and improving connection speeds and accessibility.

Today, every broadcaster has embraced some form of streaming which highlights that it is the interest is the enabler and no company has a defensible moat without killer content at an acceptable cost.



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September 19 2022

Commentary by Eoin Treacy

September 19 2022

Commentary by Eoin Treacy

Email of the day on global property prices

In the Big Picture Roundup, you shared this wonderful chart.

The problem is that the way that you shared it, means that we could not see the date axis.

It would be great if you could share a better version of this chart e.g., on Comment of the Day

Thank you in advance

Eoin Treacy's view -

Thank you for pointing this out. The aspect ratio between my monitor and the recording software is not always one to one. Here is the chart you were asking about.

What I like about this chart is it starts in 2000. It graphically illustrates that some property markets completely sidestepped the housing crash associated with the global financial crisis in 2008. These same markets, notably Australia, Canada, New Zealand and Sweden are expensive on a price/income and price/rent basis.



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September 19 2022

Commentary by Eoin Treacy

Volta Offers Free EV Charging, With Caveats

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

Tesla set the bar high with free charging for many years. Now comes Volta Charging, a company that aims to build a network of high-speed chargers for all EVs that are free for the first 30 minutes. They’d be in upscale locations that meet Volta’s standards and supported by advertising, including on signage near the DC fast chargers.

The typical motorist would pick up 175 miles of driving from the half-hour charge. The user then decides to complete the charge on their own nickel, or disconnect and drive for a couple more days. Volta already has a series of Level 2 (240-volt) charging stations in and around a dozen major metro areas. The first DC fast-charge station will be in Norwalk, Connecticut, along I-95 linking New York City and Boston.

Eoin Treacy's view -

One of the biggest arguments against the rollout of electric vehicles is they require charging facilities and not everyone who owns a car has control over the environment in which they park. There is also the question of where all the electricity is going to come from to supply electric vehicles. Much more generating capacity is going to be required to support the sector and companies are already under pressure to keep up with demand as coal is sidelined and the grid ages.



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September 19 2022

Commentary by Eoin Treacy

Tycoon Running a Quarter of China's Copper Trade Is on the Ropes

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

 

Much as He’s rise was a microcosm of China’s economic boom, his current woes may mark a turning point for commodity markets: the end of an era in which Chinese demand could only go up.

“In some ways Maike’s story is the story of modern China,” said David Lilley, who started dealing with Maike in the 1990s, first as a trader at MG Plc and later as co-founder of trading house and hedge fund Red Kite. “He has skillfully ridden the dynamics of the Chinese economy, but no one was prepared for the Covid lockdowns.”

This account of He’s rise to the pinnacle of China’s commodities industry is based on interviews with business associates, rivals and bankers, many of whom asked not to be named because of the sensitivity of the situation. 

Eoin Treacy's view -

“Never mistake a bull market for brains” is one of the most useful adages in the markets. The challenge is that to make truly life changing money in a bull market one has to act as if it will never end. That implies loading up on leverage, making big bullish bets and never giving into doubt. In bull markets that last for a decade or more, the biggest gamblers look like prophets and are treated as such by the market. When liquidity conditions eventually change, that business model experiences significant duress.



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September 16 2022

Commentary by Eoin Treacy

September 16 2022

Commentary by Eoin Treacy

Germany Tightens Control Over Industry With Russian Oil Grab

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

Germany seized the local unit of Russian oil major Rosneft PJSC as Berlin moves to take sweeping control of its energy industry, secure supplies and sever decades of deep dependence on Moscow for fuel. 

Alongside its move for the Rosneft unit, Chancellor Olaf Scholz’s administration is in advanced talks to take over Uniper SE and two other major gas importers, Bloomberg reported on Thursday. Germany is pressing ahead with an historic overhaul of its economy just two and half years after the Covid-19 pandemic, grabbing control over a huge chunk of its industrial base to prevent shortages and blackouts this winter. 

A decision on the next moves could come within days. The need for action is urgent with Uniper losing 100 million euros ($99.7 million) a day as it tries to replace Russian gas to maintain deliveries to local utilities and manufacturers.

Eoin Treacy's view -

Germany took over all of the landesbanks during the Eurozone’s sovereign wealth crisis. Shorting individual stocks is frowned upon, with several bans being introduced over the last decade. The state has also waded into the market for failing companies, like Wirecard, and banned naked shorting. Therefore, it is not such a logical leap to think Germany will have fully nationalised the domestic gas industry within the year.



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September 16 2022

Commentary by Eoin Treacy

China's Economy Shows Signs of Recovery as Stimulus Ramps Up

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

China’s economy showed signs of recovery in August as Beijing rolled out stimulus measures to counter a slowdown, although a property market slump and Covid outbreaks continue to weigh on the outlook.

Industrial production, retail sales and fixed-asset investment all grew faster than economists expected last month. The urban jobless rate slid to 5.3%, while the youth unemployment rate fell from a record high.

The boost to retail sales was partly due to a lower base of comparison from a year earlier and a surge in car sales after Beijing gave buyers subsidies on electric vehicles. Industrial output was also supported by a big spike in electricity production during August’s heatwave, a rebound that’s unlikely to be sustained. 

Despite signs of improvement, the recovery remains fragile as Covid outbreaks spread to more parts of the country and the government tightens curbs to contain infections in the run-up to the Communist Party’s twice-in-a-decade leadership congress next month. A property market slump also shows no sign of easing, with separate data on Friday showing home prices have now declined every month in the past year, with the contraction in August bigger than in July. 

“While today’s data are better than expected, it’s unlikely to change the prevailing pessimism toward China, given the multiple headwinds underway including zero-Covid, property rout and the lack of decisive policy moves before the Party Congress,” said Larry Hu, chief China economist at Macquarie Group Inc. 

Eoin Treacy's view -

China’s administration knows better than anyone that a property crash would represent an existential crisis for social cohesion. At the same time, they don’t want to allow a bubble to expand any further and have been trying to stamp out speculation. The conflict arises in the fact you can’t have a bull market without people willing to take risks. Building in the hopes of selling at a profit is speculative by nature.



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September 16 2022

Commentary by Eoin Treacy

What it's like to eat lunch at Mezli, San Francisco's new autonomous robot restaurant

This article for SFgate.com may be of interest to subscribers. Here is a section:

Of course, San Francisco is no stranger to robots at restaurants. I’m personally familiar with both coffee robot Cafe X and the ROBOJuice smoothie-making robot at the San Francisco Metreon. But neither offer a full meal — and full-service restaurants that do employ robots tend to still need humans to fulfill some tasks, such as taking orders. 

Mezli also isn’t quite fully autonomous. Real humans do the prep work for the Mediterranean menu (created by chef Eric Minnich of Michelin-starred Madera in Menlo Park) in a central kitchen offsite. 

It’s also more of a vending machine than it is a full-service restaurant — robots aren’t waiting tables. But from the moment you place your order to the moment a piping hot bowl is in your hands, the robots are in charge. 

Eoin Treacy's view -

With a law proposed in California to raise only fast-food salaries to $22 an hour, the message is clear; innovate or die. Wage growth incentivises innovation in labour saving devices. That becomes more urgent as inflation pushes up the cost of everything else too.



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September 16 2022

Commentary by Eoin Treacy

Swiss Government Scientist Says We May Be on the Brink of Discovering Alien Life

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

"In 1995, my colleague [and Noble Prize laureate] Didier Queloz discovered the first planet outside our solar system," Quanz said during the opening of the institute's new Center for the Origin and Prevalence of Life earlier in September. "Today, more than 5,000 exoplanets are known and we are discovering them on a daily basis."

Of those thousands of exoplanets, dozens are believed to be at least potentially habitable, with the conditions on their surface ripe for liquid water. And as he said, that number is growing all the time.

Eoin Treacy's view -

I suspect we will “see” extraterrestrial life well before we ever meet real life aliens. Technological innovations like the James Webb Telescope and future much more advanced space telescopes will have the capacity to see into the atmospheres of distant planets. 



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September 15 2022

Commentary by Eoin Treacy

September 15 2022

Commentary by Eoin Treacy

Global Recession Looms Amid Broadest Tightening in Five Decades

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

The global economy may face a recession next year caused by an aggressive wave of policy tightening that could yet prove inadequate to temper inflation, the World Bank said in a new report.

Policy makers around the world are rolling back monetary and fiscal support at a degree of synchronization not seen in half a century, according to the study released in Washington on Thursday. That sets off larger-than-envisioned impacts in sapping financial conditions and deepening the global growth slowdown, it said.

Investors expect central banks to raise global monetary policy rates to almost 4% next year, double the average in 2021, just to keep core inflation at the 5% level. Rates could go as high as 6% if central banks look to wrangle inflation within their target bands, according to the report’s model.

Eoin Treacy's view -

When quantitative easing was first introduced there was a lot of handwringing at the thought of moral hazard. The Federal Reserve waded into public markets to buy sovereign bonds with the stated aim of back stopping government spending and encouraging speculation. It was viewed as a very risky endeavour that would send the wrong signal to speculators; that they can’t lose. In 2012/13 the EU went in the opposite direction and withdrew liquidity for fear that debtor nations would not mend their ways if assistance was too generous. 



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September 15 2022

Commentary by Eoin Treacy

Email of the day on preserving purchasing power

Dear Eoin, I may not be the only Europe-based investor who is currently facing the following dilemma. My income and expenditure are both in Euros. I have protected and increased my wealth and income by investing in USA stocks which have given me both capital appreciation and currency increase. Now the USA dollar looks over-valued and all equity options appear to be unfavourable. In addition, inflation is high and so holding liquidity means losing real spending power. What are the alternatives on offer?

Eoin Treacy's view -

Thank you for this question which touches on a topic everyone has an interest in at present. Inflation has been described as the thief which comes in the night, but lately it feels like bandits are roaming around the house in broad daylight.



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September 15 2022

Commentary by Eoin Treacy

Email of the day on silver's outperformance

With the ongoing downdraught in gold prices, silver seems to be holding its ground very well. Could this be partly due to its industrial uses?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. There are a couple of important points to consider in understanding silver’s recent outperformance and not least because of the tendency of silver to outperform during the 2nd and 3rd stages of a secular bull in precious metals.



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September 14 2022

Commentary by Eoin Treacy

Video commentary for September 14th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: recession risk increases with inflation hard to temper. Nasdaq-100 susceptible to breaking the secular uptrend, gold steady but Dollar still strong, platinum outperforming, copper distributing, 



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September 14 2022

Commentary by Eoin Treacy

It Starts With Inflation

This article by Ray Dalio may be of interest to subscribers. Here is a section: 

I think it looks like interest rates will have to rise a lot (toward the higher end of the 4.5 to 6 percent range) and a significant fall in private credit that will curtail spending. This will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.

Now, we can estimate what that rise in rates will mean for market prices and economic growth. The rise in interest rates will have two types of negative effects on asset prices: 1) the present value discount rate and 2) the decline in incomes produced by assets because of the weaker economy. We have to look at both. What are your estimates for these? I estimate that a rise in rates from where they are to about 4.5 percent will produce about a 20 percent negative impact on equity prices (on average, though greater for longer duration assets and less for shorter duration ones) based on the present value discount effect and about a 10 percent negative impact from declining incomes.

Now we can estimate what the fall in markets will mean for the economy i.e., the "wealth effect." When people lose money, they become cautious, and lenders are more cautious in lending to them, so they spend less. My guesstimate that a significant economic contraction will be required, but it will take a while to happen because cash levels and wealth levels are now relatively high, so they can be used to support spending until they are drawn down. We are now seeing that happen. For example, while we are seeing a significant weakening in the interest rate and debt dependent sectors like housing, we are still seeing relatively strong consumption spending and employment.

The upshot is that it looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects. 

Eoin Treacy's view -

US rail workers are about to go on strike. By now the pattern is familiar. The companies they work for are making record profits and the wages have not kept up with inflation. This will also again highlight the disparity between the benefits of union workers versus less well represented groups. This is exactly the kind of evidence of a wage price spiral the Fed is seeking to avoid by hiking rates aggressively.



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September 14 2022

Commentary by Eoin Treacy

The Future of Copper

Thanks to a subscriber for this report from S&P Global which may be of interest. Here is a section from the conclusion:

Notably, neither scenario assumes that the growth in new capacity—expansions and new mines—speeds up. Absent a major policy shift, however, regulatory, permitting, and legal challenges, combined with long timelines for new mines to come onstream, will continue to dampen the pace of supply increases. This supply-demand gap for copper will pose a significant challenge to the energy transition timeline targeting Net-Zero Emissions by 2050. The challenge will be compounded by increasingly complex geopolitical and country-level operating environments. These include

The strategic rivalry between the United States and China—over a projected period in which China will remain the dominant global supplier of refined copper, while the United States depends on imports for well over half its copper.

Russia’s invasion of Ukraine and its cascading effects on the commodities markets and energy security, which have highlighted the vulnerability of supply chains. “Supply chain resilience” policies aiming to secure reliable supplies of the materials needed for energy transition—and economies in general—are likely to be a central feature of the emerging geopolitics.

A growing tension between energy transition, social license, and ESG objectives that dramatically increase the need for minerals like copper on one hand, while raising the compliance, legal, and operational costs of mining those minerals on the other.

The risk of a significant, structural increase in copper prices as the supply-demand gap increases, with a potentially destabilizing impact on global markets and industry. While structurally higher prices incentivize international investment in new capacity, governments in sourcing countries are likely to seek to capture domestically a rising share of revenues.

The fragmenting of globalization and a resurgence of resource nationalism. The resulting challenge for all actors involved with the energy transition will be to manage often competing and seemingly contradictory priorities. It is clear that technology and policy innovation will both be critical to reducing the supply-demand gap for copper in order to help enable the net-zero goals

Eoin Treacy's view -

Every major bull market which climaxes in a mania exhibits contradictory arguments. We are fully aware of the earnings don’t matter claims from the 1990s or house prices only go up ahead of the GFC. The difficulties with fulfilment of the renewable energy idealistic dream are a fresh contradiction. It is impossible to double copper production within 13 years. Therefore, there is no possible way the zero carbon ambitions of the green lobby can be realized. 



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September 14 2022

Commentary by Eoin Treacy

Eskom on the brink as outages again spiral to record levels

This article from Moneyweb.co.za may be of interest to subscribers. Here is a section:

A bigger looming problem is where Eskom is going to find another R7 billion for diesel for the rest of the year. It was provided with ‘fiscal support’ (read: a bailout) of R21.9 billion in Finance Minister Enoch Godongwana’s February budget.

By July, Eskom’s debt owed by municipalities stood at R49.1 billion – an R8.2 billion increase since September 2021. The total amount was ‘only’ R9.5 billion in 2017.

Shoddy maintenance = unavailability
Oberholzer also admitted on Monday that the work done by Eskom and its contractors’ maintenance team is simply not up to standard. He said that units will often break down shortly after undergoing maintenance. This is due to a “lack of skills” both internally and at contractors. One might describe this skills crisis at the utility as ‘acute’.

The coal fleet has not been able to generate more than 19 500MW sustainably since Friday morning, and last achieved over 21 000MW on Thursday morning.

Eoin Treacy's view -

Electricity availability is becoming a factor in a host of locations. In some areas its because of less snowmelt. In others its because of a reluctance to build new sources of supply. In South Africa, it is unfortunately a story of corruption forced ineptitude.



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September 13 2022

Commentary by Eoin Treacy

Video commentary for September 13th 2022

September 13 2022

Commentary by Eoin Treacy

US Inflation Tops Forecasts, Cementing Odds of Big Fed Hike

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

US consumer prices were resurgent last month, dashing hopes of a nascent slowdown and likely assuring another historically large interest-rate hike from the Federal Reserve.

The consumer price index increased 0.1% from July, after no change in the prior month, Labor Department data showed Tuesday. From a year earlier, prices climbed 8.3%, a slight deceleration, largely due to recent declines in gasoline prices.

So-called core CPI, which strips out the more volatile food and energy components, advanced 0.6% from July and 6.3% from a year ago, the first acceleration in six months on an annual basis. All measures came in above forecasts. Shelter, food and medical care were among the largest contributors to price growth.

The acceleration in inflation points to a stubbornly high cost of living for Americans, despite some relief at the gas pump. Price pressures are still historically elevated and widespread, pointing to a long road ahead toward the Fed’s inflation target.

Eoin Treacy's view -

Inflation probably has peaked but that is not a commentary on how quickly it comes back down. The bullish narrative for inflation is that the pandemic was an anomaly. The surge in inflation was created by supply shocks and liquidity-fuelled asset price appreciation. With the end of the pandemic and less money supply, inflation will fall back as quickly as it rose, so buy the dip.



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September 13 2022

Commentary by Eoin Treacy

Crop Prices Touch Two-Month High as Food Supply Concerns Mount

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

A US crop report Monday showed a surprisingly large cut in the country’s soybean stockpiles following a hot and dry summer. Drought also is sinking the French corn harvest to its smallest in three decades and has curbed sugar supplies from South America.

“The damage has been done,” said Peter Collier, market analyst at UK-based CRM AgriCommodities. “It’s now beginning to be quantified.”

The weather challenges, combined with Russian President Vladimir Putin’s recent criticism of the Black Sea crop-export deal, highlight how fragile global supplies are. The Bloomberg Agriculture Spot Index, which tracks crops including wheat, sugar and soy, climbed for a second straight day Tuesday to its highest level since late June.

Eoin Treacy's view -

From 2002 to 2008 there were concerns the world was heading toward peak oil. That created a boom in biofuels which created a new source of demand for food commodities like corn, sugar and palm oil. Prices spiked and the world decided maybe it wasn’t such a good idea to rely on food for fuel.



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September 13 2022

Commentary by Eoin Treacy

Gold Slides as Hotter US Inflation Keeps Hawkish Fed on Track

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

“A shockingly hot inflation report pulled the rug for gold as investors are now starting to price in more Fed tightening. A 75-basis-point rate increase is a done deal for September and it is starting to look like we might not see a downshift in November,” said Ed Moya, senior market analyst at Oanda.

Gold fell 1.1% to $1,706.18 an ounce at 9:42 a.m. in New York, after slumping as much as 1.6% earlier. The Bloomberg Dollar Spot Index rose 0.7% after falling 0.4% on Monday. Spot silver, platinum and palladium also fell.

Eoin Treacy's view -

We have had negative real interest rates for a decade. In that time gold has gone through significant periods of strength and weakness. Intuitively, negative real interest rates should support gold because inflation is outpacing the return from cash for a prolonged period. However, that is not a sufficient condition to support a bull market.



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September 12 2022

Commentary by Eoin Treacy

Video commentary for September 12th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: CPI potentially peaking, euro trying to rebound but still encumbered by domestic challenges, European natural gas prices continue to fall, stocks firm, silver rebounds strongly. bond yield still rising .



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September 12 2022

Commentary by Eoin Treacy

Thoughts from the Road

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

After the discussion around earnings trajectory for the S&P 500, the focus then typically turned to how to trade it. Here, we have some sympathy for the view that markets may potentially hold up very tactically until the EPS cuts actually happen. As already noted, conference season is upon us and investors are ready for some bad news at least with regard to how 3Q is progressing. However, the degree of that deterioration is more debated now given the recently announced $500 billion student debt forgiveness and extended moratorium on loan payments until December, combined with the energy subsidy announced this past week in the UK to help consumers through the winter. Both of these are rather large fiscal stimulus packages that could keep the "tone" of company commentary less bearish than feared, and potentially delay the eventual cuts. Nonetheless, we have high conviction that EPS cuts will play out in earnest over the next 2-3 months, and as a reminder from our note last week, mid-September through October is a particularly challenging seasonal period for EPS revisions.

Eoin Treacy's view -

The yield curve (10-year – 2-year) inverted for a week in April and has been persistently inverted since June. The classic version of the yield curve (10-year – 3-month) is not yet inverted but it is still trending lower. This spread collapsed from an artificially elevated level in May. It tends to be much more volatile than the longer-dated version because short-term interest rates can whip around a lot.  



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September 12 2022

Commentary by Eoin Treacy

Swedish Nationalist Set to Take His Party From Pariah to Power

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

The rise of the Sweden Democrats has parallels in its Nordic neighbors. In Denmark, the anti-immigrant Danish People’s Party saw its heyday in the early 2000s and pushed Denmark to adopt one of the harshest stances on immigration in the European Union, including policies such as confiscating excess cash from asylum seekers claiming benefits in the country.

As its support has collapsed spectacularly in recent years, other groups have tried to fill the gap, including the Denmark Democrats, established in June by Inger Stojberg, who was convicted for illegally separating refugee couples when she was immigration minister in 2016.

Similarly, in neighboring Norway and Finland, anti-immigrant parties had already seen large gains in earlier years. Support for Norway’s Progress Party has slid after peaking in 2005 and 2009 parliamentary elections, and the Finns Party had its first big victory already in 2011. Arguably, their popularity has rubbed on the mainstream parties, who have sought to appeal to uncertain voters by sharpening their policies.

Elsewhere in Europe, nationalist Marine Le Pen posted best ever result in France in May and big gains in parliament. Far-right Brothers of Italy are set to take power in Rome after this month’s election, and in Slovakia, pro-Russian parties are on track to take power as soon as an early election is called. 

The UK’s governing Conservative Party chose hardliner Liz Truss to succeed Boris Johnson this month after she endorsed his controversial plans to deport undocumented migrants and signaled her willingness to revive tensions with the EU. Truss though will also maintain Johnson’s strong support for Ukraine.

Eoin Treacy's view -

European cohesion was born from repulsion at the thought of war on the continent and enthusiasm at the prospect of growing prosperity through trade. That culminated with the creation of the Euro at the same time China’s entry into the WTO eviscerated European low skilled manufacturing.

The loss of manufacturing jobs was papered over by dispensed Germany’s interest rates to the entire Eurozone. Credit availability fuelled building booms on an historic scale across the periphery and leverage reaching problematic heights. The credit crisis was not only a banking issue. It exposed the deep scars left by globalization on living standards of millions of people.



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September 12 2022

Commentary by Eoin Treacy

Bristol-Myers Jumps Most Since 2014 on Psoriasis Drug Nod

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

“This is what one could call pipeline in a pill,” said Bristol’s Chief Medical Officer Samit Hirawat.  

Sotyktu will not carry a black box warning, the US Food and Drug Administration’s strongest communication of potential risks. Analysts were closely watching the safety language in the drug’s label since such warnings have hampered other promising autoimmune drugs. 

The label is “close to the best case scenario,” Citi analyst Andrew Baum wrote in a note to clients. Shares of Ventyx Bioscience, a biotech company pursuing TYK2 drugs, soared as much as 67.14%. 

Bristol will try to unseat Amgen Inc.’s Otezla, a top-selling psoriasis pill that Sotyktu bested in clinical trials. Shares of Amgen fell as much as 4.3%. Convincing health insurers to cover Sotyktu will take time, said Bristol Chief Commercialization Officer Chris Boerner.

Eoin Treacy's view -

It has been a busy few days for the biotech sector with drug approvals making headlines for Bristol Myers Squibb, Regeneron and Clovis Oncology. President Biden’s cancer moonshot speech today was an additional catalyst for interest in the biotech sector. Here is a section from article by NBC

"Under Dr. Wegrzyn’s leadership, ARPA-H will support programs and projects that undertake challenges ranging from the molecular to the societal, with the potential to transform entire areas of medicine and health in order to prevent, detect, and treat some of the most complex diseases such as Alzheimer’s, diabetes, and cancer, providing benefits for all Americans," the White House said.



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September 09 2022

Commentary by Eoin Treacy

September 09 2022

Commentary by Eoin Treacy

There's More to the ECB Meeting Than Meets the Eye

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

Actually, it all started moments before the ECB released its policy statement. The euro dropped like a stone by around 40 pips in a move that got me wondering whether there had been a leak. Most likely, it’s one of those trades that was going to be very directional, but it’s telling that the move was bearish the euro when most expected a jumbo hike and shows that investors expect the euro to remain under pressure, with high conviction on the trade.

Then came the unprecedented interest rate increase. And for everyone that expected some lively action, it seemed that screens were frozen. Little reaction from the common currency, same picture with the bond monitors. Was it down to some great communication by the ECB that there was little reaction? Or did the market just wait for more info before trading in size? The answer came a few minutes later when euro area bond yields felt some pressure as the decision by the Governing Council was unanimous.

It became totally evident when short-end yields led a double-digit advance across the curve and the euro didn’t budge. The current narrative goes that there’s little the ECB can do to support the euro given the energy crisis. And especially if inflation remains supply-driven in the euro area, higher rates won’t do the trick. Not as much as they can do for a demand-driven inflation, like the one in the US, as Lagarde said. After all, there’s been a deep breakdown of the correlation between the common currency and bond yields since mid-August, and yesterday just highlighted this divergence. Given natural gas prices fell to the lowest in almost a month as politicians draw plans to intervene in regional markets, it could be that the euro manages to set a medium-term bottom soon.

Eoin Treacy's view -

The ECB only has one mandate which is to control inflation. It has taken on a wide range of additional responsibilities over the last twenty years but the central mandate to target a 2% rate has not changed. 

Of course, they never accounted for the possibility of mass hysteria among the ruling class during a pandemic and a war on the border of the EU shortly afterwards. 

 



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September 09 2022

Commentary by Eoin Treacy

The Coming Global Crisis of Climate Policy

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

Politicians are happy to blame Vladimir Putin and his Ukraine invasion for the current energy disaster. But what transformed that one-off shift in the relative price for energy into a global disaster was two decades of green-energy policy beforehand. In Europe, that includes a fixation on renewables incapable of powering industrial economies absent battery technologies that don't exist, a refusal to tap domestic fossil-fuel reserves such as shale gas, and a deep and irrational hostility to nuclear power in many parts of the Continent.

This has created an energy system of dangerous rigidity and inefficiency incapable of adapting to a blow such as Russia's partial exit from the European gas market. It's almost inevitable that the imminent result will be a recession in Europe. We can only hope that it won't also trigger a global financial crisis.

Eoin Treacy's view -

The tide has certainly turning against the revisionist green movement. This article is very representative of the growing groundswell of disillusionment with how electricity grids and generation has been managed.



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September 09 2022

Commentary by Eoin Treacy

CryptoSlate: Ethereum Merge is 34k blocks away, expected to happen Sept. 14

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

According to Ultrasound money, the total Ethereum supply stands at over 120 million, and the amount of staked Ethereum on the Beacon chain is 13.6 million ETH, which is over 10% of the asset supply.

The tracker predicted that Ethereum PoS would issue 1700 ETH daily if staked ETH touches 14 million. It noted that as the number of staked Ethereum increases, the number of issued assets would increase too.

Meanwhile, a Chainalysis report said the merge would entice more institutional investors to Ethereum. According to the report, ETH would behave more like bonds and commodities, boosting their confidence in the token.

Ethereum burning mechanism
Ethereum’s burning mechanism will likely ensure that the supply of the token decreases.

In the past 24 hours, 1,967.60 ETH has been burned, representing 1.37 ETH per minute, and the network has burned 38,236.53 ETH in the last 30 days.

Protocols responsible for most of the burned ETH in the last 30 days include OpenSea, Uniswap V3, Uniswap V2, Gem, and 1inch v4, meaning NFT and DeFi protocols are mostly responsible for burned ETH.

Eoin Treacy's view -

The migration of Ethereum away from mining and into a proof of stake protocol is a major event for the crypto universe. It turns the second largest token into a more transaction-ready system. It also addresses some of the power usage issues bitcoin has. The fact it is reducing supply and paying dividends to investors is akin to the practice many corporations follow with their shares.



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September 08 2022

Commentary by Eoin Treacy

September 08 2022

Commentary by Eoin Treacy

Queen Elizabeth II dies aged 96: Royal family and nation in mourning - latest news

This obituary from the Telegraph may be of interest to subscribers. Here is a section:

It was the great blessing of Elizabeth II’s reign, and the great good fortune of her subjects, that she succeeded in this to a degree that could not have been expected or even hoped for.

She had made clear her dedication to the task on the occasion of her 21st birthday when, as Princess Elizabeth, she made a moving declaration from Cape Town that was broadcast across the Empire:

“I declare before you all that my whole life, whether it be long or short, shall be devoted to your service and the service of our great imperial family to which we all belong. But I shall not have the strength to carry our this resolution alone unless you join in it with me, as I now invite you to do: I know that your support will be unfailingly given. God help me to make good my vow, and Gold bless all of you who are willing share in it.”

Eoin Treacy's view -

It is an uncommon characteristic in our age to say something,  mean it, live by it and leave everyone else in the dust by persisting in it. That’s what I find truly inspiring about Queen Elizabeth II. She embodied a quiet confidence in the rightness of her actions most of us can only aspire to.



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September 08 2022

Commentary by Eoin Treacy

Email of the day on the relationship between inflation and P/E

Hi Eoin, Over the past 3 weeks or so I heard a lot of commentators saying "valuation of the stock market is too high in this inflationary environment". do you have historic comparisons in order to say where valuations should be? Tkx for your excellent work every day, appreciate it very much! kindest regards

Eoin Treacy's view -

Thank you for your kind words and I am delighted you are enjoying the service. I have seen a good deal of conversation about this topic too. We have enjoyed decades when inflation, as measured by central banks, has reliably trended lower and been unsurprising. Now that we are in a new environment of surprising inflation, it deserves a reassessment of where value can best be found.



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September 08 2022

Commentary by Eoin Treacy

Heavy China platinum imports spur shortages elsewhere, WPIC says

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

It was difficult to track what happened to some of the Chinese imports, so the platinum market was in surplus on paper but on the ground tightness sent lease rates surging to the highest levels in a decade, the WPIC said in its latest quarterly report.

And

China may be increasing its platinum loadings in catalytic converters of heavy vehicles due to stricter emission standards, he said.

Eoin Treacy's view -

Nothing emphasised the fact platinum is an industrial metal more than its demise during Volkswagen’s diesel cheating scandal. The price collapsed and has not recovered because investment demand has not compensated for the loss of automaker buying.



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September 08 2022

Commentary by Eoin Treacy

GM unveils $30,000 electric SUV that will be one of the cheapest EVs available

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

General Motors revealed a new electric SUV Thursday that the automaker expects will be the cheapest compact electric SUV on the market when it goes into product in about a year. The Chevrolet Equinox EV will have a starting price around $30,000 which, at any rate, will make it among the cheapest electric vehicles of any sort.

The average electric vehicle available today has a base sticker price of about $47,500, according to Edmunds.com. The $30,000 price for the Equinox EV would be, of course, for the simplest version with no optional features. That price does not include tax credits but GM is not currently eligible for any electric vehicle tax credits, anyway, and it’s uncertain if any GM vehicles will be eligible under new rules, either.

Among 2022 model year mass-market EVs, only the Nissan Leaf, with its base price $28,500, costs less and it also currently qualifies for a $7,500 federal tax credit. There are a few other models in the low- to mid-$30,000 price range, too. Among them are Chevrolet’s own Bolt EV and the SUV-ish Bolt EUV.

Eoin Treacy's view -

The big question is how much money is GM willing to lose on EVs before it achieves the scale necessary to turn a profit. There is nothing easy about building an SUV at a price point that is thousands less than the nearest competitor. It suggests the company is going to be at the mercy of commodity prices in just the same way that oil deters consumers from buying gas guzzlers.



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September 07 2022

Commentary by Eoin Treacy

September 07 2022

Commentary by Eoin Treacy

Greed & Fear Negative SPX, Sees $130-$150 Oil Price

Thanks to a subscriber for this note summarizing the recent Raymond James Conference presentation by Christopher Wood. Here it is in full:

A few key takeaways (ask for replay)
a) has been negative USA , SPX P/S still very expensive at 2.5x, US M2 has risen by 40% in absolute terms since March 2020 (annualised rate of 15%), has slowed to an annualised rate of just 0.6% in the six months to July.
b) USA CPI ex-energy has been flat, while headline CPI down (due to oil price)
c) we see OIL price rising back to $130-$150, which would mean inflation expectations would rise too (0.80 correlation)
d) fossil fuel still 82% of global energy consumption
e) reminder EM equities vs US dollar index : 0.72 negative correlation
f) Indonesia has been our favorite market this year, credit growth rising
g) China property market woes outweigh infrastructure stimulus
i) we are neutral China
j) if YEN breaks 150 and we see 3% inflation in Japan, then base case is focus will be put on defending further Yen weakness
k) YEN is cheapest since 1971
l) India remains our favorite market on a 10 year view , we are heavy financials & property in India, housing affordability good
m) very underweight Australia (though + energy). Negative Australia housing as interest rates rising, home price declines accelerating

Eoin Treacy's view -

There is a lot of discussion in the media about the outlook for rates, the war in Europe and the region’s energy crisis, the new UK administration, and the lockdowns in China ahead of the Party Congress. For me the one thing that was front of mind this morning was it is easier to make money on the short side than by going long. That tells us a lot about the wider environment. 



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September 07 2022

Commentary by Eoin Treacy

Email of the day on the S&P 500

Thanks for another very informative comment of the day. do you expect the SP500 to test the lows of 2020? I would very much like to hear your views on this. Thanks in advance. Best rgds.

Eoin Treacy's view -

Thank you for this topical question. As a repeat delegate at the Chart Seminar, you will remember that targets are more a reflection of personal bias than an accurate predictor of where prices are likely to trade. Since I am short the Nasdaq-100 I am keenly aware of the influence that has on my personal psychology and that is likely to affect how I view downside potential. Let’s look at the chart facts.



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September 07 2022

Commentary by Eoin Treacy

Lululemon stock soars as earnings show company's customers are still visiting its stores in droves and paying full price

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

"New guest acquisition remains strong, with transactions by first-time guests increasing over 20% in (the) quarter," McDonald told analysts on the company's earnings call, according to a FactSet transcript.

"Transactions by existing guests increased in the high teens. Traffic across channels remains robust, with store traffic up over 30%, and e-commerce traffic increasing over 40%. And importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so."

Still, inventories rose 85% to $1.5 billion at quarter-end, up from $800 million in the year-earlier period. "The company believes its inventories are well positioned to support its expected revenue growth in the third quarter," it said in its earnings release.

An inability to clear inventories to make way for fresher products and steep declines in traffic to stores has plagued most other clothing retailers this earnings season.

Eoin Treacy's view -

Mrs. Treacy was complaining last week that her pickleball team’s Lululemon uniform was out of stock. In her search she found plenty of inventory on third party sites at more than 100% markups. That’s suggests robust consumer demand for the company’s products.

 



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September 06 2022

Commentary by Eoin Treacy

Video commentary for September 6th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: EUR swap breads at 2008 levels and bitcoin breaking lower suggest very tight liquidity, oil and gold weak, Dollar at new highs stocks reverse lower, UK Gilts surge on outsized spending measures. 



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September 06 2022

Commentary by Eoin Treacy

How £170 Bln of Energy-Aid Could Upend BOE's Outlook

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

According to a Bloomberg News report, Truss has drafted plans to cap annual electricity and gas bills for a typical household at or below the current level of £1,971 ($2,300). That would have a significant impact on inflation, which our baseline scenario forecasts will reach 15% in January. Mechanically inputting the cap freeze into our forecast shows inflation peaking in July (at 10.1%) and then falling back at a faster pace -- approaching 2% within a year.

The cost of implementing that measure would be a whopping £130 billion over the next 18 months, according to Bloomberg News. If we then add fresh support to businesses, which may total £40 billion based on draft government plans, the full size of the package could reach 7% of GDP. That’s a massive fiscal boost, close to the level of government support seen during the pandemic.

But it’s early days. There’s a high probability that the reported plans will face significant push-back from the Treasury or from within the Conservative Party -- especially as these measures would be poorly targeted. A key question will be how the energy cap is funded. It could be clawed back from households later, keeping energy prices higher for longer, or purely financed by government borrowing. The latter option would create a significant hole in the government’s finances -- even if the cap delivers around £30 billion of savings from lower inflation-linked debt payments in 2023-24.

Another possibility is the government intervening in wholesale energy markets. That could dampen the impact on the public finances, because it would open up the possibility of reducing bumper profits from some electricity producers. The snag here is it would be akin to a windfall tax, which Truss has previously said she would not pursue.

Eoin Treacy's view -

7% of GDP is a lot of money to spend on standing still. The fact the £170 billion price tag coincides almost identically with the excess profits for energy companies quoted last week. It suggests the government is aware of what sector can be targeted should financing this stimulus become an issue.  



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September 06 2022

Commentary by Eoin Treacy

Energy Trading Stressed by Margin Calls of $1.5 Trillion

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

Aside from fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s pushing European Union officials to intervene to prevent energy markets from stalling, while governments across the region are stepping in to backstop struggling utilities. Finland has warned of a “Lehman Brothers” moment, with power companies facing sudden cash shortages. 

“Liquidity support is going to be needed,” Helge Haugane, Equinor’s senior vice president for gas and power, said in an interview. The issue is focused on derivatives trading, while the physical market is functioning, he said, adding that the energy company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.”

Many companies are finding it increasingly difficult to manage margin calls, an exchange requirement for extra collateral to guarantee trading positions when prices rise. That’s forcing utilities to secure multi-billion euro credit lines, while rising interest rates add to costs.

“This is just capital that is dead and tied up in margin calls,” Haugane said in an interview at the Gastech conference in Milan. “If the companies need to put up that much money, that means liquidity in the market dries up and this is not good for this part of the gas markets.”  

Eoin Treacy's view -

The ECB is looking primed to begin hiking rates while at the same time it will also be prevailed upon to provide significant additional liquidity. This is akin to taking with one hand and giving with the other. Even that’s a stretch.



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September 06 2022

Commentary by Eoin Treacy

Ethereum Implements Bellatrix Network's Upcoming Paris Upgrade to Trigger The Merge, Validator Block

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

The blockchain network Ethereum has officially activated the Bellatrix upgrade, the final change before The Merge, the highly anticipated transition from proof-of-work (PoW) to proof-of-stake (PoS). Bellatrix was successfully codified into the codebase at epoch 144,896 on the Beacon chain and Ethereum co-founder Vitalik Buterin detailed it was important for network participants to update their clients.

From Bellatrix to Paris — Ethereum Participants Get Ready for the Final Step of the Merge
The Merge is estimated to take place on September 13, 2022, according to the wenmerge.com countdown, which notes there’s a hair over seven days left until the ruleset change. On September 6, Ethereum developers implemented the Bellatrix upgrade which is the final step until The Merge happens next week.

 

Eoin Treacy's view -

The migration from proof of work to proof of stake is a major evolution of Ethereum. It’s the reason it has become the favoured crypto asset of institutions. They see the transition as a way of allowing Ethereum to be valued on a discounted cashflow basis because of the payments that will be granted for staking tokens.



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