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January 15 2021

Commentary by Eoin Treacy

January 15 2021

Commentary by Eoin Treacy

Carry Trades

Eoin Treacy's view -

There is nothing in the financial markets that can’t be made better with leverage. That’s the foundation most trading operations are based on. One of the most common trade patterns is to source cheap funding in a currency which is depreciating in value. That way when it comes to paying back the loan, you get to keep the profit on the currency trade as well as any gain from the assets you invested in.

Japan’s zero interest rates made it an ideal candidate for carry trades but the propensity for the Yen to strengthen meant that short yen carry trades tended to be rather volatile. It was common in the decade up to the introduction of Abenomics in early 2012 for unwinding of carry trades to contribute to profit taking across global markets.

As interest rates have trended towards zero across the world the opportunity to access cheap funding in a wide array of currencies has never been greater. The challenge today is to find the currency most likely to decline versus assets with high growth and yield potential.



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January 15 2021

Commentary by Eoin Treacy

City of London High-Flyers Get Ready to Migrate

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

The rules for London’s financial services firms may still be uncertain after Brexit, but one result is already clear: a steady stream of people and business leaving Europe’s financial capital. First it was stock-trading, now fund managers. They are concerned about a Brussels-shaped threat to $2 trillion of business. As Lucca de Paoli and Silla Brush report, the EU is considering tightening the rules on delegation, meaning the management of some assets could be forced out of London.

Thousands of traders and salespeople have already moved out of London since the 2016 referendum. But the next wave is likely to include the high-flyers who advise on strategy, mergers and the raising of capital, according to more than a dozen officials at global institutions. Goldman Sachs Group Inc., for one, is moving senior London investment bankers to the continent. The problem, as Eyk Henning and Jan-Henrik Förster report, is that U.K. bankers can no longer directly pitch transactions to EU

corporate clients. They need a chaperone, a colleague within the EU to initiate contact. And one European regulator has already warned firms against trying to game the system.

The backdrop to all this is the negotiation between the EU and U.K. over regulatory equivalence. Unless the EU determines that Britain’s rules are as strict as its own, U.K. firms won’t be able to offer their services directly to clients in the bloc.

The problem for London is that equivalence is entirely in Brussels’ gift – and it’s hard to see what incentive EU member states, which have long lusted after a slice of London’s business, have to grant it soon. If anything, there’s an incentive for them to prolong the uncertainty and lure business away.

Eoin Treacy's view -

The presence of a deal has eased investor fears of an abrupt change to the status quo. However, the relationship between the UK and EU has been changed and the full implications of that will only become obvious over time. The one thing we do know is the EU is going to attempt to take the most possible advantage of the new environment and the UK will do the same.



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January 15 2021

Commentary by Eoin Treacy

China Unexpectedly Drains Cash as Leverage Builds in Bonds

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

China’s central bank withdrew cash from the financial system for the first time in six months, after excess liquidity had pushed an interbank borrowing cost to an all-time low. The People’s Bank of China offered just 500 billion yuan ($77 billion) of medium-term loans to lenders on Friday, resulting in a net drainage of 40.5 billion yuan for January. Analysts had predicted a net injection of 230

The move signals that the PBOC’s monetary easing of the past two months may be ending. While the policy has helped repair sentiment in China’s credit and government bond markets, injecting too much cash risks further stoking leverage in the financial system.

“The injection is much less than consensus,” said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “This means that the era of super-loose cash supply will end, and liquidity conditions will not be as favorable as previous years.”

Eoin Treacy's view -

China’s economy rebounded quicker than most others because it successfully contained the spread and demand for the products it exports surged to new highs.

The reality is that China became the workshop of the world because it was willing to subject its population to privation and pay little heed to environmental concerns. That went into overdrive during the lockdowns when whole workforces were quarantined at factories to ensure production remained on track.



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January 15 2021

Commentary by Eoin Treacy

January 14 2021

Commentary by Eoin Treacy

Video commentary for January 14th 2021

Eoin Treacy's view -

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

Some of the topics discussed include: financial repression and bond yields, megacaps susceptible to additional weakness, small caps, Europe, Japan, emerging and commodities continue to outperform, gold stable, bitcoin pauses at $40K. 



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January 14 2021

Commentary by Eoin Treacy

Email of the day on financial repression:

Thanks so much for the terrifically informative analysis that you continue to provide. The quality of your work is simply jaw dropping at times. But I wonder if you could please clarify one thing. Would you mind defining more clearly what you mean by the term “financial repression”? I can certainly search this, but I’d like to know what it means to you.

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you enjoy the service. The term “financial repression” is emotionally charged because of its historic significance. After World War II the US government paid back its war debt by inflating it away. That was a deliberate policy where interest rates were held at a low level for a prolonged period, taxes were raised and inflation eroded the debt over decades. From an investors perspective it was akin to the government reaching into your pocket and taking your money.



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January 14 2021

Commentary by Eoin Treacy

Russia May Raise Wheat-Export Tax, Stoking Grain Supply Worries

This article by Megan Durisin and Yuliya Fedorinova for Bloomberg may be of interest to subscribers. Here is a section:

Russia may almost double a planned levy on wheat exports and impose new restrictions on barley and corn in an effort to curb food prices, heightening supply risks for global grain markets.

Officials in the world’s top wheat shipper will meet Friday to review grain-export duties and may increase a planned tax on shipments to 45 euros ($55) per ton from March 15, a spokesman for the Agriculture Ministry said. That compares with a 25-euro levy approved last month for sales from mid-February through June, as well as a quota on grain shipments.

The moves come after President Vladimir Putin’s call to cool food-price inflation because of sharp increases for staples like bread and sunflower oil last month. The threat of heightened restrictions from a major exporter helped stoke wheat futures in Chicago and Paris, and adds to concerns of crop
protectionism as grain prices rise.

Eoin Treacy's view -

Export restrictions might curb domestic food price inflation but will exacerbate it everywhere else. We are on the front end of significant commodity price inflation. The three most important food commodities are wheat, soybeans and rice. All have completed base formations. No one single factor creates more social unrest than a surge in basic food commodities. The high cost of bread in Tunisia was once of the causal factors in the origin of Arab Spring. Considering the extend of social unrest seen in the last 12 months it is quite likely we are going to see significant unrest in 2021 if food prices continue to rise.



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January 14 2021

Commentary by Eoin Treacy

Global Money Dispatch

Thanks to a subscriber for this note from Zoltan Pozsar for Credit Suisse. Here is a section:

Eoin Treacy's view -

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

The absence of a credit multiplier helped to keep inflation under wraps for the decade after the Global Financial Crisis. Banks just did not have the ability to lend, even if they had wanted to. Rebuilding their balance sheets was the number one priority. It was a monumental task. New regulations massively increased the burden of compliance and simultaneously denuded banks of some of their most profitable operations. The result is that the sector has been recapitalised but it is now much more risk averse than before.



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January 13 2021

Commentary by Eoin Treacy

January 13 2021

Commentary by Eoin Treacy

Email of the day - on debt servicing costs and liquidity

You've been pointing to this risk mentioned by Mohamed El-Erian in this article.

Is there an answer? Can the Fed extricate itself without damaging markets?

"One of the most under covered stories is what’s happening to the US yield curve. It’s on a consistent move up, and that puts the Fed in a very difficult position, because if it allows the curve to continue to steepen it can undermine financial stability. If the Fed wants the yield curve to stop steeping, it has to implement yield curve control, or what they like to call yield curve targeting. But yield curve targeting is a huge step in policy. It would distort the US Treasury market completely. So keep an eye on this, because this is starting to get to dangerous levels."

Also he sounds as if he is saying that trend following is the most viable strategy now - get out when the trend breaks!

"Honestly, I’m really happy that I don’t manage other people’s money. That’s because I know I would go back to doing something that is very tactical in nature: I would be like a surfer on a wave, knowing that the liquidity will end at some point, but going to be on it for as long as I can. I would look around and see that many other surfers are riding the same wave, and I would start wondering what happens if we get into each other's way or if the wave breaks. So I would be a very nervous investor."

Eoin Treacy's view -

Thanks for this article which offers a fresh perspective on the outlook for rates, liquidity and momentum trades. Sometimes it helps to take a birds-eye view.

Wall Street has been rallying since late 2008 so we are in the 13th year of the uptrend. In that time the leading companies are those that benefitted from the introduction of 4G and quick internet connectivity. The second group of companies that benefitted took the biggest bets by utilising cheap abundant credit to the greatest effect. So outside of everything else that has happened, the two big themes have been technological advances and cheap credit. Therefore, it makes sense that those are the topics we need to continue to pay attention to as the trend matures.



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January 13 2021

Commentary by Eoin Treacy

EV makers' battery choices raise questions about future cobalt demand -

This article from S&P Global Platts was written in November but includes some useful information about the outlook for battery chemistries. Here is a section:

In May, Volkswagen acquired a stake in Chinese battery supplier Gotion-High Tech, one of the country's largest suppliers of LFP batteries. However, Volkswagen told Platts by e-mail that it currently does not plan to use LFP in its cars, although the company is "verifying that technology and its opportunities."

Another German automaker, BMW, recently expanded its battery plant in Tiexi, China, but reportedly to produce nickel-cobalt-manganese (NCM) batteries for the iX3 model. The company's primary goal at the moment is to increase driving range, but lowering costs will be a priority in the future, BMW told Platts by e-mail.

"In this conflict of objectives between range and cost, it is more important than ever to completely penetrate all actuators, starting with raw materials, cell chemistry, cell and module construction, and optimizing their entire interactions," BMW said, without dismissing any specific kind of cathode chemistry.

Some western market participants still argue that LFP should be restricted in the future to Chinese low-range city cars, as well as energy storage systems. Most of the investment is still flowing into NCM technology, which will maintain cobalt's relevance, sources said.

Even Tesla, despite committing to completely move away from cobalt and employing LFP in its Chinese-made Model 3 Standard Range, still uses NCM 811 (8 parts nickel, 1 part each cobalt and manganese), supplied by LG Chem, in the Model 3 Long Range version produced in Shanghai.

Eoin Treacy's view -

Every battery manufacturer is chasing economies of scale so there is a great deal of investment flowing into battery production. At the same time there is a lot of competition to come up with the most effect chemistries. Some are better for short haul city cars but long-range vehicles need different batteries.

On top of that complication there is the promise of completely new products disrupting the market. An increasing number of companies believe they have what it takes to commercialise solid state batteries. Toyota’s concept vehicle will be released this year and Quantum Scape went public on the promise of delivering a product by 2025. That suggest picking the one battery manufacturer that will break the mould is likely to be quite difficult but there are other ways to play the theme.



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January 13 2021

Commentary by Eoin Treacy

Corn Supply Squeeze Sends Prices Soaring, Risking Food Inflation

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

Corn futures rose to a seven-year high a day after the U.S. slashed its forecast for domestic stockpiles more than expected, adding steam to a rally fueled by Chinese demand for grain and soybeans.

The U.S. Department of Agriculture’s cut in the corn-inventory forecast to a seven-year low means world supply is tighter than expected at a time when Chinese demand shows little sign of letting up and South American growers face drier-than normal weather. Brazil’s crop agency on Wednesday lowered its estimates for corn and soybean output. Global food prices have been rising and stronger grains means further inflation is likely.

“Corn markets should stay bid this winter,” given Chinese demand and risks to Brazil’s harvest, Citigroup said in a note.

Eoin Treacy's view -

Subscribers may remember the swarms of locusts that plagued east Africa, India and China last year. What I found interesting at the time was the willingness of Western media to be spoon fed stories of how successful China was in combatting the swarms using drones. At the time I thought it was the modern equivalent of a Potemkin village. We may now be seeing the repercussions of Asian crop damage in 2020 combined with the impact the pandemic has had on planting and harvesting. 



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January 12 2021

Commentary by Eoin Treacy

January 12 2021

Commentary by Eoin Treacy

Email of the day on California, governance and manias

Happy New Year and, as always very much enjoy your nightly newsletter. That said, very sorry to hear in Governance about your experience (I assume it was yours-maybe a contributor?) w BLM door knocking and your wife's apprehension. I am also in LA, for 35 years now and, in years past, my friends from across the pond only moved back when they couldn't take earthquakes or fires. We are also thinking of a move, after hearing friends talk about arming themselves at home because of police defunding, the state's inability to stop spending and taxing, etc. A sad state of a once great state. Be well

Eoin Treacy's view -

Thank you for this email and I am one of the people who has recently armed himself. For me it’s the trend. Fires and earthquakes are a nuisance but don’t phase us. People are a different matter.

When we arrived in 2013 the city was quite different, at least to my eyes. Vagrancy and public indecency among the homeless have been a long running problem. However, in 2017 the City was barred from seizing and destroying the belongings of homeless people that are found on the street. 

After that, the number of homeless exploded on the West side. Google’s campus in Venice is surrounded by a large homeless encampment. They are building another one less than half a mile from my home which is due to open in the next 18 months. There is no one size fits all symptom for homelessness but the majority of people on the streets are not from California. The state has been a magnet for people trying to make it big for generations and the weather makes it so living on the street is possible.

In 2014 theft of anything less than $950 was made a misdemeanour. It has been a bonanza for thieves. Criminality has become big business and the lockdown riots were like all their Christmases came at once. On my block four cars have had their wheels stolen in the last eighteen months. There is very little the police can do. Videos are popping up everywhere of shoplifting from all kinds of stores. Here are two recent ones. (Cheviot Hills and Rodeo Drive)  The shoplifting ordinance was upheld by popular vote in the recent election so there is no end in sight to this trend.



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January 12 2021

Commentary by Eoin Treacy

Precious Metals: Easy come's "But for how long will easy stay"

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

Eoin Treacy's view -

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

Most major miners are now very reluctant to embark on ambitious exploration and development programs. They have been punished by the markets for doing so for over the decade and are often described as capital destroyers. Instead, they have concentrated on M&A activity, where they have security of production already underway and at least partial visibility about the extent of the resource base.



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January 12 2021

Commentary by Eoin Treacy

Why Israel Was the Perfect Test Case for Vaccines

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

All Israelis are insured by one of four national health maintenance organizations (HMOs), whose clinics and hospitals are spread throughout the country. They are competitive, but the price of membership, co-payments and treatments are regulated and uniform. So is the subsidized “basket” of medication, procedures and treatments. These are decided by a national board of experts. Medication is bought by the government and centrally distributed via a single company. All medical records are online, available to hospitals, doctors and the Ministry of Health.

This makes Israel especially attractive to Pfizer and other vaccine producers. HMOs know who has been vaccinated and in what order of priority. They know who has returned for a booster shot and who has opted out. Israel knows the ages, medical conditions and other demographic information of a heterogeneous population. And all this data is held by the Ministry of Health. It is a treasure for testing efficacy of the vaccine among various groups and the relative amount of vaccine needed for efficacy. Israel will be likely to be the first country to know the level of coverage needed to achieve herd immunity.

Distribution has been a model of efficiency. Vaccinations happen seven days a week in most places and even late at night. While it is a civilian operation, the army is vaccinating its own soldiers and helping with tracking and tracing infection and some logistics. 

Israel’s government has left people guessing about the number of vaccines it has received, what it has paid for them or what supply is coming. We know that 2 million people have received a dose of the Pfizer vaccine and will receive their second dose starting this week. According to Netanyahu, an unspecified “millions more” are in the pipeline. Last week, Moderna, whose chief medical officer is an Israeli, sent an initial shipment of 100,000 doses. Israel is also working on a homemade vaccine that could be ready by the summer.

Eoin Treacy's view -

Israel, with a small population and abundant supplies of vaccines, is reaping the benefits of being a first mover. Its economy will be among the first to recover from the pandemic. That puts it in the company of a relatively small number of Asian countries which have come through the pandemic with little in the way of economic hardship.



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January 11 2021

Commentary by Eoin Treacy

Video commentary for January 11th 2020

January 11 2021

Commentary by Eoin Treacy

Bitcoin whales are profiting as 'weak hands' sell BTC throughout $40K bull run

This article by William Subery for cointelegraph.com may be of interest to subscribers. Here is a section:

While institutional buy-ins have become the standard narrative of Bitcoin over the past few months, a rogue “weak hands” signal from one of them caught analysts’ attention this week.

As Cointelegraph reported, Guggenheim Partners, which announced a sizable fund allocation to BTC in late November, is allegedly planning to sell some of its holdings already. The trigger came from chief investment officer Scott Minerd, who on Monday said that Bitcoin’s weekend drop provides the impetus to rethink its position.

“Bitcoin's parabolic rise is unsustainable in the near term," he wrote. "Vulnerable to a setback.”

“The target technical upside of $35,000 has been exceeded. Time to take some money off the table.”

His suggestion appeared to confuse market participants, with responses questioning the rationale behind the decision, coming just weeks after Guggenheim’s initial entry.

“CIO of huge firm day trading btc? It's a 5-10yr hold minimum,” macro investor Dan Tapeiro argued.

Institutional uptake comes amid a more fundamental supply and demand squeeze for Bitcoin, with large buyers already outpacing what miners can produce each month. At the same time, miners have stepped up their sales in recent days in what one theory suggests is some well-earned profit-taking at or near all-time highs.

Eoin Treacy's view -

The ownership of bitcoin has become more concentrated over the last six months because institutions have been buying in size. Meanwhile the concentration of mining in a handful of companies is detracting from the decentralised argument for bitcoin. Both of these factors contribute to the speculative nature of the market but detract from the long-term store of value argument.



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January 11 2021

Commentary by Eoin Treacy

Governance

Eoin Treacy's view -

There is no way the storming of the Capitol can be justified. Overwhelming an unsuspecting police cordon and disrespecting the nation’s seat of power is an affront no government is going to tolerate. That’s on top of what impact it has had on the vast majority of people who live their lives by a code of common decency.

By the same token, riots where private businesses are destroyed, police stations set light and people afraid for the integrity of their homes should also be condemned.

The problem with the polarization of political discourse in the USA is neither side is willing to sharply criticize the actions of their adherents. To do so would be political or busines suicide.

We are currently being treated to commentary fomenting fear that there will be a great deal of unrest at the upcoming Presidential inauguration. It’s a significant risk but it is far from the only form of intimidation.

My doorbell rang on Saturday night while we were sitting down to dinner. I thought it was an Amazon delivery so I went out to see what it was. Two BLM activists were waiting and informed me they were collecting donations. I told them we were in the middle of dinner and closed the door. They left chanting Black Lives Matter.

One way of looking at this encounter is that it was innocuous. Another is that they were indeed innocently collecting donations for their cause. Another is that they were canvasing the leafy suburb to identify who supports them and who doesn’t. For Mrs. Treacy’s part, she saw correlations with the Cultural Revolution.

The challenge is that the rioters during the summer threatened they would come into the neighborhoods. It never happened, but when fund raisers come knocking on the door it feels like they are after protection money. I think our days in Los Angeles are numbered. This is not the city we moved to seven years ago.

President-elect Biden says he wants to heal the country. That’s a tall order but regardless of its success it will mean throwing money at the problem. There is clear potential the USA is now moving towards formal adoption of MMT.



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January 11 2021

Commentary by Eoin Treacy

As Polar Vortex Stirs, Deep Freeze Threatens U.S. and Europe

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

Technically, the polar vortex refers to a band of winds that encircle the Arctic and keep the cold locked far to the North. But with that temperature spike, known as sudden stratospheric warming, the band can buckle, allowing frigid air to head south. Gas traders used to call it the “polar pig.”

That could mean chills anywhere in the Northern Hemisphere, though this year it’s likely to end up in the U.S. according to Ryan Truchelut, president of Weather Tiger LCC. A wave of deep cold could give the Great Lakes and East Coast their first real blast of frigid winter weather, along with a storm pattern that delivers snow storms as well.

It will be a big shift for the U.S., where winter has been a bit lackluster so far. In New York, January readings have been 5.1 degrees above normal through Thursday, and Chicago has been 7.2 degrees warmer for the month.

Still, there’s no guarantee it will happen. While a sudden stratospheric warming usually leads to a burst of frigid weather, sometimes the clockwork of gears in the atmosphere doesn’t deliver.

“Many times in the past, the forecast for a cold weather event across the country resulted in a false alarm,” said Jim Rouiller, lead meteorologist with the Energy Weather Group LLC.

Eoin Treacy's view -

Weather is indeed fickle so no one can be sure that the expected wintry weather will in fact arrive. However, it is worth considering that the global economy is attempting to recover and delivery drivers are more a part of the fabric of the economy than ever before.



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January 11 2021

Commentary by Eoin Treacy

Musings From the Oil Patch December 29th 2020

Thanks to a subscriber for this report by Allen Brooks for PPHB. Here is a section:

What is most interesting is the impact of the JKM price rise on the global LNG market and its implications for the U.S. LNG industry. The sharp JKM price increase has diverted LNG cargoes away from Europe and toward Asia. This means Europe is drawing down on its record gas inventories. With JKM trading at the highest premium to the Dutch and U.K. gas benchmarks since 2014, this shift in cargoes will continue. That will help boost European gas imports during 2021, meaning there is less risk of another gas glut developing that would force Gulf Coast cargo cancellations. It also means the expansion of the domestic LNG business will be supported, leading to ‘final investment decisions” on several of the new terminals under development.

On December 7th, Cheniere Energy announced that its Train 3 at the firm’s Corpus Christi terminal had loaded its initial commissioning cargo. This will add about 700 million cubic feet per day to the LNG gas feed rate, the amount of domestic gas flowing from producing wells to LNG terminals, pushing the total to more than 11 billion cubic feet per day (Bcf/d). The EIA’s Short-Term Energy Outlook for December estimated that November dry gas production in the U.S. was 89.6/Bcf/d. It also estimates that net LNG exports were running at a 9.2/Bcf/d rate, or slightly over 10% of domestic supply. Assume that gas production remains at this level, lifting the feed gas flow to 11/Bcf/d will push LNG’s share of domestic gas output above 12%, which will likely grow further. That prospect was captured in a chart from a gas market report by Grand View Research. Under their outlook, growth will steadily increase, driven primarily by increased use of gas in power generation. As the world’s energy system decarbonizes, coal will be displaced by natural gas.

Eoin Treacy's view -

There is an abundance of natural gas and the price is also cheap. Together that creates an incentive to use more of the commodity. The fact that natural gas is less polluting than coal for power generation is at least a medium-term stop gap measure until the presumed utopia of carbon free power is achieved.  



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January 08 2021

Commentary by Eoin Treacy

January 08 2021

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review January 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on December 4th.

This month it seems like a particularly good time to think about the long-term because the world has seen a great deal of change in a very short period of time. In December the EU and China signed an investment agreement which many believe is a precursor to a wider trade deal. The UK left the EU in a reasonably smooth manner and the African Continental Free Trade Area came into effect on January 1st.

This week anarchists broke into the US Capitol building, took a lot of selfies and shattered the legitimacy of the populist right wing, from the perspective of just about everyone outside of that group. Almost as an aside, the Democrat Party now have full control of the US government and will therefore have ample potential to increase spending on their priorities.

The US 10-year yield is now above 1% and completing a medium-term base formation. One of the idiosyncrasies of 2020 is that government borrowing costs declined meaningfully even though their total debt ballooned. The only reason that was possible was because interest rates compressed so quickly. The sustainability of government debt is totally dependent on yields staying low; indefinitely. Therefore, the jump above the 1% hurdle is a meaningful event.



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January 07 2021

Commentary by Eoin Treacy

Video commentary for January 7th 2020

January 07 2021

Commentary by Eoin Treacy

The Fever Has Broken, Stability is Coming

Thanks to a subscriber for this article by Greg Valliere for AGF which may be of interest. Here is a section:

AN INEPT INSURRECTION FAILED, and there will be an orderly transition of power on Jan. 20; even Trump pledged as much early this morning. He probably won’t be ousted but his legacy will be forever stained, and his sycophants — Josh Hawley, Ted Cruz, etc. — will never recover.

THE TEMPERATURE WILL LOWER SOON: For the next few days, there will be speculation about removing Trump, largely out of fear over what he may do — especially geopolitically — in his final two weeks. And there will be questions about why the Capitol Hill police were so pathetically caught off guard yesterday. But a change is coming . . .

Eoin Treacy's view -

Stoking the mob is always tempting for populists on both sides of the spectrum.

That was abundantly clear in the mass protests, looting and destruction of public property over the summer. Those protests have since abated because the organisers achieved their goal of overthrowing the Trump administration.

The big question now is whether the mob seeking to overthrow the new Democrat controlled government will be chastened by yesterday’s events. My intuition tells me they represent a significant demographic and will form a significant portion of the new opposition, regardless of whether Donald Trump is banned on Twitter/Facebook.



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January 07 2021

Commentary by Eoin Treacy

Banana Republic

This post by Edward Ballsdon may be of interest to subscribers. Here is a section:

In 2018 it was clear that Trump's excessive deficits would lead to debt refinancing risks that were similar to those of the Italian Tesoro following the 2011 peripheral crisis. This die was already cast before the Covid19 pandemic as the US private sector indebtedness was reaching saturation point and, just like in Japan, the government would have to support economic growth with fiscal policy. This is the "private to public debt growth switch" that I have discussed in previous posts.

The Covid pandemic has merely brought forward the day of reckoning that was already on the cards, simply because the private sector had no buffers and reserves for bad times, so the government had to step up to the plate.

The investor ramifications from this upcoming long dated debt issuance are huge. If the private sector has to finance this forthcoming tsunami of coupon issuance, you can bet that real yields will have to rise to attract those private sector savings away from private sector assets. This is exactly what 2018 was all about - real yields rose and stocks and corporate bonds got clobbered until the FED reversed its tapering exercise and started buying USTs in size. 

My thoughts remain the same - see previous posts - the genie is out of the bottle and the Fed will of course come to the water and have to buy an ever larger amount of USTs to keep net supply and thus real yields low. This will be to try and keep financial assets afloat, which will of course allow bubbles to continue. The same will naturally occur in the Eurozone, UK and Japan. But take note from the previous charts, the increase in debt is NOT linear - the power of cumulation is at work.

Given the supply next year, it is fair to say that Central Bank QE had better NOT be temporary in nature, otherwise risk assets could move in a similar fashion to 4Q 2018 (when there was the terrible combination of large debt issuance, Fed unwinding its balance sheet and rising real yields). My guess is the FED and other Central Banks will continue to buy substantial amounts of debt, raising the question of what Temporary actually means.........and thus the title of the post.

Eoin Treacy's view -

Milton Friedman’s quip the “nothing is so permanent as a temporary government program” is particularly relevant when we think about the outlook for money printing. In simply terms, if there is not enough of money to go around, the central bank will print more. They don’t have much choice.



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January 07 2021

Commentary by Eoin Treacy

Cryptocurrency market cap tops $1 trillion with bitcoin above $37,000

This note from MarketWatch may be of interest to subscribers.

The market capitalization of all cryptocurrencies topped over $1 trillion for the first time, according to data from Coindesk. That came as bitcoin BTCUSD, 9.15% topped $37,000, trading up nearly 4% to $37,152. Cryptocurrencies have surged, helped by a move in the autumn by PayPal to allow transactions through their service.

Eoin Treacy's view -

Cryptocurrencies have risen to a $1 trillion market cap faster than Tesla which is no mean feat. Until quite recently Tesla’s share price advance has been outpacing even the feverish pace of bitcoin’s ascent. That all changed this week with Bitcoin’s three-day jump from $30,000 to $40,000.



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January 07 2021

Commentary by Eoin Treacy

Email of the day - on US COVID cases

As a result of the violent rioting in Washington yesterday, by thousands of people under huge stress, a super-spreader event has almost certainly been generated. I note the daily tally of deaths yesterday in the US exceeded 4000. Not good!

Eoin Treacy's view -

I totally agree and it seems like there are super-spreader events going on all the time. Since the UK variant of the virus has been found in an increasingly large number of countries, we have to assume it is much more pervasive than spotty testing highlights. Many countries now test for coronavirus but much fewer do the genetic testing necessary to identify variants. The USA for example doesn’t have a wide tracking system for mutations.



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January 07 2021

Commentary by Eoin Treacy

January 06 2021

Commentary by Eoin Treacy

Video commentary for January 6th 2021

January 06 2021

Commentary by Eoin Treacy

Banks, Small Caps Power Stock Rally as Tech Drops

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

Investors poured into financial assets that benefit from a stronger economy after Democrats looked set to take control of Congress, potentially unleashing a torrent of federal spending to revive growth.

Banks and energy producers led gains in the S&P 500 as the Russell 2000 Index of smaller companies climbed 3%. The Nasdaq 100 fell as traders sold out of high-flying stocks such as the Apple Inc. and Amazon.com Inc. The Dow Jones Industrial Average outperformed.

Democrats claimed one of the two Senate seats contested in Georgia and led in the other tight race. Two wins would give President-elect Joe Biden’s party control of Congress and smooth the path for some of his spending policies. That’s fueled bets that increased stimulus will boost the economy and spark inflation. The 10-year Treasury yield powered past 1% for the first time since March, and the dollar fluctuated after earlier weakening toward a six-year low.

“The growth-into-value rotation may be reinforced after the results of the Georgia Senate election amid the prospect of a higher fiscal stimulus bill and steeper yield curve, which would benefit banks and other non-tech companies,” David Bahnsen, chief investment officer of the Bahnsen Group in Newport Beach, California, wrote in a note to clients.

Eoin Treacy's view -

Control of the Senate will give the Democrats greater power to remake policy. It won’t all be plain sailing since such a slim majority will require total unanimity but it certainly means they will have an easier time passing spending measures. If debt financing and Modern Monetary Theory were likely before, they are doubly so today.



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January 06 2021

Commentary by Eoin Treacy

Waiting For The Last Dance

Thanks to a number of subscribers for this article by Jeremy Grantham which may be of interest. 

The strangest feature of this bull market is how unlike every previous great bubble it is in one respect. Previous bubbles have combined accommodative monetary conditions with economic conditions that are perceived at the time, rightly or wrongly, as near perfect, which perfection is extrapolated into the indefinite future. The state of economic excellence of any previous bubble of course did not last long, but if it could have lasted, then the market would justifiably have sold at a huge multiple of book. But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.

This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there’s the rub.

All bubbles end with near universal acceptance that the current one will not end yet…because. Because in 1929 the economy had clicked into “a permanently high plateau”; because Greenspan’s Fed in 2000 was predicting an enduring improvement in productivity and was pledging its loyalty (or moral hazard) to the stock market; because Bernanke believed in 2006 that “U.S. house prices merely reflect a strong U.S. economy” as he perpetuated the moral hazard: if you win you’re on your own, but if you lose you can count on our support. Yellen, and now Powell, maintained this approach. All three of Powell’s predecessors claimed that the asset prices they helped inflate in turn aided the economy through the wealth effect. Which effect we all admit is real. But all three avoided claiming credit for the ensuing market breaks that inevitably followed: the equity bust of 2000 and the housing bust of 2008, each replete with the accompanying anti-wealth effect that came when we least needed it, exaggerating the already guaranteed weakness in the economy. This game surely is the ultimate deal with the devil.

Eoin Treacy's view -

The challenge for value investors is they tend to see trouble coming way before the rest of the crowd. For many funds the high Cyclically Adjusted P/E ratio has ensured they have been underinvested for years so bearishness is not a new phenomenon even if some are now doubling down on their view.



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January 06 2021

Commentary by Eoin Treacy

Wealth Taxes Are Going Global, From California to Germany

This article by Ben Steverman and Benjamin Stupples for Bloomberg may be of interest to subscribers. Here is a section: 

Driving the idea’s revival is the need for revenue. The pandemic has devastated government finances around the world, boosting spending by trillions of dollars, from India to Canada, while slashing tax collections.

The situation in the U.K. — which now faces its widest fiscal deficit since World War II — has brought the idea of taxing wealth back into the discussion. An independent commission last month called for a one-off levy to raise about 260 billion pounds ($354 billion) — more than a third of the U.K.’s tax receipts in the latest financial year. Raising that much money would require taxing individual wealth above 500,000 pounds at 1% annually for five years, affecting 8 million people.

“There’s been quite a lot of murmurings about reforming existing taxes on wealth, but everyone’s just effectively treated a wealth tax as being off the ‘serious’ agenda,” said
London School of Economics assistant law professor Andy Summers, one of the report’s authors. “Partly, that’s because barely anyone in the U.K. has studied it since the 1970s.”

Eoin Treacy's view -

Wealthy individuals represent a ripe target for taxation. So do wealthy companies with hundreds of billions sitting in cash. The time to look at trusts, real assets like gold or property, gifting to children, deferring income, options programs, internationally diversifying where wealth is held and potentially looking at alternative accommodations was yesterday.



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January 05 2021

Commentary by Eoin Treacy

Video commentary for January 5th 2021

January 05 2021

Commentary by Eoin Treacy

China-EU investment deal: who's the real winner after seven years of negotiations?

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

Some said the deal was premature and could come at the cost of a reboot of the transatlantic alliance Biden has set as a priority in his multilateral approach to countering China.

George Magnus, a research associate at Oxford University’s China Centre, said the EU appeared to have conceded leverage for seemingly very little in return.

The agreement was unlikely to become a platform for the deepening of EU-China relations or even pave the way to a free-trade agreement, but it was a good move for China “without having to make major concessions commercially or any on labour standards and rights, which the EU is normally very robust about”, he said.

According to Gal Luft, co-director of Institute for the Analysis of Global Security, a think tank in Washington, the EU’s move was a deliberate attempt to take advantage of the power vacuum in the US.

“Concluding it in the interregnum period ensures that the outgoing administration will have no time to penalise Brussels while the new one will have no chance to weigh in,” he said.

“This shows that the EU, despite its misgivings about China’s behaviour and policies, wants to remain an independent player and is unwilling to be dragged into the US-China power struggle.” 

Eoin Treacy's view -

The last couple of months of 2020 ushered in three significant trade deals. That gives those of us who think globalisation is under threat something to contemplate. If we consider exactly what these agreements mean, it supports rather than negates the view we are entering a multipolar world.



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January 05 2021

Commentary by Eoin Treacy

Saudis Surprise Oil Market With Big Unilateral Output Cut

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

The de-facto leaders of the group have different priorities, with Saudi Arabia preferring to sacrifice volume in exchange for higher prices, while Russia wants to boost production before rival suppliers can fill the gap.

Russian Deputy Prime Minister Alexander Novak welcomed Saudi Arabia’s move, telling reporters that “it’s a great New Year present for the whole oil industry.” It’s an especially sweet gift for U.S. shale drillers, said RBC analyst Helima Croft.

The agreement means the global market will get far less supply than traders had been expecting prior to this week. The OPEC+ meeting opened on Monday with a proposal from Russia for a 500,000 barrel a day output hike next month, which was opposed by most other members. The alliance had been scheduled to discuss similar-sized increases in March and April, but that plan has been superseded by the latest accord.
 

Eoin Treacy's view -

This agreement is the necessary catalyst to inject a sense of urgency into the oil markets. Many shares have been priced as if demand for oil is going to evaporate in the short term. The reality is that even if the most bullish EV estimates are realised oil will remain the primary transportation fuel for at least another decade.



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January 05 2021

Commentary by Eoin Treacy

China's Steel Plan Puts Challenge to Australian Iron Ore Miners

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

China has already been moving steadily to secure iron ore resources. Some of its overseas mines include Sinosteel Corp.’s Channar mine joint venture in Australia and Shougang Group Co.’s Marcona project in Peru. But the focus is on Guinea, where some of China’s biggest state-owned firms are close to getting the go-ahead to develop Simandou, the world’s largest untapped iron ore deposit.

“It’s entirely feasible that China could raise its self-sufficiency in virgin and secondary iron units to 45% from its current level of just over 30% if it successfully develops the Simandou project,” said Navigate Commodities co-founder Atilla Widnell.

To reach 45%, Simandou has to produce 200 million tons a year to displace imports from other countries, said Widnell. Still, “it may be a stretch” to achieve that level by 2025 given geographical challenges in the area, and he estimates that with the current pace of development, the goals will be reached by 2030.

Eoin Treacy's view -

Ownership of Simandou has been a point of contention for much of the last decade. Payments to politicians by Rio Tinto eventually resulted in the company selling all of its interest to Chinalco in 2017. That provided China with full ownership of the asset bloc and it has no issue with making payments to politicians to ease the development of the mine.



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January 04 2021

Commentary by Eoin Treacy

January 04 2021

Commentary by Eoin Treacy

December Research Letter

Thanks to a subscriber for this report from Crescat Capital which contains a number of interesting charts. Here is a section:

Contributing to the supply shortage, the number of major new gold discoveries by year, i.e., greater than 2 million Troy ounces, has been in a declining secular trend for 30 years including the cyclical boost between 2000 and 2007. At Crescat, we have been building an activist portfolio of gold and silver mining exploration companies that we believe will kick off a new cyclical surge in discoveries over the next several years from today’s depressed levels.

Gold mining exploration expense industrywide, down sharply since 2012, has been one of the issues adding to the supply problems today. Crescat is providing capital to the industry to help reverse this trend.

Since 2012, there has also been a declining trend of capital expenditures toward developing new mines. From a macro standpoint, gold prices are likely to be supported by this lack of past investment until these trends are dramatically reversed over the next several years. Credit availability for gold and silver mining companies completely dried up over the last decade. Companies were forced to buckle up and apply strict capital controls to financially survive during that period. Investors demanded significant reductions in debt and equity issuances while miners had to effectively tighten up operational costs, cut back investment, and prioritize the quality of their balance sheet assets.

Eoin Treacy's view -

Supply Inelasticity Meets Rising Demand was the catch call of the commodity-led bull market between the early 2000s and 2011. Once identified it represents the beginning of a new bull market.

It takes time to convince investors there is a new bull market. By the time that happens prices have been trending higher for years already. Then it takes time to find and build new mines. That can take anything up to five years. Over that time, the firmness of prices convinces more and more people that the trend of demand dominance is irreversible so miners come under a great deal of pressure to expand capital expenditure or to buy out other operations. That generally occurs around the same time that new mines come online and contributes to a triple waterfall decline. Supply increases, debt is unmanageable and prices declines destroy valuations. Such is the cyclicality of the mining sector.



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January 04 2021

Commentary by Eoin Treacy

Bitcoin Holds Near Record, Ether Surges Amid Crypto Rally

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

Bitcoin held near a record a day after breaching $34,000 for the first time while Ether, another digital currency, also surged as the crypto rally continues.

Ether climbed as much as 22% to about $1,163 following a 30% advance on Sunday. Bitcoin held onto most of its weekend gains, dipping about 1.6% to $33,060 as of 6:53 a.m. on Monday in London, according to a composite of prices compiled by Bloomberg.

“What we’re seeing is the standard moving of the crypto markets from Bitcoin to the Altcoin market led by Ether,” said Vijay Ayyar, head of business development with crypto exchange Luno in Singapore. “This rotation happens usually when Bitcoin has a large rally and investors rotate profits” into other digital coins, he said.

Bitcoin eclipsed its 2017 high late last year and only hit $20,000 for the first time in the middle of December. Proponents of the world’s largest cryptocurrency argue that it’s muscling in on gold as a hedge against U.S. dollar weakness and inflation risk, citing evidence of growing interest among institutional investors.

Skeptics view the digital asset’s more than 300% surge over the past year as a risky bubble fueled by investors chasing the momentum in crypto prices.

Eoin Treacy's view -

Bitcoin and Ethereum has experienced one of the more impressive Santa Claus rallies ever with a major surge between Christmas Eve and this weekend. The big question that will be occupying the minds of anyone monitoring the market is whether the move is now over or are we seeing the first consolidation following a breakout?



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January 04 2021

Commentary by Eoin Treacy

Byron Wien and Joe Zidle Announce the Ten Surprises of 2021

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

5. The economy develops momentum on its own because of pent-up demand, and depressed hospitality and airline stocks become strong performers. Fiscal and monetary policy remain historically accommodative. Nominal economic growth for the full year exceeds 6% and the unemployment rate falls to 5%. We begin the longest economic cycle in history, surpassing the cycle that lasted from 2010 to 2020.

6. The Federal Reserve and the Treasury openly embrace Modern Monetary Theory as their accommodative policies continue. As long as growth exceeds the rate of inflation, deficits don’t seem to matter. Because inflation increases modestly, gold rallies and cryptocurrencies gain more respect during the year.

7. Even as energy company executives cut estimates for long-term growth, near-term opportunities are increasing. The return to “normal” increases both industrial activity and mobility, and the price of West Texas Intermediate oil rises to $65/bbl. Rig counts increase and energy high yield bonds rally soundly. Energy stocks are among the best performers in 2021.

8. The equity market broadens out. Stocks beyond health care and technology participate in the rise in prices. “Risk on” is not without risk and the market corrects almost 20% in the first half, but the S&P 500 trades at 4,500 later in the year. Cyclicals lead defensives, small caps beat large caps and the “K” shaped equity market recovery unwinds. Big cap tech is the source of liquidity, and the stocks are laggards for the year.

9. The surge in economic growth causes the 10-year Treasury yield to rise to 2%. The yield curve steepens, but a concomitant increase in inflation keeps real rates near zero. The Fed wants the strength in housing and autos to continue. As a result, it extends the duration of bond purchases in order to prevent higher rates at the long end of the curve from choking off credit to consumers and businesses.

Eoin Treacy's view -

If we contrast this list of potential surprises, I get the feeling they are less ambitious than in years past. I have heard the rumour from many quarters that President Trump is planning to set up his own TV station and there is plenty of speculation that the entire effort to overturn the election is to create a sound footing for a re-run at the title in 2024.



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January 04 2021

Commentary by Eoin Treacy

Rolls-Royce to Shelf Next-Generation Propulsion Engine After Testing Ends in 2022

This note from the Financial Times may be of interest to subscribers. Here it is in full:

Rolls-Royce Holdings PLC will shelf its next-generation UltraFan engine program and halt investment until a new aircraft is launched as the industry grapples with low demand for new airplanes, the Financial Times reports.

--The British engineering giant will finish testing the new engine in 2022 but will then put the program "on ice," including postponing the search for an industrial partner for the new propulsion system, according to the FT.

--Rolls-Royce Chief Executive Warren East said he expects a significant delay until the new aircraft appear as the industry reels from the acute shock of the coronavirus pandemic, the FT reports.

Eoin Treacy's view -

The challenge for many industrial companies is that their growth prospects are dependent on economic growth and the ability of their customers to boost capital expenditure. At present the enthusiasm which greeted vaccine approvals is being tested by the evolution of new strains of the COVID-19 virus. That suggests capex decisions will likely be delayed until customers have visibility on what their post pandemic businesses will look like.



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December 30 2020

Commentary by Eoin Treacy

December 30 2020

Commentary by Eoin Treacy

December 30 2020

Commentary by Eoin Treacy

How the Fed Will Respond to the Coming Inflation Scare

This article by Tim Duy for Bloomberg may be of interest to subscribers. Here is a question:

For an example of how the economy might recover faster than expected, consider that the consensus estimate for fourth-quarter growth is just under 4% while the Atlanta Fed’s GDPNow current estimate is 10.4%. Although the fourth quarter might not turn out to be quite so rosy given rising Covid-19 cases, the Atlanta Fed number still illustrates the possibility of some very good outcomes for the economy. For another example, consider that the $900 billion fiscal package is about 4.5% of GDP, or just about the size of the output gap. Imagine the possibility of being on the edge of full capacity already when the vaccine has been sufficiently distributed to allow the resumption of normal activities.

To be sure, any estimates of the output or unemployment gaps are just that — estimates. They will raise some worries about reports showing higher rates of inflation yet still leave the Fed hesitant to change the expected path of rate increases. The Fed will believe the economy is operating closer to full capacity if wage growth accelerates meaningfully beyond the 3.5% seen in July 2019, the high of the last cycle. That would help the clear the way to higher interest rates

​My instinct is that getting all three of these pieces to come together makes inflation more of a 2022 story than a 2021 story. At this point, the 2021 story still looks less like real inflation and more like an inflation scare. And with its new policy strategy, the Fed won’t scare easily.

Eoin Treacy's view -

The rebound from a large decline will always have the benefit of a base effect. A decline of 20% requires a rebound of 25% to get back to even. When that occurs in a short period of time it looks like a big move and it affects sentiment. 2021 is going to be a year of reflation because economic contractions are already being repaired as vaccines are rolled out. The rising number of cases at present are as much to do with the higher transmissibility of the new strain as they are about the impatience of consumers to get back to life as normal. That suggests plenty of scope for higher consumption.



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December 30 2020

Commentary by Eoin Treacy

Email of the day on rising inflationary pressures and Ethereum

I hope you are enjoying the holidays and looking forward to a better year next year.

Here’s another one of Charles Gave's excellent articles-the oil price is on the move thus starting to bear out his fear of a 1970s-type repeat.

Secondly, regarding Ethereum, have you been able to quantify any price target and if so, what technical data/events have you chosen to use?

Eoin Treacy's view -

Thank you for this interesting report which repeats Gave’s earlier call for an inflationary boom with which I agree. However, I’m not sure we are in the same kind of bull market in oil that we had in the first decade of this century. The history of secular bull markets in oil points to rising prices lasting as long as it takes new sources of supply to reach market. That is followed by decades of ranging.



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December 30 2020

Commentary by Eoin Treacy

Email of the day on asymmetric risks

"SMIC could be blocked from 7nm or more advanced technology while overseas rivals like Taiwan Semiconductor Manufacturing Co. dominate the market."

​With the massive importance of semiconductors, one wonders if this alone could be the trigger that leads to China invading Taiwan - and the Third World War!

Eoin Treacy's view -

Thank you for this question which raises an important topic. Semiconductors are a major choke point for China’s goals of achieving and sustaining global hegemony. Therefore, they will do whatever is necessary to secure supply lines. There are only a limited number of ways that can be achieved. Domestic manufacturing is difficult, time consuming and expensive. However, they are certainly pursuing this goal by funding new companies, attracting talent from overseas and developing next generation technologies like quantum computing.



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December 29 2020

Commentary by Eoin Treacy

Video commentary for December 29th 2020

December 29 2020

Commentary by Eoin Treacy

Email of the day After Brexit

The Brexit deal has made me think of David Fuller a lot in recent days. I shared several wonderful lunches with him in London at which his view on Theresa May's handling of the negotiations was quite clear! I think he would have been delighted with the unexpectedly good outcome (for the UK and the EU). Oddly, the deal has helped me at last come to terms with David's death. Knowing he would be happy makes me happy.

The attached article on the UKs economic prospects surprised me for its positivity, especially the massive amount the UK is predicted to pull ahead of France. Here is section:

...the annual growth rate will be an average of 4 per cent until 2025.

By 2035, UK GDP in dollars is forecast to be 23 per cent more than traditional economic rival France.

Douglas Williams, the deputy chairman of the CEBR, suggested Britain's digital sector would flourish in the coming years.

'People often forget that the UK's largest economic sector is digital and creative,' he said.

'We have a huge competitive advantage in this tech-based sector which the pandemic has kicked forward.

'Most of this is pretty Brexit-proof provided the UK continues to attract talented people.'

Moreover, this CEBR analysis was made before the Brexit deal was announced, so maybe the prospects are even more positive now.

The key question for us investors is which London-listed companies are best placed to capitalise on the great opportunities ahead.

And

I hope you are well and had a relaxing Christmas.

This article (attached) today in the Telegraph added some interesting facts about the UK's trading future post-Brexit. It also seemed to cut across your own recent remarks about the future of the EU and the possibility of the Euro becoming the dominant reserve currency. The graphic was particularly revealing.

https://www.telegraph.co.uk/business/2020/12/29/uk-must-keep-shifting-away-continental-europe/

Eoin Treacy's view -

Thank you both for these articles which may be of interest to the Collective. We had a very enjoyable Christmas and played a lot of Mahjong. The Far Niente, panettone, Colin Street Bakery fruitcake and left overs have all been polished off and we’re starting to get back onto an enjoyable blend of epicureanism and ascetism.  I’ve been thinking a lot about David too over the last few weeks. I think he would have wholly approved of Boris Johnson’s tough negotiating stance and the commitment to follow through on the Democratic will of the people.

The world is full of opportunity for any company or country willing to compete. The UK is full of people who are willing to look on the positive side of the Brexit debate; with a view to gaining global market share for their individual enterprises.



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December 29 2020

Commentary by Eoin Treacy

Email of the day on the Dollar and competitive currency devaluation

I hope you and your family had a wonderful Christmas!

Back to work please find the following argument which contradicts yours re the USD being the currency that (relatively) is being debased the most. If there were a potentially violent rally of the USD than all bets would be off for a while…, especially on PM’s. All the best,

Eoin Treacy's view -

Thank you for this email raises some important points. The Dollar has been among the strongest currencies in the world over the last five years. It has been persistently firm against most emerging and commodity related currencies and has held an upward bias against most other reserve currencies. Since the onset of the pandemic monetary and fiscal response it has trended lower.



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December 29 2020

Commentary by Eoin Treacy

Email of the day - on hydrogen ETFs

Hope you have a good Xmas. Could I ask, are you aware of an ETF in which I can get exposure to Hydrogen. I live in the UK, as such, I may be restricted with my choice?

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. To the best of my knowledge, the sector has not gained sufficient adherents, beyond the broad renewables universe, for any firm to  launch an ETF.

Here is a link to the Chart Library folder for Hydrogen companies.



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December 29 2020

Commentary by Eoin Treacy

Email of the day - on India and downloading the video

Wish you, Mrs. Tracy and your lovely children a very Happy Christmas and a great holiday season.

I have always loved your optimism on India ever since we first met in Singapore nearly a decade back. Regretfully I was unable to share the same sentiment then and unable to do so now.

For instance, internet connectivity is poor even in Mumbai. At home I am at a handicap, while at office in the prime Nariman Point area we have three redundancies, and still lose out, though rarely.

The only way to enjoy your lovely "Eoin's World View of Markets" as I like to think of your daily videos, is to download them and then listen offline. In the absence of a download icon over the past two days, the streaming media loading every now and then has been highly irritating.

I sincerely hope you will be able to restore the download facility so that we in the internet challenged parts of the world can enjoy your uninterrupted services.

Wishing you and your family fun times in the meanwhile.

Eoin Treacy's view -

Thank you for this email and I’m sure the Collective would welcome additional perspectives from on the ground subscribers in India. I would be particularly interested, for example, in hearing how good your Jio 4G connectivity is? How does it perform when watching videos?

That would offer me some insight into how the service is being consumed internationally but it is also likely to be of particular interest to anyone invested in Netflix which has taken a big bet on penetrating the Indian market. Without reliable internet access the value proposition for streaming/ecommerce/online banking/social media companies is much less compelling.

It came to my attention last week that the Subscriber’s video was being re-posted by a competing subscription service. That forced me to limit all forms of sharing for the videos until the issue was cleared up. It is also why one of the videos was posted via YouTube before the Christmas break.

For the record, FullerTreacyMoney has been producing podcasts since that was even a word. I daresay we are the longest running financial markets podcast provider anywhere. I introduced the first videos four years ago and they continue to be among the most popular features of the service.

We do not have a marketing budget. Sales are driven entirely by word of mouth. There are more lucrative business models which other newsletter providers deploy. They create sales funnels, income maximisation plans and bombard subscribers with marketing material. David and I made the decision a long time ago to avoid that kind of sales strategy for better or worse. I want to continue in the same manner for as long as possible; putting the welfare of subscribers above that of the business. I don’t have an issue with sharing the occasional video or article with someone who might be a prospective subscriber, but I will cancel the subscription of anyone who abuses the service.



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December 23 2020

Commentary by Eoin Treacy

December 23 2020

Commentary by Eoin Treacy

December 23 2020

Commentary by Eoin Treacy

Brexit Negotiators Reach Outline of Historic Trade Accord

This article by Ian Wishart, Alberto Nardelli and Kitty Donaldson for Bloomberg may be of interest to subscribers. Here is a section:

U.K. and European Union negotiators have reached the outline of a post-Brexit trade agreement, and are now working to finalize the wording of the deal after almost ten months of often fraught deliberations.

The accord still needs to be approved by British Prime Minister Boris Johnson and the EU, according to officials with knowledge of the matter. That means the deal could still fall apart, and any announcement could be some hours away, they said.

The pound soared, advancing by as much as 1.6% to $1.3571, for its biggest intraday gain in more than a week. The yield on 10-year U.K. government bonds was poised for the biggest gain since March.

Johnson and European Commission President Ursula von der Leyen intervened personally in recent days, holding several phone conversations in a last-ditch bid to reach an agreement before the U.K. leaves the single market at the end of the month.

Eoin Treacy's view -

The headline of a “deal” and the signal that sends about the willingness of politicians to avoid economic distress is positive for the stock market and the Pound. Of course, we do not know exactly what the deal will contain. I remain of the view that an agreement always looked likely, but that its scale is likely to be rather limited. There will still be years of wheeling and dealing over enforcement and relative advantage. Delivering Brexit was a major election promise, its success will be measured by how each individual household fares after the fact. In other words, now the hard work begins.



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December 23 2020

Commentary by Eoin Treacy

The World's First Hydrogen Hubs Are In The Making

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

Regional plans foresee the local production of hydrogen, both blue and green. They find places to store captured carbon below the ground and seafloor. And they see ample opportunity to power electrolyzers with winds from the North Sea and other nearby renewable sources. 

Yet the buildup of major industrial clusters requiring growing amounts of clean hydrogen, through the 2020s and ‘30s, may open opportunities to develop new more far-flung sources of it. The development of hydrogen hubs suggests their linkage with the other pole of regional planning for clean hydrogen, namely major global supply areas. 

IRENA sees industrial users can drive the development of dedicated “green hydrogen corridors” that connect regions generating low-cost renewable energy with demand centers. The IEA sees the need to get international shipping routes for the hydrogen trade going. These corridors (‘spokes’) will inevitably appear where the varying cost of hydrogen production among countries and regions favors resource-rich areas.

Europe and Japan, having relatively high costs and strong policy support for hydrogen, are likely importers. Big exporters would be Australia, Chile, the Southern US, the Middle East and North Africa, and other regions. To take advantage of an emerging global clean hydrogen market they will have to overcome an enormous challenge in the form of transportation costs. 

Eoin Treacy's view -

From the perspective of politicians the debate about global warming is over and they are moving ahead with policy. The framework for pioneering a carbon free world is rapidly evolving. Quite whether it eventually has a marked effect on emissions is an entirely different topic, but both capital and legislation are being committed globally on the assumption it will.



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December 23 2020

Commentary by Eoin Treacy

Email of the day on IPO outperformance

Good evening Eoin I remember that you highlighted the IPO ETF USA - great performance! would you think that the IPO activity in the USA will continue into 2021 - I think about an initial first tranche investment into this ETF.

Eoin Treacy's view -

2020 has been the year of the blank cheque company or SPAC (special purpose acquisition company. The wall of cash thrown at global markets was a tsunami that raised all boats. That afforded entrepreneurs the opportunity to offload illiquid positions in private companies at record valuations. The same trend allowed Tesla to raise more capital in 2020 than in all other years combined even as its stock zoomed higher. It also allowed Apple’s stock to double to a market cap in excess of $2 trillion. 



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December 23 2020

Commentary by Eoin Treacy

December 22 2020

Commentary by Eoin Treacy

December 22 2020

Commentary by Eoin Treacy

Greenback at Risk of Sharp Year-End Drop to Cap a Miserable 2020

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

The dollar is heading into the year-end vulnerable to a sharp extension of the bear run that’s shaped global currency markets since March.

Long-term trends on technical charts stretching back over the past decade reveal multiple trigger points that could see the greenback shoot lower against a host of key currencies.

Poor liquidity, lightly-staffed trading desks, defensive price-making engines and reduced seasonal demand add to the potential for outsized moves.

Eoin Treacy's view -

This article reflects the deep negative sentiment currently being expressed by investors everywhere. The Dollar has done little but fall since March. It has lost its interest rate advantage and supply is abundant by any definition. The US government is also calling out countries because their currencies are not rising quickly enough against it. In the competitive world of currency markets, the USA is doing more than most to devalue its currency.



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December 22 2020

Commentary by Eoin Treacy

Lidar Makers Jump After Report on Apple's Autonomous Car Plans

This article by Divya Balji and Crystal Kim for Bloomberg may be of interest to subscribers. Here it is in full:

Some lidar suppliers gained Tuesday after Reuters reported that Apple Inc. plans to build a self-driving car for consumers and is tapping outside partners for elements of the system as it develops its own battery technology.

Apple is approaching companies for some parts, including lidar sensors that provide autonomous cars with a real-time, 3-D view of the world, the report said, citing unidentified people familiar with the matter.

Lidar supplier Luminar Technologies Inc. rose as much as 12% on Tuesday, while Velodyne Lidar Inc. surged 16%. Blank-check firms that are bringing more lidar players to the market also advanced: InterPrivate Acquisition Corp. climbed 17%, while Collective Growth Corp. jumped as much as 24%.

Apple has been working on driverless car technology since 2014, but pared back its ambitions from a full-fledged vehicle in 2017, Bloomberg News has reported. Since then, Apple has been working on the underlying autonomous system. The company has been deciding whether to attach this system to its own car, or existing vehicles, or to partner with an established carmaker, Bloomberg News reported earlier this month.

Eoin Treacy's view -

Apple enjoys an almost 40% gross margin on its iPhones and tablets. Porsche has about a 47% gross margin on the 911 and Ferrari has a more than 50% gross margin on its cars. Tesla’s is 16.5%. Toyota’s is 18% and Volkswagen’s is 19.5%. No mass market producer has been able to achieve margins on the scale technology companies are accustomed to.



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December 22 2020

Commentary by Eoin Treacy

How Chinese Chip Giant SMIC Can Evade Trump's Newest Crackdown

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

Within the company, engineers are scrambling to assess the fallout and figure out workarounds to secure the equipment it needs, much like Huawei did two years prior, another person familiar with the matter said. At issue is the administration’s focus on drawing a line at 10-nanometer technology, banning the sale of equipment intended for use in more advanced processes. SMIC could conceivably repurpose 80% of older-generation gear to crank out more advanced chips, but that tactic won’t sustain production for the longer term and much depends on how far President-elect Joe Biden decides to take the rules, a third person close to the situation said, asking not to be identified discussing sensitive matters.

“The company has already got critical equipment and materials needed to continue production,” said Xiang Ligang, Beijing-based director-general of the Information Consumption Alliance. “In the past, China wasn’t too sensitive about the technological bottlenecks it has. But now, Beijing is fully aware of the potential damage and is determined to solve these issues.”

Chinese government-backed SMIC, a manufacturer of chips for global names from Qualcomm Inc. to Broadcom Inc., relies on U.S. gear for its longer-term technology road map. While its engineers may be able to sustain research and output in the short run, the latest sanctions basically freeze its capabilities while the industry advances. If a Biden White House takes it to the max, SMIC could be blocked from 7nm or more advanced technology while overseas rivals like Taiwan Semiconductor Manufacturing Co. dominate the market. The heightened scrutiny may also discourage clients leery of dealing with the uncertainty.

Eoin Treacy's view -

Self sufficiency in semi-conductors is a central policy objective for China. It is the basis on which the country seeks to compete with the USA in future. China may be able to do without Australian coal or wine but it has no hope of competing effectively on the geopolitical front without securing the supply line for technology’s basic ingredients.



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December 21 2020

Commentary by Eoin Treacy

Video commentary for December 21st 2020

December 21 2020

Commentary by Eoin Treacy

U.K. Faces Food Crisis Threat as Virus Surge Blocks Trade

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

The U.K. confronted threats of food insecurity and panicked shopping days before Christmas as European nations restricted trade and travel to guard against a resurgent coronavirus, offering Britain a preview of the border chaos to come in the absence of a Brexit deal.

Fearing a fast-spreading new strain of the virus that forced a strict lockdown across England, France on Sunday suspended travel from the U.K. for 48 hours and wants a stricter testing regime before lifting the blockade. Germany and Italy halted arriving flights from Britain with Spain and Portugal following suit. The crisis gave renewed urgency to negotiations for a trade deal with the European Union that remained at a critical stage after weekend talks.

Late Sunday, the Port of Dover stopped freight moved by truck into France while allowing unaccompanied cargo to keep moving. Traffic into the U.K. is unaffected, though truckers often run supplies in both directions and the latest outbreak in the heart of England may discourage them from entering the island.

Eoin Treacy's view -

The announcement over the weekend that one of the evolved versions of the original COVID--19 virus has travelled from South Africa to the UK has caused a panicky response from European governments. The new variant appears to be more infectious but no more lethal than the last. That suggests it will quickly become the dominant form of the virus circulating the global before long. Since the newer version is now already in Italy, closing borders with the UK is unlikely to have any effect on its ability to spread inside the EU.



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December 21 2020

Commentary by Eoin Treacy

'Politics come first' as ban on Australian coal worsens China's power cuts

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

Yiwu, a city in eastern China known for making products such as flags and badges, has not only switched off all its street lights during the evening but has forced factories to cut working hours by up to 80 per cent until the end of this year.

“We are not living a normal life when our factory can only work two days a week and the streets are dark at night,” said Mike Li, owner of a plastic flower factory in Yiwu.

Chinese authorities have blamed these problems on a combination of an unusually cold winter in parts of the country and high energy demand.

Power plants, however, said their operation had also suffered from the suspension of Australian coal imports.

Official data show Chinese plants obtained about 3 per cent of their thermal coal from Australia last year. The ratio, said an official at trade association the China Electricity Council, could exceed 10 per cent in more developed provinces that are drawn to the high quality of Australian coal.

“The import ban doesn’t make economic sense,” said the official.

Eoin Treacy's view -

Christmas is not a holiday in China but Chinese New Year is. Therefore, December is the time when orders are placed for delivery in January because nothing tends to get done over the two-week Spring Festival break. The slowdown in manufacturing capacity across many of China’s major industrial areas is likely to have a knock-on effect of delivery timelines towards the end of the quarter. That suggests inflationary pressures will mount as a result of this trend of putting politics ahead of the economy.



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December 21 2020

Commentary by Eoin Treacy

Email of the day - on filling the gap

Hi Eoin - re the Chart Seminar, which I haven't done for nearly 40 years!! - can you remind us/me the significance of filling the gap (down) - see, for instance, latest movement on CDE US Equity. Thanks and Happy Christmas.

Eoin Treacy's view -

Thank you for your patronage over the decades. Gaps in the market come in a variety of forms such as breakaway, trend extensions, exhaustion gaps and island reversals. The one thing they all share is a dynamic move outside of market hours.



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December 18 2020

Commentary by Eoin Treacy

December 18 2020

Commentary by Eoin Treacy

Quadruple Witching Roils Stock Market, Sparking Bursts of Volume

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

Coinciding with the event is Tesla Inc.’s widely-watched inclusion in the S&P 500, a development that alone is estimated to force roughly $80 billion of stock trading. While all the turbulence means headaches for traders, some market watchers view it as the final chance for investors to shuffle big holdings before liquidity thins out into Christmas and the New Year’s holidays.

“Traditionally these are outsized liquidity days, and following the rebalances we expect liquidity to dwindle into year-end,” Wells Fargo & Co. strategist Chris Harvey said. “In other words, Friday is likely the last opportunity to make major portfolio shifts before the 2020 liquidity window closes.”

Quadruple witching typically fuels trading as large derivatives positions roll over. While spikes in volume usually occur around the open and close, providing windows of robust liquidity, large price swings can happen suddenly at any time of the day.

Eoin Treacy's view -

Tesla trades at an historic P/E of more than 1000 and a forward P/E of 297. That’s a racy valuation by any definition. The fact it also has a market cap of $630 billion and will occupy a greater weighting in the S&P500 than Berkshire Hathaway is going to greatly increase the overall valuation of the Index.



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December 18 2020

Commentary by Eoin Treacy

US 'Has Evidence Russia Breached Its Nuclear Networks' in Massive Cyber Attack

This article by Matthew Field for The Telegraph may be of interest to subscribers. Here is a section:

President-elect Joe Biden issued a statement Thursday on “what appears to be a massive cybersecurity breach affecting potentially thousands of victims, including US companies and federal government entities.” “I want to be clear," Mr Biden wrote.

"My administration will make cybersecurity a top priority at every level of government -- and we will make dealing with this breach a top priority from the moment we take office.”

Federal investigators have been combing through networks in recent days to determine what hackers had been able to access and how much damage might have done in one of the most serious cyber attacks on the US government in recent years.

Thomas Bossert, Mr Trump's former homeland security adviser, warned that a Russian cyber attack on the US government could take more than six months to resolve and will require a “staggering effort” to rebuild existing IT systems.

Eoin Treacy's view -

The evolution of cloud computing has resulted in wonder cost savings, productivity enhancements and the ability to work remotely. It has also created additional challenges in securing information and access to databases. 



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December 18 2020

Commentary by Eoin Treacy

Norway Is Seen Leading the Way in Post-Covid Interest Rate Hikes

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

Norway has never cut rates below zero or experimented with quantitative easing, in part because most of its stimulus has been fiscal.

The krone, meanwhile, will end 2020 as the worst performing of the world’s 10 most-traded currencies, in part due to the economy’s reliance on oil. That exchange-rate weakness has helped push inflation above the central bank’s 2% target, with underlying annual consumer prices hitting 2.9% in November.

The central bank signaled that significant uncertainty remains, as the pandemic tightens its grip across Europe.

“The sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalizing,” Governor Oystein Olsen said in a statement.

Eoin Treacy's view -

Norway is one of the wealthiest countries in the world so it has ample room to support the economy through fiscal measures. As the oil price continues to rebound it will further improve domestic economic conditions and raise the spectre of rising inflation. A stronger currency, particularly when it is coming off a low base helps to keep inflationary pressures in check. That may be the clearest rationale for any country considering raising interest rates. The challenge will be that it will become a magnet for investment flows.



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December 17 2020

Commentary by Eoin Treacy

December 17 2020

Commentary by Eoin Treacy

Chinese EV Makers Trade at High Valuations, Helped by Tesla and National EV Targets

This note from Dow Jones may be of interest to subscribers. Here is a section:

NIO, BYD and Xpeng are examples of Chinese electric-vehicle makers that have surged in value, buttressed by national targets regarding electric vehicles on the road and investors' search for the next EV titans. The American depositary receipts in these companies have surged this year and the meteoric rises put their valuations in line with large traditional car makers, such as General Motors and Ford Motor. To help cut carbon emissions, China aims for EVs to make up 20% of car sales by 2025, and 50% by 2035. Tesla's success this year has also fueled investor appetite for the technology. Investors should be aware though that most Chinese upstarts are unprofitable, The Wall Street Journal reported, and they are also selling far fewer vehicles than major automobile groups.

Eoin Treacy's view -

Tesla’s success in attracting capital has set off a global gold rush in copycats seeking to cash in on investor demand for renewable investments. Anything that has a battery in the description is doing well and a lack of income was not seen as a barrier to entry when discount rates are zero and the world is swimming in cash.

The evolution of the SPAC market has been a gateway for a pace of IPOs to rival that of the late 1990s. The number in 2020 alone has exceeded the total for all other years combined. The result is new companies have been popping up on the stock market at a dizzying pace. Advice to pursue growth at all costs, capture market share and not to worry about profits carry heavy reminiscences of the tech bubble in the late 1990s.



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December 17 2020

Commentary by Eoin Treacy

Email of the day on cannabis stocks

Hello Eoin What is your opinion on Cannabis stocks? All the best from Switzerland, I enjoy your comments every day with greatest interest

Eoin Treacy's view -

Thanks for you support and kind words. Opium poppies have been central to pain medication for millennia. However, they are uniquely unsuited to chronic pain ailments. The issues that have arisen over the last decade with opioid over prescription and addiction are well understood. Considering the significant anecdotal evidence from cannabis advocates, there is a clear rationale for at least giving the medicinal cannabis a second look. My own experience is cannabis ointment is effective in numbing painful muscles temporarily but it is not a cure. Meanwhile, recreational cannabis is where the speculative interest resides.



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December 17 2020

Commentary by Eoin Treacy

China's Central Bank Going It Alone Spurs an Influx of Capital

This article by Tom Hancock and Enda Curran for Bloomberg may be of interest to subscribers. Here is a section:

One reason it hasn’t leaned on its balance sheet as much as global peers is the PBOC largely handed the task of increasing money supply and lowering interest-rates to state-owned banks. It cut bank reserve-requirements, meaning they had more cash to dole out in loans.

With the economy growing again, policy makers have signaled they want a more sustainable pace of credit expansion. By contrast, the Fed, European Central Bank and Bank of Japan have all announced plans to maintain and step-up stimulus into the next year.

“Advanced economy central banks will try to use negative real interest rates and inflation to erode the real value of their sovereign debt,” said Andrew Sheng, chief adviser to China’s Banking and Insurance Regulatory Commission. “This is why real money flows will go to the economies that show growth, higher productivity” and steady monetary and exchange rate policy, he said.

The difference in yield between Chinese government bonds and U.S. Treasuries is already near record levels, with many market players expecting the gap to widen further next year

Eoin Treacy's view -

The Chinese approach to the pandemic has been to allow companies to issue a lot more debt and to give banks the leeway to facilitate that practice. That has occurred despite the uptick in corporate defaults. That has amounted to an addition CNY5 trillion in debt issuance this year or an increase of about 40% over the peaks of the last four years.



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December 17 2020

Commentary by Eoin Treacy

December 16 2020

Commentary by Eoin Treacy

December 16 2020

Commentary by Eoin Treacy

Fed to Maintain Bond Buys Until 'Substantial' Economy Gains Seen

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

The FOMC “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” policy makers said, repeating language from their November statement.

The central bank’s meeting builds on their earlier response to the coronavirus pandemic, in which officials cut interest rates to near zero while unleashing massive bond purchases and a multitude of emergency lending programs.

U.S. central bankers are still far away from their goals, and Powell has repeatedly called on Congress to pass another round of fiscal stimulus to help the economy through the winter as the pandemic continues to rage. The unemployment rate stood at 6.7% in November, while inflation remains below 2%.

Eoin Treacy's view -

There is little chance of additional Fed stimulus while the stock market is within a couple of percent of its all-time high. With the US government agreeing a fiscal stimulus yesterday, that takes some pressure off of the Fed to urgently provide assistance.



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December 16 2020

Commentary by Eoin Treacy

Email of the day on the best day to buy

Would Mr Treacy be able to let us know what day in December is most optimal to buy stocks (at the lowest price)?

Eoin Treacy's view -

Thank you for this question which may be impossible to answer with any true sense of satisfaction. The best time to buy at the lowest prices is after a shake out and if those were predictable, they would be arbitraged out of the market.

I am concerned that no one is asking what is the best day to sell stocks. A large number of high momentum shares have short-term overbought conditions and the stay-at-home mega-caps are underperforming. The timing of investing is one thing but I think a more pressing question is what should one buy. A significant rotation into value and out of mega-caps remains underway.



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December 16 2020

Commentary by Eoin Treacy

Bitcoin Whale Surfaces With $1 Billion and Alan Howard's Backing

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

 

Peters was wary of triggering a spike in the prices of Bitcoin or Ether. He described executing his trades as inconspicuously as possible and finishing all the buying in November before Bitcoin hit $16,000.
Another investor with One River Digital is Ruffer LLP, the U.K. investment firm known for its bets on market volatility.

Ruffer on Tuesday disclosed a 2.5% position in Bitcoin in one of its funds, describing it as “a small but potent insurance policy against the continuing devaluation of the world’s major currencies.”
 

Eoin Treacy's view -

This kind of fund “promotion” falls into the same bracket of market manipulation that Bill Gross and Warren Buffett perform. Buy first then talk loudly to journalists about what a great idea it is to invest in it. It’s highly effective because copycats will always be interested in what the luminaries of the investment world think and are doing with their own money.



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December 16 2020

Commentary by Eoin Treacy

Iron Ore's Towering Rally Set to Roll Into 2021 as Mills Protest

This article by Krystal Chia and James Attwood for Bloomberg may be of interest to subscribers. Here is a section:

Once the biggest iron ore miner in the world, Brazil’s Vale SA fell back to second spot last year after the devastating tailings dam collapse that killed about 270 people and triggered an overhaul of its waste storage facilities.

Vale is still about 100 million tons short of meeting the 400 million tons in output promised prior to the Brumadinho dam disaster. The recovery has been slower than expected, depriving the market of much-needed ore. Like its Australian rivals -- Rio Tinto Group, BHP Group and Fortescue Metals Group Ltd. -- Vale has prioritized value over volume. With current prices above $150 a ton and mining costs as low as $12 a ton, it’s an approach that has reaped rich rewards.

Eoin Treacy's view -

BHP, Rio Tinto and Vale control the vast majority of the iron-ore market. They were very disciplined in refusing to raise production volumes for at least the first half of the commodity bull market. That supply inelasticity was the driver of a significant bull market and only came to a close when high price encouraged competitors into the market. Since then, many of the upstarts have gone bust. Supply might not be as concentrated as it was in the early 2000s but these companies still hold a lot of sway.



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December 15 2020

Commentary by Eoin Treacy

Video commentary for December 15th 2020

December 15 2020

Commentary by Eoin Treacy

Email of the day on third party perspectives on the US/China competition

Very interesting interview for those interested in our regional and international affairs Just ignore the first 3 minutes of the intro in the Malay language if you don't understand Bahasa.

Worth 93 minutes of you time. Download & watch at your leisure.

Kishore Mahbuhani, a Singaporean diplomat, Mahbuhani is brilliant.

Eoin Treacy's view -

Thank you for this video which I agree highlighted a number of interesting themes. The challenge for governments in Asian countries is how to balance the demands for loyalty coming from the world’s superpowers. That’s a particular challenge for those that have historically depended on US support for markets and military protection. They now see their primary growth engine in China while China’s Belt and Road program is the primary source of FDI for many potential projects. 



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December 15 2020

Commentary by Eoin Treacy

Gold Climbs as Stimulus, Fed and Fresh Lockdowns Support Advance

This article by Ranjeetha Pakiam and Eddie Spence for Bloomberg may be of interest to subscribers. Here is a section:

 

A bipartisan group of lawmakers delivered details of a $908 billion relief package, splitting it into two
parts in recognition of deep differences over state aid and a liability shield for employers. With Joe Biden now confirmed as president by the Electoral College, leaders in Congress need to find a way to get one or both parts through the House and Senate before the last of the relief provisions from earlier stimulus expire at the end of the year.

Bullion’s path in recent weeks has been dominated by developments on vaccines and prolonged stimulus talks in the U.S., with prices set for the first quarterly loss since 2018. Still, the metal may get some support after the Fed meets Tuesday and Wednesday, with markets expecting fresh guidance on
asset purchases. In addition, the haven may get a boost from fresh anti-virus curbs being rolled out in major economies including Germany and the U.K.

“Prices are looking vulnerable again but should once again be saved by the Fed,” said Edward Moya, senior market analyst at Oanda Corp. “Economic scarring will undoubtedly make it easier for the Fed to continue to provide more accommodation and that could make many traders want to jump back in.”

 

Eoin Treacy's view -

$900 billion is less than what was originally sought but it is still a substantial amount of money. The announcement is also the first concrete evidence of an agreement on additional stimulus since the summer. It vindicates the belief that spending is likely to remain open ended in the coming years as reflation take priority over fiscal responsibility.



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December 15 2020

Commentary by Eoin Treacy

ECB Lifts Ban on Bank Dividend With 15% Payout Cap on Profit -

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

Andrea Enria, head of the ECB’s supervisory arm, said in a Bloomberg Television interview that there’s limited visibility on asset quality and that the bank will revisit its decision in September. He also called for moderation on banks’ variable pay.

The cap makes the ECB one of the more hawkish banking watchdogs in Europe. The Bank of England said last week that it will allow lenders to make payouts that don’t exceed 0.2% their risk-weighted assets, or 25% of cumulative quarterly profits over 2019 and 2020 after deducting shareholder distributions.

Eoin Treacy's view -

Europe’s banks are hamstrung by negative interest rates but they still charge fees for just about everything and don’t pay an interest rate. The most significant factor in their favour is the bad debts issue is slowly being eroded. That particularly true on the periphery. 



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December 15 2020

Commentary by Eoin Treacy

Biden Plots Cuba Reset in Rebuke of Trump's Sanctions

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

That strategy includes reducing restrictions on travel, investment and remittances for the island nation that are perceived to disproportionately hurt Americans and ordinary Cubans, said the people, who requested anonymity because the new administration is still coming together. Other measures that target Cuba for human rights abuses would remain in place, the people said.

The prospect of a détente between Washington and Havana rekindles memories of the thaw that Biden helped champion during the Obama administration, when the two nations restored diplomatic ties that had been broken for decades following Fidel Castro’s rise to power.

But the president-elect is returning to an even messier scene: the Cuban economy is suffering its worst crisis since the collapse of the Soviet Union amid fallout from Covid-19 and U.S. sanctions. At the same time, Cuban intelligence officers have helped prop up Nicolas Maduro in Venezuela, allowing his regime to consolidate its grip on power in defiance of demands for free and fair elections.

Eoin Treacy's view -

It looks increasingly likely that outside of the China question, the USA is likely to migrate back to many of the foreign policies championed during the Obama administration. There may also be a quid pro quo in the offing. Perhaps some assistance on the Venezuela question will be provided in return for easing sanctions.



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December 14 2020

Commentary by Eoin Treacy

Video commentary for December 14th 2020

December 14 2020

Commentary by Eoin Treacy

Email of the day on yield to worst versus total return calculations

Dear Eoin. First of all, thank you for all the great work you do! In a recent email there was a quote that mentioned 10-year Treasuries would decline by 2/3 in value if rates go from 1% to 3%. This is not even close to the correct math. A $1000 bond today selling at a 1% semi-annual yield would be worth $828.31 should rates go to 3%. It is true that a 1% bond has greater convexity than a 4% bond but the differences are not nearly as material as the quote suggests. A 4% par bond moving to 6% would trade at $851.23 which is less than a 3% difference to the fall in value for the 1% bond. Hope this helps, (I disclose that I am an actuary :))

Eoin Treacy's view -

Thank you for this email which highlights an important consideration for bond investors. Your raw bond calculations gel with the bond calculators in Bloomberg I used to discuss the issue in the Big Picture Long-Term video.



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December 14 2020

Commentary by Eoin Treacy

Kidney Dialysis Is a Booming Business. Is it Also a Rigged One?

This article by Carrie Arnold for Undark may be of interest to subscribers. Here is a section:

The scheme, according to Wood and other critics, works something like this: Nearly everyone in the U.S. with end-stage renal disease is eligible for coverage by Medicare, even if they are under age 65. The federal program pays a fixed cost of about $240 per treatment. Patients receiving Medicare pay an annual deductible, after which they continue to be responsible for a 20 percent co-payment, or about $48, for each visit.

Patients with private insurance, however — including those with health benefits paid for by their employers — are a different story. Those insurance companies must negotiate payments with for-profit dialysis centers, and research has suggested that the centers have an edge in those negotiations — one they use to jack up prices. One research letter, published last year in the Journal of the American Medical Association, Internal Medicine, found that private insurers paid, on average, over $1,000 per treatment — roughly four times Medicare’s fixed costs.

One possible reason: More than 80 percent of dialysis patients receive their treatments from either DaVita or Fresenius Medical Care, which is headquartered in Germany, giving the two companies upwards of 80 percent of the $24.7 billion American dialysis market — and significant influence over the prices charged to private insurers. What’s more, both are widely known to donate hundreds of millions of dollars to the American Kidney Fund, covering the vast majority of the nonprofit’s budget. That’s a problem, according to Wood. With the help of the American Kidney Fund, after all, more patients are able to stay on private insurance longer, so both companies have an incentive to keep the AKF well-funded. More patients with private insurance means DaVita and Fresenius can bill much higher prices for their dialysis services — and pad their own bottom lines.

According to Wood, for every dollar DaVita or Fresenius donates to the American Kidney Fund, they get roughly $3.50 in return from private insurers. No wonder, then, that the two dialysis giants, which together earned about $2.2 billion in net income in 2019, reportedly donated $247 million to the nonprofit organization in 2018 — roughly 80 percent of the fund’s annual budget that year. (AKF’s own financial documents do not name the companies outright, instead referring to two unnamed corporations. When asked to confirm the identity of these donors, Tamara Ruggiero, a spokesperson for the organization, said the AKF was barred from doing so by rules established by the Inspector General of the Department of Health and Human Services — ironically to “ensure that patients are not unduly influenced in their choice of dialysis providers.”)

Eoin Treacy's view -

This is but one example of how perverse the US healthcare system is. The reality of private health insurance is that there is no competition. The dance between for-profit insures with for-profit providers means that costs are greatly inflated relative to the rest of the world. The existence of vendor financing deals for patients is just another example of how difficult it is to ever reform the system.



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December 14 2020

Commentary by Eoin Treacy

Barnier's Narrow Path: How a Brexit Deal Could Be Done This Week

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

Barnier said that if fishing rights can be settled, then the deal could come this week. But he warned that there’s also a risk the talks could drag on right up to the Dec. 31 deadline, and could eventually end in failure.

France’s junior minister for EU affairs, Clement Beaune, said he doesn’t think the negotiations should go beyond this week because it would leave too little time for dealing with the consequences -- whether that’s ratification or a collapse.

People close to the British team had been talking about a deal as early as Tuesday to give the U.K. Parliament time to ratify the accord before it breaks up for the Christmas vacation. On Monday afternoon, however, an official said there had been no significant progress in recent days despite British efforts to invigorate the process.

What’s the latest mood?

“Obviously, no deal is a possible outcome,” Prime Minister Boris Johnson’s spokesman, Jamie Davies, told reporters on Monday. That marks a step back from Johnson’s warning on Thursday that a no-deal split was a “strong possibility.” But after a moment of optimism on Sunday, both sides are once again talking up the difficulties ahead.

Eoin Treacy's view -

When politicians talk about the possibility of a no-deal it has generally meant they are actively negotiating. When they seem confident of a deal, the market tends to be more willing to support a higher price value for the Pound versus the Euro.



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December 11 2020

Commentary by Eoin Treacy

December 11 2020

Commentary by Eoin Treacy

Sea Fever Off the Cape

This edition of John Authers newsletter for Bloomberg may be of interest to subscribers. Here is a section:

Edwards expected CAPE to be around 10 by now, given the moves in bond yields, and admits he was guilty of a “forecasting error of epic proportions.” But his Ice Age thesis has played out as predicted in Europe, and he has also been correct to predict that stocks would look ever cheaper relative to bonds in the U.S. For now, his judgment is clear: “In my Ice Age view of the world, Robert Shiller is dead wrong. In my view, US equity valuations are a QE-fueled bubble waiting to burst.”

Now the question is whether this is really so different from the Shiller view. His model plainly suggests that stocks will do badly over the next 10 years, and that bonds will do even worse. This was the way Shiller put it in a research piece for Barclays Plc in October, (which can be found on SSRN here):

In summary, investors expect a certain return in equities as compensation for investing in a riskier asset class, and as interest rates have declined, the relative expected return for equities has increased dramatically. We believe this may quantitatively help to explain investors current preference for equities over bonds, and as such the quick recoveries we are observing (with the exception of the UK), whilst still in the midst of a pandemic. In the US in particular, we are once again observing stretched valuations and high CAPE ratios compared to history.

Bond arithmetic may help to show that Edwards and Shiller aren’t as far apart as they appear.

When yields are this low, moving to a higher yield involves serious losses. To get from the current 10-year yield of 1% back to the 3% that 10-year Treasuries were offering as recently as two years ago, the Treasury price would have to drop by two-thirds. (If yields were a more normal 4%, then a two-percentage-point increase would require a fall in the bond price of only one-third.) At this point, bonds offer low income, little upside, and risk of massive downside. 

Maybe it isn’t that big an act of apostasy for someone who remains dubious about the future for stocks to predict that they should still do better than bonds. 

Eoin Treacy's view -

Debt is where the big bubble is inflating. That was true a decade ago and it is truer today. The big question therefore is what would cause this bubble to deflate? We can spend a great deal of time worrying about the CAPE ratio because it is at an historic high level but the fact is that until there is a catalyst to deflate the bubble the status quo will be sustained.



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December 11 2020

Commentary by Eoin Treacy

Disney Shares Hit Record on Forecast of Streaming Surge

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

In a presentation to investors Thursday, the world’s largest entertainment company outlined plans for dozens of new movies and TV shows from those major brands, with an eye toward becoming a streaming behemoth in four years. The company expects its program spending to reach $14 billion to $16 billion annually by then.

Disney+, the entertainment giant’s flagship streaming platform, also is getting a price hike. The U.S. monthly rate will climb $1 to $8 in a move that executives telegraphed earlier this year. In Europe, the price will rise 29% to 9 euros ($11) a month, although there it is getting additional content aimed at adults.

Shares of Disney rose as much as 11% to a record $171 in New York trading Friday. The stock has about doubled since March on the strength of the streaming business.

“The enormous success of Disney+ inspired us to be even more ambitious,” Executive Chairman Bob Iger said at the event. “Our pipeline is much more robust than we initially anticipated,” he said, adding that the Disney+ cadence should soon hit 100 new titles per year.

Eoin Treacy's view -

Disney+ ESPN and Hulu round out Disney’s streaming portfolio. The transmission medium is no longer dependent on cable TV and or satellite connection which affords streaming companies an opportunity to retain more of their earnings. So far, this saving has been passed on to consumers in the form of low subscription fees. However, the route to profitability lies in price rises despite the highly competitive environment.



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December 11 2020

Commentary by Eoin Treacy

Facebook Breakup Would Demolish Zuckerberg's Social Media Empire

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

“Breakups are scary for investors because in some ways they could disrupt the business models,” said Dan Ives, an analyst at Wedbush Securities who called Instagram one of the three best business acquisitions of the past 15 years. Still, Ives thinks the chance of an actual breakup is “slim” without legislative changes from Congress, which he believes are unlikely. “It’s a noisy headline but it doesn’t massively change the situation for Facebook in the near term.”

However remote the prospects, any sign that the FTC is leaning toward a breakup is likely to weigh further on Facebook’s stock. Facebook acquired these promising rival platforms precisely
because it expected the main social network to one day fade, and it wanted to be the company deciding what apps people would turn to next. A breakup would undo most of Zuckerberg’s hedging for
Facebook’s future, just as his immense investments in Instagram and WhatsApp are starting to pay off. Facebook argues that those investments made Instagram and WhatsApp what they are today.

“Our acquisitions of Instagram and WhatsApp have dramatically improved those services and helped them reach many more people,” Zuckerberg wrote in a post to employees on Wednesday. “We compete hard and we compete fairly. I’m proud of that.”

Eoin Treacy's view -

Breaking up Facebook is a monumental challenge which could take years, if it happens at all. However, the constant haranguing of the company by politicians is likely to limit its ability to grow. It will be unable to acquire future up and coming social media platforms to appeal to younger demographics. Musical.ly, which was acquired by TikTok, is an example of how Facebook has already been limited in continuing to buy competitors.



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December 11 2020

Commentary by Eoin Treacy

Wheat Set for Biggest Weekly Gain Since July on Supply Surprise

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

“A 3% increase in global wheat feed demand should add another layer of price support,”Jacquie Holland, an analyst at Farm Futures, said in a note.

On Friday, consultant SovEcon cut its Russian wheat-output estimate 5.2% to 76.8 million tons on adverse weather. Government officials are considering an export tax in addition to a proposal to set a grain-shipment quota for a few months next year, according to an industry group. This week, Putin expressed surprise at sharp price increases for staples including bread and sunflower oil.
 

Eoin Treacy's view -

The pandemic has had an influence on agricultural commodity supply chains. It has also had a meaningful effect on the consumption habits of whole populations. That is all happening against a background of the transition from El Nino to La Nina which has already resulted in a drought in much of Latin America. It also tends to bring much heavier rainfall to eastern Australia.



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December 10 2020

Commentary by Eoin Treacy

Video commentary for December 10th 2020

December 10 2020

Commentary by Eoin Treacy

Email of the day - on the international beauty contest

This article today struck me as being a profound historical perspective on the UK and the EU. It reinforces my view (and yours I think) that the EMs are where the growth will be for the medium-long term. Whether we in the UK will be able to capitalise on this is our question.

Eoin Treacy's view -

Thank you for this emotional article which highlights the frustration many people feel with both the trajectory of European integration and the UK’s membership of the long-term federal project. As David used to say, “the markets are an international beauty contest where we get to be the judges.”



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December 10 2020

Commentary by Eoin Treacy

Chinese Household Debt Surges Through the Pandemic

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

China’s household debt ballooned in the first half of the year, rising by about $380 billion, according to new Bank for International Settlements data. That increase was almost four times as large as the second-place U.S. And it compounds one of China’s biggest economic vulnerabilities.

It has been widely reported that China’s industrial production and exports have helped to power its recovery this year. But the other leg of the recovery is the continued rapid rise of real-estate investment, which is set to outstrip GDP growth again in 2020, as it has in 16 of the past 17 years.

Interest rates this year fell sharply in most countries, but the People’s Bank of China has resisted this trend. That means that whereas borrowers in the U.S. were at least able to refinance real-estate loans, Chinese borrowers are left with largely unchanged debt-servicing costs.

Eoin Treacy's view -

A common sence way of looking at the market is to buy the assets that domestic investors favour. In the USA that’s equities, in Germany it's bonds and in China it is properties. A portfolio made up of that mix would have done rather well over the last few decades.



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December 10 2020

Commentary by Eoin Treacy

SPAC with ties to Biden Cabinet picks sees surge in support from Wall Street after offering "access"

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

A company with ties to at least two people selected by Joe Biden for his Cabinet is seeing a surge in support from Wall Street players after pitching access to investors.

Pine Island Acquisition Corp., a special purpose acquisition company, was first described in September to investors in a prospectus featuring its direct affiliation with the investment firm, Pine Island Capital Partners. The document was filed with the Securities and Exchange Commission as Biden surged in the polls ahead of President Donald Trump.

“We believe that with our access, network and expertise, we are well-suited to take advantage of the current and future opportunities present in the aerospace, defense and government services industries,” the SEC filing said at the time.

Pine Island’s team includes Tony Blinken, Biden’s choice to be secretary of State, and Ret. Gen. Lloyd Austin, his nominee for Defense secretary. Austin was listed on the original SPAC proposal, while Blinken was left off as he took a leave of absence from the firm when he joined the Biden campaign.

Eoin Treacy's view -

It’s not every day that the machinations of influence peddling are made so public. The fact an investment vehicle to take a view on the success of such strategies is easily available is also a new and unsettling development.



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December 09 2020

Commentary by Eoin Treacy