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December 03 2021

Commentary by Eoin Treacy

Secular Themes Review December 3rd 2021

Eoin Treacy's view -

A year ago, I began a series of reviews of longer-term themes which will be updated going forward on the first Monday every month. The last was on October 1st. These reviews can be found via the search bar using the term “Secular Themes Review”.

One of the most basic truisms in the financial markets is it is easier to make money in a bull market. The bull market that began in late 2008 and early 2009 has been liquidity fuelled. That was not obvious to everyone a decade ago but now everyone gets the message. Money printing inflates asset prices. As long as central banks are printing, we will have bull markets and the most speculative assets will perform best.



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December 01 2021

Commentary by Eoin Treacy

Lira Respite Will Come Down to How Far the Central Bank Can Go

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

Turkey’s direct intervention in its currency markets on Wednesday, the first in seven years, shows policy makers are intent on drawing a line in the sand on how far they are willing to tolerate weakness in the lira.

However, how long policy makers are able to buy the currency some respite will essentially come down to the size of the war chest and how willing the central bank is to run down those assets. The Turkish central bank’s gross reserves add up to $128.5 billion, with $60.5 billion coming from the bank’s swap deals, according to latest data released on Nov. 19. When swaps and other liabilities such as required reserves are stripped, Turkey’s net reserves stand at -$35 billion. The bank has repeatedly said that its gross reserves -- the total amount at its disposal at the time -- are more important than net reserves.

The central bank’s intervention this morning is significant if only for the signaling it sends. During a previous episode of similar stress in the lira back in 2018, there was no reported intervention. In other words, the policy makers may be telling the markets that their strategy to ward off any speculation on the currency will take a different tack this time. In 2018, the central bank took the benchmark rate to 24% from 8% in a short span to arrest the decline in the lira.

Last week the lira tumbled more than 11% against the dollar in a single day, representing a 10-standard deviation shock based on its moves in the past five years. The currency has weakened after the central bank slashed its benchmark by 400 basis points since the end of August. The monetary authority meets next on Dec. 16.

Eoin Treacy's view -

Erdogan seems to remain of the opinion that the answer to high inflation is low interest rates. At the same time, he has said that the central bank’s intervention in the market, to trim the currency’s decline, is lawful. Without the ability to raise rates, the central bank has even fewer resources. Eventually it will run out of money.



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November 30 2021

Commentary by Eoin Treacy

Euro-Area Inflation Tops All Forecasts With Record 4.9%

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

Anticipating a spike in inflation this month, ECB officials have redoubled efforts in recent days to reassure citizens that they are facing a once-in-a-generation cost-of-living squeeze that won’t endure, driven by energy and a series of one-time factors.

While President Christine Lagarde is sticking to that script, some colleagues are warning that price pressures might take longer to subside, stoking speculation about the future course of monetary policy. 

At a Dec. 16 gathering, the Governing Council is set to announce the end of its pandemic bond-buying plan and outline how regular purchases and interest rates will develop as the economy continues its recovery.

“While energy costs and statistical effects can explain the bulk of this month’s jump, today’s reading also revealed some stronger than anticipated underlying pressure. That will add to concern over upside risks to the outlook, but the ECB is still likely to see inflation falling below 2% by the end of next year.” - Maeva Cousin, senior euro-area economist. 

Eoin Treacy's view -

The spike in Eurozone inflation was expected even if the headline number was higher than estimates. The ECB believes inflation will drop back towards 2% once the pandemic subsides. At least they are dearly hoping that will be the case.



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November 29 2021

Commentary by Eoin Treacy

Doctor Who Saw Omicron Early Says Symptoms Milder Than Delta

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

South Africa announced the identification of a new variant on Nov. 25, saying a few cases had first been identified in neighboring Botswana and then others had followed in Tshwane, the municipal area in which Pretoria is located. The announcement caused a global panic, roiling markets and resulting in travel bans on southern African nations.

Scientists advising South Africa’s government told a media briefing on Monday that while omicron appeared to be more transmissible, cases appeared to be very mild.

Coetzee’s patients have been relatively young. A vaccinated 66-year-old patient did return a positive test on Monday but was only mildly ill, she said.

Eoin Treacy's view -

Everything we have been led to believe over the last couple of years is that cold and flu viruses mostly evolve to be more transmissible because that furthers the urge to replicate all organisms share. Becoming less deadly is often a part of that because it aids in replication. That part of the argument is complicated by the fact that COVID does not kill before it is has ample time to replicate and disperse.



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November 26 2021

Commentary by Eoin Treacy

What We Know About the Virus Variant Rocking Markets

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

6. How worrisome is this variant?
It’s too early to say. The World Health Organization said there are fewer than 100 whole genomic sequences of the new strain available, which could add to the time it takes to study how it compares to previous strains and its impact on Covid therapies and vaccines. Viruses mutate all the time, with the
changes sometimes making the virus weaker or sometimes making it more adept at evading antibodies and infecting humans. Covid vaccines have shown they are effective against previous variants and pills being developed by Merck & Co. and Pfizer Inc. may also provide new treatments. 

7. What should we look out for next?
In the U.S., which recently lifted a year-long ban on tourism from much of the world, top medical adviser Anthony Fauci said he wants to see more data. The European Centre for Disease Prevention and Control assigned the variant -- first detected in South Africa and Botswana -- the category “Variant of Concern.” BioNTech expects the first data from laboratory tests about how it interacts with its vaccine within two weeks.

Eoin Treacy's view -

This is the most important chart from the above article. It highlights how transmissible this variant it. From the available data, it is much more transmissible than the Delta or Beta variants and is already approaching dominance of South Africa cases. That implies it will spread around the world rapidly and within a month or at most two will be the dominant global strain.



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November 24 2021

Commentary by Eoin Treacy

Chile's right rejoices after pro-Pinochet candidate wins presidential first round

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

But the result is a bracing reality check for the Chilean left after two years in which the country has followed a broadly progressive trajectory.

Since 2019, mass anti-inequality protests have rocked the country, leading to the election of a broadly leftwing assembly to rewrite Chile’s Pinochet-era constitution.

But Sunday’s result suggested that the protest movement’s ability to galvanise support has worn thin.

Kast survived a bruising final week of campaigning in which his open support for Genl Augusto Pinochet’s dictatorship and its economic legacy were the subject of intense scrutiny.

As he took to the brightly lit stage on Sunday night, he had regained some of the composure that had deserted him before the vote, presenting the runoff election as an existential fight against “the intransigent left”.

“We are going to chose between freedom and communism – between democracy and communism,” he said.

Kast’s campaign spokesperson, Macarena Santelices – a great-niece of Gen Pinochet who briefly served outgoing President Sebastián Piñera as women’s minister – also appeared on stage.

Eoin Treacy's view -

Political commentary has until recently assumed that the entire South American continent would be subsumed by a tide of progressive new governments. That conclusion is being challenged in Chile and suggests traditional arguments about law and order, health and education will be more important talking points.



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November 18 2021

Commentary by Eoin Treacy

Alibaba Outlook Disappoints After China Slowdown Hurt Sales

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

Revenue growth at a plethora of divisions including its Cainiao logistics arm and local on-demand services underperformed expectations, while bread-and-butter customer management revenue from platforms like Taobao and Tmall grew just 3% -- the slowest in at least five quarters.

Competition is intensifying just as China grapples with the widest Covid-19 outbreak since the virus first emerged in Wuhan. Rivals like JD.com Inc. and Pinduoduo Inc. are stepping up investments to win over Alibaba’s users, just as a resurgence in coronavirus cases dents consumer spending. Gross domestic product expanded 4.9% in the September quarter, cooling from the 7.9% growth in the previous period, partly because of lockdown measures across many cities.

“Looking ahead, we will continue to invest heavily into three growth engines of domestic consumption, globalization, cloud computing and data intelligence,” Zhang told analysts on the call.

Eoin Treacy's view -

China’s growth has slowed meaningfully as the housing market shock therapy imposed in response to Evergrande’s overleverage has weighed on sentiment. As more credit is made available to property developers, speculative interest should begin to recovery over coming quarters.



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November 17 2021

Commentary by Eoin Treacy

Cargill CEO Says Food Prices to Stay High on Labor Crunch

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

MacLennan said in September that soaring food costs would prove transitory and should dissipate in time. Since then, the rally in energy prices and continued supply-chain snarls have made markets “a lot tighter,” he said.

“When you have limited supply, that can lead to higher prices,” MacLennan said. However, he noted that China hasn’t been buying crops as aggressively as it did last year, while North American harvests are robust. “That takes some pressure off the system.”

A search for greener airplane fuel and biodiesel is also pitting food against energy production, leading to tighter edible oil supplies. Prices for palm oil, the world’s most consumed vegetable oil, have soared about 50% in the past year, while soybean oil is up 60%. Canola, also used to make oil, is near a record.

The food-versus-fuel tension will become more intense than it’s ever been in the last 15 years, MacLennan said. The day will come when more agricultural products will be used for energy than food, so it will be incumbent upon the farmers of the world to innovate and become more productive, he added.

Eoin Treacy's view -

Using food for fuel should be a much more controversial practice. We are literally substituting political idealism for the wellbeing of millions of people. The fact that palm oil demand is soaring because of its use as both a food ingredient and a fuel is a useful example of how the environmental lobby often does more harm than good.



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November 15 2021

Commentary by Eoin Treacy

4 Million Tons a Day Show Why China and India Won't Quit Coal

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

Meanwhile, mines across China and India have been ramping up production in recent weeks to ease a supply crunch that’s caused widespread power shortages and curbs on industrial activity. China’s miners have beaten a government target to raise output to 12 million tons a day, while India’s daily production is close to 2 million tons.

“The power cuts since mid-to-late September show that we are still not prepared enough,” Yang Weimin, a member of the economic committee of the Chinese People’s Political Consultative Conference and a government advisor, told a conference in Beijing on Saturday. Additional funding is needed to ensure coal plants can be used to complement a rising share of renewables, he said.

Coal’s share in global electricity generation fell in 2020 to 34%, the smallest in more than two decades, though it remains the single largest power source, according to BloombergNEF.

In China, it accounted for about 62% of electricity generation last year. President Xi Jinping has set a target for the nation to peak its consumption of the fuel in 2025, and aims to have non-fossil fuel energy sources exceed 80% of its total mix by 2060.

For India, coal is even more important, representing 72% of electricity generation. The fuel will still make up 21% of India’s electricity mix by 2050, BNEF analysts including Atin Jain said in a note last month.

Eoin Treacy's view -

The focus on attention right now is on the willingness and potential of both India and China to eventually limit their use of coal. Much less attention is focused on Africa where the bulk of population growth is occurring. The next couple of billion people will mostly be born in Africa. That means increasing demand for power and higher standards of living as the continent urbanises



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November 15 2021

Commentary by Eoin Treacy

Why AT&T Stock May Be Near a Bottom With Its Proposed Dividend Cut

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

The question remains then whether $20.23 is still too high. For example, with a 6% dividend yield, the stock has to trade at $19.17 per share. If we add $4.76 to that price, this implies that T stock should be at $23.93 per share.

That implies that T stock could fall another $1.12 or 4.5% to $23.87 if the post-split dividend yield will be at 6%.

But don’t forget this is just an estimate. We don’t know exactly what the new dividend payment will be. For example, if the dividend is reset at $1.18, then today’s price implies a new post-split yield of 5.62% (i.e., $1.18 / $20.99). That is fairly close to 6% and may imply that T stock is actually near a trough.

Until the company begins to clarify some of these issues, the market will not know exactly where to price T stock. However, all indications are that it is getting close to a trough, assuming that the new yield will be close to 6%.

Eoin Treacy's view -

An 8.38% yield is conspicuously large even for the high yielding global telecommunications sector. With a lengthy history of both paying and increasing the pay out, it is reasonable to assume a good many investors are in the share for the income and are selling because they fear their income will be reduced.



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November 11 2021

Commentary by Eoin Treacy

Three Reasons To Be Bullish

This report from Morgan Stanley focusing on Indonesia may be of interest to subscribers. Here is a section:

Economics - 3 Reasons To Be Bullish: We see an absolute and relative growth story in Indonesia for 2022. We expect growth here to accelerate into 2022, even as it moderates in other parts of Asia and growth differentials between Indonesia and the rest of the world are likely to become more favourable. Indeed, we expect Indonesia to be a prime beneficiary as growth broadens out from the front-runners to the laggards and from exports to domestic demand. This is due to: (1) Indonesia is a reopening domestic demand play. We estimate that Indonesia will have implemented more than enough doses to fully vaccinate its adult population by Jan-22 and 99% of its total population by Mar-22. Rising vaccination rates should unlock growth delta from domestic demand. India's recovery patterns offer some interesting insights in that regard. (2) Indonesia offers an inflation hedge against stagflation concerns from supply-side constraints. It is one of the only two net commodity exporting economies in AXJ and hence benefits from the positive terms-of-trade as commodity prices rise. (3) It has one of the strongest structural growth stories in the region and offers diversification opportunities away from China. Its benign demography and low debt ratio stand in contrast to most other parts of Asia. Geopolitical tension and Covid have increased the need to diversify manufacturing risks and policy[1]makers are capitalising on this with the right structural reforms.

Eoin Treacy's view -

Indonesia was one of the best performing markets in the post GFC recovery. That was because the entire ASEAN region was not leveraged to the US mortgage market and reacted very positively to massive monetary accommodation. The recovery in commodity prices also contributed to its outperformance. That ended when commodities peaked and the Dollar began to recover.



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November 09 2021

Commentary by Eoin Treacy

Email of the day on telecoms companies

Hi Eoin, would like to hear your opinion on the Global Telecom sector and AT&T in particular. Is there any reason why these high yielding but low growing stocks are so unloved? Tkx for your thoughts!

Eoin Treacy's view -

Thank you for this question. I was also looking at AT&T over the weekend and found the size of the decline puzzling. The most recent news is focused on the delay to rolling out 5G imposed on both AT&T and Verizon; resulting from a complaint by the FAA that their signals might interfere with aircraft.  



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November 05 2021

Commentary by Eoin Treacy

Zillow's House-Flipping Rivals Defend Tech-Powered Homebuying

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

For Opendoor, Zillow’s departure represents an opportunity, CEO Eric Wu said in an interview. He expects his company, which pioneered the iBuying model, to be the market leader now that the best-known brand is out.

“We’re going to lead the charge in this transition from offline to online,” he said in an interview.

Wu said Opendoor has invested heavily to build expertise in home pricing and getting renovations done in a timely, cost-efficient manner. Those challenges contributed to Zillow’s iBuying demise.  

On Oct. 17, Bloomberg reported that the Seattle-based company would stop pursuing new acquisitions for its iBuying business, citing shortages of workers and supplies it needed to fix up homes. But Zillow also struggled to get pricing right. The company bought many homes for more than it could sell them for, forcing it to take writedowns of more than $500 million on property inventory. 

Those results convinced Zillow CEO Rich Barton that the iBuying model was too risky for his company.

“Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” Barton said on the company’s earnings call this week.

Eoin Treacy's view -

Anyone using Zillow’s app to look at houses over the last year will quickly have realised how inaccurate the “Zestimate” score is for gauging a home’s value. It was in no way reflective of the market condition because it was not adjusting quickly to new selling prices for homes. That resulted in differences of over 20% when we were housing hunting in the spring. That would also have forced Zillow’s algorithm to be manually adjusted to cope with the lag of data which obviously created issues.



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November 02 2021

Commentary by Eoin Treacy

RBA's Dovish Tone Set to Reignite Aussie Yield-Curve Steepening

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

“The RBA is clearly more dovish than the market anticipated,” said Jeffrey Halley, a senior market analyst at Oanda Asia Pacific in Singapore. “The market was clearly short and now they are taking some of it back after bit of a disappointing decision by the RBA.”

Australia’s underlying inflation is forecast to be no higher than 2.5% at the end of 2023, with only a gradual increase in wages growth, the RBA said in its policy statement. The central bank said last month its central scenario was that conditions for a rate hike wouldn’t be met before 2024.

The RBA’s policy statement means traders are likely to dial back some of their expectations for higher rates and that should pave the way for a steeper yield curve, according to Westpac Banking Corp.

“We expect that the market will be satisfied with the shift in the RBA’s approach, and will continue to pare back some of the aggressive front-end pricing,” Damien McColough, head of fixed-income research at Westpac in Sydney, wrote in a research note.

Eoin Treacy's view -

The RBA ended its yield curve control policy today so that implies they will allow not get in the way of short-term rates rising. The other side of that argument is they are not going to be in a hurry to raise rates. There are still too many uncertainties in too many portions of the economy to commit to a pattern of raising rates.



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November 01 2021

Commentary by Eoin Treacy

America's Plunging Barley Crop Means Cheap Beer No More

This note from Bloomberg may be of interest to subscribers.

It’s last call for cheap beer. Rising input costs are soaring across the globe, fueled by withering barley supplies and surging aluminum costs, plus the same labor and transport bottlenecks plaguing every other industry. In North America, dry weather scorched fields, which typically produce enough barley to account for about 20% of global commercial beer production. In the U.S., American farmers reaped the smallest crop since 1934, just after Prohibition ended, while in Canada - - the fifth-largest producer -- barley output shrunk 34% to the second-smallest harvest since 1968

Eoin Treacy's view -

The cost of both barley and aluminium might be rising but there is increasing evidence that brewers are using this as an opportunity to raise prices. Many consumers have been couped up at home for more than a year and they are probably more willing to accept a price increase now than before the pandemic if they can get some semblance of their normal social life back.



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November 01 2021

Commentary by Eoin Treacy

I'm A Twenty Year Truck Driver, I Will Tell You Why America's "Shipping Crisis" Will Not End

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

How do you convince truckers to work when their pay isn’t guaranteed, even to the point where they lose money?

Nobody is compelling the transportation industries to make the needed changes to their infrastructure. There are no laws compelling them to hire the needed workers, or pay them a living wage, or improve working conditions. And nobody is compelling them to buy more container chassis units, more cranes, or more storage space. This is for an industry that literally every business in the world is reliant on in some way or another.

My prediction is that nothing is going to change and the shipping crisis is only going to get worse. Nobody in the supply chain wants to pay to solve the problem. They literally just won’t pay to solve the problem. At the point we are at now, things are so backed up that the backups THEMSELVES are causing container companies, ports, warehouses, and trucking companies to charge massive rate increases for doing literally NOTHING. Container companies have already decreased the maximum allowable times before containers have to be back to the port, and if the congestion is so bad that you can’t get the container back into the port when it is due, the container company can charge massive late fees. The ports themselves will start charging massive storage fees for not getting containers out on time — storage charges alone can run into thousands of dollars a day. Warehouses can charge massive premiums for their services, and so can trucking companies. Chronic understaffing has led to this problem, but it is allowing these same companies to charge ten times more for regular services. Since they’re not paying the workers any more than they did last year or five years ago, the whole industry sits back and cashes in on the mess it created. In fact, the more things are backed up, the more every point of the supply chain cashes in. There is literally NO incentive to change, even if it means consumers have to do holiday shopping in July and pay triple for shipping.

Eoin Treacy's view -

I was at the bonded warehouse in Dallas this morning to pick up Mrs. Treacy’s Christmas inventory. There is a great deal of talk at present about the supply chain crisis so I thought subscribers might be interested to know how long it took for us to get our goods.



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October 27 2021

Commentary by Eoin Treacy

Sunak Delivers Johnson-Style Budget That Ramps Up U.K. Spending

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

“We need to strengthen our public finances so that when the next crisis comes, we have the fiscal space to act,” Sunak said. He also said the country hasn’t yet turned the corner on infections, warning of “challenging months ahead.”

The chancellor signaled the need to repair the country’s finances after racking up hundreds of billions of extra debt to protect workers and businesses through the pandemic. Unveiling new fiscal rules that will guide his approach to rebuilding the economy from its worst recession in a century, he vowed that in “normal times,” the government would only borrow to invest and that underlying public sector net debt must be falling as a percentage of output.

With inflation already well above the Bank of England’s 2% target and forecast to rise to at least double that, it’s already raising the cost of repaying the country’s debt, a quarter of which is linked to inflation indexes. Sunak also faces the prospect of an interest-rate hike that would add to borrowing costs: For every percentage point that interest rates go up, the Treasury estimates it would cost an extra 23 billion pounds a year.

“The House will recognize the challenging backdrop of rising inflation,” the chancellor said. “Our public finances are twice as sensitive to changes in interest rates as they were before the pandemic and six times as sensitive as they were before the financial crisis.”

And

Sunak’s firepower was boosted by a significantly improved outlook for the British economy from the Office for Budget Responsibility, the government’s independent fiscal watchdog. It revised upwards its forecast for growth this year to 6.5% from 4%, and downwards its forecast for the long-term economic scarring caused by the pandemic to 2% of output from 3%.

With growth filling the government coffers, the OBR’s borrowing forecast for the next five years was lowered by 154 billion pounds, while planned debt sales for this fiscal year were cut by a fifth.

Eoin Treacy's view -

The UK is boosting spending which is a crowd pleaser. That’s possible because the economy is rebounding from the pandemic nadir and the outsized growth is benefitting from the base effect of last year’s decline. Sustaining that momentum will be a key challenge, so supporting workers with higher wages and businesses with lower taxes is a necessary move but it also delays balancing the budget which will exacerbate the fiscal drag.



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October 26 2021

Commentary by Eoin Treacy

S&P's Best Earnings Run Since 1999 Meets Rebalance

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

The S&P 500 has advanced 5% since JPMorgan Chase & Co. kicked off the earnings season nine days ago, in the best start to a reporting cycle since the dot-com mayhem 88 quarters ago. Along the way, the index slipped only once, with a 0.1% drop on Friday doing little to derail the benchmark from its best month since the election.

Now institutional investors with large stock and bond holdings will need to balance out their positions, buying dips on losers and taking profits on winners. How big will the impact be? A regression analysis done by strategists at BNP Paribas SA shows that the outflow needed to compensate for a divergence between this month’s drop in the bond market and rally in stocks could translate into a 2.6% decline in the S&P 500 when the rebalancing takes place.

Eoin Treacy's view -

End of month reweighting of portfolios is a predictable event and represents a solid rationale for the recent bounce in Treasury futures. It’s unlikely to contribute to more than temporary strength because none of the underlying factors have changed.



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October 25 2021

Commentary by Eoin Treacy

Hertz Orders 100,000 Teslas in Rental-Market Shake-Up

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

The cars will be delivered over the next 14 months, and Tesla’s Model 3 sedans will be available to rent at Hertz locations in major U.S. markets and parts of Europe starting in early November, the rental company said in a statement. Customers will have access to Tesla’s network of superchargers, and Hertz is also building its own charging infrastructure.

It’s the single-largest purchase ever for electric vehicles, or EVs, and represents about $4.2 billion of revenue for Tesla, according to people familiar with the matter who declined to be identified because the information is private. While car-rental companies typically demand big discounts from automakers, the size of the order implies that Hertz is paying close to list prices.

“How do we democratize access to electric vehicles? That’s a very important part of our strategy,” Mark Fields, who joined Hertz as interim chief executive officer earlier this month, said in an interview. “Tesla is the only manufacturer that can produce EVs at scale.”

The electrification plan, which eventually will encompass almost all of Hertz’s half-million cars and trucks worldwide, is the company’s first big initiative since emerging from bankruptcy in June. And it signals that Hertz’s new owners, Knighthead Capital Management and Certares Management, are intent on shaking up an industry dominated by a handful of large players who are typically slow to change.

Eoin Treacy's view -

This is a win/win situation for Hertz and Tesla. Anyone wishing to rent a vehicle will take a look at Hertz if only for novelty value. For Tesla, it represents a strong try before you buy marketing campaign, they don’t have to pay for. I had both Toyota and Hyundai SUVs when I was house-hunting in Dallas earlier this year and my opinion of both brands was much improved following the experience. For many consumers looking at a minimum of five months wait time for a new Tesla, the chance to drive one on a temporary basis will be a tempting prospect.



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October 22 2021

Commentary by Eoin Treacy

Russia sharply raises key rate as prices soar

This article from Bloomberg may be of interest to subscribers.

Russia's central bank aggressively raised its interest rate for the sixth time in a row Friday in an
effort to slow soaring food prices, and did not rule out further hikes.

Rising prices, falling incomes and a lack of tangible government support during the pandemic have been eroding popular support for President Vladimir Putin's two-decade rule, and authorities are under pressure to ease inflation.

At a meeting on Friday, the Bank of Russia increased its key rate by 0.75 percentage points to 7.50 percent, surprising many analysts who had expected a smaller hike.

The bank said that more hikes could follow and revised up inflation predictions.

"Inflation is developing substantially above the Bank of Russia's forecast and is expected to be within the range of 7.4-7.9 percent at the end of 2021," the bank said.

The Bank of Russia said that as of October 18, inflation stood at 7.8 percent but was expected to return to 4.0-4.5 percent next year.

"The central bank continues to act decisively and proactively," Dmitry Polevoy, head of investment at Locko Invest, said in a note to clients.

After months of historically low inflation, consumer prices began to climb in March 2020, driven by a drop in the ruble's value in the middle of the coronavirus pandemic.

The central bank started raising its historically low rate the same month. Its next rate review meeting is scheduled for December 17. In September, the bank raised its interest rate by 0.25 percentage points to 6.75 percent.

Eoin Treacy's view -

Russia is a major grain producer but is also reliant on imports for many additional food stuffs. That offers a graphic representation of how everyone is susceptible to the fragility of the global supply chain. Shutting the whole world down eighteen months ago had a dire effect on the ability of producers to manage their operations. The ensuing volatility has taken much longer than anyone thought to iron out and it is not over yet.



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October 21 2021

Commentary by Eoin Treacy

Guedes Cites 'Waiver' for Fiscal Cap Bolsonaro Pledged to Uphold

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

Guedes, who spoke shortly before markets closed, said the government also mulls bringing forward a spending cap revision scheduled for 2026.  

“We want to be a popular, not a populist government,” he said, adding that the country must remain committed to fiscal responsibility.

Brazilian assets tumbled the most in the world on Tuesday on reports the government would breach the country’s spending cap rule, in place since 2017, to finance the new social program. 

The cap is seen by economists and investors as one of the key pillars of Brazil’s fiscal policy, keeping public finances from derailing by limiting spending growth to the inflation rate of the previous year. The government bypassed the rule in 2020 and 2021, getting one-time exemptions approved in congress to accommodate pandemic-related expenses.

Eoin Treacy's view -

One of the central themes of democracy is the loser of an election leaves office peacefully and handovers to new governments are reasonably smooth. When that pattern does not go according to plan, as in the US earlier this year, the strength of a nation’s institutions is tested. The USA passed that test, even though no one ever considered it would ever need to be tested.



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October 21 2021

Commentary by Eoin Treacy

West Coast ports to stay open 24/7 under U.S. plan to relieve supply chain issues

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

The White House plan has the cooperation of the International Longshore and Warehouse Union, whose leaders and port officials were expected to meet with Biden's top officials on Wednesday. The ILWU says its members are willing to work extra shifts to ease the crisis.

Six companies are part of the plan -- Walmart, FedEx, UPS, Target, Home Depot and Samsung.

"Across these six companies over 3,500 additional containers per week will move at night through the end of the year," the White House said in a statement.

The administration said it's also trying to assist in a truck driver shortage by supporting state motor vehicle departments.

"In 2021, an average of 50,000 commercial drivers licenses and learner's permits have been issued each month, 60% higher than the 2020 numbers," a senior administration official said. "The supply chain is essentially in the hands of the private sector, so we need the private sector to up to help solve problems."

Eoin Treacy's view -

To say that the supply chain is in the hands of the private sector is a gross misrepresentation of the power unions hold over how speedily goods move through the most significant ports in the USA.



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October 20 2021

Commentary by Eoin Treacy

Apple's iPhone Partner Foxconn Unveils First Electric Vehicles

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

Foxconn is among the technology companies targeting EVs as a source of growth beyond low-margin electronics assembly. The Ohio deal is a boon for Foxconn, giving it assembly capacity, equipment and talent, Citigroup analyst Carrie Liu wrote in a recent note. The company is close to deciding the location for a car plant in Europe, Liu said.

The Apple car would be the ultimate prize for every aspiring EV manufacturer. Working in Foxconn’s favor is its strong relationship with the U.S. consumer-electronics giant. The years-long partnership has expanded as Apple has added product categories, and the company now accounts for about 50% of Foxconn’s annual sales.

Any Apple automobile is still years away and the company has suffered setbacks including the recent departure of the head of its car project to Ford Motor Co. An Apple car has for years been somewhat of a paradox -- it’s one of its most hotly anticipated products yet the company has publicly said almost nothing about it.

Foxconn has yet to start sales of any vehicle following the debut of its EV platform last year. It plans to start mass production of Lordstown’s Endurance electric pickup in Ohio in April, according to a person familiar with its schedule.

Eoin Treacy's view -

Even if Apple is not going to produce a car, we are in a new era for the automotive sector. The evolution of the battery drive fuel cycle has lowered the barrier to entry and enables third manufacturing business models.



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October 19 2021

Commentary by Eoin Treacy

Quarterly Global Outlook 4Q 2021

Thanks to a subscriber for this report from UOB 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. 

Every country had to break the piggy bank to deal with the pandemic. That helped to boost economic activity and demand for just about everything over the last 18 months. Going back to less profligate ways will be a challenge everywhere, but emerging markets have the benefit of growth to ease the challenge. They also have more recent experience of doing what is necessary to combat inflation which should be a useful skillset going forwards.



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October 18 2021

Commentary by Eoin Treacy

New Zealand Inflation Surges to Fastest Pace in 10 Years

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

The Reserve Bank of New Zealand (RBNZ), which seeks to keep inflation around the midpoint of a 1 per cent to 3 per cent target band, raised its official cash rate on Oct 6 and signalled more increases are coming. That is despite a coronavirus outbreak that has kept largest city Auckland in lockdown for two months, curbing economic growth.

"We can now see annual CPI (consumer price index) inflation exceeding 5 per cent by the end of this year," said Mr Mark Smith, senior economist at ASB Bank in Auckland. "The widespread nature of price increases seen today was not a comforting sign. If it were not for the Delta variant outbreak, the pace of OCR (official cash rate) hikes being implemented by the RBNZ would potentially be quicker than 25 basis point increments."

Investors ratcheted up bets on further RBNZ rate hikes. Another increase is now fully priced in for the Nov 24 policy decision and there is a chance the bank will deliver a 50-point move, swaps data shows.

Eoin Treacy's view -

- I received this account from a New Zealand-based subscriber last week which may be of interest:

I hope life is going well for you and your family in your new abode.

Life is very good on a personal level although we are sad at our present inability to visit our son and his family in Portugal. They moved from the UK to the Algarve in early 2019 just before Covid hit. Luckily, we have a daughter and her family here and we are helping them to build a new house next door to ours.

Auckland is struggling with an outbreak of Delta but, so far, the rest of the country is Covid-free, as we have been all the way through.  There is a big race to get 90%+ of the nation fully vaccinated before Christmas. That looks achievable and we all hope we won't stumble at the last hurdle. NZ has coped with the pandemic very well to date but Delta is a tricky challenge.

The economy has surprised everyone with its strength, even through lockdown periods.  Our government debt levels were low by world standards going into the pandemic (thanks to years of sound economic management by successive administrations) and even with the generous support measures over the past 18 months, net Government debt is still only around 30% of GDP.  Apart from tourism and some parts of hospitality, businesses are thriving, with the recent tax- take far above expectations.

As in many countries, Covid has highlighted the wealth disparities in our society, exacerbated by the recent house price boom.  The disadvantaged communities (Maori and Pacific Islanders in our case) are at greatest risk of severe Covid with unlucky genetics, poor housing and little financial flexibility.  Lockdowns have shown the absurdity that most of the truly essential workers in societies are often also the lowest paid and least appreciated.  The social fabric is a precious, fragile thing and history shows that prolonged injustice and disparity will sooner or later cause it to rend. 

As the fortunate son of Estonian WW2 refugees from totalitarianism, it troubles me that surveys all over the Western world show younger people losing faith in democracy and market economies and, unfortunately, it's not hard to see why in many places today.

I want to thank you for the great job you are doing in taking over from the late, great David.  As a long-time subscriber (and Chart Seminar attendee), I can't think of a year where your service hasn't helped me make up my subscription several times over.

Thank you for this generous email. New Zealand has fared better than most during the pandemic and not least because demand for its primary exports has sustained the economy despite the challenges of losing tourist revenue.

I totally agree on the challenge of young people losing faith in free markets and democracy. Unfortunately, they have grown up in an environment where markets have not been free and where democracy has been overridden by special interest groups (both public and private) and much of what passes for legislation is the product of focus groups.



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October 18 2021

Commentary by Eoin Treacy

Radiant aims to replace diesel generators with small nuclear reactors

This article from NewAtlas may be of interest. Here is a section:

Radiant says its fuel "does not melt down, and withstands higher temperatures when compared to traditional nuclear fuels." Using helium as the coolant "greatly reduces corrosion, boiling and contamination risks," and the company says it's received provisional patents for ideas it's developed around refueling the reactors and efficiently transporting heat out of the reactor core.

Radiant joins a number of companies now working on compact nuclear reactors, and a smaller number focusing specifically on portable units, which would include the floating barges proposed for mass-manufacture by Seaborg. It'll be a while before we see one up and running, but a clean, convenient, low-cost, long-life alternative to diesel generators would be very welcome.

Eoin Treacy's view -

The evolution of small modular reactors and the increasing volume of space traffic point towards secular growth trends for helium. The terminal decline of helium supply from North America’s major source of production in Amarillo Texas was highlighted in 2018 as a major supply bottleneck. It had the potential to be a major supply inelasticity trend, as new sources of demand emerged. With so much enthusiasm about nuclear reactors in the market today, I thought it might be worth revisiting.  



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October 15 2021

Commentary by Eoin Treacy

Rising Rents Are Fueling Inflation, Posing Trouble for the Fed

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

“Many participants pointed out that the owners’ equivalent rent component of price indexes should be monitored carefully, as rising home prices could lead to upward pressure on rents,” minutes from the Fed’s September meeting, released Wednesday, said.

Rent is less critical to the Fed’s preferred inflation gauge, the one it officially targets when it shoots for 2 percent annual inflation on average, than it is to the C.P.I. But it is a big part of people’s experience with prices, so it could help shape their expectations about future cost increases.

Those expectations matter a lot to the Fed. If consumers come to anticipate faster inflation, they may begin to demand higher wages to cover their rising expenses. As businesses lift prices to cover rising costs, they could set off an upward spiral. Already, some key measures of inflation outlooks — notably the New York Fed’s Survey of Consumer Expectations — have jumped higher.

The Fed is already preparing to start slowing the large bond purchases it has been making during the pandemic to keep longer-term interest rates low and money flowing around the economy. If inflation stays high, the Fed may also come under pressure to raise its policy interest rate, its more traditional and more powerful tool. That might slow mortgage lending, cool the housing market and weigh down inflation.

But doing that would come at a big cost, slowing the labor market when there are 5 million fewer jobs than before the pandemic. So for now, Fed officials are getting themselves into a position where they can be nimble without signaling that they’re poised to raise rates.

Eoin Treacy's view -

David Ricardo’s Iron Law of Wages dictates that the prevailing base rate will be enough for people to scrape by.  Since the cost of everyday items people spend money on to survive keeps rising, there is only one way for wages to go.



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October 12 2021

Commentary by Eoin Treacy

Gloves Come Off in EU Clash With Rogue Members Over Rule of Law

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

Separately on Tuesday, Luxembourg Prime Minister Xavier Bettel said his government “fully supports the new conditionality mechanism.”

Member nations “cannot take advantage of EU financial aid on the one hand, and disrespect the European values that unite us on the other. We cannot and will not accept this,” he said. “This is even truer in the context of a recent decision in Poland.”

Testing the Limit
The verdict questioning the supremacy of EU law, announced last week in Warsaw, marked a major escalation in Poland’s already fraught relations with the bloc and triggered street protests. In a joint statement just days later, France and Germany said Poland has a legal and moral obligation to abide by
EU rules.

Poland’s opposition, led by former European Council President Donald Tusk, accused the government of trying to force the country out of the EU. Prime Minister Mateusz Morawiecki, who triggered the ruling by the Polish court, has dismissed that accusation as “fake news”
Still, his government ushered the ruling into law by publishing it in the official gazette on Tuesday, putting put to rest any doubt it may be seeking a way to compromise. “The government has decided to put itself on the collision course with the EU,” said Piotr Buras, a senior policy fellow at the European Council on Foreign Relations in Warsaw. “They’re trying to test the limits of how far they can go.”

Eoin Treacy's view -

The big question for everyone in Europe is where does the state end and the superstate begin. That’s a question which is currently being tested on the eastern frontier of the bloc. Many policy setters in the Eurozone tend to socially and fiscally liberal (France, Spain, Italy, Belgium), while many in the governments in former eastern bloc countries tend to be both socially and fiscally conservative. That’s true even if they are some of the biggest beneficiaries from structural funds.



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October 06 2021

Commentary by Eoin Treacy

Tony the Tiger's road to appearing in a Kellogg's worker protest

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

While Tony the Tiger thinks Frosted Flakes are “grrr-eat,” hundreds of Kellogg’s factory workers think the company is “grrr-eedy”—and they’re using Tony to drive their point home.

On Oct. 5, when about 1,400 Kellogg’s workers across four US plants went on strike over payments and benefits, a poster featuring the iconic tiger appeared along the picket line in Battle Creek, Michigan. In front of Tony were the words “I’m greedy.” A digital poster by the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union also features an angry Tony holding a”Kellogg’s on Strrr-ike” sign.

Eoin Treacy's view -

Many workers feel like they did everything right during the pandemic and came out worse off than they went in. That belief was reinforced by millions of people making more on welfare and stimulus payments than from working. We are now seeing the results of those policies. Worker activism is trending higher.



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October 04 2021

Commentary by Eoin Treacy

World's biggest clean energy project to power Singapore from Australia

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

The Australia-Asia PowerLink project, led by Australia's Sun Cable, plans to create a mammoth "Powell Creek Solar Precinct" on 12,000 hectares (29650 ac) of arid land about 800 km (500 miles) south of Darwin. The site, chosen because it's one of the most consistently sunny places on Earth, would be home to a mind-boggling 17-20 gigawatts of peak solar power generation and some 36-42 GWh of battery storage.

To give you a sense of scale, that's nearly 10 times the size of the world's current largest solar power installation, the 2.245-GW Bhadia Solar Park in India, and more than 30 times more energy storage than the last "world's biggest battery" project we covered in February. It's a bit big.

Eoin Treacy's view -

Not all that long ago spending more than $20 billion on a first of its kind project was considered completely unreasonable. Today, $20 billion is a rounding error compared to the quantities spent on stimulus.

The market for High Voltage Direct Current lines has been growing for more than five years. The first report of a feasibility study for an Australia - Indonesia connector is from 2016.



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October 01 2021

Commentary by Eoin Treacy

Secular Themes Review October 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 May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”

Supply Inelasticity Meets Rising Demand was the phrase David coined to explain the last commodity-led bull market. After decades of underinvestment in commodity supply infrastructure, the market was not prepared for the massive swell of new demand from China; as it leaped from economic obscurity into one of the largest economies in the world. A decade of investment in new production was needed to supply China and that crested ahead of the credit crisis in 2008.

Today, we also have extreme example of supply inelasticity, and demand is breaking records for all manner of goods and services. The factors contributing to these trends are quite different from a decade though. Some will be resolved relatively quickly. Others will take years.



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September 30 2021

Commentary by Eoin Treacy

Indonesia Parliament Approves 2022 Budget, Pushes Tax Reform Law

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

Lawmakers passed the 2022 budget into law at a plenary meeting on Thursday, with state spending seen at 2,714.2 trillion rupiah, slightly lower than the 2,750 trillion rupiah set for this year. It set a faster economic growth forecast of 5.2% for 2022, while reducing its budget deficit to 4.85% of gross domestic product from a projected 5.8% this year. 

Earlier in the day, a parliamentary commission approved a tax reform proposal that will introduce a carbon tax policy, overhaul the value-added tax system, expand income tax brackets, and offer another round of tax amnesty program. The bill will next be deliberated at the plenary level so it can be passed into law. 

Indonesia joins its neighbors in finding solutions to improve finances as a protracted coronavirus outbreak depletes government coffers. While Thailand has been forced to raise its public debt ceiling and Malaysia weighs doing the same, Indonesia has stood by its pledge to bring its budget deficit back to 3% of GDP by 2023 by streamlining spending and expanding revenue sources.

 

Eoin Treacy's view -

Asian and other emerging markets are much more accustomed to dealing with inflationary pressures than we are in the West. As a result, it is not all that surprising that they are further along in normalising policy and taking corrective measures to improve economic efficiency and tax collection.



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September 29 2021

Commentary by Eoin Treacy

Dollar Tree to Add Products Above $1 in Dollar Tree Plus Stores

This article from Bloomberg may be of interest. Here it is in full: 

Dollar Tree said it plans to begin adding new price points above $1 across all Dollar Tree Plus stores.

To test additional price points above $1 in selected legacy Dollar Tree stores
On track in 2021 to have 500 Dollar Tree Plus stores by fiscal year-end
Another 1,500 stores are planned for fiscal 2022; at least 5,000 Dollar Tree Plus stores are expected by the end of fiscal 2024
Currently has 105 Combo Stores; expects to add 400 Combo Stores in fiscal 2022
Sees potential for up to 3,000 Combo Stores over the next several years

Eoin Treacy's view -

Rising shipping costs, power cuts in major manufacturing centres and rising commodity prices all point towards margin compression for the sellers of low-priced items. They have no choice than to pass that inflation along to customers. The temporary shutting down of port facilities outside Shanghai will also have had the knock-on effect of putting upward pressure on prices because so much manufacturing capacity of low-cost items comes from Zhejiang.



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September 28 2021

Commentary by Eoin Treacy

Email of the day on China's energy challenges

You mentioned the energy shortages in China. These two articles from the Daily Telegraph spell out the scale and the implications globally. Best wishes to you and family

Eoin Treacy's view -

Thank you for the wishes and both these articles. Here is a section from Ambrose Evans Pritchard’s and here is a link to the other: 

The property squeeze is compounded by a parallel squeeze on carbon. Xi has promised peak CO2 emissions by 2030, a 25pc cut per unit of GDP by 2025, and a 3pc cut in energy intensity this year.

He knows that China is paying a high credibility price for foot-dragging as Europe and the US launch green deals (nobody can hide behind Trump any longer), and may soon face a carbon border tax in its top markets if it is not careful.

Energy-saving edicts are raining down. Party cadres have been mobilised to pursue CO2 crimes, and are reportedly doing so with the zeal of the Cultural Revolution. The state planner (NDRC) says 20 Chinese provinces have failed to meet this year’s goals on cutting energy intensity.

Nomura says nine have received “Level 1 warnings”, including Guangdong and Jiangsu, 35pc of China’s economy between them. Woe betide the Party officials responsible.

The steel, cement, and aluminium industries face production caps by the industry ministry (MIIT). They stole part of their allowance over the first half, and must cut back this half to compensate. That means drastic falls in steel output. It has already begun and is hammering iron ore prices, along with miners such as Vale and BHP Billiton.

I wonder does anyone remember the butter mountains and the wine lakes of the late 1980s and early 1990s? They were a political embarrassment, but prices were low. The EU and North America were overproducing because they subsidized farmers and low prices meant third world country farmers were impoverished and could not compete. The result was the abandonment of subsidies, much higher prices, still impoverished global farmers and a migration of market dominance to Brazil. I mention it here to emphasise that no good intention is left unpunished in the commodity markets.



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September 28 2021

Commentary by Eoin Treacy

Email of the day on Rolls Royce

Dear Eoin, could you kindly update us on Rolls Royce, e.g.: Worth buying more on this surge? Sell and buy back on inevitable dip after rumours regarding nuclear reactor subside? Thank you very much, very best, 

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Rolls Royce is a potential beneficiary from the UK’s decision to exclude Chinese companies from its nuclear sector. That’s been a bullish factor for the share recently, not least as uranium investments have broken out. The additional news that it has sold ITP Aero unit for £1.5 billion also helped to support the share.



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September 27 2021

Commentary by Eoin Treacy

Email of the day on investing for inflation:

Dear Eoin, Many thanks for your comment on inflation as a solution for the massive public debts. In these circumstances how would you structure your portfolio? In which sectors would you invest your funds?

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. This is a very big question because the stocks that have done best over the last decade have benefitted enormously from the massive availability of liquidity and very low rates. Divesting from the best performers runs contrary to most people’s instinct to run their winners so monitoring the consistency of their price action is particularly relevant to all portfolios over the next decade.



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September 24 2021

Commentary by Eoin Treacy

Roubini Says He's "Dr. Realist" by Warning of Global-Debt Trap

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

“My concern is that we are in a debt trap,” Roubini, chairman and chief executive officer of Roubini Macro Associates, said in an exclusive interview on Bloomberg TV at the Greenwich Economic Forum in Connecticut. “When central banks are going to want to essentially phase out unconventional monetary policy, given the debt ratios, there is the risk of a crash in the bond market, in the credit market, in the stock market, in the economy and therefore they’ll be in that debt trap and unable to normalize policy rates.”

When the Covid-19 pandemic started to strangle the global economy, easy monetary policies and stimulative fiscal policies were seen as necessary to “backstop the financial system,” Roubini said. But the results have been extreme.

“We are in a debt super cycle,” he said. “And eventually, central banks are in a trap. People said they are going to normalize policy rates, but with these levels of private and public debt, if they were trying to do that, there will be a market crash, an economic crash, and therefore, I think the path of least resistance is going to be to wipe out the real value of nominal debt at fixed-interest rates with higher inflation.”

Eoin Treacy's view -

The recipe for success in 2020 was a willingness to accept problems and look through them to the inevitable solutions. The magnitude of the challenge the pandemic presented was so large that only a massive monetary and fiscal response would suffice to blunt its impact. With that conclusion in hand asset prices rebounded impressively.
 



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September 24 2021

Commentary by Eoin Treacy

Email of the day on slower Chinese growth:

Think, you may find interesting this Financial Times story that looks into the longer-term consequences of Evergrande saga - https://on.ft.com/3io45gH (open link). It seems that the Chinese real estate market finally (at long, long last) is crumbling, not without help of the country leaders. If it is so and given the fact that the property market accounts for 29% of the Chinese GDP (and land sales to developers, for the third of local governments’ revenues), the economic growth seems to slow dramatically in the coming years. What could be implications, in your view? We all remember that China and its industrialization were the major drivers of the global commodities supercycle in the 21st century. Also, every time China has got into trouble, the Communist party used the same recipe “more investments in infrastructure and construction, more leverage. If now China and its property sector grow much more slowly, not to mention possible contraction of the latter, it will need much less metals and materials, and also possibly less gas (to power plants and send it to homes) and even oil (fewer working trucks and construction equipment). What do you think?

Eoin Treacy's view -

Thank you for this informative email which may be of interest to the Collective. Here is a section from the FT article:

An even more consequential trend for China’s political economy is the collapse in land sales by local governments, which fell 90 per cent year on year in the first 12 days of September, official figures show. Such land sales generate about one-third of local government revenues, which in turn are used to help pay the principal and interest on some $8.4tn in debt issued by several thousand local government financing vehicles. LGFVs act as an often unseen dynamo for the broader economy; they raise capital through bond issuance that is then used to fund vast infrastructure projects.

The property market has funded local governments for decades. Without a solid trend of land sales municipal governments face bankruptcy. There is just no way the central government can let that happen. The first order solution will be to avert contagion into the rest of the property market following Evergrande’s demise.



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September 22 2021

Commentary by Eoin Treacy

Fed Signals Bond-Buying Taper May Start Soon, Split on 2022 Hike

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

If progress toward the Fed’s employment and inflation goals “continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the U.S. central bank’s policy-setting Federal Open Market Committee said Wednesday in a statement following a two-day meeting.   

The Fed also published updated quarterly projections which showed officials are now evenly split on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year, according to the median estimate of FOMC participants. In June, the median projection indicated no rate increases until 2023.
And 

Projections for 2024 were also published for the first time, with the median suggesting a federal funds rate of 1.8% by the end of that year. The median for 2023 rose to 1%, from 0.6% in the June projection.  

 

Eoin Treacy's view -

Here is a link to the side by side comparison of today’s statement with the July one. Central banks feel the need to act to normalise policy because they are worried their actions are fuelling speculative activity. Yet, many of the countries that have begun to taper have soon found their initial estimates of the pace at which that can take place were overly ambitious.



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September 15 2021

Commentary by Eoin Treacy

Priciest Food Since 1970s Is a Big Challenge for Governments

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

Adjusted for inflation and annualized, costs are already higher now than for almost anytime in the past six decades, according FAO data. Indeed, it’s now harder to afford food than it was during the 2011 protests in the Middle East that led to the overthrow of leaders in Tunisia, Libya and Egypt, said Alastair Smith, senior teaching fellow in global sustainable development at Warwick University in the U.K.

“Food is more expensive today than it has been for the vast majority of modern recorded history,” he said.

Eoin Treacy's view -

It is interesting to contrast the charts of Food and Agriculture World Prices disseminated by the UN with how the commodity sector as a whole has performed.



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September 15 2021

Commentary by Eoin Treacy

Key U.K. Power Cable Will Be Partly Knocked Out Until March

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

A key U.K. power cable knocked out by a fire will stay partly offline until March, National Grid Plc said, deepening the energy crisis threatening Britain as it heads into winter.

The timing couldn’t be worse. The U.K. is already struggling with shortages, with gas and power prices breaking records day after day. The energy crunch is fueling concerns about inflation and a potential hit to businesses just as the economy emerges from the worst impact of the pandemic. How the U.K. fares through the winter now hinges in large part on the weather.

Eoin Treacy's view -

One has to question how long it will be before the population wakes up to the reality that wind and solar are not base load suppliers of electricity. Placing one’s faith on an intermittent source of power is inevitably going to result in blackouts when the system breaks down.



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September 14 2021

Commentary by Eoin Treacy

Email of the day on Modern Monetary Theory

Hope you are well in Dallas.

I have a question: why do you often mention that we have MMT in action right now?

MMT is not a policy adopted by government or central banks. They don’t “do mmt”

MMT is a theoretical framework that tries to explain how the monetary system works in a freely convertible and fiat currency system in which we have been living for 50 years now (and it explains it correctly to a large part in my opinion). it’s not the “policy ode making debt”. Isn’t it?

When you mention “MMT in action” you likely refer to the government demand for goods, services and the grant of subsidies / social securities payment / medicare /unemployment benefit to people etc. along with the debt issuance “to pay for” this spending. Finally the FED buying the government debt to “ease” the monetary conditions (the QE vs tapering).

But this is not “MMT”. Government spending has always existed and it is the second largest component of a country GDP (after “C” , private consumption). Look at the development of the US federal debt since the early 80es to the almost USD 28tn in 2021 / today. It does not matter who administered the country (super conservative or super liberal), they have all managed to expand the debt. And the market has always absorbed the “debt”. Have they been “doing MMT” for 40 years?

Thank you for your regular market updates... always appreciated

Eoin Treacy's view -

Thank you for this email which I believe will be of interest to the Collective. I agree there is nothing “modern” about MMT. Governments have a natural proclivity to spend and the freedom of fiat currencies inevitably leads to high debt loads. In that regard, the sustainability of debt regimes has been on a downward trajectory for a long time and people have been worrying about it for just as long. The bigger question is whether anything has really changed? 



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September 10 2021

Commentary by Eoin Treacy

Brazil's Bolsonaro: Only God will remove me from power

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

But mounting pressure from several investigations and calls for his impeachment have led to the president's rhetoric becoming ever more belligerent.

The rallies he convened for independence day were seen as an attempt to demonstrate he can still draw huge crowds of supporters after recent polls had him trailing his left-wing rival Luiz Inácio Lula da Silva by nine percentage points.

While elections are not due to be held until October 2022, Mr Bolsonaro's approval ratings have also dropped to an all-time low.

A poll by the Atlas Institute suggested that 61% of Brazilians described his government's performance as bad or very bad, up from 23% when he first took office in January 2019.

While an attempt to impeach the president over his handling of the Covid crisis was blocked by the speaker of the lower house of Congress, Mr Bolsonaro is portraying himself as under attack from Congress and the Supreme Court.

Last week, he told evangelical leaders - who are among his staunchest backers - that "I have three alternatives for my future: being arrested, killed or victory".

And he again took up that theme in his speech on independence day, saying that "only God will oust me".

Eoin Treacy's view -

The accusations being levelled against Bolsonaro are primarily focused on his response to the pandemic, but are likely to gain traction because he has been playing fast and loose with rules and regulations.



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September 09 2021

Commentary by Eoin Treacy

ECB Slows Crisis Stimulus in Shift Lagarde Insists Isn't a Taper

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

“This is not a tapering decision, as ECB President Lagarde stressed,” Elga Bartsch, head of macro research at the BlackRock Investment Institute, said in an emailed comment. “Asset purchases look here to stay as the new policy framework paves the way for looser for longer monetary policy in the euro area.”

Mark Dowding, who oversees $70 billion at BlueBay Asset Management LLP, was less convinced by Lagarde’s protestations. 

“To me it is just semantics,” he said. “It is a choice of words. It looks like a taper and smells like a taper, so markets will view it as the start of the taper process.”

With supply-chain disruptions and resurgent virus infections threatening to undermine the recovery and medium-term price pressures likely to remain well below its goal, officials have insisted in recent weeks that the euro-area economy is in a different state than the U.S. and remains reliant on ECB support.

Yet some governors have started to warn publicly that maintaining an ultra-accommodative stance for too long also carries risks. Austria’s Robert Holzmann and Klaas Knot of the Netherlands both told Bloomberg in separate interviews last week that emergency asset purchases should end in March, hinting at heated discussions about the policy path in the months ahead.

Eoin Treacy's view -

The most likely scenario is a long slow taper; potentially beginning in December. That appears to be the plan being laid out by central bankers everywhere with a similar statement released about Australia’s ongoing taper earlier this week.

They don’t have much choice. We are 18 months on from the pandemic nadir in markets and economies are well on the road to a full recovery. As economies recover, they have to think about tailoring their assistance. However, we are still a long way from the first interest rate hikes.



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September 03 2021

Commentary by Eoin Treacy

Secular Themes Review September 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 May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

If it walks like a duck and quacks like a duck, it must be a duck. Wall Street is behaving like it is in a bubble. The most important thing is the bubble is still inflating.



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September 02 2021

Commentary by Eoin Treacy

Email of the day on food price inflation and political polarisation

I did notice the surge in fresh fish prices for the past 6 months. For example, dover soles (300-400g size) had been in the 20-25 eur/kg (with an average at +/-23 eur) for +/- 15 years with a few peaks at 30 eur and dips at 18 eur; for the past 6 months, I have never seen the price below 30 euros and it has averaged 35-37eur with peaks at 40+ eur. I wonder whether it has to do with Brexit and therefore less fish available on the EU market. In any case all fish prices have substantially increased (depending on the species 40-70%); the cost of milk, pasta, etc. has also increased, not talking about gasoline or real estate.

(Here in Luxembourg, I have been made aware that a new project outside the city -at +/- 10 km to the north- a new residential development to be delivered in 2023 has prices at 20.000 euros/sq m for flats of 65-75 sq m) ... [Ed. c.€1890/sqft]

Wages are not following, and taxes are globally up with budgets still showing too large deficits. This will fuel resentment and populism, maybe revolts when people have nothing left to lose (the situation is dire in France and the split within the have and have nots deepening by the day compounded by and immigration - whether with a French ID or not - separatism being more evident by the day. Wages are not following.

Eoin Treacy's view -

Thank you for this insightful account. The rising cost of marine products may be an unintended consequence of renewable energy, regulations and compliance. This article from the BBC profiling Grimsby may be of interest. Here is a section: 

Shell fisherman Darren Kenyon is not a fan of the wind companies, though.

"It's been a really bad thing for us," he says. "They've taken thousands of miles of sea up, and put wind poles in. They've gridded the sea with electricity cables."

Darren complains that he cannot compete with the wages the wind farm companies pay their crews. 

And

According to the environmental group, Greenpeace, just five wealthy UK families own or control nearly a third of the country's fishing quota.

Danny complains that the whole system conspires to push small players out. Retiring smaller fishermen have often sold their quota - sometimes to continental Europeans. Others rent out their allocation on a monthly basis; they're known in the trade as "slipper skippers" because it's assumed that they sit snug and warm at home while others go fishing.



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August 31 2021

Commentary by Eoin Treacy

How water shortages are brewing wars

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

Unfortunately, there's no one-size-fits-all solution to water scarcity. In many countries simply reducing loss and leaks could make a huge difference – Iraq loses as much as two-thirds of treated water due to damaged infrastructure. The WPS partners also suggest tackling corruption and reducing agricultural over-abstraction as other key policies that could help. Iceland even suggests increasing the price of water to reflect the cost of its provision – in many parts of the world, humans have grown used to getting water being a cheap and plentiful resource rather than something to be treasured.

Much can also be done by freeing up more water for use through techniques such as desalination of seawater. Saudi Arabia currently meets 50% of its water needs through the process. "Grey", or waste water, recycling can also offer a low-cost, easy-to-implement alternative, which can help farming communities impacted by drought. One assessment of global desalination and wastewater treatment predicted that increased capacity of these could reduce the proportion of the global population under severe water scarcity from 40% to 14%.

At the international level, extensive damming by countries upstream are likely to increase the risk of disputes with those that rely on rivers for much of their water supply further downstream. But Susanne Schmeier, associate professor of water law and diplomacy at IHE Delft in the Netherlands, says that co-riparian conflict is easier to spot and less likely to come to a head. "Local conflicts are much more difficult to control and tend to escalate rapidly – a main difference from the transboundary level, where relations between states often limit the escalation of water-related conflicts," she says

Eoin Treacy's view -

Large populations with aspirations of increasing living standards are bumping up against the reality of resource scarcity. This is particularly true for water because many people think of it as free resource that falls from the sky or flows through the city. As cities grow larger and the global population becomes further concentrated at the deltas of major rivers, it is inevitable that water is going to become an increasingly contentious issue. That’s before anyone even begins to think about the ramifications of a changing climate.



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August 27 2021

Commentary by Eoin Treacy

Powell Says Taper Could Start in 2021, With No Rush on Rate Hike

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

Investors took the news of the coming taper in their stride -- avoiding any hint of the so-called 2013 “tantrum” when the Fed surprised markets by unexpectedly announcing it would start to pare back asset purchases. The S&P 500 rose during the much-anticipated address to stand more than 0.6% higher from opening levels. Ten-year Treasury yields nudged slightly lower to around 1.33% and the dollar fell.

“Chair Powell stuck to the script in his Jackson Hole speech; anyone hoping for a steer on the timing of the taper will have been disappointed, but it was never likely,” said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

At the July Federal Open Market Committee meeting, most Fed officials agreed it would probably be appropriate to begin tapering the central bank’s $120-billion-a-month bond-buying program before the end of the year, according to a record of the gathering. Some are pushing for a move as soon as next month.

Monetary policy makers would like to conclude the purchases before they begin raising interest rates, and several in June saw a possible need for rate increases as early as 2022 amid inflation that is running above the central bank’s 2% target. The Fed cut its benchmark rate to nearly zero and relaunched the crisis-era purchase program last year at the onset of the pandemic.

Eoin Treacy's view -

No surprises and the promise of a potentially lengthy interval between the end of quantitative easing and tightening was greeted with enthusiasm by investors. It ensures the Fed will remain a significant force in the Treasury market for a while longer.



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August 26 2021

Commentary by Eoin Treacy

VW and Daimler Going Electric Overwhelms German Auto Suppliers

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

Carmakers are exacerbating issues by producing more components in-house. Tesla, VW and Porsche are making car batteries themselves or with a partner from outside the traditional car-parts industry. VW aims to cut procurement costs by 7% and fixed costs by 5% over the next couple years, potentially pressuring suppliers including Continental, Magna and ZF Friedrichshafen, my colleague Joel Levington wrote for Bloomberg Intelligence. During a visit to Germany earlier this month, Tesla CEO Elon Musk publicly called out Bosch for not supplying chips quickly enough.

The industry’s struggles won’t be over soon. The semiconductor shortage will cut worldwide auto production by as many as 7.1 million vehicles this year, with pandemic-related supply disruptions hobbling output well into 2022, according to IHS Markit. This week, VW's Wolfsburg plant — the world’s
biggest, employing some 60,000 people — restarted from its usual summer break running only one shift.

Chancellor Angela Merkel’s government, which has been kind to the industry in past years, earlier this month green-lighted a 1 billion-euro “future” fund to help German regions reliant on autos survive the shift away from the combustion engine. Still, analysts anticipate greater consolidation of the parts industry. So, what can suppliers do? Roland Berger says they must overhaul long-established processes to become leaner, invest more in software and digitization, become more open to R&D partnerships and look to Asia for potential growth.

Eoin Treacy's view -

I wonder if the CDU/CSU is prepared for the destruction of the auto parts sector to become an election issue because these kinds of events tend to spark populist uprising. There is no getting around the fact that electric vehicles do not have nearly as many parts as internal combustion engine-driven vehicles. As carbon credit taxes surge the incentive to sell rather than buy them ensures a migration towards batteries. That’s going to put a lot of people out of work in Germany’s CDU dominated industrial heartland.



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August 25 2021

Commentary by Eoin Treacy

Shortages From Chips to Paper Are Threatening Germany�s Recovery

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

“It’s metal products, it’s plastic products, paper even. And then it’s certainly the pandemic,” he said. 

Concerns about the outlook come as Germany prepares for next month’s elections that will see the winner succeed outgoing Chancellor Angela Merkelafter 16 years in power. 

The Bundesbank, Germany’s central bank, said this week economic growth this year may be somewhat lower than the 3.7% it had forecast in June. But Fuest said a lot depends on how long supply shortages will last.

“What we see in this month is that in manufacturing, things are actually getting worse rather than better,” he said. “If that continues it will be a significant downgrade of the growth outlook.”  

Eoin Treacy's view -

China locked down half the country to deal with its outbreak of the Delta variant. That stopped people moving from the hinterland to the coast to find work. That has resulted in longer lead times for manufacturing. The temporary and partial shutdown of port facilities in Shenzhen and Ningbo created additional supply constraints with long queues of ships waiting to be loaded. These events have been significant contributions to shortages in Europe.



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August 18 2021

Commentary by Eoin Treacy

Luxury Stocks Sink as China's Comments on Wealth Cause Jitters

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

Luxury stocks sink in Europe, dragging the Stoxx 600 Index lower, after Chinese state media said President Xi Jinping offered an outline for “common prosperity” that includes income regulation and redistribution, putting China’s wealthiest citizens on notice. 

LVMH -4.3%, Burberry -4%, Kering -3.5%, Hermes -3%, Richemont -2.2%

“This is a rather nervous market reaction to leadership statements in China about the ‘third wealth redistribution,’” Bernstein analyst Luca Solca says in an email

“I am not sure there is necessarily a lot to fear from that,” he adds. “Time will tell”

NOTE: Since Xi took office in 2012, the ruling party has made it a priority to end poverty and build a moderately prosperous society, goals that the party sees as central to promoting well-being and strengthening its governance

Income inequality in the country is wide -- the richest 20% earn more than 10 times poorest 20% -- and hasn’t budged since 2015

Eoin Treacy's view -

Bernard Arnault is now the wealthiest individual in the world. That’s a significant achievement considering the products his companies sell haven’t exactly changed the world. Instead, the world has changed so there are enough nouveau riche to purchase the products amid the illusion of supply inelasticity.



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August 17 2021

Commentary by Eoin Treacy

Inflation Tempers Americans' Enthusiasm About Red-Hot Economy

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

By global standards, the U.S. has bounced back fast. But as data on the recovery continue to pour in, there’s plenty to support the suspicion that the glass is still half-empty.

Consumer sentiment fell in early August to the lowest level in nearly a decade by one measure and U.S. retail sales fell in July by more than forecast.

The following charts help explain why Americans still aren’t clear how impressed they should be.

Eoin Treacy's view -

I was at a wholesale furniture warehouse this morning that does not deal with retail customers. The two things that employees related to me were that business was booming in the 1st and 2nd quarters, but over the last two months sales have been way down. The second was there was a big whiteboard on the wall with their monthly minimum sales target of $950,000. As of this morning they were at $431,000.



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August 16 2021

Commentary by Eoin Treacy

Strong Earnings vs Mid Cycle De-Rating

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

Eoin Treacy's view -

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

The big question for investors is how to attribute responsibility for the strong earnings growth in the 2nd quarter. There is a good argument that much of the surge in earnings was due to pent up demand and outsized liquidity provision. As the economy opened up and confidence built around the protection offered by vaccinations there was a surge of economic activity. In order for the pace of the recovery to be self-sustaining, consumer confidence has to continue to recover and liquidity needs to remain abundant.



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August 16 2021

Commentary by Eoin Treacy

Cost to Bury Carbon Near Tipping Point as Emissions Price Soars

This article by Rachel Morison and Samuel Etienne for Bloomberg may be of interest to subscribers. Here is a section:

“We need to see higher carbon prices to make those projects profitable,” said Anders Opedal, chief executive officer of Equinor ASA, which is developing CCS in the U.K., Norway, Germany and the Netherlands. “It actually needs to be more expensive to pollute than actually capture and store.”

Britain has the most ambitious climate goals of the G-20 nations, targeting a 78% reduction in emissions by 2035. The nation has committed to helping fund two industrial hubs, where heavy industry and power generation can use carbon capture and storage by 2025, with another two by the end of the decade.

The aim is to scrub as much as 10 million tons of carbon dioxide from the atmosphere every year. Details on how the funding will be allocated are due before December. At today’s power prices, the U.K.’s largest planned project at Drax Group Plc’s biomass station in north England already would be profitable using carbon-capture technology, according to Credit Suisse.

“We need to be sure we could get those prices over a long time period, but we’re getting pretty close,” CEO Will Gardiner said in an interview on Bloomberg Radio. Drax’s project will start in 2027, and by 2030 it will capture and store 8 million tons of carbon dioxide a year.

In 2019, the world emitted about 33 gigatons of carbon. Operational projects are capturing just a fraction of that, about 40 million tons, according to Wood Mackenzie. There are 19 large-scale CCS facilities in operation today and another 32 in development, according to Credit Suisse. If these all come online, they could store 100 million tons – a slightly bigger fraction.

There’s also a chance the technology might not be as effective as promised. The world’s biggest project, at Chevron Corp.’s $54 billion liquefied natural gas plant in Australia, has fallen short of its target to capture 80% of emissions from the plant, burying just 30% over five years.

“The tech isn’t there yet for large-scale adoption, but our industry has to start changing how we operate,” said Andrew Gardner, chairman of Ineos Grangemouth Ltd., which is working with Royal Dutch Shell Plc on the Acorn project in Scotland that’s scheduled to start in 2027.

The system developed by Oslo-based Aker Carbon Capture ASA costs between 60 euros and 120 euros per ton, CEO Valborg Lundegaard said. That means CCS could be nearing a crossover point.

Eoin Treacy's view -

The fundamentals of carbon prices focus on the outlook for the economy and how much emissions will be created to achieve the anticipated growth rate. The reality, however, is that this is a politically motivated rate. The European Commission has said on regular occasions that it wants to see prices trade up to €100 and nothing has happened to question that view.



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August 13 2021

Commentary by Eoin Treacy

China coronavirus infection closes shipping terminal at massive Ningbo-Zhoushan Port as container rates soar

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

Nair was referring to massive delays at Shenzhen's Yantian port in May and June. Weeks of containment efforts following outbreaks of Covid-19 among dockworkers in China's Pearl River Delta caused global shipping delays, supply-chain disruptions and surging freight costs. The problems have not been fully resolved.

Lars Jensen, CEO of liner consultancy Vespucci Maritime, also said the Meishan terminal closure could have a similar impact on the Ningbo-Zhoushan Port that Yantian experienced when it was closed for more than three weeks.

"Significant problems, both for export cargo as well as for the movement of empty containers into the region, would then ensue," he wrote in a LinkedIn post on Wednesday.

With its zero-tolerance approach to the coronavirus, China is currently carrying out mass testing to contain the spread of the highly infectious Delta variant, which Ningbo authorities said the Meishan worker tested positive for.

However, the deputy director of the Ningbo Centre for Disease Control and Prevention, Yi Bo, said the worker may have contracted the virus from his interactions with foreign crewmembers of cargo freighters that he had boarded at the port. Video surveillance showed he had close contact with crews.

Meishan is one of the busiest terminals at the Ningbo-Zhoushan Port, servicing main trade destinations in North America and Europe. In 2020, it handled 5,440,400 TEUs of container throughput, or around 20 per cent of the total container throughput at the Ningbo-Zhoushan Port, according to official statistics.

Eoin Treacy's view -

Shipping rates from China to the USA and Europe are up 400% in the last year. A good part of the reason for that jump is because ports are having difficulty managing the volume of traffic. That’s both a function of outsized demand during the pandemic and the infection rates among dock workers.



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August 13 2021

Commentary by Eoin Treacy

Rand Gains as South Africa Finance Head Pledges Fiscal Restraint

South Africa’s new finance minister, Enoch Godongwana, has a difficult job ahead: convincing investors that he can help Africa’s most industrialized economy reduce debt while boosting economic growth.

He took the first step in an investor call Friday, when said there would be no changes to the fiscal framework for Africa’s most industrialized economy. The rand gained and bond yields fell after he spoke.

“I don’t see much changing in that fiscal framework,” Godongwana said on the call. “There is commitment from myself as the minister of finance and I would imagine from government.”

The rand reversed losses against the dollar, and strengthened 0.2% to 14.7576 per U.S. dollar by 4:13 p.m. in Johannesburg. Yields on the most-liquid 2026 government fell three basis points to 7.39%.

Eoin Treacy's view -

Europe adopted fiscal austerity after the global financial crisis and its sovereign wealth crisis. The result was the surge in populism and widespread disaffection with the European project. On this occasion they have resolved not to make that mistake again. In fact, it could be argued the pandemic has been the perfect excuse to ditch the failed austerity program.



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August 12 2021

Commentary by Eoin Treacy

Email of the day on the delta variant

40 minutes but really good (essential) analysis of where we are now with the virus. Martenson has been an excellent guide throughout. One for the collective perhaps. 

Eoin Treacy's view -

Thank you for this informative video. The primary points are that the delta variant is much more transmissible that previous versions of the novel coronavirus but it is less deadly. That stands up to logic. If the transmissibility is indeed anything approaching that of chickpox, everyone will be exposed to the delta variant in a short period of time. The UK’s high case count but low death count confirm it is less deadly. India’s experience, as the country where delta evolved, suggests a rapid flare up of cases and equally rapid decline as something approaching herd immunity is reached.



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August 10 2021

Commentary by Eoin Treacy

Predicting Equity Returns with Inflation

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

In this article, we document that two derived US inflation variables—inflation cycles and inflation surprises—have been robust predictors of US equity returns. We demonstrate that this predictability translates into new sources of alpha that investors can seek to harvest. In particular, we highlight the signals’ ability to perform during the worst times in the stock market without missing upside opportunities.

The tail-hedging properties derived from inflation signals are particularly desirable. Hedging positive inflation shocks can be costly when inflation is low.9 For example, strategic allocations to alternative assets, such as commodities, or absolute return strategies as a way to protect against inflation have not all fared well in recent years, with commodity indices down more than 30% versus their 2011 levels. As a result, many asset owners may not be able to stay the course if inflation fails to materialize in the medium term. We find that inflation signals can provide a new tool for investors who wish to hedge their portfolios against inflationary and deflationary risks.

“The tail-hedging properties derived from inflation signals are particularly desirable.”

Eoin Treacy's view -

For forty years inflation is the dog that refused to bite. There have been several occasions when it looked inevitable profligate spending, overly generous social programs, supply disruptions, commodity and property booms and busts would break the trend of disinflation but they never did.



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August 10 2021

Commentary by Eoin Treacy

COVID: 90% of patients treated with new Israeli drug discharged in 5 days

Thanks to a subscriber for this article from the Jerusalem Post may be of interest to subscribers. Here is a section:

Arber and his team, including Dr. Shiran Shapira, developed the drug based on a molecule that the professor has been studying for 25 years called CD24, which is naturally present in the body.

and

Arber noted that another breakthrough element of this treatment is its delivery.

“We are employing exosomes, very small vesicles derived from the membrane of the cells which are responsible for the exchange of information between them,” he said.

“By managing to deliver them exactly where they are needed, we avoid many side effects,” he added.

The team is now ready to launch the last phase of the study.

“As promising as the findings of the first phases of a treatment can be, no one can be sure of anything until results are compared to the ones of patients who receive a placebo,” he said.

Some 155 coronavirus patients will take part in the study. Two-thirds of them will be administered the drug, and one-third a placebo.

The study will be conducted in Israel and it might be also carried out in other places if the number of patients in the country will not suffice.

“We hope to complete it by the end of the year,” Arber said.

If the results are confirmed, he vowed that the treatment can be made available relatively quickly and at a low cost.

“In addition, a success could pave the wave to treat many other diseases,” he concluded.

Eoin Treacy's view -

Many doctors have stated that using wartime phraseology to talk about the efforts to treat the coronavirus are unhelpful. However, there is one important crossover worth considering. Wars tend to result in significant technological acceleration.



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August 06 2021

Commentary by Eoin Treacy

Secular Themes Review August 6th 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 May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

We are 17 months on from the panic low in 2020. At this stage it is quite normal to marvel at the speed of the advance and worry that the pace can’t possibly be sustained. The abiding sentiment is something like “surely, the world is not nearly as good as it was before the pandemic and therefore how on earth can prices be so high?”.

The world is not as good as it was before, millions of people have been deeply inconvenienced and many are traumatized by the events of the last 17 months. The counter argument is the quantity of money in circulation has only been matched during wartime and that has helped to inflate the price of everything. That’s the key to the argument. Having spent so much to achieve this recovery does anyone really believe central banks are going to endanger it? So where do we go from here?



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August 05 2021

Commentary by Eoin Treacy

Investors Are Ignoring a Dangerous Crackdown on Press Freedom

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

Adding press freedom to the list may benefit those seeking investment too. When a newspaper closes, the local government’s borrowing costs rise because diminished scrutiny makes investors less comfortable, a 2019 report published in the Journal of Financial Economics found. 

Press freedom “is a very foundational thing that needs to be in place before you can have meaningful ESG metrics,” said Perth Tolle, founder of Life + Liberty Indexes, which invests in countries based on third-party rankings of various freedoms. The Freedom 100 Emerging Markets ETF, which tracks Tolle’s index, has no holdings in Turkey or China and also reduced its position in Poland in recent years as concerns have mounted over the country’s erosion of the rule of law. The benchmark MSCI Emerging Markets Index — which Tolle’s index has outperformed this year — has exposure to all three nations. ​

Most investors simply don’t factor in human rights concerns when it comes to allocating capital, Tolle added.

“The metrics are out there, the problem with Wall Street is that they don’t make any money out of those, and they don’t like it,” said Tolle, who was born in China and now lives in Texas. “In places that have no press freedom, do you think they’ll have freedom for stock or bond analysts?

Eoin Treacy's view -

Governance is Everything has been a central theme of this service for decades. It really is as simple as knowing that when you have a grievance, you will have recourse to a system of justice. In order for that to be possible you need property rights and respect for minority shareholder interests. You need an independent judiciary, so your case can get a free hearing. Then you need a free press to help publicise corruption and political overreach so they system can be sustained.



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August 05 2021

Commentary by Eoin Treacy

Philippine Peso Drops Most Since 2013 Ahead of Manila Lockdown

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

The Philippine peso posted its biggest intra-day decline since 2013 as investors turned cautious ahead
of a two-week strict lockdown in the Manila capital region starting Friday.

The peso slid as much as 1.2% to 50.37 against the dollar to become Asia’s worst performing currency on Thursday. Local stocks also declined after rising for three straight days. The peso’s drop comes after Bangko Sentral ng Pilipinas said on Wednesday that a reserve requirement ratio cut could be on the
table. The central bank is set announce its policy decision on Aug. 12.

The peso may have weakened on “some positioning ahead of the imposition of the tighter restrictions starting tomorrow,” said Nicholas Mapa, an economist in Manila at ING Groep NV. There’s also “some chatter now also about the RRR reduction from BSP as the central bank appears to have run out of policy rate cuts for now.”

Eoin Treacy's view -

It’s well understood that there is no one fundamental metric that dictates how currencies trade. From one year to the next traders will focus on interest rate differentials or forward rates, money supply growth, or economic development. Over the last 12 months, the primary focus has been on how well any individual country is faring against the pandemic. At present ASEAN is taking the epicentre of rising numbers of cases so that is weighing on regional currencies.



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July 30 2021

Commentary by Eoin Treacy

Why COVID cases are now falling in the UK - and what could happen next

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

This lack of long-term protection against infection means that herd immunity is probably impossible and that the virus will become endemic and continue to circulate in human populations. If this happens and the disease then stabilises, such that case numbers are constant across the population, neither increasing nor decreasing, it will have reached what’s called an “endemic equilibrium”.

So is this what we’re now witnessing? Possibly. One of the basic models of how infectious disease cases change over time is called an SIR model, which looks at how many people are susceptible to a disease, infectious with it or have recovered from it (and so are immune) at any one time.

With this model, cases increase rapidly at the start of an epidemic as lots of people are susceptible, become infected, and go on to infect other susceptible people. But as infections mount, over time fewer people are susceptible and more have recovered. The rate of growth therefore decelerates, the epidemic reaches its peak, and then case numbers decline to an endemic equilibrium point, where they remain roughly stable.

Eoin Treacy's view -

A leaked CDC document has been circulating today with a claim that the Delta variant is as contagious as chickenpox. That news is enough to make anyone worried. The fact that this variant is also more likely to result in acute sickness is doubly worrying. With 110,000 confirmed breakthrough cases in the USA there is a palpable sense of worry that news is about to get worse. Meanwhile, the UK’s number of cases has peaked and is falling quickly. That should act as at least a partial salve to those worries.



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July 29 2021

Commentary by Eoin Treacy

SpaceX to be Tokenized

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

They further explain if the market reaches the higher end, a new market could be opened with a new range, so making this effectively price discovery for non publicly traded companies, including McLaren, Reddit, SpaceX or OpenSea, Zapper, dYdX.

This hasn’t quite launched yet, with it to be seen what it will look like exactly once it is in hard code, but the idea is that once the company goes public, then the prePO price is settled at the company’s opening price on the first day of trading.

So in theory and perhaps even in practice this can allow for betting on startups even at the very early stages as well as mature companies that will probably go public at some point with the investor benefiting from the price appreciation that does finally settle once the company goes public.

“When the asset goes public, you can exit your position at a final settlement price, based on the price at the end of the first day of public trading for stocks, or on a time-weighted average price for tokens,” they say.

Eoin Treacy's view -

Every major bull market comes up with a way for investors to believe they have an edge over everyone else. In the 1990s that was characterised by buying IPOs. During the housing bubble it was liar loans and zero down mortgages. Today, the tokenization of everything from art to companies is allowing private investors an opportunity to invest in private markets like never before.



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July 28 2021

Commentary by Eoin Treacy

Pfizer Boosts Forecast for Vaccine Sales to $33.5 Billion

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

 

A resurgence of virus infections thanks to the delta variant is likely to mean sustained demand for vaccines around the world. Further, it is widely expected that many people could require booster shoots to bolster the immunity gained in the initial round of immunizations.

Pfizer said in a presentation accompanying its earnings release that emerging real-world data “suggests immunity against infection and symptomatic disease may wane,” underscoring the need for boosters.

The company said regulators will determine “whether, and which, populations to recommend booster,” and that they will likely first focus on those with compromised immune systems and older adults.

Eoin Treacy's view -

The ideal business model for any pharmaceutical company is to develop a treatment for an unmet but dire chronic condition. Diabetes is the perfect example. There is no cure and treatments are both necessary and tend to increase in magnitude as the disease progresses. Each patient represents a growing cashflow for as long as they live following a diagnosis. Viagra was also a blockbuster because it catered to an unmet need but did not cure it. 



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July 26 2021

Commentary by Eoin Treacy

Big US implications from Israel

This video from Dr. John Campbell may be of interest to subscribers.

July 26 2021

Commentary by Eoin Treacy

New Oriental Frogs

Thanks to Iain Little for this edition of his Global Thematic Investors’ Diary. Here is a section:

One of our HK analysts wrote this week: “the USA government has issued a joint advisory on the risks of conducting business, studying, and investing in HK, in a direct response to the June 2020 National Security Law (NSL)…which effectively crushed the autonomous region’s special freedoms. Certain multinationals in Hong Kong now face two-way political risk as the U.S.-China decoupling continues…Businesses will be forced to pick a side: adhere to U.S. sanctions and be penalized by China or potentially violate U.S. sanctions to maintain access to Chinese markets. Airlines will need to provide passenger information to authorities before flights depart…to prevent…political dissidents from leaving HK. The NSL allows authorities to conduct wiretaps or electronic surveillance, search and seize electronic devices, requires internet service providers to produce corporate or consumer data. The NSL has dissolved freedom of press in HK. The city’s public radio station is also now under tight censorship...all media based in HK now reflects the political agenda of Beijing. The U.S. has placed sanctions on several individuals and entities within HK, barring U.S. businesses and nationals from transacting with them.”

It is clear that under President-For-Life Xi, the primary condition for portfolio investment in China –the safety of one’s capital in a free system under a Rule of Law- does not, indeed cannot, exist.

This brings us back to the frog. The human tendency to cling onto hope and the status quo can be admirable, but it can also be a pathway to the poorhouse in investment. The destructive forces of late 1930s Germany were foreshadowed a decade before; “Mein Kampf” was published in 1925.

Why not invest in sectors that are actively encouraged by the Chinese state, such as semi-conductors, or which lie outside the ambit of state interference? For institutional investors tied to a global equity index, this is indeed an option, though the tendrils of the Chinese state reach everywhere. For private investors who have no compulsion to invest in China, and who see the world of investment as a “global beauty contest” it may be considered a risk too far. Other more beautiful shores, those that feel the radiation effect of a booming China, may offer more attractive prospects. ASEAN and the free-thinking members of the Trans Pacific Partnership spring to mind.

Eoin Treacy's view -

Sometimes investing is about the return of your money rather than return on it. That’s the challenge for investors in Chinese equities at present. It’s a big question because Chinese stocks represent significant weightings in the broad emerging markets universe. That’s true for both equities and bonds.



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July 23 2021

Commentary by Eoin Treacy

Nike, Adidas Output Snarled as Covid Wave Shuts Asian Factories

This article by Michelle Jamrisko for Bloomberg may be of interest. Here is a section:

“It’s going to be worse before it gets better,” with shutdowns and staff disruptions increasing in Asia, said Deborah Elms, executive director of the Singapore-based Asian Trade Centre. “Places like Vietnam that largely avoided locking down cannot maintain an open posture. With vaccinations painfully slow, I assume more shutdowns in factories, with the ripple effects felt elsewhere.”

Trade in goods has been a rare buffer for the Covid-ravaged global economy -- especially for export-heavy Asian countries -- but the latest reports show cracks in this growth pillar. The delta variant-driven surge has hit Southeast Asia especially hard, underscoring the delicate choices for policy makers who are balancing vaccination drives and mobility restrictions while trying to keep their economies afloat.

The manufacturing pain is especially acute in Vietnam, where officials have taken drastic steps to ensure factories can continue operating. In some instances, electronics and tech companies have had workers sleep overnight on-site.

The garment industry, with lower profits and more workers, hasn’t been able to replicate that effort. Feng Tay Enterprise Co., Pou Chen Corp. and Sports Gear Co. are among manufacturers that have suspended some operations in Vietnam.

Eoin Treacy's view -

My 13-year-old informed Mrs. Treacy yesterday last night that they had to go to the Nike store because the shoes she wants for school were sold out online. Her rationale was most people begin shopping for school in August so now was the time to make the purchase. They dutifully made the journey and secured the shoes while witnessing numerous kids making Snapchat videos with their purchases.



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July 23 2021

Commentary by Eoin Treacy

Zomato Soars 80% in Debut of India's New Tech Generation

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

For many others, the potential outweighs the downsides. With almost half its 1.3 billion people accessing the internet via smartphones, a bet on Zomato represents optimism that India’s tech upstarts could go the way of the U.S. or China, particularly as India’s internet infrastructure remains nascent and consumers are just getting used to buying online.

“This is how it is supposed to work. Nine out of 10 will fail,” Goyal, who is barred from commenting in the run-up to the listing, said in an earlier interview. “But the one that thrives will be a spectacular success.”

Fund-Raising Blitz
In previous conversations, Goyal recounted how he first got the idea for an online service when, as a math and computer science student at the Indian Institute of Technology, he was particularly frustrated with a pizza order. His resolve strengthened after he graduated and joined Bain, where he saw colleagues in the company cafeteria skimming the limited menu and talking longingly about food at nearby restaurants.

Goyal and Chaddah started uploading menus of neighborhood cafes and restaurants onto the company intranet, with phone numbers. That was a huge hit with coworkers, driving a weekend venture they christened foodiebay.com. After his wife got a teaching job at Delhi University, Goyal quit to pursue
entrepreneurship full-time, shrugging off the onset of the global financial crisis.

In the India of a decade ago, entrepreneurship was frowned upon and Goyal didn’t tell his parents -- both teachers -- until much later. In the first year, the startup began by listing thousands of restaurants in India’s six biggest cities. Then came an email from entrepreneur-turned-investor Sanjeev Bikhchandani, who invested $1 million through his Info Edge India Ltd.

Eoin Treacy's view -

4G is having the same effect on the Indian economy as it has had everywhere else. The spectrum of online services available has increased significantly which is benefitting the banking, entertainment and nascent social sectors. Food delivery services have sprung up everywhere mobile broadband access becomes available. India is no different.



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July 20 2021

Commentary by Eoin Treacy

Stock Traders Buy the Dip as Cyclicals Drive Rally

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

“We have a ways to go on the cyclical recovery here,” Levine, head of equities at the firm, said on Bloomberg TV and Radio. The U.S. has exhibited “an exceptionalism in the amount of fiscal policy, the amount of monetary stimulus and also in the way we vaccinated the population. And because of that I actually am very bullish,” she added.

For Bill Callahan, an investment strategist at Schroders, “equities just make sense right now,” and dip buyers will be rewarded as the market continues to grind higher.

On the economic front, data showed U.S. housing starts increased in June by more than forecast, suggesting residential construction is stabilizing despite lingering supply-chain constraints and labor shortages.

Eoin Treacy's view -

The compression in yields makes the argument for investing equities more compelling because it reduces speculation that monetary accommodation is about to be removed.



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July 20 2021

Commentary by Eoin Treacy

Five companies make quarter of world's single use plastics

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

Plastic waste is “a massive problem . . . On this trajectory, we will have more plastics in our ocean by weight than fish by 2050”, said Sander Defruyt, who leads the New Plastics Economy initiative at the Ellen MacArthur Foundation. 

Its root cause was our “throwaway society” — countries must move from a system “based on the extraction of resources to one that is based on the circulation of resources”.

Plastics are made from fossil fuel-based chemicals, and break up into smaller and smaller pieces when they are disposed of, rather than decompose in the way that food does. Although disposable plastic items can often be recycled, many are not and millions of tonnes of plastic waste find their way into the ocean each year. 

As images of plastic-strewn beaches have become familiar sights, governments have started cracking down on the material with plastic bans or taxes.

Last year, England banned single use plastic straws, stirrers and cotton buds, and raised the charge on plastic bags. China outlawed single use bags and cutlery in major cities, and is planning to extend plastic bans in the years to 2025.

In a drive to entice eco conscious shoppers, consumer brands, including coffee chain Starbucks and fast food retailer McDonald’s, have started replacing disposable plastic items with paper alternatives. In April, grocer Morrisons announced it would become the first UK supermarket to completely remove plastic bags from stores.

In its 2020 annual report, Dow said plastics were facing “increased public scrutiny”.

“Local, state, federal and foreign governments have been increasingly proposing — and in some cases approving — bans on certain plastic-based products including single-use plastics,” which could affect demand, it said.

Nevertheless, producers expect global demand for plastics to increase, driven by population growth and an expanding middle class. The pandemic also prompted an increase in the use of disposable items, which have been seen as a way to minimise the virus’ transmission.

Eoin Treacy's view -

The drive towards managing the growing volume of waste products, and the related demand for landfill sites which no wants near their home, means the single use plastics sector is likely to attract significant attention in the expanding global carbon emissions market. That’s particularly true following the massive growth in demand for single use items during the pandemic. I think many people found it ironic that as soon as plastic straws were banned, that the number of used mask litter increased exponentially.



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July 19 2021

Commentary by Eoin Treacy

U.K. Set for Big Reopening as Cases Soar Most in the World

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

But the lifting of curbs came against a fraught backdrop of surging infections and political strife for Johnson. The U.K. added more than 54,000 new cases Saturday, and over 47,600 on Sunday, more than Indonesia, the current pandemic epicenter, according to data compiled by Johns Hopkins University.

The surge in cases weighed on the pound, which fell as much as 0.4% to $1.3707, the lowest since mid-April. Meanwhile, demand for safety boosted U.K. government bonds, with 10-year gilt yields falling two and a half basis points to 0.60%.

The prime minister, meanwhile, is fighting to regain his credibility after a furious backlash forced him and finance minister Rishi Sunak to abandon an initial attempt to avoid their own government’s isolation rules. The pair were told they needed to stay home after meeting Health Secretary Sajid Javid, who tested positive for Covid-19.

The furore — overshadowing what U.K. media have called “Freedom Day” — is a deep irony for Johnson. It graphically demonstrates the perils the premier faces as he tries to break the U.K.’s cycle of lockdowns and revive economic activity while ensuring state-run hospitals are not overwhelmed.

Eoin Treacy's view -

The big question for the UK was whether the trend of new cases would be followed by a trend of new deaths. Without the aid of a high vaccination rate, the death rate could have been expected to surge higher by now. The fact that it has not points to the efficacy of the vaccines administered.



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July 19 2021

Commentary by Eoin Treacy

Email of the day on South Africa reportedly from Clem Sauter:

“Dear friends,

Many of you outside of South Africa are wondering what is really going on. So here is a very simple outline. The thing is obviously far more complex and nuanced than can be set out in a brief note but this will give you some picture of what is really happening.

Following the 1994 democratic elections in South Africa, South Africa did really well economically until about 2008. That was also the year that Jacob Zuma was elected president of the ANC. At that point in time, some of us had a sense of disquiet already. But little did any of us understand then the extent of the corruption and weakening of government institutions that would follow. We have no clear idea of the extent of what was stolen during the Jacob Zuma years, other than that it is a stupendous sum of money which this country certainly cannot afford. Eventually however the internal tide within the ANC started to slowly turn against Jacob Zuma. On 18 December 2017 Cyril Ramaphosa was elected as the president of the ANC (and also subsequently became the president of South Africa). But it was a very narrow margin of victory.

The thing about Cyril Ramaphosa is that he is fundamentally a principled man. And certainly, determined to clean up the history of corruption we have seen since 2008. Various steps have been taken by him and the ANC under his guidance to give effect to this. One of the things that was done was to establish a commission chaired by Raymond Zondo, who is the Deputy Chief Justice of South Africa. The purpose of this commission was to investigate the corruption issues and to expose them to the light of day.

Jacob Zuma was required to appear in front of the commission. He effectively refused to do so. He was ordered by the Constitutional Court to do so. He defied the order of the Constitutional Court. The Constitutional Court in turn ordered his imprisonment for a period of 15 months for contempt of court. This, whatever you call it, is fundamentally the rule of law in action.

Initially there was resistance to imprisonment by Jacob Zuma and his supporters. A week ago, however Jacob Zuma submitted himself to imprisonment. And then all hell broke loose.

What you need to understand is that Jacob Zuma has his powerbase in KwaZulu Natal, where the riots have been at their worst. This is also, as the name will tell you, the home territory of the Zulu nation. And Jacob Zuma is a prominent figure in the Zulu nation. Within the Jacob Zuma camp, individuals set about instigating the so-called protests, riots and looting that you have seen in the media. To a significant extent they leveraged the problems of poverty and inequality in South Africa to achieve their ends. Very often in this country we have areas where many very poor people are resident adjacent to commercial complexes. This was an ideal combination to exploit. In addition to that there are the existing fissures along race lines that exist in our society which were also available to leverage. Audio files doing the rounds encouraged people to attack and destroy what are perceived to be white and white owned businesses. In the end though, many black businesspeople also suffered considerable losses.

The gameplan was to create a situation which would force the hand of the current government. Ideally, it would result in an overreaction by the security forces, with the result that many of the poor and vulnerable would be killed (which is what happened at Marikana a few years back). If that occurred, it would likely force the resignation or removal of Cyril Ramaphosa as president. Meaning the Jacob Zuma camp would have achieved their objective. This is one reason why the security forces have been so careful not to use excessive force in dealing with the riots and the looters.

While there is still a lot of instability in KwaZulu Natal and certain pockets in Gauteng, what is now starting to emerge quite clearly is that the gambit by the Jacob Zuma camp has failed. South African society of all walks has turned its face against this insurrection. In effect, an attempted coup has failed.

South Africans are a strange nation in many ways. They argue and fight amongst themselves but when pushed to the edge, they always pull together for the common good. This has happened again and again over the decades.

This has been perhaps a necessary test of our democracy and of the rule of law. Make no mistake but that South Africa has many very real challenges. But South Africa will pass through this and will put the locust years behind it.”

Eoin Treacy's view -

South Africa is a country of contrasts but it will survive as long people are willing to pull together during times of crisis. The significant threat to the rule of law that arose last week was a major challenge. The restraint shown by the armed forces, at least so far, is to be welcomed and highlights the fact that there are government institutions capable of acting responsibly and effectively. South Africa’s greatest institutional strength is the independence of the judiciary and a free press. Threats to both these pillars of governance never cease to arise but as long as they survive there is the potential for bounce backs following crises.



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July 14 2021

Commentary by Eoin Treacy

How China's New Carbon Market Will Work

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

Before the launch of the national ETS, China had already established regional ETSs in eight provinces and cities, including Beijing, Shanghai and Shenzhen. Seven of the regional ETSs started trading in 2013, while the one in the eastern province of Fujian kicked off three years later. These regions allow companies to buy carbon credits equivalent to as much as 5% to 10% of their original quotas or actual emissions. The average price of carbon credits traded on the regional ETSs stands at 50 yuan ($7.73) per ton, analysts at Guotai Junan Securities Co. Ltd. estimate, far lower than the 250 yuan equivalent per ton in the EU ETS in 2020.

And

Initially, China’s national ETS will only cover the electricity generation sector. A batch of 2,225 electricity companies (link in Chinese) will participate in the trading.

In addition to electricity, the trading system will eventually cover seven other industries (link in Chinese), including petrochemical, chemical, construction materials, steel, nonferrous metal, papermaking and aviation. Companies that emit greenhouse gases equivalent to more than 26,000 tons of carbon dioxide a year will be included in the system.

It is expected that financial institutions will indirectly engage in the carbon market, as central bank Governor Yi Gang in April said that “the carbon market should be a financial market in nature and allow carbon financial derivatives trading.”

Eoin Treacy's view -

China appears to be serious about its intentions to migrate away from its reliance on coal (65%) for electricity generation. As a country’s economy progresses the relative value received from the health and wellbeing of citizens increases relative to the benefit gained from physical output. China crossed that barrier a decade ago so it is logical to expect greater focus on air and water resources.



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July 14 2021

Commentary by Eoin Treacy

World Hunger Hit 15-Year High as Virus Stifled Food Access

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

 

“This is a wake-up call to the entire world,” David Beasley, executive director of the World Food Programme, said on a webcast on Monday. “We’re heading in the wrong direction. To think that we’re going to end hunger by 2030, that’s not even possible given the direction, trajectory we’re on now.”

Between 720 million and 811 million people were undernourished last year, according to the UN, which used a mid-range of 768 million due to uncertainty of the pandemic’s impact. Most of those were in Asia. Roughly a third of all people lacked access to adequate food, a figure that rose by 320 million from a year earlier, about as much as in the previous five years combined.

The report -- the first global assessment of food insecurity in the wake of the Covid-19 crisis -- was jointly produced by agencies including the Food and Agriculture Organization, the WFP, Unicef and World Health Organization.

“Famine should be consigned to history, yet in multiple countries they loom again,” Unicef Executive Director Henrietta Fore said. “Millions of children are still struggling to access the nutritious and safe diets they need to grow, to learn, to develop and reach their full potential.”

Eoin Treacy's view -

The global community made a conscious decision to increase food prices in the 1990s. The primary argument was farm subsidies were creating an unfair system that favoured farmers in Europe and North America. Subsidies contributed to poverty among poor countries as excess supply was dumped on those markets. 



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July 13 2021

Commentary by Eoin Treacy

Rioters Undeterred by Army Wreak Havoc in South Africa

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

“Zuma’s imprisonment was the spark that ignited the protests, but underlying issues such as rampant unemployment, widespread inequality and discontent with Covid-19 related restrictions are the powder keg,” Montana said.

Eoin Treacy's view -

The reality is South Africa is suffering from the declining standards of governance the economy has endured for the last couple of decades. South Africa’s strength is in the independent judiciary. It is imperative that contempt of court charges be addressed in an adroit manner regardless of the target. The challenge is faith in democratic institutions has fallen to a low ebb and many of Zuma’s supporters believe the corruption charges levied against him are politically motivated. It’s hard to avoid that conclusion when corruption is rife and the new administration has failed to do anything to improve the situation.



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July 07 2021

Commentary by Eoin Treacy

Australia Central Bank Takes First Steps to Paring Stimulus

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

“This is a more hawkish statement than we had expected,” said Bill Evans, chief economist at Westpac Banking Corp.

The Australian dollar extended its intraday gain, rising to 75.84 U.S. cents in response to the statement and subsequent comments from Lowe. The April 2024 bond yield crept slightly above the RBA’s target, to 0.13%, while the yield on the November 2024 note surged 8 basis points to 0.45%. Ten-year yields rose 4 basis points to 1.47%.

Lowe is determined to stay near the tail of global peers unwinding stimulus -- particularly the Federal Reserve -- even as Australia has recovered earlier and faster than many economies. That stance is likely aimed at avoiding the currency damage of previous early exits while also reflecting Australia’s vulnerability to further virus outbreaks due to a low vaccination rate.

The governor, in a post-meeting press conference, said that while Australia’s economy had surprised on the upside, this hadn’t passed through to wages and inflation. He said this explained why the RBA wasn’t laying the ground for rate increases like Canada.

“In Canada, the underlying inflation rate is quite close to the Bank of Canada’s target,” Lowe said. “Here in Australia, we’ve been below the target for too many years, and the prospect of reaching the target in the short-term is not particularly high.”

Eoin Treacy's view -

Tapering pandemic assistance is high on the list of priorities for countries less affected by the pandemic. That’s particularly true as inflationary pressures creep upwards with so much money sloshing around the system. At the same time no one wants a strong currency so there is a lot of reticence to be too aggressive in normalising policy.  



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July 07 2021

Commentary by Eoin Treacy

Email of the day on construction work, supply bottlenecks and Japan

Heard the construction work yesterday, hope you and the family will soon be peacefully settled in!!

A minor update on Japan.

Last year my Japanese portfolio performed well when the Nikkei was up , but this year, having tweaked my portfolio it performs in line with the Topix. Today was typical, percentage wise the Topix was up over double the Nikkei and my portfolio performed very well. Plus I think the Topix index will be the 1st to break it's psychological level of 2,000 before the Nikkei breaks the 30,000 level!! Take a look at the 10-year Topix chart, this year it has formed a perfect pennant, ready to pierce the 2,000 level. I believe the Topix is closer to following the 2nd section than the Nikkei. 

Eoin Treacy's view -

Thank you for your well wishes and this topical email. Our contractor is back again today so I apologise if there is any banging in the background while I record this aternoon.

We bought a newbuild home foreclosure that had been sitting on the market for eighteen months. The builder had gone bust so the final touches on the home were rushed and the kitchen was left unfinished. As far as we can make out the reason the house sat unwanted for so long was the starting price was too high back in late 2019 and the absence of a kitchen was a deterrent. There was also a leak in the dishwasher that led to significant mould growth in the kitchen island so that probably also limited demand.



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July 02 2021

Commentary by Eoin Treacy

Secular Themes Review July 2nd 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 May 7th. These reviews can be found via the search bar using the term “secular themes review”.

News today that Johnson & Johnson’s vaccine is effective against the delta variant should help to allay fears that the world is about to experience a round of upheaval similar to early 2020.

There is no question that the pandemic has acted as an accelerant. It forced migration and adaption to new conditions in a manner that might otherwise never have happened. Some of those changes will stick, others will fade away.

Everyone seems to think that the pandemic has to mean something and that we will never again get back to normal life. I don’t believe it. The surges back into social activity whenever restrictions are lifted is confirmation that humans are social beings. We crave physical contact and fellow feeling. That’s not going to change, even if we have a better appreciation for it today than since the demise of organised religion.  

As with every other crisis, the liquidity created to deal with the shock will remain in the system for much longer than it is strictly required. Central banks cannot afford to jeopardise the recovery they worked so hard to create. Meanwhile, populations everywhere are impatient for better conditions.



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July 01 2021

Commentary by Eoin Treacy

Ray Dalio and Larry Summers Discuss the New Paradigm

Thanks to a subscriber for this transcript from the Qatar Economic Forum which may be of interest to subscribers. Here is a section:

Let me take your question a moment ago and then come to that, Stephanie. Look, I think the arguments about average inflation targeting and so forth, they kind of have their place. But I think we need to recognize when you declare victory. When we’ve got a record labor shortage, the Fed probably shouldn’t be obsessing about making sure there are opportunities available. When we’ve now got average inflation over the last two or three years, up to 2%, we don’t have the problem of needing more inflation in order to get to some kind of level of average. So, I just think we need to recognize the new reality is very different from the secular stagnation reality of two years ago.

Look, I am all for a strengthening on a variety of dimensions of the hand of workers. I think we need to raise the minimum wage. I think we need to re-empower the ability to organize unions. I think that we can’t read the stories about working conditions at Amazon and not think that something should be happening to rebalance things.

At the same time, I think you have to recognize that doing all of those things is going to bear on the inflation process. It’s going to bear on what economists call the natural rate of unemployment. And you’re going to have it have a set of consequences, and you need to factor those in in setting macroeconomic policy.

I mean, we had a moment very much like the current moment, coming after a long period of no inflation. We had a government that had very expansive desires for what it was going to do. We had a progressive tide sweeping through the country, changing attitudes on very many fronts. We had that in the 1960s. And what we saw was that inflation rose more rapidly than anybody anticipated, that a right-wing tide in politics was ushered in with the successive elections with lags of Richard Nixon and Ronald Reagan, and that what happened ultimately did not serve the interests of the progressives who supported it. And you saw a big upsurge with the way in which the United States went off gold and imposed tariffs universally 50 years ago this summer.

So, a return to that does not seem to me to be what we should be targeting, and my concern is that I see too much in the current trajectory of economic policy. The Lyndon Johnson/John Connally axis of economic policy making doesn’t seem to me to be a healthy guide.

Eoin Treacy's view -

It might seem like a choice but it never is. The reality is that the modern protest movement and the new age civil rights movement share many of the same motivations of their progenitors 50 years ago. Arguably today’s vintage is less violent than in other generations, because they have additional tools like social media where they have the opportunity to vent their frustrations.



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June 29 2021

Commentary by Eoin Treacy

Deadly Delta Variant Starts to Ripple Through Emerging Markets

This article from Bloomberg may be of interest to subscribers. Here are some soundbites from regional analysts:

"The U.K. has shown that the variant is not such a health challenge if people have been vaccinated. We are concerned that Australasia and the smaller markets in Asean could continue to be impacted. We remain cautious on Asean equities. Watching for any sharp increase in Covid cases in Asean”

Kelvin Wong, an analyst at CMC Markets (Singapore) Pte.: “Tactically, it is likely to be more of a rotation play that may last into the upcoming third quarter where high-quality technology stocks may outperform over cyclicals”

“Hence for Southeast Asian equities that tends to be heavily weighted toward cyclical/financials and the external sector such as tourism are likely to underperform, for example Singapore’s Straits Times Index”

“The major key support to watch on the STI will be at 2,950/2,920 which also coincides with the 200-day moving average”

Alan Richardson, a senior portfolio manager at Samsung Asset Management (HK) Ltd. “It’s a speed bump that could slow the speed of the recovery but doesn’t change the direction to a post-Covid economy. The delta variant should increase the urgency for countries to reach three-quarters immunization”

Paul Mackel, global head of FX research at HSBC Holdings Plc in Hong Kong: Market is watching closely the recent Covid resurgence as it has caused short-term depreciation of some currencies

“But the elephant in the room is whether the dollar has bottomed or not” and “it’s not yet. But if the dollar is indeed getting stronger and the Fed is becoming more hawkish, it could challenge the outlook of some Asian currencies”

Eoin Treacy's view -

There is an incredible variety of perspectives on the merits of vaccination. The primary point I made last year was it doesn’t matter what anyone thinks, global governments have all followed a similar set of policies. Having made the decision to lock down, there has to be a set of requirements which need to be demonstrably met to open back up. Vaccinations are key to that decision making process. Variants introduce some doubt into the equation.



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June 24 2021

Commentary by Eoin Treacy

Copper/Gold ratio

Eoin Treacy's view -

This ratio is often looked at in the bond markets because it can be a lead indicator for yields. The logic is simple enough. Dr. Copper gives us some perspective on the health of the global economy and gold is the ultimate bond so it reflects demand for a safe haven.

At the low in 2020 the ratio tested the lows from 1986/87. The global economy had shut down so demand for commodities collapsed and safe haven surged. Since then, the ratio has trended back up to test the highs of the last decade; with copper floating higher on a tide of abundant liquidity.



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June 24 2021

Commentary by Eoin Treacy

BOE Warns Against Tightening Too Soon as Inflation Surges

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

“Today’s decision reinforces our belief that the committee will continue providing monetary support through the economic restart,” said Vivek Paul, U.K. chief investment strategist at BlackRock Investment Institute.

Officials led by Governor Andrew Bailey voted unanimously to keep the benchmark lending rate at 0.1% and by 8-1 to maintain the pace of its bond purchases, targeting a cumulative 895 billion pounds ($1.2 trillion) by the end of this year. Chief Economist Andy Haldane, who steps down from the nine-member Monetary Policy Committee this month, pressed for a reduction in the stimulus.

The pound dipped against the dollar and euro after the decision, and U.K. stocks ticked higher. The yield on U.K. government 10-year bonds fell after the decision. Money-market bets on the BOE raising interest rates were also pushed back by two months to August 2022.

“Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory,” the BOE said in a statement on Thursday.

Eoin Treacy's view -

That transitory word is becoming progressively more common in the statements of central banks globally. The question in my mind is do central banks create inflation. That is another way of thinking about the monetarist view of the topic.



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June 24 2021

Commentary by Eoin Treacy

Tilting The Odds In Your Favour

This promotional piece from Baillie Gifford may be of interest to subscribers. Here is a section:

It may come as a surprise to learn that Tel Aviv (Israel), Vilnius (Lithuania), and Tallinn (Estonia) all rank in the top 50 cities in the world in Fintech. You may not yet have heard of many of their leading companies, but I’ll wager you will in the coming decade. Lithuania ranks number one in the world in terms of broadband speed and in the top five countries for Fintech innovation. Investment in the right infrastructure has given that country a head start it is not wasting.

Access to capital and need for less of it in today’s capital-lite, ‘free money’ world means more and more entrepreneurs, the geniuses who will lead the exceptional companies of tomorrow, no longer feel anchored to the US. 20 years ago, fewer than 15 per cent of Chinese students studying abroad felt compelled to return home, filled with ideas but lacking the capital to fund their ambitions. Today closer to 80 per cent see a much more favourable environment in which to put their western education to profitable use domestically.

Adding to the earlier comments on the popularity of the Hong Kong stock market, companies are increasingly eschewing an ADR listing entirely, preferring a Hong Kong local listing, with exchange regulators encouragingly supportive. For the Chinese company of the future, a dual listing may well mean H-shares (HK) and A-shares (mainland China).

In a world obsessed with buybacks (at the wrong time) and cost-cutting (at the wrong time), we look for investment and expansion. Here, the US is no longer the world leader it once was.

Eoin Treacy's view -

There is an exceptional amount of competition for attention in today’s market. The wall of money printed in the last year has refocused attention on relative performance of assets. Interest rates and currency movements play a big part in how well international assets fare versus US assets. That’s particularly relevant for large pools of US capital that have mostly stayed at home over the last decade.



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June 23 2021

Commentary by Eoin Treacy

The monumental challenge of trying to hit climate targets

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

Eoin Treacy's view -

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

When numbers in excess of $100 trillion are bandied about most people’s eyes glaze over. The global annual GDP in 2020 was $93 trillion. That suggests to achieve the stated aim of containing temperature rises to 1.5% by 2050, we need to made big assumptions. The most important is that if we go ahead and make the sacrifices and spend the money, that it will work.



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June 22 2021

Commentary by Eoin Treacy

'Value' Label Haunting Japanese Shares Again: Taking Stock

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

As a key “value” market, Japan’s shares have gotten rolled up in the reversal of the reflation trade sparked by the Fed’s hawkish turn last week. The market capitalization of traditional value sectors financials, industrials, energy and materials is about 36% of the MSCI Japan Index, versus around 24% for the U.S. equivalent, according to data compiled by Bloomberg.

With stocks trading higher Tuesday, after a value share rally in the U.S. overnight, it would seem the path for Japanese shares -- at least in the short-term -- is linked to the fate of global reflation bets.

Back at home, the slow vaccination rollout is still a risk especially with the Olympics looming. Only about 6% of Japan’s population have been fully vaccinated, a sharp contrast to other Asian markets like Singapore and Hong Kong, where 35% and 17% of the population have received two doses, according to data compiled by Bloomberg.

“The vaccine rollout is picking up, but risks of a resurgence will increase as Japan lifts the state of emergency and welcomes thousands of Olympic athletes and officials,” wrote Barclays Plc’s Tetsufumi Yamakawa and Kazuma Maeda in a note Friday.

Eoin Treacy's view -

It would be nice to think that Japan’s growing success in vaccinating the population and fighting the pandemic is behind renewed demand in the stock market. Instead, the more likely scenario is there is a swarm of hot money lurching from one asset class to another as perceptions about growth and inflation ebb and flow.



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June 21 2021

Commentary by Eoin Treacy

China's tech workers pushed to limits by surveillance software

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

In China, technology adoption promises its swelling middle classes an easier, more productive life. But as companies bring productivity-enhancing tools into everyday office life, their efficiency is being channeled, not into leisure time, but into squeezing ever more value from employees.

Just as algorithms have come to govern the workdays of blue-collar warehouse workers at Alibaba Group Holding and food delivery riders for Meituan, elsewhere, white-collar workers are becoming affected by the creep of software-driven management and monitoring into their professional lives.

This is particularly the case in China's tech industry, where rapid technological development, paired with poor labor regulations, has created a potential for labor abuse. The big tech companies themselves, locked in cutthroat competition for new business opportunities, are pioneering these technologies and tools in their own operations. From hiring and goal-setting to appraisal and layoff, productivity-enhancing technologies look to quantify workers' behavior by collecting and analyzing extensive amounts of personal data.

Some scholars warn that some practices can be unethical, invading employees' privacy and burdening them with greater workload and mental stress. Others draw parallels to the fatigue faced by factory laborers during industrial revolutions, where workers chased the pace of machines.

"I felt that I was getting busier and having less time for myself," said the engineer Wang, looking back on his five years at Chinese internet companies.

Eoin Treacy's view -

Asian work culture is not something many in the West are familiar with. Long hours, arriving before the boss and leaving after him are normal work practices. Not taking holiday, an expectation to do whatever is asked and the assumption of absolute loyalty are common characteristics of working in Japan, China, South Korea and elsewhere. When a Japanese newspaper talks about potentially overworking individuals it is worth paying attention. Afterall Japan has a word for being worked to death. (karoshi - death by overwork).



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June 18 2021

Commentary by Eoin Treacy

"Mosquito smoothies" streamline production of promising malaria vaccine

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

This new process, spearheaded by scientists at Imperial College London, could make the process far more efficient. The method involves the batch processing of whole mosquitoes, which are reduced to a slurry that is then filtered by size, density and electrical charge. This process of making "mosquito smoothies" leaves behind the necessary sporozoite products for vaccination.

“Creating whole-parasites vaccines in large enough volumes and in a timely and cost-effective way has been a major roadblock for advancing malaria vaccinology, unless you can employ an army of skilled mosquito dissectors," says lead researcher Professor Jake Baum, from Imperial College London. "Our new method presents a way to radically cheapen, speed up and improve vaccine production.”

In addition to making the process faster and cheaper, the technique can also make the vaccine more potent. Traditional extraction of sporozoites brings with it contaminants such as unwanted proteins and other debris, which can affect the infectivity of the sporozoites and possibly the immune system response, compromising the efficacy of the whole parasite vaccine. Conversely, the mosquito smoothies result in pure uncontaminated samples.

Eoin Treacy's view -

The promise of a vaccine against malaria is a significant piece of the missing puzzle to economic development in Africa. Malaria is a wasting disease that strikes people in their prime. It reduces productivity and requires other people to care for the invalid, which only compounds the effect. It is one of the biggest taxes on productivity on the continent. If malaria is solved, it frees up resources and productive capacity for significant evolution of human potential.



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June 17 2021

Commentary by Eoin Treacy

Lifting the mask

 This initial article by Edward Snowden for his new letter may be of interest to subscribers. Here is a section:

One history of the Internet — and I'd argue a rather significant one — is the history of the individual's disempowerment, as governments and businesses both sought to monitor and profit from what had fundamentally been a user-to-user or peer-to-peer relationship. The result was the centralization and consolidation of the Internet — the true y2k tragedy. This tragedy unfolded in stages, a gradual infringement of rights: users had to first be made transparent to their internet service providers, and then they were made transparent to the internet services they used, and finally they were made transparent to one another. The intimate linking of users' online personas with their offline legal identity was an iniquitous squandering of liberty and technology that has resulted in today's atmosphere of accountability for the citizen and impunity for the state. Gone were the days of self-reinvention, imagination, and flexibility, and a new era emerged — a new eternal era — where our pasts were held against us. Forever.

Everything we do now lasts forever... The Internet's synonymizing of digital presence and physical existence ensures fidelity to memory, identitarian consistency, and ideological conformity. Be honest: if one of your opinions provokes the hordes on social media, you're less likely to ditch your account and start a new one than you are to apologize and grovel, or dig in and harden yourself ideologically. Neither of those "solutions" is one that fosters change, or intellectual and emotional growth.

The forced identicality of online and offline lives, and the permanency of the Internet's record, augur against forgiveness, and advise against all mercy. Technological omniscence, and the ease of accessibility, promulgate a climate of censorship that in the so-called free world instantiates as self-censorship: people are afraid to speak and so they speak the party's words... or people are afraid to speak and so they speak no words at all...

Even the most ardent practitioners of cancel culture — which I've always read as an imperative: Cancel culture! — must admit that cancellation is a form of surveillance borne of the same technological capacities used to oppress the vulnerable by patriachal, racist, and downright unkind governments the world over. The intents and outcomes might be different — cancelled people are not sent to camps — but the modus is the same: a constant monitoring, and a rush to judgment.

Eoin Treacy's view -

Censorship is not something I thought I would ever write about and yet today we are surrounded by it. It is not so much that the law has changed, but that we find ourselves in a position where speaking one’s mind comes with consequences that can stretch into a lifetime. Most people’s default is to play along to get along so self-censorship is an easy answer. That’s a challenge and it is not easily overcome.

The chasm between tribes who believe in the rightness of their opposite positions is a recipe for continued political polarisation. Politicians continue to contort themselves so they can appeal both to the fringe and the core, so they can win elections.



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June 15 2021

Commentary by Eoin Treacy

Zombies Are on the March in Post-Covid Markets

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

Recessions are supposed to lead to more bankruptcies, and make it harder for companies to borrow. Rises in debt outstanding, all else equal, should increase the risk of bankruptcies down the line. So what has happened in the last 12 months virtually surpasses understanding. French bankruptcies had steadily declined since the brief recession caused by the sovereign debt crisis, while companies took advantage of the dirt-cheap credit that had been engineered to save the euro to refinance and take on more leverage. When the crisis hit, they were then able to borrow far more, while bankruptcies tumbled.

Logic might dictate that an increase in bankruptcies lies ahead. This should mean that debt investors demand a higher yield to compensate them for the greater risk of defaults. In the U.S., this is exactly what has not happened. The spread between the yield on “high-yield” bonds (which might need to be renamed) over five-year Treasury bonds hasn’t been this low since the summer of 2007. And we know what happened after that:

Eoin Treacy's view -

Interest expense is seldom the reason for companies to get into trouble. It’s when large portions of a company’s debt approaches maturity and needs to be refinanced that the potential for trouble increases.



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June 09 2021

Commentary by Eoin Treacy

Inflation: The defining macro story of this decade

This is a thought-provoking report from Deutsche Bank’s new What’s in the tails? series of reports. Here is a section:

The Fed’s move away from pre-emptive action in its new policy framework is the most important factor raising the risk that it will fall well behind the curve and be too late to deal effectively with an inflation problem without a major disruption to activity. Monetary policy operates with long and variable lags, and as we have noted, it will also take time to recognize that inflation has actually overshot excessively and persistently. As inflation rises sustainably above target, forward looking expectations are likely to become unanchored and drift higher, adding momentum to the process.

By this point, the Fed will likely be moved to act, and when it does the impact will be highly disruptive to the markets and the economy. In the past, the Fed has not been able to reverse a sustained run-up in inflation without causing a recession and potentially large increase in unemployment. Being behind the curve when it starts will make the event that much more painful. Rising interest rates will also cause havoc in a debt-heavy world, leading to financial crises especially in emerging markets. If the Fed lets up and reverses rate increases in response to rising unemployment and other economic pain as occurred during the 1970s, inflation could back up again, leading to a repeat of the stop-go economic cycles that occurred during that period.

Depending on the timing of this potential inflation scenario, the 2022 midterm elections could be crucial. A surprisingly strong showing on the Democratic side could even pave the way for modifying the Federal Reserve Act to raise the inflation objective. This discussion has been brewing in academic circles for some time, not the least as a way to enhance the Fed’s power to move interest rates into negative territory when needed. But such a move could damage the Fed’s inflation fighting credibility. It could also lead to still higher inflation over time and ultimately intensifying the kind of boom-bust cycle experienced during the 1970s.

In brief, the easy policy decisions of the disinflationary 1980-2020 period appear to be behind us.

Eoin Treacy's view -

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

The response to the credit crisis resulted in massive asset price inflation which exacerbated inequality across society in most countries. The response to the pandemic is aimed at reversing that trend and providing greater opportunity to the people left behind by the last recovery. That implies massive money printing, spending and social programs.



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June 09 2021

Commentary by Eoin Treacy

Warner-Discovery, French Deal 'Dramatically' Push M&A Up European TV Agenda

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

While European broadcasters are still profitable, “and some very much so,” Godard highlighted, “savvy investors believe this is looking suspiciously like the high earnings of printed newspapers circa 2007, or a Wile E. Coyote run over the edge of the cliff. Broadcasters are capturing a declining share of total video audiences and their capacity to finance attractive content is shrinking as talent is bid up by SVOD operators.”

The analyst then outlined two consolidation options that have emerged in Europe.

“The first path — heralded by Bertelsmann RTL Group — would aim at creating national broadcasters with the content scale to operate compelling online platforms” via domestic acquisitions, Godard said, calling this the “possibly more defensive but also more realistic” option.

The second path is “more ambitious but lacking a credible backer,” he argued. It targets “the never achieved idea of pan-European synergies, leveraging increased international appetite for non-English language content” by merging assets across borders, something that the likes of Italy’s Mediaset and Vivendi have talked about. “But its champion, Italy’s Mediaset, lacks capacity to deliver,” Godard concluded.

“The group is already the biggest broadcaster in Italy and Spain and has built a 24 percent stake in Germany’s ProSieben, with the remaining shareholding fragmented,” he explained. “The problem is, if the cross-border strategy is sound, Mediaset may be its worst possible proponent. Besides bringing in strong leadership to its Spanish division, Mediaset never extracted significant synergies from its two Mediterranean units, despite their cultural affinity.”

Eoin Treacy's view -

National broadcasters survive because they have state backing and a captive audience. The value proposition they represent is tied to continued support from governments because they provide domestic language content. That does not transfer well internationally. This map of the 12 most spoken languages in the world suggest the biggest opportunities are in the Chinese, English, Spanish, Hindu-Urdu and Arabic speaking parts of the world. 



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June 07 2021

Commentary by Eoin Treacy

Peru Riven in Two With Presidential Election Too Close to Call

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

Peru’s currency and stocks tumbled after incomplete results of Sunday’s presidential runoff showed the leftist candidate gaining momentum even as he trailed by a thin margin in the count.

The sol headed to its biggest drop in more than a decade at one point and the S&P/BVL Peru General Index fell as much as 6.8%, the most since November, with mining companies and financial firms among the hardest hit. Overseas bonds edged lower in light trading while the cost to insure against a default climbed.

Analysts were left to scour incomplete vote tallies for hints at who had the advantage, after investor favorite Keiko Fujimori saw her early lead over leftist opponent Pedro Castillo fade overnight and in the early morning. With almost 93% of votes counted, Fujimori had 50.1% support to 49.9% for Castillo, a former school teacher turned union organizer from the Peruvian highlands.

“The country is pretty much split down the middle,” said Alfredo Torres, director of Ipsos Peru. An unofficial quick count published earlier by Ipsos gave Castillo a 0.4 percentage point advantage over Fujimori, within the margin of error, while an Ipsos exit poll after Sunday’s voting showed Fujimori with a slight lead.

Fujimori, who is under investigation for corruption and campaigned while out on bail, gets more of her support from urban centers, while Castillo has the advantage in the countryside. She has vowed to save the country from “communism” by preserving a liberal economic model and boosting cash payments to families affected by the pandemic. The daughter of a jailed former president, it’s her third attempt at the top office.

Castillo, who launched his political bid with a Marxist party and was virtually unknown at the start of the year, ran on a platform of extracting more taxes from multinational miners and oil drillers to increase outlays on education and health. He blames the country’s inequality on the ruling elite whom he says have long been content to run Peru from Lima while ignoring swathes of the country.

Eoin Treacy's view -

The gulf between populist left and right-wing parties conspires to create volatility in all manner of financial assets prices. However, the reality of governing has been less revolutionary because most left-wing populists have achieved victory by slim margins which has curtailed their ability to implement their policy goals.



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June 04 2021

Commentary by Eoin Treacy

Secular Themes Review June 4th 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 May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic panic is now one year in the rear-view mirror. It seems to have lost its ability to scare us so that begs the question what happens next? That’s the big conundrum

Some still believe that technology will solve all our problems and that the largest companies in the world will continue get even larger. Others believe that the inflation genie has been releases so it is inevitable that bonds will collapse in value. Others believe that we are in for a long grind of subpar growth because the debt is so large, it will sap the will to live out of every speculative asset. Others believe we are in a stock, commodity and property market bubble that could pop at any moment. Still other believe that cryptocurrencies are the solution, though no one is exactly sure what the problem is. So how do we make sense of these divergent views?

Personally, I have a strong feeling of déjà vu. In late 1999 and early 2000 I was selling Optus cable connections door to door in Melbourne. When I tired of backpacking, I went to London and within three weeks had started at Bloomberg. I was amazed at the speed of the Royal Mail. I saw an ad in The Times on a Wednesday for European sales people. I posted my CV that afternoon and had a reply back from Bloomberg delivered the next day. I had an interview on Monday and started on Tuesday. To say they were desperate for sales people is a gross understatement. I was in Belgium, visiting private banks, 10 days later. That was the top of the market and it was evidence of a true mania in the TMT (Telecoms, Media and Technology) sectors.

By the end of the Nasdaq bear market in 2003 the number of Bloomberg terminals being sold to mortgage bankers was surging. I was even offered a job by one. The Dollar was pulling back, there were fears about financial repression, China’s demand for commodities was only beginning, emerging markets were breaking out and gold was completing its base formation. A year later oil broke out.



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June 03 2021

Commentary by Eoin Treacy

Email of the day on post pandemic recovery candidates

Dear Eoin I hope that your move went well. The chart of Carnival (CUK in the USA) is making an interesting breakout. It is a classic example of a company that suffered greatly from Covid and that has a great recovery potential.

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. Thanks also for the well wishes. We are settling in nicely. Cruises were either the bargain of the year or a boondoggle for consumers in December. I had brochures arriving at my home offering buy one get one free and thousands in onboard credits and shore excursion for sailings into 2022. I thought of it as a value proposition. The rest of the family were not so keen.



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June 02 2021

Commentary by Eoin Treacy

Australia's Economy Powers On, Recouping Pandemic Losses

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

Australia’s rapid rebound has been underpinned by its ability to limit Covid-19 outbreaks, boosting consumer and business confidence. A massive fiscal-monetary injection strengthened the financial position of households and firms during the lockdown, and consumers are spending and companies hiring.

“Australia is in rare company here -- only five other countries can boast an economy that’s larger now than before the pandemic,” said Kristian Kolding, a partner at Deloitte Access Economics. “Maintaining this trajectory is now the task at hand -- the lockdowns in Victoria are a stark reminder that the pandemic is far from over.”

Deloitte noted that on average, economies in the Organisation for Economic Cooperation and Development are 2.7% smaller than they were before the pandemic. The U.K. is almost 9% smaller, the European Union is 5% smaller and the U.S. has shrunk 1%, it said.

Yet a potential risk to the outlook is the sluggish rollout of a Covid vaccine. This has been magnified by a renewed outbreak of the virus in Melbourne that prompted a lockdown in the nation’s second-largest city, and has now been extended for another week.

Eoin Treacy's view -

Victoria is back in lockdown but the number of cases is comparatively low and the rest of the country is reasonably unaffected. Investors are taking the news in their stride. After more than a decade of liquidity infusions the reality remains liquidity beats most other factors most of the time. Central bankers also understand that logic and must feel vindicated in their actions. Every time there is a problem, they boost money supply and act to depress yields and the economy rebounds. They are unlikely to do anything different until that policy stops working.



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June 02 2021

Commentary by Eoin Treacy

Vietnam Stocks Set to Rally Further Despite Virus Resurgence

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

Local investors have continued to snap up stocks despite a domestic coronavirus surge, with more than 4,000 local virus cases reported since the end of April - three times more than new cases last year. Last month, the index gained more than 7%, the most in the region.

That compares to a 25% slump in March last year as the global pandemic erupted, and a decline of about 4% in January when another wave hit the country.

Stocks have remained resilient in part due to efforts by the government to contain the outbreak and demand from the Vietnamese making the most of low interest rates. Trading value for Vietnamese stocks climbed to all-time high Monday-- at more than $1 billion, as retail traders poured funds into the market.

On Tuesday, the main bourse halted trading in the afternoon as turnover surged. The VN Index is trading at about 15 times estimated earnings for the next year, compared with more than 16 times on the MSCI Asia Pacific Index.

Eoin Treacy's view -

Vietnam has been dealing with new case loads from the coronavirus but the broader success of the economy in keeping factories and businesses open is more important to investors.



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May 28 2021

Commentary by Eoin Treacy

First named storm of hurricane season comes early because of warming seas

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

"The system is considered a subtropical cyclone rather than a tropical cyclone since it is still entangled with an upper-level low as evident in water vapor satellite images, but it does have some tropical characteristics as well," according to the National Hurricane Center.

There have been pre-season named storms in the past six years, but Ana’s addition to the group is distinct for another reason. Storms in May normally form near the eastern Gulf of Mexico, the western Caribbean Sea or the Southeastern coast of the United States, CNN reported. But subtropical storm Ana is distinct because it formed in the Atlantic. 

The National Oceanic and Atmospheric Administration (NOAA) recorded a record-breaking 30 named storms in 2020. NOAA reported that 2020 was the fifth consecutive year with an “above-normal” hurricane season. There have been 18 “above-normal” seasons out of the last 26. 

“As we correctly predicted, an interrelated set of atmospheric and oceanic conditions linked to the warm AMO were again present this year. These included warmer-than-average Atlantic sea surface temperatures and a stronger west African monsoon, along with much weaker vertical wind shear and wind patterns coming off of Africa that were more favorable for storm development. These conditions, combined with La Nina, helped make this record-breaking, extremely active hurricane season possible,” said Gerry Bell, lead seasonal hurricane forecaster at NOAA’s Climate Prediction Center. 

Eoin Treacy's view -

La Nina has dissipated and we are now in the lull before a new El Nino forms. How long that takes is likely to have an impact on how storms form over the summer months. Seven years in a row for an early hurricane season is not an aberration but looks more like a trend.



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May 28 2021

Commentary by Eoin Treacy

ECB Expected to Keep Its Higher Bond-Buying Pace Through Summer

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

The pandemic purchases were ramped up in March when the U.S. rebound was fueling a global rise in borrowing costs while the euro zone was in a double-dip recession. The ECB will unveil new economic projections that should confirm a far brighter outlook as vaccinations pick up.

A European Commission report on Friday showed economic confidence in May at the highest level in more than three years as restaurants, hotels and shops across the region start to reopen.

Yet in a sign that the recovery remains fragile, French data on Friday came in much weaker than expected. Consumer spending fell 8.3% in April from the previous month, more than twice as much as forecast, and first-quarter gross domestic product was revised to show a decline. Finland also posted an unexpected contraction.

Eoin Treacy's view -

Over the past few decades there have seldom been times when European equities outperformed the S&P500. The equity cult in the USA is much stronger than elsewhere which creates demand for domestic growth stories. The presence of strong consumer brands, companies with long histories of paying and increasing dividends, the ready supply of new exciting stories from Silicon Valley and the largest consumer base in the world means Wall Street has tended to outperform.



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May 27 2021

Commentary by Eoin Treacy

Bank of England likely to raise rates at some point in 2022

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

“In that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, with some modest further tightening thereafter,” he added.

The government’s furlough programme, which pays the wages of more than 2 million workers, does not expire until Sept. 30 and Vlieghe said it would take time for the true health of the economy until early in 2022.

If unemployment in the first quarter of 2021 was low and upward pressure on wages stronger then than the BoE expected, “a rise in Bank Rate could be appropriate soon after, along a slightly steeper path than in my central case,” Vlieghe said.

However, if concerns about COVID infection risks persist - possibly as a result of new variants of the disease - higher unemployment could prove persistent and the economy might need more BoE stimulus. (Reporting by David Milliken and Andy Bruce)

Eoin Treacy's view -

Dominic Cummings and his lengthy testimony in front of Parliament are making headlines today but crowds have short memories.

Psychologically, we tend to remember a whole experience by how we feel at the end. Christmas is a good example. All of the preparation, decoration and rushing around are worth it because of the positive experience at the climax of the festival.



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