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May 12 2021

Commentary by Eoin Treacy

No Relief in Sight for World's Soy Supply Crunch, U.S. Says

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

“Something has to give,” Scott Irwin, a professor at the University of Illinois said by phone. “Either we have to find more planted acres, we have to get lucky with summer weather, or the price has to go high enough to ration usage lower than projected.”

Crop markets have skyrocketed amid record Chinese demand and rising consumption as economies recover from the pandemic. More evidence of China’s strong appetite for farm commodities emerged this week with further purchases of U.S. corn. Weather concerns persisting in major producers like Brazil also risk further straining global supplies.

The relentless rally across crop markets has stoked worries over rising food bills at a time when many consumers are still struggling from the fallout of the Covid-19 pandemic. The United Nation’s monthly gauge of global food prices has climbed for 11 straight months.

There is a scenario in which the supply crunch could see some relief.

“If we don’t see a major weather problem from September all the way through June of next year, then we should see maybe new crop prices remain below the average that we’ll probably realize for the current marketing year,” said Terry Reilly, senior commodities analyst at Futures International LLC in Chicago.

Eoin Treacy's view -

Soybean supply is dominated by the USA and Brazil. Demand is focused on Chinese consumption and cooking oil demand everywhere. The pandemic hit restaurant demand last year so there were fewer acres planted, and the surge in demand this year has resulted in a supply shortfall. US drought conditions eased over the last week which is good for crops but the Brazilian drought remains ongoing.



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May 11 2021

Commentary by Eoin Treacy

Agronomics to raise GBP50 million to invest in "cultivated meat"

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

The net proceeds of the fundraising will be used to finance further investment into current portfolio companies and projects, investment in new opportunities within the "cultivated meat" sector and development and commercialisation of intellectual property where Agronomics holds an interest.

"Agronomics has expanded rapidly over the past two years, and this financing will further accelerate its growth," said Non-Executive Chair Richard Reed.

"We anticipate it will provide the full funding to support our existing portfolio companies through their next financing rounds, while also giving us sufficient capital to pursue acquisitions of new investments in this exciting field as it enters into what we expect will be a multi-decade growth phase," added Reed.

Eoin Treacy's view -

The renewable energy sector did spectacularly well in the run-up to the oil price and credit availability peaks in 2007. There was a great sales pitch that an energy revolution was underway and renewables would take over. However, at the time the inability of the companies to breakeven was a major headwind. The rationale for owning the sector was heavily influenced by the comparison with oil. When oil prices fell, the sector collapsed.



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May 10 2021

Commentary by Eoin Treacy

Email of the day on shipping investment vehicles:

Further to your longer-term theme review on Fri., the Collective might want to consider this new shipping fund launch.

Eoin Treacy's view -

Thank you for this press release which may be of interest to subscribers. Here is a section:

The seed portfolio consists of 23 Handysize and Supramax ships, which are all fully operational and income-generating, and are expected to be purchased soon after the listing. According to the intention to float document published today, these classes of vessels have historically demonstrated average annual yields over 7%.

That will enable the investment company to target an initial dividend yield of 7% in its first year. Once fully invested, the fund managers will target a total return including dividends from the underlying portfolio of 10-12% per annum.

The seed assets have an estimated average remaining life of 17 years. Of the 23 ships, 17 are already under the commercial management of Taylor Maritime, while the rest are being sourced from vendors with established relationships with the managers. About $24m worth of the seed assets will be acquired in exchange for shares in the new fund, issued in consideration.



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May 07 2021

Commentary by Eoin Treacy

Secular Themes Review May 7th 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 March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

After a crash everyone is wary. We all seek to learn lessons from our most recent experience because it is the only way to help us emotionally move past the trauma. Coming out of the pandemic most investors wished they had sold everything at the first sight of virus news in early 2020 and bought everything back again following the crash. Today they are worried that there is another big shock waiting around the corner that will cause a repeat of pandemic panic.

The challenge for investors is less to learn from the most recent mistake but rather to know when to deploy the lessons learned. The best time to be wary about a massive decline is when no one is worried about it. The time to take precautionary action is when it seems like a waste of time and when you are most afraid of giving up on the potential for even better gains. That’s the best time to remember the experience of the crash but the interval of time and the positive reinforcement of experience in an uptrend make it difficult.



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May 06 2021

Commentary by Eoin Treacy

Americas May Lead World's Silver Mined-Supply Recovery

This note from Bloomberg may be of interest to subscribers.

Silver primary supply set to recover in 2021, following Covid-19 operational restrictions suffered last year. 2020 saw the silver mining industry's biggest fall of the last decade, down 6% to 784 million ounce, based on Metals Focus data. Mined-output may rise by 8% year-over-year to 849 million ounces in 2021, based on Metals Focus estimates. We believe the Americas, with a 58% of global supply share, will lead the recovery in 2021, thanks to higher output from Mexico, Peru and Bolivia. Mexico could stay as the world's No. 2 producer, with nearly 200 million ounces, up 12% based on BI's scenario analysis.

Fresnillo kept its crown as world's No. 1 silver producing company in 2020, followed by KGHM, Glencore, Newmont and Codelco. We calculated that these miners combined represented 23% of global mined supply.

Eoin Treacy's view -

Silver is mostly produced as a by-production of other mining activity and the majority of pureplay silver miners now concentrate on gold. Additionally, silver is more of an industrial resource than gold so it tends to elicit interest from many different sources. Those complicated supply and demand fundamentals mean significant new sources of supply or demand are required to meaningfully change the outlook for prices. The loss of photographic film demand was a major hit meanwhile the building boom in solar cells now accounts for 10% of total demand.  



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May 05 2021

Commentary by Eoin Treacy

Gold CEO Blasts 'Hysterical' Fund Managers Chasing Quick Cash

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

“I’m cautioning people not to become too obsessed with stripping the industry out of its cash, and not allowing strengthened balanced sheets to be built and investments in the future,” he said. “Whether it’s exploration or deal making, it’s got to create value and you can’t create value as a mining executive if you don’t have support from the fund managers.”

Eoin Treacy's view -

Investors have been conditioned to expect well-capitalised companies will buy back shares, pay special dividends and will not engage with capital intensive business lines. That sounds great for tech companies but it doesn’t work for miners. Mining executives that are not actively engaging with M&A targets are coming under profound pressure to distribute available cash. Meanwhile there is no tolerance for green field exploration among either large miners or investors. No one wants that kind of open-ended risk. The 10-month correction in the gold price will only have further damaged appetite for investment in new supply and particularly from banks which control the supply of liquidity. At a minimum it will require even better prospects than normal. That bolsters the limited supply argument over the medium term.



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May 05 2021

Commentary by Eoin Treacy

Colombia Coffee Exports Halted by Protests, Federation Says

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

Coffee isn’t moving to ports, including the main Buenaventura shipping hub, because of nationwide protests and road blockades, Roberto Velez, CEO at the Colombian Federation of Coffee Growers says by phone from Bogota.

The Colombian situation is fueling gains for prices in New York, which have reached the highest since 2017
Protests that started last week against a tax reform bill continued even after it was withdrawn, Velez says, adding any solution would have to come from the central government
There’s also concern that Covid-19 rates are increasing in coffee areas
Coffee pickers needed for the harvest are already on the farms
NOTE: Colombia Protests Slow Coffee Shipments to Ports, Importer Says
2021 Coffee Output Seen at 14M Bags: Trade Group

Eoin Treacy's view -

The Brazilian drought has been the primary tailwind for coffee prices over the last few months. A threat to the consistency of Colombian exports represents and additional tailwind for as long as it lasts. Coffee is one more commodity experiencing supply inelasticity. The year of lockdowns unset supply/demand fundamentals and left the commodity markets more susceptible to weather or political interruptions. The result is rising prices for just about everything.



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April 30 2021

Commentary by Eoin Treacy

Copper Boom Is Just Beginning for the CEO of Biggest Gold Miner

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

Copper may be flirting with record highs but the metal is far from peaking as the energy transition revs up, according to Newmont Corp. Chief Executive Officer Tom Palmer.

Futures hit $10,000 a metric ton on Thursday for the first time since 2011 as mines struggle to keep up with surging demand. Newmont, the world’s largest gold producer, is increasing exposure to copper through several “mega projects,” Palmer said on an earnings call. Even if just one materializes, copper will account for 15-20% of the company’s total output by the end of the decade, he said.

“I’m pretty excited about having good exposure to copper at that time when the world is going through the energy transition,” Palmer said on an interview with Bloomberg TV following the earnings call. “Copper’s got a pretty good story in front of it. I think its day in the sun is more towards the end of this decade.”

The copper push doesn’t mean Palmer has a downbeat view on gold. He sees bullion prices holding their current “very healthy levels” or even moving higher given fiscal and monetary stimulus. India should remain one of the key sources of demand after the country recovers from the Covid-19 tragedy, Palmer said.

Eoin Treacy's view -

Mining executives have been slow to invest in new supply because they are still scarred from the negative experience of the last bear market. Green field mining is expensive and uncertain and they now wish to preserve their balance sheets and strong cash positions. Investors are certainly not complaining at the rising dividends either. There is a growing belief among gold mining CEOs that copper/gold deposits are the most attractive for new investment. That might also be considered a hangover from the mining bust because it hedges exposure to the gold price and diversifies income streams.  



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April 30 2021

Commentary by Eoin Treacy

Biden = Roosevelt: The Analogue

This side by side comparison by Ray Dalio may be of interest to subscribers. Here is a section on corporations:

Roosevelt, 1935: “We have established the principle of graduated taxation in respect to personal incomes, gifts, and estates. We should apply the same principle to corporations. Today the smallest corporation pays the same rate on its net profits as the corporation which is a thousand times its size.”

Biden, April 2021 Speech to Joint Session of Congress: “Recent studies show that 55 of the nation’s biggest corporations paid zero in federal income tax last year. No federal taxes on more than $40 billion in profits. A lot of companies also evade taxes through tax havens from Switzerland to Bermuda to the Cayman Islands. And they benefit from tax loopholes and deductions that allow for offshoring jobs and shifting profits overseas. That’s not right. We’re going to reform corporate taxes so they pay their fair share and help pay for the public investments their businesses will benefit from.”

Treasury Report on Biden Tax Plan, 2021: “The President’s Made in America tax plan is guided by [six principles, including] requiring all corporations to pay their fair share. To ensure that large, profitable companies pay a baseline amount of taxes, the President’s plan would impose a minimum tax on firms with large discrepancies between income reported to shareholders and that reported to the IRS. It would also provide the IRS with resources to pursue large corporations who do not meet their tax obligations, reversing a trend toward fewer corporate audits.”

Eoin Treacy's view -

When there are thousands of people on the street and parliament buildings are under siege, politicians tend to wake up to the public mood. The harrowing experience, many elderly politicians experienced in the USA during the Capitol riot, is likely to inform their decision making going forward. That’s true regardless of whether they are aware of it or not. Giving the people what they want, which is more money, is going to be high on the list of priorities.



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April 27 2021

Commentary by Eoin Treacy

OPEC+ Confirms Plan to Gently Hike Supply as Demand Recovers

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

The global oil market “is on the one hand positive, we see a recovery of demand and higher global GDP estimates,” Russia’s Deputy Prime Minister Alexander Novak told Rossiya 24 television after the OPEC+ committee’s conference call. Nevertheless, the group must keep monitoring the coronavirus situation across many regions, including Asia, he added.

“We see that some countries record higher coronavirus numbers, like in India and Latin America, which raises some concerns about further growth of demand,” Novak said.

Crude futures held gains after the OPEC+ gathering, trading 0.4% higher at almost $66 a barrel in London.

Strong Demand

It was the OPEC+ Joint Ministerial Monitoring Committee that initially recommended sticking to their planned output increase. Ministers from the panel then asked other OPEC+ members to cancel the full meeting scheduled for Wednesday, and instead they drafted Tuesday’s statement by exchanging diplomatic messages.

Eoin Treacy's view -

There is no shortage of oil and there is no mystery about where to find more if it is needed. The drop off in domestic US drilling and the combined efforts of OPEC+ to curtail supply have shaved at least 7 million barrels a day from the market. That has been instrumental in the rebound for oil prices.



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April 27 2021

Commentary by Eoin Treacy

'Like science fiction,' Seattle startup sends laser-equipped robots to zap weeds on farmland

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

Over the next decade, the Western Growers Association aims to automate half of the harvest of specialty crops, which include fruits, vegetables and nuts. A Florida company has been developing a strawberry-picking robot. At Washington State University Tri-Cities, scientists are working on an apple-picking robot — an idea some farmworker advocates met with skepticism. 

Edgar Franks, political director at the union Familias Unidas por La Justicia, based in Burlington, Washington, said that, generally speaking, the rise of automation is concerning. Farm work is grueling “because of the exploitation of labor,” he said.

“From our point of view, it’s all about labor control and cutting labor costs down…What’s going to happen to the workers who made the industry so profitable, all of a sudden to be kicked out?” Franks said.

Myers said it has become more difficult to hire people for work like weeding. This year, 80% of the migrant workers he planned to hire on temporary H-2A visas are delayed at the U.S.-Mexico border, he said.

“It’s harder to find people to do that work every single year,” he said. 

Mikesell declined to provide an exact cost of the robot, but said its price is in the hundreds of thousands of dollars, comparable to the cost of some tractors. 

The weeding robot, manufactured in Mukilteo, uses GPS technology to stay within a geofence at the edge of the field. Cameras underneath the robot scan the ground and artificial intelligence identifies the weeds among the crops. 

Then a carbon dioxide laser (the same kind used to cut metal) “targets the weeds for destruction,” in the words of the company’s website. The company says the machine can weed 15-20 acres per day. 

Developing the machine meant troubleshooting to ensure that the lasers and robot could withstand hot and freezing temperatures, plus rain, dust and lightning – to match the “general ruggedness of farm equipment,” Mikesell said.

Eoin Treacy's view -

Unskilled heavy labour is often performed by uneducated migrant workers. The necessity of this work has been a cornerstone of immigration policy in many parts of the world for a long time. If there is no longer a need for large numbers of people to tend crops the route to entry to many countries is likely to become tighter over time.



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April 26 2021

Commentary by Eoin Treacy

Container Shipping Insights The 'mega' trend to continue

Here is a section from a JPMorgan report focusing on shipping costs.

Global liners are stepping up de-carbonization efforts and experimenting with alternative fuels
To achieve the industry target, many global liners such as A.P. Moller Maersk (viewed an industry bellwether) are stepping up de-carbonization efforts, recently unveiled plans to fast-track its de-carbonization efforts, with a target to put the world’s first vessel powered by carbon-neutral fuel into operation in 2023, seven years ahead of its original schedule. Specifically, Maersk will install its smaller feeder vessels (capacity of around 2,000 TEUs) with dual fuel technology, power them using alternative fuels including methanol (produced from plant waste) while retaining the option to use VLSFO if necessary. Maersk is also currently experimenting with other alternative fuels including ammonia. Looking ahead, Maersk targets to operate more methanol-fueled vessels in the future and expects methanol and ammonia to emerge as more viable future fuel options.

Adoption of new technology and alternative fuels will take time to achieve commercial feasibility. There are inherent limitations towards adopting alternative fuels. Referencing remarks made by Mr. Morten Bo Christiansen (Maersk head of de-carbonization), methanol has the potential to reduce CO2 emissions by up to 15% vs conventional marine fuels while enjoying other advantages including having well-established infrastructure and manageable vessel retrofitting cost. Having said that, methanol has inherent limitations including low energy density and certain safety-related challenges. With respect to ammonia, Maersk expects ammonia to be an ideal replacement from a net zero carbon perspective, but overall technology capability remains at a nascent stage and no vessels today are equipped to utilize this fuel type. Maersk also takes a contrarian view compared to its peers and does not view Liquefied Natural Gas (LNG) as a viable alternative, given its upstream and onboard emissions.

Eoin Treacy's view -

The IMO 2020 regulations on emissions for the global shipping sector took more than a decade to agree and finally to implement. That was emblematic of an era when there was some commitment to reducing emissions but no real sense of urgency and where industry lobby groups were given priority. Today, the situation could not be more different. Shipping companies see the future of regulation and taxation and expect to be able to pass on green premiums to customers. That will put an additional cost on everything and represents an even bigger tax on global activity than an oil price spike because it is permanent in nature.



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April 23 2021

Commentary by Eoin Treacy

Longer-Run Economic Consequences of Pandemics

This report from the San Francisco Fed may be of interest to subscribers. Here is the conclusion:

Summing up our findings, the great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets, as far as the limited data allow us to conclude. These responses are huge. Smaller responses are found in real wages, but still statistically significant, and consistent with the baseline neoclassical model.

Measured by deviations in a benchmark economic statistic, the real natural rate of interest, these responses indicate that pandemics are followed by sustained periods—over multiple decades—with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth. Either way, if the trends play out similarly in the wake of COVID-19 then the global economic trajectory will be very different than was expected only a few months ago.

Should we expect declines of 1.5%–2% in the real natural rate, however? There may be at least three factors that could possibly attenuate the decline of the natural rate predicted by our analysis, but their presence and magnitude is uncertain and unknowable until therapies to fight COVID-19 are more developed. First, the death toll of COVID-19 relative to the total population might be smaller than in the worst pandemics of the past, but we cannot know for sure at this point. Second, COVID-19 primarily affects the elderly, who are no longer in the labor force and tend to save relatively more than the young, so the demographic channels could be altered, although the recent pick up in infections is now affecting younger individuals. Third, aggressive counter-pandemic fiscal expansion will boost public debt further, reducing the national savings rate and this might put upward pressure on the natural rate, even though our analysis suggests that this expansion of public debt should be easier to sustain in the long-run.

Eoin Treacy's view -

This report has obviously helped to inform the view of the Fed in how they expect the path of interest rates to play out. They are worried that the rebound from the pandemic will not translate into a sustained path of outsized growth because of the damage done to the economy and animal spirits will take time to overcome.



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April 23 2021

Commentary by Eoin Treacy

A Chipmaker's Advice to the Auto Industry

This interview with the head of automotive at Global Foundries (ahead of the company’s IPO) may be of interest to subscribers.

Fixing The Chip Crisis
It’s been almost five months since the global chip shortage surfaced as a serious problem for the auto industry. Some experts say it could take a year before automakers emerge from this expensive supply-chain hell.

The consequences will last much longer as the pandemic forces car companies to rethink how they manage their supply chains. Lead times for automotive chips already were lengthening before Covid-19 lockdowns, as the auto industry became a bigger semiconductor customer than ever before. That's because systems that alert drivers when they drift out of a lane and better harness an EV battery require more data processing than yesterday’s power windows and car radios.

I recently spoke with Mike Hogan, the head of automotive at Global Foundries, a chipmaker that has plants in the U.S., Europe, and Asia. Since autos consume just 10% of global chip production, car companies usually buy consumer electronics chips off the shelf. Hogan says that with electrification and autonomy transforming vehicles, automakers have to look more deeply into their supplier networks.

Here are excerpts from our discussion, edited for length and clarity:
Where are we now, is this going to get worse? When will the shortage ease?
The first wave of help [for automakers] is probably a third-quarter thing.

It’s very hard to tell if there’s a shortage hiding behind a worse shortage. Because auto is so diverse, there are so many different kinds of semiconductors that go in there — if the auto guys don’t know what they need, how do they know they don’t need something else that they don’t see yet? That’s the real concern.

So I think it could be very lumpy trying to get out of this. Is that unique to the auto guys — versus someone who makes a smartphone or an iPad?

The folks who make smartphones, they don’t outsource the design to a bunch of people. They tightly control everything that goes in that smartphone. Even to the point where they say, ‘Look, Global Foundries, I want to make sure it’s there, so I’ll prepay for it, I will reserve the capacity. If I don’t take it on the day, you thought I was showing up, it doesn’t go anywhere because we’ve already pre-paid.’
People often talk about how making cars is such a low-margin business, it has to be done this way.

Do you think that’s true?
If you can’t build a $50,000 car and ship it and put all those people to work because you don’t have $15 worth of semiconductors...I think it’s time to shift that and say, ‘No, we’re the auto market, we have very unique needs, we need an architectural approach to building our cars, we don’t need to
buy retail off-the-shelf stuff.’ Then you have the real conversation ahead of time, versus, ‘Hey you don’t know me but I’m out of chips and it’s your fault buddy.’

Is that starting to happen?
There are a lot of good, smart people in auto that have seen this. This is the moment that gives that cohort within those companies the voice to say, ‘This is exactly why we needed to think different.’ I think you’ll see more of this direct relationship between autos and semiconductors.

Can chip factories in the U.S. compete with lower-cost producers in Asia?
We built a factory from the ground up in upstate New York. It cost billions, but there’s over 3,000 people working there. Are those 3,000 people getting paid a little more than the 3,000 people in Korea? Yeah, probably. But if you build enough wafers, it’s still very competitive. Part of this might be tilting some advantage for folks to use the domestic supply that we create, but that’s how it is everywhere in the world.

Eoin Treacy's view -

The global automotive sector is totally reliant on just in time sourcing of materials and components. They don’t hold inventory and are used to squeezing suppliers so they don’t have to. As they stray into the world of technology where there is competition for supply, they will have no choice but to compete. That means investing in additional supply and paying upfront.



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April 22 2021

Commentary by Eoin Treacy

China Blasts Australia's Decision to Cancel Belt and Road Deal

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

The Australian federal government scrapped both the memorandum of understanding and framework agreement signed between Victoria and China’s National Development and Reform Commission, Beijing’s top economic planning body, Foreign Minister Marise Payne said in an emailed statement Wednesday. She described the deals as “inconsistent with Australia’s foreign policy or adverse to our foreign relations.”

The step “is another unreasonable and provocative move taken by the Australian side against China,” the Chinese embassy in Canberra said in an emailed statement. “It further shows that the Australian government has no sincerity in improving China-Australia relations -- it is bound to bring further damage to bilateral relations, and will only end up hurting itself.”

Australia “basically fired the first major shot against China in trade and investment” conflicts, Chen Hong, director of the Australian Studies Center at East China Normal University in Shanghai, told the Communist Party-backed Global Times. “China will surely respond accordingly.”

China has lodged stern representations with Australia over the issue and reserved the right to take more action, Foreign Ministry spokesman Wang Wenbin said at a regular press briefing Thursday in Beijing.

Eoin Treacy's view -

China may successfully be able to cow smaller countries into submission by following a carrot and stick approach to infrastructure and trade development. Australia is a different story.



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April 22 2021

Commentary by Eoin Treacy

Corn, Soybeans, Wheat Surge on Chinese Demand, Weather Woes

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

Corn jumped by the exchange limit and soybeans topped $15 a bushel for the first time since 2014 as China’s rampant demand and adverse weather around the world threaten to further tighten supply.

Brazil’s second-corn crop is suffering from drought, and U.S. planting has been slowed by a record cold snap that may also have damaged some winter wheat. Meanwhile, western Europe lacks moisture for early growth of the grain, helping push up wheat futures and adding to worries about global food-price inflation as consumers still contend with the coronavirus pandemic.

The weather concerns in major growers come amid signs of continued strong demand, particularly in China, which the U.S. Department of Agriculture expectsto import a record 28 million metric tons of corn. The country is already scooping up the next U.S. crop. Soybean oil futures jumped by the most allowed, amid growing demand for renewable diesel.

“It’s an incredible rally. It is primarily the weather and demand and low stocks that are really driving this thing, and the realization that Brazil could have a poor second corn crop,” said Jack Scoville, a vice president for Price Futures Group in Chicago. “There’s just nothing going on that says sell the market.”

Eoin Treacy's view -

The supply disruptions resulting from the pandemic continue to represent challenges for the global supply chain. That’s particularly true for the agriculture sector where weather is having an outsized influence after years of low prices and less investment in additional new supply.



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April 20 2021

Commentary by Eoin Treacy

April 20 2021

Commentary by Eoin Treacy

Oatly Reveals Growing Losses, Revenue in U.S. IPO Filing

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

Oatly Group AB, the vegan food and drink maker, has filed for a U.S. initial public offering.
The Malmo, Sweden-based company, in a filing Monday with the U.S. Securities and Exchange Commission, listed an IPO size of $100 million, a placeholder that will likely change.

Oatly reported a $60 million loss on $421 million revenue in 2020, compared with a loss of $36 million on revenue of $204 million a year earlier.

The company counts Chinese conglomerate China Resources Co., Swedish private equity firm Verlinvest and Blackstone Group Inc. among its biggest shareholders, the filing showed. Morgan Stanley, JPMorgan Chase & Co. and Credit Suisse Group AG are leading the offering. Oatly plans to list on Nasdaq Global Select Market under the symbol OTLY.

Eoin Treacy's view -

Oatly has spent a great deal of money already on getting into supermarkets and cafes. That begs the question where the additional money from an IPO will be spent? Perhaps it will simply compensate the initial backers as they transfer ownership before it eventually goes bust. There is certainly an increasingly active health food market but Oatly does not own a patent on producing oat milk. Competition is inevitable and will be expensive to fend off.



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April 20 2021

Commentary by Eoin Treacy

Chemical Maker Elementis Rejects Third Deal Offer in Five Months

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

U.K. specialty-chemical company Elementis Plc turned down a third acquisition offer in five months, a move that risks further irritating investors who have missed out on potential deals.

Rival Innospec Inc. said Tuesday it is no longer considering an acquisition of Elementis after the latter company’s board rejected a 160 pence per share offer made late last month. Elementis shares pared a gain of as much as 22% to trade up just 1% at 137 pence.

Elementis rebuffed two earlier offers that another U.S. foe, Minerals Technologies Inc., made in November of last year. J O Hambro Capital Management Ltd., a top investor in Elementis at the time, told Bloomberg News it had concerns about management’s strategy and the board’s refusal to enter into discussions with Minerals Technologies. Sky News first reported on Monday that Elementis had
received takeover interest from Innospec.

Eoin Treacy's view -

Refusing three takeover offers in the space of a year raises big questions for the current management team at Elementis. They are either going to have to come up with a plan to realise the value these suitors see or fire the CEO and accept an offer. Either way, significant corporate changes lie ahead.



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April 19 2021

Commentary by Eoin Treacy

Midas Touch

Thanks to a subscriber for the report from Celtic Gold which may be of interest to subscribers. Here is a section on seasonality:

In the current year, the gold price seems to be running two months ahead of its seasonal pattern established over decades. The top on January 6th was followed by a clear wave down lasting almost three months until the end of March. This correction would actually have been more typical for the period March to June. With the double low reached at the end of March, the beginning of the usually strong summer phase would be conceivable from May or June this year. In the short term, seasonality continues to urge patience. At the very latest, the gold price should be able to take off again from the beginning of July.

Eoin Treacy's view -

The re-opening of the Chinese gold import window and the bottoming in demand from India represent examples of Asian buying looking to accumulate on weakness. Meanwhile, investment demand continues to moderate as ETF holdings remain under pressure. That suggests institutional buyers have been sufficiently chastened by the decline to want to wait of clear evidence of a bottom before recommitting.



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April 16 2021

Commentary by Eoin Treacy

China opens its borders to billions of dollars of gold imports

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

 

About 150 tonnes of gold worth $8.5 billion at current prices is likely to be shipped following the green light from Beijing, four sources said. Two said the gold would be shipped in April and two said it would arrive over April and May.

The bulk of China's gold imports typically comes from Australia, South Africa and Switzerland.

The People's Bank of China (PBOC), the country's central bank, controls how much gold enters China through a system of quotas given to commercial banks. It usually allows metal in but sometimes restricts flows.

"We had no quotas for a while. Now we are getting them ... the most since 2019," said a source at one of the banks moving gold into China.

The size of the shipments signals China's dramatic return to the global bullion market. Since February 2020, the country has on average imported gold worth about $600 million a month, or roughly 10 tonnes, Chinese customs data show.

And
 
India's demand for bullion has also rebounded from a pandemic-induced slump, with record-breaking imports in March of 160 tonnes of gold, an Indian government source told Reuters this month.

Eoin Treacy's view -

India and China are the world’s largest consumers of gold. India’s demand collapsed in 2020 and China has been very quiet both about how much gold it holds and how much is imported. Those have been contributing factors in the decline of gold since the August peak.



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April 16 2021

Commentary by Eoin Treacy

Porsche's Electric Taycan Sales on Course to Eclipse Iconic 911

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

“Established models have supported this excellent result along with the latest additions to our product range, above all the new model variants of the all-electric Taycan,” Porsche sales chief Detlev von Platen said of the brand’s 36% first-quarter surge. “We can look back on a very positive start to the year.”

The Taycan, which Porsche recently flanked with a more spacious version, is a litmus test for the carmaker’s costly shift to electric vehicles. Boosting EV sales with Porsche will be key to maintaining healthy margins as the division is VW group’s biggest profit contributor by far.

Porsche’s total global deliveries rose to 71,986 vehicles in the first quarter, driven mainly by demand in China, its largest market. The compact Macan SUV was the brand’s best-selling model, ahead of the larger Cayenne. Porsche will launch a battery-powered version of the Macan next year that’s underpinned by a new platform for upscale electric cars co-developed with sister brand Audi.

Porsche remains optimistic about business prospects this year even as a global shortage of semiconductor parts disrupts production plans across the industry. Order books “continue to develop very well,” Von Platen said.

Eoin Treacy's view -

Introducing new technology at a high price point before filtering it down to cheaper models in subsequent years has been the go-to model for automakers. Nothing has changed. The positive reception the Taycan has received will fortify the mood at Volkswagen that they have made the correct decision to bet on electric vehicles.



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April 16 2021

Commentary by Eoin Treacy

U.S. Infrastructure Plan May Lift These Three Brazilian Stocks

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

Two weeks ago, Biden unveiled a $2.25 trillion plan to overhaul the country’s physical and technological infrastructure. He has said the plan needs to go far beyond bridges and roads and has called for investment in electric vehicles, renewable power and the electric grid.

Shares of Gerdau and Tupy are up 27% and 15% this year, respectively, while the benchmark Ibovespa index is down 0.6% and Weg is little changed.

“Limited geographical diversification puts a cap on Brazilian companies seizing this moment, but we can see some clear winners,” the analysts said. “Although we believe they have not gone unnoticed by the market, recent performance indicates that the impact is likely larger than what is currently priced in.”

Eoin Treacy's view -

Brazil is currently dealing with the challenge of rising pandemic case numbers and deaths. That’s a near-term challenge for the economic recovery and it might be a few months before the worst is over. 



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April 15 2021

Commentary by Eoin Treacy

A Mystery in 10-Year Treasuries Has Links to Carry Trade Blowup

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

Hedge funds are snapping up 10-year Treasury futures, and no other maturity, presenting a puzzle. The answer may lie in the collapse of a popular carry trade last year.

The highly-leveraged basis trade involved going long cash bonds and selling futures, to profit from the difference between the two, but came asunder in March 2020 when investors stampeded to buy the latter at the peak of coronavirus fears and upended the spread. Now the gap -- the so-called gross basis -- has reversed and favors shorting cash bonds and buying futures.

Of course, it’s not quite that simple. In futures markets, the counterparty who is short determines which specific cash bond traders have to deliver, adding another element of risk to the transaction. But with so-called ultra 10-year Treasury futures, there are only two bonds in the delivery pool, limiting that risk compared to other contracts.

That could be one reason why leveraged funds have built up net-long positions of almost 230,000 ultra 10-year futures, despite this year’s Treasury market slump, according to the latest data from the Commodity Futures Trading Commission. As for the original strategy -- there are no signs of it returning anytime soon.

While returns from this year’s trade are much lighter, a play based on 10-year ultra futures is most attractive, according to one trader who asked not to be identified as he isn’t authorized to speak publicly.

Cash Bond Pressure
A sense of how the cheapest-to-deliver 10-year Treasury bond has performed against futures can be seen in the implied repurchase rate for the note. It flipped from positive to negative in the first quarter, indicative of greater selling pressure on cash bonds than futures.

“With the sudden and significant rates selloff in late February, Treasuries came under pressure, underperforming futures quite noticeably,” wrote Morgan Stanley’s Kelcie Gerson in a note this week. “On an outright level, futures/cheapest-to-deliver bases reached the widest levels seen since last March/April.”

Across the rest of the Treasuries curve, hedge funds hold net short positions, though well below last year’s levels after the collapse of the original basis trade.

Market
A gauge of aggregate leveraged fund short futures positions -- which would likely be mirrored by long cash bonds in a basis trade -- has dropped by over $300 billion since last year’s February peak, according to calculations by Bloomberg.

Eoin Treacy's view -

Repositioning in the sovereign bond markets gathered pace today with a high degree of commonality across the sector. This above narrative highlights how quickly positions can be unwound when the trend changes and it represents a potent source of short covering activity.



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April 15 2021

Commentary by Eoin Treacy

S. Africa Central Bank Governor Sees Room to Keep Rates Low

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

South Africa’s central bank is likely to maintain its accommodative monetary policy stance to support the economy for as long as it has room to do so, according to Governor Lesetja Kganyago.

“As long as inflation is remaining contained, the central bank would have no reason to remove the accommodation that we are currently providing,” Kganyago said Thursday in an interview with Bloomberg TV.

The monetary policy committee has cut the benchmark interest rate by three percentage points since the start of 2020, of which 275 basis points of easing was in response to the impact of Covid-19 on the economy. That’s taken the rate to a record-low 3.5%. Last month’s decision was the first time since the 2020 rate cuts in which no member voted for a reduction and expectations have now shifted to when the first hike will come.

While the implied policy rate of the central bank’s quarterly projection model, which the MPC uses as a guide, indicates two rate increases this year of 25 basis points each -- next month and in the fourth quarter -- policy makers see risks to the inflation outlook as balanced and feel that they can continue to offer support to the economy, Kganyago said.

Eoin Treacy's view -

South African government bonds yield 9.08%. Obviously, in a world of ultra-low rates that outlier must exist for a reason. South African growth is expected to be in the order of 3% this year but the big question for investors will be on the trajectory of governance and the speed at which the pandemic can be overcome.



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April 14 2021

Commentary by Eoin Treacy

Russia Scores New Bond Record as Yields Drop on Summit Hopes

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

Russia sold a record volume of ruble bonds as state banks continued to prop up demand and sanctions jitters faded after U.S. President Joe Biden proposed a summit with Russia’s Vladimir Putin.

The Finance Ministry sold 213 billion rubles ($2.8 billion) of fixed-coupon debt due in March 2031 in its second auction of the day, beating a record set two weeks earlier. The yield on Russia’s 10-year bonds fell the most since November as Tuesday’s phone call between the leaders appeared to reduce the possibility of penalties targeting the nation’s local OFZ debt.

“We’re seeing considerable demand once again, with big local players buying about 70% of both offerings today,” said Stanislav Ponomarev, a money manager at Transfingroup JSC in Moscow. “There’s been demand from foreigners since the morning, but it looked more like they were closing short positions rather than increasing their Russia allocations.”

The prospect of fresh sanctions has been mounting for the best part of a month and the recent troop buildup on the border with Ukraine has added to the tensions. State banks have stepped in to backstop the recent auctions as foreigners stay clear.

“The market was extremely negative on Russia,” said Sergei Strigo at Amundi Ltd. “Now there is a pullback on renewed hope of some sort of normalization in relationships, even if it’s short-term. Levels on the ruble and OFZs look much more attractive.”

Eoin Treacy's view -

How serious is the US administration in countering China? That’s the primary question for investors as they assess the potential for a normalisation of relations between the USA and Russia. As a major commodity producer, seller of advanced weapons systems and with significant experience in space, Russia is being courted by China.



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April 14 2021

Commentary by Eoin Treacy

Trafigura Sees Green Copper Supercycle Driving Prices to $15,000

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

Trafigura expects the metal to breach $10,000 a ton this year, before entering a range of $12,000 to $15,000 a ton over the coming decade. Other ardent copper bulls including Goldman Sachs Group Inc., Bank of America Corp. and Citigroup Inc. have similarly strong near-term forecasts, but Trafigura has set itself apart with its lofty long-term target.

Goldman expects copper to hit $10,500 a ton within 12 months, while Citi sees it reaching $12,000 next year in its bull-case forecast. In the years to come, that’s likely to become the floor for prices as the industry revalues the metal, according to Trafigura.

“You can’t move to a green economic environment and not have the copper price moving significantly higher,” Bintas said. “How can you have one without the other?”

Eoin Treacy's view -

Every country wants its economy to recover from the ravages of the pandemic. They are all looking at the same playbook. They need to increase growth without raising taxes and need a quick way to get as many people back to work as possible which will hopefully kick start the velocity of money. Infrastructure development has been the preferred strategy to achieve those goals after every other recession and this one is now different. The only question was what kind of infrastructure would be approved.



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April 13 2021

Commentary by Eoin Treacy

Lumber Frenzy Drives Up Home Prices as Suppliers Can't Keep Up

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

“Each part of the supply chain has different issues,” said Brooks Mendell, chief executive officer of forest-supply researcher Forisk Consulting in Georgia. “There is not a sawmill that I have talked to in two years that has all their slots filled.”

This is a big turnaround from just two years ago. In 2019, weak demand prompted a steady stream of output reductions and mill closures from companies including Canfor Corp. and West Fraser Timber Co., the world’s biggest lumber supplier. That left producers flat footed amid the unexpected demand boom as the pandemic kept people indoors, sparking a wave of do-it-yourself upgrades, full-scale renovations and purchases of bigger homes.

When demand held strong throughout the winter, typically a seasonal lull, mills didn’t have time to replenish their inventories. Now, stockpiles are “extremely lean” as North America heads back into peak building season and lumber prices will stay high “for the foreseeable future,” Devin Stockfish, the CEO of Weyerhaeuser Co., said last month.

Lumber futures have more than tripled since the pandemic started, touching an all-time high of $1,157.50 per 1,000 board feet on Monday.

Eoin Treacy's view -

The mountain pine beetle infestation has been a growing problem for more than a decade but production cuts, the closing of mills and lack of a skilled workforce are more immediate problems. The only way to encourage more workers into the sector is to offer higher wages. That suggests we have seen a step change in the price of lumber and the breakout will be sustained in just the same way as it was in 1993. 



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April 12 2021

Commentary by Eoin Treacy

Impatience

Eoin Treacy's view -

There is one theme that seems to be running through every asset class at present. Perhaps it is because we have been locked up for a year, and literally can’t wait until it is all over, but there is a distinct air of impatience in every circle of life. The pandemic has accelerated the decision-making process for everyone in every facet of our lives.

Mrs. Treacy and I have been discussing moving from Los Angeles for two years but there was never a push big enough to stir us into action. We looked at Las Vegas suburbs in 2019 and toured schools but my eldest daughter was accepted into one of the most prestigious high schools in Los Angeles, so we decided to linger.

The experience of living in Los Angeles during the lockdowns, from schooling to public safety, made us impatient for a change. Like many others we decided to move and have only been delayed by reapplying to schools for our daughters and finding a suitable home.



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April 09 2021

Commentary by Eoin Treacy

Fragile Planet 2021

Thanks to a subscriber for this report from HSBC which may be of interest. Here is a section on renewable energy materials availability:

Here we look at the 2019 share of global production and at the share of global reserves for countries around the world. We use data from the United States Geological Survey’s Mineral Resources Program, and the World Nuclear Association. While production data are considered relatively accurate, reserves data is imperfect, given lack of exploration is some areas. However, we take a view that if countries have reserves, but have zero production currently, then there are likely to be technical, financial and/or institutional factors to overcome to allow production in the near future. (Note that we were unable to access reserves data for the commodities Indium and Gallium, and only included production numbers). We create a blended metric for production and reserves values for these commodities (weighting them all equally), in order to score and rank countries in this area. South Africa is ranked first here, followed by China and Chile. Australia comes in fourth, making it the highest ranking DM country on this indicator.

Eoin Treacy's view -

Government policy, everywhere, is increasingly skewing towards the assumption that sea level rise, water insecurity, global warming and climate change are inevitable. Renewable energy assets are increasingly also being priced on the assumption that a migration to carbon-free economies is also inevitable.

Trillions of Dollars are being committed to building out carbon-free infrastructure, whether than is solar, wind, geothermal, nuclear or hydrogen. As that buildout gets under way it will require massive fiscal support, regulatory bypasses for permitting and taxation supports in the form of carbon credits. It will also result in a significant near-term boost in demand for all manner of resources from copper to lithium and from coal to oil.



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April 07 2021

Commentary by Eoin Treacy

VanEck ViewPoint: The rhyme of history

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

We expect a catalyst to emerge in the second half of the year that could drive gold higher. The most likely catalyst would be excessive inflationary expectations. Inflation expectations have returned to pre-pandemic norms, although a number of developments listed here suggest it could spiral out of control:

• US$1.9 trillion of additional fiscal stimulus is likely to be introduced on top of previous government spending, some of which has yet to be utilised;
• The US Federal Reserve (Fed) continues to buy US$120 billion worth of Treasuries and mortgage-backed securities each month;
• Lumber, oil, copper, food staples and other commodities prices have been on the rise, many reaching multi-year highs;
• Shortages of semiconductors, shipping containers and truck drivers have been documented;
• Many people are content to stay out of the workforce, collecting generous government handouts;
• Purchasing power of American families has reached record highs. Further into 2022, once the trillions of stimulus dollars have been spent, other systemic risk catalysts could emerge, such as a weakening economy, debt problems, US dollar weakness and/or black swan events caused by radical fiscal and monetary policies. We believe the long-term bull market remains intact and expect prices to ultimately surpass US$3,000 per ounce. We also note that gold miners remain cheap relative to the price of gold.

It is worth noting that since mid-2020 it appears that Bitcoin has replaced gold as the new gold. But as cryptos have continued to soar, US real rates have now undermined gold value. To remain long Bitcoin would require a belief that real rates are going to retreat.

Eoin Treacy's view -

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

Mining companies are a hard sell in a world where investors are focused on ESG. As an extractive sector, miners can’t get around the fact that they are polluters. Even with remediation commitments, there is no way to avoid the moniker for polluter.

That also impacts the ability of the sector to source the funding they need for expansion via exploration. Finding somewhere to dig and build is an inherently uncertain prospect but the added obstacle of environmental regulations, protests and carbon costs mean the hurdles to exploration are increasingly high.



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April 06 2021

Commentary by Eoin Treacy

Email of the day on the potential for a crash:

I am a little concerned, that Bill Ackman is shorting the market and Ray Dalio and Michael Burry have predicted a market collapse. Burry recently went on record to confirm this prediction.

You have not mentioned Margin Debt for a while and my further concerns are that despite Margin Debt officially being at an all-time high - the ArchEgos scandal has demonstrated that perhaps not all of the margin debt is recorded as some hedge funds are circumventing the need to record their position by using prime banks to hold assets for them.

RLB

PS Best wishes to you and your family.

Eoin Treacy's view -

Thank you for your kind words and for this email which helps to elucidate the very real concerns of a large swathe of the market. Just over a year ago the market crashed. The decline was unlike anything we’ve seen before because it was unrelenting in its severity. Even during the crash of September/October 2008 there were weeks when the market rallied.

That did not happen in 2020. Between late February and March 24th, the S&P500 failed to rally for two consecutive days. Fear permeated market and it had a long-lasting impact on sentiment. Even today people are afraid of a repeat of this unrelenting selling. However, it would be extremely unusual to see another 35% drawdown a year after the last one.



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April 06 2021

Commentary by Eoin Treacy

Gold Rises to Eight-Session High With Dollar, Yield Gains Ebbing

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

Gold advanced to the highest in more than a week as gains in bond yields and the dollar abated.

Treasury yields edged down from a recent high, increasing the allure of bullion, which doesn’t earn interest. The dollar gave back early gains, making gold more appealing to investors holding other currencies. The ebb is taking place even as positive economic data shows rapid growth for U.S. businesses and jobs.

That’s “good news for gold,” according to Commerzbank AG analyst Carsten Fritsch.

Gold has been under pressure this year because of increasing optimism over the post-pandemic economic recovery in the U.S., which buoyed bond yields and the dollar. Investors fled bullion-backed exchange-traded funds, a major pillar in gold’s ascent to an all-time high last year, with holdings in ETFs dropping to the lowest since May.

Eoin Treacy's view -

It is not a coincidence that gold and Treasury bond prices peaked within a day of each other in August. As bond prices have declined, they have taken gold with them. The strong correlation between the two assets has raised all sorts of questions for gold investors. Let’s try and answer some of them by looking at flows.



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April 06 2021

Commentary by Eoin Treacy

Biggest Mining Buyback in Years Propels Vale to All-Time High

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

Vale’s buyback, which comes on the heels of a bigger-than-expected dividend, is the latest chapter in its turnaround story. In early 2019, a tailings dam disaster sent Vale into crisis mode, with dividends cut and operations scaled back as the company focused on shoring up safety. Now, after agreeing to a dam-collapse settlement and seeing the prices of its metals rally, Vale is repaying investor loyalty.

While metal prices have come off multi-year highs in recent weeks, they’re still well up on year-ago levels. Vale’s iron ore business generated its second-highest earnings ever and the company is focused on existing assets rather than splashing out on deals as it did in previous booms.

Shares rose as much as 6.6% in Sao Paulo Monday, closing at the highest level since trading began in 1994. The buyback should help narrow Vale’s discount to its Australian peers, according to BTG Pactual analysts led by Leonardo Correa. Vale fetches 4.8 times estimated profit versus top iron producer Rio Tinto Group’s ratio of 7.9.

Eoin Treacy's view -

The mining sector is flush with cash. The sector went through a painful rationalization between 2011 and 2016 so they have been cautious about embarking on risky behaviour. That left them well placed to benefit from the recovery in industrial metal prices from the pandemic lows.



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April 01 2021

Commentary by Eoin Treacy

Secular Themes Review April 1st 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 March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic has been an accelerant. The full ramifications of what that means are becoming increasingly clear.

The pandemic took trends that have been in evidence for a while and exaggerated them. At the same time, it introduced new challenges which require new solutions.

Corporations operating without the safety net of cash on the balance sheet has been a feature of the markets for decades too. They continue to be bailed out when they get into trouble. There is no evidence that the trend of using all available means to buy back shares has ended. In fact, buybacks are back at pre-pandemic levels. Companies were touting “resiliency” last summer. It appears to have been just talk. Buybacks represent a powerful tailwind for stock markets that were absent for much of 2020 but are now back in force. 



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March 31 2021

Commentary by Eoin Treacy

Voltswagen Is the Perfect Example of German Humor

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

This week Volkswagen AG provided a lesson in just how difficult it is to “be Elon.” VW’s U.S. arm claimed it was changing its corporate name to “Voltswagen,” denied it was an April Fools’ Day joke, then admitted that, um, it was in fact an April Fools’ Day joke gone wrong.  

The German giant has been riding a wave of investor excitement about its electric-car strategy. Thanks in part to some clever social media and marketing, VW seemed to have cracked Musk’s knack for share-price boosting publicity. The more frequently traded VW preference shares are close to a six-year high.

News of the purported name change helped VW’s American depositary receipts — the ones favored by U.S. retail investors — to climb as much as 12.5% on Tuesday. Which is where this cringeworthy incident goes from being a disastrous attempt at humor to something potentially more serious.

I’m not suggesting VW’s gaffe was an attempt to manipulate the stock market and I doubt the U.S. Securities and Exchange Commission would view it like that. It’s a reminder, however, that we now live in the meme-stock age where even bad jokes can add or subtract billions of dollars in market value. It’s a minefield for corporate executives to navigate.

Eoin Treacy's view -

The market liked the Voltswagen idea. That’s going to give Volkswagen’s board something to think about. Tesla prospered because it gained a near monopoly on California’s carbon credits when Karma went bust. That allowed it fund loss making operations and meet payment deadlines while it was building its first battery factory. Many people wonder at Tesla’s business model. Is it a car company, a solar company or a battery company? The most accurate description is it is a regulatory arbitrage company. That’s a consideration every company board should be discussing.



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March 30 2021

Commentary by Eoin Treacy

Email of the day on where the most leverage resides

After Greensill and Archegos, where next? The GCC of 2008 cleaned up the banks and the Tech Bust of 2000 cleaned up non-earning tech. Leverage always lies hidden somewhere, and rising interest rates usually make the best assassins. But where's the leverage this time? Tech + Leveraged Product Roll Out? Can we put together a list of leveraged companies and sectors that will make the headlines in 2021 and 2022 as 10-year yields breach 2% and beyond? Keep up the excellent work.

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. The Global Credit Crisis decapitated the banking sector and many of the tech champions of the 1990s disappeared. Both crashes exposed massive leverage and egregious abuses. The first challenge is to identify the sectors where leverage is concentrated and then what are the potential catalysts to unwind those positions.

The rush of interest in listing via SPACs is an obvious area to begin searching. Many private companies eschewed listing for years because they had no need to seek funds in the public markets. They are now eager to list because their backers want to exit while there is still time. Softbank’s wake-up call with WeWork was the catalyst for much greater interest in IPOs.



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March 26 2021

Commentary by Eoin Treacy

Rio Tinto to deploy Heliogen's AI-powered industrial "solar refinery"

This article by Loz Blain for New Atlas may be of interest to subscribers. Here is a section:

That temperature can be used to generate steam and turn turbines to produce electricity, or the heat can be stored for later use outside daylight hours. It's also hot enough to be used in cheap hydrogen production – Heliogen's Bill Gross told the Abu Dhabi Sustainability Week 2021 conference in January that a 600 x 600-m (656 x 656-yd) plant could produce around a million kilograms (2.2 million lb) of green hydrogen per year at an impressively low cost around US$1.80 per kilogram (2.2 lb) – lower than the average price of dirty hydrogen today.

Rio Tinto's boron operation, rather fittingly located in Boron, California, currently uses natural gas co-generation and boilers to produce steam for its processes. The Heliogen installation will contribute up to 35,000 lb (15,876 kg) of steam per hour to the plant day and night thanks to energy storage, and Rio Tinto says this has the potential to reduce total plant emissions by about 7 percent – "equivalent to taking more than 5,000 cars off the road," says the company, neatly sidestepping the fact that it's leaving more than 70,000 cars on the road in this metaphor.

This is just a pilot, though; should it prove viable, the company will assess whether to upgrade the facility to more than three times its current production rate, and the state intention here is to pilot the technology with a view to replicating it at other Rio Tinto facilities around the world where there's enough sunlight.

Eoin Treacy's view -

Rio Tinto’s management have displayed impressive foresight in positioning the company as the supplier of materials to drive the development of a carbon free economy. Making headlines for supporting concentrated solar plants in California is another example of sound PR strategy that detracts from the destructive nature of mining.

The company concentrates on iron-ore, copper and aluminium production which has allowed them to make a big play on being the most ESG-aware miner. Pollution is one portion of the ESG gambit the other is mine safety.



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March 26 2021

Commentary by Eoin Treacy

Message Received, Loud & Clear

This report from CIBC may be of interest to subscribers. Here is a section:

The Bank of Canada is seeing enough progress in the economy that it feels it can begin reducing outdated programs, as well as slowly begin to remove some of the considerable stimulus in the system. There should not be too much impact from the cessation of select market functioning facilities directly. The bigger news today is the strongest signal yet that the Bank is ready to conduct a taper, and begin ‘right sizing’ the QE program. This is also the first time we have been shown what the future sequencing looks like, which is: i) taper to a net-zero purchase profile; ii) enter a reinvestment phase, and; iii) normalize rates. The best trades to take advantage of this are micro in nature, though also put ‘bigger’ macro trades like receiving 2yr-to-4yr forwards versus the U.S. at risk.

Eoin Treacy's view -

As we exit the pandemic the approach being adopted by central banks to the respective challenges in their countries will help to inform us on what to expect from the late starters. Since Canada is about to begin tapering in April how the bond, currency and stock markets perform may offer a foretaste of what a taper will eventually look like in the USA and elsewhere.



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March 24 2021

Commentary by Eoin Treacy

In Copper Country, Lawmakers Want a Bigger Share of the Windfall

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

The proposal is unnecessary and risks thwarting investment, according to government and industry representatives. Responding to criticism that Chile didn’t tax producers enough in the last supercycle, Energy and Mining Minister Juan Carlos Jobet said the current royalty system will generate more after a surge in prices pushed up earnings.

In his first term in office a decade ago, Pinera introduced a complicated system of payments that now charges large producers a variable rate on operating profit of as much as 14%. A new tax on sales wouldn’t bring in more than the current system, according to Diego Hernandez, head of mining society Sonami. Mining Council boss Joaquin Villarino warned against rushing through legislation just because copper has traded above $4 a pound for several weeks.

While consensus is building that highly profitable sectors such as mining should help finance the pandemic recovery, a heavier tax burden would add to rising costs associated with labor and the environment, BTG Pactual raw-materials analyst Cesar Perez-Novoa said.

“When doing the math, the cost competitiveness of Chile as a mining jurisdiction comes down,” he said. “So it matters.”

Eoin Treacy's view -

Copper is in a bull market and demand growth is likely to continue to increase as the focus of stimulus and economic recovery settles on renewable energy and the electric vehicles sectors. That introduces additional use cases for the metal in addition to the traditional telecommunications and infrastructure sectors.



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March 17 2021

Commentary by Eoin Treacy

BlackRock, Lombard Say Faster Inflation Calls Are Premature

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

“As the dust settles in the wake of today’s FOMC, we will be focusing upon whether any additional back-up in yields is accompanied by a further widening of breakevens,” said Richard McGuire, the head of rates strategy at Rabobank. “If so then this argues that the move higher in rates is sustainable.”

But as long as U.S. yields don’t rise in a chaotic fashion, risk assets including emerging-market and high-yield corporate debt are expected to outperform, according to BlackRock’s Seth. “Rates can drift higher and still remain a positive backdrop for the risk assets, as long as the vulnerability is under control,” he said.

A Bloomberg Barclays index on global credit returns has gained 11% over the past year, compared with a loss of 2% for a gauge tracking Treasuries. BlackRock switched to a neutral duration position in February from underweight. The fund likes notes sold by Chinese real estate companies and the nation’s onshore bonds.

“The lack of correlation with the rest of the global developed markets also provides a diversification benefit,” Seth said of Chinese debt.

Eoin Treacy's view -

The Fed remains wedded to its view nascent inflationary pressures will not last long. There is a logical argument to support the view that the bounce back from the pandemic lows is exaggerated by the base effect and everything will settle down over the course of the next year or two. Since the Fed is willing to wait and see with inflation, it could be two full years before they are willing to draw firm conclusions.



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March 15 2021

Commentary by Eoin Treacy

Why in the World Would You Own Bonds

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

…History and logic show that central banks, when faced with the supply/demand imbalance situation that would lead interest rates to rise to more than is desirable in light of economic circumstances, will print the money to buy bonds and create “yield curve controls” to put a cap on bond yields and will devalue cash. That makes cash terrible to own and great to borrow. Through their powers central banks can, at least temporarily, put a lid on interest rates and keep short-term interest rates low relative to long-term rates so that it becomes profitable to buy bonds with cash, which central banks abundantly provide which makes real interest rates very negative. For example, during the 1930-45 period the Fed kept the bond yield around 2.5% and the cash yield around 1%, which made it profitable to borrow cash and use it to buy and own bonds. While that can make holding bonds financed with cash profitable at low rates, under such circumstances both the cash rate and the bond rate are bad. Naturally, because cash rates are so low it pays to borrow cash and invest it in investments that are higher-returning. Back in the 1930-45 period, the Fed was able to keep yields there, and the way they did that was also through outlawing gold and the movement of capital elsewhere. So, when I look at it, while I want to be short bonds (because they have the most terrible fundamentals), I do know that central bankers can keep cash more terrible, and I do know that they might have to prevent the movement to other storehold of wealth assets and other countries. 

Eoin Treacy's view -

There is a good reason large hedge fund managers have been buying trophy properties around the world. They wish them to be hedges against the potential for a significant devaluation in the purchasing power of their wealth. At the other extreme we have people like Elon Musk who just sold all his property (in California) because he is afraid of being taxed into oblivion. That suggests while some are betting on property as a hedge, the location in a friendly regulatory environment is likely to either make or break the trade.



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March 08 2021

Commentary by Eoin Treacy

Email of the day - on gold ETF holdings

On gold, I notice there is now significant weakness in the chart for Total known holdings of gold ETF. Will we need to see this stabilize and turn up before any rise is likely in spot gold prices?

Eoin Treacy's view -

There is undoubtedly some liquidation of gold longs going on at present as investors price in the potential for outsized swift economic recovery. That’s also the main rationale for selling bonds since there is less need for a safe haven.



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March 05 2021

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review March 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 January 8th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The rollout of vaccines to COVID-19 continues to accelerate and that will continue through the balance of the year and 2022. There is encouraging news about the number of different vaccines which have been approved and their success against variants. By the end of the year, the world will be inundated with doses which will provide at least some protection from the virus for anyone who wants it. That’s all the rationale any government needs for reopening the economy.

On Valentine’s Day 2020 Mrs Treacy and I went out for dinner with another couple. We talked about the news of a virus threat from China and how it could potentially cause ructions further afield. We told them we had stocked up on rice, meat, protein bars and batteries just in case. They thought we were crazy crackpots jumping at shadows.

It was hard to imagine then just how disruptive the decision to lockdown was going to be. A similar condition exists today. After a year of being confined to our immediate vicinity it is tempting to think this is how it will always be. The reality, however, is we are going to see a surge back to normalcy much quicker than most believe possible.

Humans are social animals and we yearn for social contact. We’ve been starved of that basic need for a year and we’ll overdose on it when we are able. That suggests we are looking at a boom in consumer activity over the coming couple of years.



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March 03 2021

Commentary by Eoin Treacy

Gold ETF Exodus Quickens in Ominous Sign for Faltering Metal

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

Gold’s reputation appears to have been tarnished considerably by the heavy losses of recent weeks, as evidenced by the ongoing outflows from gold ETFs,” Carsten Fritsch, an analyst at Commerzbank AG, said in a note. “A shift in sentiment among investors would be needed for gold to free itself from its extremely difficult predicament.”

Federal Reserve officials slated to speak this week may give more insight into the economic outlook and how the central bank might respond to the recent tumult in bond markets. Higher yields dim the appeal of the non-interest-bearing metal.

“Gold remains vulnerable to a further tightening from real rates,” TD Securities analysts led by Bart Melek said in a note.

Eoin Treacy's view -

Sentiment towards gold is rapidly deteriorating as the pace of the decline from the August peak picks up. The trend of gold holdings in ETFs is also now below its trend mean as investors migrate away from the yellow metal in favour of better performing assets. The big question for investors is whether this is a temporary or major correction.



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February 26 2021

Commentary by Eoin Treacy

Copper Crunch Set to Ease With More Supply Heading to China

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

Chinese copper smelters grappling with a shortage of semi-processed material are set to see an influx of supply from South America, a sign that the tightness helping supercharge the metal’s rally may be easing.

Starting next month, there’ll be a large number of ships arriving at Chinese ports from Chile and Peru, the nation’s main suppliers, as bottlenecks ease, according to IHS Markit lead shipping analyst Daejin Lee. The amount of concentrate expected to reach the Asian nation may climb almost 60% from February’s volume, he estimated.

“The narrative could be shifting from very tight supply on account of port congestion and logistics difficulties, and even the waves in Chile, to more easier supply,” said Ed Meir, an analyst with ED&F Man Capital Market. That could take a little bit of the air out of copper’s rally, he said.

Eoin Treacy's view -

Commodities are volatile and chasing prices that are already at elevated levels is seldom a useful exercise. One of the oldest adages in the commodity markets is “the cure for high prices is high prices.” The surge in copper prices has begun to encourage supply into the market. At least some further consolidation of recent gains appears likely.



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February 24 2021

Commentary by Eoin Treacy

Email of the day on paying up for commodities

Thanks again for your very calm analysis of these volatile times. I appreciate it a lot. I enjoyed very much your comments about the tendency of remembering the end of the events/experiences. There is a very good experiment on this done by Daniel Kahnemann. On a different note; you seem to be very bullish on copper, but it seems not enough to invest on that theme yet. Are you planning to invest? Otherwise, what would be a good instrument to invest for the medium/long term on that theme. Thanks in advance

Eoin Treacy's view -

Thank you for this email which may be of interest to subscribers. I have been conditioned through the decades to refuse to pay up for commodities. It’s a volatile sector that tends to have outsized moves in both directions. I am very bullish on industrial commodities overall and copper in particular.

Seeing outsized new sources of demand emerge for a commodity is a once in a couple of decades event. It will require a massive supply response to bring the market back into equilibrium. At present commodities are rallying because investors are pricing in an epic rebound in economic activity as fear about the pandemic subsides and people embrace fun and joie de vivre.



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February 24 2021

Commentary by Eoin Treacy

Long-End Yields Surge in Biggest Treasury Selloff Since January

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

The selloff in Treasuries sent the yield on the 30-year bond surging on Wednesday, putting the long-end
benchmark on track for its biggest one-day advance since early January.

Rates climbed across notes and bonds, with the long-end increasing most and the curve steepening. The 30-year yield jumped by around 11 basis points at one stage, hitting a one-year high of 2.29%, while the 10-year rate rose as much as 9 basis points to 1.43%.

Global bond markets are suffering this year amid the prospects for U.S. stimulus and a surging reflationary narrative, with volatility gauges climbing to multi-month highs. That’s prompted fears over a potential tantrum in havens, such as Treasuries and German bonds. While Federal Reserve Chairman
Jerome Powell this week called the recent run-up in bond yields “a statement of confidence” in the economic outlook, the move raises pressure on central banks to keep financing conditions easy.
 

“The market is nervous about additional stimulus, worried about the risks of higher inflation, and concerned about QE tapering,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. “The selloff is likely being exacerbated by convexity hedging and positioning stop-outs.”

Eoin Treacy's view -

Demand for save havens is waning. That’s perhaps the easiest way to explain the run-up in yields; globally. The scale of the flight to quantity because of angst at the lockdowns drove yields down to historic lows almost everywhere.



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February 22 2021

Commentary by Eoin Treacy

Gold Extends Rebound on Wavering Dollar, Inflation Concerns

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

“I think the strong buying in gold stems from a sharp bounce from new lows and strong close on Friday,” said Tai Wong, head of metals derivatives trading at BMO Capital Markets. “And a softer dollar negates the impact of higher U.S. yields.”

A revival in Indian gold imports could also indicate some physical dip buying of bullion, according to Marcus Garvey, head of metals and bulk commodity strategy at Macquarie Group Ltd.

Meanwhile, Democrats begin the final push for President Joe Biden’s $1.9 trillion stimulus bill this week, and the Biden administration may unveil a multitrillion-dollar recovery package in March centered on infrastructure.

Eoin Treacy's view -

Perhaps gold has been overshadowed by bitcoin during the latest bull run. The continued strength in cryptocurrencies is attracting interest from all manner of sources internationally. Everyone is aware of the strength the sector is capable of but few are willing to consider bitcoin is also capable of pulling back by 90% following its accelerations.



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February 19 2021

Commentary by Eoin Treacy

Email of the day on silver's relative strength

Silver price appears to be holding up much better vs. gold price. Any idea why?

Eoin Treacy's view -

Thank you for this question which I have been pondering over for the last few days. The easy answer is that silver has more industrial uses than gold. As industrial metals continue to price in additional infrastructure growth and new use cases in transportation and electricity generation they may be lending some support to silver versus gold.



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February 18 2021

Commentary by Eoin Treacy

Peak oil demand is coming - but first brace for an almighty supply crunch

Thanks to a subscriber for this article by Ambrose Evans Pritchard in the Telegraph. Here is a section:

The world has turned its back on austerity. Keynesian reflation doctrines are triumphant. The Biden administration explicitly aims to run the US economy hot, with the help of the Federal Reserve.

Global "green deals" amount to $16 trillion. “It’s going to turbo-charge oil demand in 2022,” said John Hess, head of Hess Corp.

This spending may be low-carbon in ultimate effect but in the short-run it is brown. The transition requires infrastructure. It requires bulldozers and trucks. It requires the mining of iron ore and thermal coal, and the shipment to steel foundries. It trumps the $10 trillion infrastructure blitz by China, India, Brazil. and the emerging market "mini-BRICs" of the last commodity supercycle.

If future demand is large, the shortfall in future supply is even larger. Investment of $600bn a year in non-Opec exploration and drilling is needed to keep the global show on the road. Spending collapsed after 2014 and has never recovered. Last year it was $300bn. It has been running at just 35pc of levels reached in the boom.

This catches up with you in the end. The last two super projects to enter supply were Norway’s Johan Sverdrup and the Exxon-Hess Guyana venture. Henceforth it is a drought.

Goldman Sachs estimates that 9m to 10m barrels a day of future supply have vanished. That is a tenth of the world’s 100m barrels a day production. Remember that a swing of just 1m either way in normal times can flip the market from slump to price spike. Short-term demand is inelastic.

The elephant in the room is falling supply from non-Opec producers. These companies and regions (excluding US shale) were gently adding 500,000 barrels a day annually a year until recently. Goldman Sachs thinks they will soon be subtracting up to 1m barrels a day each year.

The pandemic has distorted the immediate picture but not the underlying dynamics. Global demand has fallen by 6m barrels a day. Two thirds of that is jet fuel. Aviation will come back fast as soon as the flying world is vaccinated.
 
The world has turned its back on austerity. Keynesian reflation doctrines are triumphant. The Biden administration explicitly aims to run the US economy hot, with the help of the Federal Reserve. Global "green deals" amount to $16 trillion. “It’s going to turbo-charge oil demand in 2022,” said John Hess, head of Hess Corp.

Eoin Treacy's view -

The commodity supercycle argument has become very popular all of a sudden among institutional investors. The trillions devoted to green tech commitments are expected to fuel a global infrastructure boom which is positive for industrial resources. 

When China entered the WTO, it embarked on the biggest building boom the world has ever seen. That primarily drove demand for oil, coal, iron-ore, copper and cement.

Secular bull markets or supercycles depend on supply inelasticity and rising demand. Twenty years ago, oil had both. Today, we have short-term supply inelasticity and the potential for a rebound in demand.



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February 12 2021

Commentary by Eoin Treacy

Vestas reveals offshore turbine with world's largest sweep

This article by Paul Ridden for NewAtlas.com may be of interest to subscribers. Here is a section: 

Each turbine is expected to deliver around 80 GWh of energy per year, depending on site-specific conditions, which is said to work out as being enough to power 20,000 European homes.

The V236-15.0 MW also offers the potential to reduce the number of turbines deployed at offshore windfarm level – with Vestas calculating that the "offshore turbine offers 65 percent higher annual energy production than the V173-9.5 MW, and for a 900-MW wind park it boosts production by five percent with 34 fewer turbines."

The company expects the first V236-15.0 MW prototype to be built in 2022, with serial production following two years later. It has a design lifetime of 25 years.

“With the V236-15.0 MW, we raise the bar in terms of technological innovation and industrialization in the wind energy industry, in favor of building scale," says Anders Nielsen, Vestas CTO. "By leveraging Vestas’ extensive proven technology, the new platform combines innovation with certainty to offer industry-leading performance while reaping the benefits of building on the supply chain of our entire product portfolio. The new offshore platform forms a solid foundation for future products and upgrades.”

Eoin Treacy's view -

Boosting production and needing to build fewer towers suggests there should be cost savings in construction. The big change in renewable energy occurred in late 2019 when economies of scale improved enough that the wind and solar sectors could survive without subsidies. That has led to a complete reappraisal of the rationale for investing in the sector. More recently it has allowed the renewable energy sector focus on the subsidies provided to fossil fuel companies across the energy supply chain.



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February 11 2021

Commentary by Eoin Treacy

Lithium | 2021 supercharge?

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

We estimate 2020 supply lifted 11% YoY to 340kt, noting lower capacity utilisation as largely a function of bottom-of-the-cycle pricing through 2020. We anticipate that a majority of the ~460kt of cumulative potential capacity that was delayed/deferred over the last ~18 months could remain suspended pending a recovery in pricing to higher levels. Recent consolidation among concentrate operations (i.e. Altura>Pilbara, Wodgina>Albemarle) now sees control of large scale, marginal cost production lies with a small number of established producers who, in our view, lack incentive to switch on large volumes of new supply.

We further note that long lead times to delivering new capacity means that the +US $4.4bn in new equity raised by lithium companies since the start of 2020 is unlikely to lead to a meaningful supply response until the mid-2020s, by which point we expect the market to move into deficit. Our revised market balance forecasts now call for more modest market surpluses (5-7% over 2021-23), with our higher rates of demand growth now expected to outpace supply growth out to 2025. Beyond 2025, we continue to forecast significant market deficits, noting a ~7x increase in supply (i.e. ~240ktpa average increase in capacity) is required to meet our 2030 demand forecast.

Eoin Treacy's view -

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

Supply Inelasticity Meets Rising Demand is the foundation of commodity bull markets. Lithium has been through one big boom and bust cycle already and perhaps the major producers have learned their lesson. The initial mining investment boom occurred almost a decade ago. That resulted in a lot of new supply hitting the market which depressed prices. It has taken significant growth in demand for electric vehicles to soak up that surfeit.



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February 09 2021

Commentary by Eoin Treacy

Marijuana Legalization Is Now in Sight. Here's How to Play It With Options

This article from Barron’s may be of interest to subscribers. Here is a section:

A trio of U.S. senators has given investors the green light to invest in marijuana stocks, an endorsement that suggests the volatile sector might finally blossom into something as acceptable and regulated as alcohol.

More details will emerge when Sens. Cory Booker (D., N.J.), Ron Wyden, (D., Ore.), and Chuck Schumer (D., N.Y.) introduce legislation to legalize and tax marijuana.

“In the early part of this year, we will release a unified discussion draft on comprehensive reform to ensure restorative justice, protect public health and implement responsible taxes and regulations,” they announced Feb. 1 in a joint statement.

Eoin Treacy's view -

The cannabis sector went through a painful rationalisation as early efforts to increase supply suppressed the margins. That led of a significant decline in 2018/19 for many of the more leveraged companies. With the Presidential election in the USA ushering in a new administration speculation began to ramp up that cannabis legalisation was back on the menu.



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February 08 2021

Commentary by Eoin Treacy

Email of the day on gold and fighting the Fed

Thursday's article, “Gold Plunges the most in Four Weeks…” is greatly appreciated.  Despite all the uncertainties and volatility of the past two months you report that you have retained your gold investments and are looking forward to “increase [your] position”.  You express even more confidence in silver.

The attached St Louis Fed Chart showing an accelerating measure of inflation provides good evidence to support your position, long term, but long-term charts, both weekly and monthly show gold is still over-extended. 

If “fighting The Fed” is to be avoided, a bullish gold position may be a courageous act when the world’s central banks will be united in their determination to frustrate gold investors.  There may have been some evidence of that last year.  Also, since silver prices are more easily manipulated, that market seems to be more vulnerable to a combined central bank manoeuvre?

Common sense says that the present world-wide, money creation will end in disaster.  In that situation, precious metals are a safe haven but, in the short term, and even the medium term, risks in those markets appear to be very high. A prudent plan to cover both outcomes seems desirable.  That plan should, perhaps, also incorporate different allocations to gold and silver. Further guidance by you would be invaluable.

Eoin Treacy's view -

Thank you for this email. Fighting the Fed would be holding a gold position in a positive real interest rate environment where one can easily anticipate a positive return from other asset classes. That is not at all what we have at present. We could be looking at a negative real yield for years to come as central banks attempt to loot savings to pay off massive unfunded debts.



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February 05 2021

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review February 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 January 8th. These reviews can be found via the search bar using the term “secular themes review”. 

Highlighting secular themes has been a hallmark of this service for as long as I have been a part of it. I first met David Fuller in Amsterdam in 2003. He was giving a talk to Bloomberg’s clients and we went out for dinner that evening. His way of looking at markets, with a focus on suspending ego to see what the market tapestry is telling us, answered all of the questions I had about how to interpret
markets. I felt honoured when he asked me to come work with him a few months later.

The easy way to find secular themes to is to look at long-term ranges. Prices can so sideways for a long time, sometimes decades, and the whole asset class can be forgotten by investors. These kinds of markets need a catalyst to reignite demand. Once that new theme gathers enough pace, prices break on the upside because the supply side is not capable to responding in a timely manner to the new phenomenon. Sometimes that’s because they don’t believe in the new trend, or it may be because they simply do not have the financial wherewithal to expand. As the power of the new catalyst gathers, it takes time for supply to respond and the market will proceed higher until there is a robust supply response. That can take a long time because demand continues to grow as the new theme increases its dominance of investor attention.



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February 04 2021

Commentary by Eoin Treacy

Gold Plunges the Most in Four Weeks With Dollar Extending Gains

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

“Looks like there’s some liquidation so far this morning,” said Tai Wong, head of metals derivatives trading at BMO Capital Markets. “The dollar is slowly grinding higher, 10-year Treasury yields are back up. Longs are very disappointed that gold never broke above key resistance at $1,860-70 even as silver soared.”

Bullion for immediate delivery fell 2.4% to $1,789.88 an ounce at 11:16 a.m. in New York. The metal dropped as much as 2.7%, the most since Jan. 8. Spot silver slid 2.7% while platinum and palladium also declined.

The wild ride in silver fueled partly by retail investors is abating for now. Last week, posts on Reddit’s WallStreetBets forum initially called for a “short squeeze” of the metal, and that snowballed into a buying frenzy through exchange-traded funds and physical markets. But sentiment shifted after CME Group raised margins, causing prices to swiftly decline, and the volatility is being scrutinized by U.S. regulators.

Eoin Treacy's view -

The demand for gold from those who were buying as a hedge against calamity is abating and that has contributed to the correction which began in August and continues today. Gold dropped below the $1800 level and is now testing the low from back in December. A clear upward dynamic will be required to signal a return to demand dominance.



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February 03 2021

Commentary by Eoin Treacy

Billionaire Pierre Lassonde on #SilverSqueeze, Gold Mining Business & Advice for Speculators

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

Pierre: Oh, look, as far as I’m concerned, the best, best deposit in the world that you can have or find today is a copper-gold deposit or a copper-gold-silver, or a copper-silver deposit, but something with copper. Because I really believe that copper is the metal of the future. In fact, our entire civilization rests on copper, on one metal, and it’s copper. Because without electricity, we have nothing. We have no transportation. We have like no communications. We have nothing. And with the emphasis on greening the world, we’re going to use more copper. So copper is absolutely the fundamental basis of our civilization and it’s going to get better. And with that in terms of fundamental money, I would say gold and silver is also part of the greening of the world. So these three metals are to my mind, the best place to be at this point in time.

Eoin Treacy's view -

Copper has been used as a conductor and alloy component since the Bronze era. In the last decade it has also taken on the role of electricity generation and is impinging on oil’s dominance of transportation.



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February 03 2021

Commentary by Eoin Treacy

New China swine fever strains point to unlicensed vaccines

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

Yan said he believes that people have replicated the sequences of virus strains being studied, which have been published in scientific literature, and that pigs injected with illicit vaccines based on them could be infecting others.

“It’s definitely man-made; this is not a natural strain,” he said.

Neither Johnson nor Yan have fully sequenced the new swine fever strains. Beijing strictly controls who is allowed to work with the virus, which can only be handled in laboratories with high biosecurity designations.

But several private companies have developed test kits that can check for specific genes.

GM Biotech, based in China’s central Hunan province, said in an online post last week it had developed a test that identifies whether the pathogen is a virulent strain, a single-gene deleted attenuated strain, or a double-gene deleted attenuated strain.

The test helps pig producers because the new strains are “very difficult to detect at the initial stage of infection and have a longer incubation period after infection,” the company said.

The government has not said how widely used illicit vaccines are or who has produced them. But a “vast amount” of pigs in China have nonetheless been vaccinated, Johnson said, a sentiment echoed by many other experts.

In 2004-5, when the H5 bird flu strains were spreading across Asia, Chinese laboratories produced several unauthorised live bird flu vaccines, said Mo Salman, a professor of veterinary medicine at Colorado State University, who has worked on animal health in Asia, raising fears that they could produce dangerous new variants.

“The current ASF unlawful vaccine(s) in China is repeating history,” Salman said

Eoin Treacy's view -

Governance is Everything but that is particularly true for the healthcare sector. The challenge for all of us is that China has very little regulation of the pharmaceuticals industry. That’s true of both the human and animal sectors. It leaves open the potential for significant issues to arise in the food supply pipeline as untested remedies proliferate.



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February 02 2021

Commentary by Eoin Treacy

U.S. nuclear: delayed closures could add 26Mlbs to 2021-30 global uranium demand

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

Eoin Treacy's view -

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

The uranium sector has had a number of false dawns over the last decades. The reason for an inability to reach escape trajectory from the lengthy base formations was KazAtom’s policy of flooding the market and driving high-cost producers out of business.



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February 01 2021

Commentary by Eoin Treacy

Citadel Silver Holding Exposes Rifts in WallStreetBets Army

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

Ken Griffin’s Citadel has once again found itself at the center of a WallStreetBets drama, this time over the firm’s holdings of silver.

The precious metal has become a popular buying target for retail investors keen to inflict losses on hedge funds, after posts on WallStreetBets claimed the market was ripe for a short squeeze. Yet some members of the Reddit forum have responded with pleas to avoid the trade, saying Citadel stands to benefit as a major holder of the largest silver exchange-traded fund. “CITADEL IS THE 5TH LARGEST OWNER OF SLV,” one WallStreetBets user wrote on Sunday, referring to the iShares trust’s ticker symbol. “IT’S IMPERATIVE WE DO NOT ‘SQUEEZE’ IT.”

Eoin Treacy's view -

The short-term pop in GameStop might have been driven by a band of retail investors and some sharp hedge fund players. The narrative has been a David and Goliath story where retail investors extract a measure of justice for the foreclosure crisis after the Global Financial Crisis. Meanwhile the narrative in silver is also a David and Goliath story, where retail and institutional investors face off against central banks and their inflationary policies. 



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February 01 2021

Commentary by Eoin Treacy

DoubleLine Round Table 2021

Section 1 Global Macroeconomy: State of Play and Outlook Part 1 and Part 2

Section 2: Financial Markets Part 1 and Part 2

Section 3: Best Ideas

 

Eoin Treacy's view -

I enjoyed this series of roundtables last year and this year did not disappoint. The points made are all relevant to the market environment as we see it today. Ther participants expressed a great deal of fear that we are dangerously close to a bubble peak. There is a lot of worry about valuations, social unrest and the effects on the credit worthiness of the corporate bond market, when the Fed is backstopping it.



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January 29 2021

Commentary by Eoin Treacy

Speculative Frenzy Spills Into Crypto as Bitcoin Tops $38,000

This article by Yakob Peterseil and Joanna Ossinger for Bloomberg may be of interest to subscribers. Here is a section:

Musk’s page on Twitter simply said #bitcoin with no further explanation, but speculation that the world’s richest man might be a Bitcoin investor was enough to set off the dramatic rally.

Prices spiked in a matter of minutes, for the biggest intraday move in almost a year.

“This huge melt-up is due to Elon’s tweet,” said Antoni Trenchev, managing partner and co-founder of Nexo in London, which bills itself as the world’s biggest crypto lender. Musk’s
support for Bitcoin “creates a safe zone for some of the smaller companies and possibly everyone in the S&P 500 to allocate into Bitcoin,” he said.

Musk also tweeted an image of a “Dogue” magazine cover featuring a whippet in a red sweater -- a play on the fashion magazine “Vogue.” He also sent posts calling Cyberpunk a great video game and said, “In retrospect, it was inevitable.”

Binance, the world’s largest cryptocurrency exchange by volume, briefly suspended withdrawals on Friday to address a large increase in requests. Chief Executive Officer Changpeng Zhao said that user sign-ups and trades jumped to a record high. “We almost ran out of DOGE coin addresses,” Zhao told Bloomberg. “Our system couldn’t generate new addresses fast enough to match new users coming in. It’s crazy.”
 

Eoin Treacy's view -

The kind of activity that has been witnessed in GameStop this week is considered normal in the completely unregulated cryptocurrency markets. Since there is no hard fundamental to base value on, the market is dependent on momentum to stoke bull markets. When an anarko-capitalist idol like Elon Musk tweets, it tends to get a lot of attention.



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January 26 2021

Commentary by Eoin Treacy

Soybeans Buoyed as China Turns to U.S. for Nearby Supplies

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

China is looking for more U.S. soybeans after top exporter Brazil suffered from a drought that delayed planting and now downpours that slowed harvesting. The Asian nation needs so much of the oilseed to feed a growing pig herd that it already bought supplies for delivery in August, at the end of the U.S. season, and for 2021-2022.

China’s interest in nearby U.S. supplies comes after Chicago soybean futures slumped more than 7% last week, or over $1 a bushel, the worst performance in more than six years. Crop prices recouped some of their losses on Monday, but remain well down on their multiyear highs earlier in January.

Corn futures in China are also down from record highs this month, tracking Chicago prices and pressured by sales from state wheat stockpiles. In terms of South American supplies, Brazil is heading for a record soybean crop after rains, while dryness is still threatening the production outlook in Argentina.

Eoin Treacy's view -

2020 was a year of plagues. The coronavirus pandemic disrupted supply chains. The swine flu killed off millions of hogs all over the world. The plague of locusts devastated harvests in East Africa, India and southwest China. Spring floods in the USA may also have had an impact on both harvesting winter crops and the overall planting schedule. 2020 was also the year much stricter emissions rules came into effect for the shipping sector so it was going to be a disruptive year because plagues arrived.



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January 25 2021

Commentary by Eoin Treacy

Email of the day on gold as a Tier 1 asset under Basel III

You mentioned that gold should be higher. I understand that there is effectively a "put" on gold, die to shorts being able to be placed - using unallocated gold - which are naked. But that the Basel 3 Accord which should be in place in June will reduce unallocated gold to a tier3 asset.

Gold I understand being elevated to a tier 1 asset (as for cash).

This surely means that the demand for physical gold (already in demand with orders not being filled) will surely surge.

Are we therefore positioned to make a killing on gold between now and June?

Eoin Treacy's view -

Thank you for this topical question. The announcement that gold would be recategorized as a Tier 1 asset under Basel III occurred two years ago. That begs the question whether the outsized demand from central banks since early 2019 was in response to the announcement and in preparation for the changeover in June 2021. I suspect Russia’s outsized purchases over the last few years were influenced by this change over.



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January 21 2021

Commentary by Eoin Treacy

Australian Resources

Eoin Treacy's view -

The S&P/ASX 200 Resources Index is back testing its peak from 2008 and now occupies about 20% of the broader index; second only to the banking sector. Of course, that is in nominal terms. On a constant currency basis, the Index is well shy of the 2008 and 2011 peaks.

That’s a common feature for resources indices around the world. The commodity crash took a heavy toll on the metal and currency values which compounded the effect of the declines on portfolios.

The opposite is now true. As the Dollar trends lower it burnishes returns for investors in currencies other than the Dollar.



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January 20 2021

Commentary by Eoin Treacy

Deflation Threatens to Push Yen Higher on Japan Real Yield Gain

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

“Japan’s real yields are high and are rising with deflation underway,” said Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co. “The real yield gap widening in the negative is very significant. It may eventually drag the yen higher.”

Consumer price growth in Japan excluding fresh food -- a measure closely watched by the country’s central bank -- has been negative or zero since April. Expectations for future inflation -- derived from 5-year breakeven rates -- sit at minus 0.12%. Equivalent U.S. breakevens are at 2.16%, up over 60 basis points and rising since November, as investors bet further stimulus under new President Joe Biden will help reflate the American economy.

Yen at 100
The result is a higher real yield in Japan, where 5-year inflation-protected notes trade around zero versus minus 1.73% in the U.S., increasing the relative attractiveness of the country’s bonds and its currency.

Eoin Treacy's view -

You know you live in a funny reality when a zero or negative interest rate produces a positive real yield. Japan’s deflationary environment has been an abiding characteristic of the market for decades and the vast quantity of debt accrued in that time is a headwind to risk taking, speculation and economic activity going forward. Attempts to reinvigorate the domestic demand story with immigration were beginning to bear fruit ahead of the pandemic. Japan has weathered the storm better than most so it will face less of a challenge in recovering as the world heads towards reflation.



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January 18 2021

Commentary by Eoin Treacy

Email of the day - on the early stages of a secular bull market.

Until the beginning of last year you often spoke on the theme of the early stages of a secular bull market. David had begun speaking about it as long as 4 years ago. But with the onset of the pandemic, you have been largely silent about it. Has it stalled or, in your view, already peaked?

Eoin Treacy's view -

Thank you for this important question. In October 2008, I remember sitting at my desk and looking at the calculation that the S&P500 was sitting on the widest overextension relative to the 200-day ever. Acceleration is always a trend ending and the crash signalled the beginning of the bottoming process. By the time Wall Street reached its nadir in March 2009 many instruments were well off their lows and by the end of the year the leaders were making new highs.

Gold, commodities, ASEAN and technology took off. Of these, technology is the only one which had uninterrupted staying power all the way through the bull market to date.  

I started writing Crowd Money in 2011. At the time a host of big international companies, with global franchises, that dominate their niches were breaking out of long-term ranges. It was a clear signal that a new secular bull market was underway. By the time the book was published in 2013, it was still a minority view that a new bull market was underway.



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January 14 2021

Commentary by Eoin Treacy

Email of the day on financial repression:

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

Eoin Treacy's view -

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



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January 14 2021

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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January 13 2021

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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January 13 2021

Commentary by Eoin Treacy

Corn Supply Squeeze Sends Prices Soaring, Risking Food Inflation

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

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

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

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

Eoin Treacy's view -

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



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January 12 2021

Commentary by Eoin Treacy

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

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

Eoin Treacy's view -

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

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



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January 06 2021

Commentary by Eoin Treacy

Waiting For The Last Dance

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

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

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

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

Eoin Treacy's view -

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



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January 05 2021

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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January 04 2021

Commentary by Eoin Treacy

December Research Letter

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

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

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

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

Eoin Treacy's view -

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

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



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December 30 2020

Commentary by Eoin Treacy

Email of the day on rising inflationary pressures and Ethereum

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

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

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

Eoin Treacy's view -

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



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December 22 2020

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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December 21 2020

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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December 21 2020

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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December 21 2020

Commentary by Eoin Treacy

Email of the day - on filling the gap

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

Eoin Treacy's view -

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



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December 17 2020

Commentary by Eoin Treacy

Email of the day on cannabis stocks

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

Eoin Treacy's view -

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



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December 17 2020

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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December 16 2020

Commentary by Eoin Treacy

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

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

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

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

Eoin Treacy's view -

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



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December 15 2020

Commentary by Eoin Treacy

Biden Plots Cuba Reset in Rebuke of Trump's Sanctions

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

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

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

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

Eoin Treacy's view -

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



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December 11 2020

Commentary by Eoin Treacy

Sea Fever Off the Cape

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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December 11 2020

Commentary by Eoin Treacy

Wheat Set for Biggest Weekly Gain Since July on Supply Surprise

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

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

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

Eoin Treacy's view -

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



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December 10 2020

Commentary by Eoin Treacy

Chinese Household Debt Surges Through the Pandemic

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

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

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

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

Eoin Treacy's view -

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



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December 09 2020

Commentary by Eoin Treacy

Email of the day on net central bank selling of gold

You periodically remind us of some of David’s good advice, such as “Don’t fight The Fed”.   The Gold Hub recently reported that central banks around the world were net sellers of gold in Q3. (See attached chart.)  It is easy to see why these institutions want to discourage gold investors.  Are we fighting not only the Fed but every other government in the world?

Eoin Treacy's view -

Thank you for this question. Gold has been in a corrective phase since late August and sentiment has seen a significant reversal. If we remember only a few months ago investors were revelling in the idea that gold was the only asset worth owning. Today there is a lot of questioning about whether it worth owning at all.



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December 07 2020

Commentary by Eoin Treacy

Uranium Stocks Rise on U.S. Defense Bill

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

Uranium stocks outperformed as House and Senate lawmakers revealed a compromise version of the annual National Defense Authorization Act. Meanwhile, industrial metals continued their rally with the global equity markets.

S&P Global reported that the bill effectively provides for the military to continue a policy under President-elect Joe Biden that classifies the domestic supplies of certain minerals such as uranium, graphite and lithium as vital to national security

Eoin Treacy's view -

Ensuring ready demand for North American supply is an important support for the uranium mining sector. Many miners have been producing uranium at a loss because of significant oversupply and the price war Kazatomprom imposed. It’s been years in the making but the big question is whether the excess supply has been worked off.



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December 04 2020

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review

Eoin Treacy's view -

On November 24th I posted a review of candidates I believe likely to prosper in the emerging post-pandemic market. It was well received by subscribers so I will post an update on my views on the first Friday of the month going forward. That way subscribers can have an expectation that long-term themes will be covered in a systematic manner and will have a point of reference to look back on.

Media hysteria about the 2nd or 3rd waves has not led to new highs in the number of deaths. The success of biotech companies in deploying vaccines means there is going to be a substantial recovery in the economic activity in 2021 and going forward.

The stay-at-home champions saw their sales growth surge in 2020. It will be impossible to sustain that growth rate in 2021. That’s particularly true for mega-caps. One-way bets on the sector are likely to work less well in the FAANGs going forward.



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December 03 2020

Commentary by Eoin Treacy

JPMorgan Sees Divergence in S. African Gold, Platinum Stocks

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

Prices of platinum, palladium and other platinum group metals will be supported by demand from China and other major consumers, given an increased push for energy transition, electric vehicles, and reduced emissions. Platinum and its by-product palladium are used in vehicle pollution-control devices.

Platinum companies “are very different now from gold,” Aserkoff said. “They have different drivers from gold, the price of the metals is going to change and the stock prices will behave differently. I don’t think they should be as correlated as they used to be.”

Eoin Treacy's view -

Gold is monetary metal so it tends to attract people who are concerned about the sustainability of a fiat currency system. The other precious metals are also industrial resources. They tend to be held in their own right but they also have industrial utilities. Solar panels are a support for silver prices and catalytic converter demand has been a tailwind for palladium. Platinum has lacked a fundamental driver since the decline of diesel engines. That may now be changing with the evolution of a hydrogen fuel cell market. 



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December 03 2020

Commentary by Eoin Treacy

Email of the day on inflation

With the growing expectation of rising inflation in 2021 what areas of the world markets would you choose to be positioned in if this proves to be the case? I note you only have a few trades on at present. Ae you likely to broaden these in the future?

https://www.bloomberg.com/opinion/articles/2020-12-03/five-reasons-to-worry-about-faster-u-s-inflation

https://twitter.com/Ole_S_Hansen/status/1334476194218205186

Eoin Treacy's view -

Thank you for this question. Governments are going all in on reflation and they are unlikely to stop until they get the inflationary outcome their desire. When above trend inflation is policy rather than a “nice to have” is has to be a more credible option.



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December 01 2020

Commentary by Eoin Treacy

Bitcoin's Rally Spurs Wall Street to Question Future of Gold

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

“The transparency in Bitcoin is helping drive a lot of interest,” said Lyle Pratt, an independent investor who owns Bitcoin. “Gold is kind of like a blackbox, you have to trust the custodians to tell you about any flows in the market.”

For Plurimi Wealth LLP’s Chief Investment Officer Patrick Armstrong, who allocates 6.5% of his discretionary funds into gold, even if Bitcoin has potentially bigger upside in an inflationary spiral, the risks are just too big. Gold also has a long history as a store of value that Bitcoin can’t match. There’s always the nagging suspicion that another, potentially central-bank backed, digital currency could supplant it.

“If the debasement trade works, it is very possible Bitcoin works better,” he said. “But it is also possible Bitcoin has no value in years to come, while I do not think the same can be said of gold.”

One thing that’s clear is Wall Street is taking Bitcoin seriously in a way that it didn’t in 2017. “I have changed my mind!” wrote Sanford C. Bernstein strategist Inigo Fraser-Jenkins in a report Monday. Bitcoin won’t replace gold, but there’s room for both, he said, especially if the future is one of inflation and extreme debt levels.

“I see it as being complementary,” he said in an interview. “Whatever one’s starting position was before the pandemic in terms of what your gold and crypto allocation should be, I think it should be materially larger now.”

Eoin Treacy's view -

Many institutional investors missed out on the initial run-up in bitcoin prices and they are committed not to miss out on this one. The big inhibition for institutional money has been the question of custody. With so many examples of exchanges being robbed and even of an exchange CEO dying with the encryption key only committed to memory, there are obvious questions about the security of custody services. That issue was addressed when Fidelity began to offer custody services. Now that both Square and PayPal are offering transaction services, the perception of risk has been reduced but not eliminated.   



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December 01 2020

Commentary by Eoin Treacy

Email of the day on top formations

Looking at the chart of Franco Nevada, is that a head and shoulders top formation?

Eoin Treacy's view -

A head and shoulders top formation is an iteration of a ranging, time and size Type-3 top discussed at the Chart Seminar. Tops are more difficult to identify than bottoms because the natural proclivity of prices is to rise once a trend has been established. Therefore, a number of factors need to fall into place to confirm top formation development.



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November 27 2020

Commentary by Eoin Treacy

Email of the day on the Service

I have been a subscriber for just over 30 years, and in that time, I can't recall many times when a clear and concise analysis of economic and political conditions was as important as it is today. You are doing a wonderful job at keeping the collective informed, allowing us to see a broader picture than our individual biases might otherwise give us. Thanks so much!

And

Congratulations our last subscriber commentary was exceptional. You have done wonders for my confidence and ability to help my clients. Keep up the good work. Best wishes

Eoin Treacy's view -

Thank you both for your kind words and it is enormously gratifying that subscribers find value in the Service. That’s particularly true for veterans who have been with us for decades. Given both the demand and positive response for a reasonably succinct list of thematic investments that cover the prevailing market outlook, I’ll review the list on at least a monthly basis. The first Friday of the month which would coincide with the Big Picture Long-Term audio/video makes sense to me.



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November 27 2020

Commentary by Eoin Treacy

Email of day on gold

What strikes me and many other observers is that Gold is down by 1.5% to 1785 cash (just before Nov. contract expiry date…) but GDX and GDXJ are UP by 0.4% and 0.9%!

Silver is DOWN by 3% (just before Nov. contract expiry date…) while Silver miners SIL is also slightly UP!

As miners normally lead for me the dichotomy between metals and miners is probably due to the bullion banks trying to push down prices for the (RECORD!) deliverable contracts (they are short Gold by about USD 35bn!) and will allow metal prices to rise next week

If so, then this then be in tune with your Nov. 26 turn-around/bottom +- 1-2 trading days for the 10 and 20 day cycles.

Thinking about undoing my residual hedge via JDST before markets close early today….

What is your view on the above?

I much wonder if your bottom-fishing orders for PM’s were triggered today – but I suppose you want to get in at prices closer to 1700 for gold…

Eoin Treacy's view -

Thank you for this question and for pointing out this divergence between gold and gold mining stocks. The proximity of the expiry of gold contracts is relevant not least because of demand for physical metal. It is well within the realm of the possible to think enterprising institutional traders might like to see a lower price ahead of delivery.



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November 25 2020

Commentary by Eoin Treacy

Inflation Regime Roadmap

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

So there’s plenty to choose from here and all seven are useful to hold in mind when thinking about inflation. For our part, we think an acceleration in inflation could now be driven by a combination of the following – the first two being critical to our case:

Monetarism – expecting persistent deficit financing causing the money stock (M2) to rise relative to GDP. Some would classify this as demand-pull inflation;

Marxism – believing that it will be impossible to re-impose austerity after the Coronavirus is over and that voters will demand rising real wages to control income inequality. Some would classify this as cost-push inflation;

Neoclassical effects – the just in time, Asia-dominated global supply chain is likely to morph into a just in case, home-grown supply chain, causing a large-scale supply-side disruption;

Environmental effects – on the basis the one should never let a good crisis go to waste, it’s likely that G7 governments now use their new-found balance sheet room to accelerate the capital investment required to make their economies ecologically sustainable, which will have the side effect of raising fixed capital costs for private sector firms.

Eoin Treacy's view -

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

Some concern has been expressed this week at the impending expiry of the moratorium on evictions in the USA. This is a useful graphic.

It highlights the fact that many states have 30% delinquency on mortgages/rent. Interestingly, despite the widely held view that New York is on the cusp of being denuded of inhabitants, it is far from the worst in terms of delinquency.



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November 25 2020

Commentary by Eoin Treacy

Australia's 'Paradox of Thrift' Risks Japan-Style Price Weakness

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

The irony of the parsimonious attitude toward pay is governments are throwing around billions of dollars in stimulus programs to support the economy and ratcheting up debt to an extent that makes such restraint almost irrelevant.

To make the new wage guidance more palatable, the federal government scrapped a 2% cap on wage gains, meaning that when businesses are boosting pay, public servants could also enjoy larger gains.

The danger is “a negative feedback loop becomes entrenched: low inflation outcomes lower the public’s inflation expectations, which in turn keeps inflation low,” said Sheard, who hails from Australia. “This in a nutshell is the story of Japan’s two-decade deflation.”

Eoin Treacy's view -

It beggars’ belief that public sector wages can increase faster than the private sectors but such is the power of unions. It seems people often ignore the fact that all public wages are ultimately paid from tax revenues. Everything possible should be done to celebrate the ingenuity of the private sector in order to boost profitability and widen the tax base.



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November 23 2020

Commentary by Eoin Treacy

Email of the day - on the politicisation of monetary policy

I hope life for you in California is more fun than it is here in England. But let's hope we really are past the low point as far as the virus is concerned. I had thought that would be true for economies too, but this latest move by President Trump (summarised in the article by Ambrose Evans Pritchard) does raise questions. With this move, which asset classes do you think will benefit and which will lose on a 3-6 month timescale?

Best wishes to you and family. 

Eoin Treacy's view -

Thanks for the well wishes and this article which may be of interest to the Collective. All is well with us since the streets were blessedly free of protestors following the election. I guess they got the result they wished for. Here is a section from the article:

He instructed Fed chairman Jerome Powell to return the unused portion of a $454bn (£342bn) account approved by Congress during the market meltdown in March. This seed money gave the Fed $4.5 trillion extra lending power under a policy of 10:1 leverage and had an electrifying effect on market confidence, helping avoid the errors made in 2008.

Krishna Guha from Evercore ISI said the Fed’s market stabilisation policy had been politicised. Congressman Bharat Ramamurti, a member of the House oversight committee on stimulus, called Mr Mnuchin’s move an unjustified and ideological decision by the treasury department.

The Fed retains its monetary policy powers and can purchase further US treasury bonds but that is a blunt tool at this juncture unless it is married to aggressive fiscal expansion, which the Republican Senate has vowed to block.

The Fed is concerned that more QE will chiefly inflate asset prices without doing much to help the real economy, exacerbating social inequality.

Congress stripped the Fed of its discretionary powers under Article 13 after the Lehman crisis. The Fed now needs permission from the treasury to go beyond its normal mandate. This was granted immediately during the panic in late March.



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