Investment Themes - Precious Metals / Commodities

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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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November 19 2020

Commentary by Eoin Treacy

The Next Phase of the V

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

#1: A global synchronous recovery: We expect a broad-based recovery, both geographically and sectorally, to take hold from March/April onwards. Driving this synchronous recovery will be a more expansive reopening of economies worldwide and the extraordinary monetary and fiscal support now in place. Global GDP, already at pre-COVID-19 levels (based on seasonally adjusted GDP levels), continues to accelerate and is on track to resume its pre-COVID-19 trajectory by 2Q21. We expect China to return to its pre-COVID-19 path this quarter, and the US to reach it by 4Q21.

#2: EMs boarding the reflation train: After a prolonged period in which EMs have faced a series of cyclical challenges, macro stability is now in check. With the COVID-19 situation improving in a broad range of EMs, their pace of recovery is catching up. EM growth rebounds sharply in 2021, helped by a widening US current account deficit, low US real rates, a weaker dollar, China’s reflationary impulse, and EMs ex China's own accommodative domestic macro policies.

#3: Inflation regime change in the US: We see a very different inflation dynamic taking hold, especially in the US. The COVID-19 shock has accelerated the pace of restructuring, creating a significant divergence between the output and unemployment paths. With policymakers maintaining highly reflationary policies to get back to preCOVID-19 rates of unemployment quickly, wage pressures and inflation will pick up from 2H21. We expect underlying core PCE inflation to rise to 2%Y in 2H21 and to overshoot from 1H22, with the risk that it happens sooner.

Eoin Treacy's view -

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

With millions of people out of work it is easy to form a gloomy picture of economic potential. However, even at a US unemployment rate of 10%, there are still 90% of people with jobs. Moreover, many people who have held onto their employment have boosted savings this year.

When 90% of people come through a crisis in OK shape and a significant minority come out ahead, there is ample scope for a significant bounce back in activity. There is a great deal of pent up demand in the global economy and all that cash on the side lines is fuel for bull markets. The fact monetary and fiscal policy is aimed to improving the outcomes for the remaining 10% suggests loss credit and low rates are here to stay.



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November 19 2020

Commentary by Eoin Treacy

A New UN Push Aims to Feed the World's Rabid Hunger for Carbon Credits

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

It’s a tricky proposition, though. Offset programs are notoriously difficult to execute with confidence. REDD+, launched in 2007 to much fanfare among developing nations and UN climate negotiators, but has rarely lived up to its original excitement as developed nations failed to install carbon-pricing policies that succeed in guaranteeing demand. 

Global demand for offsets may outstrip supply by 2025, according to a September analysis by Fitch Ratings. Many companies, including Microsoft Corp, The Walt Disney Co, and Royal Dutch Shell Plc, have already begun either buying or planning to buy offsets. Amazon.com Inc. founder Jeff Bezos this week announced $791 million in funding for 16 environmental groups, including $100 million each to organizations with strong forestry or offsets programs—EDF, World Resources Institute, and World Wildlife Fund.

Navigating the challenges to come may require groups like Emergent to continue to act as market-making entities. Or, if markets get the boost they need from the Green Gigaton Challenge and other initiatives, “we'd be thrilled to turn off the lights, close the door,” Bloomgarden said. “Impact achieved.”

Eoin Treacy's view -

I was part of team that put together a proposal for a group in Alaska who were seeking to raise investment capital for a welfare/education program for their community. They were in line to sell a significant asset but instead were able to hold the asset and sell carbon credits on a stand of forest on the community’s property. That delivered a long-term cashflow, they got to keep their assets and they had no plans to sell or cut the trees in any case.



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November 19 2020

Commentary by Eoin Treacy

Rocketing Bitcoin Stakes Claim as Pandemic Refuge for Brave

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

“Bitcoin seems to be the hedge of choice against the U.S. dollar debasement that is looming, either through more Federal Reserve quantitative easing, higher government debt or a steepening yield curve -- or all three,” Jeffrey Halley, a senior market analyst with Oanda Asia Pacific Pte, wrote in an email.

Bitcoin’s investor base is also widening as more institutions make the jump into the asset class. Purchases or endorsements from the likes of Square Inc., Paul Tudor Jones and Stan Druckenmiller add to the mix. But its volatility -- including a furious run toward $20,000 in December 2017 followed by a bust -- make arguments for the cryptocurrency as a store of value contentious.

Fear of missing out “is well and truly in play here, and the fact that so many big hitters are publicly declaring their positions is clearly helping,” Chris Weston, head of research at Pepperstone Financial Pty, wrote in a Nov. 18 note. “I don’t see this move as a mania or grossly over-loved just yet.”

Eoin Treacy's view -

The bitcoin price is back testing its peaks which begs the question whether it is about to break on the upside in a rerun of the 2017 mania. The one big difference between bitcoin and other assets is it is completely borderless. All anyone needs is an internet connection to buy. That equates to a very wide investor base for what is a tight market.



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November 18 2020

Commentary by Eoin Treacy

Platinum Heads for Record Deficit This Year on Supply Disruption

This article by Eddie Spence for Bloomberg may be of interest to subscriber. Here is a section:

Platinum markets are poised for a record deficit this year as disruptions to key producers and an increase in investor appetite far outstripped the pandemic’s effect on industrial demand.

Pandemic-related mine closures and outages at Anglo American Plc’s converter plant in South Africa have cut supply, according to a report by the World Platinum Investment Council. The group projects a deficit of 1.2 million ounces for 2020, the largest since records began, and almost four times higher than it forecast two months ago.

Despite the record shortfall, platinum has declined about 3% this year, making it one of the worst-performing major metals. Demand from auto-catalysts, the biggest consumers of platinum, is forecast to drop 16%. By contrast, gold has surged 24%, while sister metal palladium has advanced more than 19%.

Eoin Treacy's view -

Platinum is an industrial metal which saw demand decline sharply following the diesel scandal. Recent news that electric vehicle sales now outpace those of diesel cars in Europe is a testament to how low demand has fallen. That has resulted in the price being among the worst performers in both the industrial and precious metals sectors over the last few years.  



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November 18 2020

Commentary by Eoin Treacy

Panasonic Is the Latest Company Betting on Electric Vehicles, Powering Past Its Tesla Partnership to Explore a Venture in Norway

This article by Jack Denton for Barrons may be of interest to subscribers. Here is a section:

Europe is one of the fastest-moving spaces in the race to dominate an expected boom in electric vehicles, with at least 12 countries planning a ban on internal combustion engine vehicles in coming years. U.K. Prime Minister Boris Johnson announced on Wednesday a ban on the sale of new gasoline and diesel cars, to come into effect by 2030.

Tesla is building a gigafactory in Germany and is reportedly planning one in the U.K., while one of its key rivals, Northvolt, is building a gigafactory in Sweden. Established European car makers like Daimler, Volkswagen, and BMW are racing to build electric vehicles on their own or through partnerships, and Panasonic has previously supplied batteries to Volkswagen and Peugeot.

Eoin Treacy's view -

At its recent battery day Tesla announced they plan on ditching outside help in producing batteries over the coming few years. That’s one of the primary ways they aim to achieve lower production costs. It obviously represents a business risk for Panasonic and this agreement appears to be a first step toward diversifying.



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November 17 2020

Commentary by Eoin Treacy

Nobel UN food agency warns 2021 will be worse than 2020

This article by Edith Lederer for AP News may be of interest to subscribers. Here is a section:

In April, Beasley said 135 million people faced “crisis levels of hunger or worse.” A WFP analysis then showed that COVID=19 could push an additional 130 million people “to the brink of starvation by the end of 2020.”

He said in Wednesday’s virtual interview from Rome, where WFP is based, that while famine was averted this year, the number of people facing crisis levels of hunger is increasing toward 270 million.

“There’s about three dozen countries that could possibly enter the famine conditions if we don’t have the money we need,” Beasley said.

According to a joint analysis by WFP and the U.N. Food and Agriculture Organization in October, 20 countries “are likely to face potential spikes in high acute food insecurity” in the next three to six months, “and require urgent attention.”

Of those, Yemen, South Sudan, northeastern Nigeria and Burkina Faso have some areas that “have reached a critical hunger situation following years of conflict or other shocks,” the U.N. agencies said, and any further deterioration in coming months “could lead to a risk of famine.”

Other countries requiring “urgent attention” are Afghanistan, Cameroon, Central African Republic, Congo, Ethiopia, Haiti, Lebanon, Mali, Mozambique, Niger, Sierra Leone, Somali, Sudan, Syria, Venezuela, Zimbabwe, they said.

Eoin Treacy's view -

Africa has, generally, come through the pandemic in much better shape than developed nations because of its large youthful population. That’s makes intuitive sense. COVID-19 affects the elderly more than any other demographic and Africa has more young people than anywhere. 



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November 16 2020

Commentary by Eoin Treacy

Sugar, Coffee Jump as Hurricane Threatens Central America Crops

This article by Marvin G. Perez and Patrick McKiernan for Bloomberg may be of interest to subscribers. Here is a section:

Iota will hit near the Honduras-Nicaragua border on Monday in the aftermath of Hurricane Eta, which killed more than 100 people. Iota’s winds reached 160 miles (257 kilometers) per hour as a Category 5 storm, the strongest on the five-step Saffir Simpson scale. A hurricane that powerful can crush homes, snap trees and make areas uninhabitable for months.

Honduras is Central America’s biggest arabica producer. Guatemala is second and a key shipper of raw and refined sugar. Iota may bring 24 inches (61 cm) to 36 inches of rain as the storm crosses the two countries and Nicaragua, Donald Keeney, senior meteorologist for Maxar in Gaithersburg, Maryland, said in a telephone interview.

The region was hammered by Tropical Depression Eta earlier this month as torrential rain damaged roads, compounding hurdles for growers facing labor shortages during the coronavirus pandemic.

Eoin Treacy's view -

This has been an unusually active and lengthy Atlantic hurricane season. Not only has it gone on longer than normal but it also started early and has had more named storms than any other year.

The severity of storms has increased of late but the more important development is the surprise rapid strengthening of storms as they approach land witnessed over the last two years. That is a wholly new phenomenon which makes the damage potential increasingly difficult to predict.

This podcast interviewing Nathan Myhrvold includes a section where he discusses his theory on how to prevent hurricanes and may be of interest to subscribers.  This article from National Graphic from 2017 may also be of interest. 



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November 13 2020

Commentary by Eoin Treacy

Quant Shock That 'Never Could Happen' Hits Wall Street Models

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

 

As money managers rushed to price in stronger economic growth, factor investors who dissect stocks by how much they’ve risen or fallen saw this strategy, known as momentum, crash on Monday like never before. Equities more sensitive to the economic cycle like value and small-cap names skyrocketed.

So while the S&P 500 is just shy of its record high, it’s been a wild week for quants even by the standards of this wild year, with many enduring violent moves rather than capitalizing on the risk-on mood.

All this recalls long-standing worries that freakish cross-asset gyrations are getting more common thanks to cheap money and investor crowding.

Quigley’s estimate for the odds of this week’s shock is in part tongue-in-cheek, based on a rule of thumb for a normal distribution of statistical data. Asset moves are not known to reliably obey this convention that says 98% of all data points occur within three standard deviations of the mean.

But even with the knowledge that market prices are more prone to outlier moves, a rotation of the magnitude seen this week was still a shock to risk models.

Eoin Treacy's view -

Quantitative strategies are designed to take advantage of relative small moves between asset classes that take place every day. They make money be sizing their positions according to the “normal” volatility in the ratios they monitor. 98% efficiency means that on any given day there is a 2% chance of a volatility event leading to unexpected losses. That’s acceptable for the vast majority of investors provided the incidence of outsized events remains low. The reason the credit crisis killed off so many fixed income macro strategies is because the dispersion in the returns broke out and stayed that way for a prolonged period.



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November 13 2020

Commentary by Eoin Treacy

Can Marijuana Help Biden Heal a Divided Nation?

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

What’s more notable is that unlike in the past, all of this happened without much of a public uproar. To be fair, there have been bigger concerns on Americans’ minds these days. But this is the moment that cannabis companies and their investors have been waiting for: to be considered a legitimate industry rather than a hot voting issue. From here, the goal is to make weed every bit as normal as junk food, wine and other vices long found in stores across America.

In order for the industry to flourish it needs the federal government’s help, and the prospects of that are suddenly looking better. Two-thirds of U.S. adults are in favor of marijuana legalization — 91% if you include those who support it at a minimum for medicinal purposes, according to Pew Research Center. That’s more than the number of Americans who support abortion rights or who think human activity contributes to climate change.

Eoin Treacy's view -

President Trump was adamant in his opposition to easing restrictions on sales of cannabis. That contributed to a significant rationalization of the sector over the last couple of years where supply overwhelmed consumption. A number of the early winners in the sector went bust and the expansion plans of the some of the largest companies were heavily cut back. As new administration in the USA takes shape, enthusiasm at the prospect of a reclassification is gaining ground.



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November 10 2020

Commentary by Eoin Treacy

Sustained high palladium price favours substitution

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

Substitution of palladium with platinum in three-way autocatalysts will help to offset platinum’s decline in time, but near-term upside is limited. A modest level of substitution is expected in gasoline autocatalysts from 2021, initially in the US where vehicles are generally larger with lower temperature engines. In China and Europe, car manufacturers have prioritised meeting increasingly tight emissions legislation, so will be behind on changing catalyst formulations compared to the US.

However, a sustained palladium price above that of platinum could be tipping the balance in favour of increased substitution, which is necessary to bring both the platinum and palladium markets closer to balance. Palladium has traded at an average of $2,187/oz this year, despite being in the midst of a pandemic and a global recession, with significant contractions to demand. The palladium market deficit is forecast to shrink to around 340 koz this year (as demand was impacted more than supply by Covid-19), and again in 2021 due to work-in-progress stock but is expected to expand significantly thereafter as light-vehicle production recovers.

Eoin Treacy's view -

Both platinum and palladium are industrial metals with precious metal attributes. They have both been used for catalytic converters and it usually takes a very large move to initiate the retooling necessary to switch from one to the other.



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November 09 2020

Commentary by Eoin Treacy

Pfizer Soars After Vaccine Prevents 90% of Covid Cases in Study

This article by Robert Langreth, Naomi Kresge and Riley Griffin for Bloomberg may be of interest to subscribers. Here is a section:
 

However, the strong reading from the first large-scale trial to post efficacy results bodes well for other experimental vaccines, in particular one being developed by Moderna Inc. that uses similar technology. Its big trial could generate efficacy and safety results in weeks. If that study succeeds as well, there could be two vaccines available in the U.S. by around year-end.

Pfizer expects to get two months of safety follow-up data, a key metric required by U.S. regulators before an emergency authorization is granted, in the third week in November. If those findings raise no problems, Pfizer could apply for an authorization in the U.S. this month. A rolling review is in process in Europe.

So far, the trial’s data monitoring committee has identified no serious safety concerns, Pfizer and BioNTech said.

Leading the Race
The positive preliminary data mean the U.S. pharma giant and its German partner are on track to be first with a vaccine, after signing advance deals with governments worldwide for hundreds of thousands of doses. The companies have said they should be able to produce 1.3 billion doses -- enough to vaccinate 650 million people -- by the end of 2021. About 50 million doses are expected to be available in 2020.

“It shows that Covid-19 can be controlled,” BioNTech Chief Executive Officer Ugur Sahin said in an interview. “At the end of the day, it’s really a victory of science.”

Eoin Treacy's view -

This news is the foundation of the argument for removing social distancing guidelines by the end of the second quarter at the latest.

It no longer matters whether one agrees with wearing a mask, practising social distancing, vacating offices, opening or closing schools or the potential for overloading the healthcare system. The question of whether this was necessary or not is now irrelevant. The introduction of vaccines will render the argument mute.



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November 06 2020

Commentary by Eoin Treacy

Bonds are the sentinels in the sequence of recovery

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

Phase 2: things have to get worse before they get better, and this means there are aggressive policies to come (more so if Biden wins). This bodes well for a recovery that should further support a rotation towards cyclical themes as we enter 2021. This should favour equities, which could have more upside potential vs HY credit, which could be less appealing on a risk/return basis at current valuations. A rotation from super-high-growth stocks into more cyclical and quality value areas will likely materialise. Commodity-related trades could also benefit from this cyclical rebound. The availability of a vaccine would be part of this recovery: markets are pricing in availability in mid-2021 and then an economic reacceleration. Any delay could generate volatility, putting the virus cycle once again at the top of market concerns. Investors should look at opportunities from rotation, while also being mindful of possibly higher volatility. Bonds will be the key sentinels for the next phase. The market will likely start pricing in higher inflation and reflation, leading to the next sequence.

Phase 3: from improving to sustained growth. The next part of the sequence embeds a new round of policy mix and a slow exit from the extreme accommodation seen so far. The measures introduced to fight the pandemic will be very difficult to withdraw, and governments and CBs will probably have to do more. Fiscal and monetary policies will be even more intertwined, making the possibility of further debt monetisation to finance the recovery a likely scenario. Some EM with weak CB credibility could see inflation rise faster amid their recoveries which could trigger higher commodity prices. This might overheat the economy, ultimately leading to some inflation. This could de-anchor the system, which is based on the assumption of low rates forever, and real rates could become more volatile. This phase will be challenging for risk assets and could favour further rotation into equity value, commodities and real assets.

Eoin Treacy's view -

There is really one question to occupy the minds of investors. What is the Federal Reserve going to do about rising long bond yields? All other investment themes flow from the answer to that question.



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November 05 2020

Commentary by Eoin Treacy

Gold Surges on Dollar, Stimulus Hopes With Election Outcome Near

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

Strong performances across most commodities with stocks sharply higher and the dollar lower is “in the realization that the combination of a Biden win and senate majority by the Republicans may remove a great deal of policy uncertainty,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said in a note.

Eoin Treacy's view -

The big question for many individuals at present is how do we insulate ourselves from the trend of massive and continued monetary and fiscal stimulus? The purchasing power of fiat currencies continues to fall and that is helping to inflate the prices of all assets. The answer is increasingly to lock down ownership of physical assets in limited supply now, before the price goes up any further.



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November 05 2020

Commentary by Eoin Treacy

Brazilian Real's Outperformance Demonstrates Trader Pragmatism

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

The Brazilian real’s outperformance hints at investors’ pragmatic stance toward the currency, which may have further room to appreciate despite potential diplomatic frictions with a Biden White House.

BRL rose 3.2% over the last two sessions, by far the best performance among all major currencies. That may sound strange given Joe Biden’s comments on potential sanctions on the country due to deforestation and Brazilian President Jair Bolsonaro’s clear alliance with Trump, but traders are working with the information they have at hand now instead of making assumptions about what will happen in the future.

A Biden presidency improves chances of stimulus in the near future even with a GOP-controlled Senate. That has prompted bets that the dollar is prone to weaken and the currency that seems to have most room for a quick swing is the Brazilian real. The currency is the most depreciated major currency in the world this year, even after this week’s gains. Brazil faces fiscal pressure with debt-to-GDP ratio expected to rise beyond 100% this year, but the fundamental issues are local and not external. With more dollars available, the temptation to bet on the recovery of a country that has shown robust activity data is just too high.

Investors will keep a close eye on Brazil’s budget challenges and the government’s maneuvers to finance itself. Concern about Brazil’s relationship with U.S. under a potential Biden government may grow in relevance, but only in the middle of next year.

Eoin Treacy's view -

The determination of governments everywhere to spur reflation in 2021 is probably a more significant factor than geopolitics for most commodity producers. Australia’s brewing dispute with China is an obvious counter example, but even then, China still needs what Australia exports. Global infrastructure development is likely to play a vital role in the plans of most countries to boost employment and stimulate growth. That’s a major commodity demand growth trend which is taking place against a background of meagre investments in additional supply.  



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November 03 2020

Commentary by Eoin Treacy

Correction Here. Now What?

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

Eoin Treacy's view -

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

Manufacturing activity figures have rebounded impressively over the last month on a global basis. That’s reflective of the snapback in activity following the contraction in the 2nd quarter and will probably moderate over coming months. Nonetheless, it is supportive of the view that this will be have been a short sharp recession.



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October 26 2020

Commentary by Eoin Treacy

What Happens Next

Thanks to Iain Little for this lengthy essay by Chris MacIintosh for Capitalist Exploits. Here is a section:

Without the freedom to say what you think, you have no freedom to think. Sharing of thoughts, opinions, data and seeking out the truth of what it all means is crucial to relationships, happiness and life. Now imagine being afraid to do that.

Everything stops.

This is so very important I can’t stress it enough. If I could, I’d do so standing on a rooftop waving my hands with spittle flying. Please understand this assault taking place across the Western world. Right now there is wealth… because it has been built, but wealth is, and always has, been in human ingenuity, what we refer to as human capital. This is what Marxists don’t understand. They see the big houses and cars… the “stuff” and think that’s wealth. It’s not. But this is what they’ll come after.

It is actually worse than that. They won’t be content simply with theft, anymore than Mao’s red guards were satisfied with destroying the jobs of intellectuals. They instead wanted to see them suffer and to bleed and die. So they beat them to death.

Eoin Treacy's view -

Governance is Everything has been a mantra at this service for decades. The most important thing is that governance is not an absolute. It’s a trend. Standards are either improving or deteriorating and that has a direct knock-on effect for risk premia in any country. The primary tools for monitoring governance are minority shareholder interests, property rights, the rule of law, independence of the judiciary and freedom of the press. Every one of these facets of governance is under threat all the time.



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October 22 2020

Commentary by Eoin Treacy

Grains Have 'Immediate Upside' Says Goldman Sachs

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

A report from Goldman Sachs says that the commodity sector is likely on its way up in 2021 due to inflation. However, while grains futures have been traveling higher, momentum is likely to slow down for agriculture in general, the report says -- pointing to energy and metals as more likely areas of growth. "Goldman Sachs analysts acknowledged that the non-energy commodities have 'immediate upside' potential due to the strong Chinese demand and weather driven risks, but they see that momentum fizzling in 2021," says Arlan Suderman of StoneX. Corn futures on the CBOT are up 0.7% Thursday, while soybeans are up 0.4%. Meanwhile, wheat is down 0.8%. 

Eoin Treacy's view -

Drought risk, the transition to a La Nina weather system and restocking following the panic buying during the initial lockdowns, all represent tailwinds for the soft commodity sector.

Another way of looking at the base formation completions in the sector is commodities are beginning to react to the weakness of the Dollar and risk of inflation in a predictable manner. There is clear potential that commodities are acting as a lead indicator for future inflation.



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October 20 2020

Commentary by Eoin Treacy

Belt up for the coming 'Global Super Cycle' and a $100 trillion World by 2023

Thanks to a subscriber for this note from EM Capital Advisors. Here is a section:

The Emerging Market (EM) share of world output in the last 20 years doubled from 19% to 38% with the EM world growing at about double the rate of the Developed world (DM). This kept the total world growth at a 3-3.5% range over the last decade despite every region in the world growing a little slower than in the previous decade.

The implications of the swings in the global deflator and the FX on businesses and global incomes was much larger than most imagined which is visible in Fig 1 above. It breaks down the nominal world output and its components showing that the world in real terms grew at a pretty even rate of 3-3.5% through most of the last twenty years, with the swing in the ‘Deflator+FX component’ creating the big booms or bust feel in the world.

We are entering another such ‘Supercycle’ which was born about a quarter ago. Our definition of a supercycle is nominal World Output growing at 8-10% for a few years lifting most boats globally. Our view on the components of this global Supercycle are essentially building in a few key assumptions –

1. The World growth in real terms continues in the 3% +/- 1% range after normalizing to pre Covid levels in real terms by 2022. This is line with the IMF and many other estimates.

2. We expect the Global deflator to stay elevated in the 2-4% range for the next few years driven by stimulative fiscal and monetary policy by most large world economies. This would be aided by a weaker US$ and concurrent to it.

3. The US$ weakens 3-4% per annum for the next few years with rising deficits, with the Chinese Yuan doing the heavy lifting on the other side. The Yuan weakness in the previous few years had prevented this from playing out earlier. This paves the way for a strong Asian and EM FX basket which together account for about half of the world output. This is in a way similar to what happened in 2003-2005.

Eoin Treacy's view -

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

Thanks for this interesting missive which may be of value to subscribers. Here is an additional note from the sender:



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October 19 2020

Commentary by Eoin Treacy

Email of the day - on zombie explorers

On zombie companies. I was very interested to hear your comments on zombie companies at the start of this week’s video. It seems to me that many of the mining exploration companies would come under this umbrella.

Some weeks ago, I decided, having done some prior research, to make an investment in one of these companies. I have reached an age where I am quite willing to put a small amount of my cash resources at risk.

I was also somewhat amused by the name of the company and its ticker, Alien metals (UFO). It had had a chequered history having traded at £5 a share at one point in 2011 but over subsequent years investors deserted the company to value the assets at a fraction of a penny.

Although making no profits, it has assets in the ground in Mexico and Western Australia. I purchased early in August, one million shares at 0.22 pence per share. As the belief stage sets in on the developing bull market in metals, it seems logical that more of these companies are going to be noticed by investors in the near future.

Eoin Treacy's view -

Thank you for this email and congratulations on taking opportunities in the market. I agree there is likely to be more interest in explorers for the simple reason that there have been no big gold discoveries in the last few years. Mining is an extractive industry and miners have to expand their reserves through exploration or acquisitions.  



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October 16 2020

Commentary by Eoin Treacy

RBA Inflation Twist Suggests Economy Can Run Hotter on Low Rates

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

Australian central bank chief Philip Lowe’s move to emphasize current inflation rates rather than projections suggests the economy will be allowed to run hotter with interest rates staying lower for longer.

Lowe conceded that assessing the outlook is problematic when inflation dynamics aren’t well understood and the world is so uncertain.

“We will now be putting a greater weight on actual, not forecast, inflation in our decision-making,” Lowe said, outlining the RBA’s latest thinking on prices in a speech on Thursday that hinted at further easing to come.

Annual inflation has averaged 1.7% since Lowe took the helm at the Reserve Bank of Australia in 2016, versus a target of 2%-3% over time, and has now dropped below zero.

 

Eoin Treacy's view -

Central banks have no choice but to pursue inflation with every tool they have available to them. Not only has the pandemic unleashed massive uncertainty, but their is no plan for how the debt taken on to combat it will be repaid.



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October 14 2020

Commentary by Eoin Treacy

Billionaire investor Howard Marks paints grim view of economic outlook: stimulus alone won't cure 'down-cycle'

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

Marks credits the Federal Reserve’s decision to cut its benchmark interest rate to a range of 0% to 0.25% and the signalling of its intention to keep uber-low levels in place for the foreseeable future for providing the most significant stimulus for financial markets in this pandemic era.

That said, investment return expectations, he insists, will be also be hurt by the current state of economy and economic policy over the longer run.

Marks explains the investment return outlook like this: 

So the lower the fed funds rate is, the lower bond yields will be, meaning outstanding bonds with higher interest rates will appreciate. And lower yields on bonds means they offer less competition to stocks, so stocks don’t have to be cheap to attract buying. They, too, will appreciate. And if high-quality assets become high-priced and thus offer low prospective returns, then low-quality assets will see buying – implying rising prices and falling prospective returns – because they look cheap relative to high-quality assets.

Eoin Treacy's view -

The default cycle during a recession tends to a long tail because businesses do not all fail at once. The supply of liquidity supported many businesses and partial re-openings will have generated some income. However, the longer reduced activity persists the greater the burden debt will have on companies. Generally, the peak of insolvencies occurs 18 months after the recession begins. That suggests continued ample sources of additional liquidity are essential to support recoveries.



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October 13 2020

Commentary by Eoin Treacy

Email of the day - on gold and the US election

hope you are good? Interesting to hear your views on the US election today. Eoin, am I the only person who is surprised that gold and gold miners are not doing better right now - given the weaker US Dollar and the potential uncertainty surrounding the US election? Also, earlier in the Summer, I think you went on record saying you didn't think there would be a 'second COVID wave.". What is your view now please? BTW, I don't listen to the Audios, I just watch the daily/weekly video commentary. Many thanks

Eoin Treacy's view -

Thank you for this series of questions which may be of interest to subscribers. I did say that there would not be a second larger wave because I do not believe the parallels being made with the Spanish flu a century ago make sense.



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October 12 2020

Commentary by Eoin Treacy

Cannabis-Focused ETF Get Boost from Harris Comments

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

Marijuana stocks jumped Thursday, sending the ETFMG Alternative Harvest exchange-traded fund up as much as 6% after U.S. Senator Kamala Harris made a strong statement about the prospects for legalization in Wednesday night’s vice-presidential debate. “We will decriminalize marijuana and we will expunge the records of those who have been convicted of marijuana,” Harris said. Bloomberg Intelligence Analyst Ken Shea said he saw no other news to account for the broad-based rally. “Maybe her comment served as a reminder to the market, and the prospects of a democratic president and/or sweep seems increasingly possible, based on polling trends,” he said.

Eoin Treacy's view -

Four years ago there was a lot of momentum behind the cannabis movement. Money was flowing in, partnerships with established drinks and tobacco companies were flourishing and the market was awash with start-ups.

Donald Trump’s electoral success and his ambivalence towards legalisation resulted in a significant rationalisation for the cannabis sector. The market suddenly looked smaller, the challenge of banking, transportation across state lines and the battles for market share took chunks out of growth forecasts.  Many stocks went bust and even the largest experienced deep declines.



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October 09 2020

Commentary by Eoin Treacy

The Challenge in Valuing Gold

Thanks to a subscriber for this well-illustrated report from Gavekal which may be of interest. Here is a section:

Yet, in periods when both budget deficits and monetary aggregates have rapidly grown, gold has historically outperformed—and it is doing so now. At such times, gold also adds diversification benefits to portfolios.

Over the past few years, we have argued in numerous pieces that gold has started a bull run. And once they start, gold bull markets tend to run until either the US dollar strengthens meaningfully, and/or the Federal Reserve tightens monetary policy. Right now, neither of these two outcomes is likely. Hence, the gold bull market looks set to continue.

Eoin Treacy's view -

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

The Dollar declined in a meaningful manner as soon as combined monetary and fiscal stimulus kicked off in March. It staged a modest rebound in September when doubt arose about the persistence of the fiscal portion of that program.



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October 08 2020

Commentary by Eoin Treacy

The Road Ahead

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

In fact, China is responding to these changes in corporate behavior using a variety of techniques, including becoming a larger and more powerful domestic economy that relies on its own production (what President Xi Jinping calls “domestic circulation”). In the current environment China may also better leverage its higher interest rate curve (both real and nominal) to try to attract capital to support this more permanent shift towards a consumption economy. A more stable currency outlook is also helping. Our bottom line: Expect a heightened rivalry across multiple facets of the relationship, including some decoupling. However, given the absolute size of the opportunity in China, now is actually the time to think through different ways to harness China’s growth in thoughtful, risk-adjusted fashion, particularly investments that reward long-term, patient capital. Specifically, we think that further implementation of domestic circulation as a policy will lead to the rise of more domestic corporate leaders, and as a result, more – not less – corporations will look to find ways to serve this emerging consumption base.

Eoin Treacy's view -

China’s golden week ends today and the market opens back up tomorrow. Over the last month there have been significant announcements about investments in infrastructure, boosting the consumer economy and championing the green energy movement. These points all likely to become actionable in the 4th quarter.



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October 02 2020

Commentary by Eoin Treacy

In the Bit We Trust: It's Time to Put Juniors to Work!

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

Notwithstanding the volatility of the equity markets and commodity price projections, the fundamental paradigm continued under investment in the mining sector over the last decade remains an overriding factor that clouds the industry’s supply side outlook. This factor is particularly topical given the cash being generated by the sector due to better operational stewardship and as of recent, elevated commodity prices. However, the simple fact remains that discoveries supporting industry performance are made through the drill bit, and fundamentally require the ‘boots-on-the-ground’ facilitated by the junior exploration segment. As a result, we look for continued investor interest in the precious metals equities, including the junior exploration and development space, as investment capital filters downstream into higher risk opportunities supported by a renewed interest in grassroots exploration programs, further top-down industry consolidation, and the development of new projects to support the longer-term production pipelines of larger industry participants.

Eoin Treacy's view -

Many of the world’s most prolific gold producing countries are very well explored. That means just about all visible surface mineralisation has already been located. What is much less well understood is how much gold is available to be found below the ground.



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October 01 2020

Commentary by Eoin Treacy

Oil Drops in Wake of Stimulus Uncertainty and OPEC Supply Fears

This article by Andres Guerra Luz and Alex Longley for Bloomberg may be of interest to subscribers. Here is a section:

Oil slid to a two-week low as conflicting signals over the prospect of U.S. fiscal relief added to concerns over rising supply from major global producers.

Futures in New York tumbled as much as 6.5% on Thursday as the dollar moved off session lows. The U.S. benchmark fell below its 100-day moving average and if futures close below the key technical level, it will signal further selling pressure ahead.

Chances for a much needed boost for demand remains uncertain, with U.S. House Speaker Nancy Pelosi saying there are still major differences to be bridged in the negotiations over a fiscal stimulus package. Meanwhile, investors are also concerned with the unexpected return of Libyan output and higher oil exports from Saudi Arabia and Iraq. Russian exports are also expected to increase.

Eoin Treacy's view -

$40 is not a high enough price to cover the costs of most oil producing nations. The ensures many OPEC members will continue to cheat on production goals and countries outside OPEC have an incentive to pump as much as possible too.



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October 01 2020

Commentary by Eoin Treacy

September 29 2020

Commentary by Eoin Treacy

Email of the day on palladium's outperformance

Dear Eoin, many thanks for the excellent commentary on these "interesting times"! is there a reason why Palladium seems to be trading better than Gold or Silver at the moment? Many thanks, A

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. Palladium is mostly produced as a byproduct of nickel and platinum mining. That means Russia and South Africa are the primary producers.



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