May 19 FT thoughts Summers & the Fed, IEA's new call, Invisible hands in China

19 May

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Asia as at  1:30pm HK time 
Bitcoin weaker drops to below US$40k (14 week low) as PBOC re-iterates digital tokens cannot be used as payments
Market opened lower as indicated by the futures, found initial support around 6,950 level saw a slight bounce as the data was released but then drifted lower; currently -140pts (-2%) @ 6,926
All sectors weak declines led by Materials and Energy
EML Payments -46% after the Central Bank of Ireland flagged additional regulation for a subsidiary previously monitored by British authorities. Meanwhile, Appen is up 13.7%
Consumer Confidence Index May 113.1 vs 118.8 Apr (F/cast was 117)
Inflation Expectations May -4.8% vs +6.2% Apr (F/cast was -1.5%)
Lending Index Q1 +0.6% QoQ vs +0.6% Q4 (F/cast was +0.7%)
Wage Price Index Q1 +1.5% YoY vs -1.3% Q4 (F/cast was +2.2%)
Sentiment hurt by Okinawa being asked to be put into emergency state.
Nikkei opened lower at 28,031 and tested 27,840 level before  bouncing back to 28,000 and then working higher to test 28,200 but failed to hold and eased back to 28,000 at lunch.  PM initially traded flat but dipped to 27,860 but working back  currently  -466pts (-1.6%) @ 27,945
Topix traded in a similar pattern open 1,888, tested 1,884, worked up to 1,903 and currently -18pts (-0.9%) @ 1,890
Data out at lunch
Industrial Production Mar +1.7% MoM vs -1.3% Feb (F/cast is +2.2%)
Industrial Production Mar +3.4% YoY vs -2% Feb (F/cast is +4%)
Capacity Utilisation Mar +5.6% MoM vs -2.8% Feb (F/cast was +3%)
Tomorrow we get Trade Data and Machinery Orders
S Korea 
Markets closed Budda’s Birthday re-open Thursday
News report 400k AstraZenica vaccines to arrive this afternoon.
Taiex opened lower at 16,112 but initial rallied to 16,225 before reversing and trended lower to test 16,010 mid morning then worked back to 16,240 around noon and then trended lower to close -13pts (-0.1%) @ 16,133
CSI 300 opened and tested down to 5,150 in early trades before rebounding to test yesterday’s closing level but failed to hold and trended lower into lunch @ 5,182. PM dipped to test 5,170 but rebounded and currently -8pts (-0.2%) @ 5,180.
Sentiment weak as EU looks to cancel Investment deal, PBOC says Bitcoin can’t be used for payments and China accuses the US of threatening the peace and stability as aguided missile destoyer sails through the Taiwan Straits.
Tomorrow we get Loan Prime Rate No change expected.
Markets closed Budda’s Birthday re-open Thursday
Futures indicate market to open lower FTSE -63 points at 6,980, DAX -148 points at 15,258, CAC 40 -60 points at 6,308 according to IG.
Earnings due from E.On, Deutsche Boerse, Uniper, Experian and Premier Foods.
EUROZONE New Car Registrations, ECB Financial Stability Review, Core Inflation Rate, Inflation Rate.
UK  Inflation Rate, Core Inflation Rate, PPI Core Output, Retail Price Index, PPI Output and Input, US Futures
Opened Dow -40pts S&P +0.2% and NDX+0.1% then eased but now falling Dow -134pts
Caution ahead of FOMC minutes and more retail earnings. Earnings season wrapping up means more focus on data; especially inflation related which could put more pressure on large tech.
AHEAD MBA Mortgage Applications and 30 yr Mortgage Rate, EIA Oil Report, FOMC minutes.
Earnings Target, Lowe’s, JD.Com, Cisco, Shoe Carnival, TJX, Eagle Materials, Analog Devices, L Brands

Firm founded by son of China finance tsar invests heavily in tech
Skycus Capital holds stakes in companies affiliated with Tencent and Liu Tianran, son of vice-premier Liu He, was listed as chair of Tianyi Ziteng Asset Management, also known as Skycus Capital before stepping back.
Challenging China: Britain after Brexit grapples with a new foreign policy The maiden voyage of an aircraft carrier is a pivotal moment in the UK’s bid to reconcile its economic, political and security priorities
Huarong’s woes are a warning to lazy investors
Beijing’s drive for efficient markets means that corporate fundamentals now matter more.
Unhedged: QE and stock prices
And why doesn’t Warren Buffett like Wells?
Taiwan ally warns of pivot to China in quest for Covid vaccines
Honduras threat to switch diplomatic recognition to Beijing stokes concern in Washington

Print Front Page 
Summers accuses Fed of misreading US economy
• Rebuke over persistently low rates
• Fear of complacency in markets
Comments from a conference hosted by the Federal Reserve Bank of Atlanta saw Summers’ escalate his concerns from being about their excessive nature to now an under reading of the economy.
'“Policy projections suggesting that rates may not be raised for . . . close to three years are creating a dangerous complacency,” Summers said, adding that the Fed could be forced into a knee-jerk tightening of monetary policy that would spook markets.'
'“The primary risks today involve overheating, asset price inflation and subsequent financial excessive leverage and subsequent financial instability.”
“It is not tenable to assert today in the contemporary American economy that labour market slack is a dominant problem,” he added. “Walk outside: labour shortage is the pervasive phenomenon.”'
He illustrates some key concerns but I am sure that the Fed will maintain its data dependant stance. Powell, I don’t think, is going to keep rates low for three years unless the economic conditions warrant such action. The questions that investors need to address are whether the current inflationary signs that we are all seeing are transitory or not and whether the Fed’s seeming pre-occupation on wage inflation as being the key determinent is correct or not.
I think that the needs to keep alert to a range ot targets and not get too focused on any one of them. Wage inflation is in favour following the example of recent history but the Fed needs to be aware that employment, wages, skills and location all have a part to play in the equation. The same will be true for many countries that have closed their borders to prevent covid spreading but then may face a shortage of migrant labourers.
Worth a read and tonight we get the FOMC minutes which might give some further insight on Fed thinking but I doubt we will get anything surprising.
Read also Opinion Reasons to worry about US inflation
Both monetary and fiscal policy are, by historical standards, wildly expansionary by Martin Wolf
Sets out four reasons for concern
1. ‘both monetary and fiscal policy settings are, by historical standards, wildly expansionary,’ I don’t think anyone would disagree with that
2. The overhang of private savings that he says are waiting to be spent. I would question this as I think the pandemic has created a mood of safety saving. Spending through the pandemic has just changed from in store to online; people who could spend have not gone short.
3. The change in the Fed’s framework; which he understands but disagrees with. ‘It means driving while looking into the rear-view mirror. It would surely be better to learn from past experience how the economy works than to try to compensate directly for historic failures. In particular, the new framework creates uncertainty over how the Fed intends to make up for the past shortfalls.’
I agree but one under estiamted issue here is the Fed had not addressed the unwinding of previous QE and other policies; it is not as if Powell had been given a blank sheet of paper; the Fed and other central banks always have a lot of baggage to carry.
4. Politics have changed. We have not had an inflation/deflation era for over 40 years. Biden is keen that this recovery should not disappoint as previous ones have. There is also the doctrine in Washington that Modern Monetary Theory is true strengthening the case for cheap money and large fiscal deficits.
All that said he feels it’s right to doubt the Fed. Its easier to loosen than tighten policy particularly now ‘if a central bank does not take away the punch bowl before the party gets going, it has to take it away from people who have become addicted to it.’ That I think we know from previous taper tantrums.
He concludes ‘Milton Friedman said that “inflation is always and everywhere a monetary phenomenon”. This is wrong: inflation is always and everywhere a political phenomenon. The question is whether societies want low inflation. It is reasonable to doubt this today. It is also reasonable to doubt whether the disinflationary forces of the past three decades are now at work so strongly. It is hard to believe these emergency monetary policies should continue for years, as many at the Fed think. I doubt whether they should continue even now.’
A good read, I agree with much of what he is saying. There was a free webinar on ERI-C on 29 April between Russell Napier and Cary Shilling a defaltion/inflation debate its still available to listen/watch on the website; well worth listening too.
Register on ERI-C or drop me an email and I will get you sorted

Human wave Moroccans brave the sea in dash for Spanish enclave of Ceuta  An estimated 1,500 children were among those who took advantage of scaled-back policing of the frontier in Morocco following a diplomatic dispute with Spain.
Also Moroccan migrants flood into Spanish enclave

Investors back Shell’s clean energy shift as IEA warns that fossil fuels must end  A huge amount of support for a shift to cleaner fuels.  
The CEO said ‘the company wanted to “accelerate the transition” of the business towards cleaner fuel, it had to do so not just “with purpose” but also “with profit”.’
The activist group Follow This failed to get support for their proposal but did see a doubling of support from last year to 30% this year.

IEA calls for end to new oil and gas exploration
Agency advocates greater investment in low-carbon technologies as part of drive to meet Paris accord goals. It wants all new oil and gas exploration projects stopped from this year. Plus a huge increase in investment into low carbon technologies and clean energy. It did concede that ‘“continued investment in existing sources of oil production are needed”. And, even while oil demand declines, the share of output controlled by Opec would rise, from about 37 per cent to about 52 per cent in 2050, according to the report.’
'While the report is not a forecast or a recommendation, the IEA’s scenarios are considered definitive by many governments and often form the basis for energy policy.'’
The article says the announcement was a huge supprise so it will be interesting to see how governments take it.
If adopted then I would expect oil to continue in the upward tradectory that we are currently seeing. Good for the drillers etc but it will put more pressure on airlines as they struggle to rebuild. Fuel surcharges are almost the last they need now.
Also read the Editorial The IEA has delivered an overdue message
Oil companies are on notice that the fossil fuel era is coming to an end

Covid drags down Japan’s growth in first quarter
Looks at yesterday’s GDP data. It highlights that consumer spending dropped but from the Trading Economic’s data that was less than concensus. The fact that it remained as high as it did probably reflects that despite the state of emergency in some prefectures people are still going about their daily business ‘normally’. To me the concern was the fact that companies were cutting Capex but the forecast was for it to expand. Companies remain cautious After the release the government said the economy has potential to recover though and it will be vigilant to the impact new state of emergency curbs could have on the outlook, “The government will act flexibly as needed, tapping into reserves (set aside for COVID-19 response) wiith a close eye on the pandemic and its impact on the economy,”.
Key is getting covid under control and vaccinations rolled out.

China. Central planning
‘Invisible hand’ of the market pulls brake on Xi’s green development
Clean alternative for Beijing industries suffers lack of cash, infrastructure and interest. It starts by saying ‘A Chinese development project championed by President Xi Jinping has been bogged down by disputes over costs and companies’ reluctance to move to the area, according to local officials and residents.’
I remember when this was first announced in 2017 when I was working at Haitong and I was sceptical, companies where said to be keen on the idea and some were changing their name to benefit from association with the venture. The idea was great to provide a new city and move many of the SoE’s and government departments out. It was also intended to build President Xi’s status.
Whilst some key elements have been build much has not. Nice quote ‘“Xiong’an is a product of central planning that goes against market principles,” said Zhuang Bo, chief China economist at TS Lombard, a London-based consultancy. “It has had trouble taking off because the invisible hand [of the market] has a bigger impact than government intervention.”’
It notes that one issue is that financing ‘CXG, controlled by Hebei’s already highly indebted provincial government, said the company was reluctant to increase borrowing. Hebei’s outstanding government debt, excluding borrowing by local government financing vehicles, was Rmb1.1tn by the end of last year, up from Rmb615bn in 2017.’ The provincial government wants the Central government to finance the project; just as it is tightening the purse strings. The basic problem is that there is no natural demand and if there is a change of mind in Beijing Hebei provincial government would not be able to afford to finance it.
Classically for China when the idea was first announced; property speculators joined local buyers and then local official stepped in. They halted projects constraining supply and trapping not just the speculators but also local purchasers who were paying steep rents whilst waiting for completions.
‘Li Yang, a 35-year-old office worker, said his rent had more than tripled over the past four years while he waited for a flat he bought in 2016 to be completed.
“Thanks to government policy I spend the bulk of my income on rent and mortgage payments for an unfinished home with no completion date,” he said.’
Local official are blaming central government saying ‘it is up to Beijing to decide when to lift the ban. “President Xi said we can’t start building until the use of every inch of land is clearly planned,” a Xiong’an housing official, who did not want to be named, said.’
That ban has hurt revenue for Hebei which was already under pressure as the previous indiginous businesses of apparel and plastics (nearly 4,000 factories) were relocated because they were not ‘green’. That prompted unemployment to soar and remain high as the promised replacement businesses have not yet arrived. Even when they do the locals are unliklely to benefit as the businesses are likely to want college graduates not factory workers.
Additioanal many of the SOE’s are reluctant to move because of the lack of services and the real possibility that staff will not relocate; which is the classic chicken and egg dilenma.

A good read, it obviously has not helped that covid happened but the project was already behind schedule. I think it also reflects the bigger issue that faces China and other nations. The miss match in labour skills and the location of labour. China has over the past 30years seen a willingness for labour to move from the land to factories. But that is less prevalent now; partly due to covid and partly I think due to aging and expectations. Those people who 30 years ago moved to the factories to earn money so their families could have a better life are now 50 plus. The current 20 year olds don’t want to work in factories but in offices and they are less concerned about their families opportunities than their own. They want success; a better life for them and their families.
The demographic change in China in conjucntion with the restrictions of the hukou system are undermining efforts to modernise the nation. The problem in changing the hukou system is a matter of cost and resources but also control; that more than anything is likely to worry those in Beijing.

India’s Serum extends freeze on jab exports
Vaccine maker stirs African anger by halting shipments until next year.
Worth a read because it illustrates how important India has become to combatting the virus and hence how the apparent complacency by the government is now impact the global response.
No doubt the Serum Institute of India will be blamed by many but it really does look as if the government is much more deserving of the blame.
Read also OPINION  Time for other vaccine makers to follow Oxford/AstraZeneca’s lead By Louise Richardson  vice-chancellor of the University of Oxford

Role of Grant Thornton at GAM tangles Greensill case

• Firm hired by asset manager in probe
• Conflict of interest questions raised
The story continues. Worth a read but raises question about how these large accountacy firms operate and the requirement to make the authorities aware when the firm has doubts about fraud or other criminal activities.

Lion’s share Amazon hopes to bag big beast of Hollywood film with $9bn talks for MGM.
More on the consolidation within the movie industy.
See also Warner-Discovery sets scene for further deals
AT&T asset spin-off comes as traditional media fight for continued role in sector where streaming is front and centre
See Lex Amazon/MGM: content is king   ‘It is an incremental investment that Amazon can afford to absorb.’

Taiwan tech titans meet mixed success with US production push
A very good read. Compares TSMC’s plans to put prodcution in the US with those of Foxconn.
Makes the point that Foxconn was political in the sense that Trump was trying to get re-elected and Terry Gou the founder and then head of Foxconn was also trying to get elected; as President of Taiwan. That was about politics and subsidies. Both failed and Foxconn’s now head Young Liu is left to try and sort out the problem. I suspect that might have got easier with Foxconn moving into the auto sector and tie-ing up with Fisker.
TSMC can actually make a business case; although the US may want to be making chips for the auto sector that is old tech and not something you would want to put into a new faciltiy although it could be done. For TSMC is makes sense to diversify (Taiwan, which is earthquake-prone and lives under a Chinese invasion threat) and also mentioned in the article it comes as rival Samsung is also looking at US production.
The other issue with these projects is that modern tech is not a huge employer; much is automated and requires skilled labour and that could become an issue in time.

Poetic flourish costs Meituan founder $2bn
Reaction to Wang’s perceived criticism of Beijing highlights investor fears over crackdown.
An interesting read into the background about Wang Xing founder of Meituan. It seems similar to the Jack Ma incident but less confrontational. Key lesson from both incidents seems to be don’t do anything that could be seen as critical of the system and only give advice if asked.

Nvidia makes its chips less useful for digital mining.
It should clarify the company is seeking to ensure that its core graphics cards go to its core clients; gamers. Recently, crypto miners have increasingly been using its cards and been willing to out bid its core clients to get them. That resulted in its price being increasinly linked to crypto rather than its core business.
So it has developed a new family of Nvidia cards for mining crypto.
It will be interesting to see if the strategy works.
Tech stocks still hold promise despite jitters  by Wei Li global chief investment strategist for the BlackRock Investment Institute
Puts forward that the fear that central banks raising interest rates will hit high tech stocks because it will reduce the value of future cash flows is wrong because it mis understands the Feds policy of allowing inflation to run hot.
She says they expected demand to lead supply leading to some inflation due to supply chain disruption and that some of that might be being underestimetated. But they remain moderately positive on equities; including tech. Also thinks of the pandemic as a natural disaster rather than a cyclical recession. Furthers that most people mis define tech and that tech has green credentials.
Notes that the GICS classifications for tech includes software and services, tech hardware and equipment, and semiconductors and equipment BUT not online search/e-commerce although she thinks they should be included. Concedes that some home working associated tech will suffer from the rotation into cyclical value names but that there will be a boost for tech cyclicals especially semiconductors.
Net net ‘the narrative of “rate up, tech down” is too simple.’ interest rates matter, esepcially for poorly run companies, there are risks like regulation and tax changes but in near term its worth staying with tech.

I think she is right, the core tech names, not online names, are well positioned the chip shortages will continue and the move to ‘green’ will require more tech hardware/software. As always investors need to dig deeper than just the headlines.

How social media accounts fuel surges in penny stocks
An FT investigation found dozens of cheap stocks that showed sudden surges following endorsements on Twitter. The wild moves are drawing attention to the rumbustious world of over-the-counter markets.
The modern pump and dump? I suspect the ‘Wolf of Wall Steet’ would be proud but disappointed it wasn’t around in his day.
Difficult to regulate or investigate but likely to come under more scrutiny even if only from regulators of the social media sites that are being used.
An interesting read.

Hunger for yield pushes foreign investors into frontier territory
European Investment Bank issues first note for debt sector as overseas demand surges.  Follows yesterday’s Central banks seek out riskier assets for reserves to counter yield drought 

Edmond de Rothschild aims to double assets with deals push
An interesting read  follows yesterdays Ex-Northill team reunites at Alderwood Capital to buy stakes in boutique firms
Seems everybody is having the same idea; which could be good for sellers.
See LEX Edmond de Rothschild Group: going shopping
‘Risks attach. This is a people industry and they can walk out the door. Net outflows can follow, as the merged Premier Miton discovered. Asia would be new terrain for Edmond de Rothschild, amplifying the risk. But in a consolidating industry, at least this family firm is well-placed to expand.’

For interest
An urban crime wave threatens Biden  By Edward Luce
‘There are other reasons behind growing crime, such as the increasing unaffordability of cities and the rise of prosecutorial forbearance. This has largely reversed the 1990s era of “zero tolerance” for small crimes, which were thought to beget a culture of impunity.
Used syringes, a harbinger of a return to street drug dealing, and chronic homelessness are becoming rife again in America’s cities, even in New York. Fairly or not, liberals will take most of the blame if such trends persist. Biden would be unlikely to escape the backlash.’

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