Wall Street Is Confused By Elon Musk's Master Plan - "Credibility Is Challenged... How Do They Fund It?"
After a much anticipated and dramatic buildup, late last night Elon Musk revealed the details of his "Master Plan, Part Deux", which as Musk himself summarized is as follows:
- Create stunning solar roofs with seamlessly integrated battery storage
- Expand the electric vehicle product line to address all major segments
- Develop a self-driving capability that is 10X safer than manual via massive fleet learning
- Enable your car to make money for you when you aren't using it
As we said at the time, "It's one of those thing you read twice, three times, and then look at those around you to see if you somehow missed the deep message." Judging by the litany of responses by the sell-side this morning, we weren't the only ones confused. As the following reactions from Wall Street analysts, the confusion was far-ranging.
Here are some examples.
From DB's Rod Lache:
Elon Musk released Part 2 of his “Master Plan” for Tesla. At a high level the document is aimed at explaining how (Tesla’s) actions fit into a “larger picture” of accelerating the advent of sustainable energy. The document is relatively short on details, and it does not contain any economic or financial objectives (these will be needed eventually, as capital markets will be called upon to provide a key “material” for the execution of this plan).
1. Creating an integrated solar energy and battery storage product;
2. Expanding the “Tesla Motors” consumer products that we know (Model S, X, 3) with the addition of a compact SUV and a “new kind of pickup truck”; expanding into commercial vehicles such as a Tesla Bus and a Heavy Duty Truck (products that we believe could benefit tremendously from Electrification and Automation); and at the same time achieving revolutionary improvements in manufacturing;
3. Developing, validating, and achieving regulatory approval for Fully Autonomous Vehicles (which Elon hints could take several years); and
4. Once Autonomous Vehicles are available, applying them in innovative ways such as creating a Tesla Owned Autonomous Ride Sharing fleet for dense urban centers, and also enabling Tesla owners to add their cars to Autonomous fleets (so that they can generate income when they are not in private use; the practical effect would be an incredibly low cost of capital for these vehicles, as owners may only be looking to reduce the fixed cost of ownership; in addition, this could also upend the entire framework we’ve been using for estimating the potential growth of shared mobility, leading to a far larger market).
At a high level none of [the] objectives are surprising. Parts of these plans have all been floated in the past. And while it goes without saying that all aspects of the plan involve very high levels of execution risk, we continue to find the “Tesla Motors” plans, which are encompassed in Parts 2, 3, and 4, as innovative and potentially compelling. We continue to work on better appreciating whether Solar is in fact a “good” business for Tesla shareholders (To be clear, we are not yet convinced of this: The business has, and will continue to consume significant amounts of capital; The NPVs ascribed to SCTY’s projects are highly dependent on government incentives and they are presented using relatively low discount rates; Valuation metrics used by TSLA investors appear to be quite different than those used by SCTY investors). We also note that parts 2-4 are likely to drive the overwhelming majority of value creation and valuation for Tesla’s Enterprise.
From Goldman's Patrick Archimbault:
Energy Storage: The company reiterated that a well-integrated solar roof with battery product continues to be a goal for the company, supporting the proposed merger between Tesla and SolarCity. Our work suggests the lifetime cost of solar + storage will remain above grid prices until storage costs fall dramatically or changes to policy accelerate a change.
New vehicle lines: TSLA plans to introduce a compact SUV and a pickup truck for consumers as well as a heavy-duty commercial vehicle and a high passenger-density bus for urban areas. Interestingly, its plans did not include a lower priced version of its upcoming Model 3 sedan. Vehicle autonomy development importance stressed. This follows recent NHTSA statements following that “no one incident will derail” development of a safety enhancing technology.
Car/ride sharing: TSLA also announced the ability for vehicle owners to turn their cars into an income generating asset during the 90% to 95% of the day they sit idle, as well as its intention to provide its own ride-sharing fleet. A key enabler for both is the approval of true self-driving technology.
Some areas of the plan were widely anticipated such as reinforcing the company’s earlier stated goal of sustainable transportation and outlining a new shared mobility plan, which makes sense to us given the extent to which shared mobility can increase accessibility to AV and EV technologies. Tesla’s product ambitions, which include pickups, SUVs, buses and commercial vehicles, were broader than we expected.
Morgan Stanley's note was aptly named: "Now That They’ve Said It, How Do They Fund It?"
Elon Musk has re-affirmed the importance for Tesla of owning a solar company while attaching itself to new multi-trillion-dollar addressable markets in shared and autonomous transportation. Will the market’s faith match the strategic ambition?
What we learned:
Tesla’s CEO emphasized that solar energy was always part of the original plan and re-affirmed the SCTY deal logic. At the same time, Elon Musk announced a variety of new vehicle segments (small SUV, pickup truck, buses and semi trucks) and entirely new business models for transportation (shared autonomous buses and cars).
In our view, the Master Plan Part Deux serves 2 major purposes: (1) To address investor concerns over governance in the wake of the SCTY announcement by impressing the logic of the combination. And (2), to attach the auto business to as many multi-trillion-dollar addressable markets as possible. We have been writing about the need for all automotive companies, including Tesla, to change how they view the addressable market to include the ‘bundled mile’ (10 trillion miles per year or 1.7 Light Years) and the roughly 600 billion hours of time spent by humanity in automobiles (equal to 68 million years annually). As we have written throughout our research pieces, including our April 19 Blue Paper: Global Investment Implications of Auto 2.0, we estimate the global miles market to be as large as $10 trillion and the global automotive value of time (both driver and passenger time) at potentially several trillion dollars including the potential to sell content and monetize data.
In addition to being an automaker, Tesla is a crowd-funded R&D innovation effort focused on transforming two of the world’s largest markets: Energy and Transportation. Given the company’s rate of cash consumption, to put this innovation into action, Tesla must fund the plan with large amounts of external capital. Tesla management have demonstrated a strong ability to convince investors of the validity and scope of its business and technological ambition. The expansion of business scope announced last night is very significant, likely requiring substantial deployment of capital and potentially many years of upfront losses to see to fruition.
Developing an all-new product line such as a small SUV or pickup truck can conceivably require more than $1bn of investment each. Development of an allnew heavy commercial vehicle (Tesla Semi) and the related infrastructure could run into the billions of dollars. Developing and launching a small bus public transport network could potentially require significantly more investment. Absorbing the losses at SCTY while funding its further expansion could likely add a further investment burden on top of all that. These are big markets and we understand they require large capital investments, time and execution risk to address. Are public investors prepared to continue to extend capital on the same terms they have done over the past 6 years? Do investors get excited over the potential to disrupt a broader scope of multi-trillion-dollar markets? Or is there a point where the cost of capital could bend somewhat under the weight of the company’s market ambitions?
Finally, UBS's Colin Langan with the most scathing take yet:
Secret Master Plan Part 2 has few surprises
Last night, TLSA outlined its long term strategy: tackle solar/storage, mass/commercial transport, fully autonomous tech, and car-sharing. With expectations around TSLA's future already high, we question if this new plan will surprise most investors. The integrated solar-storage was known post the SCTY deal, more models were expected, and autonomous/shared vehicles are a likely part of many OEM's plans. Tesla previously alluded to improving factory. TSLA now specified that it sees a 5-10 fold increase by version 3 in 2 years; however details remain light on how this will be different from traditional OEMs and credibility is challenged given near term production issues.
Lacks new color on solar storage combo
Given investor caution around the SCTY deal (stock traded down ~10% on the news), we are surprised by the lack of new details on the solar/storage combo. It is unclear why a JV wouldn't enable the same opportunity. We see the merger as an unneeded distraction adding complexity to TSLA, which already has too much on its plate with near term production issues, the coming Model 3 launch, and aggressive production targets (see Driving off into the Sunset). Also, in our prior note Merger Puts Battery Storage Front and Center, we highlighted our view that storage is not economic for most residential customers due to net metering.
Heavy truck a surprise; autonomous/shared cars expected
TSLA announced that a new compact SUV and new kind of pickup are coming. These mass market models were widely expected; however, we are surprised by the announcement of an eventual heavy duty truck (TSLA Semi) and bus. TSLA did not provide a timeline for these new vehicles, but we question if it can handle the added complexity of varying platforms when it is currently having issues with only 2 models. Moreover, a heavy truck application may be challenged by range (imagine the battery needed to make a cross-country trip). TSLA's focus on self-driving (10x safer than human) and shared cars is not surprising or unique to TSLA. For example, GM bought Cruise Automation and invested in Lyft with these future trends in mobility in mind
In short: Elon Musk just admitted that his company will need lots and lots of additional capital in the coming years, and as MS politely puts it: "Do investors get excited over the potential to disrupt a broader scope of multi-trillion-dollar markets? Or is there a point where the cost of capital could bend somewhat under the weight of the company’s market ambitions?" which said otherwise, means will investors keep handing over their cash to Musk to fund what is an unprecedented hype machine, and one which is years, if not decades away from profitability, and where the cash burn seems to get bigger with every passing year.
Perhaps taking a cue from recent events in Turkey, moments ago Reuters reported that Brazil's federal police began an anti-terrorism operation early Thursday, just over two weeks before the Olympics start in Rio de Janeiro, a justice ministry source told Reuters. The source said that federal police had arrested members of a group that was preparing acts of terrorism. It was unclear where the operation was taking place or what the specifics of the operation were.
As WSJ adds, the 10 Brazilians arrested allegedly had links the Islamic State. Justice Minister Alexandre de Moraes said at a late-morning press conference that the operation had been coordinated and carried out by members of Brazil’s armed forces and the ABIN, the country’s equivalent of the CIA, with help from international intelligence agencies. Mr. de Moraes said that two other suspects are being sought. It wasn’t immediately clear where the arrests had occurred.
Mr. de Moraes said the suspects were members of a terrorist cell that had communicated via an encrypted messaging service, and had gone from exchanging comments about the Islamic State to making preparations for an attack.
Mr. de Moraes said that one of the suspects had tried to purchase an AK-47 rifle in Paraguay, which shares a porous border area with Brazil and Argentina. That region is notorious for money-laundering and drugs and arms trafficking. It wasn’t clear whether that purchase had been made.
Mr. de Moraes said there was no clear target for the alleged attacks. But the arrests are certain to elevate concerns about the possibility of a terrorist attack at the Games and raise additional questions over Brazil’s security preparations.
An estimated 500,000 tourists and athletes are expected to descend on Rio for the Games, including about 200,000 from the United States.
Curiously this takes place just day after the NYT reported that a delegation of U.S. activists from the Black Lives Matter movement, who were on a 4 day visit to Rio, warned that the Rio de Janeiro Olympic Games could prove deadly for the city's poor black people. The American activists were on a four-day visit to Rio aimed at highlighting the risks posed by the giant Olympic security apparatus in a country where a United Nations report has concluded law enforcement officers are responsible for a "significant portion" of the nearly 60,000 annual violent deaths.
"It's important that we stand with each other because we know this violence is connected," said Daunasia Yancey, a Black Lives Matter activist from Boston. "Anti-black violence is global and our resistance is global."
Perhaps the two events are related, or perhaps Brazil is merely already setting the stage for having a convenient scapegoat if the olympics, for which the country is woefully unprepared, end which in a worst case scenario, may even result in casualties.
Two weeks ago we announced our fundraising drive, with a goal of $100,000. I am happy to report that after just two weeks, we have achieved half our goal!
But we still have a ways to go. We welcome donations of any size and would love to say that 100 percent of our members participated.
Do you find our extensive website useful? Do you enjoy our presence on Facebook and other social media sites? Have you or members of your family benefited from our nutrition information?
Then please support our work with a donation. Just go to www.westonaprice.org/donate to donate online. You may also phone the office or send a check.
What could be more important than helping parents bringing healthy babies into the world, and helping children grow up healthy and happy in a toxic world.
Thank you in advance for your support!
Sally Fallon Morell, President
The Weston A. Price Foundation
PMB 106-380, 4200 Wisconsin Avenue, NW
Washington, DC 20016
Leftists Planning Coup On President Trump? L.A. Times Says “Voters Must Stop Him Before Military Has To”
How far will they go to destroy this country? Liberals and globalists are already plotting several moves ahead.
If Donald Trump beats Hillary, they are already contemplating a Plan B.
In a op-ed, L.A. Times. writer James Kirchick dangles the ambiguous but ominous threat, “If Trump wins, a coup isn’t impossible here in the U.S.”
It basically hints that a military overthrow of a Trump Presidency might be coming in the future, and would then be justified by horrific dictatorial acts that hordes of screaming leftists have been warning about all this time:
From the L.A. Times:
Americans viewing the recent failed coup attempt in Turkey as some exotic foreign news story — the latest, violent yet hardly unusual political development to occur in a region constantly beset by turmoil — should pause to consider that the prospect of similar instability would not be unfathomable in this country if Donald Trump were to win the presidency.
Naturally, in this scenario, Trump would be quick to commit war crimes (as Kirchick and many others see it).
What if his presidency is so dangerously unconstitutional and misguided that a military intervention will be necessary to take the country back?
In their quest to stop Trump at all costs, many of his opponents are already prepared to take things that far. That is telling, and very chilling indeed.
Throughout the campaign, Trump has repeatedly bragged about ordering soldiers to commit war crimes, and has dismissed the possibility that he would face any resistance. “They won’t refuse,” he told Fox News’ Bret Baierearlier this year. “They’re not gonna refuse me. Believe me.” When Baier insisted that such orders are “illegal,” Trump replied, “I’m a leader. I’ve always been a leader. I’ve never had any problem leading people. If I say do it, they’re going to do it.”
Try to imagine, then, a situation in which Trump commanded our military to do something stupid, illegal or irrational.
If this scenario sounds implausible, consider that Trump has normalized so many once-outrageous things — from open racism to blatant lying. Needless to say, such dystopian situations are unimaginable under a President Hillary Clinton, who, whatever her faults, would never contemplate ordering a bombing run or — heaven forbid — a nuclear strike on a country just because its leader slighted her small hands at a summit. Rubio might detest her, but he cannot honestly say that Clinton, a former secretary of State, should not be trusted with the nation’s nuclear codes.
Trump is not only patently unfit to be president, but a danger to America and the world. Voters must stop him before the military has to.
The veiled threat can’t be dismissed just because it is misguided or vague.
Should Donald Trump take it as a threat? Is his life in danger?
What happens if voters don’t make the choice these people think is the right one?
Glenn Beck was suspended from air for a week for allow a guest to make similar comments that hinted at ‘taking Trump out.’
Discussing a potential Donald Trump presidency, Thor lamented that impeachment would likely be off the table.
“If Congress won’t remove him from office, what patriot will step up and do that if, if, he oversteps his mandate as president, his constitutional-granted authority, I should say, as president,” Thor said. “If he oversteps that, how do we get him out of office? And I don’t think there is a legal means available. I think it will be a terrible, terrible position the American people will be in to get Trump out of office because you won’t be able to do it through Congress.”
There is a very real and very potent anger fomenting across our country. Though there are good reasons for it, most of it is misdirected, and 2016 has proven to be open season for attacks of all kind against Trump and his supporters.
Violence has trailed his campaign as passionate leftists stop at nothing to defy his controversial policies on immigration and the rest of it.
The rule of law is slipping away, and certain sectors of the establishment love the chaos is will bring.
As widely expected from the formulaic statement issued by the ECB ahead of Draghi's press conference, the central bank announced moments ago that it kept all three of its interest rates unchanged as follows:
- ECB keeps main refinancing rate unchanged at 0.00%.
- Leaves deposit facility rate unchanged at -0.40%
- Keeps marginal lending rate unchanged at 0.25%
The ECB's full statement also confirms that "the monthly asset purchases of €80 billion are intended to run until the end of March 2017 or beyond if necessary and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim"
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.
Regarding non-standard monetary policy measures, the Governing Council confirms that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
Now attention turns to Draghi in 45 minutes where his press conference is expected to give some additional color on how the central bank will address the issue of rapidly disappearing collateral.
- Global stocks nurse nine-month highs before ECB meeting (Reuters)
- Kuroda Says No Need and No Possibility for Helicopter Money (BBG)
- As Republican Party tries to heal wounds, discord rules at convention (Reuters)
- GOP Divided as Cruz Snubs Trump (WSJ)
- Trump Chooses War With Cruz at Convention Aimed at Unification (BBG)
- Trump considering fracking mogul Harold Hamm as energy secretary (Reuters)
- Turkey says no return to past repression despite state of emergency (Reuters)
- UK says unlikely to trigger formal EU divorce before year end (Reuters)
- Citadel Hiring About 17 Portfolio Managers From Shuttered Hedge Fund Visium (WSJ)
- Goldman Sachs under spotlight in Malaysian fund scandal (Reuters)
- Tesla CEO Elon Musk Announces Heavy Truck, Ride Sharing Fleet of Cars (BBG)
- France orders Nice policing inquiry after July 14 attack (Reuters)
- Another First for S&P 500 as Record Comes With Yuan in Reverse (BBG)
- Komatsu to buy U.S. mining equipment rival Joy Global in $3.7 billion deal (Reuters)
- Cryptocurrency Platform Ethereum Gets a Controversial Update (WSJ)
- Exxon Grabs Reins in InterOil Hunt as Rivals Bow Out of Deal (BBG)
- Son of Bangladesh opposition leader gets seven-year jail term for money laundering (Reuters)
- Chinese Private Equity Funds Are Taking on the World's Giants (BBG)
Overnight Media Digest
- Texas Senator Ted Cruz upstaged Republican vice presidential nominee Mike Pence Wednesday night by refusing to endorse Donald Trump for president, disrupting a night that was supposed to be devoted to party unity. http://on.wsj.com/2acF2gg
- U.S. prosecutors have linked the prime minister of Malaysia to hundreds of millions of dollars allegedly siphoned from an economic development fund, and are seeking the seizure of more than $1 billion of assets. http://on.wsj.com/2acFcEp
- A foreign-exchange executive of HSBC Holdings Plc was arrested for allegedly front-running a $3.5 billion currency trade for a client, in a deal that netted millions in profits for the bank. http://on.wsj.com/2acEUNJ
- The custodians of the popular cryptocurrency platform Ethereum implemented a controversial change to it Wednesday. The change, called a "hard fork," essentially undoes the transactions that allowed a June theft of $60 million worth of the digital currency, thereby allowing the money to be returned its rightful owner. http://on.wsj.com/2acFvis
- Kenneth Griffin's Citadel Llc hedge fund hired about 17 portfolio managers this week from fallen rival Visium Asset Management, imperiling Visium's plan to sell its last remaining part to another money manager. http://on.wsj.com/2acFhrB
- The U.S. Justice Department on Wednesday signed off on Anheuser Busch InBev SA's acquisition of rival SABMiller Plc, removing one of the last major hurdles standing in the way of a roughly $108 billion deal to create a global beer giant. http://on.wsj.com/2acFOK8
*Two HSBC foreign exchange traders have been arrested and charged for allegedly making $8 million in profits and fees by "front running" a client's $3.5 billion foreign exchange trade.
*German exchanges operator Deutsche Borse remains short of a 60 percent threshold it needs to merge with the London Stock Exchange.
*FirstGroup will be the first UK bus and rail operator to run a U.S. passenger rail operation after it bagged a contract to run services on the outskirts of Dallas in Texas.
*Britain's unemployment rate dropped below 5 percent for the first time in 11 years. Official data show unemployment at 4.9 percent, the employment rate at a record high of 74.4 percent and inactivity at record lows.
- Two senior executives of HSBC face criminal charges after being accused of a currency manipulation scheme that federal prosecutors say generated $8 million in profits and fees. http://nyti.ms/29OOLEK
- Airbnb has hired former United States Attorney General Eric Holder Jr as an adviser to help create the company's new anti-discrimination policy, adding a big name to its battle to prevent people on its service from refusing minority and transgender customers. http://nyti.ms/2a0x4W0
- Executives at 21st Century Fox decided to end the tenure of Roger Ailes after lawyers they hired to investigate an allegation of sexual harassment against him took statements from at least six other women who described inappropriate behavior from Ailes. http://nyti.ms/29WoO4R
- The Republican convention erupted into tumult on Wednesday night as the bitter primary battle between Donald Trump and Senator Ted Cruz re-ignited unexpectedly, crushing hopes that the party could project unity. A clamor broke out as it became clear that Cruz was not going to endorse Trump, pointedly snubbing the party nominee from center stage. http://nyti.ms/29VmLnT
THE GLOBE AND MAIL
** Canada ranks 10th among the 23 largest energy consumers in the world when it comes to using that energy efficiently. A study released on Wednesday by the non-profit American Council for an Energy-Efficient Economy (ACEEE) put Canada in the middle ranks for energy efficiency, citing the country's strict appliance and building standards as areas of strength. (http://bit.ly/29Pf0ep)
** Junior miner and hostile takeover target Dolly Varden Silver Corp insists it has valid business reasons to seek a private placement that would dilute the company's market value in the face of a hostile takeover bid launched by Hecla Mining Co. (http://bit.ly/29NIEEa)
** Prime Minister Justin Trudeau is trumpeting the new Canada Child Benefit that just landed in parents' bank accounts across the country, but the government's inability to properly pay tens of thousands of federal workers is proving to be a costly distraction for the Liberals. (http://bit.ly/29NJfGh)
Sports Direct minimum wage investigation to cover shop workers
The official investigation into Sports Direct International Plc's failure to pay its warehouse workers the national minimum wage is understood to have been widened to include the sportswear chain's 13,000 retail workers. In a development that could significantly increase the scope of potential fines and back-pay due, investigators from HM Revenue & Customs are examining if Sports Direct retail staff - as well as about 3,000 warehouse workers at the group's headquarters in Shirebrook, Derbyshire - have been paid less than the legal minimum. (http://bit.ly/29OqJK0)
Mondelez in talks to buy Cadbury biscuit licence from Burton's
Mondelez International Plc, the owner of Cadbury, is in talks to buy back the licence for the British chocolatier's biscuit business in a deal worth up to 200 million pounds. The U.S. confectionery giant previously known as Kraft, which bought Cadbury in 2010, is in talks with Burton's Biscuits, the Birmingham-based business which has the right to make Cadbury Fingers and Cadbury Animals in perpetuity under a deal signed in 1986. (http://bit.ly/29WHz98)
Unilever buys Dollar Shave Club in male grooming fight with P&G
Unilever Plc is to go head-to-head with its arch consumer goods rival Procter & Gamble Co in the male shaving market after buying Dollar Shave Club for an estimated $1 billion. P&G owns Gillette, which dominates the global shaving market and accounts for around 60 percent of sales in North America. (http://bit.ly/2ahSvmx)
BP eyeing sell-off of UK oil terminals and pipeline stake
BP Plc is selling off a string of fuel storage terminals as well as its stake in an enormous pipeline as part of a shake-up of its operations in the UK that affects around 350 jobs. (http://bit.ly/29VXQhj)
Top HSBC Banker Arrested In US Fraud Case
A senior HSBC Holdings Plc executive faces fraud charges over a currency trade from which the bank allegedly profited at a client's expense. Mark Johnson, the London-headquartered lender's head of global foreign exchange cash trading, and Stuart Scott, a former colleague, were accused on Wednesday of defrauding an unnamed company by 'front-running' a $3.4bn purchase of sterling for their own benefit.
VW Takes Fresh 2.2 Billion Euros Hit Over Diesel Scandal
Volkswagen AG has taken a fresh 2.2 billion euros profit hit thanks to "further legal risks" in North America where it is facing big payouts over the diesel emissions scandal. It comes a day after three U.S. states filed three civil lawsuits against the company in cases that could lead to fines of hundreds of millions of dollars or more. (http://bit.ly/2ahRzOV)
Just as the dust begins to settle on Brexit, Italy's banking system looms as the next threat to global financial markets.
Previous attempts to resolve Italy's banking sector woes have proven to be less than effective. Non Performing Loans on the balance sheets of Italian banks represent over 8% of the total loan portfolios. However some analyst fear that this is set to grow to a whopping 15% in the near future.
Results of a stress tests by the European Banking Authority due on July 29 are expected to shed more light on the capital needs of the Italian banking sector, potentially serving as a spark to renewed financial turmoil.
While foreign exposure to Italian banks is relatively low, the bigger worry is that a backlash over a bailout leads voters to revolt, empowering the euroskeptic 5 Star Movement, a political party that is growing in poularity, which has called for a referendum on eurozone membership.
Could we be moving from Brexit to Italeave?
You can read the full article here
Gold and Silver Bullion - News and Prices
Why gold’s bond with the dollar has broken (Marketwatch)
Gold Prices (LBMA AM)
21 July: USD 1,322.00 ., EUR 1,199.318 & GBP 1,000.754 per ounce
20 July: USD 1,325.60, EUR 1,204.308 & GBP 1,005.865 per ounce
19 July: USD 1,332.20, EUR 1,203.376 & GBP 1,009.042 per ounce
18 July: USD 1,326.15, EUR 1,200.298 & GBP 1,000.050 per ounce
15 July: USD 1,330.50, EUR 1,194.789 & GBP 994.150 per ounce
14 July: USD 1,325.705, EUR 1,192.99 & GBP 1,001.96 per ounce
13 July: USD 1,340.25, EUR 1,211.45 & GBP 1,009.74 per ounce
Silver Prices (LBMA)
21 July: USD 19.34, EUR 17.55 & GBP 14.66 per ounce
20 July: USD 19.70, EUR 17.88 & GBP 14.95 per ounce
19 July: USD 19.99, EUR 18.07 & GBP 15.18 per ounce
18 July: USD 19.72, EUR 17.83 & GBP 14.89 per ounce
15 July: USD 20.14, EUR 18.08 & GBP 15.06 per ounce
14 July: USD 20.25, EUR 18.23 & GBP 15.15 per ounce
13 July: USD 20.29, EUR 18.31 & GBP 15.25 per ounce
Recent Market Updates
- Gold Holds Near Two-Week Low as Risk Appetite Rises on U.S. Data
- Gold, Trump and Rates: Bank That Foresaw Rally Flags $1,500
- Gold Lower After Central Bank’s Surprise Move
- "We Are On the Cusp of an Explosion in the Silver Price" - John Embry
- Stocks Rally – Is Brexit Systemic Risks Contained?
- Britain has a new prime minister – here’s what that means for you
- Metals Caught Between Global Gloom, U.S. Job Gains as Gold Slips
- Central Bank Resumes Monthly Gold Buying in Bid to Diversify Reserves
- Property Fund Turmoil in the UK has Eerie Echoes of Bear Stearns
- "In Gold We Trust" Annual Report - New Bull Market "Emerging"
- 3 Charts Show "How Precious Brexit Is" for Gold and Silver Bullion
- Gold, Silver Best Performing Assets In H1, 2016 – Up 26% & 38%
Following the previously noted fireworks from Kuroda, who in a BBC interview said that there is "no possibility" of helicopter money (which however the WSJ quickly added was based on an interview conducted in mid-June which supposedly means there is possibility now) In under an hour the market will turn its attention to the ECB's latest statement, where as SocGen's Anatoli Annenkov writes, it is "time to send another dovish signal." The main reason for this is that as we explained yesterday, unless the ECB changes the structure of its government bond buying program, it may run out of German bonds to monetize as soon as a few months from today.
Using a UBS analysis, we presented the following matrix of what options Draghi has to remedy this situation.
That sentiment persists today, with most banks and analysts expecting more easing from the ECB today. This morning the consensus sentiment is best summarized by SocGen which writes that "as the dust settles and other central banks prepare for more easing, it is likely that the ECB will need to strengthen its dovish tone further. Two immediate challenges stand out: how to deal with a much reduced universe of bonds following the Brexit referendum, which at current interest rate levels causes problems for individual countries, and what to do with the March 2017 reference as a possible end-date for the APP. On the first issue, we believe there is room to increase the issue share limit already at next week’s meeting, but with increasingly complex implications for the aim to stay clear of a blocking minority in the event of restructuring. On the second issue, there is reason to extend the horizon until September 2017, probably after the summer, while still retaining the ability to start tapering (as we expect as of March next year). Next week’s press conference is also likely to focus on the state of euro area banks. While ducking the issues to the extent possible, President Draghi is unlikely to be able to straighten out all the issues as he did in January, when another ECB request caused widespread concerns over the health of Italian banks."
* * *
Here is a quick checklist courtesy of Bloomberg of what else to expect:
- Any tweaks to the ECB’s QE program and discussion about next steps are in focus as an increasing number of government bonds trade below the deposit rate.
- Draghi’s press conference at 2:30pm CET will be watched for signals on whether further rate cuts are possible given the impact on banks and insurers
BOND SCARCITY AND THE CAPITAL KEY
- Given the pool of eligible bonds is shrinking, some governing council members favor changing the allocation of bond purchases to be more in line with levels of outstanding debt, a Bloomberg source said at the start of the month
- And the ECB has already been quietly exceeding quotas depending on where bonds are available
- However, most analysts agree that dropping the capital key altogether will be a last resort and the ECB will explore other options first
- While it’s probably too soon to abandon the capital key, there’s a possibility the ECB could tweak other aspects of the program as soon as today, including dropping the maturity limits or allowing the NCBs to buy bonds with yields lower than the deposit rate
- Given the impact of negative rates on bank profitability, the investment community thinks central banks are approaching the lower bound on rates and will increasingly focus on alternative forms of easing
- In June, Draghi said the governing council sees rates at current or lower levels for an extended time; central bank watchers will be looking for any change in that language
- Draghi reportedly told EU leaders Brexit could reduce euro growth by as much as 0.5% for the next three years and the ECB stepped up cooperation with central banks on FX movements after the vote
- Calm markets, the paucity of data on the economic impact of the vote to leave and the BOE decision to wait and see could see Draghi echoing the MPC’s approach, possibly limiting himself to reiterating that the Euro area’s central bank is monitoring the impact and is ready for all contingencies
- More than a quarter of the corporate bonds the ECB has bought so far have negative yields
- ECB has bought low-BBB names such as RWE, Metro, EdP, Renault, as well as credits with sub-IG ratings including Telecom Italia, Lufthansa, showing it isn’t shying away from taking credit risk, BofAML says
- To date, the volume of bond buying has surpassed consensus expectations, but the ECB may explain this away as an attempt to front-load purchases given historically issuance slows over the summer
- At some point the ECB may extend the program by buying bond issued by financials but few expect any detail on that yet given the program only began last month
- Draghi told EU leaders fiscal policy should shift toward investment after the Brexit vote; has repeatedly said monetary policy can’t do all the heavy lifting and Peter Praet called for a concerted effort in fiscal and structural policy
- With Japan apparently readying to provide more fiscal stimulus and the U.K.’s new PM hinting the country may row back on austerity, Draghi may be pressed on how fiscal policy could be used to bolster the impact of the bank’s easy policy
* * *
And the three residual key issues outstanding: what happens after March 2017, the Italian banks, and rising inflation. Some final thoughts from SocGen
Soon time to tell markets what is going to happen beyond March 2017
As markets will demand some guidance on what can be expected beyond March 2017, we also expect the ECB to prepare to extend the horizon of the asset purchases, probably until September 2017. The ECB may well wait until September to communicate this, when new forecasts are available. Depending on how dovish the ECB would like to sound, it could either:
- Extend the horizon without specific mention as to the volume of monthly purchases;
- Extend the horizon but with specific mention of €80bn per month (as in the past).
As this reference is part of forward guidance, and thus a projection rather than a promise, we don’t see any major problem with pursuing the tapering next year if the economic data support it. Indeed, we maintain our current call that the ECB will start tapering in March 2017, as headline inflation picks up towards the target (and real deflation fears ease), and end it in December 2017.
Italian banks remind us of the risks to financial stability following Brexit
For the ECB to start buying bank debt, equity or foreign assets, we believe it would have to expect a significant recession, with major risks to financial stability from high market volatility. With the OMT now having been cleared by the German Constitutional Court, the ECB will feel reassured that it still has some tools at its disposal in the event of country-specific shocks. While the OMT could be activated if a country requests financial assistance involving the ESM, the ECB will face a bigger challenge if there are bigger contagion effects in the euro area financial system. The upcoming stress tests from the EBA at the end of the month have been widely discussed in the press, and ECB President Draghi is likely to be asked lots of questions at the press conference relating to the state of Italian banks, especially against the background of the recent ECB supervisory request to reduce NPLs in one Italian bank. While Draghi may refer to the separation principle with the SSM and the fact that the ECB is not the resolution authority, he is unlikely to be able to calm fears to the extent he did in January this year, following a similar market scare relating to an ECB information request.
Maintaining a dovish stance as inflation rises is going to be a challenge
While the inflation forecasts for September can be expected to be lowered due to the Brexit vote, there are likely also some upside revisions needed linked to the surprisingly low upward revisions to inflation in June. Despite rising oil prices and the additional policy measures decided in March this year, the ECB in June only revised up inflation this year by 0.1pp, while core inflation in 2018 was revised down. In the Accounts from the June meeting, it is fairly clear that there were some expectations that the ECB action in March, which were still being implemented in June, would have some further impact on inflation, with the Governing Council even stating that there “were also upside risks” to inflation.
We expect it to be increasingly difficult for the ECB to manage expectations downwards in an environment of rising inflation in the second half of this year (see Chart 2). While there is likely to be a focus on still low core inflation and the need to see through the energy-driven rise in headline inflation, the ECB could also be perceived as not believing in its own policy measures if the inflation forecasts are very dovish. Combined with the problem of finding an ever-greater universe of assets to purchase, we believe that the improved inflation situation in 6-9 months time will allow the ECB to finally gradually lift its foot from the gas pedal, and start tapering as of March next year. In order to counter any negative market effects, we also believe it will be possible to launch a new TLTRO 3 at that time, starting in June 2017, thereby keeping the momentum on the balance sheet. In a negative economic outlook scenario, we also believe it would be possible to open up the TLTROs to mortgage loans in order to maintain consumer confidence, as was the case with the Funding for Lending scheme in the UK.
The main catalyst that has pushed stocks to new all time highs, and sent the Yen plunging the most in the 21st century last week, were reports that Ben Bernanke was urging Japan to unleash helicopter money. Indeed, just yesterday, the USDJPY hit new two month highs on reports Japan was considering doubling the previously rumored fiscal stimulus of JPY10 trillion to 20, with the implication that the BOJ would provide the funds. It appeared that Japan had found just the jawboning tagline to keep stocks levitating and the Yen dropped: just hint every other day that more helicopter-funded stimulus is coming and jawbone assets, the same way verbal hints of more BOJ QE worked in 2015.
Which is why we were surprised to read this morning that BOJ governor Kuroda had shut down Bernanke, saying there is no need and no possibility of helicopter money in Japan, increasing speculation about the course of monetary and fiscal policy in the world’s third-largest economy. Given the current institutional setting, there is "no need and no possibility for helicopter money," Kuroda said in a BBC Radio 4 program that was broadcast Thursday. “At this moment, the Bank of Japan has three options with quantitative and qualitative easing with negative interest rates."
These current policies can be expanded, he said. Kuroda also repeated that he is determined to rid Japan of its deflationary mindset, and that there are no significant limitations to further monetary stimulus if needed by the BOJ.
Which, however, is not true: like the ECB, the BOJ is rapidly running out of willing bond sellers as its universe of eligible bonds gets smaller, while NIRP has proven to be far more deflationary than anyone had expected. In fact, the only way the BOJ's policies can continue is if the government opens the debt issuance spigot, which is all that helicopter money really is. We are confident that Kuroda gets this, and we are confident that despite his reverse-jawboning today, helicopter money is precisely what will happen.
But first there needs to be a crisis. As BofA's Athanasios Vamvakidis said, "markets had run ahead of themselves, expecting too much. Helicopter money is the inevitable end game in Japan, but we aren’t there yet, it will be the bazooka that the BOJ will use after a crisis." So we just need the crisis. For now however, there is none, and immediately after Kuroda's interview, the Yen soared, strengthening against all 16 of its major peers. The USDJPY tumbled more than 1% in the minutes after Kuroda's interview was releaesed.
“Kuroda has just given investors a bit of a disappointment,” said Peter Garnry, head of equity strategy at Saxo Bank A/S in Hellerup, Denmark. “The market had actually changed its sentiment and pricing based on the assumption that we would get something big on the fiscal stimulus side, and that Japan would be the first wave.”
Meanwhile, almost $5 trillion has been added to the value of global equities since June 27 amid signs central banks including the BOJ will boost stimulus to shore up economies after the U.K. voted to leave the European Union.
Elsewhere, the euro hovered near a three-week low amid speculation the European Central Bank will leave rates unchanged and signal further easing for later in the year when Mario Draghi speaks in two hours.
The Stoxx Europe 600 Index slipped 0.4%, with share of airlines sliding after Deutsche Lufthansa AG cut its earnings forecast. Lufthansa tumbled 8.4 percent, and EasyJet Plc slid 5 percent after posting a drop in quarterly revenue. Tele2 AB lost 6.4 percent as its earnings missed estimates. Hermes International SCA gained 3.4 percent as the luxury clothing and handbag maker said its profitability improved. Miners in the Stoxx 600 advanced for the first time in three days.
Turkish stocks fell the most worldwide after the president called for a state of emergency and S&P Global Ratings cut the country’s credit score. S&P 500 futures expiring in September lost 0.2 percent, while the MSCI All-Country World Index gained 0.1 percent, trading at its highest level since November. In the U.S., Intel Corp. slipped 2.8 percent in early New York trading after reporting slower growth in its server-chip division, while Qualcomm Inc. gained 6.5 percent as its results showed the chipmaker is overcoming hurdles in China. Joy Global Inc. rallied 20 percent after Japan’s Komatsu Ltd., the world’s second-biggest mining and construction equipment maker, agreed to buy it. Komatsu added 2.3 percent.
The Borsa Istanbul 100 Index slumped 3.8 percent. Turkey imposed a three-month state of emergency as the government pursues those responsible for last week’s failed military coup, detaining thousands of army officers, judges and prosecutors. A wider purge is under way that encompasses universities, schools and the civil service. The country won’t be under military rule, with army units taking orders from provincial governors, President Recep Tayyip Erdogan said in Ankara on Wednesday.
Germany’s 10-year bond was little changed, with the yield at minus 0.005 percent. The yield on similar-maturity U.S. Treasuries was 1.58 percent. It sank to a record 1.32 percent on July 6 and analysts see it ending the year at 1.74 percent, a Bloomberg survey shows.
- S&P 500 futures down 0.2% to 2164
- Stoxx 600 down 0.4% to 340
- FTSE 100 down 0.4% to 6703
- DAX down 0.2% to 10117
- German 10Yr yield up less than 1bp to -0.01%
- Italian 10Yr yield up less than 1bp to 1.25%
- Spanish 10Yr yield down 2bps to 1.14%
- S&P GSCI Index up 0.1% to 355.4
- MSCI Asia Pacific up 0.9% to 135
- Nikkei 225 up 0.8% to 16810
- Hang Seng up 0.9% to 22090
- Shanghai Composite up 0.3% to 3036
- S&P/ASX 200 up 0.4% to 5512
- US 10-yr yield down less than 1bp to 1.58%
- Dollar Index down 0.28% to 96.93
- WTI Crude futures up less than 0.1% to $45.79
- Brent Futures unchanged at 47.17
- Gold spot up 0.5% to $1,322
- Silver spot up 0.4% to $19.48
Global Headline News
- Kuroda Says No Need and No Possibility for Helicopter Money: Central bank Governor Haruhiko Kuroda spoke in BBC Radio 4 program
- Japan’s Komatsu to Buy U.S. Joy Global for $2.89b: Komatsu to pay $28.30 a share in cash, 20% premium to close
- Tesla’s Musk Sees Building Semi Truck in New ‘Master Plan’: CEO plans business expansion to include ride-sharing, buses
- Singapore Seizes S$240m in Assets Related to 1MDB Probe: U.S. seeks also to seize assets linked to 1MDB
- Shenhua Said to Seek CGN Merger to Form $204b Giant: China’s top coal miner said to submit proposal to regulators
- Exxon in Catbird’s Seat for InterOil as Oil Search Drops Out: Exxon bid values Papua New Guinea gas explorer at $2.5b
- Qualcomm Shows China Progress While Intel Stokes Server Fears: Intel’s data center business lags behind growth target, Qualcomm gets catch-up licensing payments, more chip orders
- Oil Extends Gains as U.S. Stockpiles Fall, Refinery Rates Rise: September futures added 0.5% in New York after gaining 0.7% Wednesday
- Trump Chooses War With Cruz at Convention Aimed at Unification
- LVMH Said to Be in Talks to Sell DKNY, DKI: New York Post
* * *
Looking at regional markets, we start in Asia where a positive picture was observed, following the latest record advance seen on Wall Street after a rally in WTI and strong financials led US higher. Nikkei 225 (+0.8%) was catapulted back into positive territory by reports that the government are preparing an additional JPY 9trl in fiscal spending to accompany the earlier reported JPY 10TRN package, however after the close Kuroda dashed Nikkei futures with his statement that helicopter money is "not possible." ASX 200 (+0.6%) extended on its progress from yesterday's session with widespread gains seen across sectors, although materials still lagged behind. Elsewhere, Chinese markets conformed to the upbeat tone with the Hang Seng (+0.5%) in the green, while new measures to boost the economy in China bolstered the Shanghai Comp (+0.4%). 10yr JGBs trade flat as the benefits from the BoJ entering the market to acquire JPY 1.135tr1 of government debt was capped by the bullish pressure in Japanese equities. According to sources, the Japanese government is said to be preparing an additional JPY 9trl in fiscal spending to accompany the reported JPY 10trl package and could be given the green light before the August 2nd cabinet is approved.
Top Asian News
- China Factory Gauge Suspended Again, This Time ‘Indefinitely’: Two indicators of Chinese economy have been discontinued
- PBOC Strengthens Yuan Fix Most in Three Weeks Amid Support Bets: Yuan trade-weighted basket advances most since February
- Yen Collapse Seen by Kuroda Critic Pitching Perpetual Bond Plan: Japan addicted to stimulus that isn’t working, Mitsuru Iwamura says
- Chinese-Owned Key Safety Systems Said to Plan Bid for Takata: Japanese co. is seeking buyers to tide over record air-bag recall
- RBNZ Says Likely That Further Policy Easing Will Be Required: Reserve Bank of New Zealand says decline in exchange rate is needed
Comments from BoJ's Kuroda have shaped the European morning, with the central bank head stating that there is no need or possibility for helicopter money. In terms of a sector breakdown, airlines were among the worst performers in Europe after downbeat updates from both EasyJet and Lufthansa, while energy names also softened. Although USTs saw upside in the wake of Kuroda's comments to head into mid-morning outperforming their European counterparts, with Bunds remaining relatively stable as participants await the ECB rate decision. Some have speculated that the ECB could alter the makeup of their asset purchases given the recent increase of bond yields slipping lower.
Top European News
- Draghi May Flag Action Ahead for ECB Under Brexit’s Shadow: President will likely address fallout from U.K. referendum
- Brexit to Halt U.K. Growth Streak With Mild Recession Seen: Survey of economists shows economy shrinking from this quarter
- Lufthansa Cuts Profit Forecast After European Terror Attacks: Terror fears depress demand for long-haul trips to Europe
- Publicis Chief Levy Sees Clear Improvement in 2017; Shares Rise: 30 years at the helm of ad firm, Levy plans to step down
- U.K. Retail Sales Fall 0.9% in Month of Brexit Referendum: Monthly survey captures week following shock vote to leave EU
- Daimler’s Mercedes Sustains Margins and Sees Boost From E- Class: Adjusted profit margin was 10% at Mercedes-Benz Cars division
In FX, the yen jumped 1.3 percent to 105.54 per dollar after Kuroda's no helicopter money remarks. Speaking in a BBC Radio 4 program broadcast Thursday, Kuroda also repeated that he is determined to rid Japan of its deflationary mindset and that there are no significant limitations to further monetary easing if needed by the Bank of Japan. The euro was little changed at $1.1020. ECB President Mario Draghi has predicted that euro-area growth will slow as a result of Brexit, suggesting a response is needed. “Draghi will keep his options open for further easing,” helping fuel a gradual decline in the euro amid broad dollar strength, said David Forrester, a foreign-exchange strategist at Credit Agricole SA’s corporate and investment-banking unit in Hong Kong. “The yen has already sold off a lot in anticipation of the government’s fiscal stimulus package and next week’s BOJ meeting. We’re looking for it to continue tracking lower.” The Bloomberg Dollar Spot Index fell 0.2 percent, after four days of gains. A Citigroup gauge that tracks the degree to which American economic data are exceeding projections is at an 18-month high and futures put the chance of a Federal Reserve interest-rate increase this year at 47 percent, up from 9 percent at the end of June.
In commodities, oil for September delivery was little changed at $45.78 a barrel in New York after weekly U.S. government data showed crude stockpiles fell for a record ninth week and refining activity climbed to a 2016 high. Gold rose 0.5 percent to $1,322.34 an ounce
On today's US calendar we have initial jobless claims as well as Philly Fed manufacturing survey for July. Existing home sales data and the FHFA house price index reading are also due out, along with the Conference Board’s leading index for June. In terms of corporate earnings we’re due to hear from 35 S&P 500 companies including General Motors (before market), AT&T (after market) and Schlumberger (after market).
* * *
Bulletin Headline Summary from RanSquawk and Bloomberg
- There is no need and no possibility of helicopter money in Japan,
central bank Governor Haruhiko Kuroda said; An increasing number of
officials at the Bank of Japan are concerned about the sustainability of
the current framework for massive monetary stimulus, according to
people familiar with the discussions
- Treasuries little changed in overnight trading as Asian equities rise on Koruda’s dismissal of “helicopter money,” European stocks fall prior to ECB policy meeting.
- While action isn’t seen as likely straight away, when Draghi addresses reporters after the ECB meeting he might signal more stimulus to be deployed in September
- BOE’s Kristin Forbes said there’s no need to hurry to add stimulus after the U.K.’S vote to exit the European Union, citing a moderation of the immediate market turmoil, calm consumers and “quite solid” growth before the referendum
- More Fed officials are making it clear with greater urgency that they need help from elected lawmakers. In June, Fed Chair Janet Yellen told the Senate Banking Committee that fiscal policy had “not played a supportive role”
- Goldman Sachs, JPMorgan Chase and Morgan Stanley collectively reduced the amount of money they set aside for employee pay in the first and second quarters by 17%, the most in at least four years, to $19 billion
- Terrorism in France, Brexit in Britain, a coup in Turkey -- political convulsions everywhere. So where’s the hot money going? It’s going to the world’s riskiest markets, where at least investors are getting paid for the risks
- Singapore vowed to take action against four banks for what it called serious lapses in their anti-money laundering controls and seized S$240 million ($177 million) in assets linked to the financial institution known as 1MDB
- The political instability in Turkey threatens to add to an already difficult year for the nation’s banks as they contend with a 33% surge in bad loans and soaring bankruptcy filings
- 8:30am: Chicago Fed Nat Activity Index, June, est. -0.2 (prior -0.51)
- 8:30am: Initial Jobless Claims, July 16, est. 265k (prior 254k); Continuing Claims, July 9, est. 2.137m (prior 2.149m)
- 8:30am: Philadelphia Fed Business Outlook, July, est. 4.5 (prior 4.7)
- 9:00am: FHFA House Price Index m/m, May, est. 0.4% (prior 0.2%)
- 9:45am: Bloomberg Economic Expectations, July (prior 41); Bloomberg Consumer Comfort, July 17 (prior 44.7)
- 10:00am: Existing Home Sales, June, est. 5.48m (prior 5.53m); Existing Home Sales m/m, June, est. -0.9% (prior 1.8%)
- 10:00am: Leading Index, June, est. 0.2% (prior -0.2%)
- 7:45am: ECB Main Refinancing Rate, est. 0% (prior 0%)
DB's Jim Reid concludes the overnight wrap
With little else to feed off, a steady stream of better than expected corporate earnings results continues to keep the tone in markets on the positive side for now. Reports out of Microsoft (post Tuesday’s close) and Morgan Stanley (prior to the open yesterday) kept the train chugging yesterday and once again helped Wall Street and the S&P 500 (+0.43%) and Dow (+0.19%) to new record highs. That said the actual intraday moves have been incredibly small recently - perhaps also reflecting a bit of early summer fatigue - with the intraday high to low range for the S&P 500 yesterday just 0.50%. In fact since the 11th July the average daily intraday range has been just 0.51% despite the index closing up in six of the eight sessions. This month the index has actually only had a daily range above 1% on two occasions. Compare that to the excitement in June where the average daily range over the entire month was 1.06%.
The ECB has the potential to shake things up today though when we’ll get the outcome of their policy meeting at 12.45pm BST. In a nutshell our European economists believe that it’s a close call, but on balance the ECB will wait until the September meeting before easing again, with the focus on extending QE. A few factors lead them to this. Firstly, they note that based on press reports, the ECB sees a smaller impact from Brexit than they do and that it would require negative data surprises if the ECB is to converge to our economists view, for which the data generally hasn’t been available since the Brexit vote. Secondly, the ECB is confident about the benefits of the policies it has implemented and believes the benefits from recent policy announcements like the TLTRO2 and CSPP will be slow to accrue. Thirdly, by waiting until September the ECB will have the benefit of additional information on the Brexit impact and the benefits of its new policies. It will also have the benefit of updated staff forecasts. They note that the ECB dislikes being under pressure to reconsider the policy stance at every meeting and has a tendency to coordinate action with the analysis accompanying new staff forecasts.
That said the scale of the Brexit impact is uncertain but negative. The ECB’s room for manoeuvre on policy is constrained by the political nature of the Brexit shock and the side-effects of further easing. In that case, the sooner the ECB acts the better. On top of this, the decline in European bank equity is a concern and another important factor to consider. So this makes the call a bit of a closer one.
Staying on this subject, yesterday our strategists published a note taking a look at the potential technical changes in QE purchases which could be introduced alongside an extension, including increasing issuer limits, removing the yield floor and deviating from capital keys. They assess how this could impact bund and peripheral spreads in particular should Draghi provide some meaningful indication at the press conference.
Elsewhere, the fallout from the failed coup in Turkey on the weekend continues. Yesterday evening President Erdogan declared a three-month state of emergency in the country. According to the FT officials in Turkey have said that this will allow the government to pass laws rapidly, however there will be no financial or commercial activity restrictions. Meanwhile the Turkish Lira weakened another -1.56% yesterday and to a fresh historic low after S&P cut the sovereign’s rating by one notch to BB with a negative outlook. The start of the week also saw Moody’s put Turkey’s Baa3 rating on review for downgrade. With Fitch (BBB-/Stable) still at IG that Moody’s move is the most important development given the possibility now of Turkey losing its IG status (with most global indices/index trackers requiring at least 2 IG ratings for a credit to be classified as IG). DB’s Seb Barker published an interesting note yesterday discussing the implications for the credit following this news.
Switching over to the latest in Asia this morning where bourses are generally following the lead from Wall Street last night. The Nikkei (+0.71%) in particular has bounced back, with a weaker Yen (-0.50%) this morning helping. Meanwhile the Hang Seng (+0.75%), Shanghai Comp (+0.69%) and ASX (+0.60%) are also up. US equity index futures are also a smidgen higher, helped by eBay’s better than expected results after the closing bell last night which saw shares climb as much as 8% in extended trading. In the FX space the Kiwi Dollar is down half a percent or so after the RBNZ strengthened its easing bias in an economic update overnight.
Moving on. In terms of the rest of markets yesterday, European equities also had a decent day yesterday with some corporate earnings results there also helping. German software maker SAP stood out while Volkswagen also provided some positive earnings guidance which helped sentiment to remain fairly positive. The Stoxx 600 closed up +1.03% while sovereign bond markets eased off, with yields edging up a few basis points.
Meanwhile, in what was another fairly quiet day for data yesterday the notable release was the European Commission’s flash consumer confidence report for July which weakened 0.7pts to -7.9 and more or less in line with expectations. Unlike the German ZEW survey from earlier in the week it’s hard to argue that the Brexit result has had a material detrimental impact on confidence given that data. Indeed the absolute value of the index was weaker in February-April earlier in the year. Elsewhere there was also some data out of the UK, albeit pre-Brexit. The ILO unemployment rate was reported as nudging down one-tenth to 4.9% (expectations had been for no change). The last time unemployment was this low was in 2005. Average weekly earnings including bonuses rose +2.3% yoy in the three months to May (from +2.0%) however ex bonus earnings were down one-tenth to +2.2%.
Before we look at the day ahead, there was a bit more chatter out of the BoE yesterday too. In an article on the Telegraph website, policy maker Kristin Forbes said that ‘given the substantial uncertainty and likelihood that growth slows, there is a valid case to ease monetary policy to support demand’. She did however go on to say that ‘but until more hard data is available, I believe this is a good time to keep calm and carry on’.
Looking at today’s calendar, this morning we’re kicking things off in France where we’ll get the latest confidence indicators for July. The UK will then report June retail sales data before focus of course turns to the ECB meeting just after midday, with Draghi scheduled to speak after at 1.30pm BST. Meanwhile there’s a bit of data to highlight out of the US this afternoon. Initial jobless claims is the early release along with the Philly Fed manufacturing survey for July. Existing home sales data and the FHFA house price index reading are also due out, along with the Conference Board’s leading index for June. In terms of corporate earnings we’re due to hear from 35 S&P 500 companies including General Motors (before market), AT&T (after market) and Schlumberger (after market). We’ll also get reports from 12 Stoxx 600 companies.
Central bankers are almost certainly unaware of this danger, partly because their chosen statistics fail to capture it, but mostly because conventional monetary economic theory is lacking in this regard.
This article draws on the evidence of extreme overvaluations in equities and bonds worldwide, and concludes the explanation lies increasingly in a greater perception of risk against holding cash, or bank deposits. Risk relationships between cash and assets are inverting, due to failing monetary policies and escalating counterparty risk with the banks.
There are of course subplots involved, such as the real and imagined rigging of markets by central banks, and the bullish confidence that gives to buyers and holders of investments. Then there is the unanimous assumption that interest rates must not and therefore will not be permitted to rise.
Extreme one-way bets aside, the overriding reason for valuation disparities is becoming more consistent with the downgrading of cash, rather than a revaluation of assets. If this was happening to money’s relationship with goods and services, economists would begin to worry about inflation, stagflation, and even hyperinflation.
Because today’s price inflation is mainly confined to assets, no one worries. Instead investors rejoice in the wealth effect. Assets are excluded from the consumer price indices, so the danger of a fall in the purchasing power of money in respect of assets does not appear to exist. This does not mean that the problem can be ignored. But if the reason behind rising markets is a flight from cash, we should begin to worry, and that point in time may have arrived. If so, we should stop rejoicing over our increasing wealth, and think about the future purchasing power of our currencies.
Confining the estimation of price inflation to selected finished goods and services is a myopic mistake. It was originally for econometric convenience that consumer purchases became so categorised, but it is misleading to assume that for the consumer there is any such clear categorisation between the purchase of different items. In pure economics there can be no distinction between the purchase of an item of food, a capital good, or the lending of money which is used by someone else to purchase capital assets and use as working capital. The exclusion of partially depreciated second-hand goods is equally illogical. All purchases are purchases, full stop.
Not only do the neo-Cambridge economists and econometricians of today ignore this fundamental error in their attempts to construct measures of price inflation, central bankers and the whole investment community make a further omission without even realising it, and that is to assume that money has a constant value in all transactions. This is hardly surprising, because we account in money, and we pay our taxes on profits measured in it.
These two important errors distort all economic analysis and can have serious consequences.
Asset inflation is increasingly spilling over into commodities, the feedstock for final goods. It has also been inflating services, for example driving up the wage rates in building trades and raising agency commissions. This effect has been developing since the last financial crisis began to recede, and has accelerated with the reversal of falling commodity prices. The official line, that there is almost no price inflation, is misleading markets, the general public, and economic planners themselves as well.Investors act rationally
It is becoming clear that some investors are showing a growing preference for investment assets over bank deposits. Analysts unquestioningly believe that this preference is not a vote against money, but is driven by a desire to profit from investment. This is correct for regulated managers of mutual funds, who are required by their mandates to generate valuation profits in absolute or relative performance terms.
Others, particularly the very rich with a close eye on their own finances, are beginning to take a different view. They observe the share prices of the banks that owe them money, and worry. Private bankers in Europe are reportedly trying to persuade their very-rich customers not to withdraw substantial funds. Anyway, transferring deposits from one bank to another doesn’t protect you against systemic risk, so you must buy something, such as a short-dated government bond or gold, to get rid of your money and transfer the risk to others.
The principal danger to these wealthy investors is a pick-up in the inflation rate, but at the moment, talk is exclusively of deflation and systemic risk, not inflation. However, raw material prices have been rising noticeably this year, reversing the trend of the last few. Unless commodity prices start falling materially and soon, they are certain to drive up recorded price inflation, despite the lack of economic activity in the advanced economies. Eventually, central banks will have to respond by raising interest rates, undermining government bond markets and the valuation of all asset classes that refer to them.
The flight from cash, for the moment at least, reflects in large part systemic risks. However, we cannot say that a collapse of the banking system will definitely happen unless interest rates rise to reflect the falling purchasing power of fiat currencies. Only then can we be much more certain of a general financial immolation, accelerating the flight from bank deposits.
For the moment, markets have gone nap on deflation. Deflationary conditions are necessary for the future monetary expansion required to rescue the banks, the economy, or both. Most investors appear to be as sure of this outcome as they were that the UK would choose to remain in the EU. The error here is to have little or no understanding that price inflation can coexist with contracting business activity.
Monetary inflation, particularly when it becomes extreme, actually guarantees a contraction in economic activity, because it withdraws purchasing power from the masses. This is why the early warning signs of asset price inflation from a declining preference for money should be taken very seriously. And as the effect spreads into the consumer price index, so too will a wider rejection of money in favour of goods.
It could easily develop into what the Austrian economist, Ludwig von Mises, described as a crack-up boom, the final flight out of money in preference for goods. We are not yet hoarding toilet paper and baked beans, but the prospect that we will be driven to do so has already been signalled to us.
The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.
Having spent a chunk of his youth “shopping” them, Jim Croce came to know a thing or two about junkyards. In those youthful days, should his clunker de jour be missing some vital part or parts, a trolling expedition through South Philly’s scrap heaps was always the enterprising Croce’s preferred method of procurement.
Amid all of Croce’s parts foraging, it was a universal joint for a ‘57 Chevy and a ‘51 Dodge transmission, two must have and must-be-cheap or, better yet, free, parts that the legendary folk singer still recalled. He also reminisced that junkyards could and would provide a no frills, but highly motivated and easy way to get in some cardio, as in running for your life.
“I got to know many junkyards well, and they all have dogs in them,” the late Croce said in a 1973 interview. “They all have either an axle tied around their necks or an old lawnmower to keep ‘em at least slowed down a bit, so you have a decent chance of getting away from them.”
So was born the junkyard dog yardstick by which to measure the meanness of one Bad, Bad Leroy Brown, Croce’s hit which landed at the top of the charts 42 years ago this week.
As for high yield bond analysts, they aren’t exactly known for catchy turns of phrase. However, in recent weeks, they’ve shed the dry and donned the dramatic, as you’ll soon see. Such is the overheated state of the junk bond market this sweltering summer.
In his latest missive, Deutsche Bank’s Oleg Melentyev, arguably the best in class high yield analyst among his sell-side peers, warned of the perils of investing in this “frenzied market.”
Legendary high yield investor Marty Fridson shares Melentyev’s concerns and has for some time. By his best estimate, high yield was already in “extreme overvaluation” territory on June 30th, defined as being one standard deviation above fair value. Flash forward two weeks, and he calculates that the standard deviation has doubled.
(A quick Statistics 101 refresher: standard deviation tells you how tightly clustered or wide-of-the-center individual components of a given data set are from their mean. Remember the grade bell curve the engineering undergrads blew in business school? When all of the test scores came in on top of each other, the bell curve was super steep; when there was vast divergence, the bell curve was low and wide.)
Defining bond valuation also requires one employ “spreads,” which compare the prevailing yields on a given credit to a supposedly risk-free Treasury of a comparable maturity. And that means you have to get down to the nitty-gritty of measuring risk in basis points (bps), or hundredths of a percentage point.
In the event your eyes have rolled into the back of your head, listen up! This is important folks, your sweet grandparents could well own junk bonds in their desperate need to generate yield on their atrophying retirement funds!
With that preamble posited, on July 15th the option-adjusted spread on Bank of America Merrill Lynch’s High Yield Index was 542 basis points. That compares to 621 bps on June 30th. The lower the spread, the less extra compensation investors are demanding for taking on the added risk of being exposed to, well, junky bonds.
Of the compression in spreads, an incredulous Fridson could only characterize the overvaluation which begat more overvaluation as, “more staggering.”
Now in light of this, just how did mom & pop investors react to the price increase? Well how else? They poured $4.4 billion into high yield mutual funds, the second highest weekly inflow on record after March 2nd’s $5.3 billion inflow.
Bloomberg caught up with yet another stunned strategist: “They’re out there scrounging through the dumpster looking for yield,” worried Karyn Cavanaugh of Voya Capital Management. “When you have artificially low rates, you force people to go out and look for things they normally wouldn’t.”
The question is, will investor insouciance ever come back to haunt them? They, as in investors, certainly don’t seem to think so.
The Daily Shot is a must-read email proffering just about every graph that’s important for investors in one succinct one-stop shop, and it’s free. The Shot’s editor, the estimable Dr. Lev Borodovsky, is notoriously judicious with his editorial additives. So when he adds a quip, his readers understandably sit up and take note.
In Tuesday’s Shot, Borodovsky featured a graph of the VIX Index, the so-called ‘fear gauge,’ which depicts the perceived risk of owning stocks, which have traditionally moved in lockstep with junk bonds. Reflecting extreme complacency, the VIX is sitting at the lowest level since last August. “In the equity markets,” Borodovsky recapped, “the VIX hits a multi-month low. All is well.”
Or not. The Shot goes on to depict the price-to-earnings ratio on the S&P 500 at the highest level since at least 2006. “These valuations rely on extremely low long-term rates,” Borodovsky cautioned.
As a punctuation mark, as in exclamation, Borodovsky features two charts on the high yield market. At the risk of over-paraphrasing, the high yield market is apparently no longer concerned about energy prices, which have yet to stage the oft-predicted blistering rebound. How so?
Despite the defaults that continue to emanate from the oil patch, the performance of high yield bonds has completely divorced itself from that of still-depressed crude prices. The mirror image of this nonchalance is that investors are no longer demanding a premium level of compensation for owning high yield energy issuers vis-à-vis their non-energy brethren.
In priceless understatement, Borodovsky concludes that, “High yield is definitely starting to look frothy.”
As for Deutsche’s Melentyev, he isn’t bothering to wait for the ink to dry on the clear message written on the wall. In his latest note to clients, he ratchets up his expectations for HY (high yield) defaults to rise this year beyond his worst case initial scenario – and it ain’t just an energy story.
“At this point, we have little doubt that our original forecast of a 4% ex-commodity HY default rate will be met by late 2016/early 2017. Moreover, we think there are now enough reasons to believe that defaults could rise to 5%, ex-commodities, sometime over the next year or so. Coupled with our 20% commodity HY default rate forecast, we are looking at 7.25% aggregate default rate sometime around mid-2017.”
In the event you’ve fallen off Planet Earth in recent weeks, the global corporate default count, as in companies reneging on their promises to make good on those coupon payments, is at the highest level since 2009. And if your memory’s eye has erased 2009 to prevent permanent scarring, the economy was in a full meltdown state back then.
Let’s get this straight. Defaults are going through the roof and investors are flocking to the sector in record numbers? And how.
Moody’s Tiina Siilaberg keeps an eagle’s eye on the concessions investors give to issuers in the form of protections they don’t demand. They’re called ‘covenants,’ which Investopedia defines as, “designed to protect the interests of both parties. Restrictive covenants forbid the issuer from undertaking certain activities; positive covenants require the issuer to meet specific requirements.”
By Siilaberg’s latest tally, covenant protections are at their weakest level in recorded history. To translate, investors’ collective interests are as vulnerable as they’ve ever been. Though the leveraged loan market remains open for business, Siilaberg is apprehensive about what’s just over the horizon given stretched valuations.
“Issuance in the high yield bond market is still relatively weak compared to historic levels,” Siilaberg said. “I worry, though, because refinancing risk for many lower-rated issuers is close to an all-time high.”
The culprit? That would be a delusional reliance on what Melentyev refers to as, “the new narrative,” and “its apparent reliance on (a) strong monetary response.” Unconventional monetary policy is delivering, “little tangible benefit.”
Overreaching central bankers are in fact doing more harm than good at this juncture. Though small investors may not be wise to the damage being wrought, veterans of financial market warfare are weary to the point of exhaustion.
The endless waiting for Godot has apparently worn their resolve down to near nothing…with good reason. For all of central bankers’ Herculean efforts, expectations that U.S. job losses will accelerate are at a two-year high while households’ prospects for the economy over the next year have fallen to a two-year low.
Pride will surely precede the fall of the orthodoxy of today’s accepted monetary policy framework. But at what cost?
“Everyone in the world needs yield and nothing else matters,” Melentyev laments. “This has never ended in any sort of a problem before, so we can all go back to sleep.” And what happens when we’re abruptly shaken from our slumber?
Recognizing the painfully obvious, Voya’s Cavanaugh observed,
Thank you Chair Yellen & Co. for rendering snarling, lawn mower toting junk bond dogs cute and cuddly critters to retirees on fixed incomes.
"It's unclear why this hasn't been a significant driver of markets across the board... maybe we just haven't hit the threshold," exhorts $234 billion bond fund Invesco's Ray Yu. The head of the firm's macro research told Bloomberg that a general theme of political risks increasing or political risk premium has been prevailing for the last few years and we are now seeing tension between established political regimes and populist movements.
But it appears Mr. Yu has had his lightbulb moment, as he adds:
"Investors are still dealing with aftermath of negative rates, super-accommodative monetary policy globally and structural need for income, which is mobilizing capital flows in unprecedented ways; “maybe that’s what we’re seeing overcome some of the concerns."
In his view, the safest strategy in a world of this much uncertainty is to buy American, noting that post-Brexit and other risks, "we’ve gotten a lot more constructive on the dollar."
Yu added that a Fed hike later this year would likely be warranted and the market is probably underpricing chance of a move sooner than expected...
"Everyone's sort of gotten too comfortable with developments in China," warning that "that story is not over."
Investors "really need to stay atop what policy makers are thinking or where they think they are in terms of executing structural plan," warning that this is "not an area investors should get too complacent about."
Which is ironic as not only is the Yuan tumbling to fresh cycle lows but rate-hike odds are quietly resurgent...
Political correctness goes beyond insane at this public school that just BANNED applause... teachers to direct parents when to engage in 'silent cheer'
"All the bullying happens in Arabic... The hierarchy of the Arab boys creates a very violent environment. ... I have filmed the particularly vile bullying of a Somali boy. You can see the tears in his eyes. They are destroying him; it is very violent. " — From a dissertation by Jalal El Derbas, Ph.D.
Danish teachers are the least respected and are spoken of in denigrating and humiliating terms.
"I am not saying that all the Arab children did ugly things, but we witnessed on a regular basis... using derogatory Arabic language towards Somalis and girls." — Lise Egholm, former head of the Rådmandsgade school in Copenhagen.
Whether Danish parliamentarians wish to acknowledge this problem or not, they are up against far wider issues than that of religious incitement in mosques by radical preachers.
After the television documentary, "Sharia in Denmark", embarrassed Danish authorities by revealing how widespread the preaching of sharia is in mosques in Denmark; the Danish government, in May, concluded a political agreement about "initiatives directed against religious preachers who seek to undermine Danish laws and values and who support parallel legal systems."
"We are doing everything we can without compromising the constitution and international agreements," Bertel Haarder, the Minister for Culture and Church, said about the political agreement.
The agreement centers on a number of initiatives, which are supposed to compensate for the detrimental effects of all the years in which sharia was allowed to spread in Denmark while most authorities paid only scant attention to what was happening. Part of the new effort, therefore, will be the mapping of all existing mosques in Denmark.
It will now be obligatory, according to the agreement, for all priests, imams and others who are not part of the Church of Denmark, and who wish to be able to perform weddings -- as well as for foreign preachers who apply for residence permits -- to learn about Danish family law, freedom and democracy. At the end of the course, all will have to sign a statement that they will accept Danish law, including freedom of speech and religion, gender equality, freedom of sexual orientation, non-discrimination and women's rights.
The government will examine how to create more transparency in foreign donations to faith communities in Denmark, including controlling and, if necessary, preventing such donations. As part of this work, on May 4 the government presented a law making it a crime to receive funding from a terror organization to establish or run an institution in Denmark, including schools and mosques.
Another element in the political agreement is the establishment of national lists with the names of traveling foreign (non-EU) religious preachers who will be excluded from entry into Denmark on the grounds that they are a threat to public order in Denmark. These named preachers will not be granted an entry visa and will be denied entry at the border. In addition, a non-public list, containing the names of such preachers who are EU citizens, will be established. The purpose of this list is to create awareness of the existence of these preachers, as, due to EU rules on free movement, they cannot be denied entry.
The final component of the agreement is the criminalization of certain speech. According to the agreement, it will become illegal explicitly to support terrorism, murder, rape, violence, incest, pedophilia, the use of force and polygamy as part of religious training, and whether or not the speech was made in private or in public. Both the activities of religious preachers and the activities of others, who speak as part of religious training, are included in the criminalization.
The political agreement is expected to become law when the Danish parliament reconvenes after the summer vacation.
Danish parliamentarians are aware that it will be difficult to measure whether these initiatives have any effect -- how do you measure whether religious preachers are indeed not explicitly supporting terrorism, murder, rape and pedophilia, unless you place them under constant surveillance? But lawmakers are nevertheless confident that the new initiatives will have an effect. "This will have an impact on what people put up with from their religious leaders." Culture and Church Minister Bertel Haarder says.
Another parliamentarian, Naser Khader, who appears more realistic, says,
"We are well aware that more initiatives are needed. But this stops hate preachers from coming to Denmark, preachers who only want to come here in order to sow discord between population groups and who encourage violence, incest and pedophilia."
After the documentary "Sharia in Denmark" embarrassed Danish authorities, the government reached a new a political agreement, which Danish Member of Parliament Naser Khader supported, saying, "this stops hate preachers from coming to Denmark, preachers who only want to come here in order to sow discord between population groups and who encourage violence, incest and pedophilia."
While Danish politicians have taken yet another step on an uncertain road that may or may not succeed in stemming the rise of sharia in Denmark, other problems abound, which compound the impression that this initiative will not amount to much more than a symbolic band-aid.
A recent Ph.D. dissertation by Jalal El Derbas, as reported by the Danish newspaper, Berlingske Tidende, shows that in several Danish schools with Arab students, the latter, mainly boys, use Arabic as a means to sexually and racially harass and bully other students as well as their teachers, especially girls, Somalis and ethnically Danish teachers, who do not understand the insults hurled at them in Arabic.
According to the article, El Derbas was shocked when he went through the video footage of 12- and 13-year-olds in two different Danish public schools with a majority of pupils with minority background. The purpose of his Ph.D. was to examine the possible causes of why bilingual boys -- who speak both Danish and Arabic -- continue to lag behind other Danish students. He wanted to see what those bilingual boys actually do in the classroom. The footage was taken over five months and it displayed a world characterized by hierarchy, sexual and religious harassment, bullying and racism, in which the first language of the students, Arabic, played a central and leading role. According to El Derbas:
"I could see that the students used Arabic as a secret code and they only used it negatively to disturb the schoolwork. If they did not want to do the work, they simply shifted to Arabic. The schools were very flexible and allowed the students to use Arabic both inside and outside the classroom. But all that this freedom accomplished was that the students shifted from Danish to Arabic if they were getting into a fight and if there was a teacher nearby whom they did not want to understand what they were saying."
The video footage also revealed a hierarchy consisting of sexual harassment and racism, because the Arab boys consider themselves higher-ranking than girls and Somali students.
"All the bullying happens in Arabic. All the ugly and mean words are uttered in Arabic. The hierarchy of the Arab boys creates a very violent environment. I have video footage of severe sexual harassment against Arab girls and I have filmed the particularly vile bullying of a Somali boy. You can see the tears in his eyes. They are destroying him; it is very violent."
According to El Derbas, Sunni and Shia Muslim strife is also imported into the grounds of these Danish schools. With the majority of the boys being Sunni Muslims, they look down on the Shia Muslim students and a teacher who is a Shia Muslim is called "Satan" or "witch", whereas a Sunni Muslim teacher is addressed courteously as "uncle" or "aunt". Danish teachers are the least respected, and are spoken of in denigrating and humiliating terms.
El Derbas, stressed that the pupils come from ghetto areas, saying:
"Many of the teachers have given up on engaging the parents in any way, but if this is to change it has to happen through the parents. Maybe it would help if the parents took turns of being present in the classroom to see how their children behave. Most of them [the parents] are not working or studying anyway. I think that could lead to an improvement. Because no parents will accept that their children behave in this manner".
The results of the dissertation come as no surprise to Lise Egholm, now retired, but who for 18 years, until 2013, was the head of Copenhagen's Rådmandsgade school, which has many Arab students.
"I am not saying that all the Arab children did ugly things," says Egholm, "but we witnessed on a regular basis exactly the phenomenon of using derogatory Arabic language towards Somalis and girls... Back then the biggest group of children in the school was Arabic speaking, and the words which in Arabic mean 'whore' and 'f--- your mother' they all knew."
In a written statement to Berlingske Tidende, Minister of Education, Ellen Trane Nørby, wrote,
"It is never all right to bully, whether this happens in Danish, Arabic, or in a third language. That is why I have initiated a large initiative, which has as its purpose to prevent and combat bullying. The teachers have to signal very strongly that there has to be room for all children and that you have to treat other pupils with respect. If some pupils do not understand this and speak in 'code language' or use a language that excludes and bullies other pupils, the schools must intervene. Danish is the language used for teaching in Denmark, and pupils should not be excluded or bullied because of parallel languages in school".
However, what the minister of education fails to mention is that the problems with this kind of behavior are not likely to remain inside the school, but will inevitably spill into the streets. Then what? No amount of lists of radical religious preachers and laws is going to change that fact.
Whether Danish parliamentarians wish to acknowledge this problem or not, they are up against far wider issues than that of religious incitement in mosques by radical preachers. Notably, El Derbas's findings have not caused any debate remotely resembling that, which was caused by the "Sharia in Denmark" documentary. They should.