John Llewellyn and Russell Jones, a pair of experienced UK macro-economic experts, just put out a shock-jock paper advocating heresy. They write:

“Conventional wisdom is that monetary finance is not worth the perceived risks

“But such fundamental regime change could conceivably be just what is required

“The 1930s experience with the gold standard offers some salutary lessons

“Abandoning gold was viewed by most as a recipe for inflationary or other disaster

“But generally, to the extent that policy retained credibility, it offered a path to salvation.

“Eight years on from the global financial crisis, and despite any number of unorthodox initiatives,

governments and central banks struggle to stimulate aggregate demand sufficiently to deliver strong and sustained output growth. In this environment there has been growing discussion of ‘helicopter money’, or ‘monetary finance’.

“The subject excites strong opinions. To many, central bank financing of an expansionary fiscal

stance is the ultimate policy taboo. At a stroke it sweeps away constraint on government expenditure, and encourages a large and permanent increase in the monetary base. It thereby risks a loss of control over the public finances, and excessive inflation. Others assert that it would be pointless, given that interest rates are already around the zero bound. If governments can borrow in the capital markets at no cost, orthodox fiscal policy can do everything that monetary finance can do, with fewer risks.

“However, the antagonists on both sides of the argument may be failing to see what could prove to

be the real point, the factor that could make a real difference. Arguably, the underlying consequence of such an unorthodox strategy as monetary finance could be, through ushering in a new policy regime, to deliver a significant positive shock to expectations − of both prices and economic growth.

“Monetary finance could be viewed as important as the abandonment of the gold standard in the 1930s.

[Then], the gold standard – the link of domestic money supplies to gold reserves – had become an albatross around the neck of the world economy. Rather than a source of confidence, strength, and stability, it had become a major destabilising influence. With the global financial architecture lacking the necessary symmetry, flexibility, and oversight, and international co-operation conspicuous by its absence, the burden of adjustment fell on the economies with the weakest fundamentals, and bad policies in one country were transmitted to others. Financial turmoil and rapid deflation, together with their associated economic, social, and political ills, spread around the world. The net result was the propagation and amplification of the Great Depression.

“Initially, few believed there was any viable alternative. On the contrary. The notion of monetary and fiscal reflation to support domestic activity and prices was anathema. The gold standard was viewed as an indispensable discipline on politicians, whose inclination was to be wasteful and extravagant, and whose unbounded largesse could lead only to uncontrolled inflation.

“In the midst of the Great Depression, when deflation was the clear and present danger, inflation was the dominant fear among politicians and beyond. Given this rigid mindset, for the most part, governments came to abandon the gold standard only under extreme duress.

“Such thinking proved to be flawed. Leaving the gold standard – a regime change of fundamental proportions – in fact promoted recovery. Moreover, which countries escaped from the Great Depression and reversed deflation accords closely with their government’s decision to abandon this once-inviolate system, and thereby progressively tailor monetary conditions to domestic ends.

“Forsaking the gold standard, and thereby changing expectations about inflation, real interest rates,

and growth proved to be the path to salvation, rather than the road to perdition.

The Orthodox and The Heretic

“Sir Warren Fisher, Permanent Secretary to HM Treasury, summer 1931: [Leaving gold would result in] 'the evaporation of confidence in money, hyperinflation, strikes, rationing and riots.'

“Clément Moret, Governor of the Bank of France, Summer 1931: 'Hair-brained and irresponsible .... [it] would lead to uncontrolled inflation and complete chaos.'

“James Warburg, Financial Advisor to Pres. Roosevelt in 1933, after the president announced the removal of the dollar from gold: 'This is the end of western civilisation.'

“And so to the heretic, John Maynard Keynes, a week before UK’s departure from gold: 'I have now come quite clearly to the belief that devaluation is the solution for this country . . . I am almost alone in openly saying so. At present there is a vast wave of so-called patriotic propaganda to the contrary, which is trying to frighten the people with most fantastic accounts of what would happen if we slipped our anchor.'

“And a week after the UK left the gold standard: 'We have at last a free hand to do what is sensible...I believe that the great events of the last week will open a new chapter in the world's monetary history.'”

(Reprinted with permission from www.llewellyn-consulting.com of London. Asked if they are saying we should think the unthinkable as an intellectual exercise or because it will work, Jones and Llewellyn said “a bit of both and Llewellyn added: “Monetary financing, properly handled, is not the bogeyman some portray it as. Japan, the UK, and even the US could be strong candidates.” )

Putin's Prowess

Lawyer Robert Amsterdam writes in Spears Newsletter, also from Britain:

“The Brexit vote has created division and fraying ties between [the] UK and the continent. Boris Titov, Russia’s commissioner for entrepreneurs’ rights, celebrated by commenting that ‘this is not the independence of Britain from Europe, but the independence of Europe from the USA’. The Kremlin couldn’t be more pleased.

“Then came the attempted military coup in Turkey, a hugely important Nato member. This coup attempt (believed to have been masterminded by the US-resident imam Fethullah Gülen, which my law firm is investigating on behalf of the Republic of Turkey) placed strain on US-Turkey relations, which benefits Moscow.

“Putin’s winning streak wasn’t finished. Before the opening of the Democratic National Convention, a hacker released to WikiLeaks a trove of emails, inciting an internal scandal designed to rip apart the party. The source of the hack was eventually allegedly traced back to Russia.

“There is a temptation to view Putin, now going on sixteen years of de facto rule of Russia, as a strategic mastermind. But no. Donald Trump is a home-grown problem. The Brexit vote was the culmination of legitimate frustrations coupled with an incompetent Remain. As for Turkey, just weeks before the attempted coup, President Recep Tayyip Erdoğan and Putin had mended fences after months of acrimonious exchanges.

“Far from being a chess grandmaster, Putin is playing a game of chance. Russia analyst Mark Galeotti has pointed out that the DNC email hack is likely to backfire with unintended consequences on Russia. Hillary Clinton’s team has pivoted from this to become the ‘anti-Russia party’, while Trump will now be cast as ‘Putin’s man’. Neither is true, but it will not help the Kremlin.

“Putin is largely a distraction from the more difficult questions of what forces have put us in the place we find ourselves. The broad rejection of EU membership and the surge of popularity of Trump are both driven by economic and social conditions. Having failed to make friends or cultivate allies, Russia is depending upon these renewed calls for isolationism. From its point of view, Russia is safest when the West finds itself in chaos.”

*Ecopetrol (EC) rose 3.1%. EC is a Colombian oil company which reported, in Colombian pesos, unaudited, Q2 sales of 11,751 bn, down 16% from prior year sales. Net income came to COP 787 mn, down 48% from prior year. CEO Juan Carlos Echeverry noted that while y/y comparisons were rotten, management focus on cash flow and profits did improve results sequentially. Vs Q1, net income was up 117%, helped also, he admitted, by crude oil prices up by a third. Its bill for pipeline dilution spending fell by 14,000 barrels/day (bbls/d) saving COP 726 bn in the past 18 months for this input alone.

He also cited steady EBITDA margins, at 38.5% vs 39.5% in the prior quarter and the prior Q2. (The margin is based on earnings before interest, taxation, depreciation, and amortization, a measure of cash flow).

In Q2 EC saved COP 392 bn with costs cuts and in H1 a total of COP 813 bn. Its target for the current year, at COP 1.6 trillion, is within reach. It also raised COP 725 bn, not in the above figures, from divesting its stake in two electric companies in Bogota, which it was saddled with for no particular reason by the prior government. It also took over the formerly Canadian owned Pacific Rubiales field and this boosted its output by 53,000 bbls/d. Another acquisition of Cusiana also went live. It now produces 500,000 bbls/day of crude oil despite cut backs of investment and operations in some high priced projects.

During the quarter, EC boosted its cash balance with a loan of US$300 mn from Canada's Export Development and an 7-yr international bond issue for $500 mn and its bonds were rated BBB, investment grade, by S&P.

It also started up its refinery at the Caribbean port of Cartagena for shipping to European markets. More Latin news below.

*I advise buying another series of Royal Bank of Scotland (RBS), the L preferreds with a % yield at $25.04/sh. While there are higher yielding variants like our P preferreds, you will take a bigger loss on them when they are reimbursed. We think the Brexit means that RBS will have to further delay its restructuring plans, but at some point it will resume repaying the prefs. The highest yielding ones will be repaid first of course.

Brexit and India

*Abhimanyu Sisodia now in Bangalore writes on the impact of Brexit on Infosys (INFY),:

*Brexit impacted Infosys which (with IBM) had a 5-yr contract with Royal Bank of Scotland, worth euros 200 mn to INFY, for the planned divestiture of standalone private bank Williams & Glyn. Post-Brexit, the contract was canceled. This unofficially may produce a revenue loss of $40-50 mn. INFY officially stated that it would also “conduct an orderly ramp-down of about 3,000 persons, primarily in India, over the next few months" in addition to any drop from attrition, further undermining its ambitious target of $20 bn in revenues by 2020. Infosys is also paying out only 75% of variable pay to employees, vs 90% in the prior quarter. To stop exits, INFY will promote some 2,500 this quarter vs 2,147 last quarter and relaunched its ESOP program. Some 7,500 lower and middle level managers will get restricted stock options to stop attrition after the program was halted a decade ago.

*Standard & Poor's raised its debt rating on Tata Motors (TTM) sub Jaguar Landrover to "BB+" from "BB" for its US$ senior unsecured notes and its standalone rating from BBB- to BB+ with a stable outlook. Ratings of JLR are constrained by its 100% control by TTM.

S&P also upped TTM senior unsecured debt to BB+ citing its luxury sub's steady profitability. This can help TTM get funds from operations used to pay debt down to 40% over the next year or two, the rating agency said. S&P added that the UK's recent vote to exit the EU has so far produced “no immediate signs that JLR UK volumes (21% of total volumes and revenues in FY 2015-6) have been adversely affected,” quoting the TTM statement reported earlier.

S&P added” “we do see a risk that UK car volumes could be lower due to our expectations of slower macroeconomic growth and weaker consumer confidence” in Britain where it manufactures most of its JLR line and where it has a sizable domestic market share. However S&P also thinks that a weaker pound vs the dollar and the euro could boost premium car sales to the US and Asia, along with new models, by 10-20%. Over the next 2 years it expects good cash flow resulting from its sub should help reduce TTM leverage. This will boost TTM's competitive and financial position, enabling it to withstand Brexit-linked volatility and risks. S&P may raise its rating on TTM which would then feed through to JLR, it wrote, if the FFO-debt ratio improves further.

*I am not sure Brexit figures in the investment by Tencent (TCEHY) in the Indian messaging app Hike Messenger, a rival to Facebook (FB), alongside Taiwanese Foxconn. Both joined a new funding round. TCEHY or TCTZF rose 4.9% yesterday to HK$197, a 52-week high. It added another 1.6% today, another 52-2week high.

*This should boost Naspers of South Africa, a 34% owner of Tencent. NSPNY actually fell today on political uncertainty in Pretoria although it went up in its home country.

Healthcare

*GlaxoSmithKline's (GSK) venture arm S.R. One joined in the $86 mn series A finance round for Tioma Therapeutics of San Francisco which is developing an anti-CD47 immune checkpoint inhibitor through advanced proof-of-concept trials. GSK joined Novo (NVS) and Roche (RHHBY) venture arms in the financing run by RiverVest Venture Partners. CD-47 is a receptor for throbospondin-1 which may treat solid and blood cancers. The firm is headed by serial biotech startup exec John Donovon.

GSK also launched via its controlled ViiV Healthcare sub a phase III trial of a 2-drug regimen of Tivicay (dolutegravir) and Epivir (lamivudine) as an HIV-1 treatment for adults who have not had any prior retroviral therapy head-to-head against 3-drugs, Tivicay plus tenofivir and Truvada (emitricitabine). The “Gemini” trial will enroll 1400 people with HIV worldwide.

*Medtronic (MDT) has invested another $20 mn in the stock of Mazor Robotics, maker of the Mazor X guidance platform for spine surgery, to launch in Oc.t The MZOR platform combines analysis, data, precision guidance, optical tracking, inter-op verification, and connectivity to improve outcomes of going under the knife. Its partner has already ordered 15 Mazor X systems and agreed to co-market them after an earlier investment of $12 mn. It now owns nearly 2 mn MZOR ADRs amounting to a total of 7.27% of the shares outstanding in the Israeli firm.

*Two recent studies have concluded, in Germany and the US, that machine learning on simulators can greatly improve cancer diagnosis. We have a play in this area, Canadian CAE. After surprising on the upside in Q2, stocksdaily.net is predicting another positive earnings surprise in the current quarter. Canada's mostly makes training systems for aviation.

*Hedge fund mgr John Paulson moved out of TEVA, Allergan (AGN), and Pfizer (PFE) in the June quarter while boosting his holding of Valeant Pharma (VRX) by 41% and his stake in Rite Aid( drugstores) by 120% and also buying Johnson & Johnson (JNJ). We own VRX through Bill Ackman's Pershing Square Holdings. VRX was raised to buy from hold by Mizuho with a $25 target price. More on funds below.

Boom Stocks

*Despite concerns about its pension plan shortfalls, BAE Systems (BAESY) continues its bullish trend and BAESY was tipped by chartists Investorsintelligence.com. 

It won another £184 mn order for Asraam dogfight air-to-air missiles for its MBDA jv  with Airbus and Finmeccanica for Typhoon Eurofighter and F-35 planes it builds jointly with Lockheed Martin.

*II also likes BP plc, just not as much, because its chart is less bullish.

*Mexichem was up 8.5%. MXCHF held an investor day with analysts in which it stressed its gains from vertical integration from ethylene and propylene to specialty products, its focus on margins rather than volumes, its push into European, Latin, US, and Indian markets, and its solid financials and leadership. You can download the convincing powerpoint slides on the Mexichem site.

*Vale (VALE) rose 2.9%. VALE is a Brazilian iron-miner.

Bust Stocks?

*Cemex (CX) was cut to neutral from buy by Santander analysts. It fell yesterday but recovered today.

*The troubles of UK based English-language schools as visa conditions are tightened post Brexit, and for their US counterparts as immigration is limited, will boost the business of Lingo Media, LMDCF, the Canada developer on language learning programs being promoted by Spain's Telefonica in Latin America and Europe.

*Benitec (BNTC) was up another 4.6%. However its warrants have not confirmed the stock rise.

*A sure bust stock is Performance Sports Group, the Canadian hockey and lacrosse equipment maker which diversified into softball and baseball via heavy US$ debt, just as the loony and its other major market currency, the ruble, sank under the ice. We sold nearly doubling our investment. Martin Ferrera quotes Napoleon that he would rather have lucky generals than smart ones. I was a smart generale and had to contend with my eldest grandchild, a hockey player, who had written up PSG.

Funds

*Saba Capital Mgm of the Cayman Islands bought another $208,000 worth of shares in our Advent Claymore Global Convertible Securities & Income Fund, AGC, last Friday, at %5.80/sh according to reports filed with our SEC. Saba also bought into its domestic sister fund, Advent Claymore Convertible Securities & Income fund, AVK, investing a larger amount, at $14.71/sh and is now a major shareholder in both.

Separately, Bulldog Investors (Phil Goldstein) bought into First Trust Dividend & Income Fund, FAV, on whose board he sits.

*SPDR Gold, GLD, is at a breakthrough level of 128.9899/sh after gold futures hit $1,350/oz. Each share is worth 1/10 of an ounce.