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    Gavekal Research

    The Economics Behind Korea’s Political Scandal

    The political turmoil engulfing South Korea claimed the scalps of both the prime minister and the finance minister on Wednesday, as embattled president Park Geun-hye opted for a cabinet reshuffle in a bid to shore up her sagging administration. In recent months Korea has seen the bankruptcy of Hanjin Shipping, the country’s largest shipping company, and the recall of millions of Samsung’s Galaxy Note 7 phones, the flagship product from the...

    0
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    Gavekal Dragonomics

    The Squeeze On Capex Loosens

    After slowing for years, fixed-asset investment in manufacturing and mining is showing signs of steadying as stimulus policies stabilize demand for their products. Manufacturing FAI could even recover modestly to 6-8% real growth next year. But firms’ caution after years of growth disappointment is unlikely to suddenly turn to exuberance.

    3
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    Gavekal Research

    A European Head Fake

    Should investors be worried by a German bond market sell-off that has seen 10-year bund yields rise some 30bp over the last month? The last time European yields climbed this quickly, in early 2015, eurozone stocks swooned in the following year, with the benchmark index falling -27% peak-to-trough. Moreover, unlike the US which has seen a long expansion, it is not clear that a still weak eurozone can handle a rise in the cost of money.

    0
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    Gavekal Research

    The Gavekal Monthly: Deflation Ends; What Next?

    The biggest market move of the past month was a significant rise in bond yields across the US and Europe. Much commentary has suggested that this might be a symptom of a sustained rise in inflationary pressures, as wages and rents start to push up prices in the US, and Chinese producer prices end four long years spent in negative territory. We are skeptical. The recent rise in yields has so far reversed only half of the decline in the first half...

    0
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    Gavekal Research

    On The Brink Of Recession

    Full steam ahead, then? Friday’s release of the first GDP estimate for 3Q16 headline showed US growth rising to an annualized 2.9%, up from 1.4% in 2Q and 0.8% in 1Q. On the face of it, this reading points to the US economy emerging from yet another soft patch, and so backing away from the recession frontier. Not so fast. A close look at the underlying components of the GDP report reveals the US as being perilously close to that threshold.

    4
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    Gavekal Dragonomics

    The New Reality Of Housing Prices

    The wild ride of Chinese housing prices is a sign of how the housing market has become more speculative and policy-driven as fundamental demand has peaked. Policies intended to help small cities have only made prices in the largest cities frothier. Rosealea thinks this policy-driven volatility in prices will continue even as the cycle turns down.

    0
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    Gavekal Research

    Sterling Sellers Look Flushed Out

    Here is a simple question: “Why has the pound fallen so far, so fast?”. My simple answer is that the City of London is the world’s dominant financial center, and so pretty much anyone who deals in global markets has a significant exposure to sterling. As a result, the near term movements of sterling are being dictated less by every twist and turn of the Brexit process, but rather by more prosaic financial transactions.

    9
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    Gavekal Dragonomics

    Power Politics After The Plenum

    Economic policy in China is now entirely beholden to political demands for stability ahead of next year’s Communist Party Congress. Whether things change after depends on how much “core” leader Xi Jinping further strengthens his power, and how much he cares about reform. In this piece, Arthur assesses the outlook after this week’s Sixth Plenum.

    0
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    Gavekal Research

    When The Keynesian Multiplier Goes Negative

    Last week I published a paper whose main point was that Keynesian policies lead to an inevitable decline in an economy’s structural growth rate (see Is The Second Shoe About To Drop?). My immediate concern is that developed economies seem set to head off on another public spending binge as they try to slay “secular stagnation”. That piece stirred a number of questions from readers, so I am following up with an addendum that extends the argument...

    6
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    Gavekal Research

    Equities Decouple From The Renminbi

    The renminbi fell to a six-year low of CNY6.78 to the US dollar this week, capping a -3% fall since June. In recent years, similar moves sparked turmoil in stock markets at home and abroad. Yet this time investors have largely ignored it and both A-share and H-share indexes have ripped higher. Why is a weak renminbi no longer a risk-off event?

    0
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    Gavekal Research

    When The Facts Change, I Change My Mind

    After the Brexit vote, Anatole became deeply bearish, fearing that a populist insurgency could unleash a destructive retreat from globalization. With the US electorate seemingly set to reject that pathway on November 8, the likelihood of other nations following Britain by turning in on themselves is greatly diminished.

    17
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    Gavekal Research

    The End Of The Goldilocks Scenario?

    Over the last seven years global investors have benefited greatly from a combination of moderate growth and non-threatening inflation, allowing for constantly loose monetary policy. Yet for the US, we are increasingly concerned that, one way or another, this “Goldilocks scenario” is about to come to an end. Here’s why:

    4
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    Gavekal Research

    Europe’s Breakout Problem

    The eurozone’s cyclical recovery remains less than stellar, yet at least it lives. The single currency area’s composite flash PMI for October recorded its strongest reading since January 2015, rising to 53.7 against an expected 52.8.The reading was flattered by weakness in the last two months, but confirms that Europe has, for now at least, weathered the Brexit vote shock. What is especially encouraging is the breadth of the improvement, which...

    0
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    Gavekal Dragonomics

    Household Debt: How Fast Can It Grow?

    Discussions about China’s debt usually focus on corporate and local government borrowing, but households have also become more important. The level of household debt is no longer low, and since 2015 it has become the major driver of credit growth. In this piece, Chen Long investigates the limits to China’s new embrace of household leverage.

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    Gavekal Research

    Safety First In EMs

    After a steady rise in emerging market inflows over the last seven months, tighter US financial conditions have led to an abrupt reversal. On the back of inflation concerns and a stronger US dollar, the seven day moving average of daily portfolio flows to EMs, as of last Monday, had fallen to its lowest level since the renminbi-induced sell-off 14 months ago. EMs are vulnerable to an externally-induced pull-back, for even if key central banks...

    0
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    Gavekal Dragonomics

    Andrew Batson: What Next For Chinese Growth?

    Chinese policymakers are set on maintaining economic stability ahead of a crucial Communist Party meeting next year—but while that means stabilizing growth it also means pushing back against a property bubble. In this video interview, Andrew assesses the tactical trade-offs that must be made in support of the strategy of stability.

    0
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    Gavekal Research

    The Milton Friedman I Knew

    In the late 1970s, when beavering away at my own little research firm, I received a letter from a “senior research analyst” at the Hoover Institution, named Milton Friedman. In the letter Friedman wrote that he agreed with some of what I had written in a recent report, but other sections had problems. He had gotten the paper from one of my clients, and I’ll admit it sent me just a bit over the moon.

    1
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    Gavekal Research

    Japan Does An Apple

    The Bank of Japan and the Japanese government have done their best to stop a grinding appreciation of the yen, but to no great avail. The unit is up 14% this year against the US dollar, which has seemingly delivered a body blow for the monetary easing “arrow” in Prime Minister Shinzo Abe’s 2012 revival quiver. This is certainly the view of foreign investors who this year have pulled money out of Japan at the fastest rate since 1987. And yet a...

    1
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    Gavekal Research

    Is The Second Shoe About To Drop?

    Keynesian beliefs are based on two key ideas. Firstly, recessions are caused by an excess of savings among nasty types known as rentiers. Secondly, if there is a shortage of demand, the government should conjure it up out of thin air by borrowing money to spend as needed. In the last few years we’ve seen what happens when the first of these two ideas is put into practice. Policymakers around the world have attempted to euthanize the rentier, and...

    14
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    Gavekal Research

    London Seminar — October 2016

    Charles Gave, Joyce Poon, Tom Miller and Anatole Kaletsky outlined their views on issues ranging from the end of the Pax Americana, global asset allocation in the face of increasingly ineffectual monetary policy, India's growth potential, and the imminent uncertainty for markets in the face of political risk.

    0
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    Gavekal Research

    No Change In Frankfurt

    Despite multiple European Central Bank officials protesting a steady-as-she-goes approach to monetary policy, the recent rise in eurozone bond yields reflects market concern about a potential tapering of its bond buying. After all, inflation has ticked higher, European banks continue to grumble about a profit-sapping yield curve and the ECB’s dealing desk in Frankfurt will soon run out of eligible bunds to buy. Despite all that, tomorrow will...

    0
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    Gavekal Dragonomics

    The Three Pillars Of Stability

    China has now delivered real GDP growth of 6.7% three quarters in a row—a stability that is uncanny even by its standards. Such stability is even more prized than usual by the government, now preoccupied with next year’s Communist Party Congress. In this piece Andrew assesses how much longer the three pillars supporting this stability can hold up.

    0
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    Gavekal Research

    What Next For Libor Rates?

    The Federal Reserve has not hiked rates this year, but that has not stopped funding cost for US companies and foreign banks from rising. While risk-free rates have barely budged, 3-month LIBOR is up 30bp YTD from 0.6% to 0.9%. This widening of short-term credit spread stems from (i) stress in Europe’s banking sector, and (ii) fund flows ahead of a regulatory overhaul of US “prime” money market funds, which took effect on Friday (see Ripples In...

    3
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    Gavekal Research

    Is Perfidious Albion Undermining The 'Shanghai Agreement'?

    Back in the early 1980s, foreign exchange volatility wreaked havoc on business spending plans and countries’ ability to repay foreign currency debt. To remedy this situation, the world’s key financial policymakers got together to agree on a plan for coordinating monetary policies; the idea was to reduce currency volatility and so limit the scope for financial shocks.

    2
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    Gavekal Research

    Thailand’s Transition

    Perhaps the one thing that Thailand’s polarized political tribes have agreed on in recent times is that the passing of their (generally) popular king would mark a pivotal moment of transition. King Bhumibol Adulyadej, 88, who died yesterday was a steady presence who stopped violent political struggles from morphing into a general civil conflict. The concern is that this restraint now goes out of the window, as opponents to the royalist...

    0
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    Gavekal Research

    The Strange Case Of The US Trade Deficit

    The last three years saw the US dollar move from being an undervalued currency to an overvalued one, and yet the US trade balance has barely budged. This contrasts sharply with past periods of dollar strength which produced huge US trade deficits that were a boon to global exporters, and also to financial markets which got a liquidity boost. The fear for emerging economies in particular is that this relationship has broken down and a reliable...

    3
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    Gavekal Research

    What Does The Italian Elite Want?

    Should we care about the Italian referendum? Without wanting to sound smug toward what remains Europe’s second prettiest country, I can’t remember ever witnessing an Italian election with consequences beyond its own borders. But the December 4th referendum could be such a first: an Italian election that matters.

    3
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    Gavekal Dragonomics

    The Equality Engine Is Stalling

    For all its leaders’ talk of a “new normal,” China has not weaned itself off the “old normal” of housing and investment-led growth. That model was in fact a powerful engine for reducing regional inequality, so it has much political support. The engine has now stalled—but rather than swap in a new one, the government keeps revving the old one.

    0
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    Gavekal Research

    The Rising Odds Of A US Recession

    We are on recession watch after yesterday’s release of September’s NFIB small business optimism survey. It was not the headline number which got us worried—that ticked down from 94.4 to 94.1. Rather, it was the significant drop in the job openings component—from 30 to 24, or from a cyclical high to the lowest level in 15 months. This suggests that demand for US labor may be rolling over, which is concerning indeed.

    7
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    Gavekal Research

    Tan Kai Xian & Leonor du Jeu: The US Trade Deficit Conundrum

    0
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    Gavekal Dragonomics

    Housing & Construction Review 2016

    In the latest edition of our annual overview of housing and construction in China, Rosealea summarizes the short- and long-term outlook for these key economic drivers. This concise chartbook provides 2017 forecasts for major indicators, and covers topics such as changes in housing policy, structural trends in demand, and the state of inventories.

    0
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    Gavekal Research

    The World's New Tax Haven

    In the aftermath of the 2008 financial crisis, there was a sense that the systemic failures it revealed would spark a radical overhaul of the global financial architecture. Eight years on, that has not happened: an exception is perhaps offshore finance. The US led the way with its Foreign Account Tax Compliance Act (FATCA), which targets US citizens with footloose money. A more ambitious initiative was launched in 2009 by the G20; it aimed for...

    3
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    Gavekal Research

    Audio & Transcript — Gavekal Research October Call

    Will Denyer presented a newly minted dynamic asset allocation tool which was developed from an ROIC-based framework that has helped us to better map and predict US economic cycles. He then answered listener questions on these themes.

    0
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    Gavekal Research

    The British Pound: A Two Year View

    The British pound has been on a roller coaster ride to the point that on a purchasing power parity basis it is undervalued by about 10% against the euro and 17.5% versus the US dollar. As a result, sterling has been left 2% below its lower bound against the euro (in average standard deviation terms) and 9% versus the dollar on the same measure. Put another way, the pound is undervalued by more than one standard deviation against the euro and by...

    10
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    Gavekal Research

    India’s Race To The Top

    What do Apache helicopters and one-fifth of the world’s vaccines have in common? They are manufactured in India’s Telangana state. How about Apple, Google and Uber? They are all opening their largest development bases outside the US in Hyderabad, the state capital, following in the footsteps of Facebook and Microsoft, which have their head India offices there. Amazon, too, is setting up its second-largest global delivery base in the city. And...

    0
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    Gavekal Research

    As Goes The Pound, So Go Eurozone Exports

    In European capitals this week schadenfreude will no doubt have been expressed at the diminished status of the UK economy and its currency. This morning’s “flash crash” in the pound most likely had technical causes, but the fact the exchange rate could fall so hard without generating automatic buying responses says much about confidence in the unit. Sterling has been under pressure since Prime Minister Theresa May earlier this week said she will...

    3
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    Gavekal Research

    Emerging From The Soft Patch

    Three weeks ago we asked whether the uniform weakness in US data—across manufacturing, services and home construction—signaled the start of a recession or merely a summer soft patch. At the time we concluded that what we were seeing was yet another soft patch. Thankfully, the latest round of data releases appears to confirm that conclusion, with the US economy now emerging from its summer doldrums.

    0
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    Gavekal Research

    Pierre Gave: Can Sweden Escape The Negative Rate Trap?

    On the surface, Sweden’s two-year experiment with zero, and then negative, interest rates appears to have worked well. Growth is strong by developed world standards, and the economy has escaped deflation. But this success has come at the price of an asset price bubble that looks increasingly dangerous. Pierre Gave assesses the risk, and examines possible exit routes for the Riksbank.

    0
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    Gavekal Research

    Angela Merkel’s Catch 22

    Back in April, we pondered whether, with their negative interest rate policies, central bankers were showing themselves to be particularly incompetent by condemning commercial banks to years of unprofitability, or whether their greater design was to drive weaker banks to the wall to advance a consolidation of banking industries around the world under the umbrella of nationalization (see NIRP: Machiavellian Design Or Policy Mistake?). In other...

    5
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    Gavekal Dragonomics

    The Foreign Debt Drawdown Stops

    One of the big drivers of recent capital outflows—Chinese companies paying down foreign-currency debt—seems to have stopped, or at least paused, in the second quarter. While China still has net capital outflows, the scale is manageable given the still-high level of reserves, giving the central bank space to pursue its preferred currency policy.

    2
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    Gavekal Research

    The Pain Behind The Agony

    The agony at Deutsche Bank is overshadowing the pain elsewhere in the European banking system—but pain there is. Last week Commerzbank, Germany’s second largest bank and biggest Mittelstand lender, announced 9,600 job cuts and sold its Frankfurt headquarters to Samsung of Korea. Yesterday ING said it would lay off some 20% of its Dutch and Belgian headcount and trim its branch network, while in recent days banks elsewhere in the eurozone have...

    0
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    Gavekal Research

    Staring Into The Abyss

    Since Rodrigo Duterte became president of the Philippines in May, he has sanctioned the extra-judicial killing of some 3,600 petty criminals and drug users, graphically insulted the US president, favorably compared himself to Hitler, and threatened to switch his country’s allegiance to China and Russia. As he has ripped up behavioral norms for democratic heads of state, investors have yanked out at least US$500mn of capital over the last two...

    1
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    Gavekal Research

    A Hardening Brexit And Softening Sterling

    The second phase of the post-Brexit sterling devaluation probably started this weekend. Theressca May's announcement of March as the deadline for Britain to launch the “Article 50 process” of formally withdrawing from European Union achieved its immediate objective of averting a battle between the Hard Brexit and Soft Brexit factions at this week’s Conservative Party Conference. Unfortunately, May’s party management success is likely to...

    3
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    Gavekal Research

    The Gavekal Monthly: What Price On A Trump Victory?

    Markets seem sanguine about the prospect of a Donald Trump victory in next month's US presidential election—too sanguine. Expert opinion gives Hillary Clinton a 75% chance of winning. But remember that four months ago in the UK, expert opinion discounted polls showing a strong chance of Brexit, and the experts were proved wrong. And the consequences of a Trump win are so huge and potentially destabilizing that even a 25% chance means...

    0
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    Gavekal Research

    That Sinking Feeling

    You almost have to feel sorry for poor Haruhiko Kuroda. Just over a week after the Bank of Japan governor announced his intention to overshoot the central bank’s 2% inflation target, it is painfully obvious that investors believe he will fall short. That much is clear from the Japanese government bond market. At last week’s meeting the BoJ announced that from now on it will tailor its JGB purchases to target a 10-year yield of zero. In the days...

    0
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    Gavekal Research

    The Eurozone Construction Revival

    The eurozone’s construction sector is on the turn as super low interest rates feed through to improved housing demand and as infrastructure building starts to pick-up. The implication is that a reliable new driver of growth should help sustain a moderate eurozone recovery. Investors are advised to take note as the sector has a decently investable universe, which is generating not too shabby earnings growth.

    0
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    Gavekal Dragonomics

    Macro Update: Delivering Reflation

    In our latest quarterly review of China's economy, Chen Long assesses the reflation in the industrial sector. Although the credit cycle has peaked, policy remains very loose, and property prices are surging. Financial markets and capital flows are stable, but private investment has not improved, and depreciation is not helping exports that much.

    0
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    Gavekal Research

    When Cartels Become Impotent

    Opec has become impotent. Despite the 6% overnight rally in oil triggered by news that the exporters’ cartel has struck an agreement in principle to make modest production cuts, the group’s members no longer have the ability, or even the desire, to maintain crude prices substantially above present levels. As a result, even if the proposed production cuts are confirmed, yesterday’s deal will be no game-changer for the international oil market.

    0
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    Gavekal Research

    The German Banking Problem

    These are not happy times for Europe’s commercial bankers. The adoption of negative interest rates may have averted the slide into a deflationary abyss, but the policy has hit lending margins, and with them profits. Exhibit A is Deutsche Bank, the dominant financial institution in Europe’s largest and most dynamic economy. Deutsche, whose market value has shrunk to just US$14bn, has problems of its own making in the US, yet its plight has been...

    1
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    Gavekal Research

    Wicksell's Guide To A Better Portfolio

    With the recent US economic data worryingly soft, and with no convincing drivers of earnings growth to be seen, how should investors position their portfolios? Will and KX set out their methodology for structuring a dynamic Wicksellian portfolio to generate superior returns at reduced levels of volatility, and determine the optimum allocation mix for the current troubled environment.

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