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E.g., 20-11-2017
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    Gavekal Research

    The Growth And Yield Dichotomy

    Of the 45 economies tracked by the OECD, all 45 are expanding, and 33 are seeing an acceleration in their rates of growth.Simply put, both official economic data and market prices are pointing the way towards economic growth—which probably explains why a “data-dependent” Federal Reserve is intent on tightening monetary policy.

    1
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    Gavekal Research

    Video: Demographics And The Savings Glut

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse.

    0
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    Gavekal Research

    Japanese Inflation: Hiding In Plain Sight?

    In Gavekal’s latest Strategy Monthly, Charles set out the reasoning that underpins his bullish call on Japan’s economy, currency and equities. In a nutshell, he outlined how Japan is finally emerging from the Fisherian “secondary depression” which followed the economy’s great boom and bust of the 1980s and 1990s. Growth is enjoying its longest sustained run in years. And with the private sector growing faster than overall GDP, corporate profits...

    7
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    Gavekal Research

    The Savings Glut’s Long Life And Slow Death

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse. In this paper Will introduces a new measure, the Capital Providers Ratio, which relates the impending demographic shifts to the...

    22
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    Gavekal Dragonomics

    The Good Kind Of Capital Outflow

    China’s government has been gradually restricting the ability of households and companies to move money out of the country, with one big exception: outbound portfolio investment is actually getting more support not less. As the Connect schemes with Hong Kong ease worries about capital flight, they have become the preferred channel for outflows.

    1
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    Gavekal Research

    MV=PQ And Fed Policy

    It’s probably not advisable for the chairman of a macroeconomic research firm to admit this, but the Federal Reserve has me thoroughly confused. My analysis of the likely outcome from a particular central bank policy is often wrong, but I generally have a fairly clear idea of the objective. In the case of Janet Yellen’s Fed, which is preparing to exit its quantitative easing program, I don’t really understand its ultimate aim.

    0
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    Gavekal Research

    Don’t Count On A Miracle

    Do animal spirits in the US live after all? As profits have picked up, firms’ capital spending has rebounded from contraction territory in 2015-16 to a perky 6.7% QoQ rise in 2Q17. A range of business surveys suggest the trend was sustained through the third quarter. Much is at stake, for if capital spending can break out of its post-2008 range, it is just possible that a productivity surge can follow, lifting underlying economic growth. KX...

    0
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    Gavekal Research

    Why A Jamaican Outcome Is Best

    Electoral math says there is little alternative in Germany to a “Jamaica coalition” and Angela Merkel has made it clear this is her plan. Investors are unimpressed and have pushed the euro lower on worries that a government comprised of Christian Democrats, Liberals and Greens augurs a more nativist Germany that will turn away from its European partners, and in particular a certain eager beaver in Paris. My initial reaction to the election...

    2
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    Gavekal Research

    Asia’s Best Story Tops Out

    On the face of it, the Philippines offers one of Asia’s best economic stories. Whatever you think of Rodrigo Duterte’s war on drugs, growth remains decent at about 6.5%, big tax reforms are in the offing and after years of promising action, infrastructure may soon actually get built. This has unfolded with public debt falling from more than 65% of GDP in 2006 to 42%. And yet the Philippine peso has slid -8% since Duterte took office in June last...

    1
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    Gavekal Research

    A Post-Reform China

    The 19th Congress of the Chinese Communist Party will decide whether Xi Jinping emerges as the head of a more “presidential” system of government, or whether the current collective system holds sway. Either way, Arthur argues that hopes for a new burst of reform in the Congress’s aftermath are probably mistaken.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research October Call

    In yesterday's monthly call Charles Gave outlined his bullish view on Japan. He argued that Japan has exited its long debt trap and is about to start a new cycle that will be substantially driven by capital spending. The fact that corporate Japan is sitting on US$4trn of domestic savings means this expansion can be funded without borrowing and so the risk of an interest rate shock is negligible. He also argued that the Bank of Japan is on...

    0
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    Gavekal Research

    How To Play A Vertiginous Europe

    Led by Germany, the latest hard European economic data yesterday came in strong pretty much across the board. And with Catalonia’s regional government seemingly stepping back from the brink in its stand-off with Madrid, the euro managed to move higher. So how best to play the European economic recovery—from the inside or the outside?

    1
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    Gavekal Research

    Japan’s Fiscal Consolidation Deferred

    Kibo no To, the Party of Hope founded last month by Tokyo governor Yuriko Koike, will not win next week’s general election in Japan. And the chances that it will win enough seats in Japan’s lower house of parliament to be invited to join the Liberal Democratic Party of prime minister Shinzo Abe in forming a coalition government are slight; at this stage probably no more than 25%. Nevertheless, Koike’s upstart party is already having an impact on...

    0
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    Gavekal Dragonomics

    A Restrained Boom In Land Sales

    Even as China’s housing market has cooled, the market for land has been heating up. Land sales to developers are up 10% so far in 2017, after declining for the past three years, and prices are up 50-100%. In this piece, Rosealea argues that such signs of froth are deceptive: land sales are still historically low and developers quite conservative.

    0
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    Gavekal Research

    A Portfolio For The Monetary Cycle

    Every US recession since the 1960s has been preceded by the combination of a fall in true money supply growth relative to real GDP growth, and a fall in the unemployment rate below NAIRU. In this paper, KX constructs a model portfolio which reduces exposure to risky assets in response to these signals, and finds that it offers investors superior risk-adjusted returns.

    3
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    Gavekal Research

    Buying The British Bluff

    You have to admire the British for the hand they are playing with Brussels over Brexit negotiations. Press attention may be focused on infighting within the governing Conservative Party, but the key losers in this game of bluff are European Union negotiators, who face the technocratic horror of not knowing who is calling the shots back in London. Far from leaving the British team emasculated, this stance allows it to effectively duck out of...

    10
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    Gavekal Research

    An Odd Bull Market

    When supermarket checkout clerks lecture their customers on the merits of leveraged ETFs, investors can be forgiven for thinking the bull market has finally passed its “shoeshine boy” moment. But although there is no shortage of late cycle indicators out there, Louis argues that for several reasons, the current run-up may still have further to go.

    12
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    Gavekal Research

    The Trouble With Eurozone ROEs

    Economic sentiment in the eurozone is riding high, probably too high. The European Commission’s industrial and consumer confidence indexes are each close to the peaks they recorded in 2000 and 2007. Such high levels suggest overconfidence rather than rational expectations. Moreover, as far as investors are concerned, there are good reasons to be skeptical about the potential of European equity markets to outperform—largely to do with the...

    3
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    Gavekal Research

    The Rather Lame US Dollar Rally

    The year is far from over but when the time does come to close the books, it seems likely that the sudden weakness of the US dollar this year will count as one of 2017’s biggest surprises. Most investors started the year with a distinct bullish bias on the dollar, and a consequent bearish bias against emerging markets (an outlook we did not share, see for example our January 19 piece Trump’s Declarations On The Dollar). However, instead of...

    6
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    Gavekal Dragonomics

    The Expanding Universe Of Private Companies

    In 2017, China is on track to host a record-setting number of IPOs, mostly by private firms. Big state firms may still dominate stock market indexes, but they are no longer the only option for investors. The number of Chinese private firms large and liquid enough to be of interest to investors is ten times larger than it was just five years ago.

    1
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    Gavekal Research

    A Kinder Semiconductor Cycle

    In August, the world’s semiconductor-makers shipped chips worth a record US$35bn, up by more than 20% over a year earlier. That growth has been reflected in stock prices. The PHLX semiconductor index has risen 43% over the last 12 months, and at yesterday’s close was just 11% below its all-time high, set in March 2000.

    0
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    Gavekal Research

    India’s Economic Funk

    India’s economy is in a cyclical funk, weighed down by rising bad debt, anemic credit and falling private investment. Growth is at its slowest for three years after weakening for five successive quarters to 5.7%, with little sign of an imminent pick up. Even foreign portfolio investors, who have poured more than US$26bn into India this year betting on its strong macro fundamentals, are beginning to waver. With the general election in 2019 now on...

    0
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    Gavekal Research

    Strategy Monthly: Japan Is Back!

    For a quarter of a century, Japan has been stuck in a structural malaise, and the only assets you wanted to own were Japanese government bonds. Charles believes this era is over. Corporate profits are at a record high relative to GDP and seemingly headed higher; the yen is the cheapest it has been, on a purchasing-power basis, since 1985. The yen could well be the best performing currency over the next few years, but is so undervalued that even...

    0
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    Gavekal Dragonomics

    Southwest Rising

    For almost two decades, China’s government has been pouring investment into its inland provinces. Tom Miller visits the southwest and finds the results have been striking: major cities have modernized and incomes are up substantially. Better infrastructure and industrial relocation are now arguably driving a self-sustaining regional growth story.

    0
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    Gavekal Research

    The Catalan Question And The Future Of Europe

    Yesterday the world was treated to the unedifying sight of the national police of a democratic state using violence in an attempt to prevent peaceful crowds of citizens from voting. If any investors still believed that the electoral defeat of the far right earlier this year in the Netherlands and the election of Emmanuel Macron in France had resolved the structural forces working to fragment the European Union, yesterday’s footage from the...

    5
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    Gavekal Research

    The Cycle And The Structure

    This bull market has been driven not by conviction, but a belief that in a zero-interest world there is no alternative to equities. Yet with global growth picking up in a seemingly coordinated fashion, commodity prices rising and bond yields firming up, does that condition still hold? Louis thinks that many investors’ “barbell” strategies could be extremely vulnerable to a change in the investment environment that may now be unfolding.

    8
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    Gavekal Research

    The Return Of Alpha?

    This week’s obsession seems to be whether the big reflation trade is back on, heralding a shift in the investment environment. Louis will address this question in a piece to be sent later today, but it is worth noting another important morphing of the investment milieu: that actively managed funds are handily outperforming passive index funds.

    2
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    Gavekal Research

    No Closer To Effective Tax Reform

    The much-anticipated US tax reform plan from “the big six” (officials from the administration, House and Senate) has landed. What a disappointment it is. The ball has barely been pushed forward at all. It thus seems unlikely the US will get major tax reform. And if it does, it is likely to be much less effective than the plans previously proposed by the House Republicans.

    9
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    Gavekal Dragonomics

    Macro Update: Prolonging The Peak

    In our latest quarterly chartbook, Chen Long reviews the mixed signals from China’s economy and markets. While the cycle has peaked, the government has still found ways to prolong industrial reflation. But economic growth and bond yields will head down from here, though gradually, as the tightening of financial regulation has been well managed.

    0
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    Gavekal Research

    The German Election And Macron's Speech

    Somewhat incongruously, French President Emmanuel Macron yesterday delivered a grand new vision of a federalist European Union less than 48 hours after German voters had offered two fingers up to such solutions. Louis applauds Macron for focusing on the logic demanded by the single currency system, but wonders if he may be whistling in the wind as Berlin turns its head eastward.

    4
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    Gavekal Research

    The Real Story With US Inflation

    While hardly ranking as a hawk, Janet Yellen yesterday restated her view that inflation remains a worry. The Federal Open Market Committee as a whole may have last week nudged its 2017/18 inflation forecasts lower, but Yellen continues to argue that weak pricing pressures are transitory. The corollary is that the Fed should stick with its gradual monetary tightening plan. This places her slightly at odds with policymakers like Charles Evans, who...

    2
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    Gavekal Research

    Japanese Stocks Beyond The Election

    Global equity investors could be forgiven for ignoring the Japanese general election announced yesterday as of little importance. After all, many remain underweight the Japanese market, and at first glance there is little prospect of any change of government or policy likely to change their minds. However, such a dismissive attitude would be a mistake.

    2
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    Gavekal Dragonomics

    The Bottom Line On North Korea

    Even as the US and North Korea exchange more threats, actual US policy still focuses on getting China to apply economic pressure. Yanmei argues that while China has gradually cut trade ties with the North, it wants the regime to stay in place. This is China’s bottom line, not because of any friendship but because China’s own interests demand it.

    10
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    Gavekal Research

    Better Than It Looks In Germany

    Headline writers seem unsure whether to laud Angela Merkel for winning a likely fourth term as German chancellor, or dub her a lame duck amid a fractured political landscape. With the Social Democratic Party (SPD) polling just 20%, it is clear that the implosion of center-left continental parties continues apace, while the stellar performance of an avowedly far-right party shows that populism remains a potent force. My bet, however, is that the...

    1
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    Gavekal Research

    May’s Misguided Brexit Speech

    Listening to Theresa May’s speech last week in Florence, Charles thought the British prime minister sounded like an unfaithful wife attempting to achieve an amicable separation from the husband she cuckolded. Her approach is mistaken. May’s interlocutors in Brussels cannot be mollified with promises of continued affection. They are ideologues, and they are out to punish the UK for daring to challenge their ideology.

    10
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    Gavekal Research

    Winners And Losers From The German Election

    Whatever the result of Germany’s election on Monday morning, the leaders of the Christian Democratic Union will start preparing for the post-Merkel era. Which is why this German election matters. Indeed, there is a significant spread of potential outcomes, which have different implications for both the European economy and investors in European assets.

    0
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    Gavekal Research

    Bond Markets Don’t Speak Catalan

    This week has seen the Spanish government arrest Catalan public officials and take control of the region’s public finances in response to an independence plebiscite that it says is illegal. Cedric concedes that the row is messy and won’t be quickly resolved, but says that it is highly unlikely to result in a genuine political crisis that derails the Spanish economic recovery.

    4
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    Gavekal Dragonomics

    Online Retail Is Maturing

    The red-hot growth of online retailing in China has cooled in recent years, but it heated up again in the first half of 2017. Ernan argues this is likely a blip, as the fundamentals show online retail is an increasingly mature market. Leading firms are now focusing on the convergence of offline and online retail as the next big opportunity.

    0
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    Gavekal Research

    EM Can Handle Fed Fallout

    Yesterday, the “world’s central bank” confirmed that it will reverse its quantitative easing policy and likely raise interest rates in December and then three times in 2018. On the same day, the benchmark emerging market index nudged higher and is only a whisker off a six year high. Ordinarily, Federal Reserve tightening is terrible news for EMs, especially for those economies with the temerity to simultaneously try policy easing. Yet this is...

    0
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    Gavekal Research

    QT And The Treasury Quandary

    The Federal Reserve has confirmed that quantitative tightening will begin next month as it gradually lowers its holding of treasuries and mortgage-backed securities. For investors, the question is whether they should “fight the Fed” by owning assets that are now out of favor with the central bank. I would argue that such a formulation is wrong and these are good times to be mitigating risk by picking up treasuries, probably of shorter duration.

    7
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    Gavekal Research

    Sterling And The Brexit Soup

    Anyone who doubts that interest rate expectations are the main driving force of currency movements, got a wake-up call last week, when sterling surged from US$1.32 to US$1.36 in response to the Bank of England’s bluntly hawkish statement that “there may need to be some [upward] adjustment of interest rates in the coming months”. Nevertheless, I remain a denier.

    0
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    Gavekal Research

    India Macro Update: The Risk In The Rupee

    Indian Economic growth in the second quarter was expected to slow due to the impact of “demonetization” and a new sales tax being rolled out, yet the biggest hit to growth came from an overvalued rupee hitting net-exports. The impact of a strong currency may be to defer India’s capital spending cycle and put the economy on a lower growth trajectory. Since Indian equities are richly valued, Udith and Tom are cautious about their outlook. In this...

    0
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    Gavekal Research

    A Somewhat Changed Germany

    After recent high-drama elections in the US, France and Britain, Germany’s national democratic exercise has been a relative snooze-fest. On Sunday, Angela Merkel’s Christian Democratic Union grouping should comfortably win the biggest slice of the vote and the coalition building will start. There are, however, reasons to think that Merkel could attempt to strike out on her own.

    6
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    Gavekal Research

    Reviewing My Calls

    Over the years my research has focused on broad concepts which have been applied in many situations and lots of reports. These include ideas such as the disruptive power of platform companies, assets whose value comes from scarcity rather than efficiency, or the effect of firms running on Schumpeterian, Malthusian or Ricardian principles. Once in a while, however, I do get specific and make investment calls. Having had a little time this week, I...

    6
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    Gavekal Research

    Any US Profits Rebound Lacks Legs

    US equities have rallied to new highs on a favorable liquidity tide, buoyed by hopes for coordinated global growth. But they have also been given a leg-up by an apparently improved US profits outlook, as shown in the second quarter national accounts data. There are, however, compelling reasons to think that an uptick in profit margins cannot last. As 59% of value added by US non-financial corporates went to their workers in 2Q17, these center on...

    0
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    Gavekal Dragonomics

    Capacity Cuts Won't Hold Up Metals Prices

    To reduce air pollution, China says it will run northern steel mills at just half their capacity this coming winter. Prices of steel and other metals initially rallied on the news, but now are coming off. In this piece, Rosealea argues that metals prices have seen the top of their range, and explains why capacity cuts won’t push prices higher.

    0
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    Gavekal Dragonomics

    High Financial Anxiety

    China’s financial system has its troubles, but a large-scale crisis is unlikely. Localized problems among poorly run, small-scale city and rural banks are the bigger risk.

    0
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    Gavekal Dragonomics

    Your Guide To The Maze

    China’s financial system has grown almost five-fold and seen a proliferation of players and products over the past decade. We try to impose order on chaos and explain how the system works.

    0
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    Gavekal Dragonomics

    A Short History Of Financial Deregulation

    Financial deregulation has seen a cartel of national state-owned banks give way to a bewildering array of local banks, non-bank lenders, wealth management products and loans disguised as investments. Regulators are tightening their grip, yet so long as Beijing demands high-speed growth, it will have to tolerate some financial misbehavior.

    0
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    Gavekal Dragonomics

    China’s Banks Are Better Than You Think

    China’s banks get a bad rap. But actually they are pretty well run, especially if one understands their twin roles as commercial actors and tools of state development policy.

    0
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