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    Gavekal Research

    Equities And The Euro

    It is likely that 2015 will be remembered as a strong year for eurozone equities. With only a few weeks of normal trading activity remaining, the MSCI EMU has delivered a solid 17% total return in local currency terms (the benchmark small and mid-cap index is up 24%). Still, we doubt that many investors will be celebrating a bumper year. The standard view was that the European Central Bank’s huge asset purchase program, which started in March,...

    0
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    Gavekal Research

    Osborne’s Masterful Tack

    “Since 2010, no economy in the G7 has grown faster than Britain,” boasted George Osborne, the Chancellor of the Exchequer, presenting his autumn public spending review yesterday. Indeed it is true that, according to the latest estimates, GDP in both Britain and the US has increased by exactly the same number, 12.4%, since the first quarter of 2010.

    0
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    Gavekal Research

    Financing Europe’s Soaring Defense Costs

    François Hollande has rightly made it clear that France is at war (see France Under Attack). And wars cost a lot of money, as keeping an army in the field and airplanes in the air is expensive. There is a reason for the military adage “amateurs talk strategy; professionals talk logistics”. Moreover, fighting a terrorist organization involves both military costs and large domestic security costs. As such, the increase in security spending for the...

    0
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    Gavekal Research

    Stick With The Dollar

    With the US set to raise interest rates and the eurozone more likely to ease policy, a long-dollar, short-euro position has been an obvious bet. Yet as the DXY inches closer to its March high, the question is whether a breakout is feasible. After all, the long US dollar trade looks crowded, with the world and its dog convinced that Janet Yellen and Mario Draghi will soon be travelling quite different monetary pathways. Such a comfortable...

    1
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    Gavekal Research

    A Britisher At Heart

    On Monday, Anatole argued that a British exit from the European Union would rank as a foreign policy disaster of historic proportions (see Brexit: A Blunder To Rank With The Boston Tea Party). This is not the first time I have disagreed with my partner on UK matters, and it will likely not be the last. In recent years Anatole worried about the impact of public spending cuts being pushed through by the Conservative-led coalition government; I...

    4
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    Gavekal Research

    Europe’s Equity Bet

    On the face of it, the opportunity in European equities is hardly exciting. US stocks may be close to their high while European equities languish 10% below their April peak, but on a valuation basis the two markets are similar. A comparison of their price-to-earnings ratios, both on a trailing and forward basis, sits near its historical average. Things, however, start to look more interesting when a cyclically-adjusted P/E ratio is applied—CAPE...

    2
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    Gavekal Research

    France Under Attack

    In the worst days of the Northern Ireland troubles, British policymakers spoke of a “tolerable level of violence”. It was taken for granted that senseless and murderous acts would be committed, but what mattered was ensuring that these did not “get out of hand”.

    9
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    Gavekal Research

    Brexit: A Blunder To Rank With The Boston Tea Party

    Ask any divorced couple whether their relationship would have been different had they never married. Actually, don’t bother asking, since the answer is obvious. Strangely, most conservative politicians do not seem to understand this—and neither do 48% of British voters. That is the number, according to recent opinion polls, who want a divorce from the European Union.

    2
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    Gavekal Research

    A Happy Apologist

    At Gavekal the conversation with clients never stops and from time to time we like to offer up a taste of debates that strike us as interesting. Louis got into just such a discussion earlier this week with one of our smarter, free-market embracing US clients. The topic of discussion was China and why Louis is such an apologist for the Chinese Communist Party when he clearly has little time for governments meddling with markets elsewhere?

    2
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    Gavekal Research

    Drifting In The Mid-Atlantic

    On the one hand the United Kingdom looks to have similar dynamics to recovering European economies, where growth is picking up nicely even though deflationary pressure still looms—Britain’s headline CPI rate stands at -0.1% and real rates have swung positive from a low of -4.7%. Such a cautious view explains why the Bank of England offered a report last week whose dovishness surprised some. Yet, on the other hand mid-Atlantic Britain in many...

    4
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    Gavekal Research

    The Catastrophe Of Negative Rates

    Yesterday both Reserve Bank of India governor Raghuram Rajan and Bundesbank president Jens Weidmann broke ranks, daring to suggest that ultra-low interest rates may not be such a good thing after all. If rates were held too low for too long, warned Rajan, the risk of financial instability would be greatly heightened, a concern Weidmann shares. Unfortunately, that’s not the half of it.

    13
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    Gavekal Dragonomics

    China And Russia: Locked In Reluctant Embrace

    China’s economic activity is gradually reducing Russian influence in Central Asia. Despite that, shared authoritarian values keep the two countries closely aligned on many issues.

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    Gavekal Dragonomics

    CEQ: China Reshapes Asia

    In the last two years China has made a bold push to expand its influence in Asia, using both the carrot of well-funded infrastructure diplomacy and the stick of forceful assertion of territorial claims in the South and East China Seas. What explains this newly assertive foreign policy, and what are its effects likely to be? This special issue of the China Economic Quarterly tries to answer these questions.

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    Gavekal Research

    Clearer Political Skies In Spain

    For the last three years Spain has been the poster child for the eurozone’s recovery. In its country report published yesterday, the European Commission described Spain’s growth as “robust, underpinned by sustained job creation, improved financing conditions, high confidence and low oil prices”. Yet not everything in the Spanish garden is rosy. The manufacturing PMI suggests the recovery is facing severe challenges, having slowed from a cyclical...

    0
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    Gavekal Research

    Good Enough In Turkey

    Investors have welcomed last weekend’s victory of the Justice and Development Party (AKP) founded by President Recep Tayyip Erdoğan in Turkey’s elections, with the lira and equities both rallying strongly. After June’s inconclusive poll failed to produce a workable government, the concern was that a country with huge economic, security and strategic challenges would become ungovernable. In this context, the election result was the best that...

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    Gavekal Research

    The Fight Against Europe’s Inflation Skeptics

    In recent conversations with Europe-based clients we have been struck by a rising tide of “inflation skepticism”. While many investors back in 2009-2011 fretted that monetary activism must lead to spiraling inflation, many now believe the exact opposite. Their fear is that irrespective of central bank action, inflation is doomed to stay below target. In just a few years, inflation has stopped being commonly thought of as “always and everywhere a...

    0
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    Gavekal Research

    Good Enough In Turkey

    Investors have welcomed last weekend’s victory of the Justice and Development Party (AKP) founded by President Recep Tayyip Erdoğan in Turkey’s elections, with the lira and equities both rallying strongly. After June’s inconclusive poll failed to produce a workable government, the concern was that a country with huge economic, security and strategic challenges would become ungovernable. In this context, the election result was the best that...

    0
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    Gavekal Research

    The Gavekal Monthly: A Possible Return Of US Inflation

    The Gavekal Monthly outlines our highest conviction ideas and summarizes the key economic, market and thematic views held by the firm’s partners and analysts. This report is an attempt to answer a question that we are often asked, but find it hard to answer: "What does Gavekal think?".

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    Gavekal Research

    Middle-East Machinations

    Russia and Turkey are increasingly at loggerheads as Moscow escalates its military engagement in Syria. Earlier this month Turkey’s President Recep Tayyip Erdogan threatened to find another gas supplier after Russian jets breached its air space, and in recent days Ankara initiated legal action against Gazprom over the price it is charged for piped gas.

    2
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    Gavekal Research

    London Seminar Audio And Slides

    We held our main fall seminar on October 27 in London, where Anatole Kaletsky, Francois-Xavier Chauchat, Neil Newman, Tom Miller and Louis-Vincent Gave presented their views on the global economy. Anatole discussed the implications of recent developments in financial markets; Francois examined Europe’s resilience to global headwinds; Neil outlined three major investment themes in Japan; Tom explored China’s regional foreign policy ambitions, and...

    0
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    Gavekal Research

    Why The Ruble Rally May Be Over

    Global investors are bulled up on Russian financial assets with the ruble having outperformed most emerging market currencies since the “junk rally” got going in early September. On a YTD basis Russian bonds have outpaced those from other big EMs. As a result, dedicated Russian funds last month saw a big inflow for the first time in a year. Certainly, the shift in sentiment has been spurred by the Federal Reserve delaying any interest rate move...

    2
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    Gavekal Research

    The Promise Of A More Forceful ECB

    The signal could hardly have been clearer. Although the European Central Bank chose to hold its fire yesterday, bank president Mario Draghi made it plain that he will be prepared to wheel out even bigger weaponry at December’s meeting to overcome the deflationary forces pressing on the eurozone’s economy. If necessary, this could include extending the current quantitative easing program beyond next September, increasing the ECB’s monthly asset...

    2
  • Gavekal Research

    The Myth Of Secular Stagnation

    When the European Central Bank meets today, discussion will center on whether it should expand quantitative easing in an attempt to stave off deflation and support the eurozone’s painfully slow growth. In Japan too, talk is about whether the Bank of Japan needs to step up its stimulus efforts. And in the US, the Federal Reserve last month decided to delay calling an end to its own zero interest rate policy amid evidence that US growth is in...

    1
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    Gavekal Research

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    0
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    Gavekal Research

    Hong Kong Seminar

    This is the full recording from Gavekal's October Hong Kong seminar featuring Joyce Poon, Andrew Batson and Anatole Kaletsky as well as a Q&A session.

    0
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    Gavekal Research

    Will The ECB Opt For QE-Plus?

    When the governing council of the European Central Bank convenes this Thursday in the Maltese capital Valetta, the assembled policymakers will be forced to contemplate a track record of quantitative easing that at best can be described as “mixed”. True, since the ECB announced its €60bn a month program of asset purchases in March this year, eurozone activity has staged a modest comeback, with growth expected to rise to 1.6% in the third quarter...

    0
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    Gavekal Research

    Could Volkswagen Save Europe?

    Volkswagen's stock price has rebounded more than 20% since its early October low, but there remains uncertainty about the firm’s future. Since news of the diesel polluting scandal broke, US$30bn has been wiped off VW’s market value, and you do not need to be conspiratorial to see a scenario that has the value of the German carmaker’s equity going to zero.

    0
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    Gavekal Research

    Italy’s Debt Trap Escape Bid

    Even though Italy has run primary surpluses for all but one of the last 20 years, public debt has ballooned to 133% of GDP, second only to Greece in the eurozone. Italy’s original profligacy dates to the 1980s, but the real issue has been an inability to bite the bullet on reform, which, according to the International Monetary Fund, has reduced potential economic growth to just 0.4%. The good news is that Italy seems to have woken up and smelt...

    0
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    Gavekal Research

    The Birth Of A Pain Trade?

    The question we have received most in recent days is whether this week’s counter-trend rally in commodities, deep cyclicals and emerging markets can morph into a “melt-up” akin to that seen in 4Q98. Seventeen years ago the blowback from the Asian Financial Crisis culminated in late September with the failure of Long Term Capital Management. Within days of a hurriedly agreed creditor bailout, the Federal Reserve had made the first of three...

    0
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    Gavekal Research

    The Gavekal Monthly: More Questions Than Answers

    With the Fed having put its rate hike decision on hold, investors face an uncertain environment of weak global growth and inflation, tottering emerging markets and continued worries about China. In this edition of The Gavekal Monthly, Louis-Vincent Gave surveys the crucial questions investors must grapple with and identifies the indicators to monitor in the coming weeks. In addition, we highlight three calls from our analyst team: Joyce...

    0
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    Gavekal Research

    QSCB: What Is The Trade Slowdown Telling Us?

    For the first time since the 1970s global trade is growing more slowly than global GDP, and if anything this growth is decelerating. One explanation is that slower world trade is a symptom of weak global demand, and perhaps a harbinger of worse economic news to come. That is possible, but in this Quarterly Strategy Chartbook we argue that the trade slowdown reflects structural changes in the world economy, and signals that a new phase of...

    0
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    Gavekal Research

    Why Big Caps Are Still Blighted

    Big cap stocks globally have had a horrible 2015 with the Volkswagen emissions scandal being just the latest “uncorrelated shock” to hit the sector. In Europe, German utilities RWE and E.ON have lost more than half of their market value, while oil and commodity producers everywhere have been hurt by a collapse in the price of their wares. Still, “blue chips” got that reassuring moniker because they tend to be the highest value counters on the...

    0
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    Gavekal Research

    A Worrying Set Of Signals

    Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a...

    0
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    Gavekal Research

    Libor Not Lehman

    With shares in Volkswagen down -28% since the diesel emissions rigging story broke last Friday, VW bond yields up sharply, and the securities of other European automakers hit hard by the news, investors face some uncomfortable questions. Is the risk posed by the scandal idiosyncratic, with the fallout likely to be confined largely to VW itself? Or could the risk prove systemic, with potentially catastrophic implications for the broader European...

    0
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    Gavekal Research

    Gastarbeiter Redux

    The influx of hundreds of thousands of asylum seekers from war torn Syria, Afghanistan, Iraq and parts of Africa has laid bare familiar divisions within the European Union. This week’s deal to relocate 120,000 more refugees from Greece and Italy on top of the 40,000 agreed in May starts to address the problem. Many multiples more are making the trip to Europe, but only one country—Germany—is promising to take large numbers. Commentators often...

    0
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    Gavekal Research

    What The VW Scandal Could Mean

    Last year as Europe tightened economic sanctions on Russia for its role in fomenting the Ukrainian conflict, German business confidence readings took a bath. This was not surprising as German exports to Russia—a one time key growth market for Teutonic metal bashers—have shrunk by about €9bn in two years. However, once the dust settled on 2014 it became clear that far from being decimated, Germany’s highly diversified exports had actually risen...

    0
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    Gavekal Research

    How Much Does China Really Matter?

    How much does China’s slowdown really matter to the rest of the world? At first this might sound like a silly question. After all, China is home to a fifth of humanity, it is the world’s second largest national economy and its second largest importer, and in recent years has contributed between a quarter and a third of global growth. What’s more, the recent volatility in China’s stock markets and exchange rate caused shockwaves around the world...

    0
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    Gavekal Research

    Europe And Chinese Risk

    Yesterday Joyce argued that the slowdown in China was not a major problem for most developed economies (see How Much Does China Really Matter?). Arguably an exception to that general observation are Europe’s multinationals, which over the last decade or so have thrived by selling goods that Chinese firms and households love to buy.

    0
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    Gavekal Research

    Is The China Panic Abating?

    For the past six weeks, global markets have been in a China-centric panic, sparked partly by bad economic data, but mostly by policy bungling from China’s policymakers. Having spurred a huge expansion in equity margin debt, regulators turned tail in June and cracked down on the practice. As an equity market crash unfolded, policymakers took to swinging a big stick: price-keeping operations were tried, stock trading was halted and speculators...

    5
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    Gavekal Research

    How Corbynomics Could Work

    Whatever you may think of Jeremy Corbyn, he has a point about economic policy. Actually he has two good points and one bad one. Corbyn has been right about what he called People’s Quantitative Easing, a potentially transformative idea for restoring economic prosperity that was proposed years ago by several radical economists but had never been taken seriously in Britain until it became the centerpiece of Corbynomics. Corbyn has also been right...

    6
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    Gavekal Research

    Is The Bull Market Over? (II)

    Yesterday we examined the three big fears that—in the absence of any markedly negative news from the OECD economies—lie behind the recent equity market sell-off, and which have prompted many investors to ask “Is The Bull Market Over?”

    2
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    Gavekal Research

    Fixing Germany’s Current Account

    Germany’s trade surplus for July rose to a record €25bn, lifting the country’s accumulated current account surplus over the last 12 months to a hefty 8.2% of GDP. The fall of the euro has clearly made German exports more competitive outside the single currency area. As a result, Germany’s expanding trade surplus is by far the dominant influence on the eurozone’s external accounts. Over the last 12 months, Germany’s trade surplus with the rest of...

    0
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    Gavekal Research

    The US Current Account Deficit And World Markets

    Spotting turning points in the US current account is central to Gavekal’s research method, as such shifts impact all other economic relationships. When the US dollar is strong the US tends to run a big current account deficit, providing the world with lots of “earned dollars.” Conversely, a weak dollar eventually leads to a shrunken US current account deficit and more incentive to borrow in dollars. Big moves in the dollar exchange rate create...

    0
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    Gavekal Research

    German Exports Are Not Kaputt

    Predictions of the German export machine’s demise followed southern Europe’s 2011 slide into deflation, the yen’s 2012/2013 devaluation, and now the emerging world’s slowdown. And yet German exports hit a new high in 2Q15 and the latest IFO survey points to more strength in 3Q. Far from going kaputt, German exporters can likely handle an emerging world crunch due to their geographical diversification, the benefit of a weak euro and improving...

    4
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    Gavekal Research

    Can Europe Be Part Of The Solution?

    The eurozone is no longer the center of the global market panic, but an interesting question is whether it can be part of the solution. Investors ostensibly sold equities yesterday on more evidence of economic weakness in China. However the deeper fear is of a faltering global growth outlook at a time when the Federal Reserve is looking to hike rates. Eurozone equities topped out back in April as the initial flush of the European Central Bank’s...

    0
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    Gavekal Research

    The Four Horsemen Of The Apocalypse

    Markets are entering bear market territory and what vexes Charles and Louis is whether the root cause is a liquidity crunch, a solvency crisis or a deflationary bust. In this wide ranging chart book they explore the problem through the revelatory prophecy of four riders whose presence marked the coming of judgement day. We don’t mean to pile on the misery in what is shaping up as a tough week and the moderately good news is that the-end-of-times...

    0
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    Gavekal Research

    As The Crisis Ebbs, Will Europe Turn Japanese?

    The China-induced crisis of recent weeks was noteworthy for being a major global risk-off event that, for once, was not made in Europe. Indeed as markets crumbled on Monday the euro soared. Europe’s graduation from weak link to quasi safe haven is not so surprising given the patch-up job done on Greece and a gathering cyclical recovery—private sector credit growth in the eurozone for July was a fairly perky 0.7% YoY. The question is whether the...

    0
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    Gavekal Research

    The Real Message From Oil

    Violent swings in oil prices are destabilizing economies and financial markets worldwide. When the oil price halved last year, from US$110 to US$55 a barrel, the cause was obvious: Saudi Arabia’s decision to increase its share of the global oil market by expanding production. But what accounts for the further plunge in oil prices in the last few weeks—to lows last seen in the immediate aftermath of the 2008 global financial crisis—and how will...

    18
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    Gavekal Research

    Who Benefits From The Fall Of Europe’s Export Champions?

    Panic in the emerging world has reverberated back to the European equity markets through the de-rating of high quality exporters. What we call “export champions” get more than half of their sales from outside Europe and account for about half of Europe’s market value within broad indices. Yet the travails currently faced by this group have not resulted in Europe’s domestically-focused “national victims” outperforming. Instead, it is the “...

    0
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    Gavekal Research

    How To Build A Reserve Currency

    A store of value, a unit of account and a medium of exchange—these are the three essential characteristics of any proper currency. Needless to say a reserve currency must possess all three. But they are far from enough. A reserve currency must have at least six other attributes too, as Jacques Rueff and Robert Triffin did so much to establish.

    1
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    Gavekal Research

    Modest Eurozone Growth May Be Enough To Lift Markets

    Eurozone economic growth disappointed in the second quarter, coming in at 0.3% quarter-on-quarter, compared with the expected 0.4%. At 1.2%, the year-on-year growth rate was the highest since 2011, but it remains too weak for comfort. For equity investors, it is crucial that gross domestic product grows strongly enough for corporate profits to rise significantly (see What A Few Decimals Of GDP Growth Could Change). Happily, corporate earnings...

    0
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    Gavekal Research

    Cutting The Tail Of The Dog

    When docking the tail of a dog there are (in theory at least) two ways by which the offending appendage can be removed: it can be amputated with a single incision, or instead sliced incrementally so that the poor creature barely notices its loss. The same logic applies to economic policymakers when a “tough” decision has to be made. The Thatchers of this world go for a single chop, while the likes of Hollande or Chirac will always plump for...

    3
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    Gavekal Research

    Bankrolling The Eurozone Recovery

    Europe’s banking sector has been catching the eye with 18 out of the 31 banks in the STOXX Europe 600 reporting positive earnings surprises and almost all beating sales targets. It may be too early to declare Europe's banking sector as being off to the races after a seven year nightmare that started in August 2007, but we see three big trends in the results.

    0
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    Growth & Markets Monthly (August 2015) – by Pierre Gave

    Our latest monthly indicators look to have taken on a somewhat schizophrenic character. On the growth side, our main indicator of global economic activity is perking up, implying a stronger second half of the year. But our diffusion index of OECD leading indicators is clearly heading south, as are commodities. A similarly bifurcated story can be seen on the risk-appetite side. Our velocity indicator has registered improvement and short term...

    1
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    Gavekal Research

    The Good News In EU Investment

    When the stimulative effects of the weak euro and the fall in oil prices fade from the picture, what will sustain Europe’s growth? At first glance it is unlikely to be investment. Structural reforms were meant to cut the costs of doing business, increasing returns on capital and so providing firms with both the confidence and the resources to expand production. Yet a glance at the headline numbers suggests things haven’t worked out that way. In...

    0
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    Gavekal Research

    Three Ugly Charts

    I would never claim to be an accomplished technical analyst, but I do know how to use a ruler when looking at charts of prices in the markets.

    5
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    Gavekal Research

    Five Corners (July 29): The Slowdown In Trade

    Overview: After years in which the world’s major governments have been busy manipulating prices, Charles Gave finds it astonishing that anyone should be surprised by the current slowdown in global trade.

    0
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    Gavekal Research

    5C Overview: Why The Surprise At Slowing Trade?

    I am afraid I am rapidly turning into Gavekal’s resident bear—asleep half the time, grumpy the rest. In particular, I am amazed how some people have suddenly discovered that world trade is going nowhere, and that they are so bamboozled by this strange pattern. Where exactly have they been for the last 15 years?

    0
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    Gavekal Research

    5C Europe: The Re-Domestication Of European Trade

    Since 2009, European exports have gone from strength to strength. As the rest of the world shook off the effects of the financial crisis, European Union exporters found themselves well-positioned to benefit both from the US recovery and from the rise of the emerging market middle classes. What is more, as deflation set in, Southern European economies directed more capital and marketing resources into their export sectors, reinforcing the...

    0
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    Gavekal Research

    How Much Upside For UK Gilt Yields?

    Eight years after the UK last raised interest rates, several members of the Bank of England’s Monetary Policy Committee are dusting off their hawkish hats. Yesterday’s MPC minutes revealed growing concerns about inflationary pressure, even though consumer inflation was at zero in June. No rate hike is expected before the first quarter of next year, but with the UK economy set to move into a new, more productive, growth phase, it is worth asking...

    0
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    Gavekal Research

    The Good News From Greece

    Greece has reopened its banks, paid its dues to the European Central Bank and cleared its arrears with the International Monetary Fund. After five years of pan-European economic depression and the near-death experience in Greece this month, can we finally say that the euro crisis is over? The conventional answer is definitely not. According to the vast majority of political commentators and economists, ranging from left-wing Keynesians such as...

    5
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    Gavekal Research

    The End Of An Empire

    Economic growth derives from one of two sources. Either it comes from a rationalization of talent, which we call Ricardian growth, or it comes from new inventions, which we call Schumpeterian growth. Of the two, Ricardian growth is easier to achieve. As barriers to trade, to the movement of people, or to the free flow of capital are dismantled, inefficiencies get squeezed out and growth can soar. Bearing this in mind, it is obvious that the...

    5
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    Gavekal Research

    Five Corners (July 15): Deflation Redux

    Overview: When governments interfere with the price discovery mechanism, most people believe the inevitable result is runaway inflation. On the contrary, argues Charles Gave, official manipulation of prices threatens to plunge us all into deflation. United States: Tan Kai Xian examines the marked divergence between goods prices and services prices and ponders what it means for the overall US inflation outlook. Europe: As the eurozone inches its...

    0
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    Gavekal Research

    Greece, Europe And The Equity Market

    After days of intense Greek psychodrama, with François Hollande playing the good cop and Angela Merkel the bad, Europe has once again served up a compromise. The deal reached yesterday imposes on Greece an even tougher plan than the one rejected by its people nine days ago. No doubt each of us will have a different take on what the agreement will mean for the future of Europe—and of Greece. However, surely everyone will agree with the late...

    0
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    Gavekal Research

    Broken Trust

    Charles likes to say that people are more likely to change their spouses than change their banks. The Greek crisis has tested this adage to the limit. For five years now, Greek banks have endured a “bank jog” of deposits out of the domestic banking system and into mattresses, foreign accounts and even bitcoins. Amazingly, however, some €130bn in household and business deposits have stayed put. But should Greek banks re-open in the near future,...

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    5C Europe: Rising Above Bedlam

    While the world has focused on the bickering and brinksmanship of the Greek bailout negotiations, activity in the rest of the eurozone has quietly been picking up pace. Economic confidence is close to its highest level in nearly three years and the composite PMI reached a four-year high of 54.2 in June. More to the point, having plunged into deflation last year, partly because of the second half’s economic soft patch and partly because of the...

    0
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    Europe's Democratic Divide

    Voters, it would seem, pose a clear and present danger to the eurozone. Syriza’s success in last weekend’s “Greferendum” shows there is only so much conventional medicine that electorates will take before looking for miracle cures. The party’s rise has mirrored the fall in Greek living standards since the financial crisis and the failure of Troika bailout packages to turn the country around. It has been useful to label Greece as “exceptional”...

    1
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    Osborne’s Budget: Good For The UK, Bad for UK Assets

    After May’s surprise election victory for David Cameron’s Tories—which proved yet again that Britain is a naturally conservative country— expectations were running high for the first truly Conservative budget in the UK for almost 20 years. Yesterday, George Osborne duly delivered an impressive relaunch of British conservatism for the 21st century, in a speech self-consciously modeled on Benjamin Disraeli’s famous “One Nation” budget speeches,...

    5
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    Europe’s Debt-Deflation Dynamic

    Amid all the talk of contagion and demonstration effects emanating from Athens, there is a straight forward question that concerns investors whose domain spreads beyond the lapping shores of the Mediterranean: is the Greek crisis, at its root, inflationary or deflationary? Given talk of new currencies being launched, the obvious fear concerns inflation. I would demur and suggest that a deflationary shock is unfolding. This matters especially for...

    3
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    The Eurozone Is Not On The Brink

    When totally wrong-footed by an astonishing event that embarrassingly contradicts one’s expectations, it is tempting to seek refuge in high-flown metaphors and literary allusions, especially if this embarrassing turn of events happens in Greece. But rather than distracting attention with references to Pyrrhic Victories, Siren Voices and Labours of Hercules, let me get straight to the point and admit that my predictions about the Greek referendum...

    5
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    A Brighter European Dawn

    The political and economic reality is that a 40-year old political neophyte from a “peripheral” European economy has taken the eurocrats to the cleaners. It is clear that the Greek populace knew exactly what was coming and extracted €89bn of “good money” from an exceptionally incompetent European Central Bank. This pool of liquid funds should prove a key support for the next year or two, and with Greece running a primary budget surplus the...

    14
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    Growth & Markets Monthly (July 2015)

    With the drama in Athens casting a pall over markets, what is the message from the Gavekal dashboard of economic and risk indicators? Overall, reasonably positive. Our main growth indicator suggests that the momentum of economic activity should pick up in the second half of the year. If correct, this would mark a repeat of the pattern seen in the last few years. Still, given the uncertainty associated with the Greek situation, there has been a...

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    Five Corners (July 01): Manufacturing Machinations

    Overview: Charles Gave argues that the manufacturing sector remains the last bastion of proper economic data in the US, and the message being sent is not good. United States: Tan Kai Xian somewhat demurs from Charles and argues that the US manufacturing sector is unlikely to be the fountainhead of the next US recession. Europe: Central Europe has emerged as the manufacturing powerhouse of Europe at the expense of France and the southern...

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    Germany Is The Real Risk

    As the Greek crisis apparently reaches its climax it strikes me as odd that the default response is to seek refuge in “safe” German assets. If, as appears quite likely, the flawed euro-system really is heading into the next phase of its denouement, then German assets are the soft underbelly of the system, and they are likely to suffer most. Here is why:

    13
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    Greferendum And The Markets

    Contrary to most of this morning’s headlines, the astonishing weekend events in Greece will almost certainly prove bullish for risk assets around the world and especially in Europe. The European market mayhem triggered by Alexis Tsipras’ bizarre referendum announcement (which Greek officials only found out about through Twitter in the midst of a negotiating session with the Troika in Brussels) seems reminiscent of the panics about US politics...

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    5C Europe: Central Europe Takes All

    Let’s start with a shocking figure: almost 80% of the additional value-adding activity created by the EU industrial sector in the last 10 years took place in Germany (47%), Austria (4%) and central and eastern European economies (28%). This obviously exceeds the weight of these countries in Europe’s economy (27%). But why has the locus of manufacturing shifted so radically and rapidly to Central Europe?

    2
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    The UK’s Sweet Spot

    Is the UK economy running out of steam? Growth slowed to just 0.3% quarter-on-quarter in the first three months of this year. That was the slowest for more than two years, and a reminder that while businesses have employed more workers, headline productivity growth has all but stalled. The fear now is that with the tightening labor market pushing up wages, poor productivity will lead to slower real growth, making it harder for the UK to attract...

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    Hedging The Unknown

    As Athens and its creditors inch painfully towards a deal that should see the release of fresh bailout funds, the probability that Greece will be unceremoniously ejected from the eurozone is diminishing. Grexit has never been Gavekal’s core scenario, however I have long held the view that while the chances of a Greek exit may have been relatively small, the damage it would have inflicted on financial markets would have been disproportionately...

    5
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    Why Athens Has No Choice

    The main actors in the Greek crisis seem happy to choreograph an ending with this week’s “last ditch” negotiations to be followed on Monday by a “final” summit of European Union leaders. Adding to the theatre, Greek Prime Minister Alexis Tsipras will today meet Vladimir Putin in St Petersburg, where talks will presumably focus on the basis for co-operation and financial support between the two nations in the event of Grexit. Our view remains...

    0
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    Greek Default Would Trigger Regime Change, Not Grexit

    As Greece moves inexorably towards default, the big news from the markets is not contagion but the opposite—the remarkable lack of response in the euro exchange rate ($1.125 today compared to $1.123 the day before January’s Greek election) and sovereign bond spreads in the Club Med (BTP-bund spread today is 150bp, against 120bp on January 23). Is this just a case of investor complacency and wishful thinking, like the period prior to Lehman? Or...

    16
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    Five Corners (June 17): Bond Market Shakeout

    Overview: Charles Gave argues that the lack of market-making capacity in the financial sector means that the next big market move could be highly disorderly. United States: 10-year Treasuries look overvalued on a fundamental basis, but don’t expect an immediate correction says Tan Kai Xian. Europe: German bond yields have had a roller coaster ride of late so François Chauchat checks in to reassess their valuation anchors. China: From a standing...

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    5C Overview: Efficiency, Capital And Bond Market Spreads

    In the “good old days” much of the capital deployed in financial markets was devoted to making markets work better. Until the mid-1980s investment banks were often partnerships whose capital was directly owned by the partners. On occasions when a disorderly market emerged that capital was “put to work”, sometimes for just a few minutes—profitability was very high. Such capital was often “owned” by a family such as the Rothschilds, Barings or...

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    5C Europe: A Quick Tour Of Bund Valuation Anchors

    With 10-year Bund yields collapsing to almost 0% and then surging to 1% in a few months, the German bond market seems to have lost its valuation anchor. The launch of a massive quantitative easing operation by the European Central Bank, and then the violent unwinding of positions by investors who had front-run this program explains most of these erratic moves. But, after the storm, are German bonds cheap or expensive? We make a quick tour of the...

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    From Farce To Irrelevance

    The good news is that a Greek default, which has become more likely after Prime Minister Alexis Tsipras’ provocative rejection of what he described as the “absurd” bailout offer by Greece’s creditors, no longer poses a serious threat to the rest of Europe. The bad news is that Tsipras does not seem to understand this. To judge by Tsipras’ belligerence, he firmly believes that Europe needs Greece as desperately as Greece needs Europe. This is the...

    3
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    Oil At Its Ceiling, Not Floor

    With oil prices rebounding strongly this week, despite the non-event of last Friday’s meeting of the Organization Of Petroleum Exporting Countries, it seems appropriate to re-examine the case for cheaper oil that we have been presenting since late last year. Specifically, our view in December that US$50/bbl was more likely to be a ceiling than a floor for the Brent oil price in the long term has been contradicted by market actions of recent...

    2
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    Protect And Survive

    Bond yields keep rising, emerging markets are softening and key cyclical stocks have taken a bath. The more I look at the global situation the more I am convinced that both economies and markets are reaching a point of transition. And as that old sage Yogi Berra said: “When you come to a fork in the road, take it!”

    3
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    The Other Reason To Avoid Turkey

    Investors had long priced in the risk that the ruling AK Party of Turkey’s Recep Tayyip Erdoğan could win a two-thirds majority in last Sunday’s parliamentary election, a result that would have allowed the president to reinforce his constitutional powers at the expense of parliament. What they failed to price in was the risk that the AKP could fail even to win a simple majority. In the event, that is exactly what happened, leaving Turkey facing...

    4
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    The Death Throes Of The Bond Bubble

    What should we conclude from the jump in bond yields that has transfixed investors in every market around the world since late April, when a disappointing German auction started the sudden rout? The simplest answer, and probably the best one, is “not much”. Like the US taper tantrum of May 2013 and the brief bump in Japanese bond yields a few months earlier, when the Bank of Japan got serious about quantitative easing, the present market...

    1
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    The Eurozone Recovery Hardens

    On the one hand there is increasing optimism about the eurozone’s cyclical recovery and diminished concerns over sovereign risk linked to the Greek crisis. On the other hand, there are rising concerns about a stuttering US economic recovery, as shown by yesterday’s release of weak factory orders for April. Markets are playing catch-up to the shifting economic sands and risk calculus. Bund yields yesterday jumped 17bps to 0.71%—narrowing the...

    1
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    Five Corners (3 June): Shifting Capital Flows

    Overview: Louis Gave traces China’s rejection of planned economy shibboleths over the last 30 years and contends that Beijing is charging full tilt toward the final frontier: the liberalization of capital itself. United States: With the strength of the US dollar favoring imports over US-made goods, the US current account balance is set to deteriorate. This, argues Will Denyer and Tan Kai Xian, will mean a bigger supply of US dollar liquidity in...

    0
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    A British-Style Recovery For France?

    France looks to have emerged from three years of stagnation after growing at a better than expected 0.6% QoQ in 1Q15. The improved mood can be seen in consumer confidence being up near a five year high. Given that the euro slid more than 20% against the dollar in the last year while Brent crude fell 40%, this should not really come as a huge surprise. Rather, the question is if these better numbers mean the French economy is about to stop...

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    Greeks Inch Toward Surrender

    The Greek situation rumbles on without resolution after a weekend that saw more posturing, but no deal between Athens and the Brussels group. The message from European Union leaders is that Greece must bow, and while Prime Minister Alexis Tsipras remains defiant, it was noteworthy that his interior minister indicated a willingness to cede ground on Syriza’s anti-austerity program. As this messy endgame plays out, the question facing jaded...

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    Growth & Markets Monthly (June 2015)

    This month saw a clear deterioration of our growth indicators. The pattern of the last few years with a weaker than expected first half of the year appears to be holding up. The question is whether 2015 will see the habitual pick-up in the second half of the year? On the inflation front, things remain quiet. US breakeven inflation rates, which looked as if they may have been breaking upwards last month, are now heading south again. Given the...

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    5C Europe: The Euro Financial Spinning Top

    Read any “International Economics 101” text book and European economies are often still described as being less reliant on the financial sphere than their “Anglo-Saxon” counterparts. Such a view is in serious need of an update as capital flows have been at the heart of the eurozone system. Absent a fiscal union, and given still fairly low labor mobility, “financial velocity” has been essential to the sustenance of the single currency area. When...

    1
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    Animal Spirits And The Revival Of European Finance

    Despite escalating worries over Grexit and a soft patch in US growth, the first quarter of 2015 saw a pleasing stabilization in the eurozone, driven by improved consumption (see More Air In The Reflation Balloon). The question is whether such green shoots can weather a more than 35% rebound in Brent crude since January, and a 4% rise in the euro since mid-March. The case for Europe being able to resist such headwinds relies in large part on a...

    2
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    The Return Of European Political Risk

    A surprising facet of the post-2010 euro crisis period has been the degree to which the political center in the European Union has held. Despite record unemployment in the struggling South, extremist movements have mostly been contained to the fringes. So it is ironic that just as the long anticipated cyclical recovery arrives, the political tide looks to be turning the other way. Voters in this weekend’s Spanish regional elections gave the...

    1
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    Why Germany Is Not Turning Japanese

    Germany has economic problems that most countries would die for—low unemployment and steadily rising real wages mean that policymakers must respond to bottlenecks such as labor shortages (see Germany Normalizes). The longer-term worry is that these “gaps” will become permanent as high-growth Germany must also grapple with Japanese-style demographics. The fear is that its post-2010 expansion could be a swan song before the structural growth...

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    Five Corners (20 May): Assessing Oil's Comeback

    Overview: In light of the rebound in oil prices Anatole Kaletsky questions his own view that the oil market is becoming driven by “marginal cost producers”, rather than classic monopoly dynamics.

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    The Untimely Demise Of US Productivity

    Let’s start with a statement of fact: since 2002 the growth of US productivity, measured as non-farm output per hour worked, has collapsed. Outside of recession periods, this is the first time since the 1950s that the four-year moving average of the annual rate of change in productivity has fallen so low. This matters because without a rise in productivity, the US economy will struggle to boost its citizens’ standard of living, whether measured...

    3
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    The Dissonance In Markets

    Perhaps the biggest challenge confronting investors today is the disconnect between financial markets and economic data. Indeed, despite weak readings from the growth locomotives of the global economy (China and the US), recent weeks have seen bonds selling off, commodities going on a tear, and deep cyclical equities experiencing huge rebounds. In short, while economic data is pointing towards a mediocre global growth outlook, markets are...

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