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    Gavekal Research

    The German Consumer Lives

    By most measures, the eurozone remains unbalanced, with a competitive north eating the lunch of a productivity-challenged Latin periphery. Germany’s current account surplus stands at 8.6% of GDP and its banks are stuffed with excess deposits, suggesting that thrift remains the Teutonic economic passion of choice. Yet look closer at Germany and it is clear that domestic demand, not exports, is driving growth—household spending accounted for about...

    0
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    Gavekal Research

    The Calm Before The European Storm

    A deal with Turkey to ease Europe’s refugee crisis is close to collapse, Greek bailout negotiations are set to test German political resolve and Britain’s referendum on European Union membership is too close to call. Europe’s “project” has been held together since 2012 by extraordinary monetary policy which has spurred a mild economic recovery, observable in the latest data. The concern now is that growing centrifugal forces—mostly political in...

    0
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    Gavekal Research

    Trump And The Tree People

    Recently I reada bookcalled Je n’ai plus peur (I am not afraid any more)by the French writer Jean-Claude Guillebaud. I do not know Guillebaud personally, but even though he is very much on the left of the French political spectrum, I must confess that I have read all his books, and that I have always liked what he has to say.

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    Gavekal Research

    Disaster Averted Is Not Success

    This week Atlante, Italy’s new private sector bail-out fund, swung into action for the first time, supporting an equity issue by the troubled Banca Popolare di Vicenza. But although Atlante’s market debut could be said to have averted a potential systemic disaster, it was hardly the success either the politicians of Rome or the financiers of Milan had been hoping for.

    1
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    Gavekal Research

    Making Sense Of The Rally In Cyclicals

    By all accounts, 2016 has so far proved to be a challenging year for “market neutral” funds, and “smart beta” strategies, along with various quant funds. Before we have even reached the seasonally-challenging part of the year—sell in May and go away, and all that—a quick glance at year-to-date returns for “low volatility” hedge funds illustrates that the pain is pretty widespread. In a sense, this is surprising; after all, spreads are tighter...

    2
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    Gavekal Research

    The Gavekal Monthly: Glass Half Full Or Glass Half Empty?

    The past month has seen the US dollar seemingly top out, the oil price settle into a trading range and China’s economic outlook stabilize. Emerging markets in particular have bolted higher despite weak global trade, an oversupplied commodity complex and worries about high levels of leverage. In this edition of The Gavekal Monthly we ask a pressing question for EM investors: is the glass now half full, or half empty?

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    Gavekal Research

    Is France “Getting Better”?

    He was not quite Reaganesque in his cheery optimism, but in a recent primetime television appearance President Francois Hollande did declare to France that life was “getting better”. He could point to growth rising to 1.1% last year from a meagre 0.2% in 2014. Unfortunately, the French jobless total hit a new record of 3.6mn in February contributing to a public response of general derision, not to mention rioting at proposed labor market reforms...

    5
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    Gavekal Research

    A European Sinner Repents

    When Brussels implemented new solvency rules for European insurance companies in 2014, it committed one of the five cardinal sins of government: over-regulation. Of course, stricter rules were always likely following the financial follies of the pre-crisis era, but when they drew up the new “Solvency II” regulations, the European Union’s generals were so focused on fighting the last war, they failed to realize the danger posed by their own...

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  • Gavekal Research

    Time To Bet On Sterling And Against Brexit

    If Britain votes to remain a member of the European Union, the moment when the tide turned against Brexit will probably be remembered as Barack Obama’s London press conference on Friday. With a single phrase Obama demolished the Brexiteers’ most powerful economic argument when he noted, with a friendly but remorseless grin, that if Britain chose to detach itself from Europe it would wait “at the back of the queue” for any special US trade deal....

    1
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    Gavekal Research

    Time Alone Is Not Enough For The ECB

    Stung by attacks on his negative interest rate policy, Mario Draghi yesterday hit back at his critics in Berlin, and pleaded for patience. “Our policies work,” insisted the European Central Bank president. “Just give them time.” Draghi’s plea is unlikely to placate German finance minister Wolfgang Schäuble, who earlier this month blamed negative rates and the harm they have inflicted on savers’ incomes for the success of right-wing populists in...

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  • Gavekal Research

    NIRP: Machiavellian Design Or A Policy Mistake?

    In order to make money, Starbucks has little choice but to sell coffee. Ford must sell cars if it hopes to stay open. And Lockheed Martin better get orders for bombs, missiles and planes if it is to remain relevant. But banks do not need to make loans (their stated purpose) in order to make payrolls and pay shareholders a dividend, at least at certain points in the cycle. When the yield curve is steep, banks can borrow money cheaply at the...

    3
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    Gavekal Research

    The Sum Of All Fears

    As “China implosion” and renminbi devaluation fears have faded, risk assets around the world have enjoyed a sustained a rally led by “China sensitive” assets such as commodities, Asian equities and emerging market high-yield debt. In short, all the assets that were priced for a scenario just short of Armageddon. But following this rebound, what next? The most obvious point is that, with the pick-up in fiscal stimulus, the rebound in construction...

    0
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    Gavekal Research

    Eurozone Reform Update 2016

    Last February we published a detailed score card of the structural reform efforts undertaken by Europe’s battered peripheral economies (see Assessing ‘Thatcherite-Keynesianism’). The last year has seen small improvements, but not enough change to warrant another box-ticking exercise. Our assessment in 2016 mostly focuses on the key relationship between the labor markets and national competitiveness. Inevitably such changes are slow moving and in...

    0
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    Gavekal Research

    No Relief For European Banks

    Yesterday a consortium of Italy’s healthier banks and financial institutions agreed to put up €5.7bn to finance a private sector bailout fund for the country’s weaker banks. The deal, which was cobbled together by Italy’s Finance Ministry, is clearly intended to circumvent European Union rules limiting state aid to the banking sector. Details remain sketchy, however it is difficult to see how the agreement can restore confidence in Italy’s banks...

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    Gavekal Research

    European Disunion

    The grand old men who conceived of a united states of Europe knew that a successful single currency demanded a modern federation with integrated monetary, fiscal and political institutions. Such a leap into the unknown was politically impossible in the 1990s, and their assumption (and perhaps hope) was that the less than optimal eurozone would suffer periodic crises, so creating the conditions for reform and a centralization of powers. Since the...

    3
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    Gavekal Research

    Fade The Emerging Market Rally

    In defiance of conventional wisdom the oil price has tumbled -10% in the last two weeks despite a weak US dollar. For emerging markets investors, the breakdown of this correlation raises tricky questions.

    0
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    Gavekal Research

    The Case For Sterling

    What was the weakest major currency in the world in the first quarter? It was not the Brazilian real nor the Australian dollar nor any of the other usual suspects among the emerging market and commodity currencies. That accolade went to the British pound, which managed to depreciate by -4%, from US$1.48 to US$1.42, even while the dollar itself fell another -5% on its trade-weighted index.

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  • Gavekal Research

    Things Fall Apart

    Over the past century periods of social breakdown have swung the pendulum of power from markets to governments and back. Each crisis ended with a transformation in economic and political thinking. Today, voter anger is a response to the 2008 breakdown of deregulated capitalism. This time, argues Anatole, politicians must reconsider the market fundamentalism that has prevailed in recent decades and design a new system of checks and balances to...

    12
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    Gavekal Research

    The Gavekal Monthly: The Dollar Weakens; Time To Buy Jewels?

    The big change over the last month is that the US dollar is now falling on a year-on-year basis. This weakness reflects a more abundant international supply of dollars as the US trade balance, ex-China and ex-oil, has swung back into the red after six years in surplus. In this edition of The Gavekal Monthly, Louis outlines why, in such a plentiful-dollar environment, investors should consider prioritizing “jewels” over “tools”.

    0
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    Gavekal Research

    Europe’s Reflation Trade

    Yesterday’s awful events in Brussels offer a stark reminder of our personal vulnerability in an unstable world and our hearts go out to the victims. They also reinforce liberal Europe’s vulnerability to hate-based ideology and highly motivated terrorists. However, we at Gavekal are economic analysts rather than geopolitical experts, and today want to focus on a more constructive view of Europe—namely, its equity market. After a knee-jerk sell-...

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