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    Gavekal Research

    The Most Important Chart Today

    In a development uncomfortably reminiscent of the breakdown of the 1987 Louvre Accord, recent US dollar weakness has propelled a marked outperformance of Chinese government bonds in US dollar terms relative to treasuries. This potentially leaves Chinese policymakers facing a tricky choice: Will Beijing repeat the BoJ’s great mistake of the late 1980s, or will it prefer the Bundesbank’s hard line?

    0
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    Gavekal Research

    Eurozone Growth: Blip, Peak Or Plateau?

    European growth was always going to soften at some point; the question is whether this week’s squishy data releases reflect a fizzling out of the upswing, or merely an inevitable maturing of the cycle. The fact that the deterioration unfolded during a market dislocation that did not originate in Europe certainly gives succor to skeptics who see the single currency area as the soft underbelly of the current global synchronized upturn.

    0
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    Gavekal Dragonomics

    Taming The Inflation Risk From Pork

    What are the odds that China has a surprise jump in inflation this year? In China, surges in the CPI are usually driven by food—particularly highly cyclical pork prices. But while food inflation is likely to turn positive this year, Ernan argues that the odds of an inflation spike are low, as farm consolidation has tamed the pork price cycle.

    1
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    Gavekal Research

    After The Yellen And Bernanke Puts, The Pavlov Put

    Last Monday, I pointed to three reasons why the recent turmoil in global equities would probably prove nothing worse than a counter-trend “buy on dips” correction, rather than the start of a serious bear market. That's not to say that worries about inflation and overheating are unfounded. But investors are still quite relaxed about both growth and inflation, as evidenced by historically modest bond yields.

    3
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    Gavekal Research

    Notes On An Indian Scandal

    As most emerging equity markets have clawed back a good portion of the losses they suffered in early February’s risk-off, there has been one notable exception. Far from rebounding, Indian stocks have taken another leg down following revelations of a US$1.7bn fraud at Punjab National Bank, the country’s second-largest state-owned lender. The scale of the fraud—roughly twice the amount promised to the bank by the government in the first tranche of...

    0
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    Gavekal Research

    Bond Market Risks

    Charles is bemused by the cacophony of commentary on the apparent bursting of a US government bond bubble. By his reckoning, treasuries are at about fair value. The same cannot be said for certain other big bond markets, where far bigger risks lurk. In this short piece, he updates his broad view on risks in the global bond market.

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    Gavekal Dragonomics

    Local Infrastructure Feels The Chill

    China’s financial crackdown is now extending to the funding tricks that local governments use to pay for infrastructure projects, which have long been tolerated in the name of economic growth. This report explains why this crackdown will put more of a chill on infrastructure spending—but also why public-works investment is unlikely to collapse.

    0
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    Gavekal Research

    Gauging The Strength Of The Oil Bid

    It made headlines around the world earlier this month when the US government’s Energy Information Administration announced that US oil production had hit 10.25mn bpd in the last week of January. At that rate, the US was not just pumping more crude than at its previous production peak in 1970, it was very likely pumping more than Saudi Arabia, lifting the US into second place in the global production league table behind Russia.

    4
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    Gavekal Research

    How To Play An EM Rebound

    On Thursday, my colleague Joyce Poon argued that strong global growth and favorable financial conditions should allow emerging markets to sustain their outperformance. In the immediate run-up to the recent global sell-off, Latin American markets like Brazil and Mexico had charged hardest on the back of higher commodity prices and an incipient global shift from growth stocks toward value plays. But once the dust settles and EMs get their mojo...

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2018

    In last week’s Research Conference Call Andrew Batson outlined the risks—both downside and upside—to the Chinese economy in 2018. Yanmei Xie focused on the risk of overzealous implementation of policy. This is especially the case for environmental regulations, which gave Beijing an uncharacteristically smog-free winter, but at the cost of a natural gas shortage.

    0
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    Gavekal Research

    A Very British Tightening

    Last week, the Bank of England upped its UK growth forecast and signaled that interest rates may be raised harder and faster than expected. This week, Theresa May’s government maintained its muddled passage towards a European Union exit, which has increasingly fretful multinationals warning that Britain’s economy could be headed for the rocks. Even, if like me, you think the UK will secure an eventual squishy-type deal with the EU that involves...

    0
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    Gavekal Research

    CSI Wall Street (Part II)

    On Monday, in CSI Wall Street Anatole morphed into Sherlock Holmes to investigate the crime scene following the market correction. He concluded that: “There’s nothing to see here. Please move along.” And the markets promptly did. Over the past week, equities have rallied around the world while volatility has gradually ratcheted down. A few more weeks like the past one, and the market moves of late January and early February will quickly be...

    5
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    Gavekal Research

    EMs And The Global Cycle

    The market correction of the last two weeks has been centered on the US, but also hit emerging markets pretty hard. A year ago, I argued that the sustainability of the EM run-up depended on continued strong global growth, more oil price gains and a further fall in tail risks associated with the financial system. The issue is whether the newly volatile conditions in global markets are a game-changer for the emerging world. That conundrum depends...

    0
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    Gavekal Research

    Deficits And Bondholders

    Economics 101 says that when there is more of something, then other things being equal its price should go down. That is worrying for US bond investors as US lawmakers last week passed a budget deal that may raise deficits by US$320bn over the next 10 years (any new infrastructure spending will be extra). Interestingly, and perhaps not entirely coincidentally, just as debt-fueled big-government becomes the new normal in Washington, November’s...

    0
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    Gavekal Research

    Video: Freeze-Thaw Conditions In Korea

    It has been a week of confusing signals from the Korean peninsula. Even as North Korea has paraded its missiles, and the US and its allies have sworn to exert “maximum pressure” against Kim Jong-Un’s rogue regime, both sides have hinted at their readiness to return to the negotiating table. Yanmei cuts through the fog to assess the future trajectory of North Korean event risk.

    0
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    Gavekal Research

    Chinese Equities: Marching To A Different Drum

    Though onshore Chinese stocks did not escape the rout of global markets in recent weeks, the real trigger for the meltdown onshore was heightened investor anxiety over Beijing’s financial regulations. Thomas and Ernan reckon that after the dust settles, benign fundamentals and attractive valuations should set the market back on its upward track.

    0
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    Gavekal Research

    Five Ways To Play European Equities

    After a traumatic couple of weeks in the equity markets, Nick and Cedric take this opportunity to revisit their longstanding advice that investors should overweight European mid-caps exposed to the eurozone’s cyclical upturn. As they explain in this report, that call still holds, and they suggest three sectors where investors should look to buy the dip, and two that portfolio managers would do well to avoid.

    0
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    Gavekal Research

    CSI Wall Street

    Bear market massacre or harmless buy-the-dip correction? Financial investigators have spent the weekend sifting through, dismantling and reassembling dozens of clues to determine the true nature of the shocking crime committed on Wall Street last week, as stock prices suddenly went down instead of up. But amid the righteous indignation inspired by this offence against morality and natural law, possibly the most important forensic evidence has...

    4
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    Gavekal Research

    Behind The Market’s Inability To Rally

    “A week is a long time in politics”, Harold Wilson was said to have once quipped to a young aide. The former British prime minister should have tried working in the US equity market. In recent days, it has sometimes felt as if time stood still. So what should we make of stocks’ inability to mount a rally after they again closed on their lows?

    0
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    Gavekal Dragonomics

    A Reversal In The Renminbi?

    The renminbi’s 0.8% fall against the US dollar on Thursday was an unusual move for a managed exchange rate. But what was even more unusual was the preceding run-up: before that drop, the renminbi was up 2.8% YTD in trade-weighted terms. This overshooting the official goal of trade-weighted stability was what set the stage for the correction.

    0
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    Gavekal Research

    The End Of Germany’s ‘Nein’ Policy?

    On the face of it, yesterday’s coalition deal between Angela Merkel’s center -right grouping and the Social Democratic Party differed little from that agreed last month. In addition to domestic stimulus measures it backed more European integration. Yet look closer and the German political landscape may just have been roiled by an earthquake, for while Merkel should stay chancellor the new man at the finance ministry is set to be Olaf Scholz, the...

    3
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    Gavekal Research

    Nobody Rings A Bell At The Top Of A Market

    Let’s start with a hypothesis. For the purposes of this note, let’s assume that the bull market that started in the second half of 2011 ended in January 2018, and that a bear market is now under way. The obvious follow-on question is what variety of the Ursus genus is emerging from its lair.

    3
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    Gavekal Dragonomics

    The Secret Ingredient For Financial Stability

    China’s regulators have done a remarkable job of de-leveraging the financial sector without hurting economic growth or disrupting markets. But was this smooth trajectory due to luck or skill, and can it continue? In this piece, Chen Long explains how the central bank used its monetary policy tools to defuse the risks from tighter regulation.

    0
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    Gavekal Research

    Parsing The Market Sell-Off

    One of the first things Charles taught me is that in a bear market you should never do on the Monday what you wish you had done on the Friday. As bad news piles up, investors brood, sleep poorly, snap at their spouses or children, and go in first thing Monday morning and start to liquidate positions. Undeniably the picture for the now rather stretched equity bull market has been deteriorating for a while, with spiking bond yields, creeping...

    2
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    Gavekal Research

    Good News Is Bad News?

    The US posted a solid employment report on Friday, and the markets didn’t like it one bit. Some 200,000 jobs were added in January, better than the expected 180,000 and prior month gain of 160,000. But what really spooked investors was the faster than expected pickup in wage growth to 2.9% YoY. On the face of it, this is good for economic growth (certainly in nominal terms) and top-line corporate revenues. The worry is that without productivity...

    2
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    Gavekal Research

    A Very Indian Budget

    New Delhi swung into election mode yesterday, a full 15 months before the election. Finance minister Arun Jaitley pledged his budget for 2018-19 would build a “New India,” but it was really a populist ploy to buy votes. After a tough economic year and a disappointing election result in Modi’s home state of Gujarat, the ruling BJP needed to shore up its core support.

    0
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    Gavekal Research

    Take Profits On US Homebuilders

    Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The Outlook For US Growth And Prices). The third element—our neutral view on homebuilding—merits...

    0
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    Gavekal Research

    Video: Playing The US Growth Picture

    Will outlines his view that real growth in the US will remain stable this year and that inflation will pick up, and discusses what this means for asset prices and portfolio construction.

    0
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    Gavekal Research

    The Sustainable Rise In US Inflation

    In her valedictory meeting yesterday, Janet Yellen presided over a slight tightening of language to indicate that the Federal Reserve’s official inflation target of 2% should be hit some time this year. Investors were not surprised as break-even inflation rates have risen to 2% from about 1.8% late last year, while the chance of four rate hikes materializing in 2018 is now priced at 22%. The fly in the ointment is still sluggish wage growth,...

    0
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    Gavekal Research

    Strategy Monthly: Portfolio Strategy For An Inflationary World

    Most money managers today have spent their entire careers in the disinflationary environment that has prevailed since the mid-1980s, in which equities prospered and bonds were an ideal hedge. This may soon change. A growing number of signals point to rising inflation and tighter liquidity. If we really do move into an inflationary era, managers will have to rethink their portfolios from the ground up. In the latest Strategy Monthly, Louis and...

    0
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    Gavekal Dragonomics

    Tightening The Grip On Urbanization

    The populations of Shanghai and Beijing, China’s two largest cities, declined in 2017, in a clear sign that urbanization policies are being enforced more strictly under Xi Jinping. In this piece, Ernan explains how planners have gotten more effective in restricting growth of the largest cities, how controls on almost all cities have tightened.

    0
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    Gavekal Research

    Relief At Hand For UK Consumers

    “I can’t stand London,” one US economist who last year relocated to the UK capital recently complained to Gavekal. “It’s grey and miserable, and all anyone ever talks about is Brexit.” It’s easy to sympathize. Political infighting over the Brexit process dominates UK headlines. However, there are growing reasons to feel more positive about the outlook for UK consumers.

    0
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    Gavekal Research

    Real Yields, The Euro And The Dollar

    The global bear market in bonds growls on. Yesterday the yield on 10-year US treasuries climbed to a new 45-month high at 2.7%. Even more striking, the yield on five-year German bunds rose to zero for the first time since November 2015, marking the beginning of the end of an era for eurozone negative yields as market expectations grow that the ECB will reduce its monetary accommodation sooner rather than later.

    4
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    Gavekal Research

    US Budget Deficits, The Falling US$ And Growth Stocks

    In emerging economies, rising yields and a falling currency invariably signals market concern over fiscal policy. The US, of course, is different. Nonetheless, Louis examines how projected increases in the US budget deficit in coming years will weigh on the dollar, and could make investors reconsider holding richly-valued US growth stocks.

    2
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    Gavekal Research

    The Outlook For US Growth And Prices

    The first estimate for real US GDP growth clocked in at 2.6% for the fourth quarter, bringing full-year 2017 growth to 2.5%. Policymakers at the Federal Reserve forecast the same rate of growth for 2018, together with a moderate pick-up in consumer inflation from 1.7% to 1.9%. At Gavekal we try to avoid making such specific numerical forecasts; as the great Danish physicist Niels Bohr used to say, “It’s very hard to make predictions, especially...

    0
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    Gavekal Dragonomics

    Mixed Consequences From The Profit Boom

    2017 was a great year for China’s industrial sector, with profits up 21%, but the gains were highly concentrated in mining, metals and materials. This pattern has a mix of important consequences, as Thomas explains in this piece: it’s good news for financial risk, less good news for households, and bad news for corporate investment.

    0
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    Gavekal Research

    The US-China Economic Rivalry Is About To Heat Up

    Economic conflict between the US and China was the dog that didn’t bark in 2017. This year it has begun to bark loudly and will soon bite deeply. The short-term macroeconomic consequences will be modest, beyond putting more downward pressure on the dollar. But the potential long-run impact on trade and investment flows, and on power relations in the Asia-Pacific, could be large.

    1
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    Gavekal Research

    Eastern Europe's Equity Sweet Spot

    The big issue facing investors globally is whether inflation makes a Lazarus-like comeback. But in one significant economic region, it is already alive and kicking. Eastern Europe experienced a painful deflation and repricing after the 2008 crisis, but inflation is now well above 2.5%. Having underperformed for many years, Cedric argues that its financial-heavy equity indexes should continue to do well in an environment of strong domestic demand...

    0
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    Gavekal Research

    Mnuchin’s Weak Dollar

    If Robert Rubin were dead, he would be turning in his grave. Speaking in Davos yesterday, US Treasury secretary Steven Mnuchin shook markets by declaring: “A weaker dollar is good for us.” His remark broke the precedent set by Rubin in 1995 and adhered to by Treasury secretaries ever since, of insisting: “A strong dollar is in the best interest of the US.”

    5
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    Gavekal Research

    Overbought But Still Undervalued

    Chinese stock markets are on a tear, with large cap A-shares up 8.9% and Hong Kong-listed H-shares up a thumping 16.3% year-to-date. After such a rapid rise, the markets are vulnerable to a near-term pull-back. But Chen Long explains that economic fundamentals, valuations and flows all suggest the bull market still has further to run.

    0
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    Gavekal Research

    A “Once In A Generation” Shift

    There is a contradiction at the heart of the current bull market in pretty much all assets. On one hand, investors believe that firms can optimize their operations and keep doing more with less. Yet on the other hand, they assume that the global economy will remain awash with excess capacity. Charles and Louis argue that as such cognitive dissonance may get a reality check, investors may need to radically rethink their portfolio architecture.

    8
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    Gavekal Research

    When Political Stagnation Is Benign

    Last week, European economic affairs commissioner Pierre Moscovici declared Italy a “political risk” for the European Union. Some of the Euroskeptic campaign rhetoric has certainly been alarming. But in this paper Nick and Cedric delve into Italy’s electoral arithmetic to conclude that no incoming government is likely to have the will or capability to act on such combative promises.

    0
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    Gavekal Research

    Keep Duration Short

    Washington may have temporarily sorted out its spending plans, but the bigger news for investors is the apparent breakout in 10-year treasury yields. The benchmark-of-benchmarks has risen to 2.65%, exceeding highs recorded in the months right after the Republicans’ election wins in November 2016. This can be ascribed to strong global growth, higher commodity prices, US tax cuts and tighter monetary policy. Hence, with US long-rates now offering...

    13
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    Gavekal Dragonomics

    Fewer Surprises From Supply-Side Reform

    China’s “supply-side reform” in coal, steel, and other products been a major swing factor for markets over the past two years. And Chinese officials started off 2018 by doubling down on their rhetoric about supply-side reform. But as Rosealea explains, there are good reasons to think the upside risk to commodities prices will be low this year.

    0
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    Gavekal Research

    The German Coalition And Europe

    Late Sunday, party delegates of Germany’s social democrat SPD voted 362 to 279 to begin formal coalition talks with chancellor Angela Merkel’s CDU/CSU conservatives. Hurdles still remain, but our base case is that the weekend’s vote paves the way for the formation of a Grand Coalition by April. After months without a stable government, any reduction in uncertainty will naturally be positive for markets. But for investors, the most significant...

    0
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    Gavekal Dragonomics

    Reviewing The Risks For 2018

    After a solid performance in 2017, worries about China have broadly receded, and our view is that 2018 should see continuity in economic policy and only a moderate slowdown in growth. In this piece, Andrew assesses the state of four major risks to this sanguine outlook, based on the latest economic data and a flurry of recent policy statements.

    0
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    Gavekal Research

    Taxes And Yields

    US equity markets have started 2018 committed to the idea that Goldilocks is alive and well. Although no clear picture has emerged of its impact, the passage of the most significant tax reform since the 1980s has had S&P 500 firms opining publicly that they hope to invest more and treat staff better. The corollary is that this cycle might be getting a second wind. The fear is inflation, as shown by yesterday’s move in treasury yields to...

    0
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    Gavekal Research

    Securing The Indo-Pacific

    Forty years after the Southeast Asia Treaty Organization was dissolved, Tom argues that an expanded version of that “Asian NATO” concept may be developing, but this time the potential theater of operations stretches across the Indo-Pacific and includes the full panoply of great powers. What has not changed is that China remains the protagonists’ key bogeyman.

    0
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    Gavekal Research

    From Recovery To Expansion

    Perception is a funny thing. Yesterday President Emmanuel Macron pitched up in London and wowed the British by loaning them a 70 meter piece of embroidered propaganda that celebrates their conquest 950 years ago. By contrast, the last French president to visit Britain had a pint of warm beer with David Cameron in a pub and no one noticed. A similarly discombobulated dynamic can be seen in European equity markets, where years of pessimism have...

    0
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    Gavekal Research

    Video: The Next Phase Of Europe's Recovery

    Cedric expects 2018 to confirm the eurozone economy as moving from recovery to expansion. Hence, four key macroeconomic trends that emerged in 2017 should become paramount this year.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call January 2018

    In Gavekal’s monthly research call yesterday, Louis Gave reviewed evidence that the investment environment is experiencing a once-in-a-generation shift from a deflationary environment to one that is broadly inflationary. Anatole Kaletsky argued that this metamorphosis will likely be an orderly affair. Arthur Kroeber updated his view on China’s likely impact on global commodity markets.

    0
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    Gavekal Research

    Stick With Dollar Depreciation Plays

    The last year has seen a rare outbreak of consensus at Gavekal. Since last January partners and analysts have been almost universally bearish on the US dollar. In that time, the DXY dollar index has slumped some -12% from its heavily overvalued level at the beginning of 2017. Now the first 12 trading days of 2018 have seen the DXY slide -1.9%, breaching September’s support level to sink to its lowest since the end of 2014. This latest...

    4
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    Gavekal Dragonomics

    The Regulatory Storm Continues

    China’s financial-regulatory storm is far from over: in recent weeks, the banking regulator has issued a half-dozen new or proposed rules, and launched another campaign to uncover financial malpractice. While this means credit growth will slow further, Chen Long argues regulators can still avoid shocks to the economy and market sentiment.

    0
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    Gavekal Research

    The Yield Curve As A Duration Guide

    With US stock markets scaling new heights, there are multiple reasons why nervous equity investors might want to reduce portfolio risk. The usual way to do this would be by increasing allocations to long-duration treasury debt. But with long-dated yields now rising, what duration of treasuries should investors hold? And when and how should they adjust duration?

    0
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    Gavekal Research

    The Five Big Bond Market Questions

    With 10-year US treasury yields near the point of breaking out above their 2017 high of 2.6%, financial commentators around the world have suddenly become obsessed with a single question: Have bonds finally entered a bear market, after the multi-decade bull trend that started back in October 1981, when the 10-year yield peaked at 15.8%?

    0
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    Gavekal Research

    Sunshine (For China) In Korea

    Sunshine has dispelled the clouds of war on the Korean Peninsula, at least for now. News headlines are cautiously celebrating the de-escalation of tensions leading up to the South Korean Winter Olympics. This amounts to a quiet victory for China's diplomacy, despite its being which was outwardly rejected by both Pyongyang and Washington.

    1
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    Gavekal Research

    Don’t Fear The End Of The Bond Bull Market

    Bond bears have been given succor in the opening days of 2018. First the Bank of Japan trimmed buying of long-dated Japanese government bonds, indirectly causing 10-year treasury yields to surge to 2.6%. Then European Central Bank policymakers were yesterday shown to be bulled up on the state of the eurozone recovery. On the face of it, central banks seem to be whistling a very different tune. In fact, it is investors who have caught up with...

    1
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    Gavekal Research

    Spending Again In Germany

    Picture the typical German consumer. The image that comes to mind is almost certainly of a deeply conservative individual: cautious, thrifty in his or her spending habits, and with a deep-seated aversion to maxing out the credit card. As with most stereotypes, this one has some foundation in experience. But like many, it also looks increasingly out of date. While Germany’s booming export sector has got most of the attention recently, it is...

    1
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    Gavekal Dragonomics

    After The Bounce In Coal Demand

    After three straight years of decline, China’s consumption of coal rose 1% in 2017, and prices are rallying. But in this piece, Rosealea argues that this bounce in demand is unlikely to persist. With the property market cooling and official efforts to switch away from coal continuing, coal use should resume its decline in 2018.

    0
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    Gavekal Research

    US Inflation Expectations: Further To Run To Catch-Up

    Over the last six weeks, market inflation expectations have undergone a signal shift to the upside. The US five-year break-even inflation rate has climbed from below 1.7% in early December to 1.95% this week. In other words, market expectations for US inflation, which had long remained markedly subdued, have now played catch-up with the Federal Reserve’s own projections, which see core PCE inflation rising to 1.9% this year and 2% in 2019....

    3
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    Gavekal Research

    Worry Not About Asian Currencies

    Asian central banks have in recent weeks taken actions or sent signals that seemingly aim to weaken their currencies. The worry is that a source of return which contributed to last year's outperformance has been lost and exchange rate declines may presage an inflationary breakout. Such a tightening scenario may materialize down the road, but it is far from being a concern.

    0
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    Gavekal Research

    Strategy Monthly: Everything Looks Fine, But…

    The year has opened with growth expectations and risk appetites at their highest levels in years. The consensus is probably right that it will be a good year for economies and stock markets. The main thing to watch out for is a faster-than-expected withdrawal of QE and low-interest rate policies by the ECB and the BOJ, which could send US bond yields sharply higher.

    0
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    Gavekal Research

    Indian Politics And The Cycle

    Despite its soaring equity markets, India had a sticky year in 2017. Quarterly GDP growth dipped below 6% in the summer, laid low by disruptive reforms, bad debt, anemic credit and weak private investment (see India’s Economic Funk). The outlook for 2018 is healthier: the twin shocks from demonetization and the introduction of a goods and sales tax have largely dissipated, consumption has rebounded, and manufacturing is accelerating. Feeble...

    0
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    Gavekal Dragonomics

    The Working-Capital Heist

    Amid the ups and downs of China's recent investment cycles, one trend has stayed constant: the slowdown in private-sector investment. In this piece, Thomas shows that a key problem is state firms routinely delaying payments to their private suppliers, forcing them to hold huge reserves of working capital that can’t be productively invested.

    1
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    Gavekal Research

    Dare To Dabble In US High Yield

    Last week US high yield spreads narrowed to within a whisker of their cycle low, bringing them within striking distance of their 2007 low. When things cannot get much better, they seldom do. However, this may be one of those rare historical occasions when things do indeed go from good to even better. The US tax changes that went into effect last week have the potential to drive credit spreads to record depths.

    0
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    Gavekal Research

    One More Cheerful Year In China

    A key driver of the synchronized global economic pickup and attendant rally in risk assets has been China’s shift from deflation to reflation. In 2018, a key question is whether China can sustain growth while containing financial risk. Arthur thinks it can easily do so, and in this paper outlines the reasons why.

    0
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    France: Believe The Hype

    A basic assumption among Anglo-Saxon investors has been that France, for all its nice food, good wine and smart infrastructure, was the unreformable economy. Then Emmanuel Macron came along promising to fix things, duly got elected president, orchestrated a thumping parliamentary majority and actually began to deliver on promises.

    1
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    Tax Reform, Capex And Financial Engineering

    The tax bill passed into US law last month is not short of critics. But for all the opprobrium it has attracted, the new law may help to repair some of the damage inflicted on the US economy over recent years by the Federal Reserve’s misguided interest rate policies. By favoring capital investment in the real economy over leveraged financial engineering, the new tax regime may yet prove broadly positive for Main Street—but at a considerable cost...

    0
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    Gavekal Dragonomics

    China In 2018: Continuity And Centralization

    China is set for another year of decent growth in 2018. The latest set of policy conclaves have re-affirmed the broad policy direction: more emphasis on the quality of growth than its speed, and continued efforts in the "three key battles" against financial risk, poverty and pollution. The main financial goals are to cut corporate debt/equity ratios rather than to reduce overall national leverage.

    0
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    The Drains On Liquidity

    For ease of math, assume that the world consumes 100mn barrels of oil a day. Then further assume an inventory across the system equal to about 100-days’ usage (in pipelines, ships and refineries). Thus, when the price of oil rises by US$10/bbl in three months—as occurred in 4Q17—a “liquidity drain” of about US$100bn is created.

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    The Big Questions For 2018

    Many of the important questions confronting investors at the beginning of 2018 are the same as they were 12 months ago. And in most cases I would suggest the same answers. This may seem boring or stubborn, but it is quite reasonable in the middle of a long term economic expansion and structural bull market.

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    The Future 8 Index

    Lyxor Asset Management Japan, Société Générale’s Asset Management division, has announced the launch of its “Neo-Futuristic World Fund” which is open to Japanese investors with an official launch on April 18. It will invest in a fully collateralised structured notes linked to an index of companies worldwide created by Gavekal Research; The Future Eight Index. “The Future Eight” refers to advanced technologies being developed in eight industries...

    0
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    The Most Indebted Country?

    One of the arguments long advanced by die-hard bears is that the US is “the most indebted country in the world”, and therefore heading irreversibly for economic disaster. Often they reach their conclusion by summing US current account deficits over the years, or by looking at how much US government debt is owned by foreigners. Sometimes they even dig a little deeper and unearth something called “the US net international investment position”,...

    1
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    German Overheating? No, Eurozone Rebalancing

    In early November, Germany’s Council of Economic Experts, a panel of five heavyweights that advises the government, declared there were clear signs that Europe’s largest economy was running above potential and at risk of overheating. Three weeks later inflation data showed that consumer prices rose by a faster than expected 1.8% year-on-year in October, up from 1.5% in September, with the core ex-energy and food inflation rate also surprising to...

    0
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    The Persistence Of European Political Risk

    This was supposed to be the year that European political risk was laid to rest by the spring defeats of populist Euro-skeptic parties in the Dutch and French elections. But as 2017 draws to a close, anyone glancing at the headlines from Europe is likely to come away with the impression that reports of the demise of political risk were ludicrously premature. A rundown of this week’s news, from today’s regional election in Catalonia, through...

    2
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    US Tax; Not What You Expect

    With the Senate having voted its approval, Republicans are set to tomorrow finalize the biggest shake up in the US tax code since the 1980s. A common refrain among analysts is that the bill should propel equity prices higher, but do precious little for economic growth. We wonder if the reverse may unfold.

    0
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    Gavekal Dragonomics

    Macro Update: A Safe Landing In 2018

    In our quarterly chartbook, Chen Long reviews the economy’s direction since the Party Congress and explains the outlook for 2018. Financial regulation is tightening, and the tradeoff between growth and the environment is shifting. But with construction holding up and inflation surprisingly strong, the base case is still for a moderate slowdown.

    0
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    Cui Bono?

    Today, with European growth humming along and Beijing having (again) shown an ability to keep China’s economy on a sustained expansion path, no one seems fazed about a possible economic downturn. Apart from the UK (where the obsession is Brexit), concern centers on geopolitical risks. Yet depending on their region, investors are worrying about very different things.

    2
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    Where Has Eurozone Inflation Gone?

    The eurozone’s recovery continues, but all is not proceeding quite as expected. At its meeting last week, the European Central Bank’s governing council raised its forecasts for eurozone growth over the next two years to reflect the single currency area’s strengthening cyclical upswing. But while growth is accelerating, inflation remains largely missing in action, with the ECB last week revising down its forecasts for core inflation.

    0
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    No Full English Brexit In The EU’s Roach Motel

    Full English Brexit is off the menu. When Theresa May rushed into the Café Berlaymont at 6:00am last Friday, all that was left on the menu was an over-priced double espresso with a side of Irish bacon. When she returned to Brussels yesterday, after losing a crucial parliamentary vote on her Brexit policy, the only new item on the menu was a large slice of humble pie.

    2
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    The Questions For The Coming Year

    The apparent glide path into year-end suggests that 2018 should offer up more of the same seen in 2017. Louis does not rule out a continuation of this “Goldilocks” scenario, but worries that global inflation could be brewing in unexpected quarters at a time when frenzied trading in speculative assets such as bitcoin produces countervailing responses from policymakers. In this wide-ranging tour across the investment landscape he asks whether, in...

    3
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    Audio & Transcript — Gavekal Research December Call

    In Gavekal Research’s monthly conference call yesterday Anatole Kaletsky outlined five reasons why investors can be optimistic that the current bull market will continue for years to come. His bullishness is moderated by three broad risks.

    0
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    There Is Now An Alternative

    There were no surprises yesterday, either in the Federal Reserve’s rate hike, or in its forecasts for next year. With the labor market set to “remain strong”, the unemployment rate likely to inch down to 3.9%—full employment—and growth forecast to get a modest boost from tax cuts to 2.5%, the dot plot projects three 25bp hikes in 2018.

    0
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    Gavekal Dragonomics

    Is Beijing Winning The Battle For Blue Skies?

    An unprecedented campaign to reduce air pollution has shuttered factories across north China, with a success that has upended the consensus view that local-government officials always favor economic growth over the environment. In this piece, Yanmei examines whether this change in environmental enforcement is going to be temporary or permanent.

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    An Original Sinner Repents

    Two weeks ago, state-backed toll road operator Jasa Marga became the first Indonesian corporate to issue a “komodo” bond—a rupiah-denominated global bond. Seen in isolation, the three-year IDR4tn (US$295mn) issue yielding 7.5% might appear little more than a novelty. However, Udith thinks it could hold more significance.

    2
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    Gavekal Dragonomics

    CEQ: China 20/20

    In this final issue of China Economic Quarterly, an all-star cast of contributors takes a look back at how the country has changed since 1997, and a look forward at how China, and its global impact, might evolve in the next couple of decades. The basic lesson is that it has never paid to underestimate China’s growth potential and capacity for change.

    0
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    Gavekal Dragonomics

    Understanding China, In 20 Books (And One Movie)

    An annotated reading and viewing list for those who just can’t get enough of China.

    0
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    Gavekal Dragonomics

    A Good Few Decades, But Not A ‘Chinese Century’

    The China Economic Quarterly will cease publication with this issue, which also marks its 20th anniversary. CEQ started life as a newsletter for a small coterie of executives and observers interested in what was then a peripheral bit of the world economy. As China became more important and information about it in more demand, we built the Dragonomics research service around it. Today China is crucial in any discussion of global affairs, and the...

    1
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    Gavekal Dragonomics

    Waiting For Their Generation

    Young Chinese who came of age during “Reform and Opening” have more liberal notions than their elders for China’s future. The tectonic plates of government and society are moving in opposite directions, but we will have to wait at least 20 years for a decisive shift to occur.

    0
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    Gavekal Dragonomics

    Never A Brother In Arms

    Over the past 20 years, China failed to follow the path Western powers had scripted for it. Instead, it is emerging as a different type of global leader, defying conventional wisdom and generating new challenges for the supporters of the old order.

    0
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    Gavekal Dragonomics

    The Environmental Horizon: Still Murky

    At long last, Beijing is getting serious about tackling the huge environmental problems caused by breakneck growth. Much more improvement is needed to clean up China’s environmental record both at home and abroad.

    0
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    Gavekal Dragonomics

    Handicapping The Global Power Shift

    China still oscillates between a desire to promote consensus and collaboration on the international stage, and powerful hegemonic and self-interested urges. More concerted international efforts will be needed to make sure the former prevails.

    0
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    Gavekal Dragonomics

    Misreading The Past, Misjudging The Future

    Smart observers have repeatedly got China wrong over the past three decades, selling short its growth potential and exaggerating its fragility. Chances are that many of today’s dark forecasts will prove wrong as well.

    0
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    Gavekal Dragonomics

    A Tarnished Triumph

    China’s economy has grown faster than even the biggest optimists imagined two decades ago. Yet social and political change has lagged behind, while policy has become less reformist and more statist. As Beijing pours ever more resources into low-productivity prestige projects, the economic future is unlikely to be as bright as the past.

    0
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    Gavekal Dragonomics

    Pax Americana-Sinica

    China’s rise is making it increasingly costly for the US to uphold Pax Americana in Asia. China wants to replace it, but scant regional enthusiasm means Pax Sinica is some way off. For the next two decades, an uneasy truce should hold in Asia.

    0
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    Gavekal Dragonomics

    From The Archives: The Internet Master Plan

    Don’t say we couldn’t have seen it coming. In this condensed reprint from the March 1999 CEQ, we explain Beijing’s strategy for building an internet that would promote growth, spur technological development—and vastly increase the state’s ability to exercise centralized coordination and control of the economy, and everything else.

    0
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    Gavekal Dragonomics

    Lessons From History

    Confessions of an analyst who got China wrong in 1997, but created a successful business and career anyway.

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    Gavekal Dragonomics

    Why India Will Never Be China

    Drawing a comparison between Asia’s two giants is tempting, but differences outnumber similarities. Despite the appeal of China’s economic model, there is little chance that Asia’s oldest democracy will follow in Beijing’s footsteps.

    0
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    Gavekal Dragonomics

    Twenty Years Of Gain, And Much Pain

    The China that foreign businesses operate in today is immensely different from the one they ventured into 20 years ago. Challenges have multiplied for MNCs along with China’s economic and political rise.

    0
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    Gavekal Research

    Bitcoin: Money Or Bust

    The definitive characteristic of money is that it is a common medium of exchange. A good becomes money when people within a community begin to accept it, not for consumption nor to produce other goods, but for its expected use in indirect exchange. The chosen money may have non-monetary uses, as gold does, but this is not a requirement for its acceptance. This brings me to bitcoin. Crypto-currencies such as Bitcoin have no non-monetary use. That...

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