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E.g., 22-10-2018
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    Gavekal Research

    Strategy Monthly: A Simple Guide To US Asset Allocation

    We synthesize four years of work on asset allocation and present a model portfolio built around analysis of the cost of and return on capital; the real rate of return on equities, bonds and cash; and the ideal duration of fixed-income holdings. Today we recommend that US portfolios hold 75% in equities, 25% in cash, and shun bonds.

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    Gavekal Research

    Italy’s Chaotic Tendency To Stabilize

    Italian debt holders have been spooked by a leading figure in the country’s populist government threatening a fiscal blowout. The spread between 10-year BTPs and bunds has widened to 282bp, exceeding the May 30 level when the latest coalition was formed in chaotic circumstances. Such rhetoric threatens the relatively benign scenario that I advocated in July and has investors fretting about another eurozone crisis. While Italian politics will...

    2
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    Gavekal Dragonomics

    An Overdue Tax Cut For Households

    Facing trade conflict with the US and a slowdown in credit growth, China is under pressure to use fiscal policy more aggressively to support the economy. On Friday, the National People’s Congress delivered on at least part of the solution, passing a large cut in personal income taxes. In this piece, Ernan explains the impact of this tax cut.

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    Gavekal Research

    Video: An Unexpected Investment Environment

    With the exception of US equities, about the only other way most investors could have achieved a positive return this year was to have held US dollar cash. That has made for a very strange investment environment that few people saw coming. In this video interview, Louis reviews the experience of the last eight months and outlines potential scenarios for the remainder of 2018.

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    Gavekal Research

    Europe’s Whimpering Economic Cycle

    As with most of the developed world, the eurozone has seen a breakdown of the Phillips Curve link between inflation and unemployment. The 2008 crisis and ensuing double-dip recession created a sclerotic environment where labor market dynamics had little impact on general prices. This is another way of saying that Europe’s economy has remained stuck a in low-growth funk. Last year that seemed to have finally changed, with cyclical forces driving...

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    Gavekal Research

    Disentangling The EM Mess

    It has been tough reconciling weak emerging market performance this year with their generally decent macro fundamentals. Charles pins the blame on a US dollar squeeze and will publish an update later today. By contrast, Anatole reckons that markets have made a mistake in assuming that EMs are especially vulnerable to a strong US dollar. I see merit in both positions, but do not buy the fact that there is a catch-all explanation for what is going...

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    Gavekal Research

    An Update On The Dollar Liquidity Crisis

    Yesterday saw a worsening of the US dollar squeeze faced by weak links such as Argentina and Turkey. For much of this year, Charles has been on the lookout for market dislocations due to vulnerable economies having too few readily available dollars. One of his key tools has been the “world monetary base” and that is now sending worrying signals.

    15
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    Gavekal Dragonomics

    The True Value Of SOE Interest Rate Subsidies

    There is a widespread belief that implicit government guarantees allow Chinese state-owned enterprises to command preferential access to credit at below-market interest rates. In this paper, Thomas digs deeply into the corporate data to determine the true magnitude of this interest rate subsidy, and its importance to SOE profitability.

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    Gavekal Research

    Tail Risks That Worry Me

    Yesterday I made the case that emerging markets should be superior performers in a global bull market, which I characterized as the most hated in history. What that analysis left out was the relative prospects of the other big blocks in the global equity universe; namely, Europe and Japan. My core point yesterday was that trade wars do more harm to economies that close their markets than those countries which supply them, and on this score...

    1
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    Gavekal Research

    India Macro Update: A Mixed Masala

    As public spending is cranked up ahead of an election that is expected to be held next spring, India should be able to sustain its current level of economic growth for a while yet. However, the rate of expansion has likely passed the high water mark for this cycle, argue Udith and Tom in this quarterly update.

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    Gavekal Research

    Misunderstanding Today’s EMs

    Suppose that, like me, you think the global equity bull market has a few more years to run and hence the sell-off which culminated with Turkish debt being downgraded two weeks ago was a merely a correction. Where are the best opportunities to “buy the dip”? The answer depends on whether you also share my view about the underlying causes of this year’s market setbacks.

    4
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    Gavekal Research

    The State Of The US Consumer

    Despite cyclical headwinds and the threat of a welfare-sapping trade war, the US consumer has stayed fairly upbeat. The worry has been that rising tariffs change that situation and hit growth. Hence, news of a trade deal between the US and Mexico is to be welcomed (Justin Trudeau may feel differently). Still, at the end of the day the effect will still be to push up costs that someone must cover. For this reason, as the economic cycle matures...

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    Gavekal Dragonomics

    The Consumer Soldiers On

    Consumer spending has been the ballast of China's economy over the past six years. But this year its resilience has been questioned, thanks to a sharp fall-off in automobile sales and reported growth rates in retail sales that appeared to bear no relationship to the underlying data. Ernan finds that household spending is actually holding up well.

    0
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    Gavekal Dragonomics

    The Retail Sales Data Enigma, Explained

    This technical note explains why the retail sales growth numbers reported by the National Bureau of Statistics are so much higher than the growth rates one can calculate by comparing this year's sales values with last year's. This is not an effort to cover up bad economic performance by fudging statistics, but the opposite.

    0
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    Gavekal Research

    Last Place In The FX Beauty Contest

    In mid-August, the US dollar hit a 12-month high against developed country currencies, and a multi-year high against emerging market currencies. Two weeks on, the burning question for investors is whether those highs represent a turning point, whether the dollar strength that prevailed from mid-April to mid-August has now played out, and whether the US currency is about to resume the softening trend that predominated through 2017. As always,...

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    Gavekal Research

    Misery Loves Company

    These days you are about as likely to encounter a happy active manager as a flying unicorn. Between the massive outperformance of a few, highly priced, stocks (Amazon, Netflix, Microsoft etc.), the continued compression of fees, the increased burden of regulations, front-running by algos and dark-pools, the fact that fewer and fewer marketmakers actually make markets... pick any topic, and the chances are it will be a sore point.

    2
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    Gavekal Dragonomics

    The Winter Air Pollution War (Part 2)

    North China is gearing up for big cuts in heavy industry output this winter, in a repeat effort to clean up the skies over Beijing. This campaign will, by constraining supply and raising costs, exert steady upward pressure on metals prices. In the long run, it will encourage producers to move to other regions, redrawing China’s industrial map.

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    Gavekal Research

    Teflon Don Or Teflon Dow?

    US equities have undeniably been the place to be in the post-2008 decade. As that divergence has gone into hyper-drive in the last three months, one might have expected events roiling the Trump presidency this week to spark a correction. Yet yesterday saw US equities end broadly flat for the day. So is this a case of Teflon Don or Teflon Dow?

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    Gavekal Research

    The Most Hated Bull Market In History

    Anatole reviews the state of the US bull market and concludes that it still has legs. He does, however, warn that portfolio strategies which worked well during the disinflationary era since the mid-1980s are unlikely to play well in this bull market’s later stage.

    2
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    Gavekal Dragonomics

    Clogging China’s Cash Pipeline To Silicon Valley

    In the past years, billions of dollars of Chinese venture capital have poured into US tech firms. This is alarming to the US Defense Department, which believes these investments could lead to a flow of critical technology back to China, eroding the American advantage in fields such as artificial intelligence, robotics, and autonomous vehicles.

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