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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.

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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...

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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.

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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...

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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.

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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...

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    Gavekal Research

    Video: The Next Phase Of Europe's Recovery

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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.

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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...

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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.

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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?

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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%?

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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. Behind the scenes, it appears that China's freeze-for-freeze diplomacy which was outwardly rejected by both Pyongyang and Washington, is in fact taking shape.

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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...

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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.

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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....

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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.

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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.

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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...

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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.

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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.

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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.

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    Gavekal Research

    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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    Gavekal Research

    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...

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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.

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    Gavekal Research

    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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    Gavekal Research

    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.

    1
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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.

    7
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    Gavekal Research

    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.

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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.

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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.

    0
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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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    Gavekal Research

    The Bitcoin Bubble Changes Shape

    All the talk about crypto-currencies, initial coin offerings, distributed ledgers etc. feels a lot like discussions on carnal knowledge in a high school boys’ locker room. Everyone is talking about it. Yet almost everyone’s experience is extremely limited. And it is likely to stay that way for the time being, because for all the talk, very few of those doing the chattering are actually getting any action. So what is there left to say about the...

    7
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    Gavekal Research

    Towards ECB Stealth Tightening?

    As the eurozone’s economy picks up, the European Central Bank finds itself facing a dilemma. In order not to freak out financial markets and push long-dated yields sharply higher, which could threaten to trigger a new financial crisis, it has promised to continue its quantitative easing program of asset purchases until at least September 2018, and not to raise policy rates until well after the end of those purchases. Yet as inflationary...

    4
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    Gavekal Research

    Our 2017 Holiday Reading List

    History, far from being over, looms large in this year’s Gavekal holiday reading list. From failing empires in the Middle East to Europe’s ceaseless struggle for dominance and Asia’s inability to bury ghosts, our writers consider how the past is shaping our future. As befits a research firm, we have lots of economics with a tour of the stagnation debate and an assessment of the threats and benefits offered by artificial intelligence. We consider...

    2
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    Gavekal Research

    Avoiding Equity Duration Risk

    Last week, Louis argued persuasively that investors should shorten portfolio duration in response to the prospect of further central bank monetary tightening, the potential threat of rising inflation in 2018, and the stretched valuations of long-dated assets (see Have We Just Glimpsed Growth Stocks’ Achilles’ Heel?). This goes not just for fixed income investors, but equity investors too.

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    Gavekal Dragonomics

    The End Of The Preschool Boom

    China’s busy and ambitious parents have driven a huge boom in private preschools, with the number of students roughly tripling over the past decade. But the sector is now clouded by allegations of child abuse, which will only strengthen a shift to tougher regulation and public provision of preschools. For now, the private preschool boom is over.

    0
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    Gavekal Research

    What the US Yield Curve Really Says

    Since 1968, the US economy has suffered seven recessions, each preceded by an inversion of the yield curve. It thus makes sense to ask if such an upending of the link between time and interest is necessary for a recession to occur. A follow-on question might be whether a recession cannot happen so long as the yield curve shape is “normal”. With the US yield curve flattening by the day Charles seeks to answer these questions.

    0
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    Gavekal Research

    Asia’s Triple Merit Scenario Lives

    Last week, the Bank of Korea raised its benchmark interest rate for the first time in six years and other Asian central banks seem likely to follow suit. This is not especially surprising given the ongoing global expansion and tightening moves by the Federal Reserve, which have narrowed short-rate differentials for Asian currencies. The worry, as elucidated by Anatole last week, is that such an expansionary scenario threatens the delicate “not...

    1
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    Gavekal Research

    Turning The Page On The Eurocrisis

    You can be forgiven for having missed yesterday’s not so momentous news that Portugal’s finance minister Mario Centeno is taking over the presidency of the Eurogroup of finance ministers. Yet, look a little closer and this switch may, in fact, signify the end of the eurocrisis and a move onto the next phase of eurozone development.

    3
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    Gavekal Dragonomics

    The Deleveraging Progress Report

    Can China manage corporate deleveraging without a credit crunch? Leverage ratios improved in 2015 and 2016, but progress has been more mixed in 2017, as companies borrowed more but raised less new equity. In 2018, Thomas expects stable or modestly deteriorating leverage ratios, with slowing growth somewhat offset by recovering equity issuance.

    0
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    Gavekal Research

    Positioning For US Tax Reform

    What’s not to like about tax cuts? Quite a lot as it turns out. Although the final shape of US tax reform has yet to be settled, there are enough common points between the House and Senate bills to allow Will and KX to conclude that the likely tax cuts will prove inflationary, and could prompt a more aggressive stance from the Fed. Despite some undoubtedly positive macro outcomes, the implications for investors are not exactly bullish.

    7
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    Gavekal Research

    Strategy Monthly: The Long Cycle Continues

    As equity markets everywhere continue to trade higher, money managers are getting increasingly nervous about how long the rally can last. In December’s Strategy Monthly, Anatole argues that we are still only half-way through a secular bull market that can last through the end of the decade. With further US rate hikes on the cards, barring any nasty surprises non-US markets are likely to outperform going forward. The only fly in the ointment is...

    0
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    Gavekal Research

    From A Ferrari To A Jeep

    When I turned 70 (I am still struggling with the fact that I now have a “7” handle), the Gavekal partners had the good idea of bringing into the firm some very bright “quants” and giving them a simple mandate: quantify and qualify the various investment rules that I have been using for decades (somewhat sporadically, and often with biases that I myself sometimes struggled to acknowledge).

    0
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    Gavekal Research

    Equities, The Yen And The BoJ’s Exit

    Last month Bank of Japan governor Haruhiko Kuroda participated in an ECB panel on the importance of communications as a tool of monetary policy. He seems to have taken the message to heart. In the couple of weeks since, scarcely a day has gone by without Kuroda or one of his colleagues on the BoJ’s policy board talking publicly about the “reversal rate”, hinting heavily that the central bank is looking to dial back its ultra-accommodative stance.

    0
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    Gavekal Research

    Goldilocks And The Ten Grizzly Bears

    Over the last fortnight, Anatole has written lengthy pieces on why he remains structurally bullish and how investors should play this trend. Today, he takes a realistic look at factors that could disrupt his generally upbeat assessment of the global economy and markets. This piece is a journey into Anatole’s darker side.

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    Gavekal Dragonomics

    The Rental Housing Solution

    China’s government has a new priority for the housing market: boost the quantity and quality of rental housing. As more middle-class Chinese are priced out of top-tier cities, promoting rentals is a new attempt to address housing affordability. In this piece, Rosealea explains the latest policy push and how it will affect property developers.

    0
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    Gavekal Research

    Have We Just Glimpsed Growth Stocks’ Achilles’ Heel?

    The best scene in HBO’s hit show “Silicon Valley” had brash billionaire Russ Hanneman explain to start-up CEO Richard Hendricks that the first goal of his tech firm should be to avoid booking sales: “If you show revenue, people will ask ‘how much?’ and it will never be enough” (see clip). This scene crystallizes the observation that in recent years investors have been rewarded in spades for loading up on “long-dated assets”. And it has been a...

    4
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    Gavekal Research

    Behind Eurozone Credit Growth

    The eurozone credit cycle is accelerating. Data released yesterday showed loans to non-financial companies grew at 2.9% YoY in October, the fastest rate since June 2009, while loans to households were up 2.7% YoY for the third month running. The pick-up in lending to private businesses bodes well for eurozone growth and markets next year, with respondents to the European Central Bank’s bank lending survey indicating that investment and...

    0
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    India Macro Update: The Pain Before The Gain

    India reports its third quarter GDP tomorrow and in this chartbook Udith and Tom offer their assessment of the economy. They expect the official numbers to show a pick-up in growth due to firms restocking after the rollout of the new Goods & Services Tax and think this trajectory will continue through to next year. They advise investors to stick with richly-valued equities, treat bonds cautiously and not worry too much about a currency...

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    Gavekal Research

    Video: The Pain Before The Gain

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    What Retail Apocalypse?

    With so much US retail activity going online, a CNN headline over the weekend asked if this “Black Friday” might be the last. That is good news for the newly-minted US$100bn man at Amazon and bad news for old-style chains like JC Penney, Sears, and Kmart, which face constant downsizing pressure. But what about more broadly for the economy?

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    Gavekal Research

    A Regime Change For Oil?

    Every US or global recession in the past 50 years has been preceded by a doubling or more of oil prices, but not every doubling of oil prices has been followed by recession. While even US$70/bbl probably does not pose a serious risk to the world economy, any rise above US$70 could spark a combination of inflationary pressure and reduced demand that proves lethal to global financial conditions and growth.

    0
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    Gavekal Dragonomics

    The Chinese Consumer: Outlook & Trends 2017

    In our annual review of the Chinese consumer, Ernan outlines the short-term outlook and longer-term trends in household spending. This chartbook explains why consumption growth has been a bit disappointing in 2017, why the outlook for 2018 is better, what are the drivers of consumption upgrading, and how the transition to online is playing out.

    0
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    Gavekal Research

    The Bull Market And The Yield Curve

    Keeping up with a runaway bull is no easy task. Which may explain why so many investors remain unenthusiastic participants: the market is old and increasingly unattractive, but holding back could cost them their careers. Yet, the upward march of global equity markets continues relentlessly (for reasons reviewed in recent articles. Today, some 84% of markets around the world are up over the past 12 months in local currency terms. Historically,...

    2
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    Gavekal Research

    Not All Bank Recaps Are Created Equal

    A month ago, India outlined a US$32bn plan to fix its publicly-controlled banks’ bad debt problem, sparking a more than 30% rally in their share prices. The plan remains under wraps, but the “round tripping” approach will see deposits lent to the government as recapitalization bonds and then injected back into banks as fresh capital. The question is whether India’s effort is credible enough for banks to both write off debt and have enough...

    0
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    Gavekal Research

    Don’t Panic Over Chinese Equities

    The A-share equity market suffered its biggest one-day sell-off this year yesterday. But Chen Long argues that conditions in fact still remain benign for Chinese equity investors. The earnings outlook is favorable, the market is cheap by global standards, and international investors are beginning to trim their longstanding underweight.

    0
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    Gavekal Research

    Fake Brexit? Or No Brexit?

    The British economy since the Brexit referendum is often likened to the suicide jumper who leaps off a 20-storey building, shouting “so far, so good” as he falls past the 10th floor. This comparison is unfair to suicides. The real message about economic performance from the government’s annual budget statement yesterday was “so far, so bad”. While a minority of economists and investors—plus a large majority of Conservative politicians—share...

    10
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    Gavekal Research

    New York Seminar — November 2017

    At Gavekal's November seminar in New York Louis Gave, Arthur Kroeber, Cedric Gemehl and Anatole Kaletsky presented their macro outlooks and investment recommendations.

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    Gavekal Research

    Investing For Constrained Insurers

    At Gavekal we have a sizable number of European Union insurance companies among our clients. Over the last three months, I have visited more than a few of them to outline my current investment recommendations, for example that investors should buy the Japanese stock market. Typically in these meetings, the investors have listened carefully and then regretfully shaken their heads, saying: “I’m afraid we can’t do it—for regulatory reasons”.

    1
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    Gavekal Dragonomics

    A Mixed Report From Steel Country

    This winter's anti-pollution campaign in north China is for real, but will have a mixed impact on the steel industry. The campaign also involves a suspension of many construction projects, which will reduce demand. Rosealea's recent field trip to the steel hub of Tangshan suggests both the supply and demand cuts are beginning to bite.

    0
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    Gavekal Dragonomics

    Towards A Single Asset Management Regime

    For the first time, China is to bring its highly heterogeneous RMB100trn asset management industry under a single regulatory umbrella. New rules published last week promise to increase transparency, curtail leverage and reduce complexity and hidden risks, especially in the booming business in so-called “wealth management products”. However, writes Chen Long, the draft regulations contain a number of omissions, ambiguities and loopholes which, if...

    0
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    Gavekal Research

    Dodging Late-Cycle Refinancing Risk

    By most generally accepted metrics, the US economy is in the late stages of its cycle and any further overheating raises the chances of a recession. The issue is really one of timing. Will Denyer’s Wicksellian model and my US business cycle indicator are both flashing orange rather than red, suggesting that the US is edging towards the recession frontier, but not yet at it. We have both advised investors to dial back on US risk, but are not much...

    2
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    Gavekal Research

    Who Needs A Government?

    What would it take to make you put more risk on the table in the final month of a year that has generally produced decent investment returns? It helps to have a synchronized global economic recovery that relies on multiple engines of growth and a US-tested monetary policy framework that seems to work as advertised. Yet the potential for disappointment, starting with US tax reform, appears to be growing. Add to that list an outbreak of political...

    1
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    How Much Slack In The Eurozone?

    It is a core contention of the bullish view on Europe espoused by Anatole and Cedric that the eurozone’s recovery is running four or five years behind the US economic cycle and that there is still plenty of slack left in the eurozone economy. But is there really as much as the bulls believe?

    2
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    A Turkish Vortex

    For a country that relies on the kindness of strangers to fund its economy, Turkey, under Recep Tayyip Erdoğan, has been going out of its way to alienate allies and capital providers. Its relationship with the US has been on a downward trajectory for months and things are not much better with the European Union. This matters because the pieces are in place for a classic balance of payments and financial crisis in Turkey. This much is clear from...

    0
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    Gavekal Research

    Asset Allocation For The Global Bull Market

    On Monday Anatole outlined his fundamental reasons to believe that the world is enjoying a global bull market that still has years to run. Today he reviews the investment recommendations that flow from his thesis, and examines how investors can best play the unprecedented divergence of the US business cycle from the cycles in Europe and the emerging markets.

    2
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    Gavekal Research

    Living With A Nuclear North Korea

    A special envoy of Chinese president Xi Jinping will head to North Korea in what is being billed as a gesture of solidarity and friendship between the two countries’ communist parties. Coming just days after Donald Trump’s visit to the region, the move appears to give the lie to Trump’s assertion that he successfully convinced Xi to “use his great economic influence” to press North Korea to give up its nuclear weapons.

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    Gavekal Dragonomics

    Decent Growth Risky For Bond Yields

    China’s economic data for October confirms that the moderate slowdown in growth is continuing as the housing cycle fades and government spending weakens, even as corporate earnings benefit from higher-than-expected inflation. Chen Long now sees an increasing risk for domestic bond yields in this combination, though it is bullish for equities.

    0
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    Gavekal Research

    Too Much Forward Guidance?

    It should be an ideal environment for equity investors. Europe yesterday published stronger than expected growth figures for the third quarter, with German GDP expanding 2.8% YoY, and even laggard Italy growing 1.8%. That performance raises the possibility of faster earnings growth even as the European Central Bank is proposing to stretch out its stimulative asset purchases through the third quarter of next year and keep interest rates in...

    0
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    Gavekal Research

    The Consequences Of Saudi Arabia

    Our new monthly Loser Report aims to identify things that investors should avoid, whether countries, sectors, themes or asset classes. In this second instalment Louis looks at the tumult affecting Saudi Arabia and assesses the ricochet effect across the Middle East and beyond. He wonders whether regional currency pegs could be set to topple and whether a major industry centered in Europe and the US could be a major victim of the shakeout.

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    Gavekal Research

    Brexit, The Pound And UK Stocks

    When it comes to Brexit, I suspect that one of the few things about which Anatole and I agree is that the negotiations between London and Brussels have so far bordered on the farcical, and that the internal squabbling within the UK’s governing Conservative Party has hardly been conducive to raising the tone. Beyond that we part company. Anatole believes the Brexit talks are approaching a critical juncture for investors in UK assets—a view he...

    3
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    Gavekal Dragonomics

    Three Retail Takeaways From 11.11

    It was a busy weekend for China’s online retailers, who reported huge sales numbers for their November 11 promotional events. Alibaba’s aggressive strategy is helping uphold its dominance even as market growth slows, and online retail integrates with offline. In this piece, Ernan cuts through the wave of publicity with three simple points.

    0
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    Gavekal Research

    Reading China’s Financial Opening

    Over the next five years Beijing says it will progressively relax—and eventually scrap—the restrictions it currently imposes on foreign ownership of Chinese financial institutions. In practical terms, this is unlikely to prove a great game-changer for the industry, but it is still a significant move with positive implications for Chinese equities.

    3
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    Gavekal Research

    This Is (Still) Not A Peak: It’s A Global Bull Market

    It was almost five years ago that Anatole started to shout loudly that the US equity market had achieved a clear breakout from its more than decade long bear market trading range. His advice has been to stick with the trend. In light of this year’s near across-the-board upward moves in risk assets globally, it would be tempting to back away from this positioning. However, in this piece he argues that the bull market is now going global and so it...

    3
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    Video: Escaping The Indian Funk

    Udith presented on India during Gavekal's Hong Kong seminar in November. This video also includes relevant excerpts from the question and answer session.

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