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    Gavekal Research

    Where The French Center May Fail

    Just five weeks after the deciding second round of France’s presidential election, French voters go to the polls yet again. In another two-round ballot, to be held on successive Sundays in June, the French electorate will vote in a new lower house of parliament. The overwhelming consensus is that voters will choose a centrist in the presidential election. But if they do, their choice may well not allay France’s heightened political risk.

    2
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    Gavekal Research

    Time To Exit US Equities

    Over the last few months Charles has argued that the US stock market rally was running on fumes. In the intervening period, US equities have, of course, powered to new highs. He now says that for the first time since 2007 his valuation model definitively points to US equities being overvalued.

    2
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    Gavekal Research

    A Structural Turn In Japan

    For more than a quarter of a century Japan has been a reliable source of disappointment for investors. After a nice little run-up late last year, a familiar pattern has emerged in 2017 as equities edge nervously sideways. Despite some evidence of Asia’s trading economy spluttering into life, Japan yesterday released surprisingly soft industrial production data for January. To top things off, the Wall Street Journal on the same day ran a...

    2
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    Gavekal Research

    A Methodology For Playing The Eurozone Bond Markets

    In yesterday’s Daily, I argued that a long position in the French CAC 40 stock index, locally funded, versus a short position in Germany’s Dax offers investors a neat “heads I win, tails I don’t lose” hedge against a possible break-up of the euro driven by French politics (see It’s Time To Buy French Equities).

    1
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    Gavekal Research

    It’s Time To Buy French Equities

    As regular Gavekal readers may remember, I have always maintained that over the long run the returns delivered by two different stock markets— adjusted for exchange rate fluctuations and differences in pay-outs—must be the same. This is just another way of saying that in an open economy the returns on invested capital generated by well diversified stock markets have to be the same.

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    Gavekal Research

    In Dutch With The Electorate

    There is a tendency to divide Europe into the “serious” beer drinkers of the north and the not so serious wine tipplers of the south. Using such a dichotomy reinforces a common assumption that trouble in modern day Europe always arrives from the Mediterranean regions. It explains why there is a cottage industry of politicos watching developments in Italy, Spain, France and Portugal, while precious little energy is expended on political goings on...

    1
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    Gavekal Research

    Choosing Between Disadvantages

    It was a record that Germany would rather not have announced, at least not this week. Yesterday official data showed that Europe’s über exporter racked up a current account surplus in 2016 of US$281bn versus a mere US$210bn for China. With the US running by far the largest offsetting deficit, such data means that the temperature between Washington and Berlin is likely to get hotter.

    4
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    Gavekal Research

    The End Of The European Dream

    Back in 2002 I wrote a book, Lions Led By Donkeys, whose main point was that the euro’s adoption would kill the competitive and heterogeneous Europe that I so loved. It was prefaced by Milton Friedman who predicted that Europe was set to enter a period of rigor mortis. Fifteen years on and it is clear that Europe as a unitary concept is indeed dying.

    4
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    Gavekal Research

    Golden Rule Says Extend Duration

    Great economists are seldom top flight mathematicians. One exception was Maurice Allais, who won the Nobel Prize in 1988 for his “rigorous mathematical formulations of market equilibrium and the efficiency properties of markets”. Among his findings was his so-called “golden rule”, which states that over the long run, long term government bond yields always converge with the structural growth rate of the economy.

    2
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    Gavekal Research

    The Real Political Risk In France

    There are many areas where Anatole and I agree to disagree. But one in which the two of us see eye to eye is the heightened influence political risk may have on markets this year. Consider France, where the political situation threatens to get complicated. The problem is not so much the presidential election, due to be held in two rounds in April and May, but the legislative elections set to be held a month later.

    2
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    Gavekal Research

    The Dow 20,000 Conundrum

    The Trump trade continues. Yesterday the Dow Jones Industrial Average passed the magical 20,000 mark for the first time, with the S&P 500 closing at a record high just a whisker short of 2,300. I hate to be the one to douse the market’s high spirits with a bucket of cold water (well, I don’t really hate it), but sober analysis suggests that the current Trump-propelled rally is a fad that may soon fade.

    0
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    Gavekal Research

    Political Fiction

    European economic indicators have turned up in recent months, causing many investors to conclude that the eurozone’s banishment in the desert of economic stagnation is over, and the promised land of a normal recovery beckons. I am not convinced and judging by recent moves in the bond market, I’m wondering if the next eurozone crisis is already upon us.

    2
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    Gavekal Research

    Long Rates & The Velocity Of Money

    As Gavekal’s readers will be aware, much of my research is driven by a handful of powerful obsessions. Lately these have included my fixation with the euro as a weapon of mass destruction, and my determination to elucidate how the theories of the great 19th century economist Knut Wicksell apply to today’s economies and markets. In recent years these have, to some extent, displaced other pre-occupations, and I have done very little work on one of...

    0
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    Gavekal Research

    Is The US Equity Market Overvalued?

    After the S&P 500 index set a new record closing high last Wednesday, up some 6% since the US presidential election, I am left once again scratching my head over the age-old question: is the US equity market expensive or cheap?

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    Gavekal Research

    Call Me An Old Curmudgeon

    Call me an old curmudgeon, but financial markets are currently experiencing an outbreak of optimism that could well prove to be dangerous. At the moment we have a situation where both the US stock market and long rates are rising on expectations of faster nominal growth. Readers who have followed my Wicksellian research are no doubt scratching their heads over this concurrent move, because they will appreciate that there is no prospect of...

    2
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    Gavekal Research

    Putting The Boot Into Italy

    Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would...

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    Gavekal Research

    The Italian Domino Teeters

    My thesis has for a while been that we are living in an era characterized by the “little man” revolting against the global elite. I explained this idea in May using the perhaps apocryphal tale of a South Pacific island made up of home-loving tree dwellers and more adventurous boat travellers (see Trump And The Tree People). The point was that the normally laid back people of the trees were stirring from their torpor as shown by the Brexit vote...

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    Gavekal Research

    Video: European Political Dominos

    In the aftermath of the Brexit vote and Donald Trump’s win in the US presidential election, attention has shifted to the eurozone with the assumption that more dominos must topple under the gathering populist political wave. In this video interview Nick considers the good, the bad and the ugly of the European political scene and offers pointers for navigating these risks.

    0
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    Gavekal Research

    Investing By The (Wicksellian) Book

    As regular readers will know, I have spent much of the last 10 years studying, and attempting to enlarge upon, the work of the great 19th century Swedish economist Knut Wicksell. My mission has been two-fold: firstly to understand how Wicksell’s writings explain what we see happening in the global economy today, and secondly to translate his theories into practical tools to help investors make asset allocation decisions in the real world.

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    Gavekal Research

    When You Sleep With An Elephant

    It is always comforting to be back in familiar territory. In a long career in investment—45 years and counting—I have seen a few Mexican crises. All these years on, I have fond memories of the 1976 peso devaluation, and of the subsequent 1980 devaluation. I remember the 1982 debt crisis well, and the “década perdida”—the lost decade—which followed. Then came the hyperinflation of the early 1990s which led to the introduction in 1993 of the new...

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