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    Gavekal Research

    The Case For A Structural Bull Market

    It’s almost three months since I recommended a ‘Buy in May’ strategy for US equities. At roughly the same time Charles reiterated his ‘balanced portfolio’ call for a long position in US equities hedged with long-dated US treasuries. Since then both equities and bonds have performed well. The S&P 500 has risen almost 6% while 30-year US Treasury bonds have gained about 3% in price.

    8
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    Gavekal Research

    5C Overview: Shiller's Snake Oil

    Like most aspects of the investment business, valuation is more art than science, which is why anyone proposing a single formula to ‘prove’ that equities or bonds are either cheap or expensive should be treated with the deference due to a snake-oil salesman. The most popular snake-oil today is Robert Shiller’s ‘Cyclically Adjusted P/E ratio’ or CAPE.

    2
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    Gavekal Research

    The Juncker Quid Pro Quo

    Who will be the hero of the hour, basking in universal gratitude when the EU summit culminates this evening with the appointment of Jean-Claude Juncker as President of the European Commission? Believe it or not, the man all the other leaders will be secretly thanking is David Cameron—and investors in Europe should do the same. Cameron is certain to suffer severe embarrassment this evening if he insists on forcing a vote that he is bound to lose...

    1
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    Gavekal Research

    The Lesson Of Sarajevo

    Why does the assassination of Archduke Franz Ferdinand—which lit the fuse to the First World War powder-keg 100 years ago this Saturday—still resonate so powerfully? Almost nobody believes that a Third World War is about to be triggered by the military conflicts in Ukraine or Iraq, or by the tension in the China Seas, yet there are many points of modern relevance in the catastrophe that started a century ago in Sarajevo.

    1
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    Gavekal Research

    Better To Be Brazilian

    What’s been the best performing asset class of the past three months? In the broadest sense, emerging market equities win this prize since it was in mid-March that the MSCI EM index began a dramatic rebound against the US and Europe. But which of the big emerging markets has done best? The surprising answer is Brazil, whose stock market gained 21% in dollar terms in the three months since March 18, narrowly beating India, up 18%, and Russia, up...

    2
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    Gavekal Research

    Janet Yellen, Control Engineer

    Yawn! What could be more boring than Wall Street setting a new record? This has happened in eight out of the last 15 trading sessions, and it is likely to happen many more times in the weeks and months ahead because of the one financial event that is even more boring and predictable than a Wall Street record—a presentation on US monetary policy.

    0
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    Gavekal Research

    New York Seminar June 2014 - Louis, Anatole & Andrew

    We held our summer seminar in New York on June 10, with Anatole, Louis and Andrew offering their take on the state of the world economy and financial markets. We were also joined by Henrik Christensen who is director of Robotics at Georgia Tech. Audio recordings of their discussions are available below:

    0
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    Gavekal Research

    An Uber Bubble Awaits

    Last week was clearly an important one for financial markets and the world economy. Friday’s US payroll data confirmed that all the jobs lost since 2008 have been restored. The European Central Bank overcame the opposition of the Bundesbank and joined the Federal Reserve, Bank of Japan and Bank of England in the ranks of growth-oriented central banks that are willing to whatever is necessary to pump up inflation and nominal GDP. And peace talks...

    13
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    Gavekal Research

    A Grandmaster At Work

    “Check-mate”. As Vladimir Putin signed Russia’s historic US$400bn gas-supply agreement with China, he must have felt the satisfaction of a chess grandmaster revealing the inexorable outcome of a complicated endgame. In theory, the next phase of the chess game between Russia and the West in Ukraine will only begin with the Ukrainian presidential election on Sunday, but Putin’s positioning of the pieces means the outcome is preordained, whoever...

    1
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    Gavekal Research

    No Magic For ECB In Negative Rates

    At last, the European Central Bank seems ready to do something—judging by last week’s comments from Mario Draghi, reinforced by the Wall Street Journal story that triggered a sell-off in the euro yesterday. The market reaction has been pretty much along the lines described by Francois last week: bond yields in Italy and Spain have fallen to record lows, European stock markets are up 1% to 2%, and the euro has weakened from almost €1.40 to €1.37...

    3
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    Gavekal Research

    Breaking The Pattern: This Could Be The Year To Buy In May

    Sell in May and go away. This time-honored adage has served equity investors extremely well for the past four years. In every year since 2010, stock markets have corrected sharply, falling from a high in May to a low in the summer or early autumn: in terms of the S&P 500 by 15% in 2010, 19% in 2011, 9% in 2012 and 5% in 2013. Given that the S&P closed last week less than 1% shy of its all time high and that the Dow Jones Industrial...

    0
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    Gavekal Research

    The Japanese Value Trap

    Equities around the world have enjoyed a modest rebound over the last week, with encouraging signs of buy-on-dips behavior and the leadership rotation that we believe was the main driving force behind early April’s sharp setback (see The New Rotation Into Value). But there is one major market that is a glaring exception to the generalized shift from growth to value: Japan.

    0
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    Gavekal Research

    The New Rotation Into Value

    Considering last Friday’s US employment figures were as investor-friendly as anyone could hope, Wall Street’s sharp sell off after a strong initial rally might be viewed as a very bearish market signal. Indeed that has been the interpretation of many investors, both those who are technically oriented and those who focus on corporate fundamentals. Looking at the data, however, it is hard to find reasons for concern.

    2
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    Gavekal Research

    London Seminar April 2014 - Anatole, Arthur, Louis & Francois

    We held our spring seminar in London on April 2, with Anatole, Arthur, Louis and Francois offering their take on the state of the world economy and financial markets. Audio recordings of their discussions are available below:

    0
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    Gavekal Research

    One Last Flicker Before The Japan Trade Goes Out

    Most of us at Gavekal have been enthusiastic devotees of Abenomics since late 2012. But Anatole suddenly showed his true Keynesian colors by turning negative on Japan in September, when Prime Minister Shinzo Abe announced his decision to implement a controversial fiscal tightening planned by the Ministry of Finance (MoF) from April 2014. And indeed, the Nikkei has underperformed the S&P 500 by 15% since the consumption tax was announced on...

    2
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    Gavekal Research

    The UK Budget: Lies That Work

    Britain’s government budget this week was not really a statement of economic policy, but a program for winning next year’s general election. In this sense, George Osborne’s speech was a natural development from the 2013 budget, which launched Britain’s present economic recovery. Almost nobody predicted the remarkable transformation of the British economy that immediately followed last year’s budget because what Osborne did was deliberately...

    2
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    Gavekal Research

    All Over Bar The Annexation

    Bertrand Russell once quipped that ‘wars are not won by who is right, but by who is left’. With that in mind, markets should welcome the result of yesterday’s referendum in the Crimea. After all, had the result been ambiguous, whether because of a low turn-out, or a split electorate, then the more fanatical elements on either side of the divide might have been tempted to take up arms to settle the issue. However, with the vox populi confirming...

    23
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    Gavekal Research

    A Boost For The 'Weather Theory'

    From mid-February until last week, a very unusual pattern was unfolding in the markets, with equities, bonds and commodities all going up at the same time. At some point this pattern was bound to break since, on the one hand, equity and commodity investors seemed to be anticipating robust economic growth while bonds were starting to price in a growth disappointment, if not a severe slowdown or recession.

    0
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    Gavekal Research

    Realpolitik In Ukraine

    Oscar Wilde described marriage as the triumph of imagination over intelligence and second marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope and realism over wishful thinking. A grim case in point is the Russian incursion into Ukraine. What makes this confrontation so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope...

    2
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    Gavekal Research

    5C Overview: We're All Happy Campers Now

    So that’s all right then. The Ukrainian conflict is over and we can all get back to business as usual—bidding up equities and putting on more risk. With the S&P 500 hitting a new all-time high and even the Moscow stock market rebounding, the world seems again to be a happy place. But are the celebrations premature? That depends on whether we focus on geopolitics, economics or market momentum.

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