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E.g., 10-12-2018
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    Gavekal Research

    Trump And The Tree People

    Recently I reada bookcalled Je n’ai plus peur (I am not afraid any more)by the French writer Jean-Claude Guillebaud. I do not know Guillebaud personally, but even though he is very much on the left of the French political spectrum, I must confess that I have read all his books, and that I have always liked what he has to say.

    7
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    Gavekal Research

    Disaster Averted Is Not Success

    This week Atlante, Italy’s new private sector bail-out fund, swung into action for the first time, supporting an equity issue by the troubled Banca Popolare di Vicenza. But although Atlante’s market debut could be said to have averted a potential systemic disaster, it was hardly the success either the politicians of Rome or the financiers of Milan had been hoping for.

    1
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    Gavekal Research

    Making Sense Of The Rally In Cyclicals

    By all accounts, 2016 has so far proved to be a challenging year for “market neutral” funds, and “smart beta” strategies, along with various quant funds. Before we have even reached the seasonally-challenging part of the year—sell in May and go away, and all that—a quick glance at year-to-date returns for “low volatility” hedge funds illustrates that the pain is pretty widespread. In a sense, this is surprising; after all, spreads are tighter...

    2
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    Gavekal Research

    Is France “Getting Better”?

    He was not quite Reaganesque in his cheery optimism, but in a recent primetime television appearance President Francois Hollande did declare to France that life was “getting better”. He could point to growth rising to 1.1% last year from a meagre 0.2% in 2014. Unfortunately, the French jobless total hit a new record of 3.6mn in February contributing to a public response of general derision, not to mention rioting at proposed labor market reforms...

    5
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    Gavekal Research

    A European Sinner Repents

    When Brussels implemented new solvency rules for European insurance companies in 2014, it committed one of the five cardinal sins of government: over-regulation. Of course, stricter rules were always likely following the financial follies of the pre-crisis era, but when they drew up the new “Solvency II” regulations, the European Union’s generals were so focused on fighting the last war, they failed to realize the danger posed by their own...

    0
  • Gavekal Research

    Time To Bet On Sterling And Against Brexit

    If Britain votes to remain a member of the European Union, the moment when the tide turned against Brexit will probably be remembered as Barack Obama’s London press conference on Friday. With a single phrase Obama demolished the Brexiteers’ most powerful economic argument when he noted, with a friendly but remorseless grin, that if Britain chose to detach itself from Europe it would wait “at the back of the queue” for any special US trade deal....

    1
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    Gavekal Research

    Time Alone Is Not Enough For The ECB

    Stung by attacks on his negative interest rate policy, Mario Draghi yesterday hit back at his critics in Berlin, and pleaded for patience. “Our policies work,” insisted the European Central Bank president. “Just give them time.” Draghi’s plea is unlikely to placate German finance minister Wolfgang Schäuble, who earlier this month blamed negative rates and the harm they have inflicted on savers’ incomes for the success of right-wing populists in...

    2
  • Gavekal Research

    NIRP: Machiavellian Design Or A Policy Mistake?

    In order to make money, Starbucks has little choice but to sell coffee. Ford must sell cars if it hopes to stay open. And Lockheed Martin better get orders for bombs, missiles and planes if it is to remain relevant. But banks do not need to make loans (their stated purpose) in order to make payrolls and pay shareholders a dividend, at least at certain points in the cycle. When the yield curve is steep, banks can borrow money cheaply at the...

    3
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    Gavekal Research

    The Sum Of All Fears

    As “China implosion” and renminbi devaluation fears have faded, risk assets around the world have enjoyed a sustained a rally led by “China sensitive” assets such as commodities, Asian equities and emerging market high-yield debt. In short, all the assets that were priced for a scenario just short of Armageddon. But following this rebound, what next? The most obvious point is that, with the pick-up in fiscal stimulus, the rebound in construction...

    0
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    Gavekal Research

    Eurozone Reform Update 2016

    Last February we published a detailed score card of the structural reform efforts undertaken by Europe’s battered peripheral economies (see Assessing ‘Thatcherite-Keynesianism’). The last year has seen small improvements, but not enough change to warrant another box-ticking exercise. Our assessment in 2016 mostly focuses on the key relationship between the labor markets and national competitiveness. Inevitably such changes are slow moving and in...

    0
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    Gavekal Research

    No Relief For European Banks

    Yesterday a consortium of Italy’s healthier banks and financial institutions agreed to put up €5.7bn to finance a private sector bailout fund for the country’s weaker banks. The deal, which was cobbled together by Italy’s Finance Ministry, is clearly intended to circumvent European Union rules limiting state aid to the banking sector. Details remain sketchy, however it is difficult to see how the agreement can restore confidence in Italy’s banks...

    0
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    Gavekal Research

    European Disunion

    The grand old men who conceived of a united states of Europe knew that a successful single currency demanded a modern federation with integrated monetary, fiscal and political institutions. Such a leap into the unknown was politically impossible in the 1990s, and their assumption (and perhaps hope) was that the less than optimal eurozone would suffer periodic crises, so creating the conditions for reform and a centralization of powers. Since the...

    3
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    Gavekal Research

    Fade The Emerging Market Rally

    In defiance of conventional wisdom the oil price has tumbled -10% in the last two weeks despite a weak US dollar. For emerging markets investors, the breakdown of this correlation raises tricky questions.

    0
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    Gavekal Research

    The Case For Sterling

    What was the weakest major currency in the world in the first quarter? It was not the Brazilian real nor the Australian dollar nor any of the other usual suspects among the emerging market and commodity currencies. That accolade went to the British pound, which managed to depreciate by -4%, from US$1.48 to US$1.42, even while the dollar itself fell another -5% on its trade-weighted index.

    2
  • Gavekal Research

    Things Fall Apart

    Over the past century periods of social breakdown have swung the pendulum of power from markets to governments and back. Each crisis ended with a transformation in economic and political thinking. Today, voter anger is a response to the 2008 breakdown of deregulated capitalism. This time, argues Anatole, politicians must reconsider the market fundamentalism that has prevailed in recent decades and design a new system of checks and balances to...

    12
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    Gavekal Research

    Europe’s Reflation Trade

    Yesterday’s awful events in Brussels offer a stark reminder of our personal vulnerability in an unstable world and our hearts go out to the victims. They also reinforce liberal Europe’s vulnerability to hate-based ideology and highly motivated terrorists. However, we at Gavekal are economic analysts rather than geopolitical experts, and today want to focus on a more constructive view of Europe—namely, its equity market. After a knee-jerk sell-...

    0
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    Gavekal Research

    Dollar Liquidity And Its Dependents

    One of our long-standing rules of thumb has been that a deteriorating US trade balance is good news for the rest of the world, and especially for emerging markets. It is thus a positive sign that the ex-energy, ex-China trade balance shifted from surplus to a deficit in 2015, sending US$150bn to the world outside of China and the oil exporters. The overall trade balance is likely to continue worsening through late 2017, thanks to the lagged...

    5
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    Gavekal Research

    The Road To Reflation

    For the last ten years or so, ever since the Hartz reforms to the German labor market, Germany has been by far the biggest driver of overall eurozone growth. Indeed, for much of 2012, Germany was the only driver of eurozone growth. This has not been a healthy phenomenon. With German savings rates high, and domestic consumption sluggish, much of Germany’s own growth was propelled by its net exports of goods to the rest of the world beyond the...

    1
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    Gavekal Research

    Super Mario: Hero To Zero To Hero

    As markets plunged following Thursday’s European Central Bank meeting, it seemed as if Super Mario had turned into Dumb Draghi.But by Friday morning Draghi had again gone from Zero to Hero, with risk-on assets racing ahead in virtually every market around the world.

    2
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    Gavekal Research

    The End Of The Road

    The European Central Bank pulled the trigger but the bazooka misfired. European stocks peaked half an hour after yesterday’s new easing measures were announced, but investors quickly focused on the broader significance of the action.

    1
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    Gavekal Research

    Draghi’s Difficulty

    When the European Central Bank’s governing council meets tomorrow, Mario Draghi and his colleagues will find themselves facing a dilemma. With growth sluggish, and inflation elusive, the consensus expects the ECB to ease its already ultra-loose monetary policy further. Likely steps include cutting the central bank deposit rate by 10bps to -40bps, increasing bond purchases to €70bn a month from €60bn, and extending the program of purchases beyond...

    0
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    Gavekal Research

    A Diagnostic Tool For Bear Markets

    One of the most vexing moments in a money manager’s career comes when one of the team—usually the young intern—asks the question: “So, are we in a bear market or not?” Immediately, everybody on the investment committee jumps into the discussion, and without fail everyone has a strong opinion on the matter. A vigorous debate ensues, and when everything is said and done, a lot more has been said than done—and neither the intern nor anyone else on...

    7
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    Gavekal Research

    Too Quiet On The Southern Front

    Since the euro crisis kicked off six years ago, policy decisions affecting banks have had two main goals. Whether it be monetary policy, the 2014 asset quality review or moves toward both a banking and capital markets union, the objective has been to boost confidence in the system and reduce the fragmentation of credit markets. A -20% fall in eurozone bank shares YTD on concerns about the impact of negative interest rates shows that the first...

    0
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    Gavekal Research

    Sweden And The NIRP Trap

    Swedish GDP growth for 4Q15 was just reported at 4.5% YoY, the fastest pace since 2011 and the tenth straight quarterly gain. This makes Sweden by far the best performing developed economy in the post-2008 period. So given that it led the way with negative interest rates, an interesting question is whether the Swedish experience represents a vindication for NIRP.

    0
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    Gavekal Research

    Video: On Wicksellian Theory

    0
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    Gavekal Research

    New European Crisis, Same Problem

    Almost every year since 2008 has been marked by a “crisis” in Europe. Last year’s big headache centered on Grexit, 2014 saw Russia’s land-grab in Ukraine and this year the worry is Brexit and a collapse of the Schengen open border system. European stocks are down -13% YTD and 10 year bunds yield 0.15%, a decline of 48bp. But are these falls justified given that the bigger concern in global markets is centered on emerging economies and a possible...

    0
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    Gavekal Research

    No More Curve To Roll Down

    Since the Bank of Japan introduced a negative deposit rate on January 30, Japanese bank shares have collapsed, falling -21% in yen terms and -15% in US dollars. The first question to ask is this: why were Japanese bank shares derated so dramatically after the policy change? Here are a few explanations, which are not mutually exclusive:

    4
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    Gavekal Research

    Why Brexit Won't Happen

    Among the multiple existential challenges facing the European Union this year—refugees, populist politics, German-inspired austerity, government bankruptcy in Greece and perhaps Portugal—one crisis is well on its way to resolution. Britain will not vote to leave the EU.

    24
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    Gavekal Research

    Down The Negative Rate Rabbit Hole

    “Curiouser and curiouser,” as Alice remarked on falling down the rabbit hole and entering Wonderland. Released yesterday, the minutes of the European Central Bank’s January meeting strongly hinted at further monetary easing measures when the governing council next meets in March. Already committed to €60bn in asset purchases per month until March 2017 and charging a negative interest rate of -0.3%, the ECB now looks likely to push its deposit...

    0
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    Gavekal Research

    Having Your Cake, And Eating It

    Is the world really facing a 2008-style economic and market meltdown all over again? If it is, then the prescription for investors is clear: load up on long-dated US treasuries in expectation of a continued slide in yields, leaven your portfolio with exposure to gold, and prepare for the apocalypse. But what if the end of days is not imminent? In that case, investors face a trickier call.

    0
  • Gavekal Research

    Crisis? What Crisis?

    Two weeks ago I published an article dissenting from the near-universal view among my Gavekal colleagues, and also probably among our clients, that the global equity markets had entered a severe bear market (see Is Wall Street In A “Bear Market”?). Since I expressed this relatively optimistic view on January 27, the S&P 500 has fallen another -2.7%, the world MSCI-ex US by -3% and the Nikkei by a whopping -8.5% in yen terms. It may therefore...

    4
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    Gavekal Research

    Europe's Banking Rout

    Following yesterday’s rout in European banking stocks, there is one thing that we can say for certain: the proximal cause of the sell-off had nothing to do with China. With Chinese markets closed for the lunar new year holiday, beleaguered investors in Europe had been hoping for a little breathing space this week. In the event, the sell-off in European bank shares only intensified, with the Euro Stoxx banks index sliding -6.4% on Monday,...

    3
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    Gavekal Research

    No More Shock Absorbers?

    Things have come to a pretty pass when the heads of two of the world’s three leading central banks come out with all guns blazing in an attempt to persuade markets that they will do whatever it takes and more to ease policy—and their currencies promptly strengthen by two big figures. Yet that is exactly what has happened this week. On Monday Mario Draghi dropped a heavy hint that the European Central Bank is preparing to push interest rates even...

    2
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    Gavekal Research

    Tools Or Jewels?

    An asset can have value for reasons of scarcity (a jewel, or gold), or because it is useful and productive, and so over time generates positive cash flows (a tool). In the long run, tools tend to go up more in value than jewels like gold. Tools also have a terrific advantage in that projecting their future productivity and discounting their future cash-flows allows them to be objectively valued. By contrast, valuing jewels like gold is a...

    13
  • Gavekal Research

    Red Herrings, Margin Calls And Heart Attacks

    Most recent commentary we have read suggests that January’s turmoil can be blamed on either the slowdown in China or the fear of an impending US recession. But let us suggest an alternative: these are red herrings which only distract from the real analytical challenges faced by investors.

    4
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    Gavekal Research

    Symptoms Of Dysfunction

    If bank shares are the canary in the global economic coalmine, they are currently singing a very alarming tune. In Japan bank shares have cratered -10% since Friday’s decision by the central bank to move to negative interest rates, even though the new -0.1% rate will only apply on the margin to additional deposits at the Bank of Japan. Elsewhere, in Europe, the banking component of the Euro Stoxx index has slumped -16.8% year-to-date, while the...

    0
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    Gavekal Research

    Learning To Love A Weak Ruble

    The oil price may have bounced in recent days and with it the ruble, but Russia’s financial situation looks increasingly perilous. The economy is struggling through a second year of recession and Russian corporates must roll over US$120bn of foreign currency debt by mid-2017. Moreover Russia’s central bank seems to have embraced a policy of benign neglect toward the ruble as it tries to preserve a reduced pile of foreign exchange reserves.

    0
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    Gavekal Research

    Anatomy Of The Bear

    I wish I shared Anatole’s degree of conviction. In yesterday’s Daily he set out his belief that the current sell-off in financial markets is not the start of “a structural ‘bear market’, still less a structural Ursus Magnus likely to last for many years” (see Is Wall Street In A ‘Bear Market’). I am not so sure. I suspect that what we are witnessing may indeed be the emergence of an Ursus Magnus, the sort of bear market so deep and prolonged...

    2
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    Gavekal Research

    The Overlooked Risk In Italy

    What is the biggest threat to European stability this year? The continent’s migrant crisis? The chance that the British will vote in a referendum to leave the European Union? Or the danger of contagion from China’s slowing economy and fragile financial markets? All of these do pose risks, but it is possible that the greatest threat to Europe this year could come from a different quarter altogether: Italy’s banking sector. At first the danger...

    4
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    Gavekal Research

    Looking For The Bright Side

    By most measures, the first two weeks of 2016 have been the worst-ever start of the year for risk assets. With the MSCI All-Countries index down nearly -20% from last May’s high, we are now in a global bear market.

    1
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    Gavekal Research

    Unintended Consequences

    Forget the Brazilian real and the Chinese renminbi. The world’s worst performing major currency over the last month is actually the British pound, which has fallen a painful -4.95% against the US dollar since mid-December. The beating has been especially brutal in recent days. After data released yesterday showed British manufacturing output is still languishing not just below its 2008 level, but even below its 1997 level, sterling slumped...

    0
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    Gavekal Research

    Stronger Macro, Sinking Stocks

    The latest macro indicators leave little doubt about the general direction of the eurozone economy. Both hard and soft data suggest that growth re-accelerated from a meagre 0.3% QoQ (1.2% annualized) in 3Q15, probably to 0.4%-0.5% (1.6%-2.0% annualized) at the turn of the year. Eurozone unemployment declined to a four-year low in December, and the economic sentiment indicator compiled by the European Commission from business and consumer surveys...

    2
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    Gavekal Research

    Forget About Oil And China, Look To The US In 2016

    On the whole, 2015 was a year for investors to forget. US bond and equity prices were both flat, equity gains in Europe were mostly wiped out (for US dollar investors) by the fall of the euro, and commodity plays and high-yield issues crumbled. China sparked a brief panic after a clumsy intervention to cushion a stock-market collapse and an unexpected currency devaluation, but by the end of the year the Shanghai index was still up nearly 5% in...

    0
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    Gavekal Research

    New Economic Realities

    As we close the book on 2015, it is worth sifting through our research to find the patterns that are likely to influence events in 2016 and beyond. Three stand out.

    0
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    Gavekal Research

    The French Patient

    As a Frenchman visiting Italy last week, I had the strong sense that for the first time in decades France was lagging its transalpine neighbor. Italian business and consumer confidence has picked-up over the last two years, and unemployment has declined for four straight quarters. France, by contrast, is the only European country that saw rising unemployment during 2015. Political confidence has evaporated as reinforced by last weekend’s rather...

    0
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    Gavekal Research

    The Clash Over Fossil Fuels

    Over the weekend in Paris, the leaders of 195 nations announced a landmark deal to address climate change that its more optimistic supporters say heralds “the end of the fossil fuel era.” But both market action and many government policies point in the opposite direction. Crude oil prices continue to tumble towards the US$30 mark, and coal prices have also collapsed—both moves that reflect abundant global supplies of fossil fuels. The Paris...

    4
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    Gavekal Research

    The Cure For Low Prices Is Low Prices

    What is the latest rout in commodity prices telling us? Certainly, China’s demand for many commodities is weak—but everyone knows this. The most important signal is rather on the supply side: low prices are finally pushing commodity producers to cut output. It is this restructuring that will eventually bring stability to commodity prices.

    0
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    Gavekal Research

    What A Brexit Means For Markets

    This week David Cameron has been on the road in Eastern Europe arguing that British voters will vote for “Brexit” unless it gets a new deal with the European Union. As polls suggest that Britons are pretty much split down the middle on the issue, the prospect of the UK bidding adieu to Brussels is getting more real by the day. Indeed, with the negotiation expected to reach a head early next year, the question of a British exit is likely to...

    0
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    Gavekal Research

    The Apex Of Market Stupidity

    In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even more silly than their other predictions.

    8
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    Gavekal Research

    A Year-Defining Week

    Four hugely important events occurred last week which between them have largely determined the course of the world economy in the year ahead: the strong US payrolls, the Organization of the Petroleum Exporting Countries’ decision not to reduce production, the European Central Bank’s escalation of monetary stimulus and the inclusion of the renmimbi in the International Monetary Fund’s Special Drawing Rights basket. While all these events were...

    1
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