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Gavekal Research
The Changing Politics Of Germany’s Debt Brake
Cedric Gemehl
21 Nov 2024
The chance of Germany moving toward reforming its debt brake rose last week as Friedrich Merz, the head of the CDU and the man most likely to be Germany’s next chancellor, opened the door to reforming Germany’s spend-averse debt brake mechanism. The question is whether the impending election produces a political result allowing for a change in the constitutionally-mandated cap on deficit spending.
Gavekal-IS
Schumpeter Was Right
Didier Darcet
21 Nov 2024
From the birth of stars and planets to the rise of life itself, a drive for greater efficiency has shaped the universe, says Didier. But the same force that builds also destroys. In this piece, he relates the effort to create a universal law of nature to investing—and to the idea of markets reaching a critical tipping point.
Gavekal Dragonomics
The Winners In Import Substitution
Tilly Zhang
21 Nov 2024
China’s industrial policy is firmly focused on import substitution, and in a wide range of manufacturing sectors, that is indeed happening. Tilly examines four examples of successful import substitution to argue that Chinese firms are generally skilled at replicating existing technologies, achieving economies of scale and improving products over time.
Gavekal Research
The Sword Or The Shield?
Louis-Vincent Gave
20 Nov 2024
In today’s Daily, Charles considered which protagonist would be hardest hit should the United States launch a trade war against China. In this piece, Louis picks up the same theme and asks whether the Chinese response to such an action would be defensive, or perhaps offensive.
Gavekal Dragonomics
Household Sentiment Picks Up
Wei He, Dragonomics Team
The Case For Equities Over Metals
Thomas Gatley
Trump’s Return Bout With China
Arthur Kroeber
The Road To Reflation
Andrew Batson
Trump Tariffs, Take Two?
Thomas Gatley
Macro Update: The Pivot To Stimulus
Andrew Batson, Dragonomics Team
Signs Of Life In Property
Xiaoxi Zhang
The Robotics Boom Consolidates
Tilly Zhang, Thomas Gatley
The Politics Of The Stimulus Pivot
Christopher Beddor
Looking To Fiscal Stimulus
Wei He, Dragonomics Team
More Research
Blocus Continental
Charles Gave
A Disinflationary Energy Policy
Tan Kai Xian
The Hong Kong-China Performance Divergence
Louis-Vincent Gave
Conversation: EM Winners And Losers Under Trump
Tom Miller, Udith Sikand
Why China Should Not Stimulate
Charles Gave
The Drivers Of US Inflation
Louis-Vincent Gave
Video: Small Silver Linings
Cedric Gemehl
For Every Tariff, There Is A Statute
Yanmei Xie
Gold Down, Bitcoin Up
Will Denyer
The Trump Trades, One Week On
Louis-Vincent Gave
Gavekal Research
Webinar: Pricing The Election Outcome
Anatole Kaletsky, Yanmei Xie, Will Denyer, Arthur Kroeber
1 Nov 2024
Markets are increasingly convinced that Donald Trump will win the US presidential race and Republicans may achieve a sweep of Congress. Yet with the key “swing states” still effectively in a dead heat between Trump and Kamala Harris, and well within the polling margin of error, the race remains highly competitive. Our panel assessed the underpinnings of the “Trump trade” but also explored macro and market scenarios in the event of Harris securing the White House.
The global view
The Sword Or The Shield?
In today’s Daily, Charles considered which protagonist would be hardest hit should the United States launch a trade war against China. In this piece, Louis picks up the same theme and asks whether the Chinese response to such an action would be defensive, or perhaps offensive.
Blocus Continental
Teddy Roosevelt used to say that the art of diplomacy was to speak softly and carry a very big stick. In recent years, it seems that the US has been speaking loudly, while carrying a very small stick. Charles points out that trade, industrial prowess and economic power has been shifting East, and it it will end badly for the US if it ends up penalizing China for being too competitive.
Triumph Of The Tree People
In May 2016, six months before Donald Trump’s first election victory, Charles wrote a note examining the widening political divide in Western countries—not between left and right—but between the globalized ruling elites and their locally-focused populations. At the time, he forecast a series of election victories for the downtrodden localists. Today he revisits the theme, and examines the investment implications.
Webinar: Testing The Reflation Hypothesis
A range of recent developments suggests that the world economy is moving into a period of higher nominal growth and persistent price pressures. China looks to be embracing a more concerted fiscal stimulus and, given the platforms of both presidential candidates, the United States is likely to stay in expansionary mode. Our panel assessed this situation and suggested investing strategies.
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Chart of the Week
Indonesia has long been a major producer of nickel—widely viewed as a key resource in the green energy transition. Today, Indonesia accounts for 50% of global nickel production, piggybacking on a wave of Chinese investment in smelting and processing facilities. Nickel production has exploded since 2020, when Indonesia implemented its “downstreaming” policy of banning nickel ore exports to extract a greater share of the EV battery supply chain.
Open Chart
Gavekal Research
Essential Reading: A Book For Every Week Of The Year
Gavekal is often asked for a recommended reading list. So, here it is: a book a week that everyone interested in the world of macro investing—whether hoary veteran or eager apprentice—can benefit from reading.
US economy & markets
A Disinflationary Energy Policy
Among Donald Trump’s cabinet picks, the choice of a hydraulic fracking executive to head the Energy Department may be the least surprising. The US president-elect ran on a promise to favor hydrocarbon energy sources and Chris Wright seems set to deliver on that. Kai Xian weighs the outlook for equities, commodities and electricity prices going forward.
Gold Down, Bitcoin Up
Since the US election on November 5, the US dollar price of gold has fallen by -4.7% while the price of bitcoin has risen 29%. This divergence is interesting. Given that both gold and bitcoin are widely regarded as alternatives to the US dollar, they tend to trade in the same direction. But anyone contemplating a short gold, long bitcoin position should consider the risks of this trade.
Red States, Green Screens
The count continues, and technically the White House could still go either way. But barring a miracle, Donald Trump will be the next president of the United States. Beyond that, Trump’s Republicans have won the Senate, and look likely—but not certain—to take the House of Representatives. This makes it possible to draw a number of conclusions for the economy and markets.
The Yen, The Dollar And Elections
Over the last year, the effect of inflation, monetary policy, national elections, and a couple of central bank interventions has sent the yen on a wild ride against the US dollar. Next on the docket is the US general election, whose run-up has seen investors weigh in with trades based on a Republican sweep. In assessing where the USDJPY currency pair goes next, Will maps out some scenarios for potential developments on both sides of the Pacific.
Gavekal Research
Webinar: After The Vote
Anatole Kaletsky, Arthur Kroeber, Louis-Vincent Gave
8 Nov 2024
As the dust begins to settle following Donald Trump's commanding victory in the US election, Gavekal Research partners Anatole Kaletsky, Arthur Kroeber and Louis-Vincent Gave assessed what the outcome implies for US growth and inflation, for global geopolitical risk and trade relations, and for financial markets around the world.
Emerging markets
China Turbocharges EM Investment
As the rich world pulls up the protectionist drawbridge, investors risk missing a bigger story
in emerging markets. Here, Chinese outbound investment is rebounding after the fallow Covid years, and is driving a new wave of industrialization that promises to lower the cost of the green-energy transition.
Why This Time Has Been Different
During past episodes of risk-off volatility, the correlation between emerging market risk assets has shot up. But early August’s bout of market volatility saw a bifurcation in EMs, and no broader macroeconomic spillover effects—which speaks well of the growing maturity of emerging markets as an asset class.
Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
A Budget For Modi 3.0
Concerns that Indian Prime Minister Narendra Modi would take a populist lurch were alleviated on Tuesday, as finance minister Nirmala Sitharaman pledged to reduce the deficit in the new budget, while maintaining healthy levels of infrastructure spending. But three new schemes to boost jobs, largely borrowed from opposition party policies, suggest that the government has heeded the lessons of the election.
Latest video
Gavekal Research
Video: Small Silver Linings
Cedric Gemehl
14 Nov 2024
European stock markets sold off and the euro fell heavily in the days following Donald Trump’s US election triumph. The declines reflected market participants’ views that a new Trump presidency will be bad news for the heavily export-dependent European economy. Cedric Gemehl goes looking for any silver linings for the old continent, and differentiates potential winners and losers.
India chartbook
Gavekal Research
India Macro Update: On An Even Keel
Udith Sikand, Tom Miller
5 Sep 2024
A slowdown in India’s headline GDP masks an improvement in the underlying drivers of growth, argue Udith and Tom. Now that election-related uncertainty is over, government spending should pick up and aid the incipient recovery in private consumption and investment. Indian bonds and equities should continue to fare well, with monetary easing likely to get underway soon.
China chartbook
Gavekal Dragonomics
Macro Update: The Pivot To Stimulus
Andrew Batson, Dragonomics Team
29 Oct 2024
The new policy package China’s government is now rolling out is not its first attempt to halt the economy’s deflationary spiral, but this time the effort is more substantial. The package is still evolving, with more fiscal details expected in November, but the broad outline is clear. In our latest quarterly chartbook, Andrew and the Dragonomics team assess the stimulus package.
Europe's economy
The Changing Politics Of Germany’s Debt Brake
The chance of Germany moving toward reforming its debt brake rose last week as Friedrich Merz, the head of the CDU and the man most likely to be Germany’s next chancellor, opened the door to reforming Germany’s spend-averse debt brake mechanism. The question is whether the impending election produces a political result allowing for a change in the constitutionally-mandated cap on deficit spending.
Germany On A Brink Of Sorts
Olaf Scholz’s three-year-old German government effectively collapsed within hours of Trump’s 2024 reelection. On first blush, this denouement came at the worst time but there may be a silver lining for Germany and Europe, says Cedric. It should mean an early election in Germany, with the chance to reset a faltering economic model.
It’s The Geopolitics, Stupid
The conventional wisdom is that geopolitics does not matter to US elections, and the relative calm of financial markets in the face of heightened geopolitical risk suggests that it doesn’t matter all that much to investors. But Anatole begs to disagree, arguing powerfully that geopolitics has played a key role in domestic US politics recently, and will be an important driver of financial markets following the US election.
Britain’s Blundering Budget
Wednesday’s British budget confirmed Anatole's worst fears about the outlook for the UK economy and sterling assets. In this piece, he sets out the four key implications for businesses and investors, all of which are likely to deepen the gloom about Britain, at least until a U-turn in economic, trade and fiscal policy happens in the next few years.
Strategy Chartbook
Gavekal Research
US Strategy: Trading Politics
Will Denyer, Tan Kai Xian
27 Aug 2024
In November, US voters will decide who controls the White House, Senate and House of Representatives. The two parties differ significantly on key policy positions that will heavily impact the economy and markets. In this Strategy Chartbook, Will and KX compare the parties’ major policy stances and assess what they mean for markets—especially US equities, US bonds and the US dollar.
Equities
The Hong Kong-China Performance Divergence
The Case For Equities Over Metals
A Grand Bargain And US Reindustrialization
It’s The Geopolitics, Stupid
Are Markets Starting To Price In A Trump Victory?
Election Optimism
Oil & commodities
Conversation: What Could Derail The Inflationary Boom
Hedging The Inflationary Bust
The Energy Faceplant
Who Is Going Bust?
Video: Beyond The Slide In Energy Prices
Will Recent Trends Last?
China tech
Xi Goes All In On Tech
Webinar: Setting The Agenda For China's Plenum
The Localization Drive Steps Up
After The Melt-Up In Semiconductors
Vietnam’s Bamboo Diplomacy
Big Tech’s Rearguard Action
Then Yen Carry Trade Unwinds
Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
More Questions Than Answers
It’s a dedicated Frenchman who consents to work in August. But the financial market volatility of the last week has seen Louis hard at it, fielding client questions about the outlook for global markets and economies. In this paper, he sets out the most salient questions, and offers his answers.
The Root Cause Of Summer Ructions
Investors are no longer seeing virtue in a Goldilocks scenario of moderating demand and easing price pressures, but having a summer freak-out over faltering global growth. Udith and Kai Xian diagnose the market jitters and say that the sell-off in high-yield currencies and tech stocks likely stems from movements in Japan rather than disappointing US economic data.
The Yen And Deindustrialization
There is a theory out there which holds that the extreme undervaluation of the yen is a consequence of Japanese deindustrialization, as Japan Inc. has shipped its factories abroad, pushing Japan's economy into an irreversible trade deficit even while it continues to run a monster current account surplus. Not so fast, says Charles, whose analysis of Japan’s external balances throws up a different explanation—and suggests a compelling investment opportunity.
