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    Gavekal Research

    No Fiscal Panacea

    It’s been a big week in Europe’s debt capital markets. The European Union sold €17bn of bonds for its SURE job support program and Italy issued €8bn of 30-year bonds yielding 1.76%. The strength of demand was an encouraging sign, given the outsize role that debt-funded government stimulus will have to play in driving the eurozone’s economic recovery from the Covid crisis.

    0
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    Video: Facing Down US Risks

    Investors in US financial assets face a panoply of concerns from political upheaval, a worsening pandemic, uncertainty over near-term fiscal stimulus and threats to the highly-rated tech sector. In this video interview, Will addresses such concerns and offers portfolio positioning advice.

    0
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    Webinar: Divergence In Emerging Markets

    Emerging markets have had very different pandemic experiences and the effects are showing up in economic data and market performance. Northeast Asian economies offer strong growth opportunities while southeast Asia is muddling through in a way that favors bond investors. The good news in Asia is that struggling economies such as India and Indonesia are pursuing reform initiatives. The picture is less rosy in Latin America, while Turkey offers...

    0
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    Crisis Averted, Hard Times Ahead

    This week, Boris Johnson got what he needed politically: a bromide from Brussels that will allow him to camouflage the compromises he must make to secure a trade deal with the EU before the year’s end. But it will be a minimalist deal that will leave the UK’s service sector out in the cold, increasingly shut out of the EU’s markets.

    5
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    The Biggest Event Of 2020 (By Analogy With 2007)

    What’s the most important event of 2020? Easy, you will answer: the Covid-19 pandemic. Maybe. But will it really look that way in hindsight? Sure, Covid seems pretty momentous today. But years hence, will it really be seen as a key driver of structural change? Or will the most important event of 2020 be regarded as something else entirely?

    18
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    A Smoking Gun

    Throughout my career, I have always found that it pays to bear in mind Jacques Rueff’s notion of US “imperial privilege.” Put succinctly: the US has long been the only country able to settle its current account deficits in its own currency. So, when the US runs a current account deficit, it pumps large quantities of US dollars abroad, many of which flow into the foreign exchange reserves of countries running current account surpluses. These...

    6
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    Erdoğan’s Dangerous Game

    Turkey’s economy is in crisis. The International Monetary Fund is forecasting a -5% contraction in GDP this year, the Turkish lira is down -28% against the euro year-to-date, unemployment and inflation are both in double digits, and bond yields are soaring. Yet President Recep Tayyip Erdoğan is pressing ahead with costly military adventures. Turkey tested its new Russian missile air-defense system in mid-October, defying its NATO allies. It is...

    0
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    Different Strokes For Different EM Folks

    Last spring, key beneficiaries of the rich world’s fiscal and monetary largesse were emerging market economies, which enjoyed unprecedented policy flexibility that gave broad-based, if not universal, financial relief. The next turn in this crisis is, however, unlikely to float as many boats, as shown by divergent inflationary trends across EM economies.

    0
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    The State Of The US Consumer

    Data released on Friday showed that US retail sales rose a welcome 1.9% month-on-month in September. However, fears are growing that the stars are now aligning against the US consumer. First, new Covid infections are climbing rapidly to rival the numbers seen at the height of July’s second wave. With government infectious diseases boss Anthony Fauci warning that things are set to get worse heading into winter, this new wave of infections raises...

    7
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    Webinar: Understanding Chinese State Capitalism

    The advance of the private sector and the retreat of the state sector has been central to China’s long transformation from an isolated socialist nation to a globally connected economy. Yet the notions of China’s private sector being either in the ascendency, or facing a squeeze in the statist Xi Jinping era are not born out by the facts. Andrew Batson discussed the findings in his recent major piece of research on this topic.

    0
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    Europe Battens Down

    Having remained sanguine over recent weeks as coronavirus infection rates in Europe mounted, on Thursday investors sat up and paid attention. After the French government imposed a 9:00pm curfew on Paris and eight other cities, and after the German government tightened restrictions on Covid hotspots including Berlin and Frankfurt, the euro Stoxx index fell -2.2% during Thursday’s session. Clearly as infection rates have risen, and governments...

    0
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    A Behind The Scenes Cash Boost

    US Treasury Secretary Steven Mnuchin’s admission that striking a deal with Congress on a new stimulus package before November’s election will be “difficult” was blamed for eroding market sentiment. Maybe. But behind the scenes, the Treasury has begun to run down some of the cash hoard it accumulated between April and August.

    0
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    Video: Gauging Asian Resilience

    Since the panicked sell-off of March, Asian emerging markets have been a relative bastion of stability. Northeast Asian equities have done well as effective pandemic control and strong export markets have powered an economic recovery, while Southeast Asia has offered bond investors solid returns as liquidity from aggressive policy easing has mostly flown into safe assets. In this video interview, Vincent discusses whether the equilibrium will be...

    0
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    The Three Key Prices: Oil

    In financial markets, there are three prices matter above all: the price of the US dollar, the yield on 10-year US treasuries, and the price of oil. Get the direction of these right, and the other pieces of the investment puzzle fall into place. In the first of a three-part series, Louis examines in depth what could cause the oil price to break out of its current trading range.

    5
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    New Tech, Same Fiat Money (For Now)

    This week saw seven western central banks and the Bank for International Settlements issue a joint report on central bank digital currencies. They come not to bury cash nor to undermine banks, but to modernize payments for a digital age. If so, the introduction of CBDCs is unlikely to upend the banking system and monetary policy, but would resemble the rollout of ATMs in the 1960s.

    2
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    Counting Europe’s Zombies

    Usually when an economy contracts, corporate bankruptcies go up. This time is different. In European countries, bankruptcies in the second quarter—the low point of the lockdown-induced economic collapse—were down by anywhere between -16% and -33% in year-on-year terms. By suspending normal bankruptcy regulations and offering generous liquidity assistance, European governments successfully prevented their lockdowns from causing a mass wave of job...

    0
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    A Typology Of Bear Markets Based On Wicksellian Analysis

    In half a century of doing financial analysis, Charles has acquired the core conviction that there is not one type of bear market, but two. Think of these as the gentle black bear-type downturn that is survivable and the highly-dangerous, big brown grizzly collapse that for many money managers proves fatal. In this piece, Charles seeks to map this insight with some analytical rigor.

    7
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    Keeping It Super Simple

    Let me start with President Donald Trump’s policies as I understand them. As a businessman, since taking office in 2017 his singular goal has been to keep US firms’ return on invested capital as high as possible. So, if Trump is reelected on November 3, I would expect more of the same. In contrast, a Joe Biden win would lower ROIC and cause the US dollar to fall against the euro.

    0
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    Webinar: Global Investment Roundtable, October 2020

    Yanmei Xie discussed the US team’s assessment of risks surrounding the US election, Anatole Kaletsky explained the reasons for his return to bullishness and Louis Gave talked about global asset allocation and how to find “anti-fragile” assets.

    0
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    Video: The Euro's Next Move

    The euro’s appreciation against the US dollar has stalled out as resurgent Covid-19 infections threaten new lockdown measures, and a possible upending of the economic recovery. Nick argues that the euro’s decade-long run as a “weak currency” was down to policy settings that kept domestic demand weak. A convincing reversal is not likely until those domestic drivers are again firing.

    0
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    Not Quite A Game-Changer

    Earlier this week, Indonesia passed a sweeping “omnibus law” aimed at attracting foreign investment by lowering taxes, reducing labor costs and cutting red tape. In pushing through the new law, president Joko Widowo hopes to capture a slice of Asia’s shifting manufacturing-for-export business, as regional supply chains migrate away from China.

    0
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    The Guiding Principle Of Our Time

    The dominant guiding principle of contemporary western society, or at least of its elite, appears increasingly to be “CYA,” which we might euphemistically render as “protect your posterior.” In this paper, Louis argues that the CYA principle is increasingly governing fiscal and monetary policy, as well as how investors act in the financial markets. The implications are significant.

    29
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    European Divergence Is Back

    Like a car, the more excess weight you add to an economy, the slower it drives. Slapping restrictions on normal activities, even if income support measures are offered, makes it harder for an economy to grow. In Europe, the second wave of Covid-19 infections is having an uneven effect depending on the severity of the outbreak and the sector composition of the affected economy. The result will be to deepen the divergence in European growth and...

    0
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    Antitrust Law And The Tech Cycle

    On Tuesday the US Congress fired a broadside against Big Tech, when a House of Representatives subcommittee on antitrust law published a 449-page report accusing Facebook, Amazon, Apple and Google of abuse of market power, and calling for them to be “reined in.” The report’s publication reflects a shift in regulatory thinking about Big Tech.

    12
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    No More Stimulus

    Within the span of a day, President Donald Trump called off Congressional talks over new fiscal stimulus and then tweeted that he supports sending more checks to all Americans. As Democrats will likely balk at such a deal without more support for the jobless, the chance of getting fresh stimulus before the November 3 election is dimming. That means no population-wide cash handout, no more business bailouts and another income crunch for the 15mn...

    0
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    India Tackles Rural Reform

    Against an awful economic backdrop, Indian policymakers are pushing through long-awaited reforms to open up agricultural and labor markets. In theory, the reform package should boost competition among buyers, create a national market in farm produce, and help to modernize agriculture by attracting greater private investment.

    3
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    Asia’s North-South Covid Divide

    If anywhere has been a winner from the Covid-19 pandemic, it is east Asia. Compared to other big regions, it has suffered lower infections, fewer deaths and incurred less economic damage. However, that generalization simplifies a big difference between its northern and southern regions, which have had quite different experiences that is also impacting the investment arena.

    0
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    Flows Favor The Renminbi

    China’s renminbi has been appreciating in recent months, driven by heavy flows of portfolio capital into China’s bond market as market participants have concluded US-China tensions do not directly affect the exchange rate. The biggest risk to continued renminbi strength is the possibility that an election victory for Donald Trump could spark fears of a renewed US-China tariff war.

    0
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    Strategy Monthly: The Real US Election Risks

    Some investors worry that a contested US election may spark social and political unrest that is serious enough to threaten US risk assets. They are likely focused on the wrong risk. The US’s democracy faces heavy strains but is nowhere near a breaking point, but the differing outcomes that can occur on (or after) November 3 pose threats to portfolios.

    0
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    A US Dollar Check-Up

    Over the last month, the US dollar has caught a bid. Admittedly, the rally is small. Since the end of August, the DXY US dollar index has edged up by 1.7%, with the rise in broader dollar indexes scarcely much greater. Nevertheless, the recent uptick is causing some to question whether the dollar’s decline has run its course.

    0
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    A Dove With Ammunition

    Hawks want the European Central Bank to wind down its monetary stimulus once the immediate Covid crisis is over. On Wednesday, ECB president Christine Lagarde poured a large bucket of cold water over that idea. Speaking in Frankfurt about the central bank’s current strategy review, she made clear that the ECB regards deflation, not inflation, as the main monetary risk, and opened the door to a symmetric inflation target going forward. In the...

    1
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    Webinar: Europe In The Second Wave

    Yesterday Cedric Gemehl, Nick Andrews and Anatole Kaletsky joined Tom Holland to discuss what's going on in Europe. Topics ranged from how the economy is fairing in the second wave of the outbreak, what that means for asset prices, and also where Brexit fits into all this.

    0
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    Video: Sizing Up US Election Risks

    Tuesday’s ill-tempered presidential debate will only fuel claims that the US election could see massive fraudulent voting and therefore end with the result challenged in court—and maybe on the streets. Such rancor threatens the long-run viability of American democratic institutions, but in the short run Yanmei says the system can comfortably handle a contested election result.

    0
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    The UK’s Savings Problem

    The British government's new job support scheme to take effect next month offers much less generous subsidies, and job losses are inevitable. Heightened job insecurity will mean increased precautionary savings, compounding the downturn in consumption. But the government faces institutional constraints on how much it is willing and able to borrow to plug the gap.

    0
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    China’s Belt And Road Looks To Bounce Back

    Even before the pandemic, it had become a common refrain to write off the Belt and Road Initiative. After foreign loans and construction peaked in 2017, China’s global infrastructure powerplay lost momentum. US-led criticism of Beijing’s “debt trap diplomacy” spread anxiety, forcing Xi Jinping to pledge reform. Then, when Covid struck, hundreds of BRI projects ground to a halt. However, Tom argues that it is too soon to dismiss the initiative:...

    0
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    When Higher Inflation Is Good News

    Equity markets often seem to have a split personality, but seldom more so than over inflation. A sizable portion of investors is worried that the Federal Reserve is struggling to overcome deflationary pressures, while many of the rest fear the explosion in monetary aggregates must inevitably lead to runaway inflation.

    0
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    The Trouble Brewing In Thailand

    Thailand is no stranger to political discontent. But the mounting street protests of the last few months are different. Not only do they unite former rival factions, for the first time the monarchy is a target of popular criticism, and these demonstrations are taking place against the backdrop of an economy hit disproportionately hard by Covid-19.

    1
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    Toward A US Health Care Rupture

    The nomination of a new Supreme Court justice with a record of opposing “Obamacare” means the US is more likely to see its health care system upended in the next nine months. Amy Coney Barrett’s probable Senate confirmation raises the chance of the Affordable Care Act being struck down by the court, spurring a plunge in government health-care spending and industry revenue. Multiple outcomes to this issue remain possible, but investors are likely...

    0
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    Video: Behind The Market's Mood Swings

    In recent weeks some of the biggest US equity winners since the start of the Covid-19 crisis have appeared to run out of steam, as the Federal Reserve abstained from stepping up its asset purchases. Meanwhile, Congressional gridlock seems to stand in the way of renewed stimulus for American consumers. Will is not too concerned, and in this interview points out that the Fed still has ample ammunition, and that the strength of the US recovery...

    0
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    EM Currencies At A Pivot Point

    Emerging market economies are heavily impacted by their currency’s level against both the US dollar and the Chinese renminbi. As the dollar is a funding currency, most EMs thrive when it is weak. In contrast, China is both a competitor and a key export market for EM economies, and so a weak renminbi poses a deflationary threat. Since late May, emerging markets have faced the ostensibly benign situation of a weaker US dollar and a stronger...

    0
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    Webinar: Taking Stock Of US-China Decoupling

    In yesterday’s webinar, Andrew Batson presented an overview of where the Chinese economy is going and how the relationship with the US is evolving, and Dan Wang addressed recent US actions in the technological rivalry between the two countries, particularly the latest executive orders on WeChat and TikTok.

    0
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    Four Exaggerated Concerns

    As if markets weren’t nervous enough, US policymakers have been fueling the nervousness. On Wednesday, a series of remarks spotlighted a number of the main concerns currently troubling investors, including that the US Federal Reserve is out of ammunition, and that disputes over the result of November’s upcoming presidential election could drag on into the new year, plaguing asset markets with additional uncertainty. This focus appeared to...

    10
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    Lockdown-Lite

    A series of controls have been announced by European countries in reaction to sharp increases in the numbers testing positive for the Sars-CoV-2 virus.This has raised fears of renewed lockdowns and economic havoc. But it appears European policymakers are opting for a lockdown-lite approach to public health restrictions in order to minimize the economic damage.

    4
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    Illiquidity And Creative Destruction

    Covid came as a shock to the world, but in many cases it is merely accelerating fundamental trends that were already unfolding anyway. This probably shouldn’t be a surprise. If there has been one constant theme in Gavekal’s research over the last 15 years or so, it is that we are living in an age of accelerating creative destruction.

    6
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    Don’t Waste Time Analyzing The US Election

    Over the next six weeks, investors will spend hours of mental anguish and spill lakes of agonized ink attempting to analyze the outcome of the US presidential election. Will it really be time well spent? Louis isn’t sure.

    2
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    Caution Prevails In US Attack On Apps

    Last month President Trump issued orders that threatened massive disruption to two of China’s biggest technology companies. But the Commerce Department’s final decision on WeChat was less extreme than feared, and Trump’s blessing of a deal to avert a ban on TikTok signals a promising shift in the political calculus.

    4
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    Video: The US Fiscal Seesaw

    There are some signs that Democrats and Republicans are inching towards a new spending deal to provide "enhanced" benefits to struggling companies and unemployed Americans. Yanmei argues that such a resolution would certainly buttress demand going into the winter season but a "no deal" outcome would not necessarily spell disaster for a US economy that is learning to live with Covid-19.

    0
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    Asia’s Winners In The US-China Tech War

    The US government has stepped up its campaign against China’s leading technology companies, and already the measures against Huawei are taking effect. This threatens to severely disrupt global electronics supply chains, but creates opportunities for companies elsewhere in Asia. Vincent assesses who stands to benefit.

    1
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    Webinar: Embattled India

    India has taken a bigger economic hit from the pandemic than any other major economy, exacerbating a slowdown that was already underway. In addition, India is engaged in a high-stakes standff with China over its Himalayan border, which may force an economic decoupling of the two countries.

    0
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    Riding Europe’s Second Wave

    The latest Covid figures from Europe make sobering reading, with countries including France, Spain and others seeing pronounced second waves of new cases. Equity markets, however, have reserved judgment. Yes, the rebound that started in mid-March has been stalled for the last two months as infections have mounted. However, European markets have not sold off significantly, despite this month’s US volatility. And an examination of the opposing...

    2
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    The First Meeting Of The Fed’s New Era

    On Wednesday, the Federal Open Market Committee concluded its first meeting after Federal Reserve chairman Jay Powell last month revised its strategic policy framework. The new framework boils down to a temporary increase in the Fed’s inflation target to “make up” for past shortfalls.

    0
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    The Challenge Of Valuing Gold

    Gold ranks as the ultimate “scarcity asset”, as its value is dictated not by its utility but because it is rare. Valuing such assets is tough as there is no “underlying value” to reference and prices are driven by the immediate supply and demand situation. Yet, in periods when both government budget deficits and monetary aggregates have rapidly grown, gold has historically outperformed—and it is doing so now.

    0
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    When Export Strength Is A Sign Of Weakness

    China’s manufacturers are back to normal, and then some. Exports and manufacturing output are running faster than their pre-pandemic trend in 2019, even as global trade is contracting. In this piece, Andrew and Thomas explain what’s driving those strong numbers, and why they are actually a sign of continued weakness in the global economy.

    2
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    Death, Taxes And Covid-19: Things That Cannot Be Avoided

    Six months after the first western countries went into lockdown, data suggest that unless imposed very early on, lockdowns did little to avert excess deaths. With weekly death rates in many western countries now running close to decade lows, Louis argues that this leaves politicians in an awkward spot, with one of three possible policy paths.

    39
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    Positioning For A Yield Curve Steepening

    Little about the Covid-19 recession has been “normal”, including shifts in the US yield curve. Contrary to expectations at the end of a cycle, the spread between 10-year and three-month treasury yields "steepened" by just 109bp from the bottom. At the same time, the Fed’s hugely expanded quantitative easing program has boosted demand for long-dated treasuries, which continues to compress yields. So what gives?

    3
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    A British Mad Man

    The world’s worst performing major currency, stock market and economy have all been located in Britain since Boris Johnson was reelected last December. This is not surprising. With hindsight, his decision to outlaw any possible extension of the Brexit transition period as soon as he was reelected fully justified the switch from bullish to bearish on sterling assets that I recommended immediately after this announcement.

    2
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    The Trouble With Covid Testing

    Last week, professional rugby started up again in France. The authorities have decreed that if any team finds that three or more of its players test positive for Covid-19, its games must be played at a later date. This ruling is being rigidly enforced even though in reality a player who tests positive has less than a 50% probability of actually having the disease.

    12
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    Of Gold And Gold Miners

    In recent weeks, attention has focused on the surge, and subsequent correction, in US technology stocks. Yet an asset class that has greatly outperformed the Nasdaq 100 this year is gold-mining equities. In this piece, Charles seeks to develop firmer investment rules for managing gold and gold-mining stocks within a portfolio.

    3
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    Webinar: From Bearish To (Conditionally) Bullish

    Anatole and Will presented their views on the efficacy of US fiscal and monetary policy in response to the Covid crisis, and outlined the prospects for the economy and asset markets.

    0
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    Pained Tales From The Hills

    On Monday, for the first time since 1975, gunshots were fired on the disputed Himalayan border between India and China.Hundreds of incidents occur along the undemarcated Line of Actual Control every year, but this year’s skirmishes are the most dangerous for at least five decades.

    0
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    Video: Assessing The Midwest Outbreak

    While the pandemic continues to ravage the US, the last month has seen rates of infection decline across most of the country. That situation has recently reversed in some low-population Midwestern states, but on balance the US has learnt to live with Covid, and therefore a resurgence in the fall will not result in the kind of disruption seen in March and April.

    0
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    India Macro Update: The Great Covid Crash

    India has taken a bigger economic hit from the pandemic than any other major economy. After reopening its economy in June, business activity is again weakening as the surging number of Covid-19 cases raises the chance of more localized restrictions. Udith and Tom evaluate the government's response and give a prognosis for the economy.

    0
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    Gavekal Research

    Growth Scare? Or Rotation?

    After a three-day rout that has seen the US Nasdaq 100 index sell off by almost -11%, fear is in the ascendant. At this point a reality check may be a valuable exercise. Whatever the proximate trigger for the slump, the deep sell-off has been confined mainly to large-cap tech stocks, and is not generalized across the market. Moreover, there are reasons to believe the picture for the US economy and earnings is set to improve.

    0
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    Webinar: Global Investment Roundtable (in French), Sept 2020

    In a turbulent economic environment, Louis sought to identify assets with “anti-fragile” qualities; Cedric deciphered the message from European markets; Didier Darcet refreshed refresh an old Gavekal framework with “Four Quadrants 2.0” and Charles moderated the discussion.

    0
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    Better Days For Europe’s Domestic Plays

    It is hardly surprising that euro strength is generally bad for European exporter stocks and good for domestically-focused firms; or that exporter-heavy markets, like Germany, tend to lag at such moments. We saw this in 2017, when the euro rose almost 12% against the dollar between April and August, spurring a -2.4% fall in the DAX and a 0.7% gain in the broad Eurostoxx. So how to explain this year’s topsy-turvy markets, where the sprightly DAX...

    0
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    Gavekal Research

    Desperately Seeking Anti-Fragility (Part II): In The Eye Of The Beholder

    Previously, Louis outlined the four asset classes that investors appear to regard as anti-fragile, now that US treasuries no longer fit the bill. With each of these four asset classes enjoying a roaring bull-run, today Louis examines the typical life cycle that lifts an asset class from unloved hell to anti-fragile heaven.

    1
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    After The ‘Pump And Dump’

    August was an odd month in the US equity market. It saw Apple, the world’s largest company by market value, add US$650bn to its market-cap despite a string of troubling news. Yet for most investors, the biggest head-scratcher may have been the continued rise in the VIX, even as stocks, led by the Nasdaq, continued to make new highs.

    14
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    The Implications Of A Disputed Election

    The pundits bill every US presidential election as the most important and dramatic for years, if not decades. This time they may have a point. However, an examination of the laws governing elections and of past ructions suggests any turbulence for investors will be limited and short-lived.

    0
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    Webinar: Global Investment Roundtable, September 2020

    Charles Gave, Louis Gave and Will Denyer joined Arthur Kroeber at the global investment roundtable to discuss what's going on in the global economy. Charles identified three big trends that will affect the investment environment in the long term, Will gave an in-dept update on the US economy, and Louis examined where to find assets with “anti-fragile” properties.

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    A Little Battler Soars Too High

    A weak US dollar is generally a boon for both global growth and asset prices, yet its recent fall has ruffled feathers. So spare a thought for the Reserve Bank of Australia, which is not only presiding over the country’s first recession in 30 years but is getting no help from its “little battler” currency, which has rocketed 27% against the US dollar since its March low.

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    Why I Was Right To Turn Bullish

    Previously, Anatole tried to explain why he had abandoned the bearish view on equities. We will not know for a long time whether any of his explanations make sense, but Jerome Powell’s speech about the Federal Reserve’s new operating philosophy bolstered his confidence in a once-in-a-generation economic regime change.

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    Strategy Monthly: Eight Questions, 11 Answers

    With US equities once again at record highs and the Fed promising to keep rates nailed to the floor, it is time to ask hard questions of the bull market that won’t die. That interrogation is conducted by Charles and Louis Gave. In these strange times, the case for owning anti-fragile assets has rarely been stronger, they contend. Four stand out for having weathered the pandemic and should be treated seriously.

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    The Dollar Still Has Downside

    Has the great US dollar correction of 2020 run its course? After all, the DXY index is down -10% from its March 19 top and -4.4% lower year-to-date. There have been good reasons to sound Cassandra-like warnings on the US currency and while some negative drivers have moderated, the balance of evidence implies more downside.

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    Video: Covid-19's Investment Implications For Asia

    Asia has handled the pandemic decently well and its solid macroeconomic fundamentals means it does not face any kind of solvency crisis. The problem for investors is that the growth outlook remains pretty grim, with limited prospects for a swift improvement. As a result, investors should stick with local currency bonds, which look well set in this environment.

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    The Model Pupil Still Has Problems

    Asia is seen as having had a “good” Covid-19 crisis, as it learnt vital lessons from the 2003 Sars outbreak and its policymakers have been typically more frugal than their Western peers.The problem with such generalizations, argue Udith and Vincent, is that they conceal huge discrepancies among countries.

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    The Perfect Asian Proxy

    The Federal Reserve’s new policy framework seems set to keep US monetary policy easier for longer, with the main victim being the dollar. Asian currencies now look well primed and the question for investors is how to play this trend given the very different experiences being had by regional economies. Fortunately, there is a simple answer: just buy the Singapore dollar.

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    A (Short) History Of Central Banking In The US

    Gavekal readers will be familiar with Charles's distinction between tools and jewels as a way of thinking about markets. He notes that today we have negative real interest rates while gold has outperformed both cash over the last 12 months and the US stock market since 2018. Today, he asks if we are at the start of a new counter-trend rally in gold relative to US equities.

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    US Profits In The Pandemic

    My preferred “NIPA profits” measure fell by -14.4% during the second quarter of the year, according to US national accounts data released late last week. That follows a similarly bad -13.3% fall in the first quarter. Both declines are on par with the worst quarters in post-war history. And like previous low points, US corporate profitability is likely to recover from here. But what does the data tell us about the investment environment and what...

    2
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    The Fed Boosts The Inflation Outlook

    The Federal Reserve made a historic change to its monetary policy framework yesterday when it officially adopted “average inflation targeting”. That bullseye remains 2%, but the definition of the target has changed in a way that, in the current context, effectively raises the inflation outlook. This has important implications for future policymaking and current asset pricing.

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    Desperately Seeking Anti-Fragility (Part I)

    Since the 1980s, OECD government bonds have tended to be negatively correlated with equities, but during the pandemic that relationship seems to have broken down. Given that the Federal Reserve is embracing a new policy framework aimed at juicing up inflation, there are plenty of reasons to think that bonds cannot continue to play an "anti-fragile" role in portfolios. In this first installment of a two-part series looking at what...

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    Rich, But Keeping It Real

    The US consumer's willingness to spend remains reliable, even during the pandemic, as shown by consumer discretionary stocks sharply outperforming the rest of the market. Since this stock grouping includes pandemic winners like Amazon and Home Depot there is little reason to bet on a trend-change, as the macro winds should remain favorable.

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    Video: A South China Sea October Surprise?

    Tensions in the South China Sea between the US and China are ramping up during a presidential campaign where the incumbent has set himself on a collision course with China. You do not have to be a crazed conspiracy theorist to wonder if this theatre could be the scene of an “October Surprise”.

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    Japan Drifts Toward Change

    This week Japanese prime minister Shinzo Abe went into hospital for medical tests, sparking fresh reports that he may soon step down on health grounds. Should Abe exit the scene it is unclear who will succeed him. If a leadership change becomes unavoidable, Abe will likely play a key role in anointing his successor, so there is unlikely to be a big shift in the “Abenomics” program anytime soon.

    0
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    Does Warren Buffett Know Something We Don't?

    The sage of Omaha made an interesting change of tack recently. Warren Buffet sold most of his shares in Goldman Sachs and bought positions in Barrick Gold. Goldman is often held up as the very epitome of the Wall Street financial engineering firm. Meanwhile, Barrick represents the kind of company you would buy if you no longer trusted financial engineering—or the currency in which the financial engineering is taking place.

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    A Bottom In Sight For European Banks

    No sector has been so beaten down as eurozone banks. But although bad loan ratios are rising, and further big writedowns are on the cards, this bad news is in the price. What is less adequately priced in is the change in policy from the European Union which means there will be no early return to austerity. Eurozone banks may be better placed than investors believe to generate earnings.

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    The Euro's Solid Ground

    After a breakneck 10% rally against the US dollar since mid-May, the euro faces headwinds as rising Covid-19 cases means that European nations must re-instigate social distancing measures. Still, Europe’s newly-agreed common purpose in facing such travails makes any sell-off in the single currency a buying opportunity as the unit looks set on a path of structural appreciation.

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    A New FDR?

    Joe Biden has accepted the Democratic Party’s nomination to run for the US presidency. Invoking Franklin D. Roosevelt, who responded to the Great Depression with huge public works, Biden promised big fiscal programs to “build back better” after the Covid-19 recession. He also vowed to combat climate change, reduce wealth disparities and advance liberal causes.

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    Making Biarritz Great Again (Part II)

    A few years back Charles and Louis bought into the storied Biarritz Olympique Rugby Club in order to save it from a looming bankruptcy. The ups and downs of this Basque region club during Covid is a microcosm of the French economy’s travails, as the state seeks to protect all players on the field of commerce from both crunching tackles and a spell in the sin bin.

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    Video: The State Of The US Recovery

    Pandemic aside, the US faces a looming fiscal cliff and rising political risk as the presidential election campaign starts proper. So why is Will so sanguine about the country’s economic prospects? In this video interview, he explains his position.

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    Europe’s Job-Protection Choices

    Between February and April, some 22mn Americans lost their jobs. The rate of unemployment soared to nearly 15%—four percentage points above its last record high in 1982—but across the pond in Europe joblessness barely budged, inching up to 7.8%, from 7.2% in March. Taking the lead from Germany, governments across Europe decided it was better to keep people in jobs than to fire and rehire them later. As Europe again faces a worsening Covid-19...

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    Solid US Earnings Do Not Mean Another Boom Beckons

    With more than 90% of firms in the S&P 500 having reported for the second quarter, the hit to earnings came in nowhere near as bad as expected. This picture is likely to be sustained in the coming year, or so and should lay the ground for solid US equity market performance. Yet, those hoping for a sustained economic recovery to generate the kind of epic returns seen in 2Q20, or in 2009 after the financial crisis, will likely be disappointed.

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    Why I Was Wrong To Turn Bearish

    Yesterday, Anatole suggested that stock markets may be soaring to new records because the Covid-19 crisis could indirectly produce a stronger world economy in the coming decade. Today, he seeks to explain his damascene conversion from post-March bearishness in order that readers can better judge the merit of this view.

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    A Death Sentence For Huawei

    The US government has passed a death sentence on Huawei. The questions now are whether it will choose to suspend that sentence, and whether China will retaliate by punishing major US companies. The likely answers, says Dan, are no and no. Huawei is probably finished as a maker of 5G network equipment and smartphones once its inventories run out early next year.

    16
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    Will A Keynesian Phoenix Arise From Covid?

    Two months ago, Anatole dismissed the rebound in equity prices as an outbreak of “market madness” among bored small-time gamblers deprived of the opportunity to bet on horses and sports. He now admits that call was wrong and in this piece explains what has driven the market to new highs. The turnaround likely reflects the largescale reconversion of leading economies to Keynesian demand-management policies and the fact that these seem baked-in...

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    The Past Is Another Country

    With US$3trn added to the US national debt during the Covid-19 crisis and trillions more in the works should new salary replacement payments be agreed in Congress, a vital question for investors is how to think about this runaway government spending and what it means for bonds and the US dollar.

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    Huawei And The Roads Of The Future

    China is engaged in an imperial project that will not be typified by territorial conquest, but by “road building”. This is done to bring commodities to the heart of the empire at the cheapest cost, while higher value-added finished goods are pushed out to its outer realms. It is no coincidence that a common saying for Europeans is that “all roads lead to Rome’”.

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    Keep Chasing Asian Yield

    As US equities brush up against new highs and safety assets like gold and treasuries sell off, global risk appetite has risen this week. Investors are betting that a vaccine for Covid-19 is at hand and if not, the world is at least learning to live with the virus. A potential beneficiary of this situation may be Asian bond markets, where quite decent yield can still be had.

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    Building A New System

    On Monday, Charles argued that developed economies’ moves to nationalize both the creation of money and the distribution of credit would degrade the unit-of-account function played by fiat currencies in many markets. Today, he outlines new monetary mechanisms that are likely to replace, or at least live alongside, fiat currencies.

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    Europe's Covid-19 Loan Drag

    In response to the Covid-19 crisis, central banks in Europe have shoveled money to banks in a bid to have them deliver liquidity to stressed companies. A worry is that this new debt binge will weigh down corporate balance sheets for years to come, and limit growth. These concerns are probably overdone.

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    What US-China Decoupling Means For The US Dollar

    Almost all of the world’s commodity trade is done in US dollars, so any commodity-importing country must keep much of its central-bank reserves in US currency. The fact that China, the world’s largest commodity importer, pays for these imports using another nation’s currency was an anomaly even when the US and China got along. As US hostility towards Beijing increases, this raises four possible scenarios.

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