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E.g., 21-09-2021
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    Gavekal Research

    Investing In Today’s Inflationary Environment

    Investing in a topsy-turvy macro environment can feel like a crapshoot. One way to seek order among chaos is to draw lessons from economic history. Louis examines the underlying causes of financial crises since the late 1990s and applies the lessons to consider the way in which the global economy and markets emerge from the pandemic.

    0
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    Gavekal Research

    No Escape From The Evergrande Effect

    Fears about the potential systemic risks posed by troubled property developer Evergrande reverberated through global financial markets on Monday. Unless China’s regulators seriously mismanage the situation, a systemic crisis in the country’s financial sector is not on the cards. Nevertheless, lenders will not be able to escape the costs.

    0
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    Gavekal Research

    Out Of The Congressional Quagmire

    Eight months after Joe Biden’s inauguration, the US president’s economic agenda remains bogged down, with two flagship spending bills stuck in Congress amid infighting among Biden’s fellow Democrats. In the coming weeks, however, there is a good chance of a compromise that will see one of the two cleared through the House of Representatives.

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    Gavekal Research

    Going Electric In The Land Of The F-150

    The US government and the auto industry are now pulling in the same direction of decarbonizing transportation. In this piece, Yanmei asks if the emerging government-industry alliance can accelerate vehicle electrification, where the US has fallen behind Europe and China, and whether they can catch up to Tesla and foreign competitors.

    3
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    Gavekal Research

    Squeaky Bum Time For The US Economy

    As Covid cases rise in the US, most indicators point to a slowing economy. After August’s payrolls came in weak, activity measures and nowcasting readings have softened, while conditions in leading sectors like housing and autos have worsened. With the Citi US economic surprise index having fallen to -44.6 from close to zero a month ago, forecasters have been caught off guard by the slowdown. As Sir Alex Ferguson, the former Manchester United...

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    Gavekal Research

    Webinar: Questions Arise As US Growth Slows

    As renewed Covid outbreaks curtail activity and the labor market starts to normalize, the US economy is no longer generating big upside growth surprises. Will the Federal Reserve defer its retreat from super-easy monetary policy, and what will come of the Biden administration's fiscal strategy?

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    Gavekal Research

    Europe’s Energy Headwinds

    The United Kingdom got a sharp lesson in the perils of energy dependence on Wednesday. A fire shut down its imports of electricity—mostly nuclear-generated—from France, pushing domestic natural gas prices up by as much as 20% in intraday trading. The fire may keep as much as a third of the UK’s capacity to import power from France closed through the winter months. Given that the UK has the capacity to import 3MW from France and on average...

    2
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    Gavekal Research

    Video: Cryptos, NFTs And CyberPunks

    As investors have flipped between euphoria and dejection over the future of crypto-currencies and related digital assets, prices have had a crazy ride. In this video Will outlines a framework for thinking about valuations. Even if digital art sold as NFTs sticks around, the basic economics of their use case means they probably won't be great stores of value.

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    Gavekal Dragonomics

    No Profits From Payments

    Online payments were one of the first and most prominent victims of China’s regulatory onslaught against internet platforms. In this piece, Xiaoxi explains how a combination of both tighter oversight and the pending launch of the digital renminbi is limiting platforms’ ability to monetize their payments businesses.

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    Gavekal Research

    ‘Transitory’ Inflation And Government Intervention

    Tuesday’s US CPI release shed little light on the “transitory versus persistent” inflation debate. Airfares and hotel rates weakened on the delta outbreak. And surprisingly, rents remained muted, while used car prices rolled over even as new car prices surged. Still, US CPI gained 5.3% YoY, while core CPI rose 4% YoY. By the standards of recent decades, these are big numbers.

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    Gavekal Dragonomics

    The Window Is Closing For Structural Reform

    China’s dismal August economic figures suggest that the “window of opportunity” identified by the Politburo in April, when officials hoped to take advantage of China’s post-Covid rebound to focus on longer-term structural priorities, is now closing. However, it is still too early to expect policymakers to shift gears into a supportive stance.

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    Gavekal Research

    Winners And Losers In India’s Dying Democracy

    As India’s economy has weakened, so too have its democratic foundations. Since Narendra Modi’s reelection victory in 2019, “the world’s largest democracy” has flirted with despotism. State institutions have been co-opted, freedoms repressed and minorities attacked. But a handful of listed companies—especially those run by tycoons with personal ties to Modi—are thriving.

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    Gavekal Research

    A Mile In MbS’s Shoes

    Steve Martin once said “before you criticize a man, walk a mile in his shoes. That way, when you do criticize him, you’ll be a mile away and have his shoes”. In this piece Louis takes a stroll in Mohammed bin Salman’s shoes to see what issues Saudi Arabia has faced recently, and outlines four scenarios that affect energy prices and geopolitics.

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    Gavekal Research

    The High Cost Of Free Money, Revisited

    It’s now more than 10 years since Charles published a seminal paper titled The High Cost Of Free Money, in which he argued that free-market capitalism could not function properly without a free-market-determined cost of capital. Today it’s clear that capital markets, at least, can continue to operate, but Charles argues this has created very little new wealth.

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    Gavekal Research

    Internet Platforms Versus Policy Darlings

    China’s offshore internet platform stocks saw fresh falls in Asia on Monday morning after reports that the Chinese authorities will break up Ant Group’s Alipay business. In recent weeks, some investors have been advocating a rotation to “safer” segments of China’s tech sector, such as hardware companies favored by policymakers. But Thomas writes, these carry risks of their own.

    0
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    Gavekal Research

    Video: The Economics Of Germany's Election

    Ahead of Germany’s election in a couple of weeks, the center-left Social Democratic Party has recently climbed up the polls to eclipse the previously dominant Christian Democratic Union. If the polling is right, the SPD is likely to form a coalition government with Germany’s smaller parties. Nick breaks out the tea leaves to see what a political shift is likely to mean.

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    Gavekal Dragonomics

    Webinar: Understanding China's Regulatory Crackdown

    Even by China’s high standards, 2021 has seen an extraordinary amount of government intervention in the economy, as top leader Xi Jinping moves aggressively to implement his vision of national greatness. In this webinar our China team assess the impact on the economy and markets, and discuss what could cause this crackdown to pause or reverse.

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    Gavekal Research

    A British Fix To Housing

    For decades, urban England has had an under-supplied and over-bought housing market. UK governments of all political stripes have tried and failed to unblock building pipelines. Britain is hardly alone in having seen home prices rocket due to pandemic effects, but there was a grim inevitability to UK home prices rising 13% in the last year. Yet, at the same juncture, there is evidence that a mixture of decent policymaking and smart market...

    2
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    Gavekal Dragonomics

    The Next Level Of Activist Government

    Even by China’s high standards, 2021 has seen an extraordinary level of active government intervention in the economy. With foreign investors spooked and growth slowing, how much longer can it go on? In this chartbook, Andrew takes stock of the many aspects of the current policy activism and assesses the prospects for a course correction.

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    Gavekal Research

    India Macro Update: A Shaky Recovery

    India is enduring a shaky, stop-start recovery. Headline GDP growth in the April-June quarter came in at a stellar 20%, but base effects are distorting the true picture. The biggest risk for investors, argue Udith and Tom, is an uncertain monetary environment. As the Fed readies to taper its asset purchases, both exports and the bond market are vulnerable to disruption.

    0
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    Gavekal Research

    The Economy And Volatility

    US equities have gone almost 18 months without a double-digit drawdown. Such calm is likely to trouble devotees of Hyman Minsky, who showed that excessively long periods of market stability breeds countervailing episodes of violent instability. The question is what will cause the transition to a more volatile market, or dare I say it, what could trigger a “Minsky moment”?

    2
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    Gavekal Research

    Covid, Markets And What Happens Next

    Over the last 18 months, Covid developments have been a key driver of financial market performance. Louis contends that this period can be split into four distinct phases. In this piece, he asks whether we are now entering a fifth phase. To do this he weighs up both encouraging and concerning developments within the pandemic and economic policy choices that flow from them.

    6
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    Gavekal Dragonomics

    What Kind Of Easing Cycle?

    It’s been clear for a couple of months now that China has begun a monetary easing cycle. What has been less clear is what kind of easing cycle will happen under the central bank’s new “cross-cyclical” policy framework. The PBOC’s guidance indicates it could start cutting rates this year, but will try to keep credit growth next year roughly flat.

    5
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    Gavekal Research

    The Split In Emerging Markets

    Animals can apparently sense impending storms and so take evasive action. Low-flying birds, sneezing cats, croaking frogs, huddled sheep and sedentary cows are all said to indicate the onset of heavy rain. In global finance, emerging markets are most exposed to sudden climatic shifts and have learned the hard way that it is unwise to be exposed when a tempest strikes. The issue today is the Federal Reserve’s well-telegraphed intention to dial...

    4
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    Gavekal Research

    Bottlenecks And Corporate Bond Yields

    It seems that not all parts of the US economy are created equal. As the Delta variant outbreak causes US Covid cases to soar, the service sector is taking a hit. In contrast, the less-exposed manufacturing sector saw job growth in August. The question for investors is how these somewhat conflicting forces impact different asset classes.

    0
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    Gavekal Dragonomics

    How Markets Multiply Subsidies

    China’s government has vast ambitions for its industrial policy, yet it spends surprisingly little on subsidies and tax breaks. Instead, it relies on domestic capital markets for funding. In this piece, Thomas explains how markets can multiply those initial subsidies into much larger spending in the government’s favored industrial sectors.

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    Gavekal Research

    Europe’s Taper Decision

    To taper, or not to taper is the question for the European Central Bank at Thursday’s policymaking meeting. The market seems to think that monthly bond purchases will soon be lowered by about €20bn to €80bn, as shown by 10-year German bund yields rising 14bp in the last two weeks. Economic output in the eurozone is back near pre-pandemic levels and consumer price inflation in August spiked to 3%. There have even been putative sightings of the...

    2
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    Gavekal Research

    Video: The Implications Of Afghanistan

    In the same week that the US military completed its chaotic withdrawal from Afghanistan, President Joe Biden outlined a more contained doctrine for US foreign policy. In this video interview, Yanmei argues against a declinist view of the Kabul dash for the exit, contending that the longer-term impact may be a much-needed reset of the American imperial project.

    0
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    Gavekal Research

    The Most Worrying Shortage

    The world’s most traded commodity, semiconductors, is running scarce, the price of the second-most important commodity, oil, is grinding higher, and the cost of moving things around the world is soaring. All this would be worrying enough, but ask any businessperson in North America or Europe about their biggest constraint, and the answer is likely to be staffing.

    9
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    Gavekal Dragonomics

    How To Create A High-Yield Bond Market

    China’s central bank has now endorsed the creation of a domestic high-yield bond market in an attempt to reverse the increasing exclusion of private-sector borrowers from existing debt markets. In this piece, Xiaoxi outlines how financial regulators are trying to increase both the supply of and demand for high-yield corporate bonds.

    2
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    Gavekal Research

    The Problem Lurking In Malaysia

    Until a few weeks ago, Malaysia had not had a proper prime minister since the eve of the pandemic. The new incumbent emerged out of a messy negotiation and oversees a weak coalition that could easily fracture. For investors, the worry is a steady deterioration of Malaysia’s fiscal fundamentals in a trend that is being seen across non-China emerging Asia.

    0
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    Gavekal Dragonomics

    Earnings Top Out

    China’s non-financial listed companies reported strong sales, profit and capital expenditure growth for Q2. Thomas explains why listed earnings should decelerate into Q3 as the housing cycle turns down and export demand moderates. High retained earnings and low funding costs will continue to support capex, but appetite is likely to weaken.

    0
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    Gavekal Research

    The Coming Slowdown In Europe’s New Orders

    European equities have had a stunning 10 months, returning 46% since the beginning of November 2020 and outperforming even the MSCI US. This performance has been driven by expectations of strong earnings growth— supported by buoyant demand and full order books. Peering ahead, however, there are good reasons to look for the pace of new orders to slow.

    0
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    Gavekal Research

    Strategy Monthly: How To Hedge Tighter Liquidity

    So far, markets have not panicked over the prospect of the Federal Reserve tapering its asset purchases. But when it comes, the taper will materially tighten global liquidity conditions. In this calm before the storm, investors running global portfolios should focus on their hedges.

    0
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    Gavekal Research

    The Long Shadow Of Canada’s Election

    Canada’s federal elections rarely make headlines. This may be because whoever wins, the outcome is usually much the same. However, Canada’s September 20 election may cast a shadow that falls beyond the country’s borders. This is because, to a large extent, the election will be a referendum on Covid policies.

    4
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    Gavekal Dragonomics

    Flows Favor A Weaker Renminbi

    The renminbi has been strong in 2021, with the central bank largely tolerating a steady march higher in the trade-weighted CFETS index. But this trend will turn in coming months, as inflows of foreign currency on both the current and capital accounts decline. With the PBOC easing as the Fed prepares to taper, the renminbi will weaken modestly.

    0
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    Gavekal Research

    Who Is Copying Who?

    When China joined the WTO in 2001, western governments hoped that closer economic integration would pull China towards a more democratic system of governance. Yet two decades on, that hasn’t happened. In fact, argues Louis, recent years have seen governments in the West increasingly infringe on individual liberties for the benefit of the common good.

    17
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    Gavekal Research

    Investing Through The Taper

    After all the build-up hype, investors seem to have taken Jerome Powell saying that the Federal Reserve may soon be buying less assets in their stride. They have no doubt taken solace from the Fed chair’s promise that tapering does not mean imminent interest rate hikes, or quantitative tightening. So is the great 2021 “taper whimper” done and dusted? Perhaps not, for while the Fed’s expectation management has been slick, in the months ahead...

    6
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    Gavekal Research

    The Evolution Of China Risk

    It has been a busy summer for China watchers, with rapid shifts in underlying risks. With that in mind, a quick recap of recent events, and where those leave investors, might make sense. Let me start with the obvious increased risks:

    4
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    Gavekal Research

    China’s Interest In Afghanistan

    The western media have been full of warnings over the last week about how the US loss in Afghanistan is China’s gain, with Beijing poised to step into the vaccuum left by Washington’s withdrawal. But while China is anxious to protect its own security, it has no wish to bury itself in the graveyard of emires and will be extremely circumspect about pouring large investments into such a volataile country.

    2
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    Gavekal Research

    The Never-Ending Chip Shortage

    Nine months after the world’s carmakers began to complain about difficulties sourcing the silicon chips they need to make their automobiles, it is becoming clear these shortages are not just the result of short-lived disruptions. Sure, the pandemic has played havoc with global hardware supply chains. But Covid is worsening underlying shortcomings baked into the semiconductor manufacturing industry. This means there will be no early end to the...

    0
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    Gavekal Dragonomics

    The Drivers Of The Regulatory Crackdown

    What is driving China’s regulatory crackdown on internet and other companies, and what will happen next? In this piece, Ernan explains how four overlapping political campaigns by top leader Xi Jinping are behind the upheaval of recent months, and how those campaigns will guide the government’s enforcement priorities in coming years.

    4
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    Gavekal Research

    How Equities Cured The Summertime Blues

    Now that equity prices have resumed their habit of setting almost daily new records, and true believers in the “buy on dips” mantra have been amply rewarded yet again, it seems worth recalling the causes of the stock market’s mini-panic in mid-July. To be more precise this was a micro-panic, lasting just five days, from July 14 to 19. What happened in those five days to rattle investors?

    0
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    Gavekal Research

    Tapering The Frontier’s Prospects

    On Monday, the International Monetary Fund began disbursing a record US$650bn of its hard currency-like reserve asset to aid stressed sovereign borrowers. Since the plan was first officially mooted in March, financing costs have fallen sharply in frontier economies. The worry now is that this respite reflects the calm before a storm, which will hit when the Federal Reserve dials back its quantitative easing program.

    0
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    Gavekal Dragonomics

    Developers Feel The Squeeze

    The steady drumbeat of tightening on China’s property developers is taking its toll on construction activity. In this report, Rosealea explains why this weakness in construction will not unduly worry policymakers and should even help them achieve their goal of reducing steel production. Developers will therefore continue to feel the squeeze.

    3
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    Gavekal Research

    Germany’s Changing Political Colors

    Questioned by opinion pollsters, most Germans say the campaign ahead of the country’s September 26 federal election is dull. Yet those same opinion polls now point to the most wide-open election race in recent history. In the last few weeks, support for the center-left social democratic SPD has surged, even as the popularity of the center-right conservative CDU/CSU has slumped and the Greens have stalled.

    0
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    Gavekal Research

    The End Of The Cash Dump

    The US Treasury is running low on cash. Having massively ramped up its holdings of cash between April and July 2020 at the height of the Covid crisis, the Treasury has been running them down again since February 2021. Normally the Treasury aims to hold cash equal to one week of its outgoings, but it has fallen to less than half that amount.

    6
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    Gavekal Dragonomics

    Building A Science Superpower

    As China’s global rivalry with the US intensifies, it has focused strongly on improving science and technology. This push is not just about prestige, but also reflects a recognition that it can’t always lag behind the US in creating novel ideas. For this piece, Dan interviewed 22 scientists to evaluate the capabilities of China’s science system.

    2
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    Gavekal Research

    Getting The Macro Right But The Market Wrong

    In December 2020, I published a report arguing that the US economy was about to enter an inflationary boom. Things went as expected through the first quarter, but after the Fed began to talk about tightening policy at some indeterminate point in the future, the portfolio I had been recommending has done very poorly. In short, I have been wrong.

    4
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    Gavekal Dragonomics

    Huarong Comes Up For Air

    Huarong Asset Management announced in a press conference on Wednesday that it had reached a recapitalization agreement with government-backed investors. In this Quick Take, Wei and Xiaoxi explore the consequences for Huarong investors and the government’s wider battle against the implicit guarantee.

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