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    Gavekal Research

    A Contrarian View On Brazil

    An inverted yield curve usually points to trouble ahead, and Brazil’s just flipped for the first time in five years. Add to that a botched Covid response, blowout fiscal deficits and political risk, and the next year may be one of living dangerously in Brazil. But given attractive valuations, Udith says there are good reasons for investors to take that risk.

    0
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    Gavekal Dragonomics

    Mortgage Easing Begins

    China’s outstanding mortgage loans grew in October, confirming anecdotal reports that banks have been allowed or encouraged to pick up the pace of mortgage lending. Wei and Xiaoxi explain that while more relaxation measures are likely on the way for property developers, it’s too early to say that their financial conditions are improving.

    0
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    Gavekal Research

    Inflation’s Medium-Term Cure

    After consumer price inflation in October topped forecasts, it is clear that the US economy is running hot. And as workers embrace the “great resignation” rather than seek fresh work, the US labor market is tight. Still, my inflationary glass has tended to be half-full on the basis that improved US capital spending should ultimately help fix the economy’s supply side.

    0
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    Gavekal Dragonomics

    Politics And Policy In Common Prosperity

    It’s now been a year since top leader Xi Jinping first laid out his new goal of achieving “common prosperity,” but how exactly that new slogan translates into government policy still remains rather unclear. As Andrew explains in this piece, that’s because common prosperity is ultimately more of a political campaign than a coherent policy agenda.

    0
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    Gavekal Research

    Transitory Inflation’s Unanswered Questions

    As a child, I was lucky enough to attend a Jesuit school. I once asked a teacher: “Father, is it true that Jesuits always answer a question with another question?”. The priest looked me up and down and answered: “Who told you that?”. In this spirit, I will try to answer today’s biggest market question—whether inflation proves transitory, or not—with more questions.

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    Gavekal Research

    The Fed Chair Question And The Euro

    The resignation Monday of US Federal Reserve governor Randy Quarles has highlighted the question marks hanging over his boss, Fed chair Jay Powell. With each week that goes by, the failure of Joe Biden to renominate Powell shortens the odds that the Fed chair will not see a second term. This may help to explain the recent rallies in bonds and equities. If Powell is to be replaced, his successor is likely to be even more dovish. Given the White...

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    Gavekal Dragonomics

    A Conservative But Costly Plan

    A major concern of negotiators and activists at this month’s global climate meetings is the size and credibility of China’s decarbonization commitment. However, as Arthur and Rosealea explain there are good reasons to believe that climate goals will play a large role in China’s policy mix in the coming decade—with large risks to economic growth.

    2
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    Gavekal Research

    Video: A Looser Labor Market

    In the US expectations are growing that labor shortages will drive accelerating pay rises, exacerbating inflationary pressures. In the eurozone, as Nick explains, the situation is different. Although anecdotes abound about employers struggling to staff up, these are a temporary wrinkle caused by rapid reopening in narrow sectors.

    0
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    Gavekal Research

    Hedging A Tighter US Economy

    After October’s payroll report came in strong on Friday, the S&P 500 hit a new high. On Saturday, the House Of Representatives was corralled into passing the Biden administration’s delayed infrastructure bill and there is a good chance of the “reconciliation bill” becoming law. Given such boosts to demand, US equity investors could be forgiven for expecting smooth sailing ahead. But KX warns of higher volatility.

    0
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    Gavekal Dragonomics

    The Case Against Easing

    Even though growth has been very disappointing in China, markets are not pricing in more monetary easing from the central bank. In this piece, Wei reviews the arguments currently being made for keeping interest rates on hold—and finds them all wanting. China’s policymakers are indeed being quite conservative, but will still end up cutting rates.

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    Gavekal Research

    Fortress Europe (Again)

    One of Europe’s enduring mysteries is why the continent’s left-of-center political parties, many of them steeped in Marxist theory, became such eager exponents of European integration. Integration, after all, promised to expose the domestic workers whose interests the left claimed to represent to cut-throat cross-border competition.

    4
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    Gavekal Research

    Webinar: Global Investment Roundtable, November 2021

    At November's Global Investment Roundtable, Gavekal’s senior team convened to discuss the global macro environment as energy prices continue to rise and the US Federal Reserve gets closer to winding down its monetary accommodation.

    0
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    Gavekal Research

    The Fed Turns Inflation Risk Manager

    At the start of 2021, not many investors expected the Federal Reserve to close the year by winding down its asset purchases. So why is it now tapering, and what comes next for US monetary policy and markets? In this piece, Will seeks to explain.

    0
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    Gavekal Research

    An Unstable Equilibrium

    In the past few weeks, the central banks of developed commodity producers including Canada, Australia and New Zealand have given up on the idea that monetary policy will stay easy forever. But the world’s major central banks do not seem to share their concern. This makes for an unstable equilibrium.

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    Gavekal Research

    Chronic Congestion

    The US is facing the prospect of a gloomy Black Friday this year. Consumer demand for products is strong. But with scores of container ships backed up outside the main US ports, supply chain bottlenecks are slowing the pace at which stuff can be distributed. This isn’t just a problem affecting imported consumer goods. It is also leading to shortages of key components, which are weighing on the output of US manufacturers. Either way, the results...

    0
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    Gavekal Dragonomics

    The Risks Of The Property Tax Transition

    China’s property market is heading into uncharted territory following a formal authorization for the government to carry out regional pilots of a property tax. The goals of such a tax are clear: reduce speculation and diversify local government revenues. However, Rosealea explains that the transition to this tax will be tricky and not without risk.

    0
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    Gavekal Research

    Decarbonization’s Disruptions

    Media attention at this month’s COP26 climate talks in Glasgow will focus on which promises governments make to combat climate change. Yet this distracts from the substantive questions the world will need to grapple with in the next several years as the promised energy transition moves into gear.

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    Gavekal Research

    Beware The Bear Flattening

    On Tuesday, the Reserve Bank of Australia became the latest major central bank to signal a change of course, shifting away from its ultra-accommodative policy stance and towards a marginal tightening in response to higher inflation pressures. In executing its shift, the RBA confirmed what the bond market had already concluded: last month, yields at the short end of the Australian dollar curve spiked higher in anticipation of interest rate...

    0
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    Gavekal Dragonomics

    Sticking With Zero Tolerance

    With tight border controls and extensive domestic tracing, China remains one of the few countries in the world still maintaining a zero-tolerance approach towards Covid-19. Ernan explains that officials consider the policy a success relative to the alternative of widespread Covid and will likely keep it in place for at least another year.

    2
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    Gavekal Research

    The Downside Of Rising Wages

    US wage growth is accelerating. The employment cost index rose 3.7% year-on-year in the third quarter, up from 2.8% in 2Q to the fastest rate since 2004. In quarter-on-quarter terms, compensation rose at a rate that has only been matched twice in recent decades—in 2001 and 1990, both times on the eve of recession. A number of transient constrictions in labor supply contributed to the rapidity of 3Q wage growth. But although these will abate in...

    3
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    Gavekal Research

    Strategy Monthly: Adding Up Inflation

    Inflation is back as a major force and economic policymakers are having to reassess their crisis-period settings and plan for tighter financial conditions ahead. How these forces play out will be the key driver of markets in the coming year.

    0
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    Gavekal Research

    Lagarde Versus The Market

    If European Central Bank president Christine Lagarde really intended to throw cold water over market expectations of an ECB interest rate hike in 2022, then she failed dismally on Thursday. At Wednesday’s close, the short term interest rate market had been pricing in a hike of 23bp by December 2022. By the end of Lagarde’s press conference on Thursday, it was pricing in an increase of 32bp.

    3
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    Gavekal Research

    Webinar: Europe's Dislocated Recovery

    Europe is in the grips of an energy crisis that is disrupting multiple industries and acting as an effective tax on consumption. In addition to broader supply chain bottlenecks, the worry is that these factors choke off Europe's nascent economic recovery. In this webinar our team of analysts assess these dynamics.

    0
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    Gavekal Dragonomics

    Venture Capital After The Tech Rout

    China’s wave of regulatory actions against internet companies has left venture-capital and private-equity investors feeling on edge. While the new policy environment demands a rethink for investors, many believe they can still find promising investments. Of bigger concern is whether new regulations will make it harder to exit their positions.

    3
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    Gavekal Research

    Video: India's Comeback

    India posted a blazing 20% year-on-year growth figure in the calendar year’s second quarter. The country seems to have ducked a third Covid wave and equity investors remain ebullient. In this video interview, Udith explores a number of gathering problems for the Indian economy but concedes that the good times could easily keep on rolling.

    0
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    Gavekal Research

    A Case Of Hopeless Optimism

    How can we reconcile the 6.5% growth forecast and the absence of feared tax hikes in Wednesday’s UK budget with The Coming UK Recession forecast by Nick Andrews at the beginning of October? The strict answer is that we cannot, because a recession in the conventional sense of two quarters of negative GDP growth is almost impossible in Britain next year. This is for the same reason that a recession is almost impossible in the US, or anywhere else...

    0
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    Gavekal Research

    This Time Really Is Different

    Let’s go back to a time before 2015. Imagine a country running a big trade surplus with the US. Typically, the exporters who create this surplus bear domestic costs and so need to change their US dollar revenues into the local currency. From here, one of two things can happen:

    6
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    Gavekal Research

    The EU’s Ambitious Roadmap To Net Zero

    Europe has by far the most ambitious decarbonization program among major regions, targeting net zero greenhouse gas emissions by 2050 and a -55% reduction from the 1990 level by the end of this decade. Cedric has examined the European Union's plans for achieving this goal, and in this article outlines the likely impact on key sectors of the economy.

    4
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    Gavekal Research

    Asia’s Taper Resilience Wanes

    In mid-2013, emerging markets faced blanket selling after the Federal Reserve said it would buy fewer assets. In time, investors differentiated between strong and fragile markets, but the damage was still severe. Fast forward eight years and there have been good reasons to think that Asia could happily avoid a rerun of the “taper tantrum”. Vincent is now revising that view.

    2
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    Gavekal Dragonomics

    Macro Update: Demand Disappoints

    Supply-side issues are dominating the headlines, but China’s real problem is now on the demand side. Growth momentum stalled in Q3 as a downturn took hold in the property sector, and policymakers are responding only cautiously. In our latest quarterly chartbook, the Dragonomics team explains the changing outlook for the economy and markets.

    0
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    Gavekal Research

    When Correlations Reverse

    For decades, portfolio managers have held US treasuries as a hedge for their equity exposure on the grounds that over periods of 12 months or so, treasuries tend to be inversely correlated with the US stock market. For the most part this strategy has worked. But few investors seem to appreciate that the relative performance of US treasuries and stocks depends heavily on the type of inflation the US economy experiences. If inflation is demand-led...

    0
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    Gavekal Dragonomics

    No Respite For Real Estate

    Troubled developer China Evergrande Group made an interest payment on a US dollar bond just before the 30-day grace period expired on October 23, narrowly avoiding a default. However, this does not mean the wave of developer defaults is over, or that the freeze in demand for developer debt has thawed.

    4
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    Gavekal Research

    Back On The Road Again

    In the last couple of weeks Louis has been on the road, meeting clients face-to-face for the first time in 18 months. In this report, he distills some of the spirit of those conversations, addressing hot button topics from the sharp run-up in energy and commodity prices, through China’s economic slowdown, to the increase in tensions across the Taiwan Strait.

    11
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    Gavekal Research

    Japan’s Poorly Defined New Dawn

    Having recorded the first rise in headline consumer prices for 18 months, Japan is once again an inflationary economy. This may be welcome news for new prime minister Fumio Kishida, who claims to have a bold new agenda to break Japan out of its funk. Alas, Kishida’s agenda looks half-baked and could spur a retreat from Japanese risk assets.

    0
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    Gavekal Research

    Webinar: What To Expect As The Fed Tapers

    The Federal Reserve is planning to wind down its creation of artificial savings just as the US net national savings rate has ticked lower and the Treasury is preparing to rebuild its depleted cash balances. Will and KX set out what these all these shifts—as well as rising inflation, tightening labor markets and deteriorating housing affordability—mean for US stock and bond markets.

    0
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    Gavekal Research

    Europe’s Wage-Price Nexus

    Data released on Wednesday showed that Germany’s producer price inflation accelerated to 14.2% year-on-year in September. That’s not only faster than consensus expectations of 12.8%, it’s the fastest since November 1974 in the immediate aftermath of the oil price shock.

    0
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    Gavekal Dragonomics

    A Decision Rule For Chinese Equities

    For investors trying to buy the dip in Chinese equities, there is one reliable indicator—the government’s macroeconomic policy, as proxied by private-sector credit growth. In this report, Thomas outlines a robust decision rule for asset allocators: when credit growth is accelerating, buy equities; when it’s decelerating, buy government bonds.

    0
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    Gavekal Research

    Video: Typhoon Season For Hong Kong

    Hong Kong is sticking to its zero-Covid policies, complete with a travel ban on outsiders and Draconian quarantine rules for returning residents, even as Singapore tentatively reopens to international arrivals. In this video interview, Vincent explains what is driving Hong Kong’s uncompromising stance on Covid. He assesses whether it will damage the city’s standing as a regional financial center, and whether doubts over the status of China...

    0
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    Gavekal Research

    Ghost Trains And The Chinese Debt Mountain

    Fears about a debt crisis erupting in the world’s most financially vulnerable nations have receded, but there is still uncertainty over how developing economies will manage their debt repayments. The biggest lender to low- and middle-income countries is China, and a new study estimates that debt owed to China has been severely underreported.

    5
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    Gavekal Research

    Drawing Conclusions From A Sample Size Of One

    We are all the fruits of our own experiences, which create biases to project our experiences into the future. Such personal experience can even be transformed into iron rules. Today, the narrative is that Federal Reserve tapering results in lower bond yields. Louis challenges this view, pointing out that as the Fed has started talk of tapering, yields have been rising.

    0
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    Gavekal Dragonomics

    Solving The Power Crisis

    To solve China’s power shortages, planners are both liberalizing electricity prices and browbeating mines to produce more coal. In this report, Rosealea explains that while getting through the crisis will require a rebound in coal-fired power, energy price liberalization should support China’s environmental goals in the long run.

    2
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    Gavekal Research

    The US Production Problem

    US manufacturing production data for September released on Monday was a double disappointment. The -0.7% month-on-month decline, down from growth of 0.2% in August, not only fell short of consensus expectations for 0.1% growth. It also dampened hopes that manufacturing is set to emerge as a significant driver of US economic growth. This raises questions over the future strength of the US expansion.

    0
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    Gavekal Research

    The Troubling Signal In US Savings

    In recent months, the US net national savings rate—the share of income unconsumed—has ticked lower. It may seem a small concern as the Federal Reserve prepares to taper, but if the rate of genuine savings continues to fall over coming quarters, it will be a danger signal both for asset markets and for US economic growth.

    7
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    Gavekal Research

    The Source Of Discoordination And Inflation

    Today, the global economy lacks its usual order. Each month brings a new shortage that is disrupting supply chains and driving up prices. In short, the right goods are not being delivered at the right time and place. Will examines the drivers of spacial and temporal "discoordination" to determine how investors should allocate assets in this challenging environment.

    3
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    Gavekal Dragonomics

    A Steady Slowdown

    Chinese economic growth continued to slow in 3Q21 thanks to ongoing supply constraints and demand weakness. In this Quick Take, the Dragonomics team explains that while China’s poor September figures reflect supply-side constraints, of greater concern is the weakening demand side due to a deepening property downturn.

    0
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    Gavekal Research

    Still Behind The Curve

    On Thursday, the Monetary Authority of Singapore announced it would target a modest nominal effective exchange rate appreciation of the Singapore dollar in order to contain domestic inflation. On the same day, the governor of the Central Bank of the Philippines, or BSP, said there “is no more need” for the central bank to continue financing government fiscal policy.

    0
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    Gavekal Research

    Webinar: China’s Policy Trajectory

    China’s leaders capitalized on the country’s post-Covid boom by pursuing reforms that further Xi Jinping’s political goals. These have resulted in hits to both economic growth and financial markets. In this webinar, Andrew unpicks these developments and explains why he thinks no U-turn in the broad policy approach is likely.

    0
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    Gavekal Research

    Building The Bubble-O-Meter

    Charles is somewhat tired of reading general descriptions of US equities being in a bubble, with little serious empirical backing to support the assertion. In this piece, he sets out to build an objective tool to answer the bubble, or not, question. Spoiler alert: he thinks investors would do well to re-assess their hedges.

    3
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    Gavekal Dragonomics

    The Long Winter For Small Business

    China’s small businesses are having a rough 2021: business conditions have stagnated or deteriorated since the recovery in late 2020. There’s been much debate on the causes of their struggles, but the biggest culprits are the ripple effects from the government’s zero-tolerance Covid policy and its tightening of credit and real-estate policies.

    0
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    Gavekal Research

    Persistent Inflation Takes Over

    Some may hope that supply bottlenecks quickly ease and the price-hike scare of 2021 soon fades, but that is not the story of the latest US inflation reading. In short, US inflation is now persistent and the Federal Reserve will soon have to address this reality head-on.

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