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    Gavekal Research

    A US vs UK Asset Allocation Model

    Over the long term, there is no reason why the UK stock market should offer a higher—or lower—return than the US market in dollar terms if the two countries operate in an open system and are similarly (badly) managed. Equally, there is no reason for the US bond market to outperform or underperform the UK bond market since—in an open system—the risk-free rates must be the same. If one market has outperformed the other for a considerable period...

    0
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    Gavekal Research

    Bank Shares And Deflation Risks

    Over the years, I have learnt the hard way to pay a good deal of attention to the behavior of bank shares. Simply put, when interest rates and bank shares fall in tandem the market is offering a clear signal that very bad news is on the way.

    3
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    Gavekal Research

    Deflation: Boom Or Bust?

    It has been my contention for a while that capitalism is returning to its 19th century deflationary roots. Indeed, the evidence for this assertion has become overwhelming. The consumer price indices of 13 OECD countries have negative YoY readings. Another eight are below 1%. In the case of “goods inflation,” all European economies are flashing negative. And if the likes of Italy or Spain thought that salvation lay with an “internal devaluation...

    2
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    Gavekal Research

    Waiting For The Japanese Pay-Off

    Back in December 2012, as it became clear Japan was moving towards an all-out attack on deflation, I argued that if Tokyo’s shock and awe campaign drove the yen into undervalued territory, it would have a powerful deflationary impact on the rest of the world. My view at the time was that the devaluation of the Japanese currency would reintroduce a formidable competitor into the world’s economic system, and that it would take roughly 18 months...

    1
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    Gavekal Research

    Plodding Towards Deflation

    It has been my core belief for some time now that the capitalist world is returning to its deflationary roots. But a period of deflation can take one of two forms. In the first, the economy grows faster in volume terms than prices are falling. In this case the revenues of companies selling goods and services that are elastic to prices will increase on a nominal basis. In the jargon this is what is known as a ‘deflationary boom’. In the second...

    2
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    Gavekal Research

    If You Keep On Doing What You’ve Always Done...

    ...you'll keep on getting what you’ve always got. At least, that's what any sports coach worth his salt would tell a losing team in the half-time huddle. And perhaps this is the problem facing the big developed economies. Not enough of today's bien-pensants (Hollande, Merkel, Yellen, Bernanke...) or their advisers (Summers, Piketty, Krugman...) have spent time chasing a ball around a field. Let me explain.

    2
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    Gavekal Research

    More Fools Than Money?

    Back in the early 1970s, when I was a young analyst looking to set up my first independent research firm, Beat Notz of Notz Stucki in Geneva offered me some invaluable advice. “Never forget that this is an easy business, Charles,” he said. “All you have to do is figure out whether there are more fools than money, or more money than fools. Once you’ve figured that out, you’ll know whether to reduce or to increase your risk”. Sadly, Beat has now...

    0
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    Gavekal Research

    How To Game A Rigged Market

    Markets are on alert in a week that could see more great insights from the gods of central banking on high. Investors seem a little spooked with the MSCI emerging markets index off 4% in the last eight trading days, while currency volatility has picked up as the US dollar has strengthened. And yet despite these minor ructions, there remains a deeper sense of calm. It is the sort of quiescence born of insiders’ knowledge that the nature of...

    3
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    Gavekal Research

    Quarterly Strategy Chart Book - Three Views of A Fragile Europe

    As we see it, the most significant investment development over the last two quarters has been a renewed bout of economic weakness in the eurozone. This is all the more worrying since the rest of the world economy looks to be set on a recovery path. As a result, European growth assets have performed miserably, while eurozone bond yields keep making new lows. As we consider the path ahead for Europe, we can see three distinct scenarios: (i) Slow...

    4
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    Gavekal Research

    QE & Bull Markets

    A client recently asked a deceptively simple question: does quantitative easing always lead to a bull market in financial assets? There was, of course, a background context to the enquiry which was last week’s much anticipated deflation-slaying action by the European Central Bank.

    3
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    Gavekal Research

    Stagnation, Default Or Devaluation

    Last week’s Jackson Hole meeting helped to highlight a simple reality: unlike other parts of the world, the eurozone remains mired in a deflationary bust six years after the 2008 financial crisis. The only official solutions to this bust seem to be a) to print more money and b) to expand government debt. Meanwhile, Europe’s already high (and rising) government debt levels and large budget deficits raise the question whether we should worry...

    0
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    Gavekal Research

    Five Corners (20 August): Velocity Of Money

    In the latest bi-weekly review of global economics and investment we focus on the velocity of money and the credit cycle in the major economic regions: Overview: Charles Gave notes with concern the downturn in the Gavekal Velocity Indicator. US: Will Denyer looks where the US is in the credit cycle and argues it looks more like 2004 than 2007. Europe: François Chauchat argues that contrary to popular belief Europe’s long credit crunch is...

    0
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    Gavekal Research

    The Cantillon Effect (And The Inevitable Demise of Financials)

    Richard Cantillon, an Irishman who spent much of his life in France, only wrote one book (Essai sur la Nature du Commerce) that was published after his death in the early 18th century. It proved a groundbreaking text in the history of political economy and had a huge influence on the likes of Knut Wicksell, the Austrian school and the great Irving Fisher.

    5
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    Gavekal Research

    A Spectacular Eur-Asian Divergence

    Financial markets are nothing if not a real time survey of real people playing with real money. Hence, no one can seriously doubt that markets contain a huge amount of highly pertinent information. The problem for the investor is how can this be profitably extracted?

    6
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    Gavekal Research

    5C Overview: Time For The Defensive Team

    In the second half of last year I wrote a number of pieces that addressed the “velocity of money.” Regular readers will be aware that Gavekal places great store on this particular economic measure (defined as the willingness of the financial sector to take risk) as a key driver of asset prices.

    0
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    Gavekal Research

    What Is The ECB Waiting For?

    Banking networks have typically been built on two elements: confidence, and capital. Historically, confidence was often based on the common background of the bankers—the Lombards in Italy and France, Jews in Spain. Otherwise it relied on an institution willing to take on transfer risks (for a fee) and large enough to reassure payers that it was ‘too big too fail’; for example, the great monastic orders of the Middle Ages.

    1
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    Gavekal Research

    Simple Rules For Asset Allocation

    In our research, we have always made two major assumptions. The first assumption is that assets can have value for one of three reasons:

    2
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    Gavekal Research

    Stock Markets And Profits

    Over the long term—and I mean the really long term—stock markets and corporate profits tend to track each other nicely. Consider the chart below which with a base in 1970 shows the S&P 500 and US profits from the national accounts adjusted for inventories and capital depreciation.

    2
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    Gavekal Research

    How And When To Short French Bonds

    Earlier this month I recommended—for the first time in my career—an unhedged short position in the French bond market (see It’s Time To Go Short French Bonds). For investors who are uncomfortable with such ‘naked’ shorts, there may be an alternative. They could go short the French OAT and go long the German bund. This Daily sets out the risks involved, together with a decision rule to determine timing.

    2
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    Gavekal Research

    The Price Of A Diminished US Dollar

    Nature, it is said, abhors a vacuum. In much the same way, geopolitics cannot tolerate a power vacuum. So it is small surprise that as a chastened and diminished United States has retreated from direct involvement in the Middle East and adopted a less interventionist diplomatic and military stance elsewhere in the world, ambitious opportunists have stepped forward to fill the gap. In East Asia, China has assumed a far more assertive attitude...

    2
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    Gavekal Research

    Indexation = Parasitism

    The role of financial markets is to evaluate in real time the marginal return on capital of different assets. This is done through a ‘price discovery mechanism’, with the ‘right price’ found out through a system of constant trial and error. To discover this price calls for a community of active money managers, each doing his or her due diligence before buying and selling. This price is a function of the return on capital and of the expected...

    14
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    Gavekal Research

    It's Time To Go Short French Bonds

    Monday is le quatorze juillet, July 14, France’s national day. In Paris a grand military parade will march along the Avenue des Champs-Élysées as air force jets streak overhead to mark the 225th anniversary of the French Revolution. Yet, behind the pageantry celebrating the glories of the republic, all is not well. For two years I have maintained that France has been facing a secondary depression. As expected, the economy is now getting worse,...

    6
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    Gavekal Research

    Poverty Matters For Capitalists

    Inflation is a much misunderstood phenomenon. Most people assume that a CPI rate of 10% means that most prices are rising by a similar amount. In reality, some prices may be falling even while others soar. This matters because price variations affect socio-economic groups in very different ways. The rich tend not to be impacted unduly by price hikes for “necessities” such as food, rent and fuel, while the impact on the poor is to slash that...

    17
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    Gavekal Research

    What Lurks Beneath

    This week has seen the conviction of both bulls and bears tested. Job creation in the US exceeded expectations in June and so investors yesterday bid the S&P 500 to yet another high. Bulls probably took succor from Janet Yellen’s mid-week promise not to use the blunt instrument of interest rate rises to prick any irrational exuberance. Yet, earlier in the week, bears must have looked approvingly at a Bank for International Settlements report...

    3
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    Gavekal Research

    The Emerging German-Russian Axis

    This weekend has seen the European Union do a stitch-up deal so that arch-federalist Jean-Claude Juncker became Commission president. To be honest, who gets to play eurocrat in chief is of no great interest to me, but the manner of the appointment tells us lots about the changing nature of power in Europe. Governments from Stockholm to Rome reportedly opposed Juncker, but ultimately none would defy Berlin. Also this weekend, it is worth noting...

    10
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    Gavekal Research

    5C Overview: Time To Exit Illiquid Credit

    “The essence of shadow banking is to give liquid claims on illiquid assets” — Jeremy Stein, Federal Reserve governor until May 28, 2014.

    2
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    Gavekal Research

    Sunnis On The March

    It is clear that we are seeing a major conflagration in the Middle East along the deep-rooted Sunni-Shia divide. But beyond the great schism of Islam, the breakdown of national borders that have broadly held since the 1918 Franco-British carve-up of the Middle East is again being dictated by great power politics. This is the story behind the Islamist surge through central Iraq this week. It is likely to have significant consequences beyond the...

    2
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    Gavekal Research

    BNP, Big Brother And The US Dollar

    France’s biggest bank, BNP Paribas, and the US government have gotten into a fight—a fight which threatens to cost BNP US$10bn in fines and possibly even its US banking license. As usual, the official causes of the fight have very little to do with the real ones. The official narrative goes like this: the US government placed embargos on a number of countries, including Sudan, Cuba and Iran. Between 2002 and 2009, BNP’s subsidiary in Geneva,...

    6
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    Gavekal Research

    Tomorrow Is Not A Game Changer

    Tomorrow we expect to see the latest Band-Aid solution being applied to the eurozone. Having teased the market for months, it seems likely that the European Central Bank will trim its main refinancing rate, possibly announce a negative deposit rate and even promise a few asset purchases. Forgive me if I don’t roll out the barrel. This is fiddling which does little to correct the fundamental dysfunction at the heart of the system. Let’s be clear...

    1
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    Gavekal Research

    Long Bonds Are Past Their Best

    I am surprised and a little bit mystified. Over the last few days, I have read article after article saying that this year’s decline in US long term rates was totally unexpected, and that the behavior of the bond market has prompted many financial firms, and even the US Federal Reserve, to throw away the econometric models they used to forecast long rates.

    5
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    Gavekal Research

    Playing The Bond Markets In A Fixed Exchange Rate System

    Contrary to what some people may believe, I do not wake up in the morning with an irresistible urge to short the French bond market, or to go long US treasuries, or whatever it happens to be. I devise decision rules and I follow them. To build these rules, I always follow the same steps.

    0
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    Gavekal Research

    A Return To Old Faithful

    Like obscenity and modern art, most economic data charts, and market data charts will mean different things to different people. For example, earlier this week Will Denyer argued that investors should sell US treasuries due to the uptick in US inflation, a moderately optimistic outlook on economic growth and the fact that 10 year bonds seem to be flirting with an important level (2.5%) from which they have bounced in the past (see Time To Sell...

    1
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    Gavekal Research

    A Supply-Sider’s View Of China

    Let’s conduct a simplified thought experiment. Imagine a country where there are two types of capex: capital spending used for building infrastructure and capital spending deployed in favor of other private sector activity. By rights, money should go to those projects with the higher return on invested capital. The problem is that most returns from infrastructure accrue to third party users of the asset (so called “externalities”) and not to its...

    6
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    Gavekal Research

    The Problem With Piketty

    Thomas Sowell coined a marvelous phrase to describe the well-intentioned social engineers who always know what needs to be done to improve the wellbeing of the downtrodden. He called them “the anointed” and explained how their reasoning always evolves in the same three stages:

    13
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    Gavekal Research

    Will The Last Businessman To Leave France Turn Out The Lights?

    This week the French government announced its opposition to GE’s proposed US$13.5bn acquisition of Alstom’s energy business, even though the bid won the approval of Alstom’s board. Instead ministers have indicated their preference for a rival deal with Germany’s Siemens. Either way, Alstom’s energy arm will still pass into foreign control, becoming just the latest in a long string of businesses to quit France.

    7
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    Gavekal Research

    A Supply-Sider’s View Of Japan

    Two years ago respectable opinion had it that the United Kingdom’s economic outlook was pretty bleak. After all, the Conservative-led government had adopted a policy of public spending cuts, which every right minded person knows must lead to insufficient aggregate demand and a descent to oblivion. My somewhat unfashionable take was that these spending cuts had laid the ground for a sustainable pick-up in private sector activity (See An...

    4
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    Gavekal Research

    Obamacare And US Growth

    Regular readers will know that I am not a great fan of GDP as a measure of a nation’s wealth creation capacity. Firstly, the numbers are so heavily revised that their value is dubious. More substantively, there is the question of what GDP measures. In the private sector, transactions are entered willingly and all costs are deducted before arriving at the sum of the added values—when a private sector entity makes a loss, that sum is deduced from...

    4
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    Gavekal Research

    Easy Eurozone Trades Are Running Out Of Road

    Investor enthusiasm for government debt from the eurozone’s southern periphery persists unabated. Last week the yield on Spanish 10-year bonds dropped to its lowest level since September 2005. Before too long, however, I believe investors will find themselves bumping up against some hard truths imposed by simple accounting identities. In this I find myself taking a somewhat different view to the one recently expressed by François (see Believe In...

    3
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    Gavekal Research

    Five Corners (16 April 2014)

    In the latest bi-weekly review of global economics and investment, Charles Gave explains why it still pays to run a balanced portfolio, despite the market’s rotation. Will Denyer argues that outlook for US consumption remains favorable, even though consumer cyclicals have taken a beating. François-Xavier Chauchat examines the reasons behind the euro’s persistent strength. Andrew Batson looks at Beijing’s new focus on jobs and finds the...

    0
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    Gavekal Research

    5C Overview: Why A Balanced Portfolio

    Last August I suggested moving from a fully invested position in equities to a “balanced portfolio” with equities hedged by high quality government bonds. What underlay this recommendation was a simple reality: the global consumer price index had by that point dipped to about 3.3% and the G7 core CPI measure was down to 1.1%.

    0
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    Gavekal Research

    The Euthanasia Of Pensioners In Peoria

    I read everywhere that the US budget deficit is contracting because government consumption is falling as a percentage of GDP, now that the worst of the crisis has passed. This would be very good news indeed, however, I am not so sure that this decline is for real. In fact, I believe it is an accounting illusion.

    1
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    Gavekal Research

    5C Overview: In Defense Of The Inverted Yield Curve

    Capitalism is inherently deflationary because private capital is subject to the creative destruction process. By contrast, government spending is naturally inflationary as it is not subject to the same competitive erosion and deficits that are funded by a government controlled central bank.

    0
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    Gavekal Research

    The Sword Is The Axis Of History

    As Anatole recently argued, we can all breathe a sigh of relief that the tussle over the Crimea has likely been resolved without serious bloodshed and at minimal cost (see All Over Bar The Annexation). But in the longer term it is clear that these events may cast a long shadow over international relations for years to come. Indeed, as British politician Ernest Bevin famously said, “don't open this Pandora’s box, it is full of Trojan horses...

    2
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    Gavekal Research

    Southern Europe’s Unavoidable Deflation

    Last week we published a piece by Francois which argued that a “reflating” Southern Europe was close to exiting its debt trap nightmare, while the promise of further counter-measures by the European Central Bank meant that Europe faced no serious deflation risk. I would respectfully differ, and in this paper will seek to show that Southern Europe is sliding further into a “secondary depression,” which is likely to worsen just so long as the...

    3
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    Gavekal Research

    How To Think About Deflation

    The word deflation is appearing in newspapers almost every day, while the International Monetary Fund and the OECD, the rich world club, are falling all over themselves to see who can most frequently use the phrase “deflation risk.” As I have been warning about deflation for quite a while—and feeling like a voice crying out from the desert—I have naturally been interested to read what these fellows have to say on the subject. Unfortunately,...

    6
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    Gavekal Research

    Gold As A 'Deflation' Hedge

    Economists have had many market puzzles to ponder in this era of monetary excess, going back to Alan Greenspan’s long bond “conundrum” nearly a decade ago. The latest market conundrum is gold: why did it begin rallying on news that US liquidity growth would be slowing (the taper), and why has it remained strong despite weak global CPI prints and flagging broad money growth the world over. This is particularly hard to understand for OECD...

    4
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    Gavekal Research

    The US Current Account And Vanishing Global Liquidity

    The US dollar is the world’s reserve currency which in simple terms means that the United States is the only country which can settle a foreign deficit by issuing its own money. As such, any “improvement” in the US current account balance means that fewer dollars show up outside of the US, while the reverse holds true in the event of a deterioration.

    0
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    Gavekal Research

    5C Overview: Volatility And Balanced Portfolios

    My big worry over the last year has been a descent into deflation due to Federal Reserve policies that have caused the velocity of money to crater. However, economic history tells us that deflation does not in all instances mean depression. After all, there have been many cases of prices falling and economic activity rising, which is a phenomenon that we have labelled as a “deflationary boom.”

    0
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    Gavekal Research

    Leading Indicators Through The Looking Glass

    Leading economic indicators are a key tool used by analysts to gain a heads up on the future. They rely on a mix of hard and soft survey data and offer a glimpse of likely spending decisions to be made by producers and consumers. That, at least, was the way things used to work in Europe. Today, the impact of multiple policy manipulations is that the predictive power of these tools has almost completely broken down (see The Problem With Leading...

    9
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    Gavekal Research

    The Emerging Market Crisis

    With emerging markets in panic mode, investors are bound to be reminded of the enduring observation, first made by a 19th century British businessman named John Mills, that: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works.” With that in mind, investors seem happy to link the ongoing EM sell-off to either a) China's large capital...

    4
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    Gavekal Research

    Portfolio Building In The Time Of Disinflation

    Stocks and bonds are the two main financial assets. The return on stocks represents compensation for ownership, while bond payouts are dictated by the “rentier” who seeks both a return on capital and, most importantly, the return of capital. Only government bonds offer the reasonable expectation that capital should always get paid back.

    4
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    Gavekal Research

    5C Overview: The Eminent Case For Rent Control

    The French minister who oversees the housing and construction sectors wants to re-introduce rent controls and toughen oversight of residential building. This enlightened proposal has naturally been met by howls of protest from the industry and most economists. And yet, consider the beneficent consequences that must surely flow from such a measure.

    0
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    Gavekal Research

    Back To MV=PQ

    Inflation expectations may have ticked higher but I am not in the camp that expects rising prices to follow a stronger US economic outlook. In fact a deflationary shock may be on the horizon. Such an outcome, if combined with stronger economic volumes, could be a boon to global economic welfare. But we are walking a very thin line.

    4
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    Gavekal Research

    On US Capital Spending

    There is a common narrative that US companies are “awash with cash.” The puzzle that economists and strategists have been trying to solve in the past few years is why these riches are not being invested. This debate continues today, but the story has moved on. The cash is now gone.

    0
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    Gavekal Research

    A New Widow Maker?

    The Japanese government bond market is famously known as a “widow maker,” since shorting it has crushed so many macro-traders. It looks like the euro is competing to grab title for itself. Many traders have been shorting the currency, with poor results so far.

    2
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    Gavekal Research

    Debate: Inflation Or Bust?

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    Gavekal Research

    A Thatcherite China

    0
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    Gavekal Research

    5C Overview: Panzers At The Border

    I have always been fascinated by those periods when the nomenclature of the day has settled on a risky strategy in the absence of any “plan B”. Think of France’s all-in bet on the Maginot line’s capacity to halt Blitzkrieg, or the fact that Japan’s military elite in WWII had no plan on how to settle for peace—it took the detonation of two atomic bombs for Emperor Hirohito to order his generals to sue for peace.

    0
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    Gavekal Research

    A New Kind Of Trigger Point

    19
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    Gavekal Research

    Back To German Bashing

    When Keynesian policies are failing, as they always do, proponents never fail to look for a scapegoat. Usually this is Germany, rebuked for the un-Keynesian practice of earning and saving. Our concern is that when German bashing reaches fever pitch, panic selling often follows. Think for example of the stock market crash in 1987, “created” by the fight between the US Treasury and the Bundesbank.

    15
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    Gavekal Research

    Forget The Yield Curve, Watch The Wicksellian Spread

    11
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    Gavekal Research

    5C Overview: Stocks As A Lagging Indicator

    Stock markets are, by nature, leading indicators of future economic conditions. They are the first responders to changes in financing rates, demand, inflation expectations, etc. So long as returns on future investments are expected to be above the cost of capital, the millions of players in the stock market will bid up equities. If marginal returns move below the cost of capital, the market will go down, and so eventually will the economy. Fine...

    1
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    Gavekal Research

    Velocity In Asset Allocation

    This is the second in a two-part series of articles which aims to illustrate why investors ignore at their peril the pace at which money circulates through the financial system. In part one, I argued that ‘V’ as defined in the classic monetary formulation MV=PQ is an independent variable with the capacity to transform the investment weather (see A Fisherian Take On Velocity). I am endlessly amazed by the lack of attention that this vital...

    11
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    Gavekal Research

    London Seminar September 2013 - Anatole, Andrew, Joyce, Francois and Charles

    For those who missed our seminar this week in London, see below links to the audio files to listen to our five speakers, and separate links to view their presentation slides. See below in order of speaker. The audio files may take a moment to open:

    0
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    Gavekal Research

    5C Overview: Waiting For Godot, And Capex

    In the Samuel Beckett play Waiting for Godot, we wait throughout the performance for the eponymous character to appear. A similarly fruitless wait seems to be affecting US capital spending, which according to every demand-side econometric model (think Keynesian) should be on the cusp of a surge. That at least has been the story for the last three years and capital spending is still going nowhere fast. The same is true for employment, which after...

    8
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    Gavekal Research

    A Fisherian Take On Velocity

    Defining the velocity of money is not an easy task. John Maynard Keynes summed it up as the ‘animal spirits,’ the Austrians called it ‘the preference for liquidity,’ Knut Wicksell labeled it the spread between the ‘market rate’ of interest and ‘the natural rate.’ Joseph Schumpeter tied changes in velocity to entrepreneurs’ willingness to take risk, which in turn is tied to factors including the legal systems in which they operate, property...

    10
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    Gavekal Research

    The Lambs That Turned

    Given recent events in Washington it might be worth looking at the basic relations that bind our modern democracies. Back in the age of enlightenment, the founding fathers of a young American republic thrashed out a system of government that allowed the majority to pursue life, liberty and happiness, while ensuring that democracy did not descend into mobocracy. As debate raged over appropriate constitutional arrangements, one Benjamin Franklin...

    59
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    Gavekal Research

    Using Wicksell To Manage Money

    All my life, I have conducted research by following two simple steps. Firstly, I try to understand the logic of the economic or financial system under consideration (economics is a branch of logic, itself a branch of philosophy rather than a subset of mathematics or even astrology). This is a messy and time-consuming process, but is aided by following the insights of great economists from times past.

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    The Unwatched Variable

    The Federal Reserve has panicked and we can expect to hear yet more justification for the decision to drag out its great monetary experiment. Yesterday, we had FOMC leading light William Dudley opine on the conditions that must apply before those geniuses in Foggy Bottom can think about tapering. The only tangible impact from last week’s action has been to further weaken the dollar, which is exacerbating one of the most frequently overlooked...

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    A Panicked Fed Doubles Down

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    Quarterly Strategy Chart Book - The Tug Of War

    The readjustment in global bond yields over the past couple of months has increased volatility across most asset classes. Some, such as US equities, weathered the storm relatively well, while others, like emerging markets and most bond markets, did very poorly.

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    Gavekal Research

    Why Europe Is Still Broken

    Back in the day, playing European markets was a simple game. Industrial production across the European continent tended to rise and fall, pretty much in lock step with Germany’s IFO index of business activity. This relationship broke down with the creation of the euro and fully fractured after 2007. For example, consider yesterday’s worse than expected French industrial production, even while Germany continues to power ahead.

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    Gavekal Research

    Of Wicksell And Fed Fallacies

    Let's start with the great Wicksellian “insight”.

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    Are Interest Rates High Or Low?

    The debate over rising US bond yields seems simple. Either interest rates are now too high and will snuff out any hope of a sustainable recovery; or this is just a “normalization” from excessively low interest rates, and thus nothing to worry about. In fact, this is the wrong debate.

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    Free Money vs Growth

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    Of Dynamite Fishing And Whales

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    A Young Man's Game

    I started in the fascinating business of trying to understand why markets go up and down in February 1971. The old money manager in the French bank which had hired me straight away said: "Charles, you will never get rich in this business using other people's money. Do NOT leverage your positions. Leverage might be all right for fellows who deal in real estate, but for those in stock markets, it only brings misery."

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    Gavekal Research

    5C Europe: How To Invest

    At the risk of sounding obnoxious, investing in Europe has actually been quite simple for the better part of the last eight years. All one had to do was overweight the stock markets of the countries which did not belong to the euro and underweight those within the doomsday machine. Such a strategy would have ensured that the investor comfortably outperformed the main European benchmark.

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    5C US: An Unusual Arbitrage Opportunity

    In a normal circumstances there is no particular reason to think the US stock market should outperform the UK stock market over the long term. Over many years I have argued that total return of the US stock market compared to the UK stock market offers no discernible trend—my series goes back to December 1969 and is based on reinvestment of dividends, price appreciation and currency changes.

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    Greek Tragedies Always End The Same

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    A Supply-Sider’s View Of The UK

    Since 2000, central bankers and governments have competed to find “better” ways to direct economic activity. Interest rates, money supply and exchange rates have all been manipulated by clever fellows who are sure they are smarter than the markets. This meddlesome brood succumb to Hayek's “fatal conceit,” not because of their commercial success in the real world, but because they got the best grades at school.

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    Gavekal Research

    The Emergence Of A US Underclass

    ). This dour relationship has been maintained over the last two years and median income has, as I suspected, continued to fall. Make no mistake, if monetary policy is not substantially changed, then median incomes will continue to fall.

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    Gavekal Research

    5C Overview: Which Theorist Works Best?

    In response to a recent report which apparently had anti-Keynesian undertones, a reader asked me: well then, which economic framework do you use for macro-analysis? The answer is not that simple.

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    Southern Europe Walks On Thin Air

    Recent economic data releases suggest, on the face of it, that Southern Europe is enjoying an improved outlook. This weekend, Portugal’s government stared into the abyss and chose for the moment not to break the terms of its bailout. Hence, in recent months, GaveKal colleagues such as Francois have argued that economic conditions in the European periphery are stabilizing (see A New Global Growth Story). I would respectfully disagree. Regardless...

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    Five Corners (17 July 2013)

    In the latest Five Corners biweekly review of global economics and investment:

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    How Markets React To Exchange Rate Manipulation

    In my humble opinion there are certain economic issues which have passed the point of needing validation. Here are a few examples.

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    Gavekal Research

    Bad Omens

    In late May we published a debate piece on the near-term outlook for equity markets. Since then, emerging markets have once again lived up to their name by proving themselves hard to emerge from during an emergency (in USD terms, Brazil is down –35% year to date while Chinese valuations are back to 2008-crisis levels); for their part, European and US equity markets have pulled back, while the only salvation has come from Japan (the one market...

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    Gavekal Research

    Five Corners (3 July 2013)

    In the latest Five Corners biweekly review of global economics and investment, Charles Gave expresses doubt about the supposed rebound in European industry, while Francois Chauchat looks at whether EMU peripheral bonds are a buy after recent sell-offs. We also have Will Denyer on US bonds/housing, Rosealea Yao on China's interbank drama and Cathy Holcombe on the rising emerging market middle classes. See more details below—and please click...

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    Gavekal Research

    A Better Dollar Tool Required

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    Gavekal Research

    When To Buy US Long Bonds

    With yields having surged back to a near two year high, there is an increasingly strong case for buying US long bonds. The more interesting question surrounds the timing of such a move and the level of conviction that should be exhibited in building a position.

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    Gavekal Research

    Volcker’s Return

    Despite the forests that have been sacrificed to explain the end of quantitative easing, it is very simple—Ben Bernanke seems to have finally done the right thing. Call it his Volcker moment.

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    Quarterly Strategy Chart Book - The Fork In The Road

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    The Problem With Leading Indicators

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    More On The Deflationary Bust Risk

    As we look back throughout history, it quickly becomes obvious that Christopher Columbus was the world’s first modern central banker. He left without knowing where he was going, when he arrived he did not know where he was, and he did it all with other people’s money.

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    Five Corners (5 June 2013)

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    Gavekal Research

    An Old Fashioned Deflationary Bust

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    Gavekal Research

    A Debate On Equity Markets

    Last week, Anatole published Goldilocks And The Ten Bears in which he addressed the ten most common complaints heard over the past year when developing a “bullish equity” thesis. Arguably, most of these complaints can be characterized as disproportionately focused on “fundamentals” (e.g., can we trust a rally fuelled by central bank liquidity creation). Of course, healthy bull markets rest on three pillars: sound fundamentals, attractive...

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    Gavekal Research

    Should One Short Germany?

    Some of our long-time readers may remember my quip, soon after the euro was launched, that a European monetary union will result in “too many houses in Spain, too many civil servants in France and too many factories in Germany.” One had to wait a while, but eventually those chickens began to come home to roost.

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    Hong Kong Seminar - Charles, Joyce and Andrew

    At our recent Hong Kong seminar, Charles Gave presented on global currency wars, Joyce on Abenomics and Andrew on the goals of the new Chinese leadership.

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    Our April, 2013 London Seminar - Anatole, Tom, Francois and Charles

    At our recent seminar in London:

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