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    Gavekal Research

    Rising US Interest Rates

    I must say that I am amused. After years of brainwashing, the Federal Reserve has apparently convinced most market participants of two things: (i) it can fully control interest rates and (ii) it will never again raise interest rates.

    2
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    Gavekal Research

    Investing Through Inflation

    When assessing the impact of inflation on US markets, Charles has long believed that its actual level is irrelevant. Instead, it is necessary to determine whether price growth is accelerating or decelerating. He uses this insight to present a new framework for investing in inflationary times.

    3
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    Gavekal Research

    Of Prices, Profits, Energy And Markets

    In various pieces over recent years, I have tried to show that most economic activity is nothing but energy transformed, and that economic value derives from "scarcity" or "efficiency". Further, US stock market returns can tell us a lot about "efficiency values" deployable in the future. These broad concepts can be tied together to assist in investment decisions.

    4
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    Gavekal Research

    Rethinking The International Liquidity Crisis

    In recent weeks Charles has published a series of reports assessing changes in the reserve of value that underpins the global financial system. In this report, he returns to one of his older frameworks for the US-dollar-centered system to see if it still has explanatory power. He concludes that it does, but he is not reassured by the findings.

    7
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    Gavekal Research

    Missing The Forest For The Trees

    In these strange times, I have recently published a few pieces looking at money’s “reserve of value” function. Yet in preparing these papers, I came to realize that over the last decade I made the classic mistake of focusing too much on what was visible, and missing what was obscured.

    3
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    Gavekal Research

    Teaching An Old Dog New Tricks

    The US dollar has long been a poor reserve of value. For decades, German bunds did the job. But negative yields mean they no longer fit the bill. That leaves the US equity market as the world’s chosen reserve of value—with far-reaching implications that Charles explores in this landmark paper.

    9
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    Gavekal Research

    Houston, We Have A Problem

    Charles looks at global bond and equity markets, concluding that the combined effect of central bank policies and private sector indexation is creating a massive corner in the US dollar and US equities.The last time something similar happened was in late 1989, when Japanese equities made up more than half of MSCI World.

    11
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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

    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 Research

    London Seminar — September 2021

    In our recent London seminar, Thomas Gatley addressed China's changed business environment and Tom Miller unpicked US-China geopolitical tensions. Charles Gave and Anatole resumed their dialogue about the future of the world economy in their first in-person sparring session since the pandemic started.

    0
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    Gavekal Research

    A Shifting Economic State

    Regular readers may be familiar Charles's my longest-serving analytical tool, the Four Quadrants framework. It aims to represent the four economic states that at different times can exist in a market economy. Through this prism, he examines current market conditions to figure out where in the quadrants we are, and where we're headed.

    3
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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.

    6
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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 Research

    Understanding Asia’s New Monetary Order (Part II)

    Last month, Charles reviewed the efforts China has made to build an alternative to Asia’s US-dollar-based trading system. Today, he peers into the future, and looks at what China is doing, not just to offer an alternative to the US dollar or euro, but to build a new monetary order for Asia.

    3
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    Gavekal Research

    The Gavekal V-Indicator And Tactical Asset Allocation

    The Gavekal velocity indicator has lately begun to send some potentially alarming signals. If in the next four weeks the daily indicator does not swing back to positive, then the three-month moving average will turn negative, raising a red flag. To explain why, it is first necessary to remind readers what our V-indicator is, and why it can be useful.

    2
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    Gavekal Research

    The Yen As An Antifragile Asset

    Over the last 12 months, the world’s best-performing major currency has been the renminbi, returning 10.6% against the US dollar. The second best has been the British pound, up 6%. The worst has been the yen, which is down -4%. Over the last 24 months, the best-performing two currencies were again the pound and the renminbi, which both gained 15.1%. The worst, again, was the yen, down -3.4%.

    2
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    Gavekal Research

    The World Becomes More Fragile

    In a July 2 paper, Didier Darcet explained how after seven months of being positive, the market reading from our Paris-run quant system had turned negative. The takeaway was that equity market volatility had “more than ever” become the indicator signaling a downturn. Watch any move in the Vix above 27 as a signal that US markets are entering the "tails" of the risk curve.

    3
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    Gavekal Research

    How Monopolies Behave

    The economy is simply energy transformed. Today, we have a situation where governments in the West are attempting to kill off energy derived from fossil fuels, to which end they are subsidizing new forms of energy. The trouble is that demand for energy is growing faster than the ability of these new forms of energy to meet it.

    3
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    Gavekal Research

    Understanding Asia’s New Monetary Order

    China’s program to dedollarize Asia must overcome two sets of problems: the problems inherent in trade between countries, and problems related to the financial risks posed by the passage of time. In this paper, the first of a major two-part report, Charles examines the progress Asia has made towards replacing the dollar as a reliable means of exchange for intra-regional trade.

    2
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    Gavekal Research

    The Peril Facing Northern Europe’s Savings Industry

    Between 1966 and 2012 investors did better in German bonds than US equities on a total return and common currency basis. That changed in 2012, and Germany’s managed savings institutions are now in peril, along with those in other parts of Northern Europe. In this piece, Charles shows how much trouble these institutions face and offers a view on how this exercise concludes.

    5
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    Gavekal Research

    Flabbergasted

    When you write in a language that you didn’t learn from your mother, it is easy to fall in love with new words and then overuse them. In the 1970’s, I came across “flabbergasted” and, truth be told, I ended up being flabbergasted in that decade rather more than I actually was. Today, however, I am again flabbergasted, but am fairly confident that it is for good reason.

    6
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    Gavekal Research

    Living In A Dual Currency World

    Let’s begin with the basic principles underlying any currency, at least according to economics 101: it should be a medium of exchange, a standard of value and a store of value. I have long argued that central banks’ determination to pursue the “euthanasia of the rentier” rather than protecting money as a store of value would lead to big problems.

    0
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    Gavekal Research

    When Money Becomes Spending Coupons

    Something is changing in the way our capitalist systems create money. For at least 200 years, Charles argues, money-creation began with a request for credit by an economic agent. In the new system, we are seeing the issuance of what amount to “spending coupons”. These coupons will never be retired, and he worries that over time their numbers will rise exponentially.

    6
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    Gavekal Research

    Is This A Private Fight, Or Can Anyone Join In?

    The old rugby player in me cannot see a bar-fight without asking: “Is this a private altercation, or can anyone join in?” I feel much the same about the debate inside Gavekal about whether or not inflation is making a comeback. Here is my contribution to the brawl.

    4
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    Gavekal Research

    Ricardian Growth Is Fragile, Schumpeterian Growth Is Anti-Fragile

    Capitalism works well when activity is undertaken using David Ricardo’s law of comparative advantage and Joseph Schumpeter’s process of creative destruction. Charles argues that an era of Ricardian growth for many countries and industries is running out of road and the drivers of Schumpeterian economic transformation are shifting.

    10
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    Gavekal Research

    How To Make The Rich Properly Rich

    On Monday Charles argued that abnormally low interest rates act to make the poor poorer and the rich (seemingly) richer. Armed with this conviction he worked with our quant team in Paris to look more closely at the impact of such a monetary policy on holders of equities, discovering a decision rule which enhances equity returns and protects against drawdowns.

    7
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    Gavekal Research

    Low Rates Are Socially Regressive

    Policymakers around the world believe that ultra-low rates are good for growth, and are therefore good for standards of living among the poorest in society. Charles has long argued this view is a fallacy. In this paper he demonstrates that under ultra-low interest rates, the poor get poorer in real terms. This has both political and investment implications.

    6
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    Gavekal Research

    Discontinuity Risk In A Bipolar World

    For the first time in generations, the world now has two economic poles—the US and China. And they are following diametrically opposed monetary and fiscal policies. US policy is as Keynesian as you can get, while China has read the book on Wicksell and is turning restrictive. This divergence is the single most important challenge investors face today.

    3
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    Gavekal Research

    Webinar: Asset Allocation Amid Low Interest Rates

    Charles Gave likes to say he is a rules-based investor, and he’s never been short of ideas. In this webinar, Charles and Gavekal TrackMacro’s Didier Darcet presented their latest work on portfolio construction, including a tool to help fixed-income managers to get satisfactory returns despite punitively low yields.

    0
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    Gavekal Research

    The Ant And The Grasshoppers

    In the last few days, Chinese policymakers have stepped up the campaign to rein in their domestic tech giants, slapping Alibaba with fines of US$2.75bn and forcing the restructuring of Alibaba spin-off Ant Financial. Their action is in stark contrast to the inaction of regulators in western countries. But this is hardly the only contrast between China and the west.

    4
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    Gavekal Research

    A Case Study: US Long Bonds

    With recent moves at the long end of the US treasury curve causing consternation among investors everywhere, Charles dusts off his decision rules for US long bonds to see what they are telling us about the present state of the market and concludes that it is not yet time to lengthen portfolio duration.

    8
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    Gavekal Research

    Updating The Malthusian Constraint

    In June 2019, I argued that big shifts in the US economy and financial markets largely result from changes in the relative price of energy. If oil prices are rising faster than nominal GDP, this points to energy shortages and more of the economy’s value-added going as the “miners’ rent”. This situation points to rising inflation and contracting price/earnings ratios.

    3
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    Gavekal Research

    Gold, Renminbi Bonds And The Clash Of Empires

    As the US expands its deficits to pay for pandemic relief, emerging economies that use the US dollar for reserve backing have reason to fret. China is being incentivized to accelerate development of the renminbi as both an international standard and store of value. Louis, Charles and Didier offer a potential roadmap for how renminbi internationalization may unfold.

    16
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    Gavekal Research

    Webinar: Global Investment Roundtable, March 2021

    As Covid-19 vaccinations are cranked up and Congress gets ready to dole out stimulus measures, US growth expectations have risen along with inflation concerns. In response, bonds have sold off and equity markets have shuddered. In our monthly global investment roundtable, Gavekal partners discussed this confluence of events and addressed what it means for risk assets.

    0
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    Gavekal Research

    Inflation And The Stock Market

    Despite a roiling US bond market sell-off, equity investors had until Thursday taken comfort from the Federal Reserve saying it would stay easy for longer. They were also fairly relaxed about a gentle rise in inflation, which seemed to be part of a "normalization" process as Covid-19 vaccines do their job and activity picks up. Charles and Didier are not so sure, and in this paper test the notion that limited inflation can, in fact,...

    2
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    Gavekal Research

    Webinar: Uncharted Territory And Portfolio Construction

    Charles has sought to codify his many investment rules into a rigorous portfolio construction framework, which includes identifying periods when returns stop being normally distributed and move into the "tails". Right now markets could be going through a phase change, and in this webinar, he explained why. He was joined by Didier, who who heads the quant team in Paris, and Louis.

    0
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    Gavekal Research

    Uncharted Territories And Portfolio Construction

    In 2015, Charles turned 73 and felt it was time to decide what he wanted to be when he grew up. But before turning his back on finance, he decided to “download” as many of the rules and experiences that had guided his steps in the financial world, over the previous 50 years. He built a small “quant” team in Paris, whose goals were to filter the very best of his rules and distill these into simple software solutions. In this piece he shows how...

    5
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    Gavekal Research

    Webinar: French-Language Webinar, January 2021

    With Europe being hit hard by a second wave of Covid-19 and facing fresh lockdowns, Charles and Cedric assessed the outlook for the region’s growth and inflation in both the short and medium term. The webinar also focused on portfolio construction work being done by our Paris team: quantitative head of research Didier and Charles trained their sights on behavioral finance and suggested a route map for managing money in a “post-Keynesian” world.

    0
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    Gavekal Research

    What The VIX Spike May Mean

    On Tuesday, Louis noted that among ill tidings for global equity markets was a rollover in European bank stocks. I want to build on this idea using portfolio construction work done by our Paris team and specifically the insight that when the VIX exceeds a critical threshold, markets globally tend to seize up.

    0
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    Gavekal Research

    The Logos, Idiotes And Demagogues

    Charles revisits the idea of the Greek "logos", "idiotes", demagogues and citizens, and how the Greeks believed that those who controlled the logos—the language used to describe the world—ipso facto controlled the political system. Problems arise when a new, competing logos started to emerge.

    8
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    Gavekal Research

    The UK After Brexit

    Four and a half years after the vote, Britain is properly out of the European Union and moving into a new era. It will surely be a freer nation, says Charles, but in this piece he asks: will it be a richer one? Spoiler alert, he thinks the upshot will be the City of London emerging as the world’s über financial capital.

    9
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    Gavekal Research

    Portfolio Construction Over The Next Two Years

    On Thursday, Anatole set out his view that undivided Democratic Party control of both the executive and legislative branches of the US government opens the door for unconstrained Keynesian stimulus, which will be highly positive for the US economy and equities. It will probably come as little surprise to Gavekal clients that I should dispute whether such unconstrained Keynesianism will be good news either for the economy or for US equities

    4
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    Gavekal Research

    The Boom Of 2021

    As he gazes into next year, Charles has reviewed some of his most trusted indicators and found that the US is moving towards an inflationary boom that should mean stronger growth, rising inflation and higher bond yields. If the Federal Reserve acts to crimp this adjustment in the price of money, he warns that the US dollar could tank.

    10
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    Gavekal Research

    The Real Bubble

    The older I get, the more I am convinced that the economy is nothing but energy transformed. Since the beginning of the industrial revolution, the story of the economy has been one of constant movement from not very efficient sources of energy, such as wood and then coal, to more “dense” and efficient sources, such as oil and nuclear fission, with the aim having been to arrive eventually at nuclear fusion.

    22
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    Gavekal Research

    Dear Cedric And Nick, Allow Me To Disagree...

    ...in Thursday’s Daily you argued that Hungary and Poland’s effort to veto yet another power grab by Brussels represents a mere hiccup in the march towards a European nation state. You can add Slovenia into that basket of recalcitrants. I believe that these three countries are posing an essential question: where does the legitimacy of a government come from?

    6
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    Gavekal Research

    Are The Markets Trying To Tell Us Something?

    I am not a technical analyst, but I am an avid consumer of charts, which I often use to check if my overall view is confirmed, or not, by the markets. Having undertaken this exercise recently, I have two strong convictions.

    2
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    Gavekal Research

    Markets And The Split Between American Trees And American Boats

    The aftermath of the US election points to deep distrust between America’s two great political tribes that could yet become a concern for investors. Charles worries that betrayal narratives in the US may lead to the Federal Reserve printing even more money in order to paper over the cracks of division.

    7
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    Gavekal Research

    Webinar: US Election & Global Investment Roundtable (in French)

    Charles Gave, Louis-Vincent Gave, Didier Darcet and Cedric Gemehl delved into the results of the US election, and discussed the latest impact of Covid-19 on the global economy and markets. Additionally, they presented Gavekal’s latest research on portfolio construction.

    0
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    Gavekal Research

    The Velocity Of Money And Its Price

    Let me go back to the old equation of MV=PQ, where money supply times velocity equals price times the quantity of output. When Covid struck the US, Q cratered and V collapsed (as everyone saved their incomes as a precaution against uncertain times). The only solution was for the Federal Reserve to print enough M to support consumption and stave off the impending economic collapse. But what happens next?

    2
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    Gavekal Research

    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...

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