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E.g., 28-10-2021
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    Gavekal Research

    On Being Wrong

    For much of the second half of 2015, Charles was concerned that the US economy was softening, and that it would tip into recession sometime in mid-2016. The feared recession never materialized. In this paper, Charles asks “why not?”, re-examining normally reliable indicators to work out where and why they went wrong.

    9
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    Gavekal Research

    Audio & Transcript — Gavekal Research January Call

    Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.

    0
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    Gavekal Research

    Political Fiction

    European economic indicators have turned up in recent months, causing many investors to conclude that the eurozone’s banishment in the desert of economic stagnation is over, and the promised land of a normal recovery beckons. I am not convinced and judging by recent moves in the bond market, I’m wondering if the next eurozone crisis is already upon us.

    2
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    Gavekal Research

    Deconstructing Dollar Strength

    The trajectory of the US dollar is likely to be the single most important determinant of investors’ returns in 2017. Either the US currency will weaken, leading to a bull market in much of the rest of the world. Or it will strengthen, which will make markets life more difficult to navigate. Charles warns that we are approaching a tipping point.

    1
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    Gavekal Research

    The End Of The Dollar Standard

    Charles is encouraged by the broad thrust of Donald Trump’s economic program, but deeply worried that the US’s emerging protectionist agenda could wreck the dollar-based credit system that underpins global financial markets. The dollar-standard was always more vulnerable to a US action than foreigners losing confidence in it as a store of value.

    6
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    Gavekal Research

    Long Rates & The Velocity Of Money

    As Gavekal’s readers will be aware, much of my research is driven by a handful of powerful obsessions. Lately these have included my fixation with the euro as a weapon of mass destruction, and my determination to elucidate how the theories of the great 19th century economist Knut Wicksell apply to today’s economies and markets. In recent years these have, to some extent, displaced other pre-occupations, and I have done very little work on one of...

    0
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    Gavekal Research

    Is The US Equity Market Overvalued?

    After the S&P 500 index set a new record closing high last Wednesday, up some 6% since the US presidential election, I am left once again scratching my head over the age-old question: is the US equity market expensive or cheap?

    4
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    Gavekal Research

    Call Me An Old Curmudgeon

    Call me an old curmudgeon, but financial markets are currently experiencing an outbreak of optimism that could well prove to be dangerous. At the moment we have a situation where both the US stock market and long rates are rising on expectations of faster nominal growth. Readers who have followed my Wicksellian research are no doubt scratching their heads over this concurrent move, because they will appreciate that there is no prospect of...

    2
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    Gavekal Research

    Putting The Boot Into Italy

    Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would...

    5
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    Gavekal Research

    The Italian Domino Teeters

    My thesis has for a while been that we are living in an era characterized by the “little man” revolting against the global elite. I explained this idea in May using the perhaps apocryphal tale of a South Pacific island made up of home-loving tree dwellers and more adventurous boat travellers (see Trump And The Tree People). The point was that the normally laid back people of the trees were stirring from their torpor as shown by the Brexit vote...

    8
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    Gavekal Research

    Video: European Political Dominos

    In the aftermath of the Brexit vote and Donald Trump’s win in the US presidential election, attention has shifted to the eurozone with the assumption that more dominos must topple under the gathering populist political wave. In this video interview Nick considers the good, the bad and the ugly of the European political scene and offers pointers for navigating these risks.

    0
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    Gavekal Research

    Stagnation or Bust? A Wicksellian Chart Dashboard

    For users’ convenience, we provide below the complete set of charts published in Charles Gave’s November 2016 book Stagnation or Bust? A Wicksellian View of the Natural Interest Rate, the Market Rate and Asset Allocation, with interactive graphics available for Macrobond subscribers.

    0
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    Gavekal Research

    Investing By The (Wicksellian) Book

    As regular readers will know, I have spent much of the last 10 years studying, and attempting to enlarge upon, the work of the great 19th century Swedish economist Knut Wicksell. My mission has been two-fold: firstly to understand how Wicksell’s writings explain what we see happening in the global economy today, and secondly to translate his theories into practical tools to help investors make asset allocation decisions in the real world.

    3
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    Gavekal Research

    Trouble With Monopsonies

    What happens when a company is so successful that it becomes the dominant buyer of labor in its market? It then has an incentive to hold down workers’ incomes, even at the expense of reduced output. As Charles argues, such “monopsonies” are increasingly acting as a drag on economic growth. Yet in an environment of free trade, there is little national governments can do.

    15
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    Gavekal Research

    When You Sleep With An Elephant

    It is always comforting to be back in familiar territory. In a long career in investment—45 years and counting—I have seen a few Mexican crises. All these years on, I have fond memories of the 1976 peso devaluation, and of the subsequent 1980 devaluation. I remember the 1982 debt crisis well, and the “década perdida”—the lost decade—which followed. Then came the hyperinflation of the early 1990s which led to the introduction in 1993 of the new...

    2
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    Gavekal Research

    Prospects For The US Bond Market

    Back in July, I wrote a paper on the US bond market which came to the conclusion that things were getting complicated. My thesis at the time was that there was no value left in the US long bond—the 30-year treasury—and that it could no longer be used as a hedge against a potential deflationary bust. At the time the long bond yield was around 2.3%. Since then the election of Donald Trump as president of the US has had a severe impact on bond...

    0
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    Gavekal Research

    President Trump And The Fall Of Davos Man

    For decades, all around the world but especially in Europe, the notion of the sovereign nation has been under fierce attack. Leading the assault have been the international bureaucrats and a clique of economists in league with those I have dubbed the men of Davos, all of them resolute proponents of crony capitalism (see Dissolving The People).

    8
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    Gavekal Research

    Sterling Sellers Look Flushed Out

    Here is a simple question: “Why has the pound fallen so far, so fast?”. My simple answer is that the City of London is the world’s dominant financial center, and so pretty much anyone who deals in global markets has a significant exposure to sterling. As a result, the near term movements of sterling are being dictated less by every twist and turn of the Brexit process, but rather by more prosaic financial transactions.

    9
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    Gavekal Research

    When The Keynesian Multiplier Goes Negative

    Last week I published a paper whose main point was that Keynesian policies lead to an inevitable decline in an economy’s structural growth rate (see Is The Second Shoe About To Drop?). My immediate concern is that developed economies seem set to head off on another public spending binge as they try to slay “secular stagnation”. That piece stirred a number of questions from readers, so I am following up with an addendum that extends the argument...

    6
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    Gavekal Research

    The Milton Friedman I Knew

    In the late 1970s, when beavering away at my own little research firm, I received a letter from a “senior research analyst” at the Hoover Institution, named Milton Friedman. In the letter Friedman wrote that he agreed with some of what I had written in a recent report, but other sections had problems. He had gotten the paper from one of my clients, and I’ll admit it sent me just a bit over the moon.

    1
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    Gavekal Research

    Is The Second Shoe About To Drop?

    Keynesian beliefs are based on two key ideas. Firstly, recessions are caused by an excess of savings among nasty types known as rentiers. Secondly, if there is a shortage of demand, the government should conjure it up out of thin air by borrowing money to spend as needed. In the last few years we’ve seen what happens when the first of these two ideas is put into practice. Policymakers around the world have attempted to euthanize the rentier, and...

    14
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    Gavekal Research

    The British Pound: A Two Year View

    The British pound has been on a roller coaster ride to the point that on a purchasing power parity basis it is undervalued by about 10% against the euro and 17.5% versus the US dollar. As a result, sterling has been left 2% below its lower bound against the euro (in average standard deviation terms) and 9% versus the dollar on the same measure. Put another way, the pound is undervalued by more than one standard deviation against the euro and by...

    13
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    Gavekal Research

    Debate: A Trump Win And The Dollar

    As the world seriously tunes into the US presidential election, four Gavekal partners debate the outlook for the US dollar should Donald Trump emerge victorious and set about his promised remaking of the international security order and global trading system.

    25
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    Gavekal Research

    The Collapse Of The Left

    Since the onset of the first industrial revolution, human institutions have typically had a lifespan of around 70 years. In the first generation, the elite build the institutional structures needed to meet the economic challenges of their time. The second generation maintain them as best as they can. And the third generation of the elite, which more often than not is corrupt to the bone, merely aims to live as well as it can off the existing...

    11
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    Gavekal Research

    Watch Real Yields On Corporates

    There are increases in real rates, and there are increases in real rates. And by no means are they all equal in impact. In Tuesday’s Daily, Joyce and KX noted that global equity markets have been supported this year primarily by the world-wide decline in real bond yields. After bond markets approached over-bought territory over the summer, the sharp increase in real yields we have seen over the last couple of weeks naturally hit stock prices. If...

    0
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    Gavekal Research

    The New Ineptocracy

    In times past, capitalist systems were organized on a simple premise. At the centre sat “money” as the medium to express all values. The primary operating dynamic of this system was that surplus money (savings) got channelled into economic activity, with a secondary effect that “unused”, or “left over”, money ended up in financial assets, usually equities, such that at times of great optimism a bull market resulted. After running for a year or...

    7
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    Gavekal Research

    I Must Admit That I’m Confused

    Friday saw the release of US jobs market data for August which had investors convinced of a continued “not too hot, not too cold” outlook for the world’s largest economy. This is at odds with the view that I have held for a while; namely, that the US has been on the brink of recession or may have even entered one. This prognosis was based on a hopefully not insubstantial analytical foundation, which may be worth reviewing.

    3
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    Gavekal Research

    The Falling Natural Rate Is No Mystery

    As the high priests of global central banking congregate in Jackson Hole, much of the chatter ahead of the meeting has concentrated on the “mystifying” fall over recent years in the natural rate of interest, and possible reasons why it should have declined to such an extent. Having spent the last ten years attempting to apply the economic theories of the great 19th century Swedish economist Knut Wicksell, I have to say I am delighted with the...

    6
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    Gavekal Research

    The Dollar And The Next Crisis

    For a third straight month in June, foreigners unloaded US bonds, with “official institutions” leading the way on net sales of US$33.5bn versus a small rise in buying by offshore private investors. The interesting thing is that foreign central banks have been lightening their US dollar reserves for a while, but the contraction has now intensified to -5.6% year-on-year. Previously, such a decline in foreign holdings of the global reserve currency...

    7
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    Gavekal Research

    The Euro And Mean Reversion

    Among my long-standing decision rules is one that generally proved reliable in the past. If two developed and open market economies trade freely with each other, then over the long run the return on invested capital in each economy will tend to be the same. In turn, this implies that over the long run, the ratio of total returns from each stock market will exhibit no trend in common currency terms. This makes intuitive sense—if one market...

    7
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    Gavekal Research

    Irving Fisher, Debt-Deflation And The Bifurcated US Economy

    Many of our readers will be familiar with Irving Fisher’s great 1933 paper The Debt-Deflation Theory Of Great Depressions. The main point of this fascinating work is that if an economy suffers simultaneously from over-indebtedness and falling prices, then strange things start to happen. These include a fall in the velocity of money and a collapse in capital spending. And when it comes to interest rates, Fisher explained that things get really...

    3
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    Gavekal Research

    Toynbee’s Europe

    In A Study of History the great Arnold Toynbee explained that the role of “elites” in any society is to handle challenges that allow the group to survive and move on to the next phase of their shared journey. If bad solutions are offered up then problems will intensify and pressure will arise for a change in the elite. This can happen in various ways: through elections in a best case scenario, a change of regime as with France’s forth Republic...

    3
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    Gavekal Research

    Recession Or Stagnation?

    On Friday US GDP data for 2Q16 was released showing an expansion that looks ever more anemic and unconvincing. Is this just the new normal in an era of stagnant global growth or is the US more perilously poised? To answer that question, imagine the US economy having two parts in the shape of “consumer GDP”, which represents about three quarters of activity, and the remainder being the non-consumer “production” portion.

    3
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    Gavekal Research

    Trump And The Prisoner’s Dilemma

    Let us assume that Mervyn King is right and the week-to-week strategy of major central banks has become to stop equity markets within their jurisdiction from going down. And let us further assume that markets are fully convinced of central bankers’ resolve to achieve this end. In the case of US equities, which sit at the center of the global system, such a proposition logically means that their price has two components: (i) the “intrinsic value...

    1
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    Gavekal Research

    Tools, Jewels And P/E Ratios

    There are two basic reasons why an asset has value and this understanding should be foundational knowledge for anyone running a portfolio. They can be prized for their efficiency (a tool) or desired because of their scarcity (a jewel). Investors preferences for jewels versus tools will shift through time, but what does not change is the fact that scarcity cannot lead to economic growth.

    0
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    Gavekal Research

    A Fundamental Assault On Freedom

    Of all basic freedoms, one of the most fundamental of all is the freedom of the individual to organize his or her relationship with time. The way we order our affairs with respect to the all too brief time allocated to us on this earth is a profound right that we all should be allowed to exercise unhindered. In short, everyone should be free to choose whether to be an ant or a grasshopper.

    10
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    Gavekal Research

    US Bonds As A Hedge: It’s Complicated

    F. Scott Fitzgerald noted that the test of a first rate intellect was being able to hold two opposing ideas, yet still function. The same could be said of any investor who aspires to follow a rules-based portfolio management strategy. Inevitably, such rigor occasionally requires messy compromises with reality as is now the case in the US bond market. Such is my dilemma as I try to broadly follow three rules:

    2
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    Gavekal Research

    The Italian Problem

    The British were recently asked if they wanted to leave the European Union and to the establishment’s horror, they chose to do just that. Italy will host Europe’s next big referendum in November with Prime Minister Matteo Renzi threatening to resign if his package of constitutional reforms isnot passed. Such a dénouement in Europe’s most indebted big economy would trigger a political crisis and require fresh elections. The issue with referendums...

    3
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    Gavekal Research

    The Gavekal Monthly: Life After The Brexit Vote

    The world is now a considerably more uncertain place than a month ago. Following the UK’s referendum vote in favor of Brexit, a near-term recession in the UK is more likely than not, the European Union faces the possibility of a renewed economic slowdown, and investors find themselves forced to reassess the probability that Donald Trump will win November’s US presidential election. In this edition of the Gavekal Monthly, our analysts set out to...

    0
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    Gavekal Research

    History Moves Again, Again

    Back in September 1989 as it became clear that big forces were shaking up the Cold War status quo, I wrote a research piece that aimed to place these convulsions in a broader context. It borrowed from a core idea of the great historian Arnold J. Toynbee that a driving force of history is what he dubbed “missionary ideas”, which tend to find their inspiration in religion (see History Moves Again). In the post-enlightenment era there have been...

    28
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    Gavekal Research

    Tax Receipts And US Recessions

    When kicking-off two days of Congressional testimony yesterday, Janet Yellen acted to sooth market nerves by declaring the US economy to be in reasonable health, while sounding sufficiently concerned about apparent labor market weakness to hose down worries of an imminent rate raise. To my mind, this is all noise for the simple reason that the question is no longer whether the US faces a recession in the future but more precisely if such a...

    4
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    Gavekal Research

    Fear Not Brexit

    The UK political class is all in a flutter as the latest European Union referendum polls show an apparent rising tide of support for “Leave”. Having orchestrated the great and good into warning of catastrophe should a Brexit materialize, it would seem that “project fear” is not cutting through. I tend to have strong political convictions and perhaps for this reason I have a lousy record of guesstimating election outcomes. Since the UK referendum...

    8
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    Gavekal Research

    The Outlook For The US$ Vs The Euro

    When coming to investment decisions in the financial markets, I always try to be as “rules-based” as I possibly can. By that, I mean that I look as closely as I can at the available evidence to determine what has worked in the past—and what has not. This is difficult enough when analyzing the US bond market or the French stock market, but when it comes to exchange rates, the task reaches a whole new level of complexity. It is necessary to look...

    5
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    Gavekal Research

    Another Take On The Payrolls

    The last two days have seen my colleagues offer erudite commentary on the meaning of the US non-farm payroll report for May (see Thinking Dark Thoughts and The Dissonance In Jobs). I would simply observe that things take time to properly coalesce and the message from the US labor market is consistent with recessionary signals dating back to the 1960s.

    0
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    Gavekal Research

    On Populism

    The ruling class, which over the last 20 years has done so much to manage our decline, has found a new enemy in the shape of political “populism.” While acknowledging that times have been tough, what so annoys this elite is the realization that “we the people” do not recognize that a complicated world is being run in our own best interests. For this reason it is no great surprise that such ingrates have been labelled populists.

    7
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    Gavekal Research

    Here Comes US Deflation

    Regular readers will be aware that I expect the next big move in prices to be down rather than up and that this shift will occur against the backdrop of a weakening US economy, possibly one that is contracting. Consider the chart below and my contention is that we may be close to that point.

    0
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    Gavekal Research

    Portfolio Construction For Fence-Sitters

    Just over six months ago, I published a Daily note in which I quoted the late American sage Yogi Berra: “When you come to a fork in the road, take it!” My thesis was simple. At the time, the world had reached the point when—in a normal cycle—investors would tend to sell the US market, preferring instead to buy into non-US markets (see The Gavekal Ethos).

    0
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    Gavekal Research

    Heading Passively To The Poorhouse

    It is astonishing the number of articles one can read all claiming to “show” that passive investments consistently outperform active money managers. Their conclusion is always the same: savers should invest in indexes or tracker funds rather than actively-managed funds, and that as a result they will be much better off. This claim has been repeated so often it has become received wisdom. Alas, in this case, as in so many others, the received...

    3
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    Gavekal Research

    Trump And The Tree People

    Recently I reada bookcalled Je n’ai plus peur (I am not afraid any more)by the French writer Jean-Claude Guillebaud. I do not know Guillebaud personally, but even though he is very much on the left of the French political spectrum, I must confess that I have read all his books, and that I have always liked what he has to say.

    7
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    Gavekal Research

    Vertigo And The US Economy

    Regular readers will be familiar with my contention that persistently low interest rates lead not to economic growth and sunlit uplands, but instead to a structural decline in the growth rate and stagnation. Based on this analysis, I have for a while expected a US economic contraction. That one has not yet materialized means there is, however, an obligation to check whether I have been barking up the wrong tree.

    3
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