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    Gavekal Research

    Webinar: Global Investment Roundtable, January 2022

    In the US and Europe, the new year has begun with a huge wave of workplace absenteeism due to surging omicron Covid cases. In China, policymakers are adopting a whack-a-mole approach to multiple Covid outbreaks, while other emerging economies are curtailing market opening measures. Our team outline their base case views for growth, inflation and markets in 2022.

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    Gavekal Research

    Video: The Quirinale Question

    The possibility that Italian prime minister Mario Draghi could be installed as the country’s largely ceremonial president when parliament chooses a new head of state next month has raised fears of a new period of political instability. In this video interview, Nick Andrews assesses the implications for Draghi’s ongoing structural reform program, and for Italian asset prices.

    0
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    Gavekal Research

    Breakout Time... Again

    In early 2021 US bond yields charged higher, and oil and gold both looked poised to break out decisively to the upside. The underperformance of value stocks seemed to be coming to an end. Then two developments pulled the rug out from under the cyclical trade. Fast forward, and today we might be back in early 2021. Louis asks what could shock markets this time.

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    Gavekal Research

    Strategy Monthly: The Supply-Side Shock

    Soaring infection rates due to the omicron Covid wave are causing widespread disruption to supply chains around the globe. A resolution to global supply issues rests on Beijing maintaining this balancing act, as it also moves to shore up growth.

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    Gavekal Research

    Peak Inflation, Peak Rotation

    As investors reassessed the risk of central bank hawkishness, European equity markets took a hit on Thursday, with the MSCI EMU index falling -1.4% to wipe out almost all the gains made in the first three trading sessions of the year. The sell-off was not universal, however.

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    Gavekal Research

    SWOT Analysis For 2022

    Despite a spate of exogenous shocks in 2021, currency markets largely remained placid, bonds barely sold off and the US equity market continued to scale new heights. This year, however, the global policy backdrop is shifting. Clearly, 2022 will be different from 2021. But how different? Louis analyzes the strengths, weaknesses, opportunities and threats in the new year.

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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.

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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.

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    Gavekal Research

    The European Inflation Split

    Europe is again being split along eastern and western lines. To the West, the European Central Bank is holding fast to its belief in the transitory inflation narrative, with Christine Lagarde barely acknowledging upside risks. Yet to the East, the CEE-3 countries—Hungary, the Czech Republic and Poland—are taking inflation as a serious threat. The Hungarian National Bank recently hiked interest rates for the seventh time in less than six months,...

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    Gavekal Research

    Are Rock-Bottom Bond Yields ‘Irrational’?

    What has been the most surprising financial event of 2021? The 20% gain in equity prices, the 40% jump in oil prices and even the fivefold leap in US inflation may all have been bigger than expected, but they were at least directionally understandable consequences of the fastest growth in the world economy for 40 years. That explosive growth, in turn, was a predictable response to last year’s unprecedented monetary and fiscal stimuli, magnified...

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    Gavekal Research

    A Tale Of Two Central Banks

    On Wednesday, the Bank of England ended its expansionary £895bn asset buying program, only to raise its key interest rate by 15bp a day later. In contrast, the European Central Bank stuck to its cautious script, saying it would buy bonds through 2022 and beyond if necessary. Of the two, the UK’s tightening approach’ looks most prone to a forced reversal.

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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.

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    Gavekal Research

    Webinar: Global Investment Roundtable, December 2021

    Our senior team consider the big strategy questions that should be vexing investors in 2022. This includes an assessment of potential positive surprises that could present opportunities for investors who are positioned ahead of time. Our team also consider prospects for the undersupplied and underinvested global energy market.

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    Gavekal Research

    Beijing Seminar & Webinar — December 2021

    In our recent live-streamed seminar in Beijing, Anatole presented his case for why markets are right not to panic about high headline inflation numbers. Louis cast doubt on claims that this current bout of inflation is transitory. Arthur and members of the Dragonomics team presented on China's economy, policy goals and asset markets.

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    Gavekal Research

    Webinar: Europe's Winter Troubles

    As winter sets in, Europe seems beset with uncertainties: around Covid, energy prices and inflation. Anatole Kaletsky, Cedric Gemehl and Nick Andrews weigh these and other forces that will be at work in 2022 to assess the outlook for Europe’s economy and markets in the new year.

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    Gavekal Research

    Strategy Monthly: Europe’s Way Through The Woods

    As 2021 draws to a close, economies and markets are once again beset by uncertainty. But looking beyond the immediate short term, there are reasons for cautious optimism about the eurozone’s economic performance in 2022, although investors are advised to assume a defensive stance.

    0
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    Gavekal Research

    The Phantom Menace

    Prices are rising around the world, but how do we know that all orders are real? If firms have responded to global supply congestion and long delivery times by ordering more than they need to meet demand, it is likely that some will end up not taking delivery of what is apparently due them.

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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.

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    Gavekal Research

    When Risk Appetite Returns

    Whenever a currency crisis engulfs an emerging economy, investors nervously look around for the next shoe to drop. After the meltdown this week in the Turkish lira—down -20% in November; -40% year-to-date—precedents from the Asian crisis of 1997-98 to the 2013 taper tantrum suggest contagion might be about to spread to infect the rest of the emerging currency complex. However, despite the broad strength of the US dollar and steep falls in a...

    3
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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.

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    Gavekal Research

    Video: Russia And The European Energy Equation

    The sharp rise this year in European energy prices has been widely attributed to Russia, which has declined to increase near-term supplies of natural gas to Europe in line with the region’s demand growth. Nick examines the incentives guiding Moscow’s decisions and explores the potential impact of Russia’s choices on Western Europe’s inflation and growth outlook.

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    Gavekal Research

    An Italian Renaissance?

    Visiting Gavekal clients in Italy this week for the first time in 18 months, I have been struck by the mood of sunny optimism that pervades the country’s financial community. Arriving there myself with a relatively upbeat view on Italy’s economic prospects, I was expecting at least a partial reality check from clients. But pushbacks were rare and half-hearted. Instead, stories of thriving new start-ups and returning Italian expatriates abounded...

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    Gavekal Research

    Shanghai Seminar — November 2021

    In our recent Shanghai seminar, Arthur Kroeber addressed China's policy moves this year, the decarbonization drive and the rivalry with the US; Thomas Gatley outlined the status and prospects for China's economy and markets; and Louis Gave presented his latest macroeconomic views as inflationary pressures around the world continue to mount.

    0
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    Gavekal Research

    Piling On The Misery

    Faced with a fourth wave of coronavirus infections, and in some places even a fifth, European Union governments are again tightening their public health restrictions. Clearly this cannot be good news for Europe’s near-term economic outlook. But how bad is it likely to be? A Covid misery index may provide a useful guide.

    0
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    Gavekal Research

    Return Of The Kitsune

    In Japanese folklore, a kitsune is a magical, very wily, nine-tailed fox who wriggles out of tricky situations. It resembles our financial markets, which have a doughty ability to manage “tail risks”. Last year, Louis wrote a series of articles looking at such risks and today returns to that theme in a substantially changed investment context.

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    Gavekal Research

    Webinar: A Climate Of Change

    As the COP26 climate conference reached its end, our team of analysts convened to discuss what to make of the world’s major economies’ climate pledges. Europe has the most ambitious target, the US has finally outlined its specific goals, and China too has set a date by which to achieve a net-zero emission economy. How rough will the transition be?

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    Gavekal Research

    Transitory Inflation’s Unanswered Questions

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

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    Gavekal Research

    The Fed Chair Question And The Euro

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

    0
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    Gavekal Research

    Video: A Looser Labor Market

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

    0
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    Gavekal Research

    Fortress Europe (Again)

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

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    Gavekal Research

    Webinar: Global Investment Roundtable, November 2021

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

    0
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    Gavekal Research

    An Unstable Equilibrium

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

    9
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    Gavekal Research

    Decarbonization’s Disruptions

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

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    Gavekal Research

    Beware The Bear Flattening

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

    0
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    Gavekal Research

    Strategy Monthly: Adding Up Inflation

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

    0
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    Gavekal Research

    Lagarde Versus The Market

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

    3
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    Gavekal Research

    Webinar: Europe's Dislocated Recovery

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

    0
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    Gavekal Research

    A Case Of Hopeless Optimism

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

    0
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    Gavekal Research

    This Time Really Is Different

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

    6
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    Gavekal Research

    The EU’s Ambitious Roadmap To Net Zero

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

    4
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    Gavekal Research

    Back On The Road Again

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

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    Gavekal Research

    Europe’s Wage-Price Nexus

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

    0
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    Gavekal Research

    Video: Typhoon Season For Hong Kong

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

    0
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    Gavekal Research

    Energy And The Euro’s Exchange Rate

    It will come as news to no one that energy prices and exchange rates are intimately connected. Historically, over the last 20 years, the euro has tended to be positively correlated with the price of oil, while the broad US dollar exchange rate has tended to be inversely correlated. So, over the first half of 2008 as the price of oil surged to a record high, the euro hit its all-time high against the US dollar. And in 2014 as the oil price...

    0
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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

    Video: Entente Discordiale

    As if a tight labor market, rising inflation and widespread fuel shortages weren’t enough to contend with, the United Kingdom is also seeing a sharp deterioration in its relations with the European Union, and France especially. Nick examines what worsening cross-Channel relations could mean for the economies of the UK and EU.

    0
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    Gavekal Research

    What, Me Worry?

    There is a growing drumbeat of commentary arguing that today’s shortages of everything from microchips to natural gas must end in an inflationary blowout and a return to the lascivious 1970s. Anatole thinks that today’s shortages are likely to correct relatively quickly, and for investors the coming period is more likely to resemble the 1950s.

    2
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    Gavekal Research

    The Price Of Policy

    Wherever you look, energy prices are shooting up, and shortages abound. The global economy, it seems, is in the grip of a full-blown energy crisis. Drill down, and it appears this is not one crisis, but many. The effects—worsening shortages and surging prices—are much the same in differentregions. But the immediate causes of the crunch seem to differ widely.

    0
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    Gavekal Research

    Fixing Italy

    The results of this weekend's municipal elections in Italy look to have buttressed Mario Draghi’s national unity government, which is half way through an ambitious overhaul of core institutions that have failed the country for decades. With 70% of Italians favoring Draghi’s initiative, and no general election due until mid-2023, the betting is that he gets to finish the job.

    1
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    Gavekal Research

    The Coming UK Recession

    Thursday saw UK GDP growth for 2Q21 revised up to a perky 5.5% from a previous 4.8%. Yet all is not well in shortage-plagued Britain. While other economies facesupply chain disruption and energy shortages, the “just in time” UK economy looks to be facing a perfect inflationary storm that could deliver a recession in 2022.

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