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Gavekal Research
Will Denyer, Udith Sikand
Apr 05th 2019
Audio & Transcript — Gavekal Research Call April 2019
In yesterday’s Gavekal Research Conference Call, Will Denyer and Udith Sikand addressed the changing US dollar liquidity environment, and its impact on markets.
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Gavekal Research
Nick Andrews
Apr 04th 2019
Auf Wiedersehen, German Competitiveness
Behind the factors that have caused Germany’s factory slowdown, deeper structural trends are eroding the competitiveness of German industry. The gains Germany made by deploying labor more effectively since the late 1990s have now run out, and that there are few signs Germany is well positioned to deploy capital more efficiently in the future.
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Gavekal Research
Cedric Gemehl, Charles Gave, Tom Miller, Anatole Kaletsky, Didier Darcet
Apr 03rd 2019
London Seminar — March 2019
Cedric Gemehl examined the possibility of a European rebound; Charles Gave argued the world is splitting into three distinct monetary zones; Tom Miller presented on the state of the US-China trade talks and the health of the Chinese economy; Anatole Kaletsky examined the risks to the bull market, and arrived at a bullish conclusion.
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Gavekal Research
Udith Sikand
Apr 01st 2019
A Tactical Opportunity In Turkey
Turkey has long been a market to steer well clear of, with investment opportunities poisoned by toxic politics and an ever-depreciating local currency. However, with the US Federal Reserve adopting a more dovish stance and following the weekend’s municipal elections, Turkish lira assets may now offer an attractive tactical opportunity.
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Gavekal Research
Louis Gave
Mar 29th 2019
A Week Is A Long Time
Harold Wilson, the former British prime minister’s, quip that “a week is a long time in politics” has become an over-used cliche. Still, in the last week, there has been good reason to dust it off.
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Gavekal Research
Louis Gave, Charles Gave
Mar 29th 2019
Beyond The Yield Curve Inversion
The current yield curve inversion and softness in growth data are curious developments, given that the four prices that matter most for the global economy—long bond yields, corporate credit spreads, the oil price, and the value of the US dollar—are all relatively favorable. Louis and Charles weigh five different explanations for what may be going on—from bullish to highly bearish—and examine the investment implications.
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Gavekal Research
Cedric Gemehl
Mar 27th 2019
The Case For A Cyclical Pick-up In Europe
As of last week, short positions in European equities were deemed to be the world’s most crowded trade and recent news has not lightened the market mood. The question is whether such information is in the price, for any marked improvement in cyclical conditions may spark a strong rally.
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Gavekal Research
Nick Andrews
Mar 19th 2019
A New Era For European Banks
European banking stocks have been battered for much of the last four years by negative interest rates and a Brussels plan to impose market discipline through shareholder bail-ins rather than public bail-outs. This approach is now in question as Germany embraces a new industrial strategy that will rely on strong state-backed banks taking political direction.
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Gavekal Research
Louis Gave
Mar 18th 2019
A Marxist Take On The Gilets Jaunes
The "yellow jackets” still protesting in France have so far received only tepid support from the country's usually vocal trade unions. Similarly, left-wing parties have also been very slow to take to the street. This begs the question of what the oracle of the French intelligentsia, Karl Marx, would have made of this protest movement.
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Gavekal Dragonomics
Tom Miller
Mar 18th 2019
The End Of China's ODI Party
Beijing’s decision to use foreign acquisitions as a tool of state industrial policy has badly backfired. With advanced economies stiffening their resistance to Chinese investment, China’s decade-long outward direct investment spree looks spent. In this piece, Tom explains how the boom ended and where funds will flow in the future.
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Gavekal Research
Cedric Gemehl
Mar 15th 2019
The Trouble With Champions
When last Sunday, Angela Merkel’s heir-apparent published an opinion piece on the EU’s future, she left the door open to an EU industrial strategy and competition policy focused on creating European champions intended to compete in global markets. Such a policy may be attractive to politicians, but it is less appealing to investors.
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Gavekal Research
Anatole Kaletsky
Mar 13th 2019
The Brexit Impasse
Political commentators and European leaders are bewailing Britain’s descent into ungovernability after the UK parliament again rejected the new and supposedly improved Brexit deal. But markets reacted calmly. In fact, for investors, the seemingly chaotic Brexit saga is unfolding roughly along the bullish lines suggested here since early January.
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Gavekal Research
Charles Gave
Mar 12th 2019
The Locus Of Capital Destruction
Germany is going through one of its periodic bouts of angst as its industrial economy faces up to cyclical headwinds, unwanted structural change and the threat of protectionism. I too have concerns about the fate of corporate Germany, but would approach the problem from the perspective of an equity investor.
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Gavekal Research
Nick Andrews
Mar 08th 2019
When You're In A Hole, Stop Digging
The first law of holes states: when you are in one, stop digging. It’s sound advice, which central bankers would do well to heed. Unfortunately for Mario Draghi and his colleagues at the European Central Bank, things are not so simple. It is one of the quirks of negative interest rates that the longer rates remain in negative territory, the less accommodative policy becomes.
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Gavekal Research
Charles Gave
Mar 08th 2019
Not Modern, Not About Money, And Not Really Much Of A Theory
Charles has had enough of all the talk going round about Modern Monetary Theory. In this forceful polemic he lets fly with both barrels at the proponents of MMT, arguing that they have no knowledge of financial history, little understanding of the nature of money, and are clueless about what constitutes a theory.
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Gavekal Research
Charles Gave
Mar 07th 2019
Keynes Is Dead; This Is The Long Run
“In theory, there is no difference between theory and practice. In practice, there is,” Yogi Berra said. Take cutting interest rates as an example. According to Keynesian theory, reducing interest rates is a way to borrow from future demand in order to prevent a recession today.The theory is sound, but then comes the practice. And in Europe today, we are in practice up to our necks.
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Gavekal Research
Cedric Gemehl, Nick Andrews
Mar 04th 2019
A Potential Lifeline For Europe's Banks
As the members of the European Central Bank’s governing council prepare to meet in Frankfurt this Thursday, they face the unsettling possibility that their policy settings may risk compounding, rather than alleviating, the eurozone’s economic weaknesses.Unfortunately for members of the council who may be inclined to dither, doing nothing is not a viable option.
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Gavekal Research
Louis Gave
Feb 20th 2019
Three Odd Things
Reserves held by foreign central banks at the Fed are shrinking, which implies there aren’t enough US dollars in the system. This would make sense: the Fed has been draining excess US dollars for the past couple of years. So with shrinking central bank reserves and a shrinking US monetary base, the US dollar should be going up, and most risk assets should be hurting. Oddly, this isn’t happening.
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Gavekal Research
Anatole Kaletsky
Feb 19th 2019
The Biggest Investment Story Of 2019
Now that stock markets around the world have recovered from the year-end panic of December 2018, it is worth returning to the question I posed here on the first trading day of 2019: was the disappointing performance of equities and other risk assets in 2018 the prelude to a deep and protracted bear market, or a contrarian opportunity to “buy the dip”?
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Gavekal Research
Cedric Gemehl, Nick Andrews
Feb 14th 2019
What Europe’s Political Ructions Mean
European politics is again heating up. Yesterday saw the Spanish government fail to pass its budget in a move likely to spur fresh elections. Populists in Italy and yellow vests in France are keeping up their campaign of disruption. Given that few of these issues directly threaten the structures of the EU, the question for investors is: Does any of this matter?
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Gavekal Research
Nick Andrews
Feb 12th 2019
The UK's Limits To Growth
For the British economy, it has been a case of “mustn’t grumble” since the 2016 Brexit referendum. However, the effect of a weak fourth quarter GDP report was to debunk any illusion that Brexit uncertainty has been weathered. Such a reckoning was inevitable with or without Brexit, as the UK has in effect hit limits to its growth.
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Gavekal Research
Cedric Gemehl
Feb 11th 2019
Not Such An Ugly Duckling
A spate of weak data releases last week confirmed Europe as the ugly duckling of key economic regions, and things may soon get worse. The worry is that a weakening external sector negatively impacts the domestic recovery through lower investment and job creation at a time when policymakers face both technical and political constraints.
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Gavekal Research
Tom Miller
Feb 08th 2019
The Global Car Industry Catches Chinese Flu
If the auto industry is a bellwether of global economic health, then much of the world is looking sick. The second half of 2018 was painful for carmakers in all the major auto markets, and 2019 is shaping up to be as bad. Is this just a passing malady that carmakers will soon shrug off, or a chronic condition they will have to manage for years to come?
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Gavekal Research
Anatole Kaletsky
Feb 07th 2019
Gaming Out Theresa May’s Gamble
Given that the UK prime minister has apparently outfoxed her opponents, why has the pound fallen back below US$1.30? The obvious reason is that Theresa May’s unexpected wins in the UK parliament last week look to have increased the chances of a disorderly “no deal” rupture. In reality, however, the chances of “no deal” are no higher today than they were a week ago as the EU and UK opposition are yielding to May’s pressure.
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Gavekal Research
Charles Gave, Cedric Gemehl
Feb 05th 2019
Audio & Transcript — Gavekal Research Call February 2019
In the call yesterday, Charles Gave and Cedric Gemehl presented their views on the economic and political situation in Europe. Cedric outlined key risks facing Europe’s economy. If the worst is avoided, he thinks Europe could get a soft landing. Charles took a different view, arguing that the eurozone was now an irretrievably diverging system.
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Gavekal Research
Charles Gave
Feb 01st 2019
A Vital Portfolio Construction Lesson
I am a rules-based investor, and over the years few financial relationships have been more useful to me in reading the economic cycle than the yield spread between long-dated US corporate bonds and 30-year US treasuries. Going back to the late 1970s, no US bear market has unfolded with key spread being below 200bp. It is now 210bp.
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Gavekal Research
Nick Andrews, Cedric Gemehl
Feb 01st 2019
Strategy Monthly: Europe's Containable Risks
As China slows and the US expansion limps into its dotage, a heavily export-dependent Europe looks vulnerable to another downturn. The latest growth numbers from Italy and Germany make for especially grim reading. Potential shocks loom in the shape of a hard Brexit, populist discontent in France and Italy and the threat of auto tariffs from the US.
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Gavekal Research
Charles Gave
Jan 30th 2019
The Recession Of 2019: Revisited
Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).
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Gavekal Research
Udith Sikand
Jan 28th 2019
Favor Local Bonds Over EM Equities
After a dismal year for emerging market assets in 2018, emerging markets have started 2019 on a positive note, with equities rising 6.5% and local currency bonds up 3% year-to-date. On Friday, Louis looked at shifts in the US dollar, long term US interest rates, credit spreads and the oil price, and concluded they favor emerging market assets through the rest of 2019. Broadly I agree, but I would take a slightly more nuanced stance. The shifts...
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Gavekal Research
Louis Gave
Jan 25th 2019
The Four Prices That Matter
It is Gavekal’s longstanding mission to develop simple principles that investors can use to navigate complicated financial markets. In this vein, one of our core tenets is that four prices matter more than all others, and together these determine the level of global economic activity and of investor risk appetite. Let us see where they stand as we head deeper into 2019.
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Gavekal Research
Cedric Gemehl
Jan 24th 2019
Germany's Industrial Slump
With leading indicators in Germany pointing south, and a host of external macro factors looming, things are likely to get worse before they get better. However, much of the potential bad news is already priced into the German stock market. As a result, there is scope for a pick-up in German equities later in the year should the worst of investors’ macro fears fail to materialize.
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Gavekal Research
Nick Andrews
Jan 24th 2019
Video: Skirting Recession In Europe?
This week the IMF has cut its GDP forecasts for European economies exposed to a synchronous global growth slowdown. Nick gauges the probability that core eurozone economies will fall into recession, examines the scope for stimulative policy responses and explores what the slowdown means for Europe’s financial markets.
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Gavekal Research
Nick Andrews
Jan 22nd 2019
The Future Of Italian Yields
Since it became clear Rome and Brussels were moving towards a compromise to end their budget stand-off, Italian assets have outperformed. The yield on 10-year BTPs has fallen, narrowing the spread over bunds. But investors should be wary of positioning for a continued contraction; in both the short and long term, Italy’s deficit and debt dynamics are unpromising.
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Gavekal Research
Dan Wang
Jan 17th 2019
Trump's Next Trade Target
Just when the risk from trade politics seemed to be dying down, it’s getting complicated again. Trade talks between the United States and China are in full swing, but just as important are imminent negotiations between the US and the European Union, which are clouded by the US threat to impose tariffs on cars and car parts.
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Gavekal Research
Charles Gave
Jan 17th 2019
Musings On Brexit
With the UK’s elite intent on frustrating the democratically-expressed will of the British people to quit the EU, the lesson for the rest of the continent is that there can be no legal or peaceful exit from the technocratic super-state. As Charles argues here, this increases the probability of disorderly exits in the future, and therefore greatly heightens European political risk.
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Gavekal Research
Anatole Kaletsky
Jan 16th 2019
Brexageddon
It should have been no surprise that sterling rallied after the overwhelming defeat of Theresa May’s Brexit plan. The disorderly “no deal” rupture with Europe rightly terrifies the markets and the business community is now much less likely. As a result, sterling is likely to rise eventually back towards its long term average real exchange rate.
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Gavekal Research
Cedric Gemehl
Jan 15th 2019
Macron Is Muddling Through
As the economy weakens, yellow-vested agitators show no sign of giving up on their campaign to block President Emmanuel Macron’s effort to change the way France works. I have argued against the increasingly mainstream view that Macron is a busted flush whose efforts to reform an unreformable France are doomed to fail and am sticking with that position.
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Gavekal Research
Charles Gave
Jan 11th 2019
A Silly Recommendation
The euro just celebrated its 20th anniversary to scant fanfare. Hardly surprising, given that it caused a Greek depression, decline in Italy’s private sector GDP and a German current account surplus that has exported deflationary pressure to Europe and beyond. Against this grim backdrop, today’s note will consider whether now is the time to buy eurozone financials.
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Gavekal Research
Louis Gave
Jan 10th 2019
The Big Questions For 2019
The last quarter of 2018 proved to be something of a horror show for most investors and despite this year starting with a firmer tone, the investment landscape looks to have changed in a fairly profound way. In this report, Louis considers the major shifts in the investment environment and asks whether these conditions will persist through 2019.
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Gavekal Research
Research Team
Jan 08th 2019
Strategy Monthly: The Hope-Vs-Despair Smackdown Of 2019
The massive sell-off in December left global equities on the precipice of a real bear market. Hope and despair are finely poised, but we find a bit more reason for hope. The US and China will both slow, but the US should avoid recession and Chinese growth should stay above 6%. Political and trade-war risk is lower, and liquidity pressures will ease. US equities and EM assets, especially local-currency bonds, both promise positive returns.
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Gavekal Research
Nick Andrews
Jan 07th 2019
Searching For A European Catalyst
With 2019 not yet a week old, the eurozone is already looking uncomfortably like the odd man out. With the world’s big three economies heading more deeply into a synchronous slowdown, policymakers in the US and China are showing their readiness to alter course. European policymakers have displayed no comparable flexibility.
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Gavekal Research
Anatole Kaletsky
Jan 03rd 2019
The Market Weighing-Machine
If there is one useful conclusion for investors from the crazy year that has just ended, maybe it is this: as they say in Hollywood, “Nobody knows anything.” The equity market predicted a boom while the bond market predicted recession, and then reversed positions. The consolation for investors should be that the market is a voting machine in the short term, but a weighing machine in the long term.
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Gavekal Research
Louis Gave
Jan 02nd 2019
A Future For Value Investing
Financial theory teaches that, in order to determine the price of an asset, we should take its foreseeable future cash-flows, discount them by a risk-free rate to which we can add a risk premium, and then beyond these cash-flows ascribe a “residual value” to the business. So it’s an easy game—we only need to determine four things: the future cash-flows, the direction of the risk-free rate, the level of the risk premium, and the residual value....
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Gavekal Research
Nick Andrews
Dec 19th 2018
A New Engine Needed
As the European Central Bank halts net new asset purchases and ends its balance sheet expansion, European equities are back at almost exactly the same level as in December 2014, on the eve of the ECB’s announcement of quantitative easing. Clearly, with extraordinary monetary stimulus no longer in the mix, European stocks will need a different driver if they are to make gains in 2019.
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Gavekal Research
Louis Gave
Dec 18th 2018
Getting Out Of The Liquidity Squeeze
With the Trump-Xi summit, compromise between Rome and Brussels, and the oil price down, all the ingredients should have been in the mix for a Santa Claus rally. Instead it's been an ugly few weeks in the markets, which strongly suggests no let up yet in this year's liquidity squeeze. In this detailed report, Louis looks back at recent history to determine what forces might bring the squeeze to an end next year, and therefore what asset...
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Gavekal Research
Charles Gave
Dec 17th 2018
Perhaps The Most Important Chart I have Ever Published
In my Wicksellian world, when the “market rate of interest” (cost of capital) moves above the “natural rate of interest” (return on capital) a recession usually follows. Italy offers an interesting case in point as it has spent so much time since the euro’s launch operating below this critical threshold.
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Gavekal Research
Cedric Gemehl
Dec 14th 2018
Europe's Changed Policy Mix
Until last week it was possible to make the case that the EU could still push ahead with major structural reform under the current political configuration. After a continuity candidate took over as head of Germany’s governing party and Macron turned on the fiscal spigots in France to buy off political dissent, that is no longer the case.
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Gavekal Research
Research Team
Dec 14th 2018
Our 2018 Holiday Reading List
“Books,” wrote Anthony Powell, “do furnish a room.” As author of the million-word, 12-volume A Dance To The Music of Time, Powell was something of an authority on the subject. But it is unlikely even his library was as eclectically furnished as Gavekal’s. If anything, our 2018 holiday reading list is even more varied than those of recent years. Sure, we’ve read and reviewed the economic and financial heavyweights: Barry Eichengreen on currencies...
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Gavekal Research
Charles Gave
Dec 13th 2018
Understanding The Next Bear Market
My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...
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Gavekal Research
Louis Gave, Anatole Kaletsky, Charles Gave
Dec 13th 2018
Audio & Transcript — Gavekal Research Call December 2018
In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.