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    Gavekal Research

    The Greek Endgame

    With most votes counted it looks as if the euro system has helped give birth to the continent’s very own Hugo Chavez, with the third largest party in Greece’s parliament being neo-Nazis. Nice work! With Spain going to the polls later this year and Italy never far from its next political imbroglio, Greece offers a glimpse of what Europe’s political future could look like. The question is whether the irresistible rise of Alexis Tsipras and his...

    1
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    5C Europe: How Milton Friedman Helped Save The Euro

    Since the euro’s inception economists have considered the attempt to conduct central banking in a fiscally decentralized currency zone as challenging at best, and at worst doomed to fail. Hence, Milton Friedman said the eurozone would not survive its first recession.

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    5C Asia: Will The BoJ Follow Suit?

    Governor Haruhiko Kuroda’s comments at the World Economic Forum in Davos last week set off speculation that the Bank of Japan may soon expand its program of quantitative easing. Our base case is that the BoJ is unlikely to oblige QE enthusiasts in the next 6-12 months as Japan is currently in a ‘honeymoon’ period where lower inflation is likely tolerable.

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    Towards Eurozone Reflation (Part II)

    The European Central Bank has finally crossed its Rubicon. Yesterday ECB president Mario Draghi unveiled plans to buy at least €1.1trn of public, private and supranational debt securities over the next 20 months. And if necessary, the ECB could extend and accelerate this quantitative easing program, expanding its balance sheet by as much as €3trn, or 30% of the eurozone’s gross domestic product, to hit its inflation target.

    1
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    Positioning Prior To The ECB Decision

    With the European Central Bank set to make its big announcement on quantitative easing tomorrow, the market is already pricing in a game changer. This makes portfolio positioning today a difficult task. Lofty expectations have increased the odds of disappointment, and yet investors can be excused for not wanting to position themselves for a fight with the ECB—after all, it could actually decide to fire up its printing presses in earnest. We have...

    3
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    Towards An OECD Recession In 2015

    One of the OECD’s jobs is to determine when a recession has hit the overall grouping of developed nations. The chart below shows OECD recessions shaded grey, while US recessions, as decided by the National Bureau of Economic Research, are in pink. The OECD seems to record a recession during periods when the industrial production index for the grouping falls over a 12 month period (one exception was 1995 when a mysterious recession apparently...

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    Gavekal Research

    Who Will Profit From Eurozone QE?

    Finally, the European Central Bank is expected to launch its first program of full-blown quantitative easing, buying sovereign bonds outright with freshly-printed euros. The announcement could come as soon as this Thursday’s policy meeting. But there are big questions still unanswered over how exactly to conduct QE in a currency union made up of supposedly independent countries and autonomous governments.

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    Gavekal Research

    Swexit!

    So Switzerland’s central bankers have decided that pegging their currency to the European lira administered by ‘Derivative Draghi’—as one of our friends in Hong Kong calls the European Central Bank president—was not such a great idea after all.

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    The SNB Loses Its Nerve

    Central banks have been at pains to use “forward guidance” as a tool to demonstrate transparency and with it make their policies credible. So investors got quite a shock yesterday when the Swiss National Bank abandoned a near 40 month commitment to peg the EUR/CHF exchange rate at 1.20. In its place the SNB escalated a policy of negative interest rates in an effort to deter hot money inflows; the 3-month Libor target was cut by -50bp to -0.75...

    7
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    Gavekal Research

    QE And The Drift To Euro-Stagnation

    It’s official, or at least very nearly. Sovereign debt purchases in the secondary market by the European Central Bank are legal under European law. This was the opinion of the European Court of Justice yesterday when giving a preliminary ruling on the ECB’s program of Open Monetary Transactions which was proposed in 2012 although never actually used. The ruling removes a key obstacle to the ECB adopting quantitative easing although the court...

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    Gavekal Research

    5C Europe: A J-Curve For Corporate Profits

    There are three main ways that the oil price counter-shock should deliver higher real economic growth in the eurozone economy (see The Triple Merit Of Lower Energy Prices).

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    Gavekal Research

    Europe’s Quantitative Teasing

    On Wednesday the eurozone is likely to inch a step closer to quantitative easing when the European Court of Justice hands down its preliminary ruling on the legality of the European Central Bank’s program of Outright Monetary Transactions proposed in 2012. While the ECJ is expected to find that the OMT lies within the ECB’s competence (to use Euro-jargon), any qualifications it makes will go a long way to determine the shape of a eurozone QE...

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    Gavekal Research

    Setting Aside Emotion And Seeking Reason

    Une nation est une âme, un principe spirituel. Deux choses qui, à vrai dire, n’en font qu’une, constituent cette âme, ce principe spirituel. L’une est dans le passé, l’autre dans le présent. L’une est la possession en commun d’un riche legs de souvenirs ; l’autre est le consentement actuel, le désir de vivre ensemble, la volonté de continuer à faire valoir l’héritage qu’on a reçu indivis. Ernest Renan, Conférence à la Sorbonne, March 1883

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    Managing Equities In A Strong Dollar World

    In December, we examined the rules a fixed income manager should follow when the US dollar is going through a period of structural appreciation. We emphasized that these are different from the guidelines he or she should follow when the US dollar is structurally falling. Equity managers too should change their approach when the US dollar is in a structural up-trend, but the sets of rules they should follow are vastly more complicated than...

    3
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    Gavekal Research

    From Greed To Fear

    For the last two and a half years since June 2012, the best strategy for global equity investors has been to buy on dips. The strategy worked because of a very high level of market resilience combined with a (sometimes excessively) optimistic environment. As a result, over the last couple of years markets have tended to recover very quickly from shallow corrections.

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    Gavekal Research

    The Long Shadow Of The Commodity Bust

    The commodity boom of the past decade had all the hallmarks of a typical bubble: massive retail participation (through ETFs, mutual funds etc…), large pension fund involvement, a widespread belief that ‘this time, things were different’ and that a ‘commodity super-cycle’ was unfolding. But like all bubbles, this one too has come to an end. There were plenty of potential triggers in the shape of (i) the Federal Reserve’s decision to stop printing...

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    Gavekal Research

    Europe's Corporate Jurassic Park

    Corporate Europe has now suffered through two years of an unwonted profit drought. Since early 2013 the eurozone’s gross domestic product has swung from a -1% year-on-year contraction to between 0.75% and 1% growth. The historical relationship between GDP growth and earnings per share implies that EPS growth should have picked up in tandem with the—admittedly modest—pick-up in economic growth. Yet the aggregate level of eurozone EPS is roughly...

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    Gavekal Research

    Catching The Russian Knife

    Why does a country with US$416bn of foreign exchange reserves and a current account surplus bigger than China or Japan relative to the size of its economy, suffer a currency crisis? The obvious answer is that the country is called Russia and it has launched an undeclared war against the US and EU. On closer inspection, however, this year’s 50% devaluation of the ruble, which culminated with an apparent death-plunge on Wednesday morning after the...

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  • Gavekal Research

    Oil: Lower For Longer

    How low can the oil price go? And how long can it stay down? These two questions are weighing on the mind of every investor in the world these days, to the exclusion of almost everything else. Nobody can respond to the first question with any confidence—although we take a stab below—but the second is actually pretty easy to answer.

    3
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    Gavekal Research

    Europe Not EMs At The Vortex

    In the summer of 1998, Russia’s financial crisis stemmed from the oil price plunge that followed the Asian financial crisis. Today the worry is that Russia’s fall is causing a cycle of contagion which could pull down even decently managed emerging economies. Unusually, this collapse is happening just as the world’s biggest asset allocators prepare to effectively shut up shop. It is rare to get a full blown crisis over year-end simply because...

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    Gavekal Research

    Managing Bonds In A Strong Dollar World

    During my money management career I have come to realize that there are two basic investing environments. There are periods when the US dollar is structurally declining and there are times when it is structurally appreciating. Depending on which condition applies, then anyone running a global investment portfolio should use different decision rules. We are probably moving into a period of structural dollar appreciation, so it seems an opportune...

    0
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    Gavekal Research

    Oil And Contagion

    So much for the gentle year-end that looked to be in store after the swift recovery from October’s sell-off. Investors now face an acute dilemma as oil demand estimates get scaled back and the energy complex howls: does the effective tax cut delivered to oil consumers outweigh the effects of capital destruction and rising bad debt that must result from a 40% fall in prices? US equity investors have mostly cheered the onset of $2 a gallon...

    0
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    Gavekal Research

    Draghi’s Job Just Got A Lot Harder

    The specter of debt default is once again haunting the eurozone. Failure by the Greek government to get its candidate elected president in a December 17 parliamentary vote will lead to a general election in January; an election that the radical left wing opposition party Syriza, which is currently ahead in the opinion polls, stands a real chance of winning. The prospect triggered a sharp sell-off in Greek government bonds yesterday, with the...

    3
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    Gavekal Research

    Five Corners (10 December): Contrarian Ideas For 2015

    Overview: Anatole Kaletsky looks at the struggle between the Middle-East sheiks and US oil producers and concludes that oil is about to finally conform to standard economic theory. One unintended consequence may be the effective liquidation of western oil majors. United States: Will Denyer considers the dramatic scaling back of the US shale oil sector but argues that US capital spending should do just fine next year. Europe: Francois Chauchat...

    0
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    Gavekal Research

    New York Seminar December 2014 - Charles, Francois, Tom & Will

    We held our winter seminar in New York on December 5 with Charles, Francois, Tom and Will offering their views of the global economic pulse and recent market developments.

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    Gavekal Research

    5C Europe: To Resist Or Succumb To Russia’s Value Call?

    With a stagnant economy, collapsing oil prices, painful EU sanctions and a grinding war in Ukraine to finance, the case for investing in Russian equities, to say the least, looks poor. Add to these huge challenges recurring rumors of capital controls, and you have a potent cocktail that is likely to scare away even the most adventurous, and battle scarred investors.

    0
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    Gavekal Research

    Sweden Goes Italian

    Sweden, normally a model of collegiate common sense, is gripped by political chaos. The Social Democrats, once Sweden’s natural party of government, snuck back into power after a general election eight weeks ago allowed them to cobble together a coalition. The government has moved to jack up taxes and unwind the previous administration’s private school reforms and adoption of for-profit healthcare. The rival right wing alliance is grumpy, but...

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    Gavekal Research

    The Burning Questions For 2015

    With two reports a day, and often more, readers sometimes complain that keeping tabs on the thoughts of the various Gavekal analysts can be a challenge. So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.

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    Gavekal Research

    Crunch Time, Really, For The ECB

    There is an odd dissonance to the spin that has led up to tomorrow’s European Central Bank’s meeting. On the one hand, ECB officials are doing their best to paint the move towards full-blown quantitative easing as manifest destiny. Indeed, the economic conditions seem to merit such action given awful PMIs released this week for France, Germany and Italy, which together account for two thirds of eurozone GDP. Yet there is a parallel track of ECB...

    1
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    Gavekal Research

    Growth & Markets Monthly (December 2014)

    This month saw our main growth indicator drop into negative territory for the first time in more than a year. The key drags were the commodity-related components and the underperformance of growth-sensitive stock markets such as South Korea and Sweden. The chief concern for markets is whether lower oil prices and the new monetary activism of the Bank of Japan and promises of action from the European Central bank can help reignite market momentum...

    0
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    Gavekal Research

    Quarterly Strategy Chartbook - Avoiding The Pitfalls Ahead

    Forces of creative destruction are building up in the world economy as never before. Several of Gavekal’s key indicators are signalling that we are moving into a mild deflationary boom, in which cheaper resources, lower technology costs—especially for robotics—and accelerating disintermediation—notably in the financial sector—all promise to act as game-changers over the coming years. Reliably picking winners in such disruptive times is difficult...

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    Gavekal Research

    The Great Policy Convergence

    Yesterday’s announcement that the European Central Bank is preparing to buy government bonds from the first quarter of next year is an event of historic importance. As the logical follow-up to Mario Draghi’s commitment to expand the ECB’s balance sheet by €1trn, yesterday’s statement by ECB vice-president Vitor Constâncio confirms beyond reasonable doubt that Europe is ready, at last, to implement full-blown quantitative easing, over-riding the...

    1
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    Gavekal Research

    Five Corners (26 November): Capital Spending In 2015

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    Italy Inches Towards Reform

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    Global Central Banks Are Driving Appetite For US Cyclicals

    The rebound in US equities since their mid-October trough has been impressive. After giving up almost all its year to date gains in just four weeks, the S&P 500 snapped back even more quickly, ending October at a new record high. Since then, it has extended its advance to notch up a YTD gain of 12%. Yet, until just a few days ago, the relative performance of sectors within the index indicated a degree of caution on the part of investors....

    0
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    Gavekal Research

    5C Europe: Reasons To Believe In A Capex Cycle Trough - François Chauchat

    Brussels will today reveal financing details of a much touted plan to boost capital spending in the European Union by €315bn, or about 2% of GDP. The intention is commendable since the core eurozone part of the community has seen investment as a share of GDP shrink to a historically low 11% (ex-dwellings). But although the program should be helpful, on its own it is unlikely to be a game changer. Simply put, there are three potential sources...

    0
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    Gavekal Research

    Where Next For Eurozone Equities?

    Eurozone equity markets have swung through a classic behavioral finance cycle this year. Optimism in the first quarter turned into complacency in 2Q, concern in 3Q, and capitulation in October (see The Liquidation of Euro-optimism). Since then, starting in the middle of last month, European markets have rebounded nicely, getting their latest fillip from Mario Draghi’s speech last Friday, in which the European Central Bank president pledged that...

    4
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    A Balanced Portfolio Alternative

    In recent weeks Charles has argued forcefully that the specter of deflation looms large. He sees capitalism returning to its “19th century roots” of deflationary booms and busts. He points to the wide dispersion of weak prices and in yesterday’s Daily added a twist by highlighting weak silver prices as a reliable predictor of price declines (see The Signal In Silver). If you accept this view, the next question becomes whether price signals point...

    0
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    Gavekal Research

    Here Comes The Melt-Up

    Back in mid-October as stock markets around the world plunged faster than at any time since 2011, many investors and economists feared a meltdown. But with the US economy steadily expanding, monetary and fiscal policy becoming more stimulative in other parts of the world and the autumn season for financial crises now over, a melt-up seems more likely than a melt-down.

    0
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    A US vs UK Asset Allocation Model

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

    0
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    Bank Shares And Deflation Risks

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

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    Five Corners (12 November): The Commodity Fallout

    Overview: Louis Gave Considers the poor performance of gold mining stocks and wonders if energy companies are set to go the same way.

    0
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    Beware The British Roller Coaster

    Mark Carney’s quarterly press conference at the Bank of England tomorrow could be the catalyst which reminds investors of the warning that we have issued several times over the past few months: Britain is no longer a haven of political and economic stability amid the turbulence in Europe—and this loss of safe-haven status is not yet remotely discounted in British asset prices, especially the sterling-dollar exchange rate and prime property in...

    4
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    Never Let A Good Crisis Go To Waste

    In most countries, new leaders typically benefit from a six month honeymoon before insiders start griping to the Fourth Estate about how dysfunctional their administration really is (usually out of resentment that someone else got a coveted job). That’s not the case in the European Union. Even before he’s measured his windows for curtains, European Commission president Jean-Claude Juncker is having to cancel media events (as he did on Sunday in...

    4
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    5C Europe: Ruble’s Fall Is Both Threat And Shock Absorber

    The ruble’s recent devaluation has exceeded falls seen in previous periods of weakening oil prices as Western sanctions have created a shortage of foreign exchange. At the same time, fears that Russia will impose capital controls has triggered outflows. Russia’s central bank has denied rumors that it is pulling up the drawbridge on its capital account and says it is sticking with a planned move towards an inflation targeting regime that will...

    0
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    Draghi Succeeds In Buying Time

    Mario Draghi did a reasonably good job of wresting back the monetary policy initiative yesterday, after several weeks in which the European Central Bank president had appeared on the back foot and under pressure. Hesitant communications about the ECB’s balance sheet target, and a series of Reuters ‘leaks’ suggesting the central bank’s governing council was irreconcilably divided and therefore largely impotent had threatened severely to undermine...

    0
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    Gavekal Research

    Gridlock Itself Is Not The Problem

    The votes are in and the result is yet more gridlock in Washington. For the US there is nothing unusual in this situation. Presidents have been opposed by both houses of Congress in 32 out of the 70 years since WWII, and opposed by one house in another 14 years (see here). However, political paralysis is becoming the norm in many democracies, especially in Europe. An important question is therefore how different countries and regions can cope...

    0
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    Take Profits On Hungarian Bonds

    Hungary has been Europe’s stand-out economic performer this year, outgrowing both its Central and Eastern European counterparts and its larger Western neighbors. While much of the continent has faltered, Hungary has surprised on the upside, with growth hitting 3.8% YoY in the second quarter; its highest reading since 2006. Meanwhile, unemployment has fallen back to 2007 levels, inflation is at a record low, and the country’s external accounts...

    0
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    Deflation: Boom Or Bust?

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

    2
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    ECB Credibility On The Line

    The latest reading of the German IFO survey may have surprised on the downside, but the balance of recent hard and soft data suggests the eurozone has experienced nothing worse than a summer “soft patch”. A triple-dip recession is unlikely and it is more likely that European growth will re-accelerate on the back of a strengthening US economy, a weaker euro, lower oil prices and improved fiscal and credit supply conditions. All this should...

    4
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    Growth & Markets Monthly (November 2014)

    In this edition of our monthly report we note that economic activity continues to register weaker momentum while deflationary pressures remain stubbornly present. On the primary liquidity side, the Fed has ended its quantitative easing program, while the Bank of Japan has committed to a more aggressive policy, which may yet inspire the European Central Bank into similar action. Private sector credit multiplication, or the velocity of money, has...

    0
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    The True Meaning Of The September October Sell-Off

    The World MSCI stands marginally higher than its position on August 1st. So someone who went on holiday for three months might conclude that not much has happened. Yet, in doing so, our Frenchman (for who else takes three month holidays?) would have overlooked an important question that is highly relevant to the here and now. Specifically, why did markets unravel so aggressively in a six week period from early September to mid-October? To this...

    2
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    London Seminar October 2014 - Anatole, Francois, Tom, Will & Charles

    We held our autumn seminar in London on October 28 with Anatole, Francois, Tom, Will and Charles offering their take on the state of the world economy and the outlook for financial markets.

    2
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    Five Corners (October 29): The Fiscal Imperative

    Overview: Anatole Kaletsky explains why monetary policy has become an effective irrelevance and fiscal policy is really the only game in town.

    0
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    At The Limits Of Policy

    If Europe was looking for a quick fix it is clear that relief is unlikely to come from fiscal policy. Any hope that promises of “structural reform” would allow the strictures of the Fiscal Compact to be loosened have been dashed. For sure the French and Italian budget deals with Brussels look to include plenty of fudge, which makes them less contractionary than the headline suggests. However, much is now riding on monetary policy. In this regard...

    1
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    5C Overview: We Are (Again) All Keynesians, Some Of Us Just Don’t Know It

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    After The ECB's Stress Tests

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    5C Europe: Almost The End Of Fiscal Drag

    As was to be expected, the game of chicken over 2015 budgets between the European Commission and France and Italy has ended with a face saving fudge. In exchange for cosmetic measures aimed at reducing ex-ante fiscal deficits by 0.2/0.3% of GDP, both countries will be able to cut taxes next year on the back of measured spending cuts and attempts to make labor regulation more flexible.

    0
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    Europe: Hope Springs Eternal

    On Sunday the European Central Bank will announce the results of its Comprehensive Assessment: intended to be an exhaustive—and conclusive—examination to establish once and for all the health of Europe’s banking sector. Although previous stress tests lacked credibility, hopes are high that the ECB’s latest exercise will assuage lingering fears that hand grenades still lurk undetected on the balance sheets of eurozone banks. By restoring...

    0
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    Travels Along The New Silk Road: The Economics Of Power

    China’s economic expansion overseas is one of the defining geopolitical shifts of our time. Chinese firms have already invested in excess of US$500bn abroad, and the annual flow of overseas investment is set to overtake the flow of foreign direct investment this year (see More Deals, More Players). The push into Africa has captured most attention, but China’s economic tentacles are spreading across developing Asia, too—not least in Central Asia...

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    Buying The Dip? Choose Asia

    Markets remain jittery, but the last week has at least seen a break in the downward momentum. Hence it may be worth taking stock of relative performance by the big regions. Looking across the MSCI benchmarks, the All Country World index is down –4.7% since its peak in early September, while the US, Eurozone, Emerging Markets (ex-Asia) and Emerging Asia declined respectively by –3.9%, -5.2%, -8.4% and –5.4%.

    0
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    A Debate: Fade Or Embrace The ECB?

    Client: You published your last quarterly on the various scenarios confronting Europe. And arguably, the recent downturn in global markets finds its source in the fact that European growth has lately come in a lot weaker than most investors expected. Throughout the year, Francois has argued for exposure to Europe’s ‘national victims.’ Do you think that this call still makes sense? We had Anatole pop by the office the other day, mostly to discuss...

    0
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    Waiting For The Japanese Pay-Off

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

    1
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    Blood And Bazaars On The New Silk Road

    After more than three decades of passive foreign policy, China has a strong leader unafraid of articulating a vision of expansionism. Like Vladimir Putin, Xi Jinping wants to re-establish his country’s historical sphere of influence—but Xi’s vision is based on economic logic rather than political machismo. Across Asia, China is using its enormous domestic market, financial power and prowess in building infrastructure to suck its neighbors into...

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    Give Last Week Back To The Indians

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    Fed To The Rescue?

    “Lord, grant me chastity and continence, but not yet.” That prayer from a young Saint Augustine sprung to mind when listening to St. Louis’ Fed president, James Bullard, suggest yesterday that the Federal Reserve may extend its quantitative easing program beyond the planned end date on October 29. Bullard thinks the Fed should “invoke that clause about it being data dependent” and keep buying $15bn worth of treasuries and mortgage bonds, at...

    0
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    Torschlusspanik!

    The Germans, it is said, have a word for everything—and their word for what we saw in European and US markets on Wednesday and in Asia on Thursday morning is Torschlusspanik. Literally ‘gate-shut-panic’, this describes the nasty crush that develops when everyone rushes at once for an exit that is fast closing; inevitably someone gets injured.

    1
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    Gavekal Research

    Five Corners (October 15): The Equity Rout

    Overview: François Chauchat asks whether a US recovery is enough to drive global equity markets or has the world changed.

    0
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    Oil Markets On The Brink

    Welcome to the “new normal” of the global oil markets. Investors are waking up to the reality that supply-demand fundamentals have gotten out of whack and are now readjusting. The price of Brent has fallen from its June high of US$115/barrel to around US$88/bbl, its lowest level since late 2010. This report will contend that prices could fall further before settling into a lower range and remaining there for a significant period.

    0
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    Gavekal Research

    Behind The Equity Market Meltdown

    Why are stock markets around the world falling? The surest explanation is one that works whenever the markets move in a big way: there are more sellers than buyers after a long period without a meaningful correction (it is three years since the 20% decline that ended in October 2011). A more sophisticated account of the correction might point to the collapse of oil prices and its impact on natural resource shares. While falling oil prices are...

    3
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    Gavekal Research

    Normal Or Systemic Markets?

    In The Crucible Arthur Miller wrote “until an hour before the Devil fell, God thought him beautiful in Heaven”. Granted, equity markets have not exactly suffered Lucifer-like de-ratings lately. Nonetheless, the price action in stock markets around the world is looking less and less healthy by the day. Let me explain: when examining the performance of a given index over a very long period of time, one typically finds that, like most things in...

    3
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    Gavekal Research

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

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

    2
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    Gavekal Research

    Seek refuge In The US

    Markets have suffered a significant risk-off move in the last month. US equities have fallen as much as –3.8%; European stocks are down -6% in euro terms and –8% in US dollar terms, and government bonds have been bid up while credit spreads have widened. Readers are surely wondering what to do now: Buy the dip, or sell everything before this turns into a full-on bear market? Hold steady, or adjust portfolios? To answer these questions, we have...

    6
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    Europe: Apocalypse Postponed

    Be afraid, be very afraid, if you are an investor in Europe. An “atomic bomb” is going to blow up in “the confrontation between Paris and Brussels”, warns Le Figaro, perhaps the most influential French newspaper, reporting what looks like the inevitable rejection of the French government’s 2015 budget by the European Commission. The same story appeared in other European media outlets this week, with many even attaching a precise date to this...

    5
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    Gavekal Research

    5C Europe: Why The 'Country Factor' Has Failed To Show

    Anyone who expected to see a clear ‘country factor’ driving the relative performance of eurozone national equity indexes this year will have been sorely disappointed. Spain and Italy are both among the continent’s best performers over the year so far, yet the economic paths they have followed have diverged sharply. Spain has surprised on the upside; Italy on the downside. Finland’s economy has had a terrible year, much worse than that of...

    1
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    5C Overview: Waiting For The Regional Rotation

    After years of doubt about the efficacy of US economic policies, the revival of confidence in America stands out as one of the key developments of 2014. This turnaround has been attested by the recovery of capital investment, by the resilience of the US economy to the Federal Reserve’s tapering process, and more recently by the strength of the US dollar.

    0
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    Europe's Great Debate

    European equities have been the big losers of the last six months with the Eurostoxx falling –9.5% in US dollar terms versus a 1.2% rise in the MSCI World index. Within Gavekal there are predictably divergent voices on the eurozone’s outlook. At the heart of discussion is the question whether policy initiatives can break the cycle of decline. Louis contends that Europe is set on a Japanese path, where deflation ensures that a cheap market gets...

    3
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    The Power Of The US To Impress

    Rightly or wrongly, the US payrolls have for years been the biggest market-moving event in the monthly news cycle. The market action on Friday was a reminder of their totemic power. We have repeatedly noted the mesmerising effect of the monthly payrolls, not just on Wall Street but even more on markets outside the US (note the near-perfect coincidence between the peaks and troughs shown on the chart below).

    5
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    Gavekal Research

    Growth & Markets Monthly (October 2014)

    This month produced another visible deterioration in our growth indicators. A large part of this downshift stems from Europe which remains the major economic region of particular concern. On the risk side, most of our indicators weakened slightly; interestingly our own proprietary velocity indicator was the lone positive outlier. On the asset allocation side, equities generally hover around fairly valued, while bonds look expensive. However,...

    0
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    Gavekal Research

    The Liquidation Of Euro-Optimism

    Mario Draghi did not impress yesterday as he unveiled details of the European Central Bank’s private securities purchase program. Investors were already in a bad mood after the TLTRO on September 18 saw banks tap less credit than expected. In refusing to offer specifics on his target for the ECB’s balance sheet expansion, Draghi seemed to step away from his recent bolder language; this may have been a communication error.

    2
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    Gavekal Research

    Europe's Losing Battle For Recovery

    The wobble in world markets continues, with stock indices across all time zones down steeply in recent sessions. Investors are not only realigning their exposure in anticipation of tighter liquidity conditions as the US Federal Reserve finally brings its asset purchases to a close later this month (see More Fools Than Money?). Ahead of today’s European Central Bank meeting they are also looking nervously at the magnitude of the task facing...

    1
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    Five Corners (1 October): The Energy Selloff

    Overview: Louis looks at the decline in oil prices and wonders whether the genesis can be found back in May when the leaders of China and Russia met for an historic summit.

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    5C Overview: A Changed Energy Dynamic

    As we see it the big developments impacting the global economy over the summer would roughly run as follows:

    3
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    The Rise In Volatility

    First it was the foreign exchange markets, then commodities, followed by fixed income markets. Now it’s the equity markets. Wherever we look, volatility has been creeping higher. To some extent, this is not surprising. At the end of the US Federal Reserve’s first round of quantitative easing, and at the end of QE2, the markets wobbled. So with QE3 now winding to a close (and with the ECB still behind the curve), a period of uncertainty and...

    2
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    5C Europe: The Triple Merit Of Lower Energy Prices - François-Xavier Chauchat

    At this stage, the jury is out on whether the decline in oil prices is cyclical or structural. Economic growth in big areas of the world economy such as Europe and China has slowed below expectations, which for now points to a cyclical answer. Europe’s economy has become increasingly dependent on oil imports so the relief from lower prices is acting as a very welcome automatic stabilizer. In 2013, net oil imports amounted to 3.5% of the...

    0
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    Italy’s Intergenerational Struggle

    Recession has become a way of life in Italy with 11 of the last 12 quarters seeing negative economic growth. The gloom was reinforced yesterday with the release of industrial orders for July showing a 0.7% YoY contraction. The sad thing for the one-time precocious catch-up kid of Europe’s post-war miracle has been Italy’s complete embrace of its dribbling dotage. Far from raging against the fading of its economic youth, Italy’s power elites have...

    4
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    The ECB's Damp Squib

    To the surprise of the market, the first round of the European Central Bank’s keenly anticipated Targeted Longer Term Refinancing Operations turned out to be a damp squib, generating only half the expected level of demand. In the event, banks borrowed just €83bn, well short of the €167bn Bloomberg consensus. Given that in the last three months European banks have repaid more than €80bn borrowed through the earlier 3-year LTROs, the net...

    2
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    Five Corners (17 September): World Bond Markets

    In our latest bi-weekly review of global economics, we take a searching look at the state of global bond markets. As the US Federal Reserve inches closer to a tightening bias, bond investors must climb a wall of fear. Recent weeks have seen yields rise globally. The issue is whether this represents a nervous short-term move or a bigger shift in the cycle. Gavekal Dragonomics analysts consider the picture from the major economic regions.

    0
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    The End Of The UK’s Haven Status

    The outcome of Thursday’s Scottish referendum is officially “too close to call”, since the difference between ‘Yes’ and ‘No’ has been inside the margin of error of almost all the polls published since the sudden swing towards independence last weekend. But markets are priced for near certainty of the status quo winning, with sterling stronger than a month ago against the euro, yen, Swiss franc and every other major currency save the dollar—and...

    4
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    5C Overview: Weatherproofing Bond Portfolios

    For much of this year bond investors have been in ‘risk-on’ mode. When in April the European Central Bank first hinted it was preparing to embark on its own unconventional easing measures, investors concluded that with all the world’s major central banks now offering a put on growth, it was safe to head out in search of extra yield. Global bond markets duly rallied across the board, with volatility falling to near-record lows.

    0
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    5C Europe: Short Term Volatility, Medium Term Strength

    Expectation of higher US short-rates has, over the last few weeks, reversed a portion of the big gains achieved in European bond markets. Just as in May 2013 when the Federal Reserve pre-announced its “tapering”, the key question is whether European bonds can resist a shift toward higher US bond yields.

    0
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    Putin’s Tolerable Victory

    The ceasefire in Ukraine agreed last Friday has now lasted almost a week. So far there have been no serious signs of a break-down, despite some sporadic shelling and localised attacks of the sort that undermined previous attempts to stop the fighting. Nevertheless, most media analysts and political consultants argue that this ceasefire will not hold, either because Russian president Vladimir Putin is a deceitful and ruthless monster greedy for...

    0
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    Putin's Tolerable Victory

    The ceasefire in Ukraine agreed last Friday has now lasted almost a week. So far there have been no serious signs of a break-down, despite some sporadic shelling and localised attacks of the sort that undermined previous attempts to stop the fighting. Nevertheless, most media analysts and political consultants argue that this ceasefire will not hold, either because Russian president Vladimir Putin is a deceitful and ruthless monster greedy for...

    0
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    Gavekal Research

    Russia's Stagflation Dilemma

    Given the escalation of East-West tensions in Europe it is hard to consider Russia’s prospects without obsessing about the impact of economic sanctions. However, the exogenous shock from Ukraine has hit an economy that was already reaching the limits of its chosen development model. In particular, Russia faces a stagflation problem which is pitting a sensible monetary policy against an increasingly cavalier fiscal approach.

    0
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    Gavekal Research

    Quarterly Strategy Chart Book - Three Views of A Fragile Europe

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

    4
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    QE & Bull Markets

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

    3
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    The UK Now Faces Years Of Volatility

    The probability that the United Kingdom will break apart now appears to be at least 50%. The weekend’s crop of opinion polls agree with each other, and support last Tuesday’s poll showing a powerful swing in favor of a ‘Yes’ vote in next week’s referendum on Scottish independence. Given that up until last Tuesday most investors and analysts (including me) saw no more than a 10%-20% probability of independence, what has happened in the past few...

    3
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    The Tipping Point

    The European Central Bank has reacted strongly to weaker than expected growth and inflation numbers, just as ECB president Mario Draghi repeatedly promised it would (see Believe in the ECB). The reflationary package delivered in June and substantially augmented and enhanced yesterday should finally convince most investors that the ECB is ready to do whatever it takes to reflate the economy, with or without Bundesbank approval. Fussier observers...

    0
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    From Grandmaster To Grand Farce

    At first glance, Vladimir Putin’s strongman status was confirmed by the release of a seven point peace plan yesterday that reputedly had him call for Ukrainian troops to withdraw from areas of their own country. This followed Putin’s demand over the weekend that Kiev begin independence talks for southeastern Ukraine. These are the new realities that NATO leaders must chew over during a summit that starts today and is being billed as the most...

    12
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    Scottish Poll A 'Yes' Vote For Volatility

    Until this week almost nobody outside Scotland took very seriously the possibility that Europe’s most stable and durable nation, the only big country on earth not to have suffered invasion, revolution or civil war in the past 300 years, might soon be wiped off the map. It now seems quite conceivable, however, that the United Kingdom of Great Britain and Northern Ireland will cease to exist within two or three years of the referendum on Scottish...

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