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    Gavekal Research

    Realpolitik In Ukraine

    Oscar Wilde described marriage as the triumph of imagination over intelligence and second marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope and realism over wishful thinking. A grim case in point is the Russian incursion into Ukraine. What makes this confrontation so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope...

    2
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    5C Europe: In Italy, Hope Springs Eternal

    Italy, home to the eternal city, looks to have become a land of timeless stagnation. Unlike Spain and Ireland whose credit bubbles at least caused rapid growth before the bust, Italy's problems have brewed for years.

    0
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    Bet On Reflation, Not Deflation

    The widely touted notion that Europe faces a Japanese-style deflation sits uncomfortably with its fast recovering financial markets being led by fragile Southern Europe. In recent months, both bonds and stocks from Spain and Italy have been stellar performers. This apparent contradiction stems from a misunderstanding about the way the European Central Bank runs policy—the deflationists have tended to conflate recent soft CPI and PPI readings...

    9
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    Europe's Divergent Deflation Risks

    A combination of a strong currency and weak domestic demand has squeezed inflationary pressures in the eurozone such that CPI stands at just 0.7%, well below target. We have pointed out previously that much of this represents “good deflation” in that falling prices boosts the purchasing power of consumers especially in the weaker peripheral countries (see The ECB, CPI And Reflation Trades). However, there is a risk that this could morph into...

    0
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    After Ukraine, Russia Risks Losing The New Great Game

    Russian president Vladimir Putin sat stony-faced through yesterday’s closing ceremony in Sochi. The Winter Olympics were supposed to convince the world that a confident and modern Russia is once again rising as a great power. But after a stunning reversal of fortune in the burning streets of Kiev, Ukraine appears to be slipping from Putin’s grasp.

    4
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    5C Europe: What The Ruble's Collapse Means

    The slowdown of Russian economic growth, in evidence since 2011, had until recently not threatened financial stability. Growth may have come in at a measly 1.3% in 2013, but the country has public debt equal to only 10% of GDP, and the current account balance remains in surplus, at 2% of GDP. Also, the consumer sector remains fairly buoyant since unemployment is near a record low of 5.5%, while real wages are growing and social spending remains...

    1
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    The UK’s Monetary Policy Puzzle

    On Wednesday, the Bank of England announced a series of technical changes to its threshold guidance and with them a potentially significant shift in direction. Contrary to most investors’ take, the BoE’s Monetary Policy Committee looks to have swung back to a dovish position from an apparent tightening-bias adopted at its last inflation report. Moreover Governor Mark Carney has broken away from straightforward inflation targeting and embraced...

    0
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    The US Current Account And Vanishing Global Liquidity

    The US dollar is the world’s reserve currency which in simple terms means that the United States is the only country which can settle a foreign deficit by issuing its own money. As such, any “improvement” in the US current account balance means that fewer dollars show up outside of the US, while the reverse holds true in the event of a deterioration.

    0
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    No Refuge In The Swissie

    As we all know, markets have endured one of the worst starts to a year on record. Risk assets all around the world have sold off, while safe haven plays have rallied. The US government ten-year yield fell from 3% to as low as 2.6%, the US dollar has gained significantly against emerging market currencies, and the trade-weighted yen has gained more than 4%. Interestingly, the Swiss franc, another classic safe haven asset, has actually lost -1.4%...

    1
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    Gavekal Research

    Is The ECB Readying For Stealth QE?

    The European Central Bank has a reputation for holding firepower until the eurozone is at the point of crisis. Although no crisis is apparent now, growing deflationary concerns compounded by volatile money market interest rates make today's ECB meeting worth watching.

    1
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    5C Europe: The EM Rout Reinforces Equity Rotation

    It is a mark of how much has changed in eurozone financial markets that 2014 started with a big risk-off move, but European equities have outperformed the rest of the world. Maybe, but experienced investors have learnt never to overestimate European markets’ capacity to weather storms for more than a few weeks. While we remain positive on the prospect for European equities this year, the emerging market rout means that investors should identify...

    0
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    Leading Indicators Through The Looking Glass

    Leading economic indicators are a key tool used by analysts to gain a heads up on the future. They rely on a mix of hard and soft survey data and offer a glimpse of likely spending decisions to be made by producers and consumers. That, at least, was the way things used to work in Europe. Today, the impact of multiple policy manipulations is that the predictive power of these tools has almost completely broken down (see The Problem With Leading...

    9
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    Central Bankers Can Still Be Trusted

    The rout in risk assets last week has generally been attributed to emerging markets—and looking at Argentina, Turkey and Ukraine, there has been plenty for investors to panic about. On the other hand, why should the dollar/yen exchange rate or the value of US equities be so sensitive to just another devaluation in Argentina or the shakiness of or incompetent regimes in places such as Ukraine?

    0
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    A French Quid Pro Quo

    We expected strong pushback from France’s traditional left after President Hollande’s speech last week which hinted at labor reform, and vowed spending cuts and tax relief for business. Instead the most vociferous attacks came from the Keynesians—with Paul Krugman, this camp’s unofficial spokesman, accusing Hollande of abdicating to German austerians (see Scandal in France). But the Keynesians are dead wrong.

    0
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    The Curious Case Of Corporate Europe

    Contrary to what Mario Draghi hoped for after delivering his “whatever it takes” speech last summer, most investors remain unconvinced that the eurozone has developed into a sustainable single currency system. Many consider that the eurozone’s architecture has not been sufficiently reinforced to weather the next testing crisis. Our view is that Europe has adopted sufficient reforms to muddle through, but we would admit that the implacable...

    0
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    5C Europe: Is Southern Europe Escaping The Debt Trap?

    Even as many still fret about the viability of the European periphery economies, financial markets continue to deliver an optimistic prognosis. Yields on five-year Italian and Spanish government bonds have declined massively to just above 2% (5-year has been the average maturity of new debt issued in recent years). So how much further can bond yields fall in Southern Europe? And perhaps more importantly, do lower yields mean that debt loads are...

    0
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    5C Overview: The Eminent Case For Rent Control

    The French minister who oversees the housing and construction sectors wants to re-introduce rent controls and toughen oversight of residential building. This enlightened proposal has naturally been met by howls of protest from the industry and most economists. And yet, consider the beneficent consequences that must surely flow from such a measure.

    0
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    Deflation In 2014? Not In The US

    Curse words attract attention, as IMF managing director Christine Lagarde knows after dropping the D-bomb yesterday. Amidst her fairly balanced outlook for the global economy in 2014, it was her comments on deflation that attracted all the media attention:

    3
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    France’s Wannabe Reformer

    For those with a more prurient interest, Francois Hollande’s press conference evaded the great question of who will be France’s next first lady. But even if his domestic arrangements remain unclear, the event did illuminate the core language surrounding the president’s economic policy. What remains to be seen is whether he has the will and the execution abilities to deliver on his claim to be a far-reaching reformer.

    1
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    Gavekal Research

    Not Every EM Is A Turkey

    Emerging markets have gotten off to a wobbly start to 2014. Tapering is elevating financing costs and encouraging capital outflows, and meanwhile there is no sign that stronger OECD growth is boosting EM exports. Some countries, such as Turkey, have seen dramatic plunges in asset values, raising fears of a broader contagion effect.

    1
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    Eight Questions For 2014

    Having just spent the past ten days in the ‘twice-promised land,’ we have become accustomed to hearing questions answered by even more questions. So it is in this spirit that we propose our top questions for the new year.

    0
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    Is France Really Diverging?

    Is every country in Europe recovering but for France? This is the question raised by a third consecutive month of disappointing French manufacturing PMIs, which plunged to 47 in December even as the eurozone-wide PMI expanded to 52.7, a 31-month high. Such a large divergence is peculiar, since France and eurozone PMIs have historically been aligned. It could be that France’s recovery is just a bit more painful and taking that much longer—but...

    0
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    Gavekal Research

    5C Europe: From The Macro To The Micro

    In spite of the remarkable performance of European financial markets since mid-2012, euro-skepticism remains alive and kicking. There are some good and some less good reasons for this. The continued German veto against any form of fiscal transfers, including the architecture of the banking union, is a clear negative. France’s economic weakness is also a concern, although it is not clear that an authentic French tail risk exists (see Is France...

    0
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    Gavekal Research

    Eastern Europe's Convergence

    Investors are still forlornly awaiting a recovery in southern Europe, but in the eastern part of the continent, things are jumping. Well, relatively so anyway, with Eastern Europe’s larger economies seeing a much snappier revival of industrial activity than elsewhere. This discrepancy in economic performance is a reminder of southern Europe’s hopeless bind when it comes to competitiveness. Countries like Greece and Portugal may be in the same...

    0
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    A New Widow Maker?

    The Japanese government bond market is famously known as a “widow maker,” since shorting it has crushed so many macro-traders. It looks like the euro is competing to grab title for itself. Many traders have been shorting the currency, with poor results so far.

    2
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    What The Czech Experiment Means

    While the European Central Bank yesterday discounted deflation risks with a breezy optimism, policymakers to the east are taking the threat more seriously. The CEE-4 grouping saw inflation fall to 0.85% in October, far below its previous low of 2% in 2009. The likes of Poland and Hungary have responded by cutting interest rates to record lows.

    0
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    Turncoats And U-Turns In The UK

    0
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    What More Can The ECB Do?

    0
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    5C Europe: Are Earnings Expectations Too Rosy?

    Equity analysts have a notorious tendency to be overly optimistic in their earnings projections. MSCI data shows that on average, reported earnings per share comes in about 10-12% below the consensus expectations forecast 12 months earlier. The average forecasting error is roughly the same in the United States and Europe.

    0
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    Gavekal Research

    Germany Chooses Growth

    In the past couple of years Germany has continued with the economic program defined by Gerhard Schroeder a decade ago, even after the former chancellor’s “Agenda 2010” had clearly reached the end of its usefulness. Schroder’s program of boosting cost-competitiveness and deleveraging the public sector had long achieved the expected outcomes, as reflected in record trade surpluses and slim budget deficits. Since what had been done does not need to...

    10
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    The UK Productivity Gamble

    3
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    Five Corners (20 November 2013)

    In our the latest bi-weekly review of global economics and investment, Anatole bullishly notes that central bank doves are back in the ascendency; Will Denyer’s wrap on the earnings season has a shale twist; Francois Chauchat argues that China reforms spell opportunity for Europe; Andrew Batson and Rosealea Yao assess the deleveraging process; and Nate Taplin writes on energy price liberalization in China.

    0
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    Gavekal Research

    How Can Chinese Assets Boom?

    Some clients have taken us to task for translating our positive call on China’s economic reform agenda into a positive call on Chinese risk assets. Over the next year or two, structural reform means slashing broad credit growth from the current 19% down to the very low teens, accepting a lower GDP growth rate, and reining in the excesses that have pumped up the property market, construction and materials demand. Even if we accept that all these...

    1
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    Gavekal Research

    5C Europe: China Reform To Spur Equities

    The decisive shift from growth to value investing in Europe since the spring has ended the outperformance of Europe’s export champions over the rest of the continent’s equity universe (see Europe: The Return of Value Investing). Still, in absolute terms, European exporters have continued to perform amazingly well. In particular, those companies heavily exposed to emerging economies have done much better than emerging market equities themselves,...

    0
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    A First Take On The TTIP

    A key concern following the Global Financial Crisis was that protectionist barriers would inevitably rise, just as high walls were constructed around trade after the Great Depression. But even though the Doha round of multilateral trade negotiations has stalled, momentum continues to gather pace for deeper, more integrated free-trade blocs.

    0
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    Gavekal Research

    Back To German Bashing

    When Keynesian policies are failing, as they always do, proponents never fail to look for a scapegoat. Usually this is Germany, rebuked for the un-Keynesian practice of earning and saving. Our concern is that when German bashing reaches fever pitch, panic selling often follows. Think for example of the stock market crash in 1987, “created” by the fight between the US Treasury and the Bundesbank.

    15
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    Gavekal Research

    The French Debt Question

    A question commonly batted around in Europe is whether “France will be the next shoe to drop.” The answer is almost always a resounding, “Yes, of course.” The country, after all, meets an essential criteria for a debt crisis: that it occurs gradually, then suddenly. Gradually because France, with a well-bid bond market, stands out in Europe as the country that seems to be refusing to undertake major reforms. Suddenly because if and when markets...

    10
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    The ECB, CPI And Reflation Trades

    0
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    5C Europe: Eastern Promise Starts To Deliver

    Despite a broad improvement in recent PMI surveys, Europe’s big economies have yet to see a convincing increase in actual production. The happy exception is Eastern Europe, where manufacturing production has broken to the upside since late spring, after more than a year of stagnation (see chart).

    0
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    The Foothills Of Banking Union

    This month the European Central Bank embarks on what is being billed as a comprehensive stress test of the eurozone’s banking system. The year-long exercise is necessary to rebuild credibility in the banking supervisory regime after past tests were derided for their lack of stress. This is the first phase of a two-step process which should ultimately progress toward some form of banking union. But the immediate worry for investors is whether...

    1
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    Gavekal Research

    The Euro's Little Bull Run May Be Over

    The euro is finally in the headlines, after losing two week’s worth of gains in the last two days, a tumble triggered by weak economic data which is raising pressure on the European Central Bank to ease. The question is why, until yesterday’s tumble, so little attention had been paid to the currency’s remarkable ascent. The euro hit its highest level against the dollar since 2011 on Monday, having jumped by 5.5% since September and over 8% since...

    0
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    Resource EMs Reopening The Doors

    Two years ago, with commodity prices high, emerging market resource producers scrambled to restrict or regulate foreign investment in their mines and oilfields, in the hopes of keeping most of their windfall profits on shore. Now they are scrambling the other way: in the past three months, Mexico, Brazil, Mongolia, Indonesia and Russia have all announced new policies to ease commodity-related FDI, or signed new export deals on favorable terms...

    0
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    The New Stockholm Syndrome

    2
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    5C Europe: The Benefits Of A Strong Euro

    At first sight a strong euro is not good for Europe. It reduces the attractiveness of financial assets to foreign investors who may fear potential currency losses down the track. And, other things equal, it hurts economic growth by reducing exporters’ profits and making export growth more difficult. And yet, given the euroland’s current political and economic context, a strong currency also has important positives.

    6
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    Who's Austere Now?

    While a year of sequesters and political deadlock has produced a major fiscal drag on the US economy, a revolt against austerity in Europe is lightening the load after several long painful years of official belt-tightening. Indeed, 2013 will be remembered as a watershed year in this respect. As we argued at the end of last year in The Case For A European Recovery, this rebalancing was to be expected; but it is clearly more pronounced than...

    0
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    A Fisherian Take On Velocity

    Defining the velocity of money is not an easy task. John Maynard Keynes summed it up as the ‘animal spirits,’ the Austrians called it ‘the preference for liquidity,’ Knut Wicksell labeled it the spread between the ‘market rate’ of interest and ‘the natural rate.’ Joseph Schumpeter tied changes in velocity to entrepreneurs’ willingness to take risk, which in turn is tied to factors including the legal systems in which they operate, property...

    10
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    Europe: The Return Of Value Investing

    Euroland equity investors have been well rewarded since the 2008 financial crisis for favoring high quality growth stocks that have not suffered from government interference. Over the last year, however, value stocks have enjoyed a comeback, performing almost evenly with their perkier growth rivals. We think this shift augurs stabilization in the outlook for European value investing, at least for the next few quarters.

    0
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    5C Europe: The Myth Of Youth Unemployment

    0
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    Paradox In Italy

    Everything in Italy originates in politics. This includes Silvio Berlusconi’s dramatic weekend attempt to bring down the governing coalition, which he claims is a protest against impending fiscal tightening measures. In fact, this move is Berlusconi’s last and only possible bet to avoid being expelled from his seat in the upper house following his August conviction for tax evasion. It is quite a gambit: by pulling his PDL party out of the...

    0
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    5C Europe: Draghi's Need For Action

    Excess liquidity in the euro system has fallen to €223bn (7-day average), which is close to the €200bn level identified by the European Central Bank as a potential threshold for intervention. Had this contraction occurred against a backdrop of improved cross-border lending and more direct transmission of ECB policy to borrowers in struggling economies, then all would be well. But this is not the case due to a “financial fragmentation” that still...

    0
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    London Property’s Inevitable Rise

    The Federal Reserve may have postponed its liquidity tightening program, but the tide of easy money looks to have receded from its high watermark. Yet, even as G7 bond prices have mostly declined to less insane levels, London property, a favored refuge for financial itinerants, keeps on rising, caught in an unusual swell of supply-demand imbalances. Although home prices never adjust as quickly as their fixed income equivalents, it is likely that...

    0
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    Germany’s New Agenda

    After one of the most boring election campaigns in recent European history, Germans go to the polls on Sunday. Such is the lack of suspense that the main talking point for the political class is whether Angela Merkel’s junior coalition partner will scrape the minimum 5% share of the vote required to stay in the Bundestag. And such is the predictable logic of Germany’s electoral system, that some form of Merkel-led coalition is all but certain....

    0
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    Gavekal Research

    Why Europe Is Still Broken

    Back in the day, playing European markets was a simple game. Industrial production across the European continent tended to rise and fall, pretty much in lock step with Germany’s IFO index of business activity. This relationship broke down with the creation of the euro and fully fractured after 2007. For example, consider yesterday’s worse than expected French industrial production, even while Germany continues to power ahead.

    5
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    The Strange Case Of The ECB

    1
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    5C Europe: Long Live Skepticism!

    Despite eurozone economic indicators having surprised on the upside since June, many investors and observers continue to fret about Europe; some even question whether the old continent is actually experiencing a recovery. For three reasons such skepticism is a very good thing.

    0
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    Gavekal Research

    It’s Not A Balance Sheet Problem

    There is a growing fear that emerging markets could be on the cusp of a general crisis of the type seen in the early 1980s or late 1990s. The concern is that too much debt was racked up during an easy money phase and chickens are coming home to roost as the US moves toward a tightening cycle (see Resetting Expectations For Emerging Markets). Attention has understandably focused on those emerging economies with sizeable current account deficits,...

    13
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    5C Europe: Stealth Rate Hike Watch

    In January, when EMU banks began repaying the LTRO loans dished out in the heat of crisis, markets worried that this process effectively constituted a monetary tightening. We wrote at the time not to worry—repayments were a sign of health in the banking system, and with excess liquidity above €600bn, there was no danger of short rates going up (see that piece here). Indeed we recommended forgetting about the issue until excess liquidity fell...

    0
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    Greek Tragedy Or La Dolce Vita?

    Like Charles, I have spent a good part of the summer in a beautiful part of Europe, but unlike Charles I spent more time relaxing, rather than thinking and writing almost daily about the financial and economic calamities that lie ahead. This has been lucky for our clients, since I have been unequivocally bullish about equities and the US economy, especially since November’s election. So any market guidance that I might have offered from lovely...

    20
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    France As A Lynchpin

    4
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    5C Europe: How To Invest

    At the risk of sounding obnoxious, investing in Europe has actually been quite simple for the better part of the last eight years. All one had to do was overweight the stock markets of the countries which did not belong to the euro and underweight those within the doomsday machine. Such a strategy would have ensured that the investor comfortably outperformed the main European benchmark.

    0
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    5C Overview: Is Europe Sleepwalking To The Brink?

    This year most developed-market stock markets have rallied nicely, but investors remain unconvinced. In the markets where growth prospects are strongest (the US and Japan) valuations seem stretched, whereas in the markets where stocks are relatively cheap (Europe, and in the developing world China), the growth outlook seems dodgy.

    0
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    5C US: An Unusual Arbitrage Opportunity

    In a normal circumstances there is no particular reason to think the US stock market should outperform the UK stock market over the long term. Over many years I have argued that total return of the US stock market compared to the UK stock market offers no discernible trend—my series goes back to December 1969 and is based on reinvestment of dividends, price appreciation and currency changes.

    0
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    Something's Working In Britain

    0
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    A Supply-Sider’s View Of The UK

    Since 2000, central bankers and governments have competed to find “better” ways to direct economic activity. Interest rates, money supply and exchange rates have all been manipulated by clever fellows who are sure they are smarter than the markets. This meddlesome brood succumb to Hayek's “fatal conceit,” not because of their commercial success in the real world, but because they got the best grades at school.

    18
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    Can EMU Stocks Re-Rate?

    After a long and sharp de-rating starting in 2007, eurozone equity markets have found firm ground since the middle of 2012. If history is any guide, this is the start of a multi-year return-to-the-mean trade. After all, compared to the US, the region’s equities remain almost two standard deviations below their historical mean, an underperformance not seen since the “euro sclerosis” era in the early 1980s.

    0
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    Light At The End Of Europe's Recession

    Recent deadly transport accidents in France, Spain, Italy and now Switzerland have heightened the sense of tragedy in Europe. The continent, scarred by a multi-year recession which has taken a devastating human toll, is desperate for an end to the relentless stream of bad news. Fortunately, this summer’s economic data offers some consolation. As we expected (see The Case For A European Recovery), Europe is moving out of recession. This is due to...

    4
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    5C Europe: The French Advantage

    For more than a year, the idea that the next episode of the euro crisis would come from France has morphed into a consensus. It has not materialized (see The French Bond Market Puzzle Explained).

    0
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    Reconciling Conflicting Views

    In recent weeks, Charles, Louis and Anatole have sparred over both the health of the global economy and the outlook for markets. On the face of it, those views seem irreconcilable (a view held by the protagonists), but as a technical analyst I would argue that a synthesis of sorts can be achieved. This is because the strongly conflicting outlooks are connected through a bridge known as investor perceptions. My argument rests on a reconciliation...

    0
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    Game Over For Austerians

    Margaret Thatcher used to say that “There Is No Alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall—you can stop banging your head against a brick wall. The G20 meeting in Moscow last weekend may have marked such a moment of revelation.

    4
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    Southern Europe Walks On Thin Air

    Recent economic data releases suggest, on the face of it, that Southern Europe is enjoying an improved outlook. This weekend, Portugal’s government stared into the abyss and chose for the moment not to break the terms of its bailout. Hence, in recent months, GaveKal colleagues such as Francois have argued that economic conditions in the European periphery are stabilizing (see A New Global Growth Story). I would respectfully disagree. Regardless...

    4
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    Can The Shale Revolution Go Global?

    More than a year after Argentina incensed oil majors by nationalizing YPF, a state oil firm half-owned by Spain’s Repsol, the industry seems ready to move on. Chevron signed a US$1.24bn deal on Wednesday to develop shale oil assets in the ominously named Vaca Muerta (“dead cow”) basin. It was the first production deal outside of North America since the US started to ramp up unconventional production last year.

    2
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    Five Corners (17 July 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    0
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    Good Omens

    Two months ago I gave ten reasons for believing that April’s break-out of the S&P 500 from its 13-year trading range “could mark the start of a secular bull market in global equities”. This piece, which came out on May 20, was singularly ill-timed, since equity markets peaked the very next day and then plunged on May 22, after Ben Bernanke’s tapering comments (see Goldilocks And The Ten Bears). Luckily for my credibility, I did end this...

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    How Markets React To Exchange Rate Manipulation

    In my humble opinion there are certain economic issues which have passed the point of needing validation. Here are a few examples.

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    Bad Omens

    In late May we published a debate piece on the near-term outlook for equity markets. Since then, emerging markets have once again lived up to their name by proving themselves hard to emerge from during an emergency (in USD terms, Brazil is down –35% year to date while Chinese valuations are back to 2008-crisis levels); for their part, European and US equity markets have pulled back, while the only salvation has come from Japan (the one market...

    10
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    What A Weakening Krona Tells Us

    Last week the ECB and the Bank of England offered up dovish forward guidance (see our Daily), but one European central bank chose to hang tough. Sweden’s Riksbank held its key policy rate at 1% and stuck to guidance for a tightening later in the year. It is noteworthy that this stance was maintained despite decidedly mixed economic data—and yesterday’s industrial production release for May showed a worse-than-expected decline of -7.3% YoY, even...

    1
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    Counter-Balancing Market Trends?

    Over the past decade, investors needed to come up with one of two ideas to ensure outsized success: “front run the Chinese” or alternatively "front run the Fed".

    5
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    Europe’s Control Engineers

    “Words are, of course, the most powerful drug used by mankind,” so said Rudyard Kipling. When central bankers meet next month for the annual Jackson Hole shindig, they can ruminate on their success being increasingly dictated less by what they do, than what they say. Take the European Central Bank and Bank of England which in recent months have been fairly taciturn next to a loquacious Federal Reserve. Yet, by yesterday verbalizing forward...

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    Carney Set To Ride A British Revival

    Mark Carney, the former head of the Bank of Canada who has just taken over as Governor of the Bank of England, will today chair his first monthly meeting of Britain’s Monetary Policy Committee. The meeting is unlikely to produce any change in policy, if only because six of the nine MPC members have consistently voted against additional quantitative easing. Yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the...

    0
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    Portugal Goes Rogue?

    Nothing so disturbs a disciplinarian teacher as the prospect of a model pupil turning into the class rebel. With Portugal’s center-right coalition government seemingly on the brink of collapse, such are the fears in Brussels and Berlin. Lisbon has pushed through painful structural reform, stuck to fiscal austerity and in the process improved a chronic trade deficit. Hence, the fallout from Portugal going rogue and rejecting the Troika medicine...

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    Five Corners (19 June 2013)

    In the latest Five Corners biweekly review of global economics and investment:

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    When Good Comes Of Bad

    It’s cynical, manipulative and hypocritical—and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy? Not often enough.

    5
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    The Incredible Deflating Gas Market

    Emerging markets are taking a pounding with commodity-producing centers worst affected. Everywhere we look we see resource markets that are either over-supplied or have the potential to be so. The old market adage that the best cure for high prices is high prices would seem as relevant as ever. But it isn’t just iron ore and copper stocks which are bulging; LNG prices have plunged almost 25% in the last couple months.

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    Not All Emerging Markets Are Equal

    Emerging markets suddenly face a perfect storm of fleeing capital and shrinking demand for their wares. The proximate cause is the global bond market sell-off, which has sucked hot money back home. And the hardest hit markets are those commodity-heavy exporters which hitherto benefitted from rapidly expanding Chinese demand. But while it may seem like a time to circle the wagons, this sell-off is most likely a healthy realignment of winners and...

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    Five Corners (5 June 2013)

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    The Russian Paradox

    You could be forgiven for thinking that Russians faced a grinding decline in living standards as is the lot of most Western Europeans. Economic growth in the first quarter slowed to a measly 1.6% compared with a year earlier, while inflation remains stubbornly high at 7.2%. And yet even as the outlook for energy exporters worsens and capital exits a slumping Russian equity market, there are good reasons to stay interested—indirectly we would...

    4
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    How Many Arrows In Robin Hood's Quiver?

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    Five Corners (22 May 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    2
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    Should One Short Germany?

    Some of our long-time readers may remember my quip, soon after the euro was launched, that a European monetary union will result in “too many houses in Spain, too many civil servants in France and too many factories in Germany.” One had to wait a while, but eventually those chickens began to come home to roost.

    5
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    An Update On The French Disaster

    Last month I laid out the reasons why France was On The Brink Of A Secondary Depression—in short, due to a deadly collision of French politics with Frankensteinian monetary union. Unfortunately subsequent data confirms the bleak trajectory:

    12
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    Europe's 'Thatcherite Keynesianism'

    Yesterday’s European Central Bank meeting, along with recent shifts in fiscal policies, moved Europe one step further down the road of “Thatcherite Keynesianism.” A consensus is slowly and painfully emerging to keep the reform agenda on track, but to end the front-loading of austerity measures, especially tax hikes. The deflationary effects of deleveraging are being mitigated through an ever more accommodative ECB, and even through selective tax...

    2
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    Waiting For The ECB Decision

    For some three years, investors in European assets felt like Hector being dragged behind Achilles’ chariot. Poor economic data would raise questions about the sustainability of GIPSI budget deficits, thereby pushing up peripheral bond yields, triggering concerns about the health of domestic banks and then a broad sell-off in risk assets. In time the panic would elicit a policy response from the EU, ECB or IMF. The troika intervention would help...

    2
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    The ECB May Surprise: By Not Easing

    What are European investors hoping for? Or, to put the question more forcefully (and give away our conclusion) what have they been smoking? The European economy is going from bad to worse. While economic and financial indicators from around the world have recently been disappointing, the US news has suggested nothing worse than the risk of another modest summer “soft patch,” while China has been settling into structurally slower, but still very...

    2
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    Implied Assumptions

    Financial markets operate on a number of implied assumptions about growth, policy direction and other factors. Experience tells us that these assumptions often turn out to be erroneous. The goal of this paper is simply to test the rationality of the current set of assumptions.

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    Growth Falters And GIPSI Bonds Rally?

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    Italy Delays The Swan Song

    European markets stabilised yesterday and Italian bonds and equities enjoyed some of their biggest gains for months after the unexpected return of Giorgio Napolitano as president. At first sight the re-election of an 87-year old for a second seven-year term that he didn’t want and that public opinion certainly did not support may seem like a confirmation that Italy has descended into chaos and ungovernability. Yet the markets’ positive reaction...

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    Hedging A Euro Crisis

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    Thatcher Would Reverse Austerity

    Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep...

    2
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    How Bond Markets Work In Euroland

    Something strange seems to be happening in European bond markets. French and Dutch bond yields this week registered new lows despite a potentially game-changing shock from the Cyprus bailout and recessions in both economies threatening their sovereign ratings. Even reports yesterday that the cost of the Cyprus rescue has risen by a third to €23bn, caused only a slight market ripple. The case of France is particularly interesting since the 10-...

    5
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    The Social Purpose Of Tax Havens

    The Cahuzac affair in France has conveniently emerged just as the search for possible scapegoats to Europe’s quandary was intensifying. Thanks to the former French budget minister’s secret Swiss bank account, Europe can now move from its war against finance (Hollande declaring that finance was his enemy, the financial transaction tax, capping of bonuses, etc) to an outright war against tax havens (letting Cyprus sink, arm-twisting Luxembourg...

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