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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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    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.

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    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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    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...

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    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...

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    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...

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    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...

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    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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    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.

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    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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    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...

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    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...

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    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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    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....

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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...

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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...

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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.

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    Gavekal Research

    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...

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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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

    1
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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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    Gavekal Research

    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...

    0
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    Gavekal Research

    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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    Gavekal Research

    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...

    1
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    Give Last Week Back To The Indians

    4
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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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