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    Gavekal Research

    The Promise Of A More Forceful ECB

    The signal could hardly have been clearer. Although the European Central Bank chose to hold its fire yesterday, bank president Mario Draghi made it plain that he will be prepared to wheel out even bigger weaponry at December’s meeting to overcome the deflationary forces pressing on the eurozone’s economy. If necessary, this could include extending the current quantitative easing program beyond next September, increasing the ECB’s monthly asset...

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  • Gavekal Research

    The Myth Of Secular Stagnation

    When the European Central Bank meets today, discussion will center on whether it should expand quantitative easing in an attempt to stave off deflation and support the eurozone’s painfully slow growth. In Japan too, talk is about whether the Bank of Japan needs to step up its stimulus efforts. And in the US, the Federal Reserve last month decided to delay calling an end to its own zero interest rate policy amid evidence that US growth is in...

    1
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    Gavekal Research

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    0
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    Gavekal Research

    Hong Kong Seminar

    This is the full recording from Gavekal's October Hong Kong seminar featuring Joyce Poon, Andrew Batson and Anatole Kaletsky as well as a Q&A session.

    0
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    Gavekal Research

    Will The ECB Opt For QE-Plus?

    When the governing council of the European Central Bank convenes this Thursday in the Maltese capital Valetta, the assembled policymakers will be forced to contemplate a track record of quantitative easing that at best can be described as “mixed”. True, since the ECB announced its €60bn a month program of asset purchases in March this year, eurozone activity has staged a modest comeback, with growth expected to rise to 1.6% in the third quarter...

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    Gavekal Research

    Could Volkswagen Save Europe?

    Volkswagen's stock price has rebounded more than 20% since its early October low, but there remains uncertainty about the firm’s future. Since news of the diesel polluting scandal broke, US$30bn has been wiped off VW’s market value, and you do not need to be conspiratorial to see a scenario that has the value of the German carmaker’s equity going to zero.

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    Gavekal Research

    Italy’s Debt Trap Escape Bid

    Even though Italy has run primary surpluses for all but one of the last 20 years, public debt has ballooned to 133% of GDP, second only to Greece in the eurozone. Italy’s original profligacy dates to the 1980s, but the real issue has been an inability to bite the bullet on reform, which, according to the International Monetary Fund, has reduced potential economic growth to just 0.4%. The good news is that Italy seems to have woken up and smelt...

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    Gavekal Research

    The Birth Of A Pain Trade?

    The question we have received most in recent days is whether this week’s counter-trend rally in commodities, deep cyclicals and emerging markets can morph into a “melt-up” akin to that seen in 4Q98. Seventeen years ago the blowback from the Asian Financial Crisis culminated in late September with the failure of Long Term Capital Management. Within days of a hurriedly agreed creditor bailout, the Federal Reserve had made the first of three...

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    Gavekal Research

    The Gavekal Monthly: More Questions Than Answers

    With the Fed having put its rate hike decision on hold, investors face an uncertain environment of weak global growth and inflation, tottering emerging markets and continued worries about China. In this edition of The Gavekal Monthly, Louis-Vincent Gave surveys the crucial questions investors must grapple with and identifies the indicators to monitor in the coming weeks. In addition, we highlight three calls from our analyst team: Joyce...

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    Gavekal Research

    QSCB: What Is The Trade Slowdown Telling Us?

    For the first time since the 1970s global trade is growing more slowly than global GDP, and if anything this growth is decelerating. One explanation is that slower world trade is a symptom of weak global demand, and perhaps a harbinger of worse economic news to come. That is possible, but in this Quarterly Strategy Chartbook we argue that the trade slowdown reflects structural changes in the world economy, and signals that a new phase of...

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    Gavekal Research

    Why Big Caps Are Still Blighted

    Big cap stocks globally have had a horrible 2015 with the Volkswagen emissions scandal being just the latest “uncorrelated shock” to hit the sector. In Europe, German utilities RWE and E.ON have lost more than half of their market value, while oil and commodity producers everywhere have been hurt by a collapse in the price of their wares. Still, “blue chips” got that reassuring moniker because they tend to be the highest value counters on the...

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    Gavekal Research

    A Worrying Set Of Signals

    Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a...

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    Gavekal Research

    Libor Not Lehman

    With shares in Volkswagen down -28% since the diesel emissions rigging story broke last Friday, VW bond yields up sharply, and the securities of other European automakers hit hard by the news, investors face some uncomfortable questions. Is the risk posed by the scandal idiosyncratic, with the fallout likely to be confined largely to VW itself? Or could the risk prove systemic, with potentially catastrophic implications for the broader European...

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    Gavekal Research

    Gastarbeiter Redux

    The influx of hundreds of thousands of asylum seekers from war torn Syria, Afghanistan, Iraq and parts of Africa has laid bare familiar divisions within the European Union. This week’s deal to relocate 120,000 more refugees from Greece and Italy on top of the 40,000 agreed in May starts to address the problem. Many multiples more are making the trip to Europe, but only one country—Germany—is promising to take large numbers. Commentators often...

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    Gavekal Research

    What The VW Scandal Could Mean

    Last year as Europe tightened economic sanctions on Russia for its role in fomenting the Ukrainian conflict, German business confidence readings took a bath. This was not surprising as German exports to Russia—a one time key growth market for Teutonic metal bashers—have shrunk by about €9bn in two years. However, once the dust settled on 2014 it became clear that far from being decimated, Germany’s highly diversified exports had actually risen...

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    Gavekal Research

    How Much Does China Really Matter?

    How much does China’s slowdown really matter to the rest of the world? At first this might sound like a silly question. After all, China is home to a fifth of humanity, it is the world’s second largest national economy and its second largest importer, and in recent years has contributed between a quarter and a third of global growth. What’s more, the recent volatility in China’s stock markets and exchange rate caused shockwaves around the world...

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    Gavekal Research

    Europe And Chinese Risk

    Yesterday Joyce argued that the slowdown in China was not a major problem for most developed economies (see How Much Does China Really Matter?). Arguably an exception to that general observation are Europe’s multinationals, which over the last decade or so have thrived by selling goods that Chinese firms and households love to buy.

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    Gavekal Research

    Is The China Panic Abating?

    For the past six weeks, global markets have been in a China-centric panic, sparked partly by bad economic data, but mostly by policy bungling from China’s policymakers. Having spurred a huge expansion in equity margin debt, regulators turned tail in June and cracked down on the practice. As an equity market crash unfolded, policymakers took to swinging a big stick: price-keeping operations were tried, stock trading was halted and speculators...

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    Gavekal Research

    How Corbynomics Could Work

    Whatever you may think of Jeremy Corbyn, he has a point about economic policy. Actually he has two good points and one bad one. Corbyn has been right about what he called People’s Quantitative Easing, a potentially transformative idea for restoring economic prosperity that was proposed years ago by several radical economists but had never been taken seriously in Britain until it became the centerpiece of Corbynomics. Corbyn has also been right...

    6
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    Gavekal Research

    Is The Bull Market Over? (II)

    Yesterday we examined the three big fears that—in the absence of any markedly negative news from the OECD economies—lie behind the recent equity market sell-off, and which have prompted many investors to ask “Is The Bull Market Over?”

    2
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    Gavekal Research

    Fixing Germany’s Current Account

    Germany’s trade surplus for July rose to a record €25bn, lifting the country’s accumulated current account surplus over the last 12 months to a hefty 8.2% of GDP. The fall of the euro has clearly made German exports more competitive outside the single currency area. As a result, Germany’s expanding trade surplus is by far the dominant influence on the eurozone’s external accounts. Over the last 12 months, Germany’s trade surplus with the rest of...

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    Gavekal Research

    The US Current Account Deficit And World Markets

    Spotting turning points in the US current account is central to Gavekal’s research method, as such shifts impact all other economic relationships. When the US dollar is strong the US tends to run a big current account deficit, providing the world with lots of “earned dollars.” Conversely, a weak dollar eventually leads to a shrunken US current account deficit and more incentive to borrow in dollars. Big moves in the dollar exchange rate create...

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    Gavekal Research

    German Exports Are Not Kaputt

    Predictions of the German export machine’s demise followed southern Europe’s 2011 slide into deflation, the yen’s 2012/2013 devaluation, and now the emerging world’s slowdown. And yet German exports hit a new high in 2Q15 and the latest IFO survey points to more strength in 3Q. Far from going kaputt, German exporters can likely handle an emerging world crunch due to their geographical diversification, the benefit of a weak euro and improving...

    4
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    Gavekal Research

    Can Europe Be Part Of The Solution?

    The eurozone is no longer the center of the global market panic, but an interesting question is whether it can be part of the solution. Investors ostensibly sold equities yesterday on more evidence of economic weakness in China. However the deeper fear is of a faltering global growth outlook at a time when the Federal Reserve is looking to hike rates. Eurozone equities topped out back in April as the initial flush of the European Central Bank’s...

    0
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    Gavekal Research

    The Four Horsemen Of The Apocalypse

    Markets are entering bear market territory and what vexes Charles and Louis is whether the root cause is a liquidity crunch, a solvency crisis or a deflationary bust. In this wide ranging chart book they explore the problem through the revelatory prophecy of four riders whose presence marked the coming of judgement day. We don’t mean to pile on the misery in what is shaping up as a tough week and the moderately good news is that the-end-of-times...

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    Gavekal Research

    As The Crisis Ebbs, Will Europe Turn Japanese?

    The China-induced crisis of recent weeks was noteworthy for being a major global risk-off event that, for once, was not made in Europe. Indeed as markets crumbled on Monday the euro soared. Europe’s graduation from weak link to quasi safe haven is not so surprising given the patch-up job done on Greece and a gathering cyclical recovery—private sector credit growth in the eurozone for July was a fairly perky 0.7% YoY. The question is whether the...

    0
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    Gavekal Research

    The Real Message From Oil

    Violent swings in oil prices are destabilizing economies and financial markets worldwide. When the oil price halved last year, from US$110 to US$55 a barrel, the cause was obvious: Saudi Arabia’s decision to increase its share of the global oil market by expanding production. But what accounts for the further plunge in oil prices in the last few weeks—to lows last seen in the immediate aftermath of the 2008 global financial crisis—and how will...

    18
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    Gavekal Research

    Who Benefits From The Fall Of Europe’s Export Champions?

    Panic in the emerging world has reverberated back to the European equity markets through the de-rating of high quality exporters. What we call “export champions” get more than half of their sales from outside Europe and account for about half of Europe’s market value within broad indices. Yet the travails currently faced by this group have not resulted in Europe’s domestically-focused “national victims” outperforming. Instead, it is the “...

    0
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    Gavekal Research

    How To Build A Reserve Currency

    A store of value, a unit of account and a medium of exchange—these are the three essential characteristics of any proper currency. Needless to say a reserve currency must possess all three. But they are far from enough. A reserve currency must have at least six other attributes too, as Jacques Rueff and Robert Triffin did so much to establish.

    1
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    Gavekal Research

    Modest Eurozone Growth May Be Enough To Lift Markets

    Eurozone economic growth disappointed in the second quarter, coming in at 0.3% quarter-on-quarter, compared with the expected 0.4%. At 1.2%, the year-on-year growth rate was the highest since 2011, but it remains too weak for comfort. For equity investors, it is crucial that gross domestic product grows strongly enough for corporate profits to rise significantly (see What A Few Decimals Of GDP Growth Could Change). Happily, corporate earnings...

    0
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    Gavekal Research

    Cutting The Tail Of The Dog

    When docking the tail of a dog there are (in theory at least) two ways by which the offending appendage can be removed: it can be amputated with a single incision, or instead sliced incrementally so that the poor creature barely notices its loss. The same logic applies to economic policymakers when a “tough” decision has to be made. The Thatchers of this world go for a single chop, while the likes of Hollande or Chirac will always plump for...

    3
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    Gavekal Research

    Bankrolling The Eurozone Recovery

    Europe’s banking sector has been catching the eye with 18 out of the 31 banks in the STOXX Europe 600 reporting positive earnings surprises and almost all beating sales targets. It may be too early to declare Europe's banking sector as being off to the races after a seven year nightmare that started in August 2007, but we see three big trends in the results.

    0
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    Gavekal Research

    Growth & Markets Monthly (August 2015) – by Pierre Gave

    Our latest monthly indicators look to have taken on a somewhat schizophrenic character. On the growth side, our main indicator of global economic activity is perking up, implying a stronger second half of the year. But our diffusion index of OECD leading indicators is clearly heading south, as are commodities. A similarly bifurcated story can be seen on the risk-appetite side. Our velocity indicator has registered improvement and short term...

    1
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    Gavekal Research

    The Good News In EU Investment

    When the stimulative effects of the weak euro and the fall in oil prices fade from the picture, what will sustain Europe’s growth? At first glance it is unlikely to be investment. Structural reforms were meant to cut the costs of doing business, increasing returns on capital and so providing firms with both the confidence and the resources to expand production. Yet a glance at the headline numbers suggests things haven’t worked out that way. In...

    0
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    Gavekal Research

    Three Ugly Charts

    I would never claim to be an accomplished technical analyst, but I do know how to use a ruler when looking at charts of prices in the markets.

    5
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    Gavekal Research

    Five Corners (July 29): The Slowdown In Trade

    Overview: After years in which the world’s major governments have been busy manipulating prices, Charles Gave finds it astonishing that anyone should be surprised by the current slowdown in global trade.

    0
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    Gavekal Research

    5C Overview: Why The Surprise At Slowing Trade?

    I am afraid I am rapidly turning into Gavekal’s resident bear—asleep half the time, grumpy the rest. In particular, I am amazed how some people have suddenly discovered that world trade is going nowhere, and that they are so bamboozled by this strange pattern. Where exactly have they been for the last 15 years?

    0
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    Gavekal Research

    5C Europe: The Re-Domestication Of European Trade

    Since 2009, European exports have gone from strength to strength. As the rest of the world shook off the effects of the financial crisis, European Union exporters found themselves well-positioned to benefit both from the US recovery and from the rise of the emerging market middle classes. What is more, as deflation set in, Southern European economies directed more capital and marketing resources into their export sectors, reinforcing the...

    0
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    Gavekal Research

    How Much Upside For UK Gilt Yields?

    Eight years after the UK last raised interest rates, several members of the Bank of England’s Monetary Policy Committee are dusting off their hawkish hats. Yesterday’s MPC minutes revealed growing concerns about inflationary pressure, even though consumer inflation was at zero in June. No rate hike is expected before the first quarter of next year, but with the UK economy set to move into a new, more productive, growth phase, it is worth asking...

    0
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    Gavekal Research

    The Good News From Greece

    Greece has reopened its banks, paid its dues to the European Central Bank and cleared its arrears with the International Monetary Fund. After five years of pan-European economic depression and the near-death experience in Greece this month, can we finally say that the euro crisis is over? The conventional answer is definitely not. According to the vast majority of political commentators and economists, ranging from left-wing Keynesians such as...

    5
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    Gavekal Research

    The End Of An Empire

    Economic growth derives from one of two sources. Either it comes from a rationalization of talent, which we call Ricardian growth, or it comes from new inventions, which we call Schumpeterian growth. Of the two, Ricardian growth is easier to achieve. As barriers to trade, to the movement of people, or to the free flow of capital are dismantled, inefficiencies get squeezed out and growth can soar. Bearing this in mind, it is obvious that the...

    5
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    Gavekal Research

    Five Corners (July 15): Deflation Redux

    Overview: When governments interfere with the price discovery mechanism, most people believe the inevitable result is runaway inflation. On the contrary, argues Charles Gave, official manipulation of prices threatens to plunge us all into deflation. United States: Tan Kai Xian examines the marked divergence between goods prices and services prices and ponders what it means for the overall US inflation outlook. Europe: As the eurozone inches its...

    0
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    Gavekal Research

    Greece, Europe And The Equity Market

    After days of intense Greek psychodrama, with François Hollande playing the good cop and Angela Merkel the bad, Europe has once again served up a compromise. The deal reached yesterday imposes on Greece an even tougher plan than the one rejected by its people nine days ago. No doubt each of us will have a different take on what the agreement will mean for the future of Europe—and of Greece. However, surely everyone will agree with the late...

    0
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    Gavekal Research

    Broken Trust

    Charles likes to say that people are more likely to change their spouses than change their banks. The Greek crisis has tested this adage to the limit. For five years now, Greek banks have endured a “bank jog” of deposits out of the domestic banking system and into mattresses, foreign accounts and even bitcoins. Amazingly, however, some €130bn in household and business deposits have stayed put. But should Greek banks re-open in the near future,...

    0
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    Gavekal Research

    5C Europe: Rising Above Bedlam

    While the world has focused on the bickering and brinksmanship of the Greek bailout negotiations, activity in the rest of the eurozone has quietly been picking up pace. Economic confidence is close to its highest level in nearly three years and the composite PMI reached a four-year high of 54.2 in June. More to the point, having plunged into deflation last year, partly because of the second half’s economic soft patch and partly because of the...

    0
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    Gavekal Research

    Europe's Democratic Divide

    Voters, it would seem, pose a clear and present danger to the eurozone. Syriza’s success in last weekend’s “Greferendum” shows there is only so much conventional medicine that electorates will take before looking for miracle cures. The party’s rise has mirrored the fall in Greek living standards since the financial crisis and the failure of Troika bailout packages to turn the country around. It has been useful to label Greece as “exceptional”...

    1
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    Gavekal Research

    Osborne’s Budget: Good For The UK, Bad for UK Assets

    After May’s surprise election victory for David Cameron’s Tories—which proved yet again that Britain is a naturally conservative country— expectations were running high for the first truly Conservative budget in the UK for almost 20 years. Yesterday, George Osborne duly delivered an impressive relaunch of British conservatism for the 21st century, in a speech self-consciously modeled on Benjamin Disraeli’s famous “One Nation” budget speeches,...

    5
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    Gavekal Research

    Europe’s Debt-Deflation Dynamic

    Amid all the talk of contagion and demonstration effects emanating from Athens, there is a straight forward question that concerns investors whose domain spreads beyond the lapping shores of the Mediterranean: is the Greek crisis, at its root, inflationary or deflationary? Given talk of new currencies being launched, the obvious fear concerns inflation. I would demur and suggest that a deflationary shock is unfolding. This matters especially for...

    3
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    Gavekal Research

    The Eurozone Is Not On The Brink

    When totally wrong-footed by an astonishing event that embarrassingly contradicts one’s expectations, it is tempting to seek refuge in high-flown metaphors and literary allusions, especially if this embarrassing turn of events happens in Greece. But rather than distracting attention with references to Pyrrhic Victories, Siren Voices and Labours of Hercules, let me get straight to the point and admit that my predictions about the Greek referendum...

    5
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    Gavekal Research

    A Brighter European Dawn

    The political and economic reality is that a 40-year old political neophyte from a “peripheral” European economy has taken the eurocrats to the cleaners. It is clear that the Greek populace knew exactly what was coming and extracted €89bn of “good money” from an exceptionally incompetent European Central Bank. This pool of liquid funds should prove a key support for the next year or two, and with Greece running a primary budget surplus the...

    14
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