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    Gavekal Research

    Oil At Its Ceiling, Not Floor

    With oil prices rebounding strongly this week, despite the non-event of last Friday’s meeting of the Organization Of Petroleum Exporting Countries, it seems appropriate to re-examine the case for cheaper oil that we have been presenting since late last year. Specifically, our view in December that US$50/bbl was more likely to be a ceiling than a floor for the Brent oil price in the long term has been contradicted by market actions of recent...

    2
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    Gavekal Research

    Protect And Survive

    Bond yields keep rising, emerging markets are softening and key cyclical stocks have taken a bath. The more I look at the global situation the more I am convinced that both economies and markets are reaching a point of transition. And as that old sage Yogi Berra said: “When you come to a fork in the road, take it!”

    3
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    Gavekal Research

    The Other Reason To Avoid Turkey

    Investors had long priced in the risk that the ruling AK Party of Turkey’s Recep Tayyip Erdoğan could win a two-thirds majority in last Sunday’s parliamentary election, a result that would have allowed the president to reinforce his constitutional powers at the expense of parliament. What they failed to price in was the risk that the AKP could fail even to win a simple majority. In the event, that is exactly what happened, leaving Turkey facing...

    4
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    Gavekal Research

    The Death Throes Of The Bond Bubble

    What should we conclude from the jump in bond yields that has transfixed investors in every market around the world since late April, when a disappointing German auction started the sudden rout? The simplest answer, and probably the best one, is “not much”. Like the US taper tantrum of May 2013 and the brief bump in Japanese bond yields a few months earlier, when the Bank of Japan got serious about quantitative easing, the present market...

    1
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    Gavekal Research

    The Eurozone Recovery Hardens

    On the one hand there is increasing optimism about the eurozone’s cyclical recovery and diminished concerns over sovereign risk linked to the Greek crisis. On the other hand, there are rising concerns about a stuttering US economic recovery, as shown by yesterday’s release of weak factory orders for April. Markets are playing catch-up to the shifting economic sands and risk calculus. Bund yields yesterday jumped 17bps to 0.71%—narrowing the...

    1
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    Gavekal Research

    Five Corners (3 June): Shifting Capital Flows

    Overview: Louis Gave traces China’s rejection of planned economy shibboleths over the last 30 years and contends that Beijing is charging full tilt toward the final frontier: the liberalization of capital itself. United States: With the strength of the US dollar favoring imports over US-made goods, the US current account balance is set to deteriorate. This, argues Will Denyer and Tan Kai Xian, will mean a bigger supply of US dollar liquidity in...

    0
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    Gavekal Research

    A British-Style Recovery For France?

    France looks to have emerged from three years of stagnation after growing at a better than expected 0.6% QoQ in 1Q15. The improved mood can be seen in consumer confidence being up near a five year high. Given that the euro slid more than 20% against the dollar in the last year while Brent crude fell 40%, this should not really come as a huge surprise. Rather, the question is if these better numbers mean the French economy is about to stop...

    0
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    Gavekal Research

    Greeks Inch Toward Surrender

    The Greek situation rumbles on without resolution after a weekend that saw more posturing, but no deal between Athens and the Brussels group. The message from European Union leaders is that Greece must bow, and while Prime Minister Alexis Tsipras remains defiant, it was noteworthy that his interior minister indicated a willingness to cede ground on Syriza’s anti-austerity program. As this messy endgame plays out, the question facing jaded...

    0
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    Gavekal Research

    Growth & Markets Monthly (June 2015)

    This month saw a clear deterioration of our growth indicators. The pattern of the last few years with a weaker than expected first half of the year appears to be holding up. The question is whether 2015 will see the habitual pick-up in the second half of the year? On the inflation front, things remain quiet. US breakeven inflation rates, which looked as if they may have been breaking upwards last month, are now heading south again. Given the...

    0
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    Gavekal Research

    5C Europe: The Euro Financial Spinning Top

    Read any “International Economics 101” text book and European economies are often still described as being less reliant on the financial sphere than their “Anglo-Saxon” counterparts. Such a view is in serious need of an update as capital flows have been at the heart of the eurozone system. Absent a fiscal union, and given still fairly low labor mobility, “financial velocity” has been essential to the sustenance of the single currency area. When...

    1
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    Gavekal Research

    Animal Spirits And The Revival Of European Finance

    Despite escalating worries over Grexit and a soft patch in US growth, the first quarter of 2015 saw a pleasing stabilization in the eurozone, driven by improved consumption (see More Air In The Reflation Balloon). The question is whether such green shoots can weather a more than 35% rebound in Brent crude since January, and a 4% rise in the euro since mid-March. The case for Europe being able to resist such headwinds relies in large part on a...

    2
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    Gavekal Research

    The Return Of European Political Risk

    A surprising facet of the post-2010 euro crisis period has been the degree to which the political center in the European Union has held. Despite record unemployment in the struggling South, extremist movements have mostly been contained to the fringes. So it is ironic that just as the long anticipated cyclical recovery arrives, the political tide looks to be turning the other way. Voters in this weekend’s Spanish regional elections gave the...

    1
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    Gavekal Research

    Why Germany Is Not Turning Japanese

    Germany has economic problems that most countries would die for—low unemployment and steadily rising real wages mean that policymakers must respond to bottlenecks such as labor shortages (see Germany Normalizes). The longer-term worry is that these “gaps” will become permanent as high-growth Germany must also grapple with Japanese-style demographics. The fear is that its post-2010 expansion could be a swan song before the structural growth...

    0
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    Gavekal Research

    Five Corners (20 May): Assessing Oil's Comeback

    Overview: In light of the rebound in oil prices Anatole Kaletsky questions his own view that the oil market is becoming driven by “marginal cost producers”, rather than classic monopoly dynamics.

    0
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    Gavekal Research

    The Untimely Demise Of US Productivity

    Let’s start with a statement of fact: since 2002 the growth of US productivity, measured as non-farm output per hour worked, has collapsed. Outside of recession periods, this is the first time since the 1950s that the four-year moving average of the annual rate of change in productivity has fallen so low. This matters because without a rise in productivity, the US economy will struggle to boost its citizens’ standard of living, whether measured...

    3
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    Gavekal Research

    The Dissonance In Markets

    Perhaps the biggest challenge confronting investors today is the disconnect between financial markets and economic data. Indeed, despite weak readings from the growth locomotives of the global economy (China and the US), recent weeks have seen bonds selling off, commodities going on a tear, and deep cyclical equities experiencing huge rebounds. In short, while economic data is pointing towards a mediocre global growth outlook, markets are...

    1
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    Gavekal Research

    5C Overview: Regime Change In The Oil Market Only Just Starting

    Since late last year, when the battle for oil market share broke out between OPEC and the US frackers, we have argued that this is not just a contest between rival groups of producers, but between distinct pricing regimes, based on very different economic principles (see Will US$50 Be Oil’s Floor, Or Its Ceiling? and The Macro Dividend From Oil).

    0
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    Gavekal Research

    5C Europe: Russia’s Diminished Pricing Power

    Is Russia a player to be reckoned with in the oil pricing game? Last year Russia accounted for 11.7% of global oil production, ranking below the US (12.6%) but above Saudi Arabia (10%). In theory this elevated position should lend Russia formidable pricing power. In practice, however, Russia lacks the flexibility to make the most of its market share, a failing it is unlikely to overcome in the next couple of years.

    0
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    Gavekal Research

    The Ruble Reconfigured

    Yesterday the Central Bank of Russia announced it had embarked on a program of foreign exchange purchases that will see it buy between US$100mn and US$200mn a day. It explained its move by saying the purchases are intended to replenish Russia’s foreign exchange reserves, depleted by last year’s currency market interventions. In effect, however, the central bank is serving the market with notice that it does not want the ruble to strengthen any...

    0
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    Gavekal Research

    More Air In The Reflation Balloon

    If investors were wondering what triggered the recent spike in eurozone bond yields, perhaps an answer emerged in yesterday’s 1Q15 GDP report. A month ago the yield on bunds out to 9-year maturities were negative and the 10-year touched 0.05%, implying a lost decade of growth—today the curve is positive beyond the 4-year. The argument of our Paris-based team has been that the eurozone is at the start of a cyclical pickup aided by low oil prices...

    0
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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

    0
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    Gavekal Research

    When Bond Markets Become Silly

    Investors are understandably spooked by recent bond market ructions given a backdrop of weakening growth in major economies, and continued accommodative central bank policy. Francois argued yesterday that this “tantrum” was partly technical, but also the result of markets looking through to higher inflation expectations due to an apparently better economic outlook (see Tantrum II And European Portfolios). I agree with him that markets are being...

    2
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    Gavekal Research

    The Liberties Of England, And What They Mean For Europe

    When the Conservative-led government of the last parliament started to show that it was serious about deficit-reduction and lessening the role of the state in the British economy, I turned very bullish on UK financial assets (see A Supply-Sider’s View Of The UK for a detailed exposition of this view). Perhaps unsurprisingly over the last five years the UK mid-cap index has outperformed the German and French equivalents. I admit to having had a...

    7
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    Gavekal Research

    Tantrum II And European Portfolios

    The curious thing about the bond market tantrum of the last two weeks is that it happened despite big economies such as the US and China reporting weak growth. Moreover, the average bond yield across the G7 has bolted 50bp higher despite none of the G7 central banks announcing a meaningful shift in their monetary policy settings. To my mind, these violent market moves have three immediate drivers with a bigger secular factor lurking in the...

    2
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    Gavekal Research

    The UK Drama Has Only Just Started

    Although the Tory victory came as a huge surprise, it changes very little about the UK's economic or financial prospects. In that sense the absence of any big reaction in the financial markets is understandable. The pound and the stock market would have fallen steeply in the event of a “hung parliament”—and, certainly, that is the outcome I expected (see The UK Cliffhanger). But now that the prospect of domestic political instability has...

    6
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    Gavekal Research

    More Tantrum Than Crash

    Nothing lasts forever, not even bond market bubbles operating under the tutelage of ultra-dovish central banks. Despite the promise of limitless financial repression in the eurozone and Japan, bond-buyers look to be going on strike. Long-dated US yields have crept higher over the last month, while yesterday’s market action saw investors throw in the towel on the eurozone’s peripheral bond markets. We even got the odd sight of the Australian...

    1
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    Gavekal Research

    Five Corners (6 May): The Weakness In Wages

    Overview: Charles Gave wonders why in spite of policymakers having the best of intentions, their efforts have caused declining productivity, lower median incomes and fewer quality jobs. United States: The labor market is no longer a clear indicator of the US economic cycle, says Will Denyer, who looks for new insights into what variables may guide the Fed in its policymaking. Europe: Although jobless numbers have fallen across much of the...

    0
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    Gavekal Research

    The UK Cliffhanger

    Conventional assumptions about British elections say that the incumbent party of government generally enjoys a swing of one or two percentage points in the final period of campaigning. Like most electorates, once all the shouting is done, British voters typically focus on livelihood issues and tend toward “the devil they know”. In recent days the Conservative Party has seen the opinion polls move slightly in their favor, but nothing so...

    1
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    Gavekal Research

    Growth & Markets Monthly (May 2015)

    While our growth readings ticked higher last month, the big shift came with a sharp rise in our risk appetite indicators. We also note an easing of deflationary pressure with the US breakeven inflation level registering a nine-month high. On the liquidity side, the European Central Bank has cranked up its expansionary efforts and its balance sheet is rising at 16% YoY. Taken together, these moves have benefited equity markets (notwithstanding...

    0
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    Gavekal Research

    5C Overview: The Real Message From Labor

    So how are we to understand the less than thrilling message emanating from the labor markets of the main economies. Is this evidence of some unescapable “secular stagnation”, or is something else going on?

    0
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    Gavekal Research

    5C Europe: Still Waiting For Pay Day

    Although it started from an extremely low base, the recovery of the eurozone’s job market since 2013 has been significant, with employment rising by almost 1% YoY in 4Q2014—the highest growth rate since 2008. Recent business surveys indicate that this trend has continued and even accelerated into 2015.

    0
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    Gavekal Research

    Beware Of Crowds, And False Prices

    The world’s largest economy is on the cusp of a deflationary depression—at least according to yesterday’s US GDP report. Real growth was up a mere 0.2% annualized in the first quarter, while nominal growth was even lower, at just 0.1%, due to a -0.1% drop in prices. Yet the markets largely looked past this “shocking” report. There were some notable moves yesterday, but not because the market was pricing in economic disaster—far from it.

    6
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    Gavekal Research

    Whither US Manufacturing

    US economic data has started to surprise on the downside, and much of this can be attributed to the manufacturing sector. This is worrying since the sector often leads the general economy. Hence, the $64,000 question is whether we should be bracing for an unscripted recession? Our answer is no, but investors should underweight the US manufacturing sector. In the near term, price adjustments, largely stemming from the energy and commodity price...

    3
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    Gavekal Research

    Starving The Greeks Out

    After Friday’s near-total breakdown in the negotiations between Greece and the eurozone, it is clear that both sides need a Plan B. In the case of Greece the alternative to a negotiated solution has always been clear. It is to default on its debts to other European governments, thereby presenting those nations with a stark alternative: either expel Greece from the euro and risk contagion to Portugal, Spain and Italy, or offer Greece the money it...

    12
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    Gavekal Research

    The Rebirth Of CEE Banking - Cedric Gemehl & Nick Andrews

    Who will benefit most from Europe’s extraordinary monetary easing? Will it be struggling giants such as Italy and France, or those lapping up liquidity on the fringes? Our contention is that Central and Eastern Europe is at the early stage of a “deflationary boom” while financial institutions have sufficiently recovered to transmit the European Central Bank’s quantitative easing program into credit expansion.

    0
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    Gavekal Research

    A Tactical Shift On Greece

    As angry rhetoric between Athens and eurozone finance ministers escalated last week, the drumroll towards Grexit appeared to be reaching a crescendo. But having raided the coffers of state enterprises this week, the Greek government can now pay its bills until June. No less significant was the move by the European Central Bank to prop up Greek banks in the face of deposit flight by upping its Emergency Liquidity Assistance limit by €1.5bn to €...

    3
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    Gavekal Research

    Five Corners (22 April): Global Trade

    Overview: Charles Gave argues that an era of globalization and expanding world trade is coming to an end. On balance, he says this is no bad thing. United States: The negative impact of the strong dollar on US exporters will become clear once disruption from the early year port strikes on the US West Coast clear up according to Will Denyer and Tan Kai Xian. Europe: Europe’s huge trade surplus is purely a German issue. François-Xavier Chauchat...

    0
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    Gavekal Research

    A Post-Volatility World

    These are words that I utter with the utmost caution—this time, it really is different. I refer not to central bankers’ scurrilous efforts at monetary debasement, nor the spineless diplomacy of European political leaders, or even the cult of celebrity in the age of social media. In some guise, we have seen all of this before. No, dear reader, for something genuinely new to the modern experience, consider the right hand side of the chart below...

    3
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    Gavekal Research

    5C Europe: The Euroglut Is All About Germany

    By depressing imports, the deflationary bust of 2011-2013 in the non-German areas of euro-land clearly contributed to the emergence of the eurozone’s monster €200bn trade surplus. But from a longer term perspective, there is no doubt that the “euroglut” has been and remains an overwhelmingly German story. Ex-Germany, the trade balance of the eurozone has only managed to recover to its pre-boom level of the early 2000s. In contrast, Germany’s...

    0
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    Gavekal Research

    5C Overview: Why The Coming Collapse Of World Trade Should Be Celebrated

    Sustained economic growth has always gone hand-in-hand with a big rise in communications infrastructure. To explain why, assume that a country has two cities, named A and B. At the point that a modern communication infrastructure is built (road, trains, internet) then, in each case, a single line of communication is needed. Three cities implies the need for three lines; a fourth city means six lines. Ultimately, if all the cities are to...

    0
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    Gavekal Research

    Small Is Beautiful

    At the end of the 1980s the world changed, with the collapse of the Soviet Union and the start of China’s renaissance. The next two and a half decades were marked by a mass movement towards globalization. We now have a long enough history to determine who were the winners over those 25 years. The answer is very simple: small countries.

    1
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    Gavekal Research

    Of Central Bankers, Monkeys And John Law

    A revealing experiment involved monkeys being placed in a cage with a pile of nuts stashed on an upper level. Their efforts to snaffle the food caused them to be doused in water, blasted with a siren and startled by an electric shock. After a number of attempts the monkeys gave up. Later, a second group of monkeys were introduced—the new entrants made a beeline for the goodies, but were quickly beaten back by the chastened first group of monkeys...

    9
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    Gavekal Research

    The Danger Of Grexit Complacence

    Grexit is growing more likely by the day. Yesterday Wolfgang Schäuble, the German finance minister, said in New York that financial markets had “priced in” all possible outcomes of Greece’s debt woes, arguing there is no risk of contagion to other eurozone members. At the same time, Greek finance minister Yanis Varoufakis is in Washington, where according to reports he is scheduled to meet Lee Buchheit, a senior lawyer who specializes in...

    0
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    Gavekal Research

    Instability Lies Ahead For The UK

    What country faces the highest degree of political risk in Western Europe? And whose financial markets should therefore carry Europe’s biggest political discount? Six months ago, when we first argued that Britain was in danger of losing its safe haven status, both in the political sense and as a tax haven for international capital, this was still a matter of speculation. Now, with the May 7 election only three weeks away, our warnings about the...

    1
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    Gavekal Research

    A Turning Point For Eurozone Bank Lending

    Is it too early to celebrate the green shoots of a eurozone recovery? Most recent data has been positive with retail sales expanding at the fastest rate since the early 2000s, PMIs signaling a broadening of growth to the struggling periphery and unemployment in most economies continuing to decline. Green shoots can easily wither in response to shocks or bad policy choices, but there is one good reason to think this recovery may have legs: bank...

    4
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    Gavekal Research

    The Eurozone's Sustainable Recovery

    Eurozone retail sales registered their first month-on-month fall in five months in February, prompting fears that Europe’s consumer-driven revival may be faltering. Since last May the price of oil has fallen -32% in euro terms, lifting real wages by 2% and boosting consumer purchasing power across the eurozone. Over the last three months, however, oil has rebounded 22% from its January low, eroding some of the European consumer’s purchasing...

    0
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    Gavekal Research

    Five Corners (8 April): The Outlook For Bank Earnings

    Overview: With banks’ earnings squeezed on one side by flat yield curves, and on the other by tech companies encroaching on their traditional consumer-facing business lines, Louis wonders where the banking sector will generate future earnings growth United States: Doing More With A Flatter Yield Curve: Now consumers have deleveraged, and with strengthening demand set to drive a pick-up in corporate investment, Will argues that earnings growth...

    0
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    Gavekal Research

    Three Brothers In Arms: Wicksell, Schumpeter And Fisher

    I am often asked which of the great economists best understood the link between the economy and financial markets. Passing judgment on such giants may be presumptuous, but practical men and women of finance may want to consider being slaves to the following propagators of ideas:

    11
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    Gavekal Research

    One Belt, One Road, One Grand Strategy

    In what can only be described as a triumph for Chinese financial diplomacy, some 48 countries had defied US disapproval to sign up for Beijing’s new Asian Infrastructure Investment Bank by yesterday’s deadline. The applicants included not only Europe’s big four economies, but staunch US allies such as Saudi Arabia, geopolitical rivals like India, and even Taiwan, which China does not recognize as a separate country.

    2
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    Gavekal Research

    The Darkest Hour Before Euro Dawn

    Two weeks ago we suggested that the euro’s decline against the US dollar—probably the clearest consensus trade of 2015—could soon be over. As luck would have it, we published this article on the very day the euro rebounded from a 12-year low against the US dollar of US$1.05 (see Beware The Euro Consensus). Dumb luck of this kind is certainly not evidence of wisdom or special insight. But now that the modest bounce following the euro’s March 13...

    5
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