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E.g., 07-07-2020
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    Gavekal Research

    Lockdowns Loom; What’s The Exit Strategy?

    We are heading into another difficult week. Covid-19 case numbers and fatalities outside China continue to grow rapidly. Social lockdowns are spreading to more US states and European countries. In the short run, fiscal support is on the way. Longer term, governments will have to start asking the uncomfortable question of when the economic pain outweighs the public health gain.

    1
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    Gavekal Dragonomics

    Rural Banks On The Brink

    The economic stress of the Covid-19 outbreak is all but certain to cause a rise in nonperforming loans. Even before the outbreak, China’s rural commercial banks—its smallest and most troubled lenders—were already short of capital and performing poorly. As Xiaoxi shows in this piece, another jump in bad loans will push more of them into distress.

    0
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    Gavekal Dragonomics

    Local Governments Will Lead On Property

    Even as China’s property market has experienced an unprecedented decline, central government policymakers have kept a tight leash on official support. However, given growing signs of a lasting disruption to the sector, Rosealea believes that Beijing will tolerate more ambitious municipal efforts to keep local markets afloat.

    0
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    Gavekal Research

    Money, Value And The Markets

    Above all, economics is the study of why goods and services have value and why these values are constantly changing. This study is greatly complicated by the fact that there are two different sources of value. In Gavekal-speak, we call these “scarcity” value (think jewels) and “efficiency” value (think tools). So the key question becomes not only “why do things have value?” but also “why do the relative values of scarcity and efficiency change...

    0
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    Gavekal Research

    The Dollar Squeeze Intensifies

    Policymakers in the world’s biggest economic blocks are responding to the current crisis with fiscal and monetary “shock and awe”. Yet even as the much maligned European Central Bank joined the asset purchase party, markets have continued to crater. For all the coordinated economic responses to the coronavirus pandemic, there has been no serious effort to free up the offshore market for US dollars.

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    Gavekal Research

    A Bad Prognosis

    The US and Europe are moving towards Hubei-style societal lockdowns. Arthur sifts through the latest epidemiological research, and concludes that while the worst case public health scenarios will be avoided, the coming lockdowns will be severe and last long enough to have an economic impact possibly more damaging than in China.

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    Gavekal Dragonomics

    Deposit Rates Are Back On The Agenda

    The People’s Bank of China has failed to join other central banks in the recent wave of rate cuts. But with the coronavirus now threatening a substantial hit to global demand, the PBOC is going to need to do more. In this piece, Wei argues that a cut in the benchmark deposit rate—a tool that has not been used in four years—is on the way soon.

    0
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    Gavekal Research

    Solvency Crisis Or Liquidity Crisis?

    Collapsing equity markets, rising bond yields, widening spreads, falling gold—in recent days, there have been few places to hide. When markets act so sick, it usually pays to take a deep breath (in a socially distant manner) and ponder whether we are facing a solvency crisis, or a liquidity crisis.

    0
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    Gavekal Dragonomics

    Terrible But True

    Given the extent of China’s coronavirus lockdown, it’s not surprising to see double-digit declines in economic indicators. The real surprise is that the statistics bureau did not fudge the data, as analysts expected it would, and printed numbers bad enough to be plausible. This suggests authorities will be pragmatic about the growth impact for 2020.

    1
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    Gavekal Dragonomics

    From The Supply Side To The Demand Side

    As China gets back to work, the biggest problem facing the economy is no longer restrictions imposed on the supply side, but the near-certain prospect of a major shock in global demand. Andrew argues that this shift will cajole Chinese policymakers, who have so far kept a conservative approach, into stepping up their growth support measures.

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    Gavekal Research

    A Modest Proposal To Avert Economic Catastrophe

    Contrary to initial expectations, the spread of the coronavirus around the world is not following the relatively benign trajectories experienced in China outside of Hubei, and in Korea, Singapore and the rest of Asia. Instead, across Europe—and likely in the US—the spread increasingly resembles the path it took in Hubei. This threatens both medical and economic disasters.

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    Gavekal Research

    What I Know

    In fraught times, Charles has decided to keep it simple and focus only on what he knows. In this piece, he considers changing relationships between oil prices, long-bond rates, US equities and the dollar and offers various approaches that could help investors survive the bear market.

    1
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    Gavekal Research

    The Conditions Needed For A Bottom

    Financial markets are now in full-blown panic mode. For investors, the key question is: What will it take for markets to form a bottom, and when will this happen? No one can answer with any precision. However, it is possible to discern the broad conditions needed to allow the markets to find a bottom. We are nowhere near them yet.

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    Gavekal Dragonomics

    Despite Shortages, Inflation Will Cool

    China’s consumer-price inflation is now around an eight-year high, driven primarily by continued pork shortages due to the African swine fever and exacerbated by the Covid-19 lockdown measures. That said, headline inflation figures are ticking down, a trend Ernan expects to continue in the coming months with an assist from lower oil prices.

    0
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    Gavekal Dragonomics

    Tech War, Meet Trade Deal

    Plans enacted by US national security hawks to toughen sanctions on Huawei and other Chinese tech firms have run into stiff resistance from both American tech firms and President Trump himself. Dan reports that, amidst this stalemate, both factions are mobilizing for a protracted fight over the fate of restrictions on exports to China.

    0
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    Gavekal Research

    Six Degrees Of Uncertainty

    World markets are in full-on panic mode, thanks to a cloud of unknowing that has settled over two topics of broad importance: the spread and economic impact of the coronavirus, and the outcome of the oil-price war between Saudi Arabia and Russia. The topics are related, and so we are grappling with the problem of pricing epidemic-related uncertainty.

    0
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    Gavekal Research

    What Goes Around Comes Around

    Amid the Covid-19 outbreak and the Saudi-Russia oil price war, markets are essentially priced for a scenario in which the US government does little in response, leaving the policy reaction to the Federal Reserve. While this may be the most plausible scenario, other possible US government actions, at home and abroad, have different implications for markets.

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    Gavekal Research

    A Hand Grenade In A Bloodbath

    If you ever wondered what would happen if someone lobbed a hand grenade into a bloodbath, now you know. Markets were always going to be shaky on Monday, as it became increasingly clear that the US is set to see a sharp rise in recorded coronavirus cases. Then, on Friday Russia walked out of the Opec+ oil producers’ cartel, initiating an all-out price war in the oil market.

    1
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    Gavekal Research

    The Bond Blow-Off Top

    The freakout in markets spurred by the coronavirus outbreak has seen US treasuries deliver one of their strongest two-week performances in the post-Cold War era. Louis argues that these moves leave investors with a stark choice to make: either we are seeing a “blow-off top”, or alternatively the world is facing an impending economic ice age.

    3
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    Gavekal Dragonomics

    Limited Help For Struggling SMEs

    Chinese policymakers have announced a wide range of monetary and fiscal measures intended to help the smaller firms hit hardest by the Covid-19 outbreak. The helpfulness of these measures will likely only be marginal; however, Thomas, Xiaoxi and Wei are cautiously optimistic that most SMEs can still weather the ongoing crisis.

    0
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    Gavekal Dragonomics

    Getting Serious About Biosecurity

    China’s government is rethinking its approach to biosecurity in order to reduce the odds of future outbreaks of infectious disease. In this piece, Lance explains what treating biosecurity as a part of national security will mean for regulation, public health and the biotechnology sector.

    1
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call March 2020

    In Thursday’s conference call, Louis-Vincent Gave, Andrew Batson and Cedric Gemehl discussed the policy and market reactions to the Covid-19 outbreak.

    0
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    Gavekal Research

    The Unfolding Rotation

    Last Friday, the markets rallied hard into the close as investors anticipated a coordinated policy move over the weekend. With policy responses in the rear view mirror, this weekend will likely prove different. Markets will continue to be choppy in the immediate future. Even so, amid all the volatility, some interesting developments are emerging.

    5
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    Gavekal Research

    Behind The A-Share Rebound

    Although China is ground zero for the coronavirus outbreak, its onshore stock markets are the world’s best performing major markets so far this year by a considerable margin. For the most part this is due to mood-enhancing domestic policy support, which is likely to continue to counteract the catastrophic near term earnings outlook.

    0
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    Gavekal Research

    Exponential Optimization

    The bull market of the last few years has been built on the twin assumptions that globalization will continue, and that interest rates will remain low for years to come. These convictions have propelled an exponential wave of optimization. As the coronavirus calls key assumptions into question, the worry is that the giant bubble which sits at the heart of the system may be about to burst.

    9
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    Gavekal Dragonomics

    A Month Of Lost Wages

    As the rise in new cases of Covid-19 in China has slowed, provinces are easing their drastic restrictions on movement and businesses are reopening. But the extended shutdown has already imposed great costs on migrant workers. Ernan estimates lost wages will be 3-4% of annual household income, though with a smaller impact on total consumption.

    2
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    Gavekal Research

    When To Catch A Falling Knife

    Now that the Federal Reserve has hit the panic button, is it time to try to catch the falling knife on Wall Street? Technical analysis and investor sentiment suggest that equity prices may still have somewhat further to fall before they find a sustainable floor, even if the viral threat is probably overstated and stimulus by major governments will eventually outweigh the temporary economic collapse.

    3
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    Gavekal Research

    Strategy Monthly: Global Virus, Local Reactions

    In the last week of February, global investors woke up to the massive effect of China’s coronavirus lockdown and the risks of a global pandemic. The resulting disruption to global supply chains will be widespread and long lasting. But not all is bleak. The Fed has promised to support the US economy, and many emerging markets have room both for expansionary fiscal policies and interest rate cuts.

    0
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    Gavekal Dragonomics

    The Worst Is Yet To Come For Steel

    Steelmakers have continued production despite a precipitous drop in demand, resulting in a short-term inventory glut. As Rosealea explains, this will lead to continued downward pressure on steel prices, at least until the construction sector recovers from the coronavirus crisis and drives demand back up to meet supply.

    0
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    Gavekal Research

    The Last Shall Be First

    Just a week ago, the S&P 500, Nikkei 225 and Eurostoxx 50 were all looking healthy. But over the past week, every major market has fallen by anywhere from -6% to -12%. This is highly unusual. The S&P 500 has only fallen by -10% or more four times in its post-1945 history. Each of these drops ended up having hugely important investment ramifications.

    6
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    Gavekal Research

    The Fragility Of A Complex World

    The question investors must confront is whether the global economy is a slow but resistant beast of burden, or a finely tuned machine which has now been thrown off its axis.

    0
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    Gavekal Dragonomics

    The Next Infrastructure Stimulus

    As size of China’s growth shock from the coronavirus shutdown becomes clear, yet another infrastructure stimulus looks to be on the way. In this piece, Wei assesses the scale of the possible boost. The most likely outcome is that public-works spending accelerates to 8-9% in 2020 from just 3.3%, a nice boost but still well below historical peaks.

    0
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    Gavekal Research

    The Velocity Of Money In The Time Of Covid-19

    Most serious investors know MV=PQ, where M is the money supply, V is the velocity of money, P is the general price level and Q is output. The typical approach is to wait for M, P and Q to be published and so derive V, which renders the equation a mere tautology. In contrast, Charles has long thought V to be an independent variable whose variations impact P and Q.

    0
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    Gavekal Dragonomics

    The Covid-19 Cost To Corporate Cashflow

    The shutdown of normal economic activity during the coronavirus outbreak is going to mean a huge hit to corporate cashflow in Q1. In this piece, Thomas outlines the difficult road ahead for Chinese firms: many will have no choice but to default on cash obligations to staff, banks and suppliers, as well as curtail their capex plans for the year.

    0
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    Gavekal Research

    Doing On Monday What We Wish We’d Done On Friday

    Monday was the epitome of Charles’s observation that in a down-market, the temptation to sell on Monday what you wish you’d sold on Friday can become overwhelming. As markets sold off on Monday following a weekend of bad news, the following developments seemed especially relevant.

    0
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    Gavekal Research

    Far From Priced In

    Asian markets switched to risk-off mode Monday as investors reacted to further coronavirus news outside of China. Yet in onshore markets, investors are optimistic that the economy will quickly normalize as the spread of the virus comes under control, and that the central bank will provide policy easing. Neither belief looks well-founded at the moment.

    0
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    Gavekal Dragonomics

    A Looming Private Liquidity Squeeze

    A March spike in maturing bonds is going to mean significant liquidity challenges for many companies, particularly as they continue to grapple with the coronavirus and its economic fallout. The government has announced some supportive policies, but as Xiaoxi explains these measures are likely to favor large and state-owned companies, leaving smaller firms at risk of going under.

    0
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    Gavekal Dragonomics

    Multinationals Take The Long View

    The coronavirus outbreak has undoubtedly had a significant impact on multinational companies’ operations in China. Nonetheless, drawing from a dozen interviews with China-based executives, Lance argues there is little evidence the outbreak will cause firms to rethink their long-term China strategies.

    0
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    Gavekal Research

    Time And Risk

    The financial world is organized around two axes: time and risk. If some authority manipulates the time axis, the effect will be to compromise the risk axis. This is not an abstract formulation. It has the potential to threaten portfolios and the solvency of major institutions.

    1
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    Gavekal Dragonomics

    Kinks Appear In The Tech Supply Chain

    Chinese electronics manufacturers are struggling to get their operations back to normal amidst the coronavirus outbreak. Dan outlines how this might lead to larger disruptions in the tightly scheduled mobile phone production cycle, and why smaller companies are more likely to postpone launching new products than their larger counterparts.

    0
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    Gavekal Research

    Q&A On The Coronavirus Situation

    Louis spent last week meeting with clients in the US and discussions centered on the coronavirus situation. His starting point is that the Chinese authorities now have every incentive to overstate, rather than understate, the severity of the viral outbreak. He explores the impact on growth in the rest of the world and asset price movements.

    1
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    Gavekal Research

    The Risk Of Falling Behind The Epidemic Curve

    China’s government was slow off the mark in responding to the initial outbreak of the new coronavirus. Although the government is now fully mobilized to fight the outbreak, it risks falling behind the curve again—this time in responding to the economic damage wrought by its extended shutdown of normal life and business activity.

    4
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    Gavekal Research

    The Long Term Risks That Matter, And Those That Don’t

    In the third paper of his series about the risks that threaten asset markets in both the short and long run, Anatole turns his attention to four longer term risks that are widely discussed—and even more widely misunderstood. Investors should worry about demographics and climate change, although not for the reasons many believe. In contrast, they can sleep relatively easily about debt and productivity growth.

    0
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    Gavekal Dragonomics

    The Hit To Consumer Durables

    The government’s drastic measures to contain the coronavirus are certain to deliver major blows to the auto and smartphone markets. Fortunately, Thomas, Ernan and Dan report that a V-shaped recovery is the most likely scenario for both sectors. Neither will meet pre-virus growth expectations, but both will likely still see an improvement from 2019.

    0
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    Gavekal Dragonomics

    The Lingering Impact On Property

    While the 2003 SARS outbreak had only a transitory impact on China’s housing market, the 2020 coronavirus episode is proving to be much more serious. In this piece, Rosealea argues that the big hit to housing sales will leave developers short of cash and limit their ability to keep projects going. This points to a lingering drag on construction.

    0
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    Gavekal Research

    Back To Work, Not Back To Normal

    China’s businesses are starting to get back to work, but the economy is still very far from normal. On Monday, the extended holiday declared by the government to help contain the coronavirus outbreak came to an end (except in Hubei province). But most businesses still face great difficulty in resuming their normal activities.

    0
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    Gavekal Research

    A Quant View Of The Virus, Updated

    Last week, Didier applied his quantitative risk management tools to model the spread of the coronavirus, setting a bound on catastrophic risk. Thankfully that bound appears to have been undershot. In this update, he models the probable trajectory of the epidemic from here and finds reasons to hope the spread of the virus has been contained.

    5
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2020

    In yesterday’s research call, Vincent Tsui and Tom Holland joined Arthur Kroeber to discuss the coronavirus outbreak, what it means for Chinese and regional economic growth, and how investors should position themselves during this period of rapid news flow and high market volatility.

    0
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    Gavekal Dragonomics

    Viral Monetary Policy

    China’s central bank has moved quickly to demonstrate its readiness to support an economy battered by the coronavirus outbreak. But Wei argues that it is too early to assume the PBOC is going to abandon its policy of selective easing and aggressively cut rates, as it still has reasons to hold to its its conservative policy stance.

    0
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    Gavekal Research

    Video: When Oil Hits The Floor

    No financial market has been hit more heavily by the Wuhan coronavirus than oil, with the price of crude falling by more than -20% from its early-January high on fears the outbreak will crush China’s demand for fuels. In this short video, Tom examines the global implications of the oil price slide, and asks “where next?” for the price of the world’s key commodity.

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