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  • Gavekal Research

    Arthur Kroeber: Is China At A Crisis Point?

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    Gavekal Research

    I Must Admit That I’m Confused

    Friday saw the release of US jobs market data for August which had investors convinced of a continued “not too hot, not too cold” outlook for the world’s largest economy. This is at odds with the view that I have held for a while; namely, that the US has been on the brink of recession or may have even entered one. This prognosis was based on a hopefully not insubstantial analytical foundation, which may be worth reviewing.

    3
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    Gavekal Research

    Who Is Buying Chinese Bank Shares?

    Few segments of global equity markets have been more reviled in recent years than the shares of China’s big state banks. As corporate debt levels in China ballooned, especially among state-owned enterprises, and economic growth slowed, international investors shied away from the H-shares of state banks listed in Hong Kong, fearing an almighty accumulation of unrecognized bad loans on their balance sheets. This caginess was reflected in bank...

    7
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    Gavekal Research

    India’s Quiet Revolution

    Last week India announced a partial liberalization of its debt and currency markets, which should open up the economy to more long term foreign capital. Such money is sorely needed to finance an estimated US$1trn of infrastructure spending over the next five years. While India has a fairly open equity market, debt issuance has been tightly controlled and banks account for some 80% of total financing across the economy. The issue is whether banks...

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    Gavekal Research

    When New Policy Easing Becomes Contractionary

    For the European Central Bank, achieving its target of inflation “below, but close to, 2%” is proving harder than anticipated. Eurozone consumer prices rose just 0.2% year-on-year in August, unchanged from July despite more than two years of negative interest rates and nearly 18 months of quantitative easing. With core inflation actually slipping in August, the ECB is facing calls to ease policy even further. However, the central bank now finds...

    2
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    Gavekal Research

    The Gavekal Monthly: How Long Can The Rally Last?

    Investors enjoyed a surprisingly upbeat summer with the World MSCI close to an all-time high and emerging markets continuing to benefit disproportionately. Yet with the Federal Reserve sounding increasingly hawkish, earnings looking soft and political uncertainty remaining the order of the day, this Gavekal Monthly focuses on threats to the current benign market mood.

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    Gavekal Research

    The Return Of US Fiscal Policy

    More than three years after the world fretted about the US economy falling off a “fiscal cliff”, there is suddenly much talk of government spending being used to gin up growth. Whatever their many differences, both Hillary Clinton and Donald Trump favour a fiscal expansion, with a focus on upgrading the US’s aging infrastructure stock. At the same time Federal Reserve officials, led by Janet Yellen and John Williams, are arguing for more fiscal...

    3
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    Gavekal Dragonomics

    The Other Property Inventory Problem Is Even Bigger

    China’s inventories of unsold housing have been declared a national problem—but officials should spare a moment for the even larger overhang in the non-residential property market. While the irrational exuberance toward commercial and office construction is finally fading, they will be a drag on construction growth for the foreseeable future.

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    Gavekal Research

    Real Yields Still Favor A Strong Yen

    Haruhiko Kuroda didn’t quite say he will do “whatever it takes” to push up inflation expectations, but he did the next best thing. Speaking at Jackson Hole on Saturday, the Bank of Japan governor promised “to take additional easing measures without hesitation”. Declaring there is “ample space” to expand the size and the scope of the BoJ’s asset purchases, as well as to push short term interest rates further into negative territory, Kuroda...

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    Gavekal Dragonomics

    A Pause In The Bond Bull Market

    The summer rally in the Chinese domestic bond has been strong, but now may be due for a pause. While Chinese government bonds certainly remain attractive over the medium term, they will probably range trade for the next three to six months until the central bank is ready to let policy interest rates take the next step down.

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    Gavekal Research

    The Fed’s Hawkish Stance

    For those who thought Janet Yellen a dyed-in-the-wool dove, her Jackson Hole speech on Friday gave pause as she endorsed fellow policymakers’ recent statements that the US economy was strong enough to warrant interest rate rises. Markets quickly adjusted. The implication for global asset markets is not altogether encouraging.

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    Gavekal Research

    Video: Yield Chasing—What Could Go Wrong?

    Louis outlines his view on this summer's unusual global economy and offers investment advice going forward into autumn.

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    Gavekal Research

    The Falling Natural Rate Is No Mystery

    As the high priests of global central banking congregate in Jackson Hole, much of the chatter ahead of the meeting has concentrated on the “mystifying” fall over recent years in the natural rate of interest, and possible reasons why it should have declined to such an extent. Having spent the last ten years attempting to apply the economic theories of the great 19th century Swedish economist Knut Wicksell, I have to say I am delighted with the...

    6
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    Gavekal Research

    Battered But Still Standing

    Battered by terrorist attacks and crippling strikes, France has hardly been having a good time of it. These problems were amply reflected in second quarter growth data which stalled after a mildly encouraging 0.7% QoQ rise in the first quarter. Yet a decent flash PMI for August—which rose to a 10-month high of 51.6—suggests an underlying resilience, which may render the 2Q16 soft patch a blip on a modest, but concerted, economic upturn of the...

    0
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    Gavekal Research

    The Next EM Yield Play?

    With global growth having stabilized and central banks remaining in super-easy mode, the dash for yield is making emerging markets ever more interesting. In recent months a number of our Hong Kong-based writers have advised investors to play this trend through bonds not equities, with Udith chiming in on Monday (see Indonesia: Bet On Stability Not Growth). The question for those who expect this “not too hot, not too cold” phase to persist is...

    7
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    Gavekal Dragonomics

    Playing The Game

    The Olympic Games may be over, but Chinese enthusiasm for sports and a healthier lifestyle is still going strong. Participation in sports has steadily risen in recent years, driven by higher incomes, a changing culture and a more supportive government. Higher-income Chinese people are, like their peers abroad, ever more focused on their health.

    0
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    Gavekal Research

    Renzi’s Great Gamble

    Italian Prime Minister Matteo Renzi has bet his premiership on a referendum over constitutional reform. It is a high stakes gamble. Renzi’s promise to step down if there is a “No” vote has turned the referendum into a vote of confidence in the government, its Europhile policies, and Italy’s membership of the eurozone itself.

    10
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    Gavekal Research

    A Brexit-Induced Recantation

    Exactly two months have now passed since the Brexit referendum. It is now an appropriate time to review what has happened, and what hasn’t, since June 23. As a quintessential member of the elite that was angrily repudiated by a majority of British voters, this referendum was a profound emotional trauma. Therefore, my initial reaction turned out to be completely wrong.

    10
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    Gavekal Research

    Indonesia: Bet On Stability Not Growth

    Late last summer, Indonesia looked like a disaster in the making as the worsening commodity bust caused its currency and equity markets to plunge. A sharp fall in exports had caused economic growth to crater, while high inflation limited the scope for monetary easing. It was a time for strong leadership and decisive action, yet President Joko “Jokowi” Widodo seemed weak and ineffectual. A year on and much has changed with economic growth up,...

    0
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    Gavekal Research

    Milestones On A Different Road

    The latest surge in China’s outward investment is not driven by state firms following strategic dictates—the Belt-and-Road has yet to gain traction—but by the private sector. The key question now is how long rich countries will put up with big inflows of Chinese money while their own firms are shut out of the best parts of China’s economy.

    0
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    Gavekal Research

    Video: Italy's Constitutional Referendum

    Nick presents what's at stake in Italy's upcoming constitutional referendum, and what it could mean for the European Union

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    Gavekal Research

    Video: The Politics Of Italy's Referendum

    Stefano Capacci On The Politics Of Italy's Referendum

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    Gavekal Research

    Cheap For A Reason

    By most measures, US equities are not cheap. Yet many investors remain overweight, believing that in a world of ultra-low interest rates and negative bond yields, equity valuations should be higher because future cash flows are now discounted at a much lower rate than in the past. At first glance, the equity risk premium—the expected return on stocks over and above the risk-free rate—appears to support this belief. At more than one standard...

    0
  • Gavekal Dragonomics

    When Will Monetary Policy Get Interesting Again?

    China’s monetary policy hasn’t been exciting lately: the PBOC has not moved benchmark interest rates since October 2015, instead keeping interbank rates stable. But as Mervyn King said, a successful central bank should be boring. This quiet can last a bit longer: the PBOC is unlikely to cut rates until 2017, when growth comes under more pressure.

    2
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    Gavekal Research

    It Still Pays To Pump

    The dog days of August have proved anything but dull for the oil market. As chatter began to circulate about a production freeze next month, funds rushed to cover their shorts and put on new longs in the futures market. In response the benchmark Brent crude price rebounded some 17% in the first two weeks of the month to within a whisker of US$50/bbl, reversing much of its -21% correction since early June. It feels very much as if we have seen...

    0
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    Gavekal Research

    A New—But Pricey—Market

    The last big barrier to investment in onshore Chinese equities is to be dismantled. Yesterday China’s cabinet approved the Shenzhen-Hong Kong Connect scheme. When the new link goes live, international investors will have free access to 80% of China’s onshore market capitalization, though the Shenzhen-listed stocks have eye-watering valuations.

    0
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    Gavekal Research

    The Dollar And The Next Crisis

    For a third straight month in June, foreigners unloaded US bonds, with “official institutions” leading the way on net sales of US$33.5bn versus a small rise in buying by offshore private investors. The interesting thing is that foreign central banks have been lightening their US dollar reserves for a while, but the contraction has now intensified to -5.6% year-on-year. Previously, such a decline in foreign holdings of the global reserve currency...

    7
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    Gavekal Research

    Demographic Dividend Or Demographic Nightmare?

    Among the Herculean challenges facing the government of India, job creation ranks first. Simply put, the number of new jobs is not keeping up with economic growth—a huge problem in a country where half the population is aged below 25. India needs to create roughly 8mn new jobs every year to absorb new entrants into the labor force. In addition, it needs to create more opportunities both for farmers seeking better-paying non-agricultural work and...

    0
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    Gavekal Research

    The Euro And Mean Reversion

    Among my long-standing decision rules is one that generally proved reliable in the past. If two developed and open market economies trade freely with each other, then over the long run the return on invested capital in each economy will tend to be the same. In turn, this implies that over the long run, the ratio of total returns from each stock market will exhibit no trend in common currency terms. This makes intuitive sense—if one market...

    7
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    Gavekal Research

    Ripples In The Eurodollar Market

    The Eurodollar market is making waves. While most benchmark interest rates around the world have been stable or softening, US dollar Libor has bucked the trend. Over the last seven weeks three-month Libor has climbed by almost 20bp to a shade over 0.8%. Meanwhile the TED spread, which effectively measures interbank credit risk by tracking the spread between Eurodollar rates and three-month US Treasury bill yields, has shot to its widest since...

    2
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    Gavekal Research

    Irving Fisher, Debt-Deflation And The Bifurcated US Economy

    Many of our readers will be familiar with Irving Fisher’s great 1933 paper The Debt-Deflation Theory Of Great Depressions. The main point of this fascinating work is that if an economy suffers simultaneously from over-indebtedness and falling prices, then strange things start to happen. These include a fall in the velocity of money and a collapse in capital spending. And when it comes to interest rates, Fisher explained that things get really...

    3
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    Gavekal Dragonomics

    Housing Takes A Breather; More Stress On The Way

    July was a weak month for China’s economy, as investment, industrial production and retail sales all slowed. An important exception was the property market, where sales ticked up and buyer sentiment seems strong. Nonetheless, housing activity will continue to slow over the rest of the year, if at a gentler pace than the plunge in May and June.

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  • Gavekal Research

    Video: Indian Growth And Demographics

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    Gavekal Research

    Eurozone Equities Ride Again

    Eurozone equities have been sucked higher in the post-Brexit global rally, but with earnings showing a mild pick-up and fears of a populist political contagion fading, the hope is that a 15 month downtrend has been broken. On a technical level the MSCI EMU’s 200-day moving average has flattened out nicely, and with the DAX on Tuesday hitting a high for the year, German stocks look as if they could break out. As to whether the broader market can...

    0
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    Gavekal Dragonomics

    Car Sales: Plenty Of Gas In The Tank

    With heavy industry in the doldrums and the golden age of housing long gone, it’s getting harder to spot areas of sustained growth in China’s economy. An important bright spot is the automotive sector: while the recent breakneck pace of car sales will slow, the value of new car sales is likely to keep growing faster than GDP for the next decade.

    0
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    Gavekal Research

    India’s Enhanced Central Bank

    Louis is fond of quoting Lenin that there are “decades when nothing happens and weeks when decades happen”. Given India’s generally sclerotic pace of institutional change, these seem to be revolutionary times that will dictate the policymaking framework for years to come. Last week saw parliamentary approval granted for a national goods and services tax that should spur a genuinely common market, while lawmakers this weekend signed-off on an...

    0
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    Gavekal Research

    The Last Free Lunch In US Markets

    Even as US equities hit new highs, this most policy-driven of bull markets remains unloved, with most investors we meet expecting an eventual collapse. US profits are declining, valuations are rich and the headwinds facing the industrial sector, in particular, show no sign of abating. On an economy-wide basis, the return on invested capital earned by US firms is falling, so edging the economy closer to recession (see A New Look At Capital:...

    1
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    Gavekal Research

    Beware The “High Dividend” Lure

    Investors have been piling into US high dividend plays as they offer decent income and a “margin of safety” in an increasingly expensive equity market that, despite soft earnings, continues to make new highs. The chase for yield has been boosted by global central banks’ easing measures which have helped drive bond yields to pifflingly low levels; at the same time the S&P 1500 dividend yield has stayed steady this year at about 2%. Yet any...

    0
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    Gavekal Research

    The Caveat In US Payrolls

    Notions of a US growth scare were apparently banished on Friday with a bullish payroll report for July helping drive US equities to a new high and causing the dollar to rally strongly. Some 255,000 jobs were added—far better than the expected 185,000—while a cycle-high average hourly earnings gain of 2.6% YoY points to strong domestic demand. So how to square this data with the far less cheery 2Q16 GDP report, released last week, which showed...

    2
  • Gavekal Research

    Video: Risks In US High Dividend Stocks

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    Gavekal Research

    Behind The BoE’s Positive Thinking

    Yesterday the Bank of England rolled out the artillery it plans to deploy against the UK’s fast-materializing post-referendum slowdown. Yet for all the effect they are likely to have, the Bank’s big guns might as well be peashooters. Although the Bank’s new forecasts suggest the UK is heading for a period of stagnation, rather than outright economic contraction, all the latest forward-looking indicators point to a severe recession starting in...

    5
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    Gavekal Research

    India’s Great Leap Forward

    India, finally, is on course to become a genuine economic power. Calling it a “Treaty of Rome” moment goes too far, but India’s Goods and Services Tax could prove nearly as significant as the agreement that created the European common market. India has been a strong political state for nearly 70 years, but its fragmented economy prevents goods and many services from moving freely within its borders. The GST promises to create a genuinely common...

    2
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    Gavekal Dragonomics

    A Better Indicator Of Investment

    Growth in fixed-asset investment is now the lowest it has been in the 12-year history of the data. But FAI is a very messy indicator, and increasingly inconsistent with the national accounts. Out of frustration, I have built a simple model to track investment growth in national-accounts terms—gross fixed capital formation—on a monthly basis.

    4
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    Gavekal Research

    The Death Throes Of The JGB Market

    While the Japanese government was rolling out its latest stimulus package yesterday—with a headline value of ¥28trn, but only ¥4.6trn of additional fiscal spending this year—investor attention was fixated on the spasms in the JGB market. Having touched a record low of -0.3% last Wednesday, the yield on 10-year JGBs leapt 28bp in just five trading days to hit a four and a half month high of -0.02% yesterday morning. On one level the spike in...

    4
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    Gavekal Research

    Toynbee’s Europe

    In A Study of History the great Arnold Toynbee explained that the role of “elites” in any society is to handle challenges that allow the group to survive and move on to the next phase of their shared journey. If bad solutions are offered up then problems will intensify and pressure will arise for a change in the elite. This can happen in various ways: through elections in a best case scenario, a change of regime as with France’s forth Republic...

    3
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    Gavekal Dragonomics

    The Temptation Of Early Retirement

    China's workers retire young—at age 54 on average, a decade earlier than in many European welfare states. The central government is now pushing hard to extend retirement ages to keep pension costs under control. But local governments are resisting, hoping to keep using early retirement to manage redundant workers in excess-capacity industries.

    0
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    Gavekal Research

    The Baleful Influence of Inventories

    The reason US second quarter GDP growth was so disappointing at 1.2% QoQ annualized was a deep contraction in US business inventories, which knocked -1.16pp off the quarterly growth figure. In itself, a fall in inventories need not be such a bad thing for longer term growth. If inventories get run down because companies are unable to keep up with a surge in demand, then a fall in inventories can foreshadow increased investment to expand business...

    0
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    Gavekal Research

    Recession Or Stagnation?

    On Friday US GDP data for 2Q16 was released showing an expansion that looks ever more anemic and unconvincing. Is this just the new normal in an era of stagnant global growth or is the US more perilously poised? To answer that question, imagine the US economy having two parts in the shape of “consumer GDP”, which represents about three quarters of activity, and the remainder being the non-consumer “production” portion.

    3
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    Gavekal Research

    The Gavekal Monthly: Shall We Dance?

    In a world in which the Fed shows no inclination to get ahead of the curve on inflation and in which both the ECB and the BoJ are in full quantitative easing mode, investors everywhere are on the hunt for yield. But the chase is a nervous one. Investors are all too aware that equities and bonds are sending conflicting signals, and that the favorable trends that have lifted most assets over the last six months could be disrupted by a sudden spike...

    0
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    Gavekal Research

    The Cracks Begin To Appear

    Backward-looking data has held up surprisingly well in the UK since June’s Brexit vote. It is not that second quarter GDP growth came in ahead of expectations at 0.6% QoQ; only one week of 2Q fell after the referendum. However, despite dire warnings of the damage June’s “Leave” vote would inflict on the UK’s all-important property market, home prices proved remarkably resilient in July. The Nationwide house price index rose 0.5% MoM, an...

    1
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    Gavekal Research

    There’s No Need To Fear A Tighter Fed

    While the US Federal Reserve left interest rates unchanged yesterday as expected, it did revise its statement to sound marginally more hawkish. Most notably, it added the line, “Near-term risks to the economic outlook have diminished,” while tweaking its language to reflect recent relatively solid data releases. The market took the announcement in its stride. The S&P 500 ended the day little changed. Yields on 10-year treasuries fell...

    7
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    Gavekal Research

    The EM Equity Question

    Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.

    2
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    Gavekal Dragonomics

    Profits Follow Housing Up, And Down

    China’s industrial profits bounced back to 6.2% growth in the first half, a stronger than expected recovery. The drivers are a boom in metals driven by the housing rebound, and continued gains in consumer sectors. But the metals boom is a temporary one, so after a couple more quarters of gains, a renewed down-cycle is likely in early 2017.

    0
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    Gavekal Research

    One Certainty In An Uncertain World

    In an uncertain world, in which Brexit, the US presidential elections, the future of the eurozone, are all strewn with wild cards whose potential impact is impossible to quantify, investors are left grasping for certainties. One is that whatever happens in the near term, the European Central Bank will continue to buy financial assets, including corporate debt.

    0
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    Gavekal Research

    The Way Ahead For Italian Banks

    On Friday, the European Banking Authority will publish the results of its 2016 stress tests. Although 51 banks from across the European Union have been tested, attention will focus most closely on the results of the five Italian banks covered. With Italy’s banking system widely identified as the most likely locus of a new eurozone crisis, bankers, politicians and investors are all hoping for the “best” likely result. This would see all the banks...

    2
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    Gavekal Research

    Trump And The Prisoner’s Dilemma

    Let us assume that Mervyn King is right and the week-to-week strategy of major central banks has become to stop equity markets within their jurisdiction from going down. And let us further assume that markets are fully convinced of central bankers’ resolve to achieve this end. In the case of US equities, which sit at the center of the global system, such a proposition logically means that their price has two components: (i) the “intrinsic value...

    1
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    Gavekal Dragonomics

    Iron Ore’s Battle Of Attrition Is Over

    China’s iron ore imports jumped in early 2016, finally validating global mining companies’ strategy to gain market share. As low prices continue to force domestic mines to close, iron ore imports still have a few quarters of growth ahead. But with import penetration already over 80%, there is not much market share left for global miners to grab.

    0
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    Gavekal Research

    The Flow Through To EM Equities

    These are strange times for investors with bond yields in big developed markets plumbing new depths on dark concerns about never ending deflation and stagnation. Yet in a clearly related development, US equities are making new highs while corporate- and emerging market-bonds continue to rally.

    2
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    Gavekal Research

    US REITs And The Rush For Yield

    One of the side effects of negative interest rates and central bank asset purchases in the eurozone and Japan has been a reach for yield which has seen foreign investors rush into relatively high-yielding US assets, compressing yields and spreads to an extent that appears at odds with the late-cycle stage of the US economy. Earlier this month the 10-year US treasury yield set a new low of 1.36%, while US Baa-rated corporate bond yields fell to...

    2
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    Gavekal Research

    The Constraints Of ECB Stimulus

    Already fragile, eurozone confidence has taken a further beating in the last four weeks. In one of the first data releases since last month’s Brexit vote, the ZEW index of German economic sentiment plunged to -6.8 yesterday from 19.2 in June, its steepest fall since 2012. With growth in the eurozone’s principal economic driver likely to soften as confidence deteriorates, expectations are mounting that the European Central Bank will respond by...

    0
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    Gavekal Dragonomics

    The Mixed Progress On Excess Capacity

    Domestic coal output has declined sharply this year, but steel production has been flat. This pattern reinforces the point that excess capacity only shuts when forced to by low prices—and steel prices were high because of the stimulus. While both excess capacity sectors will continue to contract, trade tensions are unlikely to vanish quickly.

    0
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    Gavekal Research

    Tools, Jewels And P/E Ratios

    There are two basic reasons why an asset has value and this understanding should be foundational knowledge for anyone running a portfolio. They can be prized for their efficiency (a tool) or desired because of their scarcity (a jewel). Investors preferences for jewels versus tools will shift through time, but what does not change is the fact that scarcity cannot lead to economic growth.

    0
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    Gavekal Research

    The Growth Trade-Off Gets Harder

    China’s better-than-expected economic data for the second quarter underscore just how effective a jolt of stimulus to housing and construction can be. But housing is already cooling, and the rest of the economy will soon follow suit. The froth in housing prices will continue to limit the government’s ability to pump up growth to meet its targets.

    0
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    Gavekal Research

    Why Brexit Still May Not Happen

    With a newly installed British prime minister gravely intoning that “Brexit means Brexit” and having just appointed a cabal of Brexiters to run the UK’s exit strategy from the European Union, it would look to be game-over. Anatole would beg to differ and explains why there remains a strong likelihood that the UK government will change tack in the face of different circumstances than prevailed at the time of last month’s referendum.

    8
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    Gavekal Research

    The JGB Endgame Approaches

    Over the last couple of weeks, the world’s attention has been focused by turns on British politics, Italy’s banking crisis, the US presidential race and most recently, last night’s ghastly events in Nice. It is little surprise then, that a series of three stories from Japan (or perhaps just two and a half) has passed largely under the radar. Taken together, however, these developments bear heavily on the future of the Japanese government bond...

    2
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    Gavekal Research

    The Post-Brexit Rally: Head Fake Or Game-Changer?

    Let’s face it, few expected the rally in global risk assets of the past ten days. Even investors who, like Charles, believed that Brexit was a fundamentally positive development did not expect positivity to erupt quite so suddenly. Yet, here we are, with the Nikkei up 10% since its post-Brexit low, the S&P 500 breaking out to new highs and the Shanghai benchmark above 3,000. Will it last?

    3
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    Gavekal Dragonomics

    The Weak Links In The Financial System

    Where are the risks in the Chinese financial system? Two weak links deserve particular attention: the rapid expansion of small and regional banks with unstable funding, and the increasing complexity of credit creation. Neither threatens an immediate systemic crisis, but they do mean that the risk of ugly financial accidents is rising.

    0
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    Gavekal Research

    The Consumer Alone Can’t Avert A US Recession

    With a strong US job market auguring well for income growth, and healthy household balance sheets, many believe the growth of consumer demand will outweigh dismal exports and weakening capital spending, staving off recession. But close inspection of historical data shows the US can tip into recession even though consumption remains broadly stable.

    2
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    Gavekal Research

    A Storm Brews In The South China Sea

    Beijing declared it “null and void,” but the verdict of the international tribunal in The Hague is clear: there is no legal basis for China’s maritime claim over the South China Sea. Beijing now faces a choice: does it find a face-saving way of lowering tensions, or does it risk military conflict by actively asserting its territorial interests? It is quite possible that Beijing does yet not know itself, and will wait to respond to international...

    1
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    Can ‘Make In India’ Work?

    In September 2014, Prime Minister Narendra Modi launched an initiative to transform India from an industrial laggard into a global manufacturing hub. The “Make in India” plan is sorely needed: in 2014, India’s merchandise exports accounted for a paltry 1.7% share of the global total. That was on a par with Taiwan, whose population is smaller than Delhi’s. India relies heavily on imports of consumer goods, especially from China, and runs a large...

    2
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    A Fundamental Assault On Freedom

    Of all basic freedoms, one of the most fundamental of all is the freedom of the individual to organize his or her relationship with time. The way we order our affairs with respect to the all too brief time allocated to us on this earth is a profound right that we all should be allowed to exercise unhindered. In short, everyone should be free to choose whether to be an ant or a grasshopper.

    10
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    Gavekal Research

    The Next Monetary Move

    Shinzo Abe was today scheduled to meet with Ben Bernanke, the chief architect of unconventional monetary policy responses following the 2008 crisis, with the issue of Japan’s adoption of so called helicopter money expected to top the agenda. In this piece Joyce asks would Japan do it and more importantly could money drops make any difference in the land of the stagnant price index.

    3
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    Gavekal Dragonomics

    Behind The Jobs Target

    China’s leaders may have missed their GDP growth targets for the last couple of years, but they are still beating their targets for job growth. Yet the statistic used for this target gives a very misleading picture of the labor market. It’s better to instead watch surveys of households and employers, which capture the real, deteriorating trend.

    0
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    Gavekal Research

    Politics Trumps Jobs

    So, it was a false alarm. By that I do not mean the Brexit vote, which remains, for reasons explained at the end of this note, the biggest threat to the world economy and to risk assets since the global financial crisis. The false alarm was the brief panic about a US recession caused by the slump in employment growth reported last month. As I said at the time there were four possible explanations for the shockingly weak May payrolls (see...

    0
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    Gavekal Research

    Ignore Japan’s Banks At Your Peril

    Any investors contemplating adding to their Japanese equity exposure following Shinzo Abe’s weekend election victory and the subsequent market rally should look closely at the performance of Japanese bank shares. Their signal, argues Joyce, is anything but encouraging.

    3
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    Gavekal Research

    The Renminbi Falls; No One Cares

    This week the renminbi slipped to its lowest level against the dollar since 2010. Yet this decline had little impact on global markets, a sharp contrast to the convulsions caused by previous drops. In the absence of a radical shift in currency policy or accelerating capital flight, China’s gradual depreciation is a non-story for most investors.

    0
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    Sterling’s Automatic Stabilizer

    As international investors question the ability of a post-Brexit UK to attract the capital inflows needed to finance its hefty current account deficit, the pound is tumbling. Yesterday cable briefly dipped below US$1.28, its lowest since the summer of 1985 just ahead of the Plaza Accord to weaken the super-strong US dollar. And many analysts believe the pound’s fall has further to run, with several houses targeting exchange rates of US$1.20, US$...

    1
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    Can The Russian Bear Turn Into A Bull?

    This month Russia’s Sukhoi Civil Aircraft Company delivered two 100-seater passenger airplanes to the regional Irish carrier CityJet, and has orders for 13 more over the next year. The news caught our eye as it is the first time the Russian plane maker has broken into the European aviation market. As economists rather than aviation experts, it got us wondering whether Russia is finally curing itself of a decade-long bout of “Dutch disease” as...

    1
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    Gavekal Dragonomics

    The Caution Of Chinese Corporations

    China’s rising corporate debt is now driven more by banks pumping out credit than by reckless firm behavior. Chinese companies are increasingly risk-averse: happy to borrow from banks, but preferring to sit on the cash not spend it. This behavior is a big reason why monetary policy is becoming less effective at stimulating demand.

    0
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    Gavekal Research

    The Options For Italy

    In the wake of the Brexit vote, investors fearful of contagion have woken to the slow-burn banking crisis in Italy. It should have been news to no one that Italy’s banks are sitting on non-performing loans. Yet with the sector index down -30%, banks are suddenly front and center in investors’ minds as the next source of European uncertainty.

    4
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    Gavekal Research

    US Bonds As A Hedge: It’s Complicated

    F. Scott Fitzgerald noted that the test of a first rate intellect was being able to hold two opposing ideas, yet still function. The same could be said of any investor who aspires to follow a rules-based portfolio management strategy. Inevitably, such rigor occasionally requires messy compromises with reality as is now the case in the US bond market. Such is my dilemma as I try to broadly follow three rules:

    2
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    Gavekal Research

    US Auto Sales: Shifting Down A Gear

    At first sight it was worrying last week when June’s number for US automobile sales came in at a disappointing 16.7mn annualized, well below the street’s expectations of 17.3mn. Auto sales are closely followed as a leading indicator of both US consumption growth and the overall business cycle, so at this stage in the cycle, when consumption is the only remaining driver of US economic growth, the undershoot was especially troubling. Worse,...

    0
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    Gavekal Dragonomics

    The Natural Gas Glut

    China’s natural gas demand is likely to rise by 7-9% annually for the rest of the decade, half the 15% pace of 2003-14. That is still a pretty decent pace of growth—but well below what the government planned for. Having signed contracts and built pipelines on the basis of ambitious forecasts, China’s challenge is now dealing with a glut of gas.

    0
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    Gavekal Research

    The Italian Problem

    The British were recently asked if they wanted to leave the European Union and to the establishment’s horror, they chose to do just that. Italy will host Europe’s next big referendum in November with Prime Minister Matteo Renzi threatening to resign if his package of constitutional reforms isnot passed. Such a dénouement in Europe’s most indebted big economy would trigger a political crisis and require fresh elections. The issue with referendums...

    3
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    Gavekal Research

    Conference Call: Investment Scenarios After Brexit

    Gavekal partners Anatole Kaletsky, Charles Gave and Louis-Vincent Gave detail their investment scenarios following last week’s Brexit vote.

    0
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    Gavekal Research

    Positioning For Uncertain Times

    Regular readers will know that Gavekal is a broad church. And while the church choir only occasionally sings in perfect unison, the different singers can often hit harmonies that are all the more powerful for being unexpected. This may be one of those occasions. Yesterday, Anatole, Charles and Louis took part in a conference call in which they laid out their different views of Brexit and what it will mean for the economy and markets of the UK,...

    1
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    Gavekal Research

    The Gavekal Monthly: Life After The Brexit Vote

    The world is now a considerably more uncertain place than a month ago. Following the UK’s referendum vote in favor of Brexit, a near-term recession in the UK is more likely than not, the European Union faces the possibility of a renewed economic slowdown, and investors find themselves forced to reassess the probability that Donald Trump will win November’s US presidential election. In this edition of the Gavekal Monthly, our analysts set out to...

    0
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    Gavekal Dragonomics

    A Boring Infrastructure Bank

    The creation of the Asian Infrastructure Investment Bank promised to reshape the world’s economic architecture, and greatly worried the US. Yet now that the AIIB is a reality, it is not challenging the existing Bretton Woods institutions. It is on course to resemble them—and cooperate with them. In fact, the AIIB has become just a bit boring.

    0
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    Gavekal Research

    The Enemy Of My Enemy Is My Friend

    The British prime minister was not the only one thwarted by a vote last week. Despite Narendra Modi’s personal efforts and heavyweight backing from Washington, India failed in its attempt to join the 48-country Nuclear Suppliers Group. It was a bruising setback for Modi, who has spent two years energetically trying to boost India’s global clout. Yet the result itself was less significant than the US support for India in the face of Chinese...

    0
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    Towards A Fiscal Union By Stealth

    Unlike most fish, sharks possess no swim bladder, which means they rely on dynamic lift to maintain their buoyancy. If they stop moving forwards, they sink. In that much, at least, Europe resembles a shark. Following the UK’s Brexit vote, if the EU does not press forward with closer union, it risks sinking under the weight of the forces dragging it into the abyss.

    2
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    Gavekal Research

    History Moves Again, Again

    Back in September 1989 as it became clear that big forces were shaking up the Cold War status quo, I wrote a research piece that aimed to place these convulsions in a broader context. It borrowed from a core idea of the great historian Arnold J. Toynbee that a driving force of history is what he dubbed “missionary ideas”, which tend to find their inspiration in religion (see History Moves Again). In the post-enlightenment era there have been...

    28
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    Gavekal Dragonomics

    Macro Update: The Limits Of Stimulus

    In our latest quarterly overview of China’s economy, Chen Long assesses the outlook after the stimulus of early 2016 and the Brexit vote. The property and credit cycles are turning as policymakers grow cautious, though private investment has benefited little. Still, deflation is easing, capital outflows are moderating and exports are improving.

    2
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    Gavekal Research

    What Constitutes A Certain Investment In Today’s Market?

    What concerns investors most in these tricky post-Brexit times is the sheer uncertainty of it all. No matter whether the “Leave” camp can work out a non-ruinous strategy for Britain to exit the European Union or “Remain” can exercise some kind of parliamentary blocking action against this “terrible mistake”, there is agreement that things will get messier before the picture clears. Even if the UK-EU “divorce” proves a rational end to a...

    0
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    Gavekal Research

    Coping With Brexhaustion

    Among all the different questions investors have had to confront in the past 72 hours, only one really matters: have we just witnessed a “Lehman moment”? At the risk of sounding like a Jesuit priest, I will answer this vital question with a bunch more questions. The first is: have the financial market’s core beliefs now been shattered?

    2
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    Gavekal Research

    Everything Just Changed

    There are moments in history when the impossible becomes inevitable without ever passing through improbable. The period after the Lehman Brothers bankruptcy was such a time. Last night’s unexpected repudiation by British voters of 40 years of European Union membership is another. The outcome of the referendum is a shock fully comparable to the Lehman collapse. Rarely, if ever, has a G7 currency fallen by -10% in a single trading session, as the...

    6
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    Gavekal Research

    Europe: Ready To Be Reborn From Its Own Ashes?

    Over the past decade, global investors would have been wise to largely ignore eurozone equities. Their underperformance has not been constant, but intermittent policy-driven rallies have become weaker and shallower. Eurozone stocks outperformed for two years after Mario Draghi’s 2012 promise to do “whatever it takes” to save the euro, yet by the time the European Central Bank got around to launching its asset-buying program in 2015 the benefit...

    1
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    Gavekal Research

    Tax Receipts And US Recessions

    When kicking-off two days of Congressional testimony yesterday, Janet Yellen acted to sooth market nerves by declaring the US economy to be in reasonable health, while sounding sufficiently concerned about apparent labor market weakness to hose down worries of an imminent rate raise. To my mind, this is all noise for the simple reason that the question is no longer whether the US faces a recession in the future but more precisely if such a...

    4
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    Gavekal Dragonomics

    Household Savings: A Permanently High Plateau?

    China’s famously high household savings rate is still stuck in the stratosphere: it has hovered around 37-38% of income since 2008. So have the drivers of savings not changed at all in recent years? Far from it. High savings were mainly caused by China’s massive housing boom, and now that the boom is over, savings rates will be grinding lower.

    0
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    Gavekal Research

    Never Mind The Brexit, Look At Eurozone Mid-Caps

    Recent releases of hard and soft macro-economic data point to a cyclical eurozone recovery whose domestic drivers are increasingly robust. On the back of stronger consumption and investment, GDP growth was just revised up to 0.6% QoQ for 1Q16. Unemployment continues to fall and, after a weak start to the year, economic sentiment indicators have rebounded—the ZEW released yesterday for June leapt to 20.2 from 16.8 in May. This improvement is...

    3
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    Brexit Tail Wags The Dog

    If anyone still doubted the claim expressed here on May 25 that politics is now driving global financial markets far more than economics (see The Brexit Vote As Harbinger Of A Populist Age, Or Not), those doubts should have been dispelled by Monday’s trading. From the moment that currency trading started in the New Zealand morning, through the Nikkei and Hang Seng openings in Asia, to the main forex business in London and finally the stock...

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