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    Gavekal Research

    Down The Negative Rate Rabbit Hole

    “Curiouser and curiouser,” as Alice remarked on falling down the rabbit hole and entering Wonderland. Released yesterday, the minutes of the European Central Bank’s January meeting strongly hinted at further monetary easing measures when the governing council next meets in March. Already committed to €60bn in asset purchases per month until March 2017 and charging a negative interest rate of -0.3%, the ECB now looks likely to push its deposit...

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    Gavekal Research

    The Dollar That Didn’t Bark

    Sherlock Holmes would have loved it. In trying to unravel the unsolved mystery of how US$20trn suddenly vanished from the vaults of international investors in early 2016, the most intriguing clue was the dog that didn’t bark. When the Federal Reserve started its hiking cycle back on December 16, 2015, a rampantly-rising US dollar was generally considered to be among the biggest risks to the global financial outlook. Two months later, the dollar...

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    Gavekal Research

    Is It Supply Side Or Demand Side?

    The signals from Chinese policymakers are mixed. In recent months official rhetoric has taken a harsh turn, with praise for deleveraging and calls for money-losing “zombie” companies to be shut down. At the same time, officials are promising yet more infrastructure spending, and new data show a record surge in bank loans in January. So which is it?

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    Gavekal Research

    Japan’s Point Of No Return

    On January 29 the BoJ destabilized Japan's market equilibrium with a poorly communicated shift to negative interest rates. The message received by the market was that Governor Haruhiko Kuroda was making a desperate gamble with the suggestion that the BoJ’s quantitative-easing strategy had run up against key limits.

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    Gavekal Research

    Two Cheers For India

    The end of China’s investment boom means the global economy is seeking a new driver of growth. India’s economy outpaced China’s last year, making it the world’s fastest-growing large economy. Tom and Udith analyze what India must do to fulfill its potential

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    Gavekal Research

    Having Your Cake, And Eating It

    Is the world really facing a 2008-style economic and market meltdown all over again? If it is, then the prescription for investors is clear: load up on long-dated US treasuries in expectation of a continued slide in yields, leaven your portfolio with exposure to gold, and prepare for the apocalypse. But what if the end of days is not imminent? In that case, investors face a trickier call.

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    Gavekal Research

    Elijah And The Prophets Of Baal

    As central banks in Europe and Japan push interest rates more deeply negative in an attempt to reflate their struggling economies, it is astonishing that no central bankers seem to have considered that far from staving off deflation as intended, their low rate policies have achieved the exact opposite, bringing the world to the brink of the very deflationary bust they have been trying to avert. For economists steeped in the academic orthodoxies...

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  • Gavekal Research

    Crisis? What Crisis?

    Two weeks ago I published an article dissenting from the near-universal view among my Gavekal colleagues, and also probably among our clients, that the global equity markets had entered a severe bear market (see Is Wall Street In A “Bear Market”?). Since I expressed this relatively optimistic view on January 27, the S&P 500 has fallen another -2.7%, the world MSCI-ex US by -3% and the Nikkei by a whopping -8.5% in yen terms. It may therefore...

    4
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    Gavekal Dragonomics

    How Good Are Those Service Jobs?

    China’s housing-led slowdown is clearly taking a toll on jobs, with troubled industrial firms laying off millions of workers. Offsetting these losses is the very rapid pace of job creation by the service sector, a fact the government regularly trumpets. But a closer look reveals that most new service jobs are at low-paying small businesses.

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    Gavekal Research

    The Death Of Policy Credibility

    Abenomics was always a confidence game. Now it seems that confidence has crumbled. Far from reinforcing investors’ belief in the power of policy to boost markets and revitalize Japan’s economy, the central bank’s decision at the end of January to cut interest rates into negative territory has backfired in spectacular fashion. As the yield on 10-year Japanese government bonds has collapsed—even turning negative on Tuesday—stocks in Japanese banks...

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    Gavekal Research

    Europe's Banking Rout

    Following yesterday’s rout in European banking stocks, there is one thing that we can say for certain: the proximal cause of the sell-off had nothing to do with China. With Chinese markets closed for the lunar new year holiday, beleaguered investors in Europe had been hoping for a little breathing space this week. In the event, the sell-off in European bank shares only intensified, with the Euro Stoxx banks index sliding -6.4% on Monday,...

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    Gavekal Research

    India’s Cleanup

    The last year has been both the best of times and the worst of times for the world’s fastest growing emerging market. India has gotten inflation under control and reaped a nice dividend from the oil price collapse, resulting in a much improved external position. The pro-growth majority government of Narendra Modi has not delivered “big bang” reforms, but has been generally competent and cut red tape. All of this marks India out as a “survivor”...

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    Gavekal Research

    QSCB: How To Adapt To A Slow-Growth Future

    Growth in the world’s two biggest economies is settling at much lower rates than investors are used to. We predictably struggle to find a neat consensus on what the current macro environment means for asset allocators, but Charles, Louis and Anatole all offer specific portfolio advice.

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    Gavekal Research

    No More Shock Absorbers?

    Things have come to a pretty pass when the heads of two of the world’s three leading central banks come out with all guns blazing in an attempt to persuade markets that they will do whatever it takes and more to ease policy—and their currencies promptly strengthen by two big figures. Yet that is exactly what has happened this week. On Monday Mario Draghi dropped a heavy hint that the European Central Bank is preparing to push interest rates even...

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    Gavekal Dragonomics

    Capital Flows And The Currency Endgame

    Concerns are rising about China’s big capital outflows, which topped US$700bn in 2015. Yet our analysis shows that China is not experiencing massive capital flight. Unfortunately, this does not matter much to markets. The real problem is that China’s currency regime is losing credibility, and outflows erode its ability to steady the renminbi.

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    Gavekal Research

    Tools Or Jewels?

    An asset can have value for reasons of scarcity (a jewel, or gold), or because it is useful and productive, and so over time generates positive cash flows (a tool). In the long run, tools tend to go up more in value than jewels like gold. Tools also have a terrific advantage in that projecting their future productivity and discounting their future cash-flows allows them to be objectively valued. By contrast, valuing jewels like gold is a...

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    Gavekal Dragonomics

    Say Goodbye To Coal Imports

    China’s coal imports dropped a stunning 30% in 2015—and all signs indicate more declines are coming. Imported coal is taking the brunt of the adjustment in the nation’s energy demand, as the domestic transportation bottlenecks that made imports attractive have eased. We think China will stop being a major net importer of coal in about two years.

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    Gavekal Research

    Why Is Yen Weakness ‘Good’ But Renminbi Weakness ‘Bad’?

    When the yen falls, global markets think it is A Good Thing, and risk appetite increases. But market moves early in January demonstrated that the opposite applies to China: when the renminbi falls, markets think that is A Bad Thing, and risk appetite vanishes. So why do investors like a weak yen but fear a weak renminbi?

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  • Gavekal Research

    Red Herrings, Margin Calls And Heart Attacks

    Most recent commentary we have read suggests that January’s turmoil can be blamed on either the slowdown in China or the fear of an impending US recession. But let us suggest an alternative: these are red herrings which only distract from the real analytical challenges faced by investors.

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    Gavekal Research

    Symptoms Of Dysfunction

    If bank shares are the canary in the global economic coalmine, they are currently singing a very alarming tune. In Japan bank shares have cratered -10% since Friday’s decision by the central bank to move to negative interest rates, even though the new -0.1% rate will only apply on the margin to additional deposits at the Bank of Japan. Elsewhere, in Europe, the banking component of the Euro Stoxx index has slumped -16.8% year-to-date, while the...

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