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    Gavekal Dragonomics

    Retreating From An International Renminbi

    Behind the recent turbulence in markets lies an important shift in China’s longer-term currency strategy. The drive to internationalize the renminbi, which required keeping the currency strong, has run out of steam. Now that the central bank has gotten much of what it wanted, internationalization is no longer driving currency policy.

    5
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    Gavekal Research

    Unintended Consequences

    Forget the Brazilian real and the Chinese renminbi. The world’s worst performing major currency over the last month is actually the British pound, which has fallen a painful -4.95% against the US dollar since mid-December. The beating has been especially brutal in recent days. After data released yesterday showed British manufacturing output is still languishing not just below its 2008 level, but even below its 1997 level, sterling slumped...

    0
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    Gavekal Research

    Stronger Macro, Sinking Stocks

    The latest macro indicators leave little doubt about the general direction of the eurozone economy. Both hard and soft data suggest that growth re-accelerated from a meagre 0.3% QoQ (1.2% annualized) in 3Q15, probably to 0.4%-0.5% (1.6%-2.0% annualized) at the turn of the year. Eurozone unemployment declined to a four-year low in December, and the economic sentiment indicator compiled by the European Commission from business and consumer surveys...

    2
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    Gavekal Research

    Is Japan’s Building Boom For Real?

    As followers of our specialist Gavekal Japan Alpha service will know, something of a construction boom is emerging in Japan. At first glance this seems surprising, especially given that Japan is pedaling into some severe demographic headwinds. According to the 2010 national census, Japan’s population did grow between 2005 and 2010—but only by 0.2% over the five-year period, to reach 128mn. Over the coming decades, that anemic demographic growth...

    0
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    Gavekal Research

    China: Still Off Course

    We began 2016 thinking that China’s policymakers had learned some lessons from last year; obviously, last week’s mayhem proved us wrong. But the real problem with the missteps on the currency and the stock market is not that collapse is imminent. Rather, it is that the leadership is not setting a clear course toward a more market-driven economy.

    0
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    Gavekal Research

    It’s About The Dollar, Not The Renminbi

    In my 50 year career working in financial markets, I have never seen the money supply of one country move across the border to another country. Hence I must confess to being perplexed when reading recent commentary fretting about “capital flight” from China. Never mind that China’s highest denomination bill is RMB100, meaning that a fleet of trucks would be needed to move any meaningful sums into Hong Kong, but the country still has foreign...

    1
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    Gavekal Research

    Going Down With The Renminbi

    Emerging markets have faced significant headwinds ever since the “taper tantrum” of mid-2013 when investors began to factor in tightening moves by the Federal Reserve. Their headache got much worse last summer when China allowed a mini-devaluation of the renminbi, and 2016 is hardly starting well. The root problem is that most emerging markets are over-geared and need to ease policy if growth is to be kick-started. Unfortunately, easing is...

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  • Gavekal Research

    Four Quadrants: A Wicksellian Analysis

    In 1978, when still young and creative, I produced my first four quadrants chart. The idea was that there are four basic investment environments depending if economic activity is expanding or contracting, and whether prices are rising or falling. It was usually obvious which state we had just left—for example the UK having suffered an inflationary bust in 1977—but far harder to judge what state we had entered. Being able to make such a call in...

    1
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    Gavekal Research

    US Risks

    While China grabs the headlines (Trading halted before 10am after a quick -7% drop, renminbi devaluation fears at fever pitch!...), we will leave those issues for a later report and focus on a question that looms larger for most investors: what is happening in the US economy, and what are the key risks facing the world’s biggest market in 2016?

    0
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    Gavekal Dragonomics

    Clearing Up The Currency Confusion

    China’s currency has once again grabbed the spotlight. Big falls against the dollar have raised fears that China is embarking on a major competitive devaluation, or that it has lost control of the financial system. We do not think these fears are correct, but the central bank’s failure to explain a new currency policy is causing much turbulence.

    6
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    Gavekal Research

    The Gavekal Monthly: The Balance Of Risks

    The new year has been a wild ride so far, with sharp drops in the renminbi, Chinese stock markets, and oil prices leading global markets down. In our first Gavekal Monthly of 2016 we try to make sense of the risks facing investors today. As usual there are some strong differences of opinion: Anatole argues that developed economies are in decent shape, the dollar's rise will soon be over, and equities should post a better performance than...

    0
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    Gavekal Research

    The Last Holdout Of US Value

    Some readers have expressed surprise at my contention that the US stock market is “not that expensive” as their direct experience suggests otherwise. The objection is reasonable, so I have conducted a review of my US equity valuation model. I like to compare equities to a long-dated US zero coupon bond because it has the same annual volatility as the US stock market. Hence, the chart below compares the S&P 500 with the price index of a zero...

    0
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    Gavekal Dragonomics

    Five Macro Questions For 2016

    For our first China research piece of the new year, we offer a guide to the economic outlook in the form of short answers to some big questions: Will China derail the global economy? Will the government step up policy easing? Will housing prices collapse? Will industrial profits recover? Will troubled companies lay off more workers?

    3
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    Gavekal Research

    The Day One Carnage

    “Well, that was an oddly timed report,” one of our long-suffering clients remarked yesterday, with justice. Right after we pressed send on our outlook for the year ahead, assuring readers that China fears and commodity prices would not play as big a role in markets in 2016 as they did last year, the Shanghai index collapsed by -7%, and oil prices had a volatile ride thanks to growing tensions between Iran and Saudi Arabia. Have we been proved...

    0
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    Gavekal Research

    ASEAN Could Yet Matter

    Until the Asian Financial Crisis of the late 1990s, Southeast Asia’s export-led development was driven by ethnically-Chinese entrepreneurs who ran dispersed production that mostly supplied the garment, electronics and consumer goods sectors. By the mid-2000s these relationships had greatly simplified, with the economies of the Association of South East Asian Nations either slotting into the Chinese manufacturing supply chain, or alternatively...

    0
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    Gavekal Research

    Forget About Oil And China, Look To The US In 2016

    On the whole, 2015 was a year for investors to forget. US bond and equity prices were both flat, equity gains in Europe were mostly wiped out (for US dollar investors) by the fall of the euro, and commodity plays and high-yield issues crumbled. China sparked a brief panic after a clumsy intervention to cushion a stock-market collapse and an unexpected currency devaluation, but by the end of the year the Shanghai index was still up nearly 5% in...

    0
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    Gavekal Research

    New Economic Realities

    As we close the book on 2015, it is worth sifting through our research to find the patterns that are likely to influence events in 2016 and beyond. Three stand out.

    0
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    Gavekal Research

    Believe The Hype

    So far so good. Two hours’ trading, which was all the time New York markets had to react to the Federal Reserve rate hike, is hardly a significant sample, but the steadiness and consistency of that brief response must have left Janet Yellen satisfied. The most predictable and predicted event in financial history, turned out to be exactly that. The Fed did exactly what Yellen had suggested all year and what everyone by now expected—announcing a...

    3
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    Gavekal Dragonomics

    Macro Update: A Cloudy Outlook For 2016

    Our latest quarterly overview of China’s economy outlines the prospects for 2016. Growth will slow further, as industry stays weak and the performance of services fades. More moves to support growth are also certain, with the focus switching to fiscal from monetary policy. Meanwhile, pressures on the financial system and labor market are rising.

    2
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    Gavekal Research

    The French Patient

    As a Frenchman visiting Italy last week, I had the strong sense that for the first time in decades France was lagging its transalpine neighbor. Italian business and consumer confidence has picked-up over the last two years, and unemployment has declined for four straight quarters. France, by contrast, is the only European country that saw rising unemployment during 2015. Political confidence has evaporated as reinforced by last weekend’s rather...

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