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  • Gavekal Research

    A New Forex Driver?

    Foreign exchange markets are serial monogamists. The currency exchange rate between two economies can be driven by factors such as differences in their respective interest rates, monetary policies, purchasing parity levels, return on invested capital, current account deficits, trade balances and inflation rates. But at any point in time, only one single factor is likely to be the primary driver of performance, which is why currency markets tend...

    3
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    Gavekal Research

    Video: On India's Growth

    0
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    Gavekal Research

    New European Crisis, Same Problem

    Almost every year since 2008 has been marked by a “crisis” in Europe. Last year’s big headache centered on Grexit, 2014 saw Russia’s land-grab in Ukraine and this year the worry is Brexit and a collapse of the Schengen open border system. European stocks are down -13% YTD and 10 year bunds yield 0.15%, a decline of 48bp. But are these falls justified given that the bigger concern in global markets is centered on emerging economies and a possible...

    0
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    Gavekal Research

    No Rush As China’s Bond Market Opens

    The opening of China’s domestic bond market to global investors announced yesterday is a milestone event, which will lead, over time, to a large influx of foreign capital. But in the near term, policy uncertainty and concerns about the currency outlook are likely to outweigh high Chinese yields, so the impact on capital flows will be modest.

    1
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    Gavekal Research

    Seeing The Chinese Forest, Not The Trees

    I do not know as much as I should about China, but I would beg readers’ indulgence as I have some general knowledge of how economies work, and some particular insights into economic history. My fairly unoriginal starting point is that the first phase of China’s development, starting in about 1990, required a focus on building infrastructure and this caused particular rules to be adopted. Since the essential roads, bridges, power plants and...

    7
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    Gavekal Research

    No More Curve To Roll Down

    Since the Bank of Japan introduced a negative deposit rate on January 30, Japanese bank shares have collapsed, falling -21% in yen terms and -15% in US dollars. The first question to ask is this: why were Japanese bank shares derated so dramatically after the policy change? Here are a few explanations, which are not mutually exclusive:

    4
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    Gavekal Research

    More Power To India

    India’s economic expansion is being retarded by an impaired banking system whose non-performing loan ratio, depending on your methodology, is as high as 12%. The biggest contributor to this bad debt mound is the country’s power sector which accounts for about 10% of bank credit (INR6trn) and 20% of “stressed” loans. The irony is that fast growing India—which currently uses about 1010kWh of power per head versus a global average of about 3000kWh—...

    0
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    Gavekal Research

    Housing And Deflation

    As regular readers will know, I have been warning for some months that the US economy is on the verge of a deflationary bust, which is by far the most dangerous part of any economic cycle (see Four Quadrants: The Growth Question or The Typology Of A Deflationary Bust). So the question readers are probably asking now is this: did the January data released last Friday, which showed US consumer price index inflation accelerating to 1.4% with core...

    3
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    Gavekal Research

    Deflation Deferred

    In the context of weak earnings, weak growth and weak inflation numbers, Beijing delivers another blow to confidence by devaluing its currency. Markets swiftly drive down the prices of equities, commodities and high-risk bonds. Anyone still expecting the US Federal Reserve to follow through with rate hikes must be completely out-of-touch with reality...

    2
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    Gavekal Dragonomics

    Doubting Debt Deflation

    After four years of declines in the PPI, there are growing concerns that China has a structural deflation problem. And when debts are high, deflation can make that burden even heavier. Indeed, China’s commodity producers have been experiencing a debt-deflation cycle for years. But this dynamic is not spreading to the rest of the economy.

    2
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    Gavekal Research

    Why Brexit Won't Happen

    Among the multiple existential challenges facing the European Union this year—refugees, populist politics, German-inspired austerity, government bankruptcy in Greece and perhaps Portugal—one crisis is well on its way to resolution. Britain will not vote to leave the EU.

    24
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    Gavekal Dragonomics

    Chasing The Recession In Shaanxi

    We all know that big swaths of China are suffering, especially areas dependent on the declining coal and steel industries. Matt spent his Chinese New Year break in a poor county of Shaanxi province to see what things are like on the ground. He did not find what he expected: conditions are neither as dire as he feared nor as good as he hoped.

    1
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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...

    0
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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...

    0
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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?

    0
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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.

    0
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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

    0
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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.

    0
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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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