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    Gavekal Research

    India's Borrowed Reserves and Other Headaches

    With its twin deficit status, India has seen the worst equity and currency performance of any major Asian country so far this year. One would expect that its foreign reserve position would reflect this disfavor, but in fact India’s foreign international reserves have expanded by nearly +7% in the past year, to $319bn, even as its trade deficit widened. How can we explain this conundrum?

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    Gavekal Research

    Australia: Implications of an Easing Cycle

    Last week the RBA cut the Australian policy rate from 4.75% to 4.5%, citing declining inflationary pressures. These falling pressures are symptomatic of a slowing domestic economy (see Australia’s Boom Fades), as Australia’s non-mining economy remains uncompetitive with the AUD around current levels. Thus, in absence of a sustained correction in the exchange rate, we expect more rate cuts over the coming quarters. Just how much the RBA eases...

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    Gavekal Research

    Has Japan Drawn a Line in the Sand on the Yen?

    The Yen plunged from an all-time high ¥75 to the USD to ¥79 on Monday October 31st, after the Bank of Japan intervened on the currency with a record ¥7.7trn (US$100bn) sold. This is Japan’s third intervention effort this year, but there are several notable features about this one that suggests the new Minister of Finance Azumi, who sets currency policy, will be more assertive than his predecessor (now Prime Minister Noda):

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    Gavekal Research

    Italy or Indonesia?

    These days Asian sovereign fixed-income markets have qualities that few countries in the West can boast. Despite the 2009 stimulus spree, most nations in the region have reasonable debt-to-GDP ratios, undervalued currencies, ample foreign exchange reserves, relative political certainty, and strong growth rates. Great qualities—yet some of these countries still have yields that pay nearly as much as Italy’s beleaguered signature!

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    Gavekal Research

    Daily - A Two-Speed Economy in the US?

    Our regular readers will know that we have argued recently that the current rally is largely dependent on US economic performance, since Europe’s crisis is not going to be solved anytime soon. On that basis, Friday’s reports of mixed and lacklustre data for US employment may not seem overly confidence-boosting. The household survey showed the unemployment rate unexpectedly ticked down from 9.1% to a six-month low of 9.0% in October; but the...

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    Gavekal Research

    Daily - The Bond Market vs the ECB

    One of the more important features of financial markets is that they are supposed to send messages about future economic conditions. But deciphering these messages has been particularly difficult in the past few months. In very short time spans, the stock markets were alternatively signalling that the world was coming to an end...or perhaps not. For a moment there it appeared that emerging markets would be the first fatality...but then not. One...

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    Gavekal Research

    Daily - The G20 Today and in 2008--the Difference Three Years Makes

    It is somewhat fitting that France should be the country hosting the upcoming G20 summit. The country that gave us Asterix, a national soccer team that goes on strike during the sport’s world cup, and a Rugby world cup team that could not even agree on what day its games were. Yet like with Asterix or the French Rugby team, France also has a history quashing strife and egotism when it matters. Unfortunately this French trait—discord followed by...

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    Gavekal Research

    China Trade Review - Nov 2011

    China trade review: Nov 2011

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    Gavekal Research

    Daily - MF Global: A Special Kind of Dolphin?

    While we are still waiting for the whale of the current liquidity squeeze to emerge (see The Unfolding Liquidity Crisis or Was This The Bottom?), yet another dolphin has floated to the surface in the shape of MF Global. This one, however, is far more interesting and important than the ones that recently preceded it (Sino-Forest, Olympus, etc.) in that MF Global is (as far as we can remember) the first company to ever go bust for holding so-...

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    Gavekal Research

    Daily - The Greek Referendum - Democracy vs Eurocracy

    Yesterday’s announcement by Prime Minister Papandreou that Greece’s latest fiscal plan and settlement with the European Union will be put to referendum is the logical conclusion of a process which, after two years of belt tightening, continues to promise more pain and little light at the end of the tunnel. Consider the following: even if the EU and the Greek government’s rosy assumptions are met (and there is little in the recent track record to...

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    Gavekal Research

    Sowell's Four Steps to Hell

    Thomas Sowell is a great American economist and columnist, now in his 80’s serving at the Hoover Institute, with ideas similar to those defended by Gary Becker or Milton Friedman. Like Friedman and Becker, or Bastiat before them, he writes with extraordinary clarity on the complex economic and social problems of our days. One of his best pieces, in my humble opinion, is on what he calls the Four Steps (to Hell).

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    Gavekal Research

    Why Has the Pound Been So Strong?

    The Pound has always traded between the Dollar and the Euro (and before that the Deutschemark). There has literally never been an extended period in which Sterling has fallen against the Dollar, while the Euro has gone up:

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    Gavekal Research

    Will the Euro Devalue at Last?

    The strength of the Euro against the Dollar continues to puzzle many investors and observers. However, beyond the short-term fluctuations of the EUR/USD associated with the risk-on/risk-off trades, the logic underpinning the strength of the Euro looks pretty clear.

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    Gavekal Research

    Crucial Stress Tests Ahead for Spain

    Visiting Spain in this crisis time provides a very different impression than reading the macroeconomic surveys on the country. Over the last 10 years Spain has not just built ghost cities along its coast, it has also invested massively in state-of-the art infrastructure. The network of high-speed trains is now one of the very best in Europe—with most large cities at less than 2.5 hours from Madrid—while roads and airports, which used to be the...

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    Gavekal Research

    France is Getting the Italian Disease

    I followed the events of the last week in Europe with considerable amazement. Clearly, much effort was made by all involved not to address the real issues. That in itself is to be expected, but it was disappointing to see that almost all the financial media swallowed the bait and talked endlessly about a bigger EFSF, bank recapitalizations, haircuts, etc.

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    Gavekal Research

    What Will Keep the Rally Going?

    The markets turned round abruptly on October 3 and have been on a tear ever since. So much so, that October is the best performing month since December 1991. The question now is whether this new trend will continue or whether the next big move in an irrationally exuberant market is likely to be another big lurch down. The December 1991 surge foreshadowed a decade-long bull market. The answer for October 2011 will largely depend on what really...

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    Gavekal Research

    Daily - BoJ Intervention Adds to a Strong Dollar Scenario

    After asking in Friday’s Daily whether the risk-on/weak US$ correlation should abate, we received enquiries from clients, who find this hypothesis puzzling and doubtful. Yet historically, there are a number of periods when risk and a strong US$ were not adverse (e.g., 1981 to 1985 and 1995 to 2000). Moreover, as we argued in A Structural Turning Point for Markets, from 1995-2008 a Ricardian growth model dominated, as comparative trade...

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    Gavekal Dragonomics

    DragonWeek - How Long Will Coal Prices Stay High?

    DragonWeek: An opinionated weekly guide to China's economic news

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    Gavekal Research

    How Will Europe Pick the Rentiers' Pockets?

    In any given economy, the entrepreneurs, rather than the rentiers, are traditionally the risk-takers. The Euro, however, has led to an enormous transfer of wealth from Europe’s entrepreneurs to its rentiers (which includes the increasingly bloated public sector). There are now too many rentiers and not enough entrepreneurs and, in our view, the ongoing European crisis is the inevitable result of this wealth transfer.

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    Gavekal Research

    Daily - The Rally Continues

    With only two trading days left, the +13.5% month-to-date gain in the S&P 500 puts the index on track to achieve its second best monthly showing in the post-WW2 era. Only October 1974 (+16%) has posted a stronger performance. Just as importantly, the S&P 500 has recovered to its levels at the end of July and has not posted two consecutive down days this month. The 14-day RSI on the index is above 70. This, along with the violence of the...

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