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    Gavekal Research

    Modest Eurozone Growth May Be Enough To Lift Markets

    Eurozone economic growth disappointed in the second quarter, coming in at 0.3% quarter-on-quarter, compared with the expected 0.4%. At 1.2%, the year-on-year growth rate was the highest since 2011, but it remains too weak for comfort. For equity investors, it is crucial that gross domestic product grows strongly enough for corporate profits to rise significantly (see What A Few Decimals Of GDP Growth Could Change). Happily, corporate earnings...

    0
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    Gavekal Dragonomics

    Expect The Unexpected

    The last couple of months have caused whiplash for China-watchers: first, the government creates huge uncertainty by a massive intervention to prop up the stock market. Next, the government creates huge uncertainty by giving up much of its historic control over the exchange rate. So does the Chinese government love markets or hate them? It is hard to tell a consistent story either way (though that hasn’t stopped people from trying). The one...

    0
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    Gavekal Research

    What About The Dollar?

    Often as not the crucial signal offered by markets is what, at a particular juncture, they did not do. This is especially the case when events unfold, that, on the face of it, add credence to a consensus view. With this in mind consider a few key market developments from last week.

    0
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    Gavekal Research

    Four Lessons And Three Forecasts From A Busy Week In China

    It has been an exciting week in China. Now that the dust has settled and the renminbi seems once more on a firm footing, it is time to step back and consider what we have learned. We offer four lessons, and three forecasts for what the new renminbi regime portends.

    0
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    Gavekal Research

    Conference Call Following The Renminbi Devaluation

    After the renminbi’s devaluation investors have been left with more questions than answers. In this conference call, Louis Gave assesses the resulting investment scenarios for China and the rest of the world.

    0
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    Gavekal Research

    Emerging Asia’s Nightmare

    The investment case for Asian currencies has been a tough one to make over the last year as stagnant global trade and a stronger US dollar has constrained the growth outlook. Still, until this week’s “renminbi shock”, the region’s reasonable fundamentals and decent yields continued to justify a holding in Asian currencies. After China’s “devaluation”, this risk-reward position has changed as regional currencies look like prime victims of Beijing...

    0
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    Gavekal Research

    Four Lessons And Three Forecasts From A Busy Week In China

    It has been an exciting week in China. Now that the dust has settled and the renminbi seems once more on a firm footing, it is time to step back and consider what we have learned. We offer four lessons, and three forecasts for what the new renminbi regime portends.

    0
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    Gavekal Research

    New Renminbi Policy Cannot Reverse China’s Slowdown

    Weak growth will prompt the government to enact more supportive policies in the months to come, but at best these will stabilize the slowdown. They are unlikely to turn the cycle around. A weaker currency—the renminbi is now down 3% against the US dollar since Tuesday’s surprise policy change—will also do little to support domestic activity.

    0
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    Gavekal Research

    Cutting The Tail Of The Dog

    When docking the tail of a dog there are (in theory at least) two ways by which the offending appendage can be removed: it can be amputated with a single incision, or instead sliced incrementally so that the poor creature barely notices its loss. The same logic applies to economic policymakers when a “tough” decision has to be made. The Thatchers of this world go for a single chop, while the likes of Hollande or Chirac will always plump for...

    3
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    Gavekal Research

    China’s New Exchange Rate Policy

    It looks, at long last, as if China is serious about having a largely market-driven exchange rate. After Tuesday’s surprise move, which saw the People’s Bank of China push the daily fixing of the renminbi against the US dollar down by -1.9% and declare that future fixings would be determined by the previous day’s closing spot rate, the central bank followed through today. Wednesday’s fixing, at CNY6.33, closely matched the prior day’s close, and...

    3
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    Gavekal Dragonomics

    The New Exchange Rate Policy

    It looks, at long last, as if China is serious about having a largely market-driven exchange rate. But ignore the silly headlines about “currency wars”. China’s move has little to do with competitive devaluation and a lot to do with enabling the renminbi’s admission into the IMF’s special drawing rights basket.

    0
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    Gavekal Research

    What Is The PBOC Really UP To?

    The People’s Bank of China sprang a surprise this morning, lifting the daily fixing rate for the US$-CNY exchange rate by 1.9% and triggering an effective 1.8% devaluation of the renminbi—the currency’s biggest one day move since July 2005 when Beijing started its exchange rate reforms. At first glance today’s move looks like a response to months of dismal trade data. In our view, however, today’s exchange rate move is a lot more than a panic...

    10
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    Gavekal Dragonomics

    What Is The PBOC Really Up To?

    The People’s Bank of China sprang a surprise this morning, lifting the daily fixing rate for the US$-CNY exchange rate by 1.9% and triggering an effective 1.8% devaluation of the renminbi—the currency’s biggest one day move since July 2005 when Beijing started its exchange rate reforms. At first glance today’s move looks like a response to months of dismal trade data. In our view, however, today’s exchange rate move is a lot more than a panic...

    2
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    Gavekal Research

    Strong US Data Confirm Underweight

    Data released on Friday reaffirmed the robust health of the US domestic sector. Paradoxically, this only strengthened our conviction that investors should underweight US equities in favor of other markets.

    0
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    Gavekal Dragonomics

    The Infrastructure Conundrum

    Officials are once again promising to boost public works to support growth. But infrastructure spending is unlikely to accelerate sharply from its already rapid pace. With little pressure on existing infrastructure, it is harder to justify new rail and power projects. And projects that do get built will be at more risk of making poor returns.

    1
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    Gavekal Research

    Long Live US Productivity Growth!

    The contrast between last Friday’s strong US employment report and the very pedestrian GDP figures published three days earlier draws renewed attention to the greatest paradox of the post-2008 economic recovery. GDP growth since 2008 has indicated the weakest cyclical expansion on record, but employment growth has been roughly as strong as usual, at least in the US and Britain. Post-crisis US employment has grown fairly steadily at a rate of 1.5...

    2
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    Gavekal Research

    Bankrolling The Eurozone Recovery

    Europe’s banking sector has been catching the eye with 18 out of the 31 banks in the STOXX Europe 600 reporting positive earnings surprises and almost all beating sales targets. It may be too early to declare Europe's banking sector as being off to the races after a seven year nightmare that started in August 2007, but we see three big trends in the results.

    0
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    Gavekal Research

    Sorry Singapore Patriots, You Are A Great Short

    On most matters the Gavekal house view is best explained by the fact that we don’t have one. Charles for now stands out as the house bear due to his concerns about a global system enfeebled by policymakers’ misguided efforts to ameliorate all risks. Our more bullish group, led by Anatole, reckons that “creative destruction” is afoot, but outdated national income accounting tools are not capturing the benefits delivered by digital globalization....

    1
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    Gavekal Research

    Japan’s ROE Revolution

    The adoption of a UK-style “stewardship code” and an officially sanctioned index of companies that satisfy minimum corporate governance standards (JPX-Nikkei Index 400) marks a serious attempt by Japan to boost both corporate productivity and shareholder returns. This effort is integral to the economic rejuvenation plan of Prime Minister Shinzo Abe, and arguably failure is not an option for an economy that a few years ago had started to flirt...

    0
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    Gavekal Research

    Capital Account Deficit Is The New Normal For China

    China’s official foreign exchange reserve has declined by US$300bn in the last 12 months, while the capital account deficit has widened significantly. The concern is that as the tide rolls back on a long boom, capital is fleeing the world’s second largest economy. Since China has lots of debt and has seen a sharp economic slowdown in the last two years, such worries are understandable. We have previously offered a contrary take on this view (see...

    0
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    Gavekal Research

    Stop Worrying And Learn To Love Cheap Oil

    In almost every financial cycle there comes a point when the publicly expressed views of analysts and investors diverge completely from market behavior. Occasionally this can be what George Soros has called a moment of truth, when investors suddenly realize that a financial boom has wildly overshot economic fundamentals and is about to turn to bust. But often it turns out that the markets have grasped a message that has not yet been consciously...

    5
  • Gavekal Dragonomics

    Are Multinationals Losing The Chinese Consumer?

    Rising Chinese incomes should in theory be good for multinational companies. But in the automobile market, there are now signs that local Chinese companies are capturing much of the gains from the new stage of consumer spending—a worrying development for multinationals counting on China growth.

    2
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    Gavekal Research

    Tech As A Commodity

    Technology equities have been a solid performer in the post-2008 crisis era, which is perhaps not surprising as the sector tends to do best in periods of innovation-fueled “creative destruction” and strong deflationary forces. Yet with the tech sub-index having outperformed the S&P 500 by more than 15% over the last two years, there are clear indications that this phase may have played out. Not only are the cyclical drivers ebbing, but the...

    0
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    Gavekal Research

    Growth & Markets Monthly (August 2015) – by Pierre Gave

    Our latest monthly indicators look to have taken on a somewhat schizophrenic character. On the growth side, our main indicator of global economic activity is perking up, implying a stronger second half of the year. But our diffusion index of OECD leading indicators is clearly heading south, as are commodities. A similarly bifurcated story can be seen on the risk-appetite side. Our velocity indicator has registered improvement and short term...

    1
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    Gavekal Research

    The Good News In EU Investment

    When the stimulative effects of the weak euro and the fall in oil prices fade from the picture, what will sustain Europe’s growth? At first glance it is unlikely to be investment. Structural reforms were meant to cut the costs of doing business, increasing returns on capital and so providing firms with both the confidence and the resources to expand production. Yet a glance at the headline numbers suggests things haven’t worked out that way. In...

    0
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    Gavekal Research

    More Cautious Than Ever On US Stocks

    Exactly six months ago, we declared we were Turning Cautious On US Equities. At the time we noted that while US domestic demand was healthy, US stocks no longer looked cheap, the US dollar was no longer competitively valued, and the Federal Reserve was moving unambiguously towards tightening monetary policy. Half a year later, the S&P 500 has risen 4.3% and the Nasdaq Composite 9.2%. On the face of it those look like respectable returns; not...

    1
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    Gavekal Dragonomics

    Housing: From Suppression To Support

    After two rounds of relaxing housing policies, China’s authorities have almost run out of ammunition within the existing policy framework. As a result, the authorities are eyeing new tools to support demand: a greatly expanded market in mortgage-backed securities and a housing policy bank to help finance home purchases.

    2
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    Gavekal Research

    Who Killed US Productivity Growth?

    Four and a half years ago, in February 2011, I published one of my first pieces of Wicksellian research, entitled The High Cost Of Free Money. In it I wrote that negative real interest rates were going to cause a sustained decline in the productivity growth of US labor, which in turn would lead to a deterioration in the structural growth rate of the economy. In making these observations, I was merely following the logic of 19th century Swedish...

    7
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    Gavekal Research

    Three Ugly Charts

    I would never claim to be an accomplished technical analyst, but I do know how to use a ruler when looking at charts of prices in the markets.

    5
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    Gavekal Dragonomics

    China Update: Weak Imports Are No Mystery

    Something has happened to China’s demand for imports. In the first and second quarters, the country’s goods imports fell by about -15% year-on-year in nominal terms, even as real GDP grew 7%. Clearly some of the decline is due to the drop in prices of raw commodities, which are among China’s biggest imports. But WTO data shows China’s imports in volume terms were down -12% in 1Q, and preliminary figures point to continued volume declines in 2Q....

    0
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    Gavekal Research

    Five Corners (July 29): The Slowdown In Trade

    Overview: After years in which the world’s major governments have been busy manipulating prices, Charles Gave finds it astonishing that anyone should be surprised by the current slowdown in global trade.

    0
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    Gavekal Research

    One China, Three Worries

    The week started badly, and the epicenter of bad news was China. On Monday the Shanghai Composite Index lost -8.5%, its second worst day ever, erasing virtually all of the gains from the previous two weeks of all-out government support. Commodity markets, which had been sickly anyway, followed suit, as did various other China-linked assets, such as mining stocks and the Brazilian real. More broadly, people are starting to question whether the...

    2
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    Gavekal Research

    5C Asia: No Escape From The Regional Trade Slowdown

    Asia’s trade performance has been disappointing. After a two-year post-crisis rebound in 2010-2011, export growth in the region has slowed to an annual average of 7.5% in US dollar terms and 6% in volume terms. Compare that with US dollar growth rates of 30% seen in the years before the crisis.

    0
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    Gavekal Research

    Three Risk Factors For US Growth

    In the run-up to the meeting this week of the rate-setting Federal Open Market Committee and the release on Thursday of second quarter gross domestic product data, confidence in the strength of US economic activity is deteriorating. It is not just that most market participants now expect 2Q growth to be modest relative to last year, with the consensus looking for an annualized QoQ figure of 2.7% compared with 4.6% for 2Q14 (see Not Déjà Vu Again...

    0
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    Gavekal Dragonomics

    Why China Inc. Has Stopped Investing

    China’s investment growth is now the slowest it has been in recent memory, and it continues to decelerate. This extended slowdown is the result of longer-term shift in China’s growth drivers: the end of the supercycle in housing demand. Until the industrial sector can adjust to this new reality, investment growth will remain sluggish.

    6
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    Gavekal Research

    5C United States: Who Gains From The Widening US Trade Deficit?

    After four years of US dollar real effective exchange rate appreciation, the US trade deficit is finally showing signs of widening. Both exports and imports have slumped heavily in value terms, largely because of a combination of weak oil prices and US dollar strength. Trade volumes paint a clearer picture, with exports down -0.5% year-on-year in May, while imports rose by 3.5%. As a result, the US trade deficit has expanded from 2.5% of GDP in...

    0
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    Gavekal Research

    5C China: Weak Imports Are No Mystery

    Something has happened to China’s demand for imports. In the first and second quarters, the country’s goods imports fell by about -15% year-on-year in nominal terms, even as real GDP grew 7%. Clearly some of the decline is due to the drop in prices of raw commodities, which are among China’s biggest imports. But WTO data shows China’s imports in volume terms were down -12% in 1Q, and preliminary figures point to continued volume declines in 2Q....

    0
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    Gavekal Research

    5C Overview: Why The Surprise At Slowing Trade?

    I am afraid I am rapidly turning into Gavekal’s resident bear—asleep half the time, grumpy the rest. In particular, I am amazed how some people have suddenly discovered that world trade is going nowhere, and that they are so bamboozled by this strange pattern. Where exactly have they been for the last 15 years?

    0
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    Gavekal Research

    5C Europe: The Re-Domestication Of European Trade

    Since 2009, European exports have gone from strength to strength. As the rest of the world shook off the effects of the financial crisis, European Union exporters found themselves well-positioned to benefit both from the US recovery and from the rise of the emerging market middle classes. What is more, as deflation set in, Southern European economies directed more capital and marketing resources into their export sectors, reinforcing the...

    0
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    Gavekal Research

    The Signal In Silver (Part II)

    Last year I came up with a chart (shown below) that I found rather intriguing. It showed that on every occasion in the last 100 years when the price of silver dropped more than 25% year-on-year, consumer price inflation in the US took a nose-dive soon afterwards.

    5
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    Gavekal Research

    How Much Upside For UK Gilt Yields?

    Eight years after the UK last raised interest rates, several members of the Bank of England’s Monetary Policy Committee are dusting off their hawkish hats. Yesterday’s MPC minutes revealed growing concerns about inflationary pressure, even though consumer inflation was at zero in June. No rate hike is expected before the first quarter of next year, but with the UK economy set to move into a new, more productive, growth phase, it is worth asking...

    0
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    Gavekal Dragonomics

    So You Want To Be A Reserve Currency

    Once every five years the International Monetary Fund reviews the composition of its own artificial currency, the Special Drawing Right. This normally technical and boring process has now become an occasion of high financial drama, thanks to China’s unprecedented campaign to get the renminbi added to the SDR basket. Although there is still debate over the merits of the campaign, all the signals indicate the renminbi will indeed join the SDR...

    5
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    Gavekal Research

    The Typology Of A Deflationary Bust

    In the summer of 1998 I wrote the first report for a new venture that was eventually to become Gavekal Research. It was called The Typology Of A Deflationary Boom. My contention at the time was that the US was in a deflationary boom and in the report I tried to explain to the tiny handful of readers we then had how to manage money in such a period. Booms and busts tend to be byproducts of the interest rate policies followed by central banks. The...

    18
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    Gavekal Research

    What Price US Growth Stocks?

    Ever since US equities bottomed in March 2009, glamour stocks such as Google, Amazon and Netflix have been at the forefront of the rebound, leading the Nasdaq composite to an all time high this week. While we continue to prefer other markets over the US (see Turning Cautious On US Equities), recent moves in mega-cap US growth stocks have set us wondering how long the outperformance of growth stocks over value stocks can last. After all, even...

    3
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    Gavekal Research

    Black Days In Brazil, But No Black Swan

    The end is not yet in sight for Brazil’s dreadful recession. The seasonally-adjusted economic activity index was down –3% YoY in June, and the current consensus forecast for full-year GDP growth is –1.7%, against +0.5% in January. Continued tightening of monetary and fiscal policy, coupled with lackluster external demand, makes possible a second year of economic contraction in 2016. The Brazilian real has lost -16.5% against the dollar this year...

    0
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    Gavekal Research

    The Good News From Greece

    Greece has reopened its banks, paid its dues to the European Central Bank and cleared its arrears with the International Monetary Fund. After five years of pan-European economic depression and the near-death experience in Greece this month, can we finally say that the euro crisis is over? The conventional answer is definitely not. According to the vast majority of political commentators and economists, ranging from left-wing Keynesians such as...

    5
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    Gavekal Dragonomics

    Inventories Still Weigh On Housing

    Many Chinese cities are still working off the overbuilding of recent years, so developers have little reason to start new housing. Until this is resolved, improving housing sales will do little to boost the economy. This excess supply will continue to weigh on construction for at least another year.

    0
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    Gavekal Research

    Not A People’s Republic-An Empire

    We often say that money managers are not paid to forecast, but to adapt. The challenge, of course, is knowing what to adapt to. For example, an investor picking up a copy of today’s Financial Times will be left scratching his head over the importance of the Greek crisis to the future of the eurozone, the likely impact of coming US Federal Reserve rate hikes, and how the deepening oil supply glut will affect global markets. In our latest...

    1
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    Gavekal Research

    Indonesia: One Step Forward, Two Back

    Almost a year after Joko Widodo blew through Indonesian politics like a breath of fresh air to win the 2014 presidential election, international investors’ enthusiasm for his country has all but evaporated. Under Jokowi, as the president is known, policy has disappointed, growth has slowed further, the current account deficit has failed to improve significantly, the rupiah has slumped, and inflation has mounted—keeping interest rates high and...

    1
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    Gavekal Research

    The End Of An Empire

    Economic growth derives from one of two sources. Either it comes from a rationalization of talent, which we call Ricardian growth, or it comes from new inventions, which we call Schumpeterian growth. Of the two, Ricardian growth is easier to achieve. As barriers to trade, to the movement of people, or to the free flow of capital are dismantled, inefficiencies get squeezed out and growth can soar. Bearing this in mind, it is obvious that the...

    5
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    Gavekal Dragonomics

    For Beijing, It’s Goodnight Vietnam

    Vietnam recently scrapped foreign ownership caps across a swathe of industries as a spur to its stalled program to privatize state-owned enterprises. It has signed up to the proposed Trans-Pacific Partnership, a US-led attempt to boost trade and investment in the Asia-Pacific, and is pursuing a free trade agreement with the EU. Liberal-minded Vietnamese are hopeful that the reformist prime minister, Nguyen Tan Dung, will take over as Communist...

    0
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    Gavekal Research

    For Beijing, It’s Goodnight Vietnam

    Vietnam recently scrapped foreign ownership caps across a swathe of industries as a spur to its stalled program to privatize state-owned enterprises. It has signed up to the proposed Trans-Pacific Partnership, a US-led attempt to boost trade and investment in the Asia-Pacific, and is pursuing a free trade agreement with the EU. Liberal-minded Vietnamese are hopeful that the reformist prime minister, Nguyen Tan Dung, will take over as Communist...

    0
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    Gavekal Dragonomics

    The Capital Account: Pushing On A Half-Open Door

    China’s recent embrace of capital account liberalization is a surprising move for a government obviously still very concerned with maintaining stable financial markets. The changes underway as part of the drive to make the renminbi a reserve currency do indeed raise concerns that China will become more vulnerable to destabilizing swings in global capital flows. But the push for convertibility makes sense once two important facts are understood....

    2
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    Gavekal Research

    Be Greedy When Others Are Fearful

    “Be fearful when others are greedy, and greedy when others are fearful,” as Warren Buffett may or may not have said. Either way, when it comes to Chinese equities, this is sound advice. The -30% slide in the Shanghai Composite index over the last month stunned a market in which greed had been pumped up to stratospheric levels by a 153% rally over the previous 12 months. As with all previous leverage-propelled booms, the run-up eventually rolled...

    0
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    Gavekal Research

    The New Iranian Revolution

    Yesterday’s deal to lift economic sanctions against Iran is an event of immense importance, whose reverberations will be felt around the world for decades to come. No one can predict with any confidence the effects of Iran’s re-emergence as a dominant regional power on nuclear proliferation, the security of Israel or the conflict between Sunni and Shia Islam. But one consequence does seem certain: oil prices will continue to move lower for...

    2
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    Gavekal Research

    Five Corners (July 15): Deflation Redux

    Overview: When governments interfere with the price discovery mechanism, most people believe the inevitable result is runaway inflation. On the contrary, argues Charles Gave, official manipulation of prices threatens to plunge us all into deflation. United States: Tan Kai Xian examines the marked divergence between goods prices and services prices and ponders what it means for the overall US inflation outlook. Europe: As the eurozone inches its...

    0
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    Gavekal Research

    Greece, Europe And The Equity Market

    After days of intense Greek psychodrama, with François Hollande playing the good cop and Angela Merkel the bad, Europe has once again served up a compromise. The deal reached yesterday imposes on Greece an even tougher plan than the one rejected by its people nine days ago. No doubt each of us will have a different take on what the agreement will mean for the future of Europe—and of Greece. However, surely everyone will agree with the late...

    0
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    Gavekal Research

    5C Asia: Is Deflation Japan’s Disease, Or Just A Symptom?

    For a generation the words “Japan” and “deflation” have been inseparable in the minds of economists. The association is so entrenched that it is universally taken for granted that the central aim of Japanese economic policy must be to defeat deflation and, by extension, that any inflation must be a good thing. The result is the massive monetary expansion being undertaken by the Bank of Japan.

    0
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    Gavekal Research

    Broken Trust

    Charles likes to say that people are more likely to change their spouses than change their banks. The Greek crisis has tested this adage to the limit. For five years now, Greek banks have endured a “bank jog” of deposits out of the domestic banking system and into mattresses, foreign accounts and even bitcoins. Amazingly, however, some €130bn in household and business deposits have stayed put. But should Greek banks re-open in the near future,...

    0
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    Gavekal Dragonomics

    Five Macro Questions For The Rest Of 2015

    1. Will economic reform make more progress? 2. Will interest rates keep falling? 3. With housing recovering, will construction also rebound? 4. Will investment growth stabilize? 5. Will deflation intensify?

    2
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    Gavekal Research

    5C Overview: Value, Prices And The Coming Deflation

    Economics started out as an effort to understand why goods and services have a “value” and why this value changes over time. After a few dead ends, such as the labor theory of value, a consensus emerged that the value of any good is the result of individual transactions conducted when both parties gain from the transaction. But the “value” I put on a ring my mother wore may have nothing to do with the price that it might fetch. Price is...

    0
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    Gavekal Research

    5C United States: The Divergence In Inflation Rates

    Following last year’s collapse in oil prices, US inflation declined from 2.1% in May 2014 to zero in May this year. Close followers of the US economy will know, however, that this zero rate masks a sharp bifurcation in prices. The slowdown in headline inflation has been propelled entirely by goods prices, which slumped -9.6% YoY in May thanks to modest international price pressures and the strong US dollar. In contrast, services prices, which...

    0
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    Gavekal Research

    5C Europe: Rising Above Bedlam

    While the world has focused on the bickering and brinksmanship of the Greek bailout negotiations, activity in the rest of the eurozone has quietly been picking up pace. Economic confidence is close to its highest level in nearly three years and the composite PMI reached a four-year high of 54.2 in June. More to the point, having plunged into deflation last year, partly because of the second half’s economic soft patch and partly because of the...

    0
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    Gavekal Research

    5C China: Is Deflation’s Grip Really Easing?

    Over the past few years, China has experienced a huge deflationary shock: nominal GDP growth went from nearly 20% in 2010-11 to around 10% in 2012-13, stepped down further to 8% in 2014, and then reached 5.8% in the first quarter of 2015. So when can we expect this deflationary shock to be over?

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    The Purpose Of The Stock Market

    When you’ve been around for as long as I have, you can’t help but come to a few conclusions—most of them unhappy. My first conclusion is that the stock market was invented to make as many people as possible as miserable as possible for as much of the time as possible. In this sense the stock market is a roaring success.

    5
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    Europe's Democratic Divide

    Voters, it would seem, pose a clear and present danger to the eurozone. Syriza’s success in last weekend’s “Greferendum” shows there is only so much conventional medicine that electorates will take before looking for miracle cures. The party’s rise has mirrored the fall in Greek living standards since the financial crisis and the failure of Troika bailout packages to turn the country around. It has been useful to label Greece as “exceptional”...

    1
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    What Lies Beneath

    As the rout in Chinese shares has deepened—and spread, hitting markets in Hong Kong and beyond—Beijing’s efforts to prop up domestic stock prices have only intensified. After an unprecedented package of market-support measures at the weekend failed to stem declines, even more unprecedented actions followed. On Wednesday, the central bank pledged to help maintain market stability, and Chinese stock regulators banned company officers and major...

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    Osborne’s Budget: Good For The UK, Bad for UK Assets

    After May’s surprise election victory for David Cameron’s Tories—which proved yet again that Britain is a naturally conservative country— expectations were running high for the first truly Conservative budget in the UK for almost 20 years. Yesterday, George Osborne duly delivered an impressive relaunch of British conservatism for the 21st century, in a speech self-consciously modeled on Benjamin Disraeli’s famous “One Nation” budget speeches,...

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    Go Ugly Early

    I fully recognize that most readers face huge regulatory and commercial constraints in the way they manage their portfolios. Nevertheless I have always believed that, as far as possible, the best starting point for effective portfolio construction is to imagine oneself marooned on a Pacific island, free from the constraints of legacy and the expectations of others.

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    Markets From China, Media Commentary From Uranus

    At one point in the movie Uranus, the central character played by Gérard Depardieu exclaims: “I am a bar-owner, a Communist Party member and a Freemason. That should tell you how much BS I have heard in my life... But this takes the cake!”. This is a little bit how we feel looking at all the ink that has been spilt over the recent collapse in Chinese equities. So to recap the most important points:

    4
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    Europe’s Debt-Deflation Dynamic

    Amid all the talk of contagion and demonstration effects emanating from Athens, there is a straight forward question that concerns investors whose domain spreads beyond the lapping shores of the Mediterranean: is the Greek crisis, at its root, inflationary or deflationary? Given talk of new currencies being launched, the obvious fear concerns inflation. I would demur and suggest that a deflationary shock is unfolding. This matters especially for...

    3
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    Gavekal Dragonomics

    Beijing’s Persian Power Play

    Now that sanctions may be lifted, Iran is hoping to re-engage western investors and to weaken China’s stranglehold on its economy. Unless Beijing can successfully transcend the bilateral tensions of recent years to consolidate its first-mover advantage, China’s energy interests and strategic goals in Iran could gradually come undone.

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    The Eurozone Is Not On The Brink

    When totally wrong-footed by an astonishing event that embarrassingly contradicts one’s expectations, it is tempting to seek refuge in high-flown metaphors and literary allusions, especially if this embarrassing turn of events happens in Greece. But rather than distracting attention with references to Pyrrhic Victories, Siren Voices and Labours of Hercules, let me get straight to the point and admit that my predictions about the Greek referendum...

    5
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    A Brighter European Dawn

    The political and economic reality is that a 40-year old political neophyte from a “peripheral” European economy has taken the eurocrats to the cleaners. It is clear that the Greek populace knew exactly what was coming and extracted €89bn of “good money” from an exceptionally incompetent European Central Bank. This pool of liquid funds should prove a key support for the next year or two, and with Greece running a primary budget surplus the...

    14
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    The Xi Jinping Put

    Over the weekend the Chinese government rushed out an unprecedented grab-bag of measures intended to support the free-falling A-share market, which by Friday’s close had tumbled 29% from its mid-June high. By deploying almost every weapon in their armory, the authorities managed to arrest the market’s slide, at least in the immediate short term. By the close of trading on Monday, the Shanghai market was up 2.4% from Friday’s close. But there is...

    3
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    Growth & Markets Monthly (July 2015)

    With the drama in Athens casting a pall over markets, what is the message from the Gavekal dashboard of economic and risk indicators? Overall, reasonably positive. Our main growth indicator suggests that the momentum of economic activity should pick up in the second half of the year. If correct, this would mark a repeat of the pattern seen in the last few years. Still, given the uncertainty associated with the Greek situation, there has been a...

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    US Payrolls Are Running Out Of Juice

    Later today we will publish our Growth & Markets Monthly, updating Gavekal’s dashboard of essential economic and risk indicators. The markets side of the equation is relatively straightforward this month: although investors have not switched into full risk-off mode, with the outlook for Greece’s eurozone membership as uncertain as ever ahead of this weekend’s referendum, there has been a clear diminution in their appetite for risk. What of...

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    The Unequal Sell-Off in Chinese Stocks

    While the world’s headlines are concentrating on Greece, the real drama in financial markets is happening much further to the East. Since its peak in mid-June, the Shanghai Composite Index has now fallen by almost -23%, putting mainland Chinese shares in what is generally accepted to be bear market territory. Meanwhile intra-day volatility has reached mind-blowing levels, with the index swinging by more than 6% from peak to trough in each of the...

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    Japan’s Sustainable Bull Market

    Plenty of old hands who thrived in Japan’s 1980s bubble era spent the next 25 years watching a structural bear market unfold and are starting to opine that history may repeat itself. With due respect to this grizzled breed, we are skeptical about historical comparisons and reckon that the combined drivers of the modern Japanese market offer a rare opportunity. Ironically, one of the biggest factors supporting Japanese equity values is that...

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    Five Corners (July 01): Manufacturing Machinations

    Overview: Charles Gave argues that the manufacturing sector remains the last bastion of proper economic data in the US, and the message being sent is not good. United States: Tan Kai Xian somewhat demurs from Charles and argues that the US manufacturing sector is unlikely to be the fountainhead of the next US recession. Europe: Central Europe has emerged as the manufacturing powerhouse of Europe at the expense of France and the southern...

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    Germany Is The Real Risk

    As the Greek crisis apparently reaches its climax it strikes me as odd that the default response is to seek refuge in “safe” German assets. If, as appears quite likely, the flawed euro-system really is heading into the next phase of its denouement, then German assets are the soft underbelly of the system, and they are likely to suffer most. Here is why:

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    Asia’s Infrastructure Arms Race

    In what finance minister Lou Jiwei called a “win-win for Asia,” China yesterday launched the Asian Infrastructure Investment Bank in a signing ceremony in Beijing. The AIIB will promote connectivity and common development across Asia, but China is the leading shareholder and will be able to veto major decisions. The AIIB “represents an important move on the part of China to fulfill its growing international responsibilities, and to improve and...

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    5C Overview: Manufacturing And Recessions

    I know that metal bashing and the business of making things comprises a declining part of economic activity in most industrialized economies. Yet as economist Brian Reading used to say in the 1980s, GDP may be getting lighter, but manufacturing continues to have a heavy influence.

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    5C United States: Will Weak Manufacturing Derail Growth?

    Marching into the second half of 2015, the US economy is gradually recovering after another weak start to the year. The majority of forecasters are now expecting a rebound in the US second quarter gross domestic product growth. This makes sense as domestic demand remains strong, supported by lower oil prices, a strong job market and deleveraged household balance sheets. However, while we have seen a robust rebound in most economic data series,...

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    Greferendum And The Markets

    Contrary to most of this morning’s headlines, the astonishing weekend events in Greece will almost certainly prove bullish for risk assets around the world and especially in Europe. The European market mayhem triggered by Alexis Tsipras’ bizarre referendum announcement (which Greek officials only found out about through Twitter in the midst of a negotiating session with the Troika in Brussels) seems reminiscent of the panics about US politics...

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    Chinese Equity Demand And The Acceleration Phenomenon

    More than any other major stock market, Shanghai is driven by flows from domestic retail investors. And obviously, in the past couple of weeks, many of these retail investors have decided to head for the exits (the Shanghai Composite Index has plunged -22% from its early June high). Of course, this drop only brought Shanghai back to where the index stood in mid-April; but why the sudden rush for the door? Have the drivers of retail sentiment...

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    Gavekal Dragonomics

    How Low Will Interest Rates Go?

    Continued weak growth and high borrowing costs have led the People’s Bank of China to cut interest rates again. The timing looked like a gift to stock-market investors, coming after the 20% correction in the Shanghai market over the past two weeks, but stocks were nonetheless down another 3.3% on Monday. We think more monetary easing is inevitable, though we suspect that for the next half-year or so the central bank will try hold off on rate...

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    5C Europe: Central Europe Takes All

    Let’s start with a shocking figure: almost 80% of the additional value-adding activity created by the EU industrial sector in the last 10 years took place in Germany (47%), Austria (4%) and central and eastern European economies (28%). This obviously exceeds the weight of these countries in Europe’s economy (27%). But why has the locus of manufacturing shifted so radically and rapidly to Central Europe?

    2
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    5C China: Better Manufacturing, Not Just Bigger

    China’s status as the workshop of the world faces no serious challengers. Accounting for nearly 25% of global manufacturing value-added, it is by far the world’s largest single manufacturing economy. But the country’s leaders still seem discontented. China may have quantity, they fret, but it lacks quality. It is not enough for China to be a “big” manufacturer, they say, it must also be a “strong” one. With a spate of new industrial policies...

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    5C Asia: “Make In India”, But For Who?

    Last year Indian prime minister Narendra Modi unveiled his “Make in India” initiative in an attempt to replicate the successes of the tried and tested East Asian development model in which economies pursue export-led manufacturing growth. To boost the share of manufacturing in output—currently at 16%—and its contribution to employment—around 12%, mostly in the “informal” sector—Modi outlined a number of key policies. But while developing...

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    Don’t Fret (Yet) About US Housing

    In the summer of 2013, a sharp rise in US bond yields driven by the taper tantrum derailed the US housing market. Will the upward spike in 10-year treasury yields from 1.7% in February to 2.4% today do the same? So far, the market is showing no signs of fear. Despite a 40bp increase in mortgage rates, monthly housing sales and prices remain highly encouraging, as do the weekly numbers for mortgage applications. Meanwhile, US homebuilder stocks...

    2
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    Gauging The Chances Of A US Recession

    A successful investment strategy requires an early warning system to monitor risks in key markets. Right now, I am most worried about a possible recession in the global system’s most important economy, namely the United States. Any evidence of an impending US recession will surely spark a collapse in investor confidence as it becomes clear that central bankers are not, in fact, the omnipotent creatures of their billing. I am especially...

    2
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    The UK’s Sweet Spot

    Is the UK economy running out of steam? Growth slowed to just 0.3% quarter-on-quarter in the first three months of this year. That was the slowest for more than two years, and a reminder that while businesses have employed more workers, headline productivity growth has all but stalled. The fear now is that with the tightening labor market pushing up wages, poor productivity will lead to slower real growth, making it harder for the UK to attract...

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    Gavekal Dragonomics

    Macro Update: After Easing, A Limited Recovery

    In the latest quarterly chartbook, Chen Long summarizes the outlook for China’s growth and economic policies in a concise presentation. After a very weak start to 2015, the authorities stepped up their supportive policies. Housing sales are now growing again as a result, but the industrial sector is still weak, and the recovery has been marginal. But the fixes to some of the first half’s fiscal problems should offer more support to growth in the...

    3
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    Buy India On Bank Reform

    In recent months India has offered investors incrementally bad news due to bad monsoon rains, the government suffering a series of political missteps and a tougher external financing environment as higher US interest rates are contemplated. Moreover, the gradual rise in the oil price has diminished the growth-boosting dividend that India won in the second half of last year. So it was pleasing to get some “good India” news yesterday with the...

    2
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    A Bear Market, Or A Rotation?

    Last week’s violent sell off in Chinese A-shares inflicted punishing losses on mainland retail investors and prompted any number of skeptical international commentators to declare that mainland China’s stock markets were a bubble that had now burst. The Shanghai Composite Index fell 13% over the week, losing an eye-watering 6.4% on Friday alone to round off the worst week for Chinese equities since the financial crisis of 2008. With the index...

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    Hedging The Unknown

    As Athens and its creditors inch painfully towards a deal that should see the release of fresh bailout funds, the probability that Greece will be unceremoniously ejected from the eurozone is diminishing. Grexit has never been Gavekal’s core scenario, however I have long held the view that while the chances of a Greek exit may have been relatively small, the damage it would have inflicted on financial markets would have been disproportionately...

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    Why Athens Has No Choice

    The main actors in the Greek crisis seem happy to choreograph an ending with this week’s “last ditch” negotiations to be followed on Monday by a “final” summit of European Union leaders. Adding to the theatre, Greek Prime Minister Alexis Tsipras will today meet Vladimir Putin in St Petersburg, where talks will presumably focus on the basis for co-operation and financial support between the two nations in the event of Grexit. Our view remains...

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    Still A Lonely Power

    China, the political scientist David Shambaugh declared last year, is a “lonely power”—lacking close friends and possessing no allies. That is something that Xi Jinping’s “proactive” foreign policy aims to change. His New Silk Road vision—now officially termed the “Belt and Road Initiative”—is to forge a “community of shared destiny,” in which Asia’s prosperity is tied to China’s rise. Rather than building formal alliances, Beijing’s goal is to...

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    The Fed And Dollar Depreciation

    So no surprises. A slightly more dovish Federal Open Market Committee stuck to the script of future monetary policy moves being data dependent. Since the US central bank yesterday scaled back its 2015 GDP growth forecast to 1.8%-2%, the implication is that rate increases, even if they start in September, will be a gradual affair. Investors liked what they heard as this suggests that Goldilocks lives, and a “not-too-hot, not-too-cold” scenario...

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