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    Gavekal Research

    Vox Clamantis In Deserto

    Some say, “if at first you don’t succeed, try, try again.” Others regard repeating the same mistake over and over again, and expecting the results to change, to be the very definition of insanity. I fear that the majority of “respectable economists” (meaning they always side with the consensus) inhabit the first of the two camps.

    3
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    Gavekal Research

    The Locus Of Capital Destruction

    Germany is going through one of its periodic bouts of angst as its industrial economy faces up to cyclical headwinds, unwanted structural change and the threat of protectionism. I too have concerns about the fate of corporate Germany, but would approach the problem from the perspective of an equity investor.

    0
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    Gavekal Research

    Not Modern, Not About Money, And Not Really Much Of A Theory

    Charles has had enough of all the talk going round about Modern Monetary Theory. In this forceful polemic he lets fly with both barrels at the proponents of MMT, arguing that they have no knowledge of financial history, little understanding of the nature of money, and are clueless about what constitutes a theory.

    7
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    Gavekal Research

    Keynes Is Dead; This Is The Long Run

    “In theory, there is no difference between theory and practice. In practice, there is,” Yogi Berra said. Take cutting interest rates as an example. According to Keynesian theory, reducing interest rates is a way to borrow from future demand in order to prevent a recession today.The theory is sound, but then comes the practice. And in Europe today, we are in practice up to our necks.

    4
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    Gavekal Research

    Back To The Barbarous Relic

    Going back to the mid-1980s, I have worked on the assumption that the US economy has been in the “deflationary” lower half of my four quadrants framework. My fear is that we may be moving into the inflationary top quadrants. If so, this means that in the bust phase of the cycle equities will have a positive correlation with bonds, and those bonds will offer much lower returns

    7
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    Gavekal Research

    Portfolio Construction In A Malthusian World

    The two key questions posed by economics are: why do things have “value” and—over time—how does that “value” change? Thomas Malthus showed why people value things that are scarce, like jewels or a Monet painting Alternatively, David Ricardo and Joseph Schumpeter, showed why its worth owning something that is useful—a “tool” from which goods and services can be made and sold at a price that exceeds their cost of production.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2019

    In the call yesterday, Charles Gave and Cedric Gemehl presented their views on the economic and political situation in Europe. Cedric outlined key risks facing Europe’s economy. If the worst is avoided, he thinks Europe could get a soft landing. Charles took a different view, arguing that the eurozone was now an irretrievably diverging system.

    0
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    Gavekal Research

    A Vital Portfolio Construction Lesson

    I am a rules-based investor, and over the years few financial relationships have been more useful to me in reading the economic cycle than the yield spread between long-dated US corporate bonds and 30-year US treasuries. Going back to the late 1970s, no US bear market has unfolded with key spread being below 200bp. It is now 210bp.

    2
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    Gavekal Research

    The Recession Of 2019: Revisited

    Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).

    4
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    Gavekal Research

    Musings On Brexit

    With the UK’s elite intent on frustrating the democratically-expressed will of the British people to quit the EU, the lesson for the rest of the continent is that there can be no legal or peaceful exit from the technocratic super-state. As Charles argues here, this increases the probability of disorderly exits in the future, and therefore greatly heightens European political risk.

    8
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    Gavekal Research

    A Silly Recommendation

    The euro just celebrated its 20th anniversary to scant fanfare. Hardly surprising, given that it caused a Greek depression, decline in Italy’s private sector GDP and a German current account surplus that has exported deflationary pressure to Europe and beyond. Against this grim backdrop, today’s note will consider whether now is the time to buy eurozone financials.

    0
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    Gavekal Research

    A Sober End To The Year

    For investors around the world, 2018 proved to be “challenging”. Yet to Gavekal’s clients, hopefully the year’s difficulties did not come as a surprise. Just over 12 months ago, early in December 2017, I published a paper entitled From A Ferrari To A Jeep advising investors to reduce the volatility of their portfolios.

    2
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    Gavekal Research

    Perhaps The Most Important Chart I have Ever Published

    In my Wicksellian world, when the “market rate of interest” (cost of capital) moves above the “natural rate of interest” (return on capital) a recession usually follows. Italy offers an interesting case in point as it has spent so much time since the euro’s launch operating below this critical threshold.

    5
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

    0
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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

    6
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    Gavekal Research

    The Real Gilets Jaunes

    France’s yellow vest protest movement may have been the first since 1789 not to stem from left-wing origins, argues Charles. Instead, it reflected a great uprising by the forgotten people of middle France who have had enough of being the piggy bank that funds the lives of an urban elite which has rigged the system to its favor.

    4
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    Gavekal Research

    The Conflict Between Liquidity And Growth

    In recent days my colleagues Anatole Kaletsky and Arthur Kroeber have debated the strained relationship between China and the US, and what it may mean for emerging markets. I agree that this standoff matters greatly for the world, but I’m not convinced it’s the main issue driving markets and therefore a resolution—or not—at the G20 next weekend may end up as a damp squib for investors. A range of issues have me concerned, from widening credit...

    6
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    Gavekal Research

    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

    0
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    Gavekal Research

    A More Timely Wicksellian Tool

    According to my Wicksellian analysis of the US, when the market rate of interest moves above the natural rate (essentially the structural growth rate of corporate profits), then a recession is coming, and investors should exit US equities and load up on treasuries. I now propose an updated and more timely proxy for the "Wicksellian market rate".

    3
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    Gavekal Research

    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

    5
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