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E.g., 26-08-2019
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    Gavekal Research

    German Banks And The Dollar

    I am certainly no technical analyst, but I do have a good memory. The story of major financial crises can be told with reference to the US dollar’s movements against the euro (and its antecedents). It now looks to have reached a significant juncture, especially with Italy moving toward another period of political instability.

    9
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    Gavekal Research

    Panic Stations

    I always try to be a rules-driven investor. And when the US stock market is down -3% in a day, taking it to -6% from its peak in three weeks, when 10-year US treasury yields have halved in nine months to just 1.55%, and when gold is up 20% in three months, it is a good time to review those rules to see what they can tell me. The answer is: quite a lot.

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    Gavekal Research

    Joining The US Recession Camp

    To listen to current commentary, you would think that US capitalism faced a Marxist end-of-times reckoning. Hence, it is noteworthy that the share of sales going to profits is now falling, while that going to labor is rising. Yet the latest US GDP report is still alarming for what it tells us about the state of the economy.

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    Gavekal Research

    The Death Spiral Of Eurozone Banks

    For months Charles has told anyone who will listen that the real threat to global markets is the slow-motion implosion of the eurozone’s banking system. Each time the region's equity has hit a critical threshold an intervention has caused it to bounce off and delay the reckoning. The size of these rebounds has waned and this time there may be no respite.

    2
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    Gavekal Research

    What Sterling’s Move Tells Us

    The sterling exchange rate is going down and the usual suspects say this is bad news. But the exchange rate is merely a price that helps allocate capital between the economy’s internal and external sectors, and so set the purchasing power of rentiers and entrepreneurs. Entrepreneurs do best when the currency is undervalued, while rentiers and consumers win out when it is overvalued.

    2
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    Gavekal Research

    Darwin Or Keynes?

    Keynes advised that at the outset of a recession, policymakers should drive down market interest rates in order to borrow from future demand. Today’s central bankers have adopted this approach as permanent policy. Unfortunately, permanent Keynesianism fatally interferes with the economic Darwinism of creative destruction that propels growth in a capitalist system—with dire consequences.

    5
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    Gavekal Research

    Brexit And The UK Trade Deficit

    The UK has long run a large goods trade deficit with its main trading partners. However, Charles argues that this ”deficit” should really be seen as two different deficits; one is with the world excluding the eurozone, and the other with the eurozone itself. Splitting them makes sense as they have different origins and react to different forces.

    1
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    Gavekal Research

    Anti-Fragile Assets As A Diversifier

    Last July Charles wrote a piece warning of a recession in the non-US OECD economies during 2019. Today, he runs an update on that thesis and seeks to refine his safety-first portfolio using assets which contain “anti-fragile” properties.

    4
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    Gavekal Research

    Betting Against The Gods Is Now Impossible

    Recently I made my usual remark to a European client about the stupidity of negative interest rates. My host told me a sobering story. He manages a pension fund and received a call by a regulator who said funds shouldn't hold too much cash because it's risky. Rather, they should buy long-dated bonds, regardless of the fact they're sure to lose money.

    13
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    Gavekal Research

    What Gold Is Telling Us

    Over the last few weeks long bond yields collapsed, which in turn led to a collapse in something called “inflation expectations”. Now, inflation expectations are a very useful indicator built by very clever PhDs. The main purpose of this indicator appears to be to persuade investors that they should buy bonds just when they really should be selling them.

    5
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    Gavekal Research

    Worrying About Bond Yields

    Germany yesterday sold medium-dated bunds at a record -24bp, while treasury yields are back near three year lows. In yesterday’s Daily, Louis outlined reasons for the surge in US bond prices, and argued that a reversal could occur if the US dollar weakens more. Today want to ask how such a shift in the rates environment will impact economic growth and equities.

    2
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    Gavekal Research

    Video: Italy And Europe's Banking Problem

    The eurozone's main banking index is back at a key threshold that over recent decades has seen large-scale intervention by global central banks. For Charles, the root of the problem lies in the deteriorating Italian economy. In this video interview, he explains this dependence and argues that this time there may be no explicit support coming for the banking sector.

    0
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    Gavekal Research

    The Malthusian Constraint

    Over the last few years, Gavekal has put considerable time and effort into researching portfolio construction in the hope of making the process a little more scientific. This research has led to some interesting results, and suggests some powerful investment themes for the future.

    4
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    Gavekal Research

    Yes, We Are In A Bear Market

    In late 2017, Charles argued that global equity markets looked to be topping out, and it was time to adopt a more conservative strategy. As things turned out, the global equity benchmark hit a peak in late January of 2018, and has not retraced that level. He now argues that global equities have likely entered a bear market cycle.

    0
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    Gavekal Research

    The Trouble Unseen

    The world and its dog are suddenly worried that the growing US-China trade war may be the event that sparks the next panic. Might I suggest that the looming iceberg that could yet sink the good ship Global Growth may not lie in the obvious spot where spy glasses are focused.The real menace may still lie in the European banking system.

    1
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    Gavekal Research

    Monopsonies, Protectionism And ROIC

    It is extremely unfashionable to say so, but Donald Trump’s campaign to bring manufacturing industries back to the US by slapping tariffs on goods imports may not be quite the act of economic illiteracy most professional practitioners of the dismal science would have you believe. On the contrary, it could well be positive for US growth, living standards, and market outperformance.

    11
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call May 2019

    Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment. In our monthly Conference Call yesterday, they outlined arguments for why this may be the case, and what it would mean for portfolio construction.

    0
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    Gavekal Research

    A Reverse-Engineered US Inflation Indicator

    In the Strategy Monthly I presented a fairly simple rule to show whether an economy is in the top, or the bottom half of the Four Quadrants framework. To show that the rule worked, I laid out relationships between the "rule" and a range of other useful indications of a price environment shift. Here, I capture all of these relationships in a simple, revised decision rule.

    0
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    Gavekal Research

    Inflation And The Gold Fix

    When the market rate of interest for a long period has been held abnormally low relative to returns on invested capital, financial engineering takes off with huge debt issuance, making a chaotic denouement of the credit cycle unavoidable. To prepare for such an event, an equity portfolio hedged with gold can reduce volatility and raise returns.

    4
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    Gavekal Research

    Strategy Monthly: The Inflation Shift And Portfolio Construction

    Despite inflation remaining muted, Wednesday saw the Federal Reserve stand pat on interest rates. Having switched to an overly dovish stance early this year, Fed Chairman Jay Powell remains wary of changing tack and easing policy as he worries about inflationary pressure bubbling up from an economy that looks to be fully occupied. For his part, Charles is less nuanced and believes the US will shortly flip over into an environment where inflation...

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