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    Gavekal Research

    What A Trump Presidency Means For Global Investors

    The social and geopolitical implications of the Trump shock are much too complex and too charged with emotion for instant assessments to be worthwhile. Even in the case of ordinary presidential elections, the immediate first-day market reaction usually turns out to be wrong. I will therefore try to avoid moral judgements and confine myself largely to economic observations, dividing them into ten items of good and bad news from a strictly...

    3
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    Gavekal Research

    Heaping Uncertainty On Brexit Doubt

    Markets and media were shocked by yesterday’s High Court judgement that UK prime minister Theresa May must seek parliamentary approval before pursuing her Brexit strategy. But for London’s legal community the decision was not unexpected. Many senior lawyers had predicted that the ruling would go against the government, if only because its case was so poorly presented by the Attorney General, who was forced for political reasons to concede the...

    1
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    Gavekal Research

    When The Facts Change, I Change My Mind

    After the Brexit vote, Anatole became deeply bearish, fearing that a populist insurgency could unleash a destructive retreat from globalization. With the US electorate seemingly set to reject that pathway on November 8, the likelihood of other nations following Britain by turning in on themselves is greatly diminished.

    17
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    Gavekal Research

    A Hardening Brexit And Softening Sterling

    The second phase of the post-Brexit sterling devaluation probably started this weekend. Theressca May's announcement of March as the deadline for Britain to launch the “Article 50 process” of formally withdrawing from European Union achieved its immediate objective of averting a battle between the Hard Brexit and Soft Brexit factions at this week’s Conservative Party Conference. Unfortunately, May’s party management success is likely to...

    3
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    Gavekal Research

    Debate: A Trump Win And The Dollar

    As the world seriously tunes into the US presidential election, four Gavekal partners debate the outlook for the US dollar should Donald Trump emerge victorious and set about his promised remaking of the international security order and global trading system.

    25
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    Gavekal Research

    Prepare For Hurricanes

    After months of contented lethargy, Friday’s big sell-off seemed to confirm the main points that Louis and I made in our conference call two days earlier. Firstly, the faith in “lower forever” bond yields is not a reason for reassurance, but a cause for concern. Secondly, political risks have not been eliminated by the summer’s market rally, merely ignored. Thirdly, what I call the “financial hurricane season” usually starts in early autumn—and...

    8
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    Gavekal Research

    A Brexit-Induced Recantation

    Exactly two months have now passed since the Brexit referendum. It is now an appropriate time to review what has happened, and what hasn’t, since June 23. As a quintessential member of the elite that was angrily repudiated by a majority of British voters, this referendum was a profound emotional trauma. Therefore, my initial reaction turned out to be completely wrong.

    10
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    Gavekal Research

    Why Brexit Still May Not Happen

    With a newly installed British prime minister gravely intoning that “Brexit means Brexit” and having just appointed a cabal of Brexiters to run the UK’s exit strategy from the European Union, it would look to be game-over. Anatole would beg to differ and explains why there remains a strong likelihood that the UK government will change tack in the face of different circumstances than prevailed at the time of last month’s referendum.

    8
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    Gavekal Research

    Politics Trumps Jobs

    So, it was a false alarm. By that I do not mean the Brexit vote, which remains, for reasons explained at the end of this note, the biggest threat to the world economy and to risk assets since the global financial crisis. The false alarm was the brief panic about a US recession caused by the slump in employment growth reported last month. As I said at the time there were four possible explanations for the shockingly weak May payrolls (see...

    0
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    Gavekal Research

    Everything Just Changed

    There are moments in history when the impossible becomes inevitable without ever passing through improbable. The period after the Lehman Brothers bankruptcy was such a time. Last night’s unexpected repudiation by British voters of 40 years of European Union membership is another. The outcome of the referendum is a shock fully comparable to the Lehman collapse. Rarely, if ever, has a G7 currency fallen by -10% in a single trading session, as the...

    6
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    Gavekal Research

    Brexit Tail Wags The Dog

    If anyone still doubted the claim expressed here on May 25 that politics is now driving global financial markets far more than economics (see The Brexit Vote As Harbinger Of A Populist Age, Or Not), those doubts should have been dispelled by Monday’s trading. From the moment that currency trading started in the New Zealand morning, through the Nikkei and Hang Seng openings in Asia, to the main forex business in London and finally the stock...

    0
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    Gavekal Research

    Populism And A New Financial Crisis

    The febrile behavior of financial markets ahead of Britain’s EU referendum shows that the voting on June 23 will influence economic and political conditions around the world far more profoundly than Britain’s share of 4% in global GDP might suggest. This outsize impact has at least three explanations.

    7
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    Gavekal Research

    Thinking Dark Thoughts

    You can put lipstick on a pig, but there is no way of disguising that the US payrolls last Friday were pig-ugly. For those of us of the bullish persuasion, May’s job growth of only 38,000, the weakest monthly figure since the post-recession employment recovery began in October 2010, sent the first credible signal that Charles’s call for a US recession and full-scale equity bear market could be right after all.

    1
  • Gavekal Research

    The Brexit Vote As Harbinger Of A Populist Age, Or Not

    The biggest threat to the world economy is no longer slumping industry in China, failing banks in Italy, unpredictable monetary policies or seesawing oil prices. All these familiar economic problems now pale compared with the political risks of Brexit, a Trump presidency and resurgent nationalism in Germany. Given the common underlying tensions driving political populism in the big advanced economies, Anatole argues that Britons will on June 23...

    9
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    Gavekal Research

    The Next Big Move In Oil

    With Brent crude approaching US$50 a barrel, analysts upgrading their bearish year-end forecasts and many hedge funds adding to already long energy positions, it seems a good time to re-examine the likelihood that US$50 or thereabouts will be a long-term ceiling for the price of oil. In December 2014, when we first proposed this view (see Oil: Lower For Longer and Will US$50 Be Oil’s Floor, Or Its Ceiling?) it provoked derision from bullish...

    0
  • Gavekal Research

    Time To Bet On Sterling And Against Brexit

    If Britain votes to remain a member of the European Union, the moment when the tide turned against Brexit will probably be remembered as Barack Obama’s London press conference on Friday. With a single phrase Obama demolished the Brexiteers’ most powerful economic argument when he noted, with a friendly but remorseless grin, that if Britain chose to detach itself from Europe it would wait “at the back of the queue” for any special US trade deal....

    1
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    Gavekal Research

    The Case For Sterling

    What was the weakest major currency in the world in the first quarter? It was not the Brazilian real nor the Australian dollar nor any of the other usual suspects among the emerging market and commodity currencies. That accolade went to the British pound, which managed to depreciate by -4%, from US$1.48 to US$1.42, even while the dollar itself fell another -5% on its trade-weighted index.

    2
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    Things Fall Apart

    Over the past century periods of social breakdown have swung the pendulum of power from markets to governments and back. Each crisis ended with a transformation in economic and political thinking. Today, voter anger is a response to the 2008 breakdown of deregulated capitalism. This time, argues Anatole, politicians must reconsider the market fundamentalism that has prevailed in recent decades and design a new system of checks and balances to...

    12
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    Gavekal Research

    Super Mario: Hero To Zero To Hero

    As markets plunged following Thursday’s European Central Bank meeting, it seemed as if Super Mario had turned into Dumb Draghi.But by Friday morning Draghi had again gone from Zero to Hero, with risk-on assets racing ahead in virtually every market around the world.

    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 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
  • 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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    Gavekal Research

    Is Wall Street In A “Bear Market”?

    Charles has boldly defined a serious bear market as a downtrend in which investors who buy at the top do not recover their money for four years or more. By contrast, he dismissed a -15% to -20% decline lasting less than 18 months as a mere bear cub that could equally well be described as a “pause that refreshes”. In my view the present decline it looks rather more like “cub” than an Ursus Magnus.

    4
  • Gavekal Research

    The Oil Market Confusion

    Enough is enough. The oil price collapse that began in the autumn of 2014 may have hit rock-bottom, at least for the time being. Having stayed stubbornly bearish ever since the oil market’s transition from a Saudi monopoly to a normal competitive pricing regime (see Oil: Lower For Longer) it is appropriate to regularly review our assumptions. After the huge price moves of the past two weeks, this review now suggests turning neutral or even...

    5
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    Gavekal Research

    Believe The Hype

    So far so good. Two hours’ trading, which was all the time New York markets had to react to the Federal Reserve rate hike, is hardly a significant sample, but the steadiness and consistency of that brief response must have left Janet Yellen satisfied. The most predictable and predicted event in financial history, turned out to be exactly that. The Fed did exactly what Yellen had suggested all year and what everyone by now expected—announcing a...

    3
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    Gavekal Research

    A Year-Defining Week

    Four hugely important events occurred last week which between them have largely determined the course of the world economy in the year ahead: the strong US payrolls, the Organization of the Petroleum Exporting Countries’ decision not to reduce production, the European Central Bank’s escalation of monetary stimulus and the inclusion of the renmimbi in the International Monetary Fund’s Special Drawing Rights basket. While all these events were...

    1
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    Gavekal Research

    Osborne’s Masterful Tack

    “Since 2010, no economy in the G7 has grown faster than Britain,” boasted George Osborne, the Chancellor of the Exchequer, presenting his autumn public spending review yesterday. Indeed it is true that, according to the latest estimates, GDP in both Britain and the US has increased by exactly the same number, 12.4%, since the first quarter of 2010.

    0
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    Gavekal Research

    Brexit: A Blunder To Rank With The Boston Tea Party

    Ask any divorced couple whether their relationship would have been different had they never married. Actually, don’t bother asking, since the answer is obvious. Strangely, most conservative politicians do not seem to understand this—and neither do 48% of British voters. That is the number, according to recent opinion polls, who want a divorce from the European Union.

    2
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    Gavekal Research

    Preparing For Fed Lift-Off

    Now that Friday’s payroll figures have confirmed the US economy’s apparent slowdown as nothing more than a statistical blip, similar to the summer “soft-patches” of 2011 and 2012 and the winter weather hits of 2013 and 2014, the Federal Reserve is near-certain to start its tightening cycle on December 16—which was what Janet Yellen suggested all along. Apart from praising Yellen for consistency and foresight, instead of castigating her for...

    6
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    Gavekal Research

    The Fed And The US Dollar

    Now that the Federal Reserve has calmed down about the risk of a financial meltdown in China, only one further condition appears to be necessary for a December rate hike: October’s payroll figures, out on Friday, must show an appreciable reversion towards this year’s mean monthly growth of 198,000. That would imply September’s surprisingly weak number was a statistical aberration, which seems a reasonable expectation, since most high-frequency...

    0
  • Gavekal Research

    The Best Financial News In Months

    To our relief, China’s latest reserve statistics showed a significantly smaller than expected decline, confirming that capital flight out of China has eased substantially. The threat to the global economy generated by the summer turmoil has now lifted, and markets all over the world should therefore return to risk-on mode.

    0
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    Gavekal Research

    Not The Obvious Payroll Conclusion

    Is the US economy sliding towards recession? After six years of steady expansion, it would not be unusual for the business cycle to start rolling over. This possibility, suggested by Charles’s time-tested recession indicators (see Positioning For A US Recession), caused equities and the dollar to swoon right after Friday’s unexpectedly weak payroll report. Until this release it was tempting to dismiss such historic cyclical indicators that rely...

    0
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    Gavekal Research

    The Fed Throws EMs A Lifeline

    The Federal Reserve’s decision to keep on procrastinating over a rate hike should have come as no surprise to anyone who has paid attention to the comments of Janet Yellen. And indeed it didn’t come as much of a surprise to the markets, to judge by their reaction yesterday. After a brief flurry of activity following the announcement, the US equity market closed little changed on the day. Currency and bond markets proved a bit more excitable, but...

    0
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    Gavekal Research

    How Corbynomics Could Work

    Whatever you may think of Jeremy Corbyn, he has a point about economic policy. Actually he has two good points and one bad one. Corbyn has been right about what he called People’s Quantitative Easing, a potentially transformative idea for restoring economic prosperity that was proposed years ago by several radical economists but had never been taken seriously in Britain until it became the centerpiece of Corbynomics. Corbyn has also been right...

    6
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    Gavekal Research

    The Gavekal Monthly: Opportunity Amid Crisis

    Today we launch a new publication, The Gavekal Monthly, which presents our latest investment recommendations, as well as a handy summary of our main views across all economies and markets. Think of it as a snapshot of the collective Gavekal brain. In this issue you'll find: "Opportunity Amid Crisis": Louis's assessment of the current investment environment, with ideas on how best to position your portfolios. Three...

    0
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    Gavekal Research

    The Real Message From Oil

    Violent swings in oil prices are destabilizing economies and financial markets worldwide. When the oil price halved last year, from US$110 to US$55 a barrel, the cause was obvious: Saudi Arabia’s decision to increase its share of the global oil market by expanding production. But what accounts for the further plunge in oil prices in the last few weeks—to lows last seen in the immediate aftermath of the 2008 global financial crisis—and how will...

    18
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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

    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
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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 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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    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,...

    5
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    Gavekal Research

    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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    Gavekal Research

    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...

    0
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    Gavekal Research

    Greek Default Would Trigger Regime Change, Not Grexit

    As Greece moves inexorably towards default, the big news from the markets is not contagion but the opposite—the remarkable lack of response in the euro exchange rate ($1.125 today compared to $1.123 the day before January’s Greek election) and sovereign bond spreads in the Club Med (BTP-bund spread today is 150bp, against 120bp on January 23). Is this just a case of investor complacency and wishful thinking, like the period prior to Lehman? Or...

    16
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    Gavekal Research

    From Farce To Irrelevance

    The good news is that a Greek default, which has become more likely after Prime Minister Alexis Tsipras’ provocative rejection of what he described as the “absurd” bailout offer by Greece’s creditors, no longer poses a serious threat to the rest of Europe. The bad news is that Tsipras does not seem to understand this. To judge by Tsipras’ belligerence, he firmly believes that Europe needs Greece as desperately as Greece needs Europe. This is the...

    3
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    Gavekal Research

    Oil At Its Ceiling, Not Floor

    With oil prices rebounding strongly this week, despite the non-event of last Friday’s meeting of the Organization Of Petroleum Exporting Countries, it seems appropriate to re-examine the case for cheaper oil that we have been presenting since late last year. Specifically, our view in December that US$50/bbl was more likely to be a ceiling than a floor for the Brent oil price in the long term has been contradicted by market actions of recent...

    2
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    Gavekal Research

    The Death Throes Of The Bond Bubble

    What should we conclude from the jump in bond yields that has transfixed investors in every market around the world since late April, when a disappointing German auction started the sudden rout? The simplest answer, and probably the best one, is “not much”. Like the US taper tantrum of May 2013 and the brief bump in Japanese bond yields a few months earlier, when the Bank of Japan got serious about quantitative easing, the present market...

    1
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    Gavekal Research

    Greeks Inch Toward Surrender

    The Greek situation rumbles on without resolution after a weekend that saw more posturing, but no deal between Athens and the Brussels group. The message from European Union leaders is that Greece must bow, and while Prime Minister Alexis Tsipras remains defiant, it was noteworthy that his interior minister indicated a willingness to cede ground on Syriza’s anti-austerity program. As this messy endgame plays out, the question facing jaded...

    0
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    5C Overview: Regime Change In The Oil Market Only Just Starting

    Since late last year, when the battle for oil market share broke out between OPEC and the US frackers, we have argued that this is not just a contest between rival groups of producers, but between distinct pricing regimes, based on very different economic principles (see Will US$50 Be Oil’s Floor, Or Its Ceiling? and The Macro Dividend From Oil).

    0
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    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

    0
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    Gavekal Research

    The UK Drama Has Only Just Started

    Although the Tory victory came as a huge surprise, it changes very little about the UK's economic or financial prospects. In that sense the absence of any big reaction in the financial markets is understandable. The pound and the stock market would have fallen steeply in the event of a “hung parliament”—and, certainly, that is the outcome I expected (see The UK Cliffhanger). But now that the prospect of domestic political instability has...

    6
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    The UK Cliffhanger

    Conventional assumptions about British elections say that the incumbent party of government generally enjoys a swing of one or two percentage points in the final period of campaigning. Like most electorates, once all the shouting is done, British voters typically focus on livelihood issues and tend toward “the devil they know”. In recent days the Conservative Party has seen the opinion polls move slightly in their favor, but nothing so...

    1
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    Gavekal Research

    Starving The Greeks Out

    After Friday’s near-total breakdown in the negotiations between Greece and the eurozone, it is clear that both sides need a Plan B. In the case of Greece the alternative to a negotiated solution has always been clear. It is to default on its debts to other European governments, thereby presenting those nations with a stark alternative: either expel Greece from the euro and risk contagion to Portugal, Spain and Italy, or offer Greece the money it...

    12
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    Instability Lies Ahead For The UK

    What country faces the highest degree of political risk in Western Europe? And whose financial markets should therefore carry Europe’s biggest political discount? Six months ago, when we first argued that Britain was in danger of losing its safe haven status, both in the political sense and as a tax haven for international capital, this was still a matter of speculation. Now, with the May 7 election only three weeks away, our warnings about the...

    1
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    The Darkest Hour Before Euro Dawn

    Two weeks ago we suggested that the euro’s decline against the US dollar—probably the clearest consensus trade of 2015—could soon be over. As luck would have it, we published this article on the very day the euro rebounded from a 12-year low against the US dollar of US$1.05 (see Beware The Euro Consensus). Dumb luck of this kind is certainly not evidence of wisdom or special insight. But now that the modest bounce following the euro’s March 13...

    5
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    Gavekal Research

    London Seminar March 2015 - Anatole, François, Andrew & Charles

    We held our main spring seminar in London on March 17 with Anatole, François, Andrew and Charles offering their views of the global economic pulse and recent market and central bank developments.

    0
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    Beware The Euro Consensus

    The US dollar is hitting new 12-year highs almost daily and the euro seems to be plunging inexorably to below parity. Recent events in the foreign exchange markets seem to have a fairly obvious explanation which most economists and policymakers accept and endorse. President Hollande, for one, has embraced the plunging euro: “It makes things nice and clear: one euro equals a dollar,” he told an audience of industrialists last week. But it is...

    1
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    Nice Economy, Shame About The Politics

    While sterling is setting new post-2007 highs almost daily against the euro and on its trade-weighted index, economic optimism seems to outweigh political nervousness as Britain heads towards its most unpredictable election in living memory on May 7. But is Britain’s economic outlook really good enough to compensate for the political mess that almost everyone now expects?

    0
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    5C Overview: The Importance Of Property

    Property, both residential and commercial, is the world’s oldest investment and, in the long run, the most reliable and profitable store of economic value. Like the world’s oldest profession, however, it operates in the financial shadows. Property lacks the transparency of mainstream asset classes such as equities, bonds and currencies, with no completely objective price benchmarks to measure returns reliably even in sophisticated markets such...

    3
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    Gavekal Research

    Patience Is A Virtue

    The clichéd phrase “patience is a virtue” does not, strictly speaking, refer to the sort of patience promised by the Federal Reserve in its minutes last night. When Janet Yellen speaks of “patience”, she means a wait of at least three month before she does anything—however gentle—that could conceivably impede US economic growth. But the patience described by medieval Christian scholars as one of the “Seven Heavenly Virtues” was not the opposite...

    1
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    Gavekal Research

    The Risks Recede in Europe

    What is the opposite of a perfect storm? Whatever the term for a sudden confluence of three unexpected blessings—or for the simultaneous removal of three mortal perils—European markets are about to enjoy it.

    2
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    Gavekal Research

    Greeks Gaming Themselves Out

    Yanis Varoufakis, the new Greek finance minister, is a professor of economics who specializes in game theory, but when it comes to negotiating strategy he has more to learn than to teach. Varoufakis’ idea of a winning strategy is to hold a gun to his own head and then demand a ransom for not pulling the trigger. Not surprisingly, this bluff has been called, first by the German government and now by the European Central Bank. As a result the...

    11
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    Gavekal Research

    Ignore The US GDP ‘Surprise’

    How worried should we be about the weakening of the US economy towards the end of last year? The answer, despite Friday’s sharp fall in equities and the record low set by the 30-year treasury bond yield, is not at all. Whatever the reasons might have been for last week’s market gyrations, they could not have been connected with the economic slowdown ‘revealed’ by Friday’s fourth quarter GDP figures, since this slowdown was almost certainly an...

    3
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    Gavekal Research

    5C Overview: Easier For Longer

    Following Mario Draghi’s dramatic quantitative easing announcement last week all the main central banks are singing from the same hymn-sheet. The obvious point is that this musical offering is more of a fugue than a unison chorus: Each central bank repeats the Federal Reserve’s original themes of ZIRP and QE in its own time and key, creating a complex pattern of overlapping harmonies and the occasional dissonance. As in a fugue, however, a...

    0
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    5C Overview: The Oil Plunge Really Is Good News - by Anatole Kaletsky

    If there is one number that has even more impact on the global economy and financial markets than the Fed funds rate, it is the price of oil. Every global recession since 1970 has been preceded by a doubling of the oil price (January to March 1974, March to October 1979, July to October 1990, June 1999 to March 2000, January 2007 to July 2008). And when oil prices have fallen by more than 50%, the plunge has generally been followed by rapidly...

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    The Macro Dividend From Oil

    Now that the markets have dealt with their post-New Year hangover and the buy-on-dips normal service has been resumed, it seems a good time to step back and consider some of the themes that could dominate markets in the months ahead. Here are some suggestions for this year’s main macro stories, with some financial implications at the end.

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    Catching The Russian Knife

    Why does a country with US$416bn of foreign exchange reserves and a current account surplus bigger than China or Japan relative to the size of its economy, suffer a currency crisis? The obvious answer is that the country is called Russia and it has launched an undeclared war against the US and EU. On closer inspection, however, this year’s 50% devaluation of the ruble, which culminated with an apparent death-plunge on Wednesday morning after the...

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    Will US$50 Be Oil’s Floor, Or Its Ceiling?

    As I explained in yesterday’s Daily, the oil price is set to remain depressed at least through 2015, until the Saudis are satisfied that they have injured their geopolitical and economic competitors severely enough to regain pricing power. The big question now is whether a price of around US$50 a barrel—some 10-15% below present levels—forms the floor of oil’s trading range for the next few years, as it did between 2005 to 2014, or whether US$...

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    Oil: Lower For Longer

    How low can the oil price go? And how long can it stay down? These two questions are weighing on the mind of every investor in the world these days, to the exclusion of almost everything else. Nobody can respond to the first question with any confidence—although we take a stab below—but the second is actually pretty easy to answer.

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    5C Overview: The Remaking Of Global Oil Markets

    Almost everyone can agree that plunging oil prices are good for the world economy and crippling for oil producers such as Russia and Venezuela, but what about the big oil companies? The shareholders of oil majors such as Exxon, Chevron, Shell, BP and Total could be surprising beneficiaries if prices fall far enough to persuade corporate raiders or LBO investors that these companies should stop spending money on exploration and instead be...

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    The Great Policy Convergence

    Yesterday’s announcement that the European Central Bank is preparing to buy government bonds from the first quarter of next year is an event of historic importance. As the logical follow-up to Mario Draghi’s commitment to expand the ECB’s balance sheet by €1trn, yesterday’s statement by ECB vice-president Vitor Constâncio confirms beyond reasonable doubt that Europe is ready, at last, to implement full-blown quantitative easing, over-riding the...

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    Here Comes The Melt-Up

    Back in mid-October as stock markets around the world plunged faster than at any time since 2011, many investors and economists feared a meltdown. But with the US economy steadily expanding, monetary and fiscal policy becoming more stimulative in other parts of the world and the autumn season for financial crises now over, a melt-up seems more likely than a melt-down.

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    Beware The British Roller Coaster

    Mark Carney’s quarterly press conference at the Bank of England tomorrow could be the catalyst which reminds investors of the warning that we have issued several times over the past few months: Britain is no longer a haven of political and economic stability amid the turbulence in Europe—and this loss of safe-haven status is not yet remotely discounted in British asset prices, especially the sterling-dollar exchange rate and prime property in...

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    Gridlock Itself Is Not The Problem

    The votes are in and the result is yet more gridlock in Washington. For the US there is nothing unusual in this situation. Presidents have been opposed by both houses of Congress in 32 out of the 70 years since WWII, and opposed by one house in another 14 years (see here). However, political paralysis is becoming the norm in many democracies, especially in Europe. An important question is therefore how different countries and regions can cope...

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    Walking Without The QE Crutch

    After three rounds, six years and some US$3.7trn in asset purchases, the US Federal Reserve yesterday finally called time on its program of quantitative easing, and shifted its language on the US labor market from ultra-dovish to something slightly closer to neutral. Investors took the news in their stride, largely untroubled by the Fed’s confirmation that it is to take away what many had long regarded as an essential crutch for asset prices....

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    Five Corners (October 29): The Fiscal Imperative

    Overview: Anatole Kaletsky explains why monetary policy has become an effective irrelevance and fiscal policy is really the only game in town.

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    5C US: The Proof That ‘Deficit Denial’ Works

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    5C Overview: We Are (Again) All Keynesians, Some Of Us Just Don’t Know It

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    A Debate: Fade Or Embrace The ECB?

    Client: You published your last quarterly on the various scenarios confronting Europe. And arguably, the recent downturn in global markets finds its source in the fact that European growth has lately come in a lot weaker than most investors expected. Throughout the year, Francois has argued for exposure to Europe’s ‘national victims.’ Do you think that this call still makes sense? We had Anatole pop by the office the other day, mostly to discuss...

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    Behind The Equity Market Meltdown

    Why are stock markets around the world falling? The surest explanation is one that works whenever the markets move in a big way: there are more sellers than buyers after a long period without a meaningful correction (it is three years since the 20% decline that ended in October 2011). A more sophisticated account of the correction might point to the collapse of oil prices and its impact on natural resource shares. While falling oil prices are...

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    Europe: Apocalypse Postponed

    Be afraid, be very afraid, if you are an investor in Europe. An “atomic bomb” is going to blow up in “the confrontation between Paris and Brussels”, warns Le Figaro, perhaps the most influential French newspaper, reporting what looks like the inevitable rejection of the French government’s 2015 budget by the European Commission. The same story appeared in other European media outlets this week, with many even attaching a precise date to this...

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    The Power Of The US To Impress

    Rightly or wrongly, the US payrolls have for years been the biggest market-moving event in the monthly news cycle. The market action on Friday was a reminder of their totemic power. We have repeatedly noted the mesmerising effect of the monthly payrolls, not just on Wall Street but even more on markets outside the US (note the near-perfect coincidence between the peaks and troughs shown on the chart below).

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    The End Of The UK’s Haven Status

    The outcome of Thursday’s Scottish referendum is officially “too close to call”, since the difference between ‘Yes’ and ‘No’ has been inside the margin of error of almost all the polls published since the sudden swing towards independence last weekend. But markets are priced for near certainty of the status quo winning, with sterling stronger than a month ago against the euro, yen, Swiss franc and every other major currency save the dollar—and...

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    Putin's Tolerable Victory

    The ceasefire in Ukraine agreed last Friday has now lasted almost a week. So far there have been no serious signs of a break-down, despite some sporadic shelling and localised attacks of the sort that undermined previous attempts to stop the fighting. Nevertheless, most media analysts and political consultants argue that this ceasefire will not hold, either because Russian president Vladimir Putin is a deceitful and ruthless monster greedy for...

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    Putin’s Tolerable Victory

    The ceasefire in Ukraine agreed last Friday has now lasted almost a week. So far there have been no serious signs of a break-down, despite some sporadic shelling and localised attacks of the sort that undermined previous attempts to stop the fighting. Nevertheless, most media analysts and political consultants argue that this ceasefire will not hold, either because Russian president Vladimir Putin is a deceitful and ruthless monster greedy for...

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    The UK Now Faces Years Of Volatility

    The probability that the United Kingdom will break apart now appears to be at least 50%. The weekend’s crop of opinion polls agree with each other, and support last Tuesday’s poll showing a powerful swing in favor of a ‘Yes’ vote in next week’s referendum on Scottish independence. Given that up until last Tuesday most investors and analysts (including me) saw no more than a 10%-20% probability of independence, what has happened in the past few...

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    Scottish Poll A 'Yes' Vote For Volatility

    Until this week almost nobody outside Scotland took very seriously the possibility that Europe’s most stable and durable nation, the only big country on earth not to have suffered invasion, revolution or civil war in the past 300 years, might soon be wiped off the map. It now seems quite conceivable, however, that the United Kingdom of Great Britain and Northern Ireland will cease to exist within two or three years of the referendum on Scottish...

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    Market Review: A Summer Series

    In late July and early August Anatole went up the mountain so to speak and penned a series of articles that aimed to explain where we were in the current market cycle, and more importantly where we are likely headed. With most major asset classes continuing to head higher we thought it worth republishing Anatole’s consolidated thinking in a single document. Please click on the pdf link above, or, alternatively, the articles can be read...

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    Hearing Echoes Of 1987

    In the first four articles in this series, I explained why I believe that a structural bull market in equities began in late 2012 and is likely to continue well into the next decade (see The Case For A Structural Bull Market). But bull markets do not just keep rising without interruption. Sooner or later, equity investors are certain to suffer some large and painful losses, even if I am absolutely right about the economic, monetary and...

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    A Return To Valuation-Driven Markets

    In the earlier articles in this series I argued that the medium term outlook for economic fundamentals and monetary policy is more predictable now than at any time since 2008, and possibly since the late 1990s. If I am right, then over the next year or two asset prices will no longer be driven by the economic statistics and monetary policy decisions which have dominated the post-crisis financial debate and which still obsess market and media...

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    Monetary Policy Is No Threat To Markets

    In the first two articles of this series, I argued that the US economy has now clearly reached ‘escape velocity’ and that, with little prospect of a renewed recession in the next year or two, investors are forgetting their earlier fears of secular stagnation and becoming increasingly confident about the extraordinary monetary and fiscal policies adopted by all the major world economies (see The Case For A Structural Bull Market and The Global...

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    5C Overview: Central Banks Are Happy With Their Balance Sheet Bloat

    With the end of the US Federal Reserve’s QE3 round of quantitative easing scheduled for October, this is a good time to consider the ‘exit strategies’ central banks might follow as they think about normalizing monetary policy. While the technicalities of each country’s monetary management are different, there are two broad questions that all central banks have to answer: Can monetary policy rely solely on interest rate management, as in the pre-...

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    The Global Obsession With US Data

    In the first article in this series, I argued that what is happening with the global economic cycle strongly influences investors beliefs’ about structural phenomena such as productivity, demographics, capital allocation and debt dynamics (see The Case For A Structural Bull Market). And while it will take many years to settle all the debates between bulls and bears about productivity or debt sustainability or zero interest rates, the cyclical...

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    The Case For A Structural Bull Market

    It’s almost three months since I recommended a ‘Buy in May’ strategy for US equities. At roughly the same time Charles reiterated his ‘balanced portfolio’ call for a long position in US equities hedged with long-dated US treasuries. Since then both equities and bonds have performed well. The S&P 500 has risen almost 6% while 30-year US Treasury bonds have gained about 3% in price.

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    5C Overview: Shiller's Snake Oil

    Like most aspects of the investment business, valuation is more art than science, which is why anyone proposing a single formula to ‘prove’ that equities or bonds are either cheap or expensive should be treated with the deference due to a snake-oil salesman. The most popular snake-oil today is Robert Shiller’s ‘Cyclically Adjusted P/E ratio’ or CAPE.

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    The Juncker Quid Pro Quo

    Who will be the hero of the hour, basking in universal gratitude when the EU summit culminates this evening with the appointment of Jean-Claude Juncker as President of the European Commission? Believe it or not, the man all the other leaders will be secretly thanking is David Cameron—and investors in Europe should do the same. Cameron is certain to suffer severe embarrassment this evening if he insists on forcing a vote that he is bound to lose...

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    The Lesson Of Sarajevo

    Why does the assassination of Archduke Franz Ferdinand—which lit the fuse to the First World War powder-keg 100 years ago this Saturday—still resonate so powerfully? Almost nobody believes that a Third World War is about to be triggered by the military conflicts in Ukraine or Iraq, or by the tension in the China Seas, yet there are many points of modern relevance in the catastrophe that started a century ago in Sarajevo.

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    Better To Be Brazilian

    What’s been the best performing asset class of the past three months? In the broadest sense, emerging market equities win this prize since it was in mid-March that the MSCI EM index began a dramatic rebound against the US and Europe. But which of the big emerging markets has done best? The surprising answer is Brazil, whose stock market gained 21% in dollar terms in the three months since March 18, narrowly beating India, up 18%, and Russia, up...

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    Janet Yellen, Control Engineer

    Yawn! What could be more boring than Wall Street setting a new record? This has happened in eight out of the last 15 trading sessions, and it is likely to happen many more times in the weeks and months ahead because of the one financial event that is even more boring and predictable than a Wall Street record—a presentation on US monetary policy.

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    New York Seminar June 2014 - Louis, Anatole & Andrew

    We held our summer seminar in New York on June 10, with Anatole, Louis and Andrew offering their take on the state of the world economy and financial markets. We were also joined by Henrik Christensen who is director of Robotics at Georgia Tech. Audio recordings of their discussions are available below:

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