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    Gavekal Research

    Quarterly Strategy Chart Book - Three Views of A Fragile Europe

    As we see it, the most significant investment development over the last two quarters has been a renewed bout of economic weakness in the eurozone. This is all the more worrying since the rest of the world economy looks to be set on a recovery path. As a result, European growth assets have performed miserably, while eurozone bond yields keep making new lows. As we consider the path ahead for Europe, we can see three distinct scenarios: (i) Slow...

    4
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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...

    3
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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...

    4
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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...

    2
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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...

    8
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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...

    0
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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...

    1
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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-...

    0
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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...

    0
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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.

    2
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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...

    1
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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.

    1
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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...

    2
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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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    An Uber Bubble Awaits

    Last week was clearly an important one for financial markets and the world economy. Friday’s US payroll data confirmed that all the jobs lost since 2008 have been restored. The European Central Bank overcame the opposition of the Bundesbank and joined the Federal Reserve, Bank of Japan and Bank of England in the ranks of growth-oriented central banks that are willing to whatever is necessary to pump up inflation and nominal GDP. And peace talks...

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    A Grandmaster At Work

    “Check-mate”. As Vladimir Putin signed Russia’s historic US$400bn gas-supply agreement with China, he must have felt the satisfaction of a chess grandmaster revealing the inexorable outcome of a complicated endgame. In theory, the next phase of the chess game between Russia and the West in Ukraine will only begin with the Ukrainian presidential election on Sunday, but Putin’s positioning of the pieces means the outcome is preordained, whoever...

    1
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    No Magic For ECB In Negative Rates

    At last, the European Central Bank seems ready to do something—judging by last week’s comments from Mario Draghi, reinforced by the Wall Street Journal story that triggered a sell-off in the euro yesterday. The market reaction has been pretty much along the lines described by Francois last week: bond yields in Italy and Spain have fallen to record lows, European stock markets are up 1% to 2%, and the euro has weakened from almost €1.40 to €1.37...

    3
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    Breaking The Pattern: This Could Be The Year To Buy In May

    Sell in May and go away. This time-honored adage has served equity investors extremely well for the past four years. In every year since 2010, stock markets have corrected sharply, falling from a high in May to a low in the summer or early autumn: in terms of the S&P 500 by 15% in 2010, 19% in 2011, 9% in 2012 and 5% in 2013. Given that the S&P closed last week less than 1% shy of its all time high and that the Dow Jones Industrial...

    0
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    The Japanese Value Trap

    Equities around the world have enjoyed a modest rebound over the last week, with encouraging signs of buy-on-dips behavior and the leadership rotation that we believe was the main driving force behind early April’s sharp setback (see The New Rotation Into Value). But there is one major market that is a glaring exception to the generalized shift from growth to value: Japan.

    0
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    The New Rotation Into Value

    Considering last Friday’s US employment figures were as investor-friendly as anyone could hope, Wall Street’s sharp sell off after a strong initial rally might be viewed as a very bearish market signal. Indeed that has been the interpretation of many investors, both those who are technically oriented and those who focus on corporate fundamentals. Looking at the data, however, it is hard to find reasons for concern.

    2
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    London Seminar April 2014 - Anatole, Arthur, Louis & Francois

    We held our spring seminar in London on April 2, with Anatole, Arthur, Louis and Francois offering their take on the state of the world economy and financial markets. Audio recordings of their discussions are available below:

    0
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    One Last Flicker Before The Japan Trade Goes Out

    Most of us at Gavekal have been enthusiastic devotees of Abenomics since late 2012. But Anatole suddenly showed his true Keynesian colors by turning negative on Japan in September, when Prime Minister Shinzo Abe announced his decision to implement a controversial fiscal tightening planned by the Ministry of Finance (MoF) from April 2014. And indeed, the Nikkei has underperformed the S&P 500 by 15% since the consumption tax was announced on...

    2
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    The UK Budget: Lies That Work

    Britain’s government budget this week was not really a statement of economic policy, but a program for winning next year’s general election. In this sense, George Osborne’s speech was a natural development from the 2013 budget, which launched Britain’s present economic recovery. Almost nobody predicted the remarkable transformation of the British economy that immediately followed last year’s budget because what Osborne did was deliberately...

    2
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    All Over Bar The Annexation

    Bertrand Russell once quipped that ‘wars are not won by who is right, but by who is left’. With that in mind, markets should welcome the result of yesterday’s referendum in the Crimea. After all, had the result been ambiguous, whether because of a low turn-out, or a split electorate, then the more fanatical elements on either side of the divide might have been tempted to take up arms to settle the issue. However, with the vox populi confirming...

    23
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    A Boost For The 'Weather Theory'

    From mid-February until last week, a very unusual pattern was unfolding in the markets, with equities, bonds and commodities all going up at the same time. At some point this pattern was bound to break since, on the one hand, equity and commodity investors seemed to be anticipating robust economic growth while bonds were starting to price in a growth disappointment, if not a severe slowdown or recession.

    0
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    Realpolitik In Ukraine

    Oscar Wilde described marriage as the triumph of imagination over intelligence and second marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope and realism over wishful thinking. A grim case in point is the Russian incursion into Ukraine. What makes this confrontation so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope...

    2
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    5C Overview: We're All Happy Campers Now

    So that’s all right then. The Ukrainian conflict is over and we can all get back to business as usual—bidding up equities and putting on more risk. With the S&P 500 hitting a new all-time high and even the Moscow stock market rebounding, the world seems again to be a happy place. But are the celebrations premature? That depends on whether we focus on geopolitics, economics or market momentum.

    0
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    Has The Spell Of US Payrolls Been Broken?

    Ever since the end of the financial crisis, monthly US employment reports have largely determined the direction of equity markets, not just in the US but the world over, as we have often pointed out (see chart below). Then something strange happened last Friday. At 8.30 am Washington time, the eagerly awaited January payroll report came in much weaker than anyone had predicted – and for a few minutes, equity futures plunged the world over, while...

    1
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    What's Causing The Panic?

    What’s causing investors to panic (or return to rationality, depending on your point of view)? There are probably as many explanations as panicking investors (or rational market participants). But many discussions with clients, other analysts and policy officials in the period since the bullish mood suddenly changed in early January, have suggested a framework for thinking about the current market mayhem. The purpose of this framework is not to...

    0
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    Central Bankers Can Still Be Trusted

    The rout in risk assets last week has generally been attributed to emerging markets—and looking at Argentina, Turkey and Ukraine, there has been plenty for investors to panic about. On the other hand, why should the dollar/yen exchange rate or the value of US equities be so sensitive to just another devaluation in Argentina or the shakiness of or incompetent regimes in places such as Ukraine?

    0
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    Same Questions, Different Answers

    A week ago, Louis produced a 19-page magnum opus addressing the most important issues that investors will confront in 2014 (see Eight Questions For 2014). But nobody can claim to have perfect clairvoyance (not even Louis, whom we have to call “Boss”). In this piece I briefly consider the same eight questions. Since the outlook on OECD economic activity and interest rates is what underlies all my other disagreements with Louis (and also with...

    4
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    A Rational Response To The Data

    When a bolt of statistical lightning strikes from a clear blue sky and blows up the expectations of investors and economists, as the US payroll release did last Friday, three possible reactions may be sensible and one definitely is not. The wrong interpretation was the one offered over the weekend by many media and market commentators. These pundits began by explaining that December’s payroll figures was distorted by weather, inconsistent with...

    3
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    Predictions And Pipedreams For 2014

    For the first time since 2008, investors, economists and business people can say “Happy New Year” without irony. While last year was statistically disappointing, with global growth slowing slightly from 2012 and apparently belying the optimism I expressed last January, the verdict of financial markets and business sentiment has been much more consistent with my predictions (see Why The World Will Be Better In 2013). Stock markets enjoyed their...

    1
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    Good News From The World's Central Bank

    Thank goodness it’s over. Financial market behavior ahead of last night’s announcement on a reduction in US monetary stimulus has been tedious and irritating, rather like listening to whining children in the backseat on a long car journey: “Daddy, are we nearly there yet?” In fact, impatience about when the Federal Reserve might start to “taper” has spoilt for many investors what should have been one of the most enjoyable financial journeys of...

    0
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    New York Seminar December 2013 - Anatole, Arthur, Francios and Pierre

    We held our final seminar of the year in New York on December 13, with Anatole, Arthur, Francois and Pierre offering their outlooks for the coming year. Audio tapes of their discussions are available below, in order of presentation:

    0
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    No More Theater: Just Watch The Data

    I have argued for many months that US fiscal policy battles would be settled this year, and more recently that a budget deal would be done by the December 13 deadline (see The End Of The Matter). Given that Washington indeed seems to have smelt the coffee on its basic governing responsibilities, markets can be expected to consolidate their move into a data-driven environment. As such, debates about monetary and fiscal policy have become largely...

    0
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    Quarterly Strategy Chart Book - Look To Asia, Tapering Or Not

    In our previous Quarterly, we argued that investors should consider increasing their exposure to the emerging markets, and Asia in particular. The logic being that the taper tantrum sell-off in the summer was overly violent and that the valuation gap with the developed markets had grown too wide. Since then, our conviction on Asia has hardened. One reason for this is China, where a pretty decisive supply-side reform agenda has emerged in the...

    0
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    Debate: Inflation Or Bust?

    0
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    Turncoats And U-Turns In The UK

    0
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    5C Overview: The Doves Have It

    It has been a banner week for dovish central bankers. Last Thursday, Janet Yellen sailed through her Senate confirmation hearing with unequivocal promises to keep interest rates near zero for the many years that it would take to restore full employment. A day earlier in Europe, Joerg Asmussen, Germany’s ECB council member, and Ewald Nowotny, the Austrian central bank governor, aligned with the doves. After having been reported as voting against...

    0
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    The Facts Have Changed

    As Keynes famously replied to some pedantic critic whom history has long forgotten: “When the facts change, I change my mind. What do you do, Sir?” Of all Keynes’s brilliant aphorism this is perhaps the most important. In economics, the only certainty is uncertainty and change. I start with this apologia because ten days ago I wrote a mildly bearish Daily about US equities for the first time since 2011.

    2
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    The Meeting That Matters

    The ponderously named Third Plenary Session of the 18th Central Committee of the Chinese Communist Party, which takes place this weekend, is a more important event for the world economy and for global geopolitics than the budget battles, central bank meetings and elections that attract much more attention in the media and financial markets.

    2
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    Discretion And Valor On Wall Street

    Is it time for the equity bulls to pull in their horns? Even those of us who have been continuously and stubbornly bullish about equities throughout this year—insisting that the US election, the fiscal cliff panic, the taper tantrum and the government shutdown were all opportunities to “buy on dips”—are starting to feel a little queasy as prices keep rising day after day.

    4
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    The Euro's Little Bull Run May Be Over

    The euro is finally in the headlines, after losing two week’s worth of gains in the last two days, a tumble triggered by weak economic data which is raising pressure on the European Central Bank to ease. The question is why, until yesterday’s tumble, so little attention had been paid to the currency’s remarkable ascent. The euro hit its highest level against the dollar since 2011 on Monday, having jumped by 5.5% since September and over 8% since...

    0
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    Tapering And "Boehnanke"

    0
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    London Seminar September 2013 - Anatole, Andrew, Joyce, Francois and Charles

    For those who missed our seminar this week in London, see below links to the audio files to listen to our five speakers, and separate links to view their presentation slides. See below in order of speaker. The audio files may take a moment to open:

    0
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    The End Of The Matter

    The purveyors of conventional wisdom in Washington and Wall Street responded with world-weary cynicism to last night’s budget votes. “A short-term deal merits relief but not celebration,” was the Financial Times’ reaction. “The deal offers only a temporary fix and does not resolve the fundamental issues of spending and deficits that divide Republicans and Democrats. It funds the government until Jan. 15 and raises the debt ceiling until Feb. 7,...

    3
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    Tragedy Or Comedy?

    Even before last night’s hint of a climb-down by House Speaker John Boehner, the tragi-comedy of the US budget seemed fairly harmless. But they say in the theatre that the difference between comedy and tragedy is timing—and the longer this pantomime continues the greater the probability that it turns into something grim.

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    Washington's Wrestling Extravaganza

    Now that market obsession with the Fed tapering scare has subsided, one might have expected investors and analysts to return to the serious business of analysing economic data and corporate financial results. Instead, the markets have discovered a new excuse to feed their obsession with US policy and politics. The battles in Washington over the budget and Obamacare will reach a climax at the end of the US fiscal year on Monday. And this crisis...

    2
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    Don't Fight The Fed

    So it was, after all, a storm in a teacup. Financial markets around the world have been going through a series of “taper tantrums” since Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the Federal Reserve’s asset purchases. Throughout this four months, I have argued that financial markets had grossly exaggerated or completely misunderstood the significance of Bernanke’s comments. This has turned out to be the case, as...

    3
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    Quarterly Strategy Chart Book - The Tug Of War

    The readjustment in global bond yields over the past couple of months has increased volatility across most asset classes. Some, such as US equities, weathered the storm relatively well, while others, like emerging markets and most bond markets, did very poorly.

    1
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    Summer's Officially Over

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    Dalian Man vs Davos Man

    The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man...

    2
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    5C Overview: Did Someone Really Shout Fire?

    Since Ben Bernanke’s tapering comments in May we have moved from markets that were largely driven by data to ones where speculation about policy changes dominate sentiment and price action. Bernanke’s tapering comments were certainly an alarm bell, but were they a false alarm, a fire-drill or a warning of a real fire? I have made this point before but it is worth updating why the answer is different for different economies.

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    The G7 Is Back On Its Feet

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    The Washington Watch

    The next few weeks will bring a confluence of four US policy events that will set the tone for financial markets everywhere. These are the monthly employment report this Friday; the Federal Reserve’s tapering decision on September 18; the announcement of a new Fed chairman expected soon after that; and the Congressional vote on the Treasury debt limit required by mid-October. After a week in the US talking to informed investors, Fed-watchers and...

    1
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    Greek Tragedy Or La Dolce Vita?

    Like Charles, I have spent a good part of the summer in a beautiful part of Europe, but unlike Charles I spent more time relaxing, rather than thinking and writing almost daily about the financial and economic calamities that lie ahead. This has been lucky for our clients, since I have been unequivocally bullish about equities and the US economy, especially since November’s election. So any market guidance that I might have offered from lovely...

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    The Debt Ceiling Showdown That Won't Be

    In the past few weeks, as interest in Fed tapering has subsided, the latter-day Kremlinologists in Washington are seeking to justify their salaries by stirring up excitement about some new policy drama. Two candidates have emerged for the next economic drama: announcement of the next Federal Reserve chairman and the next debt ceiling deadline, both of which will hit the markets in November or December.

    2
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    5C Overview: Is Europe Sleepwalking To The Brink?

    This year most developed-market stock markets have rallied nicely, but investors remain unconvinced. In the markets where growth prospects are strongest (the US and Japan) valuations seem stretched, whereas in the markets where stocks are relatively cheap (Europe, and in the developing world China), the growth outlook seems dodgy.

    0
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    Something's Working In Britain

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    Game Over For Austerians

    Margaret Thatcher used to say that “There Is No Alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall—you can stop banging your head against a brick wall. The G20 meeting in Moscow last weekend may have marked such a moment of revelation.

    4
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    Good Omens

    Two months ago I gave ten reasons for believing that April’s break-out of the S&P 500 from its 13-year trading range “could mark the start of a secular bull market in global equities”. This piece, which came out on May 20, was singularly ill-timed, since equity markets peaked the very next day and then plunged on May 22, after Ben Bernanke’s tapering comments (see Goldilocks And The Ten Bears). Luckily for my credibility, I did end this...

    5
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    Fed’s Fire Drill Obscures The Real Risk

    Whenever Alan Greenspan was praised for delivering a clear message on US monetary policy, he liked to reply: “If you think that, you have misunderstood what I said”. Ben Bernanke prefers the opposite approach, trying to explain in painstaking detail the precise conditions and possible timing of monetary tapering. He might do the world economy, and his own reputation, a favor by imitating Greenspan’s obfuscation. The Federal Reserve minutes...

    0
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    Europe’s Control Engineers

    “Words are, of course, the most powerful drug used by mankind,” so said Rudyard Kipling. When central bankers meet next month for the annual Jackson Hole shindig, they can ruminate on their success being increasingly dictated less by what they do, than what they say. Take the European Central Bank and Bank of England which in recent months have been fairly taciturn next to a loquacious Federal Reserve. Yet, by yesterday verbalizing forward...

    0
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    Carney Set To Ride A British Revival

    Mark Carney, the former head of the Bank of Canada who has just taken over as Governor of the Bank of England, will today chair his first monthly meeting of Britain’s Monetary Policy Committee. The meeting is unlikely to produce any change in policy, if only because six of the nine MPC members have consistently voted against additional quantitative easing. Yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the...

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    Portugal Goes Rogue?

    Nothing so disturbs a disciplinarian teacher as the prospect of a model pupil turning into the class rebel. With Portugal’s center-right coalition government seemingly on the brink of collapse, such are the fears in Brussels and Berlin. Lisbon has pushed through painful structural reform, stuck to fiscal austerity and in the process improved a chronic trade deficit. Hence, the fallout from Portugal going rogue and rejecting the Troika medicine...

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    A New Global Growth Story

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    A Bearish Blunder

    Since Ben Bernanke mentioned on May 22 that the Federal Reserve Board might start to taper its program of quantitative easing later this year, more than $2 trillion has been wiped off the value of global stock markets—and probably far more from the value of global bonds.

    3
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    Quarterly Strategy Chart Book - The Fork In The Road

    2
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    When Good Comes Of Bad

    It’s cynical, manipulative and hypocritical—and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy? Not often enough.

    5
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    It's The Economy, Not The 'Tapering'

    Friday’s better than expected US payrolls were too ambiguous to settle definitely the debate about whether the US economy is accelerating or slowing, but there was one issue this release should have settled once and for all. Contrary to what we read every day on Bloomberg and Reuters, financial markets have been paying almost no attention to the debate about “Fed tapering” that has obsessed Wall Street pundits and media talking heads.

    0
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    Five Corners (5 June 2013)

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    Can Japan Stop The Rout?

    The sudden collapse of Japanese equity prices last month had many possible explanations (see An Odd Divergence) but one that deserves more attention is the simplest—there were more sellers than buyers. What makes this banal observation potentially useful in Japan’s case is the possibility that the imbalance between buyers and sellers may be about to shift. More precisely this imbalance may soon be affected by a change in government regulation...

    5
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    A Debate On Equity Markets

    Last week, Anatole published Goldilocks And The Ten Bears in which he addressed the ten most common complaints heard over the past year when developing a “bullish equity” thesis. Arguably, most of these complaints can be characterized as disproportionately focused on “fundamentals” (e.g., can we trust a rally fuelled by central bank liquidity creation). Of course, healthy bull markets rest on three pillars: sound fundamentals, attractive...

    7
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    Goldilocks And The Ten Bears

    Two weeks ago, as the S&P 500 soared out of the trading range in which it had been trapped for 13 years we suggested that this break-out could mark the start of a secular bull market in global equities (see This Is Not A Peak: It’s A Bull Market). This idea provoked derision and even outrage from many clients. While we cannot do justice to all of the objections we received, it seemed helpful to summarize the main criticisms and offer a...

    34
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    The Arithmetic Of Abenomics

    The 3.5% GDP growth announced this morning suggests that Japan may be the fastest growing economy in the G7. Since the Tokyo stock market hit bottom exactly six months ago, the Nikkei share index has soared 72%. Meanwhile, the yen has experienced its biggest ever six-month move against the dollar. All these events appear to be linked to Shinzo Abe and the new regime he has installed at the Bank of Japan.

    0
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    This Is Not A Peak: It's A Bull Market

    When stock market prices hit new highs almost daily a sickening sense of vertigo is hard to avoid. As we pointed out two months ago, investors naturally tend to expect a long descent once they reach the top of the mountain. But how literally should we take such mountaineering metaphors? Bearish analysts often claim that previous stock market peaks have always been followed by precipitous falls. The record high of October 2007, for example, which...

    16
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    Our April, 2013 London Seminar - Anatole, Tom, Francois and Charles

    At our recent seminar in London:

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    The ECB May Surprise: By Not Easing

    What are European investors hoping for? Or, to put the question more forcefully (and give away our conclusion) what have they been smoking? The European economy is going from bad to worse. While economic and financial indicators from around the world have recently been disappointing, the US news has suggested nothing worse than the risk of another modest summer “soft patch,” while China has been settling into structurally slower, but still very...

    2
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    Italy Delays The Swan Song

    European markets stabilised yesterday and Italian bonds and equities enjoyed some of their biggest gains for months after the unexpected return of Giorgio Napolitano as president. At first sight the re-election of an 87-year old for a second seven-year term that he didn’t want and that public opinion certainly did not support may seem like a confirmation that Italy has descended into chaos and ungovernability. Yet the markets’ positive reaction...

    0
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    Thatcher Would Reverse Austerity

    Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep...

    2
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    A First Non-Euro Currency Debate

    Last Thursday the Bank of Japan stunned investors with a muscular monetary response that aims to break a deflationary cycle that had seemed to condemn Japan to permanent economic decline. In this piece we debate what the new policy settings mean for investors and crucially, seek to answer the trillion-yen question of where the Japanese currency is headed.

    3
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    Nikkei: Far From A Crowded Trade

    The GaveKal view is for 2013 to be the year when the main driver of markets shifts from government policy to economic fundamentals. We never expected this to be a smooth ride and the global economy continues to throw up contradictory signals (see today’s Daily Riding A Bull Market With No Conviction). The big exception to this conceptual framework was always going to emanate from Tokyo. Unlike the US, China and (even) Europe, it has been clear...

    2
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    Cyprus Should Switch Euros For Rubles

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    UK's Backdoor Escape From Austerity

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    Et Tu, Italy?

    The Italian “protest vote” has reverberated far and wide: equities fell, the VIX surged 34%, investors scrambled to safe-haven bonds and Japan’s crusade to weaken its currency suffered a major setback, with the biggest overnight jump in the yen since 2011. Markets seem to fear that Italian voters have stuck a knife into the back of the euro project. But we are not so sure the drama of this election will turn out to be as Shakespearean as all...

    2
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    A Timely Downgrade For The UK

    Moody’s downgrade of the UK on Friday was just what the doctor ordered in at least three different respects. Firstly, the action was fully deserved, insofar as rating agencies’ criteria are to be taken seriously, which is not very far. Secondly, the downgrade accelerated the fall in sterling, which was exactly what the Bank of England and the Treasury had been trying for months to achieve, in the hope of stimulating some export growth, at least...

    0
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    Merkel's Coming Election Loss: In Italy

    We do not yet know the winner of Sunday’s Italian election, but the losers are already clear. And in this particular election, who loses may be much more important than who wins.

    6
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    The Sequester: A Looming Non-Event

    It has been a nice lazy holiday weekend in the United States, with President Obama on a golfing trip in Florida, apparently brushing off a parting shot from House Speaker John Boehner, who warned on Thursday that “the sequester will be in effect until there are cuts and reforms that put us on a path to balance the budget in the next 10 years.”

    0
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    Here Come The Helicopters

    Wednesday night may have marked the “emperor’s new clothes” moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that does not have to be humored. That delusion is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a “new normal” of mass unemployment and declining living standards is inevitable for years or decades to come.

    6
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    On Hedging A "Rotation"

    By now our regular readers must surely know that we believe equities represent the most attractive asset class and that safe haven bond markets are very far from “safe”. We are certainly not alone in this view, as evidenced by the very vigorous inflows to equity markets over the past few months. We believe this “Great Rotation” is likely to be sustained becausea) institutional allocations to stock markets remain very low (hedge funds seem to be...

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    Not A Sterling Year For The UK

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    The Great Rotation Debate

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    The Game Of Chicken Is Ending

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    The US Recovery (Or Not)

    The US economy seems to have burst out of the gate this month, with very strong figures on housing, employment, industrial production and retail sales. This contrasts with widespread expectations of economic weakness after the election and ahead of the fiscal cliff drama, when consumer and business confidence had dived—small business confidence as measured by the NFIB, for example, suffered a bigger collapse in November than in the month of the...

    0
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    Why The World Will Be Better In 2013

    This week Anatole debates Mohamed El-Erian in a forum organized by the Economist. In this piece Anatole argues that the world economy will improve during 2013, in contrast to the more bearish stance argued by the PIMCO CEO.

    3
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    Japan Shakes The World?

    The themes that obsessed financial markets in 2012 emanated from the US, Europe and China, and they were all largely negative. Now that the US fiscal cliff and a euro breakup have been averted, and China’s economy again proved it was not a massive investment bubble on the brink of implosion, attention should turn elsewhere. In 2013, Japan—where politics and monetary policy have suddenly got exciting—could prove to be a major story.

    10
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    The Fiscal Lift

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