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    Gavekal Research

    A Recantation

    Over the years a number of economists and political scientists have seen the error of their ways and come clean with a reasoned recantation. The mid-19th century British thinker John Stuart Mill famously changed his mind on the divisive question of industrial wages. My contribution to political economy hardly matches Mill’s, but I have spent my adult life pondering the linkages between economics and markets. However, in recent times I have come...

    11
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    Gavekal Research

    Return Of The Great Euro Debate

    Overview — by Arthur Kroeber

    5
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    Gavekal Research

    Quarterly Strategy Chart Book - Beyond Currency Wars: A New Investment Landscape

    Since the end of 2011, the world MSCI has gained more than 20%, while the safe-haven bond markets of the world are basically flat. Given this strong rally in equities, it is important that we get confirmation of global growth – a theme we explored in our last Quarterly. Fortunately, the news on this front remains fairly encouraging, and we don’t see any reason to change our optimistic outlook on growth. What has changed quite significantly is...

    1
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    Gavekal Research

    Down With Reform

    Italian electors’ rejection of Brussels-imposed economic diktat is an extraordinarily important moment in the history of modern Europe—perhaps the best political news since the fall of the Berlin Wall. Given the power of unelected technocrats, it is easy to forget that sovereignty in Europe still resides with the nation state as expressed through elections. The problem for those unelected officials who conspired to capture the political system—...

    18
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    Gavekal Research

    The Last Great Potemkin Village

    On the surface, it would seem that the euro crisis has calmed. Markets have rallied since the summer and, to borrow a phrase from Herbert Hoover, “prosperity is just around the corner.” But outward appearances in Europe are like a Potemkin village. Behind the well-scrubbed facades, Southern Europe is collapsing. Anyone convinced that the European monetary union has come through the crisis stronger is a victim of the slickest PR campaign in...

    21
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    Gavekal Research

    Towards Government Sponsored Bubbles

    Usually in periods of asset inflation driven by excess liquidity, investors know that the central bank will eventually step in and restore order. Indeed, the normal complaint is that this happens too soon. As William McChesney Martin, the longest-serving Fed chairman once put it, the job of central banks is to "take away the punch bowl just when the party gets going."

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    Gavekal Research

    Carried Away On Corporate Bonds

    At GaveKal we see three main ways to make money from trading: return-to-the-mean, momentum and carry trades. Of these, the carry trade can be both the simplest to conceptualize, but the most dangerous to manage. It is easy to become fooled that the circumstances supporting a particular carry trade is a permanent market feature—until, of course, it reverses. Since the acute phase of the 2008-09 financial crisis the relentless tightening of...

    0
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    Gavekal Research

    A Wicksellian Analysis Of Four Fed Chairmen

    11
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    Gavekal Research

    US Seminars: Charles & Anatole Debate, Plus Francois, Will, Nate and Tom

    We sent a big gang to Boston and New York for our pre-Christmas seminars this year. Charles and Anatole debated on Keynesianism and the true scope of government participation in OECD economies. Francois explained his nearly singular view within GaveKal that European growth is set for take-off (at least in some parts). Will Denyer examined the shifting drivers of the US economy. Nate looked at why shale gas has not taken off in China, and Tom...

    0
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    Gavekal Research

    The Control Engineers And The Notion Of Risk

    There is a great movie scene where Harpo and Groucho Marx meet in the “socialist restaurant.” Groucho says, “this food is disgusting and inedible!” To which Harpo replies, “and on top of that, the portions are far too small!” So by the late 1930s and the golden era of the Marx Brothers, it was already obvious that socialism was bad fare in high demand. Yet it took another half century for “scientific socialism” to be finally discredited in...

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    Gavekal Research

    By All Means, DO Fight The Fed

    9
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    Gavekal Research

    GDP As A Concept: Misleading If Not Outright Criminal

    If I receive a research piece by an economist who starts by giving me his “forecast” of the GDP for the next year or two, or who writes that the government should spend more money to "avoid a decline" in the GDP, or even worse, tells me that if the government starts cutting, GDP will collapse and that it would be a disaster, I stop reading immediately. Not worth my time.

    13
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    Gavekal Research

    The End Of Japan As A Global Shock Absorber

    5
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    Gavekal Research

    And Meanwhile In Iceland

    The negotiations over the latest “extend and pretend” deal in Greece is, as usual, focusing on to what degree the economy should be strangled as retribution for past financial sins. According to the logic of the geniuses who created the euro, the population of Greece — as well as Spain, Ireland, France, Italy, Portugal, etc — has to suffer because there is "no other solution.”

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    Gavekal Research

    The Benefits Of A Receding Hairline

    One of the few benefits of getting old is that one gets to say: “I’ve seen this all before.” Take the current over-indebtedness of most Western democracies today. This is a situation that anyone with hair growing where one does not want it and not growing where one would like it to, has seen before. And not that long ago. Indeed:

    0
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    Gavekal Research

    European Seminar Presentations - With Anatole, Charles, Francois And Andrew

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    Gavekal Research

    Four More Years

    The American electorate may share the same national bed, but they have vastly different dreams. Our take on the election’s significance is similarly bifurcated—a cathartic political cleansing allowing for a deal on the fiscal cliff (Anatole) to disaster (Charles). Arthur asks whether the Republican Party can win nationally without reconciling itself to America’s changed demographics and the realities of the new knowledge-intense economy. Will...

    5
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    Gavekal Research

    A Simple World

    Many of our readers seem to believe that the world is getting ever more complex. I disagree. In fact, I have never seen a world whose key drivers were so simple to grasp. Almost everybody, save a few politicians in France, realize that government is the problem. Even the 50% or more of US citizens who receive "bribes" with money borrowed from their grandchildren concede the spending has to slow. As the anti-Obama adverts on TV put it...

    2
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    Gavekal Research

    A Measure Of Keynesianism

    Economics is, ultimately, a science of measurement. But not everything is directly measurable. For instance, the powers that be have decided the private economy is broken, and needs government fixing. That means we have to measure the competence or incompetence of those at the helm, something that cannot be done with any reliable precision. One rule of thumb is that the shorter the time that the elected officials have spent in the private...

    11
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    Gavekal Research

    If I Were A German

    6
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    Gavekal Research

    GaveKal Five Corners

    One of the main themes of our research since last summer has been the possibility of a sharp improvement in the US economy—and the likelihood that US economic conditions, whether good or bad, would set the tone for financial markets in 2012, even while investors and policymakers remained obsessed with the chaos in Europe. In other words, the US economy would produce the “signal” for markets, while Europe would create a lot of random noise. This...

    0
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    Gavekal Research

    Of QE3 And Black Swans

    5
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    Gavekal Research

    The Fed's Money Tree

    QE3 has set off a debate not just over whether this is good or bad (most here agree it is bad) but on what are the short– vs long-term effects on economies as well as markets. Louis and Charles make the contrarian argument that open-ended and more aggressive quantitative easing will ultimately take away, rather than add, to global liquidity, and warn that investors should prepare for a dollar crisis further down the line. Anatole and Francois...

    8
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    Gavekal Research

    Frugal Italy And The French Carry Trade

    From time to time financial markets throw up pricing anomalies which are not backed by underlying economic reality. At the height of the global financial crisis in 2009, for example, yields on investment grade US corporate bonds were as much as triple the level for comparable local government bonds. At such a point, the rational investor has to admit that something has fundamentally changed, or, instead, recognize that markets have a bad dose of...

    9
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    Gavekal Research

    False Optimism

    There are days when I feel very discouraged. A supposed upside to the economic misery in Europe is that, thanks to deflation and a weaker euro, the EMU’s real effective exchange rate has fallen considerably since 2008. But it is preposterous to tout the external trade benefits of a collectively weaker REER—when the trend in real intra-EMU exchange rates is what put us in this boat in the first place.

    3
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    Gavekal Research

    Is Germany Entering A Recession?

    5
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    Gavekal Research

    Shadoks & Stock Markets

    5
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    Gavekal Research

    The Coming French Depression

    5
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    Gavekal Research

    The Euro Debate Returns

    The markets reacted very positively to the announcements that followed the 20th ‘save-the-euro’ summit. So, like 20th marriages, is this the triumph of hope over experience? Or perhaps a cynical “mark-up” exercise of risk assets in the last hours of trading before the quarter’s end? Or did we see the beginning of a solution to the crisis finally emerge? The general media was quick to portray the summit as a victory of a “united South” against a...

    7
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    Gavekal Research

    Charles' Presentation At Our June 26, 2012 NY Seminar

    At our recent New York seminar, Charles discussed the unintended consequences of excessively loose monetary policy. Attached is his presentation; this is mostly slides, with little text.

    0
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    Gavekal Research

    Obsessed By Negative Real Rates

    7
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    Gavekal Research

    Armistice Or Capitulation

    Why did the euro first come about? Some will explain that it was to favor pan-European trade, tourism and a more efficient allocation of capital; even if in the times of Visa/Mastercard/Amex cards, and of easy currency-risk hedges through forwards, options and the like, such an explanation appears naïve at best. Others will explain that the euro was created as a “political project” to ensure the political integration that Europe’s people did not...

    10
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    Gavekal Research

    Federalism, Debt Traps And Competition

    14
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    Gavekal Research

    Euro Choices Are Getting Starker

    As has become painfully obvious, we have now moved to the next chapter of the euro crisis. Southern Europe’s vulnerable bond markets are again under pressure (Spanish 10y yields have risen to 6.2%, and the Italian counterparts are at 5.9%), European equity markets have sold off brutally and EMU bank stocks have now fallen to the lowest level since late 1987.

    10
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    Gavekal Research

    Euroland's Secondary Depression

    The US economy continues to throw off seemingly contradictory signals. Since the start of the year bond yields have fallen sharply even while equities have rallied convincingly and economic data points to a clear, if patchy, recovery. So why are US Treasuries priced for a lost economic decade? Earlier this week, Warwick argued that the market was irrational in its pricing of Treasuries (see The Sun Still Rises, We’re Still Bond Bears). But of...

    0
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    Gavekal Research

    How To Deal With Bad Bubbles

    As our regular readers know, there are good bubbles and there are bad ones. By our definition, a “good bubble” occurs in productive assets, such as railways or internet lines, and is financed by equity. A “bad bubble” takes place in unproductive assets (tulips, land, government bonds…) and is financed by bank credit.

    9
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    Gavekal Research

    CHF Peg And The Bund Rally

    Over the past month German bunds have rallied significantly with yields on the ten-year dropping by –42bps since March 16th. Partly fuelled by fears of deterioration in Spain’s fiscal and financial situation (see Europe Is Still The Ugliest Sister), they hit an all-time low yesterday of 1.63%. These movements have an obvious proximate cause, but arguably a less visible effect may be stirring the move to safety.

    1
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    Gavekal Research

    Debt Traps: A Refresher

    What economists refer to as the “debt trap” was first defined by Lord Keynes and the logic is very simple: when a country’s cost of capital exceeds its economic growth for a protracted period, trouble soon follows.

    29
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    Gavekal Research

    French Election: A Friedmanian Take

    The US primary marathon may be nearing a resolution, but another not insignificant electoral process kicks off on April 22 with the race to choose an occupant for the Elysee Palace. Readers may be aware that Gavekal has certain French roots, which we hope are discernible from the mélange of elegance, moderation and occasional insight provided by our writings. For this reason, some clients have asked for a view on the forthcoming presidential...

    0
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    Gavekal Research

    An Alternative View On The UK

    8
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    Gavekal Research

    When A Bond Hedge Stops Working

    A diversified portfolio of 60% equities and 40% bonds has outperformed the equities market since at least 2000, which marked the beginning of the first real non-inflationary bear equity market since the thirties.

    5
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    Gavekal Research

    On US Inflation

    One of the big concerns last year was the fear of a US double-dip. Now, however, as US economic data keeps surprising on the upside, it seems increasingly likely that this year’s more pressing issue will be the risk of an inflation backlash. Will the slack in the economy, coupled with the continued deleveraging of government and the financial sector be enough to stave away any price pressures? Or will the unprecedented central bank liquidity...

    8
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    Gavekal Research

    Blind Men Looking At Money

    Over the past year, we have published a number of debates on the euro, which generated vigorous client feedback, from the logical “isn’t it obvious that, if the euro continues as presently constructed, then it won’t”, to the somewhat tasteless “I was at Disney World this weekend and saw the Euro wearing a Make-A-Wish T-Shirt”. But at the heart of every one of these debates was a simple question—namely, what is money?

    11
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    Gavekal Research

    Bernanke's Comeuppance?

    Milton Friedman’s contention “that inflation is always and everywhere a monetary phenomenon” is a famous entry in the economic lexicon. However, Professor Friedman also explained that lags between money supply (monetary policy) and prices can be huge and variable. This is because the velocity of money reacts very strongly to conditions in the banking system.

    0
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    Gavekal Research

    The Non-Event Of French Elections

    There is a famous story about the last days of Constantinople. While the Turks were at the gates of the city, heated discussions were taking place inside the walls about whether angels were male or female. This is exactly how Paris feels these days, with candidates in the upcoming presidential elections debating the gender of angels, while ignoring the biggest dangers.

    0
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    Gavekal Research

    The Non-Starting Keynesian Identity

    Everybody knows the Keynesian identity, which postulates that GDP = government + investment + net exports + consumption, summarized as the famous equation of GDP= G + I +(X-M) + C. And using that formula, Keynes argued very influentially that when private-sector C + I collapses, then the government must increase its weight in the economy. Otherwise a recession or even a depression is unavoidable (e.g., see any article by Paul Krugman). The...

    5
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    Gavekal Research

    Returning to the Golden Rule

    The “golden rule” as expressed by Maurice Allais or Knut Wicksell specifies that, over the medium term, long rates and the nominal growth rate of the economy tend to converge. Thus, if the reader accepts our basic premise that an increase in government spending leads to a decline in the structural growth rate of the economy, then it stands to reason that an increase in government spending leads to lower interest rates, since the interest rates...

    0
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    Gavekal Research

    The US and the UK are on Right Track

    Recently there has been a lot of talk about the supposed stark differences between the US and UK budget policies. Many argue that the UK policy path of aggressively cutting government expenditure is going to lead to a new recession; in contrast, the sure-to-be-reelected President Obama is said to be wisely staving off a double-dip by maintaining government spending at a high level. There is a slight problem with this view, however. It is not at...

    0
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    Gavekal Research

    Draghi in Control, But for How Long?

    [INDENT=2]

    0
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    Gavekal Research

    The Triumph of Southern Italy over Northern Italy

    In Have Southern Europeans Bought Too Many BMWs?, my colleague argues that Italy’s balance of payments problem is not caused by the Euro, but instead by the China factor and rising commodities prices. Besides the fact that Italy would have better adjusted to the pressures of a rising China and higher commodities prices were it not for its artificially high foreign exchange rate under the Euro, this theory fails to explain Italy’s disappearing...

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