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E.g., 28-10-2021
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    Gavekal Research

    Europe’s Debt-Deflation Dynamic

    Amid all the talk of contagion and demonstration effects emanating from Athens, there is a straight forward question that concerns investors whose domain spreads beyond the lapping shores of the Mediterranean: is the Greek crisis, at its root, inflationary or deflationary? Given talk of new currencies being launched, the obvious fear concerns inflation. I would demur and suggest that a deflationary shock is unfolding. This matters especially for...

    3
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    Gavekal Research

    A Brighter European Dawn

    The political and economic reality is that a 40-year old political neophyte from a “peripheral” European economy has taken the eurocrats to the cleaners. It is clear that the Greek populace knew exactly what was coming and extracted €89bn of “good money” from an exceptionally incompetent European Central Bank. This pool of liquid funds should prove a key support for the next year or two, and with Greece running a primary budget surplus the...

    14
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    Gavekal Research

    Germany Is The Real Risk

    As the Greek crisis apparently reaches its climax it strikes me as odd that the default response is to seek refuge in “safe” German assets. If, as appears quite likely, the flawed euro-system really is heading into the next phase of its denouement, then German assets are the soft underbelly of the system, and they are likely to suffer most. Here is why:

    13
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    Gavekal Research

    5C Overview: Manufacturing And Recessions

    I know that metal bashing and the business of making things comprises a declining part of economic activity in most industrialized economies. Yet as economist Brian Reading used to say in the 1980s, GDP may be getting lighter, but manufacturing continues to have a heavy influence.

    0
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    Gavekal Research

    Gauging The Chances Of A US Recession

    A successful investment strategy requires an early warning system to monitor risks in key markets. Right now, I am most worried about a possible recession in the global system’s most important economy, namely the United States. Any evidence of an impending US recession will surely spark a collapse in investor confidence as it becomes clear that central bankers are not, in fact, the omnipotent creatures of their billing. I am especially...

    2
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    Gavekal Research

    5C Overview: Efficiency, Capital And Bond Market Spreads

    In the “good old days” much of the capital deployed in financial markets was devoted to making markets work better. Until the mid-1980s investment banks were often partnerships whose capital was directly owned by the partners. On occasions when a disorderly market emerged that capital was “put to work”, sometimes for just a few minutes—profitability was very high. Such capital was often “owned” by a family such as the Rothschilds, Barings or...

    0
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    Gavekal Research

    Protect And Survive

    Bond yields keep rising, emerging markets are softening and key cyclical stocks have taken a bath. The more I look at the global situation the more I am convinced that both economies and markets are reaching a point of transition. And as that old sage Yogi Berra said: “When you come to a fork in the road, take it!”

    3
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    Gavekal Research

    Towards A US Recession?

    Yesterday the Federal Reserve minutes showed policymakers to be nervous about the outlook for US growth, and so more likely to extend the zero interest rate policy. I would, of course, argue that this is to confuse cause and effect, as US economic weakness in fact stems directly from ZIRP (see The Untimely Demise Of US Productivity). But what concerns me today is less whether a quarter point rise in policy rates happens next month or in...

    10
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    Gavekal Research

    The Untimely Demise Of US Productivity

    Let’s start with a statement of fact: since 2002 the growth of US productivity, measured as non-farm output per hour worked, has collapsed. Outside of recession periods, this is the first time since the 1950s that the four-year moving average of the annual rate of change in productivity has fallen so low. This matters because without a rise in productivity, the US economy will struggle to boost its citizens’ standard of living, whether measured...

    3
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    Gavekal Research

    Bull Market, What Bull Market?

    Underweighting US equities has become a consensual position and yet the market continues to flirt with new highs. So what gives? My approach has always been to rely on decision rules built on historical data analysis. When enough of these rules signal a “buy” or “sell”, I make a move (for a good example of this approach see Managing Equities In A Strong Dollar World). My esteemed colleague Anatole has been arguing for a while that the S&P500...

    4
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    Gavekal Research

    When Bond Markets Become Silly

    Investors are understandably spooked by recent bond market ructions given a backdrop of weakening growth in major economies, and continued accommodative central bank policy. Francois argued yesterday that this “tantrum” was partly technical, but also the result of markets looking through to higher inflation expectations due to an apparently better economic outlook (see Tantrum II And European Portfolios). I agree with him that markets are being...

    2
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    Gavekal Research

    The Liberties Of England, And What They Mean For Europe

    When the Conservative-led government of the last parliament started to show that it was serious about deficit-reduction and lessening the role of the state in the British economy, I turned very bullish on UK financial assets (see A Supply-Sider’s View Of The UK for a detailed exposition of this view). Perhaps unsurprisingly over the last five years the UK mid-cap index has outperformed the German and French equivalents. I admit to having had a...

    7
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    Gavekal Research

    5C Overview: The Real Message From Labor

    So how are we to understand the less than thrilling message emanating from the labor markets of the main economies. Is this evidence of some unescapable “secular stagnation”, or is something else going on?

    0
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    Gavekal Research

    A Post-Volatility World

    These are words that I utter with the utmost caution—this time, it really is different. I refer not to central bankers’ scurrilous efforts at monetary debasement, nor the spineless diplomacy of European political leaders, or even the cult of celebrity in the age of social media. In some guise, we have seen all of this before. No, dear reader, for something genuinely new to the modern experience, consider the right hand side of the chart below...

    3
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    Gavekal Research

    5C Overview: Why The Coming Collapse Of World Trade Should Be Celebrated

    Sustained economic growth has always gone hand-in-hand with a big rise in communications infrastructure. To explain why, assume that a country has two cities, named A and B. At the point that a modern communication infrastructure is built (road, trains, internet) then, in each case, a single line of communication is needed. Three cities implies the need for three lines; a fourth city means six lines. Ultimately, if all the cities are to...

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    Gavekal Research

    Small Is Beautiful

    At the end of the 1980s the world changed, with the collapse of the Soviet Union and the start of China’s renaissance. The next two and a half decades were marked by a mass movement towards globalization. We now have a long enough history to determine who were the winners over those 25 years. The answer is very simple: small countries.

    1
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    Gavekal Research

    Of Central Bankers, Monkeys And John Law

    A revealing experiment involved monkeys being placed in a cage with a pile of nuts stashed on an upper level. Their efforts to snaffle the food caused them to be doused in water, blasted with a siren and startled by an electric shock. After a number of attempts the monkeys gave up. Later, a second group of monkeys were introduced—the new entrants made a beeline for the goodies, but were quickly beaten back by the chastened first group of monkeys...

    9
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    Gavekal Research

    How Indexation Killed Growth

    Indexing, as I have written before, is a form of socialism, since capital is allocated not as it should be—according to its marginal return—but rather according to swings in the market capitalization of the underlying assets. It is hard to think of a more stupid way to allocate this scarce resource.

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    Gavekal Research

    Three Brothers In Arms: Wicksell, Schumpeter And Fisher

    I am often asked which of the great economists best understood the link between the economy and financial markets. Passing judgment on such giants may be presumptuous, but practical men and women of finance may want to consider being slaves to the following propagators of ideas:

    11
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    Gavekal Research

    Trying To Measure The US Dollar Short Position

    It seems to be conventional wisdom that the long-dollar trade has become worryingly “crowded”. That was certainly the message after last week’s none too startling language tweak by the Federal Reserve produced a frantic dash out of the unit. But as ever, there is what you see, and what you don’t. In this case, what is obscured may be of far greater significance than what is visible in plain sight. Here is why:

    7
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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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    Gavekal Research

    5C Overview: Going Long The Yen

    If I held a decision making role within the Japanese policy apparatus, I would do everything in my power to spur a yen appreciation. Here is why:

    1
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    Gavekal Research

    The Hidden Tax On Savings

    Frederic Bastiat, the great 19th century French liberal thinker, observed that mediocre economists spend plenty of time talking up the immediate beneficial impact of their measures, but usually ignore the less obvious long term effects. He summarized this view with the pithy observation: “In economics, there is what you see and there is what you don’t.”

    5
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    Gavekal Research

    The Financing Gap And Bond Spreads

    So far this month, the yield on the 30-year US Treasury bond has risen from 2.22% to almost 2.73%—a sharp move for such a short period of time. In December, we took a searching look at long rates in the US, and expressed the view that as 30-year Treasury yields dipped below 2.5%—the lower limit of our valuation model for long bonds—it would be time to shorten the duration of bond portfolios from 30 years to seven years (see Managing Bonds In A...

    6
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    Gavekal Research

    Toward System Failure

    As I see it, our obligation to clients at Gavekal Dragonomics is not to make forecasts (they never work) but to explain events and identify likely winners and losers. Such an approach implies that we live in a world where policymakers have a semblance of rationality. My concern is that the negative interest rates policies currently being embraced in Europe fly in the face of this requirement. The implication is that foundational principles of...

    7
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    Gavekal Research

    A Modest Proposal To Save The World

    The last few years have been some of the most intellectually interesting of my career as the post financial crisis period has seen policymakers test the limits of economic theory, and push well beyond. Inspired by their example, I would like to post my small contribution to the sum of new knowledge that this era of extremes has thrown up.

    6
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    Gavekal Research

    5C Overview: Profits and Productivity

    Former West German leader Helmut Schmidt used to say: “The corporate profits of today are the investments of tomorrow and the jobs of the day after.” Put another way, higher labor productivity leads to increased profits, more jobs and a better standard of living. In this regard the chart below shows the link between US profits and productivity growth (centered on its historical mean of 2%). From 1968 to 1993, productivity variations preceded...

    0
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    Gavekal Research

    Panic or Process?

    In the past few months, we have seen surprise interest rate cuts from India, Australia, Russia, Turkey, China, Switzerland, Denmark... the list goes on. So what lies behind all these surprise cuts? Panic, or process? The arguments for panic are obvious, and include:

    5
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    Gavekal Research

    Sweden: The Planets Are Aligning

    Asset allocation is—or at least should be—a process. Investors try to identify the favorable and unfavorable factors driving an asset’s performance, and monitor developments to identify where they stand in the investment cycle.

    2
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    Gavekal Research

    QE: Competitive Devaluation, Or Stealth Bank Recapitalization?

    The battle for morale is half the war. So it is likely to prove in the eurozone, where the impact of quantitative easing will hinge on how investors perceive the European Central Bank’s policy. If they regard it primarily as a competitive devaluation, which would be deeply deflationary for the world economy, then it will make good sense to remain long eurozone bonds and short the euro. On the other hand, if markets decide QE amounts to a...

    9
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    Gavekal Research

    Beware The Correction Of False Prices

    I want to start this paper by reiterating a few of my strongly held convictions about the role of central bankers:

    14
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    Gavekal Research

    Towards An OECD Recession In 2015

    One of the OECD’s jobs is to determine when a recession has hit the overall grouping of developed nations. The chart below shows OECD recessions shaded grey, while US recessions, as decided by the National Bureau of Economic Research, are in pink. The OECD seems to record a recession during periods when the industrial production index for the grouping falls over a 12 month period (one exception was 1995 when a mysterious recession apparently...

    5
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    Gavekal Research

    Swexit!

    So Switzerland’s central bankers have decided that pegging their currency to the European lira administered by ‘Derivative Draghi’—as one of our friends in Hong Kong calls the European Central Bank president—was not such a great idea after all.

    10
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    Gavekal Research

    Setting Aside Emotion And Seeking Reason

    Une nation est une âme, un principe spirituel. Deux choses qui, à vrai dire, n’en font qu’une, constituent cette âme, ce principe spirituel. L’une est dans le passé, l’autre dans le présent. L’une est la possession en commun d’un riche legs de souvenirs ; l’autre est le consentement actuel, le désir de vivre ensemble, la volonté de continuer à faire valoir l’héritage qu’on a reçu indivis. Ernest Renan, Conférence à la Sorbonne, March 1883

    7
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    Gavekal Research

    Managing Equities In A Strong Dollar World

    In December, we examined the rules a fixed income manager should follow when the US dollar is going through a period of structural appreciation. We emphasized that these are different from the guidelines he or she should follow when the US dollar is structurally falling. Equity managers too should change their approach when the US dollar is in a structural up-trend, but the sets of rules they should follow are vastly more complicated than...

    3
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    Gavekal Research

    Stick With US Treasuries

    US treasuries have maintained their stellar performance in the first three trading sessions of 2015 with yields of both the 10-year and 30-year declining more than 20bp. A year ago I advised strongly for investors to buy long-dated treasuries. But last month I suggested a tilt toward shorter duration portfolios due to the changed macro environment and more challenging valuations (see Managing Bonds In A Strong Dollar World). In light of recent...

    3
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    Gavekal Research

    Janet Yellen’s Inner Wicksellian

    As readers may be aware I have written very little on central banks and their policies recently. At the beginning of the zero interest rate policy experiment—which so far has lasted longer than World War II—I tried to explain why I thought it was a terrible idea (see The High Cost Of Free Money). However, I rapidly came to realize that my role was not to tell central banks what they ought and ought not to do, but rather to try to help our...

    2
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    Gavekal Research

    Managing Bonds In A Strong Dollar World

    During my money management career I have come to realize that there are two basic investing environments. There are periods when the US dollar is structurally declining and there are times when it is structurally appreciating. Depending on which condition applies, then anyone running a global investment portfolio should use different decision rules. We are probably moving into a period of structural dollar appreciation, so it seems an opportune...

    0
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    Gavekal Research

    Our Holiday Reading List

    For the third year we are publishing a year-end books round-up. The topics covered by the 17 books in our compendium include hardy Gavekal perennials such as economics, politics and the effect of technological transformation on modern life. In addition Charles considers ancient Rome’s decline due to its apparent embrace of socialism over liberalism. Louis kicks us off with a look at the roots of our most basic human urges.

    8
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    Gavekal Research

    New York Seminar December 2014 - Charles, Francois, Tom & Will

    We held our winter seminar in New York on December 5 with Charles, Francois, Tom and Will offering their views of the global economic pulse and recent market developments.

    0
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    Gavekal Research

    Asset Allocation In The Era Of Cheap Oil

    I’ve read plenty of bullish statements recently saying that the decline in oil prices amounts to a massive tax cut; “a phenomenon that’s making everybody better off,” as US Federal Reserve vice chairman Stanley Fischer declared last week. But as Frédéric Bastiat wrote, in economics you have what you see and what you don’t see, or as Milton Friedman put it: “There is no such thing as a free lunch.”

    4
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    Gavekal Research

    5C Overview: ZIRP And Capital Spending

    0
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    Gavekal Research

    The Signal In Silver

    Since mid-July the price of silver has slumped by -25%. These days silver is mostly an industrial metal. But down the decades it has retained some of its monetary characteristics. What’s more, for more than a century silver has traded freely in the market, unlike gold which only started to float in the 1970s. So the question I am trying to answer is very simple: Is there a relationship between variations in the price of silver and...

    2
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    Gavekal Research

    A US vs UK Asset Allocation Model

    Over the long term, there is no reason why the UK stock market should offer a higher—or lower—return than the US market in dollar terms if the two countries operate in an open system and are similarly (badly) managed. Equally, there is no reason for the US bond market to outperform or underperform the UK bond market since—in an open system—the risk-free rates must be the same. If one market has outperformed the other for a considerable period...

    0
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    Gavekal Research

    Bank Shares And Deflation Risks

    Over the years, I have learnt the hard way to pay a good deal of attention to the behavior of bank shares. Simply put, when interest rates and bank shares fall in tandem the market is offering a clear signal that very bad news is on the way.

    3
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    Gavekal Research

    Deflation: Boom Or Bust?

    It has been my contention for a while that capitalism is returning to its 19th century deflationary roots. Indeed, the evidence for this assertion has become overwhelming. The consumer price indices of 13 OECD countries have negative YoY readings. Another eight are below 1%. In the case of “goods inflation,” all European economies are flashing negative. And if the likes of Italy or Spain thought that salvation lay with an “internal devaluation...

    2
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    Gavekal Research

    Waiting For The Japanese Pay-Off

    Back in December 2012, as it became clear Japan was moving towards an all-out attack on deflation, I argued that if Tokyo’s shock and awe campaign drove the yen into undervalued territory, it would have a powerful deflationary impact on the rest of the world. My view at the time was that the devaluation of the Japanese currency would reintroduce a formidable competitor into the world’s economic system, and that it would take roughly 18 months...

    1
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    Gavekal Research

    Plodding Towards Deflation

    It has been my core belief for some time now that the capitalist world is returning to its deflationary roots. But a period of deflation can take one of two forms. In the first, the economy grows faster in volume terms than prices are falling. In this case the revenues of companies selling goods and services that are elastic to prices will increase on a nominal basis. In the jargon this is what is known as a ‘deflationary boom’. In the second...

    2
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    Gavekal Research

    If You Keep On Doing What You’ve Always Done...

    ...you'll keep on getting what you’ve always got. At least, that's what any sports coach worth his salt would tell a losing team in the half-time huddle. And perhaps this is the problem facing the big developed economies. Not enough of today's bien-pensants (Hollande, Merkel, Yellen, Bernanke...) or their advisers (Summers, Piketty, Krugman...) have spent time chasing a ball around a field. Let me explain.

    2
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    Gavekal Research

    More Fools Than Money?

    Back in the early 1970s, when I was a young analyst looking to set up my first independent research firm, Beat Notz of Notz Stucki in Geneva offered me some invaluable advice. “Never forget that this is an easy business, Charles,” he said. “All you have to do is figure out whether there are more fools than money, or more money than fools. Once you’ve figured that out, you’ll know whether to reduce or to increase your risk”. Sadly, Beat has now...

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