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    Gavekal Research

    Surviving The Bear Market

    Never mind whether investors in US equities should buy the dip. The question now is whether a six year bull market is yielding to a bear market. Bears are stealthy animals that tend to creep up unannounced. I have had the nagging suspicion for a while that we were approaching grizzly territory and have been recommending an increasingly conservative portfolio positioning (see Protect And Survive). However, the core of my investment philosophy...

    13
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    Gavekal Research

    How To Build A Reserve Currency

    A store of value, a unit of account and a medium of exchange—these are the three essential characteristics of any proper currency. Needless to say a reserve currency must possess all three. But they are far from enough. A reserve currency must have at least six other attributes too, as Jacques Rueff and Robert Triffin did so much to establish.

    1
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    Gavekal Research

    Cutting The Tail Of The Dog

    When docking the tail of a dog there are (in theory at least) two ways by which the offending appendage can be removed: it can be amputated with a single incision, or instead sliced incrementally so that the poor creature barely notices its loss. The same logic applies to economic policymakers when a “tough” decision has to be made. The Thatchers of this world go for a single chop, while the likes of Hollande or Chirac will always plump for...

    3
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    Gavekal Research

    Who Killed US Productivity Growth?

    Four and a half years ago, in February 2011, I published one of my first pieces of Wicksellian research, entitled The High Cost Of Free Money. In it I wrote that negative real interest rates were going to cause a sustained decline in the productivity growth of US labor, which in turn would lead to a deterioration in the structural growth rate of the economy. In making these observations, I was merely following the logic of 19th century Swedish...

    7
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    Gavekal Research

    Three Ugly Charts

    I would never claim to be an accomplished technical analyst, but I do know how to use a ruler when looking at charts of prices in the markets.

    5
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    Gavekal Research

    5C Overview: Why The Surprise At Slowing Trade?

    I am afraid I am rapidly turning into Gavekal’s resident bear—asleep half the time, grumpy the rest. In particular, I am amazed how some people have suddenly discovered that world trade is going nowhere, and that they are so bamboozled by this strange pattern. Where exactly have they been for the last 15 years?

    0
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    Gavekal Research

    The Signal In Silver (Part II)

    Last year I came up with a chart (shown below) that I found rather intriguing. It showed that on every occasion in the last 100 years when the price of silver dropped more than 25% year-on-year, consumer price inflation in the US took a nose-dive soon afterwards.

    5
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    Gavekal Research

    The Typology Of A Deflationary Bust

    In the summer of 1998 I wrote the first report for a new venture that was eventually to become Gavekal Research. It was called The Typology Of A Deflationary Boom. My contention at the time was that the US was in a deflationary boom and in the report I tried to explain to the tiny handful of readers we then had how to manage money in such a period. Booms and busts tend to be byproducts of the interest rate policies followed by central banks. The...

    18
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    Gavekal Research

    5C Overview: Value, Prices And The Coming Deflation

    Economics started out as an effort to understand why goods and services have a “value” and why this value changes over time. After a few dead ends, such as the labor theory of value, a consensus emerged that the value of any good is the result of individual transactions conducted when both parties gain from the transaction. But the “value” I put on a ring my mother wore may have nothing to do with the price that it might fetch. Price is...

    0
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    Gavekal Research

    The Purpose Of The Stock Market

    When you’ve been around for as long as I have, you can’t help but come to a few conclusions—most of them unhappy. My first conclusion is that the stock market was invented to make as many people as possible as miserable as possible for as much of the time as possible. In this sense the stock market is a roaring success.

    5
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    Gavekal Research

    Go Ugly Early

    I fully recognize that most readers face huge regulatory and commercial constraints in the way they manage their portfolios. Nevertheless I have always believed that, as far as possible, the best starting point for effective portfolio construction is to imagine oneself marooned on a Pacific island, free from the constraints of legacy and the expectations of others.

    0
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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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