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    Gavekal Research

    Did The USD Just Make A Turn?

    Yesterday’s less dovish than expected FOMC meeting triggered a bit of a back-up in the belly of the yield curve and a mild rally on the US dollar. Admittedly, these moves probably have more to do with how one-sided the market was positioned coming into the first meeting presided over by Federal Reserve chairwoman Janet Yellen. Knee-jerk reactions aside, could we still be witnessing a start of a turn in the US dollar’s fortunes?

    0
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    The Sword Is The Axis Of History

    As Anatole recently argued, we can all breathe a sigh of relief that the tussle over the Crimea has likely been resolved without serious bloodshed and at minimal cost (see All Over Bar The Annexation). But in the longer term it is clear that these events may cast a long shadow over international relations for years to come. Indeed, as British politician Ernest Bevin famously said, “don't open this Pandora’s box, it is full of Trojan horses...

    2
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    5C US: What If The Fed's BS Doesn't Shrink?

    The Federal Reserve’s publicly stated exit strategy has one element that is unsettling for any investor who cares to look that far ahead. The Fed calls this element a “normalization” but that mild word does little to mask the harsh reality: we are talking about the biggest contraction of a central bank balance sheet the world has ever seen.

    0
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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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    It's All Good In America, And All Bad In China

    “By three methods we may learn wisdom: First by reflection, which is noblest. Second, by imitation, which is easiest. And third by experience, which is the bitterest.” - Confucius.

    0
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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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    5C US: Balancing The Risks On Margin Debt

    US investors have leveraged up their portfolios like never before. Equity margin debt levels exceed the lofty peaks of the 2000 tech boom and the 2007 credit bubble. With more of the market posted as collateral, the risk is ever greater that moderate selloffs become exaggerated by margin calls and forced selling.

    1
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    US Energy: Escaping The Vortex

    It’s been a bumpy ride this winter for energy prices as the so-called polar vortex stormed down upon American consumers and businesses. Natural gas prices, dormant for years in the US$3-4 per mmbtu range, spiked up as high as US$8 in mid-February, before collapsing back down to their current US$5. Are proponents of the US shale revolution—and the downstream industrial firms betting on a cheap energy renaissance—about to get burned?

    1
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    How To Think About Deflation

    The word deflation is appearing in newspapers almost every day, while the International Monetary Fund and the OECD, the rich world club, are falling all over themselves to see who can most frequently use the phrase “deflation risk.” As I have been warning about deflation for quite a while—and feeling like a voice crying out from the desert—I have naturally been interested to read what these fellows have to say on the subject. Unfortunately,...

    6
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    Gavekal Research

    The Ides Of March

    There are two ways to look at the recent spate of weak US data. The first is to conclude that the weakness must be weather related. In light of the polar-vortex generated storms that have repeatedly hit the Northeast, Midwest and even the South, and the severe droughts in California, one can conclude that recent economic data and surveys are a poor reflection of how US consumers and businesses really feel. In fact, the bad weather probably means...

    2
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    No Building, No Tapering?

    The main message from the minutes of the January FOMC meeting was summed up yesterday by San Francisco Fed President John Williams, who said in a TV interview that the “hurdle is pretty high on changing the pace of the step-downs in our [asset] purchases.” But if the economic data does not improve soon, we might just find out how high is “pretty high.”

    2
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    Gold As A 'Deflation' Hedge

    Economists have had many market puzzles to ponder in this era of monetary excess, going back to Alan Greenspan’s long bond “conundrum” nearly a decade ago. The latest market conundrum is gold: why did it begin rallying on news that US liquidity growth would be slowing (the taper), and why has it remained strong despite weak global CPI prints and flagging broad money growth the world over. This is particularly hard to understand for OECD...

    4
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    5C US: A Little Late For Early Cyclicals

    US consumer discretionary stocks are considered “early cyclicals” because they tend to outperform in the first two or three years of the cycle. This time around, the firms that make everything from iPhones to automobiles have outperformed for nearly five years! Are we really still in the early part of this cycle? Or are we starting to see signs of fatigue in an overextended rally? The sector is down –2.4% year to date, finally underperforming...

    0
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    The Great Pacific Gas Arbitrage

    Severe winter weather in the US has driven gas prices higher, forcing power firms to impose sizeable fuel bill hikes on consumers. But those who think that the low-cost US energy revolution is about to be dashed on the rocks of rising production costs are wrong. US shale gas still trades at a near 60% price discount to Asian liquefied natural gas (LNG) benchmarks, and the gap is unlikely to close quickly. As the US faces no meaningful constraint...

    0
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    Continuity-Of Bad Policy

    It was a busy day on Capitol Hill yesterday. In a notable departure from the budget battles of recent years, the Republican-controlled House passed a clean debt ceiling bill to fund the Treasury for the next thirteen months (despite the fact that Paul Ryan voted against funding the budget he himself negotiated). Meanwhile, the House Financial Services Committee gave Janet Yellen her first opportunity as the new chair of the Federal Reserve to...

    7
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    Gavekal Research

    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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    Gavekal Research

    The US Current Account And Vanishing Global Liquidity

    The US dollar is the world’s reserve currency which in simple terms means that the United States is the only country which can settle a foreign deficit by issuing its own money. As such, any “improvement” in the US current account balance means that fewer dollars show up outside of the US, while the reverse holds true in the event of a deterioration.

    0
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    Gavekal Research

    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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    Gavekal Research

    5C US: What Might Lead Yellen To Pause Tapering?

    As capital flees emerging markets, some foreign policymakers have begged the Federal Reserve to go easy with the tapering. Sorry guys. If Janet Yellen is anything like her predecessors such pleas will fall on deaf ears. (Just as foreign pleas a few years ago, to stop fueling global inflationary flames with the same QE programs, cut little mustard). But Yellen will be intently watching the bond market.

    3
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    5C Resources: Keystone No Longer Quite So Key

    Keystone XL, the southbound Canadian crude oil pipeline, once viewed as crucial to the nation’s economic future, moved a step closer to reality last week. US State Department approval—and the finding that the project would add only incrementally to carbon emissions in the long run—raises that odds that the highly politicized project will finally get built.

    0
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    Gavekal Research

    522 Days And Counting

    In recent weeks, attempted sell-offs on the major equity benchmarks have failed. Are investors presciently buying on dips—or tragically failing to face up to impending doom? With no major correction on the S&P 500 for 522 days now, that is the question being debated on a fundamental level. But looked at from a technical angle, and recent market behavior can be summed up in one word: resilience.

    6
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    Gavekal Research

    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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    Gavekal Research

    An Elitist Housing Recovery

    Yesterday’s data spit showed that US existing home sales edged up slightly in December, good news after several months of declining momentum. But it remains to be seen if the US housing recovery can get back on track, and this is worrying for two reasons. The first, obvious one, is that the rebound in house prices since 2011 has been a key support for an otherwise struggling US economy. The second worry is that consumer confidence has been...

    4
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    Gavekal Research

    The Great Escape Of "Stranded" US Oil

    2
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    Gavekal Research

    Portfolio Building In The Time Of Disinflation

    Stocks and bonds are the two main financial assets. The return on stocks represents compensation for ownership, while bond payouts are dictated by the “rentier” who seeks both a return on capital and, most importantly, the return of capital. Only government bonds offer the reasonable expectation that capital should always get paid back.

    4
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    Gavekal Research

    5C US: The Yield Spread Matters For Profit Margins

    With US corporate profit margins at extreme highs, investors are on high alert for the dreaded “mean reversion.” One concern has been that after years of benefitting from extremely low interest rates, margins are going to fall as rates normalize. We don’t buy it.

    0
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    5C Overview: The Eminent Case For Rent Control

    The French minister who oversees the housing and construction sectors wants to re-introduce rent controls and toughen oversight of residential building. This enlightened proposal has naturally been met by howls of protest from the industry and most economists. And yet, consider the beneficent consequences that must surely flow from such a measure.

    0
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    Gavekal Research

    Deflation In 2014? Not In The US

    Curse words attract attention, as IMF managing director Christine Lagarde knows after dropping the D-bomb yesterday. Amidst her fairly balanced outlook for the global economy in 2014, it was her comments on deflation that attracted all the media attention:

    3
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    Gavekal Research

    Three Ways Of Making Money

    Since the mid-1990s (when the data starts), the JP Morgan Asian fixed income index has delivered negative annual returns three separate times: in 1997 (during the Asian Crisis), in 2008 (when anything but the most riskless of risk assets collapsed) and in 2013. And the past year was also the first year on record in which Asian bonds fell, while Asian equities rose. The same dichotomy was even more visible on global markets for although the World...

    0
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    Gavekal Research

    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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    Gavekal Research

    Eight Questions For 2014

    Having just spent the past ten days in the ‘twice-promised land,’ we have become accustomed to hearing questions answered by even more questions. So it is in this spirit that we propose our top questions for the new year.

    0
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    Gavekal Research

    Back To MV=PQ

    Inflation expectations may have ticked higher but I am not in the camp that expects rising prices to follow a stronger US economic outlook. In fact a deflationary shock may be on the horizon. Such an outcome, if combined with stronger economic volumes, could be a boon to global economic welfare. But we are walking a very thin line.

    4
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    Gavekal Research

    On US Capital Spending

    There is a common narrative that US companies are “awash with cash.” The puzzle that economists and strategists have been trying to solve in the past few years is why these riches are not being invested. This debate continues today, but the story has moved on. The cash is now gone.

    0
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    Gavekal Research

    5C Overview: Escape Velocity Or Deflationary Bust?

    As we start a new year, clients should perhaps spare a thought for Arthur Kroeber, GaveKal's head of research, who has spent much of the past year trying to reconcile the divergent views of our two founding partners, Charles and Anatole. This is a thankless task for the views are based on diametrically opposed perceptions of how the world works.

    1
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    Gavekal Research

    5C US: What Is Normal In 2014?

    After years of extremes, we begin this year with many of our indicators back at normal levels. Perhaps most importantly, households have deleveraged. To be sure, income and wealth inequality remain an issue, but a steep decline in debt and a dramatic rebound in asset prices has put aggregate leverage on household balance sheets back to levels seen in the 1990s (see Is The Deleveraging Over?).

    2
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    Gavekal Research

    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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    Energy Buyers Are In Charge

    After months of wrangling, Mexico has dramatically passed its long-awaited energy reform bill, amid fistfights and shouts of “treason” in Congress. Mexico’s oil sector opening—significantly more liberal than the initial proposal circulated in August—will be a boon to the country’s sagging growth rate and an opportunity for the oil majors who have been locked out of the country for decades. But it is also another sign of the times—with fuel...

    0
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    Gavekal Research

    US Government Spending, Recent Past And Near Future

    The US looks to have reached a fiscal détente this week in the shape of a bipartisan mini-budget deal brokered by Paul Ryan and Patty Murray. The package will allow for a small rise in government spending next year, but its main effect will be to avert another Washington showdown and potential government closure for at least two years.

    0
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    Gavekal Research

    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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    Gavekal Research

    The Scarcity Value Of Revenues

    The good news is that the Black Friday shopping scrum in the US passed with minimal casualties caused from stampedes, only scattered gunshot incidents and no reported shopper-on-shopper pepper-spray attacks. The bad news for traditional retailers, at least, is that overall sales were down by -2.9% compared to last year, even as online sales look to have soared. As of noon on Friday, Amazon and eBay, for example, had reported that sales were up...

    0
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    5C US: Good News Is Good News

    US growth data is looking up. Despite the government shutdown, manufacturing PMIs have now provided back-to-back positive surprises in both October and November. In fact, outside France and Spain, most PMIs around the globe are rising. But you wouldn’t know it by looking at your Bloomberg screens.

    0
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    On Profits: There Will Be No Revolution

    7
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    Healthcare.goof And Consumer Confidence

    There have historically been three main inputs into US consumer confidence: gasoline prices, mortgage rates and equity prices. And given the changes in all three measures over the past couple of months, one might have expected US consumer confidence to be strong. However, yesterday's number disappointed. This could be an outlier; and frankly, we do not like to put too much emphasis on surveys. Nevertheless, two possible explanations for the...

    2
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    Gavekal Research

    A New Kind Of Trigger Point

    19
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    Five Corners (20 November 2013)

    In our the latest bi-weekly review of global economics and investment, Anatole bullishly notes that central bank doves are back in the ascendency; Will Denyer’s wrap on the earnings season has a shale twist; Francois Chauchat argues that China reforms spell opportunity for Europe; Andrew Batson and Rosealea Yao assess the deleveraging process; and Nate Taplin writes on energy price liberalization in China.

    0
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    5C US: A Shale Boost To Downstream Earnings

    So far it has been business as usual this earnings season, with companies managing to squeeze reasonably decent profits out of lackluster sales. In the few areas where we did see surprises, the shale gas revolution was a factor.

    0
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    Gavekal Research

    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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    A First Take On The TTIP

    A key concern following the Global Financial Crisis was that protectionist barriers would inevitably rise, just as high walls were constructed around trade after the Great Depression. But even though the Doha round of multilateral trade negotiations has stalled, momentum continues to gather pace for deeper, more integrated free-trade blocs.

    0
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    A Re-Energized US Industrial Machine

    2
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    Forget The Yield Curve, Watch The Wicksellian Spread

    11
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    Ready To Hit Sell

    7
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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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    Latam’s Free Marketers

    Outside of peripheral Europe and a handful of city states, Northeast Asia is the only region where rural backwaters have managed to develop into fully industrialized economies. For the most part, this ‘miracle’ was not achieved using the standard Washington prescription of open markets, liberalized financial systems and political pluralism. Indeed, rarely has the development nostrums promoted by the International Monetary Fund and World Bank...

    0
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    Another Milestone For Chinese Offshore Bonds

    On Friday the three-year-old Chinese offshore renminbi bond market marked a new milestone: the first AAA issue by a foreign government. The Canadian province of British Columbia issued a one-year, RMB2.5bn (a little over US$400mn) bond yielding 2.25%. This is big news, for many different reasons.

    1
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    5C Demographics: Let The Race Begin

    In Race Against The Machine, Erik Brynjolfsson and Andrew McAfee speculate that many of the jobs cut in the Great Recession may never come back, as employers take the opportunity to switch to automated services. The authors warn of “a growing mismatch between rapidly advancing digital technologies and slow-changing humans.” The challenge for workers—the “Race” in the title of the book—is to develop new skills or be left behind by the digital...

    10
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    5C US: Can We Keep Climbing The Wall Of Worry?

    Data was mixed, Washington remained dysfunctional, but corporate earnings were decent and the Fed stayed incontinent. Despite this muddled state of affairs, equities made new highs. So it was another normal week in the US, but did we learn anything new?

    0
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    5C Overview: Stocks As A Lagging Indicator

    Stock markets are, by nature, leading indicators of future economic conditions. They are the first responders to changes in financing rates, demand, inflation expectations, etc. So long as returns on future investments are expected to be above the cost of capital, the millions of players in the stock market will bid up equities. If marginal returns move below the cost of capital, the market will go down, and so eventually will the economy. Fine...

    1
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    How Slack Is The US Labor Market?

    8
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    Resource EMs Reopening The Doors

    Two years ago, with commodity prices high, emerging market resource producers scrambled to restrict or regulate foreign investment in their mines and oilfields, in the hopes of keeping most of their windfall profits on shore. Now they are scrambling the other way: in the past three months, Mexico, Brazil, Mongolia, Indonesia and Russia have all announced new policies to ease commodity-related FDI, or signed new export deals on favorable terms...

    0
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    Brace For US Disappointments

    0
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    Brazil: Back To The Bad Old Days

    A few short years ago, Brazil was considered the “It” country. After weathering the financial downturn better than nearly any other large economy, Brazil attracted record inflows of foreign direct investment and its currency soared 46% between late 2008 and the end of 2010. But since then growth has slowed sharply, from a peak of 7.5% in 2010 to a dismal 0.9% in 2012. Meanwhile inflation remains high at 6%, despite the freezing of gasoline...

    2
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    Tapering And "Boehnanke"

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    Velocity In Asset Allocation

    This is the second in a two-part series of articles which aims to illustrate why investors ignore at their peril the pace at which money circulates through the financial system. In part one, I argued that ‘V’ as defined in the classic monetary formulation MV=PQ is an independent variable with the capacity to transform the investment weather (see A Fisherian Take On Velocity). I am endlessly amazed by the lack of attention that this vital...

    11
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    Gavekal Research

    5C US: Fed To Ease While Tightening

    While no major policy changes are expected at next week’s FOMC meeting, the market will leave no tea leaf unturned in the run-up. One action already garnering attention is the Federal Reserve’s testing of a new operation—the overnight fixed-rate reverse repo facility. This is an interesting new lever that the Fed may pull during its exit. It is worth understanding the context and rationale behind this new tool.

    0
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    5C Overview: Waiting For Godot, And Capex

    In the Samuel Beckett play Waiting for Godot, we wait throughout the performance for the eponymous character to appear. A similarly fruitless wait seems to be affecting US capital spending, which according to every demand-side econometric model (think Keynesian) should be on the cusp of a surge. That at least has been the story for the last three years and capital spending is still going nowhere fast. The same is true for employment, which after...

    8
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    Gavekal Research

    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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    Washington Gridlock And QE Infinity

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    The Yellen Thud

    12
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    Changing The EM Pavlovian Response

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    A Fisherian Take On Velocity

    Defining the velocity of money is not an easy task. John Maynard Keynes summed it up as the ‘animal spirits,’ the Austrians called it ‘the preference for liquidity,’ Knut Wicksell labeled it the spread between the ‘market rate’ of interest and ‘the natural rate.’ Joseph Schumpeter tied changes in velocity to entrepreneurs’ willingness to take risk, which in turn is tied to factors including the legal systems in which they operate, property...

    10
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    Gavekal Research

    Waiting For The Last Minute

    We have tried to avoid saying too much on the very slow moving situation in Washington DC for a number of reasons, including the fact that a) every broker is already on this one so why join the fray, b) each time one writes about politics, one is likely to not only anger roughly one half of the readership but also half of the GaveKal partnership (whether Red Anatole, Green Arthur etc.) and finally c) markets had, until now, mostly treated the...

    1
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    5C Overview: East Asia's Reforms: Thank The US

    1
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    5C US: Thinking The Unthinkable

    Hitting the debt ceiling is unlikely, but quite possible. This raises the unthinkable prospect that the US might default on its debt, thereby removing the pillar upon which rests the modern global credit system, the current reserve currency, and arguably the whole fiat money system—namely, the full faith and credit of the US government.

    0
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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.

    8
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    Gavekal Research

    Hong Kong's Stay Of Execution

    The political showdown in the United States could turn out to be highly damaging for the US recovery, but it is providing a reprieve for those markets sensitive to US monetary policy settings. In Hong Kong, where property prices are up 125% since the Federal Reserve began quantitative easing in 2009, one might say that this reprieve feels eerily like a stay of execution. Share prices have crept back up in recent weeks, but are still trading at...

    3
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    Gavekal Research

    The Lambs That Turned

    Given recent events in Washington it might be worth looking at the basic relations that bind our modern democracies. Back in the age of enlightenment, the founding fathers of a young American republic thrashed out a system of government that allowed the majority to pursue life, liberty and happiness, while ensuring that democracy did not descend into mobocracy. As debate raged over appropriate constitutional arrangements, one Benjamin Franklin...

    59
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    Gavekal Research

    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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    Using Wicksell To Manage Money

    All my life, I have conducted research by following two simple steps. Firstly, I try to understand the logic of the economic or financial system under consideration (economics is a branch of logic, itself a branch of philosophy rather than a subset of mathematics or even astrology). This is a messy and time-consuming process, but is aided by following the insights of great economists from times past.

    1
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    Gavekal Research

    Is US Consumer Deleveraging Over?

    The Federal Reserve’s latest snapshot of US household balance sheets, contained in its Flow of Funds report, shows that net worth rose a further 1.8% in the second quarter. Meanwhile net household borrowing was flat. This is a continuation of a multi-year story. Through a combination of unprecedented debt reduction and a rebound in both equity and house prices, major progress has been made in the US household deleveraging story. In fact, we have...

    7
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    The Unwatched Variable

    The Federal Reserve has panicked and we can expect to hear yet more justification for the decision to drag out its great monetary experiment. Yesterday, we had FOMC leading light William Dudley opine on the conditions that must apply before those geniuses in Foggy Bottom can think about tapering. The only tangible impact from last week’s action has been to further weaken the dollar, which is exacerbating one of the most frequently overlooked...

    7
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    Gavekal Research

    5C Overview: A Surprising New Fed

    Ben Bernanke has always made it very clear that, if nothing else, the Federal Reserve would not “surprise” the markets as long as he was chairman. This makes last week's non-taper decision all the much harder to stomach for bond traders who, following the Fed’s signals, had started to position their portfolios for a lighter QE program.

    0
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    5C US: A Valuation Tool For Residential Construction

    One of the reasons the Federal Reserve delayed QE tapering last week was to allow more time to assess how the economy reacts to the rise in interest rates since May. The residential construction sector is an obvious area of focus. How will it do? My bet: OK.

    3
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    5C Demographics: Pensions And Property

    Detroit’s spectacular downfall is an extreme case, but many other US cities and states face pressures similar to those that drove the Motor City to file for bankruptcy. In particular, pension liabilities are rising, both for accounting reasons and demographics. It is not just muni bondholders who should worry about these funding pressures. So should property owners—including private equity firms which have scooped up apartment complexes in the...

    0
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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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    A Panicked Fed Doubles Down

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    Expectations All But Tapered

    Today is the big day when Ben Bernanke is expected to begin the process of finishing what he started. It has been a strange week in markets with Larry Summer’s surprise move putting attention back on the current Fed’s policy approach. Market reaction to Summers’ withdrawal from the Fed chairmanship race has been to assume that President Obama will now appoint a consensus candidate, most likely Janet Yellen (see Summer’s Officially Over)....

    0
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    Gavekal Dragonomics

    DragonWeek - Charting An Export Recovery

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    Gavekal Research

    Summer's Officially Over

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    5C US: America Is Ready And Willing For Tapering

    Next week Ben Bernanke is expected to announce that the US economy and its financial system are ready to tolerate a gradual tapering of the Federal Reserve’s bond purchase program. Encouragingly, the money markets, bond and equity markets, as well as business managers, all seem to agree. Confidence runs high.

    1
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    Gavekal Research

    Equities Fail To Rejoice In The Good News

    With the Citigroup Economic Surprise index set to hit a new 52 week high, the summer lull in OECD data increasingly looks like it was just that. And unsurprisingly, bond markets are reacting, with US ten-year government bond yields hitting 3%. What is interesting, however, is that in recent weeks, as the economic data has surprised on the upside, equity markets have not broken out to new highs. Cyclical markets like the Kospi are still negative...

    0
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    Gavekal Research

    Of Wicksell And Fed Fallacies

    Let's start with the great Wicksellian “insight”.

    4
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    Gavekal Research

    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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    Gavekal Research

    Are Interest Rates High Or Low?

    The debate over rising US bond yields seems simple. Either interest rates are now too high and will snuff out any hope of a sustainable recovery; or this is just a “normalization” from excessively low interest rates, and thus nothing to worry about. In fact, this is the wrong debate.

    10
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    Gavekal Research

    Sophie's Choice: Munis Or Equities?

    We have been told that the mood at the Federal Reserve is so bad that some directors no longer even speak to others (hence the need for a thick-skinned Larry Summers to take the helm). Needless to say, we have no way to know whether this is true or not—though given how poisonous the overall atmosphere in Washington, DC generally is, we would not be surprised. After all, why should the Fed be immune to the overall US government trend of refusing...

    0
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    Gavekal Research

    Syria And The US Consumer

    It took a while, but markets have finally reacted to the deteriorating situation in Syria, and in a rather dramatic fashion. Brent oil shot up 3% to a six-month high of US$114 per barrel yesterday, its biggest gain since October. World equity markets were broadly down by -1 to -2%. This follows US Secretary of State John Kerry’s stern rhetoric on Monday, and Britain’s signaling that it was on board for a possible coordinated missile strike with...

    1
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    Gavekal Research

    Free Money vs Growth

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    Gavekal Research

    It’s Not A Balance Sheet Problem

    There is a growing fear that emerging markets could be on the cusp of a general crisis of the type seen in the early 1980s or late 1990s. The concern is that too much debt was racked up during an easy money phase and chickens are coming home to roost as the US moves toward a tightening cycle (see Resetting Expectations For Emerging Markets). Attention has understandably focused on those emerging economies with sizeable current account deficits,...

    13
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    Gavekal Research

    5C US: The Bond Sell-Off Has Not Overshot

    The great bond trade is now unwinding. And as is typical of bursting bubbles, there is potential for bonds to overshoot. But they have not done so yet.

    0
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    Gavekal Research

    5C Overview: Is Bad News Good, Or Bad?

    The past month's trading sessions in US equity markets have been challenging for investors. The obvious starting point is that much of the recent news has been bad. US economic data releases (new home sales, durable good orders, mortgage applications) have been uninspiring. A pattern of disappointing releases has triggered the hope that the Fed would only apply “taper-lite” and seemed to push us back into an environment in which “bad news...

    0
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    Gavekal Research

    The End Is Nigh

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