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    Gavekal Research

    Three Odd Things

    Reserves held by foreign central banks at the Fed are shrinking, which implies there aren’t enough US dollars in the system. This would make sense: the Fed has been draining excess US dollars for the past couple of years. So with shrinking central bank reserves and a shrinking US monetary base, the US dollar should be going up, and most risk assets should be hurting. Oddly, this isn’t happening.

    4
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    Gavekal Research

    The Biggest Investment Story Of 2019

    Now that stock markets around the world have recovered from the year-end panic of December 2018, it is worth returning to the question I posed here on the first trading day of 2019: was the disappointing performance of equities and other risk assets in 2018 the prelude to a deep and protracted bear market, or a contrarian opportunity to “buy the dip”?

    2
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    Gavekal Research

    What Europe’s Political Ructions Mean

    European politics is again heating up. Yesterday saw the Spanish government fail to pass its budget in a move likely to spur fresh elections. Populists in Italy and yellow vests in France are keeping up their campaign of disruption. Given that few of these issues directly threaten the structures of the EU, the question for investors is: Does any of this matter?

    0
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    Gavekal Research

    The UK's Limits To Growth

    For the British economy, it has been a case of “mustn’t grumble” since the 2016 Brexit referendum. However, the effect of a weak fourth quarter GDP report was to debunk any illusion that Brexit uncertainty has been weathered. Such a reckoning was inevitable with or without Brexit, as the UK has in effect hit limits to its growth.

    0
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    Gavekal Research

    Not Such An Ugly Duckling

    A spate of weak data releases last week confirmed Europe as the ugly duckling of key economic regions, and things may soon get worse. The worry is that a weakening external sector negatively impacts the domestic recovery through lower investment and job creation at a time when policymakers face both technical and political constraints.

    1
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    Gavekal Research

    The Global Car Industry Catches Chinese Flu

    If the auto industry is a bellwether of global economic health, then much of the world is looking sick. The second half of 2018 was painful for carmakers in all the major auto markets, and 2019 is shaping up to be as bad. Is this just a passing malady that carmakers will soon shrug off, or a chronic condition they will have to manage for years to come?

    3
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    Gavekal Research

    Gaming Out Theresa May’s Gamble

    Given that the UK prime minister has apparently outfoxed her opponents, why has the pound fallen back below US$1.30? The obvious reason is that Theresa May’s unexpected wins in the UK parliament last week look to have increased the chances of a disorderly “no deal” rupture. In reality, however, the chances of “no deal” are no higher today than they were a week ago as the EU and UK opposition are yielding to May’s pressure.

    8
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2019

    In the call yesterday, Charles Gave and Cedric Gemehl presented their views on the economic and political situation in Europe. Cedric outlined key risks facing Europe’s economy. If the worst is avoided, he thinks Europe could get a soft landing. Charles took a different view, arguing that the eurozone was now an irretrievably diverging system.

    0
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    Gavekal Research

    Strategy Monthly: Europe's Containable Risks

    As China slows and the US expansion limps into its dotage, a heavily export-dependent Europe looks vulnerable to another downturn. The latest growth numbers from Italy and Germany make for especially grim reading. Potential shocks loom in the shape of a hard Brexit, populist discontent in France and Italy and the threat of auto tariffs from the US.

    0
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    Gavekal Research

    A Vital Portfolio Construction Lesson

    I am a rules-based investor, and over the years few financial relationships have been more useful to me in reading the economic cycle than the yield spread between long-dated US corporate bonds and 30-year US treasuries. Going back to the late 1970s, no US bear market has unfolded with key spread being below 200bp. It is now 210bp.

    2
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    Gavekal Research

    The Recession Of 2019: Revisited

    Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).

    4
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    Gavekal Research

    Favor Local Bonds Over EM Equities

    After a dismal year for emerging market assets in 2018, emerging markets have started 2019 on a positive note, with equities rising 6.5% and local currency bonds up 3% year-to-date. On Friday, Louis looked at shifts in the US dollar, long term US interest rates, credit spreads and the oil price, and concluded they favor emerging market assets through the rest of 2019. Broadly I agree, but I would take a slightly more nuanced stance. The shifts...

    0
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    Gavekal Research

    The Four Prices That Matter

    It is Gavekal’s longstanding mission to develop simple principles that investors can use to navigate complicated financial markets. In this vein, one of our core tenets is that four prices matter more than all others, and together these determine the level of global economic activity and of investor risk appetite. Let us see where they stand as we head deeper into 2019.

    12
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    Gavekal Research

    Video: Skirting Recession In Europe?

    This week the IMF has cut its GDP forecasts for European economies exposed to a synchronous global growth slowdown. Nick gauges the probability that core eurozone economies will fall into recession, examines the scope for stimulative policy responses and explores what the slowdown means for Europe’s financial markets.

    0
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    Gavekal Research

    Germany's Industrial Slump

    With leading indicators in Germany pointing south, and a host of external macro factors looming, things are likely to get worse before they get better. However, much of the potential bad news is already priced into the German stock market. As a result, there is scope for a pick-up in German equities later in the year should the worst of investors’ macro fears fail to materialize.

    1
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    Gavekal Research

    The Future Of Italian Yields

    Since it became clear Rome and Brussels were moving towards a compromise to end their budget stand-off, Italian assets have outperformed. The yield on 10-year BTPs has fallen, narrowing the spread over bunds. But investors should be wary of positioning for a continued contraction; in both the short and long term, Italy’s deficit and debt dynamics are unpromising.

    2
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    Gavekal Research

    Musings On Brexit

    With the UK’s elite intent on frustrating the democratically-expressed will of the British people to quit the EU, the lesson for the rest of the continent is that there can be no legal or peaceful exit from the technocratic super-state. As Charles argues here, this increases the probability of disorderly exits in the future, and therefore greatly heightens European political risk.

    8
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    Gavekal Research

    Trump's Next Trade Target

    Just when the risk from trade politics seemed to be dying down, it’s getting complicated again. Trade talks between the United States and China are in full swing, but just as important are imminent negotiations between the US and the European Union, which are clouded by the US threat to impose tariffs on cars and car parts.

    0
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    Gavekal Research

    Brexageddon

    It should have been no surprise that sterling rallied after the overwhelming defeat of Theresa May’s Brexit plan. The disorderly “no deal” rupture with Europe rightly terrifies the markets and the business community is now much less likely. As a result, sterling is likely to rise eventually back towards its long term average real exchange rate.

    6
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    Gavekal Research

    Macron Is Muddling Through

    As the economy weakens, yellow-vested agitators show no sign of giving up on their campaign to block President Emmanuel Macron’s effort to change the way France works. I have argued against the increasingly mainstream view that Macron is a busted flush whose efforts to reform an unreformable France are doomed to fail and am sticking with that position.

    1
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    Gavekal Research

    A Silly Recommendation

    The euro just celebrated its 20th anniversary to scant fanfare. Hardly surprising, given that it caused a Greek depression, decline in Italy’s private sector GDP and a German current account surplus that has exported deflationary pressure to Europe and beyond. Against this grim backdrop, today’s note will consider whether now is the time to buy eurozone financials.

    0
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    Gavekal Research

    The Big Questions For 2019

    The last quarter of 2018 proved to be something of a horror show for most investors and despite this year starting with a firmer tone, the investment landscape looks to have changed in a fairly profound way. In this report, Louis considers the major shifts in the investment environment and asks whether these conditions will persist through 2019.

    3
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    Gavekal Research

    Strategy Monthly: The Hope-Vs-Despair Smackdown Of 2019

    The massive sell-off in December left global equities on the precipice of a real bear market. Hope and despair are finely poised, but we find a bit more reason for hope. The US and China will both slow, but the US should avoid recession and Chinese growth should stay above 6%. Political and trade-war risk is lower, and liquidity pressures will ease. US equities and EM assets, especially local-currency bonds, both promise positive returns.

    0
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    Gavekal Research

    Searching For A European Catalyst

    With 2019 not yet a week old, the eurozone is already looking uncomfortably like the odd man out. With the world’s big three economies heading more deeply into a synchronous slowdown, policymakers in the US and China are showing their readiness to alter course. European policymakers have displayed no comparable flexibility.

    0
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    Gavekal Research

    The Market Weighing-Machine

    If there is one useful conclusion for investors from the crazy year that has just ended, maybe it is this: as they say in Hollywood, “Nobody knows anything.” The equity market predicted a boom while the bond market predicted recession, and then reversed positions. The consolation for investors should be that the market is a voting machine in the short term, but a weighing machine in the long term.

    2
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    Gavekal Research

    A Future For Value Investing

    Financial theory teaches that, in order to determine the price of an asset, we should take its foreseeable future cash-flows, discount them by a risk-free rate to which we can add a risk premium, and then beyond these cash-flows ascribe a “residual value” to the business. So it’s an easy game—we only need to determine four things: the future cash-flows, the direction of the risk-free rate, the level of the risk premium, and the residual value....

    1
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    Gavekal Research

    A New Engine Needed

    As the European Central Bank halts net new asset purchases and ends its balance sheet expansion, European equities are back at almost exactly the same level as in December 2014, on the eve of the ECB’s announcement of quantitative easing. Clearly, with extraordinary monetary stimulus no longer in the mix, European stocks will need a different driver if they are to make gains in 2019.

    2
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    Gavekal Research

    Getting Out Of The Liquidity Squeeze

    With the Trump-Xi summit, compromise between Rome and Brussels, and the oil price down, all the ingredients should have been in the mix for a Santa Claus rally. Instead it's been an ugly few weeks in the markets, which strongly suggests no let up yet in this year's liquidity squeeze. In this detailed report, Louis looks back at recent history to determine what forces might bring the squeeze to an end next year, and therefore what asset...

    0
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    Gavekal Research

    Perhaps The Most Important Chart I have Ever Published

    In my Wicksellian world, when the “market rate of interest” (cost of capital) moves above the “natural rate of interest” (return on capital) a recession usually follows. Italy offers an interesting case in point as it has spent so much time since the euro’s launch operating below this critical threshold.

    5
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    Gavekal Research

    Our 2018 Holiday Reading List

    “Books,” wrote Anthony Powell, “do furnish a room.” As author of the million-word, 12-volume A Dance To The Music of Time, Powell was something of an authority on the subject. But it is unlikely even his library was as eclectically furnished as Gavekal’s. If anything, our 2018 holiday reading list is even more varied than those of recent years. Sure, we’ve read and reviewed the economic and financial heavyweights: Barry Eichengreen on currencies...

    1
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    Gavekal Research

    Europe's Changed Policy Mix

    Until last week it was possible to make the case that the EU could still push ahead with major structural reform under the current political configuration. After a continuity candidate took over as head of Germany’s governing party and Macron turned on the fiscal spigots in France to buy off political dissent, that is no longer the case.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

    0
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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

    6
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    Gavekal Research

    Drinking Red Wine And Buying Italy

    A Gavekal rule of thumb has it that investors can safely invest in economies where the “working class” mostly drink beer but should be careful in places where theymostly drink red wine. I make this observation as investors face a quandary among the wine drinkers: France versus Italy. The assumption in the spring was that holding Italian bonds was crazy, while French paper offered safety. But is that the case?

    1
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    Gavekal Research

    The Brexit Game Of Chicken

    The Brexit roller coaster seemed to come off the rails on Monday with Theresa May’s effort to prevent parliament voting on what looked like her doomed plan to leave the European Union. May’s decision, which had been denied by her most trusted senior ministers right up to the moment it was leaked to the BBC, initially looked like a typical case of the can being kicked down the road. Yet by the time she had finished her parliamentary statement,...

    4
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    Gavekal Research

    Strategy Monthly: Three Questions For The Year Ahead

    This has been a miserable year across most asset classes, with markets roiled by tighter US dollar liquidity. Looking into 2019, Louis sees the investment environment being dictated by whether the US dollar liquidity situation really is easing, the overall US policy and the possibility for the “Chimerica” relationship to rupture.

    0
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    Gavekal Research

    The Evolving Trade War

    There is little doubt that the US president is surrounded by advisers who see China as a genuine threat to the long term economic health and geopolitical strength of the United States. But, it is likely that Donald Trump’s most immediate concerns are more down to earth. Specifically, in order to be re-elected in 2020, Trump needs once again to carry states such as Ohio, Michigan and Wisconsin. And it is unlikely that he will be able to win the...

    5
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    Gavekal Research

    The Real Gilets Jaunes

    France’s yellow vest protest movement may have been the first since 1789 not to stem from left-wing origins, argues Charles. Instead, it reflected a great uprising by the forgotten people of middle France who have had enough of being the piggy bank that funds the lives of an urban elite which has rigged the system to its favor.

    4
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    Gavekal Research

    Macron’s Reform Program Lives On

    At first sight, the French government’s decision to postpone its proposed fuel tax increases in the face of popular gilet jaune street protests looks a lot like the climb-downs of 1996, 2006 and 2016, all of which saw attempts at economic reform derailed by mass opposition. Cedric argues such a conclusion would be overly hasty.

    1
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    Gavekal Research

    The Next Target Of Trump’s Firepower

    In today’s Daily, Arthur Kroeber offered his analysis of the weekend’s Trump-Xi summit in Buenos Aires. In this short report, Louis takes a slightly different tack, reviewing the series of tumultuous events in recent weeks. His conclusion is that few investors’ portfolios are well positioned for the probable outcome.

    0
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    Gavekal Research

    Winter For Eurozone Credit Growth

    A depressing autumn is turning into a dismal winter in the eurozone, as November’s deteriorating PMIs follow weak third quarter growth—and even a quarter-on-quarter contraction in Germany. Much of the softness can be attributed to poor external demand, especially from China and the emerging markets, and to the ongoing disruption to car sales caused by the introduction of new emissions tests. Together these have hammered European manufacturing,...

    0
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    Gavekal Dragonomics

    Germany Is Rethinking But Not Rejecting China

    As the US-China trade conflict drags on, both sides are looking to Europe, particularly Germany, for support. Germany does share US concerns about China’s protectionism and expansionism. But it still sees China as an economic boon and is committed to engagement. Berlin is therefore unlikely to fully take the side of either Beijing or Washington.

    0
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    Gavekal Research

    Salvini, Part Deux?

    This weekend saw protests in France that united demonstrators from all parts of the political spectrum against President Emmanuel Macron. Louis wonders if this represents the beginning of a populist wave that rejects the president’s mushy centrism and joins political bed fellows who have never laid down before. After all, it happened in Italy.

    3
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    Gavekal Research

    The Conflict Between Liquidity And Growth

    In recent days my colleagues Anatole Kaletsky and Arthur Kroeber have debated the strained relationship between China and the US, and what it may mean for emerging markets. I agree that this standoff matters greatly for the world, but I’m not convinced it’s the main issue driving markets and therefore a resolution—or not—at the G20 next weekend may end up as a damp squib for investors. A range of issues have me concerned, from widening credit...

    6
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    Gavekal Research

    Countering The Belt And Road

    In its escalating rivalry with China, the US has a new target: the Belt and Road Initiative. But both the US and Europe are struggling to redefine the way they win friends and influence people with development finance. Tom argues that the somewhat quieter middle way being pursued by Japan is delivering it both influence and profits.

    3
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    Gavekal Research

    The Uphill Struggle For Equities

    Last week saw the MSCI World turn in its sixth negative week in eight, while the only sector to record gains over the last two months has been utilities; cyclical sectors like materials, industrials, IT, energy and consumer discretionary have mostly entered correction territory. That begs the question: Is this a dip to buy, or will the environment remain harsh?

    5
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    Gavekal Research

    The Winding Road To Vassalage

    No one much likes Theresa May’s compromise deal that would leave Britain as a rule-taking, semi-detached appendage to the European Union. That, however, is the most likely outcome after the UK cabinet yesterday approved an exit deal that sets up a November 25 summit, where EU leaders will be asked for their assent. Shortly afterwards, the UK parliament will have its say, and despite challenging math in the House of Commons a “national interest”...

    0
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    Gavekal Research

    The Doom Loop Tightens

    The stand-off between Rome and Brussels over Italy’s 2019 budget claimed its first casualty on Monday. Italy’s major banks were forced to club together to support an emergency bond issue by Banca Carige, after the rise in Italian government bond yields triggered by the budget battle eroded the mid-sized lender’s capital base, pushing it to the brink of collapse.

    0
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    Gavekal Research

    The True Story Of Eurozone Equities

    Since the financial crisis, European equities have proven serial duds compared to their transatlantic cousins. Cedric argues this divergence is simple reflection of the higher earnings-per-share achieved by US firms. Looking forward, however, he says it will be almost impossible for US firms to maintain this profits gap.

    1
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    Gavekal Research

    Germany, And Europe, After Merkel

    All political careers end in failure. Doubtless Angela Merkel is already feeling the sting. Even as the long-serving German chancellor stands up on Tuesday to address the European parliament in Strasbourg, political observers and investors are looking beyond Merkel’s term in office to the identity of her successor. That is likely to be decided on December 7, when Merkel’s Christian Democratic Union is set to elect a new party chairman, so...

    0
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    Gavekal Research

    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

    0
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    Gavekal Research

    What's Changed In The Oil Market

    “Sanctions are coming,” proclaimed Donald Trump in a tweet last week, three days before the imposition of the latest US embargo on Iranian oil exports. The oil market was not impressed. Since late September, when crude hit four-year highs, the Brent price has slumped -16.7% from US$86.29 to US$71.91, with WTI falling -19.1%.

    0
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    Gavekal Research

    It's Finally Safe To Buy Sterling

    The pound rose 2% yesterday after a statement from the British government that a Brexit deal could be expected by late this month. That has since been rowed back. Nevertheless, the UK is moving into an endgame where the most plausible outcomes are either a "soft Brexit", or a new referendum which results in the UK remaining in the EU. Both would be good news for sterling.

    5
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    Gavekal Research

    Strategy Monthly: Yes, We're Still In A Bull Market

    Anatole and Will believe that continued exposure to US equities makes sense, since underlying corporate profitability remains strong. So long as one avoids the most rate-sensitive sectors, US portfolios should be 70-75% in stocks, with the rest mainly in cash. Moreover, they argue that the period of EM underperformance is now done, and emerging markets are poised for a significant rally.

    0
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    Gavekal Research

    Has Oil Set Its High For This Cycle?

    With the price of WTI crude oil now back below its 200-day moving average, Louis puts himself in the shoes of Turkish president Recep Tayyip Erdogan and imagines what sort of leverage he could exert over Donald Trump, what this means for the enforcement of sanctions against Iran, and what that implies for the oil price going forward.

    4
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    Gavekal Research

    Another Weight On The Euro

    The bear flattening of the US yield curve while European short rates remain anchored in negative territory means that it no longer makes sense for euro-based investors to hedge the currency risk of US bond purchases. Their hedging costs have risen to a level that wipes out the yield they would get on a 10-year US treasury. For US dollar investors, the opposite is true.

    0
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    Gavekal Research

    Listen To What Italians Say

    Among the factors rattling global markets this week has been the brewing dispute between Brussels and Italy’s populist government over its blowout budget proposal.The fear is that Italy gets into a vicious circle of tightening credit markets and faltering growth that could end with a resumption of the euro crisis and ultimately its exit from the single currency.

    0
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    Gavekal Research

    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

    5
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    Gavekal Research

    How The Brexit Stalemate Breaks

    As the Brexit negotiations enter their endgame, a stalemate has become the most likely outcome. Theresa May’s Conservative Party is now in open rebellion against her leadership, with Britain’s weekend press reporting that her government is just 72 hours from collapse. And a “No Deal” Brexit “car crash” is now described as a 50-50 probability by many politicians and commentators in both Britain and Europe. Yet the pound has maintained its value...

    6
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    Gavekal Research

    Six Impossible Things Before Breakfast

    Louis investigates six of the most incongruous sets of relationships that have held sway this year and offers alternative explanations. In particular, he focuses on the strange case of China’s response to US trade hostility and argues that understanding Beijing’s game plan may hold the key to whether the long US bull market in equities can stay the course.

    4
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    Gavekal Research

    Softly, Softly, Mr. Draghi

    Last week was an ugly one for equity markets on both sides of the Atlantic. But there was a crucial difference. US stocks are down from an all-time high set as recently as last month, with the S&P500 closing on Friday above (just) its 200-day moving average. In contrast, eurozone equities have been trending continuously lower ever since the end of January.

    0
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    Gavekal Research

    The Politics (And Economics) Of A Multi-Polar Europe

    This weekend’s election in Bavaria saw voters deal parties in Germany’s ruling coalition a bruising rebuff that further erodes Merkel’s authority and effectively kills off Macron’s plan for the EU to integrate at a faster pace. In light of such a changed environment, Nick and Cedric introduce a new framework to explain how political bargaining will work in an increasingly multi-polar Europe.

    2
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    Gavekal Research

    Bonds' Failure To Rally

    Given all the bad news for markets this year, one would be forgiven for thinking that US treasuries and German bunds would have been a good investment. But even as emerging markets have sold off and the US dollar has risen against almost every emerging market currency out there, US treasuries (and to a lesser extent bunds) have been an absolute dog of an investment.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call October 2018

    In this month’s Research Conference Call Louis-Vincent Gave examined the present bad tidings from markets and asked whether the global bull market faces a denouement. Anatole Kaletsky argued that this sell-off will likely prove to be a temporary setback for emerging markets and that the global bull market may have further to run. However, he warned that the outcome will depend heavily on where the oil price goes from here.

    0
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    Gavekal Research

    Why I Love The Euro

    By now surely almost everyone, except perhaps Jacques Delors and Jean-Claude Trichet, must accept that the euro is the greatest monetary mistake governments have imposed on their unsuspecting populations since then Chancellor of the Exchequer Winston Churchill took Britain back onto the gold standard in 1925.

    2
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    Gavekal Research

    Bottoming Out In France

    It has been a tough summer for the French economy, and a difficult rentrée—as the French call September’s return to classes at the start of the school year—for the government of president Emmanuel Macron. France’s growth rates have fallen of a cliff this year, with GDP growth falling to just 0.2% quarter-on-quarter in the first and second quarters, from an average of 0.7% in 2017. And after household spending actually contracted in 2Q, consumer...

    0
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    Gavekal Research

    Strategy Monthly: Are We Still In A Bull Market?

    At the start of the year, markets seemed poised for a rotation out of US equities into non-US assets. In fact, US equities and cash are the only assets to have delivered positive returns this year. Louis examines the reasons why and concludes that portfolio managers should stay defensive, while looking for buying opportunities in oversold emerging markets, and in European assets in non-euro countries such as the UK, Sweden and Switzerland.

    0
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    Gavekal Research

    Italy’s Inevitable Endgame

    Just over a year ago, with the optimism towards eurozone stock markets, and Italy in particular, riding high, I wrote a paper expressing the view that none of the eurozone’s underlying problems, nor Italy’s, had been solved. One year later, the situation is now looking very dangerous indeed.

    1
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    More Trouble Ahead For Italian Yields

    The market gave an unequivocal two thumbs down to Italy’s budget deficit forecast announced on Friday. In proposing a deficit target for each of the next three years of 2.4% of GDP, finance minister Giovanni Tria was perceived to have bowed to pressure from Italy’s populist coalition for spending increases and tax cuts, and to have relegated debt reduction to a back seat. In response, Italy’s 10-year government bond yield jumped 26bp to 3.14%,...

    0
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    No Deal Could Mean No Brexit

    After European Union leaders rejected Theresa May’s Chequers deal, the UK government is left with only two alternatives, argues Anatole. If Parliament in November is confronted with No Deal or No Brexit, the most likely outcome would be a new referendum and a vote to remain. The result will be a massive appreciation of sterling and a rally in many UK domestic assets.

    9
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    Why The US Cannot Win A Trade War

    The US has made a fundamental policy mistake in pursuing a trade war against China. A Keynesian macroeconomic analysis shows that the US will likely be worst affected by the conflict, while China should escape unscathed and several other emerging markets could be clear gainers. This sell-off may be an ideal opportunity to "buy the dip" in EMs

    7
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    Europe’s Populist Wave Peaks

    Since the migration crisis of 2015, nationalist-populist movements have been on a tear across Western Europe. Sunday saw the anti-immigrant Sweden Democrats boost their ranking, and even claim to be the election’s real winner. Yet look closer and what stands out over the last two years has been such parties’ failure to fully break through.

    2
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    The Exit From A Liquidity Squeeze

    If it walks like a duck and quacks like a duck, then it probably is a duck. By the same token, if central bank reserves are shrinking, the US dollar is rising, and emerging market currencies are cratering, we probably face a liquidity squeeze. None of this should be surprising, as the drains on US dollar liquidity have come from all directions this year.

    7
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    The Case Against Eurozone Stocks

    The eurozone may not face the kind of liquidity crunch roiling US dollar-based emerging economies, but its equity markets remain on a grinding downward trajectory. The MSCI EMU index is within 1.0% of this year’s low and a range of technical indicators make for ugly reading. I would advise global investors to generally avoid the single currency area, but for those who must be there I will slightly surprise myself by arguing that the eurozone’s...

    0
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    On Getting It Wrong

    Louis went into 2018 with a set of assumptions about how growth and markets around the world would play out. It hasn’t exactly worked out as expected and in this mea culpa he seeks to understand how he got it wrong and what comes next. He concludes that a key driver of the changed investment environment was not so much the strength of the US dollar but China’s decision to allow a renminbi devaluation.

    10
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    Strategy Monthly: A Simple Guide To US Asset Allocation

    We synthesize four years of work on asset allocation and present a model portfolio built around analysis of the cost of and return on capital; the real rate of return on equities, bonds and cash; and the ideal duration of fixed-income holdings. Today we recommend that US portfolios hold 75% in equities, 25% in cash, and shun bonds.

    0
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    Italy’s Chaotic Tendency To Stabilize

    Italian debt holders have been spooked by a leading figure in the country’s populist government threatening a fiscal blowout. Such rhetoric threatens the relatively benign scenario that I advocated in July and has investors fretting about another eurozone crisis. While Italian politics will remain febrile, such concerns are probably overdone.

    2
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    Europe’s Whimpering Economic Cycle

    As with most of the developed world, the eurozone has seen a breakdown of the Phillips Curve link between inflation and unemployment. The 2008 crisis and ensuing double-dip recession created a sclerotic environment where labor market dynamics had little impact on general prices. This is another way of saying that Europe’s economy has remained stuck a in low-growth funk. Last year that seemed to have finally changed, with cyclical forces driving...

    0
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    Tail Risks That Worry Me

    Yesterday I made the case that emerging markets should be superior performers in a global bull market, which I characterized as the most hated in history. What that analysis left out was the relative prospects of the other big blocks in the global equity universe; namely, Europe and Japan. My core point yesterday was that trade wars do more harm to economies that close their markets than those countries which supply them, and on this score...

    1
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    Last Place In The FX Beauty Contest

    In mid-August, the US dollar hit a 12-month high against developed country currencies, and a multi-year high against emerging market currencies. Two weeks on, the burning question for investors is whether those highs represent a turning point, whether the dollar strength that prevailed from mid-April to mid-August has now played out, and whether the US currency is about to resume the softening trend that predominated through 2017. As always,...

    8
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    Trouble With Monopsonies II: Joan Robinson Versus David Ricardo

    Among the discussion topics at this week’s Jackson Hole meeting of world central bankers will be whether the market power of giant corporations is so great it allows them to hold down workers’ wages at the global level. Charles has no doubt, arguing in this paper that the development of platform companies into labor monopsonies accounts for what has been misunderstood as “secular stagnation”.

    5
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    A Step Back From War On All Fronts

    Events of the past few weeks have lowered the risk of the worst-case scenario of a trade-war-on-all-fronts that Arthur laid out earlier this summer. But although officials in both the US and China are eyeing a truce, no bilateral deal can be nailed down until the two countries’ presidents meet in November, after the US midterm elections. That leaves time for the Trump administration’s trade hawks to regain the upper hand.

    6
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    More Than Collateral Damage

    Among the collateral casualties of Turkey’s lira crisis have been European bank shares. Over the last week, as the lira plunged, the SX7E index—the EuroSTOXX banking index—slumped -7% on fears about banks’ exposure to Turkish borrowers. But Turkey is not the only concern weighing on European bank stocks. The sell-off over the last week is just the latest in a series of downlegs that together have seen the SX7E fall -19.7% over the last six...

    0
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    Is Italy The Whale?

    Markets have an end-of-an era feeling to them as the US’s exit from easy money causes the dollar to rise, emerging markets to crater and strongmen to cry blue murder . Louis yesterday concluded that we are not yet seeing the kind of event that marks a cycle’s denouement. I agree but wonder if we did just glimpse a big beast breaking the surface in the shape of Italy, which judging by yesterday’s 12bp rise in BTP yields may already be in play.

    16
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    Turkey Is A Big Fish, But No Whale

    The meltdown unfolding in Turkey is not a surprise (see A Turkish Vortex). However, it does raise the question of where we go from here, and whether the Turkish crisis is a symptom of a change in the investment environment.

    2
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    The Biggest Question Of The Day

    Should we take Donald Trump literally when he says he wants to eliminate the US trade deficit? In this paper, Louis examines the different ways the US might hope to cut its trade deficit, including its bilateral deficit with China, and explores why the outlook for risk assets depends enormously on the US administration's real aims in launching its international trade war.

    7
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    When Non Means Non

    The UK government is on the offensive trying to sell a “Chequers” plan that would leave it with a semi-detached trading and administrative relationship with the European Union. The negotiating position, has won few plaudits at home, and over the last week got a courteous, but non-committal response on the continent. Cedric is doubtful that the intended "divide and conquer" approach will bear fruit.

    0
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    The Bullish Logic Of Trump’s U-Turns

    The news on Wednesday that Donald Trump’s administration is considering imposing tariffs of 25%—rather than 10%—on an additional US$200bn of Chinese goods might appear to be an aggressive escalation of its trade conflict with China. But there is a high probability the proposed tariffs will never be implemented. Trump has a track record of talking tough, only to back down before it comes to the crunch; a pattern of behavior that may help to...

    4
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    No Exit From Brexit

    On Friday, Anatole set out his view that a second Brexit referendum is likely, and that in all probability it will reverse the original 2016 vote. Exercising his right to reply, today Charles explains why no second referendum is possible, why a no-deal, hard Brexit is increasingly likely, and why this will present a great buying opportunity in UK assets.

    15
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    Stabilizing, Not Slumping

    After a rocky first half of the year, in which a clutch of key indicators deteriorated steeply, recent signs indicate that eurozone growth is stabilizing rather than rolling over. Without doubt, there are still formidable downside risks. However, on balance the latest batches of data point to a continuation of above-potential growth, albeit in a lower gear than in 2017.

    0
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    The Arithmetic Of Brexit

    If a country votes to make two plus two equal five, that “democratic decision” will eventually be overwritten by the rules of arithmetic. Anatole reckons this is what’s playing out in Britain, as Theresa May’s government struggles to get a parliamentary majority for any realistic Brexit plan. If the situation persists, the only alternative will be another referendum—only this time the choice would be between remain and a far less attractive, but...

    11
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    No Cause For Celebration

    The US-EU trade truce announced by President Donald Trump and European Commission President Jean-Claude Juncker on Wednesday is good news for the world economy. Yet it is still far too early to write off global macro risk from a generalized trade war. US tariffs on steel and aluminum imports remain in place, as do the EU’s retaliatory tariffs on US goods; and the threat of American levies on US$335bn in car and car part imports has been...

    1
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    What US Auto Tariffs Would Mean For Europe

    Last week’s public hearings in Washington heard a chorus of industry opposition to the US administration’s proposed import tariffs on cars and car parts. But in Europe at least, markets appear to be coming around to the view that the tariffs will go ahead regardless. After Friday’s fall, the auto and auto parts sub-index of the Stoxx 600 has slumped -15% since late May when the US Commerce Department announced its Section 232 investigation,...

    1
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    Europe's Tri-Polar Disorder

    Having been at odds with each other for at least three years, the empire is striking back against an upstart member. The European Union on Thursday said it will sue Hungary for its unfair treatment of asylum seekers. A few years ago, such a stand-off would have been assumed to have only one outcome: a win for the dispensers of patronage in Brussels. That is no longer the case and this tells us much about how the EU’s traditional power brokers—...

    3
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    Allez Les Bleus!

    A year into Emmanuel Macron’s presidency, the French have finally invaded the streets in huge numbers. It was not, however, to man the barricades and defy his reform agenda, but instead to engage in a massive national celebration after Les Bleus won their second football World Cup in 20 years. Having suffered the confidence-sapping impact of 12 major terrorist attacks since 2012, Sunday’s win against Croatia has blown away the cobwebs and as one...

    0
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    The Real Italian Story

    The big worry about Italy is that its new populist government adopts policies that spark another eurozone crisis, and even a breakup of the European Union. This view is almost certainly wrong, for despite the government this week announcing a roll-back of labor market reforms, it will struggle to implement its radical agenda in any systematic way. This is due to constitutional checks that inhibit radical changes, and the fraught political logic...

    4
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    The Recession Of 2019

    Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of...

    17
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    The Message From Eurozone Credit

    Should we worry that eurozone corporate bond spreads have doubled since late January? After all, bond yields are rising globally and as deflationary risks have ebbed the European Central Bank has signaled its intent to normalize monetary policy. Yet, looking back at the eurozone’s last cycle, policy was tightened without spreads blowing out. My concern is that the present squeezing of financial conditions is sending a darker message, and will...

    0
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    Time To Buy Brexit Britain

    “Will the Brexit agony never end?” Anatole asked in mid-June. It now seems that the agony may end much sooner than expected. Following last Friday’s decision by prime minister Theresa May to blur all her “red lines” in negotiations with the EU, and—paradoxically—the subsequent resignation of hard-Brexiteer cabinet minister David Davis, the time to start buying cheap British assets may have come.

    4
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    Hard Yards For Emerging Markets

    Emerging markets have been hit by the combined effect of a stronger US dollar, tighter international liquidity and rising trade tensions, causing their currencies to fall more in the last few months than in the 2013 “taper tantrum”. The big fear for EMs is that the end of easy money globally creates a giant margin call. As a firm, we have tended to be upbeat on their prospects in this cycle, and it may be that a huge buying opportunity has...

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