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    Gavekal Research

    A Perfect Storm In Europe?

    Last week we argued that the most likely scenario for Europe was a messy and rather boring muddle-through, where the biggest risk was not a reprise of the euro crisis but prolonged stagnation. No sooner did that missive go out than Spanish premier Mariano Rajoy was engulfed by allegations of getting payouts from a party slush fund. Spanish bond yields have risen by 50 basis points over the last two weeks, with nearly half that move coming...

    3
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    Not A Sterling Year For The UK

    0
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    Gavekal Research

    The Case For A European Recovery

    Attractive valuations and bountiful liquidity have driven stunning performance in most eurozone financial markets since last summer. Yet for the recent “europhoria” to turn into a sustainable bull market, we must see both a cyclical economic recovery and further enhancements in governance arrangements. Among the GaveKal team, my more optimistic view stems from the fact that most of the negative dynamics that drove Europe’s economic crisis have...

    7
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    Gavekal Research

    Muddle-Through Europe: For How Long?

    A year ago, the choice in Europe seemed clear: either set a clear course for fiscal union, or let the common currency blow up. Yet somehow Europe avoided making a tough choice, settled for a murky muddle-through path – and markets applauded. European equities had a fine year, the euro has perked up to $1.35, and ten-year sovereign bond yields for two of the riskiest major economies, Italy and Spain, have settled around 4% and 5% respectively....

    0
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    Gavekal Research

    Europe's Goldilocks LTRO Scenario?

    3
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    Gavekal Research

    The French Time-Bomb: Defused

    On the 50th anniversary of the Elysees Treaty signed by Charles de Gaulle and Konrad Adenauer to seal the Franco-German partnership, one has to be struck by the considerable differences in recent economic performance between the two countries. The Economist’s November cover story of “the time-bomb at the heart of Europe,” illustrated with loaves of baguettes ready to blow, underlined these divergent paths, amid fears stirred by the election of...

    0
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    Gavekal Research

    Russia: Trust But Verify

    As Gerard Depardieu gets Russian citizenship, wine exports to Russia are almost certain to get a boost. But Europe probably hoped for more after the country’s entry into WTO last summer. And indeed, tensions were thick at an EU-Russia summit held in Brussels just before Christmas, where the EU trade commissioner threatened legal action against Russia and sniped that, “far from using its new membership of the WTO as a tool for broader reform,...

    5
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    Gavekal Research

    The Cracks Are Widening

    Over the past four days, the Swiss Franc has lost –2.5% against the euro. This precipitous move follows a one year period when the CHF constantly tested the upper bounds of the EUR peg. It is another decisive piece of evidence that highlights the eurozone’s improved financial conditions.

    2
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    Gavekal Research

    Is Japan Gunning For Europe?

    It almost looks like Japan has Europe’s export champions in its cross hairs. Yesterday saw another significant bout of yen weakness and this time it was particularly pronounced against the euro. Indeed, the yen lost 1.8% against the single currency, the biggest one-day drop since mid-September last year and is now trading at ¥117.8/€, the lowest level since May 2011. Given that Germany is a major trade competitor, and that Japan recently...

    0
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    Gavekal Research

    And Now For The Telecom Union

    0
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    Gavekal Research

    Euro Strength - A Winter Phenomenon?

    Currencies are notoriously tricky for they can have multiple drivers: interest rate differentials, growth differentials, divergences from their historical purchasing parities, trade flows, cross-border M&A deals, etc. Worse yet, market drivers can turn on a dime. For example, investors love the Australian dollar for its interest rate pick-up—until the global environment turns wobbly, and then they hate the AUD for the deteriorating trade...

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    Gavekal Research

    Goodbye Break-up

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    Fathom China

    Profile: Geely: The Swedish Gamble

    China’s love affair with the automobile over the past decade has led to two types of car companies: joint ventures between foreign brands and state enterprises, and upstart private-sector firms making cheap cars. In the second category, Geely ranks among the best. The company is run by a self-described peasant who maintains absolute control over a large number of auto makers and suppliers, some listed and some not. This report focuses on the...

    0
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    Gavekal Research

    A Clown Comeback Unlikely In Italy

    1
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    Budgets And Monkeys

    1
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    Gavekal Research

    Value In Bombed-Out EMU Stocks?

    In recent months a reduced focus on austerity and promises of monetary support from the European Central Bank has led to The Decline Of European Risk. The markets have rewarded these developments, with the MSCI EMU outperforming the MSCI World by eight percentage points since the European Union summit in late June. But the rallies in European assets have not been uniform.

    0
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    Gavekal Research

    Britain's Two Cheers For Carney

    5
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    Gavekal Research

    The Changing Face Of The Euro Crisis

    When Angela Merkel imposed the IMF on Europe in 2010, her move was initially interpreted as insulting for the EU commission and for the ECB, as well as a slippery maneuver to escape the debate over eurobonds. Now this plan has backfired, as the IMF has become an ally with the other troika actors against “German management” of the recovery process, with important implications for European financial markets.

    0
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    Gavekal Research

    And Meanwhile In Iceland

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

    9
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    Gavekal Research

    Aa1 Mes Amis! - Francois Chauchat

    There is a distinctly Gallic reason for Donizetti’s “La fille du regiment” receiving a warm reception at the Paris Opera this autumn: each act ends with a resounding “Cocorico” at the same time as a giant picture of a proudly posturing rooster falls on the stage. Success guaranteed. Unfortunately, a perusal of the economic press the following morning will remind audiences that the Paris Opera is one of the few places where unabashed national...

    14
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    Gavekal Research

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

    0
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    Gavekal Research

    Goodbye Default Risk, Hello Volatility

    The global scramble for yield has caused investors to pour billions into emerging market bond funds. In a remarkable twist on recent history, markets such as Mexico and Indonesia have started to look like havens in the storm. Yet investors would be wrong to conclude that risk has been removed from emerging market fixed income investing. While solid fundamentals and lower total indebtedness has undoubtedly cut the chances of default, we would...

    1
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    Gavekal Research

    The Well-Kept Secret Of European Growth

    In the very early years of the last decade, I remember Warren Buffett saying that he would not consider investing in Europe “because there is no growth out there.” At that time, his widely shared belief was built on the extreme weakness of the German economy, the then sick giant of Europe. Like others, he missed a five-year long equity rally with outstanding performance by many European growth clusters that he was not even looking at: Spain, the...

    2
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    Gavekal Research

    UK Economy Is Still A Sick Man

    The British economy rebounded strongly in the third quarter, shedding the memory of a double-dip recession as it soared to the stratosphere with 4% annualised GDP growth. That, at least, might be the view of a Martian economist who knew nothing about earthling life. Such creatures seemed to be operating in the financial markets yesterday, to judge by gains in sterling and losses in the gilt market in what was otherwise a mildly “risk-off” day....

    2
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    Gavekal Research

    Welcome Back To The Euro Crisis

    There are plenty of plausible explanations for yesterday’s slide in equity prices and “risk-on” currencies, but one you are unlikely to have read in financial media relates to recent events in Dublin and Berlin. As we warned last Friday, the purported EU banking union agreement was anything but a done deal—and sure enough, this plan has already begun to unravel, creating a dangerously complicated new dynamic between the German, Irish and Spanish...

    2
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    Gavekal Research

    Mystical Rapture And The Euro

    Of all the miracles, or conjuring tricks, behind the euro’s unlikely survival, perhaps the most intriguing is that investors buy-in to the hypnotic power of magic words. Angela Merkel or Mario Draghi have only to say “Abracadabra” and all the Masters of the Universe fall into an obedient trance. What else but magic or hypnosis explains the narrowing of bond spreads, the rally in the euro and the powerful gains in Spanish equities in response to...

    1
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    Gavekal Research

    Eastern Europe’s Competitiveness Boom

    It may not have been enough to fully distract Dominique Strauss Kahn from extra curricular pursuits, but in 2008 it was Eastern Europe that put the IMF back to work. Ukraine, Hungary and then Latvia all needed to tap the fund in the aftermath of Lehman Brothers’ bankruptcy. After a substantial credit bubble leading up to 2008, most Eastern European economies (Poland excepted) have experienced a sharp and painful deleveraging. Although less...

    4
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    Gavekal Research

    The Failure Of Fiscal Sado-Masochism

    The controlled experiment continues and the results are getting clearer by the day. Since 2009, Britain and the US have applied diametrically opposite fiscal policies to two broadly similar economies, while keeping monetary policies almost exactly the same. Britain has raised taxes and cut public spending with more determination than any other G7 country, while the US government has made relatively little effort to tighten fiscal policy. The...

    9
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    Gavekal Research

    If I Were A German

    6
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    Gavekal Research

    The French Bond Market Puzzle Explained

    The superb performance of the French bond market has come as a big surprise for an overwhelming majority of investors and observers. Moody’s pulled France’s AAA sovereign credit rating in January, and in May the country elected the socialist Francois Hollande, who promptly implemented an economic policy that the business community roundly disapproved. Yet the 10-year OAT-bund spread declined to a range of 50-70bp recently, from almost 200bp in...

    8
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    Gavekal Research

    GaveKal Five Corners

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

    0
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    Gavekal Research

    Europe And The Chinese Consumer

    It would be easy to conclude that the good times are over for European consumer-good retailers in Asia. Investors recently felt a chill autumnal breeze after Burberry, the British retailer of spiffy trench coats and scarves, issued a profit warning based on lower Chinese “gift giving”. Concerns are centred on a slowdown after a brief period when Chinese shoppers seemed to rule the world. These fears are overdone since European retailers are...

    4
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    Gavekal Research

    A Reprieve From Repression?

    Although new asset purchase programs by the world’s major central banks promise to escalate the manipulation of market prices (see The Fed’s Money Tree), we detect a flicker of sanity among prudential regulators. Interestingly, the fight back against financial repression has come from some unlikely quarters, notably Paris.

    0
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    Gavekal Research

    Do Not Fear The German Recession

    Germany has been the main bright spot of the eurozone economy since the Global Financial Crisis, with +3% growth in 2011 after a +4.2% bounce in 2010. But this year’s economic slowdown now threatens to head into recession territory. Not only is the export industry under pressure from a global and European slump, but many are questioning whether the renewed prosperity in the domestic economy can last. In my view, these concerns are overplayed....

    0
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    Gavekal Research

    Why Europe Just Got Worse

    20
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    Gavekal Research

    A Money-Making Proposal To Save The Euro

    10
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    Gavekal Research

    Draghi's Plan

    So it is done now. The European Central Bank has announced a plan: it is called the OMT, for Outright Monetary Transactions, and to make a long story short, this plan is essentially a way to bypass the German opposition to providing a banking license to the size-limited ESM bailout vehicle. It does this through conditional but potentially unlimited ECB purchases of short-dated government bonds. By focusing on the short end of the curve (one to...

    4
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    Gavekal Research

    Frugal Italy And The French Carry Trade

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

    9
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    Gavekal Research

    False Optimism

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

    3
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    Gavekal Research

    Look To Asia For Value

    The outperformance of US equity markets has certainly been impressive. Since the start of 2010 the S&P 500 is up +26%, beating the MSCI AC World by 16 percentage points. This outperformance has been driven by both US corporate strength and the weakening EMU and Asian economies. While we remain convinced of the long term structural re-rating of US equities (see Once More Into The Breach or Weeks When Decades Happen) after such a period of...

    20
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    Gavekal Research

    The Decline Of European Risk

    After a two month rally in Eurozone risk assets, including one month of outperformance against the US, disciplined investors are naturally tempted to sell. Surely, the next couple of months will provide us with additional episodes to the euro crisis. The German constitutional court is expected to take a decision on whether the ESM bailout fund breaks German law on September 12, the same day as the Netherlands concludes general elections...

    10
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    Gavekal Research

    The True Test For the Euro?

    We have argued since 2005 (see Divorce – Italian Style) that the true test of the euro’s survival would take place in Italy rather than Spain, Greece Ireland or Portugal. Not because of Italy’s high debt-to-GDP ratio (unlike in France, Italy’s debt is mostly domestically financed) but instead because of Italy’s unique political structure. In almost all euroland member states, a given country’s “elite” typically belongs either to the political,...

    10
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    Gavekal Research

    Safe Is The New Risky

    This has been a year for the bears. By late July anyone invested in long-dated treasuries had 12 month gains of +35%—not bad for owning the world’s “safe haven” asset. But even havens can get overrun. UST gains have partially reversed in recent weeks with yields rising from 1.5% to 1.8%. The trigger was slightly improved US economic news and waning hopes that the Fed will adopt a QE3 monetary stimulus. For this reason, we recently argued that...

    0
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    Gavekal Research

    Sweden's Property Bubble In Waiting

    A few months back Michael Wolf, the CEO of Swedbank, was the subject of a prominent newspaper profile that featured an arresting photograph of him surrounded by live wolves. Unbeknownst to Mr. Wolf, this was an extremely risky stunt— not long after, the same wolves turned on their handler and tragically killed her. Recently, Mr. Wolf has confronted another pack of potentially unfriendly beasts by suggesting that Swedish politicians should force...

    0
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    Gavekal Research

    Spain, Italy Are No California, Yet

    Mitt Romney warned last week that the US must put its fiscal house in order or end up like Greece, Italy and Spain—or even (and this was the controversial part) California. The comment ruffled feathers in the golden state where residents face tax rises and severe spending cuts. Mr. Romney made a clever polemical point, however his basic analysis was dead wrong. For while Californians face hard times, they are unlikely to suffer a southern...

    7
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    Gavekal Research

    Swiss Franc: Not A Peg For All Seasons

    The Swiss National Bank has constrained the appreciation of the franc, but incurred spill-over effects. The result of liquid funds pouring into safe-haven Switzerland has been rapid credit growth and a surge in property prices. But the question we increasingly hear asked is whether the SNB will stick with the de facto peg since the cost of doing so keeps increasing.

    3
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    Gavekal Research

    Is Germany Entering A Recession?

    5
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    Gavekal Research

    Dams, Earthquakes And Bond Markets

    While investors, or at least the financial media, continue to focus on non-events in Europe, US Treasury-bond futures yesterday fell another full point. This drop, coming on the back of recent pull-backs means that the US long bond has lost four points in less than two weeks. Technically, we are thus approaching interesting levels as a drop of another point will have the US long bond forming a nice “double-top”, thereby suggesting much lower...

    4
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    Gavekal Dragonomics

    China Property: Steady As She Goes

    China’s property sector is clearly on the mend, but the recovery is slow and steady rather than meteoric. Policy makers probably welcome the modest rebound in transactions and prices, which should lead an uptick in broader economic growth later this year. But they remain vigilant about containing sharp rises in house prices, which could spark social discontent. So Beijing’s property policy will almost certainly stay on its present course, with...

    1
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    Gavekal Research

    Where Is Draghi's Gran Torino Headed?

    On Monday we compared Mario Draghi to Clint Eastwood’s Dirty Harry when he boasted that he would do everything necessary to save the euro (see How Many Bullets in Draghi’s .44 Magnum?). Yesterday we learned that Draghi had stumbled into the wrong movie. Instead of Dirty Harry, which ends with Eastwood killing the villain with his last bullet, the ECB boss’s press conference replayed Gran Torino, where the gun apparently in Eastwood’s pocket...

    3
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    Gavekal Research

    How Many Bullets In Draghi's .44 Magnum?

    Mario Draghi’s combative remarks at the global investment conference in London last week are a must read—not because they change the European game, but for how they illustrate the tension between the ECB chief’s tough-guy talk and the limited armoury under his command.

    5
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    Gavekal Research

    The Euro Carry Trade

    6
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    Gavekal Research

    Say Goodbye To UK Austerity

    The -0.7% plunge in Britain’s quarterly GDP announced yesterday—the biggest decline in the British economy since 2009—was officially a “shock” to the markets, because consensus forecasts had predicted a decline of only -0.2%, according to Bloomberg. But the second quarter was bound to show a continuing deterioration in the British economy for two reasons we pointed out three months ago, when the downside “surprise” for the first quarter was...

    3
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    Gavekal Research

    Shadoks & Stock Markets

    5
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    Gavekal Research

    A Sweltering Summer For The Euro

    The euro crisis is taking another critical turn. Greece is under intense and probably unbearable pressure, while Spain faces sovereign yields near 7.5% which all but freezes it out from market financing. “Dr Draghi” is dispensing harsh medicine to the southern economies without outlining a treatment plan that may resuscitate the patient.

    6
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    Gavekal Research

    Russia's Reluctant Move To Abundance

    As Frederic Bastiat explained more than 150 years ago in his essay “Sophisms of the Protectionists” (read here), it is not easy to fight the arguments of the protectionists. This is mainly because “our adversaries in the discussion have a signal advantage over us. They can, in a few words, present an incomplete truth; which, for us to show that it is incomplete, renders necessary long and uninteresting dissertations”. Who then can be surprised...

    14
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    Gavekal Research

    Export Wars: Germany 1, Japan 0

    Japan and Germany both started the new millennium with dominant positions in the global export market and both had strong incentives to keep it that way. Japan’s domestic economy was still deflating from an epic asset bubble burst, while Germany was reeling from unification with the East’s wrecked and unproductive ex-communist economy.

    2
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    Gavekal Research

    ZIRP Goes To Europe

    Central banks have set the bar high for what is now considered “major monetary easing”. A bread-and-butter 25bp rate cut no longer qualifies, at least not usually. But last week the ECB not only cut the rate at which it lends to banks by 25bp to 0.75%, it also chopped the rate it pays on deposits by 25bp—to zero. The move focused attention on Mario Draghi’s assertive approach to policy, especially amid signs that deposits are fleeing the ECB....

    3
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    Gavekal Research

    The Coming French Depression

    5
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    Gavekal Research

    France, Tax Increases and Economic Recovery

    11
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    Gavekal Research

    What Is A Bund Worth?

    5
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    Gavekal Research

    The Euro Debate Returns

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

    7
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    Gavekal Research

    Solvency II: A Cardinal Sin

    Over the years, we have identified five “cardinal sins” of policymaking. These are: 1) Protectionism, 2) tax increases, 3) increases in regulation, 4) monetary policy mistakes and 5) wars. Because structural bear markets almost always occur when one or several of these cardinal sins have been committed, it is with this list in mind that we dive into the exciting world of insurance company regulation.

    8
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    Gavekal Research

    Germany Has To Stay: A Riposte

    In his Reuters column last week (see here), and his recent Daily (see It May Be Time To Say “Auf Wiedersehen”), Anatole argues that it may be more logical for Germany to leave the eurozone, rather than Spain or Italy. Germany is indeed the main outlier in economic terms; if it were removed, intra-euro zone economic dispersion would be much lower. However a scenario where Germany is the only country that exits is not just improbable—it is also...

    14
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    Gavekal Research

    The Euro Debate And The Wizard Of Oz

    Confucius is said to have remarked: “When words lose their meaning, kingdoms become ungovernable”. We often think of this when debating whether the euro can “work,” for this term can mean very different things to different people. Proponents will argue that with greater federalism, continent-wide bank guarantees and national parliaments giving up power to the European Union, the euro can be made to “work”. Opponents, meanwhile, argue that it...

    7
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    Gavekal Research

    It May Be Time To Say "Auf Wiedersehen"

    Now that the Greek election is over, with the pro-bailout parties gaining enough seats for a slim majority, Europe can return to the regular cycle of panic, relief, disappointment and renewed panic, that we have observed for the past two years. This time, however, the relief rally may be even shorter than usual, since the market’s attention will soon shift from Athens to Madrid, Paris and, above all, Berlin. Since Greece has no chance of...

    18
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    Gavekal Research

    Drowning-By-Numbers: A €10 Trillion Game

    What kind of mess would financial institutions wake up to the day after a break-up of the eurozone? A very large one. In the decade to 2008, euro area financial institutions accumulated growing cross-border positions within the currency area, spurred on by officials, financial regulators and a complacent attitude toward risk. Over the past few years, and especially since the euro crisis intensified in 2010, European financiers have learned to...

    2
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    Gavekal Research

    ECB Role Shift The Real Game Changer

    As the Euro crisis intensifies and yields on Spanish bonds reach new heights, the pressure on EMU policymakers has become intense. Markets are already looking through Sunday’s Greek election toward the EU leaders summit on June 28-29 to see if a grand bargain can be struck to forestall a Grexit and restore some confidence in GIPSI financial systems. From what we understand, Francois Hollande and Mario Monti have agreed to champion the following...

    5
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    Gavekal Research

    MULTIMEDIA - Louis Talks About Europe On Radio Show Streettalklive

    Louis was recently interviewed on the radio program streettalklive, where the talk unsurprisingly centered on the European crisis. Those who would like to listen to this lively discussion can download or stream the audio file, split into two parts:

    0
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    Gavekal Research

    Armistice Or Capitulation

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

    10
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    Gavekal Research

    Sweden Moves Against Repression

    On Thursday last week, the Swedish OMX jumped by +3.2%, the biggest gain in six months, while bond markets sold off heavily. Yields on the Swedish 10y leapt by +33bps to 1.47%, or a shocking 25% move, the biggest daily change on record. What prompted this violent reaction?

    6
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    Gavekal Research

    Federalism, Debt Traps And Competition

    14
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    Gavekal Research

    The Triumph of Hope Over Experience

    As we go through the few scant details of the bank bailout offered to Spain, we cannot help but shake an uneasy feeling of deja-vu all over again:

    1
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    Gavekal Research

    Euro End Game: Four Vital Questions

    The British writer AA Gill once noted that “Europe is an allegory for the ages of man. You are born Italian, relentlessly infantile and mother-obsessed. In childhood, you are English: chronically shy, tongue-tied clicky and only happy kicking balls or pulling the legs off things. Teenagers are French: pretentiously philosophical, embarrassingly vain, ridiculously romantic yet simultaneously insecure. During Middle-Age, we become either Irish and...

    21
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    Gavekal Research

    Quarterly Strategy Chart Book: How To Survive A Panic Attack

    1
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    Gavekal Research

    Please-No More Liquidity Fixes--by Will Denyer

    As we hear talk of a global central bank coordinated action to solve Europe’s market malaise, we have to ask, to what purpose? Large liquidity injections once served to keep Europe’s financial system alive until the continent’s economies sputtered back to life. The problem is, this never happened. Now the ECB’s substantial liquidity programs instead serve the purpose of providing leaders more stall time before acting. The monetary union is...

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    The Swiss Line In The Sand

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    The Unfolding Panic & The European Convergence Trade

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    Signposts For Euro Survival

    Like a game of whack-a-mole, European concerns have shifted yet again from the Irish referendum and Greek elections to Spanish banking problems, and we find ourselves in another crunch time for the euro crisis. While our internal debates on the euro crisis have been well documented, in recent days we have come to a surprising consensus on how this situation plays out—or at least on the milestones to determine whether the euro will survive (and...

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    Why Ireland Matters

    While the world is tuned into every rhetorical twist in Greece’s general election campaign, the more slowly evolving situation in Ireland is arguably just as significant. When Irish voters decide on Thursday (May 31) whether to accept the EU’s new “fiscal compact,” they will directly influence the outcome in Athens. But more importantly the economic experience of the troika’s model pupil means that lessons learnt in Dublin are likely to change...

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    The French OAT - French CDS Very Odd Divergence

    Here is a story of relevance to everyone who deals in markets; five monkeys are placed at the bottom of a set of stairs and bananas are left at the top. After one monkey attempts to climb the stairs, the whole group is sprayed with jets of cold water. A second monkey tries the ascent, but the group is again doused. Unsurprisingly, the monkeys desist from further attempts. Then one of the troop is removed and replaced with a new monkey—spotting...

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    Expect Another QE Dousing In The UK

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    Unsatisfactory Peace To Follow The War

    When Microsoft last month said it would pay AOL US$1bn for a patent portfolio, long-time readers started emailing to congratulate us on the vindication of our long-standing thesis that "knowledge is the world's most undervalued asset." What better proof than the outlandish prices which tech companies now pay to acquire intellectual property packages?(The Microsoft/AOL deal pales in comparison to last year's $4.5 billion...

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    The Swedish Krona, An Odd Victim

    It is puzzling that the Swedish krona should be so directly in the firing line as investors flee the chaos in southern Europe. The SEK has fallen for 15 of the last 16 days against the US$ (the longest losing streak since 1971) and is trading at a two-year low. It also has the dubious distinction of being the worst major OECD currency against the euro so far this month, losing nearly 3%.

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    Breakup Or Federalism: And When Will We Know?

    This week the Bank of Greece has written to the government to warn of an unfolding run on deposits at the country’s banks. More than anything, this highlights why hopes that southern Europe could deflate its way to competitiveness were misplaced. Southern Europe is not Hong Kong in 1997-2003, or Latvia in 2007-2010. There is no way for investors to hedge the potential risk of a euro exit and currency devaluation in Greece, Portugal or Spain....

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    The Rational Thing To Do In A Bank Run

    The first phase of the European crisis was about the sustainability of budget deficits; this triggered the creation of the EFSF and ESM. The second phase of the crisis was about bank liquidity; this triggered the creation of the LTROs. This third phase of the crisis, however, is about the political willingness of southern Europe to remain “nailed to a cross of euros.” Indeed, as our friend Michael Cembalest put it recently in a missive to his...

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    A New German Trade Revolution

    Amid the sturm and drang in Europe this week, sunny numbers from Germany have gone almost unnoticed. GDP rose +0.5% QoQ and +1.7% YoY during the first quarter, well above consensus expectations of +0.1% QoQ and +0.9% YoY. While this is a preliminary report and thus short on details, the German statistical office explained that the recovery was driven mainly by net trade. But how is this possible given the extreme weakness in Europe’s...

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    Euro Choices Are Getting Starker

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

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    The Euro's Greek Election Test

    Nobody can answer for certain whether the euro will survive a likely second Greek election—not even Angela Merkel. The most useful approach at this stage, rather than trying to predict an unknowable future, is to understand the sequence of events that could lead to the euro’s disintegration or survival after the tumultuous events of the past week. These are the scenarios we consider below.

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    Euroland's Secondary Depression

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

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    Reluctant Reflation In Germany

    In the midst of increasingly weak numbers out of southern Europe, a strong German economy is very important. Indeed, the nation once known as the sick man of Europe has now become the economic anchor of the region. This is why April’s weak German PMI reading (a drop to 46.2, the weakest since the summer of 2009) and the surprising rise in unemployment was so concerning to many investors.

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    Will Merkolland Lead Europe To Thatcherite Keynesianism?

    My colleagues here expect that, with Francois Hollande’s victory, France will be the camel that breaks the euro’s back. The Socialist agenda will lead to growth-killing tax rises and ballooning deficits, sending Europe’s second-largest economy down the path recently trod by Spain and Italy. Thus far, however, the bond markets do not seem to share those exact same fears, with OAT yields falling ahead of Hollande’s widely expected victory...

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    The French Farce Has Just Started

    [CENTER]

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    How To Deal With Bad Bubbles

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

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    The Financial Consequences Of Britain's Double-Dip

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    Purgatory vs Hell

    Are European risk assets headed for another implosion? The latest dismal round of economic and political news suggests so. The composite euro area PMI plummeted from 49.1 to 47.4, and the rout was comprehensive, hitting both manufacturing and services and both southern and northern Europe. The euro area seems unable to extricate itself from its first double-dip recession since World War II. Politics is not helping: the Dutch government...

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    All About Low Countries

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    Euro Federalism, Through The Back Door

    The mood in Europe has grown increasingly nervous in the past few weeks: Spanish bond yields have risen toward 6% on Madrid’s announcement that it would fail to meet its budget deficit reduction target, and investors worry that the ECB’s LTRO scheme for ensuring banking-system stability is running out of steam. The markets need a signal that European governments are moving away from stop-gap measures toward a permanent solution for their fiscal...

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    CHF Peg And The Bund Rally

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

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    Robot Revolt: Picking The Next Intel

    Bill Gates forecasted that new generation robots may become as ubiquitous and have as transformative an effect as the personal computer. In the home, the rich world’s graying populations are forecast to soon rely on robots to conduct chores such as washing and cleaning. If such predictions prove half right then huge upside can be secured from identifying the early winners – put another way it may be like buying Microsoft or Intel stock in the...

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