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E.g., 17-11-2019
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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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    Gavekal Research

    The Swiss Line In The Sand

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    The Unfolding Panic & The European Convergence Trade

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    Gavekal Research

    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...

    2
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    Expect Another QE Dousing In The UK

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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    The French Farce Has Just Started

    [CENTER]

    1
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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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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.

    1
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    Gavekal Research

    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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    Gavekal Research

    Was The UK Devaluation A Success?

    4
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    Debt Traps: A Refresher

    What economists refer to as the “debt trap” was first defined by Lord Keynes and the logic is very simple: when a country’s cost of capital exceeds its economic growth for a protracted period, trouble soon follows.

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    Europe is Still The Ugliest Sister

    2
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    Bond Rally Looks Over-Cooked

    Friday’s US employment numbers were well below expectations, and the related rise in US Treasuries capped a strong couple of weeks for bond investors. Do these numbers, and the coincident rise in Spanish and Italian bond yields signal an end to the risk-on rally, and undermine our short bond thesis? We think not.

    1
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    Gavekal Research

    Markets Question Liquidity Flow

    The last few days remind us that markets are made at the margin. Central bankers are still far from being restrictive, or hawkish. But there has been a marginal shift in rhetoric from “aggressively dovish” to “reluctantly dovish”—for example, the ECB’s expressed concern about rising inflation after deciding to hold policy rates, while the Federal Reserve’s recent communiqué highlights growing reluctance within the FOMC for further monetary...

    0
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    Growth & Markets Monthly

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    French Election: A Friedmanian Take

    The US primary marathon may be nearing a resolution, but another not insignificant electoral process kicks off on April 22 with the race to choose an occupant for the Elysee Palace. Readers may be aware that Gavekal has certain French roots, which we hope are discernible from the mélange of elegance, moderation and occasional insight provided by our writings. For this reason, some clients have asked for a view on the forthcoming presidential...

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    Gavekal Research

    Inflation Is Back For Good

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    An Alternative View On The UK

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    Gavekal Research

    Can Debt Nationalization Save Spain?

    Spain is back on the front page, dogged by two long-festering balance sheet issues i) ballooning regional debt levels, and ii) inadequately recognized bank losses (see Crucial Stress Tests Ahead For Spain). These twin problems threaten to turn the country into the next EMU bailout country—unless debt renationalization comes to the rescue.

    1
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    Gavekal Research

    Hong Kong Seminar Presentations - With Francois, Louis And Joyce

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    Gavekal Research

    A "Riotous" UK Budget

    Yesterday’s budget in Britain was treated by the markets as a non-event --and that was a correct assessment of its macroeconomic impact. But George Osborne’s package of tax and spending changes, which was presented as more or less fiscally neutral, could nevertheless turn out to be a political and financial milestone. The good news is that, by cutting Britain’s top rate of income tax from 50% to 45%, with hints that it would be further reduced...

    1
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    Gavekal Research

    The Euro Is Weaker Than It Looks

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    Gavekal Research

    Weeks When Decades Happen

    Talking about the Russian Revolution, Lenin once said that “there are decades when nothing happens and there are weeks when decades happen.” The last quarter of 2001 looks in retrospect like one of those exciting periods: three events occurred which set in motion the main economic trends of the ensuing decade. Successful investors latched on to at least one of these trends.

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    Gavekal Research

    Mediterranean Icebergs

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    Euroland's Political Barbell

    With the French presidential elections looming, many of our clients are asking us what we should make of the likely victory of Socialist candidate Francois Hollande (see The French Establishment Wins). The obvious risk is that France might be tempted to water down its reform agenda, and rely on ever-increasing tax rates to fight the public deficit—a counterproductive strategy to say the least. Hollande recently made a lot of noise by proposing a...

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    Gavekal Research

    QSCB: The Global Bond Yield Conundrum

    2
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    Gavekal Research

    The Risk-on, Risk-off Euro-Equities Trade

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    The United States Of Europe

    Another month, another failed Euro-summit – the seventeenth in the two years since the Greek crisis, according to a Reuters count. Monday’s summit failed to agree on policies for growth and on details of a new austerity pact. Angela Merkel embarrassed everybody with a plan to impose euro-Viceroys on Greece and other debtor countries. Financial markets concluded that Portugal would inevitably follow Greece into debt default. And with Merkel...

    5
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    Gavekal Research

    The LTRO Carry-Trade In Action

    Nobody knows whether today’s Long Term Refinancing Operation in Europe will be bigger or smaller than the first LTRO in December (i.e, The ECB’s 489bn Euro Christmas Gift). But one thing is certain: the ECB’s unprecedented liquidity injections have been far more effective in creating some (temporary?) stability in European financial markets than any of the treaties, bailouts and austerity programs that have obsessed politicians and media...

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    Gavekal Research

    Signs Of German Softening

    Last week, Francois argued that the Germans had successfully forced a strict, unforgiving and reformist agenda on the EMU, as underscored by the tough terms of the latest Greek bailout (see Has Germany Won?). The upside to this German victory is a plethora of reforms across the Eurozone. But of course the downside is that Germany’s tough medicine has brought Europe to its knees. Indeed, one could argue that the German plan is behind the record-...

    6
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    Has Germany Won?

    My colleagues have argued that the euro can only be saved if Germany supports a full fiscal union and stops straitjacketing the ECB (see for example, Euro Woes And German Culpability)—and that almost nothing that has been done up to now deserves any praise. My view is slightly different: I think there is a case to be made that Germany is already on its way to saving the euro. The fiscal compact agreed to last month by 25 out of 27 EU member...

    0
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    Blind Men Looking At Money

    Over the past year, we have published a number of debates on the euro, which generated vigorous client feedback, from the logical “isn’t it obvious that, if the euro continues as presently constructed, then it won’t”, to the somewhat tasteless “I was at Disney World this weekend and saw the Euro wearing a Make-A-Wish T-Shirt”. But at the heart of every one of these debates was a simple question—namely, what is money?

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    Gavekal Research

    Another Round Behind Achilles’ Chariot?

    Most investors that we have met in recent months tell us that they feel like Hector, being dragged around and around on the back of Achilles' chariot. And to be sure, the past few quarters have been one long series of sharp rallies (as we have just experienced), punctuated by sharp sell-offs that bring us back just where we started. Behind this constant to and fro lies a simple reality, namely that markets are made at the margin. And lately...

    0
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    Greek Riots And Orderly Breakups

    The latest “strategy to save the euro” will again end in failure. That much is clear from the riots in Greece and from the public warnings by Greek politicians that they will not be bound by any deal negotiated by the technocratic government imposed on them by Brussels and Berlin. Even more important was the corresponding promise from Francois Hollande, the probable President of France after the May election, that he too would reopen the half-...

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    The French Establishment Wins

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    Europe's Russian Advantage

    After many years of trying, in December Russia finally negotiated a deal to join the WTO. The last hurdle left is for the country’s parliament to ratify the agreement, which will probably be done after the next elections in early March. As we explained in The Four Merits of Russia’s Accession to WTO, Russia’s entry into the WTO is a momentous event—and is a positive development for an ailing Europe:

    6
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    Gavekal Research

    The OAT Hedge

    In a world in which most of the economic data continues to improve (signs of recovery in the US housing and job markets, renewed pick-up in Chinese financial deregulation, Japan finding its footing in spite of an overvalued Yen, Germany humming along even as Southern Europe collapses), the news out of France remains frankly uninspiring. Indeed, yesterday’s December trade balance report pushed France into a new record high trade deficit of €69....

    2
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    Gavekal Research

    The Non-Event Of French Elections

    There is a famous story about the last days of Constantinople. While the Turks were at the gates of the city, heated discussions were taking place inside the walls about whether angels were male or female. This is exactly how Paris feels these days, with candidates in the upcoming presidential elections debating the gender of angels, while ignoring the biggest dangers.

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    Positive EMU Growth Surprises?

    In the second half of last year, growth expectations for the Euro area plunged. As most advanced indicators of economic growth went from boom to bust territory, the consensus revised its projections for 2012 GDP growth from +1.75% in 2Q11 to -0.4% recently! This 2.65ppt swing was primarily led by deteriorating outlooks in Southern Europe and in France, but also by the prevailing assumption that the German economy would inevitably succumb to the...

    0
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    A Hedge Against the Coming Euro BoP Crisis

    Over the past two years, the euro crisis has morphed from a sovereign crisis in a peripheral country (Greece), to a banking crisis, and back to a sovereign crisis in core countries (Italy, Spain). At every turn a “solution” is devised whose purpose is to “save” the euro but whose actual result is simply to push the crisis into new and more desperate terrain. The latest solution -- aggressive easing by the ECB -- means that the next phase of the...

    0
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    Does Friday's Nine-Country Downgrade Matter?

    This is undeniably the question that, over the weekend, every investor has had to ponder. On the one hand, it could be argued that rating agencies are, as always, a “day late and a Euro short” and simply telling the market what it already knows. After all, the yield on the Eurozone debt-weighted average 10-year bond yield rose considerably in October and November, to over 6% (see chart). The OAT-BUND spread also reached new record highs and has...

    0
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    Euro Woes and German Culpability

    The world watched with horror and fascination this week as investigators sought the cause of an entirely avoidable shipwreck in Italy that could have cost as many as 40 lives. Meanwhile, the cause of a much greater wreck—that of the good ship euro—is heaving into view. As Greece moves towards default, as France, Italy and Spain suffer credit downgrades, and as negotiations on last month’s fiscal treaty reach deadlock, the euro is heading for the...

    0
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    Checking the Boxes: Monday, January 16, 2012

    This is undeniably the question that, over the weekend, every investor has had to ponder. On the one hand, it could be argued that rating agencies are, as always, a “day late and a Euro short” and simply telling the market what it already knows. After all, the yield on the Eurozone debt-weighted average 10-year bond yield rose considerably in October and November, to over 6% (see p. 2). The OAT-BUND spread also reached new record highs and has...

    0
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    The US and the UK are on Right Track

    Recently there has been a lot of talk about the supposed stark differences between the US and UK budget policies. Many argue that the UK policy path of aggressively cutting government expenditure is going to lead to a new recession; in contrast, the sure-to-be-reelected President Obama is said to be wisely staving off a double-dip by maintaining government spending at a high level. There is a slight problem with this view, however. It is not at...

    0
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    Daily - Europe's Coming Balance of Payments Crisis

    In a recent piece (see Draghi in Control – But For How Long?), Charles argues that, thanks to the ECB’s aggressive liquidity provisions, Europe’s policymakers have likely managed to avoid near-term budget and banking crisis…but at the cost of an upcoming balance of payment crisis. Indeed, by forcing down the cost of capital for hapless European governments, and thereby postponing the hard medicine and removing any incentive for reform, the ECB...

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    Draghi in Control, But for How Long?

    [INDENT=2]

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    The ECB’s 489 Billion Euro Christmas Gift

    After much anticipation, 523 banks tapped the ECB for €489bn of its new 3 year loans-significantly exceeding market expectations closer to €300bn. This confirms our initial take that this new facility, with longer duration loans and easier collateral requirements, is a major development. But what exactly does it accomplish?

    0
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    Daily - The UK in 2012

    To say something useful about the UK’s economic prospects in 2012, we have to begin by turning the clock back one year. At this time last year, the consensus view in the City of London was for Bank of England rate hikes to begin as early as May 2011 and for rates to be back around 2% by the end of the year! Given these absurdly hawkish monetary expectations amid over-optimism about UK growth prospects in the wake of the 2010 election, it was...

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    Daily - Europe's Tragic Ironies

    As highlighted by Christian Noyer’s latest comments, the French technocrats seem to feel it is a tragic irony that their country, rather than perfidious Albion, is at risk of losing its top-notch credit rating. However, while this past week has seen a number of tragic ironies, we are not sure this has anything to do with the Brits.

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    The Triumph of Southern Italy over Northern Italy

    In Have Southern Europeans Bought Too Many BMWs?, my colleague argues that Italy’s balance of payments problem is not caused by the Euro, but instead by the China factor and rising commodities prices. Besides the fact that Italy would have better adjusted to the pressures of a rising China and higher commodities prices were it not for its artificially high foreign exchange rate under the Euro, this theory fails to explain Italy’s disappearing...

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    Have Southern Europeans Bought Too Many BMWs?

    We are often being told that the first decade of the Euro led to artificially low rates in the South, which provoked a credit-led consumption boom that allowed the poor guys in Valencia or Lecce to buy a BMW. This story is supposed to provide a colorful illustration of the intra-Eurozone imbalances accumulated over the last decade. Yet, as we show below, the deterioration of the Southern European trade balances with Germany has accounted for a...

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    The Long March of the Communist Economies

    As we look forward to the coming year, we can bet our bottom drachmas that French and Italian trade deficits are going to continue to crater. Industrial production in most European countries will continue falling (who will invest given the uncertainty and the constant changing rules?). Unemployment is going to go ballistic.

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    Gavekal Research

    ...And Now for the Good News

    We reviewed some of the many downsides of the latest EU summit in Starting With the Bad News.... Now let us turn to the good news, at least for the Eurocrats and perhaps, in the short-term, for the European markets. The potential support from the ECB is the one part of the summit deal that could turn out to be much stronger than it seemed at first sight. While Mario Draghi’s public statements were less than helpful, they were presumably directed...

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    Starting With the Bad News...by Anatole Kaletsky

    Although the usual post-summit rally should not be too hard to orchestrate in the thin markets around Christmas, there was more bad news than good for the dwindling band of bureaucrats and politicians who are determined to save the Euro, regardless of the costs to the democracies and economies of Europe. We will begin with the “bad” news–partly because our bias is to treat bad news for the Euro as good news for the world and Europe, but mainly...

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    Daily: Fog in the Channel - Continent Cut Off

    At Queen Elizabeth II’s coronation in 1953 the Hakim of Bahrain came upon prime minister Winston Churchill sitting at the bottom of a staircase. He attempted to ingratiate himself to win British support for a Bahraini land claim against Qatar. By that point in the evening, Sir Winston was in no mood to discuss Arab territorial disputes. Later he instructed Britain’s resident in Bahrain: “Tell him that we never desert our friends.... Unless we...

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    Daily: EMU Crisis Fighting Intensifies - Will It Be Enough?

    No one expects leaders going into the current, umpteenth EMU summit to solve the existential problems of the Euro—much of which has to do with competitiveness and balance of payment issues. But investors are waiting for answers on three major questions related to liquidity and solvency issues in Europe:

    0
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    Daily - Riding on a Wing and a Prayer in Europe

    Over the past 5 days, Italian 10y bond yields have dropped –122bp, Spain –142, Belgium –122, etc. This impressive rally has been driven by a number of factors: the recent coordinated central bank action to improve liquidity, the Italian austerity plan, the Sarkozy-Merkel deal on borrowing limits and penalties for deficit violaters. But of course the main force behind the rally is, as usual, a wing and prayer. Not only do EMU leaders have the...

    0
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    Gavekal Research

    Two-Tier Economies, Two-Tier Markets

    Print Version:

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    Daily - US Swaplines: What a Difference a Few Basis Points Make

    It would be easy to write off this week’s news on USD swaplines as a bit of technical trickery aimed at boosting market sentiment without any real costs. In fact, the adjustment to the Fed’s swap facility changed the very nature of the program in a way that greatly enhances its significance in today’s global financial environment. At the prior cost of 100bp over OIS, the USD swaps were analogous to high-deductible, catastrophic insurance—only to...

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    Daily - Swedish Democracy vs Eurocracy

    In early 2003, we found ourselves in Sweden at the time of furious national debate over the potential adoption of the Euro. Our view was then, as it is now, that the Euro was not a sustainable project and that Sweden would be much better off on its own. However, back then, this was not a popular opinion in the financial community and we were met with fierce opposition in pretty much all our client meetings that week. The main argument of the pro...

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    Kicking a Can Full of Worms Down the Road

    An unfortunate fact of the Euro era is that a number of nations have become increasingly uncompetitive (see France is Getting the Italian Disease). The result has been a lower structural growth rate (e.g., Italy has had no growth for 10 years) and from there the double malediction of growing external deficits and widening budget deficits.

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    Cutting Through the Noise in Europe

    Whatever the end-game of the ongoing EMU crisis, we can be sure of one thing: Europe will have to live according to its means and no longer according to how much it can borrow. Among other things, this implies:

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    The ECB Is Already Doing QE, Its Own Way

    The current pleas for the ECB to start “quantitative easing” often miss one important detail: the ECB is already conducting QE, in every way but in name. The two core elements of what is commonly referred to as QE are: 1) the expansion of the asset side of a central bank’s balance sheet, well beyond what is required to simply target short-term policy rates and with the aim of easing credit conditions; and 2) the expansion of a central bank’s...

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    On German Rebalancing

    One problem with the Euro is that it has turned all economic analysis into a black or white exercise. Take the German export strength since 2000. The conventional idea is that the Euro project allowed German businesses to push down wages, in turn increasing Germany’s export competitiveness. However, the reality is that the lower wage growth in Germany was a consequence of the post-reunification deleveraging and the resulting rise in...

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    Daily - Looming Balance Sheet Risks for the ECB

    Lately, as the EMU crisis intensifies, many of our clients have wondered when the ECB is going to get serious and start actual quantitative easing? Our first response to this question is that, semantics aside, the ECB has already effectively done €260bn worth (or $350bn) of QE thus far, and that figure is growing every week. This of course pales in comparison to the Fed’s QE operations of closer to $2 trillion. And given what is happening in EMU...

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    Daily - Approaching No-Man's Land in Europe

    Meeting with clients over the last couple of days, it is becoming increasingly evident that institutional investors are frantically shuffling through a menu of post-Euro scenarios. And some of the “Day After” visions under consideration are quite unsettling. For example, some expect Germany will be the exit country—but after reintroducing the Deutschmark they will express their disgust with their lesser-abled former union members by continuing...

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    Daily - End of the Bund Hedge?

    Until now, we have argued that the two best hedges to Euroland troubles are German Bunds and the US Dollar. While the Bund hedge has been the most effective to date, it is now starting to look a little shaky. Indeed, yesterday’s big news about the failed German bond auction, where 35% of the volume did not get bid (worst results since the introduction of the Euro), highlighted that German sovereign yields are no longer falling on bad news. And...

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    Daily - Has There Been a Bigger Policy Failure than the Euro in the Past Decade?

    Since early September, the debt-weighted EMU 10 year bond yield has shot up from 4.2.% to a new decade high of 5.5% (see chart). Behind this surge, one finds the recent wobbles of the Italian BTP market, the renewed concerns surrounding France’s triple-AAA rating and the fact that, for the first time since the European crisis started in earnest two years ago, German Bund yields are no longer falling in the face of bad news. Given this backdrop...

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    Daily - Looking for Signs of EMU-Related Funding Stress in Asia

    European banks are essentially the world’s most global banks—providing, for example, more US$ loans to the rest of the world than US banks do. Indeed, the EMU played a lead role in the growth in the global funding market from 2000-2007—when total global cross-border claims on average grew by +5% of global GDP every six months (see chart), rising as high as US$22.5 trillion before the bust in 2008.

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    An Update on French Bank Bond Holdings

    The common view in France is that French banks obeyed the Bercy and held their positions on GIPSI bonds through the storms of the past year. But based on 2Q11 data released yesterday from the French central bank, this seems to be way off the mark. Indeed, it seems that French banks have been selling GIPSI bonds massively from as early as 4Q10.

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    Daily - The Problem With Technocrats

    The replacement in Greece and Italy of elected heads of governments with career EU technocrats (ECB in the case of Greece, Federal Trade Commission in the case of Italy) raises a number of questions:

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    Daily - No More Road to Kick the Can Down?

    One of the many questions concerning the European economy in the past year is whether the relative strength of the Northern countries will pull the drowning southern nations to safer ground. With bond yields flaring up, banks in paralysis, equity markets battered and yet the Euro still not providing any relief through a significant external devaluation, the simple answer to this question would appear to be “no.” However, perhaps the safety boats...

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    A Q&A on EMU Procedure and the ECB's Powers

    With the EMU crisis deepening, we have received a number of technical questions on the ECB and EMU rules. We thought other clients might be interested in the exchange below:

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    Where Do We Hide?

    As our regular readers know, we have been arguing that the US currency is now very undervalued, especially against the Euro and the commodity currencies of the world. In our view, the US current account will almost certainly continue narrowing for the next two years:

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    Weathering the Crisis Through a European Barbell

    The huge uncertainties in the EMU have understandably paralyzed many European investors this year—and as the Italian and French crises illustrate, the fear factor is here to stay. It is possible, however, for investors to structure portfolios which not only provide shelter from the fallout, but produce very reasonable returns.

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    Good and Bad Bubbles

    As we have often argued, there are two kinds of bubbles and two ways to finance them. The best kind of bubbles take place in productive assets (canals, railways & the internet) and are financed primarily by equity. When these bubbles burst it is of course very painful for the equity holders, but when it is all said and done, the world is still left with more productive assets and the banking system is still relatively intact.

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    Daily - The Doomsday Machine Part Deux?

    In the midst of the Lehman crisis, we wrote about the The Doomsday Machine Unleashed in which banks, under mark-to-market rules, were forced to sell assets into a fire sale, thus perpetuating a cycle of doom. In other words, the incompetence of regulators gravely aggravated an already deadly situation. Most rational actors would think lessons had been learned here—yet amazingly, three years later, European policymakers may be setting in motion...

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    Daily - The Euro's Moment of Truth

    As much as we hate to do so, we have little choice but to return to the unfolding Euro debacle where, with Italian bond yields now touching 7.4%, the battle lines are now very clear. As we have argued before, either the ECB steps in and purchases risk assets very aggressively in a manner reminiscent to what the HKMA did in 1998, or a number of Southern European countries, and perhaps even France, will be forced to impose capital controls, shut...

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    Daily - The Bond Market vs the ECB

    One of the more important features of financial markets is that they are supposed to send messages about future economic conditions. But deciphering these messages has been particularly difficult in the past few months. In very short time spans, the stock markets were alternatively signalling that the world was coming to an end...or perhaps not. For a moment there it appeared that emerging markets would be the first fatality...but then not. One...

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    Daily - The G20 Today and in 2008--the Difference Three Years Makes

    It is somewhat fitting that France should be the country hosting the upcoming G20 summit. The country that gave us Asterix, a national soccer team that goes on strike during the sport’s world cup, and a Rugby world cup team that could not even agree on what day its games were. Yet like with Asterix or the French Rugby team, France also has a history quashing strife and egotism when it matters. Unfortunately this French trait—discord followed by...

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    Daily - MF Global: A Special Kind of Dolphin?

    While we are still waiting for the whale of the current liquidity squeeze to emerge (see The Unfolding Liquidity Crisis or Was This The Bottom?), yet another dolphin has floated to the surface in the shape of MF Global. This one, however, is far more interesting and important than the ones that recently preceded it (Sino-Forest, Olympus, etc.) in that MF Global is (as far as we can remember) the first company to ever go bust for holding so-...

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    Daily - The Greek Referendum - Democracy vs Eurocracy

    Yesterday’s announcement by Prime Minister Papandreou that Greece’s latest fiscal plan and settlement with the European Union will be put to referendum is the logical conclusion of a process which, after two years of belt tightening, continues to promise more pain and little light at the end of the tunnel. Consider the following: even if the EU and the Greek government’s rosy assumptions are met (and there is little in the recent track record to...

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    Why Has the Pound Been So Strong?

    The Pound has always traded between the Dollar and the Euro (and before that the Deutschemark). There has literally never been an extended period in which Sterling has fallen against the Dollar, while the Euro has gone up:

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    Will the Euro Devalue at Last?

    The strength of the Euro against the Dollar continues to puzzle many investors and observers. However, beyond the short-term fluctuations of the EUR/USD associated with the risk-on/risk-off trades, the logic underpinning the strength of the Euro looks pretty clear.

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