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    Gavekal Research

    5C Overview: Why A Balanced Portfolio

    Last August I suggested moving from a fully invested position in equities to a “balanced portfolio” with equities hedged by high quality government bonds. What underlay this recommendation was a simple reality: the global consumer price index had by that point dipped to about 3.3% and the G7 core CPI measure was down to 1.1%.

    0
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    Believe In The ECB

    Two irreconcilable views typify opinions about the European Central Bank. One crowd looks longingly at the Federal Reserve, the Bank of England and even the Bank of Japan as they embrace the new “unconventional” orthodoxy in order to arrest a collapse in monetary velocity, and so in economic activity. They are shocked that the ECB does not join in, especially as the European patient seems to crave the same pain relief from persistent...

    1
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    Draghi's Faustian Bargain

    On Thursday European Central Bank president Mario Draghi added Easter to the list of reasons why inflation is so far below target; another exogenous factor that the ECB can do little about and that, in time, will fall out of the calculations.

    5
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    London Seminar April 2014 - Anatole, Arthur, Louis & Francois

    We held our spring seminar in London on April 2, with Anatole, Arthur, Louis and Francois offering their take on the state of the world economy and financial markets. Audio recordings of their discussions are available below:

    0
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    Gavekal Research

    Growth & Markets Monthly (April 2014)

    Please find the latest monthly review of our models and indicators. In this edition we note two important changes. First, our growth indicators have taken a turn for the worse, and second our indicators on risk appetite have deteriorated. Since we have seen no significant rises in market spreads, this is probably more a sign of a slightly overextended rally, then a real erosion of financial conditions. Could the rally in risk assets be about to...

    0
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    Bet On Europe Vs The US-EM Axis

    Following decades of European economic integration, euro coins and notes were introduced with great fanfare in January 2002. Equity investors barely noticed as their attention was focused on the emerging trans-Pacific economic relationship between the US and China. Initially, this axis relied on the buying power of the US consumer and the production capabilities of the Chinese factory lands. But as the decade wore on this simplified “ChinAmerica...

    4
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    How To Treat The Fall In Velocity

    Debate continues to rage in our office as to the sustainability of the US economic recovery. On the plus side of the ledger, we can book factors such as decent bank loan growth (both for households and corporates), rising wage growth, falling unemployment and solid business surveys. On the negative side, we find a weakening housing sector (which has been the lynchpin of the US recovery), intensifying disinflationary pressure, and long bond...

    0
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    Is Turkey A Joke--Or A Buy?

    As Turkey prepares for local polls this Sunday, the country’s leaders would appear to be sliding into a parallel universe. After a Turkish court overruled his ban on Twitter, Prime Minister Erdogan came back yesterday with a similar prohibition on YouTube. This kind of repression might have been doable in the Cold War era, but is laughable in light of modern communications technology, and smacks of desperation. Yet against a backdrop of...

    0
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    5C Europe: By The Power Of Poseidon

    A familiar criticism of the Troika reforms is that Greece cannot be Germany. But this misses the point. Structural reforms such as those approved by the Greek parliament this week aim to leverage the talents it does have by breaking closed shop arrangements in key parts of the national logistics sector.

    0
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    A Reason For The Bundesbank's Turn

    Common enemies make good friends. It would seem the strong euro is, increasingly, uniting Germany and other members of the European monetary union. Yesterday Bundesbank President Jens Weidmann even opened the door to quantitative easing, a very un-Bundesbank emotion. Our guess is Germany is less worried about deflation or financing the peripherals, and more concerned that the region’s export competitiveness is getting crushed.

    1
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    The UK Budget: Lies That Work

    Britain’s government budget this week was not really a statement of economic policy, but a program for winning next year’s general election. In this sense, George Osborne’s speech was a natural development from the 2013 budget, which launched Britain’s present economic recovery. Almost nobody predicted the remarkable transformation of the British economy that immediately followed last year’s budget because what Osborne did was deliberately...

    2
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    Gavekal Research

    The Sword Is The Axis Of History

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

    2
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    All Over Bar The Annexation

    Bertrand Russell once quipped that ‘wars are not won by who is right, but by who is left’. With that in mind, markets should welcome the result of yesterday’s referendum in the Crimea. After all, had the result been ambiguous, whether because of a low turn-out, or a split electorate, then the more fanatical elements on either side of the divide might have been tempted to take up arms to settle the issue. However, with the vox populi confirming...

    23
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    Gavekal Research

    5C Europe: Turkey Compared To The Other "Fragiles"

    In dollar terms, the Turkish stock market has lost more than -40% since May last year, when financial markets began to price in the effects of the Federal Reserve’s tapering. With a price to book of 1.3x, the MSCI Turkey index traded cheaper only during the months that followed the Lehman crisis, from October 2008 to March 2009.

    2
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    Italy Aligned On Thatcherite Keynesianism

    While economists and observers around the world debate at length what the European Central Bank could and should do to fight low inflation, we continue to see more clarity on eurozone fiscal policy settings. After French President Francois Hollande’s turn in favor of tax and spending cuts in January, the new Italian Prime minister Matteo Renzi yesterday outlined a host of easing and reform measures. If implemented, Renzi’s reforms would clearly...

    5
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    Russia's Permanent Interests

    Nineteenth century statesman Lord Palmerston famously said that “nations have no permanent friends or allies, they only have permanent interests.” As anyone who has ever opened a history book knows, Russia’s permanent interest has always been access to warm-water seaports. So perhaps we can just reduce the current showdown over Crimea to this very simple truth: there is no way Russia will ever let go of Sevastopol again. And aside from the...

    12
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    Gavekal Research

    The Ambiguous Message Of A Strong Euro

    Over recent days the euro has broken out against a number of key currencies, exceeding 1.38 against the USD, 8.40 against the Chinese renminbi, and 50 against the ruble, a new historical high. Against its 20 largest trading partners, the euro nominal effective exchange rate is now back to where it was in the summer of 2011, and towers 10% above its low from the summer of 2012. With the risk of war at Europe’s borders, and deflation risks...

    4
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    Gavekal Research

    ECB: Searching For The Silver Bullet

    It is that time of the month again when the European Central Bank meets, warns that it is ready to tackle deflation, then does nothing. As the governing council goes into today’s conclave, inflation is dangerously below target at 0.8%, and no higher than it was the last time the ECB vowed to act. Is this the day that Mario Draghi actually follows up on his promises?

    0
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    Gavekal Research

    Southern Europe’s Unavoidable Deflation

    Last week we published a piece by Francois which argued that a “reflating” Southern Europe was close to exiting its debt trap nightmare, while the promise of further counter-measures by the European Central Bank meant that Europe faced no serious deflation risk. I would respectfully differ, and in this paper will seek to show that Southern Europe is sliding further into a “secondary depression,” which is likely to worsen just so long as the...

    3
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    Gavekal Research

    Realpolitik In Ukraine

    Oscar Wilde described marriage as the triumph of imagination over intelligence and second marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope and realism over wishful thinking. A grim case in point is the Russian incursion into Ukraine. What makes this confrontation so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope...

    2
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    Gavekal Research

    5C Europe: In Italy, Hope Springs Eternal

    Italy, home to the eternal city, looks to have become a land of timeless stagnation. Unlike Spain and Ireland whose credit bubbles at least caused rapid growth before the bust, Italy's problems have brewed for years.

    0
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    Gavekal Research

    Bet On Reflation, Not Deflation

    The widely touted notion that Europe faces a Japanese-style deflation sits uncomfortably with its fast recovering financial markets being led by fragile Southern Europe. In recent months, both bonds and stocks from Spain and Italy have been stellar performers. This apparent contradiction stems from a misunderstanding about the way the European Central Bank runs policy—the deflationists have tended to conflate recent soft CPI and PPI readings...

    9
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    Gavekal Research

    Europe's Divergent Deflation Risks

    A combination of a strong currency and weak domestic demand has squeezed inflationary pressures in the eurozone such that CPI stands at just 0.7%, well below target. We have pointed out previously that much of this represents “good deflation” in that falling prices boosts the purchasing power of consumers especially in the weaker peripheral countries (see The ECB, CPI And Reflation Trades). However, there is a risk that this could morph into...

    0
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    After Ukraine, Russia Risks Losing The New Great Game

    Russian president Vladimir Putin sat stony-faced through yesterday’s closing ceremony in Sochi. The Winter Olympics were supposed to convince the world that a confident and modern Russia is once again rising as a great power. But after a stunning reversal of fortune in the burning streets of Kiev, Ukraine appears to be slipping from Putin’s grasp.

    4
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    Gavekal Research

    5C Europe: What The Ruble's Collapse Means

    The slowdown of Russian economic growth, in evidence since 2011, had until recently not threatened financial stability. Growth may have come in at a measly 1.3% in 2013, but the country has public debt equal to only 10% of GDP, and the current account balance remains in surplus, at 2% of GDP. Also, the consumer sector remains fairly buoyant since unemployment is near a record low of 5.5%, while real wages are growing and social spending remains...

    1
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    Gavekal Research

    The UK’s Monetary Policy Puzzle

    On Wednesday, the Bank of England announced a series of technical changes to its threshold guidance and with them a potentially significant shift in direction. Contrary to most investors’ take, the BoE’s Monetary Policy Committee looks to have swung back to a dovish position from an apparent tightening-bias adopted at its last inflation report. Moreover Governor Mark Carney has broken away from straightforward inflation targeting and embraced...

    0
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    Gavekal Research

    The US Current Account And Vanishing Global Liquidity

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

    0
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    Gavekal Research

    No Refuge In The Swissie

    As we all know, markets have endured one of the worst starts to a year on record. Risk assets all around the world have sold off, while safe haven plays have rallied. The US government ten-year yield fell from 3% to as low as 2.6%, the US dollar has gained significantly against emerging market currencies, and the trade-weighted yen has gained more than 4%. Interestingly, the Swiss franc, another classic safe haven asset, has actually lost -1.4%...

    1
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    Gavekal Research

    Is The ECB Readying For Stealth QE?

    The European Central Bank has a reputation for holding firepower until the eurozone is at the point of crisis. Although no crisis is apparent now, growing deflationary concerns compounded by volatile money market interest rates make today's ECB meeting worth watching.

    1
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    Gavekal Research

    5C Europe: The EM Rout Reinforces Equity Rotation

    It is a mark of how much has changed in eurozone financial markets that 2014 started with a big risk-off move, but European equities have outperformed the rest of the world. Maybe, but experienced investors have learnt never to overestimate European markets’ capacity to weather storms for more than a few weeks. While we remain positive on the prospect for European equities this year, the emerging market rout means that investors should identify...

    0
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    Gavekal Research

    Leading Indicators Through The Looking Glass

    Leading economic indicators are a key tool used by analysts to gain a heads up on the future. They rely on a mix of hard and soft survey data and offer a glimpse of likely spending decisions to be made by producers and consumers. That, at least, was the way things used to work in Europe. Today, the impact of multiple policy manipulations is that the predictive power of these tools has almost completely broken down (see The Problem With Leading...

    9
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    Gavekal Research

    Central Bankers Can Still Be Trusted

    The rout in risk assets last week has generally been attributed to emerging markets—and looking at Argentina, Turkey and Ukraine, there has been plenty for investors to panic about. On the other hand, why should the dollar/yen exchange rate or the value of US equities be so sensitive to just another devaluation in Argentina or the shakiness of or incompetent regimes in places such as Ukraine?

    0
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    Gavekal Research

    A French Quid Pro Quo

    We expected strong pushback from France’s traditional left after President Hollande’s speech last week which hinted at labor reform, and vowed spending cuts and tax relief for business. Instead the most vociferous attacks came from the Keynesians—with Paul Krugman, this camp’s unofficial spokesman, accusing Hollande of abdicating to German austerians (see Scandal in France). But the Keynesians are dead wrong.

    0
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    Gavekal Research

    The Curious Case Of Corporate Europe

    Contrary to what Mario Draghi hoped for after delivering his “whatever it takes” speech last summer, most investors remain unconvinced that the eurozone has developed into a sustainable single currency system. Many consider that the eurozone’s architecture has not been sufficiently reinforced to weather the next testing crisis. Our view is that Europe has adopted sufficient reforms to muddle through, but we would admit that the implacable...

    0
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    5C Europe: Is Southern Europe Escaping The Debt Trap?

    Even as many still fret about the viability of the European periphery economies, financial markets continue to deliver an optimistic prognosis. Yields on five-year Italian and Spanish government bonds have declined massively to just above 2% (5-year has been the average maturity of new debt issued in recent years). So how much further can bond yields fall in Southern Europe? And perhaps more importantly, do lower yields mean that debt loads are...

    0
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    5C Overview: The Eminent Case For Rent Control

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

    0
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    Gavekal Research

    Deflation In 2014? Not In The US

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

    3
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    France’s Wannabe Reformer

    For those with a more prurient interest, Francois Hollande’s press conference evaded the great question of who will be France’s next first lady. But even if his domestic arrangements remain unclear, the event did illuminate the core language surrounding the president’s economic policy. What remains to be seen is whether he has the will and the execution abilities to deliver on his claim to be a far-reaching reformer.

    1
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    Gavekal Research

    Not Every EM Is A Turkey

    Emerging markets have gotten off to a wobbly start to 2014. Tapering is elevating financing costs and encouraging capital outflows, and meanwhile there is no sign that stronger OECD growth is boosting EM exports. Some countries, such as Turkey, have seen dramatic plunges in asset values, raising fears of a broader contagion effect.

    1
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    Eight Questions For 2014

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

    0
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    Is France Really Diverging?

    Is every country in Europe recovering but for France? This is the question raised by a third consecutive month of disappointing French manufacturing PMIs, which plunged to 47 in December even as the eurozone-wide PMI expanded to 52.7, a 31-month high. Such a large divergence is peculiar, since France and eurozone PMIs have historically been aligned. It could be that France’s recovery is just a bit more painful and taking that much longer—but...

    0
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    5C Europe: From The Macro To The Micro

    In spite of the remarkable performance of European financial markets since mid-2012, euro-skepticism remains alive and kicking. There are some good and some less good reasons for this. The continued German veto against any form of fiscal transfers, including the architecture of the banking union, is a clear negative. France’s economic weakness is also a concern, although it is not clear that an authentic French tail risk exists (see Is France...

    0
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    Eastern Europe's Convergence

    Investors are still forlornly awaiting a recovery in southern Europe, but in the eastern part of the continent, things are jumping. Well, relatively so anyway, with Eastern Europe’s larger economies seeing a much snappier revival of industrial activity than elsewhere. This discrepancy in economic performance is a reminder of southern Europe’s hopeless bind when it comes to competitiveness. Countries like Greece and Portugal may be in the same...

    0
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    A New Widow Maker?

    The Japanese government bond market is famously known as a “widow maker,” since shorting it has crushed so many macro-traders. It looks like the euro is competing to grab title for itself. Many traders have been shorting the currency, with poor results so far.

    2
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    What The Czech Experiment Means

    While the European Central Bank yesterday discounted deflation risks with a breezy optimism, policymakers to the east are taking the threat more seriously. The CEE-4 grouping saw inflation fall to 0.85% in October, far below its previous low of 2% in 2009. The likes of Poland and Hungary have responded by cutting interest rates to record lows.

    0
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    Turncoats And U-Turns In The UK

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    What More Can The ECB Do?

    0
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    5C Europe: Are Earnings Expectations Too Rosy?

    Equity analysts have a notorious tendency to be overly optimistic in their earnings projections. MSCI data shows that on average, reported earnings per share comes in about 10-12% below the consensus expectations forecast 12 months earlier. The average forecasting error is roughly the same in the United States and Europe.

    0
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    Gavekal Research

    Germany Chooses Growth

    In the past couple of years Germany has continued with the economic program defined by Gerhard Schroeder a decade ago, even after the former chancellor’s “Agenda 2010” had clearly reached the end of its usefulness. Schroder’s program of boosting cost-competitiveness and deleveraging the public sector had long achieved the expected outcomes, as reflected in record trade surpluses and slim budget deficits. Since what had been done does not need to...

    10
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    Gavekal Research

    The UK Productivity Gamble

    3
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    Five Corners (20 November 2013)

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

    0
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    How Can Chinese Assets Boom?

    Some clients have taken us to task for translating our positive call on China’s economic reform agenda into a positive call on Chinese risk assets. Over the next year or two, structural reform means slashing broad credit growth from the current 19% down to the very low teens, accepting a lower GDP growth rate, and reining in the excesses that have pumped up the property market, construction and materials demand. Even if we accept that all these...

    1
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    Gavekal Research

    5C Europe: China Reform To Spur Equities

    The decisive shift from growth to value investing in Europe since the spring has ended the outperformance of Europe’s export champions over the rest of the continent’s equity universe (see Europe: The Return of Value Investing). Still, in absolute terms, European exporters have continued to perform amazingly well. In particular, those companies heavily exposed to emerging economies have done much better than emerging market equities themselves,...

    0
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    Gavekal Research

    A First Take On The TTIP

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

    0
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    Back To German Bashing

    When Keynesian policies are failing, as they always do, proponents never fail to look for a scapegoat. Usually this is Germany, rebuked for the un-Keynesian practice of earning and saving. Our concern is that when German bashing reaches fever pitch, panic selling often follows. Think for example of the stock market crash in 1987, “created” by the fight between the US Treasury and the Bundesbank.

    15
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    Gavekal Research

    The French Debt Question

    A question commonly batted around in Europe is whether “France will be the next shoe to drop.” The answer is almost always a resounding, “Yes, of course.” The country, after all, meets an essential criteria for a debt crisis: that it occurs gradually, then suddenly. Gradually because France, with a well-bid bond market, stands out in Europe as the country that seems to be refusing to undertake major reforms. Suddenly because if and when markets...

    10
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    The ECB, CPI And Reflation Trades

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    5C Europe: Eastern Promise Starts To Deliver

    Despite a broad improvement in recent PMI surveys, Europe’s big economies have yet to see a convincing increase in actual production. The happy exception is Eastern Europe, where manufacturing production has broken to the upside since late spring, after more than a year of stagnation (see chart).

    0
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    The Foothills Of Banking Union

    This month the European Central Bank embarks on what is being billed as a comprehensive stress test of the eurozone’s banking system. The year-long exercise is necessary to rebuild credibility in the banking supervisory regime after past tests were derided for their lack of stress. This is the first phase of a two-step process which should ultimately progress toward some form of banking union. But the immediate worry for investors is whether...

    1
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    Gavekal Research

    The Euro's Little Bull Run May Be Over

    The euro is finally in the headlines, after losing two week’s worth of gains in the last two days, a tumble triggered by weak economic data which is raising pressure on the European Central Bank to ease. The question is why, until yesterday’s tumble, so little attention had been paid to the currency’s remarkable ascent. The euro hit its highest level against the dollar since 2011 on Monday, having jumped by 5.5% since September and over 8% since...

    0
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    Resource EMs Reopening The Doors

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

    0
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    Gavekal Research

    The New Stockholm Syndrome

    2
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    Gavekal Research

    5C Europe: The Benefits Of A Strong Euro

    At first sight a strong euro is not good for Europe. It reduces the attractiveness of financial assets to foreign investors who may fear potential currency losses down the track. And, other things equal, it hurts economic growth by reducing exporters’ profits and making export growth more difficult. And yet, given the euroland’s current political and economic context, a strong currency also has important positives.

    6
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    Gavekal Research

    Who's Austere Now?

    While a year of sequesters and political deadlock has produced a major fiscal drag on the US economy, a revolt against austerity in Europe is lightening the load after several long painful years of official belt-tightening. Indeed, 2013 will be remembered as a watershed year in this respect. As we argued at the end of last year in The Case For A European Recovery, this rebalancing was to be expected; but it is clearly more pronounced than...

    0
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    Gavekal Research

    A Fisherian Take On Velocity

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

    10
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    Gavekal Research

    Europe: The Return Of Value Investing

    Euroland equity investors have been well rewarded since the 2008 financial crisis for favoring high quality growth stocks that have not suffered from government interference. Over the last year, however, value stocks have enjoyed a comeback, performing almost evenly with their perkier growth rivals. We think this shift augurs stabilization in the outlook for European value investing, at least for the next few quarters.

    0
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    5C Europe: The Myth Of Youth Unemployment

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    Paradox In Italy

    Everything in Italy originates in politics. This includes Silvio Berlusconi’s dramatic weekend attempt to bring down the governing coalition, which he claims is a protest against impending fiscal tightening measures. In fact, this move is Berlusconi’s last and only possible bet to avoid being expelled from his seat in the upper house following his August conviction for tax evasion. It is quite a gambit: by pulling his PDL party out of the...

    0
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    Gavekal Research

    5C Europe: Draghi's Need For Action

    Excess liquidity in the euro system has fallen to €223bn (7-day average), which is close to the €200bn level identified by the European Central Bank as a potential threshold for intervention. Had this contraction occurred against a backdrop of improved cross-border lending and more direct transmission of ECB policy to borrowers in struggling economies, then all would be well. But this is not the case due to a “financial fragmentation” that still...

    0
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    Gavekal Research

    London Property’s Inevitable Rise

    The Federal Reserve may have postponed its liquidity tightening program, but the tide of easy money looks to have receded from its high watermark. Yet, even as G7 bond prices have mostly declined to less insane levels, London property, a favored refuge for financial itinerants, keeps on rising, caught in an unusual swell of supply-demand imbalances. Although home prices never adjust as quickly as their fixed income equivalents, it is likely that...

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    Germany’s New Agenda

    After one of the most boring election campaigns in recent European history, Germans go to the polls on Sunday. Such is the lack of suspense that the main talking point for the political class is whether Angela Merkel’s junior coalition partner will scrape the minimum 5% share of the vote required to stay in the Bundestag. And such is the predictable logic of Germany’s electoral system, that some form of Merkel-led coalition is all but certain....

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    Why Europe Is Still Broken

    Back in the day, playing European markets was a simple game. Industrial production across the European continent tended to rise and fall, pretty much in lock step with Germany’s IFO index of business activity. This relationship broke down with the creation of the euro and fully fractured after 2007. For example, consider yesterday’s worse than expected French industrial production, even while Germany continues to power ahead.

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    The Strange Case Of The ECB

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    5C Europe: Long Live Skepticism!

    Despite eurozone economic indicators having surprised on the upside since June, many investors and observers continue to fret about Europe; some even question whether the old continent is actually experiencing a recovery. For three reasons such skepticism is a very good thing.

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    It’s Not A Balance Sheet Problem

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

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    5C Europe: Stealth Rate Hike Watch

    In January, when EMU banks began repaying the LTRO loans dished out in the heat of crisis, markets worried that this process effectively constituted a monetary tightening. We wrote at the time not to worry—repayments were a sign of health in the banking system, and with excess liquidity above €600bn, there was no danger of short rates going up (see that piece here). Indeed we recommended forgetting about the issue until excess liquidity fell...

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    Greek Tragedy Or La Dolce Vita?

    Like Charles, I have spent a good part of the summer in a beautiful part of Europe, but unlike Charles I spent more time relaxing, rather than thinking and writing almost daily about the financial and economic calamities that lie ahead. This has been lucky for our clients, since I have been unequivocally bullish about equities and the US economy, especially since November’s election. So any market guidance that I might have offered from lovely...

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    France As A Lynchpin

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    5C Europe: How To Invest

    At the risk of sounding obnoxious, investing in Europe has actually been quite simple for the better part of the last eight years. All one had to do was overweight the stock markets of the countries which did not belong to the euro and underweight those within the doomsday machine. Such a strategy would have ensured that the investor comfortably outperformed the main European benchmark.

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    5C Overview: Is Europe Sleepwalking To The Brink?

    This year most developed-market stock markets have rallied nicely, but investors remain unconvinced. In the markets where growth prospects are strongest (the US and Japan) valuations seem stretched, whereas in the markets where stocks are relatively cheap (Europe, and in the developing world China), the growth outlook seems dodgy.

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    5C US: An Unusual Arbitrage Opportunity

    In a normal circumstances there is no particular reason to think the US stock market should outperform the UK stock market over the long term. Over many years I have argued that total return of the US stock market compared to the UK stock market offers no discernible trend—my series goes back to December 1969 and is based on reinvestment of dividends, price appreciation and currency changes.

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    Something's Working In Britain

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    A Supply-Sider’s View Of The UK

    Since 2000, central bankers and governments have competed to find “better” ways to direct economic activity. Interest rates, money supply and exchange rates have all been manipulated by clever fellows who are sure they are smarter than the markets. This meddlesome brood succumb to Hayek's “fatal conceit,” not because of their commercial success in the real world, but because they got the best grades at school.

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    Can EMU Stocks Re-Rate?

    After a long and sharp de-rating starting in 2007, eurozone equity markets have found firm ground since the middle of 2012. If history is any guide, this is the start of a multi-year return-to-the-mean trade. After all, compared to the US, the region’s equities remain almost two standard deviations below their historical mean, an underperformance not seen since the “euro sclerosis” era in the early 1980s.

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    Light At The End Of Europe's Recession

    Recent deadly transport accidents in France, Spain, Italy and now Switzerland have heightened the sense of tragedy in Europe. The continent, scarred by a multi-year recession which has taken a devastating human toll, is desperate for an end to the relentless stream of bad news. Fortunately, this summer’s economic data offers some consolation. As we expected (see The Case For A European Recovery), Europe is moving out of recession. This is due to...

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    5C Europe: The French Advantage

    For more than a year, the idea that the next episode of the euro crisis would come from France has morphed into a consensus. It has not materialized (see The French Bond Market Puzzle Explained).

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    Reconciling Conflicting Views

    In recent weeks, Charles, Louis and Anatole have sparred over both the health of the global economy and the outlook for markets. On the face of it, those views seem irreconcilable (a view held by the protagonists), but as a technical analyst I would argue that a synthesis of sorts can be achieved. This is because the strongly conflicting outlooks are connected through a bridge known as investor perceptions. My argument rests on a reconciliation...

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    Game Over For Austerians

    Margaret Thatcher used to say that “There Is No Alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall—you can stop banging your head against a brick wall. The G20 meeting in Moscow last weekend may have marked such a moment of revelation.

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    Southern Europe Walks On Thin Air

    Recent economic data releases suggest, on the face of it, that Southern Europe is enjoying an improved outlook. This weekend, Portugal’s government stared into the abyss and chose for the moment not to break the terms of its bailout. Hence, in recent months, GaveKal colleagues such as Francois have argued that economic conditions in the European periphery are stabilizing (see A New Global Growth Story). I would respectfully disagree. Regardless...

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    Can The Shale Revolution Go Global?

    More than a year after Argentina incensed oil majors by nationalizing YPF, a state oil firm half-owned by Spain’s Repsol, the industry seems ready to move on. Chevron signed a US$1.24bn deal on Wednesday to develop shale oil assets in the ominously named Vaca Muerta (“dead cow”) basin. It was the first production deal outside of North America since the US started to ramp up unconventional production last year.

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    Five Corners (17 July 2013)

    In the latest Five Corners biweekly review of global economics and investment:

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    Good Omens

    Two months ago I gave ten reasons for believing that April’s break-out of the S&P 500 from its 13-year trading range “could mark the start of a secular bull market in global equities”. This piece, which came out on May 20, was singularly ill-timed, since equity markets peaked the very next day and then plunged on May 22, after Ben Bernanke’s tapering comments (see Goldilocks And The Ten Bears). Luckily for my credibility, I did end this...

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    How Markets React To Exchange Rate Manipulation

    In my humble opinion there are certain economic issues which have passed the point of needing validation. Here are a few examples.

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    Bad Omens

    In late May we published a debate piece on the near-term outlook for equity markets. Since then, emerging markets have once again lived up to their name by proving themselves hard to emerge from during an emergency (in USD terms, Brazil is down –35% year to date while Chinese valuations are back to 2008-crisis levels); for their part, European and US equity markets have pulled back, while the only salvation has come from Japan (the one market...

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    What A Weakening Krona Tells Us

    Last week the ECB and the Bank of England offered up dovish forward guidance (see our Daily), but one European central bank chose to hang tough. Sweden’s Riksbank held its key policy rate at 1% and stuck to guidance for a tightening later in the year. It is noteworthy that this stance was maintained despite decidedly mixed economic data—and yesterday’s industrial production release for May showed a worse-than-expected decline of -7.3% YoY, even...

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    Counter-Balancing Market Trends?

    Over the past decade, investors needed to come up with one of two ideas to ensure outsized success: “front run the Chinese” or alternatively "front run the Fed".

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    Europe’s Control Engineers

    “Words are, of course, the most powerful drug used by mankind,” so said Rudyard Kipling. When central bankers meet next month for the annual Jackson Hole shindig, they can ruminate on their success being increasingly dictated less by what they do, than what they say. Take the European Central Bank and Bank of England which in recent months have been fairly taciturn next to a loquacious Federal Reserve. Yet, by yesterday verbalizing forward...

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    Carney Set To Ride A British Revival

    Mark Carney, the former head of the Bank of Canada who has just taken over as Governor of the Bank of England, will today chair his first monthly meeting of Britain’s Monetary Policy Committee. The meeting is unlikely to produce any change in policy, if only because six of the nine MPC members have consistently voted against additional quantitative easing. Yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the...

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    Portugal Goes Rogue?

    Nothing so disturbs a disciplinarian teacher as the prospect of a model pupil turning into the class rebel. With Portugal’s center-right coalition government seemingly on the brink of collapse, such are the fears in Brussels and Berlin. Lisbon has pushed through painful structural reform, stuck to fiscal austerity and in the process improved a chronic trade deficit. Hence, the fallout from Portugal going rogue and rejecting the Troika medicine...

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    Five Corners (19 June 2013)

    In the latest Five Corners biweekly review of global economics and investment:

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