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    Gavekal Research

    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.

    4
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    Gavekal Research

    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...

    4
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    Gavekal Research

    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.

    2
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    Gavekal Research

    Five Corners (17 July 2013)

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

    0
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    Gavekal Research

    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...

    5
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    Gavekal Research

    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.

    3
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    Gavekal Research

    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...

    10
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    Gavekal Research

    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...

    1
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    Gavekal Research

    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".

    5
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    Gavekal Research

    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...

    0
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    Gavekal Research

    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...

    0
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    Gavekal Research

    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...

    0
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    Gavekal Research

    Five Corners (19 June 2013)

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

    0
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    Gavekal Research

    When Good Comes Of Bad

    It’s cynical, manipulative and hypocritical—and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy? Not often enough.

    5
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    Gavekal Research

    The Incredible Deflating Gas Market

    Emerging markets are taking a pounding with commodity-producing centers worst affected. Everywhere we look we see resource markets that are either over-supplied or have the potential to be so. The old market adage that the best cure for high prices is high prices would seem as relevant as ever. But it isn’t just iron ore and copper stocks which are bulging; LNG prices have plunged almost 25% in the last couple months.

    6
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    Gavekal Research

    Not All Emerging Markets Are Equal

    Emerging markets suddenly face a perfect storm of fleeing capital and shrinking demand for their wares. The proximate cause is the global bond market sell-off, which has sucked hot money back home. And the hardest hit markets are those commodity-heavy exporters which hitherto benefitted from rapidly expanding Chinese demand. But while it may seem like a time to circle the wagons, this sell-off is most likely a healthy realignment of winners and...

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    Gavekal Research

    Five Corners (5 June 2013)

    2
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    Gavekal Research

    The Russian Paradox

    You could be forgiven for thinking that Russians faced a grinding decline in living standards as is the lot of most Western Europeans. Economic growth in the first quarter slowed to a measly 1.6% compared with a year earlier, while inflation remains stubbornly high at 7.2%. And yet even as the outlook for energy exporters worsens and capital exits a slumping Russian equity market, there are good reasons to stay interested—indirectly we would...

    4
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    Gavekal Research

    How Many Arrows In Robin Hood's Quiver?

    4
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    Gavekal Research

    Five Corners (22 May 2013)

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

    2
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    Gavekal Research

    Should One Short Germany?

    Some of our long-time readers may remember my quip, soon after the euro was launched, that a European monetary union will result in “too many houses in Spain, too many civil servants in France and too many factories in Germany.” One had to wait a while, but eventually those chickens began to come home to roost.

    5
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    Gavekal Research

    An Update On The French Disaster

    Last month I laid out the reasons why France was On The Brink Of A Secondary Depression—in short, due to a deadly collision of French politics with Frankensteinian monetary union. Unfortunately subsequent data confirms the bleak trajectory:

    12
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    Gavekal Research

    Europe's 'Thatcherite Keynesianism'

    Yesterday’s European Central Bank meeting, along with recent shifts in fiscal policies, moved Europe one step further down the road of “Thatcherite Keynesianism.” A consensus is slowly and painfully emerging to keep the reform agenda on track, but to end the front-loading of austerity measures, especially tax hikes. The deflationary effects of deleveraging are being mitigated through an ever more accommodative ECB, and even through selective tax...

    2
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    Gavekal Research

    Waiting For The ECB Decision

    For some three years, investors in European assets felt like Hector being dragged behind Achilles’ chariot. Poor economic data would raise questions about the sustainability of GIPSI budget deficits, thereby pushing up peripheral bond yields, triggering concerns about the health of domestic banks and then a broad sell-off in risk assets. In time the panic would elicit a policy response from the EU, ECB or IMF. The troika intervention would help...

    2
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    Gavekal Research

    The ECB May Surprise: By Not Easing

    What are European investors hoping for? Or, to put the question more forcefully (and give away our conclusion) what have they been smoking? The European economy is going from bad to worse. While economic and financial indicators from around the world have recently been disappointing, the US news has suggested nothing worse than the risk of another modest summer “soft patch,” while China has been settling into structurally slower, but still very...

    2
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    Gavekal Research

    Implied Assumptions

    Financial markets operate on a number of implied assumptions about growth, policy direction and other factors. Experience tells us that these assumptions often turn out to be erroneous. The goal of this paper is simply to test the rationality of the current set of assumptions.

    9
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    Gavekal Research

    Growth Falters And GIPSI Bonds Rally?

    0
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    Gavekal Research

    Italy Delays The Swan Song

    European markets stabilised yesterday and Italian bonds and equities enjoyed some of their biggest gains for months after the unexpected return of Giorgio Napolitano as president. At first sight the re-election of an 87-year old for a second seven-year term that he didn’t want and that public opinion certainly did not support may seem like a confirmation that Italy has descended into chaos and ungovernability. Yet the markets’ positive reaction...

    0
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    Gavekal Research

    Hedging A Euro Crisis

    10
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    Gavekal Research

    Thatcher Would Reverse Austerity

    Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep...

    2
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    Gavekal Research

    How Bond Markets Work In Euroland

    Something strange seems to be happening in European bond markets. French and Dutch bond yields this week registered new lows despite a potentially game-changing shock from the Cyprus bailout and recessions in both economies threatening their sovereign ratings. Even reports yesterday that the cost of the Cyprus rescue has risen by a third to €23bn, caused only a slight market ripple. The case of France is particularly interesting since the 10-...

    5
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    Gavekal Research

    The Social Purpose Of Tax Havens

    The Cahuzac affair in France has conveniently emerged just as the search for possible scapegoats to Europe’s quandary was intensifying. Thanks to the former French budget minister’s secret Swiss bank account, Europe can now move from its war against finance (Hollande declaring that finance was his enemy, the financial transaction tax, capping of bonuses, etc) to an outright war against tax havens (letting Cyprus sink, arm-twisting Luxembourg...

    7
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    Gavekal Research

    TINA's Triumph

    In 1980 there was no clear agreement as to how economies should be run. Socialism was still live and prevalent, in forms ranging from the totalitarianism of the USSR and China, the milder copycat versions in India and much of the developing world, Scandinavian social democracy, and British dysfunction. The world’s two biggest economies, the US and Japan, were respectively mired in confidence-sapping stagflation and happily dirigiste. The truth...

    0
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    Gavekal Research

    France On The Brink Of A Secondary Depression

    13
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    Gavekal Research

    Riding A Bull Market With No Conviction

    The Irish poet WB Yeats wrote, “The best lack all conviction, while the worst are full of passionate intensity.” We see something similar in equity markets. With the S&P 500 on Tuesday hitting a new all-time high, we clearly remain in bull market territory. Central bank easing measures such as that just announced by the Bank of Japan mean we could push higher. And yet we see plenty of evidence that these new peaks have come on the back of...

    4
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    Gavekal Research

    Teutonic Depression vs Draghi’s Reflation

    The disastrous management of the Cyprus bailout has, in a blink of an eye, raised systemic risks that European Central Bank boss Mario Draghi so successfully buried last summer with his “whatever it takes” pledge. We have seen a Teutonic attack with the Dutch finance minister stating that the treatment of Cypriot bank depositors maybe a model for other eurozone bailouts, while his German counterpart noted that deposit guarantees are “only as...

    0
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    Gavekal Research

    A Recantation

    Over the years a number of economists and political scientists have seen the error of their ways and come clean with a reasoned recantation. The mid-19th century British thinker John Stuart Mill famously changed his mind on the divisive question of industrial wages. My contribution to political economy hardly matches Mill’s, but I have spent my adult life pondering the linkages between economics and markets. However, in recent times I have come...

    11
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    Gavekal Research

    Is Divorcing An Abusive Spouse Ever Too Expensive?

    An old joke asks “why does a divorce cost you half your money?” with the answer being “because it’s worth it”. After all, there is little worse than being stuck in a loveless, tense, or even downright hostile relationship. Which, of course, is what the eurozone has become, without even the excuse of keeping the show on the road for the kids’ benefit. In the eurozone’s loveless marriage, no-one dares to move out because the potential costs of...

    13
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    Gavekal Research

    A Stronger US Offsets An Irrelevant Europe

    While Europe stumbled from fiasco to debacle, the US stock market hit a new five-year high yesterday, with the S&P 500 closing just a tantalizing 1.4 points off the all-time record it set in October 2007. In a sense, this divergence is easy to explain. US economic figures since the autumn have continually surprised on the upside, with housing and bank credit powering the recovery, as they did for most of last year. Meanwhile, partisan...

    3
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    Gavekal Research

    Who Pays The Piper?

    One of the many unanswered questions surrounding the eurozone has always been—who would pay for systemic large losses in a banking system? In the US, we always knew that the federal government, through the insurance payments levied via the FDIC, would guarantee all small depositors. In Europe meanwhile the eurocrats issued a post-crisis pan-European promise that every deposit up to €100,000 was guaranteed; even if it was left unclear who would...

    6
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    Gavekal Research

    Cyprus Should Switch Euros For Rubles

    13
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    Gavekal Research

    Cyprus Questions Left Unanswered

    There were many shocking elements in the initial Troika-led "rescue" deal for Cyprus. The first was how small depositors, who were insured for up to €100,000, almost saw the rug pulled out from under their feet. The second was the uniformity of the proposed tax: regardless of how conservatively, or aggressively, a Cypriot bank had conducted its business, the haircut was the same. The message sent to banks was clear: if your...

    5
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    Gavekal Research

    Return Of The Great Euro Debate

    Overview — by Arthur Kroeber

    5
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    Gavekal Research

    A Brief Overview Of Global Equities

    As we never tire of pointing out, equity bull markets rest on three pillars: attractive valuations, decent economic growth, and excess liquidity (to push valuations higher). Looking at global markets on the basis of these three pillars, we find that:

    2
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    Gavekal Research

    UK's Backdoor Escape From Austerity

    1
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    Gavekal Research

    Cyprus' Game Of Chicken

    Judging by the market’s general yawn on Cyprus, many investors have apparently concluded that this case of Troika overreach is an untroubling one-off event. This may be because of the small size of the Cypriot economy, or perhaps because a percentage of the losses are to be inflicted on Russians? Or investors are seeing through the rhetoric and discounting yet another German U-turn and ECB bailout? In yesterday's piece on the Cyprus...

    0
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    Gavekal Research

    Worse Than A Crime, A Mistake

    8
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    Gavekal Research

    The Dutch Case Against Austerity

    The European Union is currently engaged in another crucial two-day summit, tussling yet again over austerity settings. The stereotype is that the frugal and prosperous north will be lecturing the south on budget discipline and the need for reform. In fact, the south will find a very willing ally in the Netherlands—and this is bullish for financial markets.

    0
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    Gavekal Research

    German-Led Recovery And The Consumer

    It is easy to get lost in the sound and fury of Europe’s ongoing political drama. Between Italian electoral paralysis, Portuguese protests and Greek national strikes, the continent gives the appearance of slipping back toward chaos. And with unemployment rising fast in both France and the Netherlands, one might conclude that the GIPSI cancer is spreading northwards. Yet look closely at the latest economic data, and a far more textured picture...

    2
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    Gavekal Research

    Will The Greens Gobble German Industry?

    For much of 2013, markets have been focused on the specter of a Japan-initiated “currency war” as a threat to European and especially German firms. But as our European economist Francois-Xavier Chauchat has long argued, changes in nominal currency rates are only a part of what drives trade competitiveness.

    0
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    Gavekal Research

    Down With Reform

    Italian electors’ rejection of Brussels-imposed economic diktat is an extraordinarily important moment in the history of modern Europe—perhaps the best political news since the fall of the Berlin Wall. Given the power of unelected technocrats, it is easy to forget that sovereignty in Europe still resides with the nation state as expressed through elections. The problem for those unelected officials who conspired to capture the political system—...

    18
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    Gavekal Research

    Et Tu, Italy?

    The Italian “protest vote” has reverberated far and wide: equities fell, the VIX surged 34%, investors scrambled to safe-haven bonds and Japan’s crusade to weaken its currency suffered a major setback, with the biggest overnight jump in the yen since 2011. Markets seem to fear that Italian voters have stuck a knife into the back of the euro project. But we are not so sure the drama of this election will turn out to be as Shakespearean as all...

    2
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    Gavekal Research

    A Timely Downgrade For The UK

    Moody’s downgrade of the UK on Friday was just what the doctor ordered in at least three different respects. Firstly, the action was fully deserved, insofar as rating agencies’ criteria are to be taken seriously, which is not very far. Secondly, the downgrade accelerated the fall in sterling, which was exactly what the Bank of England and the Treasury had been trying for months to achieve, in the hope of stimulating some export growth, at least...

    0
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    Gavekal Research

    The Scope For A Pull-Back

    In our discussions with clients on the state of global equity markets, as well as in our own internal debate, the overwhelming belief is that the “risk-on/risk-off” period whereby equity markets suddenly shed -15% or more, only to bounce back strongly a few weeks later, should now be behind us. After all, global growth seems to be on a healthier footing (see Why the World Will be Better in 2013), animal spirits are on the mend with every week...

    3
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    Gavekal Research

    Merkel's Coming Election Loss: In Italy

    We do not yet know the winner of Sunday’s Italian election, but the losers are already clear. And in this particular election, who loses may be much more important than who wins.

    6
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    Gavekal Research

    EMU Growth: Beef Or Horse?

    A French food wholesaler has been accused of knowingly selling Romanian horsemeat to consumers and calling it beef, the latest charge in what is proving to be one of the biggest food scandals Europe has seen in a very long time. Conversely, one look at the latest European GDP numbers and one has to wonder if the story we have been served by policymakers on growth is in fact a pile of horse manure (see The Last Great Potemkin Village).

    3
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    Gavekal Research

    What To Buy The Grandchildren

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    Gavekal Research

    Here Come The Helicopters

    Wednesday night may have marked the “emperor’s new clothes” moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that does not have to be humored. That delusion is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a “new normal” of mass unemployment and declining living standards is inevitable for years or decades to come.

    6
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    Gavekal Research

    The Euro, Growth And Currency Wars

    Last year Europe managed to slap down systematic risk fears, making it safe for investors to return to the markets. But then another problem arose: the strengthening euro. A number of European officials have been venting concern—Bundesbankers publicly derided Japan for “currency war” behavior and this week Francois Hollande called for a euro target. Yesterday the Big Guy joined the conversation: ECB governor Mario Draghi said that if the...

    9
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    Gavekal Research

    The Last Great Potemkin Village

    On the surface, it would seem that the euro crisis has calmed. Markets have rallied since the summer and, to borrow a phrase from Herbert Hoover, “prosperity is just around the corner.” But outward appearances in Europe are like a Potemkin village. Behind the well-scrubbed facades, Southern Europe is collapsing. Anyone convinced that the European monetary union has come through the crisis stronger is a victim of the slickest PR campaign in...

    21
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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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    Gavekal Research

    Not A Sterling Year For The UK

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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

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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

    9
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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

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    Gavekal Research

    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

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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.

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    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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    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...

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

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    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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    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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    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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    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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    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...

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    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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    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...

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    If I Were A German

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    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 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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    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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    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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    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....

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    Why Europe Just Got Worse

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    A Money-Making Proposal To Save The Euro

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    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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    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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    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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    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...

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