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    Gavekal Research

    The Decline Of European Risk

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

    10
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    Gavekal Research

    The True Test For the Euro?

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

    10
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    Gavekal Research

    Safe Is The New Risky

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

    0
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    Gavekal Research

    Sweden's Property Bubble In Waiting

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

    0
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    Gavekal Research

    Spain, Italy Are No California, Yet

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

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    Gavekal Research

    Swiss Franc: Not A Peg For All Seasons

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

    3
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    Gavekal Research

    Is Germany Entering A Recession?

    5
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    Gavekal Research

    Dams, Earthquakes And Bond Markets

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

    4
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    Gavekal Dragonomics

    China Property: Steady As She Goes

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

    1
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    Gavekal Research

    Where Is Draghi's Gran Torino Headed?

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

    3
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    Gavekal Research

    How Many Bullets In Draghi's .44 Magnum?

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

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    Gavekal Research

    The Euro Carry Trade

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    Gavekal Research

    Say Goodbye To UK Austerity

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

    3
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    Gavekal Research

    Shadoks & Stock Markets

    5
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    Gavekal Research

    A Sweltering Summer For The Euro

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

    6
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    Gavekal Research

    Russia's Reluctant Move To Abundance

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

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    Gavekal Research

    Export Wars: Germany 1, Japan 0

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

    2
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    Gavekal Research

    ZIRP Goes To Europe

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

    3
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    Gavekal Research

    The Coming French Depression

    5
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    Gavekal Research

    France, Tax Increases and Economic Recovery

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    Gavekal Research

    What Is A Bund Worth?

    5
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    Gavekal Research

    The Euro Debate Returns

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

    7
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    Gavekal Research

    Solvency II: A Cardinal Sin

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

    8
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    Gavekal Research

    Germany Has To Stay: A Riposte

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

    14
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    Gavekal Research

    The Euro Debate And The Wizard Of Oz

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

    7
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    Gavekal Research

    It May Be Time To Say "Auf Wiedersehen"

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

    18
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    Gavekal Research

    Drowning-By-Numbers: A €10 Trillion Game

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

    2
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    Gavekal Research

    ECB Role Shift The Real Game Changer

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

    5
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    Gavekal Research

    MULTIMEDIA - Louis Talks About Europe On Radio Show Streettalklive

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

    0
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    Gavekal Research

    Armistice Or Capitulation

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

    10
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    Gavekal Research

    Sweden Moves Against Repression

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

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    Gavekal Research

    Federalism, Debt Traps And Competition

    14
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    Gavekal Research

    The Triumph of Hope Over Experience

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

    1
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    Gavekal Research

    Euro End Game: Four Vital Questions

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

    21
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    Gavekal Research

    Quarterly Strategy Chart Book: How To Survive A Panic Attack

    1
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    Gavekal Research

    Please-No More Liquidity Fixes--by Will Denyer

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

    4
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    Gavekal Research

    The Swiss Line In The Sand

    3
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    Gavekal Research

    The Unfolding Panic & The European Convergence Trade

    9
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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...

    0
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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...

    4
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    Gavekal Research

    Expect Another QE Dousing In The UK

    2
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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...

    0
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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%.

    0
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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....

    11
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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...

    15
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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...

    8
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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.

    10
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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.

    12
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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...

    0
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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.

    9
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    Gavekal Research

    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...

    0
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    Gavekal Research

    The French Farce Has Just Started

    [CENTER]

    1
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    Gavekal Research

    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.

    9
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    Gavekal Research

    The Financial Consequences Of Britain's Double-Dip

    5
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    Gavekal Research

    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...

    0
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    Gavekal Research

    All About Low Countries

    0
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    Gavekal Research

    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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    Gavekal Research

    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.

    29
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    Europe is Still The Ugliest Sister

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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...

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    Gavekal Research

    Growth & Markets Monthly

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    Gavekal Research

    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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    Gavekal Research

    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...

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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.

    9
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    Gavekal Research

    Mediterranean Icebergs

    7
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    Gavekal Research

    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...

    7
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    Gavekal Research

    QSCB: The Global Bond Yield Conundrum

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    Gavekal Research

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

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    Gavekal Research

    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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    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...

    10
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    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?

    11
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    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-...

    9
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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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    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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    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.

    0
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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...

    0
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    Draghi in Control, But for How Long?

    [INDENT=2]

    0
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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...

    0
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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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