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E.g., 16-12-2019
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    Gavekal Research

    Greek Riots And Orderly Breakups

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

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    Gavekal Research

    The French Establishment Wins

    9
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    Gavekal Research

    Europe's Russian Advantage

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

    6
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    Gavekal Research

    The OAT Hedge

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

    2
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    Gavekal Research

    The Non-Event Of French Elections

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

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    Gavekal Research

    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...

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    Gavekal Research

    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...

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    Gavekal Research

    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...

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    Gavekal Research

    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...

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    Gavekal Research

    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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    Gavekal Research

    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...

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    Gavekal Research

    Daily - Europe's Coming Balance of Payments Crisis

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

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    Gavekal Research

    Draghi in Control, But for How Long?

    [INDENT=2]

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    Gavekal Research

    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?

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    Gavekal Research

    Daily - The UK in 2012

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

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    Gavekal Research

    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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    Gavekal Research

    The Triumph of Southern Italy over Northern Italy

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

    0
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    Gavekal Research

    Have Southern Europeans Bought Too Many BMWs?

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

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    Gavekal Research

    The Long March of the Communist Economies

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

    0
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    Gavekal Research

    ...And Now for the Good News

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

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    Gavekal Research

    Starting With the Bad News...by Anatole Kaletsky

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

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    Gavekal Research

    Daily: Fog in the Channel - Continent Cut Off

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

    0
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    Gavekal Research

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

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

    0
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    Gavekal Research

    Daily - Riding on a Wing and a Prayer in Europe

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

    0
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    Gavekal Research

    Two-Tier Economies, Two-Tier Markets

    Print Version:

    0
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    Gavekal Research

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

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

    3
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    Gavekal Research

    Daily - Swedish Democracy vs Eurocracy

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

    1
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    Gavekal Research

    Kicking a Can Full of Worms Down the Road

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

    0
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    Gavekal Research

    Cutting Through the Noise in Europe

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

    0
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    Gavekal Research

    The ECB Is Already Doing QE, Its Own Way

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

    1
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    Gavekal Research

    On German Rebalancing

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

    0
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    Gavekal Research

    Daily - Looming Balance Sheet Risks for the ECB

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

    0
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    Gavekal Research

    Daily - Approaching No-Man's Land in Europe

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

    0
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    Gavekal Research

    Daily - End of the Bund Hedge?

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

    0
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    Gavekal Research

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

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

    0
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    Gavekal Research

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

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

    0
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    Gavekal Research

    An Update on French Bank Bond Holdings

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

    0
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    Gavekal Research

    Daily - The Problem With Technocrats

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

    0
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    Gavekal Research

    Daily - No More Road to Kick the Can Down?

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

    0
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    Gavekal Research

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

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

    0
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    Gavekal Research

    Where Do We Hide?

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

    0
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    Gavekal Research

    Weathering the Crisis Through a European Barbell

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

    0
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    Gavekal Research

    Good and Bad Bubbles

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

    0
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    Gavekal Research

    Daily - The Doomsday Machine Part Deux?

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

    0
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    Gavekal Research

    Daily - The Euro's Moment of Truth

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

    0
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    Gavekal Research

    Daily - The Bond Market vs the ECB

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

    0
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    Gavekal Research

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

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

    0
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    Gavekal Research

    Daily - MF Global: A Special Kind of Dolphin?

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

    0
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    Gavekal Research

    Daily - The Greek Referendum - Democracy vs Eurocracy

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

    0
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    Gavekal Research

    Why Has the Pound Been So Strong?

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

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