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

    Will the Euro Devalue at Last?

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

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    Gavekal Research

    Crucial Stress Tests Ahead for Spain

    Visiting Spain in this crisis time provides a very different impression than reading the macroeconomic surveys on the country. Over the last 10 years Spain has not just built ghost cities along its coast, it has also invested massively in state-of-the art infrastructure. The network of high-speed trains is now one of the very best in Europe—with most large cities at less than 2.5 hours from Madrid—while roads and airports, which used to be the...

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    Gavekal Research

    France is Getting the Italian Disease

    I followed the events of the last week in Europe with considerable amazement. Clearly, much effort was made by all involved not to address the real issues. That in itself is to be expected, but it was disappointing to see that almost all the financial media swallowed the bait and talked endlessly about a bigger EFSF, bank recapitalizations, haircuts, etc.

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    Gavekal Research

    How Will Europe Pick the Rentiers' Pockets?

    In any given economy, the entrepreneurs, rather than the rentiers, are traditionally the risk-takers. The Euro, however, has led to an enormous transfer of wealth from Europe’s entrepreneurs to its rentiers (which includes the increasingly bloated public sector). There are now too many rentiers and not enough entrepreneurs and, in our view, the ongoing European crisis is the inevitable result of this wealth transfer.

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    Gavekal Research

    Daily - Is Europe Behind the Rally?

    Earlier this week Anatole argued that we should not expect much from the EMU deal to be announced at the October 26th summit (see Daily—Germany Plays Hardball at EU Summit), but that markets would rally anyway. Clearly he was being too optimistic—there was in fact hardly a deal at all. There were broad agreements but no plan for executing them; e.g., some €106bn is required/earmarked for bank recapitalizations, but no word yet on whether the...

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    Gavekal Research

    Daily - Facing the Music

    As an English friend of ours put it to us recently “you know the world is turned on its head when I feel compelled to support France at rugby and Germany at brinksmanship (see The Road to Hell is Paved by Good Intentions).” And as we head into the 14th EU “crisis summit” in 21 months, most investors that we talk to seem to have rallied to the German point of view that bondholders (rather than the taxpayer or the ECB) should take the losses for...

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    Gavekal Research

    Daily - Germany Plays Hardball at EU Summit

    Angela Merkel has consistently promised to do “whatever it takes” to preserve the Euro. With equal consistency and persistence she has always added a modest qualification – “I mean, of course , whatever it takes, apart from the two things that would actually work”. Those two actions would be the creation of Euro-bonds joint and severally guaranteed by Germany along with all the other Euro countries, or large-scale purchases of government bonds...

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    Gavekal Research

    Daily - The Paradigm Shift Behind the European Crisis

    In the early 1980s, the then Citicorp chief Walter Wriston famously declared that “countries don’t go bust”; that was just before Mexico and most other Latin American sovereign issuers hit the wall and reminded banks and bondholders of the dangers of countries issuing debt in a currency that cannot be printed. “Plus ça change, plus c’est la meme chose”, and today with most Southern European nations finding it increasingly expensive to roll over...

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    Gavekal Research

    Is the ECB Aiming for 'Stealth Cut' to 0.75%?

    Recent moves by the ECB are more significant than some may realize, and could prove significantly bearish for the Euro/USD as excess liquidity is flooded into the system by the end of the month. And yet the Euro has risen since the ECB announcements on October 6th, likely for the following reasons:

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    Gavekal Research

    The Case for European Exporters to the US

    Since very early on in the EMU crisis, we have recommended a strong overweight of European exporters in European equity portfolios. And even if these stocks look quite expensive now versus the completely depressed domestic-European stock universe, we see little reason to recommend a change in this strategy. On the contrary, many recent developments suggest that the non-European economic environment will remain more hopeful than the European one...

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    Gavekal Research

    What the OAT-Bund Spread is Telling Us

    The 10-year spread between French and German sovereigns closed at nearly 100bps last Friday, its highest level since 1995, and not that far from its peak of 125bps reached just before the Maastricht referendum of September 1992. This follows the collapse of French banking shares, poor economic news, and populist political posturing ahead of the general elections of May/June next year. Importantly, the most recent leg in the widening of the Oat/...

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    Gavekal Research

    Daily - The Greek Drip-feed Continues

    The troika signaled yesterday that it is preparing to deliver another €8 billion tranche in Greek’s €109 billion bailout program, even while acknowledging that the country has failed to meet its 2011 targets. In our view, this is terrible news, for the following reasons:

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    Gavekal Research

    Daily - The BOE's QE

    The Bank of England’s decision yesterday to start a second round of quantitative easing was almost drowned out by the noise about banking rescues out of Europe. But it was a genuinely important event with instructive features for the rest of Europe and the US. We have been saying since the beginning of the year that QE2 in Britain was much more likely to happen than QE3 in America and that inflation running at double its target rate would not...

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    Gavekal Research

    Daily - The Consequences of the Dexia Bailout

    Since the start of the European crisis, the aim of policymakers has been to shelter sovereign bondholders, chief amongst them the banks, from taking losses on their holdings. And this for two reasons: firstly, the memories of Lehman, Citi, AIG, Fannie, etc… are still fresh in everyone’s mind. Secondly, European banks by and large remain almost as leveraged as they were three years ago (Dexia’s total assets are apparently worth 74x Dexia’s equity...

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    Gavekal Research

    The Euro Debate Continues: A Leveraged EFSF?

    Last week European markets enjoyed a short-lived rally amid talk that a leveraged EMU war chest would be used to shore up Europe’s ailing banking system. One reason such a solution is being considered is that the size of the EFSF, at €440bn, is likely not enough to make a big enough dent in Europe’s growing sovereign debt problem. After all, there is some €3.3 trillion in outstanding GIPSI debt alone, of which a substantial €1.5 trillion is in...

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    Gavekal Research

    Daily - The Risk of Recession and the Variable of Adjustment

    Looking solely at financial markets, it seems impossible to avoid the conclusion that we are heading straight into a global recession: most major equity markets have entered bear territory and registered new 52-week lows, commodity prices are plunging (see our Indicator of Economic Sensitive Prices chart below), spreads are widening everywhere, all currencies except for the US$ and Yen are feeling weak at the knees, etc... As one client put it...

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    Gavekal Research

    Lessons from Ireland

    While George Soros recently said that Ireland should perhaps consider leaving the Eurozone (along with Greece and Portugal), the market does not seem to agree. Irish bonds have seen an extraordinary rally since mid-July, with the 10-year yield recovering from 14% to below 8%, and the two-year yield plunging from 24% to 7%. Thus, in the midst of one of the worst European crises in history, Irish bonds have proved to be the best asset class of the...

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    Gavekal Research

    Garbage In, Garbage Out

    Faced with another bad call in a 1981 match against Tom Gullikson, John McEnroe famously screamed: “You cannot be serious!” Being an avid tennis player in his now very distant youth, Charles often feels compelled to utter those same words as he reads the financial pages. Most recently, his frustration concerns the growing worries about the outlook for UK GDP growth.

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    Gavekal Research

    Daily - Is the IMF Set to Assume its Historic Role?

    The IMF has historically been charged with the task of delivering the news that elected politicians found simply too hard to convey. As the European crisis progresses, it seems increasingly likely that the IMF will once again be charged with this unpleasant task, this time by being the one to pull the plug on the bailouts to Greece. Indeed, it is painfully obvious that Greek debt needs to be restructured (a point made by Dominique Strauss-Kahn...

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    Gavekal Research

    Daily - Is the IMF Set to Assume its Historical Role?

    The IMF has historically been charged with the task of delivering the news that elected politicians found simply too hard to convey. As the European crisis progresses, it seems increasingly likely that the IMF will once again be charged with this unpleasant task, this time by being the one to pull the plug on the bailouts to Greece. Indeed, it is painfully obvious that Greek debt needs to be restructured (a point made by Dominique Strauss-Kahn...

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    Gavekal Research

    Daily - Solving Italy

    As default risk moves up the food chain in Europe, one question we are being asked is whether Italy’s debt needs to be restructured, especially now that S&P has just downgraded Italy’s debt. Our first answer to this question is that it is too early to say; we need to wait to see what happens with Greece. But broadly speaking:

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    Gavekal Research

    The Swiss Version of QE

    How far is the SNB willing to go to defend its new ceiling of 1.20 Francs per Euro, and for how long? The short answer is that, assuming the Euro remains, the SNB will likely defend the ceiling aggressively, so long as this is consistent with the SNB’s desired domestic monetary policy stance. Here is why...

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    Gavekal Research

    The Swiss Version of QE

    How far is the SNB willing to go to defend its new ceiling of 1.20 Francs per Euro, and for how long? The short answer is that, assuming the Euro remains, the SNB will likely defend the ceiling aggressively, so long as this is consistent with the SNB’s desired domestic monetary policy stance. Here is why...

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    Gavekal Research

    Germany Really Will Pay

    Anxiety about the Euro has now intensified to the point where Eurocrats in Brussels talk openly about the risk that the Euro will break up and the US Treasury Secretary feels obliged to fly across the Atlantic to read the Riot Act to his European colleagues. As longstanding detractors of the Frankenstein currency, some of us here at GaveKal do not know whether to laugh or to cry about the apparent vindication of our Euroscepticism. Contrary to...

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    Gavekal Research

    Daily - Overhangs and Uncertainties

    When it comes to the question of who will pick up the tab for capital misallocated under the Euro experiment, we have argued that there are three potential payers (Nordic taxpayers, current bondholders and the ECB) and three players (French civil service, Nordic governments and the Bundesbank). With each disappointing summit, it has become clearer and clearer that these three players cannot agree. In this sense, this weekend’s failure by...

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    Gavekal Research

    Daily - The Neutering of the Bundesbank and the SNB

    As financial markets continue to grapple with the many strands of the European crisis, we thought we would highlight that Europe is really dealing with two separate problems:

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    Gavekal Research

    An Imaginary Conversation Among the European Royalty

    A reader of Charles’ blog (see website) recently posted a very interesting vignette to the site. Non-French speakers please see the translation below in English.

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    Gavekal Research

    Daily - The Franco-German War and the Start of the Euro's Structural Bear Market

    The resignation of Axel Weber earlier this year led Charles to conclude that the Bundesbank would now be on the war path. As Charles explained in An Update on the Euro Debate, one thing he has learnt in his career is that the Bundebank “never forgives and never forgets.” Axel Weber’s resignation thus marked a new phase of hostility in Europe’s policymaking circles, and thus instability for financial markets.

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    Gavekal Research

    QSCB - 4Q11 - The Euro: Staring into the Abyss

    Until this summer, financial instability in the Eurozone seemed manageable and consistent with the notion of necessary "market discipline" to pressure GIPSI countries to reform. However since the collapse of Italian bond markets in July, and as global growth slows substantially, the crisis has entered a very different, incomparably more dangerous stage, making a "muddle through" no longer credible.

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    Gavekal Research

    Daily - Will Government Misery Kill Corporate Prosperity?

    Amid the misery that debt-laden and teetering governments have suffered in the past two years, we have had the offsetting phenomenon of a very strong corporate sector (ex-financials, of course). Whipped into shape by competitive pressures of globalization, and greatly assisted by new management and just-in-time technologies (see Europe and the SAP Recession), OECD companies were able to nimbly respond to the disruptions caused by the Global...

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    Gavekal Research

    Daily - Empty Shelves and Rising Inflation?

    Clearly markets are cynical of recent assurances by policymakers, or central bankers such as Ben Bernanke, that growth is not, in fact, cratering. And so are companies. Discussions with exporters here in Asia reveal that the July/August order books are decidedly underwhelming. Headline figures such as China’s PMI new orders and Korean IP are bearish, and the region’s tech and exporter stocks have sold off rather fiercely. Clearly, OECD retail...

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    Gavekal Research

    Daily - The Consequences of the CHF Ceiling

    Woody Allen once said: “we have reached a crossroad. One way leads us to despair and annihilation; the other to certain death. I hope we choose wisely.” We imagine that this is was how the Swiss National Bank felt yesterday when it decided to place a ceiling on the CHF-Euro exchange rate. Over the years, we have seen a lot of currencies being pegged (HKD, RMB, MYR, DKK…) to another, but the usual pattern is first a currency devaluation,...

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    Gavekal Research

    Daily - A Tough Start to the European Week

    Yesterday saw another worrying meltdown on the European markets. Granted, the US market was closed for Labor Day which meant lower volume, but this was still a significant development. All Euroland equity markets saw losses in excess of -4%, with the DAX being the worst performer, losing –5.3%. As money flowed out of equity markets, bond markets saw solid gains and 10-year Bund yields fell by –16bps to 1.85%, the lowest ever. As we highlighted...

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    Gavekal Research

    Daily - The Three Remaining Options to Save the Euro

    The challenge confronting policymakers in Europe is simple. European sovereigns are reflecting roughly €800bn in losses (poor real estate investments in Spain, civil servants getting paid too much in Greece, etc…) and the problem, of course, is that this loss has, for the most part, yet to be taken by anybody: Greek debt is still marked at par in the books of the ECB, most of the Greek commercial banks, insurance companies, etc… In turn, this...

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    Gavekal Research

    A Big Week for the Euro

    Our readers know we have long been structurally cautious on Europe’s single currency, due to its significant design flaws. These flaws have of course come to the forefront in recent years, and yet the Euro has pushed higher (in nominal terms and on a PPP basis). Our best explanation for this Euro resilience is twofold: 1) The fiscal/political situation in the US has recently looked just as bad, if not worse; and 2) the ECB did not loosen as...

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    Gavekal Research

    The Road to Hell is Paved with Good Intentions

    With losses on GIPSI bonds at roughly €600bn (basically marking the losses to market before the recent ECB intervention drove Italian and Spanish yields back below 6%) and if most of Europe’s sovereign debt is held by European financials (banks, insurance companies…) then it is fairly obvious that Europe is in big trouble—given that the total market cap of the S&P EMU financials sector is today a paltry €400bn.

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    Gavekal Research

    On Basel 3 and Solvency 2

    In their seminal work, The Monetary History of the United States, Milton Friedman and Anna Schwartz showed that one of the main factors behind the Great Depression was the Fed’s error in allowing US money supply to collapse. On Friedman’s 90th birthday, back in 2002, Ben Bernanke acknowledged this in a speech: “I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks...

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    Gavekal Research

    Daily - The Painful Resilience of the Euro

    In a recent piece on the Euro, our friend Simon Ogus of DSG Asia remarked: “Germans are already deeply unhappy with what is going on… and historically speaking, one would rather see Greeks on the streets than Germans’” Now as we have been highlighting (see A German Uberrumbelt), Germany’s simmering unhappiness could soon be coming to a boil, what with the September 7th constitutional court decision on the legality of the EMU bailout packages,...

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    Gavekal Research

    Daily - A Policy Accident or Surprise in the Coming Weeks?

    With financial markets on edge and economic growth decelerating almost everywhere, policymakers coming back from holidays will be walking a tight rope. So what potential surprises, or disappointments, will shaky financial markets have to stomach?

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    Gavekal Research

    Daily - A German Uberrumpelt

    Obviously something is still amiss in Europe. CDS on European banks remain elevated despite the retreat in sovereign bond yields of Ireland (now back to their November 2010 levels), Spanish, French and Italian sovereigns are still in misery territory, and equity markets remain very tentative despite attractive valuations (as yesterday’s DAX “flash crash” exemplified). It feels as if markets are bracing themselves for an unpleasant surprise;...

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    Gavekal Research

    Daily - The ECB's Stealth Rate Cuts

    This week there seems to be an inordinate amount of focus on what Ben Bernanke might say at Jackson Hole on Friday, and whether we are due for another round of QE from the Fed. However, the real news on central bank policy actually comes from across the pond: not only has the ECB been more aggressively buying assets of distressed sovereigns as part of its “solvency management” policy, but significant liquidity provisions have resulted in stealth...

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    Gavekal Research

    The Political Football of the French Credit Rating

    Following S&P’s downgrade of the US, it is obvious that no nation is now safe from losing its AAA status. This new reality has lately cast an uncomfortable spotlight on France. After all, with twin deficits above 10% of GDP, a debt to GDP ratio of over 84%, with total tax receipts already comfortably above 50% of GDP, the French government seemingly on the hook for both its domestic banks and the debt of its southern neighbors…the question...

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    Gavekal Research

    Europe's Purgatory and the Eurobond Yield

    Very understandably, more and more analysts and observers have now come to the conclusion that the only two passable roads for the Euro area are i) full-fledged federalism or ii) a complete dismantling of the system, and that any further “middle road” options would lead to a decade of misery. But while the probability of radical solutions has significantly increased, Europe’s delicate balance of forces nevertheless continues to argue for a more...

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    Gavekal Research

    French Economic Activity and the Primary Deficit

    After the Merkozy summit this week, the big news was undoubtedly the disastrous revival of the financial transaction tax proposal (see Daily—The European Bait and Switch). However, somewhat lost in the shuffle, the French President and the German Chancellor also proposed another idea, which has far more merit: to introduce a constitutional rule in every Euroland country banning the very existence of budget deficits. This is an interesting...

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    Gavekal Research

    Daily - The European Bait & Switch

    Most European GDP data releases have lately been coming in weaker than expected, with the whole Euro area growing a mere +0.2% QoQ, the weakest gain since the 2009 recession. Germany, the economic locomotive of Europe, also witnessed a substantial slowdown to +0.1% QoQ, while the French economy stagnated. Of course, some of this weakening should be expected. After all, Germany was not going to sustain the recent +4.6% YoY growth rate and the...

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    Gavekal Research

    Daily - Why Is the Euro Holding Up?

    In What Drives the US-Euro?, Francois introduced a model for the Euro-US$ exchange rate predicated on three drivers: the one-year interest rate differential, the Spanish CDS (as a proxy for EMU sovereign risk) and changes in the oil price; and since 2006, this model has displayed a solid correlation with the Euro. Today this model is showing that the Euro should be at €1.30 against the US$ (see chart on p. 2); but of course, the recent exchange...

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    Gavekal Research

    Daily - More Ugly Currencies Will Not Help

    Underlying the current market turmoil is a decline of confidence in the two main reserve currencies of the world, the USD and the Euro. While this may not yet be characterized as a fiat currency crisis, serious questions have clearly driven many to diversify into other fiat currencies (the CHF, Yen, AUD…), or move completely out of fiat currencies into zero-duration assets (gold, silver, fine wines…). This has driven the prices of these “...

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    Gavekal Research

    Daily - Who Will Lead Out of the Bear Market?

    Following yesterday’s further sell-off, almost every single equity market is now in bear market territory. Almost every equity market is also deeply undervalued against bonds, against gold and against real estate. And needless to say, almost every market is deeply oversold. So why aren’t investors (ourselves included) getting more excited about the opportunities currently offered up by equity markets? The easiest answer is that the uncertainties...

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    Gavekal Research

    Why We Have Not Seen a US$ Squeeze This Time

    As the last few days have made painfully clear, markets face a level of uncertainty that is high even on today’s standards. But one question that most investors (ourselves included) are struggling with is why, in this uncertain environment, the US$ is not faring better? Indeed, in recent months we have repeatedly laid out the case for of an international US$ Liquidity Crisis. This was largely based on the observation that the growth rate of US$...

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    Gavekal Research

    An Alternative Euro End-Game

    Anatole’s scenario on the previous page is very interesting but there are a few serious hurdles, mostly pertaining to France’s willingness to go ahead with a non-German Euro. Indeed, the French vision of the Euro is anchored on three basic principles:

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