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E.g., 10-12-2019
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    Gavekal Research

    The EU Summit Plan: Problem Solved?

    The consensus view is that the outcome of the EU summit falls short of what is required to guarantee financial stability in Euroland, and it is hard to disagree with this conclusion. The probability of a huge market crisis in Euroland remains far too high for any investor to feel comfortable.

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    Daily - The Definitive EMU Solution: Round Six

    For the sixth time in 18 months European leaders have announced a definitive solution to the Euro crisis. Should this version of the final bailout be taken any more seriously than the first and second solutions to the Greek crisis in May and September 2010 or the Irish bailout of December 2010 or the Portuguese rescue package of March 2011 or the breakthrough vote in the Greek parliament of last month? The supposedly good news for markets was...

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    The Unfolding Liquidity Crisis

    In The Threats To Our International Monetary System, we described the international monetary system as a road bound by two guardrails. One guardrail is a US Dollar Crisis: this typically follows a US-led boom, in which the US consumer parties hard, its Dollar rises and its current account deficit grows. This causes an excess of Dollars in the global system and generally leads to a US-led downturn (tech bust, the initial sub-prime bust...). The...

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    Daily - Euro Crisis Spreads: Is France Next?

    In a reflection of the times, last week a client wrote in and asked what assets would be best to short to hedge the risk of a Euro implosion. Our answers varied. Charles said sell German equities, as eventually the burden will fall to the strongest state. Louis recommended Italy as the most likely “whale”. Francois reluctantly offered some short ideas, including on Spanish and Italian markets since the weight of financials and quasi-governmental...

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    Daily - Italy's Tough Choice

    Looking at the choices facing the latest EMU crisis country, Italy, provides a cross experiment for what Greece might do in two years’ time. Unlike Italy, Greece has a primary deficit—in other words, it depends on external financing to meet its budgetary needs. This has led some investors to express a certain cynicism vis-à-vis Greece’s motives: Sure, Greek lawmakers may be promising reforms now, but two years down the line, when the country...

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    Daily - No Choice But Reform for the OECD Welfare State

    These days, it is easy to feel despondent about the fate of the developed world, what with the bills rising for the bailout of the weaker EMU countries, Japan struggling under Herculean debt loads as it rebuilds from natural disaster, and now Moody’s putting the US on watch for a credit downgrade as Congress and the administration haggle over a debt-ceiling deal. And unlike even just three years ago, rich-nation governments now have much less...

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    Gavekal Research

    The Euro's Design Flaw

    Since we are on the topic of Italy, let us look at the country’s structural growth rate (the seven-year average annual nominal GDP growth) against trends in its trade balance. First, here is a chart of the Italian coverage ratio (i.e., the ratio of exports to imports):

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    Daily - A Summer of Ultimatums

    In the past 24 hours, we have seen the Greek deputy finance minister announce that Athens would fall far short of planned asset sales (this can only come as a surprise to investors born yesterday) and the Greek prime minister publish an open letter to Eurogroup Chairman Juncker warning that Greece has done all that it could. Mr Panandreaou went on to say that the onus is now on European policymakers to meet in a closed forum, with no damaging...

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    Italy's Twin Deficits

    It was just a matter of time before the lack of economic growth in Italy produced a credit warning and it was thus not surprising to see Moody’s putting its Aa2 rating for Italy under negative credit watch last month. After all, Italy’s GDP grew by only +1% over the last four quarters, versus +2.75% in the rest of the Euroarea, and has effectively flatlined since end-2003 compared to a +10% GDP expansion for its EMU peers. Moody’s has logically...

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    Murdoch Stumbles

    When the aging leader of a wolf pack suddenly stumbles, the other wolves sense his weakness. When they do, they turn on him and tear him to pieces. Rupert Murdoch, universally regarded as the world’s most powerful media magnate, stumbled last week with his audacious decision to close down the News of the World following the tabloid’s phone-hacking and bribery scandals. Instead of limiting the damage at News Corporation’s British papers, the...

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    'Lazy Brits' and Undervalued Gilts

    Nearly a year ago, after Britain’s new Conservative government spelt out in full its highly restrictive fiscal policy, we noted that consolidation would be good for the economy in the long-term, but would also put Britain at greater risk of a double-dip recession than any other G7 country. Thus we argued that monetary policy would stay easier for longer in Britain than in the US or Europe, and concluded that British Gilts were probably the world...

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    Gavekal Research

    The Euro's Design Flaw

    Since we are on the topic of Italy, let us look at the country’s structural growth rate (the seven-year average annual nominal GDP growth) against trends in its trade balance. First, here is a chart of the Italian coverage ratio (i.e., the ratio of exports to imports):

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    Daily - EMU Shocks Are Becoming More Frequent

    For the past few months, we have argued that the international liquidity environment is deteriorating (see The Threats to Our International Monetary System) and that markets have started to behave as if a liquidity crisis was unfolding: from the growing spate of corporate scandals, to the sudden devaluation of small currencies (Belarus, Maldives, Kenya…) to the recent outperformance of the most visible US$ cash-generating assets (US Treasuries,...

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    Daily - Weaker EMU Data and Shakier Euro Fundamentals?

    After the last ECB meeting, the central bank ECB signaled that it would hike rates at tomorrow’s meeting (by using the “vigilant” phrase), in an attempt to pressure EMU CPI rates back down from the current +2.7% toward the ECB’s single medium-term target of +2%. In all likelihood, Jean-Claude Trichet will carry through with his promise (or threat). Yet we cannot help but wonder if he wished he had kept his intentions to himself, as recent...

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    Daily - Achieving a Default That is Not a Default

    Over the past week global markets have rallied for a number of reasons, including better US numbers, stability in earnings and falling oil prices. But the biggest wind at the markets’ back was likely the hope of a breakthrough on the European sovereign debt crisis. Not only did the new Greek austerity plan pass the Greek parliament, clearing the way for the next tranche of funding and ensuring no immediate default, but the market was also...

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    Ulterior Motives for China's Interest in the Euro?

    One of the greatest mysteries of the 18 months since the start of the Greek crisis has been the strength of the Euro. One of the most convincing explanations for this phenomenon has been the support for the Euro provided by China and other Asian governments and sovereign wealth funds. Many traders have noted that, regardless of any bad news from Europe during the London trading day, the Euro usually rebounded in Asia after the main forex...

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    Behind the ECB's Stubborness

    Europe’s dilemma is obvious enough: Greece has some €360bn of debt outstanding and this debt is currently trading at roughly 50c on the Euro. Now interestingly, because most of this debt is owned by commercial banks, or even the ECB directly, most of the €180bn “paper loss” has yet to be recognized and written off. Instead, a lot of the outstanding Greek debt continues to be marked at par with holders crossing their fingers that a solution will...

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    Daily - The Important Level in the World MSCI

    In April 2010, the MSCI peaked around 880 on fears over Greece and the end of QE1. In November 2010, the World MSCI pulled back from that level as emerging markets stopped being the force pushing global markets and economic activity higher. In March 2011, following the devastation in Japan, the World MSCI fell to 876 before rebounding hard; and today, the global equity index stands roughly at the same level, below its 200-day moving average, on...

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    Gavekal Research

    What Drives the Euro-USD?

    In the ugly contest between the major currencies, few expected that the Euro would prove to be the least ugly. The resilience of the European currency has indeed been one of the biggest surprises of the past couple of years. The Euro may have lost value against the Swiss Franc, Swedish Krona, the Brazilian Real, etc., but overall it has been much stronger and more stable than the EMU existential crisis would have suggested. In and of itself,...

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    Daily - More Cracks in the Euro's Foundations

    On what fragile foundations powerful institutions are built! As Anatole pointed out last month in An Update on the Euro Debate, blowing up the Euro would not require a majority vote in a referendum, but merely a revolt from just one powerful political group in just one country—the Germans declining to pay, the Irish failing to assume their banks’ debt, the Greeks refusing to tighten their belts.... Interestingly, while all eyes have been on the...

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    Daily - Turkey's Monetary Experiment to Come to an End?

    As is well known, the virtually-zero interest rate policies of the major economies has put enormous stress on the world’s higher-growth and emerging markets. Some nations have responded by going with the flow and accepting the sizable currency appreciation (e.g., Indonesia and Singapore), some have sharpened their already well-honed manipulative defenses (China), and some have made feeble attempts to erect new capital barriers (Brazil, and more...

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    The US$-Euro From Here

    In recent years, the USD’s path of least resistance has been lower, except at times of crisis and financial market stress. And undeniably today, a number of potential “fat tail-risks” could shake markets. These include another flair-up in the EMU crisis, a crisis in one of the several countries around the globe currently exhibiting a high combination of trade and budget deficits (see p. 35 of our Quarterly), a shortage of Dollars abroad to...

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    Gavekal Research

    The Myth of Internal Devaluation

    Most observers and economists seem to be convinced that one of the main issues facing the weakest European economies is that they do not have the option to devalue their currency to restore their allegedly lost competitiveness (see for example the previous page, or Kenneth Rogoff again recently in this FT article). The weak links are thus supposedly forced to embark on a “criminal” economic policy of internal devaluation, through real wage cuts...

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    Trying to Understand, and Failing Miserably

    In the good old days, back when schools could be relied on to teach useful things (like latin or calculus), settling a trade deficit between two European countries, say Greece and Germany, was simple. When Greece ran a trade deficit with Germany, the Germans in surplus could either spend their Drachmas on holidays in Greece, re-invest the proceeds into Greek assets or—more often than not—sell the Drachmas for Deutsche Marks. When nobody was...

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    Daily - Three Sources of Instability

    Our investing business is all about “Value”. To measure values we use currencies, though it is very hard to explain why currencies themselves have any value since in our world of fiat money the marginal cost of producing it is zero. This means that our investing business really has two sides: the easy one is trying to understand how the values are going to move vs. each other (i.e., bonds vs equities), making in the meantime the assumption that...

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    Gavekal Dragonomics

    CEQ Q2 2011 - Russian Far East

    Russian Far East: The bear and the dragon

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    Gavekal Research

    Will the Krona Be a Victim of its Own Success?

    We have long argued that the Swedish currency has all the elements of a hedge against European risk (see The Nordic Hedge): an undervalued currency on a PPP basis, low public sector debt, buoyant economic growth, rising asset markets and widening interest rate differentials with the Euro.

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    GaveKal Daily - Political Tensions Make It Harder to Buy Time for EMU Deals

    Downgrades of debt outlooks for Italy and Belgium, the openly discussed and unresolved “restructure or not” question for Greece, Portugal’s recent tapping of the EFSF, a deceleration in the May purchasing managers’ indices, etc... Undeniably, the newsflow out of Europe has lately been rather poor. However, for us, the most unsettling news is coming from the increasingly disjointed political scene: after witnessing a week of protests led by...

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    An Update on the Euro Debate

    Investors currently have three major issues to confront: 1) The looming end of US quantitative easing, 2) Tightening in China and its potential impact on domestic growth and global risk assets and 3) The sustainability of Europe’s monetary union. Of these three issues, we have argued that the last one has the greatest scope for unleashing serious disruptions in global financial markets. This is why, on any given day, a good ten emails fly around...

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    GaveKal Daily - DSK and the Non-Inquisitive French Media

    The recent DSK scandal has once again brought the spotlight on the cozy and uncomfortable relationship between France’s political elite and a media which, in France, seems to abdicate all too rapidly and all too often its role as the fourth estate. But can French journalists really be blamed for being as passive as the Anglo-Saxon press currently makes them out to be? As Charlie Munger repeatedly says: ‘show me the incentives and I’ll show you...

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    GaveKal Daily - Poland and the Risks of Fiscal Stimulus

    Like most investors, we keep a wary eye on countries in the twin-deficits club. It is generally believed that once an economy has twin deficits that sum up to 10% or more of GDP, serious trouble is usually around the corner. Unfortunately, some of the world’s most promising economies are slipping towards this category amid the stresses of the past few years. Poland offers an example of how easy it can be to get into this situation, and how...

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    Gavekal Research

    Bad News for Nabucco, Good News for Russia

    Europe’s Nabucco pipeline, a long-planned solution to reduce dependence on Russia for natural gas supplies, appears in peril. The targeted completion for the project, which would make Turkey the gateway to supplies from the Caspian region and the Middle East, has been pushed back until 2017, three years later than originally planned. EU Energy Commissioner Geunther Oettinger last week said delays could mean total construction costs will rise to...

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    Mervyn King as a Contra-Indicator?

    There was a time when central bankers used to pride themselves on their ability to surprise and confuse the markets. These days transparency and predictability are generally viewed as the hallmarks of sound central banking—except at the Bank of England, which seems to believe that confusion and obfuscation are back in style.

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    Northern European Prosperity and the Bund Hedge

    Europe’s strong GDP data published last week have provided a striking illustration of the themes we have outlined since the beginning of last year. They also point to the irony in holding German bonds as a hedge against EMU risk. But let’s look at the facts first:

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    GaveKal Daily - A Challenging Year

    Travelling around the world and meeting investors, we have lately found few happy souls. And to some degree, this makes sense as there have lately been few reliable, bankable trends aside from the weakness in the US$ and the strength in ‘weak US$’ asset plays (oil, mining, HK physical real estate...). However, as the past couple of weeks has shown, jumping on the “weak US$” band-wagon can be fraught with risk as:

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    Gavekal Research

    Mitigating the "Sell in May" Rule

    The ‘Sell in May and Go Away’ rule has a pretty good reputation on equity markets. Its accuracy is usually presented in these terms: on average since year Y, the performance of equity markets from May to September (or October, depending on the version) has been much lower than from November to April. For example, since 1998 the S&P500 declined on average by -1.3% during the May-to-October period, and gained +4.7% during November-to-April....

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    UK Growth & Why Buying Gilts Makes Sense

    While the dollar tumbled this week in response to the US economy’s meagre 1.8% annualised growth rate, the pound was boosted by an almost identical British GDP figure. The bullish reaction in Britain, based on the view that the figure might have been even worse and that the Bank of England would start to tighten regardless in the autumn–seemed even more misguided than overly pessimistic view of the US statistics discussed on today’s Daily. The...

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    GaveKal Daily - Greece, the Ultimatum Game and a Modest Proposal

    Economists love to play games where the rationality of the players can be tested. One such game is called the ultimatum game, in which two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between the two players, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts...

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    Gavekal Research

    An Aging Dividend for Korean Stocks?

    Like many other Asian countries, South Korea faces the demographic challenge of a rising dependency ratio and the peaking of its working-aged population (see chart). The country’s so-called “1958 Year of The Dog Generation”— equivalent to Japan’s “Dankai Generation”, but about 10 years younger as Korean baby boomers were born after the Korean War—will gradually start retiring in the next 10 years. It seems reasonable to expect the Korean economy...

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    GaveKal Daily - A Rising Political Backlash Against EMU Bailouts?

    Since Mrs. Merkel’s promise of ‘unconditional support’ made at Davos earlier this year, systemic risk across Europe appeared to be on the decline (see A Fragmentation of the PIIGS). However, as every investor knows by now, peace in financial Europe has lately been as stable as Middle-Eastern politics—and so, just when the market starts to price in the likelihood of a solution to the European fiscal mess, local politics usually rears its head to...

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    GaveKal Daily - What if Dollar Weakness Isn't Just About the Fed?

    We witnessed an interesting duel of sorts yesterday between two powerful central bankers—the ECB’s Jurgen Stark and the Fed’s William Dudley. Speaking at a dinner event in Hong Kong, Stark dominated the evening by delivering a series of well-aimed blows to the Fed’s monetary philosophy. He pointed out, for example, that “certain developed-world central banks” seem to have failed to abide by lessons learned in the 1970s—namely, that price...

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    Gavekal Research

    Where the Fed Stands on its Mandates

    When Bernanke took the job as Chairman of the Fed, he took on the legal mandate "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." While the desirability of these multiple mandates is debatable, one can see why, in 2008-09, the Fed Chairman felt compelled to aggressively cut rates and buy long-term MBS and UST. Bank loans were contracting, unemployment soaring, CPIs and price...

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    Gavekal Research

    In Europe, What is Priced In?

    I have a number of reservations about Charles’ arguments in his piece, An Old Man's Doubts. But rather than discussing all his points, I will focus on one question only: what is priced in? Charles and Anatole, along with the FT, believe that European markets are complacent about risks. Meanwhile, since the end of last year, I have argued that European markets offer attractive valuation in relation to risks. Indeed:

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    GaveKal Daily - The Implications of Iceland's No Vote

    Eighteen months ago, the gallows humour of bond trading floors was that the only difference between Ireland and Iceland was one letter and about six months. The timing may have proven a little off, and the end result may yet prove very different. However, the questions on the similarities between the two countries may be re-opened by this weekend’s overwhelming “No” vote from Icelandic voters who, for the second time around, have shown little...

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    GaveKal Daily - Is Oil the New Interest Rate?

    With Brent oil at US$122, and other commodities (gold, silver, corn…) making new highs, the single most important question confronting investors is whether oil has become the new interest rate. In a typical cycle, interest rates rise along with economic activity until nominal rates move above nominal GDP growth, triggering a slow-down in growth. However, in this cycle, the dovishness of central banks appears so deeply ingrained that commodity...

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    GaveKal Daily - Is Oil the New Interest Rate?

    With Brent oil at US$122, and other commodities (gold, silver, corn…) making new highs, the single most important question confronting investors is whether oil has become the new interest rate. In a typical cycle, interest rates rise along with economic activity until nominal rates move above nominal GDP growth, triggering a slow-down in growth. However, in this cycle, the dovishness of central banks appears so deeply ingrained that commodity...

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    GaveKal Daily - The Irish Hot Potato

    Last night brought a lot of news from the Euro Crisis front—currently in Ireland.

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    GaveKal Daily - Can Capitalism Work Without a Cost of Capital?

    It is obvious that central banks operate with four policy gauges:

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    GaveKal Daily - The "PIG" Test of the Euro Project

    The European debate continues to rage—including here at GaveKal. Readers of yesterday’s Five Corners page on the weekend’s European Council summit may have noticed that Anatole was unimpressed by the event, which he saw as stronger in rhetoric than action. “What the leaders did was deliver more speeches about their commitment to defend the European financial system,” he wrote. “They then agreed to meet again in another three months’ time to...

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    The Russian Hedge

    The recent events in Japan and the Middle East have considerably changed the situation on world energy markets—in particular for natural gas. First, a sharp decline in gas exports from North African countries needs to be compensated by deliveries of piped gas into Europe by other suppliers; second, the crisis in Japan has led China, Germany and others to re-examine their nuclear strategy, and consider other sources of energy—and here natural gas...

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