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E.g., 25-02-2020
We have found 2015 results.
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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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    Gavekal Research

    The Way of the Sudo

    One of the greatest dangers for the Euro has to be the risk that Germany finally balks at having to come up with bailout after bailout to save its profligate neighbors. While we are certainly not there yet, it may be still be interesting to ponder how such a development could play out. Initially, this move could be triggered by a Constitutional Court judgment, mass resignations by Bundesbank directors or a conservative political rebellion...

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    Gavekal Research

    Will the Sell-Off Trigger More Policy Cooperation?

    What is causing the selling panic? As usual, there are many possible answers, but the two mentioned most often in market reports and newspaper headlines—the US credit downgrade and the crisis in Italy—are probably overplayed. The US downgrade may inspire lurid headlines, but it has to be viewed by the markets as a non-event or a joke. Indeed, US Treasury bonds enjoyed one of their biggest ever rallies the day after S&P’s announcement, and...

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    Gavekal Research

    Daily - What Impact Will the Latest Currency Interventions Have?

    In the past 24 hours, we have witnessed the Swiss National Bank slash interest rates to as close to zero as possible while easing CHF refinancing options for domestic banks, and the Bank of Japan come into the market to push down Yen from close to its post-war high of ¥76.25/US$. Needless to say, both economies are struggling to cope with the overvaluation of their domestic currencies (even if the CHF is by far looking more expensive than the...

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    Gavekal Research

    Daily - What Could Trigger a Rally in Equities?

    Two weeks ago, European policymakers supposedly delivered a solution to the crisis plaguing Southern Europe. Two days ago, US policymakers finally came to an agreement to prevent a technical debt default. But in spite of these apparent breakthroughs, risk assets are continuing to fare poorly: yesterday, the S&P 500 fell for the seventh straight day, its longest consecutive decline in three years, and the Dow marked its eight consecutive down...

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    Gavekal Research

    The Tour de France & European Bond Divergence

    As good Frenchmen, once in a while we watch the biggest bicycle race in the world, the Tour de France. It is always full of action and drama—much like last week’s events at the EU Summit (except there's a clear winner with the Tour de France). The most spectacular moments always occur in the mountains when the best rider leads without looking behind him and once in a while, as the incline gets steeper, one of the riders suddenly cannot...

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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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    '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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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