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E.g., 25-03-2019
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    Gavekal Research

    A Brave New, New World?

    The traffic has been one-way. Since mid-August, the Philly semiconductors index is up 23%, the Nikkei 225 by 18%, the S&P energy index by 14% and the S&P materials index by 10%. In other words, all “deep-cyclicals” and “price monetizers” are ripping higher. So what to make of this?

    2
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    Gavekal Research

    The Pain In Spain

    To date, the situation in Catalonia reminds that a political imbroglio does not have to morph into an economic crisis. It all depends on the context. Recent data shows that Spain’s economy has broadly shrugged off the secession drama being played out in Barcelona and Madrid.

    0
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    Gavekal Research

    Keep Calm And Suck It Up

    The Bank of England is expected to turn tail today by raising interest rates for the first time in a decade. What follows is a particular worry for homeowners, who since 2008 have seen interest payments on mortgages fall by as much as -95% due to 550bp of rate cuts. After all, the specter of a disorderly Brexit looms, businesses are threatening to move out of the UK and economic growth has slowed to a miserly 1.5%. I am relaxed about this...

    0
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    Gavekal Research

    Debating The Eurozone Recovery

    Over the last two years, Nick and Cedric have held similar views about the eurozone’s economic situation. In recent months, however, they have started to diverge on whether this framework still describes Europe’s situation. The upshot is that while Cedric is bulled up, Nick has begun to think the recovery is running out of road.

    2
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    Gavekal Research

    Tapering Without The Tantrum

    Mario Draghi yesterday confirmed the European Central Bank’s decision to opt for a “slower for longer” approach to winding down its quantitative easing program of asset purchases. His announcement outlined a threefold approach to ECB tapering:

    0
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    Gavekal Research

    The Curious Case Of European Optimism

    This weekend saw Madrid announce emergency measures over Catalonia, upping the chance of a declaration of independence being made in Barcelona. Yet despite the worst Spanish political crisis since the 80s, markets have mostly shrugged. After eight years viewing all glasses as half-empty, investors in eurozone assets have since the Brexit vote seemingly turned into congenital optimists.

    1
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    Gavekal Research

    The (Austrian) Empire Strikes Back

    The weekend’s news hardly bolsters confidence that Europe’s technocrats are in competent command of the continent’s political situation. In Spain, hundreds of thousands took to the street to protest central government rule over Catalonia. Meanwhile in unofficial referendums, millions of citizens in two of Italy’s wealthiest regions voted overwhelmingly in favor of greater political and fiscal autonomy from Rome.

    6
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    Gavekal Research

    Experiences, Not Things

    It is a core Gavekal belief that good money management is more about “avoiding losers” than “picking winners”. Yet sell-side research focuses almost entirely on identifying winners. This leaves an avenue for a small, independent firm like ours to lean the other way and help clients identify “losers”.

    27
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    Gavekal Research

    Why A Jamaican Outcome Is Best

    Electoral math says there is little alternative in Germany to a “Jamaica coalition” and Angela Merkel has made it clear this is her plan. Investors are unimpressed and have pushed the euro lower on worries that a government comprised of Christian Democrats, Liberals and Greens augurs a more nativist Germany that will turn away from its European partners, and in particular a certain eager beaver in Paris. My initial reaction to the election...

    2
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    Gavekal Research

    How To Play A Vertiginous Europe

    Led by Germany, the latest hard European economic data yesterday came in strong pretty much across the board. And with Catalonia’s regional government seemingly stepping back from the brink in its stand-off with Madrid, the euro managed to move higher. So how best to play the European economic recovery—from the inside or the outside?

    1
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    Gavekal Research

    Buying The British Bluff

    You have to admire the British for the hand they are playing with Brussels over Brexit negotiations. Press attention may be focused on infighting within the governing Conservative Party, but the key losers in this game of bluff are European Union negotiators, who face the technocratic horror of not knowing who is calling the shots back in London. Far from leaving the British team emasculated, this stance allows it to effectively duck out of...

    10
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    Gavekal Research

    An Odd Bull Market

    When supermarket checkout clerks lecture their customers on the merits of leveraged ETFs, investors can be forgiven for thinking the bull market has finally passed its “shoeshine boy” moment. But although there is no shortage of late cycle indicators out there, Louis argues that for several reasons, the current run-up may still have further to go.

    12
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    Gavekal Research

    The Trouble With Eurozone ROEs

    Economic sentiment in the eurozone is riding high, probably too high. The European Commission’s industrial and consumer confidence indexes are each close to the peaks they recorded in 2000 and 2007. Such high levels suggest overconfidence rather than rational expectations. Moreover, as far as investors are concerned, there are good reasons to be skeptical about the potential of European equity markets to outperform—largely to do with the...

    3
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    Gavekal Research

    The Rather Lame US Dollar Rally

    The year is far from over but when the time does come to close the books, it seems likely that the sudden weakness of the US dollar this year will count as one of 2017’s biggest surprises. Most investors started the year with a distinct bullish bias on the dollar, and a consequent bearish bias against emerging markets (an outlook we did not share, see for example our January 19 piece Trump’s Declarations On The Dollar). However, instead of...

    6
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    Gavekal Research

    The Catalan Question And The Future Of Europe

    Yesterday the world was treated to the unedifying sight of the national police of a democratic state using violence in an attempt to prevent peaceful crowds of citizens from voting. If any investors still believed that the electoral defeat of the far right earlier this year in the Netherlands and the election of Emmanuel Macron in France had resolved the structural forces working to fragment the European Union, yesterday’s footage from the...

    5
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    Gavekal Research

    The Return Of Alpha?

    This week’s obsession seems to be whether the big reflation trade is back on, heralding a shift in the investment environment. Louis will address this question in a piece to be sent later today, but it is worth noting another important morphing of the investment milieu: that actively managed funds are handily outperforming passive index funds.

    2
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    Gavekal Research

    The German Election And Macron's Speech

    Somewhat incongruously, French President Emmanuel Macron yesterday delivered a grand new vision of a federalist European Union less than 48 hours after German voters had offered two fingers up to such solutions. Louis applauds Macron for focusing on the logic demanded by the single currency system, but wonders if he may be whistling in the wind as Berlin turns its head eastward.

    4
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    Gavekal Research

    Better Than It Looks In Germany

    Headline writers seem unsure whether to laud Angela Merkel for winning a likely fourth term as German chancellor, or dub her a lame duck amid a fractured political landscape. With the Social Democratic Party (SPD) polling just 20%, it is clear that the implosion of center-left continental parties continues apace, while the stellar performance of an avowedly far-right party shows that populism remains a potent force. My bet, however, is that the...

    1
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    Gavekal Research

    May’s Misguided Brexit Speech

    Listening to Theresa May’s speech last week in Florence, Charles thought the British prime minister sounded like an unfaithful wife attempting to achieve an amicable separation from the husband she cuckolded. Her approach is mistaken. May’s interlocutors in Brussels cannot be mollified with promises of continued affection. They are ideologues, and they are out to punish the UK for daring to challenge their ideology.

    10
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    Gavekal Research

    Winners And Losers From The German Election

    Whatever the result of Germany’s election on Monday morning, the leaders of the Christian Democratic Union will start preparing for the post-Merkel era. Which is why this German election matters. Indeed, there is a significant spread of potential outcomes, which have different implications for both the European economy and investors in European assets.

    0
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    Gavekal Research

    Bond Markets Don’t Speak Catalan

    This week has seen the Spanish government arrest Catalan public officials and take control of the region’s public finances in response to an independence plebiscite that it says is illegal. Cedric concedes that the row is messy and won’t be quickly resolved, but says that it is highly unlikely to result in a genuine political crisis that derails the Spanish economic recovery.

    4
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    Gavekal Research

    Sterling And The Brexit Soup

    Anyone who doubts that interest rate expectations are the main driving force of currency movements, got a wake-up call last week, when sterling surged from US$1.32 to US$1.36 in response to the Bank of England’s bluntly hawkish statement that “there may need to be some [upward] adjustment of interest rates in the coming months”. Nevertheless, I remain a denier.

    0
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    Gavekal Research

    A Somewhat Changed Germany

    After recent high-drama elections in the US, France and Britain, Germany’s national democratic exercise has been a relative snooze-fest. On Sunday, Angela Merkel’s Christian Democratic Union grouping should comfortably win the biggest slice of the vote and the coalition building will start. There are, however, reasons to think that Merkel could attempt to strike out on her own.

    6
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    Gavekal Research

    Reviewing My Calls

    Over the years my research has focused on broad concepts which have been applied in many situations and lots of reports. These include ideas such as the disruptive power of platform companies, assets whose value comes from scarcity rather than efficiency, or the effect of firms running on Schumpeterian, Malthusian or Ricardian principles. Once in a while, however, I do get specific and make investment calls. Having had a little time this week, I...

    6
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    Gavekal Research

    A Very British Zombie Apocalypse

    After the Bank of England signaled its intent to raise interest rates yesterday, sterling jumped more than 1% against the US dollar and the international FTSE 100 index fell similarly. With the UK’s latest inflation reading rising to 2.9% and unemployment hitting a post-1975 low of 4.3%, it is increasingly hard to justify leaving the policy lending rate at 0.25%. One argument for deferring hikes is the UK’s lack of wage growth, but such thinking...

    4
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    Gavekal Research

    2002 All Over Again For Europe?

    The eurozone’s recovery is speeding up despite the unresolved “original sin” of lumping a single currency on to a heterogeneous economy. Yesterday Charles argued that this conceit meant the next big move for Europe would be back toward crisis, and among other things investors should avoid eurozone banks. I would not dispute this basic analysis, but take a different view on timing.

    0
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    Gavekal Research

    Italy: The Bear Case

    No chain is stronger than its weakest link, and the eurozone’s weakest link is Italy. Growth has picked up over the last two years, but as Charles demonstrates in this paper, the Italian economy is uncompetitive both within the eurozone and on the global stage. With the rise in the euro exacerbating the problem, and the prospect of ECB tapering threatening to push up Rome’s funding costs, Italy risks falling once again into a debt trap.

    1
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    Gavekal Research

    Time For A Eurozone Reality Check

    A new wave of optimism is sweeping across the eurozone. Disconcerted by the single currency area’s new-found economic buoyancy, confirmed euroskeptic Charles reviews the structural trends at work in the eurozone to determine whether it is finally time to throw in the towel on his longstanding euro-pessimism.

    7
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    Gavekal Research

    Audio & Transcript — Gavekal Research September Call

    In yesterday’s monthly call Louis Gave presented his view on the global investment outlook for the rest of the year. He argued that the key story so far in 2017 has been the strong performance of Asian equities, which has added a second leg to a bull market led by US technology and consumer stocks. The question is whether this can last.

    0
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    Gavekal Research

    A New World Order In The Making

    It’s all too easy to laugh at the BRICS group, a motley crew of five developing nations with little in common other than the fact that they’re (mostly) big and not yet rich. The term has been mocked as a “Bloody Ridiculous Investment Concept”. So why do the BRICS themselves take it so seriously?

    0
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    Gavekal Research

    Macron Goes To Work On Reform

    The moment of truth is approaching for French president Emmanuel Macron. Four months after he pledged an early reform of France’s overly rigid labor market he is pushing ahead. On Thursday the French government unveiled proposals to the lighten the regulatory burden on employers and clear away the legal uncertainties that have long deterred businesses from hiring.

    0
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    Gavekal Research

    Deteriorating Market Signals?

    We have a rule of thumb at Gavekal that when the S&P 500 equal-weighted outperforms the “S&P 500 index”, our equity clients are cheery since beating the benchmark is fairly easy. At such times, clients will typically take more risk. The reverse is, of course, true: outperformance by the S&P 500 makes for grumpy clients, tougher meetings, and less appetite for risk-taking. In the latter case, there is a tendency for investors to rush...

    3
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    Gavekal Research

    Korean Rage And European Angst

    When North Korea fired off another ballistic missile yesterday morning the immediate response of investors in the most directly affected neighboring economies was to shrug. Curiously it took far-away Europe to get in a flap, with the euro soaring and equities falling. Granted, currency players were also reacting to the Texas flooding, especially as London was closed for a public holiday on Monday. Yet it was strange for the region least...

    0
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    Gavekal Research

    Not That Canadian

    The US and Canadian economies share many similarities due to their geographical proximity, similar level of development and Anglo-Saxon traditions of common law and open political dialogue. So it is curious that each economy’s labor market dynamics are strikingly different. This observation has more than hypothetical significance as workers become hard to find at the right price in late-cycle America.

    5
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    Gavekal Research

    Despite Draghi, Flows Favor The Euro

    All eyes will be on Mario Draghi this week. Last Thursday’s release of minutes from July’s European Central Bank monetary policy meeting highlighted policymakers’ unease at the strength of the euro. The suspicion now is that the ECB president may attempt to talk down the euro when he stands up to make his lunchtime speech this Friday at Jackson Hole. Yet even if Draghi does play down the prospect of an early or rapid ECB exit from either...

    0
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    Gavekal Research

    In Work But Out Of Pocket

    Data released yesterday showed that the UK’s unemployment rate fell to 4.4% in the second quarter, its lowest since the second quarter of 1975 (when Britons voted by a 34pp margin in favor of membership of the precursor to the European Union). Yet despite the lowest unemployment in generations, wage growth in the UK remains for the most part missing in action. Workers’ total earnings rose by a muted 2.1% in 2Q. With CPI inflation running at a...

    0
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    Gavekal Research

    The Strangulation Of Enterprise

    Zero interest rates have made a great many people a great deal richer. But paradoxically they have strangled wealth creation. The reason for this is that enterprise is overwhelmingly a phenomenon found among smaller companies. Among big companies it is a rare and ailing quality. Quite simply, the overriding goal of every big company is to transform itself into a monopoly, so it can move away from having to earn its profits towards collecting...

    4
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    Gavekal Research

    Carthago Delenda Est

    Global geopolitics is characterized by the “land-based” empire of China challenging the dominant “maritime” empire of the United States according to Louis and Charles. What they cannot figure out is the seemingly contradictory responses of Washington to this well telegraphed challenge. In this piece they examine pressing challenges to American power and explore the investment consequences, which may come home to roost far quicker than most...

    4
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    Gavekal Research

    Testing Europe’s Escape Velocity

    The eurozone has exited the emergency room and is looking to sustain a recovery that takes it back to rude health. T Last year’s Chinese stimulus helped spur the latest eurozone pickup and the worry is that recent weakness in both Chinese and German trade data points to an external weakening. So could a stronger euro and slowing China spark another setback?

    0
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    Gavekal Research

    Love The Economy, Hate Economists

    Charles is proud of his data-driven approach to economic analysis and is not impressed with the methods applied by much of the modern economics profession. More to the point, he thinks that most modern economic remedies have negatively impacted the growth outlook and dulled investment performance.

    14
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    Gavekal Research

    Leading Europe Into Reflation

    The Czech National Bank has become the first central bank in Europe to raise interest rates in this cycle. Yesterday the CNB lifted its policy rate from 0.05% to 0.25%, its first rate hike since 2008. Where the Czechs are leading, others, including the European Central Bank, will follow—but in the case of the ECB, likely not for another two years or more.

    0
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    Gavekal Research

    The Brexit Talks Don’t Matter

    The details of the Brexit talks between the British government and Brussels are far less important, argues Charles in this paper, than the blow Britain’s referendum vote has dealt to the technocratic principles which underpin the European Union’s power structure. The pillars of the temple are crumbling, and sooner or later the edifice must fall.

    14
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    Gavekal Research

    Get Selective Over Eurozone Stocks

    Emmanuel Macron’s political honeymoon proved short-lived, but the new French president’s honeymoon with eurozone equity investors was over before it began. In a classic case of buy the rumor sell the fact, the euro Stoxx index peaked on May 5, the last trading day before the second round of the French presidential election. That run-up had been driven by receding fears of deflation, as investors embraced the idea of eurozone reflation, coupled...

    0
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    Gavekal Research

    The Battle Of Brexit Is Over

    Judging by statements made by two of the most fervent Europhobes in Theresa May’s cabinet, Soft Brexit has emerged the victor over Hard Brexit. While this means the UK's exit will be postponed during a transition period, and possibly beyond, Anatole argues this comes with its own drawbacks and risks. Things are likely to get worse before they get better.

    0
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    Gavekal Research

    When Smoking Pays

    Baseball cards, Beanie Babies, bitcoins... For the last eight years, governments have regarded them as much the same sort of thing, taking a broadly tolerant attitude to the proliferation of crypto-currencies. Not anymore. Yesterday the US SEC declared that blockchain-based digital tokens such as bitcoin are in fact securities and thus subject to the full panoply of SEC regulation.

    0
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    Gavekal Research

    Big Tech Is Not Standard Oil

    Back in May, Louis warned that the regulatory knives were coming out for Big Tech. In the worst case scenario for the dominant technology giants that have done so much to drive the stock market to new highs, Louis argued that they could even face the same treatment that Standard Oil received at the hands of the US government in 1911. Investors were forcibly reminded of this tightening regulatory squeeze yesterday when Google parent Alphabet...

    6
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    Gavekal Research

    The Eurozone Is Now So Far Behind The US, It’s In Front

    Among the many tricky tasks facing investors is to determine the relative positions of the US and eurozone economies in their respective business cycles. Over the preceding two cycles—the ones that peaked in 2000/01 and 2005/06—the two economies moved broadly in phase, with the eurozone lagging the US by around one year. Estimates from the International Monetary Fund and OECD suggest that that relative position is largely unchanged, with the...

    2
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    Gavekal Research

    Draghi Can’t Lean Against The Euro’s Rise

    After the euro broke out of its three-year trading range last week, it is reasonable to assume that the European Central Bank would much rather see a big correction than a further move to the upside. But central bankers can’t always get what they want—and their powers to control the currency markets are much more limited than generally assumed by day traders and media headline writers.

    1
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    Gavekal Research

    Life’s Certainties And The Euro

    There are very few certainties in life. Death, taxes, US consumers living beyond their means, and Italian central bankers talking down their currency are pretty much the only things I have learnt in my career to be inevitable. Sure enough, Mario Draghi came out yesterday doing his best to sound as dovish as he possibly could. That did not stop the euro from surging past its ceiling of US$1.15 to reach US$1.1620.

    1
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    Gavekal Research

    Watch US-Eurozone Rate Differentials

    Interest rate differentials between the US and eurozone are wide by historical standards. This is no surprise. The US has enjoyed uninterrupted growth (at least in year-on-year terms) since 2010, and today the Federal Reserve stands as the most hawkish big central bank in town. In contrast, the eurozone slumped back into recession in 2012, and the European Central Bank remains in full-blown easing mode. As a result, interest rate differentials...

    2
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