Download - Perspectives économiques 2003
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GaveKal Research
A Quick Review of the Cyclical Indicators A Look at MV=PQ
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GaveKal Research
Presentation to Euro92
Alain MadelinSeptembre 25 2003, Paris
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GaveKal Research3
An Expansionist Monetary Policy=M is Going UP
� Central banks all around the world hav e been printing money agg ressiv ely to either fig ht off the deflation/depression demons (USA, UK, EMU«) or to pre v ent their currencies from rising too quickly (Japan, China, India«). The recentle v el of monetary activism is reflected by the up-tick in our Global M Indicator.
� An expanding g lobal money supply is usually g ood for stocks and bad for bonds. In lig ht of the major central banks·activism, the recent behaviour of bond and equity mark ets is understandable.
Money Supply Growth (M2) in Major Countries
USA M2 Annual GrowthJapan M2 Annual GrowthEuroland M2 Annual GrowthChina M2
97 98 99 00 01 02 03
Y oY % C h an g e
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
Rebound in China, US, & EMU M2 growth
Mild rebound in Japan M2 growth
GaveKal M Indicator & US Bond Market
USA government bond index in local currency all matur. dailyGaveKal Indicator of Liquidity (M)
93 94 95 96 97 98 99 00 01 02 03 04
M
I n d i c a t or
-9
-7
-5
-3
-1
1
3
5
7
9
Y oY % C h an g e
-18.0
-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
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GaveKal Research4
V is Rebounding very Strongly� Our v elocity indicators
bottomed in September
2002 and returned to
positiv e territory in
March 2003.
� W ith the continued
contraction in quality
spreads and the pick-upin bank lending , w e do
not f ear a ne w
contraction in v elocity .
� The question today isnot whether v elocity will
once ag ain collapse, but whether the v elocity rebound is already priced into the mark et?
The eKal Vel it (V) I i at r Vix I ex
V l cit I ic t r -
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V l city F lli
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GaveKal Research5
No inflation Risk on the Horizon.
� Our P indicatorindicates that there
will be v ery little
inflationary pressures
ov er the coming
months.
� As such, centralbanks will be able to
continue their
anchoring of short
rates and their
agg ressiv e printing of
money .
GaveKal P I i at r A E RI F t r e I flati Gauge
P I ! " ic # t $ r
% ! it
& " ' t # t & s, I ! fl # ti
$ ! ! .i.& .,
( ) RI F 0 t 0 r & i ! fl# ti
$ ! 1 # 0 1 & ,
% ' D
P I ! " ic # t $ r Source: EcoWin
94 95 96 97 98 99 00 01 02 03 04
95
100
105
110
115
120
125
1 9 9 2 =1 0 0
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
P Ind ic 2 t 3 r l 4 2 ds 5 y f
3 6 r m 3 nt 7 s
R= 0.84
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GaveKal Research6
Conclusion: Q will Boom
GaveKal Quantity (Q) Indicator & O8
CD GD9
Q Indicator @ ECA Gross domestic product,
B
olume, sa C HSQ Indicator
92 93 94 95 96 97 98 99 00 01 02 03 04
QI n d i c a t or
-20
-16
-12
-8
-4
0
4
8
12
16
20
Y oY % C h an g e
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
R=D
.E
, lead ti F
e threeF
onths
� For most of the past year, the predominant concern of financial mark ets has been whether economic activity would
pick-up following the end of the Iraq W ar. In July , policy mak ers, economic data, and the financial mark ets seem to hav eput these f ears to rest!
� Our indicator of daily economic sensitiv e prices is now announcing a solid economic rebound; as is our monthly g rowth(Q) indicator. And so is the data: last w eek, US GDP increased by a much hig her than expected 2.4% in the secondquarter and jobless claims ov er the past two w eeks hav e been coming in better than expected.
� The recov ery is there. And it will be strong .
Daily Indicator of G
conomic SensitiveH
rices & OG
CD Ind.H
rod.
GaveKal Indicator of I aily Economic Senstive P ricesGaveKal Indicator of I aily Economic Senstive P rices Q EC I I P total industry,
R
olume, sa
92 93 94 95 96 97 98 99 00 01 02 03 04
I n d ex
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
G aveKal I ndi S ator leads bT
1U U
daT
s
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GaveKal Research7
Back to the Deflationary Boom Prices
++
Inflationary BoomBuy: Scarcity Assets & Cyclicals
Sell: Bonds,
Interest Sensitive Stocks
Deflationary BoomBuy: Efficiency Shares
Sell: Price Inelastic
Inflationary BustBuy: Gold, Cash
Sell: Financial Assets
Deflationary Bust
Buy: Government Bonds
Sell: Equity,
Negative Cash Flow Assets
++
E conomicactivity
� Accelerating g rowth,accelerating liquidity and tame prices: we are back tothe glory days of thedeflationary boom.
� A deflationary boom is a v ery exciting , and dangerous, in v estmenten vironment (see Theoretical
Framework for the Analysis of A Deflationary Boom on our w ebsite ).
� It is v ery propitious to ov er-in v estments, ov er-excitements, and bubbles.
W here will the next bubble be? Our g uess is Asia«and
w e want to participate in it!
� In any e v ent, the mark ets·recent mov es mak e sense in lig ht of economicfundamentals.
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GaveKal Research
Who will benefit structurally from the Boom
A Wicksellian Analysis of the World
Central Banks, Inflation, Deflation and
Financial Mark ets
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GaveKal Research9
Introduction.� W icksell, the Sw edish economist had a v ery pow erful intuition. His vie w was that economic cy cles
could be explained by the div ergences betw een what he called the ¶· natural·· interest rates, and what he called the ¶·mark et·· rates. (More on those two later)
� If the ¶·mark et rates·· w ere too low i.e. if money was too cheap , it led to a boom centred on excesscapital spending , excess borrowing , excess consumption.
� These ¶·boom conditions·· led e v entually to a rise in the mark et rates abov e the natural rate, and this changes in the price of money e v entually broug ht about a bust, which would lead in due time to a fall of the mark et rates below the le v el of the natural rates.
� And on and on«
� W ith e v ery country (at the time of his writing ) operating under the Gold Exchange Standard, there
was little that could be done to stem these periodic booms and busts, more a function of g old discov eries and international capital flows than the results of conscious decisions by the centralbank ers.
� This is not the case any more: central bank ers do control mark et rates at the short end.
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GaveKal Research10
Wicksell·s Children
Three economic schools can be traced to W icksell.
1. The K eynesians. Their vie w is v ery simple: since the rise of the mark et rate abov e the naturalrate creates the bust, the central bank should pre v ent the mark et rate from e v er g oing abov e the natural one. Their vie w was de v eloped during a depression, and was dominant up to the end of the se v enties.
2. The Austrians. They belie v e that pre v enting the mark et rate from g oing up distorts the price mechanism and that the central bank should leav e the interest rate as close as possible fromthe natural rate all the time. Their vie w, represented by the Bundesbank was de v eloped during an inflationary period and pre vailed from the end of the se v enties to the end of the nineties.
3. The Fischerians, who after Irving Fischer considered that the role of the central bank was tomanage short rates contra-cyclically . Their vie ws w ere de v eloped into a historical period full of
potentially v ery dangerous financial accidents ( Oil shocks, Banking collapses, countries g oing bankrupt etc«) Their best representativ e is of course the Fed with Mr Greenspan
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GaveKal Research11
The Goal of this Presentation
Once in a while, w e indulge in a little bit of theoretical work.
Not because w e want to bore our readers to death, but simply to ¶·reposition·· ourselv esintellectually .
We belie v e it leads afterwards to better understanding and thus better ad vice.
The work that w e hav e done ov er the last f e w years (in fact since the re-emergence of our researcheffort in 1998) has in fact con vinced us that the W icksellian analy sis is the correct one.
Thus w e will:
1. Present our ow n definitions of what the ¶·natural·· rate is
2. Show that div ergence betw een the natural and the mark et rate is indeed at the orig in of the economic cy cle.
3. Show that the ¶·core beliefs·· under which a central bank is operating , leads almost naturally to a series of economic and financial consequences ov er time, alway s the same for the same set of core beliefs.
4. Show that when a central bank changes it sets of core beliefs, (from K eynesian to Austrian
etc«), it has a huge influence on the underly ing financial mark ets.5. Identif y the sets of beliefs under which the main central banks are operating today , and draw
some investment conclusions.
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GaveKal Research12
Identifying the ¶· Natural ·· rate
USA IP Total I ex GDP : 10 Year Aver ages A ual I r eases
IP t t l i , V l , sr ss D stic Pr ct, V l , R, s
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
1 2
t s V
r i t i
s T
Y
r s
r
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
The V W
N X t Y r X l Rat e m Y st ̀ e ar a Y
nd 3%
A b er ag e Gr a c
t h Rat e a f t he GDP
A b er ag e Gr a c
t h Rat e a f t he V W
IP
� O v er the last
tw enty fiv e years,
the US GDP has
g row n by 3% per
year on av erage,
and the IndustrialProduction by 2.7%.
� So the ¶·natural
rate for the US
economy must be
slig htly below 3%
real
� W hy ?
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GaveKal Research13
Reasoning ¶·ad absurdum··
US GDP (Volume) US ash--Flows
r ss D stic Pr ct, V l , R, sr r t c s -fl s, B s 100 i 1982
rt R t s it lis ( T Bills)
74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
DP &
s
-F l
s B
s
1 0 0 i
1 9 8 2
40
90
140
190
240
290
340
� O v er the long
term, the g rowthrate of the USGDP=the g rowthrate of the USCorporate cash-flows (profits).
� If short term
rates capitalised (the g reen line )g re w faster than corporate profitsor the GDP,overtime the sy stem would implode.
� Erg o, the upper limit of the naturalrate must be the g rowth rate in volume of the economy ,
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GaveKal Research14
Defining ¶·Real·· Rates
So, the upper limit of the ¶· N atural ¶· rate is 3 %.
Interest rates should not stay abov e 3 % for a sustained period of time real without creating substantial damages to the economy . Big help indeed.
It leav es us with more questions than answ ers.
The question w e hav e to address now are:
1. W hich market interest rates are w e g oing to use as a proxy for our market interest rates?2. W hich inflation rate are w e g oing to deflate these interest rates with?
Fortunately , w e hav e done ov er the last f e w years quite a lot of work on these topics, and hav e come
to the following conclusions.
W hen it comes to interest rates, w e cannot introduce a ¶·risk· ·element in the picture, so w e will hav e to
use Gov ernment related tools.
We cannot use short rates only (too short a period ), nor can w e use long rates (volatility in inflation expectations). So w e will use the av erage of three months T Bills and 10 Y ears bonds.
As far as inflation is concerned, our readers k now that w e hav e alway s favoured the av erage inflation
of the last ten years, as the best proxy for the ¶·perceiv ed·· inflation rate.
R esults
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GaveKal Research15
Our Measure of Real Rates
� We are reasonably happy with ourmarket rate proxy .
� It mov es betw een 0 and +3 %,
which is what w e w ere expecting ,and there is nodiscernible trend,a sign that w e are using the rig htinflation rate todeflate the
nominal interestrates.
� Next question of course: does it
work ?
Mar et Rates i the US
R l R t s i t
6 2 6 3 6 4 6 5 6 6 6 7 6 8 6 9 7 0 7 1 7 2 7 3 7 4 7 5 7 6 7 7 7 8 7 9 8 0 8 1 8 2 8 3 8 4 8 5 8 6 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3
R
l R
t s
-1
0
1
2
3
4
5
6
7
8
P r d xy f d r t he Wick selli an M ark et Rat es
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GaveKal Research16
The Proof
� Every recession
since 1968 in the
US took place after
a rise in real rates
above 3% (Gray boxes abov e zero).
� W hen mark et rates w ere below the
natural rate, the
US economy g re w
¶·normally ··.
� So it works«
US GDP Variations Mar et Rates vs Natur al Rates
r ss D stic Pr ct, V l , R, s
0 rk t R t s r B l N t r l R t
68 6 9 7 0 7 1 7 2 7 3 7 4 7 5 7 6 7 7 7 8 7 9 8 0 8 1 8 2 8 3 8 4 8 5 8 6 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 9 5 96 9 7 98 9 9 00 0 1 02 0 3
Y / / Y
s
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
-5
-4
-3
-2
-1
0
1
2
3
4
5
M ark et Rat es Bel e f
N at g r al Rat es
M ark et Rat es Ah
e i e N at g r al Rat es
Ever Recession Took Place AFTER
M ark et Rat es r e se ABOV p
N at g r al Rat e
R ec essi e ns
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GaveKal Research17
The Keynesian Central Bank
� The characteristic of
a K eynesian central
bank is that short
rates will be
maintained all the
time below the g rowth rate of the
economy .
� This alway s leads to
e v ery body and his
brother borrowing ,
money supply
exploding and
inflation going up
structurally «US
1958. 1979
US T Bills ields & US GD nnual Growth ate
Market q ates r ominalG
s t Growth q ate (
u
alue)USA C t I 12 Months
u
ariations four Years Moving A verage
58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
v
er c en t
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
Interest rates lower than G Interest rates higher than G
I nflationw
esinflation/ w
eflation
?
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GaveKal Research18
Moving from Keynesian to Austrian
� A K eynesian monetary policy is aimed at what K eynes called the ¶·euthanasia of the R entier··.
� It can work only if the financial mark ets are heavily reg ulated (reg ulation Q, credit controls, foreign
exchange controls etc...)
� W hen the Futures mark ets in Chicag o in v ented the contracts on the US interest rates, then this
policy was doomed.
� The futures allow ed the in v estors to hedge ag ainst the future inflation, thereby leading to a massiv e
rise in real rates immediately .
� This rise in real rates broug ht those way abov e 3 % (the natural rate ) for an extended period of
time and killed the incentiv e to borrow.
� And the US mov ed from inflation to des-inflation-deflation.
� This mov e has huge financial consequences, which w e are g oing to study now using the Japanese
example.
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GaveKal Research19
The Japanese Drama in Three Acts
� At the end of a K eynesian period, real rates are deeply neg ativ e, and nominal rates are hig h.
� In the first phase (boom, bubble ), w e see a g radual fall in nominal rates and a g radual rise in real rates.,at the same time. Since nominal rates are used to discount future cash-flows, w e hav e an incredible boom cum bubble.
� Ev entually (second act), real rates (mark et rates) rise abov e the long term g rowth rate of the economy , e v en thoug h nominal rates k eep falling . This is when the bubble bursts. As long as real rates (Market Rates) remain above the structural growth rate of the economy (which might be falling due to the liquidation of the bad investments of the bubble period), the economy keeps stalling or falling.
� The wav e of bankruptcies destroy the banking sy stem, V elocity collapses, and deflation kicks in
(third phase )
� See next g raph for the three phases«
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GaveKal Research20
A Graphic view of the Japanese Drama
Japan GDP Real Inter est Rates (Str uctur al Inflation)
12 x
y
� t� s V�
ri�
tiy
� s�
DP i� Vy
l� � �
[� �
12]
x
�
rk�
t R�
t�
s R� �
l
x
�
rk�
t R�
t�
s Ny �
i �
�
l
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
%
-2
-1
0
1
2
3
4
5
6
7
8
9
B �
� �
l e B � st
Banki ng � ri si sM ark et Rat es > N at � r al Rat es
V el � city � �
ll apses
M ark et Rat es < N at � r al Rat es
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GaveKal Research21
Preliminary Conclusion
� A French Politician once confronted with a v ery favourable de v elopment in France said ¶· Let · s feign to be the organisers of these phenomena that we do not understand ·· . This is a luxury that a centralbank cannot afford.
� The most dangerous phase when a central bank mov es from K eynesian to Austrian is after af e w years of boom when real (mark et) rates start moving abov e the structural g rowth rate of the economy ( natural rate ), when e v ery body has understood and borrows to buy financial assets«
� This usually coincides with the peak of the bubble (Japan 1989).� The central bank must then talk tough , but be willing to cut short rates agg ressiv ely and very
quickly to pre v ent a collapse of the house of cards, i.e. it must mov e from Austrian to Fischerian in no time«
� Maintaining real rates abov e the structural g rowth rate of the economy during more than fiv e years as the BO J did was suicidal.
� If such a mistak e is made then the third phase unfolds, centred around a collapse of the
financials in general and the commercial banks in particular«and monetary policy becomesineff ectiv e.
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GaveKal Research22
What about a Central Bank being Austrian since its
Origin ? The reader still with us may then ask: OK, then I should k eep my money all the time in a country
ruled by a central bank which has operated for e v er under the Austrian theory . If only lif e was thatsimple«
� Because to operate efficiently , this central bank must hav e a pretty g ood idea of what the structural g rowth rate of the economy is .
� If this structural g rowth rate of the economy mov es down for one reason or another, and if the central bank does not adjust downwards the short rates target, then the economy will mov e, ov ertime, into a deflation-depression«
� The same is true on the other side if the g rowth rate mov es up« We could hav e an inflation boomemerg ing
� Moreov er the mandate of the central bank may change from one country to a g roup of countries,and if the central bank follows a policy aimed at the average of all those countries , then all those with a
below av erage natural rate will g o bust, e v entually .� This is what is happening in EuroLand.
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GaveKal Research23
Incompetence & Arrogance
Fr ance: Mar ket Rates and Natur al Rate
Fr �
� c�
�
DP t� t�
l, V� l, s�
[�
�
3, c.� .�
12] �
�
rk�
t R�
t�
i � R� �
l T�
r � sFr
�
� c�
�
DP t� t�
l, V� l, s�
[�
�
3, c.� .�
12]
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
P
r c
t
-3
-2
-1
0
1
2
3
4
5
6
7
M ark et Rat e �
el
N at r al Rat e= Gr
t h
M ark et Rat e abov e N at r al Rat e = B st
� Rates in France
are 200 bp too
hig h.
� The French
Economy should
continue collapsing .
� Question: is it
g oing to be sav ed
by a positiv e
mov ement in
foreign trade
(boom in exports)?
� See next pages
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GaveKal Research24
The French Example
France Deflationary ressure Inde (D I)
Using I
*C
I0
rench
I
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
er c en t
-5
-3
-1
1
3
5
7
9
11
13
15
Mar j et Ratek
bove l atural Rate
Mar j et Rate m elow l atural Rate
� Mark ets
rates hav e
been abov e
the natural
rate 95 %
of the time since 1987.
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GaveKal Research25
Back to Purchasing Parity
Purchasing Parity djusted for the differences in Productivity
n
rance Exchange rate USo
/n n
urchasing
arity
ne Standardo
eviation U
ne Standardo
eviationo
own
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
U S
/
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
0
1
2
3
4
5
6
7
8
9
10
US ollar ver alued
US ollar Undervalued
� On a PP
adjusted for
the
diff erences in
productivity ,
the Euro isov ervalued by at least 15
%...and this is
not to
mention the
PP with
China, Korea
etc«
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GaveKal Research26
France is not Price Competitive
Productivity Differences & uro vs Dollar
roductivity Europe- roductivity USTaux de Change
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
i f f er en c e s
-6.0
-5.5
-5.0
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
E x c h an g e
a t e
0.8
0.9
1.0
1.1
1.2
1.3
1.4
The Euro should be at .
� The
EuroLand
economy is
not benefiting
from the rise
in
productivity which w e are
seeing in the
US.
� In fact
productivity
k eeps
decelerating in
Europe (UK
included )
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GaveKal Research27
The Rise of the Euro Will Keep Hurting
Eur o vs Dollar Fr ench Exports
c r t D/ RFr c rts f s s r ic s, V l , s , Ri t c l
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
1 2
z
t {
s V
|
r i |
t i
z
s
-20
-15
-10
-5
0
5
10
15
20
1 2
z
t {
s V
|
r i |
t i
z
s
-20
-15
-10
-5
0
5
10
15
20� The collapse of
French (read
EuroLand ) exports
is just starting .
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GaveKal Research28
Who is going to Pay?
Purchasing Parity en uro & dded alue in French Industry
rance alue added, by sector, industry, alue, saeviation rom urchasing arity with the Yen
Jul 95 Jul 96 Jul 97 Jul 98 Jul 99 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04
al u eA d d e d
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
E U
/ J
Y
-20
-15
-10
-5
0
5
10
15
20
} ren ~ h Corporate Profits to Collapse
� W ho else butthe Frenchcompanies?
� After all, w e hav e a
Gov ernment which has notrepealed one of the stupid Socialist laws
� Lik e the UK conservativ esbefore Mrs
Thatcher, they are ¶·manag ing ··the decline.
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GaveKal Research29
The EuroLand Drama: End of Act 1, Moving Towards
Act 2� From 1970 to 1991, the German Industrial production g re w on av erage by 2.5 % per year.
� From 1992 to 2003, this g rowth rate has fallen to 1.2% per year. ( Our objectiv e here is NO T toexplain this decline, but simply to mention it).
� In the 80·s real rates in Germany w ere most of the time abov e 3% when the g rowth rate was at2.5%. Tig ht but not unbearable.
� Those rates are still close to 3%, e v en thoug h the g rowth rate has fallen to 1.25%. The diff erence betw een the natural rate and the mark et rate has seldom been hig her.
� An Austrian central Bank by gravely misreading the long term structural growth rate
of its economy can create a disaster about as bad as anything a Keynesian central bankhas achieved in the past.This state of affairs cannot not lead to the collapse of the Euro.We are not sure that the Euro will survive in its present format.
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GaveKal Research30
The Economy is very Sensitive to the Variations in
Short RatesFed Funds vs. Industrial Pr oduction in the US
USA IP total index, Volume, sa [ma 3, c.o.p 12] Changes in Fedeal Funds Rates RHS Inverted [ma 3, c.o.p 12, lag 12]
70 71 7 2 7 3 7 4 7 5 7 6 7 7 7 8 7 9 8 0 81 82 83 8 4 8 5 8 6 8 7 8 8 8 9 9 0 91 92 93 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 02 03 04
Y Y %
-12.5
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
F
F
s V
r i t i
s i
r t
-75
-50
-25
0
25
50
75
100
125
Lead T ime
M ont hs
W ar+T a x Incr eases
� Tw elv e monthsafter a fall in USrates, Economicactivity picks up,the re v erse being
also true.� As a result the
US central always maintain the f ed funds ratesbetw een the long term g rowth rate of the USeconomy and 0(in real terms)«
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GaveKal Research 31
A Fischerian Central Bank
Real Rates US GDP
DP i V
l
12
t�
s V� ri � ti
sR
� l R� t s
T Bills
si
�
10 Y I fl � ti
2.3 0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
R
l R
t s
-2
-1
0
1
2
3
4
5
Boom. t he F ed T i g ht ens
B � st, t he F ed �
ases
R eal Rat es R emai n Bet � een - and +3...
� There is noalternativ e (TINAas Mrs Thatcher
was fond of say ing ) , but to be a Fischerian central bank,manipulating short rates,putting themabov e the g rowthrate of the economy when the economy isbooming , and putting them at
zero or below when the economy isbusting .
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GaveKal Research 32
Conclusion
� Of all the countries which w e follow, the biggest positiv e spread betw een the natural rate and the mark et rate are to be found in Asia in general and China in particular. (see our R esearch on
Asia & China) A ne w boom there has started or is imminent. The way the local central banks will manage the passage from K eynesian orthodoxy to Fischerian prag matism will be the k ey betw een a ne w boom and bust cy cle or a sustained period of economic g rowth.
� In the US the fundamentals hav e seldom been better for risks tak ers and corporate profits. The US companies are back to positiv e cash flow. In the US, w e should see a massiv e depreciation of the US dollar vs. the Asian currencies, and an export surge, accompanied by a boom in capital spending . The Fed will hav e to tig hten pretty soon, or run the risk of inflation accelerating mark edly .
� No hope for EuroLand, except if the Euro collapses and bring s about a surge in nominalactivity throug h exports, allowing the mark et rates to mov e below the natural rate at leasttemporarily . Unfortunately , w e tend to belie v e that if the Euro w ere to fall the ECB mig ht be
raising rates «
� The procedures of the ECB are economically incoherent, and cannot work. We are not sure that the Euro is g oing to surviv e in its present format. It could v ery w ell disappear. EuroLand isentering into a massiv e political crisis.
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GaveKal Research 33
For more information, please contact Louis-Vincent Gave
or call us on 852- 2869 8363, fax: 852- 2869 8131.
This presentation is available on our website:
www.gavekal.com