1. Longview Quick Take - Chinese Oil Demand

    posted by Longview Economics | posted

    This is the first of our ‘Quick-Take’ Videod and it introduces & explains “China’s Crude: Breaking Down the Numbers” in which our Senior Strategist Harry Colvin argues that in the short-term oil markets could be set for a fall back as Chinese demand for oil falls.

    The video will also feature on the newly created Longview Economics Youtube Channel. The Channel will be populated regularly in the future so that our clients can access our key views in short video format.

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  2. BREXIT: 1453 All Over Again?

    posted by Chris Watling | posted

    Over the span of history, there are few years that can genuinely be considered as years on which the history of the world turned. The birth of Christ in 1AD and perhaps more importantly Christ’s death in around 30 – 35AD is an obvious example – so much of Western civilisation, its ethical & cultural norms, as well as its  principles derive their roots from those events, whilst so many have been, and continue to be, influenced and inspired by Christ’s teaching. The creation of democracy, perhaps by Democrates in Ancient Greece in 460BC is another; while the invention of steam engine (and other machinery/processes) is arguably another key moment about which history turned, kick starting the industrial revolution and propelling a broad based rise in living standards for the next 250 years (There are of course other examples).

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  3. Reforming the International Monetary System

    posted by Chris Watling | posted

  4. UK BREXIT - Initial Market Thoughts, Things to Watch & Points of Uncertainty (Longview Reaction)

    posted by | posted

  5. Helicopter Money – Really? a.k.a. How did we get here?

    posted by Chris Watling | posted

  6. Rising US Recession risk

    posted by Harry Colvin | posted

    Since the Fed tapered its QE program, the US economy and markets have come under pressure. Major equity indices have trended sideways; the yield curve has flattened; implied inflation has fallen to multi year lows and cyclically sensitive parts of the economy have deteriorated (e.g. manufacturing, trade & capex cycles). In recent weeks, hawkish language from Fed governors has rapidly brought forward the timing of rate hikes. The key question therefore is whether the Fed is beginning to overtighten?
     

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  7. Chinese Equities - Re-test of the Lows Expected

    posted by Andrew Sluman | posted

    With a collapse in Chinese stock prices, the key question is whether the Chinese equity bubble has burst (and is now deflating), or whether this is simply a pullback within an ongoing bull market? In our view the latter is most likely for a number of reasons (as laid out in full in our latest China-India Monthly).

    In addition to those factors, recent Chinese equity market price action is consistent with the EM experience of stock market corrections. An analysis of all major stock market crashes in 20 key EM economies since 1985 shows that China’s price pattern is far from unprecedented (despite initially being among the sharpest pullbacks in history). Indeed, at 33 trading sessions after the market peak, Chinese equities are currently tracking the median performance of the pullbacks we’ve analysed (see first chart below).

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  8. UK Demographics, Deleveraging & Deflation

    posted by Harry Colvin | posted

    Long term deleveraging cycles are alive and well in Western economies: Private sector debt ratios are falling; Western bank balance sheets are shrinking, money has been ‘destroyed’ by commercial banks and, as such, the threat of deflation has remained a dominant theme in the Western world.

    A key question for investors today is: How much more deleveraging is left to run, and for how long will it persist? Once markets begin to anticipate the beginning of the end of the deleveraging cycles, then bond yields should begin their long, slow process of normalization. If history is any guide, that turn higher in yields should mark the start of a new multi-decade bear market in bonds (i.e. a long term ‘Kondratieff cycle’ of rising yields).

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  9. Why are bond yields spiking?

    posted by Chris Watling | posted

    German, US and other Western bond yields have spiked sharply in recent trading sessions. The German 10 year bund having threatened to turn negative just 3 weeks ago, has backed up sharply to approx 67bps from its closing low of 8bps (on 20th April). US 10 year treasury yields, having fallen close to their 2012 yield lows, have also backed up sharply (now @ 2.24%). With such a sharp sell-off investors are wondering what has caused it and whether this the start of a new trend in bonds?

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  10. Rounding up the Fed

    posted by Andrew Sluman | posted

    There were 3 key changes to come out of yesterday’s Fed meeting: i) Grabbing the headlines, the word ‘patient’ was removed from the statement*; ii) The ‘dot’ charts signalled a more dovish stance of the Fed as a whole (i.e. since the December meeting). It also signalled a greater degree of unanimity among the FOMC members (see analysis below); and iii) The Fed downgraded its assessment of the economy (i.e. from ‘solid’ to ‘moderate’).

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  11. China and the Copper carry trade

    posted by Harry Colvin | posted

    Since 1970, global copper inventories and price have been closely correlated. Not surprisingly, rising inventories have been accompanied by falling prices, and vice versa. In recent decades, that change in inventories, at the margin, has been determined by China. In particular, the cycle of inventories in Chinese factories has driven the global LME inventory cycle (for detail/evidence see April 2010 Commodities Monthly: “China Needs More Copper”).

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  12. UK Wage Inflation – Cracking the Conundrum

    posted by Harry Colvin | posted

    The UK economy is now in its 6th year of recovery, GDP growth is amongst the highest in the G7 and, with that, traditional signs of a tightening labour market are increasing. As such, one of the key conundrums for UK policy makers (and investors) is the apparent lack of wage growth. Indeed, employment growth has accelerated; job vacancy rates are high; the redundancy rate is low; and the most skilled/confident workers are already back in work. Historically, those conditions tend to be accompanied by much faster wage growth (of around 3 – 4% p.a.). Currently, though, wage inflation is just 2% Y-o-Y.

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  13. Pass the Debt Parcel

    posted by Harry Colvin | posted

    Since 2009, the US economy has lived in a post credit boom world. Poor productivity, private sector deleveraging and (relatively) slow job growth have been at the heart of this economic expansion. The Fed’s response, as is well known, has been extremely loose monetary policy (i.e. QE & ZIRP).

     

    As is typical following a ‘credit bust’, capital has migrated away from the low yielding currency of the slower growing/deleveraging economy (in this case away from the US economy & the US dollar). That capital has found its way into faster growing economies with higher yielding currencies (in this case China & other emerging markets) – e.g. see chart below. The ‘debt parcel’ has therefore been passed from West to East and, with that, China and other Asian economies have had credit booms (we lay out the mechanics of that in last month’s Longview Letter No 86 “Pass the Debt Parcel – Part II”).

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  14. Oil – The Return of the Supply Glut

    posted by Harry Colvin | posted

    Oil has entered a new trading range of between $80 – $100 (over the next 12 – 18 months). Underpinning that range are bearish fundamental dynamics: Western demand is in structural decline; US shale production is growing rapidly; Saudi is unlikely to cut production to support prices; Libyan supply is recovering and the vast majority (98%) of the world’s oil supply is still profitable at a price of $80.

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  15. Global Utilities expected to Underperform (next 3-9 months)

    posted by Andrew Sluman, Chris Watling | posted

    Andrew Sluman, Market Analyst: dl+44 (0) 207 062 8802

    Chris Watling, CEO & Chief Market Strategist: dl+44 (0) 207 062 8804

    Using 28 years of data, Global Utilities are close to their most expensive on record (see Heatmap 1 & explanation below). Added to that, the sector is notably overbought (using technical relative RSI indicators). Historically, SELL signals from both these indicators have been efficacious signals for timing sector rotation. Furthermore, the big driver year to date of Utilities outperformance has been the fall in global bond yields (fig 1). With yields likely to have passed their lows for 2014, that prior support is likely to become a headwind. As such this is a sector we’d expect to underperform over the next 3-9 months.

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  16. Gold – Bear Market Ongoing

    posted by Harry Colvin | posted

    Having trended down for three years, gold is now 36% below its peak in 2011. With that, a number of commentators are turning bullish – for a number of reasons: In particular, gold has become increasingly unloved: ETF holdings have unwound considerably, net long speculative positioning is low and measured sentiment readings are bearish (a key contrarian BUY signal). In addition, geopolitical risks are high, monetary policy is still loose and inflation risks are probably higher than many think. 

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  17. Box-and-whisker analysis of latest Fed guidance

    posted by Andrew Sluman | posted

    The Fed yesterday chose to keep their forward guidance unchanged. In particular the ‘considerable time’ phrase was left in the statement, albeit with some qualification during the Q&A section of the press conference. That proved therefore to be consistent with the WSJ’s Jon Hilsenrath’s claim in his podcast on Tuesday.

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  18. The Scottish Question – The LONG view

    posted by Chris Watling | posted

    In our view there are 3 key specific risks surrounding a YES vote by Scotland for independence from the UK. Those are: i) the currency question; ii) the fiscal position of a newly independent Scotland; & iii) the economic & employment risks associated with some level of likely corporate exodus.

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  19. The UK Productivity Puzzle

    posted by Harry Colvin | posted

    Ultimately, the long term health and sustainability of any economic expansion hinges on productivity growth. Indeed, productivity growth is true wealth creation, it underpins long term growth in corporate profits and sits squarely at the heart of the economic cycle and its longevity.

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  20. The US Labour Market: How Tight is it?

    posted by Harry Colvin | posted

    Tomorrow Janet Yellen speaks at the Jackson Hole symposium on ‘re-evaluating labour market dynamics’. That topic is at the heart of the debate on wage inflation, inflation generally and the outlook for the speed and timing of interest rate hikes by the Fed. On one side of the debate are the neo-Keynesians, typified by Yellen and many of the Fed governors. They have a benign view on wage inflation as they expect that the fall in the participation rate is somewhat temporary and should therefore soon reverse. As a result of that expected reversal, slack in the labour market should increase as disaffected workers are drawn back into the work force thereby tempering/slowing the rise in wage inflation.

    In the other camp are the hawks on wage inflation and the labour market. They point to not only the demographic trends (i.e. retiring baby boomers) but also the behaviour of disaffected workers in prior recoveries. In their thinking the falling participation rate is set to continue – and as such the slack in the labour market is fast disappearing.

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  21. Why the AUS$ should go down: The American Angle

    posted by Chris Watling | posted

    There’s a fixation in global markets that SHORTing the AUS$ is all about SHORTing an economy that is a play on the Chinese credit bubble, a play on expensive housing and an overleveraged consumer and a play on a falling iron ore price. While we would concur with the economic growth challenges created by those structural issues, it’s only half the story. As with all currency pairs there is 2 sides to the trade – i.e. the US as well as the Australian economic and rates outlook. 

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  22. The Beginning of the End of the Cycle

    posted by Chris Watling | posted

    Largely unnoticed, the US corporate sector has become cashflow poor over the past 18 months. Rising capex spending, accelerating buybacks and increasing dividends have not only underpinned rising equity markets, but have also driven deterioration into negative aggregate corporate sector cashflow. That deterioration generally signals the entry into the final stages of the economic cycle (i.e. the final 1/3rd). Consistent with that, corporate sector profits typically peak on average 12 months prior to the recession (table 1 in Longview Letter no 83). Corporate sector cashflows deteriorate sharply into the start of the recession while tighter credit conditions and an inverted yield curve also signal that start. At present credit conditions are yet to tighten and the yield curve is yet to invert – those therefore point to at least 12 more months of economic expansion (and this cyclical bull market). Once the Fed’s tightening cycle begins, though, weak/negative corporate sector cash flows suggest a limited degree of tightening will bring about that curve flattening and tighter credit conditions. A recent deterioration in the trend in productivity growth is also consistent with that cashflow (and corporate profits growth) deterioration. A reversal of that productivity growth weakness, if forthcoming, would be the corporate sectors’ saving grace. Without it, though, the cycle’s longevity appears limited. 

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  23. Quiescent markets - should we be concerned?

    posted by Chris Watling | posted

    Price action remains impressive in the S&P500 with all attempts at weakness petering out quickly (and the rally then quickly recommencing). YTD the largest pullback was in Jan-Feb this year with the S&P500 pulling back by 5.8% from local closing high to local (closing) low. If that quiescence continues this will evolve into one of the quietest years of S&P volatility in the last 50 years. Indeed years without a pullback of 7.5% (local high to local low) are rare indeed - with only 9 years in the past 50. Rarer still are years with no pullback larger than 5% (with only 1 year in the last 50 years & only 4 since the start of the data in 1928). Clearly record low VIX levels is highlighting that lack of volatility - our lowest reading on record on our global volatility indicator is a further sign of that quiescence. Table 1 below highlghts how rare sub 7.5% pullback years are in the history of the last 50 years - and indeed how common pullbacks of 10% or greater are in contrast. Model signals from a numbe rof our indicators adds to our nervousness. For full analysis please see our latest Monthly Market Outlook, no 126, published 3rd July 2014: "SELL signals - a Full House"

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  24. Imminent wave of risk aversion in global markets

    posted by Chris Watling | posted

    A 5 – 15% pullback in the S&P500 is likely over the course of the coming weeks. 

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  25. Pass the Debt Parcel - Jaime Caruana, General Manager BIS, speech 9th April 2014

    posted by Chris Watling | posted

    It’s encouraging to read a speech from a policy maker which so elegantly depicts the problems with the current Western approach to monetary policy. As Jaime Caruana, General Manager BIS (former Governor Bank of Spain), lays out in his recent speech, there are broadly speaking 2 understandings of the Western economic situation that inform approaches to Western monetary policy: i) the ‘Shortfall of Demand’ view; & ii) the ‘Balance sheet recession’ view (see LINK for recent speech).

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  26. Oil Price Risks – Broadly Balanced?

    posted by Harry Colvin | posted

    In 2004, the oil price began to march higher – with a major price spike in the middle of 2008. That spike, as economic theory would suggest, has delivered a supply response: The shale revolution in the US, for example, has been significant, proven oil reserves (globally) have risen and, in the past couple of years, the market has registered a ‘supply surplus’ (in 2012 & 2013).

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  27. UK Momentum: Building & Broadening

    posted by Harry Colvin | posted

    Last month George Osborne, UK Chancellor, delivered his 5th budget to the House of Commons. With a UK election next year and a Scottish referendum in September, his statement was closely watched. For the economy, though, the budget, the election and the Scottish vote are likely to be mostly political events – offering little in the way of ‘big picture’ macro implications for the UK. Indeed, while the budget was ‘business friendly’, it was also fiscally neutral – and mostly a political gesture aimed at older voters, possibly disillusioned by Tory policy.

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  28. Global Financial Crisis – Chapter 3?

    posted by Harry Colvin | posted

    Optimism has resurfaced in markets – with plenty to suggest that EM risks are now subsiding. Global risk assets, for example, have rallied in February, CDS spreads on many EM sovereigns have fallen and a number of EM currencies have rallied sharply. The Turkish Lira, for example, has rallied 6.6% since late Jan while the Rupiah (+4.0%) has begun to retrace some of its 2013 losses.

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  29. Silver – Still a Deflating Bubble?

    posted by Harry Colvin | posted

    With building EM macro challenges in the past few weeks – the outlook for precious metals is back in focus. As a group, they have outperformed other risk assets (particularly vs. equities & EM assets). We would expect rising fear/stress in EM markets (probably into late March/early Feb) to add to that ongoing strength/outperformance i.e. as capital moves towards perceived ‘safe haven’ assets. Silver, which is oversold & close to technical support, would probably perform well (NB sentiment towards silver is currently bearish – a key contrarian BUY signal)…

    The longer term outlook for silver, though, is somewhat troubling. In the past 5 years – silver’s price pattern has resembled the classic behaviour of an inflating, bursting & then deflating commodity price bubble. See its recent price pattern, for example, overlaid with that of the price bubble in cocoa in the late 1970s/early 80s (chart below). Given the case for higher US (real) interest rates (over the course of the next 12 – 18 months), silver’s price bubble will therefore probably continue to deflate (probably in a manner similar to cocoa). Indeed, as the Fed withdraws US$ liquidity from the system, the investment case should continue to be undermined (NB investment demand is the key source of marginal demand growth for silver).

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  30. Libya’s power struggle – East vs. West

    posted by Harry Colvin | posted

    With hopes having been dashed in recent months, the chance of an agreement in Libya appears, once again, to be improving (according to key oil news flow today).

    The source of protest/violence in recent months has come, primarily, from the ‘Federalists’ in the East of Libya (who have blockaded 3 major oil ports which account for approx. half Libya’s total exports). Their self-styled leader, al-Ibrahim Jathran (33 years old) is a former rebel who fought against Gaddafi & now commands an army of thousands of former state oil security guards. In 2011 they chased out Gaddafi – and now they’re looking to be the beneficiaries of that initial uprising. In particular, and like many others in the East (which is poor/underdeveloped) – they want to split the country into three self-governing parts along tribal lines going back to the time before independence in 1951. At that time – Libya was divided into the eastern Cyrenaica region, a western part with Tripoli as its capital, and with Fezzan in the south. With that – they want each region to supervise its own oil sales – with oil revenues shared amongst those 3 regions (based on a law from the pre-Gaddafi-era). The Eastern region also has a self-declared prime minister, Abb-Rabbo al-Barassi (who supports Jathran & his campaign for a federal structure).

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  31. Europe's Deleveraging: Nearly Over?

    posted by Harry Colvin | posted

    The key to reversing deflationary pressures in Europe is a turn in the credit cycle (and a re-leveraging of peripheral EZ economies through the banking system). Indeed, the trend in headline EZ CPI (Y-o-Y) has been primarily driven by the pace of growth of system wide bank assets. A re-leveraging of the economy will therefore reflate the economy (despite high unemployment, a large output gap, high spare capacity and so on).

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  32. Low Grade US Credit booming again - article worth reading (slides notable)

    posted by Chris Watling | posted

  33. Summers speech - Great Stagnation - Right diagnosis - wrong solution

    posted by Chris Watling | posted

    Great speech from Larry Summers (much to be admired in it - well worth watching only 16 minutes long - short for an economist! almost gripping!). 

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  34. Anecdotal Trucking data supports continued improvement in US economy

    posted by Chris Watling | posted

    Apart from a host of regular indicators that we (and many others) watch closely, its always interesting to get a different perspective on the US economy - in that respect shipping cargo volumes (especially the mega ports of Los Angeles and Long Beach - the 2 large West Coast ports), railroad volumes and trucking data all provide interesting additional insights regarding the outlook for the US economy. Below we show the Trucking data index - which not unsurprisingly has a loose correlation with the S&P500. The key message though is that since end 2011 (i.e. when the Euro crisis was at its height - albeit problems lingered into 2012), this index has trended nicely higher, with an acceleration of that uptrend in 2013 (despite the government's fiscal tightening). All in all, with any meaningful monetary policy tightening a long way off, that bodes well for the S&P500 in 2014. 

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  35. Western World Playing 'Pass the Debt Parcel'

    posted by Chris Watling | posted

    Extract from our latest Longview Letter, published 16th July 2013: "Is Western Secular Bear Market Over?; ak.a. How Much Debt is Too Much?" - Link also attached to CNBC appearance discussing analysis

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  36. Extract from Latest Oil analysis: “Oil Part II, a.k.a. North America: Pipelines & Production”

    posted by Harry Colvin | posted

    Since late 2010/early 2011 (until recently), North American pipeline infrastructure has been insufficient to transport US/Canadian oil production to its final destination. As such a supply glut formed (primarily since early 2011) which then, in turn, led to WTI (as well as Canadian crude) trading at a discount to the Brent global benchmark. New pipeline projects are now, however, coming on-stream rapidly. Indeed an extra 6 mbpd of pipeline capacity is scheduled to come on line over the next 4 ½ years in the US & Canada. Critically, those new pipelines in the US are now coming on line more quickly than the new oil production (hence the recent supply bottlenecks should continue to ease).

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  37. Ever Growing Oil Reserves

    posted by Harry Colvin | posted

    In response to the march higher in the oil price from 1999 through to its peak in 2008, dramatic changes are afoot in the oil market. In particular, higher prices and improved technology are delivering the supply response that economic theory suggests they would...

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  38. Rising fear/stress in China

    posted by Harry Colvin | posted

    Interesting that signs of stress in China’s economy and financial system have increased in recent days & weeks. Shanghai rebar prices, for example (a key steel product) have fallen sharply (now below 2009 levels) – consistent with falling iron ore prices (down 23% YTD). Added to that, Shibor interbank lending rates have spiked, CDS prices have picked up and the yield curve continues to flatten (reflecting, in our view, the poor message of key ‘big picture’ macro indicators in China – with data mostly disappointing expectations in recent weeks). Critically, tighter money (in conjunction with and/or followed by slowing growth) increases the likelihood of an unwinding of China’s credit bubble…

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  39. Abenomics - will it work?

    posted by Chris Watling | posted

    Interesting article by Jeremy Warner in D Telegraph - the key to the Japanese conundrum is raising trend Japanese real growth rates.

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  40. Debt - The First 5,000 years

    posted by Chris Watling | posted

    Having trained as an economist but as someone who’s been pondering the debt question for many years, I found Gaeber’s latest book: “Debt – the First 5,000 years” a fascinating read. Graeber, as an anthropologist, turns economics on its head.

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  41. Kindleberger's Asset Price Bubbles & J Stein Speech - Feb 2013 "Overheating in Credit Markets"

    posted by Chris Watling | posted

  42. China's shifting policy priorities

    posted by Chris Watling | posted

    Replacement of Chen Yuan is likely a key signal of chinas leaderships intent on cleaning up excessive credit growth. The CDB sits at the heart of the lending to and the growth of the LGFVs - ie at the heart of the creation of its credit bubble

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  43. China's Credit bubble

    posted by Chris Watling | posted

    An interesting development on what is arguably the most important issue facing global markets in coming years - i.e. is Chinese growth driven by too much urbanization, funded by too much debt? (NB Chinese credit intensity of GDP has been trending at around 2 - 4x these past 4-5 years - a level similar to other economies pre their credit bust).

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  44. Chinese land grab

    posted by Chris Watling | posted

    This is a figure we've been searching for for a while and is a key component for understanding the Chinese growth and credit bubble story:

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  45. The Cycle of Empires

    posted by Chris Watling | posted

    While cycles shouldn't be stuck to rigidly when investing they do give very good signposts and frameworks for thinking about current policy debates (& current investing environments). David's work on the life cycles of Empires, in that respect, is fascinating.

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