(Louis Gave is the CEO of Gavekal, a very well respected research and investment firm) 

I hope you are all well. I just came back down from climbing Mt Rainier with a friend of mine (who has climbed Everest four times and Cho Oyu twice). We had a great time even though the weather was miserable. We were caught by what I think is the worst storm I have gone through on the way back down. It was a tough six or seven hours of work to make it back down. A great mountaineering experience though.

I include Charles' latest ad-hoc piece entitled Hermes Ties, Longines Watches & Sub-Prime Bonds, which I hope you will all enjoy. 



 There are a couple of more things about Sweden that need to be said:

It did avoid the two world wars (which were great destroyers of human and physical capital for most other developed economies).

From my experiences there, I find that there is a special quality that Swedish people have. They work together as a team tremendously well.

Sweden is now aggressively cutting taxes. It's hard not to be massively bullish on the place!

Andrea Ravano writes:

The first step is to quantify in absolute terms, in lieu of percentage points. That alone gives the investor a rough idea of the magnitude of the tax rate rebate. For instance the nominal GDP in the States is around $13 trillion, while Sweden is running around two percent of the US economy.

Then we might want to add the percentage of savings the Swedes are likely to retain, before dissipating the remaining balance in a well due drinking spree ahead of the sad and depressing Monday. After such a work is completed is too late anyway to invest because the bulls have lifted all available offers and the market seems a bit too expensive even for the most optimistic.



 If there is one reason the market has doubled in the past four years, aside from the creative power of entrepreneurialism, its intrinsic ability to earn a return that is mutually beneficial to the public at 10% a year, and the earnings yield interest rate yield differential, it's the reduction in capital gains and dividends taxes instituted by the current US administration in 2003. Thus, I note with interest that the new president of France, Nicholas Sarkozy, claims that the vote in his favor is a mandate for cuts in the Service rate. This offers the same prospect for advances in French entrepreneurial activity as it did in the US.

When I was chief finder for thousands of acquisitions over 20 years, I could tell that the after-Service amount that owners received was the key to every transaction and that nothing was a greater motivator to them then the difference between capital and ordinary gains, with preferences truly crucial. However, the US cuts of 2003 are scheduled to sunset in 2010, and most politicians don't realize how important an incentive the rate is. The easiest way to kill an economy and a stock market is to let rates increase. This, according to Albert Jay Nock, is the Roman way of inevitable destruction and despondency. And I have found in my own studies that there will be much incentive to create despondency and destruction in 2010 by public officials acting in their own self interest, as predicted by the public choice theorists, who gain so much when the number dependent on redistribution is increased merrily as the economy sinks into revulsion.

Thus it's a great countervailing signal in France today, and perhaps it will serve as an offset to the coming revulsion in 2010 if public choice theory predictions in the US come true.

Louis Vincent Gave adds:

There was actually a lot of good news in this French election, beyond Sarko's obviously encouraging result.

Good News #1: The complete implosion of the far left. The communist party only did 2%. So they will have very little legitimacy in calling on strikes and blocking the whole country as they did in 1995 when Ch-Irak tried to reform the pension system. Better yet, the communist party could now go broke as it did not make the 5% of the vote necessary to get public funding as a political party … it couldn't happen to a nice bunch of people.

Good News #2: This dismal score for the left occurred when the participation in the election reached OECD records (close to 85% of people voting). Very encouraging for democracy.

Good News #3: the National front of Le Pen is basically imploding and may not survive the retirement of its charismatic (but completely nuts) leader.

Good News #4: The Socialist Party is, this morning, starting to tear itself to shreads looking for the reasons as to why they have lost the third presidential campaign in a row.

All in all, a lot to be happy if you are French and reform minded right now.

Jeff Sasmor notices:

07:24 TASR TASER: Sarkozy wins election; $100-120 mln order could drive $4.00 in incremental value per share - Merriman (9.53 )

Merriman notes Sarkozy was elected to a five-year term. Firm ests that the opportunity in France is worth as much as $300 mln in revs to TASR assuming the purchase of a TASR and TASR Cam for each of the 250,000 police officers in the Police Nationale and Gendarmerie Nationale. Firm says according to what TASR mgmt has last heard, a Sarkozy victory could mean the near-term purchase of 100,000 TASERs, which they est that could represent up to $100-120 mln in revs.



 After the brutal sell-off of the last two days, markets are now enjoying some much-needed respite. Last night, the S&P 500 gained +0.7%, while the NASDAQ added +0.9%. This positive momentum continued this morning, as the Topix is up +1.4%, the Hang Seng has added +0.8% and the Kospi is up +1.3%. Meanwhile, the Yen has weakened by -0.7% to ¥117.3/US$, as investors piled back into the carry-trade.

And interestingly, yesterday, we saw a number of stories in the financial press about how exaggerated the subprime mortgage story has been (for an example, see this article in Forbes). In addition, Lehman Brothers, the second biggest US underwriter of mortgage-backed bonds, came out and stated that the risks posed by rising home-loan delinquencies are "well-contained", and that they will have little effect on the firm's earnings.

What about additional risk to the housing market? As we see it, the most likely development is that vulture funds will eventually buy up mortgages on the cheap. Then they will probably sit on their collateral until they can sell it at a profit. They are unlikely to accelerate foreclosures for properties for two reasons. First, there is absolutely no bid for such properties at almost any price. Second, subprime loans are almost all second mortgages, which cannot foreclose without agreement of the first mortgage. It is hard to see why first mortgages would allow this to happen, since they would also lose money and face write-offs in forced sales. In any case, second mortgages are usually just 20% of the property value and almost every foreclosure would wipe this out immediately. Thus, subprime lenders who foreclose today would face immediate 100% write-offs. They (or their liquidators) would be better off selling the mortgages for 10 or 15 cents on the dollar to vulture funds which can afford to hold onto the paper for a few years, while house prices stabilise and recover.

And aside from the stress on the relatively small subprime lending sector, economic fundamentals are still looking very decent. US overall mortgage applications rose by +2.8% to the highest level since early December (see chart); UK February unemployment fell by -3,800 to the lowest level in a year;

China's retail sales rose by +14.7% YoY in the first two months of the year; Chinese industrial production accelerated to +18.5% YoY (expected +15.0%); and South Korean February unemployment fell to 3.2%, the lowest level in four years. On the market side, we note that the BDI has jumped +17% in 17 straight sessions of gains, hardly a sign of an impending global slowdown.

Overall, we remain very optimistic on equities, especially since the last sell-off failed to break through the lows of the previous deluge. As we see it, this is a sign of strength by the markets and could very well prove to be an attractive buying opportunity.



A Commentary by Louis Vincent Gave, foreword by Victor Niederhoffer

The following article by the Gavekal group is indicative of their world view, as are the books they write including Our Brave New World, which we have reviewed favorably on this site. I find them a modern incarnation of the practical implementation of the creative spirit of enterprise - the purveyors of a program that Hank Reardon might have been head of, had he been in the financial consulting field. They offer a link and free trial subscription to their service to the first 100 of our readers that are so inclined.

We are often complimented by readers of this site that we are not hawking, self aggrandizing, or selling products here. While this is true, we find it enobling to proffer a mutually beneficial opportunity for improvement to our readers, and this link is made in that context. However, do understand that we have no connection of any kind with Gavekal, except for the value we receive from their contributions of knowledge and opinion to our benevolent forum. VN

Announcing the publication of a new Gavekal book:

The End Is Not Nigh, by Louis-Vincent Gave, Charles Gave, Anatole Kaletsky & Steven Vannelli

A brief review of the book: Today's global financial system is characterized by a curious mixture of freedom and manipulations. Between the two main currencies of the world, the US dollar and the Euro, we have a free float. But between the dollar and a lot of other currencies, especially in Asia, we have a dirty float, or fixed exchange rates, the goal being to maintain the exchange rate at an abnormally low parity to the dollar.

To make matter worse, a lot of those countries (especially China and India) have decided to make their currency inconvertible. This would not matter if these currencies were small and irrelevant, but they are increasingly less so by the day. This state of affairs leads to profound price, and volume, distortions some well understood (i.e.: the RMB is undervalued and can only go up) and some not as well understood. It also triggers a number of important questions. Namely:

1) What distortions does the intervention of non-market players in the Asian foreign exchange markets engender?
2) Are the distortions abating? Or accelerating?
3) How long can those distortions last?
4) If/when the adjustment comes, what assets will be most at risk?

Of all these questions, the last one is probably the most important. As we never tire of writing, money management is often more about avoiding the assets that implode, and diversifying amongst the rest, than about picking outsized winners.

While it may be tempting to adopt a very defensive posture in the face of such blatant distortion, there are many reasons to believe that the current distortions may last and that the overall positive growth environment will continue for the coming years.

In The End is Not Nigh, we push some of the themes developed in Our Brave New World a little further and review the reasons that have led us, in recent years, to shy away from prophecies of doom and why we remain positive on global financial markets.

We will be distributing the book at this Thursday's London seminar, this April's Paris & Stockholm seminars, and the May New York seminar. Clients who cannot attend these events, or who wish to receive a copy before then, can email me for a copy. Please include your hard copy mailing address in any book request.

For non-Gavekal clients, the book will be available for sale at our website starting today for US $22 per copy (incl shipping). Starting next week, the book will also be available for sale.    

Needless to say, if you like the book, we would be most grateful if you could plug it to your circle of friends and colleagues. Thanks to the "word of mouth" effect, we sold what we felt was a surprisingly high number of Our Brave New World. We ended up having to do four re-prints of Our Brave New World, and this with no advertising, hardly any PR and only the GaveKal distribution network. Thanks to our readers, Our Brave New World ended up being widely read and discussed. We hope that The End is Not Nigh will be able to follow in the same path.

If you do not like the book, or if you find some factual or conceptual errors, please let us know.

We take this opportunity to once again thank you for your support.



The first thing I would like to say is that, of course, I am flattered that Mr Niederhoffer not only took the time to read, but even review the book I wrote back in 2005. I hope he will do the same for my next book, due out in a couple of months!

The second thing is that, unsurprisingly, I do not think that some of the points Mr. Niederhoffer makes are very fair and I thus welcome this opportunity to "set the record straight".Our Brave New World was never a book written for general public distribution. It was self-published and was written as a sort of summary of the more important research reports and research themes we had been developing at our research firm, GaveKal research, since its launch in 1999.

In essence, we wrote it so that new clients of our research service could quickly get "up to speed" on the key ideas and concepts that we had been developing for years (and in much greater detail in our research).

Now, as I am sure Mr Niederhoffer knows all too well, most money managers (the crux of our client base) are inundated with reports to read. Thus, if you want to ensure their attention, reports have to be engaging and to the point. One can not afford to get lost in pages of econometric models_ at least, one can not do if one hopes to make money as an independent research provider!

Now all the themes that we develop in the book are developed further, and in more depth, in our reports (all posted on our website). To be honest, this is the first time that we have ever been criticized for not backing up our assertions with data, charts etc. and I think that, if Mr Niederhoffer did not find his heart's content in the book, maybe he will find it by signing up for our web archive and, better yet, a free trial subscrition to our research?

I also believe that Mr. Niederhoffer's criticism of our views on velocity is not a fair one. Indeed, since 2001, one of our biggest mantras has been that the velocity of money has increased significantly, and that this has had a profound impact on asset prices. We have also spent a lot of time and resources tracking changes in the velocity of money and have built various indicators to do just that.

So in conclusion, I would say that Mr. Niederhoffer's criticism of our book stems probably from a "divergence in goals" as to what the book should be and should do. It sounds like Mr. Niederhoffer was expecting some kind of treaty in econometrics, with pages of mathematical models etc. Meanwhile, we wrote the book as a summary to some of the ideas developed in further depth in other reports.

I am sorry to hear that Mr. Niederhoffer was disappointed and that his expectations weren't met. But to show that we don't hold a grudge, I'll send him the next one free of charge (though I fear that his criticism may be the same the next time around as well!)

Vic responds:

You are well justified in your critique of my review, and there is no need to send me a free copy of your book as I will buy all of your work in the future. I somehow lost the flavor in my review that everything you say about the world I agree with. If you read what I've been writing over the years, our conclusions are identical to yours, and certainly don't have a more rigorous backdrop to them. My reference to Kuhn was that whenever something is very good and revolutionary, first there is disbelief, then hatred, and then the next stage is "my goodness I knew that all along". I didn't make that point very clearly, and you're certainly on the side of the angels.

Despite this, I didn't like your back and forth with Faber because your views seem completely opposed to his, and yet you sought conciliation.

I certainly have much to learn from your group whom I first discovered when one of your readers told us to get this book as "these people are the best, the smartest, and the most insightful." I do agree with this viewpoint, except that I think your investment conclusions have to be sharpened, and that you need to encorporate ever-changing cycles, which is something that I'm sure you take account of in your more timely work.

Feel free to use this as a letter of commendation to you. Somehow my writing didn't get across the point that if only the investment world were to follow your guidance, the rate of wealth creation would be so much greater than it is.

Vic further adds:

 Because their research is related to such important and deep issues as the sources of wealth, the mainsprings of progress, and the creative power of individuals when given proper incentives, it is hard to quantify. With all their faults, they certainly do the best job of putting the weather gage at the back of an investor that I have come across in my 45 years of continuous work in this field. One has a piece of Gorham silver in his collection that shows a mad painter riding a squid, in a squall, with sea monsters attacking him on all fronts, painting a beautiful picture, caressing a magnificent girl, and calming the sea at the same time. It brings to mind Gavekal research. Better yet, from Sound of Music, "how do you catch a cloud and pin it down a fibbertjibbet … a will of the wisp a clown. How do you keep a wave upon the sand? How do you hold a moonbeam in your hand?"

Louis-Vincent Gave replies:

Thanks a lot for the kind, and very flattering words. Now you’ll definitetly get our next book for free! I guess our motto might be what Lord Keynes once said: “I’d rather be approximately right than precisely wrong”. In this fast ever-changing world, that’s probably the best that we can hope for.


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