Gavekal on Russia and Japan

I look at dozens of sources a day on global macroeconomics, but one source I go to every day is my good friends at Gavekal. The Gavekal partnership – father Charles Gave, son Louis-Vincent Gave, and noted economist and journalist Anatole Kaletsky – spans three continents: Charles is based in Paris, Anatole is in London, Louis has set up shop in Hong Kong, and the firm also has an office in the US. And they have an extensive team of outstanding analysts.

Gavekal’s publishes global macro articles for its clients on an almost daily basis, and for today’s Outside the Box they have allowed me to share two of them with you. First, Louis Gave gives us a very insightful analysis of Russia’s permanent interests and makes a very interesting case connecting Middle East oil and Crimea.

The author of the second piece is Gavekal Asia Research Director Joyce Poon, who has been rising on my must-read list because she consistently thinks differently and more deeply than most conventional analysts. Her analysis here on Japan is very intriguing, convincing, and counterintuitive to standard economic theory. But, you’ll note, the end result is to still short the yen.

Incidentally, Anatole Kaletsky will speak at our Strategic Investment Conference this year, as he has for the past several years. This is a must-attend conference.

There has been a great response to the exclusive-to-Mauldin-Economics video interview by Jim Bruce of Janet Yellen when she was the president of the San Francisco Fed. He interviewed her in the course of producing the gonzo documentary on the Federal Reserve,Money for Nothing. The original interview was quite wide-ranging – over two hours – and Jim has edited the interview to just over 10 minutes of the most pertinent and interesting pieces segments. Given that today is the day Yellen chairs her first Fed meeting, I think it might be interesting to see what her views are on the role of the Federal Reserve.

What’s fascinating to me are the risks inherent in so many of her beliefs:

  • That the Fed can reduce “the pain that people feel when they want to have jobs” by stimulating financial markets with ultra-low rates
  • That the Fed will be able to control inflation no matter how profligate Washington gets
  • That the Fed wasn’t irresponsible in deliberately fueling the housing bubble, and shouldn’t raise rates to puncture a bubble because it might impact the economy.

These are the views that are going to be driving Fed policy and shaping the monetary environment in which we all invest. I think it’s worth your time to consider. You can watch the interview here.

As you receive this I am on a plane to Buenos Aires, where I will spend the day before flying on to Salta and then driving three hours up through a beautiful canyon to Cafayate. Sometime early in the week I will make a 4- to 5-hour trek over the roughest terrain I’ve ever driven on, back to see my old friend Bill Bonner at his hacienda at 10,000 feet in the Andes. He retreats there for two months every year, where he continues to write and pursue his avocation of building things with his own hands. In theory there is internet, but in practice I was completely cut off for a few days when I was there last year. Withdrawal was acute, but I survived. I might even need to stay a few days longer with just my books to see if the reflexive tics go away.

As soon as I get back to the resort at La Estancia, I will once again be connected to the world and will be able to write my weekly letter as usual. With everything happening so fast these days, it almost seems like I should be writing to you three times a week. But that is why we have the other writers like Grant Williams and our Outside the Box contributors to supplement my humble weekly missives.

Have a great week, and follow me on Twitter as I try to post from Argentina and from South Africa in a few weeks.

Your getting ready to feast at almost daily asados analyst,


John Mauldin, Editor
Outside the Box
[email protected]

Russia’s Permanent Interests

By Louis-Vincent Gave

Nineteenth century statesman Lord Palmerston famously said that “nations have no permanent friends or allies, they only have permanent interests.” As anyone who has ever opened a history book knows, Russia’s permanent interest has always been access to warm-water seaports. So perhaps we can just reduce the current showdown over Crimea to this very simple truth: there is no way Russia will ever let go of Sevastopol again. And aside from the historical importance of Crimea (Russia did fight France, England and Turkey 160 years ago to claim its stake on the Crimean peninsula), there are two potential reasons for Russia to risk everything in order to hold on to a warm seaport. Let us call the first explanation “reasoned paranoia,” the other “devilish Machiavellianism.”

Reasoned paranoia

Put yourself in Russian shoes for a brief instant: over the past two centuries, Russia has had to fight back invasions from France (led by Napoleon in 1812), an alliance including France, England and Turkey (Crimean War in the 1850s), and Germany in both world wars. Why does this matter? Because when one looks at a map of the world today, there really is only one empire that continues to gobble up territory all along its borders, insists on a common set of values with little discussion (removal of death penalty, acceptance of alternative lifestyles and multi- culturalism…), centralizes economic and political decisions away from local populations, etc. And that empire may be based in Brussels, but it is fundamentally run by Germans and Frenchmen (Belgians have a hard enough time running their own country). More importantly, that empire is coming ever closer to Russia’s borders.

Of course, the European Union’s enlargement on its own could be presented as primarily an economic enterprise, designed mainly to raise living standards in central and eastern Europe, and even to increase the potential of Russia’s neighbors as trading partners. However, this is not how most of the EU leaders themselves view the exercise; instead the EU project is defined as being first political, then economic. Worse yet in Russian eyes, the combination of the EU and NATO expansion, which is what we have broadly seen (with US recently sending fighter jets to Poland and a Baltic state) is a very different proposition, for there is nothing economic about NATO enlargement!

For Russia, how can the EU-NATO continuous eastward expansion not be seen as an unstoppable politico-military juggernaut, advancing relentlessly towards Russia’s borders and swallowing up all intervening countries, with the unique and critical exception of Russia itself? From Moscow, this eastward expansion can become hard to distinguish from previous encroachments by French and German leaders whose intentions may have been less benign than those of the present Western leaders, but whose supposedly “civilizing” missions were just as strong. Throw on top of that the debate/bashing of Russia over gay rights, the less than favorable coverage of its very expensive Olympic party, the glorification in the Western media of Pussy Riot, the confiscation of Russian assets in Cyprus … and one can

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