Professional Documents
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Required
more
exports
A Virtuous Circle
Producing Dollars For A
Richer China
Japan
low ROI =
consumed <
save
Provided
Japan with
exports
Produced
investment
boom
Source: EAM.
Kaiser Wilhelm II
However
Kindleberger
was
writing
pre-neomercantilism. He would have expected the follow-on
from this to be higher consumption as a result of the
wealth effect of higher asset prices (people who feel rich
spend more) and of the boost to spending from a rising
currency giving falling import prices. Hed have looked
at 2004 China and expected every member of the
middle class to be driving a cheap BMW by 2006. That
didnt happen. Instead currency interventions held
down the yuan and, at the same time, the planners
need for cheap credit to finance their investment
projects meant the real returns from bank deposits
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GDP*
GDP**
This has been our world for some time now. Thats a
problem for the likes of us. Why? Because when the
psychology of the price discovery mechanism becomes
more dependent on money creation than economic
growth, as in Japan during the 1980s and in China for
the last decade, asset prices become an abstraction.
They separate from our qualitative perception of
reality; they are more susceptible to wild price trends
that in theory have no limit; and they display a two-way
causality.
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UK
France
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USA
Japan
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Danger Mouse
The
German
philosopher
and
experimental
psychologist scientist, Gustav Fechner, once proposed a
rule that can be expressed as follows in order that the
intensity of a sensation may increase in arithmetical
progression, the stimulus must increase in geometrical
progression. That seems to describe China pretty well.
The huge disappointments in growth elsewhere mean
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2.7
2.5
2.3
2.1
1.9
1.7
1.5
Over the last decade you could have done this and
nothing else and escaped most criticism. A simple
trading rule where one is long S&P futures when the
condition is met, and flat otherwise, has produced a
return of 75% since the 1st of January 2003 (around the
bottom of the TMT crash). A long-only strategy has
produced better gains - almost 95% - but using the rule
would have lowered your maximum drawdown from
56% to just 20%. So once you adjust for volatility you
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0
Sources: EAM, TSE and Bloomberg. TOPIX Total Return Index. Shows monthly averages.
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performance is no indication of future results. All charts are sourced from Eclectica Asset Management LLP. 2005-13 Eclectica Asset
Management LLP; Registration No. OC312442; registered office at 6 Salem Road, London, W2 4BU.
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