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August 9, 2015
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Clearly since the financial crisis of 2008 the U.S. Government, the Federal Reserve, social activists and pundits have been preoccupied with the idea of “Too Big to Fail”. The U.S. government enacted the Dodd–Frank Wall Street Reform and Consumer Protection Act on July 10, 2010. As described by President Obama, this Act to change the U.S. financial regulatory system (and impact the global financial system) would be a “sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”.

The greatest impact of Dodd-Frank on the marketplace has been the destruction/elimination of entrepreneurial. Instead of controlling those financial entities that are “too big to fail”, Dodd-Frank has enhanced their size, power and market competitiveness as compared to smaller entities. The regulatory framework which Dodd-Frank has put in place has all but limited entrepreneurial development of financial institutions, such as start up hedge funds or new start-up banking/financial institutions, The Dodd-Frank Act has not only increased the likelihood that a large entity will need to be protected from failing, but also that its failure will have a significant and systemic impact as these entities have become even more pervasive throughout American society and the economy.

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August 3, 2015
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By: Charles Gave of GaveKal Research – Reprinted with Permission

I am afraid I am rapidly turning into Gavekal’s resident bear—asleep half the time, grumpy the rest. In particular, I am amazed how some people have suddenly discovered that world trade is going nowhere, and that they are so bamboozled by this strange pattern. Where exactly have they been for the last 15 years?

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August 15, 2014
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Equity Market Performance

The first quarter of 2014 produced positive equity market returns. For the first quarter ending March 31, 2014, the Standard & Poor’s 500 Index (“S&P 500”) produced a total return [including dividends] of 1.8%. The Dow Jones Industrial Index (“Dow”) and the Nasdaq Composite Index (“Nasdaq”) produced total returns of (0.2)% and 0.8%, respectively. Measuring only capital appreciation, the S&P 500 produced a return of 1.3%, while the Dow and the Nasdaq produced returns of (0.7)% and 0.5%, respectively.

The second quarter of 2014 produced positive equity market returns. For the second quarter ending June 30, 2014, the S&P 500 produced a total return [including dividends] of 5.2%. The Dow and the Nasdaq produced total returns of 2.8% and 5.3%, respectively. Measuring only capital appreciation, the S&P 500 produced a return of 4.7%; while the Dow and the Nasdaq produced returns of 2.2% and 5.0%, respectively.

Through the first half of 2014 the equity market produced positive returns. For the first half of 2014, the S&P 500 produced a total return [including dividends] of 7.1%. The Dow and the Nasdaq produced total returns of 2.7% and 6.2%, respectively. Measuring only capital appreciation, the S&P 500 produced a return of 6.1%; while the Dow and the Nasdaq produced returns of 1.5% and 5.5%, respectively.

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March 31, 2014
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“When you see an asphalt roller (compactor) rolling down hill, what do you do? Step aside and let it hit the guy behind you”. –  Jay Charles Goodgal, 1982, Question/Comments to the Assistant Treasurer of Ingersoll-Rand, A solution for the Chairman of Ingersoll-Rand when Company learned of major loss as a result of a currency devaluation – “Aim the compactor at the Vice Chairman”. 

The Chinese economy and its financial markets are becoming increasingly fragile. Total debt, including public, central and local governments, public and corporate debt, to Gross Domestic Product (“GDP”) has risen to 230%. At the close of 2012, total debt to GDP was 215.7%, up from 125% at the end of 2008. Given that the Chinese economy has slowed from 10.3% in 2010 to 7.5% in 2013, with expectations that 2014 will be lower than 2013. In fact, it appears that first quarter GDP statistics may show an economy growing at its slowest rate since 1990.

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March 27, 2014
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Update: The Chinese Shadow Banking Market: One Failure to Financial Crisis

Does anyone remember the financial crisis of 2008? Politicians, bankers and corporate executives were playing down the potential of a financial crisis before it occurred. What goes around comes around.

Nearly two weeks ago, Premier Li Keqiang of China in reference to the growing default risks developing in the Chinese shadow banking market stated, “It is indeed difficult to avoid a few default cases. We must tighten monitoring to prevent regional and systemic financial risks”. And recently, Stuart Gulliver the Chief Executive of HSBC stated the following regarding the threat the shadow banking system poses on China’s financial system, s banks also have the resilience to withstand the impact and the central bank has enough flexibility to provide liquidity support”.

At the beginning of the month, China experienced its first bond default in over 15 years when Chaori Solar, a small privately owned solar panelmaker, failed to pay the interest on Rmb1billion (US$163 million) worth of bonds issued two years ago. China has not seen a single outright default of a domestic corporate bond since it established a nascent bond market in the early 1990s. In 1997, following a series of technical defaults on bonds issued by companies backed by local governments across the country, the People’s Bank of China (“PBoC”) issued a mandate that forced those governments to bail the companies and their bondholders out. Additional defaults are beginning to emerge. Haixin is the largest privately owned steel mill in Shanxi, the heart of China’s coal country, accounting for 60% of the tax revenues in Wenxi County and home to 400,000 people defaulted on its debt too. The default, reported in the Financial Times by steel traders, sent shockwaves through the local banking and shadow banking sectors as debts were envisioned to be held by various interrelated parties in banking, coal, steel and other associated industries. Haixin was also a lead investor along with other local private companies, in Jinshang Investment Guarantee, which backed other companies’ debts for a fee and appeared to have been shuttered. Clearly, there exists the possibility of systemic risk developing as companies and financial institutions are linked together in this debt crisis.

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