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E.g., 20-09-2017
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    Gavekal Research

    Reviewing My Calls

    Over the years my research has focused on broad concepts which have been applied in many situations and lots of reports. These include ideas such as the disruptive power of platform companies, assets whose value comes from scarcity rather than efficiency, or the effect of firms running on Schumpeterian, Malthusian or Ricardian principles. Once in a while, however, I do get specific and make investment calls. Having had a little time this week, I...

    0
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    Gavekal Research

    Any US Profits Rebound Lacks Legs

    US equities have rallied to new highs on a favorable liquidity tide, buoyed by hopes for coordinated global growth. But they have also been given a leg-up by an apparently improved US profits outlook, as shown in the second quarter national accounts data. There are, however, compelling reasons to think that an uptick in profit margins cannot last. As 59% of value added by US non-financial corporates went to their workers in 2Q17, these center on...

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    Gavekal Dragonomics

    Capacity Cuts Won't Hold Up Metals Prices

    To reduce air pollution, China says it will run northern steel mills at just half their capacity this coming winter. Prices of steel and other metals initially rallied on the news, but now are coming off. In this piece, Rosealea argues that metals prices have seen the top of their range, and explains why capacity cuts won’t push prices higher.

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    Gavekal Dragonomics

    High Financial Anxiety

    China’s financial system has its troubles, but a large-scale crisis is unlikely. Localized problems among poorly run, small-scale city and rural banks are the bigger risk.

    0
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    Gavekal Dragonomics

    Your Guide To The Maze

    China’s financial system has grown almost five-fold and seen a proliferation of players and products over the past decade. We try to impose order on chaos and explain how the system works.

    0
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    Gavekal Dragonomics

    A Short History Of Financial Deregulation

    Financial deregulation has seen a cartel of national state-owned banks give way to a bewildering array of local banks, non-bank lenders, wealth management products and loans disguised as investments. Regulators are tightening their grip, yet so long as Beijing demands high-speed growth, it will have to tolerate some financial misbehavior.

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    Gavekal Dragonomics

    China’s Banks Are Better Than You Think

    China’s banks get a bad rap. But actually they are pretty well run, especially if one understands their twin roles as commercial actors and tools of state development policy.

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    Gavekal Dragonomics

    Beijing’s Bid To Make US Rail Great Again

    CRRC is winning contract after contract in the US light rail market, slowly squeezing out traditional competitors. Its secret? The promise of direct investment and job creation.

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    Gavekal Dragonomics

    Hollywood Hoo-ha

    Chinese investors have developed a taste for Hollywood, but their buying spree has drawn more scrutiny than tangible benefits. With their wings clipped by new foreign investment rules, their focus will turn back to their home market.

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    Gavekal Dragonomics

    Finally, China Learns To Kick Ass

    When future historians seek to mark the moment when China celebrated its arrival as a world power, they may well point to its newly crowned highest-grossing movie, Wolf Warrior 2. The film is repudiates every sick-man-of-Asia slight China has suffered since the Opium War, and tells the world: those days are over; China is powerful; get used to it.

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    Gavekal Dragonomics

    Rebooting China Inc.

    Beijing is tightening controls on cross-border deals. The good old days of unhindered and lavish outward investment are over. Strategic ODI is back in fashion, with China’s SOEs at the helm.

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    Gavekal Dragonomics

    Dealing The Right Kind Of Opium

    Xi Jinping’s embrace of traditional Chinese religions is a highly political move to build up popular support. But his hostility to Christianity, Islam and Tibetan Buddhism could cost him dearly in terms of social stability.

    0
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    Gavekal Dragonomics

    Three Sets Of Books

    China’s financial system has grown dizzyingly complex, but at its heart sit the banks, which provide most of the funds for shadow lending by non-banks. To assess the system’s risks, we need to understand the banks’ three credit books: their loans, their “investments” routed through non-banks, and their off-balance-sheet wealth management products.

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    Gavekal Research

    A Very British Zombie Apocalypse

    After the Bank of England signaled its intent to raise interest rates yesterday, sterling jumped more than 1% against the US dollar and the international FTSE 100 index fell similarly. With the UK’s latest inflation reading rising to 2.9% and unemployment hitting a post-1975 low of 4.3%, it is increasingly hard to justify leaving the policy lending rate at 0.25%. One argument for deferring hikes is the UK’s lack of wage growth, but such thinking...

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    Gavekal Dragonomics

    CEQ: The Financial Labyrinth

    Is China’s financial system going to collapse? The speed of credit growth, the proliferation of financial institutions and financial products, and the chaotic and fragmentary data all make it reasonable to fret that China is on the verge of catastrophe. This issue of the CEQ is our attempt to bring clarity to this mystifying landscape.

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    Gavekal Dragonomics

    Straight On Through The Party Congress

    China’s economic data for August confirmed that growth has stepped down a bit in the third quarter. The long-anticipated slowdown is for real, but is also still quite gradual. Andrew argues that policymakers will be comfortable with this situation, and that we should not expect a big change of direction after the Party Congress in October.

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    Gavekal Research

    Asian Hardware Makers Trump California Engineers

    When Apple launched its new lineup of smartphones a couple of days ago, the loudest cheer may have come not from its new donut ring headquarters in Cupertino, but the factory lands of Taiwan and Korea that house its key component suppliers. Launching a flagship phone whose innards are in short supply represents a subtle shift in power from software engineers in California to hardware makers in Asia.

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    Gavekal Research

    2002 All Over Again For Europe?

    The eurozone’s recovery is speeding up despite the unresolved “original sin” of lumping a single currency on to a heterogeneous economy. Yesterday Charles argued that this conceit meant the next big move for Europe would be back toward crisis, and among other things investors should avoid eurozone banks. I would not dispute this basic analysis, but take a different view on timing.

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    Gavekal Research

    Italy: The Bear Case

    No chain is stronger than its weakest link, and the eurozone’s weakest link is Italy. Growth has picked up over the last two years, but as Charles demonstrates in this paper, the Italian economy is uncompetitive both within the eurozone and on the global stage. With the rise in the euro exacerbating the problem, and the prospect of ECB tapering threatening to push up Rome’s funding costs, Italy risks falling once again into a debt trap.

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    Gavekal Research

    Video: The Robots Are (Not Yet) Coming

    It is hard to open a business magazine these days without finding some grave prediction about machines eating the jobs of middle class professionals from Pittsburgh to Paris. Yet for all the agonizing about mechanized baristas in every neighborhood coffee shop, killer robots and subversive AI algorithms, it is not clear that machines are taking over. Dan has run the numbers, and in this video interview sets the record straight.

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    Gavekal Research

    Disasters, Bond Yields And The Dollar

    In the past few weeks the US administration cut a deal with opposition Democrats to keep the government open, increasing the likelihood of a budget deficit expansion, and a string of natural disasters have roiled North America. In turn, these events seem to have triggered a sell-off in the US dollar and a global bond rally. Louis outlines two scenarios for where things could go from here.

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    Gavekal Research

    Robots Everywhere, But The Statistics

    It is hard to open a business magazine these days without finding some grave prediction about machines eating the jobs of middle class professionals from Pittsburgh to Paris. Yet for all the agonizing about mechanized baristas in every neighborhood coffee shop, killer robots and subversive AI algorithms, it is not clear that machines are taking over. Dan runs the numbers in this piece and reaches some sobering conclusions.

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    Gavekal Research

    Time For A Eurozone Reality Check

    A new wave of optimism is sweeping across the eurozone. Disconcerted by the single currency area’s new-found economic buoyancy, confirmed euroskeptic Charles reviews the structural trends at work in the eurozone to determine whether it is finally time to throw in the towel on his longstanding euro-pessimism.

    7
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    Gavekal Research

    After The Renminbi Rally

    The last renminbi bears are throwing in the towel: with Chinese corporates unwinding the dollar holdings they have accumulated over the last two years, the renminbi is up strongly. Although the PBOC is for now happy to step back and let appreciation happen, there are still limits to how much it will want the trade-weighted exchange rate to rise.

    2
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    Gavekal Research

    Audio & Transcript — Gavekal Research September Call

    In yesterday’s monthly call Louis Gave presented his view on the global investment outlook for the rest of the year. He argued that the key story so far in 2017 has been the strong performance of Asian equities, which has added a second leg to a bull market led by US technology and consumer stocks. The question is whether this can last.

    0
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    Gavekal Research

    Don’t Sweat The Euro

    In response to a stronger euro, the European Central Bank yesterday cut its inflation forecasts. Since the ECB’s monetary policy mandate is entirely focused on consumer prices, the disinflationary impact of a stronger currency leaves policymakers with a conundrum: do they go ahead and taper asset purchases as expected, or instead hold back, figuring that the currency markets are doing the “tightening” job for them?

    0
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    Gavekal Dragonomics

    The New Economy Takes The Baton

    Second-quarter earnings for Chinese listed companies showed heavy industry still enjoying strong profit growth, but the more important trend is the consistent rise in profits in the “new economy.” As industrial reflation gradually cools, Thomas argues, these consumer, healthcare, and technology firms are set to outperform.

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    Gavekal Research

    What Next From Washington?

    Despite all the bickering in Washington, kicking cans is still a bipartisan sport. Yesterday, President Donald Trump sided with the Democrats in a deal to temporarily raise the debt limit and fund the government for three more months. Republican leaders wanted to kick the can further down the road, but will accept the president’s lead. With the issue temporarily parked, Trump jumped on Air Force One and in North Dakota today he is expected to...

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    Gavekal Research

    A New World Order In The Making

    It’s all too easy to laugh at the BRICS group, a motley crew of five developing nations with little in common other than the fact that they’re (mostly) big and not yet rich. The term has been mocked as a “Bloody Ridiculous Investment Concept”. So why do the BRICS themselves take it so seriously?

    0
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    Gavekal Research

    Algo Trading: A Great Opportunity For The Human Brain

    The rise and rise in money management of computerized trading systems which seek out and exploit correlations among assets and markets can have some curious side effects. One of them is that the rise of the machines, far from rendering the human brain obsolete, can throw up some wonderful investment opportunities for those surviving managers who prefer to rely on solid economic principles and good old fashioned common sense.

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    Gavekal Research

    Strategy Monthly: A Two-Legged Equity Bull Market

    For the past several years, the brightest spot in global equity markets has been the US, and in particular tech and consumer stocks. This is changing, and we now have a "two-legged" equity bull market led both by US tech stocks and by a resurgent Asia. In our review of global investment conditions Louis explains why this is so, and argues none of the obvious land mines is likely to go off at any time soon.

    0
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    Gavekal Research

    The Difference A Couple Of Years Makes

    In August 2015 the offshore renminbi fell -4.5% against the US dollar, unleashing a global panic as investors fretted that another big deflationary downdraft beckoned. Fast forward to August 2017 and the renminbi rose a little over 2.07%, making it the world’s best performing major currency—it even outstripped rises in the euro and Scandinavian currencies.

    0
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    Gavekal Research

    Tremors On The North Korean Border

    Yanmei Xie reports from China’s border with North Korea, where local residents and officials were left largely unshaken yesterday by the earth tremors from Kim Jong Un’s latest and biggest test of a nuclear bomb. Despite imposing some trade sanctions on its troublesome neighbor, Beijing has no desire to back the North Korean regime into a corner.

    6
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    Gavekal Research

    Macron Goes To Work On Reform

    The moment of truth is approaching for French president Emmanuel Macron. Four months after he pledged an early reform of France’s overly rigid labor market he is pushing ahead. On Thursday the French government unveiled proposals to the lighten the regulatory burden on employers and clear away the legal uncertainties that have long deterred businesses from hiring.

    0
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    Gavekal Dragonomics

    Housing Prices Set To Slowly Cool

    Housing prices have had a wild ride in China this year, but with sales now cooling, prices are also losing steam. In this piece, Rosealea argues that the coming correction in housing prices will be a moderate one—probably about half of the 10% nationwide decline in 2014—as inventories are still low and policies are not particularly tight.

    0
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    Gavekal Research

    Deteriorating Market Signals?

    We have a rule of thumb at Gavekal that when the S&P 500 equal-weighted outperforms the “S&P 500 index”, our equity clients are cheery since beating the benchmark is fairly easy. At such times, clients will typically take more risk. The reverse is, of course, true: outperformance by the S&P 500 makes for grumpy clients, tougher meetings, and less appetite for risk-taking. In the latter case, there is a tendency for investors to rush...

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    Gavekal Research

    Good News At The NIPA Coal Face

    The so-called NIPA data (national income and product accounts) offers a cleansed account of US profitability as the effects of inflation and currency moves are stripped out. Thus, while nominal profits reported by S&P 500 companies have rebounded since early 2016, no such signal has emerged from the NIPA numbers—until now. This matters as in late-cycle situations it is common for my preferred inflation-adjusted version of NIPA profits to...

    0
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    Gavekal Research

    Korean Rage And European Angst

    When North Korea fired off another ballistic missile yesterday morning the immediate response of investors in the most directly affected neighboring economies was to shrug. Curiously it took far-away Europe to get in a flap, with the euro soaring and equities falling. Granted, currency players were also reacting to the Texas flooding, especially as London was closed for a public holiday on Monday. Yet it was strange for the region least...

    0
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    Gavekal Research

    Video: Feeling Insecure — Japan’s Food Problem

    Japan’s late conversion to the cause of free trade owes a lot to the recognition that continued trade protection is no longer sustainable in what historically has been one of Japan’s most rigorously defended domestic sectors: agriculture. Demographics and changing diets mean Japan’s food self-sufficiency rate has fallen to 38%, the lowest among developed economies.

    0
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    Gavekal Dragonomics

    Mortgages Take A Bite Out Of Consumption

    Despite the recovering economy, household consumption in China has slowed this year rather than accelerated. As Ernan explains in this piece, the culprit is the surge in mortgage debt, which has meant a sharp increase in the burden of mortgage payments on household budgets. While income growth is solid, less of the gains are available to spend.

    0
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    Gavekal Research

    Behind Japan’s Free Trade Drive

    When in January Donald Trump’s administration announced that the US was withdrawing from the Trans-Pacific Partnership, pundits around the world lost no time in declaring Barack Obama’s flagship trade agreement dead in the water. They were premature. In a 180 degree policy U-turn, Japan stepped forward to provide leadership by stressing the attractiveness of access to its own home market.

    0
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    Gavekal Research

    Not That Canadian

    The US and Canadian economies share many similarities due to their geographical proximity, similar level of development and Anglo-Saxon traditions of common law and open political dialogue. So it is curious that each economy’s labor market dynamics are strikingly different. This observation has more than hypothetical significance as workers become hard to find at the right price in late-cycle America.

    5
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    Gavekal Research

    Bank Deregulation Is Not The Answer

    Janet Yellen nailed her regulatory colors to the mast on Friday. In her speech on financial stability at Jackson Hole, the Federal Reserve chair made plain her opposition to any wholesale roll-back of financial regulations introduced in the aftermath of the 2008 crisis. She didn’t mention by name the Financial Choice Act, the attempt currently before Congress to scrap key provisions of the post-crisis Dodd-Frank regulations. But she did address...

    2
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    Gavekal Dragonomics

    China Unicom’s Mixed-Ownership Mixup

    China Unicom says its US$11.6bn share placement will bring it ten new strategic shareholders, including the nation's biggest internet firms. State media are touting the deal as a triumph of the "mixed ownership" reform for state enterprises, but it looks more like a bailout timed to score political points ahead of this fall's Party Congress.

    0
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    Gavekal Research

    Why Lower Forever Is Good News For Investors In Big Oil

    Suppose you are convinced, as I am, that oil prices will fall to near-zero by the middle of this century, for the reasons I outlined last week. If so, then among the best investments of the coming decades will be the equity of giant international oil companies such as BP, Shell, Exxon, Chevron, ENI and Total.

    7
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    Gavekal Research

    A Better Tool Required

    Having long advocated that equity managers hedge their portfolios with a US long-bond, I mostly run at a 50:50 weighting. Still, the aim must be to adopt a rules-based mechanism for sliding the bond-equity mix (say between 60:40 and 40:60) and also the average duration of the fixed income piece. I can satisfy this aim by combining market-based measures with my recent valuation work.

    0
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    Gavekal Research

    Good Governance, Poor Performance

    Japan has embraced the idea that better corporate governance leads to superior stock price performance. In 2014 the stock exchange launched the JPX-Nikkei 400 good governance index in an attempt to get Japan Inc. to raise its governance game. There’s just one problem: the index has consistently underperformed the broader market.

    3
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    Gavekal Research

    Irving Fisher And Japan

    Few papers written by defunct economists have had as much influence on my way of looking at markets as Irving Fisher’s seminal 1933 article The Debt-Deflation Theory Of Great Depressions. In it, Fisher hypothesized the patterns that great depressions go through. In a nutshell, great depressions go through four phases.

    3
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    Gavekal Research

    From A Newly-Minted Gold Bug

    Gold, as we know, is and always has been a hedge against the silliness of central bankers and governments. So when from 2012 onwards the world’s central banks decided to throw all caution to the winds, logically one would have expected gold and gold miners to rise strongly.But instead of going up, both gold and gold miners went down big time, while the price of most other assets went up.

    1
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    Gavekal Dragonomics

    The Electric Passenger-Car Acid Test

    China's industrial planners have a clear goal for electric cars: they want China to be the world's biggest market, and the global technological leader, by 2025. The first goal is already in the bag, thanks to massive subsidies and orchestrated purchases by city governments. Gaining technological leadership will be a much tougher slog.

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