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    Gavekal Research

    Trump, And The US Dollar As The World's Reserve Currency

    For the 70 years since the launch of the Marshall Plan, the US dollar has reigned unchallenged as the world’s reserve currency. I have written extensively about the characteristics of the world monetary system that has grown up based on the US dollar. But I do not remember ever having written on the costs the US must bear to sustain what Jacques Rueff termed its “imperial privilege” as issuer of the global reserve currency.

    8
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    Gavekal Dragonomics

    Don't Fixate On Fixed-Asset Investment

    If you believe China’s official statistics on fixed-asset investment, then capital spending is now collapsing across the country. But you probably shouldn’t believe those numbers, for reasons that Andrew explains in this piece. True growth in investment spending will slow in 2018, but much less catastrophically than the headline data suggest.

    2
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    Gavekal Research

    Allez Les Bleus!

    A year into Emmanuel Macron’s presidency, the French have finally invaded the streets in huge numbers. It was not, however, to man the barricades and defy his reform agenda, but instead to engage in a massive national celebration after Les Bleus won their second football World Cup in 20 years. Having suffered the confidence-sapping impact of 12 major terrorist attacks since 2012, Sunday’s win against Croatia has blown away the cobwebs and as one...

    0
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    Gavekal Dragonomics

    Video: China's Technology Strategy

    China has an ambitious industrial upgrading plan, called Made in China 2025, which targets Chinese leadership in about 30 technological segments. In this video interview Dan explains how the government aims to achieve this, how this plan differs from previous Chinese policy goals, and whether it is likely to succeed.

    0
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    Gavekal Research

    The Yield Curve As A Recession Signal

    Every time since the 1960s that the US yield has inverted, a recession has followed within 18 months to two years. So it is no surprise that the recent flattening of the curve, which has seen the 10-2-year treasury yield spread fall to just 25bp, is attracting attention. Many observers say the flattening reflects market expectations of weaker aggregate demand ahead. Some argue that the flattening of the curve itself may cause a recession, by...

    0
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    Gavekal Dragonomics

    Time To Get Fiscal?

    China’s latest data reinforce an economic trajectory that is getting worrisome for policymakers, with weaker domestic activity, an escalating trade conflict and a greater-than-expected slowdown in credit growth. Further easing of monetary policy is definitely in the cards, but there is now rising pressure on Beijing to step up fiscal spending.

    1
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    Gavekal Research

    Japan Joins The Global Labor Market

    The biggest worry of senior managers at Japanese manufacturing firms is not Donald Trump’s trade war, the state of global demand or fear of Chinese intellectual property theft, but an acute shortage of workers. Neil charts the dynamics of Japan’s ever-decreasing labor market, and examines the policies Tokyo is rolling out in an attempt to deal with the problem.

    1
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    Gavekal Dragonomics

    The Biggest Winners In Real Estate

    China’s real-estate developers are getting hammered in stock and credit markets. But the largest of these firms are well-placed to ride out current strains, and are the main beneficiaries of accelerating consolidation and government policy. As the Chinese property market matures, the winners are likely to be a small group of the largest companies.

    0
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    Gavekal Research

    The Chinese Juggernaut Will Roll On

    In 2015, I sat down with Sri Lanka’s then-new finance minister. The “teardrop of India” had recently elected a fresh government, kicking out a corrupt president widely regarded as in China’s pocket. Vowing to scrutinize all Chinese deals, the new leaders suspended a massive real estate project in Colombo harbor. “The high costs come from nothing other than corruption, but we do not want taxpayers to pay for the past decisions of a corrupt regime...

    1
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    Gavekal Dragonomics

    Audio & Transcript — Gavekal Research Call July 2018

    In this call Arthur Kroeber outlined his view on why President Donald Trump’s trade war is not a bluff, and is likely to escalate ahead of the US midterm elections in November; Andrew Batson explained the macro-level effects caused by all this uncertainty; and Chen Long discussed the market impacts in China and the country’s likely response.

    0
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    Gavekal Research

    The Real Italian Story

    The big worry about Italy is that its new populist government adopts policies that spark another eurozone crisis, and even a breakup of the European Union. This view is almost certainly wrong, for despite the government this week announcing a roll-back of labor market reforms, it will struggle to implement its radical agenda in any systematic way. This is due to constitutional checks that inhibit radical changes, and the fraught political logic...

    4
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    Gavekal Dragonomics

    Policy Headwinds For Chinese Stocks

    Chinese equities have finally had a few solid trading sessions after their steep decline in the latter half of June. But the CSI 300 index is still down -14% year-to-date, and betting on a rebound from here looks unwise. A confluence of factors has been pushing down the market—tougher financial regulation, weak data, a falling currency, and the trade conflict with the US. And none of these factors is turning positive, especially with the US...

    0
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    Gavekal Research

    The Recession Of 2019

    Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of...

    17
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    Gavekal Research

    India’s Logistics Revolution

    India's logistics sector is so inefficient that getting goods from producers to consumers accounts for about 17% of national output, or twice the level in most developed economies. The result is retarded growth and weakened competitiveness. But thanks to a nationwide goods and services tax, growing consumer demand and rising land prices, consolidation and modernization is afoot across the sector.

    0
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    Gavekal Research

    The Message From Eurozone Credit

    Should we worry that eurozone corporate bond spreads have doubled since late January? After all, bond yields are rising globally and as deflationary risks have ebbed the European Central Bank has signaled its intent to normalize monetary policy. Yet, looking back at the eurozone’s last cycle, policy was tightened without spreads blowing out. My concern is that the present squeezing of financial conditions is sending a darker message, and will...

    0
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    Gavekal Research

    Still Caught In The Cycle

    The June US labor market report released on Friday appears to bear out Federal Reserve chairman Jay Powell’s view, set out in a speech last month, that “there is a lot to like about low unemployment”. Although the headline payrolls number grew by an unexpectedly strong 213,000 month-on-month, the unemployment rate actually ticked higher from 3.8% to 4%, as greater numbers entered, or reentered, the labor market.

    0
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    Gavekal Dragonomics

    The Global Rise Of Chinese Smartphones

    Xiaomi and other Chinese smartphone makers are among the first Chinese consumer-goods companies to have gained significant market share outside of China. In this piece, Dan explains where their success has come from and assesses their prospects: Chinese smartphones may not displace Apple and Samsung, but can limit their gains in emerging markets.

    0
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    Gavekal Research

    Time To Buy Brexit Britain

    “Will the Brexit agony never end?” Anatole asked in mid-June. It now seems that the agony may end much sooner than expected. Following last Friday’s decision by prime minister Theresa May to blur all her “red lines” in negotiations with the EU, and—paradoxically—the subsequent resignation of hard-Brexiteer cabinet minister David Davis, the time to start buying cheap British assets may have come.

    4
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    Gavekal Research

    A National Security Imperative

    Depending on commodity prices, in any given year China spends between US$250bn and US$400bn on imports of the “big five” commodities it needs to continue growing: oil, iron ore, coal, copper and soybeans. Before it can do that, it must first “earn” those US$250-400bn. Only then can it can turn around and buy the stuff the country needs to ensure its long-term growth.

    10
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    Gavekal Research

    Hard Yards For Emerging Markets

    Emerging markets have been hit by the combined effect of a stronger US dollar, tighter international liquidity and rising trade tensions, causing their currencies to fall more in the last few months than in the 2013 “taper tantrum”. The big fear for EMs is that the end of easy money globally creates a giant margin call. As a firm, we have tended to be upbeat on their prospects in this cycle, and it may be that a huge buying opportunity has...

    2
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    Gavekal Dragonomics

    The Renminbi Catches Up With Reality

    After its biggest downward move since 2015, where is the renminbi headed next? Since mid-June it has fallen by over -4% against the US dollar to CNY6.63, and the trade-weighted CFETS index has also declined by -3% from its June peak. This has led to some commentary that China is pushing down its currency to prepare for a trade war with the US. In fact the downward move was overdue, and was largely a delayed reaction to foreign exchange market...

    0
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    Gavekal Research

    A Better Fed Model

    The “Fed model” which values US equities relative to bonds is now more than 20 years old. In that time, it has become widely used and has attracted equally widespread criticism. In this paper Will and KX revise the original to iron out some of its flaws, and come up with an improved model which offers greatly superior risk-adjusted returns.

    6
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    Gavekal Research

    The Trade War And The US Cycle

    How will the US administration’s trade disputes affect the US economic cycle? In the worst case scenario, if Donald Trump follows through on all his threats the disruption to global supply chains could be great enough to push the world economy into recession. At this point, the greatest impact flows from the high degree of uncertainty about future actions.

    0
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    Gavekal Research

    Strategy Monthly: The Four Roads Ahead

    The first half of the year was not a great one for global equities, and the second half is clouded by risks: slowing growth, rising inflation, renewed political stress in the eurozone, and most of all the threat of massive protectionism by the United States. Louis Gave offers four scenarios of how things could play out, and Arthur Kroeber explains why it's time to start seriously worrying about a worst-case trade scenario.

    0
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    Gavekal Dragonomics

    The End Of Normal Trade

    The US may have backed down from imposing new restrictions on Chinese investment in the US. But it would be wrong to see this as a de-escalation of the US-China trade conflict. In this piece, Andrew argues that the tariffs taking effect Friday will mark the end of two decades of normal US trade with China, and the return of political uncertainty.

    0
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    Gavekal Research

    What Could Turn The Tide?

    The global equity bull market is increasingly looking like the German soccer team: old, tired and getting slow, having reached its peak a while back. Even the “captain” of the bull market, the S&P 500, last made new highs five months ago. Since then, the asset classes that have delivered positive returns have been as few and far between as German goals. Year to date, investors have lost money on US investment grade bonds, on emerging debt,...

    2
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    Gavekal Dragonomics

    A Rethinking Of Housing Subsidies

    China's government, worried about continued rapid growth in housing prices, is now reconsidering a major program for subsidizing housing sales. As Rosealea explains, this policy change shows the government is still more focused on curbing frothy housing prices than on boosting growth, and will weigh on housing sales in the rest of 2018.

    0
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    Gavekal Research

    The End Of Tech Codependency

    The US has backed away from the “nuclear” option of slapping new investment curbs on Chinese firms, but its likely use of export restrictions and tariffs on “strategic” sectors like semiconductors will hit all parts of the supply chain, regardless of nationality. At best chipmakers can expect to muddle through; at worst the industry takes a big hit.

    2
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    Gavekal Research

    Slower Eurozone Growth Ahead

    Wednesday was another grim day for European bank stocks, which are now down almost -24% from their late January peak. Yesterday Louis looked at the reasons behind the slump in bank shares globally, and attempted to find a silver lining to the dark cloud of their underperformance (see The Message From Bank Stocks). When it comes to Europe, however, the fall in bank shares is just one more reason to feel pessimistic.

    0
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    Gavekal Research

    The New Model Duration Rule

    Choosing the right level of duration for a bond portfolio is devilishly tough. It is doubly so when the global interest rate environment is shifting. For this reason KX is introducing a new top-down based duration management tool which encouragingly offers superior signaling and can be used across multiple developed economy bond markets.

    2
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    Gavekal Research

    The Message From Bank Stocks

    This year, being a bank investor has been almost as miserable as being a bank employee. European banks are down -17% year to date. Japanese banks have hardly fared much better, falling -13%. Asian banks are down -7%. And US banks are down around -5%. Tuesday was a case in point: on a day when the US market was broadly flat, banks were once again one of the worst-performing sectors.

    3
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    Gavekal Dragonomics

    How China Can Fight Back In The Trade War

    China is a veteran in economic warfare. As the US prepares to hit China with trade and investment penalties, China can draw on years of experience and an arsenal of regulatory tools to craft a response. The local operations of US companies present a large target. In this piece, Yanmei explains how China is most likely to retaliate against the US.

    6
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    Gavekal Research

    Behind European Underperformance

    Amid Monday’s trade-war-inspired risk-off, it is significant that European equities underperformed. Sure, Europe had already closed when White House trade advisor Peter Navarro emerged to reassure investors that the US administration is not proposing blanket investment restrictions. Even so, European markets suffered disproportionately. That should be no surprise, considering that the current global trade uncertainties have arisen against a...

    0
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    Gavekal Research

    Oil After The OPEC Meeting

    Let us start with a simple reality: assuming the world economy avoids a 2008-type implosion, then global demand for oil should approach 100mn barrels per day by the year’s end. That represents an increase in global demand this year of roughly 1.5mn bpd—more or less the same pace of increase the world has had to deal with in recent years.

    11
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    Gavekal Dragonomics

    Macro Update: More Stress, More Easing

    In this concise chartbook, Chen Long explains where the Chinese economy stands today. The business cycle has been surprisingly strong but is likely to soften more in the second half. Trade conflict with the US is raising uncertainty just as domestic credit stress increases. Policy is adjusting, but to smooth the growth trajectory not reverse it.

    0
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    Gavekal Research

    Brazil’s Year Of Living Messily

    After a couple of years of political stability and economic improvement, Brazil again looks like an emerging market in the cross-hairs. As measures of financial stress have risen sharply, its currency and stock market have plunged. The bet must be that Brazil muddles through, but a crisis this year cannot be ruled out.

    0
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    Gavekal Research

    The Trouble With Trade Retaliation

    When this week US president Donald Trump threatened to slap tariffs on an additional US$200bn of imports from China, on top of the US$50bn already targeted, the Chinese government immediately promised to retaliate in full proportion. The trouble is that retaliating will be a lot more difficult and painful than Beijing’s counter-threats make it sound.

    2
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    Gavekal Dragonomics

    Easing Won’t Help Chinese Equities

    When the White House rattled global markets earlier this week with its threat markedly to escalate the international trade war, mainland Chinese stock markets were hit the worst. That is not surprising, considering that the US administration’s threats were targeted specifically at imports from China. However, the fall in Chinese markets was so severe, and the subsequent recovery so anemic, in part because investors’ heightened fears over trade...

    0
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    Gavekal Research

    The Investment Scenarios Ahead

    The interaction of three prices—the US dollar, long-dated US interest rates, and oil—tend to determine the behavior of most other asset values, and so far this year, all three have moved higher. Investors have adjusted to this new reality with some trepidation: among major markets, only the US (S&P 500) and Japan (Nikkei 225, barely) are up year-to-date in US dollar terms.

    3
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    Gavekal Dragonomics

    The Restructuring Of Retail

    China’s rapid shift to online shopping is emptying malls and forcing retailers to close hundreds of stores. But at the same time, the big internet companies are investing billions to seek new growth from brick-and-mortar stores. In this piece, Ernan explains how Chinese retail is restructuring and where the growth opportunities are.

    0
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    Gavekal Research

    Why US Long Rates Aren’t Going Up

    The behavior of US long rates presents something of a puzzle just now. The US economy is humming along nicely for this late in the cycle, and is even booming following last year’s tax cuts. Inflation is ticking higher. And short rates are rising. As a result, I would normally expect long rates to be climbing towards the top of the reasonable valuation band dictated by my bond market model (seeBond Market Risks). But they are doing no such thing...

    1
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    Gavekal Research

    The Empire Strikes Back?

    Over the last 70 years the global population has tripled. Yet in defiance of every Malthusian theory out there, the average citizen of the world has never known such a high level of material comfort as today. To start with the obvious, the world has almost entirely eradicated the famines that plagued entire regions just a few generations ago (this isn’t to deny the humanitarian catastrophes unfolding today in Yemen or Syria, but these are caused...

    3
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    Gavekal Dragonomics

    Trade War Escalates. What’s Next?

    With the imposition of tariffs on US$34bn of imports from China last Friday, the US has expanded the trade war it launched two weeks earlier with steel and aluminum tariffs, mostly on friendly countries. More are likely to come by the end of the year: additional tariffs on China, and possibly levies on imports of cars and car parts (which again would mainly hurt US allies). It is possible that the US could pull out of Nafta. How worried should...

    1
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    Gavekal Dragonomics

    Parsing The Slowdown In Credit Growth

    China’s credit growth slowed to a new low in May, but the deceleration in real economic activity remains a moderate one—although sharp contrasts are now appearing among different indicators. In this piece, Chen Long explains why credit growth is likely to continue to slow, and how that will affect different parts of the economy.

    0
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    Gavekal Research

    Europe Through Rose-Tinted Specs

    If the European Central Bank had a dot plot, on Thursday it would have shifted downwards. The ECB’s dovishness stood in contrast with the Federal Reserve, which just a day earlier moved its own dot plot projection of future interest rates upwards. If the market retained confidence in Europe’s relative growth and returns, this divergence of rate expectations probably would not matter greatly. But with European growth softening, and political risk...

    0
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    Gavekal Research

    The Terms Of Betrayal

    Will the Brexit agony never end? Theresa May managed this week to remove troublesome amendments attached by the House of Lords to her legislation for taking Britain out of the European Union. But she was immediately in even deeper political trouble. These problems show just why I have been advising clients to avoid any big bets in sterling assets, whether long or short.

    1
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    Gavekal Research

    Is The Fed Really Going To Cause A Crisis?

    Is a crisis in US dollar bond markets really inevitable if the Federal Reserve continues on its current tightening trajectory? Some think so, including Reserve Bank of India governor Urjit Patel, who this month expressed his fears in an op-ed in the Financial Times.

    5
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    Gavekal Dragonomics

    The Way Ahead For North Korea

    After the Trump-Kim summit, North Korea's commitment to denuclearization still remains a fiction. Future negotiations will be mostly about stringing along the US administration. While Washington and Pyongyang talk, Beijing and Seoul will continue to try to normalize the existence of a nuclear-armed North Korea and cement peace.

    0
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    Gavekal Research

    Europe's Cyclical Blues

    When they meet on Thursday, European Central Bank policymakers face a dilemma. As wage and price pressures rise across the eurozone, they are expected to outline an exit from quantitative easing policies. At the same time, growth indicators are weakening, raising the specter of a eurozone recovery (again) being cut off in its infancy. The essential point is whether Europe’s turnaround has become self-sustaining. We think the answer to that...

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call June 2018

    During Friday’s monthly call, Louis Gave addressed the direction of the US dollar and the impact of expanding US fiscal deficits. Anatole Kaletsky focused on the rise of populist politics, which remains his major concern. Charles Gave considered the impact of resurgent nationalism on the investment environment. There was also significant discussion of the oil price with Anatole and Louis taking differing positions.

    0
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