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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.

    0
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    Gavekal Research

    Despite Draghi, Flows Favor The Euro

    All eyes will be on Mario Draghi this week. Last Thursday’s release of minutes from July’s European Central Bank monetary policy meeting highlighted policymakers’ unease at the strength of the euro. The suspicion now is that the ECB president may attempt to talk down the euro when he stands up to make his lunchtime speech this Friday at Jackson Hole. Yet even if Draghi does play down the prospect of an early or rapid ECB exit from either...

    0
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    Gavekal Research

    Oily Slope Of Hope

    As Louis often points out, a highly-touted stock that fails to rise on good news is often riding for a fall. The best example of such a “tired bull” at present is not the much-despised US equity market, which has continued making higher highs and higher lows since February 2016, despite a pretty terrible news flow. It is crude oil.

    0
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    Gavekal Research

    In Work But Out Of Pocket

    Data released yesterday showed that the UK’s unemployment rate fell to 4.4% in the second quarter, its lowest since the second quarter of 1975 (when Britons voted by a 34pp margin in favor of membership of the precursor to the European Union). Yet despite the lowest unemployment in generations, wage growth in the UK remains for the most part missing in action. Workers’ total earnings rose by a muted 2.1% in 2Q. With CPI inflation running at a...

    0
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    Gavekal Research

    It Is Not Slack Weighing On Wages

    How can a labor market be very tight, yet have barely any wage growth? In today’s daily Nick tackled this for the UK and found a mix of universal and idiosyncratic causes. For the US and Japan a frequent refrain is that official data hugely understates the potential size of the workforce and so a ready source of “slack”. Will and Udith beg to differ.

    4
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    Gavekal Dragonomics

    The China Inc. Annual Report 2017

    This chartbook outlines the recent core trends in China’s corporate sector. There has been a major rebound in revenues and profits, but most firms are using this to repair balance sheets rather than boost capex. So leverage is down and debt servicing ability is up. But the profit cycle is now likely at its peak, as is firms’ ability to deleverage.

    0
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    Gavekal Research

    The Strangulation Of Enterprise

    Zero interest rates have made a great many people a great deal richer. But paradoxically they have strangled wealth creation. The reason for this is that enterprise is overwhelmingly a phenomenon found among smaller companies. Among big companies it is a rare and ailing quality. Quite simply, the overriding goal of every big company is to transform itself into a monopoly, so it can move away from having to earn its profits towards collecting...

    4
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    Gavekal Research

    Carthago Delenda Est

    Global geopolitics is characterized by the “land-based” empire of China challenging the dominant “maritime” empire of the United States according to Louis and Charles. What they cannot figure out is the seemingly contradictory responses of Washington to this well telegraphed challenge. In this piece they examine pressing challenges to American power and explore the investment consequences, which may come home to roost far quicker than most...

    4
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    Gavekal Research

    Testing Europe’s Escape Velocity

    The eurozone has exited the emergency room and is looking to sustain a recovery that takes it back to rude health. T Last year’s Chinese stimulus helped spur the latest eurozone pickup and the worry is that recent weakness in both Chinese and German trade data points to an external weakening. So could a stronger euro and slowing China spark another setback?

    0
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    Gavekal Research

    China’s Slow Exit From Reflation

    China’s first monthly data for the second half of 2017 showed growth momentum softening. While reflation peaked in the first half of 2017, the story is still that the exit from reflation will be very slow and gradual. Economic policy will be largely on hold in this period: tightening has peaked, but the switch to easing is still a long way away.

    0
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    Gavekal Research

    The Limits Of Magical Thinking

    A persistent American fantasy of hardliners is that threats of force will magically cause other countries to abandon their interests and cave in to US demands. The current occupant of the White House is taking this magical thinking to new heights in his approach to Asia. But thankfully, despite the dire headlines, the real-world impact is small.

    5
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    Gavekal Research

    Can The US Property Engine Fire Up?

    Two years ago banks started to make it harder for US construction firms to borrow and soon after activity began to fizzle. While blame has been pinned on skilled worker shortages and rising costs of both land and materials, KX and Will think financing was the key issue. The good news is that banks seem to be again loosening their purse strings.

    2
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    Gavekal Research

    The Resurgence Of Walmart Man

    In July 2014, I wrote a piece looking at the fallout from poorer Americans getting poorer (see Poverty Matters For Capitalists). My basic point was that the consumer price index understated the loss of real income being suffered by non-supervisory workers. I showed this using my Walmart index, which is weighted 50% food, 30% shelter and 20% rent to reflect this group’s true consumption basket. Three years ago this population cohort faced a...

    3
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    Gavekal Research

    Finding Outperformance In Japan

    On Monday, the cabinet office in Tokyo is expected to announce that Japan’s economy grew at an annualized rate of around 2.5% in the second quarter. If it does, it will mark Japan’s sixth consecutive quarter of economic expansion, the longest period of uninterrupted growth since the mid-2000s, when prime minister Junichiro Koizumi was in power.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research August Call

    In this week's call Tom Miller and Udith Sikand presented their view on India's macroeconomic situation and opportunities for foreign investors. Tom outlined the broad macro fundamentals and assessed the Modi government's progress in reforming the economy. Udith presented the investment consequences, expecting a capex revival to begin as soon as next year.

    0
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    Gavekal Dragonomics

    Oil Import Deregulation Put On Hold

    China’s market for gasoline, diesel and other oil products has gotten increasingly competitive since the government started allowing private-sector refiners to import their own crude oil. But the government has now put additional liberalization on hold, which will halt gains for independent refiners and benefit big state enterprises.

    0
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    Gavekal Research

    The Most Important Change And Its Natural Hedge

    I don’t usually quote mass murderers, but when I do, I usually fall back on Lenin’s quip that “there are decades when nothing happens, and weeks when decades happen”. Lenin was referring to the Russian Revolution which took place a hundred years ago and to this day still casts a long shadow. To some extent, the Russian Revolution, itself a bastard child of the first world war, crystallized the end of an era for Europe. Thereafter the world’s...

    8
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    Gavekal Research

    Love The Economy, Hate Economists

    Charles is proud of his data-driven approach to economic analysis and is not impressed with the methods applied by much of the modern economics profession. More to the point, he thinks that most modern economic remedies have negatively impacted the growth outlook and dulled investment performance.

    14
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    Gavekal Research

    Is The Whale Breaking Surface?

    Charles has often said that the impact of a market shock shows up with the same sort of delay as the effects of dynamite fishing. First the small fry float to the top, then the mid-size fish. Only later does the dead whale break surface. With that analogy in mind, Louis has long maintained that investors will not be able to call the end of the oil price slump with any confidence until they have seen major bankruptcies and/or consolidation among...

    4
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    Gavekal Research

    Beijing’s New Renminbi Strategy

    Since 2016 China has pursued an opportunistic currency strategy, taking advantage of periods of US dollar weakness to steer a depreciation of the renminbi’s trade-weighted exchange rate. But over the last couple of months that policy has shifted, as it looks as if the authorities are satisfied with the renminbi’s current trade-weighted value.

    0
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    Gavekal Research

    Leading Europe Into Reflation

    The Czech National Bank has become the first central bank in Europe to raise interest rates in this cycle. Yesterday the CNB lifted its policy rate from 0.05% to 0.25%, its first rate hike since 2008. Where the Czechs are leading, others, including the European Central Bank, will follow—but in the case of the ECB, likely not for another two years or more.

    0
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    Gavekal Research

    The Brexit Talks Don’t Matter

    The details of the Brexit talks between the British government and Brussels are far less important, argues Charles in this paper, than the blow Britain’s referendum vote has dealt to the technocratic principles which underpin the European Union’s power structure. The pillars of the temple are crumbling, and sooner or later the edifice must fall.

    14
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    Gavekal Research

    Energy Stocks, If Only As A Hedge

    A quick glance at our Gavekal TrackMacro application illustrates how the global equity environment remains benign: modest but accelerating growth, low inflation, solid corporate profits and low interest rates. In such an environment, why not load up on equities? Investors have clearly done just that in recent quarters. As one seasoned client put it in a recent meeting: “If central banks are not going to raise rates with German consumer...

    1
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    Gavekal Dragonomics

    The Lull In The Tourism Boom

    Chinese outbound tourism is having a rough 2017: growth in international travelers is down to about 6%, from 20%-plus growth in earlier years. So has something fundamental in the Chinese tourism story changed, or is this just a blip? In this piece, Ernan argues this slowdown is largely temporary, caused by events in key destinations in Asia.

    0
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    Gavekal Research

    Building A Bond Valuation Tool

    The “golden rule” of French Nobel laureate Maurice Allais states that over the long run, long term government bond yields always converge with the nominal structural growth rate of the economy. In this paper Charles sets out to build a government bond market valuation tool based on the Allais postulate.

    0
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    Gavekal Research

    The Misleading Signal In US Auto Sales

    Trying to tease economic trends out of recent US data releases is a frustrating business. Take yesterday’s figures. Although the ISM manufacturing PMI ticked down a shade in July to come in a fraction below expectations, at 56.3 the number remained firmly in expansionary territory. On the other hand, two classic cyclical indicators of US economic health—construction spending and automobile sales—both came in weak.

    0
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    Gavekal Research

    Strategy Monthly: India — Poised For A Pickup

    India clearly offers one of the best long-term growth stories in the world today. In 2016 for the first time it added more to global nominal GDP growth than China. Demographics are favorable, opportunities for infrastructure- and housing-driven growth are abundant, and despite some hiccups the Modi government has done a good job of taming inflation and setting the country on a structurally sounder path. For investors, the problem is that Indian...

    0
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    Gavekal Research

    Fade The Latest Commodity Rally

    China’s property market is once again running hotter than expected, pushing prices of iron, steel and coal up by 15%-40% over recent weeks. But the gradual downward trend in property has not changed. And with high prices and government intervention both stimulating more commodity supply, the potential for further price gains is limited.

    3
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    Gavekal Research

    Get Selective Over Eurozone Stocks

    Emmanuel Macron’s political honeymoon proved short-lived, but the new French president’s honeymoon with eurozone equity investors was over before it began. In a classic case of buy the rumor sell the fact, the euro Stoxx index peaked on May 5, the last trading day before the second round of the French presidential election. That run-up had been driven by receding fears of deflation, as investors embraced the idea of eurozone reflation, coupled...

    0
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    Gavekal Research

    An Interesting Configuration

    When the market is suffering from doubts, it pays to start with the facts. And clearly the market is having a few doubts right now. After setting the latest in a series of record highs in intraday trading yesterday, US equities succumbed to the jitters. In the space of an hour, the S&P500 fell -1% and the Nasdaq -2%, as investors questioned the underpinnings of the current run-up in stocks. So, let’s begin with some facts:

    0
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    Gavekal Research

    The Battle Of Brexit Is Over

    Judging by statements made by two of the most fervent Europhobes in Theresa May’s cabinet, Soft Brexit has emerged the victor over Hard Brexit. While this means the UK's exit will be postponed during a transition period, and possibly beyond, Anatole argues this comes with its own drawbacks and risks. Things are likely to get worse before they get better.

    0
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    Gavekal Research

    US Bear Flattening Ahead

    The miniscule change of wording in yesterday’s Federal Reserve statement appears to confirm that the Fed will go ahead and begin to shrink its balance sheet from September. June’s statement said balance sheet normalization would begin “this year”, implying the process would start by December at the latest. Yesterday’s statement altered that to “relatively soon”—and relatively sooner than December suggests September, as the only other meeting...

    0
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    Gavekal Dragonomics

    Profits Heading Down But Not Out

    The profits of China’s industrial sector handily beat expectations in the first half of 2017, rising 22% YoY. In this piece, Thomas surveys the profit cycle’s path over the next 12 months, which mirrors that for the overall economy: a slowdown in the rest of 2017 and into 2018, but quite a gradual one with little risk of a profit recession.

    0
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    Gavekal Research

    When Smoking Pays

    Baseball cards, Beanie Babies, bitcoins... For the last eight years, governments have regarded them as much the same sort of thing, taking a broadly tolerant attitude to the proliferation of crypto-currencies. Not anymore. Yesterday the US SEC declared that blockchain-based digital tokens such as bitcoin are in fact securities and thus subject to the full panoply of SEC regulation.

    0
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    Gavekal Research

    Big Tech Is Not Standard Oil

    Back in May, Louis warned that the regulatory knives were coming out for Big Tech. In the worst case scenario for the dominant technology giants that have done so much to drive the stock market to new highs, Louis argued that they could even face the same treatment that Standard Oil received at the hands of the US government in 1911. Investors were forcibly reminded of this tightening regulatory squeeze yesterday when Google parent Alphabet...

    6
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    Gavekal Research

    The Eurozone Is Now So Far Behind The US, It’s In Front

    Among the many tricky tasks facing investors is to determine the relative positions of the US and eurozone economies in their respective business cycles. Over the preceding two cycles—the ones that peaked in 2000/01 and 2005/06—the two economies moved broadly in phase, with the eurozone lagging the US by around one year. Estimates from the International Monetary Fund and OECD suggest that that relative position is largely unchanged, with the...

    2
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    Gavekal Research

    Draghi Can’t Lean Against The Euro’s Rise

    After the euro broke out of its three-year trading range last week, it is reasonable to assume that the European Central Bank would much rather see a big correction than a further move to the upside. But central bankers can’t always get what they want—and their powers to control the currency markets are much more limited than generally assumed by day traders and media headline writers.

    1
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    Gavekal Dragonomics

    Taking Stock Of The Investment Cycle

    Investment drives China’s growth, but the state of the investment cycle is now being obscured rather than revealed by the most closely followed indicator of capital spending, fixed-asset investment. In this piece, Andrew updates his model of monthly real growth in gross fixed capital formation, and draws three conclusions from its signals.

    0
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    Gavekal Research

    Life’s Certainties And The Euro

    There are very few certainties in life. Death, taxes, US consumers living beyond their means, and Italian central bankers talking down their currency are pretty much the only things I have learnt in my career to be inevitable. Sure enough, Mario Draghi came out yesterday doing his best to sound as dovish as he possibly could. That did not stop the euro from surging past its ceiling of US$1.15 to reach US$1.1620.

    1
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    Gavekal Research

    Value Creation In A Capitalist World

    In a capitalist economy there are three different kinds of value creation: the Schumpeterian, the Ricardian, and the Malthusian. And the companies in each of these value creation segments swing through very different cycles. In this short paper, Charles outlines how each segment works, explains where they are in their cycles, and suggests how investors can build appropriately hedged portfolios.

    1
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    Gavekal Research

    Reading Trump’s Trade Signals

    Donald Trump came into office six months ago today promising to rip up the rules of global trade in order to put America’s narrow interests first and cut its trade deficit. So far, though, his administration’s trade policies have been more smoke than substance. Global trade volume has accelerated smartly since the US election. Threats of a trade war with the main target, China, fizzled in the face of US business interests, Beijing’s ability to...

    0
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    Gavekal Research

    Liquidity: More Bad News Than Good

    Gavekal has long maintained that bull markets rest on three pillars: liquidity, valuations, and growth. Now with the Fed set to tighten further in an environment of weak bank credit growth, KX and Will warn that the liquidity pillar which has done so much to support the current bull market in US equities is looking increasingly shaky. That is especially ominous, given that valuations are no longer cheap and catch-up growth is played out for this...

    8
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    Gavekal Research

    Watch US-Eurozone Rate Differentials

    Interest rate differentials between the US and eurozone are wide by historical standards. This is no surprise. The US has enjoyed uninterrupted growth (at least in year-on-year terms) since 2010, and today the Federal Reserve stands as the most hawkish big central bank in town. In contrast, the eurozone slumped back into recession in 2012, and the European Central Bank remains in full-blown easing mode. As a result, interest rate differentials...

    2
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