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    Gavekal Research

    Trump’s Tax Plans And The Dollar

    Following last week’s US election result, the US dollar—as represented by the DXY index—has risen to test the upper bound of the range that has prevailed since the first quarter of 2015. At these levels the US currency looks overvalued, both in real effective exchange rate terms against other major currencies, and on a purchasing power parity basis. Yet it would be premature to bet against a break-out to the upside. Although the dollar’s REER is...

    0
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    Gavekal Research

    When You Sleep With An Elephant

    It is always comforting to be back in familiar territory. In a long career in investment—45 years and counting—I have seen a few Mexican crises. All these years on, I have fond memories of the 1976 peso devaluation, and of the subsequent 1980 devaluation. I remember the 1982 debt crisis well, and the “década perdida”—the lost decade—which followed. Then came the hyperinflation of the early 1990s which led to the introduction in 1993 of the new...

    2
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    Gavekal Research

    The Decision Tree From Here

    For months, I have argued that the MSCI World’s push to within a couple of percentage points of its all time high was driven by two powerful forces: the extremely low level of global bond yields, and the continued compression of foreign exchange volatility. I went as far as to argue that this environment was reminiscent of 1986-87, and the Louvre Accord, whose breakdown ultimately triggered the 1987 crash (see Forget Central Banks, Watch Foreign...

    6
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    Gavekal Research

    Prospects For The US Bond Market

    Back in July, I wrote a paper on the US bond market which came to the conclusion that things were getting complicated. My thesis at the time was that there was no value left in the US long bond—the 30-year treasury—and that it could no longer be used as a hedge against a potential deflationary bust. At the time the long bond yield was around 2.3%. Since then the election of Donald Trump as president of the US has had a severe impact on bond...

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    Gavekal Research

    Audio & Transcript — Gavekal Research November Call

    Anatole Kaletsky, Arthur Kroeber and Charles Gave presented their views on what a Donald Trump presidency means. Anatole outlined both positive and negative potential outcomes. On the positive side, US growth could see a boost from expansionary fiscal policy, but isolationist trade policies could threaten US firms and equity prices. Arthur warned of the geopolitical risk of a power vacuum should the US pull back from its treaty obligations....

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    Gavekal Research

    Arthur Kroeber: What A Trump Presidency Means

    This is an excerpt from Arthur Kroeber's presentation at Gavekal's Hong Kong seminar on November 10. In this video Arthur presents his initial thoughts on the changes in the political situation in the US, and what it means for the rest of the world.

    0
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    Gavekal Research

    Trump’s Bond Market Correction

    The new US leadership was always likely to inherit a bond market correction. Now, the Republicans’ clean sweep in winning control of the White House and both houses of Congress significantly increases the odds of a deep bond market sell-off. Which in turn will be likely to knock equities down a few notches.

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    Gavekal Research

    India’s Banknote Bombshell

    While the world’s attention was riveted on this week’s US election, India sprang a surprise.On Tuesday Prime Minister Narendra Modi announced the immediate demonetization of all existing banknotes with denominations of INR500 and INR1,000—note issues which together accounted for nearly 90% of the total currency in circulation by value.

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    Gavekal Research

    What A Trump Presidency Means For Global Investors

    The social and geopolitical implications of the Trump shock are much too complex and too charged with emotion for instant assessments to be worthwhile. Even in the case of ordinary presidential elections, the immediate first-day market reaction usually turns out to be wrong. I will therefore try to avoid moral judgements and confine myself largely to economic observations, dividing them into ten items of good and bad news from a strictly...

    3
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    Gavekal Research

    President Trump And The Fall Of Davos Man

    For decades, all around the world but especially in Europe, the notion of the sovereign nation has been under fierce attack. Leading the assault have been the international bureaucrats and a clique of economists in league with those I have dubbed the men of Davos, all of them resolute proponents of crony capitalism (see Dissolving The People).

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    Gavekal Research

    When Elites Fail

    Burkean conservative in me wants to agree with de Tocqueville: the passions unleashed by this election will hopefully once again, go back into their box for the next three and half years, only to be stirred up again the next time the electoral cycle comes around. Still, there are two elements of this week’s vote that do raise discomfort.

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    Gavekal Research

    Deteriorating Price Momentum And Rising Political Risk

    As of Friday’s close the S&P 500 had recorded nine consecutive down days, falling back to its 200-day moving average. One can point the finger for this pull-back at any of several factors: broadly disappointing earnings (ex-financials), rising foreign exchange volatility (see Is Perfidious Albion Undermining The ‘Shanghai Agreement?’), higher long term interest rates and, of course, rising political risk. Unfortunately, none of these forces...

    2
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    Gavekal Research

    Will Denyer: Assessing US Recession Risk

    Despite recent headline data releases being mildly encouraging, Will is worried that the US economy is limping toward recession territory. In this video interview he discusses his framework for assessing the US economy and proposes investment strategies to deal with what he sees as the two most likely scenarios; namely, an outright contraction or a mild growth pick-up associated with rising inflation.

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    Gavekal Research

    A Good Bond Repricing, Anyone?

    Even after the recent move higher in yields, there is general agreement at Gavekal that long-dated bonds remain horribly overvalued. The question is whether the adjustment toward fair value happens in a disruptive manner, or through a smooth transition to a new growth cycle. Anatole tends to the view that US economic growth should pick up from here, while Will Denyer is on recession-watch. The Federal Reserve, for its part, is worried about...

    2
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    Gavekal Research

    On The Brink Of Recession

    Full steam ahead, then? Friday’s release of the first GDP estimate for 3Q16 headline showed US growth rising to an annualized 2.9%, up from 1.4% in 2Q and 0.8% in 1Q. On the face of it, this reading points to the US economy emerging from yet another soft patch, and so backing away from the recession frontier. Not so fast. A close look at the underlying components of the GDP report reveals the US as being perilously close to that threshold.

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    Gavekal Research

    When The Keynesian Multiplier Goes Negative

    Last week I published a paper whose main point was that Keynesian policies lead to an inevitable decline in an economy’s structural growth rate (see Is The Second Shoe About To Drop?). My immediate concern is that developed economies seem set to head off on another public spending binge as they try to slay “secular stagnation”. That piece stirred a number of questions from readers, so I am following up with an addendum that extends the argument...

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    Gavekal Research

    When The Facts Change, I Change My Mind

    After the Brexit vote, Anatole became deeply bearish, fearing that a populist insurgency could unleash a destructive retreat from globalization. With the US electorate seemingly set to reject that pathway on November 8, the likelihood of other nations following Britain by turning in on themselves is greatly diminished.

    17
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    Gavekal Research

    The End Of The Goldilocks Scenario?

    Over the last seven years global investors have benefited greatly from a combination of moderate growth and non-threatening inflation, allowing for constantly loose monetary policy. Yet for the US, we are increasingly concerned that, one way or another, this “Goldilocks scenario” is about to come to an end. Here’s why:

    4
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    Gavekal Research

    Safety First In EMs

    After a steady rise in emerging market inflows over the last seven months, tighter US financial conditions have led to an abrupt reversal. On the back of inflation concerns and a stronger US dollar, the seven day moving average of daily portfolio flows to EMs, as of last Monday, had fallen to its lowest level since the renminbi-induced sell-off 14 months ago. EMs are vulnerable to an externally-induced pull-back, for even if key central banks...

    0
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    Gavekal Research

    The Milton Friedman I Knew

    In the late 1970s, when beavering away at my own little research firm, I received a letter from a “senior research analyst” at the Hoover Institution, named Milton Friedman. In the letter Friedman wrote that he agreed with some of what I had written in a recent report, but other sections had problems. He had gotten the paper from one of my clients, and I’ll admit it sent me just a bit over the moon.

    1
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    Gavekal Research

    London Seminar — October 2016

    Charles Gave, Joyce Poon, Tom Miller and Anatole Kaletsky outlined their views on issues ranging from the end of the Pax Americana, global asset allocation in the face of increasingly ineffectual monetary policy, India's growth potential, and the imminent uncertainty for markets in the face of political risk.

    0
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    Gavekal Research

    What Next For Libor Rates?

    The Federal Reserve has not hiked rates this year, but that has not stopped funding cost for US companies and foreign banks from rising. While risk-free rates have barely budged, 3-month LIBOR is up 30bp YTD from 0.6% to 0.9%. This widening of short-term credit spread stems from (i) stress in Europe’s banking sector, and (ii) fund flows ahead of a regulatory overhaul of US “prime” money market funds, which took effect on Friday (see Ripples In...

    3
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    Gavekal Research

    The Strange Case Of The US Trade Deficit

    The last three years saw the US dollar move from being an undervalued currency to an overvalued one, and yet the US trade balance has barely budged. This contrasts sharply with past periods of dollar strength which produced huge US trade deficits that were a boon to global exporters, and also to financial markets which got a liquidity boost. The fear for emerging economies in particular is that this relationship has broken down and a reliable...

    3
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    Gavekal Research

    The Rising Odds Of A US Recession

    We are on recession watch after yesterday’s release of September’s NFIB small business optimism survey. It was not the headline number which got us worried—that ticked down from 94.4 to 94.1. Rather, it was the significant drop in the job openings component—from 30 to 24, or from a cyclical high to the lowest level in 15 months. This suggests that demand for US labor may be rolling over, which is concerning indeed.

    7
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    Gavekal Research

    The World's New Tax Haven

    In the aftermath of the 2008 financial crisis, there was a sense that the systemic failures it revealed would spark a radical overhaul of the global financial architecture. Eight years on, that has not happened: an exception is perhaps offshore finance. The US led the way with its Foreign Account Tax Compliance Act (FATCA), which targets US citizens with footloose money. A more ambitious initiative was launched in 2009 by the G20; it aimed for...

    3
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    Gavekal Research

    Audio & Transcript — Gavekal Research October Call

    Will Denyer presented a newly minted dynamic asset allocation tool which was developed from an ROIC-based framework that has helped us to better map and predict US economic cycles. He then answered listener questions on these themes.

    0
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    Gavekal Research

    Emerging From The Soft Patch

    Three weeks ago we asked whether the uniform weakness in US data—across manufacturing, services and home construction—signaled the start of a recession or merely a summer soft patch. At the time we concluded that what we were seeing was yet another soft patch. Thankfully, the latest round of data releases appears to confirm that conclusion, with the US economy now emerging from its summer doldrums.

    0
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    Gavekal Research

    Angela Merkel’s Catch 22

    Back in April, we pondered whether, with their negative interest rate policies, central bankers were showing themselves to be particularly incompetent by condemning commercial banks to years of unprofitability, or whether their greater design was to drive weaker banks to the wall to advance a consolidation of banking industries around the world under the umbrella of nationalization (see NIRP: Machiavellian Design Or Policy Mistake?). In other...

    5
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    Gavekal Research

    Wicksell's Guide To A Better Portfolio

    With the recent US economic data worryingly soft, and with no convincing drivers of earnings growth to be seen, how should investors position their portfolios? Will and KX set out their methodology for structuring a dynamic Wicksellian portfolio to generate superior returns at reduced levels of volatility, and determine the optimum allocation mix for the current troubled environment.

    7
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    Gavekal Research

    Singapore Seminar—September 2016

    Audio and video from the latest Gavekal seminar in Singapore is available here. Louis Gave explains why financial markets have recently behaved predictably, and why that is about to change. Andrew Batson explains why Chinese policy making is in a holding pattern until next year's party congress is settled. Udith Sikand explains why this year's emerging market outperformance is likely to continue, as bonds and especially equities have...

    0
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    Gavekal Research

    Will Low Volatility Get Trumped?

    As we enter the final stretch of the exhausting US electoral cycle, the single most important question confronting investors may well be whether the current low volatility environment for equities, bonds, and exchange rates is dependent on politicians or not. Clearly, with the VIX hovering around 12, and with volatility in exchange rates barely noticeable (see Forget Central Banks, Watch Foreign Exchange Volatility), financial market...

    0
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    Gavekal Research

    Debate: A Trump Win And The Dollar

    As the world seriously tunes into the US presidential election, four Gavekal partners debate the outlook for the US dollar should Donald Trump emerge victorious and set about his promised remaking of the international security order and global trading system.

    25
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    Gavekal Research

    Don’t Count On US Profits Riding To The Rescue

    A funny thing happened to US equities once the dust cleared after the late June sell-off that was sparked by the UK’s Brexit vote. As yields of most income earning assets fell on hopes of yet more central bank easing, equity investors discarded growth concerns and engineered a multiple expansion which drove the market to new vertigo-inducing highs (see Real Yields In The Driving Seat). The big question now is whether a profits boost can keep the...

    1
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    Gavekal Research

    Knowing Whether To Buy The Dip

    With all the current focus on the Federal Reserve and markets, it’s easy to overlook the increasingly ugly state of the underlying US economy. Throughout the long post-2009 recovery, when any one driver of US growth showed signs of stalling, the others continued ticking over nicely, which meant overall growth averaged out around 2%. Recent data releases signal that has now changed. Although none of our key indicators has shown a dramatic...

    4
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    Gavekal Research

    Watch Real Yields On Corporates

    There are increases in real rates, and there are increases in real rates. And by no means are they all equal in impact. In Tuesday’s Daily, Joyce and KX noted that global equity markets have been supported this year primarily by the world-wide decline in real bond yields. After bond markets approached over-bought territory over the summer, the sharp increase in real yields we have seen over the last couple of weeks naturally hit stock prices. If...

    0
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    Gavekal Research

    The End Of A Bubble?

    Ask three economists for the definition of a financial bubble, and you will be lucky to get fewer than four different answers. Even in our little shop, we like to make distinctions between bubbles in productive assets (US railroads, the internet, fiber optic cables, shale gas wells...) and bubbles in unproductive assets (gold, tulips, Japanese land, Florida condos…). We also like to make distinctions on how bubbles are financed: equity (good) or...

    2
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    Gavekal Research

    Post-Impeachment Brazil: Not For Beginners

    When it finally came, Dilma Rousseff’s ouster by impeachment on August 31 was, in the harsh language of markets, all in the price. The question for investors, who may have (profitably) ridden the rumor of her demise since January, is whether they should now sell the fact. A reason to stick with the trade is that after a severe recession, Brazil’s economy is stabilizing. Confidence levels have perked up and 2Q16 saw industrial output and...

    0
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    Gavekal Research

    Real Yields In The Driving Seat

    Notwithstanding yesterday’s bounce, the stock market is a nervous place just now. After riding a post-Brexit rebound that saw both the S&P 500 and the Nasdaq Composite scale record highs on minimal volatility, investors are increasingly wondering about the extent of the potential near term downside, not just in the US but around the world

    2
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    Gavekal Research

    Prepare For Hurricanes

    After months of contented lethargy, Friday’s big sell-off seemed to confirm the main points that Louis and I made in our conference call two days earlier. Firstly, the faith in “lower forever” bond yields is not a reason for reassurance, but a cause for concern. Secondly, political risks have not been eliminated by the summer’s market rally, merely ignored. Thirdly, what I call the “financial hurricane season” usually starts in early autumn—and...

    8
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    Gavekal Research

    The New Ineptocracy

    In times past, capitalist systems were organized on a simple premise. At the centre sat “money” as the medium to express all values. The primary operating dynamic of this system was that surplus money (savings) got channelled into economic activity, with a secondary effect that “unused”, or “left over”, money ended up in financial assets, usually equities, such that at times of great optimism a bull market resulted. After running for a year or...

    7
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    Gavekal Research

    Gavekal Research Monthly Conference Call — September 2016

    In the inaugural Gavekal Research monthly conference call, Louis, Anatole and Arthur addressed the global growth environment and offered asset allocation suggestions.

    0
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    Gavekal Research

    A Better G-20 Communiqué

    Another year, another G-20, another yawn. Though the group of the world’s 20 biggest economies was useful in the aftermath of the 2008 financial crisis, it has since degenerated into another global drawing room where leaders explain to one other how the world would be a better place if only it were a better place. This was a missed opportunity.

    1
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    Gavekal Research

    I Must Admit That I’m Confused

    Friday saw the release of US jobs market data for August which had investors convinced of a continued “not too hot, not too cold” outlook for the world’s largest economy. This is at odds with the view that I have held for a while; namely, that the US has been on the brink of recession or may have even entered one. This prognosis was based on a hopefully not insubstantial analytical foundation, which may be worth reviewing.

    3
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    Gavekal Research

    The Return Of US Fiscal Policy

    More than three years after the world fretted about the US economy falling off a “fiscal cliff”, there is suddenly much talk of government spending being used to gin up growth. Whatever their many differences, both Hillary Clinton and Donald Trump favour a fiscal expansion, with a focus on upgrading the US’s aging infrastructure stock. At the same time Federal Reserve officials, led by Janet Yellen and John Williams, are arguing for more fiscal...

    3
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    Gavekal Research

    The Fed’s Hawkish Stance

    For those who thought Janet Yellen a dyed-in-the-wool dove, her Jackson Hole speech on Friday gave pause as she endorsed fellow policymakers’ recent statements that the US economy was strong enough to warrant interest rate rises. Markets quickly adjusted. The implication for global asset markets is not altogether encouraging.

    0
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    Gavekal Research

    Video: Yield Chasing—What Could Go Wrong?

    Louis outlines his view on this summer's unusual global economy and offers investment advice going forward into autumn.

    0
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    Gavekal Research

    The Falling Natural Rate Is No Mystery

    As the high priests of global central banking congregate in Jackson Hole, much of the chatter ahead of the meeting has concentrated on the “mystifying” fall over recent years in the natural rate of interest, and possible reasons why it should have declined to such an extent. Having spent the last ten years attempting to apply the economic theories of the great 19th century Swedish economist Knut Wicksell, I have to say I am delighted with the...

    6
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    Gavekal Research

    The Next EM Yield Play?

    With global growth having stabilized and central banks remaining in super-easy mode, the dash for yield is making emerging markets ever more interesting. In recent months a number of our Hong Kong-based writers have advised investors to play this trend through bonds not equities, with Udith chiming in on Monday (see Indonesia: Bet On Stability Not Growth). The question for those who expect this “not too hot, not too cold” phase to persist is...

    7
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    Gavekal Research

    A Brexit-Induced Recantation

    Exactly two months have now passed since the Brexit referendum. It is now an appropriate time to review what has happened, and what hasn’t, since June 23. As a quintessential member of the elite that was angrily repudiated by a majority of British voters, this referendum was a profound emotional trauma. Therefore, my initial reaction turned out to be completely wrong.

    10
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    Gavekal Research

    Cheap For A Reason

    By most measures, US equities are not cheap. Yet many investors remain overweight, believing that in a world of ultra-low interest rates and negative bond yields, equity valuations should be higher because future cash flows are now discounted at a much lower rate than in the past. At first glance, the equity risk premium—the expected return on stocks over and above the risk-free rate—appears to support this belief. At more than one standard...

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