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    Gavekal Research

    Is The US Equity Market Overvalued?

    After the S&P 500 index set a new record closing high last Wednesday, up some 6% since the US presidential election, I am left once again scratching my head over the age-old question: is the US equity market expensive or cheap?

    4
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    Gavekal Research

    The Dollar Surge Continues, For Now

    Louis likes to say that the foreign exchange market is a serial monogamist. At any one time, the market is faithful to a single idea. The trouble is that at any moment it is liable to switch the object of its affections. Right now the foreign exchange market is clearly still smitten by the Trumpflation trade. Following the US Federal Reserve’s decision earlier this week to raise interest rates, yesterday the US currency’s DXY index climbed to...

    2
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    Gavekal Research

    The Post-Fed Risk Of Sector Rotation

    As expected, the US Federal Reserve went ahead and raised its benchmark interest rate by 25bp yesterday. Less widely expected was the positive tone of the Fed’s comments on the economic outlook, and its slightly more hawkish view on the trajectory of rates, with policymakers now projecting three rate increases next year rather than two. Fed chair Janet Yellen described the changes as “tiny”. But the market reaction—10-year treasury yields rose...

    0
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    Gavekal Research

    Call Me An Old Curmudgeon

    Call me an old curmudgeon, but financial markets are currently experiencing an outbreak of optimism that could well prove to be dangerous. At the moment we have a situation where both the US stock market and long rates are rising on expectations of faster nominal growth. Readers who have followed my Wicksellian research are no doubt scratching their heads over this concurrent move, because they will appreciate that there is no prospect of...

    2
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    Gavekal Research

    Our 2016 Holiday Reading List

    “All books are divisible into two classes,” said John Ruskin, “the books of the hour, and the books of all time.” This year’s list of works enjoyed by Gavekal staff in 2016 includes books from both categories; among them are an account of Russian nationalism, an examination of the sharing economy, and a look at the future of Japan. Happy reading.

    2
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    Gavekal Dragonomics

    Grand Bargain Or Grand Conflict With The US?

    For more than two centuries, China-US relations have swung back and forth between high expectations and dashed hopes. Today the stakes are higher than ever, as Beijing seeks to carve out a sphere of influence and Washington struggles to craft a response. And where the relationship is headed under a volatile President Trump is anyone’s guess.

    0
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    Gavekal Dragonomics

    CEQ: Xi Jinping’s China

    2017 will be a very political year for China. The short-term priority is a smooth economic run-up to the Communist Party Congress, when Xi Jinping will strengthen his grip on power. In the long term, questions are growing as to whether the Party is flexible enough to govern a dynamic society. This issue of CEQ assesses China’s political future.

    0
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    Gavekal Research

    The Unsustainable Oil Price Spike

    It took a while, but the spike in the oil price expected at the end of November finally occurred this morning in Asia, when front-month Brent crude futures briefly hit US$57.89/bbl, up from US$54.33/bbl on Friday. The jump higher was triggered by news over the weekend that a handful of major non-Opec producers led by Russia have agreed to cut their output by 558,000 barrels per day on top of the 1.2mn b/d reduction announced by Opec at the end...

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research December Call

    Louis and Anatole outlined their views on the new investment environment. Louis focused on the apparent contradictions in investors’ reaction to Donald Trump’s win in the US presidential election. Anatole argued that the US has almost certainly transitioned to a more inflationary growth path, but said it would be a slow build-up.

    0
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    Gavekal Research

    Cash Repatriation Won’t Trigger A New Buyback Boom

    With the incoming US administration promising big tax breaks on the repatriation of corporate cash piles held overseas, Wall Street is confidently predicting a renewed equity market buyback boom in 2017. On first hearing, this sounds like a reasonable expectation. For one thing, in recent years US companies have consistently chosen to plough their retained earnings—and a sizable amount of debt—into share buybacks, rather than into investment in...

    0
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    Gavekal Research

    Assessing EMs Vulnerability To The Trump Trade

    Emerging markets have faced selling pressure since Donald Trump’s US presidential election win started to drive treasury yields higher. EM debt funds saw their largest ever outflow the week after the election, while currencies have fallen on fears of trade protectionism and more talk of the US dollar being primed for a 1980s-style super-spike. Given this basket of worries, Joyce revisits her “emerging market relative balance sheet vulnerability...

    0
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    Gavekal Research

    How Bad Is The Dollar Squeeze?

    This has not been your regular dollar squeeze. Over the last month, the cost of obtaining US dollars offshore has soared to levels last seen in “crisis” periods, yet bank equities have rallied the most in six years. Rather than a new crisis unfolding, we seem to be transitioning to a macro environment where dollars are structurally scarce. This will be challenging for weak link economies, as shown yesterday by adverse market moves in Brazil and...

    2
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    Gavekal Research

    Only The Start Of The Trumpflation Trade

    Three weeks after the US presidential election, and it looks as though the Trumpflation trade may be running out of puff. Far from it, argues Anatole. With US policy about to swing from monetarist to Keynesian, markets are only at the start of a long term bear market in bonds and a bull market in the US dollar that will have enormous repercussions on asset prices around the world.

    2
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    Gavekal Research

    Something's Gotta Give

    Louis Gave held a conference call on December 6 where he discussed the state of global markets as the US gets ready for a Trump presidency. The fundamental challenge for investors is that while equities and the US dollar have rallied strongly and bonds have sold off in a “Trump reflation trade,” it is not clear how long that trade can withstand the reality of Trump’s economic program.

    0
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    Gavekal Research

    The Gavekal Monthly: Preparing For The Trumped-Up Economy

    Markets have been on a startling trajectory since Donald Trump upended investors’ assumptions with his win in the US presidential election. In this issue of the Monthly two Gavekal partners ask whether the macro environment really has fundamentally shifted due to the emerging policy platform of the president-elect.

    0
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    Gavekal Research

    A Wicksellian Spread Update

    US economic growth and corporate profits both rebounded in the third quarter. Yesterday the Bureau of Economic Analysis revised its number for 3Q16 growth in gross domestic product up from 2.9% to 3.2% year-on-year. At the same time the BEA also released its first estimate of 3Q corporate profits, which at first glance also looked positive. For example, profits in the domestic non-financial sector jumped by an annualized 24% in 3Q, after falling...

    0
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    Gavekal Research

    Risk-On And The Rising US Dollar

    Inflation is when the haircut that used to cost you US$20 back when you had hair now costs you US$30. Looking at recent market moves, it seems that investors are increasingly pricing in, and even welcoming, a higher rate of US inflation. In a world in which deflation is a problem, currency depreciations such as those we have just witnessed (whether of the yen, the euro, the renminbi etc.) are bad news, for they accentuate deflationary pressures...

    1
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    Gavekal Research

    Investing By The (Wicksellian) Book

    As regular readers will know, I have spent much of the last 10 years studying, and attempting to enlarge upon, the work of the great 19th century Swedish economist Knut Wicksell. My mission has been two-fold: firstly to understand how Wicksell’s writings explain what we see happening in the global economy today, and secondly to translate his theories into practical tools to help investors make asset allocation decisions in the real world.

    3
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    Gavekal Research

    A Cautionary Note On US Housing

    After months of anemic activity, US homebuilding picked up in October. This is a welcome development, given that residential construction is a key leading indicator for the overall economy, and that lately it has been close to sending a recession signal (see On The Brink Of Recession). However, the magnitude of the improvement should not be overstated. While housing starts did post the biggest monthly increase since 1982, this is a volatile...

    0
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    Gavekal Research

    Hong Kong Seminar — November 2016

    Arthur Kroeber presented his thoughts on the outcome of the US election, as well as an analysis of China's leadership politics. Will Denyer presented his thoughts on the US economy. Tom Miller gave an optimistic take on reforms in India under Modi's government.

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