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E.g., 16-10-2018
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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.

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