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    Gavekal Research

    Longer For A Reason

    Could this be the US economic expansion without end? Almost certainly not, but it is starting to break some serious records for longevity. Yet as the expansion gets longer in the tooth, the obvious question is whether it simply withers due to old age. Like Janet Yellen, KX is suspicious of such a deterministic arguments and in this piece says there are very good reasons for economic cycles to be getting longer.

    2
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    Gavekal Research

    Don’t Sweat An Impeachment

    After weeks of ignoring ever wackier White House shenanigans, investors yesterday focused on US political risk. The revelation of memos that seem to offer prima facie evidence of the president obstructing justice means the chance of an impeachment has jumped from improbable to possible. As the government’s investigative machinery cranked up a notch yesterday, US equities experienced their worst day since last September and treasury yields fell...

    2
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    Gavekal Research

    The Headwinds To US Housebuilding

    US home prices are on the up, having climbed 6% over the 12 months to February. Yet housebuilding has failed to keep pace with the rise in prices. Although construction has made a positive contribution to GDP growth over the last couple of quarters, activity has built from a very low base. Housing starts in March were an annualized 1.215mn, with a consensus forecast for April of 1.25mn. Both figures are well below the long term pre-crisis US...

    2
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    Gavekal Research

    Behind Weak US Wage Growth

    After seven steady years of decline, the US unemployment rate fell further in April to a 10-year low of 4.4%—the same as in May 2007 immediately before the onset of the credit crunch. At the same time, the number of job openings has exceeded its 2001 high, emphasizing the increasing tightness of the US labor market. Yet despite this tightening, increases in wage growth have been remarkably modest for this late stage of the cycle.

    8
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    Gavekal Research

    Don’t Bet On Another Bond Bubble

    Recent days have not been good for US treasury bears betting on higher yields. First, Donald Trump’s much hyped tax reform plan proved thin on detail and lacking in credibility. Then Friday’s weak US GDP release for 1Q17 showed an economy facing a notable softening in consumption demand. The one factor offering succor to treasury shorts has been reduced political risk in Europe after a centrist made it through to the second round of France’s...

    0
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    Gavekal Research

    Watch US Money Supply Growth

    Every US recession in the last 50 years has been preceded by a steep fall in true money supply growth, or an outright contraction. So it is worrying that true money supply growth has recently slumped to its lowest since 2008. In this paper KX investigates whether we could be witnessing a false signal, and finds few reasons to be cheerful.

    13
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    Gavekal Research

    US Auto Sales Hit Their Speed Limit

    US auto sales leveled off 18 months ago, and growth has been stalled ever since. Now with interest rates rising and lenders tightening standards on auto loans, KX sees additional reasons to believe that sales have reached their speed limit. Happily, the problems are largely sector-specific, not indicative of general weakness in US consumer demand.

    0
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    Gavekal Research

    After The Health Care Reform Failure

    The Republican drive to repeal and replace Obamacare failed ignominiously on Friday. Together, President Donald Trump and House Speaker Paul Ryan were unable to muster enough support to pass the new health care bill through the House of Representatives. Bowing to reality, they pulled the vote. If there is a positive element to this failure, it is that both the administration and Congress will now shift their focus to tax reform. However, the...

    2
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    Gavekal Research

    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

    0
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    Gavekal Research

    Don’t Bet on US Manufacturing

    The Federal Reserve seems convinced that strong survey readings point to a strengthening US economy that is becoming self-sustaining. This is the reason that investors are betting with increasing confidence on a series of interest rate increases this year. KX is not convinced that such assumptions are built on solid ground.

    0
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    Gavekal Research

    Calling Time On Bank Outperformance

    Tomorrow Donald Trump is scheduled to address a joint session of the US Congress. Although expected to be long on characteristic bombast, the president’s speech is likely to be short on hard details about his core policies. That shouldn’t be too surprising. Drawing up tax reform and infrastructure spending plans and squaring them away with the Republican majority in Congress will take many months. However, without concrete information to sustain...

    0
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    Gavekal Research

    Are Border Adjustments Protectionist?

    The introduction of border adjustments into the US tax code is by far the most controversial part of the House Republicans’ “blueprint” for tax reform—with good reason. This reform alone would be a game-changer, with many winners and losers. This is why, like all major tax reforms, it faces an uphill battle to become law, and why it may never happen. But the same was said of a Donald Trump presidency, and of Brexit. So, investors still need to...

    5
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    Gavekal Research

    US Inflation: The End Of The Affair

    If there is one consensus view about US markets it is that inflation is ticking up, a tightening cycle is underway and the dollar will again rise. As markets are made at the margin, any hit to these beliefs could push investors into a sharp repositioning. Within Gavekal there is disagreement on this score, with Anatole arguing that US inflation and bond yields are on an upward trend, Charles taking the opposite view and Louis stating that US...

    0
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    Gavekal Research

    Less Than It Seems: US Financial Deregulation

    US bank stocks rallied strongly on Friday on Donald Trump’s promise to tear up much of the Dodd-Frank 2010 financial regulation act. But steering a new act through Congress will not be easy. And while proposals now on the table greatly simplify the existing rules, they do not amount to the wholesale easing of regulations that would be needed to drive a rapid acceleration of bank lending.

    0
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    Gavekal Research

    Border Tax Adjustments In Context

    US president Donald Trump moved a step closer to realizing his “America first” trade policy yesterday, promising a 20% tax on imports from Mexico. However, rather than an outright tariff on imports, it is looking increasingly likely that the new levy will come in the form of a border tax adjustment, as envisaged by the House Republican majority as part of a wider US tax reform program. In theory, border tax adjustments should be trade-neutral,...

    2
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    Gavekal Research

    Do We Need To Worry About The Shrinking US Monetary Base?

    The US monetary base is shrinking, and with Fed officials talking about winding down their bond holdings, it is only natural for equity investors to be concerned. However, as KX explains, the contraction in base money is a technical effect of recent regulatory changes, and the Fed is not yet running down its assets.

    0
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    Gavekal Research

    Tax Reform And The Dollar: It’s Not So Straightforward

    Tax reform is high on the agenda both for US president-elect Donald Trump and for the new session of Congress that began earlier this month. Among the reform proposals that could most affect investors are those advanced by the House Republicans, which many commentators have argued could cause a substantial exchange rate appreciation of the US dollar. In theory—all else being equal—this would be true. But our examination of current exchange rate...

    7
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    Gavekal Research

    The US Equity Dilemma

    On the first trading day of the year, we learnt that the Trump trade remains very much alive. The S&P 500 rose 0.8%, 10-year treasury yields inched up 1.3bp and the DXY US dollar index climbed 0.4%. While investors seem focused on the positive ramifications of a Donald Trump presidency, the year ahead is full of uncertainty—with changes in store for fiscal, monetary, regulatory and trade policies, all of which will occur in the context of a...

    0
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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

    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...

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