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E.g., 18-11-2017
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    Gavekal Research

    The US Investment Environment

    House Republicans put forward their tax reform bill and Jerome Powell was put up to replace Janet Yellen at the Federal Reserve. On the face of it, this all seems like good news for markets. US firms may soon get a permanent tax cut on domestic earnings and mostly keep Uncle Sam away from their foreign earnings, while the prospect of a Taylor-rule adjustment to interest rates has been dodged as Powell seems set to maintain a path of gradual...

    2
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    Gavekal Research

    Strategy Monthly: How Much Longer For Low Rates?

    For decades fixed income and equity markets have enjoyed a secular bull market, propelled higher by low real long term interest rates, depressed by a glut of global savings. In this Strategy Monthly, Will Denyer updates his Capital Provider Ratio, a powerful demographic tool which indicates that the growth of global excess savings has peaked, and that the glut will soon begin to dry up, with far-reaching consequences for global asset markets.

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    Gavekal Research

    Video: Demographics And The Savings Glut

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse.

    0
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    Gavekal Research

    The Savings Glut’s Long Life And Slow Death

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse. In this paper Will introduces a new measure, the Capital Providers Ratio, which relates the impending demographic shifts to the...

    22
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    Gavekal Research

    No Closer To Effective Tax Reform

    The much-anticipated US tax reform plan from “the big six” (officials from the administration, House and Senate) has landed. What a disappointment it is. The ball has barely been pushed forward at all. It thus seems unlikely the US will get major tax reform. And if it does, it is likely to be much less effective than the plans previously proposed by the House Republicans.

    9
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    Gavekal Research

    QT And The Treasury Quandary

    The Federal Reserve has confirmed that quantitative tightening will begin next month as it gradually lowers its holding of treasuries and mortgage-backed securities. For investors, the question is whether they should “fight the Fed” by owning assets that are now out of favor with the central bank. I would argue that such a formulation is wrong and these are good times to be mitigating risk by picking up treasuries, probably of shorter duration.

    7
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    Gavekal Research

    What Next From Washington?

    Despite all the bickering in Washington, kicking cans is still a bipartisan sport. Yesterday, President Donald Trump sided with the Democrats in a deal to temporarily raise the debt limit and fund the government for three more months. Republican leaders wanted to kick the can further down the road, but will accept the president’s lead. With the issue temporarily parked, Trump jumped on Air Force One and in North Dakota today he is expected to...

    0
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    Gavekal Research

    Good News At The NIPA Coal Face

    The so-called NIPA data (national income and product accounts) offers a cleansed account of US profitability as the effects of inflation and currency moves are stripped out. Thus, while nominal profits reported by S&P 500 companies have rebounded since early 2016, no such signal has emerged from the NIPA numbers—until now. This matters as in late-cycle situations it is common for my preferred inflation-adjusted version of NIPA profits to...

    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 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

    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

    The Payrolls Paradox: Tight Labor But Weak Wage Growth

    As usual the market focused closely on the headline number in last Friday’s employment report, which saw non-farm payrolls come in at a stronger than expected 220,000 in June. As usual, we caution against reading too much into any one month’s figures, for the reasons Anatole has explained so elegantly (see Beyond The March Payrolls Soft Patch). Instead we prefer to take a step back and to attempt to answer the two big questions currently hanging...

    5
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    Gavekal Research

    What Could Turn Around The US Business Cycle? Hint: Not Much

    As often happens, US data is sending mixed messages. Yesterday’s ADP report showed weak job growth in June, despite the latest ISM service sector PMI being decidedly perky. Investing according to the latest high-frequency growth data is a good way to get whiplash. Instead, let’s take a step back and review the US economy’s overall positioning.

    0
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    Gavekal Research

    Not Getting Paid To Take Credit Risk

    When things cannot get any better, they rarely do. Credit spreads for both high-yield and investment-grade corporate bonds are back near lows last seen just before the onset of previous financial busts. Will the calm soon give way to another perfect storm? Worryingly, corporate fundamentals are already deteriorating.

    3
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    Gavekal Research

    The Fed's Balance Sheet Contraction

    As universally expected, the Federal Reserve raised interest rates by another 25bp yesterday. It also published details about its plan to start shrinking its balance sheet before the end of this year. While this too was widely expected, there remain plenty of questions about how the markets will respond. With no precedents for the Fed’s impending move to contract its bloated balance sheet, no one can be entirely confident how the market will...

    0
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    Gavekal Research

    Policy & Productivity: How To Make America Great Again

    A critical and much-debated question about the US economy is whether it is permanently stuck in a “new normal” of 2-2.5% annual growth—about a point below the 3.2% average growth rate in 1970-2000—or if it can regain its previous luster. Will assesses arguments from both the upbeat techno-optimists and the grizzled growth skeptics and updates his own view based on US policymaking in the age of Trump.

    5
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    Gavekal Research

    Still No Real Recovery In US Profits

    After a very strong corporate earnings season, Friday delivered the first estimate of profits as tallied by the US national income and product accounts, or NIPA. Unfortunately, the NIPA data pours cold water over the notion that the US is seeing a real, widespread recovery in profitability. The nonfinancial corporate sector of the US economy (not exactly a niche segment) is experiencing nothing of the sort. Instead, real profitability continues...

    4
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    Gavekal Research

    What The Fed Really, Really Means

    The Federal Open Market Committee has fired the starting gun on its plan to start shrinking the US central bank’s balance sheet before the year is out. The language was coy, but indicated a consensus that outright contraction will start so long as the trajectory of growth and the key policy interest rate matches the committee’s expectations.

    2
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    Gavekal Research

    Strategy Monthly: Global Goldilocks And The Two Bears

    Markets seem convinced that a Global Goldilocks scenario of “just right” growth and rising corporate earnings is unfolding. This is plausible, but a careful review of the US economy suggests that two far more bearish outcomes are also possible. Will Denyer reviews the case for all three scenarios and recommends reducing risk exposure, especially in the US.

    0
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    Gavekal Research

    Taxing Times In The US

    The big news this week is the lack of news. Tectonic changes—that inspired both hope and fear—now look less likely to materialize. The first round result in France’s presidential election suggests that the centrist, pro-euro Emmanuel Macron will be the next head of state, rather than the disruptive Marine Le Pen—no révolution in Europe. Then yesterday Donald Trump revealed his much anticipated tax plan. It only served to show how little progress...

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