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  • Gavekal Research

    The Myth Of Secular Stagnation

    When the European Central Bank meets today, discussion will center on whether it should expand quantitative easing in an attempt to stave off deflation and support the eurozone’s painfully slow growth. In Japan too, talk is about whether the Bank of Japan needs to step up its stimulus efforts. And in the US, the Federal Reserve last month decided to delay calling an end to its own zero interest rate policy amid evidence that US growth is in...

    1
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    Gavekal Research

    The Dollar, Deflation And US Equities

    Is the threat of US deflation really receding? Far from it—for a large segment of the US stock market deflationary pressure is set to intensify, rather than abate, over the coming months. Sure, data for September released yesterday showed an uptick in core inflation (ex-energy and food) to 1.9% from 1.8%, raising expectations that that overall US consumer prices are poised for a moderate uptrend driven largely by housing and healthcare costs....

    1
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    Gavekal Research

    The Financing Gap, Creative Accounting And US Recessions

    The pithy aphorism that there are “lies, damned lies and statistics” is attributed to Benjamin Disraeli. Having spent the better part of my adult life torturing data to prove points, I would certainly agree. But in my view, the British Prime Minister missed a beat, for surely the most predictable form of officially sanctioned lying is the type overseen by accountants.

    0
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    Gavekal Research

    Positioning For A US Recession

    Since the end of last year I have been worried about an “unexpected” slow-down, or even recession, in the world’s developed economies. In order to monitor the situation on a daily basis, I built a new indicator of US economic activity which contains 17 components ranging from lumber prices and high-yield bond spreads to the inventory-to-sales ratio.

    0
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    Gavekal Research

    I Know, I Know...

    ...the US economy is doing fine and after the longest run up in history, may be on the verge of achieving take-off velocity. So why am I so worried? The problem is that my US recession indicator has entered negative territory, after literally collapsing in the last 6 months. Today I will try and explain my concerns about the US, when all others seem fixated by China. It should be acknowledged that since about 2002 the US economy has been managed...

    3
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    Gavekal Research

    Termaillage And The Renminbi

    For years I have felt like a lone voice in the wilderness, monitoring central bank reserves as an important determining factor of what I loosely call “international liquidity”. Suddenly I’ve got company. In the last few weeks everyone has been focusing on the topic, and “experts” by the dozen have penned reports about it. Naturally, I’ve read everything that has passed across my screen, and—sad to say—I’m appalled by the results: an egregious...

    0
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    Gavekal Research

    What To Do With US Bonds

    Given the recent turmoil in financial markets and an intensifying focus on the Federal Reserve’s forthcoming policy decision, it seems a good time to update readers on our thinking about the proper positioning of a US fixed income portfolio. As a starting point, it is worth restating the two main determining factors that influence the yields on longer-dated treasuries.

    0
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    Gavekal Research

    The World Monetary Base And The Dollar

    If the supply of US dollars is declining then, all else being equal, the value of the dollar should rise, and vice versa. This truism can be checked by comparing the annual growth rate of the “world monetary base” with changes in the JP Morgan trade weighted dollar. Regular readers will recall that the WMB is simply the sum of the US monetary base and foreign exchange reserves deposited at the Federal Reserve for the account of foreign central...

    12
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    Gavekal Research

    Surviving The Bear Market

    Never mind whether investors in US equities should buy the dip. The question now is whether a six year bull market is yielding to a bear market. Bears are stealthy animals that tend to creep up unannounced. I have had the nagging suspicion for a while that we were approaching grizzly territory and have been recommending an increasingly conservative portfolio positioning (see Protect And Survive). However, the core of my investment philosophy...

    13
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    Gavekal Research

    Three Ugly Charts

    I would never claim to be an accomplished technical analyst, but I do know how to use a ruler when looking at charts of prices in the markets.

    5
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    Gavekal Research

    The Signal In Silver (Part II)

    Last year I came up with a chart (shown below) that I found rather intriguing. It showed that on every occasion in the last 100 years when the price of silver dropped more than 25% year-on-year, consumer price inflation in the US took a nose-dive soon afterwards.

    5
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    Gavekal Research

    The Purpose Of The Stock Market

    When you’ve been around for as long as I have, you can’t help but come to a few conclusions—most of them unhappy. My first conclusion is that the stock market was invented to make as many people as possible as miserable as possible for as much of the time as possible. In this sense the stock market is a roaring success.

    5
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    Gavekal Research

    Go Ugly Early

    I fully recognize that most readers face huge regulatory and commercial constraints in the way they manage their portfolios. Nevertheless I have always believed that, as far as possible, the best starting point for effective portfolio construction is to imagine oneself marooned on a Pacific island, free from the constraints of legacy and the expectations of others.

    0
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    Gavekal Research

    Europe’s Debt-Deflation Dynamic

    Amid all the talk of contagion and demonstration effects emanating from Athens, there is a straight forward question that concerns investors whose domain spreads beyond the lapping shores of the Mediterranean: is the Greek crisis, at its root, inflationary or deflationary? Given talk of new currencies being launched, the obvious fear concerns inflation. I would demur and suggest that a deflationary shock is unfolding. This matters especially for...

    3
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    Gavekal Research

    Germany Is The Real Risk

    As the Greek crisis apparently reaches its climax it strikes me as odd that the default response is to seek refuge in “safe” German assets. If, as appears quite likely, the flawed euro-system really is heading into the next phase of its denouement, then German assets are the soft underbelly of the system, and they are likely to suffer most. Here is why:

    13
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    Gavekal Research

    Protect And Survive

    Bond yields keep rising, emerging markets are softening and key cyclical stocks have taken a bath. The more I look at the global situation the more I am convinced that both economies and markets are reaching a point of transition. And as that old sage Yogi Berra said: “When you come to a fork in the road, take it!”

    3
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    Gavekal Research

    Towards A US Recession?

    Yesterday the Federal Reserve minutes showed policymakers to be nervous about the outlook for US growth, and so more likely to extend the zero interest rate policy. I would, of course, argue that this is to confuse cause and effect, as US economic weakness in fact stems directly from ZIRP (see The Untimely Demise Of US Productivity). But what concerns me today is less whether a quarter point rise in policy rates happens next month or in...

    10
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    Gavekal Research

    Bull Market, What Bull Market?

    Underweighting US equities has become a consensual position and yet the market continues to flirt with new highs. So what gives? My approach has always been to rely on decision rules built on historical data analysis. When enough of these rules signal a “buy” or “sell”, I make a move (for a good example of this approach see Managing Equities In A Strong Dollar World). My esteemed colleague Anatole has been arguing for a while that the S&P500...

    4
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    Gavekal Research

    When Bond Markets Become Silly

    Investors are understandably spooked by recent bond market ructions given a backdrop of weakening growth in major economies, and continued accommodative central bank policy. Francois argued yesterday that this “tantrum” was partly technical, but also the result of markets looking through to higher inflation expectations due to an apparently better economic outlook (see Tantrum II And European Portfolios). I agree with him that markets are being...

    2
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    Gavekal Research

    A Post-Volatility World

    These are words that I utter with the utmost caution—this time, it really is different. I refer not to central bankers’ scurrilous efforts at monetary debasement, nor the spineless diplomacy of European political leaders, or even the cult of celebrity in the age of social media. In some guise, we have seen all of this before. No, dear reader, for something genuinely new to the modern experience, consider the right hand side of the chart below...

    3
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