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    Gavekal Research

    On The Brink Of Recession

    Full steam ahead, then? Friday’s release of the first GDP estimate for 3Q16 headline showed US growth rising to an annualized 2.9%, up from 1.4% in 2Q and 0.8% in 1Q. On the face of it, this reading points to the US economy emerging from yet another soft patch, and so backing away from the recession frontier. Not so fast. A close look at the underlying components of the GDP report reveals the US as being perilously close to that threshold.

    4
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    Gavekal Research

    The End Of The Goldilocks Scenario?

    Over the last seven years global investors have benefited greatly from a combination of moderate growth and non-threatening inflation, allowing for constantly loose monetary policy. Yet for the US, we are increasingly concerned that, one way or another, this “Goldilocks scenario” is about to come to an end. Here’s why:

    4
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    Gavekal Research

    What Next For Libor Rates?

    The Federal Reserve has not hiked rates this year, but that has not stopped funding cost for US companies and foreign banks from rising. While risk-free rates have barely budged, 3-month LIBOR is up 30bp YTD from 0.6% to 0.9%. This widening of short-term credit spread stems from (i) stress in Europe’s banking sector, and (ii) fund flows ahead of a regulatory overhaul of US “prime” money market funds, which took effect on Friday (see Ripples In...

    3
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    Gavekal Research

    The Rising Odds Of A US Recession

    We are on recession watch after yesterday’s release of September’s NFIB small business optimism survey. It was not the headline number which got us worried—that ticked down from 94.4 to 94.1. Rather, it was the significant drop in the job openings component—from 30 to 24, or from a cyclical high to the lowest level in 15 months. This suggests that demand for US labor may be rolling over, which is concerning indeed.

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    Gavekal Research

    Emerging From The Soft Patch

    Three weeks ago we asked whether the uniform weakness in US data—across manufacturing, services and home construction—signaled the start of a recession or merely a summer soft patch. At the time we concluded that what we were seeing was yet another soft patch. Thankfully, the latest round of data releases appears to confirm that conclusion, with the US economy now emerging from its summer doldrums.

    0
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    Gavekal Research

    Knowing Whether To Buy The Dip

    With all the current focus on the Federal Reserve and markets, it’s easy to overlook the increasingly ugly state of the underlying US economy. Throughout the long post-2009 recovery, when any one driver of US growth showed signs of stalling, the others continued ticking over nicely, which meant overall growth averaged out around 2%. Recent data releases signal that has now changed. Although none of our key indicators has shown a dramatic...

    4
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    Gavekal Research

    Risk On? Maybe Not

    Equity and oil prices have rallied in true risk-on fashion since the February 11 market trough, and are now back near their highs of late last year. Given this apparent rebound in risk appetite, one might have expected US government bonds to sell off in equally dramatic fashion, with yields climbing back to the 2.2-2.3% levels seen at the end of last year. Instead, there has been no rebound at all. Today, 10-year treasuries yield 1.75%, much the...

    0
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    Gavekal Research

    Rebalance Away From US Equities

    Yesterday the S&P 500 closed at a year-to-date high of 2,094, up 14.5% from its February 11 low. Now comes the real test of investor confidence. At its current level the index is just 1.7% below its all-time high, set on May 21 last year. Since then the market has tried and failed on four occasions to surpass that level, in June and July, and then following the summer’s sell-off, in November and December. With the market apparently poised...

    0
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    Gavekal Research

    Returns On Capital Are Deteriorating

    The rate of return on capital invested in the US has taken another step down. While not terribly surprising, this does bring the world’s largest economy one step closer to the next recession and a full-scale bear market. Nevertheless, the day of reckoning remains some way off; the current cycle is not about to reach the end of its road just yet.

    0
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    Gavekal Research

    US Housing: From Great To Good

    The US housing recovery properly kickedoff in 2011 as a confluence of benign factors converged to favor the sector. Yet while housing continues to provide a much-needed positive contribution to US economic growth, recent data points to reduced momentum. After a weak January, homes sales for February, released yesterday, ticked a little higher. Yet over the last year, sales have been choppy and generally flat. The NAHB index also shows...

    2
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    Gavekal Research

    Back To Climbing The Wall Of Worry

    Just three weeks ago markets were in full-blown panic mode. The S&P 500 was down -10% YTD, 10-year treasury yields were down to just 1.6%, and credit spreads were close to their cyclical highs. Dark clouds seemed to be rolling in on every front—from China, Brazil, Europe, banks, and the energy sector, all compounded by fears the Federal Reserve had made a grievous policy error. Since then, the skies haven’t exactly cleared, yet the S&P...

    0
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    Gavekal Research

    No More Curve To Roll Down

    Since the Bank of Japan introduced a negative deposit rate on January 30, Japanese bank shares have collapsed, falling -21% in yen terms and -15% in US dollars. The first question to ask is this: why were Japanese bank shares derated so dramatically after the policy change? Here are a few explanations, which are not mutually exclusive:

    4
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    Gavekal Research

    Deflation Deferred

    In the context of weak earnings, weak growth and weak inflation numbers, Beijing delivers another blow to confidence by devaluing its currency. Markets swiftly drive down the prices of equities, commodities and high-risk bonds. Anyone still expecting the US Federal Reserve to follow through with rate hikes must be completely out-of-touch with reality...

    2
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    Gavekal Research

    Keep Calm And Rebalance Into Equities

    The investment environment has not fundamentally changed since December. Then as now, the situation neither justifies being “all in” nor “all out”. Since the economic situation is worsening, a balanced portfolio of some type makes sense—unless there's evidence of a looming US recession. In my view, that time has not yet come.

    3
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    Gavekal Research

    US Risks

    While China grabs the headlines (Trading halted before 10am after a quick -7% drop, renminbi devaluation fears at fever pitch!...), we will leave those issues for a later report and focus on a question that looms larger for most investors: what is happening in the US economy, and what are the key risks facing the world’s biggest market in 2016?

    0
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    Gavekal Research

    The Shudder In US Credit

    As oil prices tumble and the first US interest rate hike for eight years comes into view, bond investors in the high-yield segment are taking flight. The market was given a foretaste of what a disorderly unwinding of an over-bought US corporate bond market may look like late last week, when two high-yield bond funds suspended redemptions. The worry is that these tremors become an earthquake, making it more costly for all companies to refinance...

    4
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    Gavekal Research

    What To Make Of Wider Credit Spreads

    US credit spreads are ticking up again, driving the Merrill Lynch US high yield index below its early October low yesterday and bringing total returns for the year to date to -3.4%. This renewed widening of spreads raises some important questions for asset allocators and economy watchers. Has the bond market got itself into an unwarranted flap, providing investors with a good opportunity to lock in some elevated yields? Or has the corporate debt...

    0
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    Gavekal Research

    The Squeeze On US Profits

    Forget yesterday’s upward revision in US third quarter GDP growth from 1.5% to 2.1%. The real news was the release of top-down domestic corporate profit data—and it was much less encouraging. Here is what we learned:

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    Gavekal Research

    The US Inventory Problem

    The US business inventory-to-sales ratio (in real terms) is one of our key recession indicators. We have been uneasy ever since it broke to a new cyclical high in May. Since then it has continued to inch higher, and in September, the latest data-point available for the total business sector, it reached a level typically seen only in recessions. Even more worrying, the rise in the inventory-to-sales ratio cannot be blamed on the travails of the...

    0
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    Gavekal Research

    The Fed’s Opportunity For Lift Off

    There are many problems in the world today, but too-high a cost of capital is not among them. This is not going to change if the Federal Reserve hikes short rates by a quarter of a percent this week, or in December. We have no particular insight as to when the Fed will make its move, but there are good reasons for it pull back on the “lift off” lever before the end of the year. Recent ructions in global markets are not likely to deter Janet...

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