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    Gavekal Research

    Keeping It Simple

    Three prices have a disproportionate impact on global financial prices: the oil price, the price of the US dollar, and US interest rates. Often the rest is just noise. In the long term, it is shifts in these three prices that drive economic cycles and determine the performance of almost any investment strategy. Take this year as an example. The investment environment has been dominated by:

    1
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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...

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    Gavekal Research

    Small Caps, Big Caps And US Corporate Spreads

    The performance of large-capitalization US stocks relative to small caps is sending an important signal about US corporate yield spreads. In this short piece, Charles decodes the message, and advises corporate bond investors to begin seeking safety in treasuries.

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    Gavekal Research

    Mind The (Output) Gap

    The US economy is offering up conflicting signals. Recent manufacturing survey data has been soft, auto sales have slowed and the rate of job creation has markedly reduced. At the same time, inflation expectations have dipped after their bolt upwards earlier this year. Yet, redirect the gaze and the same US economy shows distinct signs of waddling towards a late cycle denouement with the labor market, in particular, looking tight. Put another...

    2
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    Gavekal Research

    Audio & Transcript — Gavekal Research June Call

    Anatole Kaletsky responded to the British Conservative Party’s shock loss of their electoral majority by arguing that the UK is now likely to end up with a soft Brexit and may even end up rejoining the European Union. Louis Gave looked across recent market moves and argued that the case for emerging markets remains exceptionally strong.

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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.

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    Gavekal Research

    Figuring Out Where The Ball Will Be

    Rugby players fall into one of two categories: the forwards, who typically go where the ball is (and in the process put their heads in places most sane people wouldn’t put their feet), and the backs, who try to go where the ball will be, which enables them to look good and keep their kit clean, but earns them the scorn of the forwards. Peter FitzSimons, the first Aussie to play for a French club (Brive), once remarked: “Come the revolution, the...

    2
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    Gavekal Research

    Getting By Without Friends

    After a week spent in Europe antagonizing fellow democratic leaders, conspicuously failing to reaffirm the US’s commitment to defend its NATO allies, and driving Angela Merkel into an uncharacteristically histrionic speech about Europe’s need to go it alone on security policy, Trump came home and announced he is pulling the US out of the Paris Agreement on climate change.

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    Gavekal Research

    Strategy Monthly: Building A Globally Diversified Portfolio

    Successful money management is more about avoiding losers than picking winners. The winners of the last decade have mainly been large-cap US equities; this increases the odds that they will underperform in coming years. In this edition of the Strategy Monthly Louis Gave recommends a rotation into eurozone equities, and EM stocks and yield plays (especially in Asia).

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    Gavekal Research

    My Whole Career In One Chart

    My career in financial markets started in January 1971, half a year before Richard Nixon changed the basis of the post-WWII financial order by ending gold convertibility for US dollars. Hence, I thought that readers may be interested in a chart below that tells a simple story of those years, while also offering an asset allocation tool that for me has proven invaluable. In short, it is the story of running a balanced portfolio.

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    Gavekal Research

    Déjà Vu All Over Again

    Three months ago, I took over the management of our global equities managed accounts and our global equities fund (GAVPLAT:ID for those who care to follow its progress). And so, like every equity manager out there, I was forced to confront the single most important question in the markets today: Does one buy into the “hot” tech stocks that keep on pushing higher? Or does one give the Amazons, Facebooks, Googles and Alibabas of this world a wide...

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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...

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    Gavekal Research

    Don’t Buy The Smartphone Hype

    As Apple prepares to launch its anniversary iPhone and Samsung unveils models that don’t blow up, technology equities in the US and Asia have soared on hopes for a new smartphone cycle. After 2016 saw high-end smartphone sales fall, investors are betting that consumers respond to gee-whizz gadgetry by replacing their devices more often. We are not so sure.

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    Gavekal Research

    ECB Normalization And Why Not To Worry About It

    The US Federal Reserve will almost certainly announce the second of this year’s rate hikes at its next policy meeting on June 14. The week before, on June 8, the European Central Bank will probably state for the first time in years that the risks to the eurozone are now balanced “symmetrically” instead of tilting unequivocally downwards. If they were brave they might even echo Benoit Coeuré, the French governing board member who in an interview...

    1
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    Gavekal Research

    Brazil: Better Than Last Time Around

    A year after Dilma Rousseff’s ouster, Brazil again faces political tumult. Impeachment calls have come thick and fast following the release last week of an incriminating taped conversation between President Michel Temer and a businessman. The worry is that a fragile coalition of interests that has been inching Brazil toward meaningful economic reform falls apart, sparking renewed market panic. Such fears are overstated as this time, both left...

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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.

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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

    What Trump Will And Won’t Do

    After President Trump’s shock firing of his top law enforcement official, this week has seen the White House scramble to keep some semblance of control over the news agenda. This means that an administration that was already dialing back the radical parts of its reform agenda will have even less room to drive change.

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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.

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    Gavekal Research

    The Upside Of The Commodity Downside

    Once again, commodity prices are taking a beating. Since Wednesday the price of Brent blend crude oil has slumped by 7%. Over the last two months copper has slipped 8%, and iron ore futures traded in China are down a precipitous 30%. Coming on top of data that showed the US economy grew by a meager annualized 0.7% in the first quarter, and the recent tightening in China’s credit conditions, the latest slide in commodity prices has been...

    2
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    Gavekal Research

    The Underperformance Of Energy Stocks

    Charles likes to say that good money management often involves taking a few key decisions and sitting on them for a decade. In 1982, for example, the avoidance of energy and material stocks ensured almost 10 years of outperformance. In 1990, avoiding Japan paid off for two decades. In 2000, sidestepping TMT and underweighting the US dollar worked for almost a decade. In 2006, avoiding financials also paid off for a decade, as did underweighting...

    0
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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.

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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

    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...

    0
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    Gavekal Research

    China’s Kim Problem

    Last weekend's extreme tension on the Korean peninsula is just the latest episode to severely test Beijing’s patience with North Korea. Yet even as elements of the Chinese leadership tire of Kim Jong Un’s grandstanding, China remains unlikely to make a bold move that threatens the regime. Despite acute US pressure, China will seek to preserve the status quo.

    0
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    Gavekal Research

    Whether Or Not To Underweight The US

    Charles has been shifting his asset allocation recommendations in recent weeks away from US assets in favor of foreign alternatives. This was squarely valuation-based as his models show the US dollar, corporate bonds and equities to be overvalued. Here, he road tests this view by incorporating non-valuation-based macroeconomic factors into the analysis.

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    Gavekal Research

    The Consequences Of Trump’s Syrian Strike

    In his 1992 book Give War a Chance, P.J. O’Rourke remarked that “wherever there’s injustice, oppression and suffering, America will show up six months late and bomb the country next to where it’s happening”. Now, in fairness to Donald Trump, the bombing of assorted Middle Eastern countries by the US armed forces did not just start this past weekend. Nonetheless, by launching his cruise missiles at a Syrian airbase, Trump has now waded into the...

    2
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    Gavekal Research

    Beyond The March Payrolls ‘Soft Patch’

    With the world busy going mad, have financial markets unexpectedly come to their senses? Friday delivered an enormous “miss” on US payrolls, with the March number printing at only 98,000, compared with expectations of 180,000. Yet the markets failed to react. The S&P 500 closed almost unchanged, while US treasury yields actually ticked up marginally. This absence of any selling in equities or buying in bonds was a crucial clue, like the dog...

    0
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    Gavekal Research

    Squeezings From The Citrus Summit

    Last week’s Citrus Summit between Xi Jinping and Donald Trump came in with a gale of empty punditry and drifted away on a warm breeze of genial platitudes. Arthur argues that the risk of a damaging trade war between the two countries has now evaporated, and that the directionless White House has yet to sort out its economic priorities on China.

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    Gavekal Research

    E Pur Si Muove

    Back in early 2011, I argued that the adoption of abnormally low short-term interest rates (in real terms) always leads to a collapse in productivity, followed by a decline in the economy’s structural growth rate. Since late 2010 marked the transition from the acute phase of the financial crisis to something approaching normality, at least in the United States, it is worth examining the US experience in the ensuing period.

    5
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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.

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    Gavekal Research

    Threats To The US Bull Market

    I have spent the last few weeks traveling around Europe telling clients to reduce risk exposure—at least to US equities, if not globally. I see four potential threats to the US bull market, and while none is certain, the odds are high that at least one of them spoils the party. Let’s review:

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    Gavekal Research

    The Future Of The US SPR

    While North Korea is sure to be a major topic at Donald Trump and Xi Jinping's meeting this weekend, bubbling under the surface will be America’s US$347bn bilateral trade deficit with China. Few observers believe the summit will lead to a meeting of minds over the deficit, but a couple of recent developments in the energy sector suggest one way the deficit could be reduced to the satisfaction of both Washington and Beijing.

    0
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    Gavekal Research

    London Seminar — March 2017

    In Gavekal’s seminar in London last week Will Denyer, Charles Gave, Tom Miller and Anatole Kaletsky presented their macroeconomic outlooks and offered investors asset allocation advice.

    0
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    Gavekal Research

    The Dollar In The Coming Quarter

    The first quarter of the year demonstrated once again that there is little more uncertain than a sure thing in the foreign exchange market. Rewind to mid-December, just before markets eased back for the holiday season, and the consensus firmly favored a stronger US dollar in 2017 . Of course, when sentiment is so strongly aligned, it means there are few marginal buyers left to enter the market. As a result, the consensus was confounded, as the...

    0
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    Gavekal Research

    Strategy Monthly: Europe Braces For The French Election

    The macroeconomic stars are aligning for the eurozone. The region’s cyclical recovery is extending itself across economies and sectors alike. Inflation remains modest, reducing the chances of an early monetary tightening. Eurozone equities are relatively cheap in an expensive world. And the euro is fundamentally undervalued against the US dollar. However, the big risk for investors remains the possibility that nationalist euroskeptic Marine Le...

    0
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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

    Will Washington Disappoint?

    Equity markets have pretty much straight lined higher since the US election on hopes for market-friendly tax cuts, health care reform, and broad deregulation. Worries about high import tariffs and other potential growth-sapping measures have been set to one side. In short, investors have been counting on “Trump without the bad stuff”. With the S&P 500 yesterday sliding -1.2%—the first fall of more than -1% since November’s election—they now...

    2
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    Gavekal Research

    The Profit Illusion

    Inflation has a way of making things look better than they really are. This is especially true of corporate profits. After a dismal first half last year, S&P 500 companies reported an earnings recovery in 2H16. In the final quarter, they posted profit growth of 6% YoY (with or without financials). Alas, this recovery appears to be a mirage, caused by accelerating inflation. Using official flow of funds data for the domestic non-financial...

    5
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    Gavekal Research

    Audio & Transcript — Gavekal Research March Call

    Yesterday’s call had Cedric Gemehl and Anatole Kaletsky opine on political risk leading up to French and German national elections later this year. Nick Andrews argued that the eurozone recovery is becoming self-sustaining, and offered views on capturing the upside, while hedging against political risk.

    0
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    Gavekal Research

    Hedges In A Bull Market

    It is hard to find an equity market anywhere that is not in bull market territory. This much is clear from a quick look at the Gavekal TrackMacro grid. Simply put, not a single country is now flashing red. You have to go back to the Spring of 2014 for such a benign global macro backdrop.

    0
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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

    The Best Macro Trade Of 2017

    What has been the world’s most crowded macro trade of the year to date? Not buying dollars, shorting US bonds or selling French OATs or sterling. The most over-extended speculative position in the world by historic standards has been the bullish exposure to crude oil. This began to reverse last week, and the -7% correction in Brent could soon turn into an avalanche.

    0
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    Gavekal Research

    The North Korean Wedge Between The US And China

    This week’s missile launches by North Korea, the latest in a recent series of provocations, are forcing the US into a position where it must take steps to limit the threat to itself and its Asian allies. But such moves are certain to antagonize China, and shatter the fiction that the US and China have common interests in dealing with North Korea.

    2
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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

    Time To Exit US Equities

    Over the last few months Charles has argued that the US stock market rally was running on fumes. In the intervening period, US equities have, of course, powered to new highs. He now says that for the first time since 2007 his valuation model definitively points to US equities being overvalued.

    2
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    Gavekal Research

    Because Of Trump, Or Despite Him?

    The enthusiastic market reaction to US President Donald Trump’s big speech on Tuesday night can be interpreted in two ways, both bullish for equities and bearish for bonds, but only one of them positive for the dollar.

    0
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    Gavekal Research

    Strategy Monthly: Reflation Gets A China Boost

    For the last three months, markets have been focused on “Trumpflation”. But the global reflation trade began long before Donald Trump’s November election, with China’s surprisingly strong growth rebound early last year. This suggests that China’s growth performance in 2017 will be a key factor in determining the sustainability of global reflation. In this edition of Gavekal’s Strategy Monthly, Arthur Kroeber and Chen Long argue that China’s...

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