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E.g., 12-12-2017
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    Gavekal Research

    The Lost Decade

    Next month will mark the tenth anniversary of the Global Financial Crisis, and the developed world’s GDP per capita still lingers 20-25% below its pre-crisis long term trend. Were there no good economic policies to deal with the aftermath? Far from it, argues Anatole, but four features of post-crisis politics and ideology blocked constructive policy responses.

    4
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    Gavekal Research

    The State Of US Inflation

    In her testimony to Congress yesterday, Federal Reserve chair Janet Yellen attributed the weakness of US inflation to temporary factors. As a result, the Fed remains focused on tightening policy. However, given that US inflation has consistently undershot the Fed’s target, any further decline will raise concerns that the US business cycle is rolling over.

    0
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    Gavekal Research

    The Wile E. Coyote Moment

    Sometimes financial markets can look a lot like Wile E. Coyote. So intent was the old Looney Tunes character on chasing the Road Runner, that he somehow never realized when he had shot over the cliff’s edge. For a few moments he would continue in thin air, legs a blur, supported by momentum and incomprehension. Only when he looked down... In much the same way, financial markets often continue their trend after the underlying conditions change,...

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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

    Should Investors Chase Defense Stocks?

    Aside from health care, the other “Trump trade” that has worked wonders since November 9 has been defense stocks. After all, with the Dow Jones sector index up some 22% in the period, what’s not to like? On taking office, Donald Trump cranked up military spending, and during his state visit to Saudi Arabia in May secured weapon sales worth US$110bn. On Friday—just hours before Xi Jinping took the stage in Hong Kong to celebrate the 20th...

    3
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    Gavekal Research

    Trump And Xi: The End Of The Bromance?

    Last week Washington soured its relationship with China by imposing sanctions on some Chinese companies and individuals that do business with North Korea and announcing a big arms sale package for Taiwan. Rumors also continue to percolate that Trump is preparing for more aggressive trade action. Arthur discusses whether it is time to worry.

    0
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    Gavekal Research

    A Late-Cycle Signal From US Factories

    Determining the exact extent of the US output gap at any point in time is immensely difficult, if not impossible. Earlier this month, KX suggested monitoring four indicators: the gap between actual unemployment and the “natural” rate; real corporate profits; profit margins, and the change of US CPI inflation. Today he adds another indicator to that list: the ratio of factory order backlogs to new orders. By this measure too, the US is running...

    0
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    Gavekal Research

    When Central Bankers Attempt To Change Direction

    In recent days , central bankers in the US and Europe have been signaling how much they want to end unconventional monetary policies and revert to a more normal monetary model that does not put asset prices at the heart of the system. It is a laudable aim. But, warns Charles in this piece, central bankers have seldom managed to transition from one monetary regime to another without causing convulsions in the financial markets. This time, the...

    1
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    Gavekal Research

    A Change In The Investment Environment?

    A couple of weeks ago, Louis asked if the downside breakout in bond yields (touching 2.10%) could foster a stable investment environment. At the time he foresaw three possible scenarios. After yesterday's hawkish pronouncements by multiple central banks, he is not so sure and is focusing on a narrower range of possibilities which may herald a new investment environment.

    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

    Calm Sailing For A Reason

    Those with a constructive view of quiescent asset markets say low volatility is justified by the stable economic situation. Others mutter of a looming “Minsky moment”. KX does not rule out a sharp rise in near-term volatility, but says the secular trend is down.

    2
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    Gavekal Research

    Should Investors Chase Health Care Stocks?

    Years ago, when Charles attempted to retire, my mother promptly decided that retirement was the “worst of both worlds”: more husband and less money. She quickly put the kibosh on the idea. The US government is a little more complicated to run than the Gave household, yet health care policy also offers a “worst of both worlds” outcome—profligate spending and rising bureaucracy (from government interference) and eye-watering prices (from the...

    0
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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...

    0
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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.

    0
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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.

    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.

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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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