Washington views China as a strategic competitor, and the White House has promised a “whole of government” effort to constrain China’s development of key advanced technologies. Dan examines the three ways in which the US is making life difficult for Chinese tech companies, and explores other weapons the US could deploy should the tech war escalate.
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Gavekal Research
September 20, 2019
Video: What Next In The Tech War
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Gavekal Research
September 20, 2019
Stay Neutral Between Equities And Cash
As August’s panic has receded, bond yields have risen from their lows. Even so, with the 10-year US treasury yield at 1.77%, the only way bonds can deliver significant upside from here is if the US economy slides into a disinflationary recession. That may yet happen. But it is by no means the most probable course for the US economy.
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Gavekal Research
September 19, 2019
The Industrial Disease (II)
Last week, Charles examined the decline of the US industrial sector, introducing his “industrial Wicksellian spread” as an indicator of environmental conditions for industry. Now he looks at the probable causes of industrial deterioration, explains why neither monetary nor fiscal policy can help, and uses his toolkit to draw some important conclusions for portfolio investors.
Global Strategy
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Gavekal Research
August 27, 2019
The Yen Dilemma
Since the beginning of the month, the yen has been one of the few major currencies to strengthen against the US dollar. At the same time, Japanese government bonds have not escaped the global bond rally.
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Gavekal Research
August 23, 2019
Making Biarritz Great Again
Some readers may know that my family is the majority shareholder in Biarritz Olympique Pays Basque, one of France’s oldest rugby clubs. Through this connection, I have had a front-row seat to the organization of the upcoming G7 meeting to be held in Biarritz over the next three days. When the city was chosen, I naively thought this was good news.
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Gavekal Research
August 20, 2019
The End Of The Panic
In almost three weeks since the beginning of August, gold is up 5.9% while investors in 10-year US treasuries have gained 4.2%. This is unusual. As Charles has highlighted, the two “anti-fragile” assets of choice seldom skyrocket simultaneously, so markets have been in full-blown panic mode.
Trade wars
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Gavekal Dragonomics
August 29, 2019
The Dimensions Of Decoupling
Whatever happens next in the US-China trade conflict, it’s clear that ties between the two nations have undergone a fundamental reset. Some “decoupling” will definitely occur as a result, and indeed has already begun. In this chartbook, Andrew and Lance explore how US-China decoupling could play out in flows of goods, money, people and ideas.
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Gavekal Research
August 28, 2019
Beijing Toughs It Out
After a month of further escalation in the US-China trade war, China’s strategy for the next stage of the dispute is becoming clear. Its leadership now looks committed to a strategy of toughing out trade tensions. This means the prospect of a US-China trade deal is receding, and therefore that global growth will face further headwinds.
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Gavekal Research
August 27, 2019
Buffeted By Deglobalization, Shipping Lines Tack To Asia
After a sluggish 2018, global shipping lines are again facing choppy seas thanks to Donald Trump's tariffs and slumping trans-Pacific trade. There is, however, a silver lining for carriers with a strong Asian presence; the US-China trade war is spurring a fragmentation of regional supply chains, and that seems set to boost intra-Asian trade.
The US economy and markets
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Gavekal Research
September 12, 2019
US Banks To Shine Again
Ahead of next week’s Federal Reserve meeting, US bank stocks look set to break out of their 21-month underperformance trend. Investors are betting on a 25bp rate cut, with at least one more to come before December. They are also cheering the rise in long rates globally over the last week or so, which has acted to steepen yield curves.
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Gavekal Research
August 30, 2019
The Case Against Recession
Earlier in August, Charles announced that he was reluctantly joining the US recession camp. His reasoning was based largely on his observation that the long run average growth rate of US corporate profits had fallen to a level that in recent decades has always indicated an economic downturn. I am more optimistic than Charles.
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Gavekal Research
August 26, 2019
Weathering Trump’s Trade War
It may be the dog days of summer, but investors got a truckload of news this weekend that points to a bad situation getting worse. Given President Donald Trump’s escalation of tariffs and threat to bar US firms from operating in China, the worry is that his hardline stance spurs a US recession. KX and Will think this is unlikely.
The eurozone's political agonies
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Gavekal Research
September 4, 2019
Italian Politics And The Bond Market
On Tuesday, members of Italy’s left wing populist 5-Star Movement lent their support to the formation of a new coalition government with the Democratic Party. The new government, to be led by Giuseppe Conte, technocrat prime minister in the previous coalition, still has to secure a confidence vote in Parliament.
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Gavekal Research
July 3, 2019
The Meaning Of The EU's New Lineup
After three days of intense maneuver and counter-maneuver, on Tuesday the European Union’s heads of government announced their choice of names to lead the EU’s central institutions for the coming years. The result is a remarkable clean sweep for the favored candidates of French president Emmanuel Macron.
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Gavekal Research
June 18, 2019
The ECB After Draghi
At the ECB's annual shindig in Portugal this week, two questions matter. Given negative interest rates and capital key constraints over asset purchases, how does the ECB fight the next downturn? And who will replace Mario Draghi?
China Tech
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Gavekal Dragonomics
September 12, 2019
Putting The Squeeze On Tech
The Trump administration has shown the world that it is willing and able to inflict severe pain on China’s top technology firms. But can the US really squeeze China hard enough to cut it off from global R&D, or stop all advances by Chinese companies?
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Gavekal Dragonomics
September 4, 2019
Taiwan’s Manufacturers Rethink Reliance On China
Could Taiwan be a winner in the US-China trade war? As Dan reports in this piece, US tariffs have succeeded in getting major contract manufacturers of electronics to shift jobs out of China, some of which are going to Taiwan. But this trend is not enough to end Taiwan’s dependence on Chinese growth, or its vulnerability to Chinese competition.
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Gavekal Dragonomics
August 13, 2019
The Rising Risks For Chinese Firms
The outcome of US-China trade talks is uncertain, but one thing is clear. Chinese companies, their customers and suppliers, faced increased risks of US American sanctions. Hardliners in the US national security establishment are pressing ahead with an “all-of-government” strategy to constrain China’s technological and financial clout.
China's economic cycle
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Gavekal Dragonomics
September 10, 2019
The Next Stage Of The Pork Crisis
The African swine fever crisis in China is reaching a new stage as prices for pigs and pork spiral upward at an unprecedented pace. The government is responding with a combination of subsidies for pork farms, as well as rationing and price caps. But this is a short-term strategy that will not contain the ASF epidemic and could even worsen it.
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Gavekal Dragonomics
August 21, 2019
Consumer Spending Growth Grinds Lower
With exports and domestic investment both weakening, China’s government hopes that consumer spending will support growth. The bad news is that all indicators of consumer spending are still softening. With a deteriorating job market weighing on household income Chinese consumer spending is set to weaken further over the coming quarters.
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Gavekal Dragonomics
August 20, 2019
Starvation Rations For Private-Sector Borrowers
After a brief respite earlier in the year, China’s private sector is once again facing a credit squeeze. The PBOC’s announcement over the weekend of a change in the calculation methodology for the loan prime rate is likely to lower the cost of corporate loans, but it does not make it any easier for private firms to get finance.
Europe's softening growth picture
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Gavekal Research
September 11, 2019
Up Against The Limit With The ECB
German savers face “custody fees” when depositing big sums at the bank, or get clipped 50bp when buying a euro-denominated money market fund. Such outcomes explain why a growing number of economists oppose calls for the European Central Bank to cut rates further and restart quantitative easing when it meets tomorrow.
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Gavekal Research
August 26, 2019
Europe’s Victimhood Culture
The biggest threat to world economic growth today is not the US-China trade war, but German exceptionalism. Even as Germany has suffered the greatest growth downgrades of any major economy, its politicians have obstinately rejected any Keynesian fiscal expansion. Now calls are mounting for a policy U-turn, but Anatole isn’t holding his breath.
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Gavekal Research
August 22, 2019
Germany’s Fiscal Firepower
Uniquely among the world’s big economies, Germany runs a budget surplus, in accordance with the “debt brake” written into its constitution following the 2008-09 financial crisis. This means Berlin could, in theory, deploy considerable fiscal firepower even within the current rules, and a great deal more if it chose to bend or rewrite them.
Energy and commodities
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Gavekal Research
September 9, 2019
The Meaning Of The Iran-China Deal
Reports that China has signed a long term agreement to buy large quantities of Iranian oil in defiance of US sanctions will weigh on global crude prices and further complicate US-China talks, reducing the chances of a deal before the 2020 US election. In effect, the world is now facing a four-way tug of war over the oil price.
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Gavekal Research
August 29, 2019
The Importance Of Oil
The world’s fixed income markets are priced for a severe bout of demand destruction and deflation. Yet, outside Europe at least, growth in the world’s major economies continues to tick over. However, could a sudden oil price rise spark an uptick in inflation pressure that triggers an abrupt repricing in which bond yields spike sharply higher?
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Gavekal Dragonomics
August 5, 2019
The Risks To Steel Prices
China’s government is once again going after pollution from the steel industry, raising the risk of more policy-induced spikes in steel prices. While forced shutdowns to ensure blue skies are on the way, Rosealea argues that the bigger risk to steel prices is on the downside, due to weakening construction activity and cautious housing policy.
India
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Gavekal Research
September 5, 2019
India's Frenetic Inertia
They say the first step to solving a problem is recognizing that you have one. With its recent moves to shore up sagging growth, Narendra Modi’s new government has finally acknowledged that India’s economy is in trouble. But unless it quickly finds a coherent reform strategy, Modi’s second term could fizzle out into economic failure.
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Gavekal Research
August 22, 2019
India Macro Update: Hardly A Growth Agenda
India’s economy is weak across the board, weighed down by lackluster investment, anemic consumption and soft external demand. Deep reforms are needed to unlock the country’s economic potential.
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Gavekal Research
July 10, 2019
Foreigners And The Deepening Of Indian Finance
India’s new government delivered a careful budget last Friday, preferring to keep a veneer of fiscal rectitude than to prioritize growth and jobs with heavy spending. Yet there was one exception amid the caution: for the first time, India is set to issue sovereign debt in foreign currency.
Video
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Gavekal Research
September 6, 2019
Video: Italian Politics Favors Bonds
Yesterday Italy’s new government took office, the 66th since 1946. Meanwhile, Italian bond yields have reached record lows. Nick attributes this to two factors. First the global bond rally. Second, the shifting winds of Italian politics away from the Euroskeptics to the Europhiles, which bodes well for Italian-European budget negotiations.
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Gavekal Research
August 30, 2019
Video: Looking Through The Bond Bubble
As yields fall to record lows, bond markets seem priced for some sort of global economic calamity. With Europe in dire straits and the US-China trade war remaining live, there is certainly cause for worry. But when things look like they can’t get any worse, Will reckons, they often don’t.
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Gavekal Research
August 23, 2019
Video: The Anatomy Of The August Panic
As more and more government bonds around the world slide into negative yield, investors can draw one of two conclusions: either the world faces an economic meltdown, or there is a buying panic in safe assets. But although there is indeed a synchronous global slowdown in growth, Louis favors the latter explanation.
Brexit and the UK economy
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Gavekal Research
September 2, 2019
‘Do Or Die’ Boris Is Bullish For Sterling
Considering the political chaos that will descend this week on the UK, it may seem surprising that the pound has bounced back to its trade-weighted level just before Boris Johnson became prime minister.
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Gavekal Research
August 2, 2019
What Sterling’s Move Tells Us
The sterling exchange rate is going down and the usual suspects say this is bad news. But the exchange rate is merely a price that helps allocate capital between the economy’s internal and external sectors, and so set the purchasing power of rentiers and entrepreneurs.
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Gavekal Research
July 31, 2019
Sterling’s Information Void
Since Boris Johnson became prime minister, the UK government’s promise of a “do or die” Brexit has caused sterling to slump -2.9% against the US dollar to about US$1.21. While the chances of Britain actually leaving the EU without a deal remain small, this outcome will remain unclear for some time.
Emerging markets
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Gavekal Research
September 11, 2019
Asia's Great Moderation
Emerging market government bonds yield more than rich-world equivalents because investors worry about getting their money back. This higher return on capital can cause a feedback loop of rising foreign debt and diminished financial sovereignty.
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Gavekal Research
August 29, 2019
Asia Ditches Fiscal Conservatism, Conservatively
As the external environment darkens, Asian governments are turning on the fiscal spigots—cautiously. Moves announced in recent weeks do not radically move the dial, but they should support growth.
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Gavekal Research
August 14, 2019
Lessons From The Argentine Shock
In US dollar terms, Argentina's equity benchmark on Monday fell -48% in a one-day move. The -24% drop in long-dated US dollar-denominated Argentine bonds, a -17% drop in the currency, or the -38% fall in the local equity index will cause pain for certain macro players and dedicated emerging market funds.
Deep Dives
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Gavekal Research
September 5, 2019
Audio & Transcript — Gavekal Research Call September 2019
In yesterday’s conference call, Anatole Kaletsky, Will Denyer and Louis-Vincent Gave outlined reasons for recent dramatic moves in bond markets and made arguments for what comes next. Anatole also addressed Brexit developments and Louis discussed the situation in Hong Kong.
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Gavekal Research
September 3, 2019
Strategy Monthly: The Message From Bonds
Record low bond yields point to a deflationary catastrophe in the making. Yet growth data in the world’s two biggest economies remain decent. Could investors be reacting to a rupture in the international order? Gavekal analysts are not persuaded by such arguments and offer four alternative explanations for the “bond bubble”.
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Gavekal Research
August 22, 2019
India Macro Update: Hardly A Growth Agenda
India’s economy is weak across the board, weighed down by lackluster investment, anemic consumption and soft external demand. Deep reforms are needed to unlock the country’s economic potential.
Chinese property
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Gavekal Research
September 6, 2019
Beijing's Conflicted Easing
As prospects for a quick resolution of the US-China trade conflict fade, and the data continue to soften, expectations for Chinese growth are getting marked down. As if on cue, the government has sent signals of more decisive policy support for growth.
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Gavekal Dragonomics
July 3, 2019
Housing Policy Turns Cautious
Housing policy in China has taken a cautious turn, with policymakers more concerned about potential overheating in prices than worried about a downturn in sales and construction. In this piece, Rosealea explains how this shift is playing out through cuts in housing subsidies and changes to local policies, and evaluates the risks to the market.
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Gavekal Dragonomics
May 23, 2019
The Household Debt Service Burden
The rapid rise in China’s household debt has become a major concern for markets and policymakers. While most analysis looks at the household debt-to-GDP ratio, in this report Ernan calculates the household debt service ratio for a better angle on the problem. She finds that the debt burden on household budgets will keep increasing in 2019.
From the archives: oldies but goodies
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Gavekal Research
November 23, 2012
Deficit Deniers Of The World Unite
In our politically correct age the pressure to bow down before certain popularly accepted and apparently proven “truths” can be overwhelming. In the aftermath of the US elections, two such nostrums are unnecessarily vexing investors—the urgency of deficit reduction and fear of higher taxes.
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Gavekal Research
July 20, 2011
Are We Entering Into Revolutionary Times?
In A Study of History, Toynbee explains that the role of a society’s elite is to rise to the challenges of the times, and find solutions fitting to those times, even if this involves a radical break with the past.
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Gavekal Research
February 28, 2011
The High Cost Of Free Money
Perhaps the most famous economic law is the one that there is no such thing as a free lunch. By keeping US short rates at abnormally low levels beyond the financial crisis and as growth bounces back beyond the dreams of the wildest optimists, the Fed increasingly seems to be trying to ‘feed the US economy for nothing’.