Gavekal Research
July 3, 2020
In the Covid-19 crisis, Charles’s “Jeep” portfolio, introduced at the end of 2017 and expounded on in mid-2019, has amply demonstrated its worth, outperforming a pure equity portfolio, but with much lower volatility. In this paper, Charles reviews the Jeep portfolio once again, upgrading its components to navigate a post-Covid world.
Gavekal Dragonomics
July 3, 2020
Japan and South Korea have responded differently to China’s attempts to peel them away from the US. Japan continues to align closely with its ally, while South Korea is more ready to accept that China as the regional power. In this report, Yanmei and Dan explore the logic behind these decisions and what they mean for the regional power balance.
Gavekal Research
July 3, 2020
When a herd of cattle is being hunted by a pack of wolves, the worst thing any cow or bull can do is show individualism and originality by running off in a different direction from the rest of the herd. In financial markets, “the trend is your friend” expresses the same evolutionary logic. Are markets now displaying non-rational herd behavior?
Gavekal Dragonomics
June 18, 2020
US President Donald Trump has pledged a response to Beijing’s decision to impose national-security legislation on Hong Kong, and has now signed legislation to sanction officials involved in the crackdown on Uighurs in Xinjiang. In this piece, Dan outlines the various legal tools that the US can bring to bear and their possible effects.
Gavekal Research
May 26, 2020
China has responded to prolonged political dissent in Hong Kong by proposing a tough anti-subversion law that threatens the city’s role as an international financial center. It remains unclear how this will be imposed on a common law-based legal system with a polar opposite jurisprudence to that on the Mainland.
Gavekal Research
May 26, 2020
German sociologist Max Weber made the distinction between the ethic of conviction, based on the philosophy of Immanuel Kant, and the ethic of responsibility, based on consequentialist philosophy, a grandchild of Aristotelian logic. The distinction between the two may help investors to determine their response to developments in Hong Kong.
Gavekal Research
June 16, 2020
Examining the frothy market action of last week, Anatole argues that crowd psychology is now driving moves in the US stock market. Five important lessons from the dotcom boom and bust of 1998-2000 indicate that if the Nasdaq composite breaks decisively through its recent high, there may be pots of money still to be made from the current bubble.
Gavekal Research
June 12, 2020
On Wednesday, Charles argued that policy responses to the Covid-19 crisis may be forcing the US economy into an inflationary boom. In this piece, he deploys the Shiller P/E as a tool for assessing US equities. He connects these findings with his tried-and-tested Wicksellian macro approach to reach a set of portfolio construction recommendations.
Gavekal Research
June 12, 2020
Recent weeks saw telltale signs of markets getting silly: firms with no sales reaching U$26bn valuations; airline-focused exchange traded funds jumping from US$50mn in size in January to US$1.5bn, and bankrupt firms becoming five and 10 baggers. This kind of activity may lead to one of three conclusions.
Gavekal Research
June 10, 2020
Many US states begun to re-open their economies without getting their Covid-19 outbreaks firmly under control. They initially did this without experiencing a spike in infection levels, but the situation has now changed, writes Arthur.
Gavekal Research
April 22, 2020
On Monday, Arthur laid out the core scenario for the exit from social lockdowns in both Europe and the US: a gradual relaxation of the most severe restrictions between now and mid-June, followed by several months or more of significant, but less onerous, restrictions.
Gavekal Research
April 20, 2020
As the US and Europe prepare to enter their second month of lockdown, the good news is that social controls, where they are imposed, are working. The less good news is that the exit from lockdowns is going to be long and arduous.
Gavekal Dragonomics
June 15, 2020
China’s economic data for May continued April’s wider recovery; however, Thomas, Rosealea and Xiaoxi argue that this upward momentum is losing steam. Weak external demand, tapering industrial production and Beijing’s aversion to further monetary easing all support the idea that China’s post-Covid bounceback is starting to plateau.
Gavekal Dragonomics
May 27, 2020
Hopes for an infrastructure boom are rising after China’s legislature approved a record amount of bond sales. But as Wei explains, the Ministry of Finance’s conservative budget targets will still limit how much localities actually spend. Infrastructure investment is headed for around 10% growth in 2020, not enough for a very strong recovery.
Gavekal Dragonomics
May 25, 2020
China’s government is promising to deliver stability in employment this year, although it has not made a full accounting of how the Covid-19 lockdown affected jobs. In this report, Ernan presents comprehensive estimates of the scale of job losses: in the range of 60-100mn. This is far more than China’s social safety net is designed to handle.
Gavekal Research
April 23, 2020
Gavekal’s dynamite fishing analogy maintains that the biggest impact of a market shock only shows up after a delay, much like the effects of an underwater explosion. First the small fry float to the top, then the mid-size fish. Only much later does the dead whale break surface.
Gavekal Research
April 21, 2020
A friend has a sizable dairy farm in France. He usually sells his cows’ milk to local makers of yogurt and cheese for anywhere between €250 and €350 per 1,000 liters. Today, with most local cheesemakers shut down, buyers are offering just €1 per 1,000 liters for his milk. It could be worse, though. He could be in oil.
Gavekal Research
April 3, 2020
Oil market pundits were quick to dismiss Donald Trump’s tweeted claim Thursday that Saudi Arabia and Russia are ready to agree crude production cuts of 10-15mn bpd as “absurd” and “incredible”. But oil production cuts of the magnitude flagged by Trump are certainly in the pipeline—whether as the result of a new Opec+ agreement or not.
Gavekal Research
June 11, 2020
In the last four weeks as market participants have reassessed relative risk premiums, they have found it increasingly easy to identify currencies which at the margin are looking more attractive than the US dollar. As a result, the dollar has weakened both against developed world and emerging market currencies.
Gavekal Research
June 10, 2020
Long-time readers will be familiar with Gavekal’s Four Quadrants framework, which describes how the economy alternates between periods of inflation and deflation, and cycles from boom and bust and back again, and which we use to illustrate which asset classes investors should favor and when.
Gavekal Research
June 1, 2020
After advising readers not to buy into the March market rebound, Anatole has reviewed the case he made for doubting that a perfectly executed Keynesian recovery was likely—and he did this as Gavekal’s fully avowed Keynesian economist.
Gavekal Research
June 17, 2020
Another day, another upside surprise from the US data. For investors, the key question is whether this recovery will continue, or whether May’s bounce-back in consumption will prove a one-off flash in the pan, extinguished by a second wave of infections and long term unemployment.
Gavekal Research
June 15, 2020
Despite some states seeing a worrying rise in Covid-19 cases, a US economic recovery is gaining strength as lockdowns are lifted. Barring unforeseen setbacks, there are reasons to think that the US recovery sustains itself and the equity rally continues. There is, however, a solid macro argument for rotating to a different class of US stocks.
Gavekal Research
June 9, 2020
Ahead of the FOMC meeting that concludes Wednesday, there has been a growing volume of chatter that the Federal Reserve is moving to scale back its easing measures. The talk has been further amplified by May’s surprisingly strong employment report, with some commentators even warning of an imminent taper tantrum in the markets.
Gavekal Dragonomics
June 18, 2020
US President Donald Trump has pledged a response to Beijing’s decision to impose national-security legislation on Hong Kong, and has now signed legislation to sanction officials involved in the crackdown on Uighurs in Xinjiang. In this piece, Dan outlines the various legal tools that the US can bring to bear and their possible effects.
Gavekal Dragonomics
June 5, 2020
As multinationals in China face growing pressure to shift their supply chains elsewhere, China’s government is doing everything it can to hold on to them. As Dan explains in this piece, China’s ability to get businesses back on their feet after the Covid-19 lockdown is a great advertisement for its attractiveness as a place to do businesses.
Gavekal Dragonomics
May 5, 2020
The US government has unveiled new rules that will make it more difficult for US companies to sell high technology to Chinese firms with any military connections. In this piece, Dan explains the risks of these new rules for both US companies and the many Chinese firms participating in their government’s “military-civil fusion” campaign.
Gavekal Dragonomics
June 16, 2020
The Covid-19 pandemic has shocked China’s financial regulators into allowing a substantial rebound in total credit growth. But they are not worried enough to abandon their strict control of shadow finance. As Xiaoxi explains in this piece, a recent bounce in the shadow finance numbers is due to a popular arbitrage which is now being contained.
Gavekal Dragonomics
June 12, 2020
As China tries to get the economy back to normal, it is focusing more on the plight of small businesses, who have lost weeks or months of revenue to the pandemic. Yet it has resisted offering the loan guarantees other countries have employed. In this piece, Xiaoxi assesses the other tools China is using to boost lending to the smallest firms.
Gavekal Dragonomics
June 8, 2020
Financial markets are the latest field in which US-China political tensions are playing out. Thomas describes two lines of attack US hawks are pursuing against China: blocking Chinese firms from US equity markets and pressuring US asset managers to avoid Chinese equities. The risk associated with Chinese stocks has therefore materially increased.
Gavekal Research
June 19, 2020
There will be some hard bargaining ahead when the European Union’s 27 heads of government meet by video conference Friday in an attempt to thrash out details of the bloc’s proposed €750bn recovery fund. German chancellor Angela Merkel is urging a quick deal.
Gavekal Research
June 5, 2020
If the worry was that European Central Bank activism was threatened by German judicial chastisement, Christine Lagarde yesterday showed no sign of being cowed. The Pandemic Emergency Purchase Program was topped up to an almost bazooka-qualifying €1.35trn from €750bn and extended a further six months to June 2021.
Gavekal Research
June 4, 2020
Another day, another big fiscal expansion from Germany. Yesterday, Berlin outlined a €130bn stimulus package, representing 3.8% of GDP. If there was any doubt, Europe has clearly ditched its decade-long infatuation with austerity and is back in the Keynesian camp.
Gavekal Research
June 18, 2020
Monday night’s deadly face-off between Indian and Chinese soldiers in the Himalayan mountains threatens to rupture a burgeoning trading relationship between Asia’s two largest nations. Diplomats should be able to deescalate military tensions between the two nuclear-armed countries, but it may be harder to normalize economic ties.
Gavekal Research
June 3, 2020
India has experienced a draconian lockdown that could result in output shrinking by -25-45% in the second quarter of the year. The result will be a sharp worsening in the fiscal deficit and a low structural growth rate that leaves India as just another emerging market rather than a growth story to rival China’s.
Gavekal Research
May 14, 2020
India’s finance minister yesterday outlined a US$265bn fiscal package to save the economy. It looks to be just enough to stop a slide into depression but not much more. A worrying factor in its response is an apparent lurch towards protectionism, which would undermine any gains made from much-needed reforms to land and labor markets
Gavekal Research
June 24, 2020
Hong Kong has been beset by a string of bad news, from mass street protests, through Covid-19, to national security legislation of unknown scope and severity imposed by the mainland.
Gavekal Research
June 18, 2020
In this video, Udith argues that the mayhem seen on the India-China border this week will provide another catalyst for Indian nationalists who want to lessen the country’s reliance on China, even if that means accepting far slower economic growth.
Gavekal Research
June 11, 2020
The US is deepening its effort to limit Chinese technology giant Huawei’s access to components that rely on American design, which may prevent Huawei from rolling out 5G networks. The US is also broadening its efforts to constrain Mainland tech firms by using sanctions that impact suppliers to China’s government and military.
Gavekal Research
June 16, 2020
The crowds that Monday swarmed British shops, allowed to open for the first time in 12 weeks, at first sight bodes well for a V-shaped recovery. Yet despite plentiful accumulated savings and considerable pent-up demand, the UK’s consumption-driven economy faces formidable post-lockdown headwinds, with consequences for equities and sterling.
Gavekal Research
May 22, 2020
No country has matched Britain’s dismal combination of currency and equity losses so far this year. Making matters worse for Britain than other DMs is Boris Johnson's refusal to extend the post-Brexit transition period beyond December, precisely the time when the Covid-19 recession might otherwise be expected to start lifting.
Gavekal Research
February 14, 2020
Ever since turning negative on sterling and the UK economy when Boris Johnson dropped his post-election bombshell announcing a new “No Deal” deadline of December 2020, I have been waiting for a chance to double-down on this bearish position. On Thursday, Johnson provided such an opportunity to extend short positions in sterling.
Gavekal Research
June 19, 2020
Since bottoming out in late March, emerging market equities and bond markets have risen significantly. This snap-back stemmed from massive liquidity injections by global central banks. Investors were also cheered by a new paradigm of fused monetary and fiscal policy in economies which rarely had such flexibility.
Gavekal Research
June 5, 2020
A terms of trade improvement and the relative resilience of electronics demand have helped support Asian currencies through the coronavirus crisis despite the deep contraction in world trade.
Gavekal Research
May 19, 2020
Developing economies are struggling from reduced trade and harder access to capital. They also face a US$109bn cut in remittance income this year as construction sites in the rich world close, ships stay in port and restaurants are shuttered.
Gavekal Research
May 15, 2020
The rivalry between the US and China has taken a turn for the worse during the Covid-19 pandemic. In yesterday’s webinar, Tom Miller talked about how China has attempted to use the pandemic in its global influence strategy. Dan Wang updated viewers on the technology rivalry.
Gavekal Research
May 4, 2020
Aside from China, emerging markets have not been hit as hard as rich countries by Covid-19, but their asset markets have been hammered. An optimistic view holds that undervalued EM assets can now bounce back.
Gavekal Research
March 6, 2020
The Reserve Bank of India's rescue of troubled private sector lender Yes Bank highlights the feedback loop between India’s bad-loan-burdened financial system and its stuttering economy, which is now facing its lowest growth rate since the financial crisis.
Gavekal Dragonomics
June 10, 2020
Local governments are balancing between encouraging housing construction and containing excess housing inventory. Although they have struck a balance so far, Rosealea argues that the growing vacancies in lower-tier cities coupled with depressed household consumption render current policies unsustainable in the long run.
Gavekal Dragonomics
June 2, 2020
Property sales are quickly recovering from their Covid-19 crash, with upward momentum that should continue for several months to come. However, Rosealea argues there are growing risks that China’s property market will start overheating, forcing policymakers to step in and leading to a downwards drift by July/August at the earliest.
Gavekal Dragonomics
March 20, 2020
Even as China’s property market has experienced an unprecedented decline, central government policymakers have kept a tight leash on official support. However, given growing signs of a lasting disruption to the sector, Rosealea believes that Beijing will tolerate more ambitious municipal efforts to keep local markets afloat.
Gavekal Research
November 23, 2012
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.
Gavekal Research
July 20, 2011
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.
Gavekal Research
February 28, 2011
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’.