Will Denyer
US Economist
Will earned a degree in business and economics at the University of Oklahoma, supplemented by extracurricular education from the Mises Institute. He worked temporarily with our research team in 2005. We decided it was a good fit, so in 2007 he moved to Hong Kong to join our team. Will is now our lead analyst on the US economy. Will speaks English (including the occasional "y'all" in conversation), and is a struggling student of Chinese.
Will writes on a range of topics, but his current area of focus is the relationship between corporate profitability and interest rates (a la Knut Wicksell). He utilizes this framework to monitor the business cycle and provide portfolio construction recommendations. By request, some of Will’s charts on this subject are provided below, with the data updated daily.
For Will's article archive click here.
The natural upper limit for interest rates is the expected rate of return on invested capital. This simple observation was made by the Swedish economist Knut Wicksell in his 1898 classic Interest & Prices. If entrepreneurs expect to generate a return of 5%, they are not likely to borrow at 7%. Thus, when the market rate of interest appears to be breaching its “upper limit” (our best estimate of the prevailing rate of ROIC), it makes sense to shift out of equities and into fixed income.
As interest rates rise relative to ROIC, lending becomes relatively more attractive and owning equity less so. Moreover, such circumstances call for caution. Credit growth can be expected to decline. Projects that appeared economical at lower interest rates may prove unsustainable. Asset price corrections and recession become increasingly probable. Under such circumstances, one should consider shifting out of equity into either corporate debt (which now offers relatively better yield, and is senior to equity) and/or even lower-risk Treasury bonds, bills or cash.
On the flipside, when the cost of capital is well below the return on capital it makes sense to overweight equities.
Secondarily, marginal changes in our “Wicksellian spread” between the return on capital and its cost may call for adjusting risk exposure on the margin. We should be more sensitive to marginal changes the longer an unusually wide Wicksellian spread has persisted—as one can expect the system to have grown more vulnerable under its influence. My current method of balancing these considerations is displayed in the charts below, updated daily.
Our estimate of the real rate of ROIC is derived from national accounts data. It aims to strip out what Ludwig von Mises called “apparent profits”—those gains resulting from inflation which should not be distributed as they are required to replenish spent inventories or capital equipment at (newly) higher prices. Our proxy for the cost of capital is the average yield on the BofML US corporate master index, deflated by inflation expectations from the Philadelphia Fed survey of professional forecasters. Further description of the model is available in Turning 90% Bullish, and on request.
The Daily
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Gavekal Research
June 14, 2018
Is The Fed Really Going To Cause A Crisis?
Is a crisis in US dollar bond markets really inevitable if the Federal Reserve continues on its current tightening trajectory? Some think so, including Reserve Bank of India governor Urjit Patel, who this month expressed his fears in an op-ed in the Financial Times.
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Gavekal Research
June 7, 2018
A Revolution In Switzerland?
This weekend the people of Switzerland vote in a referendum that could upend their country’s monetary system in ways never seen before. If the “Vollgeld” initiative is approved, it will be a major event in world economic history.
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Gavekal Research
April 30, 2018
The American Growth Dynamic
It is clear from data released on Friday that the US economy remains set on an expansionary and inflationary trajectory. Growth in 1Q18 came in at a stronger-than-expected 2.3%, while the US employment cost index rose 2.8% YoY to a high for this cycle.
Ideas
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Gavekal Research
March 28, 2018
Don’t Fret About Libor
A disproportionate increase in Libor relative to other benchmark short term rates over recent months has got many observers flustered. In this concise paper, Will and KX dig down to the cause of the increase, and explain what it does and doesn’t mean for portfolio investors.
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Gavekal Research
March 13, 2018
Turning 90% Bullish
Over the last three years, Will has developed his own version of Charles's Wicksellian framework to analyze the US economic cycle. His approach has been to gauge the difference between the private sector’s return on invested capital and its cost.
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Gavekal Research
February 2, 2018
Take Profits On US Homebuilders
Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The
Multimedia
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Gavekal Research
June 8, 2018
Video: When To Buy US Bonds
With 10-year US treasury yields having failed so far to climb significantly above the 3% mark, investors are asking whether it is time to buy US long bonds. In this short video interview, Will presents a simple framework for approaching the bond market.
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Gavekal Research
March 16, 2018
Video: Fixing The Model
Earlier this week Will issued a mea culpa report that explained why he was revising his Wicksellian asset allocation model and substantially changing his recommendations for the US market. In this video interview he explains the story behind this revision.
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Gavekal Research
February 2, 2018
Video: Playing The US Growth Picture
Will outlines his view that real growth in the US will remain stable this year and that inflation will pick up, and discusses what this means for asset prices and portfolio construction.