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E.g., 17-07-2019
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    Gavekal Research

    Back To The Barbarous Relic

    Going back to the mid-1980s, I have worked on the assumption that the US economy has been in the “deflationary” lower half of my four quadrants framework. My fear is that we may be moving into the inflationary top quadrants. If so, this means that in the bust phase of the cycle equities will have a positive correlation with bonds, and those bonds will offer much lower returns

    7
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    Gavekal Research

    Time To Underweight Thailand

    In the two weeks since the announcement that a movie star princess would stand for prime minister in Thailand's March election—though her candidacy was swiftly shot down by the palace—investors have largely shrugged off fears of renewed upheavals. However, this is not just Thai politics as usual. It reopens old wounds and throws current alignments into doubt.

    0
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    Gavekal Research

    The Trade Deal Scenarios

    In recent days, news reports have pointed to an impending trade deal between the US and China. A tweet by the US president that seemed to favor Chinese tech firms has added to that expectation. In this piece, Louis considers two possible outcomes to these talks, with one offering markets a short-term fillip, and the other being a likely gamechanger that will impact investors’ performance for years to come.

    2
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    Gavekal Research

    A Catspaw, Not A Tailwind

    The publication of minutes from FOMC’s January meeting confirmed that the Fed has executed an about-turn in its policy stance and is now in dovish mode. More specifically, the minutes confirmed that the Fed is planning to halt the contraction of its balance sheet later this year, putting an early end to the quantitative tightening that began in October 2017.

    0
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    Gavekal Research

    Video: What Kind Of US-China Deal?

    In recent weeks, the US dollar has rallied, emerging markets have been strong and gold seems to be breaking out to the upside. That is an unusual combination, and in this video Louis outlines three possible explanations for the moves. Most provocatively, as the US-China trade talks get critical, he wonders if China is gearing up to accept a one-off revaluation of the renminbi.

    0
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    Gavekal Research

    India Macro Update: Pre-Election Jitters

    In India, all eyes are focused on May’s general election. In the lead-up, the government has turned on the spending spigots and the central bank has obliged with a recent surprise interest rate cut. However, in this quarterly update Udith and Tom argue that such measures may not be enough to restart the stalled capital spending cycle.

    0
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    Gavekal Research

    Three Odd Things

    Reserves held by foreign central banks at the Fed are shrinking, which implies there aren’t enough US dollars in the system. This would make sense: the Fed has been draining excess US dollars for the past couple of years. So with shrinking central bank reserves and a shrinking US monetary base, the US dollar should be going up, and most risk assets should be hurting. Oddly, this isn’t happening.

    4
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    Gavekal Dragonomics

    The Sunset Of Housing Subsidies

    China’s local governments are cutting back their slum redevelopment plans, which points to lower government subsidies for housing in 2019. As a result, Rosealea argues, housing sales are likely to have a deeper decline this year, although Beijing will manage the phase-out of subsidies with a careful eye on how it affects the market.

    7
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    Gavekal Research

    The Biggest Investment Story Of 2019

    Now that stock markets around the world have recovered from the year-end panic of December 2018, it is worth returning to the question I posed here on the first trading day of 2019: was the disappointing performance of equities and other risk assets in 2018 the prelude to a deep and protracted bear market, or a contrarian opportunity to “buy the dip”?

    2
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    Gavekal Research

    China’s Credit Cycle Turns

    China’s easing of monetary policy is finally showing some results, with total credit growth delivering a surprising rebound in January. This pick-up suggests that the credit cycle has now bottomed out. But, Chen Long argues, the rebound in credit growth is likely to prove moderate, and economic activity will take more time to stabilize.

    4
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    Gavekal Research

    Video: Containing China's Tech Ambitions

    More constructive rhetoric suggests the US and China may be about to strike a truce on tariffs and market access. However, that does not mean they are about to bury the hatchet. Powerful groups in Washington want to contain China’s rise as a technological power, and the US has many tools at its disposal even if it drops tariffs.

    0
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    Gavekal Research

    The QT Endgame

    A voting member of the FOMC said yesterday that the Federal Reserve should quit shrinking its balance sheet later this year. This was the clearest indication yet that the US central bank will end quantitative tightening one or two years sooner than the 2020-2021 estimate put forward by Chairman Jay Powell last July. I suspect Brainard will get her wish.

    2
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    Gavekal Research

    Thirty Years Later: Tiananmen's Long Shadow

    On Monday we published a piece from Louis in which he assessed the three economic fronts where the US and China are doing battle. In this second part of the series, Louis steps back and considers the chief monetary priorities that China has settled on since the tumultuous events at Tiananmen Square almost 30 years ago.

    1
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    Gavekal Dragonomics

    After The Crash In Car Sales

    Is the long boom in China’s car market finally over? In this piece, Ernan takes stock of the prospects for auto sales after 2018’s historic decline. Since that drop was caused by expiring stimulus policies, sales can stabilize and recover. Future growth, however, is likely to be much slower than the industry has become accustomed to.

    0
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    Gavekal Research

    What Europe’s Political Ructions Mean

    European politics is again heating up. Yesterday saw the Spanish government fail to pass its budget in a move likely to spur fresh elections. Populists in Italy and yellow vests in France are keeping up their campaign of disruption. Given that few of these issues directly threaten the structures of the EU, the question for investors is: Does any of this matter?

    0
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    Gavekal Research

    Fear Not The ‘Earnings Recession’

    US earnings growth is clearly slowing. As global growth ebbs and the effect of last year’s US tax cut wears off, 1Q19 will be worse according to US analysts who in aggregate are predicting EPS to fall -1.4%. Some commentators are even declaring an “earnings recession.” Time to take profits for the year and run to the hills? I’d say “no”.

    5
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    Gavekal Dragonomics

    The Long Arm Of US Export Controls

    While investors eye the progress of US-China talks to avert tariff hikes, the US is mobilizing on another front. In this piece, Dan explains how the US is preparing for more aggressive use of export controls to disentangle the US and Chinese tech sectors. This can certainly hurt Chinese firms, but will also affect US and other tech companies.

    2
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    Gavekal Research

    The UK's Limits To Growth

    For the British economy, it has been a case of “mustn’t grumble” since the 2016 Brexit referendum. However, the effect of a weak fourth quarter GDP report was to debunk any illusion that Brexit uncertainty has been weathered. Such a reckoning was inevitable with or without Brexit, as the UK has in effect hit limits to its growth.

    0
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    Gavekal Research

    Not Such An Ugly Duckling

    A spate of weak data releases last week confirmed Europe as the ugly duckling of key economic regions, and things may soon get worse. The worry is that a weakening external sector negatively impacts the domestic recovery through lower investment and job creation at a time when policymakers face both technical and political constraints.

    1
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    Gavekal Research

    Three Separate Battlefronts In The Unfolding Cold War

    As the clash between China and the US intensifies, Louis notes the primacy that Mao Zedong’s guerrilla tactics would have had in forming the current Chinese leadership’s political consciousness and setting a template for the way they handle conflict. As such, he sees the struggle between the two superpowers playing out on three distinct fronts.

    19
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    Gavekal Research

    EM Balance Sheet Vs Income Statement

    Emerging market investors face a dilemma in 2019. Softer relative growth prospects in the US as the initial effects of 2018’s tax cuts wear off, coupled with the easing of the US dollar liquidity squeeze implied by a more dovish Federal Reserve and softer oil price, favor emerging market assets. The question is: how best to implement this view?

    0
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    Gavekal Research

    The Global Car Industry Catches Chinese Flu

    If the auto industry is a bellwether of global economic health, then much of the world is looking sick. The second half of 2018 was painful for carmakers in all the major auto markets, and 2019 is shaping up to be as bad. Is this just a passing malady that carmakers will soon shrug off, or a chronic condition they will have to manage for years to come?

    3
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    Gavekal Research

    Gaming Out Theresa May’s Gamble

    Given that the UK prime minister has apparently outfoxed her opponents, why has the pound fallen back below US$1.30? The obvious reason is that Theresa May’s unexpected wins in the UK parliament last week look to have increased the chances of a disorderly “no deal” rupture. In reality, however, the chances of “no deal” are no higher today than they were a week ago as the EU and UK opposition are yielding to May’s pressure.

    8
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    Gavekal Dragonomics

    It’s Not 2015 All Over Again

    The profits of China’s industrial sector are turning down—but as Thomas argues in this piece, a repeat of the traumatic downturn of 2014-15 is not in the cards for 2019. Heavy industry will hold up better this time around, but consumer-facing sectors will do worse. This downcycle will be more broad-based, but less severe, than the last one.

    0
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    Gavekal Research

    Portfolio Construction In A Malthusian World

    The two key questions posed by economics are: why do things have “value” and—over time—how does that “value” change? Thomas Malthus showed why people value things that are scarce, like jewels or a Monet painting Alternatively, David Ricardo and Joseph Schumpeter, showed why its worth owning something that is useful—a “tool” from which goods and services can be made and sold at a price that exceeds their cost of production.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2019

    In the call yesterday, Charles Gave and Cedric Gemehl presented their views on the economic and political situation in Europe. Cedric outlined key risks facing Europe’s economy. If the worst is avoided, he thinks Europe could get a soft landing. Charles took a different view, arguing that the eurozone was now an irretrievably diverging system.

    0
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    Gavekal Research

    A Looser Fed And Tighter Banks

    News flow from the US and beyond over recent months has pointed to an easing of financial conditions. A notable exception has, however, emerged: US commercial banks have stopped loosening lending standards and have started to tighten them—just a touch. I remain constructive, but have gotten more cautious about US risk assets.

    0
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    Gavekal Research

    Video: Conflicting Signals From The US Labor Market

    The US labor market is sending apparently contradictory signals. On one hand the unemployment rate ticked higher in January. On the other, job creation was much stronger than expected. Will looks behind the latest data points to examine the labor market’s underlying trends, and concludes they spell relatively bullish news for the US economy and risk assets over the coming months.

    0
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    Gavekal Research

    The Politics Of Indian Largesse

    India aspires to be a US$10trn economy by 2030. It’s fine to dream, but first the ruling BJP must win a general election. After recent defeats in three state elections and a resurgent opposition, it faces a tough race. The interim budget on Friday responded to the Congress Party’s leftist populism while presenting a fiscal plan designed not to spook markets.

    2
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    Gavekal Research

    A Vital Portfolio Construction Lesson

    I am a rules-based investor, and over the years few financial relationships have been more useful to me in reading the economic cycle than the yield spread between long-dated US corporate bonds and 30-year US treasuries. Going back to the late 1970s, no US bear market has unfolded with key spread being below 200bp. It is now 210bp.

    2
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    Gavekal Research

    Strategy Monthly: Europe's Containable Risks

    As China slows and the US expansion limps into its dotage, a heavily export-dependent Europe looks vulnerable to another downturn. The latest growth numbers from Italy and Germany make for especially grim reading. Potential shocks loom in the shape of a hard Brexit, populist discontent in France and Italy and the threat of auto tariffs from the US.

    0
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    Gavekal Dragonomics

    The Large Print Giveth, The Small Print Taketh Away

    China’s government has made a cut in personal-income taxes, rushed out in August 2018, a centerpiece of its response to a slowing economy. Additional tax deductions were unveiled in January, but as Ernan explains, the new details are not that bullish for consumer spending. Enforcement is tightening, and some tax breaks will be phased out.

    0
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    Gavekal Research

    Fed To The Rescue

    It was no surprise on Wednesday that the US Federal Reserve promised to be “patient” about further interest hikes and flexible on the pace and extent of its balance sheet reduction. The Fed’s more dovish stance had been clearly signaled in a series of speeches ahead of yesterday’s policy meeting. As Fed chairman Jay Powell explained, with US inflation data subdued and other major economies slowing, it makes good sense for the Fed to take a “wait...

    0
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    Gavekal Dragonomics

    The Long Plateau In Housing Demand

    While many forecasters had expected China’s steel demand to enter long-term decline as housing construction peaks, in fact it has stayed surprisingly strong. In this piece, Rosealea revisits her housing model, and finds it is consistent with recent trends. Construction should peak in 2020-22, so steel demand can stay elevated for a few more years.

    0
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    Gavekal Research

    The Recession Of 2019: Revisited

    Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).

    4
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    Gavekal Research

    Don't Fear Corporate Leverage (Yet)

    With Brexit, the US-China trade war and a synchronous global slowdown, these are anxious times for investors. But apparently, all these concerns pale in comparison with worries about US corporate leverage. According to a BofAML survey this month, corporate indebtedness is the biggest single worry among fund managers. We beg to differ.

    17
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    Gavekal Research

    A Huawei-Scale Problem

    The charges that US prosecutors have now filed against telecom equipment supplier Huawei are similar to those thrown at two other Chinese tech firms last year. The eventual outcome is likely to be similar: the imposition of export controls that will threaten Huawei’s survival and force it to accede to a restrictive deal with the US government.

    0
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    Gavekal Research

    Favor Local Bonds Over EM Equities

    After a dismal year for emerging market assets in 2018, emerging markets have started 2019 on a positive note, with equities rising 6.5% and local currency bonds up 3% year-to-date. On Friday, Louis looked at shifts in the US dollar, long term US interest rates, credit spreads and the oil price, and concluded they favor emerging market assets through the rest of 2019. Broadly I agree, but I would take a slightly more nuanced stance. The shifts...

    0
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    Gavekal Research

    The Four Prices That Matter

    It is Gavekal’s longstanding mission to develop simple principles that investors can use to navigate complicated financial markets. In this vein, one of our core tenets is that four prices matter more than all others, and together these determine the level of global economic activity and of investor risk appetite. Let us see where they stand as we head deeper into 2019.

    12
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    Gavekal Research

    Video: Skirting Recession In Europe?

    This week the IMF has cut its GDP forecasts for European economies exposed to a synchronous global growth slowdown. Nick gauges the probability that core eurozone economies will fall into recession, examines the scope for stimulative policy responses and explores what the slowdown means for Europe’s financial markets.

    0
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    Gavekal Research

    Germany's Industrial Slump

    With leading indicators in Germany pointing south, and a host of external macro factors looming, things are likely to get worse before they get better. However, much of the potential bad news is already priced into the German stock market. As a result, there is scope for a pick-up in German equities later in the year should the worst of investors’ macro fears fail to materialize.

    1
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    Gavekal Dragonomics

    The Next Liquidity Squeeze On Private Firms

    China’s private firms suffered a big liquidity squeeze in 2018 as regulators cracked down on shadow financing. But in 2019 they must also contend with the threat of another liquidity squeeze: state-owned enterprises hoarding cash and delaying payments. Unless officials force them to stop, SOEs could squeeze another RMB1trn from private firms.

    1
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    Gavekal Research

    The Bull Case For US Housing

    As the US government shutdown drags on, US-China tariff talks stutter, the Chinese growth engine slows, global trade slumps and GDP forecasts get cut, the stream of macro-misery in recent days has seemed relentless. On Tuesday, the US National Association of Realtors added its voice to the dirge, reporting that sales volumes for existing homes fell -10% year-on-year to a three year low in December. With new home sales and construction equally...

    10
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    Gavekal Research

    The Future Of Italian Yields

    Since it became clear Rome and Brussels were moving towards a compromise to end their budget stand-off, Italian assets have outperformed. The yield on 10-year BTPs has fallen, narrowing the spread over bunds. But investors should be wary of positioning for a continued contraction; in both the short and long term, Italy’s deficit and debt dynamics are unpromising.

    2
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    Gavekal Research

    Time For US Curve Steepeners

    Despite the risk-on move of the last four weeks in the US, the two-year to five-year portion of the yield curve remains inverted. And as recent data releases pointing to a slowdown in growth, fears persist that the US economy is heading towards a recession. However, while US growth set to moderate, forecasts of recession are premature.

    0
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    Gavekal Dragonomics

    Not Out Of The Woods Yet

    China’s growth in the fourth quarter slowed to 6.4%. There were some bright spots, notably the resilience of the property market. However, the export sector was weak, and the removal of policy constraints on industry gave a mixed picture. All in all, Beijing’s policy measures so far have at best only cushioned the impact of the slowdown.

    7
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    Gavekal Research

    Mexico 1, Brazil 0

    When Brazil met Mexico in last year’s football world cup, the Brazilian team walked away the victors by two goals to nil. In financial markets too, Brazil has lately been beating Mexico. In recent weeks each country has installed as its president a fiery populist—although they hail from different ends of the ideological spectrum. In Brazil, Jair Bolsonaro is an unabashed right-winger, while his Mexican counterpart Andrés Manuel López Obrador, or...

    8
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    Gavekal Research

    Video: Beyond The Government Shutdown

    As the US government shutdown threatens to enter its fifth week, Will looks back at previous shutdowns to weigh the likely impact on America’s economy and financial markets, against the backdrop of an aging economic cycle, flattening yield curve and tighter financial conditions.

    0
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    Gavekal Research

    Musings On Brexit

    With the UK’s elite intent on frustrating the democratically-expressed will of the British people to quit the EU, the lesson for the rest of the continent is that there can be no legal or peaceful exit from the technocratic super-state. As Charles argues here, this increases the probability of disorderly exits in the future, and therefore greatly heightens European political risk.

    8
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    Gavekal Research

    Trump's Next Trade Target

    Just when the risk from trade politics seemed to be dying down, it’s getting complicated again. Trade talks between the United States and China are in full swing, but just as important are imminent negotiations between the US and the European Union, which are clouded by the US threat to impose tariffs on cars and car parts.

    0
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