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    Gavekal Research

    Beware Of Crowds, And False Prices

    The world’s largest economy is on the cusp of a deflationary depression—at least according to yesterday’s US GDP report. Real growth was up a mere 0.2% annualized in the first quarter, while nominal growth was even lower, at just 0.1%, due to a -0.1% drop in prices. Yet the markets largely looked past this “shocking” report. There were some notable moves yesterday, but not because the market was pricing in economic disaster—far from it.

    6
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    Gavekal Research

    Whither US Manufacturing

    US economic data has started to surprise on the downside, and much of this can be attributed to the manufacturing sector. This is worrying since the sector often leads the general economy. Hence, the $64,000 question is whether we should be bracing for an unscripted recession? Our answer is no, but investors should underweight the US manufacturing sector. In the near term, price adjustments, largely stemming from the energy and commodity price...

    3
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    Gavekal Research

    Drop The Dollar Hedge

    The United States represents more than half of global equity benchmarks (58% of the developed-market world MSCI and 52% of the all-country version). So the key question every global equity investor must answer is whether to be overweight or underweight the US?

    5
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    Gavekal Research

    5C United States: Competitiveness Lost

    We must be in a global recession! At least that is the conclusion an investor might draw if looking only at US trade data. US import and export volumes both collapsed by an annualized –25% in the first two months of the year, something not seen since the 2008 recession, and 2001 before that. An assessment of trade values would result in an even worse conclusion being drawn—a deflationary depression is underway. The truth is that the situation...

    0
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    Gavekal Research

    The US Market’s Silver Lining

    We are no bulls on the US market. Even if growth remains solid, our view is that US equities will struggle to post yet another year of outperformance given that valuations are already stretched, the Federal Reserve is no longer the easiest central bank in town, and the US dollar is no longer super-competitive (see Does It Still Make Sense to Overweight the US? and Turning Cautious On US Equities). Even worse, decent growth is not a given. While...

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    Gavekal Research

    5C US: Doing More With A Flatter Yield Curve

    Banks borrow short and lend long. Hence profits are a function of a) the steepness of the yield curve, and b) how much risk (and return) banks are willing and able to reach for at the long end of the curve—taking either duration risk or credit risk, or both. With this in mind, we consider earnings potential in the three key areas:

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    Gavekal Research

    The Fed’s New Policy: Zero Real Rates

    The Federal Reserve is convinced that the US is not turning Japanese—even though the US consumer price index was flat in February compared with a year ago, having fallen -0.1% in January. Once the effects of lower oil prices abate, the Fed expects inflation to head back toward its 2% target. Whether policymakers are right about this inflation outlook means everything for the trajectory of future policy rate hikes, for two reasons:

    2
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    Gavekal Research

    Who Gains When The Fed Hikes?

    The Fed has lost patience in words only, not in deeds. In its statement yesterday the Federal Open Market Committee dropped its linguistic backstop—the word “patient”—indicating that the first rate rise since 2006 could come as early as June (remember, Fed chair Janet Yellen defined “patience” as meaning there would be no rate hike for at least two meetings after the word’s use). But the underlying message the market took away yesterday is that...

    0
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    Gavekal Research

    The US Corporate Profit Paradox

    The US equity market is richly valued and faces a buffeting headwind in the shape of the soaring dollar. Our recommendation in recent months has been to dial back exposure, but committed investors should stay concentrated in domestic plays rather than firms with a big reliance on international earnings (see Turning Cautious On US Equities). Such a portfolio orientation was borne out by generally weak 4Q14 corporate earnings. But a key part of...

    0
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    Gavekal Research

    Strong Economy, Weak Markets

    The US has been dishing out report after report showing an improving labor market. And the equity market doesn’t like it one bit.

    0
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    Gavekal Research

    5C United States: A Crowded Trade, With Good Reason

    The dollar has had quite a run—with the DXY up 22% since July. This crowded trade is obviously vulnerable to pullbacks. But volatility aside, is there potential for the dollar to rally further in the medium term? The short answer is yes, especially against the euro. But if you want to be contrarian, we suggest going long yen. These calls are based on three factors: (i) relative monetary policy trajectories, (ii) the likely direction of fund...

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    Gavekal Research

    The Sense Of An Ending

    In yesterday’s congressional testimony, Federal Reserve chair Janet Yellen did not indicate that she is backing away from her tentative plan to hike interest rates later this year. Sorry markets. But investors may take comfort in the fact that she has made it crystal clear that rate hikes will not come as a surprise. There will be ample warning.

    0
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    Gavekal Research

    5C United States: The Stars Have Aligned

    The 2013 “taper tantrum” sent mortgage rates up and so put the housing market recovery on hold for a few quarters. But then rates came back down, and the US housing recovery resumed—albeit modestly. We must admit that this “recovery of the recovery” has been weaker and narrower than we expected. And now, a key housing market indicator has rolled over; existing home sales in January fell –4.9% MoM, the biggest decline in more than a year....

    0
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    Gavekal Research

    The Signal In US Market Cap

    The ratio of US stock market capitalization to US gross domestic product has long been a favorite indicator for many investors. The great Warren Buffet himself endorsed it in 2001 as “probably the best single measure of where valuations stand.” But we think we can improve on it. Recent history has shown that it is more appropriate, and more useful, to value US stocks against global GDP. Looking at this measure today we find one more reason to...

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    Gavekal Research

    The Resolute US Motors On

    January saw the oil and gas industry fire more workers than in any period since the 2008 recession. Viewed in this context the overall pace of job growth in the US is remarkably robust. The January jobs report saw non-farm payrolls grow by 257,000, far ahead of the expected 228,000 and confirming 11 straight months of job gains above 200,000. It also reinforces the point that the energy sector is a fairly small part of the US economy, and the...

    1
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    Gavekal Research

    5C United States: An Earnings Season Divided

    Having passed the halfway stage of the 4Q14 earnings season there is a hint of disappointment in the air. On a median basis, sales and earnings grew 4.0% YoY and 6.0% respectively, down from 5% and 10% in 3Q. Unsurprisingly, the misses have mostly come from energy firms and those players which rely on overseas markets, and so suffer from a strong US dollar.

    0
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    Gavekal Research

    US Housing Gets Interesting Again

    You’d think the US housing market should be humming along nicely. Economic growth is decent even as worries of deflation in overseas markets help push long-dated bond yields to record lows, so cutting the cost of home finance. The collapse in oil prices has given households money to spend and pushed consumer confidence readings for January to a post-crisis high. Last week’s GDP report for 4Q14 showed personal consumption growing at an impressive...

    0
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    Gavekal Research

    Turning Cautious on US Equities

    Given their remarkable performance over the last four years, can US equities really continue to outperform global peers? Recent developments give cause for concern as market technicals look weak and earnings announcements for bellwether stocks have come in lackluster. Earlier this week Louis asked some basic questions about US equity market leadership (see Does It Still Make Sense To Overweight US Equities?). We share his concern not because we...

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    Gavekal Research

    5C United States: What If The Fed Really Did Hike This Year?

    Since making its first rate cut in September 2007, the Federal Reserve has delivered seven years of the most intense monetary easing that modern economies have experienced. Now, the world must grapple with the exit strategy. To be sure, that moment of reckoning could be delayed by factors that include lower oil prices, a higher dollar and renewed risk of a Grexit. But, unlike a certain central bank from a country noted for its chocolate and...

    0
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    Gavekal Research

    5C United States: The Economic Ripple Of Cheaper Oil

    Some worry that while US consumers are today benefitting from lower fuel costs, this will be trumped by mass layoffs as the shale energy boom goes bust. We don’t buy it. The shale boom is certainly going to bust, but the size of the US energy sector should not be over-estimated and nor should the positive effects that tend to follow oil price declines be underestimated.

    0
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    Gavekal Research

    Oil And US Contagion Risks

    Oil prices are 50% lower than last summer and it is not clear that the rout is over. Such a dramatic price adjustment in what is arguably the most essential commodity to modern life will inevitably shape the economic and investment landscape in 2015. In the case of the world’s largest oil consumer, our view has been that lower oil prices reinforce the case for a sustained US recovery. Our proviso to this fairly cheery prognosis is that the...

    5
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    Gavekal Research

    The Sources Of US Purchasing Power

    5
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    Gavekal Research

    New York Seminar December 2014 - Charles, Francois, Tom & Will

    We held our winter seminar in New York on December 5 with Charles, Francois, Tom and Will offering their views of the global economic pulse and recent market developments.

    0
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    Gavekal Research

    5C United States: US Capex Will Grow Despite Energy Sector Cuts

    The relentless decline of oil prices promises to be a key variable impacting economic activity in 2015. The positive implication for consumers is clear. The implication for capital spending growth is less obvious. Our view is that the outlook for overall US capital spending is bright, despite the likely collapse of oil-related capex. In fact, it may be brighter because of the collapse in oil prices.

    0
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    Gavekal Research

    5C US: United States: Capital Spending Is Picking Up

    Corporate America has been extraordinarily profitable through the post-2009 recovery, with the latest earnings season once again surprising on the upside. Yet, economy watchers have been frustrated that companies have not used this profitability to fund a capital spending spree. Instead, they have opted to buy back shares and pursue mergers and acquisitions. Our view—considering the economic circumstances—is that this was rational behavior. But...

    0
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    Gavekal Research

    Global Central Banks Are Driving Appetite For US Cyclicals

    The rebound in US equities since their mid-October trough has been impressive. After giving up almost all its year to date gains in just four weeks, the S&P 500 snapped back even more quickly, ending October at a new record high. Since then, it has extended its advance to notch up a YTD gain of 12%. Yet, until just a few days ago, the relative performance of sectors within the index indicated a degree of caution on the part of investors....

    0
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    Gavekal Research

    5C US: To The Consumer Go The Spoils Of Shale

    The US shale energy revolution will continue to confer economic benefits, but a reordering of the main winners and losers is unfolding. With the WTI benchmark at $77/barrel and seemingly headed lower, the US shale oil drilling industry is set for a significant slowdown. That is bad news for the energy companies, equipment suppliers and those states with heavy exposure to the sector—all of which have had a great few years (see Is The Shale Boom...

    0
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    Gavekal Research

    The Most Reliable Source Of Demand

    The strong third quarter growth in US gross domestic product announced yesterday—a 3.5% annualized rate—not only suggested that the American economy is on a sustainable upward trajectory; it also confirmed that the Federal Reserve’s decision to end quantitative easing is appropriate. Although the faster-than-expected headline growth figure was partly driven by government spending, the two key engines of the economy—business capital spending and...

    1
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    Gavekal Research

    Walking Without The QE Crutch

    After three rounds, six years and some US$3.7trn in asset purchases, the US Federal Reserve yesterday finally called time on its program of quantitative easing, and shifted its language on the US labor market from ultra-dovish to something slightly closer to neutral. Investors took the news in their stride, largely untroubled by the Fed’s confirmation that it is to take away what many had long regarded as an essential crutch for asset prices....

    3
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    Gavekal Research

    Is The Shale Boom Turning To Bust?

    America’s shale bonanza has been one of the great success stories of the last ten years. Since the mid-2000s, the US energy industry has transformed itself, as rising international energy prices and advances in horizontal drilling made it feasible to exploit vast hydrocarbon resources locked away in the shale beds which underlie much of the country east of the Rockies. As companies drilled new wells by the thousand, domestic production soared,...

    15
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    Gavekal Research

    Fed To The Rescue?

    “Lord, grant me chastity and continence, but not yet.” That prayer from a young Saint Augustine sprung to mind when listening to St. Louis’ Fed president, James Bullard, suggest yesterday that the Federal Reserve may extend its quantitative easing program beyond the planned end date on October 29. Bullard thinks the Fed should “invoke that clause about it being data dependent” and keep buying $15bn worth of treasuries and mortgage bonds, at...

    0
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    Gavekal Research

    Five Corners (October 15): The Equity Rout

    Overview: François Chauchat asks whether a US recovery is enough to drive global equity markets or has the world changed.

    0
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    Gavekal Research

    5C US: Domestic Plays Beat Multinationals

    The current sell-off has left few places to hide, but some areas have done worse than others. Small caps have underperformed large caps; cyclicals have fallen versus defensives; and foreign markets have done worse than the US (especially in US dollar terms). While our clients have surely given a lot of thought to these trends, today we suggest dividing the US equity market another way: between ‘domestics’ and ‘multinationals’.

    2
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    Gavekal Research

    Seek refuge In The US

    Markets have suffered a significant risk-off move in the last month. US equities have fallen as much as –3.8%; European stocks are down -6% in euro terms and –8% in US dollar terms, and government bonds have been bid up while credit spreads have widened. Readers are surely wondering what to do now: Buy the dip, or sell everything before this turns into a full-on bear market? Hold steady, or adjust portfolios? To answer these questions, we have...

    6
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    Gavekal Research

    5C US: Beware The Small Cap Energy Effect - Will Denyer & Tan Kai Xian

    The US hydrocarbon industry continues to suffer weak natural gas prices and must wait until 2016 before new LNG export terminals allow more gas to be shipped overseas. Hence, active production rigs in areas such as Texas and North Dakota are increasingly being used to extract oil. The expansion of US crude production has seen output reach 8.6mn barrels per day, back to levels seen in the 1980s; and the rig count continues to rise. But if this is...

    0
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    Gavekal Research

    Can Working Women Revitalize Japan?

    In his reshuffle earlier this month, prime minister Shinzo Abe appointed five women to Japan’s cabinet. By more than doubling the number of senior ministerial posts held by women, Abe was hoping to lend some extra impetus to the ‘third arrow’ of his ‘Abenomics’ program to revitalize Japan’s economy. The first two arrows—fiscal and monetary stimuli—have succeeded in weakening the yen to a six year low against the US dollar, returning Japan to...

    1
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    Gavekal Research

    The Fed And The Volatility Conundrum

    As investors digested the utterances from yesterday’s FOMC meeting, the broad US dollar index jumped a meaty 1%, gaining against every major currency. At first glance, such a volatile reaction seems odd. After all, the statement was an effective non-event—just another well telegraphed $10bn tapering of asset purchases, that leaves the Federal Reserve on course to end its quantitative easing program next month. If anything, this could have been...

    0
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    Gavekal Research

    Cutting Through The Noise: A New Inflation Indicator

    The outlook for US inflation and monetary policy was already cloudy, even before the Federal Reserve further muddied the waters yesterday with its conflicting signals. To help clients pierce through the haze, Will and KX have developed a new composite diffusion index to provide a reliable leading indicator of US consumer inflation, which they are publishing for the first time in today’s Chartbook. Based on five components from both the money and...

    2
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    Gavekal Research

    The Maturing US Recovery, Policy & Markets

    World markets are jittery going into a two day Federal Reserve meeting on the “good-is-bad” concern that a sustained recovery will produce a faster than expected move toward monetary tightening. In this chartbook Will provides a comprehensive update of his US economic view and explains what these projections mean for policy setting. His bottom line is that the US economy looks more like it did in 2004 than in 2007. Hence, there is every reason...

    6
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    Gavekal Research

    5C US: The Reaction To Fed Tightening

    Yields at the short end of the US bond market are creeping up as it looks increasingly likely that the Federal Reserve will hike rates next year, perhaps in the first half. Recent data showing a maturing US recovery support these moves (see yesterday’s Chartbook: The Maturing US Recovery, Policy & Markets).

    0
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    Gavekal Research

    5C US: Cutting The Slack

    Federal Reserve chair Janet Yellen opened her speech in Jackson Hole with the fairly obvious assertion that the labor market has made major improvements but has yet to recover fully. We agree. Our preferred cyclical labor market indicator, the employment-to-population ratio for core working ages 25-54, has risen to 76.6% from the trough of 74.8% in late 2010, but it is still way below its pre-crisis peak of 80.7%.

    0
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    Gavekal Research

    Hello US Capital Spending?

    The US has managed a steady but sub-par economic recovery with the crucial missing ingredient being a sustained pick-up in capital spending. There is some evidence this may be changing since yesterday’s second revision for 2Q14 GDP pointed to the main two engines of investment spending starting to fire simultaneously. It may be too early to declare the start of a new capital spending cycle, but for pretty much the first time since the post-2009...

    0
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    Gavekal Research

    The Shifting Sands Under US Homes

    The US housing market seems to be coming off the boil with the latest national price measures pointing to significantly reduced gains. The worry is that professional investors are pulling back from the market as the share of home purchases made with cash fell to 37.9% in 2Q14 from a high of 42% the previous quarter (see report). Private equity firms such as Blackstone Group, the largest private landlord in the US, have bought an estimated 200,...

    2
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    Gavekal Research

    The US Consumer Lives, Really

    Even as US real wage growth has picked up over the last 18 months, consumption spending has been slow to respond. The relatively weak state of the US consumer, once the irresistible force pulling along the global economy, has emboldened those advocating a ‘secular stagnation’ thesis. But is this really a fair analysis? The answer has a particular relevance as central bankers gather for the Federal Reserve’s annual Jackson Hole shindig and...

    0
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    Gavekal Research

    Five Corners (20 August): Velocity Of Money

    In the latest bi-weekly review of global economics and investment we focus on the velocity of money and the credit cycle in the major economic regions: Overview: Charles Gave notes with concern the downturn in the Gavekal Velocity Indicator. US: Will Denyer looks where the US is in the credit cycle and argues it looks more like 2004 than 2007. Europe: François Chauchat argues that contrary to popular belief Europe’s long credit crunch is...

    0
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    Gavekal Research

    5C US: Is This 2004 Or 2007?

    The tide is coming in. The US business cycle is maturing from the recovery phase to the expansion phase. Credit is growing and money is flowing.

    0
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    Gavekal Research

    US 2Q Earnings Favor Industrials

    As the second quarter US earnings season winds up, the dominant picture is of stronger sales and faster earnings growth. That’s handy. In the early stages of this five year bull market, it was central bank liquidity that pushed equity prices higher. Then over the last two years, multiple expansion took over. Now, with valuations back in line with fair value, top and bottom line growth are emerging as the market’s main driving force (see The...

    3
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    Gavekal Research

    5C US: The Fed's Balance Sheet: No Change Is A Big Change

    The largest balance sheet in the land will almost surely see a year of stability after the Federal Reserve’s latest round of QE purchases tapers off in October. But that stability will itself be a big change from recent years. It will be interesting to see how the market reacts.

    2
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    Gavekal Research

    The US Growth Engine Sparks Into Life

    Second quarter US GDP growth came in encouragingly strong at 4% quarter-on-quarter annualized, much better than the expected 3%. At the same time the 1Q number was revised up to -2.1%. That’s up from -2.9%, but it’s still a contraction; so a strong 2Q reading was crucial to show the previous GDP number was just a blip and not the start of a slide into recession. But looking past the headlines, was this really a strong report?

    0
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    Gavekal Research

    5C US: No Longer Cheap, But Keep Reaching For Yield

    In 2012 and early 2013, it was easy to argue in favor of selling bonds and loading up on US equities on the basis of valuations alone. Equities were extremely cheap, bonds extremely expensive, and you would have been hard pressed to find standard metrics to indicate otherwise. Even Charles, who was anything but enthusiastic about the US policy mix, suggested overweighting equities and shunning bonds. Now the valuation call is no longer obvious,...

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