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Gavekal Research
Will Denyer
Apr 02nd 2015
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
Will Denyer
Apr 01st 2015
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
Will Denyer
Mar 25th 2015
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:
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Gavekal Research
Will Denyer, Tan Kai Xian
Mar 19th 2015
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Mar 17th 2015
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...
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Gavekal Research
Will Denyer
Mar 11th 2015
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.
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Gavekal Research
Will Denyer
Mar 08th 2015
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
Will Denyer, Tan Kai Xian
Feb 25th 2015
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.
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 23rd 2015
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....
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Gavekal Research
Will Denyer
Feb 18th 2015
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
Will Denyer, Tan Kai Xian
Feb 09th 2015
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 06th 2015
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.
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 03rd 2015
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Jan 30th 2015
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
Will Denyer
Jan 25th 2015
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Jan 14th 2015
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.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jan 06th 2015
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Dec 12th 2014
The Sources Of US Purchasing Power
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Tom Miller
Dec 09th 2014
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.
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Gavekal Research
Will Denyer
Dec 08th 2014
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.
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Gavekal Research
Will Denyer, Tan Kai Xian
Nov 25th 2014
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Nov 25th 2014
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....
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Gavekal Research
Will Denyer
Nov 09th 2014
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Oct 31st 2014
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...
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Gavekal Research
Anatole Kaletsky, Will Denyer
Oct 30th 2014
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....
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Gavekal Research
Will Denyer, Tan Kai Xian
Oct 28th 2014
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,...
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Gavekal Research
Will Denyer
Oct 17th 2014
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...
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Gavekal Research
François-Xavier Chauchat, Will Denyer, Joyce Poon, Udith Sikand, Tan Kai Xian
Oct 15th 2014
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.
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Gavekal Research
Will Denyer, Tan Kai Xian
Oct 08th 2014
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’.
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Gavekal Research
Will Denyer
Oct 08th 2014
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Sep 26th 2014
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...
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Gavekal Research
Will Denyer
Sep 22nd 2014
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...
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Gavekal Research
Will Denyer
Sep 18th 2014
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...
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Gavekal Research
Will Denyer, Tan Kai Xian
Sep 18th 2014
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...
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Gavekal Research
Will Denyer
Sep 16th 2014
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...
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Gavekal Research
Will Denyer
Sep 12th 2014
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).
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Gavekal Research
Will Denyer, Tan Kai Xian
Sep 01st 2014
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%.
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Gavekal Research
Tan Kai Xian
Aug 29th 2014
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...
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Gavekal Research
Tan Kai Xian
Aug 28th 2014
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,...
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Gavekal Research
Will Denyer, Tan Kai Xian
Aug 20th 2014
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...
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Joyce Poon, Udith Sikand, Long Chen
Aug 20th 2014
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...
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Gavekal Research
Will Denyer
Aug 14th 2014
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.
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Gavekal Research
Tan Kai Xian
Aug 11th 2014
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...
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Gavekal Research
Will Denyer
Aug 01st 2014
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.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jul 31st 2014
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?
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Gavekal Research
Will Denyer
Jul 16th 2014
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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Gavekal Research
Will Denyer
Jul 07th 2014
The Next Phase Of The Rally
With US equities making new highs and another earnings season now under way, it is a good time to remember that to be sustainable, a bull market should rest on three pillars: liquidity, valuations, and growth. At any given point in time, however, just one of the pillars is likely to be doing most of the load-bearing. Consider the current bull market. At the outset, central bank liquidity played the key role. Then last year was largely about...
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Gavekal Research
Will Denyer
Jul 02nd 2014
5C US: The Inflation Rebound Is For Real
US inflation measures have bounced back up near the Federal Reserve’s 2% target. This is not just noise. The rebound is evident not only in the volatile headline CPI, but also in the core and median metrics (see chart). Moreover, there is growing corroborating evidence of economic actors regaining pricing power.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jun 24th 2014
US Construction: Once More Into The Breach
Having been a key driver of the US economic recovery, the residential property sector has had a tough year. Ructions in the bond market last summer forced up mortgage rates and gave a shock to both buyers and builders of property. And just as markets calmed down, severe winter weather meant that construction workers were more likely to break their tools than break ground on fresh projects. The onset of warmer weather has inevitably produced a...
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Gavekal Research
Will Denyer
Jun 20th 2014
5C US: Housing Will Support Growth Again - Will Denyer
For the US economy to grow at a decent clip in the coming quarters two things are required from the housing market. The recovery in construction needs to be confirmed, and house prices must hold up.
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Gavekal Research
Will Denyer
Jun 17th 2014
Will The Fed Spoil The Party?
With tapering set to consign quantitative easing to the history books before the end of this year, the burning question now is how long the US Federal Reserve will stick to its zero interest rate policy (ZIRP). The statement following this week’s two-day meeting is unlikely to tell us anything we don’t already know. But we will all listen to tomorrow’s press conference for any guidance on short term interest rate policy. The consensus is that...
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Gavekal Research
Will Denyer, Tan Kai Xian
Jun 09th 2014
5C US: Profits: Past The Peak Or Just A Blip?
US statisticians recently provided a far more shocking view of the first quarter than the benign picture we got from the S&P500 earnings season, reinforcing concerns that the exceptional US profit story is peaking and that margins are finally going to mean revert.
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Gavekal Research
Will Denyer, Tan Kai Xian
May 30th 2014
Unpicking The US Capital Spending Puzzle
US statisticians told us yesterday that GDP, business investment, and corporate sales all dropped in 1Q14. Such weakness can be blamed on freak winter weather, but looking back to last fall, growth trends were not exactly stellar. The nagging issue for US economy watchers in recent times has been the sustained weakness in business investment. In the immediate aftermath of the 2008-09 slump capital spending (ex-housing) snapped back, raising...
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Gavekal Research
Arthur Kroeber, Will Denyer, Joyce Poon, Tan Kai Xian, Nick Andrews, Long Chen
May 28th 2014
Five Corners (28 May 2014)
In the latest bi-weekly review of global economics and investment:
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Gavekal Research
Will Denyer
May 26th 2014
High Profit Margins Are Here To Stay
Non-financial profit margins in the US stand at more than 6% today. By the standards of the last 40 years, this is a sky-high reading. But although high compared to recent historical levels, it is not unprecedented. Looking at the history books, we found that US companies enjoyed similarly fat margins in the 1960s. That caused us to wonder: what can this uncertain age possibly have in common with the go-go years of the 1960s? The answer is weak...
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Gavekal Research
Will Denyer, Tan Kai Xian
May 22nd 2014
5C US: Hello Stagflation?
Inflation’s back. In April US CPI rose to 2% YoY with both goods and services making a meaningful contribution. Manufacturers are starting to report higher output prices according to business surveys by the Philadelphia Fed and the NFIB, a small business representative body. After a weak GDP growth in 1Q14, mutterings of “stagflation” can be heard in the bear camp. But is this really what the data suggests?
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Gavekal Research
Will Denyer
May 22nd 2014
The End Is In Sight For Zero US Rates
US inflation is rebounding. Both goods and services prices increased in April, pushing the CPI up to 2% YoY after nearly a year below the Federal Reserve's target. Pressure is coming from housing rents and, lately, from the rebound in commodities. Businesses are also raising prices as wage growth squeezes margins, and better off consumers prove willing to pay more. This could be viewed as just the rebound in real activity and inflation that...
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Gavekal Research
Will Denyer
May 19th 2014
Time To Sell Treasuries
The benchmark 10-year treasury yield has traded sideways in a range from 2.5% to 3% since the taper tantrum of last summer. Now it is threatening to break out on the downside. If you expect a collapse in yields, you should load up on bonds and sell everything else. We don’t.
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Gavekal Research
Will Denyer, Tan Kai Xian
May 13th 2014
Fat Margins, Thin Growth Prospects
With more than 450 of the S&P 500’s constituents having reported first quarter earnings, investors were sufficiently happy with the outcome of the results season to bid the index up to a new record close of 1,897 on Monday. In aggregate, the story told by first quarter earnings was more of the same—extraordinary margins, but lackluster growth. As a result, the pessimists expecting a collapse in growth or a mean reversion in margins have been...
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Gavekal Research
Will Denyer, Tan Kai Xian
May 08th 2014
5C US: A Rotation Into Value, Not Defensives
Since mid March, we have seen a drastic rotation into value stocks. Clearly, investors are starting to rethink the kind of multiples they are willing to buy into.
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Gavekal Research
Arthur Kroeber, Will Denyer, Joyce Poon, Tan Kai Xian, Nick Andrews, Long Chen
Apr 30th 2014
Five Corners (30 April 2014)
In the latest bi-weekly review of global economics and investment, Arthur Kroeber considers the implications of Asian deflation. Will Denyer & Tan Kai Xian consider the strong rental market for US homes and wonder what this means for the broader housing sector. Nick Andrews looks up close at reduced liquidity in the eurozone’s financial system. Chen Long looks at a favorable convergence between national GDP numbers and the growth claims made...
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Gavekal Research
Will Denyer, Simon Pritchard
Apr 29th 2014
What Ails The Dollar
A curious brew of cheap money, a grinding cyclical recovery and “new economy” verisimilitude has helped drive Wall Street to new highs. And yet even as equity investors have scaled the wall of worry, the dollar has remained uninspired. The unit arguably started a structural upswing in 2008 but the recent performance has been lackluster with the DXY index at the bottom of its trading range.
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Gavekal Research
Will Denyer, Tan Kai Xian
Apr 22nd 2014
5C United States: Fed Targets + Weak Global Inflation = Rising Rents
The US housing market has had a rough time recently—first mortgage rates rose then an extreme winter hit. So don’t expect residential construction to be a positive contributor to first quarter GDP growth (out Thursday). But how will the housing market fare going forward? Our bet is that it won’t be too bad.
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Andrew Batson, Joyce Poon, Udith Sikand
Apr 16th 2014
Five Corners (16 April 2014)
In the latest bi-weekly review of global economics and investment, Charles Gave explains why it still pays to run a balanced portfolio, despite the market’s rotation. Will Denyer argues that outlook for US consumption remains favorable, even though consumer cyclicals have taken a beating. François-Xavier Chauchat examines the reasons behind the euro’s persistent strength. Andrew Batson looks at Beijing’s new focus on jobs and finds the...
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Gavekal Research
Will Denyer
Apr 14th 2014
Buy The Dip, With A 30y UST Hedge
Imagine that a colleague has just returned from a one-month holiday and asks for an update. You start by telling him two things: 1) US consumer discretionary stocks have fallen -5% MoM; and 2) the yield on the 30-year US treasury bond broke below 3.5% last night, re-crossing that threshold for the first time since yields rose during the ‘taper tantrum’ last summer.
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Gavekal Research
Will Denyer
Apr 11th 2014
5C US: The Consumer Defies Market Jitters
Vexed US commentators have been on tenterhooks to see whether soft US growth data really could be blamed on the weather. The worry was that the winter shivers had obscured an underlying deterioration in the US outlook. In fact, an enlivened US consumer tells us that it was a temporary weather-related soft patch.
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Gavekal Research
Will Denyer
Apr 10th 2014
Making Sense Of Fed Talk & Actions
Is the Federal Open Markets Committee playing games? Should we listen to what it says or watch what it does? Is it easing or tightening, dovish or hawkish? As the Fed moves from “all guns blazing” to a nuanced and gradual exit strategy, these questions are inevitable. We’ll do our best here to make sense of it all and chart the trajectory of US monetary policy.
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Gavekal Research
Will Denyer
Apr 02nd 2014
The US Consumer Must Lead
Back in the depths of winter when the polar vortex was causing daily life in the US to grind to a halt, we looked forward to March and April data and mused that the US economy might rebound like a coiled spring. The hope was that pent up demand would allow the US economy finally to achieve escape velocity. The alternative was another false dawn as companies and households remained hunkered down (see The Ides Of March). This week has seen the...
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Gavekal Research
Will Denyer
Mar 26th 2014
5C US: What To Make Of The Surge In C&I Loans?
In a surprising turn of events, US bank loan growth has bounced back, posting the strongest growth since 2008. After decelerating from annual growth rates of around 5% in 2012 to less than 2% last year, bank loans jumped in the first quarter of this year at an annualized rate of 9.3%. Leading the charge was a 17.5% annualized rise in commercial & industrial loans. Several clients have asked what we make of it.
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Gavekal Research
Will Denyer, Tan Kai Xian
Mar 24th 2014
The End Of The Automobile? Not So Fast
US auto sales have had a strong run and are nearly back on their pre-crisis trend. This is hardly surprising since Americans have long shown a willingness to scrimp on life’s essentials rather than give up their vehicles—through the 1930s depression they kept on driving even while relying on soup kitchens for nutrition. But how much juice is left in this purring engine of US consumption?
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Gavekal Research
Will Denyer
Mar 21st 2014
Fannie-ing The Flames Of A US Housing Downturn?
The US housing recovery has had a rough run in the past nine months. First there was the taper tantrum, that drove up mortgage rates. Then the record cold winter interfered with sales and construction, highlighted once again by yesterday’s poor home sales data for February. Between the normalization of housing affordability and the extreme weather in January and February, we can expect housing construction to provide another negative...
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Gavekal Research
Will Denyer
Mar 16th 2014
5C US: What If The Fed's BS Doesn't Shrink?
The Federal Reserve’s publicly stated exit strategy has one element that is unsettling for any investor who cares to look that far ahead. The Fed calls this element a “normalization” but that mild word does little to mask the harsh reality: we are talking about the biggest contraction of a central bank balance sheet the world has ever seen.
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Gavekal Research
Will Denyer
Mar 07th 2014
It's All Good In America, And All Bad In China
“By three methods we may learn wisdom: First by reflection, which is noblest. Second, by imitation, which is easiest. And third by experience, which is the bitterest.” - Confucius.
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Gavekal Research
Will Denyer
Mar 01st 2014
5C US: Balancing The Risks On Margin Debt
US investors have leveraged up their portfolios like never before. Equity margin debt levels exceed the lofty peaks of the 2000 tech boom and the 2007 credit bubble. With more of the market posted as collateral, the risk is ever greater that moderate selloffs become exaggerated by margin calls and forced selling.
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Gavekal Research
Will Denyer
Feb 20th 2014
No Building, No Tapering?
The main message from the minutes of the January FOMC meeting was summed up yesterday by San Francisco Fed President John Williams, who said in a TV interview that the “hurdle is pretty high on changing the pace of the step-downs in our [asset] purchases.” But if the economic data does not improve soon, we might just find out how high is “pretty high.”
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 14th 2014
5C US: A Little Late For Early Cyclicals
US consumer discretionary stocks are considered “early cyclicals” because they tend to outperform in the first two or three years of the cycle. This time around, the firms that make everything from iPhones to automobiles have outperformed for nearly five years! Are we really still in the early part of this cycle? Or are we starting to see signs of fatigue in an overextended rally? The sector is down –2.4% year to date, finally underperforming...
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Gavekal Research
Will Denyer
Feb 12th 2014
Continuity-Of Bad Policy
It was a busy day on Capitol Hill yesterday. In a notable departure from the budget battles of recent years, the Republican-controlled House passed a clean debt ceiling bill to fund the Treasury for the next thirteen months (despite the fact that Paul Ryan voted against funding the budget he himself negotiated). Meanwhile, the House Financial Services Committee gave Janet Yellen her first opportunity as the new chair of the Federal Reserve to...
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Gavekal Research
Will Denyer
Feb 01st 2014
5C US: What Might Lead Yellen To Pause Tapering?
As capital flees emerging markets, some foreign policymakers have begged the Federal Reserve to go easy with the tapering. Sorry guys. If Janet Yellen is anything like her predecessors such pleas will fall on deaf ears. (Just as foreign pleas a few years ago, to stop fueling global inflationary flames with the same QE programs, cut little mustard). But Yellen will be intently watching the bond market.
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Gavekal Research
Tan Kai Xian
Jan 24th 2014
An Elitist Housing Recovery
Yesterday’s data spit showed that US existing home sales edged up slightly in December, good news after several months of declining momentum. But it remains to be seen if the US housing recovery can get back on track, and this is worrying for two reasons. The first, obvious one, is that the rebound in house prices since 2011 has been a key support for an otherwise struggling US economy. The second worry is that consumer confidence has been...
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Gavekal Research
Will Denyer, Tan Kai Xian
Jan 18th 2014
5C US: The Yield Spread Matters For Profit Margins
With US corporate profit margins at extreme highs, investors are on high alert for the dreaded “mean reversion.” One concern has been that after years of benefitting from extremely low interest rates, margins are going to fall as rates normalize. We don’t buy it.
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Gavekal Research
Will Denyer
Jan 16th 2014
Deflation In 2014? Not In The US
Curse words attract attention, as IMF managing director Christine Lagarde knows after dropping the D-bomb yesterday. Amidst her fairly balanced outlook for the global economy in 2014, it was her comments on deflation that attracted all the media attention:
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Gavekal Research
Will Denyer
Jan 05th 2014
5C US: What Is Normal In 2014?
After years of extremes, we begin this year with many of our indicators back at normal levels. Perhaps most importantly, households have deleveraged. To be sure, income and wealth inequality remain an issue, but a steep decline in debt and a dramatic rebound in asset prices has put aggregate leverage on household balance sheets back to levels seen in the 1990s (see Is The Deleveraging Over?).
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Gavekal Research
Will Denyer
Dec 12th 2013
US Government Spending, Recent Past And Near Future
The US looks to have reached a fiscal détente this week in the shape of a bipartisan mini-budget deal brokered by Paul Ryan and Patty Murray. The package will allow for a small rise in government spending next year, but its main effect will be to avert another Washington showdown and potential government closure for at least two years.
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Gavekal Research
Will Denyer
Dec 01st 2013
5C US: Good News Is Good News
US growth data is looking up. Despite the government shutdown, manufacturing PMIs have now provided back-to-back positive surprises in both October and November. In fact, outside France and Spain, most PMIs around the globe are rising. But you wouldn’t know it by looking at your Bloomberg screens.
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Gavekal Research
Will Denyer, Tan Kai Xian
Nov 27th 2013
On Profits: There Will Be No Revolution
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Gavekal Research
Will Denyer
Nov 16th 2013
5C US: A Shale Boost To Downstream Earnings
So far it has been business as usual this earnings season, with companies managing to squeeze reasonably decent profits out of lackluster sales. In the few areas where we did see surprises, the shale gas revolution was a factor.
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Gavekal Research
Will Denyer
Nov 02nd 2013
5C US: Can We Keep Climbing The Wall Of Worry?
Data was mixed, Washington remained dysfunctional, but corporate earnings were decent and the Fed stayed incontinent. Despite this muddled state of affairs, equities made new highs. So it was another normal week in the US, but did we learn anything new?
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Gavekal Research
Will Denyer
Oct 31st 2013
How Slack Is The US Labor Market?
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Gavekal Research
Will Denyer
Oct 29th 2013
Brace For US Disappointments
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Gavekal Research
Will Denyer
Oct 18th 2013
5C US: Fed To Ease While Tightening
While no major policy changes are expected at next week’s FOMC meeting, the market will leave no tea leaf unturned in the run-up. One action already garnering attention is the Federal Reserve’s testing of a new operation—the overnight fixed-rate reverse repo facility. This is an interesting new lever that the Fed may pull during its exit. It is worth understanding the context and rationale behind this new tool.
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Gavekal Research
Will Denyer
Oct 04th 2013
5C US: Thinking The Unthinkable
Hitting the debt ceiling is unlikely, but quite possible. This raises the unthinkable prospect that the US might default on its debt, thereby removing the pillar upon which rests the modern global credit system, the current reserve currency, and arguably the whole fiat money system—namely, the full faith and credit of the US government.
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Gavekal Research
Will Denyer
Sep 26th 2013
Is US Consumer Deleveraging Over?
The Federal Reserve’s latest snapshot of US household balance sheets, contained in its Flow of Funds report, shows that net worth rose a further 1.8% in the second quarter. Meanwhile net household borrowing was flat. This is a continuation of a multi-year story. Through a combination of unprecedented debt reduction and a rebound in both equity and house prices, major progress has been made in the US household deleveraging story. In fact, we have...
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Gavekal Research
Will Denyer
Sep 20th 2013
5C US: A Valuation Tool For Residential Construction
One of the reasons the Federal Reserve delayed QE tapering last week was to allow more time to assess how the economy reacts to the rise in interest rates since May. The residential construction sector is an obvious area of focus. How will it do? My bet: OK.
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Gavekal Research
Will Denyer
Sep 18th 2013
Expectations All But Tapered
Today is the big day when Ben Bernanke is expected to begin the process of finishing what he started. It has been a strange week in markets with Larry Summer’s surprise move putting attention back on the current Fed’s policy approach. Market reaction to Summers’ withdrawal from the Fed chairmanship race has been to assume that President Obama will now appoint a consensus candidate, most likely Janet Yellen (see Summer’s Officially Over)....
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Gavekal Research
Will Denyer
Sep 08th 2013
5C US: America Is Ready And Willing For Tapering
Next week Ben Bernanke is expected to announce that the US economy and its financial system are ready to tolerate a gradual tapering of the Federal Reserve’s bond purchase program. Encouragingly, the money markets, bond and equity markets, as well as business managers, all seem to agree. Confidence runs high.
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Gavekal Research
Will Denyer
Aug 23rd 2013
5C US: The Bond Sell-Off Has Not Overshot
The great bond trade is now unwinding. And as is typical of bursting bubbles, there is potential for bonds to overshoot. But they have not done so yet.
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Gavekal Research
Will Denyer
Aug 22nd 2013
The End Is Nigh
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Gavekal Research
Will Denyer, Tan Kai Xian
Aug 15th 2013
Student Loans: Bubble, What Bubble? - Will Denyer & Tan Kai Xian
Last Friday, the US enacted legislation that will peg the interest charges on student loans to 10-year treasury yields. The move headed off an automatic surge in loan rates and should ensure reasonably priced student finance for years to come. But even as Washington celebrated an outbreak of bipartisanship there were concerns that these latest reforms could wrongly incentivize young Americans to pursue higher education.
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Gavekal Research
Will Denyer
Jul 26th 2013
5C US: Disability And The US Job Market
Global investors with an interest in Federal Reserve policy moves have rarely had to scrutinize the US labor market so closely. However, we wonder if a substantial part of the US employment picture is being overlooked by most observers. If so, the implication for future monetary policy decisions could be significant.
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Gavekal Research
Will Denyer
Jul 23rd 2013
Taper Timing: What To Watch
In case you hadn’t noticed, Ben Bernanke wants to dial back the Federal Reserve’s quantitative easing program later this year. This has focused intense scrutiny of the chairman’s every utterance, which is turning hard-nosed Fed-watchers into amateur psychologists. Some ask whether he will initiate a tapering of the program as a professional courtesy to his successor, while others opine on the legacy he may want to secure in the central banking...
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