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E.g., 23-01-2022
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    Gavekal Research

    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...

    7
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    Gavekal Research

    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.

    3
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    Gavekal Research

    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...

    4
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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:

    3
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    Gavekal Research

    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?).

    2
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    On Profits: There Will Be No Revolution

    7
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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?

    0
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    Gavekal Research

    How Slack Is The US Labor Market?

    8
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    Gavekal Research

    Brace For US Disappointments

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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...

    7
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    Gavekal Research

    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.

    3
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    Gavekal Research

    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)....

    0
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    Gavekal Research

    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.

    1
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    Gavekal Research

    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.

    0
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    Gavekal Research

    The End Is Nigh

    1
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    Gavekal Research

    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.

    19
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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...

    6
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    Gavekal Research

    Housing, Bonds & Ben Bernanke

    Ben Bernanke again tried to calm market nerves yesterday by stressing the conditionality of any tapering to the Federal Reserve’s quantitative easing program. In particular, the Fed chairman pointed out that his committee “will be watching to see if the movement in mortgage rates has any material effect on housing.” This is important qualification since yesterday saw new data released which suggests the recent rise in prices and interest rates...

    2
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    Gavekal Research

    Five Corners (17 July 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    0
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    Gavekal Research

    Will Higher Rates Kill US Housing?

    Both US house prices and interest rates have experienced big upward moves—raising the obvious question of whether a higher cost of money will derail the housing recovery. Our approach was to test affordability levels based on a range of higher interest rates. We found that the housing market can easily bear 10-year treasury yields at 3%, and may eventually bear higher rates than that, but the fast and easy gains are behind us.

    5
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    Gavekal Research

    What's Wrong With An Optimistic Fed?

    The Federal Reserve made no policy changes yesterday—short rates remain near zero and quantitative easing continues at a fast clip of $85bn per month. The Fed did however adjust its economic projections, for the better—unemployment is expected to fall faster than previously thought, and inflation lower. Chairman Bernanke then spent an hour with reporters trying to clarify what this means for the future policy trajectory.

    3
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    Gavekal Research

    Five Corners (19 June 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    0
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    Gavekal Research

    The Truth About US Rates

    Interest rates in the US are extraordinarily low. It is common to blame this situation on central bank manipulation, but Federal Reserve bond buying is only part of the story. The bigger reason for ultra-low rates is that bond markets are pricing in an assumption that the past five years of abnormally low nominal GDP growth will be repeated. We think this is unlikely: nominal GDP growth is picking up and bond yields will rise with it. The...

    0
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    Gavekal Research

    Is It A Bond Bear Market?

    0
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    Gavekal Research

    Good, But Not Out Of The Woods Yet

    After weeks of relentlessly disappointing growth data, the US finally delivered a major positive release. Stronger-than-expected payroll numbers set off an equities rally and pushed up bond yields. This report comes as a relief —but we are not out of the woods yet.

    5
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    Gavekal Research

    New Century, New Structural Growth Rates

    In the second half of the last century, the US labor force was swelled by baby boomers and a surge of female participation. These major demographic forces shaped the economy and established growth expectations. But they have since changed dramatically. The structural growth rate of the labor force is now, and will continue to be, slow and steady. All else equal, this implies a slower and steadier structural growth rate of the economy.

    2
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    Gavekal Research

    Why Does Velocity Fall In Spring?

    Tolstoy said that “spring is the time of plans and projects.” Obviously, Tolstoy did not manage money as for the fourth year in a row, spring appears to be the time when US growth indicators roll over, the euro project threatens suicide, and investor risk appetite falls out of bed. To be honest, we are still scratching our heads for a solid explanation (and very much welcome comments from our wise readers). But below are a few possibilities to...

    0
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    Gavekal Research

    Riding A Bull Market With No Conviction

    The Irish poet WB Yeats wrote, “The best lack all conviction, while the worst are full of passionate intensity.” We see something similar in equity markets. With the S&P 500 on Tuesday hitting a new all-time high, we clearly remain in bull market territory. Central bank easing measures such as that just announced by the Bank of Japan mean we could push higher. And yet we see plenty of evidence that these new peaks have come on the back of...

    4
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    Gavekal Research

    Beyond The Sequester

    Newspaper headlines are focused on the sequester, but we are more interested in the recent positive developments in the private sector. After all, it is the private sector that truly drives the economy forward over the long run, not the government.

    1
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    Gavekal Research

    Is US Housing Cheap, Really?

    US homebuilder stocks were hit especially hard last week by the revelation that some Federal Reserve policymakers want an early end to quantitative easing. Such an investor response makes sense given that the US housing recovery has been fuelled by super low mortgage rates, so any “exit” from easy money must be a big negative. Follow this logic a little further and a thornier question is whether US housing, after an approximate 25% price decline...

    2
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    Gavekal Research

    The Fed In The Red

    QE3 has been dubbed “QE Infinity” because it does not have an expiration date. But a growing constituency at the Federal Reserve now appears to be asking whether a third quantitative easing program was one too many. According to the minutes of January 29-30 FOMC meeting, released yesterday: “A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or...

    8
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    Gavekal Research

    US Consumers: Death By Taxes?

    A slew of tax increases went into effect in the United State on January 1st, raising concerns that the death of consumption will follow. Nearly all US consumers will be affected—either by the 2 percentage point increase in the payroll tax, the 4.6pp rise of the top marginal tax rate, the new Medicare surtax, higher capital gain and dividend taxes, etc. Without a doubt, this is a significant headwind for US consumption. But there are two major...

    8
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    Gavekal Research

    US Dipping Into Recession? Not Yet

    US GDP just contracted for the first time since the 2007-09 recession. It was a mere –0.1% decline, but this is still rather unsettling given there is only one example to be found over the last 50 years, in 1977, when US GDP growth dipped below zero without marking the start of a recession. And yet markets shrugged off this shocking news—as they should have. Behind the poor headline number, the components indicate that underlying domestic growth...

    4
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    Gavekal Research

    The Big Cap Effect Is Not About To Ebb

    Small firms, and very often newly formed endeavors, have long fuelled job growth in the US. Indeed, it has become axiomatic in public discourse that the business of America is small business. Hence, a reduction in the number of startups and the tendency for small firms to employ fewer workers has sparked a predictable blame game: those with a “declinist” view contend that the US is losing its innovative edge, mainstream economists point to...

    4
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    Gavekal Research

    A Pulse From US Manufacturing

    Maybe the patient lives. 2013 has already started to deliver early indications that we are indeed at an inflection point in global growth. Canada reported yesterday that its Ivey PMI rebounded to an expansionary level of 52.8 in December, from 47.5; respondents to Germany’s IFO survey of business expectations (highly correlated to German exports) has risen for two straight months. And while less obvious, US data is also beginning to stir. Recent...

    0
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    Gavekal Research

    A New Threat To The US Recovery

    Improvements in the US domestic sector have raised hopes that the US will pull the global economy out of its current funk. But what if the cycle is working in reverse—with weakness beyond American shores feeding back to undermine the nascent recovery at home? After 37 straight months of growth, employment in US manufacturing contracted in November for the first time since 2009, according to ISM. This raises the concern that weak growth in the...

    0
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    Gavekal Research

    Bernanke Turning Hawkish?

    Fed Chairman Ben Bernanke rattled markets yesterday when he explained why the potential growth rate of the US economy appears to have declined while the structural unemployment rate has risen. The initial reaction from equity markets was negative, for an obvious reason: If the chairman is now raising his target unemployment rate, this implies a shorter shelf-life for extremely easy monetary policies.

    0
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    Gavekal Research

    US Tax Changes In A Brave New World

    It is a common complaint that US corporations are sitting on exceptional piles of cash, while the domestic economy experiences lackluster growth in capital spending and employment. With weak growth comes lower tax revenues. As such, policymakers are looking at new ways to raise revenues from corporates and from individuals (mostly the wealthiest). But we live in a “Brave New World” of global operations, fragmented supply chains, and light,...

    3
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    Gavekal Research

    Four More Years

    The American electorate may share the same national bed, but they have vastly different dreams. Our take on the election’s significance is similarly bifurcated—a cathartic political cleansing allowing for a deal on the fiscal cliff (Anatole) to disaster (Charles). Arthur asks whether the Republican Party can win nationally without reconciling itself to America’s changed demographics and the realities of the new knowledge-intense economy. Will...

    5
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    Gavekal Research

    US Recovery Under New Leadership

    Friday’s 3Q GDP report tells a simple story about the US economy—namely that the recovery has come under new leadership. Step aside manufacturing and exports, enter US housing rebound.

    8
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    Gavekal Research

    US Tech: The Modern Day Safe Haven

    3
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    Gavekal Research

    The Fed's Money Tree

    QE3 has set off a debate not just over whether this is good or bad (most here agree it is bad) but on what are the short– vs long-term effects on economies as well as markets. Louis and Charles make the contrarian argument that open-ended and more aggressive quantitative easing will ultimately take away, rather than add, to global liquidity, and warn that investors should prepare for a dollar crisis further down the line. Anatole and Francois...

    8
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    Gavekal Research

    More Liquidity May Burst The Dam

    Whatever else you may think of Ben Bernanke you cannot accuse him of obfuscation—QE3 was telegraphed in his Jackson Hole speech and yesterday the Federal Reserve delivered with a promise to buy $40bn of mortgage backed securities a month while allowing its curve-flattening treasury purchase program (Operation Twist) to expire as planned in December. The short term impact on risk assets is fairly clear; what worries us is the longer term...

    10
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