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    Gavekal Research

    Not That Canadian

    The US and Canadian economies share many similarities due to their geographical proximity, similar level of development and Anglo-Saxon traditions of common law and open political dialogue. So it is curious that each economy’s labor market dynamics are strikingly different. This observation has more than hypothetical significance as workers become hard to find at the right price in late-cycle America.

    5
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    Gavekal Research

    Bank Deregulation Is Not The Answer

    Janet Yellen nailed her regulatory colors to the mast on Friday. In her speech on financial stability at Jackson Hole, the Federal Reserve chair made plain her opposition to any wholesale roll-back of financial regulations introduced in the aftermath of the 2008 crisis. She didn’t mention by name the Financial Choice Act, the attempt currently before Congress to scrap key provisions of the post-crisis Dodd-Frank regulations. But she did address...

    2
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    Gavekal Research

    Can The US Property Engine Fire Up?

    Two years ago banks started to make it harder for US construction firms to borrow and soon after activity began to fizzle. While blame has been pinned on skilled worker shortages and rising costs of both land and materials, KX and Will think financing was the key issue. The good news is that banks seem to be again loosening their purse strings.

    2
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    Gavekal Research

    The Misleading Signal In US Auto Sales

    Trying to tease economic trends out of recent US data releases is a frustrating business. Take yesterday’s figures. Although the ISM manufacturing PMI ticked down a shade in July to come in a fraction below expectations, at 56.3 the number remained firmly in expansionary territory. On the other hand, two classic cyclical indicators of US economic health—construction spending and automobile sales—both came in weak.

    0
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    Gavekal Research

    US Bear Flattening Ahead

    The miniscule change of wording in yesterday’s Federal Reserve statement appears to confirm that the Fed will go ahead and begin to shrink its balance sheet from September. June’s statement said balance sheet normalization would begin “this year”, implying the process would start by December at the latest. Yesterday’s statement altered that to “relatively soon”—and relatively sooner than December suggests September, as the only other meeting...

    0
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    Gavekal Research

    The Eurozone Is Now So Far Behind The US, It’s In Front

    Among the many tricky tasks facing investors is to determine the relative positions of the US and eurozone economies in their respective business cycles. Over the preceding two cycles—the ones that peaked in 2000/01 and 2005/06—the two economies moved broadly in phase, with the eurozone lagging the US by around one year. Estimates from the International Monetary Fund and OECD suggest that that relative position is largely unchanged, with the...

    2
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    Gavekal Research

    Liquidity: More Bad News Than Good

    Gavekal has long maintained that bull markets rest on three pillars: liquidity, valuations, and growth. Now with the Fed set to tighten further in an environment of weak bank credit growth, KX and Will warn that the liquidity pillar which has done so much to support the current bull market in US equities is looking increasingly shaky. That is especially ominous, given that valuations are no longer cheap and catch-up growth is played out for this...

    8
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    Gavekal Research

    Watch US-Eurozone Rate Differentials

    Interest rate differentials between the US and eurozone are wide by historical standards. This is no surprise. The US has enjoyed uninterrupted growth (at least in year-on-year terms) since 2010, and today the Federal Reserve stands as the most hawkish big central bank in town. In contrast, the eurozone slumped back into recession in 2012, and the European Central Bank remains in full-blown easing mode. As a result, interest rate differentials...

    2
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    Gavekal Research

    The State Of US Inflation

    In her testimony to Congress yesterday, Federal Reserve chair Janet Yellen attributed the weakness of US inflation to temporary factors. As a result, the Fed remains focused on tightening policy. However, given that US inflation has consistently undershot the Fed’s target, any further decline will raise concerns that the US business cycle is rolling over.

    0
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    Gavekal Research

    The Payrolls Paradox: Tight Labor But Weak Wage Growth

    As usual the market focused closely on the headline number in last Friday’s employment report, which saw non-farm payrolls come in at a stronger than expected 220,000 in June. As usual, we caution against reading too much into any one month’s figures, for the reasons Anatole has explained so elegantly (see Beyond The March Payrolls Soft Patch). Instead we prefer to take a step back and to attempt to answer the two big questions currently hanging...

    5
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    Gavekal Research

    What Could Turn Around The US Business Cycle? Hint: Not Much

    As often happens, US data is sending mixed messages. Yesterday’s ADP report showed weak job growth in June, despite the latest ISM service sector PMI being decidedly perky. Investing according to the latest high-frequency growth data is a good way to get whiplash. Instead, let’s take a step back and review the US economy’s overall positioning.

    0
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    Gavekal Research

    A Late-Cycle Signal From US Factories

    Determining the exact extent of the US output gap at any point in time is immensely difficult, if not impossible. Earlier this month, KX suggested monitoring four indicators: the gap between actual unemployment and the “natural” rate; real corporate profits; profit margins, and the change of US CPI inflation. Today he adds another indicator to that list: the ratio of factory order backlogs to new orders. By this measure too, the US is running...

    0
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    Gavekal Research

    Calm Sailing For A Reason

    Those with a constructive view of quiescent asset markets say low volatility is justified by the stable economic situation. Others mutter of a looming “Minsky moment”. KX does not rule out a sharp rise in near-term volatility, but says the secular trend is down.

    2
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    Gavekal Research

    Mind The (Output) Gap

    The US economy is offering up conflicting signals. Recent manufacturing survey data has been soft, auto sales have slowed and the rate of job creation has markedly reduced. At the same time, inflation expectations have dipped after their bolt upwards earlier this year. Yet, redirect the gaze and the same US economy shows distinct signs of waddling towards a late cycle denouement with the labor market, in particular, looking tight. Put another...

    2
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    Gavekal Research

    Longer For A Reason

    Could this be the US economic expansion without end? Almost certainly not, but it is starting to break some serious records for longevity. Yet as the expansion gets longer in the tooth, the obvious question is whether it simply withers due to old age. Like Janet Yellen, KX is suspicious of such a deterministic arguments and in this piece says there are very good reasons for economic cycles to be getting longer.

    2
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    Gavekal Research

    Don’t Sweat An Impeachment

    After weeks of ignoring ever wackier White House shenanigans, investors yesterday focused on US political risk. The revelation of memos that seem to offer prima facie evidence of the president obstructing justice means the chance of an impeachment has jumped from improbable to possible. As the government’s investigative machinery cranked up a notch yesterday, US equities experienced their worst day since last September and treasury yields fell...

    2
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    Gavekal Research

    The Headwinds To US Housebuilding

    US home prices are on the up, having climbed 6% over the 12 months to February. Yet housebuilding has failed to keep pace with the rise in prices. Although construction has made a positive contribution to GDP growth over the last couple of quarters, activity has built from a very low base. Housing starts in March were an annualized 1.215mn, with a consensus forecast for April of 1.25mn. Both figures are well below the long term pre-crisis US...

    2
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    Gavekal Research

    Behind Weak US Wage Growth

    After seven steady years of decline, the US unemployment rate fell further in April to a 10-year low of 4.4%—the same as in May 2007 immediately before the onset of the credit crunch. At the same time, the number of job openings has exceeded its 2001 high, emphasizing the increasing tightness of the US labor market. Yet despite this tightening, increases in wage growth have been remarkably modest for this late stage of the cycle.

    8
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    Gavekal Research

    Don’t Bet On Another Bond Bubble

    Recent days have not been good for US treasury bears betting on higher yields. First, Donald Trump’s much hyped tax reform plan proved thin on detail and lacking in credibility. Then Friday’s weak US GDP release for 1Q17 showed an economy facing a notable softening in consumption demand. The one factor offering succor to treasury shorts has been reduced political risk in Europe after a centrist made it through to the second round of France’s...

    0
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    Gavekal Research

    Watch US Money Supply Growth

    Every US recession in the last 50 years has been preceded by a steep fall in true money supply growth, or an outright contraction. So it is worrying that true money supply growth has recently slumped to its lowest since 2008. In this paper KX investigates whether we could be witnessing a false signal, and finds few reasons to be cheerful.

    13
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    Gavekal Research

    US Auto Sales Hit Their Speed Limit

    US auto sales leveled off 18 months ago, and growth has been stalled ever since. Now with interest rates rising and lenders tightening standards on auto loans, KX sees additional reasons to believe that sales have reached their speed limit. Happily, the problems are largely sector-specific, not indicative of general weakness in US consumer demand.

    0
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    Gavekal Research

    After The Health Care Reform Failure

    The Republican drive to repeal and replace Obamacare failed ignominiously on Friday. Together, President Donald Trump and House Speaker Paul Ryan were unable to muster enough support to pass the new health care bill through the House of Representatives. Bowing to reality, they pulled the vote. If there is a positive element to this failure, it is that both the administration and Congress will now shift their focus to tax reform. However, the...

    2
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    Gavekal Research

    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

    0
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    Gavekal Research

    Don’t Bet on US Manufacturing

    The Federal Reserve seems convinced that strong survey readings point to a strengthening US economy that is becoming self-sustaining. This is the reason that investors are betting with increasing confidence on a series of interest rate increases this year. KX is not convinced that such assumptions are built on solid ground.

    0
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    Gavekal Research

    Calling Time On Bank Outperformance

    Tomorrow Donald Trump is scheduled to address a joint session of the US Congress. Although expected to be long on characteristic bombast, the president’s speech is likely to be short on hard details about his core policies. That shouldn’t be too surprising. Drawing up tax reform and infrastructure spending plans and squaring them away with the Republican majority in Congress will take many months. However, without concrete information to sustain...

    0
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    Gavekal Research

    Are Border Adjustments Protectionist?

    The introduction of border adjustments into the US tax code is by far the most controversial part of the House Republicans’ “blueprint” for tax reform—with good reason. This reform alone would be a game-changer, with many winners and losers. This is why, like all major tax reforms, it faces an uphill battle to become law, and why it may never happen. But the same was said of a Donald Trump presidency, and of Brexit. So, investors still need to...

    5
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    Gavekal Research

    US Inflation: The End Of The Affair

    If there is one consensus view about US markets it is that inflation is ticking up, a tightening cycle is underway and the dollar will again rise. As markets are made at the margin, any hit to these beliefs could push investors into a sharp repositioning. Within Gavekal there is disagreement on this score, with Anatole arguing that US inflation and bond yields are on an upward trend, Charles taking the opposite view and Louis stating that US...

    0
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    Gavekal Research

    Less Than It Seems: US Financial Deregulation

    US bank stocks rallied strongly on Friday on Donald Trump’s promise to tear up much of the Dodd-Frank 2010 financial regulation act. But steering a new act through Congress will not be easy. And while proposals now on the table greatly simplify the existing rules, they do not amount to the wholesale easing of regulations that would be needed to drive a rapid acceleration of bank lending.

    0
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    Gavekal Research

    Border Tax Adjustments In Context

    US president Donald Trump moved a step closer to realizing his “America first” trade policy yesterday, promising a 20% tax on imports from Mexico. However, rather than an outright tariff on imports, it is looking increasingly likely that the new levy will come in the form of a border tax adjustment, as envisaged by the House Republican majority as part of a wider US tax reform program. In theory, border tax adjustments should be trade-neutral,...

    2
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    Gavekal Research

    Do We Need To Worry About The Shrinking US Monetary Base?

    The US monetary base is shrinking, and with Fed officials talking about winding down their bond holdings, it is only natural for equity investors to be concerned. However, as KX explains, the contraction in base money is a technical effect of recent regulatory changes, and the Fed is not yet running down its assets.

    0
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    Gavekal Research

    Tax Reform And The Dollar: It’s Not So Straightforward

    Tax reform is high on the agenda both for US president-elect Donald Trump and for the new session of Congress that began earlier this month. Among the reform proposals that could most affect investors are those advanced by the House Republicans, which many commentators have argued could cause a substantial exchange rate appreciation of the US dollar. In theory—all else being equal—this would be true. But our examination of current exchange rate...

    7
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    Gavekal Research

    The US Equity Dilemma

    On the first trading day of the year, we learnt that the Trump trade remains very much alive. The S&P 500 rose 0.8%, 10-year treasury yields inched up 1.3bp and the DXY US dollar index climbed 0.4%. While investors seem focused on the positive ramifications of a Donald Trump presidency, the year ahead is full of uncertainty—with changes in store for fiscal, monetary, regulatory and trade policies, all of which will occur in the context of a...

    0
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    Gavekal Research

    The Post-Fed Risk Of Sector Rotation

    As expected, the US Federal Reserve went ahead and raised its benchmark interest rate by 25bp yesterday. Less widely expected was the positive tone of the Fed’s comments on the economic outlook, and its slightly more hawkish view on the trajectory of rates, with policymakers now projecting three rate increases next year rather than two. Fed chair Janet Yellen described the changes as “tiny”. But the market reaction—10-year treasury yields rose...

    0
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    Gavekal Research

    Cash Repatriation Won’t Trigger A New Buyback Boom

    With the incoming US administration promising big tax breaks on the repatriation of corporate cash piles held overseas, Wall Street is confidently predicting a renewed equity market buyback boom in 2017. On first hearing, this sounds like a reasonable expectation. For one thing, in recent years US companies have consistently chosen to plough their retained earnings—and a sizable amount of debt—into share buybacks, rather than into investment in...

    0
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    Gavekal Research

    Riding The US Monetary Cycle

    In market conditions that abound with conflicting signals, KX argues that investors should keep a close eye on an adjusted measure of real US money supply growth as an early warning signal of recession, and suggests how a tool based on this measure could make a useful allocation tool for equity managers.

    4
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    Gavekal Research

    A Cautionary Note On US Housing

    After months of anemic activity, US homebuilding picked up in October. This is a welcome development, given that residential construction is a key leading indicator for the overall economy, and that lately it has been close to sending a recession signal (see On The Brink Of Recession). However, the magnitude of the improvement should not be overstated. While housing starts did post the biggest monthly increase since 1982, this is a volatile...

    0
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    Gavekal Research

    The End Of The Goldilocks Scenario?

    Over the last seven years global investors have benefited greatly from a combination of moderate growth and non-threatening inflation, allowing for constantly loose monetary policy. Yet for the US, we are increasingly concerned that, one way or another, this “Goldilocks scenario” is about to come to an end. Here’s why:

    4
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    Gavekal Research

    The Strange Case Of The US Trade Deficit

    The last three years saw the US dollar move from being an undervalued currency to an overvalued one, and yet the US trade balance has barely budged. This contrasts sharply with past periods of dollar strength which produced huge US trade deficits that were a boon to global exporters, and also to financial markets which got a liquidity boost. The fear for emerging economies in particular is that this relationship has broken down and a reliable...

    3
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    Gavekal Research

    The Rising Odds Of A US Recession

    We are on recession watch after yesterday’s release of September’s NFIB small business optimism survey. It was not the headline number which got us worried—that ticked down from 94.4 to 94.1. Rather, it was the significant drop in the job openings component—from 30 to 24, or from a cyclical high to the lowest level in 15 months. This suggests that demand for US labor may be rolling over, which is concerning indeed.

    7
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    Gavekal Research

    Tan Kai Xian & Leonor du Jeu: The US Trade Deficit Conundrum

    0
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    Gavekal Research

    Emerging From The Soft Patch

    Three weeks ago we asked whether the uniform weakness in US data—across manufacturing, services and home construction—signaled the start of a recession or merely a summer soft patch. At the time we concluded that what we were seeing was yet another soft patch. Thankfully, the latest round of data releases appears to confirm that conclusion, with the US economy now emerging from its summer doldrums.

    0
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    Gavekal Research

    Wicksell's Guide To A Better Portfolio

    With the recent US economic data worryingly soft, and with no convincing drivers of earnings growth to be seen, how should investors position their portfolios? Will and KX set out their methodology for structuring a dynamic Wicksellian portfolio to generate superior returns at reduced levels of volatility, and determine the optimum allocation mix for the current troubled environment.

    7
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    Gavekal Research

    Don’t Count On US Profits Riding To The Rescue

    A funny thing happened to US equities once the dust cleared after the late June sell-off that was sparked by the UK’s Brexit vote. As yields of most income earning assets fell on hopes of yet more central bank easing, equity investors discarded growth concerns and engineered a multiple expansion which drove the market to new vertigo-inducing highs (see Real Yields In The Driving Seat). The big question now is whether a profits boost can keep the...

    1
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    Gavekal Research

    Will & KX: Soft Growth And Volatile Markets

    Will and KX present the quick view on the US economy and financial markets

    0
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    Gavekal Research

    Knowing Whether To Buy The Dip

    With all the current focus on the Federal Reserve and markets, it’s easy to overlook the increasingly ugly state of the underlying US economy. Throughout the long post-2009 recovery, when any one driver of US growth showed signs of stalling, the others continued ticking over nicely, which meant overall growth averaged out around 2%. Recent data releases signal that has now changed. Although none of our key indicators has shown a dramatic...

    4
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    Gavekal Research

    Real Yields In The Driving Seat

    Notwithstanding yesterday’s bounce, the stock market is a nervous place just now. After riding a post-Brexit rebound that saw both the S&P 500 and the Nasdaq Composite scale record highs on minimal volatility, investors are increasingly wondering about the extent of the potential near term downside, not just in the US but around the world

    2
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    Gavekal Research

    The Return Of US Fiscal Policy

    More than three years after the world fretted about the US economy falling off a “fiscal cliff”, there is suddenly much talk of government spending being used to gin up growth. Whatever their many differences, both Hillary Clinton and Donald Trump favour a fiscal expansion, with a focus on upgrading the US’s aging infrastructure stock. At the same time Federal Reserve officials, led by Janet Yellen and John Williams, are arguing for more fiscal...

    3
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    Gavekal Research

    The Fed’s Hawkish Stance

    For those who thought Janet Yellen a dyed-in-the-wool dove, her Jackson Hole speech on Friday gave pause as she endorsed fellow policymakers’ recent statements that the US economy was strong enough to warrant interest rate rises. Markets quickly adjusted. The implication for global asset markets is not altogether encouraging.

    0
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    Gavekal Research

    The Next EM Yield Play?

    With global growth having stabilized and central banks remaining in super-easy mode, the dash for yield is making emerging markets ever more interesting. In recent months a number of our Hong Kong-based writers have advised investors to play this trend through bonds not equities, with Udith chiming in on Monday (see Indonesia: Bet On Stability Not Growth). The question for those who expect this “not too hot, not too cold” phase to persist is...

    7
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    Gavekal Research

    Cheap For A Reason

    By most measures, US equities are not cheap. Yet many investors remain overweight, believing that in a world of ultra-low interest rates and negative bond yields, equity valuations should be higher because future cash flows are now discounted at a much lower rate than in the past. At first glance, the equity risk premium—the expected return on stocks over and above the risk-free rate—appears to support this belief. At more than one standard...

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