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E.g., 18-11-2019
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    Gavekal Research

    Video: Fixing The Model

    Earlier this week Will issued a mea culpa report that explained why he was revising his Wicksellian asset allocation model and substantially changing his recommendations for the US market. In this video interview he explains the story behind this revision.

    0
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    Gavekal Research

    Turning 90% Bullish

    Over the last three years, Will has developed his own version of Charles's Wicksellian framework to analyze the US economic cycle. His approach has been to gauge the difference between the private sector’s return on invested capital and its cost. In this candid report, he explains why he is overhauling his model and how this has substantially changed his recommendations.

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    Gavekal Research

    Housing And The US Economy

    The last economic cycle in the US was marked by excesses in residential investment and a dearth of business investment, which proved negative for productivity growth. As the current cycle gets a pro-cyclical boost in its mature phase from last year’s tax reforms, that imbalance will be at least partially reversed.

    2
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    Gavekal Research

    Deficits And Bondholders

    Economics 101 says that when there is more of something, then other things being equal its price should go down. That is worrying for US bond investors as US lawmakers last week passed a budget deal that may raise deficits by US$320bn over the next 10 years (any new infrastructure spending will be extra). Interestingly, and perhaps not entirely coincidentally, just as debt-fueled big-government becomes the new normal in Washington, November’s...

    0
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    Gavekal Research

    Good News Is Bad News?

    The US posted a solid employment report on Friday, and the markets didn’t like it one bit. Some 200,000 jobs were added in January, better than the expected 180,000 and prior month gain of 160,000. But what really spooked investors was the faster than expected pickup in wage growth to 2.9% YoY. On the face of it, this is good for economic growth (certainly in nominal terms) and top-line corporate revenues. The worry is that without productivity...

    2
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    Gavekal Research

    Take Profits On US Homebuilders

    Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The Outlook For US Growth And Prices). The third element—our neutral view on homebuilding—merits...

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    Gavekal Research

    Video: Playing The US Growth Picture

    Will outlines his view that real growth in the US will remain stable this year and that inflation will pick up, and discusses what this means for asset prices and portfolio construction.

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    Gavekal Research

    The Outlook For US Growth And Prices

    The first estimate for real US GDP growth clocked in at 2.6% for the fourth quarter, bringing full-year 2017 growth to 2.5%. Policymakers at the Federal Reserve forecast the same rate of growth for 2018, together with a moderate pick-up in consumer inflation from 1.7% to 1.9%. At Gavekal we try to avoid making such specific numerical forecasts; as the great Danish physicist Niels Bohr used to say, “It’s very hard to make predictions, especially...

    0
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    Gavekal Research

    Keep Duration Short

    Washington may have temporarily sorted out its spending plans, but the bigger news for investors is the apparent breakout in 10-year treasury yields. The benchmark-of-benchmarks has risen to 2.65%, exceeding highs recorded in the months right after the Republicans’ election wins in November 2016. This can be ascribed to strong global growth, higher commodity prices, US tax cuts and tighter monetary policy. Hence, with US long-rates now offering...

    13
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    Gavekal Research

    Dare To Dabble In US High Yield

    Last week US high yield spreads narrowed to within a whisker of their cycle low, bringing them within striking distance of their 2007 low. When things cannot get much better, they seldom do. However, this may be one of those rare historical occasions when things do indeed go from good to even better. The US tax changes that went into effect last week have the potential to drive credit spreads to record depths.

    0
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    Gavekal Research

    US Tax; Not What You Expect

    With the Senate having voted its approval, Republicans are set to tomorrow finalize the biggest shake up in the US tax code since the 1980s. A common refrain among analysts is that the bill should propel equity prices higher, but do precious little for economic growth. We wonder if the reverse may unfold.

    0
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    Gavekal Research

    There Is Now An Alternative

    There were no surprises yesterday, either in the Federal Reserve’s rate hike, or in its forecasts for next year. With the labor market set to “remain strong”, the unemployment rate likely to inch down to 3.9%—full employment—and growth forecast to get a modest boost from tax cuts to 2.5%, the dot plot projects three 25bp hikes in 2018.

    0
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    Gavekal Research

    Bitcoin: Money Or Bust

    The definitive characteristic of money is that it is a common medium of exchange. A good becomes money when people within a community begin to accept it, not for consumption nor to produce other goods, but for its expected use in indirect exchange. The chosen money may have non-monetary uses, as gold does, but this is not a requirement for its acceptance. This brings me to bitcoin. Crypto-currencies such as Bitcoin have no non-monetary use. That...

    18
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    Gavekal Research

    Positioning For US Tax Reform

    What’s not to like about tax cuts? Quite a lot as it turns out. Although the final shape of US tax reform has yet to be settled, there are enough common points between the House and Senate bills to allow Will and KX to conclude that the likely tax cuts will prove inflationary, and could prompt a more aggressive stance from the Fed. Despite some undoubtedly positive macro outcomes, the implications for investors are not exactly bullish.

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    Gavekal Research

    The US Investment Environment

    House Republicans put forward their tax reform bill and Jerome Powell was put up to replace Janet Yellen at the Federal Reserve. On the face of it, this all seems like good news for markets. US firms may soon get a permanent tax cut on domestic earnings and mostly keep Uncle Sam away from their foreign earnings, while the prospect of a Taylor-rule adjustment to interest rates has been dodged as Powell seems set to maintain a path of gradual...

    4
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    Gavekal Research

    Strategy Monthly: How Much Longer For Low Rates?

    For decades fixed income and equity markets have enjoyed a secular bull market, propelled higher by low real long term interest rates, depressed by a glut of global savings. In this Strategy Monthly, Will Denyer updates his Capital Provider Ratio, a powerful demographic tool which indicates that the growth of global excess savings has peaked, and that the glut will soon begin to dry up, with far-reaching consequences for global asset markets.

    0
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    Gavekal Research

    Video: Demographics And The Savings Glut

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse.

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  • Gavekal Research

    The Savings Glut’s Long Life And Slow Death

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse. In this paper Will introduces a new measure, the Capital Providers Ratio, which relates the impending demographic shifts to the...

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    Gavekal Research

    No Closer To Effective Tax Reform

    The much-anticipated US tax reform plan from “the big six” (officials from the administration, House and Senate) has landed. What a disappointment it is. The ball has barely been pushed forward at all. It thus seems unlikely the US will get major tax reform. And if it does, it is likely to be much less effective than the plans previously proposed by the House Republicans.

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    Gavekal Research

    QT And The Treasury Quandary

    The Federal Reserve has confirmed that quantitative tightening will begin next month as it gradually lowers its holding of treasuries and mortgage-backed securities. For investors, the question is whether they should “fight the Fed” by owning assets that are now out of favor with the central bank. I would argue that such a formulation is wrong and these are good times to be mitigating risk by picking up treasuries, probably of shorter duration.

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