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    Gavekal Research

    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...

    6
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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

    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...

    1
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    Gavekal Research

    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

    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

    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.

    1
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    Gavekal Research

    The Future Of Money

    A month ago, Mt Gox was leading the charge as the biggest exchange for bitcoins, a hopeful new digital currency. Now it is the young currency’s biggest threat. The immediate question is, will bitcoin survive this heavy confidence blow? We should know in the coming weeks, but either way, the bigger question will remain: Does bitcoin, or any other digital currency, have what it takes to become a widely adopted money?

    1
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    Gavekal Research

    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.”

    2
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    Gavekal Research

    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...

    0
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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...

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    Gavekal Research

    Is The ECB Readying For Stealth QE?

    The European Central Bank has a reputation for holding firepower until the eurozone is at the point of crisis. Although no crisis is apparent now, growing deflationary concerns compounded by volatile money market interest rates make today's ECB meeting worth watching.

    1
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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

    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:

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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.

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    Gavekal Research

    What More Can The ECB Do?

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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

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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?

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    Gavekal Research

    Brace For US Disappointments

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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 Europe: Stealth Rate Hike Watch

    In January, when EMU banks began repaying the LTRO loans dished out in the heat of crisis, markets worried that this process effectively constituted a monetary tightening. We wrote at the time not to worry—repayments were a sign of health in the banking system, and with excess liquidity above €600bn, there was no danger of short rates going up (see that piece here). Indeed we recommended forgetting about the issue until excess liquidity fell...

    0
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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

    Australia And The China Syndrome

    So for the satellite supplier economies to the Chinese juggernaut, is it simply a matter of following the leader? This morning it was announced that China’s economic growth duly slowed to an annual rate of 7.5% in 2Q13 from 7.7% in the previous period. Moreover, the latest credit data shows that China’s credit cycle has decisively turned, implying that last month’s interbank rate spike was no aberration. Dragonomics will publish a detailed look...

    2
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    Gavekal Research

    Europe’s Control Engineers

    “Words are, of course, the most powerful drug used by mankind,” so said Rudyard Kipling. When central bankers meet next month for the annual Jackson Hole shindig, they can ruminate on their success being increasingly dictated less by what they do, than what they say. Take the European Central Bank and Bank of England which in recent months have been fairly taciturn next to a loquacious Federal Reserve. Yet, by yesterday verbalizing forward...

    0
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    Gavekal Research

    Five Corners (3 July 2013)

    In the latest Five Corners biweekly review of global economics and investment, Charles Gave expresses doubt about the supposed rebound in European industry, while Francois Chauchat looks at whether EMU peripheral bonds are a buy after recent sell-offs. We also have Will Denyer on US bonds/housing, Rosealea Yao on China's interbank drama and Cathy Holcombe on the rising emerging market middle classes. See more details below—and please click...

    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

    Five Corners (8 May 2013)

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

    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.

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    Gavekal Research

    Five Corners (24 April 2013)

    Long-time GaveKal readers will recall a former publication called Five Corners, in which we presented a series of short takes on global economic and market developments. Today we re-launch Five Corners in a new format, which we hope will enable readers to keep closer track of our core views.

    2
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    Gavekal Research

    Growth Falters And GIPSI Bonds Rally?

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