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    Gavekal Dragonomics

    Huawei’s Path To Survival

    The future of Huawei, China’s most successful electronics manufacturer, has looked bleak ever since the US put it on an export blacklist in May. But with the Trump administration proving willing to soften its export controls, and companies being able to find loopholes in them, it now looks like Huawei has a decent chance to survive.

    0
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    Gavekal Research

    Housing Points To Solid US Growth

    US mortgage applications fell in the week ended July 12, compared with the week before. But do not be misled by the latest week-on-week decline in this high frequency data series. In year-on-year terms, mortgage applications for home purchases have been rising consistently since the beginning of 2019, pointing to a rise in housing construction over the coming months.

    0
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    Gavekal Research

    Why This Time Is Different

    The evolution of the yield curve over the last four months—an inversion after a series of Federal Reserve interest rate hikes, followed by a rapid steepening—has been characteristic of the early stages of the last four US recessions. However, investors worried that the US economy may already be in recession can relax.

    2
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call July 2019

    In yesterday’s Gavekal Research conference call, Louis-Vincent Gave, Anatole Kaletsky and Arthur Kroeber conducted a mid-year review of the investment environment and outlined their expectations for the rest of the year onward.

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    Gavekal Research

    Look For Just One-And-Done

    In Congressional testimony on Wednesday, Jay Powell cooed just like the dove investors want him to be. The Fed chairman dispelled any lingering doubts that either the end-June trade truce between the US and China or June’s strong US payrolls number will dissuade the Fed from cutting interest rates at the end of July.

    0
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    Gavekal Research

    Emerging Markets After The Trade War

    Emerging markets did nicely out of the rumor, less well from the fact. As hopes grew through June for some form of trade détente between the US and China, EM assets staged a broad rally. Similarly, EM currencies pushed broadly higher, on the back of a wider US dollar softness. Over the last week, however, EM equities and currencies have pulled back.

    0
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    Gavekal Research

    Anti-Fragile Assets As A Diversifier

    Last July Charles wrote a piece warning of a recession in the non-US OECD economies during 2019. Today, he runs an update on that thesis and seeks to refine his safety-first portfolio using assets which contain “anti-fragile” properties.

    2
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    Gavekal Research

    An Investment Thesis For The 2020s

    A look back at the last 50 years shows that the dominant conviction among investors at the end of each decade about what would drive markets over the following decade was invariably wrong. With this in mind, and on the basis that avoiding losers is easier work than picking winners, Louis asks what beliefs dominate investors’ minds today, and how they are likely to be proved wrong in the 2020s.

    12
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    Gavekal Research

    The Direction Of The Dollar

    The US dollar’s strength over the last year or so has been attributed in large part to expectations that the US administration would impose additional tariffs on imports from China. So, with those expectations on hold following last week’s agreement to resume trade negotiations, you might think the US dollar should be falling.

    0
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    Gavekal Research

    Strategy Monthly: Should We Believe Equities, Or Bonds?

    Record-high US equity prices seem hard to reconcile with the message sent by the lowest bond yields since 2016. Should investors hunker down due to the inverted yield curve, or jump aboard the equity bandwagon? In fact, both markets may be right in their own way.

    0
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    Gavekal Research

    The Focus Turns To The Fed

    After the de-escalation of the US-China economic cold war at the weekend’s G20 summit in Osaka, all eyes are now on the US Federal Reserve, following policymakers’ recent indications that they are ready to cut interest rates. It could be argued that the trade war ceasefire reduces economic risk, and therefore will leave the Fed less inclined to loosen policy. But the Fed’s primary focus is on inflation expectations, and the degree to which they...

    2
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    Gavekal Research

    The Story Behind Low US Volatility

    When Donald Trump declared his trade war against China in the spring of 2018, investors could have been forgiven for expecting the resulting uncertainty and additional economic friction to add both to US equity market and GDP growth volatility. In fact, equity market volatility has generally been low, and US economic growth has remained stable.

    0
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    Gavekal Research

    A Cold War Interglacial

    It is now almost certain that presidents Donald Trump and Xi Jinping will restart trade talks at the G20 summit in Osaka this weekend. Moreover, discussions in Washington suggest that there is a good chance these talks will result in a deal in the next few months. Our core scenario now is that macro risk from an escalating trade war is receding. There are also signs that the US and China could negotiate a truce on Huawei, lifting the apparent...

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    Gavekal Research

    Trade War II, The Dollar And Gold

    After the opening Twitter salvo in "Trade War II" by Donald Trump in May, markets have reacted quite differently from "Trade War I" in the spring of 2018. This time, the Federal Reserve is sounding more dovish, US bond yields have fallen back to 2%, the dollar seems to be rolling over, and gold and EMs are doing well. This raises the question whether the investment environment is changing before our eyes.

    9
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    Gavekal Research

    The Iran Wildcard

    Of the many risks besetting investors right now, the hardest to assess is the confrontation between the US and Iran. Should tensions escalate into a shooting war, the consequences would be far-reaching and severe. However, looking beyond the bellicose rhetoric there are reasons to believe that the balance of probability still weighs against a marked escalation.

    1
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    Gavekal Research

    Libra's Monetary Challenge

    Facebook has 2.7bn users and 90mn companies operating on its various platforms. Perhaps more than any other non-state player, it has the resources, reach and data trove to launch a global currency. Will is not convinced and tackles the issue by asking what benchmarks the new Libra currency will need to hit if it is to become a widely-used medium of exchange.

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    Gavekal Research

    What Gold Is Telling Us

    Over the last few weeks long bond yields collapsed, which in turn led to a collapse in something called “inflation expectations”. Now, inflation expectations are a very useful indicator built by very clever PhDs. The main purpose of this indicator appears to be to persuade investors that they should buy bonds just when they really should be selling them.

    5
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    Gavekal Research

    Video: China's Three Vulnerabilities

    Even if Presidents Donald Trump and Xi Jinping leave the G-20 meeting in Osaka next week with a trade deal in hand, the broader rivalry will continue. In this extensive video interview Louis identifies three ways in which China is vulnerable to US pressure and explains how this may impact investors.

    0
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    Gavekal Research

    Keeping China In Play

    Next week’s big event will be the G-20 leaders’ meeting in Osaka, where presidents Donald Trump and Xi Jinping will sit down to figure out whether their stalled trade negotiations can be re-started. It is quite likely that trade talks will get back on track, but quite unlikely that a deal can actually be struck before the end of the year.

    2
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    Gavekal Research

    How To Play The Fed Tease

    After the Federal Reserve’s two-day policy meeting, chairman Jay Powell told the market what it wanted to hear. Policymakers see rising risks and stand ready to cut interest rates, but there is no reason to panic—just yet. Real growth is solid, which is good for earnings, but inflation pressures are muted, allowing the Fed to be more accommodative.

    6
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    Gavekal Research

    Investing For A New Cold War

    Earlier this year, Louis and Charles published a book whose main thesis was that an era of globalization is ending and the world is breaking into three separate economic zones.The question Louis addresses in this piece is how investors should play this macro shift. Those strategies that did best over the last decade are unlikely to outperform in the next period.

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    Gavekal Research

    Don't Worry About The US Consumer

    There is a schizophrenic quality to commentary on the health of the US consumer. On the bright side, sentiment readings are cheery and the labor market is generally solid. Yet on the other hand, Cassandras point to rising credit card delinquency rates, and weakness in sales of autos and homes as early signals of a recession. So what gives?

    4
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    Gavekal Research

    Worrying About Bond Yields

    Germany yesterday sold medium-dated bunds at a record -24bp, while treasury yields are back near three year lows. In yesterday’s Daily, Louis outlined reasons for the surge in US bond prices, and argued that a reversal could occur if the US dollar weakens more. Today want to ask how such a shift in the rates environment will impact economic growth and equities.

    2
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    Gavekal Research

    Video: Bull Markets Don't Die Of Old Age

    The US economic expansion is entering its 11th year, which makes some wonder whether the end of the business cycle is nigh. Anatole thinks that’s asking the wrong question, because bull markets don’t die of old age. They are, however, more susceptible to diseases of old age. He identifies three events that would cause an economy to keel over. Also on the docket is the seemingly contradictory signals sent by bullish US equity markets and bearish...

    0
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    Gavekal Research

    Driving The Bond Bubble—The Sum Of All Fears

    For the past 30 odd years, President Donald Trump has opposed free trade and argued that foreign producers should face tariffs. Yet the market responds with shock each time the US threatens new tariffs. By the same token, almost every central banker today is saying they (i) want to see higher inflation, (ii) will stop at nothing until inflation picks up, and (iii) once inflation duly appears, they will likely let it ramp up. So how does the...

    1
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    Gavekal Research

    Not Such A Dystopian Market

    Although Donald Trump's lifting his threat to impose new tariffs on Mexico was good news, raising the chance of a US-China trade climbdown, betting good money on the US president getting up on the right side of the bed is ill advised. So, to maintain our sanity we should focus on US economic data and monetary policy, which turned positive last week.

    4
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    Gavekal Research

    Recession Risk Mispriced

    US treasury yields are up from their 21-month low touched earlier this week, but the market is still priced for recession. Sure, the trade war uncertainty is negative for risk assets. But there are good reasons to believe that the US economy will continue to grow, albeit at a modest rate. As a result, piling into treasuries at current yields is a dangerous move.

    4
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    Gavekal Research

    Trump's War And Our Problem

    In the seven decades after World War II, the most powerful nation in the world could be relied on to defend and promote free trade among nations. Then came President Donald. J Trump. Now it’s conceivable that Trump’s goal is to shake up the old rules-based system.

    3
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    Gavekal Research

    EMs Hit The Trade Wall

    It is not clear if the latest trade actions launched by the US against Mexico and India form part of coherent plan. Such moves do signal that the US-centered multilateral trading system is hanging by a thread. This upending of the post-WWII order is especially bad news for trade-dependent emerging economies.

    0
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    Gavekal Research

    Strategy Monthly: Who Suffers Most In A Long Trade War?

    Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.

    0
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    Gavekal Research

    Yes, We Are In A Bear Market

    In late 2017, Charles argued that global equity markets looked to be topping out, and it was time to adopt a more conservative strategy. As things turned out, the global equity benchmark hit a peak in late January of 2018, and has not retraced that level. He now argues that global equities have likely entered a bear market cycle.

    0
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    Gavekal Research

    An Ugly Trade War And An Inverted Yield Curve

    Will a trade war boost US growth and inflation, or instead cause a deflationary recession? The bond market is basically saying that a trade war will dent US growth and force the Federal Reserve into easing. Bear with my two-handed explanation, but there are also good reasons why it could also boost nominal growth.

    6
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    Gavekal Research

    China's Options In The Unfolding Trade War

    China is widely seen as having a pretty miserable hand in its trade stand-off with China. However, Louis is not convinced that China has so few options. Here he considers Beijing’s scope for retaliation, and so leverage, from using its financial clout to spook US capital markets to winding up Kim Jong-un to start causing trouble for the US and its allies.

    10
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    Gavekal Research

    Audio & Transcript — The US-China Trade And Technology Mess

    In yesterday's special Gavekal Research Conference call Gavekal's Arthur Kroeber and Dan Wang, along with Fathom China's Matt Forney, considered what the breakdown of the US-China trade talks means for the trajectory of the trade war, and what the blacklisting of Huawei means for the tech cold war.

    0
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    Gavekal Research

    The Message In Market Dispersion

    Economic events create winners and losers. It is too early to say with confidence how the current US trade and technology confrontation with China will play out, or whether US tariffs on imported autos and the threatened retaliation will go into force. But it is possible to tell how great investors believe the potential disruption is likely to be.

    0
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    Gavekal Dragonomics

    Who Wants A New Long March?

    Since the collapse of the US-China trade talks, the public position of both sides has hardened. Top leader Xi Jinping’s call for a “new Long March” was widely taken as a sign he is ready for a protracted standoff with the US. But support for such a stance is not universal, as the surprising public comments of Huawei chairman Ren Zhengfei suggest.

    4
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    Gavekal Research

    Video: Iran And The Oil Price

    Angry rhetoric between the US and Iran reached blood-curdling intensity after the US announced in late April that it wouldn't grant waivers for sanctions on Iran's oil exports. While this caused a short term spike in the oil price, it has since fallen about -8% from its high. Are oil traders too complacent about the risks, or does the market have it right?

    0
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    Gavekal Research

    A Change In The Market Mood

    Thursday was an ugly day for global equity markets, with losses that brought total returns on US equities almost back to their January 2018 level, and non-US equities to the brink of bear market territory. It is hard to shake the feeling that the investment environment has changed. What lessons should we draw from the tumultuous trading session?

    7
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    Gavekal Research

    Trade War: Back From The Dead

    0
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    Gavekal Dragonomics

    The Fate Of Huawei

    The US government has China’s most prominent technology firm in a stranglehold. The question now is whether the US government continues to strangle Huawei until it goes out of business, or chooses to eventually stop squeezing and allow a weakened Huawei to keep operating under some limitations. In this report, Dan explores the possible scenarios.

    3
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    Gavekal Research

    Trump's Trade War Calculus

    Keeping track of all the pieces of the US-China confrontation has become a full-time job. But the chaos and uncertainty of the past couple of weeks has begun to resolve itself into fairly clear patterns, even if the outcomes remain in doubt. Three main conclusions emerge from last week’s activity, and none of them are particularly reassuring.

    10
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    Gavekal Research

    One Reduction Of Risk At The Margin

    By putting off for six months its decision whether or not to impose a 25% tariff on all imports of passenger cars and car parts on national security grounds, the US administration bowed to expedience on Wednesday. In theory, the threat of auto tariffs remains on the table. In practice, the six month delay has robbed the proposal of much of its credibility.

    1
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    Gavekal Research

    The Case Of The Missing Inflation: The Changing Demographic Picture

    Demography, it is said, is destiny. If so, then the finger of destiny may be pointing at a more inflationary future for the world economy. Louis reviews the slow shifts in demographic profile which govern trends in consumption and savings, and so propel the forces of inflation and deflation over the very long term.

    6
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    Gavekal Research

    Monopsonies, Protectionism And ROIC

    It is extremely unfashionable to say so, but Donald Trump’s campaign to bring manufacturing industries back to the US by slapping tariffs on goods imports may not be quite the act of economic illiteracy most professional practitioners of the dismal science would have you believe. On the contrary, it could well be positive for US growth, living standards, and market outperformance.

    11
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    Gavekal Research

    Beijing's Most Effective Trade Tool

    In response to the escalation of the US-China trade war, Chinese policymakers are likely to step up their easing measures. This should help support domestic demand. But as Chen Long argues in this piece, the effect of policy easing, coupled with the impact of increased tariffs on China’s exports, will add to downward pressure on the renminbi.

    4
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    Gavekal Research

    The Trade War Story Lines Harden

    The US-China trade war has three potential outcomes. First, we could see a step back from brinksmanship and a deal in the next few weeks. Second, the two sides could dig in for more protracted negotiations. Third, the talks could break down and the trade war become permanent. With the probability of each outcome less than 50%, the only certainty is continued uncertainty.

    0
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    Gavekal Research

    Goldilocks And The Ten Bears (2019)

    Anatole returns to the framework he set out in November 2017, examining the 10 key risks that could threaten global markets over the next 18 months and which investors should monitor closely—and he comes to some surprising conclusions about the central locus of global dangers.

    4
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    Gavekal Research

    The Motivation Behind Trump's Tweets

    Since becoming president, Donald Trump has made it clear that he sees the S&P 500 as the real-time judge of his White House performance. Why, then, did Trump on Sunday send a tweet alleging that China had backed off from agreed positions in the US-China trade talks, and in so doing rattle a market priced for Goldilocks?

    5
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call May 2019

    Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment. In our monthly Conference Call yesterday, they outlined arguments for why this may be the case, and what it would mean for portfolio construction.

    0
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    Gavekal Research

    A Better Time For A Trade War

    For equity investors, there is a never a good time to have a trade war. Nevertheless, if there must be one, the US stock market is now better placed to ride out a US-China tariff conflict than it was a year ago. That’s just as well. Chinese negotiator Liu He is set to arrive in Washington on Thursday for the latest round of trade talks which are going down to the wire.

    5
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    Gavekal Research

    Gauging The EM Collateral Damage

    After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.

    3
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    Gavekal Research

    Series: The Case Of The Missing Inflation

    As the Federal Reserve launched the second round of its quantitative easing, the fear was that the Fed’s unorthodox monetary policy would ignite a new round of inflation throughout the world, with dramatic effects on asset prices. After all, most asset prices are driven by the interaction of inflation and economic activity. But inflation failed to materialize, and even fell from more than 3% globally in 2010 to negative territory in 2015. These...

    0
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    Gavekal Research

    A Reverse-Engineered US Inflation Indicator

    In the Strategy Monthly I presented a fairly simple rule to show whether an economy is in the top, or the bottom half of the Four Quadrants framework. To show that the rule worked, I laid out relationships between the "rule" and a range of other useful indications of a price environment shift. Here, I capture all of these relationships in a simple, revised decision rule.

    0
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    Gavekal Research

    How Long Can Productivity Contain US Inflation Pressure?

    April’s US payrolls report showed job creation was stronger than expected and unemployment lower, yet wage pressures were softer. This suggests weaker unit labor costs will allow the Fed to remain dovish, at least for now. All else being equal this is positive for equity investors. The question is: How long can this benign combination persist?

    0
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    Gavekal Research

    Trade Deal Delayed, Not Yet Denied

    Any trade negotiator will tell you that the last yard is always the hardest. That is obvious now in the US-China trade talks, which were thrown into doubt by Donald Trump’s weekend tweets threatening to hike tariffs on US$200bn of imports from China from 10% to 25% this Friday if a deal is not done.

    2
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    Gavekal Research

    Inflation And The Gold Fix

    When the market rate of interest for a long period has been held abnormally low relative to returns on invested capital, financial engineering takes off with huge debt issuance, making a chaotic denouement of the credit cycle unavoidable. To prepare for such an event, an equity portfolio hedged with gold can reduce volatility and raise returns.

    4
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    Gavekal Research

    Strategy Monthly: The Inflation Shift And Portfolio Construction

    Despite inflation remaining muted, Wednesday saw the Federal Reserve stand pat on interest rates. Having switched to an overly dovish stance early this year, Fed Chairman Jay Powell remains wary of changing tack and easing policy as he worries about inflationary pressure bubbling up from an economy that looks to be fully occupied. For his part, Charles is less nuanced and believes the US will shortly flip over into an environment where inflation...

    0
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    Gavekal Research

    Managing Today’s Biggest Risk

    The US first quarter GDP data released on Friday proved consistent with the picture of slower—but still positive—growth through 2019, and a continuation of the Goldilocks tailwind for asset markets. But after a strong run-up in equities this year, it might be time to ask what the greatest risk is to the current environment, and how to position for it.

    0
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    Gavekal Research

    The Case Of The Missing Inflation: US Fiscal Policy

    The US seems set to run huge fiscal deficits for as far as the eye can see, and it is not clear who is going to fund this indulgence. In the fourth instalment of his “missing inflation” investigation Louis considers the options available to the US Treasury and concludes that hard funding choices will likely be ducked by whoever wins the 2020 election.

    1
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    Gavekal Research

    The Case Of The Missing Inflation: Chinese Monetary Policy

    China’s response to the Fed’s QEII program in 2010 was to tighten monetary policy, as it feared a spill-over effect into inflation. Since that point China has seen credit growth progressively slow, making it an inhibitor to any global rebound in inflation. This orientation by China is changing as the focus of policy shifts away from crimping the shadow finance sector.

    4
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    Gavekal Research

    Why The Bulls Are Back In Charge

    Now that the S&P 500 has hit a new all-time high and other stock markets have recovered most of the steep losses they suffered last summer, it seems a lifetime since the financial panics of 2018. Investors who bought the dip have enjoyed Wall Street’s strongest quarterly performance in this bull market. After being so well rewarded, how should bullish investors who kept the faith now respond?

    1
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    Gavekal Research

    How Contagious Is The Health Care Downturn?

    On paper, this should have been a good year for health care stocks: global growth has disappointed, long term interest rates have fallen, the US yield curve for a brief while was inverted and a looming US-China trade deal should see China buy lots of health care gear and drugs from the US. Yet, even though the stars aligned, health care has been the worst performing major US equity sector this year. Notwithstanding a bounce yesterday, the sector...

    0
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    Gavekal Research

    Iran Waivers And The Oil Price Spike

    US Secretary of State Mike Pompeo has announced that the US will not roll over waivers on its sanctions on Iranian oil exports when they expire in May. The question for investors is this: If Washington does make good on its threat, to what extent are other oil producers able and willing to increase output in order to make up any supply shortfall in global markets?

    5
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    Gavekal Research

    The Case Of The Missing Inflation: Energy’s Impact

    When the Fed launched QE2 in 2010, there was widespread fear that a great inflation beckoned. It has not exactly worked out that way. Louis considers the role energy played in a decade of becalmed US consumer prices. Yet, with oil prices again rising, he asks whether the market has grown complacent in its analysis of the relationship between oil and inflation.

    3
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    Gavekal Research

    The Case Of The Missing Inflation

    As the Federal Reserve launched the second round of its quantitative easing, the fear was that the unorthodox monetary policy would ignite a new round of inflation—even hyper-inflation—throughout the world, with dramatic effects on asset prices. But inflation failed to materialize, and now nobody seems to be worried about it anymore.

    5
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    Gavekal Research

    US Financial Asset Valuations Stretched Every Which Way

    Charles dusts off his equity and bond valuation models for the US and is disturbed to see that for only the fourth time since the mid-1980s both asset classes are simultaneously overvalued. In this piece, he asks: what gives?

    1
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    Gavekal Research

    Inflation Is The Real Risk

    Happy days seem to be here again as risk assets soar on a dovish Federal Reserve and better growth outlook. Yet, investors should take note. The Fed has three official mandates; namely, to keep inflation low and stable, keep unemployment down, and keep interest rates low and stable. Yet among those “equals”, the first is thought to be bearing down on inflation.

    5
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    Gavekal Research

    A New Look At The Housing Market

    When the US slides into recession, it generally does so because of a contraction in investment, either in the corporate sector or in the housing market. Today, returns on capital invested in housing exceed the cost of capital, signalling a positive outlook for US residential investment, construction, house prices, and the shares of homebuilders.

    3
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    Gavekal Research

    Hong Kong Seminar — April 2019

    Louis Gave examined the reasons for equity markets' good performance amid a global trade slowdown; Thomas Gatley assessed the state of the Chinese economy and whether the current Chinese equity bull market still has legs; Udith Sikand reckoned it is time to be positive on emerging markets, especially EM Asia.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call April 2019

    In yesterday’s Gavekal Research Conference Call, Will Denyer and Udith Sikand addressed the changing US dollar liquidity environment, and its impact on markets.

    0
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    Gavekal Research

    Europe's Export Problem

    Europe is the world’s most export-dependent big economic region. In such a precious position, the effect of external weakness can be debilitating, as shown by the eurozone manufacturing PMI having just fallen to its lowest in nearly six years at 47.5. The question is whether any respite can be found in overseas markets.

    0
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    Gavekal Research

    Play A Longer US Cycle With Small Caps

    After a wobble late last year, the US economy looks to be stabilizing. The Atlanta Fed has revised up its estimate for 1Q19 GDP growth to 2.1%, while more timely indicators such as mortgage applications, PMI readings and durable goods orders indicate a steadying of the ship.The question is how to play this development.

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    London Seminar — March 2019

    Cedric Gemehl examined the possibility of a European rebound; Charles Gave argued the world is splitting into three distinct monetary zones; Tom Miller presented on the state of the US-China trade talks and the health of the Chinese economy; Anatole Kaletsky examined the risks to the bull market, and arrived at a bullish conclusion.

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    Good News For Goldilocks

    Last Thursday, with the price of oil approaching a four-and-a-half month high, Donald Trump took to Twitter. “Price of Oil getting too high.” Trump’s tweet had little effect, with Brent crude hitting US$69/bbl on Monday. Prices are likely to continue to push higher over the coming months towards 2018's highs—a troubling prospect.

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    Strategy Monthly: A New Liquidity Environment

    The prospect of easier liquidity conditions helped make 1Q19 one of the best ever quarters for US equities. Confirmation of the Federal Reserve’s newly dovish policy stance means that US equities should continue to do well through 2019. Other big winners in this environment may be equities in northeast Asian emerging markets that do not rely on Chinese commodity demand.

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    Beyond The Yield Curve Inversion

    The current yield curve inversion and softness in growth data are curious developments, given that the four prices that matter most for the global economy—long bond yields, corporate credit spreads, the oil price, and the value of the US dollar—are all relatively favorable. Louis and Charles weigh five different explanations for what may be going on—from bullish to highly bearish—and examine the investment implications.

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    A Week Is A Long Time

    Harold Wilson, the former British prime minister’s, quip that “a week is a long time in politics” has become an over-used cliche. Still, in the last week, there has been good reason to dust it off.

    1
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    Video: Europe's Response To China

    Europe has an ambivalent relationship with China that is increasingly under scrutiny. The European Commission recently labelled China a “systemic rival” and France and Germany want to create corporate champions to compete against Chinese state owned enterprises. Europe, however, is not singing from the same hymn sheet.

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    Recession Warning, Or False Alarm?

    On Friday, the three-month to 10-year portion of the US treasury curve inverted for the first time this cycle, heightening investors’ fears of impending recession. But although every US recession of recent decades has been preceded by an inversion of the yield curve, not every inversion has been followed by a recession; there have been cases of false positives.

    6
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    Gavekal Research

    Vox Clamantis In Deserto

    Some say, “if at first you don’t succeed, try, try again.” Others regard repeating the same mistake over and over again, and expecting the results to change, to be the very definition of insanity. I fear that the majority of “respectable economists” (meaning they always side with the consensus) inhabit the first of the two camps.

    4
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    Gather Round The Punch Bowl

    US monetary policy tightening is over, at least for now. While the Federal Reserve is not adding any more hooch to the punch bowl, chairman Jay Powell has promised to stop cutting his serving sizes. Although not much of a surprise, the Fed’s guidance is broadly positive for just about everything but US dollar cash—especially equities and real assets.

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    Believe In The US Consumer, Still

    Just as the Federal Reserve eases up on monetary tightening and negotiators struggle to avert a trans-Pacific trade war, the US consumer is emerging as the next source of worry. Americans are deferring big-ticket purchases, consumer confidence readings have softened and retail sales growth has slowed. Suddenly, the picture looks similar to the 2015-16 soft patch, or worse still it resembles the phase leading up to the 2008 crisis, when an...

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    Gavekal Dragonomics

    The End Of China's ODI Party

    Beijing’s decision to use foreign acquisitions as a tool of state industrial policy has badly backfired. With advanced economies stiffening their resistance to Chinese investment, China’s decade-long outward direct investment spree looks spent. In this piece, Tom explains how the boom ended and where funds will flow in the future.

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    Video: The Fed's Potential Paradigm Shift

    The Federal Reserve is debating a fundamental shift in its inflation targeting. Right now it's targeting 2% inflation no matter what it has been in the past, a so-called "bygones" policy. In this video interview Will discusses the consequences of switching to price-level targeting, where the aim is to keep average inflation over time at 2%.

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    Productivity To The Rescue, For Now

    On first reading, Friday’s US payroll report for February made grim reading for most investors. The screeching slowdown in non-farm hiring seemed to point to a US economy that is flirting with recession. To compound matters, wage growth seemes to point to a very tight labor market. On closer inspection, however, a less concerning picture is revealed.

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    Not Modern, Not About Money, And Not Really Much Of A Theory

    Charles has had enough of all the talk going round about Modern Monetary Theory. In this forceful polemic he lets fly with both barrels at the proponents of MMT, arguing that they have no knowledge of financial history, little understanding of the nature of money, and are clueless about what constitutes a theory.

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    Gavekal Research

    An Investor's Rough Guide To Modern Monetary Theory

    Modern Monetary Theory—the idea that governments can spend as much as they want, free from funding constraints—is attracting more and more attention. Will examines the precepts of the theory, explores whether it really brings anything new to the table, and outlines some of the implications for investors should it ever be applied as practical policy.

    16
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    Video: Shifting Sands At The Fed

    The US Federal Reserve has said it is likely to end its process of balance sheet “normalization” sooner than previously planned. This sounds like an obscure monetary technicality, but it has important implications for investors. In this video interview Will explains why.

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    Get Ready To Buy The Dip

    With the S&P 500 up a nifty 18% from its Christmas eve low, propelled by the Federal Reserve’s dovish turn and hopes of a US-China trade truce, it is natural to wonder if US stocks are due for a correction. The question for investors is whether they should fade the rally now before it is too late, or stay invested and look to buy the dip should a correction occur.

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    Gavekal Dragonomics

    The US Technology Control Toolbox

    The US and China appear to be moving toward a trade deal that will at least halt further hikes in tariffs. But as Dan shows in this piece, the US still wants to constrain China’s technological rise, and has many tools it can use. US-China technology exchanges are becoming politically and legally fraught, causing collateral damage on both sides.

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    Gavekal Research

    The Trouble With Price Level Targeting

    The Federal Reserve is talking about changing the way it targets inflation. Currently it tweaks policy in an attempt to zero in on a specific inflation rate: 2%. Under the framework it is discussing, instead it would aim to hit a price index level consistent with a particular long term average inflation rate. The distinction might sound subtle, but by targeting a price level, the Fed would compensate for any undershooting by attempting to...

    6
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    Gavekal Research

    What To Expect From Trump-Kim II

    The the eight months since Trump and Kim's historic handshake in Singapore has seen no progress on North Korea’s denuclearization, with the two sides still leagues apart. Although their second meeting this week will do nothing to bridge the gap, Trump’s determination to be seen as a peacemaker will further reduce tensions in North East Asia.

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    After A Trade Deal, Then What?

    So far, so predictable: President Donald Trump’s weekend tweets extending the deadline for US-China trade talks past March 1 made clear his intention to get a deal done, most likely in the second half of March when Xi Jinping pays a visit to Mar-a-Lago. A deal is now almost certain to happen; the live questions are what will be in it and what impact it will have.

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    Gavekal Research

    The Mystery Of The Missing Stimulus

    Since late 2016, the US trade deficit has been widening. Usually, when the US trade deficit expands, the effect is stimulative for the rest of the world. However, this time around there have been no signs that non-US economies are enjoying a resulting pick-up. In this report, KX examines possible explanations for the failure of this longstanding relationship.

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    Gavekal Research

    Back To The Barbarous Relic

    Going back to the mid-1980s, I have worked on the assumption that the US economy has been in the “deflationary” lower half of my four quadrants framework. My fear is that we may be moving into the inflationary top quadrants. If so, this means that in the bust phase of the cycle equities will have a positive correlation with bonds, and those bonds will offer much lower returns

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    Gavekal Research

    A Catspaw, Not A Tailwind

    The publication of minutes from FOMC’s January meeting confirmed that the Fed has executed an about-turn in its policy stance and is now in dovish mode. More specifically, the minutes confirmed that the Fed is planning to halt the contraction of its balance sheet later this year, putting an early end to the quantitative tightening that began in October 2017.

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    Video: What Kind Of US-China Deal?

    In recent weeks, the US dollar has rallied, emerging markets have been strong and gold seems to be breaking out to the upside. That is an unusual combination, and in this video Louis outlines three possible explanations for the moves. Most provocatively, as the US-China trade talks get critical, he wonders if China is gearing up to accept a one-off revaluation of the renminbi.

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    Gavekal Research

    Three Odd Things

    Reserves held by foreign central banks at the Fed are shrinking, which implies there aren’t enough US dollars in the system. This would make sense: the Fed has been draining excess US dollars for the past couple of years. So with shrinking central bank reserves and a shrinking US monetary base, the US dollar should be going up, and most risk assets should be hurting. Oddly, this isn’t happening.

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    Gavekal Research

    The Biggest Investment Story Of 2019

    Now that stock markets around the world have recovered from the year-end panic of December 2018, it is worth returning to the question I posed here on the first trading day of 2019: was the disappointing performance of equities and other risk assets in 2018 the prelude to a deep and protracted bear market, or a contrarian opportunity to “buy the dip”?

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    Video: Containing China's Tech Ambitions

    More constructive rhetoric suggests the US and China may be about to strike a truce on tariffs and market access. However, that does not mean they are about to bury the hatchet. Powerful groups in Washington want to contain China’s rise as a technological power, and the US has many tools at its disposal even if it drops tariffs.

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