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E.g., 21-09-2019
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    Gavekal Research

    The Industrial Disease (II)

    Last week, Charles examined the decline of the US industrial sector, introducing his “industrial Wicksellian spread” as an indicator of environmental conditions for industry. Now he looks at the probable causes of industrial deterioration, explains why neither monetary nor fiscal policy can help, and uses his toolkit to draw some important conclusions for portfolio investors.

    0
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    Gavekal Research

    The Cost Of Cleaner Shipping

    Right now, investors concerned about energy prices are focused on the attacks on Saudi Arabia’s processing facilities. But a possible conflict in the Gulf will not be the only emergent factor likely to affect oil prices over the coming months. New rules for cleaner shipping fuels, known as “IMO 2020,” also have the potential to roil global petroleum markets.

    0
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    Gavekal Research

    Draghi's Fiscal Gift

    As he pushed interest rates still further into negative territory and announced the resumption of quantitative easing on Thursday, outgoing European Central Bank chief Mario Draghi made clear that he was passing on the baton of policy stimulus—not so much to his successor, but rather to Europe’s finance ministries.

    4
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    Gavekal Research

    The Industrial Disease (I)

    Something ails the industrial sector. Since the 2008 crisis, the growth of US industrial production has failed to keep pace with the growth of the overall US economy. In this paper, Charles examines the industrial sector’s malaise using tools derived from the theories of 19th century Swedish economist Knut Wicksell. His conclusions are disturbing.

    2
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    Gavekal Research

    The Three Waves Of Capitalism

    Three great forces drive capitalism and markets: the Schumpeterian, the Ricardian, and the Malthusian. Usually only one dominates at any one time. The flood of capital into tech indicates investors believe that Schumpeterian creative destruction will continue to drive returns over the coming years. But Louis argues that a new wave may be about to take over.

    15
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    Gavekal Research

    Up Against The Limit With The ECB

    German savers face “custody fees” when depositing big sums at the bank, or get clipped 50bp when buying a euro-denominated money market fund. Such outcomes explain why a growing number of economists oppose calls for the European Central Bank to cut rates further and restart quantitative easing when it meets tomorrow.

    1
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    Gavekal Research

    The Danger Of A Dumbbell Portfolio

    Both bond and equity markets are signaling investors' belief that monetary policy will not only stay easy for as far as the eye can see, but actually get easier in the coming weeks and months. But what if they end up getting wrong-footed in their expectations of another wave of interest rate cuts, quantitative easing and other uber-dovish monetary policy measures?

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    Gavekal Research

    Video: Italian Politics Favors Bonds

    Yesterday Italy’s new government took office, the 66th since 1946. Meanwhile, Italian bond yields have reached record lows. Nick attributes this to two factors. First the global bond rally. Second, the shifting winds of Italian politics away from the Euroskeptics to the Europhiles, which bodes well for Italian-European budget negotiations.

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    Gavekal Research

    Audio & Transcript — Gavekal Research Call September 2019

    In yesterday’s conference call, Anatole Kaletsky, Will Denyer and Louis-Vincent Gave outlined reasons for recent dramatic moves in bond markets and made arguments for what comes next. Anatole also addressed Brexit developments and Louis discussed the situation in Hong Kong.

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    Gavekal Research

    Italian Politics And The Bond Market

    On Tuesday, members of Italy’s left wing populist 5-Star Movement lent their support to the formation of a new coalition government with the Democratic Party. The new government, to be led by Giuseppe Conte, technocrat prime minister in the previous coalition, still has to secure a confidence vote in Parliament. But that should go through in the next couple of weeks. If it does, right wing populist Matteo Salvini—Italy’s most prominent...

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    Gavekal Research

    Strategy Monthly: The Message From Bonds

    Record low bond yields point to a deflationary catastrophe in the making. Yet growth data in the world’s two biggest economies remain decent. Could investors be reacting to a rupture in the international order? Gavekal analysts are not persuaded by such arguments and offer four alternative explanations for the “bond bubble”.

    0
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    Gavekal Research

    ‘Do Or Die’ Boris Is Bullish For Sterling

    Considering the political chaos that will descend this week on the UK, it may seem surprising that the pound has bounced back to its trade-weighted level just before Boris Johnson became prime minister. Or maybe it is not too surprising—if a “No Deal Brexit” is the only possible scenario that would justify a further weakening of sterling and other UK assets.

    1
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    Gavekal Research

    The Importance Of Oil

    The world’s fixed income markets are priced for a severe bout of demand destruction and deflation. Yet, outside Europe at least, growth in the world’s major economies continues to tick over. However, could a sudden oil price rise spark an uptick in inflation pressure that triggers an abrupt repricing in which bond yields spike sharply higher?

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    Gavekal Research

    Europe’s Victimhood Culture

    The biggest threat to world economic growth today is not the US-China trade war, but German exceptionalism. Even as Germany has suffered the greatest growth downgrades of any major economy, its politicians have obstinately rejected any Keynesian fiscal expansion. Now calls are mounting for a policy U-turn, but Anatole isn’t holding his breath.

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    Gavekal Research

    Video: The Anatomy Of The August Panic

    As more and more government bonds around the world slide into negative yield, investors can draw one of two conclusions: either the world faces an economic meltdown, or there is a buying panic in safe assets. But although there is indeed a synchronous global slowdown in growth, Louis favors the latter explanation.

    0
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    Gavekal Research

    Germany’s Fiscal Firepower

    Uniquely among the world’s big economies, Germany runs a budget surplus, in accordance with the “debt brake” written into its constitution following the 2008-09 financial crisis. This means Berlin could, in theory, deploy considerable fiscal firepower even within the current rules, and a great deal more if it chose to bend or rewrite them.

    1
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    Gavekal Research

    German Banks And The Dollar

    I am certainly no technical analyst, but I do have a good memory. The story of major financial crises can be told with reference to the US dollar’s movements against the euro (and its antecedents). It now looks to have reached a significant juncture, especially with Italy moving toward another period of political instability.

    9
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    Gavekal Research

    The Diminishing Market Impact Of Tariffs

    After the US imposed its first major round of tariffs on Chinese goods last September, the S&P 500 sold off by -20%. After the second round went into force, it fell -6.8%. And since President Trump announced a third round, it has sold off by -6.1%. It seems each successive escalation in the trade war is having a smaller impact on the US stock market.

    2
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    Gavekal Research

    When The World Goes To Hell

    Anatole has previously argued that the correlation between inverted yield curves and recessions has very little predictive significance. In this piece he updates that view to argue that inverted yield curves have no predictive significance whatsoever. For this reason, he thinks that equity investors have gotten their reaction to recent developments about right, while bond investors are all in a muddle.

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    Gavekal Research

    The Surge In Anti-Fragile Assets

    The latest round of data releases appears to confirm fears that the world is facing another synchronous global downturn. If so, it will be different from other slowdowns, in that it will not have been caused by rising interest rates or higher energy prices. What’s more, it will be setting in when there is little prospect of a globally coordinated response, when monetary policy appears to have lost traction, and when asset prices are looking...

    3
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    Gavekal Research

    What Germany Means For Europe

    Even before the US-China trade war escalated last week, Europe stood on shaky ground. We learnt yesterday that German industrial production for June fell -1.5%. Europe’s largest economy faces cyclical and structural challenges, and the question is whether it takes its neighbors down with it.

    0
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    Gavekal Research

    The Death Spiral Of Eurozone Banks

    For months Charles has told anyone who will listen that the real threat to global markets is the slow-motion implosion of the eurozone’s banking system. Each time the region's equity has hit a critical threshold an intervention has caused it to bounce off and delay the reckoning. The size of these rebounds has waned and this time there may be no respite.

    2
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    Gavekal Research

    Strategy Monthly: Focus On The Fed, Not On US Tariff Threats

    Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.

    0
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    Gavekal Research

    What Sterling’s Move Tells Us

    The sterling exchange rate is going down and the usual suspects say this is bad news. But the exchange rate is merely a price that helps allocate capital between the economy’s internal and external sectors, and so set the purchasing power of rentiers and entrepreneurs. Entrepreneurs do best when the currency is undervalued, while rentiers and consumers win out when it is overvalued.

    2
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    Gavekal Research

    Video: Enter Boris

    In the last week or so, the pound has fallen sharply to a two-and-a-half-year low against the US dollar. That’s all down to the new British government, headed by Boris Johnson, and his "do or die" Brexit campaign. But when a deal is finally struck, Britain’s strong economic fundamentals mean it is well placed for a boost in growth, along with the pound.

    0
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    Gavekal Research

    Sterling’s Information Void

    Since Boris Johnson became prime minister, the UK government’s promise of a “do or die” Brexit has caused sterling to slump -2.9% against the US dollar to about US$1.21. While the chances of Britain actually leaving the EU without a deal remain small, this outcome will remain unclear for some time. That presents risks, but great opportunities for those dealing in sterling.

    0
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    Gavekal Research

    Darwin Or Keynes?

    Keynes advised that at the outset of a recession, policymakers should drive down market interest rates in order to borrow from future demand. Today’s central bankers have adopted this approach as permanent policy. Unfortunately, permanent Keynesianism fatally interferes with the economic Darwinism of creative destruction that propels growth in a capitalist system—with dire consequences.

    5
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    Gavekal Research

    The Most That ECB Easing Can Do

    Mario Draghi fired no new bazooka on Thursday. But the European Central Bank president did signal the deployment of a whole arsenal of monetary weaponry in September. Such a package will cement the transition of the ECB under Draghi into a more active and more actively political institution, with a much more counter-cyclical policy stance.

    2
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    Gavekal Research

    Healthchecking Boris Johnson’s Britain

    On Wednesday, “colorful” former journalist, television comedian and London mayor Boris Johnson will achieve a long-held ambition when he moves into Number 10 Downing Street to replace the hapless Theresa May as the United Kingdom’s new prime minister. Judging from the headlines, Johnson is taking over an economy on the brink of a painful slowdown, if not already actually in recession.

    0
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    Gavekal Research

    La Garde Meurt Mais Ne Se Rend Pas

    Surrounded at Waterloo and asked to lay down his arms, General Cambronne of Napoleon’s Imperial Guard replied: “La garde meurt mais ne se rend pas”. This translates as “The guard may die, but it does not surrender”. A saying that could apply to the new ECB head is: “The president’s term may end, but the institution does not yield to conventional monetary policies”.

    0
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    Gavekal Research

    No Time To Be Chicago Trained

    Technocrats globally are under the cosh from populist politicians who have tired of doing the sensible thing. In the developed world, checks and balances have insulated most big agencies, but the story is different in developing economies. The worry is that they are lurching off onto a development track that ends with fiscal blowouts and currency debasement.

    0
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    Gavekal Research

    Brexit And The UK Trade Deficit

    The UK has long run a large goods trade deficit with its main trading partners. However, Charles argues that this ”deficit” should really be seen as two different deficits; one is with the world excluding the eurozone, and the other with the eurozone itself. Splitting them makes sense as they have different origins and react to different forces.

    1
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    Gavekal Research

    Boris Johnson And The Pound

    With Boris Johnson’s almost inevitable enthronement as British prime minister only a week away, it is a good time to review the recommendation to buy sterling and sell UK government bonds which I first made in January, and repeated in April and again in late May.

    1
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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.

    0
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    Gavekal Dragonomics

    Beijing's Backdoor Into Europe

    The new enthusiasm of some European countries for China’s infrastructure-building Belt and Road Initiative has raised alarm across the continent. Brussels fears China is buying influence in Europe’s periphery, sowing disunity and threatening democracy. Our latest in-depth DeepChina report explains the real story of China’s influence on Europe.

    1
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    Gavekal Research

    France's Industrial Resilience

    France is bucking the downturn in European—and global—industry. In May, French industrial production confounded expectations by rising an impressive 4% year-on-year. And crucially, French industry is creating jobs again after a brutal 17-year contraction. Cedric examines the reasons for France’s industrial health.

    3
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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

    Betting Against The Gods Is Now Impossible

    Recently I made my usual remark to a European client about the stupidity of negative interest rates. My host told me a sobering story. He manages a pension fund and received a call by a regulator who said funds shouldn't hold too much cash because it's risky. Rather, they should buy long-dated bonds, regardless of the fact they're sure to lose money.

    14
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    Gavekal Research

    An Asymmetric Opportunity In BTPs

    The yield on 10-year BTPs has fallen below 2% for the first time since Italy’s populist government took office, yet investors continue to demand high premiums to hold Italian debt. Given that the cost of servicing this debt has fallen, and upcoming ratings reviews, there is a likelihood that BTP yields will converge further towards Portuguese and Spanish yields.

    1
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    Gavekal Research

    The Meaning Of The EU's New Lineup

    After three days of intense maneuver and counter-maneuver, on Tuesday the European Union’s heads of government announced their choice of names to lead the EU’s central institutions for the coming years. The result is a remarkable clean sweep for the favored candidates of French president Emmanuel Macron.

    2
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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

    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

    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.

    10
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    Gavekal Research

    The ECB After Draghi

    At the ECB's annual shindig in Portugal this week, two questions matter. Given negative interest rates and capital key constraints over asset purchases, how does the ECB fight the next downturn? And who will replace Mario Draghi? His successor must be politically cunning if they are to persuade Europe’s leaders that monetary policy is reaching its limits, and fiscal policy must take the strain.

    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

    The ECB Reloads

    The ECB may hope for the best, but it is preparing for the worst. As Mario Draghi prepares to hand over the ECB’s reins to an undecided successor, he seems to be restocking its armory.

    0
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    Gavekal Research

    Video: Italy And Europe's Banking Problem

    The eurozone's main banking index is back at a key threshold that over recent decades has seen large-scale intervention by global central banks. For Charles, the root of the problem lies in the deteriorating Italian economy. In this video interview, he explains this dependence and argues that this time there may be no explicit support coming for the banking sector.

    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

    A European Vortex

    There is a big disconnect between markets and reported data in the eurozone. Bund yields are within a whisker of all time lows, inflation expectations have cratered and the Eurostoxx banks index fell -12.5% in May. Yet at the same, Europe’s macro data, while not great, points to stabilization after a 16-month industrial downturn.

    0
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    Gavekal Research

    Harder Times For European Luxury

    It is conceivable that some European industries may benefit from the trans-Pacific economic cold war, picking up business lost to their US and Chinese competitors as a result of the worsening tensions. But one sector that will not benefit is the European equity investor’s favorite: luxury goods. European luxury goods companies now face tougher times ahead.

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