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E.g., 22-10-2019
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    Gavekal Research

    The Renminbi, Manipulation And The Trade War

    Monday’s actions on the Chinese currency—Beijing’s decision to let the renminbi’s exchange rate weaken past CNY7.00 to the US dollar, and Washington’s decision to label China a currency manipulator—signal that the US and China are close to throwing in the towel on a trade deal. Trade war escalation should now be the base case.

    1
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    The Long Term Impact Of Trump’s Latest Tariffs

    Aftershocks from Donald Trump’s August 1 tweets promising new tariffs on US imports from China continued to reverberate through Asian markets on Monday morning. Most notably, China’s yuan fell by some -1.3%, with the USD-CNY exchange rate breezing unimpeded by the Chinese authorities through the CNY7.00 to the US dollar mark for the first time since early 2008. Equity markets in the region were also hard hit, with Japan down -2% and Hong Kong...

    0
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    Gavekal Dragonomics

    The Risks To Steel Prices

    China’s government is once again going after pollution from the steel industry, raising the risk of more policy-induced spikes in steel prices. While forced shutdowns to ensure blue skies are on the way, Rosealea argues that the bigger risk to steel prices is on the downside, due to weakening construction activity and cautious housing policy.

    0
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    Gavekal Research

    The Renminbi Devaluation’s Fork In The Road

    Following the surprise renminbi devaluation of August 2015 policymakers in the world’s major financial powers acted to calm markets in what came to be known as the “Shanghai Agreement” of February 2016. Since then, currency markets have broadly been one big yawn, with little volatility and few opportunities for macro traders to make meaningful money. Is that situation now changing?

    0
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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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    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

    What The Early End Of QT Means

    As expected, the Federal Reserve cut short term interest rates by 25bp on Wednesday. Less expected the Fed also halted its program of quantitative tightening, effective immediately. The decision to end the program early cancels an expected additional US$70bn contraction in the supply of money. This represents a significant easing.

    4
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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 Dragonomics

    Read My Lips: No Housing Stimulus

    The world’s major economies are seemingly united on the need for a fresh round of stimulus—except for China. And hopes for a more aggressive approach were dashed by the latest Politburo meeting, which declared that China would not boost the housing market to revive growth. In this piece, Andrew explains what’s behind China’s policy stance.

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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

    China’s Hong Kong Gambit

    Following more violent protests in Hong Kong, Beijing reiterated its support for the city’s embattled chief executive in a first-ever press briefing on Hong Kong’s affairs. While the conflict shows no signs of resolution, the example set by Paris shows that Hong Kong can be both a dependable financial center and a hotbed of political dissent.

    0
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    Gavekal Research

    Shanghai Talks Now A Sideshow

    Trade talks between the US and China resume today after a three-month hiatus. This meeting may or may not pave the way for a deal in the next several months, but it no longer matters much. The global macro risk from the trade conflict has ebbed dramatically. What's important now is the dimensions of the decoupling between the world’s two biggest economies.

    1
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    Gavekal Research

    The Downward Revision In US Profits

    Alongside last Friday’s second quarter US GDP release, the BEA issued revisions which wiped out almost all the increase in pre-tax corporate profits since the end of 2016, and much of the post-tax increase. The revisions can be attributed almost entirely to weak top-line growth and rising wage costs. The good news is that the revisions do not sound a recession warning.

    10
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    Gavekal Dragonomics

    From Trade War To Decoupling

    Trade talks between the US and China will resume this week after a three-month hiatus, but how much do they really matter? In this piece, Arthur argues that the macro risk from the US-China trade conflict has ebbed to almost zero. What’s important now is to understand the dimensions of the decoupling between the world’s two biggest economies.

    1
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    Gavekal Research

    Unpicking US 2Q GDP

    Second quarter US GDP growth came in at 2.1%, slightly better than expectations. In itself, this headline figure is not especially illuminating. But dig deeper into the various components of 2Q growth, and there are reasons for moderate optimism about the trajectory of the US economy through the second half of 2019.

    4
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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

    The Choice Confronting Investors

    With US$13.5trn of bonds on negative yields, Germany’s sovereign curve in negative territory out to 20 years, and G7 yields lower than in the 2008 crisis, the euro crisis, or 2016, when the world expected China to collapse, there are two possibilities. Either the world is facing low growth and inflation forever, or the bond market is in the final phase of an almighty bubble.

    5
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    Gavekal Dragonomics

    The Size Of State Subsidies

    The US government alleges that “China provides massive, market-distorting subsidies,” particularly to state firms. But just how big are China’s subsidies to state-owned enterprises, and what kind of economic distortions do they create? This in-depth report quantifies three major types of direct and indirect subsidies, and explores their effects.

    1
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    Gavekal Research

    The Effectiveness Of EM Rate Cuts

    An easier Fed stance suggests that the US dollar is unlikely to trend significantly higher from its present levels. The prospect of limited US dollar upside frees Asian central banks from the necessity of defending their exchange rates, and gives them leeway to support growth by cutting interest rates. However, the impact of rate cuts on both growth and asset prices will vary among Asian EMs.

    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

    The Future Of Big Tech

    Big Tech is in the US government’s cross-hairs. Google, Facebook, Amazon and Apple face probes into their behavior, and legislation is in the works to clip their wings. The question for investors is: How serious will the stand-off with the government get and will a prolonged downturn in tech spark a broader decline in the US equity market?

    0
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    Gavekal Research

    Fiscal Crisis Averted, At A Cost To Liquidity

    On Monday, the White House and Congressional leaders reached a tentative agreement to raise US government spending caps and suspend the debt ceiling for two years. Assuming the deal is passed by Congress in the next few days, a fiscal crisis will be averted this year. But before investors breathe a sigh of relief and bet on a rally, it should be noted that one near term effect of the agreement could be an acute liquidity drain as the Treasury...

    8
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    Gavekal Research

    STAR Is Born

    Trading on the world's newest stock market board got off to a predictably volatile start on Monday, when Shanghai's STAR market opened for business. But while that was entirely foreseeable, the reaction of regulators will be less predictable, and will send important signals on the long-term liberalization of China’s stock markets.

    4
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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

    Video: Korea's Coping Strategy

    No other G20 economy is as exposed to global trade tensions as Korea. With its heavy dependence on semiconductor manufacturing, Korea has proved vulnerable both to the US-China economic cold war, and to long-running disputes between Seoul and Tokyo. As a result, exports have cratered and economists have slashed their Korean growth forecasts.

    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 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

    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 Dragonomics

    The Fallout From Baoshang Bank

    The takeover of Baoshang Bank in May was China’s biggest bank failure in at least a decade. But the People’s Bank of China managed the ensuing market jitters well, once again proving itself to be an effective financial firefighter. Still, Baoshang’s failure does confirm that the era of rapid, unregulated growth for China’s smaller banks is over.

    1
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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

    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.

    4
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    Gavekal Dragonomics

    Two Cheers For Unbalanced Growth

    China’s economy ended the second quarter on a high note, with industry and exports doing better than expected in June. The data reassured markets that the government’s macro policy stance—which has been quite conservative—is justified. But as Andrew argues in this piece, growth is being driven mainly by property, and can slow further.

    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

    Video: Modi's Second Term Challenges

    Indian prime minister Narendra Modi faces some daunting economic challenges in his second term. As Udith explains in this interview, the biggest is to create new jobs India needs. In the coming decades, India must generate some 10mn new jobs every year simply to provide employment for the cohort of young Indians set to enter the workforce.

    0
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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 Research

    Normalizing Tech Disruption

    Investors have been cheered by the US and China deescalating a trade dispute that has focused on China’s use of US technology. So what to make of a stand-off between two US allies in North Asia that could disrupt highly integrated technology supply chains? Could this action reflect the normalization of trade sanctions being used in bilateral disputes?

    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

    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

    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

    Foreigners And The Deepening Of Indian Finance

    India’s new government delivered a careful budget last Friday, preferring to keep a veneer of fiscal rectitude than to prioritize growth and jobs with heavy spending. Yet there was one exception amid the caution: for the first time, India is set to issue sovereign debt in foreign currency. This is an intriguing development for foreign investors wanting exposure to India while avoiding currency risk.

    0
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    Gavekal Research

    Return Of The Widowmaker

    If shorting Japanese government bonds is the ultimate widowmaker, calling the top of the gravity-defying Hong Kong property market cannot be far behind. The International Monetary Fund, for example, has been warning about the dangers of an unsustainable bubble since 2010. Now suspicions are growing that the stopped clock’s hour may finally be at hand.

    2
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    Gavekal Dragonomics

    The Emissions Mess In Autos

    China’s auto market is still locked in the worst downturn in its history. In this report, Ernan explains how the government’s rushed transition to new vehicle-emissions standards worsened that downturn, and why it hasn’t reversed course. Though an end-year recovery for auto sales is still likely, 2019 will be a second bad year for the industry.

    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.

    4
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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

    Three Messages From The Markets

    Last week’s market action confirmed three longstanding ideas that I have been presenting to clients. Firstly, there's no sign of a US recession. Secondly, bond market "signals" no longer convey useful information about economic growth prospects. Thirdly, there's no conflict between bearish bonds and bullish equities—they tell different stories.

    0
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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 Dragonomics

    The Future Of Forced Technology Transfers

    As China and the US restart their trade talks, negotiators face a daunting list of issues to resolve. One of the stumbling blocks is the US allegation of “forced technology transfer.” In this piece, Dan explains what China is doing to address the problem, how that might not be enough—and why forced transfers of technology don’t even always work.

    0
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    Gavekal Research

    Video: What Is Libra, And Will It Work?

    Facebook will have an uphill battle trying to convince consumers to adopt its announced digital currency, libra. As it will be backed by a basket of assets denominated in different currencies, the prices of goods and services will be more volatile in libra than in existing local currencies, even in emerging markets. This volatility will deter consumers from making the switch.

    0
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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.

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