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    Gavekal Research

    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

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    Gavekal Research

    A More Timely Wicksellian Tool

    According to my Wicksellian analysis of the US, when the market rate of interest moves above the natural rate (essentially the structural growth rate of corporate profits), then a recession is coming, and investors should exit US equities and load up on treasuries. I now propose an updated and more timely proxy for the "Wicksellian market rate".

    3
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    Gavekal Research

    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

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    Gavekal Research

    Why I Love The Euro

    By now surely almost everyone, except perhaps Jacques Delors and Jean-Claude Trichet, must accept that the euro is the greatest monetary mistake governments have imposed on their unsuspecting populations since then Chancellor of the Exchequer Winston Churchill took Britain back onto the gold standard in 1925.

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    Gavekal Research

    Italy’s Inevitable Endgame

    Just over a year ago, with the optimism towards eurozone stock markets, and Italy in particular, riding high, I wrote a paper expressing the view that none of the eurozone’s underlying problems, nor Italy’s, had been solved. One year later, the situation is now looking very dangerous indeed.

    1
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    Gavekal Research

    The Art Of (Trade) War

    Donald Trump’s trade war against China demonstrates that the Washington consensus is dead and buried. This suggests that the world will split into three monetary zones, each with its own anchor currency and risk-free asset class. As a result, the close relationship between the renminbi and the US dollar is a thing of the past and China’s vast current account surplus will become unsustainable. Charles examines what all this means for investment...

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    Gavekal Research

    Towards US Goods Price Deflation

    Emerging economies have spent the last three or four months squirming under the weight of a strong dollar. The effect of such currency strength is now showing up in the US itself, with the price of both consumer goods and imports softening. This deflationary pressure may end up impacting real interest rates, and hence the relative attractiveness of US bonds and equities.

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    Gavekal Research

    Asia And The Emergence Of A New Monetary Zone

    Having broadly developed as an integrated whole over the last 30 years, Charles thinks the world economy is now splitting into three big groups—North America, Europe and Asia. In this piece he considers Asia whose economies are increasingly coalescing around the renminbi and suggests a new-fangled balanced portfolio approach for maximizing risk-adjusted returns.

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    Gavekal Research

    An Update On The Dollar Liquidity Crisis

    Yesterday saw a worsening of the US dollar squeeze faced by weak links such as Argentina and Turkey. For much of this year, Charles has been on the lookout for market dislocations due to vulnerable economies having too few readily available dollars. One of his key tools has been the “world monetary base” and that is now sending worrying signals.

    15
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    Gavekal Research

    Trouble With Monopsonies II: Joan Robinson Versus David Ricardo

    Among the discussion topics at this week’s Jackson Hole meeting of world central bankers will be whether the market power of giant corporations is so great it allows them to hold down workers’ wages at the global level. Charles has no doubt, arguing in this paper that the development of platform companies into labor monopsonies accounts for what has been misunderstood as “secular stagnation”.

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    Gavekal Research

    Is Italy The Whale?

    Markets have an end-of-an era feeling to them as the US’s exit from easy money causes the dollar to rise, emerging markets to crater and strongmen to cry blue murder . Louis yesterday concluded that we are not yet seeing the kind of event that marks a cycle’s denouement. I agree but wonder if we did just glimpse a big beast breaking the surface in the shape of Italy, which judging by yesterday’s 12bp rise in BTP yields may already be in play.

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    Gavekal Research

    I Didn’t See It Coming

    As a rules-based investor, I got jumpy late last year when key indicators like my velocity indicator began to flash red. In January, I advised investors to reduce portfolio volatility by holding yen cash, short-dated treasuries and even Chinese bonds. Through to about April, this positioning worked fine as markets had a rocky period. Since April, however, the picture has changed in ways I did not expect.

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    Gavekal Research

    Strategy Monthly: Towards A Global Liquidity Crisis?

    In our latest outlook for global investment strategy, Charles Gave warns that the world may be heading into a dollar liquidity squeeze. There have been seven such scarce-dollar episodes since 1971, and every one produced some big financial accidents. The basic symptom today is that the US is heading into an inflationary boom, while the rest of the world is seeing slower economic growth and weaker asset prices. Investors must be defensive; but...

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    Gavekal Research

    No Exit From Brexit

    On Friday, Anatole set out his view that a second Brexit referendum is likely, and that in all probability it will reverse the original 2016 vote. Exercising his right to reply, today Charles explains why no second referendum is possible, why a no-deal, hard Brexit is increasingly likely, and why this will present a great buying opportunity in UK assets.

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    Gavekal Research

    Trump, And The US Dollar As The World's Reserve Currency

    For the 70 years since the launch of the Marshall Plan, the US dollar has reigned unchallenged as the world’s reserve currency. I have written extensively about the characteristics of the world monetary system that has grown up based on the US dollar. But I do not remember ever having written on the costs the US must bear to sustain what Jacques Rueff termed its “imperial privilege” as issuer of the global reserve currency.

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    Gavekal Research

    The Recession Of 2019

    Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of...

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    Gavekal Research

    Why US Long Rates Aren’t Going Up

    The behavior of US long rates presents something of a puzzle just now. The US economy is humming along nicely for this late in the cycle, and is even booming following last year’s tax cuts. Inflation is ticking higher. And short rates are rising. As a result, I would normally expect long rates to be climbing towards the top of the reasonable valuation band dictated by my bond market model (seeBond Market Risks). But they are doing no such thing...

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    Gavekal Research

    Audio & Transcript — Gavekal Research Call June 2018

    During Friday’s monthly call, Louis Gave addressed the direction of the US dollar and the impact of expanding US fiscal deficits. Anatole Kaletsky focused on the rise of populist politics, which remains his major concern. Charles Gave considered the impact of resurgent nationalism on the investment environment. There was also significant discussion of the oil price with Anatole and Louis taking differing positions.

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    Gavekal Research

    America First, The Rest Of The World Second

    Bears are stealthy creatures that rarely offer much warning of their arrival. Based on my experience in the financial wilderness, I have rarely recognized the clear manifestation of a bear market until I was caught firmly in its clutches. In the US today, excitement about President Trump’s daily activities means there is a lack of clear thinking about this market’s outlook. Similarly, a meme for many investors, including Gavekal colleagues, has...

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    Gavekal Research

    What Bothers Me About The Eurozone

    With Italy facing a constitutional crisis and likely fresh elections within months, attention is set to again focus on Europe’s single currency system. One effect of the euro is that it distorts self-correcting price adjustments, which regulate normal market-based economies. Understanding this dynamic is crucial, argues Charles, if equity investors are not to be pulled into value-traps, of the type which are now presenting themselves.

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