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    Gavekal Research

    A Silly Recommendation

    The euro just celebrated its 20th anniversary to scant fanfare. Hardly surprising, given that it caused a Greek depression, decline in Italy’s private sector GDP and a German current account surplus that has exported deflationary pressure to Europe and beyond. Against this grim backdrop, today’s note will consider whether now is the time to buy eurozone financials.

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    Gavekal Research

    A Sober End To The Year

    For investors around the world, 2018 proved to be “challenging”. Yet to Gavekal’s clients, hopefully the year’s difficulties did not come as a surprise. Just over 12 months ago, early in December 2017, I published a paper entitled From A Ferrari To A Jeep advising investors to reduce the volatility of their portfolios.

    2
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    Gavekal Research

    Perhaps The Most Important Chart I have Ever Published

    In my Wicksellian world, when the “market rate of interest” (cost of capital) moves above the “natural rate of interest” (return on capital) a recession usually follows. Italy offers an interesting case in point as it has spent so much time since the euro’s launch operating below this critical threshold.

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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

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    Gavekal Research

    The Real Gilets Jaunes

    France’s yellow vest protest movement may have been the first since 1789 not to stem from left-wing origins, argues Charles. Instead, it reflected a great uprising by the forgotten people of middle France who have had enough of being the piggy bank that funds the lives of an urban elite which has rigged the system to its favor.

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    Gavekal Research

    The Conflict Between Liquidity And Growth

    In recent days my colleagues Anatole Kaletsky and Arthur Kroeber have debated the strained relationship between China and the US, and what it may mean for emerging markets. I agree that this standoff matters greatly for the world, but I’m not convinced it’s the main issue driving markets and therefore a resolution—or not—at the G20 next weekend may end up as a damp squib for investors. A range of issues have me concerned, from widening credit...

    6
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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.

    5
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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.

    2
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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...

    2
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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.

    0
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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.

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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.

    16
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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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