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E.g., 16-12-2019
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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 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.

    8
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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

    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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    Gavekal Research

    The Drag Of US Housing

    Despite the overall US growth outlook remaining decent, markets have taken on an ugly tone, with US equities having given back their 2018 gains and credit spreads gapping wider. Adding to grim tidings, yesterday saw weak housing data released, which is a worry as the sector often leads the broader US economy.

    16
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    Gavekal Research

    US Housing Gets Vertiginous

    There is a lot to like about US housing. Vacancy rates are low, as are inventories of unsold homes. The labor market is tight and wages are steadily rising. At this point of the cycle there has usually been substantial over-building, but not this time. While supply has increased, housing starts have yet to exceed my estimate of the structural rate of household formation. Yet despite these decent enough fundamentals, valuations look stretched and...

    0
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    Gavekal Research

    A Better Fed Model

    The “Fed model” which values US equities relative to bonds is now more than 20 years old. In that time, it has become widely used and has attracted equally widespread criticism. In this paper Will and KX revise the original to iron out some of its flaws, and come up with an improved model which offers greatly superior risk-adjusted returns.

    6
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    Gavekal Research

    Don’t Fret About Libor

    A disproportionate increase in Libor relative to other benchmark short term rates over recent months has got many observers flustered. In this concise paper, Will and KX dig down to the cause of the increase, and explain what it does and doesn’t mean for portfolio investors.

    0
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    Gavekal Research

    Turning 90% Bullish

    Over the last three years, Will has developed his own version of Charles's Wicksellian framework to analyze the US economic cycle. His approach has been to gauge the difference between the private sector’s return on invested capital and its cost. In this candid report, he explains why he is overhauling his model and how this has substantially changed his recommendations.

    12
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    Gavekal Research

    Take Profits On US Homebuilders

    Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The Outlook For US Growth And Prices). The third element—our neutral view on homebuilding—merits...

    0
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    Gavekal Research

    Positioning For US Tax Reform

    What’s not to like about tax cuts? Quite a lot as it turns out. Although the final shape of US tax reform has yet to be settled, there are enough common points between the House and Senate bills to allow Will and KX to conclude that the likely tax cuts will prove inflationary, and could prompt a more aggressive stance from the Fed. Despite some undoubtedly positive macro outcomes, the implications for investors are not exactly bullish.

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  • Gavekal Research

    The Savings Glut’s Long Life And Slow Death

    Slow-moving demographic trends have a big impact on asset prices. For the last 35 years, the age structure of the world’s population has created a global savings glut which has propelled secular bull markets in both equities and bonds. Now that demographic tailwind is fading. In a few years it is likely to reverse. In this paper Will introduces a new measure, the Capital Providers Ratio, which relates the impending demographic shifts to the...

    22
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    Gavekal Research

    QT And The Treasury Quandary

    The Federal Reserve has confirmed that quantitative tightening will begin next month as it gradually lowers its holding of treasuries and mortgage-backed securities. For investors, the question is whether they should “fight the Fed” by owning assets that are now out of favor with the central bank. I would argue that such a formulation is wrong and these are good times to be mitigating risk by picking up treasuries, probably of shorter duration.

    7
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    Gavekal Research

    Good News At The NIPA Coal Face

    The so-called NIPA data (national income and product accounts) offers a cleansed account of US profitability as the effects of inflation and currency moves are stripped out. Thus, while nominal profits reported by S&P 500 companies have rebounded since early 2016, no such signal has emerged from the NIPA numbers—until now. This matters as in late-cycle situations it is common for my preferred inflation-adjusted version of NIPA profits to...

    0
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    Gavekal Research

    It Is Not Slack Weighing On Wages

    How can a labor market be very tight, yet have barely any wage growth? In today’s daily Nick tackled this for the UK and found a mix of universal and idiosyncratic causes. For the US and Japan a frequent refrain is that official data hugely understates the potential size of the workforce and so a ready source of “slack”. Will and Udith beg to differ.

    4
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    Gavekal Research

    Can The US Property Engine Fire Up?

    Two years ago banks started to make it harder for US construction firms to borrow and soon after activity began to fizzle. While blame has been pinned on skilled worker shortages and rising costs of both land and materials, KX and Will think financing was the key issue. The good news is that banks seem to be again loosening their purse strings.

    2
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    Gavekal Research

    Liquidity: More Bad News Than Good

    Gavekal has long maintained that bull markets rest on three pillars: liquidity, valuations, and growth. Now with the Fed set to tighten further in an environment of weak bank credit growth, KX and Will warn that the liquidity pillar which has done so much to support the current bull market in US equities is looking increasingly shaky. That is especially ominous, given that valuations are no longer cheap and catch-up growth is played out for this...

    8
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    Gavekal Research

    Policy & Productivity: How To Make America Great Again

    A critical and much-debated question about the US economy is whether it is permanently stuck in a “new normal” of 2-2.5% annual growth—about a point below the 3.2% average growth rate in 1970-2000—or if it can regain its previous luster. Will assesses arguments from both the upbeat techno-optimists and the grizzled growth skeptics and updates his own view based on US policymaking in the age of Trump.

    5
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    Gavekal Research

    Tax Reform And The Dollar: It’s Not So Straightforward

    Tax reform is high on the agenda both for US president-elect Donald Trump and for the new session of Congress that began earlier this month. Among the reform proposals that could most affect investors are those advanced by the House Republicans, which many commentators have argued could cause a substantial exchange rate appreciation of the US dollar. In theory—all else being equal—this would be true. But our examination of current exchange rate...

    7
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    Gavekal Research

    Cash Repatriation Won’t Trigger A New Buyback Boom

    With the incoming US administration promising big tax breaks on the repatriation of corporate cash piles held overseas, Wall Street is confidently predicting a renewed equity market buyback boom in 2017. On first hearing, this sounds like a reasonable expectation. For one thing, in recent years US companies have consistently chosen to plough their retained earnings—and a sizable amount of debt—into share buybacks, rather than into investment in...

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