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    Gavekal Research

    A Surfeit Of Money

    The fruits of the US Federal Reserve’s swing to monetary easing are ripening. In the last couple of months the about-turn in monetary direction has triggered a dramatic rebound in aggregate US money supply growth, which is outpacing GDP growth. This suggests excess cash may be piling up. If so, the excess is likely to further bid up US asset prices.

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    Gavekal Research

    The Dial Moves Against US Growth Stocks

    The outperformance of growth over value continues, yet an increasing number of serious US managers are making the case for value. On the macro front the worry is of a strong economy that continues to have an inflationary vibe. Over the last five years, I have taken an equity growth bias. Now I’m shifting towards the value camp.

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    Gavekal Research

    A Sweet Spot For US Jobs

    US non-farm payrolls came in stronger than expected in January. Examining more forward-looking data, such as job openings, many observers suspect the US jobs market may be heading for slower job creation and weaker wage growth in the coming quarters. These worries are likely misplaced.

    2
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    Gavekal Research

    Bad Shocks Can Have Benign Effects

    There are few people outside Donald Trump’s administration who think the US-China trade war was a good thing. There are surely even fewer who think the Wuhan coronavirus outbreak has any positive aspects at all. Nevertheless, while both last year’s trade war and this year’s viral epidemic are bad for global economic growth, they are both largely beneficial for US households.

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    Gavekal Research

    The Threat To US Equities

    On Friday the US equity market succumbed to coronavirus jitters, with the S&P 500 sliding -1.77% to wipe out its year-to-date gains for January. The sell-off was accompanied by a surge in the VIX volatility index, which could continue to rise. Happily, however, there are five good reasons to think any such elevated volatility will prove short-lived.

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    Gavekal Research

    Don't Fret About The Fed's Balance Sheet

    As if investors didn’t have enough to worry about just now, many have been spooked by this month’s dip in the size of the US Federal Reserve’s balance sheet. Happily the Fed is one thing investors don’t need to fret about. The Fed’s statement and press conference on Wednesday confirmed that US monetary policy remains clear and predictable—and accommodative.

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    Gavekal Research

    The Dark Side Of A Strong US Economy

    The US’s growth outlook has been bolstered by easy financial conditions and trade deals being reached with China and its near neighbors. Yet, those prospects are also hampered by a tight labor market that threatens corporate profits. What recent data releases highlight is both the enduring strength of the US economy and niggling late-cycle factors that could yet undo it.

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    Gavekal Research

    Video: US Autos Ride Again

    A range of cyclical and structural factors have conspired to hit US auto sales in recent years. But with the US labor market remaining in rude health and US monetary policy being loosened, that may be about to change. The impact could be positive for US growth and for risk assets, argues KX in this interview.

    0
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    Gavekal Research

    A Qualified Bull On US Equities

    US unemployment is at its lowest in half a century. Yet for investors, the strength of the US jobs market is far from an unalloyed good. The biggest macro risk to the bull market in US equities this year is a sharp rise in inflation. And such a rise in inflation could have two probable causes: a steep rise in energy prices, or a marked rise in labor costs.

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    Gavekal Research

    Credit Spreads: Not Worth The Risk

    US corporate bonds had a great run in 2019, and have started 2020 on a strong note. Both investment grade and high yield indexes rose by around 14% last year, with credit spreads contracting substantially in the fourth quarter to approach their narrowest for this cycle. However, as US corporate leverage has risen, considerable latent risks have accumulated in the system.

    0
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    Gavekal Research

    Echoes Of 2017

    Global markets began 2020 on a bullish note, with the US S&P 500 climbing to a fresh record close, up a chunky 4.3% over the last month. Indeed, the US monetary backdrop at the start of 2020 is reminiscent of that in early 2017, a year which saw the S&P 500 climb 19.4%. History may not repeat this year, but there are good reasons to believe it may yet rhyme.

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    Gavekal Research

    Audio — Gavekal Research Call December 2019

    In the final Gavekal Research Conference Call of the year Louis-Vincent Gave, Anatole Kaletsky, Arthur Kroeber and Will Denyer reviewed the current investment environment and outlined their expectations for 2020.

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    Gavekal Research

    The Repo Paradox

    Following the US dollar liquidity squeeze and repo rate spike in mid-September—an event which went on to trigger hearty liquidity injections from the Federal Reserve—the market has been on the lookout for new stressors in the US dollar money markets. There were concerns of renewed stress on Monday as the Treasury sucked up an estimated US$84bn on the settlement of new debt issues and through the receipt of corporate taxes. US money market rates...

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    Gavekal Research

    What Would Volcker Do?

    Paul Volcker, who died this week aged 92, leaves a legacy of public service with a backbone. He managed the monetary affairs of the world’s leading economy during its post-WW2 nadir, and so his perspective on conducting monetary policy in times of political turmoil is without match.

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    Gavekal Research

    Parsing Payrolls And The Fed

    November’s employment figures show that the US jobs market is slowing, but the slowdown is gradual and not sufficient to worry investors to any significant degree about an impending recession. Nor, with inflation expectations subdued, do recent jobs data give the Federal Reserve reason to act either one way or the other at this week’s policy meeting.

    0
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    Gavekal Research

    A Safety Rope On The Wall Of Worry

    Markets are heading into the end of 2019 on a broadly constructive note. Yet there are daunting risks hanging over 2020. And although a number of these risks may be of modest probability, the impact on portfolios should they arise will be great. This means investors are to an extent climbing a wall of worry. Fortuitously, there is a safety rope to hand.

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    Gavekal Research

    Seminar Series Multimedia — Fall 2019

    Partners and analysts present their core ideas for the big economic regions and global markets heading into the year-end and looking forward to 2020.

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    Gavekal Research

    The Earningless Equity Rally

    In the third quarter, US macro-level domestic earnings fell -1.9% year-on-year. Behind this squeeze lies a weak sales picture tied to trading uncertainty and a rise in wages. In the near term, both factors could intensify. Yet there is nothing especially new in weak US profits and a ripping equity market. There are, in fact, three reasons to think this situation can be sustained.

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    Gavekal Research

    The US Manufacturing Slump Abates

    US manufacturing output fell -1.5% year-on-year in October to mark its weakest month since December 2015. The worry is that a US manufacturing recession causes such a drag that even well-performing sectors like housing get sucked down as well. The good news is that these production numbers look like a nadir.

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    Gavekal Research

    Looking Through To US Inflation

    In Congressional testimony yesterday, Jay Powell expressed optimism that US inflation will gradually rise toward the Federal Reserve’s target of 2%. If this is the case then it is reasonable to think that the US central bank could be done with rate cuts in this cycle but some way away from any rate hikes—this points to a Goldilocks of sorts.

    0
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    Gavekal Research

    Video: A Turning Point For The Dollar

    For the last five years, the world has lived with a strong US dollar. That may be about to change. Not only has the Fed turned dovish, its return to balance sheet expansion means it is now printing more money each month than its central bank peers, such as the ECB. This liquidity splurge, coupled with a diminution of dollar-supportive international risks may point to a period of US dollar weakness.

    0
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    Gavekal Research

    Time To Embrace The US Consumer

    Whether moving into a fixer-upper or a freshly finished McMansion, most homeowners will splurge on big ticket items to embellish their new abode. With the US housing market looking strong, investors should bet on consumer discretionary—it has the advantage of offering protection if long-dated bond yields move materially higher.

    0
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    Gavekal Research

    Strategy Monthly: Towards A Dollar Decline

    The last five years have been an era of US dollar strength. That era may now be coming to an end. After the US Federal Reserve halted its balance sheet contraction and last month resumed buying T-bills at a rate of US$60bn a month, the Fed is now printing money faster than the other central banks. As a result, relative liquidity growth now favors US dollar weakness.

    0
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    Gavekal Research

    Easy Money And Robust Growth

    No wonder the S&P 500 closed at a new high yesterday. On the same day the Federal Reserve cut interest rates by 25bp, US GDP growth for 3Q19 came in at a robust 1.9%. For its part, the Fed gave no indication of paring down its new asset purchase program (quantitative easing in all but name). This is bullish for risk assets and bearish for the US dollar.

    0
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    Gavekal Research

    US Dollar Under Fire

    The richly-valued US dollar is finally starting to look vulnerable. While still in its post-2015 trading range, the DXY index has given up -1.5% in the last 11 trading days; broader trade-weighted measures have also swooned. A range of factors are now weighing on the US currency and if they persist the unit could see a pronounced decline in the coming months.

    0
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    Gavekal Research

    Video: Playing The Un-inversion

    Having inverted over the summer, the US yield curve has steepened sharply. In the past such a move has often presaged recession—but not always. Twice since the 1960s an inversion and steepening was not followed by recession. Then, as now, the return on invested corporate capital was higher than the cost of that capital.

    0
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    Gavekal Research

    Culling The Pessimists

    A series of head-spinning flip-flops in the on-again-off-again trade war over the summer has caused US businesses to delay fresh investment. As a result, business surveys have been giving readings consistent with a US recession. Yet it seems likely that any damage wrought by the trade war remains ephemeral—at least hard data suggests this.

    0
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    Gavekal Research

    The Fed Goes On The Offensive

    Grocery shoppers get perturbed when they buy produce labeled as “organic” but get something from the agro-industrial complex. Investors, on the other hand, should welcome the Federal Reserve’s balance sheet boost, that was described on Friday as nothing more than “organic” growth. As it turns out, this is a heavily engineered offering by the custodians of money.

    0
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    Gavekal Research

    Watching For Signs Of A US Spillover

    Is the rot spreading? In the eurozone, there are signs that this year’s slump in manufacturing may be beginning to spill over to weigh on activity in the broader economy. Plenty of observers believe the US economy is destined to follow a similar path. Their fears may yet be realized, but so far there is no evidence the US economy is heading that way.

    0
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    Gavekal Research

    Back To Balance Sheet Expansion

    On Tuesday, Jay Powell confirmed that the US Federal Reserve will go back to growing its balance sheet once again following its meeting at the end of October. The aim is for the balance sheet to grow gradually along with the economy. While the Fed’s planned move is clearly positive for liquidity growth, it is likely to disappoint investors for two reasons.

    7
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    Gavekal Research

    Video: Where The Fed Stands

    Investors are nervous about weak US data and a liquidity squeeze in the US repo markets. They are now looking to the Federal Reserve for reassurance. In this video, Will tells us what policy changes to expect from the Fed at the end of this month and why.

    0
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    Gavekal Research

    Echoes Of 2000 Strike A False Note

    First there was the WeWork IPO failure and a string of other flops. Now the S&P 500 has slumped -3% in just two days, leaving the index down -4.6% from its July high. As a result, nervous investors are wondering whether the US may be seeing the beginning of the bursting of a bubble, just as in 2000. Are the fears justified?

    2
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    Gavekal Research

    Quantifying Trade War Risk

    Investors seem to have grown somewhat blasé about the US-China trade war lately. Over 12 months after the outbreak of hostilities, the S&P 500 is up 2.2% year-on-year. Part of the reason for this nonchalance appears to be a belief that US growth and domestic profits are invulnerable to any escalation of the conflict. This belief may be mistaken.

    2
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    Gavekal Research

    What If The Fed Has Finished Cutting

    What happens to the US equity market if the Federal Reserve has already finished cutting interest rates? Last Friday, Will made the case for a rebound in US growth, but withheld judgement whether it would be driven by real growth or inflation. The prospect raises the very real possibility that the Fed may decide rates have been cut enough.

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    Gavekal Research

    Stay Neutral Between Equities And Cash

    As August’s panic has receded, bond yields have risen from their lows. Even so, with the 10-year US treasury yield at 1.77%, the only way bonds can deliver significant upside from here is if the US economy slides into a disinflationary recession. That may yet happen. But it is by no means the most probable course for the US economy.

    0
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    Gavekal Research

    US Liquidity Is Not The Worry

    Despite this week’s violent US money market judders, the Federal Reserve looks to have a clear plan for managing monetary policy and liquidity conditions. There are many reasons to worry about risk asset pricing, but a shock from the bowels of the US financial system is not among them. In contrast, there are four reasons to stay upbeat about the US liquidity situation.

    2
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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.

    0
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    Gavekal Research

    Tariffs Won't Trouble US Consumers

    As US growth has slowed this year, consumer spending has been the economy’s bright spot. Personal consumption expenditure was the principal contributor to growth in the second quarter and July. However, fears are growing that the US consumer will come under increasing pressure in the coming months as the latest round of tariffs go into effect.

    4
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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

    Video: Looking Through The Bond Bubble

    As yields fall to record lows, bond markets seem priced for some sort of global economic calamity. With Europe in dire straits and the US-China trade war remaining live, there is certainly cause for worry. But when things look like they can’t get any worse, Will reckons, they often don’t. As the US growth outlook appears steady, equities and cash are the better bet.

    0
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    Gavekal Research

    The Case Against Recession

    Earlier in August, Charles announced that he was reluctantly joining the US recession camp. His reasoning was based largely on his observation that the long run average growth rate of US corporate profits had fallen to a level that in recent decades has always indicated an economic downturn. I am more optimistic than Charles.

    7
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    Gavekal Research

    Weathering Trump’s Trade War

    It may be the dog days of summer, but investors got a truckload of news this weekend that points to a bad situation getting worse. Given President Donald Trump’s escalation of tariffs and threat to bar US firms from operating in China, the worry is that his hardline stance spurs a US recession. KX and Will think this is unlikely.

    3
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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

    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 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 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

    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

    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 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...

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