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    Gavekal Research

    A Britisher At Heart

    On Monday, Anatole argued that a British exit from the European Union would rank as a foreign policy disaster of historic proportions (see Brexit: A Blunder To Rank With The Boston Tea Party). This is not the first time I have disagreed with my partner on UK matters, and it will likely not be the last. In recent years Anatole worried about the impact of public spending cuts being pushed through by the Conservative-led coalition government; I...

    4
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    Gavekal Research

    Wicksell And Capital Misallocation

    Accepted opinion among investors is that, when it eventually comes, the Federal Reserve’s first interest rate increase in almost nine and a half years will have been signaled so well in advance and will be so small—effectively from zero to 25bps—that it will have little or no effect on either the financial markets or the real economy. Unfortunately, given the monetary policy settings that have prevailed since 2010, I am not convinced the...

    12
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    Gavekal Research

    The Catastrophe Of Negative Rates

    Yesterday both Reserve Bank of India governor Raghuram Rajan and Bundesbank president Jens Weidmann broke ranks, daring to suggest that ultra-low interest rates may not be such a good thing after all. If rates were held too low for too long, warned Rajan, the risk of financial instability would be greatly heightened, a concern Weidmann shares. Unfortunately, that’s not the half of it.

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    Gavekal Research

    The Gavekal Ethos

    In recent days a number of our readers have expressed surprise—even bewilderment—at the difference of opinions within Gavekal on some important topics. “What,” they ask, “is the Gavekal house view?” This is a perfectly legitimate question, and as chairman of the firm, it is my duty to explain our position.

    3
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    Gavekal Research

    Middle-East Machinations

    Russia and Turkey are increasingly at loggerheads as Moscow escalates its military engagement in Syria. Earlier this month Turkey’s President Recep Tayyip Erdogan threatened to find another gas supplier after Russian jets breached its air space, and in recent days Ankara initiated legal action against Gazprom over the price it is charged for piped gas.

    2
  • Gavekal Research

    The Myth Of Secular Stagnation

    When the European Central Bank meets today, discussion will center on whether it should expand quantitative easing in an attempt to stave off deflation and support the eurozone’s painfully slow growth. In Japan too, talk is about whether the Bank of Japan needs to step up its stimulus efforts. And in the US, the Federal Reserve last month decided to delay calling an end to its own zero interest rate policy amid evidence that US growth is in...

    1
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    Gavekal Research

    The Dollar, Deflation And US Equities

    Is the threat of US deflation really receding? Far from it—for a large segment of the US stock market deflationary pressure is set to intensify, rather than abate, over the coming months. Sure, data for September released yesterday showed an uptick in core inflation (ex-energy and food) to 1.9% from 1.8%, raising expectations that that overall US consumer prices are poised for a moderate uptrend driven largely by housing and healthcare costs....

    1
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    Gavekal Research

    The Financing Gap, Creative Accounting And US Recessions

    The pithy aphorism that there are “lies, damned lies and statistics” is attributed to Benjamin Disraeli. Having spent the better part of my adult life torturing data to prove points, I would certainly agree. But in my view, the British Prime Minister missed a beat, for surely the most predictable form of officially sanctioned lying is the type overseen by accountants.

    0
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    Gavekal Research

    Positioning For A US Recession

    Since the end of last year I have been worried about an “unexpected” slow-down, or even recession, in the world’s developed economies. In order to monitor the situation on a daily basis, I built a new indicator of US economic activity which contains 17 components ranging from lumber prices and high-yield bond spreads to the inventory-to-sales ratio.

    0
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    Gavekal Research

    I Know, I Know...

    ...the US economy is doing fine and after the longest run up in history, may be on the verge of achieving take-off velocity. So why am I so worried? The problem is that my US recession indicator has entered negative territory, after literally collapsing in the last 6 months. Today I will try and explain my concerns about the US, when all others seem fixated by China. It should be acknowledged that since about 2002 the US economy has been managed...

    3
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    Gavekal Research

    Termaillage And The Renminbi

    For years I have felt like a lone voice in the wilderness, monitoring central bank reserves as an important determining factor of what I loosely call “international liquidity”. Suddenly I’ve got company. In the last few weeks everyone has been focusing on the topic, and “experts” by the dozen have penned reports about it. Naturally, I’ve read everything that has passed across my screen, and—sad to say—I’m appalled by the results: an egregious...

    0
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    Gavekal Research

    What To Do With US Bonds

    Given the recent turmoil in financial markets and an intensifying focus on the Federal Reserve’s forthcoming policy decision, it seems a good time to update readers on our thinking about the proper positioning of a US fixed income portfolio. As a starting point, it is worth restating the two main determining factors that influence the yields on longer-dated treasuries.

    0
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    Gavekal Research

    The World Monetary Base And The Dollar

    If the supply of US dollars is declining then, all else being equal, the value of the dollar should rise, and vice versa. This truism can be checked by comparing the annual growth rate of the “world monetary base” with changes in the JP Morgan trade weighted dollar. Regular readers will recall that the WMB is simply the sum of the US monetary base and foreign exchange reserves deposited at the Federal Reserve for the account of foreign central...

    12
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    Gavekal Research

    Surviving The Bear Market

    Never mind whether investors in US equities should buy the dip. The question now is whether a six year bull market is yielding to a bear market. Bears are stealthy animals that tend to creep up unannounced. I have had the nagging suspicion for a while that we were approaching grizzly territory and have been recommending an increasingly conservative portfolio positioning (see Protect And Survive). However, the core of my investment philosophy...

    13
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    Gavekal Research

    Three Ugly Charts

    I would never claim to be an accomplished technical analyst, but I do know how to use a ruler when looking at charts of prices in the markets.

    5
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    Gavekal Research

    The Signal In Silver (Part II)

    Last year I came up with a chart (shown below) that I found rather intriguing. It showed that on every occasion in the last 100 years when the price of silver dropped more than 25% year-on-year, consumer price inflation in the US took a nose-dive soon afterwards.

    5
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    Gavekal Research

    The Purpose Of The Stock Market

    When you’ve been around for as long as I have, you can’t help but come to a few conclusions—most of them unhappy. My first conclusion is that the stock market was invented to make as many people as possible as miserable as possible for as much of the time as possible. In this sense the stock market is a roaring success.

    5
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    Gavekal Research

    Go Ugly Early

    I fully recognize that most readers face huge regulatory and commercial constraints in the way they manage their portfolios. Nevertheless I have always believed that, as far as possible, the best starting point for effective portfolio construction is to imagine oneself marooned on a Pacific island, free from the constraints of legacy and the expectations of others.

    0
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    Gavekal Research

    Europe’s Debt-Deflation Dynamic

    Amid all the talk of contagion and demonstration effects emanating from Athens, there is a straight forward question that concerns investors whose domain spreads beyond the lapping shores of the Mediterranean: is the Greek crisis, at its root, inflationary or deflationary? Given talk of new currencies being launched, the obvious fear concerns inflation. I would demur and suggest that a deflationary shock is unfolding. This matters especially for...

    3
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    Gavekal Research

    Germany Is The Real Risk

    As the Greek crisis apparently reaches its climax it strikes me as odd that the default response is to seek refuge in “safe” German assets. If, as appears quite likely, the flawed euro-system really is heading into the next phase of its denouement, then German assets are the soft underbelly of the system, and they are likely to suffer most. Here is why:

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