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  • Gavekal Research

    Four Quadrants: The Growth Question

    Charles has been on a near 40 year quest to find a rules-based solution to the most basic of economic questions “what is the current situation?”. He has long used his Four Quadrants methodology which categorizes an economy as being in either an inflationary boom or bust, or alternatively a disinflationary boom or bust. In the first part of this series he proposed a framework to show whether the US was in the inflationary or disinflationary part...

    0
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    Gavekal Research

    It’s About The Dollar, Not The Renminbi

    In my 50 year career working in financial markets, I have never seen the money supply of one country move across the border to another country. Hence I must confess to being perplexed when reading recent commentary fretting about “capital flight” from China. Never mind that China’s highest denomination bill is RMB100, meaning that a fleet of trucks would be needed to move any meaningful sums into Hong Kong, but the country still has foreign...

    1
  • Gavekal Research

    Four Quadrants: A Wicksellian Analysis

    In 1978, when still young and creative, I produced my first four quadrants chart. The idea was that there are four basic investment environments depending if economic activity is expanding or contracting, and whether prices are rising or falling. It was usually obvious which state we had just left—for example the UK having suffered an inflationary bust in 1977—but far harder to judge what state we had entered. Being able to make such a call in...

    1
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    Gavekal Research

    The Gavekal Monthly: The Balance Of Risks

    The new year has been a wild ride so far, with sharp drops in the renminbi, Chinese stock markets, and oil prices leading global markets down. In our first Gavekal Monthly of 2016 we try to make sense of the risks facing investors today. As usual there are some strong differences of opinion: Anatole argues that developed economies are in decent shape, the dollar's rise will soon be over, and equities should post a better performance than...

    0
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    Gavekal Research

    The Last Holdout Of US Value

    Some readers have expressed surprise at my contention that the US stock market is “not that expensive” as their direct experience suggests otherwise. The objection is reasonable, so I have conducted a review of my US equity valuation model. I like to compare equities to a long-dated US zero coupon bond because it has the same annual volatility as the US stock market. Hence, the chart below compares the S&P 500 with the price index of a zero...

    0
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    Gavekal Research

    The Apex Of Market Stupidity

    In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even more silly than their other predictions.

    8
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    Gavekal Research

    Why Not To Trust In Central Bankers

    More than ever investors are fixated with central bankers, whether it be the latest utterance of Janet Yellen or what Mario Draghi may announce later today. To my mind, there are bigger issues on the horizon.

    6
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    Gavekal Research

    When To Reduce The Volatility Of An Equity Portfolio

    Having worked as a money manager with mandates that allowed me the freedom to move at will between cash, bonds and equities, while still being measured against the world equity index, my key asset allocation decision was always when to reduce the portfolio’s volatility below that of the benchmark—and which tool to use in pursuit of this goal.

    0
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    Gavekal Research

    Lament For A Vanished Middle East

    It is desperately saddening to see the terrified population of the Middle East fleeing for refuge towards a Europe that has utterly forgotten what the region looked like just a few decades ago. Yet nobody can hope to understand the disaster that is unfolding if he knows nothing of the events that shaped the modern Middle East.

    7
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    Gavekal Research

    Poverty Still Matters For Capitalists

    Since 2000 the median US household income has fallen by -7% in real terms as living standards have declined for the poorest members of American society. As Charles explains in this follow-up to his July 2014 paper, Poverty Matters For Capitalists, this worsening impoverishment has been inflicted largely by monetary policy mistakes, and threatens to drag the entire US economy into recession.

    7
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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.

    13
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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.

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  • Gavekal Research

    Philosophical Dominance, Profits And Stocks

    Let us start with a simple idea, which also happens to be validated by the data: stock market returns and corporate profits over the long term have the same growth rate.

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