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    Gavekal Research

    Video: Bitcoin—Money Or Snakeoil?

    Will Denyer examines the forces behind the eye-watering run-up and eye-popping volatility of bitcoin, and delves behind the near-term moves in crypto-currency markets to ask whether bitcoin and its ilk will ever gain traction as a unit of account, means of exchange or store of value.

    0
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    Gavekal Research

    It’s A Policy-Driven Market

    US bond yields are rising as the growth outlook is boosted by the vaccine roll-out and sustained monetary and fiscal stimulus. US value stocks and the sectors hit by Covid restrictions are ripping. Growth investors, in contrast, are spooked about this situation, as much of their worth comes from earnings discounted far into the future. The investors' reactions to Federal Reserve Chair Jay Powell’s Congressional testimony on Tuesday reminded...

    0
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    Webinar: The Economic Impact Of A New Era

    Vaccines, fiscal stimulus and cheap money are working together to bolster the outlook for growth and inflation in the United States. The US is also under new leadership with new priorities. Our US team of analysts explained what this all means for the economy and asset markets.

    0
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    Gavekal Research

    US Inflation Has Many Fathers

    As the economics adage goes, inflation happens when “too much money chases too few goods”. This is an oversimplification but it does contain a core truth: the monetary price of goods is dictated by supply and demand factors that impact both the goods in question, and money itself.

    4
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    Gavekal Research

    Will Stimulus Cause US Overheating?

    The US Democrats are declining to cut the size of their stimulus proposals enough to secure bipartisan support, and are instead proposing to push the bulk of their US$1.9trn package through Congress using the reconciliation process (see The State Of Biden’s Stimulus). Their determination has raised fears that pressing ahead with such a large fiscal stimulus at a time when the US output gap appears to be closing fast could prove uncomfortably...

    4
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    Gavekal Research

    After GameStop

    Yesterday saw Treasury Secretary Janet Yellen chair a meeting of US financial regulators to assess the fallout of recent frenzied trading in “meme stocks”. There is unlikely to be a Dodd-Frank type response to this episode but a new administration may be motivated to act decisively. Yet the effect of GameStop may go wider, so consider the effect on the four key actors in the saga.

    1
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    Gavekal Research

    A Tactical Turn In The Dollar?

    Neither the United States nor the European Union got off to a flying start, but the US is out front with its vaccination program. This points to longer Covid disruption in Europe, which—in the short term—should support the US dollar versus the euro. Yet, in the longer term there remain many reasons to underweight the dollar, certainly against cheaper “risk-on” currencies.

    2
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    Gavekal Research

    Webinar: Global Investment Roundtable, January 2021

    A Democratic US administration is set to control all arms of the US government for the first time since 2010. Will this mean a fiscal blowout, causing big changes in the pricing of treasuries and the US dollar? Louis, Anatole and Will assess the possibilities.

    0
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    Gavekal Research

    Biden’s Spending Plan

    In a speech late Thursday, US President-Elect Joe Biden called on Congress to approve an additional US$1.9trn of federal spending to tackle the Covid-19 pandemic and support the US economy. If approved, Biden’s package will bring US government stimulus spending since the start of the pandemic to more than US$5trn. Heavy on support for households, Biden’s proposal would avert the risk of a first quarter contraction in the US economy and prime the...

    0
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    Gavekal Research

    The Road Ahead For US Yields

    Friday’s US labor market figures showing a surprise 140,000 contraction in December’s non-farm payrolls emphasized just how tough the winter months are going to be for the world’s largest economy as coronavirus infection rates and resulting hospitalizations continue to accelerate. Yet the grim near-term economic outlook notwithstanding, the first week of 2021 saw inflation expectations push higher, with the 10-year breakeven inflation rate...

    0
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    Gavekal Research

    Bitcoin, Gold Or Fiat?

    Governments and central banks are giving users of fiat money reason to consider alternative mediums of exchange and stores of value. And it seems entirely possible that Bitcoin can rally even harder than it already has. But are there the makings of a good money? Because if the answer is “no”, then bitcoin is running on fumes.

    29
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    Gavekal Research

    The Senate Upheaval

    With some trepidation, Yanmei and Will offer their view on the economic consequences of Georgia, assuming that the Democrats have indeed secured a wafer-thin majority in the Senate. While the fiscal restraints will now surely be released and tax hikes are more likely, the real winners of this election will be centrists in the Democratic Party, who in effect wield veto power over its more liberal instincts.

    3
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    Gavekal Research

    Webinar: Global Investment Roundtable, December 2020

    The US equity market is seeing a switch from the winners of the pandemic like technology and online retail, to the beaten-up losers such as travel plays. At the same time, hopes for a strong economic recovery in 2021 are juicing up value stocks. Similar dynamics are being seen in other major markets. Our team of analysts discussed what happens next, and what’s in store in 2021.

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  • Gavekal Research

    Video: The Treasury’s Liquidity Programs And Markets

    US Treasury Secretary Steven Mnuchin has come under fire for failing to extend a number of the Treasury’s liquidity support programs into 2021. But as Will outlines in this short video interview, while the existence of the facilities that are set to expire helped to shore up sentiment back in March and April, they have been little used, and are now largely irrelevant in practical terms.

    0
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    Gavekal Research

    Strategy Monthly: Two Equity Rotations For A Post-Covid World

    The impending rollout of vaccines in the United States is spurring two big equity rotations. With investors looking ahead to a post-Covid world, a rotation has begun from stocks that thrived in the pandemic to those that merely clung on. Second, the expectation that a robust economic recovery will push interest rates up has caused beaten-down value stocks to recover some mojo. Investors should play these rotations at a granular, sub-sector level...

    0
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    Gavekal Research

    Two Equity Rotations In The Making

    Investors are bulled up on hopes that successful vaccine roll-outs will end the Covid-19 pandemic before next spring and the US will get a smooth transition of power that leaves an investor-friendly divided government. Since Pfizer announced its successful stage-three vaccine trials on November 9, managers have been forced to reassess their US portfolio positioning. That process has likely only just got going.

    2
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    Gavekal Research

    Time To Look Beyond The US

    Heading into the US elections, there were three big reasons to be bearish on the US dollar. With the results as they stand, one of those concerns has diminished. But the other two continue to weigh on the US currency. Meanwhile, the US equity market is looking extremely expensive compared with equity markets elsewhere. Together, these factors favor unhedged positions in selected non-US equity markets.

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  • Gavekal Research

    Video: Politics And Pandemics—The US After The Election

    The last week has seen two big developments affecting the US economy and markets: effective confirmation that Joe Biden has won the presidency, and a surge in hopes for the early rollout of a coronavirus vaccine as infection rates continue to accelerate. Will examines how the last week’s news affects the US growth outlook, and outlines what it means for US bonds, equities and the dollar.

    0
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    Gavekal Research

    US Election Points To A Bullish Result

    The US election is tilting towards a denouement but a categorical result may not be known for weeks. That uncertainty is not good for Americans’ nerves but should not especially trouble investors. More impactful will be policy changes (or maybe the lack of them) that flow from the result. US equities, and growth stocks especially, have been buoyed by the chance of a Joe Biden presidency and split Congress.

    0
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    Gavekal Research

    Webinar: The 2020 US Election

    With the US election outcome likely subject to a period of litigation and some uncertainty, yesterday Gavekal partners and US analysts convened to discuss the possible scenarios lying ahead and what they're likely to mean for asset markets.

    0
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    Gavekal Research

    US Inflation Is Still Benign

    The current investment environment in the US faces three clear and present dangers. The first is tomorrow’s election, the second is the resurgent Covid outbreak and the third, is the threat of an inflation surge, which could force the Federal Reserve to tighten monetary policy. Thankfully for asset markets, the latest releases show inflation to remain benign.

    0
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    Gavekal Research

    Webinar: Facing Down US Risks

    The world is focused on the US election, with concerns over a disputed result. Our US team of analysts are less worried about process than the substantive impact of big changes in domestic economic policy settings. Will, Yanmei and KX assessed the likely fallout from November 3 and assess the latest US economic data with a focus on threats to the US recovery should the pandemic worsen and near-term fiscal responses remain uncertain.

    0
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    Gavekal Research

    Video: Facing Down US Risks

    Investors in US financial assets face a panoply of concerns from political upheaval, a worsening pandemic, uncertainty over near-term fiscal stimulus and threats to the highly-rated tech sector. In this video interview, Will addresses such concerns and offers portfolio positioning advice.

    0
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    Gavekal Research

    A Behind The Scenes Cash Boost

    US Treasury Secretary Steven Mnuchin’s admission that striking a deal with Congress on a new stimulus package before November’s election will be “difficult” was blamed for eroding market sentiment. Maybe. But behind the scenes, the Treasury has begun to run down some of the cash hoard it accumulated between April and August.

    0
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    Gavekal Research

    New Tech, Same Fiat Money (For Now)

    This week saw seven western central banks and the Bank for International Settlements issue a joint report on central bank digital currencies. They come not to bury cash nor to undermine banks, but to modernize payments for a digital age. If so, the introduction of CBDCs is unlikely to upend the banking system and monetary policy, but would resemble the rollout of ATMs in the 1960s.

    2
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    Gavekal Research

    Strategy Monthly: The Real US Election Risks

    Some investors worry that a contested US election may spark social and political unrest that is serious enough to threaten US risk assets. They are likely focused on the wrong risk. The US’s democracy faces heavy strains but is nowhere near a breaking point, but the differing outcomes that can occur on (or after) November 3 pose threats to portfolios.

    0
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    Gavekal Research

    Video: Behind The Market's Mood Swings

    In recent weeks some of the biggest US equity winners since the start of the Covid-19 crisis have appeared to run out of steam, as the Federal Reserve abstained from stepping up its asset purchases. Meanwhile, Congressional gridlock seems to stand in the way of renewed stimulus for American consumers. Will is not too concerned, and in this interview points out that the Fed still has ample ammunition, and that the strength of the US recovery...

    0
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    Gavekal Research

    Four Exaggerated Concerns

    As if markets weren’t nervous enough, US policymakers have been fueling the nervousness. On Wednesday, a series of remarks spotlighted a number of the main concerns currently troubling investors, including that the US Federal Reserve is out of ammunition, and that disputes over the result of November’s upcoming presidential election could drag on into the new year, plaguing asset markets with additional uncertainty. This focus appeared to...

    10
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    Gavekal Research

    The First Meeting Of The Fed’s New Era

    On Wednesday, the Federal Open Market Committee concluded its first meeting after Federal Reserve chairman Jay Powell last month revised its strategic policy framework. The new framework boils down to a temporary increase in the Fed’s inflation target to “make up” for past shortfalls.

    0
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    Gavekal Research

    Webinar: From Bearish To (Conditionally) Bullish

    Anatole and Will presented their views on the efficacy of US fiscal and monetary policy in response to the Covid crisis, and outlined the prospects for the economy and asset markets.

    0
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    Gavekal Research

    Webinar: Global Investment Roundtable, September 2020

    Charles Gave, Louis Gave and Will Denyer joined Arthur Kroeber at the global investment roundtable to discuss what's going on in the global economy. Charles identified three big trends that will affect the investment environment in the long term, Will gave an in-dept update on the US economy, and Louis examined where to find assets with “anti-fragile” properties.

    0
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    Gavekal Research

    The Dollar Still Has Downside

    Has the great US dollar correction of 2020 run its course? After all, the DXY index is down -10% from its March 19 top and -4.4% lower year-to-date. There have been good reasons to sound Cassandra-like warnings on the US currency and while some negative drivers have moderated, the balance of evidence implies more downside.

    0
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    Gavekal Research

    US Profits In The Pandemic

    My preferred “NIPA profits” measure fell by -14.4% during the second quarter of the year, according to US national accounts data released late last week. That follows a similarly bad -13.3% fall in the first quarter. Both declines are on par with the worst quarters in post-war history. And like previous low points, US corporate profitability is likely to recover from here. But what does the data tell us about the investment environment and what...

    2
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    Gavekal Research

    The Fed Boosts The Inflation Outlook

    The Federal Reserve made a historic change to its monetary policy framework yesterday when it officially adopted “average inflation targeting”. That bullseye remains 2%, but the definition of the target has changed in a way that, in the current context, effectively raises the inflation outlook. This has important implications for future policymaking and current asset pricing.

    5
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    Gavekal Research

    Video: The State Of The US Recovery

    Pandemic aside, the US faces a looming fiscal cliff and rising political risk as the presidential election campaign starts proper. So why is Will so sanguine about the country’s economic prospects? In this video interview, he explains his position.

    0
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    Gavekal Research

    Strategy Monthly: From Bullish To Neutral On The US

    The upsurge in second-round Covid-19 infections has put the US economic recovery on hold for now. But government, businesses and consumers have got better at coping with Covid, and in contrast to the first round, the economy is not going backwards.

    0
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    Gavekal Research

    A Conventional Fed

    The Federal Reserve did not shift its policy stance yesterday and nor is it likely to announce some big-bang reform after a “strategic policy framework review”, which Jerome Powell indicated should be wrapped up within a couple of policy-setting meetings. That may not be an exciting story, but it is one that financial markets will welcome.

    0
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    Gavekal Research

    Not Cheap, But Not Expensive Either

    I don’t propose to wade into the debate over whether US equities are in are in a bubble or not. I'd only point out that by one key metric—relative valuation—equities do not look excessively expensive today, at least when compared with the relative valuations seen at the height of the dot-com boom at the turn of the century.

    11
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    Webinar: Global Investment Roundtable, June 2020

    Yesterday Louis Gave, Will Denyer and Andrew Batson joined Arthur Kroeber at the Global Investment Roundtable. They discussed the economic growth and market situation in the US, the state of the Chinese recovery, and what a post-Covid-19 world might look like.

    0
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    Gavekal Research

    From Bullish To Neutral

    There has been a lot of talk about how the rally in US markets has been driven entirely by irrational sentiment. We disagree, and have since late March argued that the rebound in risk assets was rational. Our assessment rested on four financial and economic pillars. Today a reexamination of these pillars suggests a moderation of our bullish stance.

    0
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    What's US$1.6trn More Or Less?

    As three months ago, the prime case for holding US risk assets is the liquidity support provided by policymakers. But while liquidity conditions remain extraordinarily easy, and will continue to do so as long as inflation expectations remain depressed, in one respect at least the potential of surplus liquidity to push asset markets higher may have been exaggerated.

    6
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    The US Consumer Has Legs

    Another day, another upside surprise from the US data. For investors, the key question is whether this recovery will continue, or whether May’s bounce-back in consumption will prove a one-off flash in the pan, extinguished by a second wave of infections and long term unemployment. Happily, there are good reasons to expect the consumption recovery to have legs.

    1
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    A Fed Reality Check

    Ahead of the FOMC meeting that concludes Wednesday, there has been a growing volume of chatter that the Federal Reserve is moving to scale back its easing measures. The talk has been further amplified by May’s surprisingly strong employment report, with some commentators even warning of an imminent taper tantrum in the markets.

    0
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    Gavekal Research

    Excess Money And Where To Find Value

    US cash balances have exploded in recent months and at some point a portion of this “excess” is likely to be deployed into financial markets. That may help push asset prices up further, but Will argues that fairly extreme valuations mean not all asset classes will rise together.

    2
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    Webinar: US Outlook (May 2020)

    In yesterday's webinar, Will Denyer, Tan Kai Xian and Yanmei Xie joined Simon to discuss the outlook for the US and answer viewer questions as the country tries to return to normal after Covid-19 lockdowns.

    0
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    The Upside For Autos And Housing

    As the US begins to reopen for business, some segments of the economy will bounce back faster than others. Among the more vigorous will be the auto and housing sectors, where activity will be lifted by a favorable combination of tailwinds. Investors should consider positioning for a strong recovery in both the automobile and residential construction sectors.

    0
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    Gavekal Research

    Breasting The Trough

    The apparent divergence between the stock market and economic reality continues to widen. Equity investors are focusing on the expected effects of the Federal Reserve’s massive liquidity injections once states emerge from lockdown. The risk to this rosy view is that the easing of restrictions could cause an infection increase so severe that new lockdowns are imposed.

    0
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    Gavekal Research

    The Fiscal Fix

    Barely a month after launching a US$2trn rescue package, the US is poised to release yet more fiscal stimulus to tackle the economic fallout of the Covid-19 crisis. The Senate has passed legislation to top up funding for a small business loan program and the House should follow suit on Thursday. Will this latest cash injection be enough to stop massive bankruptcies? Probably, but the program will remain a messy work in progress in need of more...

    10
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    Gavekal Research

    Webinar: Outlook For The US Economy And Global Markets

    In Tuesday's webinar, Will Denyer reviewed the economic situation in the US and suggested how investors should position their portfolios, and Louis Gave presented his global macroeconomic view, taking into account the remarkable developments in the oil market.

    0
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    Gavekal Research

    Video: The US Economic Response

    The US government has promised unprecedented support to individuals and businesses who face loss of income as a result of Covid-19. Will Denyer weighs the measures to see if they will be enough to sufficiently limit the economic damage wrought.

    0
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    Gavekal Research

    This Is Not A New Monetary Era

    Central banks across the developed world are cranking up their printing presses to buy huge amounts of public debt that is being issued to support companies and individuals. The worry is that this causes high inflation down the track, or that it means the fiscal and monetary management functions of governmens are merging. The way I approach this issue is through two simple questions.

    3
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    Gavekal Research

    Webinar: Looking Through The Lockdowns

    Andrew and Rosealea discussed China’s slow return to normal, the state of the property and construction sector, and warned of the global demand shock China will face due to Covid-19. Will outlined his view on asset allocation in light of the shock to the US economy and the asset price adjustments that have taken place so far.

    0
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    The Atlantic Divide

    Second order economic effects from the Covid-19 outbreak are ripping through industrialized economies, with soaring unemployment, shuttered industries and a fall in corporate profits. While China has eschewed large-scale government support, Europe and the US have adopted massive fiscal and monetary responses. These Western initiatives do, however, differ in key respects and when lockdowns finally end, one or other approach will likely have...

    1
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    Gavekal Research

    Is US$2trn In Fiscal Support Enough?

    Will the US$2trn fiscal packiage prove big enough? The initial market reaction might have suggested that it won’t. However, if extreme lockdowns last no longer than a month or two, the fiscal package may well succeed in its twin objectives of averting mass business failures and preventing a big rise in long term unemployment.

    2
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    The Case For Corporate Bonds

    Although the US spread of Covid-19 continues to accelerate, in the near term markets have been encouraged by promises of heavy fiscal support for the US economy and the Federal Reserve’s plans to take risk off private sector balance sheets, including by buying corporate debt. Is now the time to increase exposure to risk assets?

    4
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    Gavekal Research

    The Importance Of The Fed’s Big Guns

    On Monday, the US Federal Reserve rolled out some of its heaviest artillery. In a move reminiscent of the moves in March 2009 which finally succeeded in stabilizing markets, it both relaxed accounting rules for banks and launched a whole suite of programs designed to take risk off private sector balance sheets, including by buying corporate bonds.

    0
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    Gavekal Research

    The Dollar Squeeze Intensifies

    Policymakers in the world’s biggest economic blocks are responding to the current crisis with fiscal and monetary “shock and awe”. Yet even as the much maligned European Central Bank joined the asset purchase party, markets have continued to crater. For all the coordinated economic responses to the coronavirus pandemic, there has been no serious effort to free up the offshore market for US dollars.

    10
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    The Fed’s ‘Whatever It Takes’ Moment

    While other US government agencies tackle the coronavirus crisis, the Federal Reserve has promised ample liquidity and functioning credit markets. Its “whatever it takes” plan is to ensure that US dollars are available at home and abroad, US credit markets remain liquid and solvent companies and individuals are not stopped out.

    3
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    How To Ride The Liquidity Wave

    On Tuesday the US Federal Reserve made good on its promise to counter the “evolving risks to economic activity” posed by the coronavirus, cutting its key policy rate. Monetary easing will neither cure the virus nor fix disrupted supply chains, but it will provide cheap funds for companies while they weather the storm.

    1
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    Still Dollar Bears (Humbly)

    The Covid-19 outbreak has sparked a flight to safety, reversing an incipient weakening of the US dollar. This is hardly unfounded, as the US so far has been spared a major outbreak and its economy is decently insulated. Yet most of the factors weighing on the US dollar late last year remain valid. Thus Will and KX advise a negative dollar bias.

    0
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    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.

    4
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    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.

    0
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    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.

    3
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    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.

    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.

    4
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    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.

    2
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    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.

    0
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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...

    8
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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.

    0
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    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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    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.

    0
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    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

    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.

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    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.

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    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.

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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.

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    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.

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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.

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    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.

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    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.

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    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?

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    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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    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.

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    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.

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    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.

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    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”.

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    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.

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    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.

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    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.

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    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.

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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.

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    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.

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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.

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    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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    Video: What Is Libra, And Will It Work?

    Facebook will have an uphill battle trying to convince consumers to adopt its announced digital currency, libra. As it will be backed by a basket of assets denominated in different currencies, the prices of goods and services will be more volatile in libra than in existing local currencies, even in emerging markets. This volatility will deter consumers from making the switch.

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    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.

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    Gavekal Research

    How To Play The Fed Tease

    After the Federal Reserve’s two-day policy meeting, chairman Jay Powell told the market what it wanted to hear. Policymakers see rising risks and stand ready to cut interest rates, but there is no reason to panic—just yet. Real growth is solid, which is good for earnings, but inflation pressures are muted, allowing the Fed to be more accommodative.

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    Trump's War And Our Problem

    In the seven decades after World War II, the most powerful nation in the world could be relied on to defend and promote free trade among nations. Then came President Donald. J Trump. Now it’s conceivable that Trump’s goal is to shake up the old rules-based system.

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    An Ugly Trade War And An Inverted Yield Curve

    Will a trade war boost US growth and inflation, or instead cause a deflationary recession? The bond market is basically saying that a trade war will dent US growth and force the Federal Reserve into easing. Bear with my two-handed explanation, but there are also good reasons why it could also boost nominal growth.

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    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?

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