Gavekal Research

Will Denyer

Apr 02nd 2014

Back in the depths of winter when the polar vortex was causing daily life in the US to grind to a halt, we looked forward to March and April data and mused that the US economy might rebound like a coiled spring. The hope was that pent up demand would allow the US economy finally to achieve escape velocity. The alternative was another false dawn as companies and households remained hunkered down (see The Ides Of March). This week has seen the...

Gavekal Research

Will Denyer, Tan Kai Xian

Mar 24th 2014

US auto sales have had a strong run and are nearly back on their pre-crisis trend. This is hardly surprising since Americans have long shown a willingness to scrimp on life’s essentials rather than give up their vehicles—through the 1930s depression they kept on driving even while relying on soup kitchens for nutrition. But how much juice is left in this purring engine of US consumption?

Gavekal Research

Will Denyer

Mar 16th 2014

The Federal Reserve’s publicly stated exit strategy has one element that is unsettling for any investor who cares to look that far ahead. The Fed calls this element a “normalization” but that mild word does little to mask the harsh reality: we are talking about the biggest contraction of a central bank balance sheet the world has ever seen.

Gavekal Research

Will Denyer

Mar 07th 2014

“By three methods we may learn wisdom: First by reflection, which is noblest. Second, by imitation, which is easiest. And third by experience, which is the bitterest.” - Confucius.

Gavekal Research

Will Denyer

Feb 26th 2014

A month ago, Mt Gox was leading the charge as the biggest exchange for bitcoins, a hopeful new digital currency. Now it is the young currency’s biggest threat. The immediate question is, will bitcoin survive this heavy confidence blow? We should know in the coming weeks, but either way, the bigger question will remain: Does bitcoin, or any other digital currency, have what it takes to become a widely adopted money?

Gavekal Research

Will Denyer, Tan Kai Xian

Feb 14th 2014

US consumer discretionary stocks are considered “early cyclicals” because they tend to outperform in the first two or three years of the cycle. This time around, the firms that make everything from iPhones to automobiles have outperformed for nearly five years! Are we really still in the early part of this cycle? Or are we starting to see signs of fatigue in an overextended rally? The sector is down –2.4% year to date, finally underperforming...

Gavekal Research

Will Denyer, Nick Andrews

Feb 06th 2014

The European Central Bank has a reputation for holding firepower until the eurozone is at the point of crisis. Although no crisis is apparent now, growing deflationary concerns compounded by volatile money market interest rates make today's ECB meeting worth watching.

Gavekal Research

Will Denyer, Tan Kai Xian

Jan 18th 2014

With US corporate profit margins at extreme highs, investors are on high alert for the dreaded “mean reversion.” One concern has been that after years of benefitting from extremely low interest rates, margins are going to fall as rates normalize. We don’t buy it.

Gavekal Research

Will Denyer

Jan 05th 2014

After years of extremes, we begin this year with many of our indicators back at normal levels. Perhaps most importantly, households have deleveraged. To be sure, income and wealth inequality remain an issue, but a steep decline in debt and a dramatic rebound in asset prices has put aggregate leverage on household balance sheets back to levels seen in the 1990s (see Is The Deleveraging Over?).

Gavekal Research

Anatole Kaletsky, François-Xavier Chauchat, Will Denyer, Andrew Batson, Joyce Poon, Pierre Gave

Dec 09th 2013

In our previous Quarterly, we argued that investors should consider increasing their exposure to the emerging markets, and Asia in particular. The logic being that the taper tantrum sell-off in the summer was overly violent and that the valuation gap with the developed markets had grown too wide. Since then, our conviction on Asia has hardened. One reason for this is China, where a pretty decisive supply-side reform agenda has emerged in the...

Gavekal Research

Will Denyer

Dec 01st 2013

US growth data is looking up. Despite the government shutdown, manufacturing PMIs have now provided back-to-back positive surprises in both October and November. In fact, outside France and Spain, most PMIs around the globe are rising. But you wouldn’t know it by looking at your Bloomberg screens.

Gavekal Research

Will Denyer

Nov 16th 2013

So far it has been business as usual this earnings season, with companies managing to squeeze reasonably decent profits out of lackluster sales. In the few areas where we did see surprises, the shale gas revolution was a factor.

Gavekal Research

Will Denyer

Oct 31st 2013

Gavekal Research

Will Denyer

Oct 18th 2013

While no major policy changes are expected at next week’s FOMC meeting, the market will leave no tea leaf unturned in the run-up. One action already garnering attention is the Federal Reserve’s testing of a new operation—the overnight fixed-rate reverse repo facility. This is an interesting new lever that the Fed may pull during its exit. It is worth understanding the context and rationale behind this new tool.

Gavekal Research

Will Denyer

Sep 26th 2013

The Federal Reserve’s latest snapshot of US household balance sheets, contained in its Flow of Funds report, shows that net worth rose a further 1.8% in the second quarter. Meanwhile net household borrowing was flat. This is a continuation of a multi-year story. Through a combination of unprecedented debt reduction and a rebound in both equity and house prices, major progress has been made in the US household deleveraging story. In fact, we have...

Gavekal Research

Will Denyer

Sep 18th 2013

Today is the big day when Ben Bernanke is expected to begin the process of finishing what he started. It has been a strange week in markets with Larry Summer’s surprise move putting attention back on the current Fed’s policy approach. Market reaction to Summers’ withdrawal from the Fed chairmanship race has been to assume that President Obama will now appoint a consensus candidate, most likely Janet Yellen (see Summer’s Officially Over)....

Gavekal Research

Will Denyer, Nick Andrews

Aug 23rd 2013

In January, when EMU banks began repaying the LTRO loans dished out in the heat of crisis, markets worried that this process effectively constituted a monetary tightening. We wrote at the time not to worry—repayments were a sign of health in the banking system, and with excess liquidity above €600bn, there was no danger of short rates going up (see that piece here). Indeed we recommended forgetting about the issue until excess liquidity fell...

Gavekal Research

Will Denyer

Aug 22nd 2013

Gavekal Research

Will Denyer

Jul 26th 2013

Global investors with an interest in Federal Reserve policy moves have rarely had to scrutinize the US labor market so closely. However, we wonder if a substantial part of the US employment picture is being overlooked by most observers. If so, the implication for future monetary policy decisions could be significant.

Gavekal Research

Will Denyer

Jul 18th 2013

Ben Bernanke again tried to calm market nerves yesterday by stressing the conditionality of any tapering to the Federal Reserve’s quantitative easing program. In particular, the Fed chairman pointed out that his committee “will be watching to see if the movement in mortgage rates has any material effect on housing.” This is important qualification since yesterday saw new data released which suggests the recent rise in prices and interest rates...

Gavekal Research

Will Denyer

Jul 15th 2013

So for the satellite supplier economies to the Chinese juggernaut, is it simply a matter of following the leader? This morning it was announced that China’s economic growth duly slowed to an annual rate of 7.5% in 2Q13 from 7.7% in the previous period. Moreover, the latest credit data shows that China’s credit cycle has decisively turned, implying that last month’s interbank rate spike was no aberration. Dragonomics will publish a detailed look...

Gavekal Research

Charles Gave, François-Xavier Chauchat, Will Denyer, Rosealea Yao, Cathy Holcombe

Jul 03rd 2013

In the latest Five Corners biweekly review of global economics and investment, Charles Gave expresses doubt about the supposed rebound in European industry, while Francois Chauchat looks at whether EMU peripheral bonds are a buy after recent sell-offs. We also have Will Denyer on US bonds/housing, Rosealea Yao on China's interbank drama and Cathy Holcombe on the rising emerging market middle classes. See more details below—and please click...

Gavekal Research

Will Denyer

Jun 20th 2013

The Federal Reserve made no policy changes yesterday—short rates remain near zero and quantitative easing continues at a fast clip of $85bn per month. The Fed did however adjust its economic projections, for the better—unemployment is expected to fall faster than previously thought, and inflation lower. Chairman Bernanke then spent an hour with reporters trying to clarify what this means for the future policy trajectory.

Gavekal Research

Will Denyer

May 31st 2013

Interest rates in the US are extraordinarily low. It is common to blame this situation on central bank manipulation, but Federal Reserve bond buying is only part of the story. The bigger reason for ultra-low rates is that bond markets are pricing in an assumption that the past five years of abnormally low nominal GDP growth will be repeated. We think this is unlikely: nominal GDP growth is picking up and bond yields will rise with it. The...

Gavekal Research

François-Xavier Chauchat, Louis Gave, Will Denyer, Rosealea Yao, Nate Taplin

May 08th 2013

In the latest Five Corners biweekly review of global economics and investment:

Gavekal Research

Arthur Kroeber, François-Xavier Chauchat, Will Denyer, Joyce Poon, Nate Taplin

Apr 24th 2013

Long-time GaveKal readers will recall a former publication called Five Corners, in which we presented a series of short takes on global economic and market developments. Today we re-launch Five Corners in a new format, which we hope will enable readers to keep closer track of our core views.

Gavekal Research

Will Denyer

Apr 17th 2013

In the second half of the last century, the US labor force was swelled by baby boomers and a surge of female participation. These major demographic forces shaped the economy and established growth expectations. But they have since changed dramatically. The structural growth rate of the labor force is now, and will continue to be, slow and steady. All else equal, this implies a slower and steadier structural growth rate of the economy.

Gavekal Research

Charles Gave, Anatole Kaletsky, Arthur Kroeber, Louis Gave, Will Denyer, Joyce Poon

Apr 09th 2013

Last Thursday the Bank of Japan stunned investors with a muscular monetary response that aims to break a deflationary cycle that had seemed to condemn Japan to permanent economic decline. In this piece we debate what the new policy settings mean for investors and crucially, seek to answer the trillion-yen question of where the Japanese currency is headed.

Gavekal Research

Louis Gave, Will Denyer

Apr 05th 2013

So much for the great rotation out of bonds. With the lone exception of Italy, ten-year G7 government bond yields have dropped to new lows for the year. And the simple average yield for all G7 bonds just made a new all-time low of 1.92%. Perhaps most crucially, US treasury yields have skidded to 1.75%, decisively below the critical level of 1.84%—which served as a resistance last year and then, thus far this year, a support (see chart). We see...

Gavekal Research

Will Denyer

Mar 04th 2013

Newspaper headlines are focused on the sequester, but we are more interested in the recent positive developments in the private sector. After all, it is the private sector that truly drives the economy forward over the long run, not the government.

Gavekal Research

Will Denyer

Feb 21st 2013

QE3 has been dubbed “QE Infinity” because it does not have an expiration date. But a growing constituency at the Federal Reserve now appears to be asking whether a third quantitative easing program was one too many. According to the minutes of January 29-30 FOMC meeting, released yesterday: “A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or...

Gavekal Research

Will Denyer

Jan 31st 2013

US GDP just contracted for the first time since the 2007-09 recession. It was a mere –0.1% decline, but this is still rather unsettling given there is only one example to be found over the last 50 years, in 1977, when US GDP growth dipped below zero without marking the start of a recession. And yet markets shrugged off this shocking news—as they should have. Behind the poor headline number, the components indicate that underlying domestic growth...

Gavekal Research

Will Denyer

Jan 24th 2013

Small firms, and very often newly formed endeavors, have long fuelled job growth in the US. Indeed, it has become axiomatic in public discourse that the business of America is small business. Hence, a reduction in the number of startups and the tendency for small firms to employ fewer workers has sparked a predictable blame game: those with a “declinist” view contend that the US is losing its innovative edge, mainstream economists point to...

Gavekal Research

Charles Gave, Anatole Kaletsky, François-Xavier Chauchat, Will Denyer, Tom Miller, Nate Taplin

Dec 20th 2012

We sent a big gang to Boston and New York for our pre-Christmas seminars this year. Charles and Anatole debated on Keynesianism and the true scope of government participation in OECD economies. Francois explained his nearly singular view within GaveKal that European growth is set for take-off (at least in some parts). Will Denyer examined the shifting drivers of the US economy. Nate looked at why shale gas has not taken off in China, and Tom...

Gavekal Research

Will Denyer

Nov 21st 2012

Fed Chairman Ben Bernanke rattled markets yesterday when he explained why the potential growth rate of the US economy appears to have declined while the structural unemployment rate has risen. The initial reaction from equity markets was negative, for an obvious reason: If the chairman is now raising his target unemployment rate, this implies a shorter shelf-life for extremely easy monetary policies.

Gavekal Research

Charles Gave, Anatole Kaletsky, Arthur Kroeber, Will Denyer

Nov 07th 2012

The American electorate may share the same national bed, but they have vastly different dreams. Our take on the election’s significance is similarly bifurcated—a cathartic political cleansing allowing for a deal on the fiscal cliff (Anatole) to disaster (Charles). Arthur asks whether the Republican Party can win nationally without reconciling itself to America’s changed demographics and the realities of the new knowledge-intense economy. Will...

Gavekal Research

Will Denyer

Sep 28th 2012

Gavekal Research

Will Denyer, Warwick Simons

Sep 14th 2012

Whatever else you may think of Ben Bernanke you cannot accuse him of obfuscation—QE3 was telegraphed in his Jackson Hole speech and yesterday the Federal Reserve delivered with a promise to buy $40bn of mortgage backed securities a month while allowing its curve-flattening treasury purchase program (Operation Twist) to expire as planned in December. The short term impact on risk assets is fairly clear; what worries us is the longer term...

Gavekal Research

Will Denyer

Jul 30th 2012

Here’s a conundrum for any economy watcher. The US housing recovery has gathered steam during 2012, and yet the broad economy remains weak as was highlighted by Friday’s 2Q12 GDP release which put growth at a measly 1.5%. So what gives?

Gavekal Research

Will Denyer

Jul 17th 2012

Central banks have set the bar high for what is now considered “major monetary easing”. A bread-and-butter 25bp rate cut no longer qualifies, at least not usually. But last week the ECB not only cut the rate at which it lends to banks by 25bp to 0.75%, it also chopped the rate it pays on deposits by 25bp—to zero. The move focused attention on Mario Draghi’s assertive approach to policy, especially amid signs that deposits are fleeing the ECB....

Gavekal Research

Will Denyer

Jul 02nd 2012

This week will deliver some potential market-moving data releases from the world’s largest economy. The Institute of Supply Management’s manufacturing PMI is released today, the ISM non-manufacturing PMI and ADP’s private employment estimate Thursday, and official payrolls Friday. Unfortunately, a number of the early signs do not look good, especially in manufacturing.

Gavekal Research

Will Denyer

Jun 14th 2012

While we may not like it, the odds have risen that the Federal Reserve will provide additional monetary stimulus. This could take the form of longer rate guidance, an extension of Operation Twist, or even QE3, and could come as soon as next week’s FOMC meeting. The odds have risen for two reasons: 1) Vice Chair Janet Yellen says so, and 2) medium-term inflation expectations have slipped.

Gavekal Research

Will Denyer

Jun 06th 2012

As we hear talk of a global central bank coordinated action to solve Europe’s market malaise, we have to ask, to what purpose? Large liquidity injections once served to keep Europe’s financial system alive until the continent’s economies sputtered back to life. The problem is, this never happened. Now the ECB’s substantial liquidity programs instead serve the purpose of providing leaders more stall time before acting. The monetary union is...

Gavekal Research

Will Denyer

Apr 30th 2012

Friday’s US GDP report offered bulls mild disappointment and raised concerns that the recovery is a sub-par affair. First quarter growth was 2.2% compared to expectations of 2.5% and a 3.0% expansion in the last quarter of 2011. The dull economic numbers contrasted sharply with what we are seeing in corporate earnings—75% of reported earnings thus far have beat expectations, with earnings up on average by 6.7% QoQ, or an annualized rate of +27...

Gavekal Research

Will Denyer

Apr 05th 2012

The last few days remind us that markets are made at the margin. Central bankers are still far from being restrictive, or hawkish. But there has been a marginal shift in rhetoric from “aggressively dovish” to “reluctantly dovish”—for example, the ECB’s expressed concern about rising inflation after deciding to hold policy rates, while the Federal Reserve’s recent communiqué highlights growing reluctance within the FOMC for further monetary...

Gavekal Research

Will Denyer

Mar 09th 2012

A WSJ article which quoted unnamed Fed officials as weighing another “novel bond-buying move” has unsurprisingly received a lot of attention. Any reader who glanced through our latest QSCB: The Global Bond Yield Conundrum, will know we think the US needs another round of QE like it needs a hole in the head. But the form of sterilization discussed in the WSJ article is actually long overdue, and could very well be implemented without further bond...

Gavekal Research

Will Denyer

Feb 23rd 2012

It is three years since the nadir of the financial crisis that brought the US household credit boom to an abrupt stop. After the collapse in asset prices sent leverage ratios into the stratosphere in 2009, US consumers have been gradually reducing their debt; meanwhile the recovery in equity markets has done even more to bring leverage ratios back down. But US consumers have a lot more deleveraging to do. At best, household leverage is only...

Gavekal Research

Will Denyer

Dec 22nd 2011

After much anticipation, 523 banks tapped the ECB for €489bn of its new 3 year loans-significantly exceeding market expectations closer to €300bn. This confirms our initial take that this new facility, with longer duration loans and easier collateral requirements, is a major development. But what exactly does it accomplish?

Gavekal Research

Will Denyer

Dec 02nd 2011

It would be easy to write off this week’s news on USD swaplines as a bit of technical trickery aimed at boosting market sentiment without any real costs. In fact, the adjustment to the Fed’s swap facility changed the very nature of the program in a way that greatly enhances its significance in today’s global financial environment. At the prior cost of 100bp over OIS, the USD swaps were analogous to high-deductible, catastrophic insurance—only to...