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Gavekal Research
Will Denyer, Tan Kai Xian
Aug 20th 2014
The US Consumer Lives, Really
Even as US real wage growth has picked up over the last 18 months, consumption spending has been slow to respond. The relatively weak state of the US consumer, once the irresistible force pulling along the global economy, has emboldened those advocating a ‘secular stagnation’ thesis. But is this really a fair analysis? The answer has a particular relevance as central bankers gather for the Federal Reserve’s annual Jackson Hole shindig and...
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Joyce Poon, Udith Sikand, Long Chen
Aug 20th 2014
Five Corners (20 August): Velocity Of Money
In the latest bi-weekly review of global economics and investment we focus on the velocity of money and the credit cycle in the major economic regions: Overview: Charles Gave notes with concern the downturn in the Gavekal Velocity Indicator. US: Will Denyer looks where the US is in the credit cycle and argues it looks more like 2004 than 2007. Europe: François Chauchat argues that contrary to popular belief Europe’s long credit crunch is...
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Gavekal Research
Will Denyer
Aug 14th 2014
5C US: Is This 2004 Or 2007?
The tide is coming in. The US business cycle is maturing from the recovery phase to the expansion phase. Credit is growing and money is flowing.
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Gavekal Research
Will Denyer
Aug 01st 2014
5C US: The Fed's Balance Sheet: No Change Is A Big Change
The largest balance sheet in the land will almost surely see a year of stability after the Federal Reserve’s latest round of QE purchases tapers off in October. But that stability will itself be a big change from recent years. It will be interesting to see how the market reacts.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jul 31st 2014
The US Growth Engine Sparks Into Life
Second quarter US GDP growth came in encouragingly strong at 4% quarter-on-quarter annualized, much better than the expected 3%. At the same time the 1Q number was revised up to -2.1%. That’s up from -2.9%, but it’s still a contraction; so a strong 2Q reading was crucial to show the previous GDP number was just a blip and not the start of a slide into recession. But looking past the headlines, was this really a strong report?
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Gavekal Research
Will Denyer
Jul 16th 2014
5C US: No Longer Cheap, But Keep Reaching For Yield
In 2012 and early 2013, it was easy to argue in favor of selling bonds and loading up on US equities on the basis of valuations alone. Equities were extremely cheap, bonds extremely expensive, and you would have been hard pressed to find standard metrics to indicate otherwise. Even Charles, who was anything but enthusiastic about the US policy mix, suggested overweighting equities and shunning bonds. Now the valuation call is no longer obvious,...
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Gavekal Research
Will Denyer
Jul 07th 2014
The Next Phase Of The Rally
With US equities making new highs and another earnings season now under way, it is a good time to remember that to be sustainable, a bull market should rest on three pillars: liquidity, valuations, and growth. At any given point in time, however, just one of the pillars is likely to be doing most of the load-bearing. Consider the current bull market. At the outset, central bank liquidity played the key role. Then last year was largely about...
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Gavekal Research
Will Denyer
Jul 02nd 2014
5C US: The Inflation Rebound Is For Real
US inflation measures have bounced back up near the Federal Reserve’s 2% target. This is not just noise. The rebound is evident not only in the volatile headline CPI, but also in the core and median metrics (see chart). Moreover, there is growing corroborating evidence of economic actors regaining pricing power.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jun 24th 2014
US Construction: Once More Into The Breach
Having been a key driver of the US economic recovery, the residential property sector has had a tough year. Ructions in the bond market last summer forced up mortgage rates and gave a shock to both buyers and builders of property. And just as markets calmed down, severe winter weather meant that construction workers were more likely to break their tools than break ground on fresh projects. The onset of warmer weather has inevitably produced a...
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Gavekal Research
Will Denyer
Jun 20th 2014
5C US: Housing Will Support Growth Again - Will Denyer
For the US economy to grow at a decent clip in the coming quarters two things are required from the housing market. The recovery in construction needs to be confirmed, and house prices must hold up.
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Gavekal Research
Will Denyer
Jun 17th 2014
Will The Fed Spoil The Party?
With tapering set to consign quantitative easing to the history books before the end of this year, the burning question now is how long the US Federal Reserve will stick to its zero interest rate policy (ZIRP). The statement following this week’s two-day meeting is unlikely to tell us anything we don’t already know. But we will all listen to tomorrow’s press conference for any guidance on short term interest rate policy. The consensus is that...
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Gavekal Research
Will Denyer, Tan Kai Xian
Jun 09th 2014
5C US: Profits: Past The Peak Or Just A Blip?
US statisticians recently provided a far more shocking view of the first quarter than the benign picture we got from the S&P500 earnings season, reinforcing concerns that the exceptional US profit story is peaking and that margins are finally going to mean revert.
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Gavekal Research
Will Denyer
Jun 06th 2014
The ECB's Real Deal
The European Central Bank has broken with tradition and over-delivered. We had our doubts, but a complete package has arrived, that in the near term should be positive for risk assets and negative for the euro. Leading up to yesterday’s meeting; we said that the ECB needed to come up with a package that lowered short rates. It did. It also needed to provide liquidity operations that were sufficiently attractive for banks to actually use them....
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Gavekal Research
Will Denyer, Tan Kai Xian
May 30th 2014
Unpicking The US Capital Spending Puzzle
US statisticians told us yesterday that GDP, business investment, and corporate sales all dropped in 1Q14. Such weakness can be blamed on freak winter weather, but looking back to last fall, growth trends were not exactly stellar. The nagging issue for US economy watchers in recent times has been the sustained weakness in business investment. In the immediate aftermath of the 2008-09 slump capital spending (ex-housing) snapped back, raising...
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Gavekal Research
Arthur Kroeber, Will Denyer, Joyce Poon, Tan Kai Xian, Nick Andrews, Long Chen
May 28th 2014
Five Corners (28 May 2014)
In the latest bi-weekly review of global economics and investment:
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Gavekal Research
Will Denyer
May 26th 2014
High Profit Margins Are Here To Stay
Non-financial profit margins in the US stand at more than 6% today. By the standards of the last 40 years, this is a sky-high reading. But although high compared to recent historical levels, it is not unprecedented. Looking at the history books, we found that US companies enjoyed similarly fat margins in the 1960s. That caused us to wonder: what can this uncertain age possibly have in common with the go-go years of the 1960s? The answer is weak...
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Gavekal Research
Will Denyer, Tan Kai Xian
May 22nd 2014
5C US: Hello Stagflation?
Inflation’s back. In April US CPI rose to 2% YoY with both goods and services making a meaningful contribution. Manufacturers are starting to report higher output prices according to business surveys by the Philadelphia Fed and the NFIB, a small business representative body. After a weak GDP growth in 1Q14, mutterings of “stagflation” can be heard in the bear camp. But is this really what the data suggests?
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Gavekal Research
Will Denyer
May 22nd 2014
The End Is In Sight For Zero US Rates
US inflation is rebounding. Both goods and services prices increased in April, pushing the CPI up to 2% YoY after nearly a year below the Federal Reserve's target. Pressure is coming from housing rents and, lately, from the rebound in commodities. Businesses are also raising prices as wage growth squeezes margins, and better off consumers prove willing to pay more. This could be viewed as just the rebound in real activity and inflation that...
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Gavekal Research
Will Denyer
May 19th 2014
Time To Sell Treasuries
The benchmark 10-year treasury yield has traded sideways in a range from 2.5% to 3% since the taper tantrum of last summer. Now it is threatening to break out on the downside. If you expect a collapse in yields, you should load up on bonds and sell everything else. We don’t.
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Gavekal Research
Will Denyer, Tan Kai Xian
May 13th 2014
Fat Margins, Thin Growth Prospects
With more than 450 of the S&P 500’s constituents having reported first quarter earnings, investors were sufficiently happy with the outcome of the results season to bid the index up to a new record close of 1,897 on Monday. In aggregate, the story told by first quarter earnings was more of the same—extraordinary margins, but lackluster growth. As a result, the pessimists expecting a collapse in growth or a mean reversion in margins have been...
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Gavekal Research
Will Denyer, Tan Kai Xian
May 08th 2014
5C US: A Rotation Into Value, Not Defensives
Since mid March, we have seen a drastic rotation into value stocks. Clearly, investors are starting to rethink the kind of multiples they are willing to buy into.
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Gavekal Research
Arthur Kroeber, Will Denyer, Joyce Poon, Tan Kai Xian, Nick Andrews, Long Chen
Apr 30th 2014
Five Corners (30 April 2014)
In the latest bi-weekly review of global economics and investment, Arthur Kroeber considers the implications of Asian deflation. Will Denyer & Tan Kai Xian consider the strong rental market for US homes and wonder what this means for the broader housing sector. Nick Andrews looks up close at reduced liquidity in the eurozone’s financial system. Chen Long looks at a favorable convergence between national GDP numbers and the growth claims made...
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Gavekal Research
Will Denyer, Simon Pritchard
Apr 29th 2014
What Ails The Dollar
A curious brew of cheap money, a grinding cyclical recovery and “new economy” verisimilitude has helped drive Wall Street to new highs. And yet even as equity investors have scaled the wall of worry, the dollar has remained uninspired. The unit arguably started a structural upswing in 2008 but the recent performance has been lackluster with the DXY index at the bottom of its trading range.
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Gavekal Research
Will Denyer, Tan Kai Xian
Apr 22nd 2014
5C United States: Fed Targets + Weak Global Inflation = Rising Rents
The US housing market has had a rough time recently—first mortgage rates rose then an extreme winter hit. So don’t expect residential construction to be a positive contributor to first quarter GDP growth (out Thursday). But how will the housing market fare going forward? Our bet is that it won’t be too bad.
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Andrew Batson, Joyce Poon, Udith Sikand
Apr 16th 2014
Five Corners (16 April 2014)
In the latest bi-weekly review of global economics and investment, Charles Gave explains why it still pays to run a balanced portfolio, despite the market’s rotation. Will Denyer argues that outlook for US consumption remains favorable, even though consumer cyclicals have taken a beating. François-Xavier Chauchat examines the reasons behind the euro’s persistent strength. Andrew Batson looks at Beijing’s new focus on jobs and finds the...
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Gavekal Research
Will Denyer
Apr 14th 2014
Buy The Dip, With A 30y UST Hedge
Imagine that a colleague has just returned from a one-month holiday and asks for an update. You start by telling him two things: 1) US consumer discretionary stocks have fallen -5% MoM; and 2) the yield on the 30-year US treasury bond broke below 3.5% last night, re-crossing that threshold for the first time since yields rose during the ‘taper tantrum’ last summer.
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Gavekal Research
Will Denyer
Apr 11th 2014
5C US: The Consumer Defies Market Jitters
Vexed US commentators have been on tenterhooks to see whether soft US growth data really could be blamed on the weather. The worry was that the winter shivers had obscured an underlying deterioration in the US outlook. In fact, an enlivened US consumer tells us that it was a temporary weather-related soft patch.
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Gavekal Research
Will Denyer
Apr 10th 2014
Making Sense Of Fed Talk & Actions
Is the Federal Open Markets Committee playing games? Should we listen to what it says or watch what it does? Is it easing or tightening, dovish or hawkish? As the Fed moves from “all guns blazing” to a nuanced and gradual exit strategy, these questions are inevitable. We’ll do our best here to make sense of it all and chart the trajectory of US monetary policy.
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Gavekal Research
Will Denyer
Apr 02nd 2014
The US Consumer Must Lead
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...
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Gavekal Research
Will Denyer
Mar 26th 2014
5C US: What To Make Of The Surge In C&I Loans?
In a surprising turn of events, US bank loan growth has bounced back, posting the strongest growth since 2008. After decelerating from annual growth rates of around 5% in 2012 to less than 2% last year, bank loans jumped in the first quarter of this year at an annualized rate of 9.3%. Leading the charge was a 17.5% annualized rise in commercial & industrial loans. Several clients have asked what we make of it.
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Gavekal Research
Will Denyer, Tan Kai Xian
Mar 24th 2014
The End Of The Automobile? Not So Fast
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?
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Gavekal Research
Will Denyer
Mar 21st 2014
Fannie-ing The Flames Of A US Housing Downturn?
The US housing recovery has had a rough run in the past nine months. First there was the taper tantrum, that drove up mortgage rates. Then the record cold winter interfered with sales and construction, highlighted once again by yesterday’s poor home sales data for February. Between the normalization of housing affordability and the extreme weather in January and February, we can expect housing construction to provide another negative...
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Gavekal Research
Will Denyer
Mar 16th 2014
5C US: What If The Fed's BS Doesn't Shrink?
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.
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Gavekal Research
François-Xavier Chauchat, Pierre Gave, Will Denyer, Andrew Batson, Joyce Poon, Nick Andrews
Mar 14th 2014
Quarterly Strategy Chart Book - Weathering The EM Slowdown
The emerging markets are the main contributors to global growth today, and without their momentum, the expansion in world GDP growth since 2008 would have sunk below 3% a year. Now, however, just as developed markets are finding their feet, the EM universe is stumbling.
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Gavekal Research
Will Denyer
Mar 07th 2014
It's All Good In America, And All Bad In China
“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.
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Gavekal Research
Will Denyer
Mar 01st 2014
5C US: Balancing The Risks On Margin Debt
US investors have leveraged up their portfolios like never before. Equity margin debt levels exceed the lofty peaks of the 2000 tech boom and the 2007 credit bubble. With more of the market posted as collateral, the risk is ever greater that moderate selloffs become exaggerated by margin calls and forced selling.
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Gavekal Research
Will Denyer
Feb 26th 2014
The Future Of Money
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?
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Gavekal Research
Will Denyer
Feb 20th 2014
No Building, No Tapering?
The main message from the minutes of the January FOMC meeting was summed up yesterday by San Francisco Fed President John Williams, who said in a TV interview that the “hurdle is pretty high on changing the pace of the step-downs in our [asset] purchases.” But if the economic data does not improve soon, we might just find out how high is “pretty high.”
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Gavekal Research
Will Denyer, Tan Kai Xian
Feb 14th 2014
5C US: A Little Late For Early Cyclicals
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...
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Gavekal Research
Will Denyer
Feb 12th 2014
Continuity-Of Bad Policy
It was a busy day on Capitol Hill yesterday. In a notable departure from the budget battles of recent years, the Republican-controlled House passed a clean debt ceiling bill to fund the Treasury for the next thirteen months (despite the fact that Paul Ryan voted against funding the budget he himself negotiated). Meanwhile, the House Financial Services Committee gave Janet Yellen her first opportunity as the new chair of the Federal Reserve to...
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Gavekal Research
Will Denyer, Nick Andrews
Feb 06th 2014
Is The ECB Readying For Stealth QE?
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.
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Gavekal Research
Will Denyer
Feb 01st 2014
5C US: What Might Lead Yellen To Pause Tapering?
As capital flees emerging markets, some foreign policymakers have begged the Federal Reserve to go easy with the tapering. Sorry guys. If Janet Yellen is anything like her predecessors such pleas will fall on deaf ears. (Just as foreign pleas a few years ago, to stop fueling global inflationary flames with the same QE programs, cut little mustard). But Yellen will be intently watching the bond market.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jan 18th 2014
5C US: The Yield Spread Matters For Profit Margins
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.
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Gavekal Research
Will Denyer
Jan 16th 2014
Deflation In 2014? Not In The US
Curse words attract attention, as IMF managing director Christine Lagarde knows after dropping the D-bomb yesterday. Amidst her fairly balanced outlook for the global economy in 2014, it was her comments on deflation that attracted all the media attention:
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Gavekal Research
Will Denyer
Jan 05th 2014
5C US: What Is Normal In 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?).
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Gavekal Research
Will Denyer
Dec 12th 2013
US Government Spending, Recent Past And Near Future
The US looks to have reached a fiscal détente this week in the shape of a bipartisan mini-budget deal brokered by Paul Ryan and Patty Murray. The package will allow for a small rise in government spending next year, but its main effect will be to avert another Washington showdown and potential government closure for at least two years.
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Gavekal Research
Anatole Kaletsky, François-Xavier Chauchat, Will Denyer, Andrew Batson, Joyce Poon, Pierre Gave
Dec 09th 2013
Quarterly Strategy Chart Book - Look To Asia, Tapering Or Not
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...
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Gavekal Research
Will Denyer
Dec 02nd 2013
What More Can The ECB Do?
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Gavekal Research
Will Denyer
Dec 01st 2013
5C US: Good News Is Good News
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.
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Gavekal Research
Will Denyer, Tan Kai Xian
Nov 27th 2013
On Profits: There Will Be No Revolution
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Gavekal Research
Will Denyer
Nov 16th 2013
5C US: A Shale Boost To Downstream Earnings
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.
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Gavekal Research
Will Denyer
Nov 02nd 2013
5C US: Can We Keep Climbing The Wall Of Worry?
Data was mixed, Washington remained dysfunctional, but corporate earnings were decent and the Fed stayed incontinent. Despite this muddled state of affairs, equities made new highs. So it was another normal week in the US, but did we learn anything new?
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Gavekal Research
Will Denyer
Oct 31st 2013
How Slack Is The US Labor Market?
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Gavekal Research
Will Denyer
Oct 29th 2013
Brace For US Disappointments
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Gavekal Research
Will Denyer
Oct 18th 2013
5C US: Fed To Ease While Tightening
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.
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Gavekal Research
Will Denyer
Oct 04th 2013
5C US: Thinking The Unthinkable
Hitting the debt ceiling is unlikely, but quite possible. This raises the unthinkable prospect that the US might default on its debt, thereby removing the pillar upon which rests the modern global credit system, the current reserve currency, and arguably the whole fiat money system—namely, the full faith and credit of the US government.
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Gavekal Research
Will Denyer
Sep 26th 2013
Is US Consumer Deleveraging Over?
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...
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Gavekal Research
Will Denyer
Sep 20th 2013
5C US: A Valuation Tool For Residential Construction
One of the reasons the Federal Reserve delayed QE tapering last week was to allow more time to assess how the economy reacts to the rise in interest rates since May. The residential construction sector is an obvious area of focus. How will it do? My bet: OK.
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Gavekal Research
Will Denyer
Sep 18th 2013
Expectations All But Tapered
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)....
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Gavekal Research
Will Denyer
Sep 08th 2013
5C US: America Is Ready And Willing For Tapering
Next week Ben Bernanke is expected to announce that the US economy and its financial system are ready to tolerate a gradual tapering of the Federal Reserve’s bond purchase program. Encouragingly, the money markets, bond and equity markets, as well as business managers, all seem to agree. Confidence runs high.
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Gavekal Research
Will Denyer, Nick Andrews
Aug 23rd 2013
5C Europe: Stealth Rate Hike Watch
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...
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Gavekal Research
Will Denyer
Aug 23rd 2013
5C US: The Bond Sell-Off Has Not Overshot
The great bond trade is now unwinding. And as is typical of bursting bubbles, there is potential for bonds to overshoot. But they have not done so yet.
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Gavekal Research
Will Denyer
Aug 22nd 2013
The End Is Nigh
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Gavekal Research
Will Denyer, Tan Kai Xian
Aug 15th 2013
Student Loans: Bubble, What Bubble? - Will Denyer & Tan Kai Xian
Last Friday, the US enacted legislation that will peg the interest charges on student loans to 10-year treasury yields. The move headed off an automatic surge in loan rates and should ensure reasonably priced student finance for years to come. But even as Washington celebrated an outbreak of bipartisanship there were concerns that these latest reforms could wrongly incentivize young Americans to pursue higher education.
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Gavekal Research
Will Denyer
Jul 26th 2013
5C US: Disability And The US Job Market
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.
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Gavekal Research
Will Denyer
Jul 23rd 2013
Taper Timing: What To Watch
In case you hadn’t noticed, Ben Bernanke wants to dial back the Federal Reserve’s quantitative easing program later this year. This has focused intense scrutiny of the chairman’s every utterance, which is turning hard-nosed Fed-watchers into amateur psychologists. Some ask whether he will initiate a tapering of the program as a professional courtesy to his successor, while others opine on the legacy he may want to secure in the central banking...
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Gavekal Research
Will Denyer
Jul 18th 2013
Housing, Bonds & Ben Bernanke
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...
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Joyce Poon, Nate Taplin
Jul 17th 2013
Five Corners (17 July 2013)
In the latest Five Corners biweekly review of global economics and investment:
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Gavekal Research
Will Denyer
Jul 15th 2013
Australia And The China Syndrome
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...
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Gavekal Research
Anatole Kaletsky, François-Xavier Chauchat, Will Denyer, Simon Pritchard
Jul 05th 2013
Europe’s Control Engineers
“Words are, of course, the most powerful drug used by mankind,” so said Rudyard Kipling. When central bankers meet next month for the annual Jackson Hole shindig, they can ruminate on their success being increasingly dictated less by what they do, than what they say. Take the European Central Bank and Bank of England which in recent months have been fairly taciturn next to a loquacious Federal Reserve. Yet, by yesterday verbalizing forward...
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Rosealea Yao, Cathy Holcombe
Jul 03rd 2013
Five Corners (3 July 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...
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Gavekal Research
Will Denyer
Jun 26th 2013
Will Higher Rates Kill US Housing?
Both US house prices and interest rates have experienced big upward moves—raising the obvious question of whether a higher cost of money will derail the housing recovery. Our approach was to test affordability levels based on a range of higher interest rates. We found that the housing market can easily bear 10-year treasury yields at 3%, and may eventually bear higher rates than that, but the fast and easy gains are behind us.
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Gavekal Research
Will Denyer
Jun 20th 2013
What's Wrong With An Optimistic Fed?
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.
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Gavekal Research
François-Xavier Chauchat, Will Denyer, Joyce Poon, Nate Taplin, Simon Pritchard
Jun 19th 2013
Five Corners (19 June 2013)
In the latest Five Corners biweekly review of global economics and investment:
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Gavekal Research
Will Denyer
May 31st 2013
The Truth About US Rates
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...
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Gavekal Research
Will Denyer
May 23rd 2013
Is It A Bond Bear Market?
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Gavekal Research
François-Xavier Chauchat, Louis Gave, Will Denyer, Rosealea Yao, Nate Taplin
May 08th 2013
Five Corners (8 May 2013)
In the latest Five Corners biweekly review of global economics and investment:
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Gavekal Research
Will Denyer
May 06th 2013
Good, But Not Out Of The Woods Yet
After weeks of relentlessly disappointing growth data, the US finally delivered a major positive release. Stronger-than-expected payroll numbers set off an equities rally and pushed up bond yields. This report comes as a relief —but we are not out of the woods yet.
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Gavekal Research
Arthur Kroeber, François-Xavier Chauchat, Will Denyer, Joyce Poon, Nate Taplin
Apr 24th 2013
Five Corners (24 April 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.
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Gavekal Research
Will Denyer
Apr 24th 2013
Growth Falters And GIPSI Bonds Rally?
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Gavekal Research
Will Denyer
Apr 17th 2013
New Century, New Structural Growth Rates
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.
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Gavekal Research
Pierre Gave, Will Denyer
Apr 11th 2013
Growth & Markets Monthly (April 2013)
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Gavekal Research
Charles Gave, Anatole Kaletsky, Arthur Kroeber, Louis Gave, Will Denyer, Joyce Poon
Apr 09th 2013
A First Non-Euro Currency Debate
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.
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Gavekal Research
Will Denyer
Apr 08th 2013
Why Does Velocity Fall In Spring?
Tolstoy said that “spring is the time of plans and projects.” Obviously, Tolstoy did not manage money as for the fourth year in a row, spring appears to be the time when US growth indicators roll over, the euro project threatens suicide, and investor risk appetite falls out of bed. To be honest, we are still scratching our heads for a solid explanation (and very much welcome comments from our wise readers). But below are a few possibilities to...
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Gavekal Research
Louis Gave, Will Denyer
Apr 05th 2013
Why Bond Yields Are Falling
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...
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Gavekal Research
Will Denyer
Apr 04th 2013
Riding A Bull Market With No Conviction
The Irish poet WB Yeats wrote, “The best lack all conviction, while the worst are full of passionate intensity.” We see something similar in equity markets. With the S&P 500 on Tuesday hitting a new all-time high, we clearly remain in bull market territory. Central bank easing measures such as that just announced by the Bank of Japan mean we could push higher. And yet we see plenty of evidence that these new peaks have come on the back of...
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Gavekal Research
Will Denyer
Mar 04th 2013
Beyond The Sequester
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.
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Gavekal Research
Will Denyer
Feb 25th 2013
Is US Housing Cheap, Really?
US homebuilder stocks were hit especially hard last week by the revelation that some Federal Reserve policymakers want an early end to quantitative easing. Such an investor response makes sense given that the US housing recovery has been fuelled by super low mortgage rates, so any “exit” from easy money must be a big negative. Follow this logic a little further and a thornier question is whether US housing, after an approximate 25% price decline...
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Gavekal Research
Will Denyer
Feb 21st 2013
The Fed In The Red
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...
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Gavekal Research
Will Denyer
Feb 07th 2013
US Consumers: Death By Taxes?
A slew of tax increases went into effect in the United State on January 1st, raising concerns that the death of consumption will follow. Nearly all US consumers will be affected—either by the 2 percentage point increase in the payroll tax, the 4.6pp rise of the top marginal tax rate, the new Medicare surtax, higher capital gain and dividend taxes, etc. Without a doubt, this is a significant headwind for US consumption. But there are two major...
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Gavekal Research
Will Denyer
Jan 31st 2013
US Dipping Into Recession? Not Yet
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...
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Gavekal Research
Will Denyer
Jan 28th 2013
Europe's Goldilocks LTRO Scenario?
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Gavekal Research
Will Denyer
Jan 24th 2013
The Big Cap Effect Is Not About To Ebb
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...
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Gavekal Research
Will Denyer
Jan 08th 2013
A Pulse From US Manufacturing
Maybe the patient lives. 2013 has already started to deliver early indications that we are indeed at an inflection point in global growth. Canada reported yesterday that its Ivey PMI rebounded to an expansionary level of 52.8 in December, from 47.5; respondents to Germany’s IFO survey of business expectations (highly correlated to German exports) has risen for two straight months. And while less obvious, US data is also beginning to stir. Recent...
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Gavekal Research
Charles Gave, Anatole Kaletsky, François-Xavier Chauchat, Will Denyer, Tom Miller, Nate Taplin
Dec 20th 2012
US Seminars: Charles & Anatole Debate, Plus Francois, Will, Nate and Tom
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...
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Gavekal Research
Will Denyer
Dec 05th 2012
A New Threat To The US Recovery
Improvements in the US domestic sector have raised hopes that the US will pull the global economy out of its current funk. But what if the cycle is working in reverse—with weakness beyond American shores feeding back to undermine the nascent recovery at home? After 37 straight months of growth, employment in US manufacturing contracted in November for the first time since 2009, according to ISM. This raises the concern that weak growth in the...
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Gavekal Research
Will Denyer
Nov 21st 2012
Bernanke Turning Hawkish?
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.
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Gavekal Research
Will Denyer
Nov 15th 2012
US Tax Changes In A Brave New World
It is a common complaint that US corporations are sitting on exceptional piles of cash, while the domestic economy experiences lackluster growth in capital spending and employment. With weak growth comes lower tax revenues. As such, policymakers are looking at new ways to raise revenues from corporates and from individuals (mostly the wealthiest). But we live in a “Brave New World” of global operations, fragmented supply chains, and light,...
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Gavekal Research
Charles Gave, Anatole Kaletsky, Arthur Kroeber, Will Denyer
Nov 07th 2012
Four More Years
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...
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Gavekal Research
Will Denyer
Oct 29th 2012
US Recovery Under New Leadership
Friday’s 3Q GDP report tells a simple story about the US economy—namely that the recovery has come under new leadership. Step aside manufacturing and exports, enter US housing rebound.