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E.g., 08-03-2021
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    Gavekal Research

    5C US: The Reaction To Fed Tightening

    Yields at the short end of the US bond market are creeping up as it looks increasingly likely that the Federal Reserve will hike rates next year, perhaps in the first half. Recent data showing a maturing US recovery support these moves (see yesterday’s Chartbook: The Maturing US Recovery, Policy & Markets).

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    Gavekal Research

    5C US: Cutting The Slack

    Federal Reserve chair Janet Yellen opened her speech in Jackson Hole with the fairly obvious assertion that the labor market has made major improvements but has yet to recover fully. We agree. Our preferred cyclical labor market indicator, the employment-to-population ratio for core working ages 25-54, has risen to 76.6% from the trough of 74.8% in late 2010, but it is still way below its pre-crisis peak of 80.7%.

    0
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    Gavekal Research

    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

    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

    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

    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

    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

    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,...

    0
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    Gavekal Research

    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...

    2
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    Gavekal Research

    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

    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...

    2
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    Gavekal Research

    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 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

    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

    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

    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

    Five Corners (28 May 2014)

    In the latest bi-weekly review of global economics and investment:

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    Gavekal Research

    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...

    19
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    Gavekal Research

    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?

    1
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    Gavekal Research

    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...

    0
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    Gavekal Research

    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.

    4
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    Gavekal Research

    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...

    0
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    Gavekal Research

    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

    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...

    0
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    Gavekal Research

    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

    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

    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...

    0
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    Gavekal Research

    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

    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.

    0
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    Gavekal Research

    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.

    4
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    Gavekal Research

    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...

    6
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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

    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...

    1
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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.

    1
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    Gavekal Research

    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?

    1
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    Gavekal Research

    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.”

    2
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    Gavekal Research

    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...

    0
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    Gavekal Research

    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...

    7
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    Gavekal Research

    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.

    1
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    Gavekal Research

    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.

    3
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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:

    3
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    Gavekal Research

    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?).

    2
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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...

    0
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    Gavekal Research

    What More Can The ECB Do?

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