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    Gavekal Research

    Sterilized QE?

    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...

    2
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    Gavekal Research

    QSCB: The Global Bond Yield Conundrum

    2
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    Gavekal Research

    US Deleveraging: Still A Long Road Ahead

    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...

    12
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    Gavekal Research

    Less Gov't, More Private Growth

    8
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    Gavekal Research

    The ECB’s 489 Billion Euro Christmas Gift

    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?

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    Gavekal Research

    Daily - Further Signs of a "Two Speed" US Economy

    The latest data from the US is comforting in two ways. First, with the shadow that Europe’s unresolvable crisis is casting over the global economy, any offsetting role that the US can play is obviously welcome. Second, the jobs data from the US fit the pattern of a “two-tiered” economic recovery; in other words, one which is led by the non-leveraged sectors (see our latest monthly chart book, USA: A Two-Speed Economy). This is crucial because...

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    Gavekal Research

    Daily - US Swaplines: What a Difference a Few Basis Points Make

    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...

    3
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    Gavekal Research

    The ECB Is Already Doing QE, Its Own Way

    The current pleas for the ECB to start “quantitative easing” often miss one important detail: the ECB is already conducting QE, in every way but in name. The two core elements of what is commonly referred to as QE are: 1) the expansion of the asset side of a central bank’s balance sheet, well beyond what is required to simply target short-term policy rates and with the aim of easing credit conditions; and 2) the expansion of a central bank’s...

    1
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    Gavekal Research

    The Fed's Exposure to Interest Rate Risk

    It goes without saying that the bold policy measures by the Fed and the ECB have increased risks for both central banks, and in turn both of their currencies. But the risks taken on each side of the Atlantic are very different in nature. The ECB is primarily vulnerable to “balance sheet risks” stemming from increasingly suspect outright holdings and collateral (see today’s Daily). This is a real concern in today’s environment of weakening EMU...

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    Gavekal Research

    Daily - Looming Balance Sheet Risks for the ECB

    Lately, as the EMU crisis intensifies, many of our clients have wondered when the ECB is going to get serious and start actual quantitative easing? Our first response to this question is that, semantics aside, the ECB has already effectively done €260bn worth (or $350bn) of QE thus far, and that figure is growing every week. This of course pales in comparison to the Fed’s QE operations of closer to $2 trillion. And given what is happening in EMU...

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    Gavekal Research

    Monthly Strategy Chart Book - USA: A Two-Speed Economy

    In the short term, it looks like the US will avoid recession once again. But there is the risk that the recovery could prove fairly anemic or short lived. The bigger question is what are the structural sources of growth that can get the US back on track to its long-term average growth rate of 3% plus?

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    Gavekal Research

    Daily - A Two-Speed Economy in the US?

    Our regular readers will know that we have argued recently that the current rally is largely dependent on US economic performance, since Europe’s crisis is not going to be solved anytime soon. On that basis, Friday’s reports of mixed and lacklustre data for US employment may not seem overly confidence-boosting. The household survey showed the unemployment rate unexpectedly ticked down from 9.1% to a six-month low of 9.0% in October; but the...

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    Gavekal Research

    Is the ECB Aiming for 'Stealth Cut' to 0.75%?

    Recent moves by the ECB are more significant than some may realize, and could prove significantly bearish for the Euro/USD as excess liquidity is flooded into the system by the end of the month. And yet the Euro has risen since the ECB announcements on October 6th, likely for the following reasons:

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    Gavekal Research

    The US Needs Brent Below $90 and Gas Below $3

    Dark clouds loom—as US data teeters on the edge of recession territory, the EMU struggles to remain united and avoid its own recession, and Beijing continues to rein in credit growth despite evermore fears of a ‘hard landing’. But the silver lining to these dark clouds may be the resulting softness in oil prices. Along with developments in Libya, China tightening and lower global growth outlooks have killed the momentum in oil prices. But what...

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    Gavekal Research

    This is Not 2010: The Context of this Fed Meeting

    As the Fed sits down to discuss monetary policy options, the environment seems, at least on the surface, to bear an uncomfortable resemblance to the 2010 “soft patch”, which of course brought us QE2. Indeed, regional manufacturing surveys have plummeted to levels that incite double-dip fears, while national data such as the manufacturing and services ISMs, factory orders and industrial production have also rolled over and now hover uncomfortably...

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    Gavekal Research

    Central Banks Prepare for a Potential USD Squeeze

    When the Fed announced plans for US Dollar loans to a number of global central banks at last week’s meeting of finance ministers in Poland, it was easy to see this as confirmation that the long-awaited Dollar crunch was now upon us. Yet, while the USD has risen some recently, it has not yet shot up in the fashion of the late 2008 Dollar short squeeze. Likewise, USD LIBOR rates and spreads have ticked up some, but remain quite low, especially...

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    Gavekal Research

    The Swiss Version of QE

    How far is the SNB willing to go to defend its new ceiling of 1.20 Francs per Euro, and for how long? The short answer is that, assuming the Euro remains, the SNB will likely defend the ceiling aggressively, so long as this is consistent with the SNB’s desired domestic monetary policy stance. Here is why...

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    Gavekal Research

    A Big Week for the Euro

    Our readers know we have long been structurally cautious on Europe’s single currency, due to its significant design flaws. These flaws have of course come to the forefront in recent years, and yet the Euro has pushed higher (in nominal terms and on a PPP basis). Our best explanation for this Euro resilience is twofold: 1) The fiscal/political situation in the US has recently looked just as bad, if not worse; and 2) the ECB did not loosen as...

    0
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    Gavekal Research

    Daily - The ECB's Stealth Rate Cuts

    This week there seems to be an inordinate amount of focus on what Ben Bernanke might say at Jackson Hole on Friday, and whether we are due for another round of QE from the Fed. However, the real news on central bank policy actually comes from across the pond: not only has the ECB been more aggressively buying assets of distressed sovereigns as part of its “solvency management” policy, but significant liquidity provisions have resulted in stealth...

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    Gavekal Research

    The Good & the Bad in Recent US Money Growth

    In the US, M2 has swung from a weak +1.5% YoY growth rate in mid-2010 to a frothy +10.2% today. And this is not due to a low base effect; M2 has grown at an annualized rate of +42% in the last month! This has raised quite a few eyebrows and we have received several questions on this topic. Should we be excited or cautious, in view of these impressive moves in money supply growth? Our answer is, well, both:

    0
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    Gavekal Research

    Daily - More Ugly Currencies Will Not Help

    Underlying the current market turmoil is a decline of confidence in the two main reserve currencies of the world, the USD and the Euro. While this may not yet be characterized as a fiat currency crisis, serious questions have clearly driven many to diversify into other fiat currencies (the CHF, Yen, AUD…), or move completely out of fiat currencies into zero-duration assets (gold, silver, fine wines…). This has driven the prices of these “...

    0
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    Gavekal Research

    Why We Have Not Seen a US$ Squeeze This Time

    As the last few days have made painfully clear, markets face a level of uncertainty that is high even on today’s standards. But one question that most investors (ourselves included) are struggling with is why, in this uncertain environment, the US$ is not faring better? Indeed, in recent months we have repeatedly laid out the case for of an international US$ Liquidity Crisis. This was largely based on the observation that the growth rate of US$...

    0
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    Gavekal Research

    A Review of Ben Bernanke's Latest Speech

    We received a number of questions on Ben Bernanke’s speech yesterday. Below is Will’s take on it:

    0
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    Gavekal Research

    Daily - Weaker EMU Data and Shakier Euro Fundamentals?

    After the last ECB meeting, the central bank ECB signaled that it would hike rates at tomorrow’s meeting (by using the “vigilant” phrase), in an attempt to pressure EMU CPI rates back down from the current +2.7% toward the ECB’s single medium-term target of +2%. In all likelihood, Jean-Claude Trichet will carry through with his promise (or threat). Yet we cannot help but wonder if he wished he had kept his intentions to himself, as recent...

    0
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    Gavekal Research

    The US$-Euro From Here

    In recent years, the USD’s path of least resistance has been lower, except at times of crisis and financial market stress. And undeniably today, a number of potential “fat tail-risks” could shake markets. These include another flair-up in the EMU crisis, a crisis in one of the several countries around the globe currently exhibiting a high combination of trade and budget deficits (see p. 35 of our Quarterly), a shortage of Dollars abroad to...

    0
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    Gavekal Research

    QSCB - 3Q11 - Life After QE2

    Many of the key risks in global financial markets can ultimately be linked to the Fed's enthusiasm for printing money (which even, to some extent, exacerbates the Euro crisis). Thus, the end of QE2 in June will likely bring the world economy to a cross-roads. For this reason, we have decided to focus our latest Quarterly on what the end of QE2 should entail.

    0
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    Gavekal Research

    A Roadmap For The Coming Changes In Fed Policy

    Following a typically anticlimactic FOMC statement, Ben Bernanke recently held his first post-meeting press conference ever and reviewed what the next steps in America’s unorthodox monetary policy might be. Will US monetary policy continue to weigh on the Dollar and support the already elevated Euro, commodity prices, commodity currencies, etc.? Or will the end of QE2 in June mark a change in trajectory for financial markets? Today, most market...

    0
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    Gavekal Research

    Where the Fed Stands on its Mandates

    When Bernanke took the job as Chairman of the Fed, he took on the legal mandate "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." While the desirability of these multiple mandates is debatable, one can see why, in 2008-09, the Fed Chairman felt compelled to aggressively cut rates and buy long-term MBS and UST. Bank loans were contracting, unemployment soaring, CPIs and price...

    0
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    Gavekal Research

    A Catalyst for a Structural Shift in Japanese Trade?

    The 2001 recession was followed by a ‘jobless recovery’ in the US—at least in the US manufacturing sector, where basically all of the layoffs occurred (see chart). That jobless recovery was soon followed by another sharp decline, courtesy of the Great Recession. In a lunch we attended last week, Yale’s Dr. Peter Schott explained that leading up to the 2001 recession, the seeds were already sown for a wave of outsourcing of relatively low-end,...

    0
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    Gavekal Research

    QSCB - 2Q11 - A Structural Turning Point for Markets?

    We would first like to offer our readers an apology: not only are we publishing our Quarterly Strategy Chart Book just 24 hours after the publication of our China Economic Quarterly (with can't miss articles on alternative energy, insurance, RMB deregulation, Mongolia, and the property slowdown), but this quarterly is long as well: a full 74 pages!

    0
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    Gavekal Research

    The ECB Hikes Rates Without Making Headlines

    Whether Fed and the ECB move together, or apart, matters greatly to forex rates. Bernanke and Trichet both responded to the global crisis by flooding their banking systems with excess reserves, thus driving overnight interbank rates down near their respective ‘floor rates,’ the rate paid by central banks for deposits of excess reserves. With the floor rate set at 0.25% in both systems, the short rate spread thus became negligible. However, one...

    0
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    Gavekal Research

    GaveKal Daily - Signs of Returning Pricing Power

    Six months ago, the US was experiencing a ‘soft patch’ that many feared would turn into a ‘double dip’ recession. And with core price measures already quite weak, there were renewed fears of a deflationary spiral. Inflationary expectations according to TIPS were falling fast. In response, the Fed stepped in aggressively, providing QE1.5 in early August, and then talking up QE2 in late August. Inflation expectations started to recover, and are...

    0
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    Gavekal Research

    A Quick Review of US Job Growth in 2010

    Going into 2011, the odds seem to be that the US$ will come out on top of the next round of the ugly contest between the euro, yen and pound (see The UK in 2011); if only because the current momentum of US economic growth should lead the Fed to soon start managing expectations about how much longer its extreme case of monetary incontinence can last (see Easy Money, Easy Fiscal…but For How Long?).

    0
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    Gavekal Research

    It's Never a Good Time for Price Floors, Even Wages

    This document is part of our old archive. It was published on 2010-11-22.You can download it here: GKFiveCorners1011224.pdf

    0
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    Gavekal Research

    QE2 - The Fifth Phase of the Fed's Crisis Response

    This document is part of our old archive. It was published on 2010-11-01.You can download it here: GKAdHocComment1011011.pdf

    0
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    Gavekal Research

    Why QE Has Not Stopped the Yen's Ascent

    This document is part of our old archive. It was published on 2010-10-12.You can download it here: GKDailyReport1010122.pdf

    0
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    Gavekal Research

    Some Real Improvements in US Personal Income

    This document is part of our old archive. It was published on 2010-09-06.You can download it here: GKFiveCorners1009064.pdf

    0
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    Gavekal Research

    Lessons From Bernanke's Testimony

    This document is part of our old archive. It was published on 2010-07-26.You can download it here: GKFiveCorners1007261.pdf

    0
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    Gavekal Research

    China Does Not 'Generally' Export Inflation

    This document is part of our old archive. It was published on 2010-07-12.You can download it here: GKFiveCorners1007122.pdf

    0
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    Gavekal Research

    Quarterly Strategy Chart Book 3Q10 - The Great Rebalancing

    This document is part of our old archive. It was published on 2010-06-10.You can download it here: GKQuarterlyStrategy1006101.pdf

    0
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    Gavekal Research

    The Collapse in M2 Growth

    This document is part of our old archive. It was published on 2010-06-01.You can download it here: GKFiveCorners100601.pdf

    0
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    Gavekal Research

    The Fig Leaf Comes Off

    This document is part of our old archive. It was published on 2010-05-17.You can download it here: GKFiveCorners1005178.pdf

    0
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    Gavekal Research

    Quarterly Strategy Chart Book 2Q 2010- The Return of Country Risk and What It Means

    This document is part of our old archive. It was published on 2010-03-03.You can download it here: GKQuarterlyStrategy1003031.pdf

    0
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    Gavekal Research

    China's UST Sell-off: A Political or Cyclical Event?

    This document is part of our old archive. It was published on 2010-02-22.You can download it here: GKFiveCorners1002222.pdf

    0
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    Gavekal Research

    Will This be a Jobless Recovery?

    This document is part of our old archive. It was published on 2010-02-08.You can download it here: GKFiveCorners1002085.pdf

    0
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    Gavekal Research

    Bernanke & Trichet's Monetary Policy Experiments

    This document is part of our old archive. It was published on 2010-01-11.You can download it here: GKFiveCorners1001113.pdf

    0
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    Gavekal Research

    The Fed Won't Raise Its Target Rate Until It Can Hit It

    This document is part of our old archive. It was published on 2009-12-15.You can download it here: GKAdHocComment091215.pdf

    0
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    Gavekal Research

    Profits as a Leading Indicator

    This document is part of our old archive. It was published on 2009-11-17.You can download it here: GKFiveCorners0911172.pdf

    0
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    Gavekal Research

    The Culture Code

    This document is part of our old archive. It was published on 2009-11-17.You can download it here: GKFiveCorners0911173.pdf

    0
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    Gavekal Research

    DRAM Wars

    This document is part of our old archive. It was published on 2009-10-12.You can download it here: GKFiveCorners0910122.pdf

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