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    Gavekal Research

    Inside The Fed’s Black Box

    Regular readers will know that we at Gavekal have spent a considerable amount of time over the last few years exploring Knut Wicksell’s concept of the “natural rate of interest”. We are not the only ones. The Federal Reserve too has recently been mulling over the great 19th century Swedish economist’s theories. According to the minutes of October’s Federal Open Market Committee meeting, policymakers were given “several briefings on the concept...

    4
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    Gavekal Research

    The Gavekal Monthly: A Cloudy Currency Outlook

    The Gavekal Monthly outlines our highest conviction ideas and summarizes the key economic, market and thematic views held by the firm’s partners and analysts. This report is an attempt to answer a question that we are often asked, but find it hard to answer: "What does Gavekal think?".

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    Gavekal Research

    The Squeeze On US Profits

    Forget yesterday’s upward revision in US third quarter GDP growth from 1.5% to 2.1%. The real news was the release of top-down domestic corporate profit data—and it was much less encouraging. Here is what we learned:

    4
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    Gavekal Research

    The US Inventory Problem

    The US business inventory-to-sales ratio (in real terms) is one of our key recession indicators. We have been uneasy ever since it broke to a new cyclical high in May. Since then it has continued to inch higher, and in September, the latest data-point available for the total business sector, it reached a level typically seen only in recessions. Even more worrying, the rise in the inventory-to-sales ratio cannot be blamed on the travails of the...

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    Gavekal Research

    A New Look At Capital: Reassessing Cost And Return

    US profits are contracting, corporate bond rates are rising, and the Federal Reserve is inching towards rate hikes. It is no wonder the US equity rally faltered this summer. As the dust settles, the question confronting investors is: Where does the US stand now in the economic cycle?

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    Gavekal Research

    The Ominous Signal In Inventories

    One of the characteristics of a recession is an overhang in inventories, which must then be sold off or written down before growth can recover. The overhang results from overproduction during the final stages of the preceding boom, an unexpected collapse in demand, or both.

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    Gavekal Research

    Position For A Pick-Up In US Inflation

    Everyone agrees that US inflation, if not actually dead, is unlikely to gain a new lease on life any time soon. With oil prices down -48% over the last 12 months and the US dollar up 11%, inflation as measured by personal consumption expenditure is just 0.3%, while core inflation (ex-food and energy) is down to 1.3% year-on-year. What’s more, investors expect no acceleration in price rises over the medium term. The implied breakeven inflation...

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    Gavekal Research

    Does Slower Job Growth Signal A Coming US Recession?

    There’s no getting away from it: last week’s US employment report was unequivocally weak. According to the latest estimates, the US added only around 140,000 jobs in each of August and September—a marked slowdown from the average growth rate of 260,000 in 2014. So what is going on? There are three possibilities:

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    Gavekal Research

    The Fed’s Opportunity For Lift Off

    There are many problems in the world today, but too-high a cost of capital is not among them. This is not going to change if the Federal Reserve hikes short rates by a quarter of a percent this week, or in December. We have no particular insight as to when the Fed will make its move, but there are good reasons for it pull back on the “lift off” lever before the end of the year. Recent ructions in global markets are not likely to deter Janet...

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    Gavekal Research

    The US Current Account Deficit And World Markets

    Spotting turning points in the US current account is central to Gavekal’s research method, as such shifts impact all other economic relationships. When the US dollar is strong the US tends to run a big current account deficit, providing the world with lots of “earned dollars.” Conversely, a weak dollar eventually leads to a shrunken US current account deficit and more incentive to borrow in dollars. Big moves in the dollar exchange rate create...

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    Gavekal Research

    Portfolio Construction Towards The End Of The Cycle

    Buy into the rebound or position for the real sell-off still to come? It is a tough question at this point. Most investors are confident we are considerably more than half way through the cycle, but they are far from certain the end is nigh (especially after yesterday’s big upward revision of US GDP). For the bamboozled, the summer sell-off of 1998 offers some interesting parallels.

    4
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    Gavekal Research

    Strong US Data Confirm Underweight

    Data released on Friday reaffirmed the robust health of the US domestic sector. Paradoxically, this only strengthened our conviction that investors should underweight US equities in favor of other markets.

    0
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    Gavekal Research

    To Cheer Or Fear US Wage Growth?

    Is the US equity market merely taking a breather before the next upward leg of the bull run? Or has it reached a worrying plateau, marking US stocks out for a protracted period of underperformance? With domestic profit margins facing a squeeze between the strong US dollar on one hand, and stirrings of wage growth on the other, we are worried it is the latter. As we argued on Tuesday, the US dollar’s strength means that any rewards US firms...

    4
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    Gavekal Research

    Will The Buyback Craze Ever End?

    Scientists tell us one of the things that sets us humans apart from other mammals is our relatively large prefrontal cortex, the part of our brain that allows us to resist the lure of instant gratification and instead sacrifice ephemeral pleasures for solid long term gains.

    6
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    Gavekal Research

    Not Déjà Vu Again For The US

    With the mid-point of 2015 approaching it looks to be a case of “déjà vu again” for a US economy suffering early year blues. As with other “soft patch” periods, there are plausible explanations for this stodginess that don’t just involve beating up on statisticians for their seasonal adjustment techniques. The US indeed had a cold winter and the West Coast port strike disrupted trade flows. But the real question for investors is whether the US...

    1
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    Gavekal Research

    5C United States: The Rising Supply Of 'Earned' US Dollars

    The US dollar is the world’s reserve currency, which means the US can settle its current account deficit by issuing more US dollars. As Charles says, this means any contraction in the US current account deficit means fewer US dollars flowing abroad (see The US Current Account And Vanishing Global Liquidity). Naturally the reverse is also true. Following the strengthening of the trade-weighted US dollar index over the past four years, the...

    1
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    Gavekal Research

    5C United States: Why So Calm After The Oil Price Collapse?

    After oil prices halved, profits in the sector look to have followed suit—S&P 500 energy firms in 1Q15 saw an eye watering -55% YoY plunge in earnings. Given this backdrop, it was to be expected that gory tales would emerge from the oil fields of Texas and North Dakota of bankruptcies, mass layoffs, forced sales and shotgun marriages. To be sure the oilfield services space has seen a bit of this, but generally an eerie calm prevails.

    0
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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

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    Gavekal Research

    5C United States: Forget Payrolls, Watch Out For Wage Growth

    Not so long ago most of what the savvy investor needed to know about the US economic cycle could be gleaned from a casual perusal of the labor market. Sadly for those seeking a simple life, those days have passed. For example, key measures of labor market slack offer mixed messages; the participation rate is stuck below the trough of the last two cycles which points to the working age population being under-utilized. Yet, a greatly reduced...

    0
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    Gavekal Research

    Beware Of Crowds, And False Prices

    The world’s largest economy is on the cusp of a deflationary depression—at least according to yesterday’s US GDP report. Real growth was up a mere 0.2% annualized in the first quarter, while nominal growth was even lower, at just 0.1%, due to a -0.1% drop in prices. Yet the markets largely looked past this “shocking” report. There were some notable moves yesterday, but not because the market was pricing in economic disaster—far from it.

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