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    Gavekal Research

    Video: The Anatomy Of The August Panic

    As more and more government bonds around the world slide into negative yield, investors can draw one of two conclusions: either the world faces an economic meltdown, or there is a buying panic in safe assets. But although there is indeed a synchronous global slowdown in growth, Louis favors the latter explanation.

    0
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    Gavekal Research

    German Banks And The Dollar

    I am certainly no technical analyst, but I do have a good memory. The story of major financial crises can be told with reference to the US dollar’s movements against the euro (and its antecedents). It now looks to have reached a significant juncture, especially with Italy moving toward another period of political instability.

    9
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    Gavekal Research

    The End Of The Panic

    In almost three weeks since the beginning of August, gold is up 5.9% while investors in 10-year US treasuries have gained 4.2%. This is unusual. As Charles has highlighted, the two “anti-fragile” assets of choice seldom skyrocket simultaneously, so markets have been in full-blown panic mode. But what were markets panicking about, and what could boost confidence once again?

    6
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    Gavekal Research

    When The World Goes To Hell

    Anatole has previously argued that the correlation between inverted yield curves and recessions has very little predictive significance. In this piece he updates that view to argue that inverted yield curves have no predictive significance whatsoever. For this reason, he thinks that equity investors have gotten their reaction to recent developments about right, while bond investors are all in a muddle.

    3
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    Gavekal Research

    The Diminishing Market Impact Of Tariffs

    After the US imposed its first major round of tariffs on Chinese goods last September, the S&P 500 sold off by -20%. After the second round went into force, it fell -6.8%. And since President Trump announced a third round, it has sold off by -6.1%. It seems each successive escalation in the trade war is having a smaller impact on the US stock market.

    2
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    Gavekal Research

    Panic Stations

    I always try to be a rules-driven investor. And when the US stock market is down -3% in a day, taking it to -6% from its peak in three weeks, when 10-year US treasury yields have halved in nine months to just 1.55%, and when gold is up 20% in three months, it is a good time to review those rules to see what they can tell me. The answer is: quite a lot.

    0
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    Gavekal Research

    Lessons From The Argentine Shock

    In US dollar terms, Argentina's equity benchmark on Monday fell -48% in a one-day move only bested by the Colombo market’s -62% plunge in 1989. The -24% drop in long-dated US dollar-denominated Argentine bonds, a -17% drop in the currency, or the -38% fall in the local equity index will cause pain for certain macro players and dedicated emerging market funds. It should also cause us to ponder a number of questions.

    3
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    Gavekal Research

    The Surge In Anti-Fragile Assets

    The latest round of data releases appears to confirm fears that the world is facing another synchronous global downturn. If so, it will be different from other slowdowns, in that it will not have been caused by rising interest rates or higher energy prices. What’s more, it will be setting in when there is little prospect of a globally coordinated response, when monetary policy appears to have lost traction, and when asset prices are looking...

    2
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    Gavekal Research

    Joining The US Recession Camp

    To listen to current commentary, you would think that US capitalism faced a Marxist end-of-times reckoning. Hence, it is noteworthy that the share of sales going to profits is now falling, while that going to labor is rising. Yet the latest US GDP report is still alarming for what it tells us about the state of the economy.

    0
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    Gavekal Dragonomics

    The Rising Risks For Chinese Firms

    The outcome of US-China trade talks is uncertain, but one thing is clear. Chinese companies, their customers and suppliers, faced increased risks of US American sanctions. Hardliners in the US national security establishment are pressing ahead with an “all-of-government” strategy to constrain China’s technological and financial clout. This will continue regardless of the outcome of trade talks.

    0
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    Gavekal Research

    The Renminbi, Manipulation And The Trade War

    Monday’s actions on the Chinese currency—Beijing’s decision to let the renminbi’s exchange rate weaken past CNY7.00 to the US dollar, and Washington’s decision to label China a currency manipulator—signal that the US and China are close to throwing in the towel on a trade deal. Trade war escalation should now be the base case.

    1
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    Gavekal Research

    The Long Term Impact Of Trump’s Latest Tariffs

    Aftershocks from Donald Trump’s August 1 tweets promising new tariffs on US imports from China continued to reverberate through Asian markets on Monday morning. Most notably, China’s yuan fell by some -1.3%, with the USD-CNY exchange rate breezing unimpeded by the Chinese authorities through the CNY7.00 to the US dollar mark for the first time since early 2008. Equity markets in the region were also hard hit, with Japan down -2% and Hong Kong...

    0
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    Gavekal Research

    Strategy Monthly: Focus On The Fed, Not On US Tariff Threats

    Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.

    0
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    Gavekal Research

    What The Early End Of QT Means

    As expected, the Federal Reserve cut short term interest rates by 25bp on Wednesday. Less expected the Fed also halted its program of quantitative tightening, effective immediately. The decision to end the program early cancels an expected additional US$70bn contraction in the supply of money. This represents a significant easing.

    4
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    Gavekal Research

    Darwin Or Keynes?

    Keynes advised that at the outset of a recession, policymakers should drive down market interest rates in order to borrow from future demand. Today’s central bankers have adopted this approach as permanent policy. Unfortunately, permanent Keynesianism fatally interferes with the economic Darwinism of creative destruction that propels growth in a capitalist system—with dire consequences.

    5
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    Gavekal Research

    Shanghai Talks Now A Sideshow

    Trade talks between the US and China resume today after a three-month hiatus. This meeting may or may not pave the way for a deal in the next several months, but it no longer matters much. The global macro risk from the trade conflict has ebbed dramatically. What's important now is the dimensions of the decoupling between the world’s two biggest economies.

    1
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    Gavekal Research

    The Downward Revision In US Profits

    Alongside last Friday’s second quarter US GDP release, the BEA issued revisions which wiped out almost all the increase in pre-tax corporate profits since the end of 2016, and much of the post-tax increase. The revisions can be attributed almost entirely to weak top-line growth and rising wage costs. The good news is that the revisions do not sound a recession warning.

    10
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    Gavekal Dragonomics

    From Trade War To Decoupling

    Trade talks between the US and China will resume this week after a three-month hiatus, but how much do they really matter? In this piece, Arthur argues that the macro risk from the US-China trade conflict has ebbed to almost zero. What’s important now is to understand the dimensions of the decoupling between the world’s two biggest economies.

    1
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    Gavekal Research

    Unpicking US 2Q GDP

    Second quarter US GDP growth came in at 2.1%, slightly better than expectations. In itself, this headline figure is not especially illuminating. But dig deeper into the various components of 2Q growth, and there are reasons for moderate optimism about the trajectory of the US economy through the second half of 2019.

    4
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    Gavekal Research

    The Choice Confronting Investors

    With US$13.5trn of bonds on negative yields, Germany’s sovereign curve in negative territory out to 20 years, and G7 yields lower than in the 2008 crisis, the euro crisis, or 2016, when the world expected China to collapse, there are two possibilities. Either the world is facing low growth and inflation forever, or the bond market is in the final phase of an almighty bubble.

    5
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    Gavekal Research

    The Future Of Big Tech

    Big Tech is in the US government’s cross-hairs. Google, Facebook, Amazon and Apple face probes into their behavior, and legislation is in the works to clip their wings. The question for investors is: How serious will the stand-off with the government get and will a prolonged downturn in tech spark a broader decline in the US equity market?

    0
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    Gavekal Research

    Fiscal Crisis Averted, At A Cost To Liquidity

    On Monday, the White House and Congressional leaders reached a tentative agreement to raise US government spending caps and suspend the debt ceiling for two years. Assuming the deal is passed by Congress in the next few days, a fiscal crisis will be averted this year. But before investors breathe a sigh of relief and bet on a rally, it should be noted that one near term effect of the agreement could be an acute liquidity drain as the Treasury...

    8
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    Gavekal Research

    Housing Points To Solid US Growth

    US mortgage applications fell in the week ended July 12, compared with the week before. But do not be misled by the latest week-on-week decline in this high frequency data series. In year-on-year terms, mortgage applications for home purchases have been rising consistently since the beginning of 2019, pointing to a rise in housing construction over the coming months.

    0
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    Gavekal Dragonomics

    Huawei’s Path To Survival

    The future of Huawei, China’s most successful electronics manufacturer, has looked bleak ever since the US put it on an export blacklist in May. But with the Trump administration proving willing to soften its export controls, and companies being able to find loopholes in them, it now looks like Huawei has a decent chance to survive.

    0
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    Gavekal Research

    Why This Time Is Different

    The evolution of the yield curve over the last four months—an inversion after a series of Federal Reserve interest rate hikes, followed by a rapid steepening—has been characteristic of the early stages of the last four US recessions. However, investors worried that the US economy may already be in recession can relax.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call July 2019

    In yesterday’s Gavekal Research conference call, Louis-Vincent Gave, Anatole Kaletsky and Arthur Kroeber conducted a mid-year review of the investment environment and outlined their expectations for the rest of the year onward.

    0
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    Gavekal Research

    Look For Just One-And-Done

    In Congressional testimony on Wednesday, Jay Powell cooed just like the dove investors want him to be. The Fed chairman dispelled any lingering doubts that either the end-June trade truce between the US and China or June’s strong US payrolls number will dissuade the Fed from cutting interest rates at the end of July.

    0
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    Gavekal Research

    Anti-Fragile Assets As A Diversifier

    Last July Charles wrote a piece warning of a recession in the non-US OECD economies during 2019. Today, he runs an update on that thesis and seeks to refine his safety-first portfolio using assets which contain “anti-fragile” properties.

    4
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    Gavekal Research

    Emerging Markets After The Trade War

    Emerging markets did nicely out of the rumor, less well from the fact. As hopes grew through June for some form of trade détente between the US and China, EM assets staged a broad rally. Similarly, EM currencies pushed broadly higher, on the back of a wider US dollar softness. Over the last week, however, EM equities and currencies have pulled back.

    0
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    Gavekal Research

    An Investment Thesis For The 2020s

    A look back at the last 50 years shows that the dominant conviction among investors at the end of each decade about what would drive markets over the following decade was invariably wrong. With this in mind, and on the basis that avoiding losers is easier work than picking winners, Louis asks what beliefs dominate investors’ minds today, and how they are likely to be proved wrong in the 2020s.

    12
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    Gavekal Research

    The Direction Of The Dollar

    The US dollar’s strength over the last year or so has been attributed in large part to expectations that the US administration would impose additional tariffs on imports from China. So, with those expectations on hold following last week’s agreement to resume trade negotiations, you might think the US dollar should be falling.

    0
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    Gavekal Research

    Strategy Monthly: Should We Believe Equities, Or Bonds?

    Record-high US equity prices seem hard to reconcile with the message sent by the lowest bond yields since 2016. Should investors hunker down due to the inverted yield curve, or jump aboard the equity bandwagon? In fact, both markets may be right in their own way.

    0
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    Gavekal Research

    The Focus Turns To The Fed

    After the de-escalation of the US-China economic cold war at the weekend’s G20 summit in Osaka, all eyes are now on the US Federal Reserve, following policymakers’ recent indications that they are ready to cut interest rates. It could be argued that the trade war ceasefire reduces economic risk, and therefore will leave the Fed less inclined to loosen policy. But the Fed’s primary focus is on inflation expectations, and the degree to which they...

    2
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    Gavekal Research

    The Story Behind Low US Volatility

    When Donald Trump declared his trade war against China in the spring of 2018, investors could have been forgiven for expecting the resulting uncertainty and additional economic friction to add both to US equity market and GDP growth volatility. In fact, equity market volatility has generally been low, and US economic growth has remained stable.

    0
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    Gavekal Research

    A Cold War Interglacial

    It is now almost certain that presidents Donald Trump and Xi Jinping will restart trade talks at the G20 summit in Osaka this weekend. Moreover, discussions in Washington suggest that there is a good chance these talks will result in a deal in the next few months. Our core scenario now is that macro risk from an escalating trade war is receding. There are also signs that the US and China could negotiate a truce on Huawei, lifting the apparent...

    7
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    Gavekal Research

    Trade War II, The Dollar And Gold

    After the opening Twitter salvo in "Trade War II" by Donald Trump in May, markets have reacted quite differently from "Trade War I" in the spring of 2018. This time, the Federal Reserve is sounding more dovish, US bond yields have fallen back to 2%, the dollar seems to be rolling over, and gold and EMs are doing well. This raises the question whether the investment environment is changing before our eyes.

    9
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    Gavekal Research

    The Iran Wildcard

    Of the many risks besetting investors right now, the hardest to assess is the confrontation between the US and Iran. Should tensions escalate into a shooting war, the consequences would be far-reaching and severe. However, looking beyond the bellicose rhetoric there are reasons to believe that the balance of probability still weighs against a marked escalation.

    1
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    Gavekal Research

    Libra's Monetary Challenge

    Facebook has 2.7bn users and 90mn companies operating on its various platforms. Perhaps more than any other non-state player, it has the resources, reach and data trove to launch a global currency. Will is not convinced and tackles the issue by asking what benchmarks the new Libra currency will need to hit if it is to become a widely-used medium of exchange.

    8
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    Gavekal Research

    What Gold Is Telling Us

    Over the last few weeks long bond yields collapsed, which in turn led to a collapse in something called “inflation expectations”. Now, inflation expectations are a very useful indicator built by very clever PhDs. The main purpose of this indicator appears to be to persuade investors that they should buy bonds just when they really should be selling them.

    5
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    Gavekal Research

    Video: China's Three Vulnerabilities

    Even if Presidents Donald Trump and Xi Jinping leave the G-20 meeting in Osaka next week with a trade deal in hand, the broader rivalry will continue. In this extensive video interview Louis identifies three ways in which China is vulnerable to US pressure and explains how this may impact investors.

    0
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    Gavekal Research

    Keeping China In Play

    Next week’s big event will be the G-20 leaders’ meeting in Osaka, where presidents Donald Trump and Xi Jinping will sit down to figure out whether their stalled trade negotiations can be re-started. It is quite likely that trade talks will get back on track, but quite unlikely that a deal can actually be struck before the end of the year.

    2
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    Gavekal Research

    How To Play The Fed Tease

    After the Federal Reserve’s two-day policy meeting, chairman Jay Powell told the market what it wanted to hear. Policymakers see rising risks and stand ready to cut interest rates, but there is no reason to panic—just yet. Real growth is solid, which is good for earnings, but inflation pressures are muted, allowing the Fed to be more accommodative.

    6
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    Gavekal Research

    Investing For A New Cold War

    Earlier this year, Louis and Charles published a book whose main thesis was that an era of globalization is ending and the world is breaking into three separate economic zones.The question Louis addresses in this piece is how investors should play this macro shift. Those strategies that did best over the last decade are unlikely to outperform in the next period.

    10
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    Gavekal Research

    Don't Worry About The US Consumer

    There is a schizophrenic quality to commentary on the health of the US consumer. On the bright side, sentiment readings are cheery and the labor market is generally solid. Yet on the other hand, Cassandras point to rising credit card delinquency rates, and weakness in sales of autos and homes as early signals of a recession. So what gives?

    4
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    Gavekal Research

    Worrying About Bond Yields

    Germany yesterday sold medium-dated bunds at a record -24bp, while treasury yields are back near three year lows. In yesterday’s Daily, Louis outlined reasons for the surge in US bond prices, and argued that a reversal could occur if the US dollar weakens more. Today want to ask how such a shift in the rates environment will impact economic growth and equities.

    2
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    Gavekal Research

    Video: Bull Markets Don't Die Of Old Age

    The US economic expansion is entering its 11th year, which makes some wonder whether the end of the business cycle is nigh. Anatole thinks that’s asking the wrong question, because bull markets don’t die of old age. They are, however, more susceptible to diseases of old age. He identifies three events that would cause an economy to keel over. Also on the docket is the seemingly contradictory signals sent by bullish US equity markets and bearish...

    0
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    Gavekal Research

    Driving The Bond Bubble—The Sum Of All Fears

    For the past 30 odd years, President Donald Trump has opposed free trade and argued that foreign producers should face tariffs. Yet the market responds with shock each time the US threatens new tariffs. By the same token, almost every central banker today is saying they (i) want to see higher inflation, (ii) will stop at nothing until inflation picks up, and (iii) once inflation duly appears, they will likely let it ramp up. So how does the...

    1
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    Gavekal Research

    Not Such A Dystopian Market

    Although Donald Trump's lifting his threat to impose new tariffs on Mexico was good news, raising the chance of a US-China trade climbdown, betting good money on the US president getting up on the right side of the bed is ill advised. So, to maintain our sanity we should focus on US economic data and monetary policy, which turned positive last week.

    4
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    Gavekal Research

    Recession Risk Mispriced

    US treasury yields are up from their 21-month low touched earlier this week, but the market is still priced for recession. Sure, the trade war uncertainty is negative for risk assets. But there are good reasons to believe that the US economy will continue to grow, albeit at a modest rate. As a result, piling into treasuries at current yields is a dangerous move.

    4
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    Gavekal Research

    Trump's War And Our Problem

    In the seven decades after World War II, the most powerful nation in the world could be relied on to defend and promote free trade among nations. Then came President Donald. J Trump. Now it’s conceivable that Trump’s goal is to shake up the old rules-based system.

    3
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    Gavekal Research

    EMs Hit The Trade Wall

    It is not clear if the latest trade actions launched by the US against Mexico and India form part of coherent plan. Such moves do signal that the US-centered multilateral trading system is hanging by a thread. This upending of the post-WWII order is especially bad news for trade-dependent emerging economies.

    0
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    Gavekal Research

    Strategy Monthly: Who Suffers Most In A Long Trade War?

    Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.

    0
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    Gavekal Research

    Yes, We Are In A Bear Market

    In late 2017, Charles argued that global equity markets looked to be topping out, and it was time to adopt a more conservative strategy. As things turned out, the global equity benchmark hit a peak in late January of 2018, and has not retraced that level. He now argues that global equities have likely entered a bear market cycle.

    0
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    Gavekal Research

    An Ugly Trade War And An Inverted Yield Curve

    Will a trade war boost US growth and inflation, or instead cause a deflationary recession? The bond market is basically saying that a trade war will dent US growth and force the Federal Reserve into easing. Bear with my two-handed explanation, but there are also good reasons why it could also boost nominal growth.

    6
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    Gavekal Research

    China's Options In The Unfolding Trade War

    China is widely seen as having a pretty miserable hand in its trade stand-off with China. However, Louis is not convinced that China has so few options. Here he considers Beijing’s scope for retaliation, and so leverage, from using its financial clout to spook US capital markets to winding up Kim Jong-un to start causing trouble for the US and its allies.

    10
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    Gavekal Research

    Audio & Transcript — The US-China Trade And Technology Mess

    In yesterday's special Gavekal Research Conference call Gavekal's Arthur Kroeber and Dan Wang, along with Fathom China's Matt Forney, considered what the breakdown of the US-China trade talks means for the trajectory of the trade war, and what the blacklisting of Huawei means for the tech cold war.

    0
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    Gavekal Research

    The Message In Market Dispersion

    Economic events create winners and losers. It is too early to say with confidence how the current US trade and technology confrontation with China will play out, or whether US tariffs on imported autos and the threatened retaliation will go into force. But it is possible to tell how great investors believe the potential disruption is likely to be.

    0
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    Gavekal Dragonomics

    Who Wants A New Long March?

    Since the collapse of the US-China trade talks, the public position of both sides has hardened. Top leader Xi Jinping’s call for a “new Long March” was widely taken as a sign he is ready for a protracted standoff with the US. But support for such a stance is not universal, as the surprising public comments of Huawei chairman Ren Zhengfei suggest.

    4
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    Gavekal Research

    Video: Iran And The Oil Price

    Angry rhetoric between the US and Iran reached blood-curdling intensity after the US announced in late April that it wouldn't grant waivers for sanctions on Iran's oil exports. While this caused a short term spike in the oil price, it has since fallen about -8% from its high. Are oil traders too complacent about the risks, or does the market have it right?

    0
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    Gavekal Research

    A Change In The Market Mood

    Thursday was an ugly day for global equity markets, with losses that brought total returns on US equities almost back to their January 2018 level, and non-US equities to the brink of bear market territory. It is hard to shake the feeling that the investment environment has changed. What lessons should we draw from the tumultuous trading session?

    7
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    Gavekal Research

    Trade War: Back From The Dead

    0
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    Gavekal Dragonomics

    The Fate Of Huawei

    The US government has China’s most prominent technology firm in a stranglehold. The question now is whether the US government continues to strangle Huawei until it goes out of business, or chooses to eventually stop squeezing and allow a weakened Huawei to keep operating under some limitations. In this report, Dan explores the possible scenarios.

    3
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    Gavekal Research

    Trump's Trade War Calculus

    Keeping track of all the pieces of the US-China confrontation has become a full-time job. But the chaos and uncertainty of the past couple of weeks has begun to resolve itself into fairly clear patterns, even if the outcomes remain in doubt. Three main conclusions emerge from last week’s activity, and none of them are particularly reassuring.

    10
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    Gavekal Research

    One Reduction Of Risk At The Margin

    By putting off for six months its decision whether or not to impose a 25% tariff on all imports of passenger cars and car parts on national security grounds, the US administration bowed to expedience on Wednesday. In theory, the threat of auto tariffs remains on the table. In practice, the six month delay has robbed the proposal of much of its credibility.

    1
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    Gavekal Research

    The Case Of The Missing Inflation: The Changing Demographic Picture

    Demography, it is said, is destiny. If so, then the finger of destiny may be pointing at a more inflationary future for the world economy. Louis reviews the slow shifts in demographic profile which govern trends in consumption and savings, and so propel the forces of inflation and deflation over the very long term.

    6
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    Gavekal Research

    Monopsonies, Protectionism And ROIC

    It is extremely unfashionable to say so, but Donald Trump’s campaign to bring manufacturing industries back to the US by slapping tariffs on goods imports may not be quite the act of economic illiteracy most professional practitioners of the dismal science would have you believe. On the contrary, it could well be positive for US growth, living standards, and market outperformance.

    11
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    Gavekal Research

    Beijing's Most Effective Trade Tool

    In response to the escalation of the US-China trade war, Chinese policymakers are likely to step up their easing measures. This should help support domestic demand. But as Chen Long argues in this piece, the effect of policy easing, coupled with the impact of increased tariffs on China’s exports, will add to downward pressure on the renminbi.

    4
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    Gavekal Research

    The Trade War Story Lines Harden

    The US-China trade war has three potential outcomes. First, we could see a step back from brinksmanship and a deal in the next few weeks. Second, the two sides could dig in for more protracted negotiations. Third, the talks could break down and the trade war become permanent. With the probability of each outcome less than 50%, the only certainty is continued uncertainty.

    0
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    Gavekal Research

    Goldilocks And The Ten Bears (2019)

    Anatole returns to the framework he set out in November 2017, examining the 10 key risks that could threaten global markets over the next 18 months and which investors should monitor closely—and he comes to some surprising conclusions about the central locus of global dangers.

    4
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    Gavekal Research

    The Motivation Behind Trump's Tweets

    Since becoming president, Donald Trump has made it clear that he sees the S&P 500 as the real-time judge of his White House performance. Why, then, did Trump on Sunday send a tweet alleging that China had backed off from agreed positions in the US-China trade talks, and in so doing rattle a market priced for Goldilocks?

    5
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call May 2019

    Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment. In our monthly Conference Call yesterday, they outlined arguments for why this may be the case, and what it would mean for portfolio construction.

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    A Better Time For A Trade War

    For equity investors, there is a never a good time to have a trade war. Nevertheless, if there must be one, the US stock market is now better placed to ride out a US-China tariff conflict than it was a year ago. That’s just as well. Chinese negotiator Liu He is set to arrive in Washington on Thursday for the latest round of trade talks which are going down to the wire.

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    Gauging The EM Collateral Damage

    After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.

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    Series: The Case Of The Missing Inflation

    As the Federal Reserve launched the second round of its quantitative easing, the fear was that the Fed’s unorthodox monetary policy would ignite a new round of inflation throughout the world, with dramatic effects on asset prices. After all, most asset prices are driven by the interaction of inflation and economic activity. But inflation failed to materialize, and even fell from more than 3% globally in 2010 to negative territory in 2015. These...

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    A Reverse-Engineered US Inflation Indicator

    In the Strategy Monthly I presented a fairly simple rule to show whether an economy is in the top, or the bottom half of the Four Quadrants framework. To show that the rule worked, I laid out relationships between the "rule" and a range of other useful indications of a price environment shift. Here, I capture all of these relationships in a simple, revised decision rule.

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    How Long Can Productivity Contain US Inflation Pressure?

    April’s US payrolls report showed job creation was stronger than expected and unemployment lower, yet wage pressures were softer. This suggests weaker unit labor costs will allow the Fed to remain dovish, at least for now. All else being equal this is positive for equity investors. The question is: How long can this benign combination persist?

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    Trade Deal Delayed, Not Yet Denied

    Any trade negotiator will tell you that the last yard is always the hardest. That is obvious now in the US-China trade talks, which were thrown into doubt by Donald Trump’s weekend tweets threatening to hike tariffs on US$200bn of imports from China from 10% to 25% this Friday if a deal is not done.

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    Inflation And The Gold Fix

    When the market rate of interest for a long period has been held abnormally low relative to returns on invested capital, financial engineering takes off with huge debt issuance, making a chaotic denouement of the credit cycle unavoidable. To prepare for such an event, an equity portfolio hedged with gold can reduce volatility and raise returns.

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    Strategy Monthly: The Inflation Shift And Portfolio Construction

    Despite inflation remaining muted, Wednesday saw the Federal Reserve stand pat on interest rates. Having switched to an overly dovish stance early this year, Fed Chairman Jay Powell remains wary of changing tack and easing policy as he worries about inflationary pressure bubbling up from an economy that looks to be fully occupied. For his part, Charles is less nuanced and believes the US will shortly flip over into an environment where inflation...

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    Managing Today’s Biggest Risk

    The US first quarter GDP data released on Friday proved consistent with the picture of slower—but still positive—growth through 2019, and a continuation of the Goldilocks tailwind for asset markets. But after a strong run-up in equities this year, it might be time to ask what the greatest risk is to the current environment, and how to position for it.

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    The Case Of The Missing Inflation: US Fiscal Policy

    The US seems set to run huge fiscal deficits for as far as the eye can see, and it is not clear who is going to fund this indulgence. In the fourth instalment of his “missing inflation” investigation Louis considers the options available to the US Treasury and concludes that hard funding choices will likely be ducked by whoever wins the 2020 election.

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    The Case Of The Missing Inflation: Chinese Monetary Policy

    China’s response to the Fed’s QEII program in 2010 was to tighten monetary policy, as it feared a spill-over effect into inflation. Since that point China has seen credit growth progressively slow, making it an inhibitor to any global rebound in inflation. This orientation by China is changing as the focus of policy shifts away from crimping the shadow finance sector.

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    Why The Bulls Are Back In Charge

    Now that the S&P 500 has hit a new all-time high and other stock markets have recovered most of the steep losses they suffered last summer, it seems a lifetime since the financial panics of 2018. Investors who bought the dip have enjoyed Wall Street’s strongest quarterly performance in this bull market. After being so well rewarded, how should bullish investors who kept the faith now respond?

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    How Contagious Is The Health Care Downturn?

    On paper, this should have been a good year for health care stocks: global growth has disappointed, long term interest rates have fallen, the US yield curve for a brief while was inverted and a looming US-China trade deal should see China buy lots of health care gear and drugs from the US. Yet, even though the stars aligned, health care has been the worst performing major US equity sector this year. Notwithstanding a bounce yesterday, the sector...

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    Iran Waivers And The Oil Price Spike

    US Secretary of State Mike Pompeo has announced that the US will not roll over waivers on its sanctions on Iranian oil exports when they expire in May. The question for investors is this: If Washington does make good on its threat, to what extent are other oil producers able and willing to increase output in order to make up any supply shortfall in global markets?

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    The Case Of The Missing Inflation: Energy’s Impact

    When the Fed launched QE2 in 2010, there was widespread fear that a great inflation beckoned. It has not exactly worked out that way. Louis considers the role energy played in a decade of becalmed US consumer prices. Yet, with oil prices again rising, he asks whether the market has grown complacent in its analysis of the relationship between oil and inflation.

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    The Case Of The Missing Inflation

    As the Federal Reserve launched the second round of its quantitative easing, the fear was that the unorthodox monetary policy would ignite a new round of inflation—even hyper-inflation—throughout the world, with dramatic effects on asset prices. But inflation failed to materialize, and now nobody seems to be worried about it anymore.

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    US Financial Asset Valuations Stretched Every Which Way

    Charles dusts off his equity and bond valuation models for the US and is disturbed to see that for only the fourth time since the mid-1980s both asset classes are simultaneously overvalued. In this piece, he asks: what gives?

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    Inflation Is The Real Risk

    Happy days seem to be here again as risk assets soar on a dovish Federal Reserve and better growth outlook. Yet, investors should take note. The Fed has three official mandates; namely, to keep inflation low and stable, keep unemployment down, and keep interest rates low and stable. Yet among those “equals”, the first is thought to be bearing down on inflation.

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    A New Look At The Housing Market

    When the US slides into recession, it generally does so because of a contraction in investment, either in the corporate sector or in the housing market. Today, returns on capital invested in housing exceed the cost of capital, signalling a positive outlook for US residential investment, construction, house prices, and the shares of homebuilders.

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    Hong Kong Seminar — April 2019

    Louis Gave examined the reasons for equity markets' good performance amid a global trade slowdown; Thomas Gatley assessed the state of the Chinese economy and whether the current Chinese equity bull market still has legs; Udith Sikand reckoned it is time to be positive on emerging markets, especially EM Asia.

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    Audio & Transcript — Gavekal Research Call April 2019

    In yesterday’s Gavekal Research Conference Call, Will Denyer and Udith Sikand addressed the changing US dollar liquidity environment, and its impact on markets.

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    Europe's Export Problem

    Europe is the world’s most export-dependent big economic region. In such a precious position, the effect of external weakness can be debilitating, as shown by the eurozone manufacturing PMI having just fallen to its lowest in nearly six years at 47.5. The question is whether any respite can be found in overseas markets.

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    Play A Longer US Cycle With Small Caps

    After a wobble late last year, the US economy looks to be stabilizing. The Atlanta Fed has revised up its estimate for 1Q19 GDP growth to 2.1%, while more timely indicators such as mortgage applications, PMI readings and durable goods orders indicate a steadying of the ship.The question is how to play this development.

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    London Seminar — March 2019

    Cedric Gemehl examined the possibility of a European rebound; Charles Gave argued the world is splitting into three distinct monetary zones; Tom Miller presented on the state of the US-China trade talks and the health of the Chinese economy; Anatole Kaletsky examined the risks to the bull market, and arrived at a bullish conclusion.

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    Good News For Goldilocks

    Last Thursday, with the price of oil approaching a four-and-a-half month high, Donald Trump took to Twitter. “Price of Oil getting too high.” Trump’s tweet had little effect, with Brent crude hitting US$69/bbl on Monday. Prices are likely to continue to push higher over the coming months towards 2018's highs—a troubling prospect.

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    Strategy Monthly: A New Liquidity Environment

    The prospect of easier liquidity conditions helped make 1Q19 one of the best ever quarters for US equities. Confirmation of the Federal Reserve’s newly dovish policy stance means that US equities should continue to do well through 2019. Other big winners in this environment may be equities in northeast Asian emerging markets that do not rely on Chinese commodity demand.

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    Beyond The Yield Curve Inversion

    The current yield curve inversion and softness in growth data are curious developments, given that the four prices that matter most for the global economy—long bond yields, corporate credit spreads, the oil price, and the value of the US dollar—are all relatively favorable. Louis and Charles weigh five different explanations for what may be going on—from bullish to highly bearish—and examine the investment implications.

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    A Week Is A Long Time

    Harold Wilson, the former British prime minister’s, quip that “a week is a long time in politics” has become an over-used cliche. Still, in the last week, there has been good reason to dust it off.

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    Video: Europe's Response To China

    Europe has an ambivalent relationship with China that is increasingly under scrutiny. The European Commission recently labelled China a “systemic rival” and France and Germany want to create corporate champions to compete against Chinese state owned enterprises. Europe, however, is not singing from the same hymn sheet.

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