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    Gavekal Research

    Trump's Next Trade Target

    Just when the risk from trade politics seemed to be dying down, it’s getting complicated again. Trade talks between the United States and China are in full swing, but just as important are imminent negotiations between the US and the European Union, which are clouded by the US threat to impose tariffs on cars and car parts.

    0
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    Gavekal Research

    A Good News Story From The US

    As the record government shutdown denies Americans vital services and federal workers paychecks, the US has hardly been putting its best foot forward. While we don't expect this political impasse to change the growth trajectory, it does weigh on the market mood. Against such a dour backdrop, we think a good news story from the US economy can be easily missed.

    0
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    Gavekal Research

    The Big Questions For 2019

    The last quarter of 2018 proved to be something of a horror show for most investors and despite this year starting with a firmer tone, the investment landscape looks to have changed in a fairly profound way. In this report, Louis considers the major shifts in the investment environment and asks whether these conditions will persist through 2019.

    3
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    Gavekal Research

    Strategy Monthly: The Hope-Vs-Despair Smackdown Of 2019

    The massive sell-off in December left global equities on the precipice of a real bear market. Hope and despair are finely poised, but we find a bit more reason for hope. The US and China will both slow, but the US should avoid recession and Chinese growth should stay above 6%. Political and trade-war risk is lower, and liquidity pressures will ease. US equities and EM assets, especially local-currency bonds, both promise positive returns.

    0
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    Gavekal Research

    This Century's Suez Crisis

    China’s “Belt and Road” initiative is a clear bid by Beijing to challenge the incumbent imperial power: the US. And in an age when the highest-value commodities are not physical goods, but the binary digits zipping around the world at the speed of light, the battleground of this struggle for dominance will be telecommunication networks.

    7
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    Gavekal Research

    Rollover In The US, Not Recession

    This week’s revenue forecast downgrades from Apple and Delta Air Lines and Thursday’s steep dive in the ISM manufacturing PMI only appeared to confirm what market participants already knew: US growth is rolling over. Yet despite the recent sell-off in equities and the further flattening of the US yield curve, we see no recession on the horizon.

    0
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    Gavekal Dragonomics

    China And The US Still Hold The Keys To Markets' Fate

    In 2018 liquidity tightening in the US and China combined with trade war fears to make a miserable year for markets. In 2019 the same forces will be at work but the outcomes may differ. The key questions are: can the US and China work out a trade deal? How bad is the Chinese slowdown and how will Beijing respond? And how much will the Fed tighten?

    4
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    Gavekal Research

    The Market Weighing-Machine

    If there is one useful conclusion for investors from the crazy year that has just ended, maybe it is this: as they say in Hollywood, “Nobody knows anything.” The equity market predicted a boom while the bond market predicted recession, and then reversed positions. The consolation for investors should be that the market is a voting machine in the short term, but a weighing machine in the long term.

    2
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    Gavekal Research

    A Future For Value Investing

    Financial theory teaches that, in order to determine the price of an asset, we should take its foreseeable future cash-flows, discount them by a risk-free rate to which we can add a risk premium, and then beyond these cash-flows ascribe a “residual value” to the business. So it’s an easy game—we only need to determine four things: the future cash-flows, the direction of the risk-free rate, the level of the risk premium, and the residual value....

    1
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    Gavekal Research

    A Sober End To The Year

    For investors around the world, 2018 proved to be “challenging”. Yet to Gavekal’s clients, hopefully the year’s difficulties did not come as a surprise. Just over 12 months ago, early in December 2017, I published a paper entitled From A Ferrari To A Jeep advising investors to reduce the volatility of their portfolios.

    2
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    Gavekal Research

    More Half Full Than Half Empty

    Despite dovish comments from the Federal Reserve about the future trajectory of interest rates, US equities fell further on Wednesday. The S&P 500 has now fallen -14% since early October. Meanwhile, 10-year treasury prices have risen almost 5%. Momentum traders will therefore find good reason to shun equities and add exposure to long-dated treasuries. We suggest doing the opposite.

    0
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    Gavekal Research

    Getting Out Of The Liquidity Squeeze

    With the Trump-Xi summit, compromise between Rome and Brussels, and the oil price down, all the ingredients should have been in the mix for a Santa Claus rally. Instead it's been an ugly few weeks in the markets, which strongly suggests no let up yet in this year's liquidity squeeze. In this detailed report, Louis looks back at recent history to determine what forces might bring the squeeze to an end next year, and therefore what asset...

    0
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    Gavekal Research

    A New Risk-Reward Equation In EMs

    US markets have come back to earth with a bump on a reassessment of risk and growth prospects. As a result, investors are betting on a less hawkish Federal Reserve and a weaker US dollar, both of which are a boon to hard-pressed emerging markets. The question is: do investors gain more from a more favorable US dollar liquidity environment than they lose from a growth picture clouded by a slowing China and unresolved trade tensions?

    4
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    Gavekal Research

    Our 2018 Holiday Reading List

    “Books,” wrote Anthony Powell, “do furnish a room.” As author of the million-word, 12-volume A Dance To The Music of Time, Powell was something of an authority on the subject. But it is unlikely even his library was as eclectically furnished as Gavekal’s. If anything, our 2018 holiday reading list is even more varied than those of recent years. Sure, we’ve read and reviewed the economic and financial heavyweights: Barry Eichengreen on currencies...

    1
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

    0
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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

    6
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    Gavekal Research

    Opportunities Beyond The Death Cross

    November’s payroll report gave investors in US equities reason to cheer on Friday as it suggested reduced inflationary pressure, yet they chose to focus on an escalating row over the fate of a top Chinese telecom executive that is intensifying trade tensions with China. A -2.3% fall in the S&P 500 had the technically-inclined scrambling to glean meaning from a “death cross” as the 50-day moving average fell below the 200-day level. We remain...

    2
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    Gavekal Research

    What Huawei To Go

    The arrest last Saturday in Vancouver airport of the CFO of Chinese telecoms giant Huawei at the request of US prosecutors will have major consequences for investors beyond the short term market volatility it contributed to this week. Reaching a permanent US-China agreement is now much more complicated, and the arrest shows the US can use more than tariffs against China.

    0
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    Gavekal Research

    Strategy Monthly: Three Questions For The Year Ahead

    This has been a miserable year across most asset classes, with markets roiled by tighter US dollar liquidity. Looking into 2019, Louis sees the investment environment being dictated by whether the US dollar liquidity situation really is easing, the overall US policy and the possibility for the “Chimerica” relationship to rupture.

    0
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    Gavekal Research

    The Evolving Trade War

    There is little doubt that the US president is surrounded by advisers who see China as a genuine threat to the long term economic health and geopolitical strength of the United States. But, it is likely that Donald Trump’s most immediate concerns are more down to earth. Specifically, in order to be re-elected in 2020, Trump needs once again to carry states such as Ohio, Michigan and Wisconsin. And it is unlikely that he will be able to win the...

    5
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    Gavekal Research

    Don’t Sweat About The Yield Curve

    At least as interesting as the 1.1% rise in US equities on Monday, following the weekend’s news of a three-month US-China tariff truce, was the day’s decline in long-dated US treasury yields and the concomitant flattening of the US yield curve. But was this bond market action good news or bad for investors?

    5
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    Gavekal Research

    The Next Target Of Trump’s Firepower

    In today’s Daily, Arthur Kroeber offered his analysis of the weekend’s Trump-Xi summit in Buenos Aires. In this short report, Louis takes a slightly different tack, reviewing the series of tumultuous events in recent weeks. His conclusion is that few investors’ portfolios are well positioned for the probable outcome.

    0
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    Gavekal Research

    The Durability Of The Trump-Xi Rally

    The Trump-Xi showdown at the G-20 has produced a truce, and Asian equity markets rallied in response. But Arthur is skeptical of the durability of the rally, as the structural nature of the US-China rivalry was not addressed by the deal, and hardliners in Washington are likely to keep ratcheting up the pressure on Beijing.

    0
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    Gavekal Research

    Christmas Comes Early

    The most cherished gifts often come in small packets, and investors duly cheered just two small words yesterday by the Federal Reserve chairman. In a speech, Jerome Powell said policy rates were “just below” the neutral level. That was a big change from a month earlier when he said they were “a long way from” the not-too-hot-not-too-cold level. This suggests that the pace of interest rate hikes may lessen, while on the same day data was released...

    0
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    Gavekal Research

    What If Oil Stays At US$50?

    Since early October, oil prices have plunged more than -30%, while the US equity benchmark is down -8%. You don’t have to be Inspector Clouseau to wonder if these moves are related. Since this oil sell-off has unfolded at a time when US economic growth is slowing, my bet is for a negative short-term effect, but a medium term outlook that is fairly cheery.

    0
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    Gavekal Research

    Positioning Ahead Of The G20

    Over the summer, the US administration’s aggressive trade stance towards China helped trigger sell-offs in most non-US equity markets, even as the US market continued to make new highs. But, in the past six weeks, the massive outperformance of US equities has stalled. Louis asks where it makes sense for investors to hide until the outcome of the G20 meeting is clear.

    1
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    Gavekal Research

    The Failure Of The Bond Cushion

    If you had been told on September 20, when the US stock market made its high, that two months later the MSCI US would be entering correction territory, down almost -10%, and that oil would be in a full-blown bear market, with Brent down almost -30%, you would probably have concluded that long-dated US bonds would be the place to be. The US dollar delivered; the DXY is up 2.7%. But long bonds did not; over the two-month period, the TLT ETF has...

    4
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    Gavekal Research

    The Conflict Between Liquidity And Growth

    In recent days my colleagues Anatole Kaletsky and Arthur Kroeber have debated the strained relationship between China and the US, and what it may mean for emerging markets. I agree that this standoff matters greatly for the world, but I’m not convinced it’s the main issue driving markets and therefore a resolution—or not—at the G20 next weekend may end up as a damp squib for investors. A range of issues have me concerned, from widening credit...

    6
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    Gavekal Research

    Don't Bet On Détente

    Yesterday my colleague Anatole Kaletsky explained his optimism ahead of the meeting between presidents Donald Trump and Xi Jinping in Buenos Aires later this month. He thinks the chances of at least a tariff cease-fire are pretty good, and investors should buy Chinese and emerging-market assets. I remain skeptical.

    2
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    Gavekal Research

    The Drag Of US Housing

    Despite the overall US growth outlook remaining decent, markets have taken on an ugly tone, with US equities having given back their 2018 gains and credit spreads gapping wider. Adding to grim tidings, yesterday saw weak housing data released, which is a worry as the sector often leads the broader US economy.

    16
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    Gavekal Research

    Reasons To Believe In Détente

    Should we take seriously President Donald Trump’s prediction of “a deal” at his summit with President Xi Jinping on November 30? Nobody can be sure—not even Trump himself—since the outcome may depend on whether Peter Navarro or Steven Mnuchin manages to catch his attention before Air Force One lands in Buenos Aires next week. There are, however, four reasons which I have discussed here before to justify continuing to increase long positions in...

    0
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    Gavekal Research

    Countering The Belt And Road

    In its escalating rivalry with China, the US has a new target: the Belt and Road Initiative. But both the US and Europe are struggling to redefine the way they win friends and influence people with development finance. Tom argues that the somewhat quieter middle way being pursued by Japan is delivering it both influence and profits.

    3
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    Gavekal Research

    The Uphill Struggle For Equities

    Last week saw the MSCI World turn in its sixth negative week in eight, while the only sector to record gains over the last two months has been utilities; cyclical sectors like materials, industrials, IT, energy and consumer discretionary have mostly entered correction territory. That begs the question: Is this a dip to buy, or will the environment remain harsh?

    5
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    Gavekal Research

    GE Is More Fish Than Fowl

    There is suddenly a flood of commentary speculating that General Electric is a canary in the proverbial coal mine for the US corporate credit market. With investors focused on the troubled conglomerate’s underfunded pension scheme and ailing power business, GE has seen its credit rating downgraded and become a focal point for broader fears that US corporates have taken on too much debt and bought back too much equity. Without taking a view on GE...

    5
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    Gavekal Research

    Credit Availability As An Asset Allocation Tool

    US analyst KX bases his equity calls largely on a Wicksellian model that compares the cost of capital with the returns earned by the corporate sector. We remain comfortable that this “spread” remains favorable for US firms, and so recommend a roughly 70% allocation to equities. Yet even if credit is reasonably priced, there is the question of its availability. For this reason, we watch lending standard measures closely, and just got a benign...

    2
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    Gavekal Research

    Video: The Battle For Chinese Tech

    China imports more semiconductors than it does crude oil, highlighting its dependence on foreign technology and know-how. The US recognizes this weakness and is intent on squeezing China’s tech sector before it is able to produce the most advanced chips at home and in scale. For this reason, tech sits at the heart of the US-China tensions.

    0
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    Gavekal Research

    This Really May Be The Start Of A Year-End Rally

    Although this week started with a violent sell-off, Anatole argues that the stars are aligned for a year-end equity rally, especially in emerging markets. This is because EMs have sold off not on US interest rate worries but a combination of rising oil prices and heightened political risk. Those headwinds now seem to be abating and beaten up markets could surprise before year-end.

    6
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    Gavekal Research

    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

    0
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    Gavekal Research

    Hong Kong Seminar — November 2018

    At Gavekal’s seminar in Hong Kong this week, Yanmei Xie, Arthur Kroeber and Will Denyer presented their latest views on China's economy, trade war, and how to approach asset allocation in the US.

    0
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    Gavekal Research

    A More Timely Wicksellian Tool

    According to my Wicksellian analysis of the US, when the market rate of interest moves above the natural rate (essentially the structural growth rate of corporate profits), then a recession is coming, and investors should exit US equities and load up on treasuries. I now propose an updated and more timely proxy for the "Wicksellian market rate".

    3
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    Gavekal Research

    What's Changed In The Oil Market

    “Sanctions are coming,” proclaimed Donald Trump in a tweet last week, three days before the imposition of the latest US embargo on Iranian oil exports. The oil market was not impressed. Since late September, when crude hit four-year highs, the Brent price has slumped -16.7% from US$86.29 to US$71.91, with WTI falling -19.1%.

    0
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    Gavekal Research

    Gridlock is Good

    The Democrats have wrested back control of the US House of Representatives, while Republicans have expanded their Senate majority. Hence, the US’s bicameral legislature is set for two years of gridlock. This was the most benign result possible from this midterm election. While largely expected, confirmation is probably positive for risk assets.

    0
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    Gavekal Research

    Handicapping The Trump-Xi Summit

    As the US prepares to wrap up its Congressional election season, Donald Trump’s administration is sending mixed signals on its China policy. The outcome of the upcoming G-20 meeting between Donald Trump and Xi Jinping is now basically a coin-flip. Either way, argues Arthur, US pressure on China’s technology sector is likely to intensify.

    1
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    Gavekal Research

    Hot, But Not Too Hot

    It remains unclear if the US is moderating its approach to trade war, but there are other factors to keep equity investors on edge. Friday’s US payroll report showed average hourly earnings rising to a cycle-high of 3.1%, confirming the picture of a tight labor market. Hence, with 10-year treasury yields just below their recent peak of 3.23%, the question is whether the US economy can weather a higher cost of capital. For now, I think the answer...

    0
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    Gavekal Research

    Strategy Monthly: Yes, We're Still In A Bull Market

    Anatole and Will believe that continued exposure to US equities makes sense, since underlying corporate profitability remains strong. So long as one avoids the most rate-sensitive sectors, US portfolios should be 70-75% in stocks, with the rest mainly in cash. Moreover, they argue that the period of EM underperformance is now done, and emerging markets are poised for a significant rally.

    0
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    Gavekal Research

    Has Oil Set Its High For This Cycle?

    With the price of WTI crude oil now back below its 200-day moving average, Louis puts himself in the shoes of Turkish president Recep Tayyip Erdogan and imagines what sort of leverage he could exert over Donald Trump, what this means for the enforcement of sanctions against Iran, and what that implies for the oil price going forward.

    4
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    Gavekal Research

    First Blood In The Long Tech War

    Washington has opened a new front in the US-China economic cold war by slapping controls on exports of all “commodities, software and technology” to Chinese chipmaker Fujian Jinhua Integrated Circuit. The breath of the national security justification cited for this action escalates the US-China confrontation over technology to a new level.

    5
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    Gavekal Research

    Beijing Seminar — October 2018

    At Gavekal’s seminar in Beijing last week, Louis-Vincent Gave, Udith Sikand and Chen Long presented their latest views on the turn in global markets, the prospects for emerging markets in the quarters ahead, and on China's policy priorities as it faces down the US in a prolonged rivalry.

    0
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    Gavekal Research

    US Macro And The Market

    Coming after another bruising week in the market, which saw the S&P 500 flirting with correction territory, down -9% from its late-September high, Friday’s third quarter US GDP report is heartening. Although 3Q’s quarter-on-quarter annualized growth rate of 3.5% was slower than the 4.2% rate recorded in 2Q, it was still strong relative to the expected 3.3% and compared with the US economy’s structural growth rate. While US growth will...

    0
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    Gavekal Research

    Buy The Dip

    “Things are fine now, but they are going to get worse.” This is what I hear from commentators on US growth, from corporate managers talking about profit margins, and from Chinese exporters discussing the impact of the trade war. The same could be said of US financial conditions—they are fine now, but as interest rates rise they will deteriorate.

    3
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    Gavekal Research

    Bolsonaro’s Brazil

    Barring an extraordinary twist, Brazilians will on Sunday elect as president a right-wing tough guy who hints at being a closet economic liberal. He will inherit an economy that is enjoying a cyclical upturn and a reform initiative to social security that is far enough advanced that it can’t reasonably be reversed. For this reason, expect a near term upside for asset values.

    0
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    Gavekal Research

    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

    5
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    Gavekal Research

    The Odd Behavior Of Gold

    Barbarous relic it may be, but I have long looked on gold as a proxy for emerging markets. The logic is that when the emerging market consumer—whether in India, China, Indonesia, Africa or the Middle East—finds himself at the end of the month with extra money in his pocket, he often tends to put that money into gold coins or jewelry. This makes sense if you live in a country with capital controls, or an untrustworthy financial system, under-...

    0
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    Gavekal Research

    Video: Why China Is Unlikely To Fold

    To many outside observers, China’s economy looks like a house of cards that is vulnerable to collapse should the US push a little harder in its trade actions. Louis is not convinced that this market-focused analysis of China’s situation properly reflects its vulnerability. He thinks the leadership is dug in for a long struggle against Washington.

    0
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    Gavekal Research

    The Consequences Of Khashoggi

    In 1939, Franklin Roosevelt famously dismissed reservations about Nicaragua’s brutal dictator Anastazio Somoza with the comment “he may be a sonofabitch, but he’s our sonofabitch.” In the world of foreign policy realpolitik, to a large degree FDR’s doctrine still holds true. Witness, for example, the verbal contortions that US president Donald Trump and secretary of state Mike Pompeo have been forced to pull off in recent days in order to...

    6
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    Gavekal Research

    Equities In The Late Cycle (Revisited)

    The stock market volatility of the last week, triggered by fears over rising bond yields, emphasizes how participants now accept that the US economy is in the late phase of its cycle. KX argues this is not a reason to flee US equities, but it does demand a more discerning approach.

    0
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    Gavekal Research

    Six Impossible Things Before Breakfast

    Louis investigates six of the most incongruous sets of relationships that have held sway this year and offers alternative explanations. In particular, he focuses on the strange case of China’s response to US trade hostility and argues that understanding Beijing’s game plan may hold the key to whether the long US bull market in equities can stay the course.

    4
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    Gavekal Research

    Time To Rebalance Into Equities

    The S&P 500 is down almost -7% in six days, the biggest drawdown since the -10% decline in the first quarter. It is now below its 200-day moving average, for the first time since April 2nd. Will it bounce back, or is a US equity bear market now upon us? I would bet on the former, but not too aggressively.

    0
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    Gavekal Research

    Bonds' Failure To Rally

    Given all the bad news for markets this year, one would be forgiven for thinking that US treasuries and German bunds would have been a good investment. But even as emerging markets have sold off and the US dollar has risen against almost every emerging market currency out there, US treasuries (and to a lesser extent bunds) have been an absolute dog of an investment.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call October 2018

    In this month’s Research Conference Call Louis-Vincent Gave examined the present bad tidings from markets and asked whether the global bull market faces a denouement. Anatole Kaletsky argued that this sell-off will likely prove to be a temporary setback for emerging markets and that the global bull market may have further to run. However, he warned that the outcome will depend heavily on where the oil price goes from here.

    0
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    Gavekal Research

    Still Not Interested In US Bonds

    Wednesday saw the second biggest sell-off in US bonds since November 10, 2016, immediately after the US presidential election. The 10-year treasury yield jumped 11bp to 3.16%, its highest since 2011. However, investors should be wary of treating this as a buying opportunity, for a number of reasons.

    4
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    Gavekal Research

    Strategy Monthly: Are We Still In A Bull Market?

    At the start of the year, markets seemed poised for a rotation out of US equities into non-US assets. In fact, US equities and cash are the only assets to have delivered positive returns this year. Louis examines the reasons why and concludes that portfolio managers should stay defensive, while looking for buying opportunities in oversold emerging markets, and in European assets in non-euro countries such as the UK, Sweden and Switzerland.

    0
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    Gavekal Research

    New Nafta Clears The Way For A China Fight

    The good news is that after months of posturing, President Donald Trump’s administration has cut a deal for a new Nafta, following July's hasty agreement with the EU to defer car tariffs. Trade war on all fronts may now be off the agenda, but conflict with China over trade, investment, technology and geopolitical dominance will only escalate.

    2
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    Gavekal Research

    The Big Lesson From Argentina

    One of the reasons this summer’s sell-off in Argentinian debt was so vicious was that few international banks these days are willing to make markets in such “exotic” bonds, and even fewer are prepared to hold a substantial inventory. As a result, when foreign investors rushed for the exit, there was no market. But as Louis explains in this paper, the problem is hardly unique to Argentina. Markets a lot closer to home could face similar trouble.

    8
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    Gavekal Research

    The Art Of (Trade) War

    Donald Trump’s trade war against China demonstrates that the Washington consensus is dead and buried. This suggests that the world will split into three monetary zones, each with its own anchor currency and risk-free asset class. As a result, the close relationship between the renminbi and the US dollar is a thing of the past and China’s vast current account surplus will become unsustainable. Charles examines what all this means for investment...

    2
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    Gavekal Research

    Rate Rises And The US Stock Market

    For the first time in the long post-2008 cycle, the US has a positive real interest rate. After Wednesday’s 25bp hike in US rates, at just short of 2.25%, the effective Fed funds rate will now exceed the Federal Reserve’s favored core PCE measure of inflation, which at the end of July stood at 2%. In theory, that could change later Thursday with the release of August PCE data. But with the dot plot suggesting another rate hike this year and...

    0
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    Gavekal Research

    Does Beijing Really Manage The RMB Against A Basket?

    Possibly the only easy thing about studying China is that Chinese policymakers tend to “say what they do and do what they say”. Take the Chinese exchange rate as an example. From 1998 to 2005, the renminbi’s exchange rate was fixed at CNY8.28 to the US dollar. Then, in 2005, investors were told that the renminbi would be allowed to appreciate gradually and with a controlled daily volatility. When the financial crisis hit, the Chinese exchange...

    4
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    Back To A Three-Figure Oil Price

    Oil broke higher on Monday, with the price of Brent decisively breaching US$80/bbl, a level it had repeatedly tested since early May, when the US administration announced it would reimpose sanctions on Iranian exports. The immediate trigger for the break-out was the decision at the weekend by the Opec cartel plus Russia not to increase their formal output target in the near term. At first glance, the market response might appear an over-reaction...

    5
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    Gavekal Research

    The Dissolution Of Chimerica

    The economies of the US and China are by far the world’s largest. Such has been their importance and dependence that the composite phrase “Chimerica” emerged to describe both the integration of supply chains and corporate profitability as well as cultural connections. Today, the single most important question may be: is the foundation on which this Chimerica pillar rested now crumbling?

    0
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    Gavekal Research

    The Quandary Of Rising Yields

    Imagine that you had been told at the start of this year that equity markets in the likes of Argentina, Turkey and South Africa would fall by as much as half, that the renminbi would slide by -10% against the US dollar and that Chinese and Hong Kong stocks would be back in a bear market. You would probably have assumed that long-dated treasuries would make a great investment. Yet, here we are, with 30-year treasury yields up about 50bp this year...

    6
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    Gavekal Research

    The Message From US Housing Construction

    Wednesday saw a soft US housing data release for August, pointing to a coming weakening in residential construction. With the Fed raising rates and 10-year treasury yields well above 3%, equity investors may sniff late-cycle decay. KX shares such concerns, but advises investors to hold their noses for a while longer.

    0
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    Gavekal Research

    Digging In For A War Of Attrition

    Donald Trump’s administration has upped the ante in its trade war with China, imposing tariffs on an additional US$200bn of Chinese imports. The tariffs will take effect on September 24 at a rate of 10%, rising to 25% at the beginning of 2019 unless some kind of a deal can be worked out with Beijing. The chances of a deal are vanishingly small.

    3
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    Gavekal Research

    Towards US Goods Price Deflation

    Emerging economies have spent the last three or four months squirming under the weight of a strong dollar. The effect of such currency strength is now showing up in the US itself, with the price of both consumer goods and imports softening. This deflationary pressure may end up impacting real interest rates, and hence the relative attractiveness of US bonds and equities.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call September 2018

    In this month’s research call, Will Denyer explains why he is still recommending a 75% equity exposure in a dedicated US portfolio. His call is based on an asset allocation method with three key components, namely, Wicksellian spreads, relative valuation tools, and a duration tool which shows how to divide a fixed income portfolio between bonds and cash.

    0
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    Gavekal Research

    The Near Term Direction Of The US Dollar

    The US dollar is trading bang on its 50-day moving average, and roughly where it was a year ago. Hence, it is tempting to conclude that it has not done much over the past 12 months. That would, of course, be wrong for the post-April rebound in the dollar explains the summer meltdown in emerging markets. And every investor today stands ready to increase or decrease risk in their portfolios depending on the next tick in the US dollar.

    17
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    Gavekal Research

    Why The US Cannot Win A Trade War

    The US has made a fundamental policy mistake in pursuing a trade war against China. A Keynesian macroeconomic analysis shows that the US will likely be worst affected by the conflict, while China should escape unscathed and several other emerging markets could be clear gainers. This sell-off may be an ideal opportunity to "buy the dip" in EMs

    7
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    Gavekal Research

    The Exit From A Liquidity Squeeze

    If it walks like a duck and quacks like a duck, then it probably is a duck. By the same token, if central bank reserves are shrinking, the US dollar is rising, and emerging market currencies are cratering, we probably face a liquidity squeeze. None of this should be surprising, as the drains on US dollar liquidity have come from all directions this year.

    7
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    Gavekal Research

    The Signaling From US Autos

    Even as the US economy fires up on tax cuts and government spending, interest rate-sensitive sectors show signs of rolling over. First it was housing, and now auto sales have slid to the lower end of their range after steadily softening this year. Over the next year, the question is less whether autos can boost growth, as how much they will detract from it. The fact that the Trump administration is still considering significant tariffs on...

    2
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    On Getting It Wrong

    Louis went into 2018 with a set of assumptions about how growth and markets around the world would play out. It hasn’t exactly worked out as expected and in this mea culpa he seeks to understand how he got it wrong and what comes next. He concludes that a key driver of the changed investment environment was not so much the strength of the US dollar but China’s decision to allow a renminbi devaluation.

    10
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    Gavekal Research

    Strategy Monthly: A Simple Guide To US Asset Allocation

    We synthesize four years of work on asset allocation and present a model portfolio built around analysis of the cost of and return on capital; the real rate of return on equities, bonds and cash; and the ideal duration of fixed-income holdings. Today we recommend that US portfolios hold 75% in equities, 25% in cash, and shun bonds.

    0
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    Gavekal Research

    Video: An Unexpected Investment Environment

    With the exception of US equities, about the only other way most investors could have achieved a positive return this year was to have held US dollar cash. That has made for a very strange investment environment that few people saw coming. In this video interview, Louis reviews the experience of the last eight months and outlines potential scenarios for the remainder of 2018.

    0
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    Gavekal Research

    Tail Risks That Worry Me

    Yesterday I made the case that emerging markets should be superior performers in a global bull market, which I characterized as the most hated in history. What that analysis left out was the relative prospects of the other big blocks in the global equity universe; namely, Europe and Japan. My core point yesterday was that trade wars do more harm to economies that close their markets than those countries which supply them, and on this score...

    1
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    Gavekal Research

    Misunderstanding Today’s EMs

    Suppose that, like me, you think the global equity bull market has a few more years to run and hence the sell-off which culminated with Turkish debt being downgraded two weeks ago was a merely a correction. Where are the best opportunities to “buy the dip”? The answer depends on whether you also share my view about the underlying causes of this year’s market setbacks.

    4
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    The State Of The US Consumer

    Despite cyclical headwinds and the threat of a welfare-sapping trade war, the US consumer has stayed fairly upbeat. The worry has been that rising tariffs change that situation and hit growth. Hence, news of a trade deal between the US and Mexico is to be welcomed (Justin Trudeau may feel differently). Still, at the end of the day the effect will still be to push up costs that someone must cover. For this reason, as the economic cycle matures...

    0
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    Last Place In The FX Beauty Contest

    In mid-August, the US dollar hit a 12-month high against developed country currencies, and a multi-year high against emerging market currencies. Two weeks on, the burning question for investors is whether those highs represent a turning point, whether the dollar strength that prevailed from mid-April to mid-August has now played out, and whether the US currency is about to resume the softening trend that predominated through 2017. As always,...

    8
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    Gavekal Research

    Misery Loves Company

    These days you are about as likely to encounter a happy active manager as a flying unicorn. Between the massive outperformance of a few, highly priced, stocks (Amazon, Netflix, Microsoft etc.), the continued compression of fees, the increased burden of regulations, front-running by algos and dark-pools, the fact that fewer and fewer marketmakers actually make markets... pick any topic, and the chances are it will be a sore point.

    2
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    Gavekal Research

    Teflon Don Or Teflon Dow?

    US equities have undeniably been the place to be in the post-2008 decade. As that divergence has gone into hyper-drive in the last three months, one might have expected events roiling the Trump presidency this week to spark a correction. Yet yesterday saw US equities end broadly flat for the day. So is this a case of Teflon Don or Teflon Dow?

    6
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    Gavekal Research

    The Most Hated Bull Market In History

    Anatole reviews the state of the US bull market and concludes that it still has legs. He does, however, warn that portfolio strategies which worked well during the disinflationary era since the mid-1980s are unlikely to play well in this bull market’s later stage.

    2
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    Gavekal Dragonomics

    Clogging China’s Cash Pipeline To Silicon Valley

    In the past years, billions of dollars of Chinese venture capital have poured into US tech firms. This is alarming to the US Defense Department, which believes these investments could lead to a flow of critical technology back to China, eroding the American advantage in fields such as artificial intelligence, robotics, and autonomous vehicles.

    0
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    Sound, Fury, Fear And Markets

    Regardless of political affiliation, there seems to be a consensus that yesterday was a bad day for the Trump administration. It is almost impossible to predict the chain of events that will unfold in the coming days and weeks, but the political fallout from Paul Manafort’s fraud conviction and Michael Cohen’s guilty plea will be unabashedly ugly. Whether this latest twist in the drama gripping Washington has broader ramifications for markets is...

    6
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    Gavekal Research

    Trouble With Monopsonies II: Joan Robinson Versus David Ricardo

    Among the discussion topics at this week’s Jackson Hole meeting of world central bankers will be whether the market power of giant corporations is so great it allows them to hold down workers’ wages at the global level. Charles has no doubt, arguing in this paper that the development of platform companies into labor monopsonies accounts for what has been misunderstood as “secular stagnation”.

    5
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    Gavekal Research

    A Step Back From War On All Fronts

    Events of the past few weeks have lowered the risk of the worst-case scenario of a trade-war-on-all-fronts that Arthur laid out earlier this summer. But although officials in both the US and China are eyeing a truce, no bilateral deal can be nailed down until the two countries’ presidents meet in November, after the US midterm elections. That leaves time for the Trump administration’s trade hawks to regain the upper hand.

    6
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    A Benign View Of US Inflation

    With US inflation now running above the Federal Reserve’s long term target rate, and the US labor market almost as tight as at any time since the turn of the century, the question for investors is not whether inflation will continue to push higher, but how fast it will rise. The distinction is important. Headline CPI inflation came in at a six-and-a-half-year high of 2.9% in July. And in June the overall and core PCE measures that the Fed...

    0
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    Gavekal Research

    The Meaning Of A Flat Yield Curve

    Every US recession since the mid-1950s has been preceded by a flat or inverted yield curve. The fact that the curve is now fairly pancake-like in form and the Federal Reserve is ratcheting up interest rates has investors on edge. On balance, I conclude that the time is right to get out of US banks, but not to be rushing the exits of the US equity market.

    4
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    Gavekal Research

    How To Assess The Stresses On EMs

    Emerging market equities are officially in a bear market, with the MSCI EM index down -20% from its January peak. EM-related commodities are also hurting, notably copper which has fallen -18% since June. The central question now is whether one should steer clear of all EM assets, because the rout is general and likely to get worse; or if one should keep an eye out for buying opportunities here and there. With some trepidation, we advise the...

    4
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    Gavekal Research

    Turkey Is A Big Fish, But No Whale

    The meltdown unfolding in Turkey is not a surprise (see A Turkish Vortex). However, it does raise the question of where we go from here, and whether the Turkish crisis is a symptom of a change in the investment environment.

    2
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    Gavekal Research

    I Didn’t See It Coming

    As a rules-based investor, I got jumpy late last year when key indicators like my velocity indicator began to flash red. In January, I advised investors to reduce portfolio volatility by holding yen cash, short-dated treasuries and even Chinese bonds. Through to about April, this positioning worked fine as markets had a rocky period. Since April, however, the picture has changed in ways I did not expect.

    7
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    Gavekal Research

    More Underperformance Ahead For US Bank Shares

    It’s been a tough few months for investors in US bank shares. Since late February banks have underperformed the broader S&P 500 index, in large part on fears that the flattening trend in the US yield curve will compress bank net interest margins and depress earnings. Yet viewed on a longer time horizon, things look different. From the fourth quarter of 2015 until the first quarter of this year (the latest data point), bank net interest...

    0
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    Gavekal Research

    The Biggest Question Of The Day

    Should we take Donald Trump literally when he says he wants to eliminate the US trade deficit? In this paper, Louis examines the different ways the US might hope to cut its trade deficit, including its bilateral deficit with China, and explores why the outlook for risk assets depends enormously on the US administration's real aims in launching its international trade war.

    7
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    Gavekal Research

    No Good Choices For China

    China wants to show that it will stand up to US threats to escalate the trade war. Yet Yanmei argues that it has few attractive policy choices. It can neither back down from the confrontation nor retaliate enough to deter the US. With little prospect of a negotiated solution in the near term, Beijing is focused on stabilizing the domestic economy.

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