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    Gavekal Research

    The QT Endgame

    A voting member of the FOMC said yesterday that the Federal Reserve should quit shrinking its balance sheet later this year. This was the clearest indication yet that the US central bank will end quantitative tightening one or two years sooner than the 2020-2021 estimate put forward by Chairman Jay Powell last July. I suspect Brainard will get her wish.

    2
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    Gavekal Research

    Fear Not The ‘Earnings Recession’

    US earnings growth is clearly slowing. As global growth ebbs and the effect of last year’s US tax cut wears off, 1Q19 will be worse according to US analysts who in aggregate are predicting EPS to fall -1.4%. Some commentators are even declaring an “earnings recession.” Time to take profits for the year and run to the hills? I’d say “no”.

    5
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    Gavekal Dragonomics

    The Long Arm Of US Export Controls

    While investors eye the progress of US-China talks to avert tariff hikes, the US is mobilizing on another front. In this piece, Dan explains how the US is preparing for more aggressive use of export controls to disentangle the US and Chinese tech sectors. This can certainly hurt Chinese firms, but will also affect US and other tech companies.

    2
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    Gavekal Research

    Three Separate Battlefronts In The Unfolding Cold War

    As the clash between China and the US intensifies, Louis notes the primacy that Mao Zedong’s guerrilla tactics would have had in forming the current Chinese leadership’s political consciousness and setting a template for the way they handle conflict. As such, he sees the struggle between the two superpowers playing out on three distinct fronts.

    19
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    Gavekal Research

    The Global Car Industry Catches Chinese Flu

    If the auto industry is a bellwether of global economic health, then much of the world is looking sick. The second half of 2018 was painful for carmakers in all the major auto markets, and 2019 is shaping up to be as bad. Is this just a passing malady that carmakers will soon shrug off, or a chronic condition they will have to manage for years to come?

    3
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    Gavekal Research

    A Looser Fed And Tighter Banks

    News flow from the US and beyond over recent months has pointed to an easing of financial conditions. A notable exception has, however, emerged: US commercial banks have stopped loosening lending standards and have started to tighten them—just a touch. I remain constructive, but have gotten more cautious about US risk assets.

    0
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    Gavekal Research

    Video: Conflicting Signals From The US Labor Market

    The US labor market is sending apparently contradictory signals. On one hand the unemployment rate ticked higher in January. On the other, job creation was much stronger than expected. Will looks behind the latest data points to examine the labor market’s underlying trends, and concludes they spell relatively bullish news for the US economy and risk assets over the coming months.

    0
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    Gavekal Research

    A Vital Portfolio Construction Lesson

    I am a rules-based investor, and over the years few financial relationships have been more useful to me in reading the economic cycle than the yield spread between long-dated US corporate bonds and 30-year US treasuries. Going back to the late 1970s, no US bear market has unfolded with key spread being below 200bp. It is now 210bp.

    2
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    Gavekal Research

    Fed To The Rescue

    It was no surprise on Wednesday that the US Federal Reserve promised to be “patient” about further interest hikes and flexible on the pace and extent of its balance sheet reduction. The Fed’s more dovish stance had been clearly signaled in a series of speeches ahead of yesterday’s policy meeting. As Fed chairman Jay Powell explained, with US inflation data subdued and other major economies slowing, it makes good sense for the Fed to take a “wait...

    0
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    Gavekal Research

    The Recession Of 2019: Revisited

    Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).

    4
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    Gavekal Research

    Don't Fear Corporate Leverage (Yet)

    With Brexit, the US-China trade war and a synchronous global slowdown, these are anxious times for investors. But apparently, all these concerns pale in comparison with worries about US corporate leverage. According to a BofAML survey this month, corporate indebtedness is the biggest single worry among fund managers. We beg to differ.

    17
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    Gavekal Research

    A Huawei-Scale Problem

    The charges that US prosecutors have now filed against telecom equipment supplier Huawei are similar to those thrown at two other Chinese tech firms last year. The eventual outcome is likely to be similar: the imposition of export controls that will threaten Huawei’s survival and force it to accede to a restrictive deal with the US government.

    0
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    Gavekal Research

    Favor Local Bonds Over EM Equities

    After a dismal year for emerging market assets in 2018, emerging markets have started 2019 on a positive note, with equities rising 6.5% and local currency bonds up 3% year-to-date. On Friday, Louis looked at shifts in the US dollar, long term US interest rates, credit spreads and the oil price, and concluded they favor emerging market assets through the rest of 2019. Broadly I agree, but I would take a slightly more nuanced stance. The shifts...

    0
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    Gavekal Research

    The Four Prices That Matter

    It is Gavekal’s longstanding mission to develop simple principles that investors can use to navigate complicated financial markets. In this vein, one of our core tenets is that four prices matter more than all others, and together these determine the level of global economic activity and of investor risk appetite. Let us see where they stand as we head deeper into 2019.

    12
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    Gavekal Research

    The Bull Case For US Housing

    As the US government shutdown drags on, US-China tariff talks stutter, the Chinese growth engine slows, global trade slumps and GDP forecasts get cut, the stream of macro-misery in recent days has seemed relentless. On Tuesday, the US National Association of Realtors added its voice to the dirge, reporting that sales volumes for existing homes fell -10% year-on-year to a three year low in December. With new home sales and construction equally...

    10
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    Gavekal Research

    Mexico 1, Brazil 0

    When Brazil met Mexico in last year’s football world cup, the Brazilian team walked away the victors by two goals to nil. In financial markets too, Brazil has lately been beating Mexico. In recent weeks each country has installed as its president a fiery populist—although they hail from different ends of the ideological spectrum. In Brazil, Jair Bolsonaro is an unabashed right-winger, while his Mexican counterpart Andrés Manuel López Obrador, or...

    8
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    Gavekal Research

    Video: Beyond The Government Shutdown

    As the US government shutdown threatens to enter its fifth week, Will looks back at previous shutdowns to weigh the likely impact on America’s economy and financial markets, against the backdrop of an aging economic cycle, flattening yield curve and tighter financial conditions.

    0
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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.

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