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    Gavekal Research

    What US Auto Tariffs Would Mean For Europe

    Last week’s public hearings in Washington heard a chorus of industry opposition to the US administration’s proposed import tariffs on cars and car parts. But in Europe at least, markets appear to be coming around to the view that the tariffs will go ahead regardless. After Friday’s fall, the auto and auto parts sub-index of the Stoxx 600 has slumped -15% since late May when the US Commerce Department announced its Section 232 investigation,...

    1
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    Gavekal Research

    Trump, And The US Dollar As The World's Reserve Currency

    For the 70 years since the launch of the Marshall Plan, the US dollar has reigned unchallenged as the world’s reserve currency. I have written extensively about the characteristics of the world monetary system that has grown up based on the US dollar. But I do not remember ever having written on the costs the US must bear to sustain what Jacques Rueff termed its “imperial privilege” as issuer of the global reserve currency.

    8
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    Gavekal Research

    The Yield Curve As A Recession Signal

    Every time since the 1960s that the US yield has inverted, a recession has followed within 18 months to two years. So it is no surprise that the recent flattening of the curve, which has seen the 10-2-year treasury yield spread fall to just 25bp, is attracting attention. Many observers say the flattening reflects market expectations of weaker aggregate demand ahead. Some argue that the flattening of the curve itself may cause a recession, by...

    0
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    Gavekal Research

    The Recession Of 2019

    Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of...

    17
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    Gavekal Research

    Still Caught In The Cycle

    The June US labor market report released on Friday appears to bear out Federal Reserve chairman Jay Powell’s view, set out in a speech last month, that “there is a lot to like about low unemployment”. Although the headline payrolls number grew by an unexpectedly strong 213,000 month-on-month, the unemployment rate actually ticked higher from 3.8% to 4%, as greater numbers entered, or reentered, the labor market.

    0
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    Gavekal Research

    A National Security Imperative

    Depending on commodity prices, in any given year China spends between US$250bn and US$400bn on imports of the “big five” commodities it needs to continue growing: oil, iron ore, coal, copper and soybeans. Before it can do that, it must first “earn” those US$250-400bn. Only then can it can turn around and buy the stuff the country needs to ensure its long-term growth.

    10
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    Gavekal Research

    Hard Yards For Emerging Markets

    Emerging markets have been hit by the combined effect of a stronger US dollar, tighter international liquidity and rising trade tensions, causing their currencies to fall more in the last few months than in the 2013 “taper tantrum”. The big fear for EMs is that the end of easy money globally creates a giant margin call. As a firm, we have tended to be upbeat on their prospects in this cycle, and it may be that a huge buying opportunity has...

    2
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    Gavekal Dragonomics

    The Renminbi Catches Up With Reality

    After its biggest downward move since 2015, where is the renminbi headed next? Since mid-June it has fallen by over -4% against the US dollar to CNY6.63, and the trade-weighted CFETS index has also declined by -3% from its June peak. This has led to some commentary that China is pushing down its currency to prepare for a trade war with the US. In fact the downward move was overdue, and was largely a delayed reaction to foreign exchange market...

    0
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    Gavekal Research

    A Better Fed Model

    The “Fed model” which values US equities relative to bonds is now more than 20 years old. In that time, it has become widely used and has attracted equally widespread criticism. In this paper Will and KX revise the original to iron out some of its flaws, and come up with an improved model which offers greatly superior risk-adjusted returns.

    6
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    Gavekal Research

    The Trade War And The US Cycle

    How will the US administration’s trade disputes affect the US economic cycle? In the worst case scenario, if Donald Trump follows through on all his threats the disruption to global supply chains could be great enough to push the world economy into recession. At this point, the greatest impact flows from the high degree of uncertainty about future actions.

    0
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    Gavekal Research

    Strategy Monthly: The Four Roads Ahead

    The first half of the year was not a great one for global equities, and the second half is clouded by risks: slowing growth, rising inflation, renewed political stress in the eurozone, and most of all the threat of massive protectionism by the United States. Louis Gave offers four scenarios of how things could play out, and Arthur Kroeber explains why it's time to start seriously worrying about a worst-case trade scenario.

    0
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    Gavekal Research

    Brazil’s Year Of Living Messily

    After a couple of years of political stability and economic improvement, Brazil again looks like an emerging market in the cross-hairs. As measures of financial stress have risen sharply, its currency and stock market have plunged. The bet must be that Brazil muddles through, but a crisis this year cannot be ruled out.

    0
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    Gavekal Research

    The Investment Scenarios Ahead

    The interaction of three prices—the US dollar, long-dated US interest rates, and oil—tend to determine the behavior of most other asset values, and so far this year, all three have moved higher. Investors have adjusted to this new reality with some trepidation: among major markets, only the US (S&P 500) and Japan (Nikkei 225, barely) are up year-to-date in US dollar terms.

    3
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    Gavekal Research

    Is The Fed Really Going To Cause A Crisis?

    Is a crisis in US dollar bond markets really inevitable if the Federal Reserve continues on its current tightening trajectory? Some think so, including Reserve Bank of India governor Urjit Patel, who this month expressed his fears in an op-ed in the Financial Times.

    5
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    Gavekal Research

    The Moment Of Truth For Emerging Markets

    A strong US dollar, rising interest rates and higher oil prices are a toxic mix for emerging markets. A month ago it was only Turkey and Argentina that were looking really sick, punished by investors for their structural imbalances. But in recent weeks nervousness has engulfed the currencies of Indonesia, South Africa, India and—most notably—Brazil. This leaves the emerging markets facing a pivotal moment. Until now, the assets of those emerging...

    0
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    Gavekal Research

    When To Buy US Bonds?

    Since the early 1980s, buying and holding US long bonds has been a solid investment strategy. This macro environment was supported by a favorable demographic tailwind that ensured a bountiful supply of global savings. That situation is now changing, and as interest rates rise investors should not assume that yields will retrace as they did after the 2013 “taper tantrum”. In this piece Will and KX put their Wicksellian framework to work and...

    0
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    Gavekal Research

    The Hurdles For US Profits

    Corporate America shot the lights out in the first quarter as tax cuts helped S&P 500 earnings soar by 23%, while macro data released this week showed profits rising an aggregate 14% year-on-year, versus 4.8% in 2017. This week also saw good news for banks, as regulatory shackles were loosened. Yet investors who think US firms are headed back to the races must convince themselves that a series of late-cycle hurdles can be overcome.

    0
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    Gavekal Research

    Does The Dollar's Run-Up Have Legs?

    Being a US dollar bear has been a humbling experience over the last few weeks. The year started well enough for bears, with the DXY dollar index declining -4.2% over the first seven weeks. But since mid-April, the US currency has staged a rebound vigorous enough to leave the DXY up 1.95% year-to-date. This rally confronts investors with a baleful prospect: any further sustained appreciation of the US dollar will have a detrimental effect on...

    4
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    Gavekal Dragonomics

    Behind The Resilient Renminbi

    The US dollar is rising, so are US interest rates, and China’s current account balance is deteriorating. So the renminbi should be weakening, but it is not. In this piece, Chen Long argues that a recent pickup in capital flows is the cause of this strength, but suspects the central bank will not want to see much more sustained appreciation.

    0
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    Gavekal Research

    Playing A Flatter US Yield Curve

    The US yield curve could invert towards the end of this year or early in 2019, the head of the St. Louis Federal Reserve said on Monday. For investors it’s a troubling thought. Over the last 50 years, whenever the US yield curve has inverted, a recession has typically followed within a year or two. Yet although the current flattening of the curve is set to continue, the process will be gradual, which means inversion and an ensuing recession...

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