Gavekal Research

Charles Gave

Feb 14th 2017

There is a tendency to divide Europe into the “serious” beer drinkers of the north and the not so serious wine tipplers of the south. Using such a dichotomy reinforces a common assumption that trouble in modern day Europe always arrives from the Mediterranean regions. It explains why there is a cottage industry of politicos watching developments in Italy, Spain, France and Portugal, while precious little energy is expended on political goings on...

Gavekal Research

Nick Andrews

Feb 08th 2017

Last month Cedric Gemehl and I argued that the new geopolitical back-drop offered by Donald Trump had changed the basic strategic equation for Germany. Berlin could respond by doubling down on its mercantilist impulses, or alternatively embrace its eurozone partners. An interesting test case of our hypothesis has just arisen: yes, the Greek problem is back on the agenda.

Gavekal Research

Cedric Gemehl

Feb 01st 2017

The data flow out of the eurozone—both forward and backward-looking—continues to paint a picture of accelerating activity, subdued core inflation, ongoing monetary accommodation, and—most notably for investors—improving corporate earnings.

Gavekal Research

Anatole Kaletsky

Jan 31st 2017

Last week Louis laid out his roadmap for navigating financial markets in 2017. In this follow-up, Anatole picks up on five debating points, and details where and why he agrees or disagrees with Louis.

Gavekal Research

Louis Gave

Jan 26th 2017

Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.

Gavekal Research

Cedric Gemehl, Nick Andrews

Jan 20th 2017

Germany, more than any other European economy, has relied on the US-dictated, rules-based international system to define its post-World War II identity. Germany’s highly specialized export-orientated economy has thrived within the World Trade Organization and its security has been ensured by the American nuclear umbrella. It is not clear whether Donald Trump’s recent broadside against Berlin reflects a permanent rupture in that order, but...

Gavekal Research

Arthur Kroeber, Charles Gave, Will Denyer

Jan 18th 2017

Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.

Gavekal Research

Arthur Kroeber

Jan 17th 2017

Once Donald Trump occupies the White House he is sure to take aim at China in the form of new tariffs, anti-dumping actions and the labeling of the country as a currency manipulator. What is unclear is whether such actions reflect a tough negotiating stance, or instead a fundamental shift in the strategic equation. In this video interview, Arthur explains why the mixed messages coming out of Washington have the potential to spark a dangerous...

Gavekal Research

Louis Gave

Jan 12th 2017

Get into a taxi in Rio de Janeiro, Jakarta or Cape Town, and ask for that day’s US dollar exchange rate, and the chances are that the driver will know the answer to within a decimal point. Try the same thing in Tokyo, London or Berlin and you will likely receive a blank stare. My anecdote reflects a simple reality: most people in emerging markets think in two currencies: their own and the US dollar. This highlights most emerging market consumers...

Gavekal Research

Research Team

Jan 06th 2017

For our first Monthly of the year, we depart from our normal format to offer our thoughts on the dozen most important questions investors must face this year. Not surprisingly, the issues that rose to the top were the impact of the new Trump administration's policies on the dollar and US bond yields, and whether the eurozone will spend the year tearing itself apart. Also,oil prices, the risk of financial implosion in China, and where to...

Gavekal Research

Anatole Kaletsky

Jan 03rd 2017

After 2008, the prevailing market fundamentalism forbade political interventions that could have shared the benefits of capitalism while mitigating its costs to specific people. The result was a post-crisis confusion and disillusionment whose political effects we witnessed last year—and which has not yet ended.

Gavekal Research

Nick Andrews, Tom Holland

Dec 16th 2016

Louis likes to say that the foreign exchange market is a serial monogamist. At any one time, the market is faithful to a single idea. The trouble is that at any moment it is liable to switch the object of its affections. Right now the foreign exchange market is clearly still smitten by the Trumpflation trade. Following the US Federal Reserve’s decision earlier this week to raise interest rates, yesterday the US currency’s DXY index climbed to...

Gavekal Research

Anatole Kaletsky

Dec 13th 2016

Sterling has gained almost 7% against the euro this month, partly because of comments from British ministers hinting at a softer version of Brexit than the sharp and rapid break implied by Theresa May’s early speeches. For example, sterling’s rebound through US$1.25 and from £0.90 to the euro was directly caused by a parliamentary answer from David Davis, the minister in charge of Brexit, suggesting that Britain might continue to make...

Gavekal Research

Dec 07th 2016

Louis and Anatole outlined their views on the new investment environment. Louis focused on the apparent contradictions in investors’ reaction to Donald Trump’s win in the US presidential election. Anatole argued that the US has almost certainly transitioned to a more inflationary growth path, but said it would be a slow build-up.

Gavekal Research

Joyce Poon, Leonor du Jeu

Dec 06th 2016

Emerging markets have faced selling pressure since Donald Trump’s US presidential election win started to drive treasury yields higher. EM debt funds saw their largest ever outflow the week after the election, while currencies have fallen on fears of trade protectionism and more talk of the US dollar being primed for a 1980s-style super-spike. Given this basket of worries, Joyce revisits her “emerging market relative balance sheet vulnerability...

Gavekal Research

Joyce Poon

Dec 02nd 2016

This has not been your regular dollar squeeze. Over the last month, the cost of obtaining US dollars offshore has soared to levels last seen in “crisis” periods, yet bank equities have rallied the most in six years. Rather than a new crisis unfolding, we seem to be transitioning to a macro environment where dollars are structurally scarce. This will be challenging for weak link economies, as shown yesterday by adverse market moves in Brazil and...

Gavekal Research

Anatole Kaletsky, Louis Gave, Will Denyer, Nick Andrews, Arthur Kroeber

Dec 01st 2016

Markets have been on a startling trajectory since Donald Trump upended investors’ assumptions with his win in the US presidential election. In this issue of the Monthly two Gavekal partners ask whether the macro environment really has fundamentally shifted due to the emerging policy platform of the president-elect.

Gavekal Research

Louis Gave, Cedric Gemehl

Nov 28th 2016

It’s been said that big data is like carnal knowledge in teenage boys’ locker rooms: everyone talks about it, but noone really knows much about it. A slew of election results in the last few years supports such a viewpoint, for in an age when everything can supposedly be measured, political forecasts have been proven hugely flawed—the UK general election in 2015, the Brexit vote, the Colombian peace-process referendum, Donald Trump winning the...

Gavekal Research

Cedric Gemehl, Nick Andrews

Nov 25th 2016

As she kicked off her general election campaign this week, Angela Merkel declared that Germany “had never had it so good”. The economy is humming so nicely that Germany’s council of economic advisors recently warned about overheating. This would seem to rule out a fiscal stimulus, which conflicts with Brussels’ policy of engineering a more expansionary fiscal environment.

Gavekal Research

Charles Gave

Nov 23rd 2016

My thesis has for a while been that we are living in an era characterized by the “little man” revolting against the global elite. I explained this idea in May using the perhaps apocryphal tale of a South Pacific island made up of home-loving tree dwellers and more adventurous boat travellers (see Trump And The Tree People). The point was that the normally laid back people of the trees were stirring from their torpor as shown by the Brexit vote...

Gavekal Research

Cedric Gemehl

Nov 17th 2016

When Brussels officials admitted in May that there was scope to loosen Europe’s fiscal straitjacket, this seemed like an expedient measure so that counties could breach their deficit limits without being penalized (see Fiscal Rules Are There To Be Broken). It is now clear that this shift was more than a one-off accommodation and the policymaking ground has moved. Yesterday the European Commission updated its view on state spending with a...

Gavekal Research

Nov 11th 2016

Anatole Kaletsky, Arthur Kroeber and Charles Gave presented their views on what a Donald Trump presidency means. Anatole outlined both positive and negative potential outcomes. On the positive side, US growth could see a boost from expansionary fiscal policy, but isolationist trade policies could threaten US firms and equity prices. Arthur warned of the geopolitical risk of a power vacuum should the US pull back from its treaty obligations....

Gavekal Research

Neil Newman

Nov 04th 2016

The highlight of this week’s Zhuhai airshow in Southern China was a fly-past by two of the People’s Liberation Army’s new J-20 warplanes, touted as China’s first stealth aircraft. Western military analysts reserved their judgment, pointing out they had learned nothing new about the aircraft, except that it was very noisy. Nevertheless, the broader message from Zhuhai was clear, echoing a similar message broadcast by the Japan International...

Gavekal Research

Arthur Kroeber, Rosealea Yao, Nick Andrews, Neil Newman

Nov 01st 2016

The biggest market move of the past month was a significant rise in bond yields across the US and Europe. Much commentary has suggested that this might be a symptom of a sustained rise in inflationary pressures, as wages and rents start to push up prices in the US, and Chinese producer prices end four long years spent in negative territory. We are skeptical. The recent rise in yields has so far reversed only half of the decline in the first half...

Gavekal Research

Anatole Kaletsky

Oct 27th 2016

After the Brexit vote, Anatole became deeply bearish, fearing that a populist insurgency could unleash a destructive retreat from globalization. With the US electorate seemingly set to reject that pathway on November 8, the likelihood of other nations following Britain by turning in on themselves is greatly diminished.

Gavekal Research

Charles Gave

Oct 20th 2016

Keynesian beliefs are based on two key ideas. Firstly, recessions are caused by an excess of savings among nasty types known as rentiers. Secondly, if there is a shortage of demand, the government should conjure it up out of thin air by borrowing money to spend as needed. In the last few years we’ve seen what happens when the first of these two ideas is put into practice. Policymakers around the world have attempted to euthanize the rentier, and...

Gavekal Research

Cedric Gemehl

Oct 19th 2016

Despite multiple European Central Bank officials protesting a steady-as-she-goes approach to monetary policy, the recent rise in eurozone bond yields reflects market concern about a potential tapering of its bond buying. After all, inflation has ticked higher, European banks continue to grumble about a profit-sapping yield curve and the ECB’s dealing desk in Frankfurt will soon run out of eligible bunds to buy. Despite all that, tomorrow will...

Gavekal Research

Louis Gave

Oct 13th 2016

Should we care about the Italian referendum? Without wanting to sound smug toward what remains Europe’s second prettiest country, I can’t remember ever witnessing an Italian election with consequences beyond its own borders. But the December 4th referendum could be such a first: an Italian election that matters.

Gavekal Research

Oct 10th 2016

Will Denyer presented a newly minted dynamic asset allocation tool which was developed from an ROIC-based framework that has helped us to better map and predict US economic cycles. He then answered listener questions on these themes.

Gavekal Research

Nick Andrews

Oct 07th 2016

In European capitals this week schadenfreude will no doubt have been expressed at the diminished status of the UK economy and its currency. This morning’s “flash crash” in the pound most likely had technical causes, but the fact the exchange rate could fall so hard without generating automatic buying responses says much about confidence in the unit. Sterling has been under pressure since Prime Minister Theresa May earlier this week said she will...

Gavekal Research

Louis Gave

Oct 05th 2016

Back in April, we pondered whether, with their negative interest rate policies, central bankers were showing themselves to be particularly incompetent by condemning commercial banks to years of unprofitability, or whether their greater design was to drive weaker banks to the wall to advance a consolidation of banking industries around the world under the umbrella of nationalization (see NIRP: Machiavellian Design Or Policy Mistake?). In other...

Gavekal Research

Anatole Kaletsky

Oct 03rd 2016

The second phase of the post-Brexit sterling devaluation probably started this weekend. Theressca May's announcement of March as the deadline for Britain to launch the “Article 50 process” of formally withdrawing from European Union achieved its immediate objective of averting a battle between the Hard Brexit and Soft Brexit factions at this week’s Conservative Party Conference. Unfortunately, May’s party management success is likely to...

Gavekal Research

Cedric Gemehl

Sep 30th 2016

The eurozone’s construction sector is on the turn as super low interest rates feed through to improved housing demand and as infrastructure building starts to pick-up. The implication is that a reliable new driver of growth should help sustain a moderate eurozone recovery. Investors are advised to take note as the sector has a decently investable universe, which is generating not too shabby earnings growth.

Gavekal Research

Cedric Gemehl

Sep 23rd 2016

European bank stocks have enjoyed a near 5% bounce in the last two trading sessions on hopes that the European Central Bank will follow its Japanese counterpart by explicitly adopting policies that help steepen the yield curve and so lessen the squeeze on bank lending margins. There are reasons to be more cheery about the outlook for European financials, but a Japanese-style rescue mission may not be one of them.

Gavekal Research

Cedric Gemehl

Sep 19th 2016

It was billed as a show of post-Brexit unity of purpose. Without the fractious Brits to obstruct progress, leaders of the remaining 27 members of the European Union would come together to affirm their unshaken commitment to the goal of “ever-closer union”. Unsurprisingly, the reality of the weekend’s Bratislava gathering failed to live up to its billing. Without the presence of the habitually adversarial British to unite them in antagonism, the...

Gavekal Research

Louis Gave

Sep 14th 2016

Ask three economists for the definition of a financial bubble, and you will be lucky to get fewer than four different answers. Even in our little shop, we like to make distinctions between bubbles in productive assets (US railroads, the internet, fiber optic cables, shale gas wells...) and bubbles in unproductive assets (gold, tulips, Japanese land, Florida condos…). We also like to make distinctions on how bubbles are financed: equity (good) or...

Gavekal Research

Anatole Kaletsky

Sep 12th 2016

After months of contented lethargy, Friday’s big sell-off seemed to confirm the main points that Louis and I made in our conference call two days earlier. Firstly, the faith in “lower forever” bond yields is not a reason for reassurance, but a cause for concern. Secondly, political risks have not been eliminated by the summer’s market rally, merely ignored. Thirdly, what I call the “financial hurricane season” usually starts in early autumn—and...

Gavekal Research

Charles Gave

Sep 09th 2016

In times past, capitalist systems were organized on a simple premise. At the centre sat “money” as the medium to express all values. The primary operating dynamic of this system was that surplus money (savings) got channelled into economic activity, with a secondary effect that “unused”, or “left over”, money ended up in financial assets, usually equities, such that at times of great optimism a bull market resulted. After running for a year or...

Gavekal Research

Nick Andrews

Sep 07th 2016

It is only three months since the European Central Bank crossed its latest “unconventional” threshold with corporate bond purchases, yet when policymakers meet tomorrow, more monetary expansion is in the cards. Eurozone economic growth is not collapsing, but it remains weak as shown by the latest flash PMI reading which slumped to a 19-month low, and consumer inflation running at just 0.2%. With the ECB’s quantitative easing program set to...

Gavekal Research

Nick Andrews

Sep 01st 2016

For the European Central Bank, achieving its target of inflation “below, but close to, 2%” is proving harder than anticipated. Eurozone consumer prices rose just 0.2% year-on-year in August, unchanged from July despite more than two years of negative interest rates and nearly 18 months of quantitative easing. With core inflation actually slipping in August, the ECB is facing calls to ease policy even further. However, the central bank now finds...

Gavekal Research

Charles Gave

Aug 26th 2016

As the high priests of global central banking congregate in Jackson Hole, much of the chatter ahead of the meeting has concentrated on the “mystifying” fall over recent years in the natural rate of interest, and possible reasons why it should have declined to such an extent. Having spent the last ten years attempting to apply the economic theories of the great 19th century Swedish economist Knut Wicksell, I have to say I am delighted with the...

Gavekal Research

Nick Andrews, Stefano Capacci

Aug 24th 2016

Italian Prime Minister Matteo Renzi has bet his premiership on a referendum over constitutional reform. It is a high stakes gamble. Renzi’s promise to step down if there is a “No” vote has turned the referendum into a vote of confidence in the government, its Europhile policies, and Italy’s membership of the eurozone itself.

Gavekal Research

Nick Andrews

Aug 21st 2016

Nick presents what's at stake in Italy's upcoming constitutional referendum, and what it could mean for the European Union

Gavekal Research

Charles Gave

Aug 15th 2016

Among my long-standing decision rules is one that generally proved reliable in the past. If two developed and open market economies trade freely with each other, then over the long run the return on invested capital in each economy will tend to be the same. In turn, this implies that over the long run, the ratio of total returns from each stock market will exhibit no trend in common currency terms. This makes intuitive sense—if one market...

Gavekal Research

Nick Andrews

Aug 11th 2016

Eurozone equities have been sucked higher in the post-Brexit global rally, but with earnings showing a mild pick-up and fears of a populist political contagion fading, the hope is that a 15 month downtrend has been broken. On a technical level the MSCI EMU’s 200-day moving average has flattened out nicely, and with the DAX on Tuesday hitting a high for the year, German stocks look as if they could break out. As to whether the broader market can...

Gavekal Research

Joyce Poon, Tan Kai Xian, Neil Newman, Udith Sikand

Aug 01st 2016

In a world in which the Fed shows no inclination to get ahead of the curve on inflation and in which both the ECB and the BoJ are in full quantitative easing mode, investors everywhere are on the hunt for yield. But the chase is a nervous one. Investors are all too aware that equities and bonds are sending conflicting signals, and that the favorable trends that have lifted most assets over the last six months could be disrupted by a sudden spike...

Gavekal Research

Joyce Poon, Udith Sikand

Jul 27th 2016

Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.

Gavekal Research

Nick Andrews

Jul 26th 2016

On Friday, the European Banking Authority will publish the results of its 2016 stress tests. Although 51 banks from across the European Union have been tested, attention will focus most closely on the results of the five Italian banks covered. With Italy’s banking system widely identified as the most likely locus of a new eurozone crisis, bankers, politicians and investors are all hoping for the “best” likely result. This would see all the banks...

Gavekal Research

Anatole Kaletsky

Jul 18th 2016

With a newly installed British prime minister gravely intoning that “Brexit means Brexit” and having just appointed a cabal of Brexiters to run the UK’s exit strategy from the European Union, it would look to be game-over. Anatole would beg to differ and explains why there remains a strong likelihood that the UK government will change tack in the face of different circumstances than prevailed at the time of last month’s referendum.