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E.g., 21-09-2021
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    Gavekal Research

    Investing In Today’s Inflationary Environment

    Investing in a topsy-turvy macro environment can feel like a crapshoot. One way to seek order among chaos is to draw lessons from economic history. Louis examines the underlying causes of financial crises since the late 1990s and applies the lessons to consider the way in which the global economy and markets emerge from the pandemic.

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    Gavekal Research

    Europe’s Energy Headwinds

    The United Kingdom got a sharp lesson in the perils of energy dependence on Wednesday. A fire shut down its imports of electricity—mostly nuclear-generated—from France, pushing domestic natural gas prices up by as much as 20% in intraday trading. The fire may keep as much as a third of the UK’s capacity to import power from France closed through the winter months. Given that the UK has the capacity to import 3MW from France and on average...

    2
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    Gavekal Research

    The High Cost Of Free Money, Revisited

    It’s now more than 10 years since Charles published a seminal paper titled The High Cost Of Free Money, in which he argued that free-market capitalism could not function properly without a free-market-determined cost of capital. Today it’s clear that capital markets, at least, can continue to operate, but Charles argues this has created very little new wealth.

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    Gavekal Research

    Video: The Economics Of Germany's Election

    Ahead of Germany’s election in a couple of weeks, the center-left Social Democratic Party has recently climbed up the polls to eclipse the previously dominant Christian Democratic Union. If the polling is right, the SPD is likely to form a coalition government with Germany’s smaller parties. Nick breaks out the tea leaves to see what a political shift is likely to mean.

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    Gavekal Dragonomics

    Webinar: Understanding China's Regulatory Crackdown

    Even by China’s high standards, 2021 has seen an extraordinary amount of government intervention in the economy, as top leader Xi Jinping moves aggressively to implement his vision of national greatness. In this webinar our China team assess the impact on the economy and markets, and discuss what could cause this crackdown to pause or reverse.

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    Gavekal Research

    A British Fix To Housing

    For decades, urban England has had an under-supplied and over-bought housing market. UK governments of all political stripes have tried and failed to unblock building pipelines. Britain is hardly alone in having seen home prices rocket due to pandemic effects, but there was a grim inevitability to UK home prices rising 13% in the last year. Yet, at the same juncture, there is evidence that a mixture of decent policymaking and smart market...

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    Gavekal Research

    Covid, Markets And What Happens Next

    Over the last 18 months, Covid developments have been a key driver of financial market performance. Louis contends that this period can be split into four distinct phases. In this piece, he asks whether we are now entering a fifth phase. To do this he weighs up both encouraging and concerning developments within the pandemic and economic policy choices that flow from them.

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    Gavekal Research

    Europe’s Taper Decision

    To taper, or not to taper is the question for the European Central Bank at Thursday’s policymaking meeting. The market seems to think that monthly bond purchases will soon be lowered by about €20bn to €80bn, as shown by 10-year German bund yields rising 14bp in the last two weeks. Economic output in the eurozone is back near pre-pandemic levels and consumer price inflation in August spiked to 3%. There have even been putative sightings of the...

    2
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    Gavekal Research

    The Most Worrying Shortage

    The world’s most traded commodity, semiconductors, is running scarce, the price of the second-most important commodity, oil, is grinding higher, and the cost of moving things around the world is soaring. All this would be worrying enough, but ask any businessperson in North America or Europe about their biggest constraint, and the answer is likely to be staffing.

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    Gavekal Research

    The Coming Slowdown In Europe’s New Orders

    European equities have had a stunning 10 months, returning 46% since the beginning of November 2020 and outperforming even the MSCI US. This performance has been driven by expectations of strong earnings growth— supported by buoyant demand and full order books. Peering ahead, however, there are good reasons to look for the pace of new orders to slow.

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    Gavekal Research

    Strategy Monthly: How To Hedge Tighter Liquidity

    So far, markets have not panicked over the prospect of the Federal Reserve tapering its asset purchases. But when it comes, the taper will materially tighten global liquidity conditions. In this calm before the storm, investors running global portfolios should focus on their hedges.

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    Gavekal Research

    Germany’s Changing Political Colors

    Questioned by opinion pollsters, most Germans say the campaign ahead of the country’s September 26 federal election is dull. Yet those same opinion polls now point to the most wide-open election race in recent history. In the last few weeks, support for the center-left social democratic SPD has surged, even as the popularity of the center-right conservative CDU/CSU has slumped and the Greens have stalled.

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    Gavekal Research

    Where There Is A Risk Of A Wage-Price Spiral

    After the United Kingdom released data on Thursday showing GDP grew 4.8% quarter-on-quarter in the second quarter, markets are now pricing in a near-100% chance of a rate hike by mid-June next year. In the event, 2Q21 GDP growth was a shade below the Bank of England’s forecasts. And unlike the US, the UK’s output remains below its prepandemic baseline—by 4.4%. Nevertheless, because of a contraction in the UK’s pool of potential labor following...

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    Gavekal Research

    Understanding Asia’s New Monetary Order (Part II)

    Last month, Charles reviewed the efforts China has made to build an alternative to Asia’s US-dollar-based trading system. Today, he peers into the future, and looks at what China is doing, not just to offer an alternative to the US dollar or euro, but to build a new monetary order for Asia.

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    Gavekal Research

    The Consequence Of The IPCC Report

    The quote I over-use most is probably Charlie Munger’s “show me the incentives and I will tell you the outcome.” With this in mind, it is no surprise that the IPCC report makes for a harrowing read. Whether you agree with its conclusions is neither here nor there. The key question is this: what will policymakers do, or want to be seen to do, in response?

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    Gavekal Research

    Webinar: Global Investment Roundtable, August 2021

    The US growth outlook may be softening as the reopening boom weakens but equity markets seem relaxed as this outcome could delay the day when monetary stimulus is withdrawn. In our sign-off webinar for August, Gavekal partners asked if markets are right in their benign assessment, or whether a nasty surprise could emerge over the usually quiet summer months.

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    Gavekal Research

    The European Rotation

    As Europe returns towards something approaching normality, the eurozone is undergoing a rotation in economic leadership from goods to services. This rotation will go on through the second half of 2020.

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    Gavekal Research

    Is The Reflationary Trade Back On?

    Forget the recent easing signals sent by the Chinese Politburo (and consequent drop in Chinese bond yields). Forget fears about the “Delta variant” giving Western central banks cover to keep extremely loose monetary policies even as inflation rises. Forget also the upcoming US stimulus bill, or the unleashing of European fiscal expansion. A positive signal that no one is yet talking about is the deflationary signal that could have materialized,...

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    Gavekal Research

    Strategy Monthly: The Global Monetary Divergence

    As the world’s three big economies—the US, the eurozone and China—recover at different speeds from the shock of Covid, their monetary policy paths are diverging. This divergence will have major implications for bond investors and foreign exchange markets.

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    Gavekal Research

    Breaking Down European Inflation

    Two weeks ago, after US consumer price data for June showed inflation had climbed to a 13-year high of 5.4%, my colleague Tan Kai Xian examined the three main drivers of this year’s rise in US inflation: base effects, supply-side constraints and demand-pull factors. He concluded that base effects have started to wear off and supply-side constraints will soon begin to ease. However, demand-pull factors are set to strengthen over the coming...

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    Gavekal Research

    Webinar: Europe Caught Between Stools

    The US has taken an approach to the pandemic that involves reopening and “living with Covid”, whereas most East Asian economies are heading down the "zero-Covid" path. Europe seems to be caught between these two stools. Which way Europe turns could have a big impact on global growth, the value of the euro and key asset values.

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    Gavekal Research

    A Glass Less Full

    The eurozone’s economy has continued to pick up in July, with the flash composite PMI released on Friday beating expectations to hit a 21-year high. The manufacturing component continued to fire strongly, and notably the services index topped 60 for the first time since May 2006 as governments relaxed Covid restrictions and the summer tourist season got under way. However, after nine months in which eurozone data has consistently come in ahead...

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    Gavekal Research

    Low For Even Longer

    On Thursday, the European Central Bank’s decisionmakers sat down for their first monetary policy meeting since they ditched their longstanding inflation target of “below, but close to 2%” in favor of a new symmetrical target centered on 2%. That decision formalized the ECB’s shift away from its Bundesbank-style focus on price stability and enshrined its role as the guardian of eurozone financial stability.

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    Gavekal Research

    Webinar: The State Of Global Growth

    The reflation trade has ebbed in recent weeks as investors have gotten more comfortable with the trajectory of US monetary policy and concerns have risen over the Delta variant of Covid disrupting economic opening. At the same time, China continues to crack down on its high-growth internet sector. Our team assessed the market implications of these trends.

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    Gavekal Research

    Webinar: What's Behind China's Internet Crackdown?

    China's authorities have aggressively tightened regulation of the formerly free-wheeling internet sector. In this webinar, Gavekal RedTech principal Michael Clendenin joined Gavekal Dragonomics's Ernan Cui and Thomas Gatley to analyze the government's motives in the ever-widening crackdown, forecast the next regulatory moves and explain how investors can navigate the risks.

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    Gavekal Research

    Bye-Bye Buba

    The European Central Bank on Thursday jettisoned its longstanding inflation target of “below, but close to 2%” in favor of a symmetrical target centered around the 2% mark. The formal adoption of a symmetrical target is significant, because it acknowledges just how far the ECB has traveled from its origins as the institutional offspring of the Deutsche Bundesbank.

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    Gavekal Research

    Webinar: China's Conflicting Pressures In The Second Half

    China is entering the second half of 2021 with its strong post-Covid economic momentum still intact, despite policymakers staying consistently hawkish on debt and property. In this webinar Wei He, Rosealea Yao and Thomas Gatley outlined how these conflicting pressures will play out over the rest of the year, and discussed the potential for an easing of the policy stance.

    0
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    Gavekal Research

    Not Quite A Wage-Price Spiral

    European companies are hiring again—or at least they would be if they could get the staff. The rebound in eurozone economic activity has fueled employers’ demand for labor. Having languished at about one standard deviation below its long term average through 4Q20 and 1Q21, the European Commission’s index of eurozone businesses’ hiring intentions has risen to over one standard deviation above its long-term average, as of end-June. The number of...

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    Gavekal Research

    Video: How Brexit Britain Shapes Up

    Six months after the UK properly left the European Union, the shape of the emerging post-Brexit economy is becoming a little clearer. Despite distorting effects from the pandemic, the impact on trade from being outside the EU’s single market can be seen, arguments about the UK’s position as a manufacturing hub can be tested and the future shape of Britain’s once super-charged financial services sector is coming into focus. Nick Andrews reviews...

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    Gavekal Research

    Demographics And Prices

    Starting in the early 1980s, the world became increasingly flush with people in their prime working and saving years. That trend, however, has largely run its course and may now be going into reverse. As a result, investors should consider what economic trends have demographic drivers, making them vulnerable to a structural shift occurring.

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    Gavekal Research

    The Inflation Quandary

    Markets seem to be comforting themselves that incipient inflation is, as the Federal Reserve has argued, a transitory phenomenon. Louis is skeptical that this is the case. He sees no evidence of any deflationary shocks that could squeeze price pressure, while at the same time, Western policymakers are doing all in their power to pump up demand.

    1
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    Gavekal Research

    Opec Frays

    Last year, when Opec+ talks broke up without an agreement on setting production quotas, the oil price collapsed. On Monday, when Opec+ talks broke up without an agreement on setting production quotas, the oil price surged. The majority of market watchers see no inconsistency, but they are making some large assumptions, which deserve close scrutiny.

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    Gavekal Research

    Webinar: Can Things Really Keep Getting Better?

    The US economy continues to break growth records as it reopens and other big regions may be set to go the same way, while Asia continues to prosper from a strong export outlook. The question is not whether the world economy slumps back into a funk, but whether growth expectations are now set too bullish.

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    Gavekal Research

    Video: Can Italy Recover?

    In response to the Covid economic shock, the European Union has vowed to adopt more expansive fiscal responses and limited mutualization of national debts. The country where this approach will fall, or rise is Italy. In this interview, Nick offers a view on whether it will be enough for Italy to mount a comeback.

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    Gavekal Research

    The G7’s Rival To The Belt And Road

    With the launch of “Build Back Better World,” the world’s rich democracies want to take on China’s Belt and Road Initiative. The G7 sees the initiative as a chance to re-energize international development finance. The plan is worthy, but the nuts and bolts of providing such projects in poor countries suggests that China does not face serious competition.

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    Gavekal Research

    The First To Normalize

    The Bank of Mexico last week joined a growing number of emerging-market central banks that have hiked policy rates this year. Developed markets, in contrast, have stayed dovish as they are not overly worried about inflation and fret about chocking off their recoveries. But there is a good chance that the BoE will be the first big Western central bank to normalize policy in 2022.

    0
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    Gavekal Research

    Webinar: Can Europe Normalize?

    In yesterday's webinar, Cedric and Nick assessed the risks and opportunities associated with Europe's economic reopening, the effectiveness of the new Recovery Fund backed by mutualized debt, and the signs heading into a new political season in which Euroskeptic parties stand to do well.

    0
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    Gavekal Research

    The Morphing Of European Political Risk

    On both sides of the Rhine, celebrations were afoot on Wednesday night after France and Germany managed to earn spots in the knockout phase of the Euro 2020 football tournament. But once a winner is finally decided on July 11, the citizens of both countries will be forced to focus some attention on politics. After a summer of fun, the specter is being raised of European political risk.

    0
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    Gavekal Research

    The Peril Facing Northern Europe’s Savings Industry

    Between 1966 and 2012 investors did better in German bonds than US equities on a total return and common currency basis. That changed in 2012, and Germany’s managed savings institutions are now in peril, along with those in other parts of Northern Europe. In this piece, Charles shows how much trouble these institutions face and offers a view on how this exercise concludes.

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    Gavekal Research

    Europe’s Battery Boom

    A few years ago, European carmakers and auto parts firms raised white flags and ceded the market for electric vehicle batteries to mostly Asian competitors. Today, they are back in the fight. If European companies’ development plans come to fruition, writes Cedric, their share of the continent’s manufacturing capacity will rise from 5% in 2020 to 67% by the middle of the decade.

    9
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    Gavekal Research

    Flabbergasted

    When you write in a language that you didn’t learn from your mother, it is easy to fall in love with new words and then overuse them. In the 1970’s, I came across “flabbergasted” and, truth be told, I ended up being flabbergasted in that decade rather more than I actually was. Today, however, I am again flabbergasted, but am fairly confident that it is for good reason.

    6
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    Gavekal Research

    What’s Your Linchpin Made Of?

    Writing here on Tuesday, Louis argued cogently that energy prices will be the “linchpin” that decides the future direction of inflation. But, in asking whether governments can successfully engineer a green energy transition, it’s fair to say he was thinking in terms of years ahead. Energy prices also have a major influence on inflation and inflation expectations on the scale of months.

    1
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    Gavekal Research

    The Energy Question

    Over the last 20 years, China has been the biggest buyer of most commodities. For investors, this meant that when China was tightening, easing up on commodity exposure made sense. That has not been the case in 2021, and in this piece, Louis seeks to explain why. He also raises the possibility that this cycle ends not with an inflationary blowout, but rather a whimper.

    7
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    Gavekal Research

    Living In A Dual Currency World

    Let’s begin with the basic principles underlying any currency, at least according to economics 101: it should be a medium of exchange, a standard of value and a store of value. I have long argued that central banks’ determination to pursue the “euthanasia of the rentier” rather than protecting money as a store of value would lead to big problems.

    0
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    Gavekal Research

    Financial Stability Über Alles

    Even as headline consumer inflation pushes higher across the developed economies, hitting a 13-year high of 5.0% in the US over the 12 months to May, the European Central Bank served notice on Thursday that it has zero intention of scaling back its asset purchases in the near term. In the statement released following Thursday’s meeting, the ECB governing council declared that in the coming quarter, it will continue to buy assets under its...

    2
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    Gavekal Research

    Webinar: The Risk To Emerging Markets

    In yesterday's webinar, Udith Sikand, Vincent Tsui and Tom Miller weighed up the risks of capital flight from emerging markets as the Federal Reserve again starts talk of tapering. They focused on the different outlook for Asian exporting powerhouses and commodity producers, and discussed India, which is emerging from a severe second wave of Covid-19.

    0
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    Gavekal Research

    The One For All Problem

    Now that a deal has been done on corporate taxation, this weekend’s Group of Seven summit will focus on helping low-income countries roll out Covid-19 vaccination programs. Given inevitable production and distribution problems, the world is unlikely to be fully vaccinated before the end of 2022.

    0
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    Gavekal Research

    Thin End Of The Corporate Tax Wedge

    Counterintuitively, the agreement on a global minimum corporate tax rate struck at the weekend by G7 finance ministers may in the near term prove positive at the margin for global equities in general. In the longer term, however, the weekend’s agreement is likely to prove the thin end of the corporate taxation wedge.

    0
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    Gavekal Research

    Webinar: Global Investment Roundtable, June 2021

    The big question is still about how durable the current burst of inflation will prove to be. Anatole and Louis joined Arthur to debate this—and everything else going on in the world economy—at our monthly global investment roundtable.

    0
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    Gavekal Research

    Supply Squeezes ≠ Consumer Inflation

    As the eurozone’s economy reopens, supply squeezes are intensifying at the same time that producer price inflation is rising rapidly, sparking fears that pandemic-induced supply chain disruptions at a time of booming demand will soon feed through into a sustained rise in the consumer inflation rate. These fears are overstated.

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