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Gavekal Research
Charles Gave
Apr 07th 2020
Rearranging The Deckchairs For Profit
When everything is falling apart around you, the urge to do something—anything—becomes irresistible. A good solution is to start rearranging the deck chairs on the Titanic. It may not change the bigger picture, but it keeps you busy and does no harm in the longer term. In this spirit, allow me to suggest a little rearrangement that should do no harm, and could even be very profitable.
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Gavekal Research
Will Denyer, Nick Andrews
Apr 06th 2020
The Atlantic Divide
Second order economic effects from the Covid-19 outbreak are ripping through industrialized economies, with soaring unemployment, shuttered industries and a fall in corporate profits. While China has eschewed large-scale government support, Europe and the US have adopted massive fiscal and monetary responses. These Western initiatives do, however, differ in key respects and when lockdowns finally end, one or other approach will likely have...
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Gavekal Research
Louis Gave
Apr 06th 2020
Waiting For Godot (21st Century Edition)
For years, investors have been waiting for China’s massive accumulation of debt to lead to a “Minsky moment”. Instead, in the Covid-19 crisis it is Western central banks that are blowing out their balance sheets in a desperate attempt to stabilize financial markets and their economies—while Chinese government bonds have proved “anti-fragile”.
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Gavekal Research
Charles Gave
Apr 03rd 2020
Breaking Down An International Liquidity Crisis
These are hard times for the global system as big economies are effectively shuttered and risk appetite craters. The US dollar has surged and many leveraged countries face trouble servicing their debts. As these factors become self-reinforcing, Charles thinks it is worth standing back to assess what is causing what. He does this by explaining the dynamics of an international liquidity crisis and suggests specific investment strategies to handle...
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Gavekal Research
Tom Holland
Apr 03rd 2020
The Truth In Trump’s Tweets
Oil market pundits were quick to dismiss Donald Trump’s tweeted claim Thursday that Saudi Arabia and Russia are ready to agree crude production cuts of 10-15mn bpd as “absurd” and “incredible”. But oil production cuts of the magnitude flagged by Trump are certainly in the pipeline—whether as the result of a new Opec+ agreement or not.
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Gavekal Research
Nick Andrews
Apr 01st 2020
Another Crisis, Another Euro-Fudge
“Europe will be forged in crises, and will be the sum of the solutions adopted in those crises,” wrote European Union “father” Jean Monnet in his 1976 memoirs. Today Europe is once again facing a crisis. And once again the solution adopted by Europe’s fractious leaders is likely to be a short term fudge that defers hard decision-making to another day.
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Gavekal Research
Research Team
Apr 01st 2020
Strategy Monthly: Lockdowns And Lost Output
Markets have been upended by the twin uncertainty of Covid-19’s rapacious spread and the economic effects of stopping it. Massive policy responses have convinced investors that a V-shaped recovery is possible, but this is far from certain. As the outbreak in Europe and the US hits its peak phase over the next month, markets will swing on the timing of any proposed exit from lockdowns.
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Gavekal Research
Louis Gave
Mar 31st 2020
Who Will Win The War On Covid-19?
In recent weeks leaders around the world have deployed all the rhetoric of wartime to declare hostilities against Covid-19. Louis examines which, if any, of the three major global powers—the US, Europe and China—is likely to emerge from the war a relative “winner”, and draws the appropriate investment conclusions.
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Gavekal Research
Anatole Kaletsky
Mar 30th 2020
Too Early To Buy Equities, But Time To Sell Dollars
After the biggest weekly gain in the Dow and with the US government having just approved the biggest-ever fiscal stimulus, how should investors react? While unrepentantly bullish in the long term, Anatole still believes that it is too early to buy equities. But for two other asset classes conditions do seem to be more propitious to call a bottom.
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Gavekal Research
Charles Gave
Mar 27th 2020
What You See, And What You Don’t
In economics there is what you see and what you don’t see, and “there is no such thing as a free lunch.” As the world economy suffers a spasm the likes of which has rarely been seen in peacetime, it may help to go back to first principles to figure out what we are not seeing about this crisis, and who is going to end up paying for it.
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Gavekal Research
Arthur Kroeber
Mar 26th 2020
How Long For The Costly Cure?
Is the cure worse than the disease? This question is already being asked about the economic lockdowns being imposed in response to Covid-19. It will be asked a lot more in the coming weeks as the economic pain gets worse. The short answer is that the cure is costly, but needed; and well-designed policies can enable a transition to a much lower-cost approach by mid-May if not earlier.
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Gavekal Research
Nick Andrews
Mar 25th 2020
Video: What's Up With The Pound
Along with other second-tier currencies the British pound fell steeply between early and mid-March as investors dashed to get their hands on US dollar cash. That US dollar liquidity squeeze has now eased, and sterling has found a near-term bottom. But the outlook for the British currency remains clouded amid the UK’s coronavirus lockdown.
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Gavekal Research
Nick Andrews, Cedric Gemehl
Mar 25th 2020
Why Europe Can Survive The Storm
Economic activity indexes in Europe have collapsed to never-before-seen levels, yet markets have rallied as investors have become persuaded that policy responses are enough to avoid a full blown euro crisis from unfolding. Europe for once appears to be more decisive in managing a crisis situation than the US and it is possible it may manage a swifter pick-up once the public health situation stabilizes.
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Gavekal Research
Louis Gave
Mar 24th 2020
Four Baskets For Four Quadrants
As investors survey the shattered remnants of the past decade’s bull market, they can reasonably assume that the winners of the future will not be those who dominated in the last decade. Louis applies the Gavekal Four Quadrants framework to address the question of which asset class will emerge victorious in a new macro environment.
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Gavekal Research
Arthur Kroeber
Mar 23rd 2020
Lockdowns Loom; What’s The Exit Strategy?
We are heading into another difficult week. Covid-19 case numbers and fatalities outside China continue to grow rapidly. Social lockdowns are spreading to more US states and European countries. In the short run, fiscal support is on the way. Longer term, governments will have to start asking the uncomfortable question of when the economic pain outweighs the public health gain.
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Gavekal Research
Louis Gave
Mar 20th 2020
After The Perfect Storm
While most media attention is focused on the Covid-19 outbreak, the energy industry simultaneously faces a solvency crisis and a liquidity seizure of epic proportions is unfolding before us. In short, these events have created a perfect storm. What comes next depends on how this three factors driving markets play out
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Gavekal Research
Charles Gave
Mar 20th 2020
Money, Value And The Markets
Above all, economics is the study of why goods and services have value and why these values are constantly changing. This study is greatly complicated by the fact that there are two different sources of value. In Gavekal-speak, we call these “scarcity” value (think jewels) and “efficiency” value (think tools). So the key question becomes not only “why do things have value?” but also “why do the relative values of scarcity and efficiency change...
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Gavekal Research
Arthur Kroeber
Mar 19th 2020
A Bad Prognosis
The US and Europe are moving towards Hubei-style societal lockdowns. Arthur sifts through the latest epidemiological research, and concludes that while the worst case public health scenarios will be avoided, the coming lockdowns will be severe and last long enough to have an economic impact possibly more damaging than in China.
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Gavekal Research
Tom Holland
Mar 18th 2020
Fiscal Intubation
“This is not a time for ideology or orthodoxy,” said UK chancellor Rishi Sunak on Tuesday. Policymakers across Europe and in the US agree. They have now thrown orthodoxy out of the window in an all-out attempt to support economies hammered by Covid-19 countermeasures. In the US, the administration announced fiscal support worth as much as US$1.2trn, or 6% of GDP, complete with the immediate mail-out of a US$1,000 check to each and every member...
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Gavekal Research
Louis Gave
Mar 17th 2020
Solvency Crisis Or Liquidity Crisis?
Collapsing equity markets, rising bond yields, widening spreads, falling gold—in recent days, there have been few places to hide. When markets act so sick, it usually pays to take a deep breath (in a socially distant manner) and ponder whether we are facing a solvency crisis, or a liquidity crisis.
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Gavekal Research
Nick Andrews
Mar 17th 2020
Video: Time For A Fiscal Union?
The coronavirus pandemic, with its calls for a coordinated European Union-wide fiscal stimulus to counter the inevitable economic ill-effects, would appear to be the ideal opportunity to press forward with the next big step towards European integration by forging a eurozone fiscal union. But things are not so simple.
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Gavekal Research
Anatole Kaletsky
Mar 16th 2020
A Modest Proposal To Avert Economic Catastrophe
Contrary to initial expectations, the spread of the coronavirus around the world is not following the relatively benign trajectories experienced in China outside of Hubei, and in Korea, Singapore and the rest of Asia. Instead, across Europe—and likely in the US—the spread increasingly resembles the path it took in Hubei. This threatens both medical and economic disasters.
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Gavekal Research
Charles Gave
Mar 13th 2020
What I Know
In fraught times, Charles has decided to keep it simple and focus only on what he knows. In this piece, he considers changing relationships between oil prices, long-bond rates, US equities and the dollar and offers various approaches that could help investors survive the bear market.
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Gavekal Research
Tom Holland
Mar 13th 2020
The Conditions Needed For A Bottom
Financial markets are now in full-blown panic mode. For investors, the key question is: What will it take for markets to form a bottom, and when will this happen? No one can answer with any precision. However, it is possible to discern the broad conditions needed to allow the markets to find a bottom. We are nowhere near them yet.
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Gavekal Research
Cedric Gemehl, Nick Andrews
Mar 12th 2020
Europe In The Eye Of The Storm
After the US slapped a 30-day travel ban on visitors from Continental Europe the world’s three biggest economic areas are now effectively cut off from most human contact. As China sees its infection rate level off, the growth dynamic of this pandemic has shifted to Europe. Economic effects will depend on government responses.
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Gavekal Research
Arthur Kroeber
Mar 10th 2020
Six Degrees Of Uncertainty
World markets are in full-on panic mode, thanks to a cloud of unknowing that has settled over two topics of broad importance: the spread and economic impact of the coronavirus, and the outcome of the oil-price war between Saudi Arabia and Russia. The topics are related, and so we are grappling with the problem of pricing epidemic-related uncertainty.
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Gavekal Research
Louis Gave
Mar 10th 2020
What Goes Around Comes Around
Amid the Covid-19 outbreak and the Saudi-Russia oil price war, markets are essentially priced for a scenario in which the US government does little in response, leaving the policy reaction to the Federal Reserve. While this may be the most plausible scenario, other possible US government actions, at home and abroad, have different implications for markets.
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Gavekal Research
Tom Holland
Mar 09th 2020
A Hand Grenade In A Bloodbath
If you ever wondered what would happen if someone lobbed a hand grenade into a bloodbath, now you know. Markets were always going to be shaky on Monday, as it became increasingly clear that the US is set to see a sharp rise in recorded coronavirus cases. Then, on Friday Russia walked out of the Opec+ oil producers’ cartel, initiating an all-out price war in the oil market.
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Gavekal Research
Louis Gave
Mar 09th 2020
The Bond Blow-Off Top
The freakout in markets spurred by the coronavirus outbreak has seen US treasuries deliver one of their strongest two-week performances in the post-Cold War era. Louis argues that these moves leave investors with a stark choice to make: either we are seeing a “blow-off top”, or alternatively the world is facing an impending economic ice age.
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Gavekal Research
Louis Gave, Andrew Batson, Cedric Gemehl
Mar 06th 2020
Audio & Transcript — Gavekal Research Call March 2020
In Thursday’s conference call, Louis-Vincent Gave, Andrew Batson and Cedric Gemehl discussed the policy and market reactions to the Covid-19 outbreak.
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Gavekal Research
Louis Gave
Mar 06th 2020
The Unfolding Rotation
Last Friday, the markets rallied hard into the close as investors anticipated a coordinated policy move over the weekend. With policy responses in the rear view mirror, this weekend will likely prove different. Markets will continue to be choppy in the immediate future. Even so, amid all the volatility, some interesting developments are emerging.
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Gavekal Research
Nick Andrews
Mar 05th 2020
Video: What Can The ECB Do?
This week the US federal Reserve cut interest rates to counter the effects of the coronavirus outbreak, and the European Central Bank promised to follow suit with “appropriate” measures of its own. But eurozone policy rates are already negative, which severely limits the scope for further cuts.
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Gavekal Research
Louis Gave
Mar 04th 2020
Exponential Optimization
The bull market of the last few years has been built on the twin assumptions that globalization will continue, and that interest rates will remain low for years to come. These convictions have propelled an exponential wave of optimization. As the coronavirus calls key assumptions into question, the worry is that the giant bubble which sits at the heart of the system may be about to burst.
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Gavekal Research
Anatole Kaletsky
Mar 02nd 2020
When To Catch A Falling Knife
Now that the Federal Reserve has hit the panic button, is it time to try to catch the falling knife on Wall Street? Technical analysis and investor sentiment suggest that equity prices may still have somewhat further to fall before they find a sustainable floor, even if the viral threat is probably overstated and stimulus by major governments will eventually outweigh the temporary economic collapse.
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Gavekal Research
Research Team
Mar 02nd 2020
Strategy Monthly: Global Virus, Local Reactions
In the last week of February, global investors woke up to the massive effect of China’s coronavirus lockdown and the risks of a global pandemic. The resulting disruption to global supply chains will be widespread and long lasting. But not all is bleak. The Fed has promised to support the US economy, and many emerging markets have room both for expansionary fiscal policies and interest rate cuts.
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Gavekal Research
Louis Gave
Feb 28th 2020
The Last Shall Be First
Just a week ago, the S&P 500, Nikkei 225 and Eurostoxx 50 were all looking healthy. But over the past week, every major market has fallen by anywhere from -6% to -12%. This is highly unusual. The S&P 500 has only fallen by -10% or more four times in its post-1945 history. Each of these drops ended up having hugely important investment ramifications.
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Gavekal Research
Charles Gave
Feb 27th 2020
The Fragility Of A Complex World
The question investors must confront is whether the global economy is a slow but resistant beast of burden, or a finely tuned machine which has now been thrown off its axis.
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Gavekal Research
Charles Gave
Feb 26th 2020
The Velocity Of Money In The Time Of Covid-19
Most serious investors know MV=PQ, where M is the money supply, V is the velocity of money, P is the general price level and Q is output. The typical approach is to wait for M, P and Q to be published and so derive V, which renders the equation a mere tautology. In contrast, Charles has long thought V to be an independent variable whose variations impact P and Q.
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Gavekal Research
Louis Gave
Feb 25th 2020
Doing On Monday What We Wish We’d Done On Friday
Monday was the epitome of Charles’s observation that in a down-market, the temptation to sell on Monday what you wish you’d sold on Friday can become overwhelming. As markets sold off on Monday following a weekend of bad news, the following developments seemed especially relevant.
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Gavekal Research
Nick Andrews
Feb 21st 2020
What Will End The US Dollar’s Run?
Among the confounding effects of the coronavirus has been its impact on foreign exchange markets. The last few weeks have seen heavy flows into the US dollar, on the grounds that the US economy is relatively insulated from the ill-effects of the outbreak. As fears have grown of a dismal first quarter for the eurozone on diminished external demand (see Just When Things Were Looking Up), the euro has slumped to a near three-year low against the US...
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Gavekal Research
Nick Andrews
Feb 19th 2020
Video: Will The Economic Contagion Hit Europe?
Europe’s financial markets are sending mixed signals. On one hand, fears about the eurozone's exposure to China’s coronavirus-hit economy have pushed the euro to a 21-month low against the US dollar. On the other, euro-denominated stocks are hitting record highs. In this interview Nick examines the mixed message.
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Gavekal Research
Charles Gave
Feb 19th 2020
Time And Risk
The financial world is organized around two axes: time and risk. If some authority manipulates the time axis, the effect will be to compromise the risk axis. This is not an abstract formulation. It has the potential to threaten portfolios and the solvency of major institutions.
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Gavekal Research
Louis Gave
Feb 18th 2020
Q&A On The Coronavirus Situation
Louis spent last week meeting with clients in the US and discussions centered on the coronavirus situation. His starting point is that the Chinese authorities now have every incentive to overstate, rather than understate, the severity of the viral outbreak. He explores the impact on growth in the rest of the world and asset price movements.
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Gavekal Research
Anatole Kaletsky
Feb 17th 2020
The Long Term Risks That Matter, And Those That Don’t
In the third paper of his series about the risks that threaten asset markets in both the short and long run, Anatole turns his attention to four longer term risks that are widely discussed—and even more widely misunderstood. Investors should worry about demographics and climate change, although not for the reasons many believe. In contrast, they can sleep relatively easily about debt and productivity growth.
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Gavekal Research
Anatole Kaletsky
Feb 14th 2020
The Downing Street Putsch
Ever since turning negative on sterling and the UK economy when Boris Johnson dropped his post-election bombshell announcing a new “No Deal” deadline of December 2020, I have been waiting for a chance to double-down on this bearish position. On Thursday, Johnson provided such an opportunity to extend short positions in sterling.
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Gavekal Research
Vincent Tsui
Feb 14th 2020
Video: Hong Kong's Viral Woes
For Hong Kong’s economy, already in recession after eight months of anti-government street protests, the Chinese coronavirus outbreak comes as a fresh blow falling on the existing bruise. Inevitably, the effect will be painful. Yet as Vincent explains, the Hong Kong economy has considerable resilience.
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Gavekal Research
Nick Andrews
Feb 13th 2020
Paying Your Way In The UK
A triumphant Boris Johnson is set on consolidating a new electoral coalition through big infrastructure projects that help “level up” forgotten regions, but he faces a weak economy and tough negotiations with the European Union over Britain's trading relationship. The worry is that investors begin to balk at funding a gaping current account deficit.
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Gavekal Research
Cedric Gemehl
Feb 11th 2020
The Fiscal Fallout Of Germany’s Political Ructions
On Monday the uncertainty quotient in German politics jumped dramatically when Angela Merkel’s chosen successor quit as leader of the CDU. Her departure will trigger a new CDU leadership struggle which will further fragment an already fractured German political scene. The upheaval is likely to lead to a more expansionary German fiscal policy in the medium term.
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Gavekal Research
Nick Andrews
Feb 06th 2020
Just When Things Were Looking Up
It seems the European economy can’t catch a break. After a grim year in 2019, especially for the manufacturing sector, the old continent entered 2020 with reasons for cautious optimism. Survey-based indexes of business optimism appeared to bottom out late last year. Then the Wuhan coronavirus hit China.
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Gavekal Research
Tom Holland
Feb 06th 2020
Video: When Oil Hits The Floor
No financial market has been hit more heavily by the Wuhan coronavirus than oil, with the price of crude falling by more than -20% from its early-January high on fears the outbreak will crush China’s demand for fuels. In this short video, Tom examines the global implications of the oil price slide, and asks “where next?” for the price of the world’s key commodity.
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