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    Gavekal Research

    It's Not 2017 Again In Europe

    Yesterday saw a global risk-on move as investors cheered reports that a US-China trade deal may be in the offing. In Europe, this followed data releases that showed German factory orders picking up and PMIs stabilizing. On first blush, this looks reminiscent of 2017’s recovery. Alas, there are three key reasons to think a rerun may not materialize this time around.

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    Gavekal Research

    Video: In Search Of Policy Traction

    New European Central Bank boss Christine Lagarde has called on European governments to do more on the fiscal front to support eurozone growth. Only Germany has wiggle room within the EU fiscal straitjacket to launch a significant stimulus program. However, political resistance in Berlin to opening the spending taps remains formidable, and may be insurmountable.

    0
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    The Knowledge Revolution And Its Consequences

    From Hong Kong to Santiago to Paris, this year has seen protestors rage against out-of-touch political elites. But does anything more than anger connect these apparently disparate movements? Louis argues that the upheavals posed by the ongoing “knowledge revolution” may explain the phenomenon, and offers investment advice on how to survive revolutionary times.

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    Gavekal Research

    Behind The Risk-On

    In recent months, economic data has improved or stabilized, and political risks have receded. But now that equity prices on Wall Street have hit new records and US treasury yields have rebounded from the bottom of their post-2011 trading range, it is worth asking if the move to risk-on conditions is a temporary mood swing, or one supported by economic fundamentals.

    0
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    Gavekal Research

    Gold Signals A System Failure

    To make the point that gold is the only monetary asset that is not someone else’s liability, John Pierpont Morgan used to say that “gold is money, the rest is credit”. For simplicity’s sake, let’s assume that this quip corresponds to reality—the implication is that the relationship between the gold price and the credit system must be full of information.

    4
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    Gavekal Research

    Strategy Monthly: Towards A Dollar Decline

    The last five years have been an era of US dollar strength. That era may now be coming to an end. After the US Federal Reserve halted its balance sheet contraction and last month resumed buying T-bills at a rate of US$60bn a month, the Fed is now printing money faster than the other central banks. As a result, relative liquidity growth now favors US dollar weakness.

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    A Swedish Canary In The Coal Mine

    Sweden’s Riksbank plans to raise its main policy rate to zero from -0.25%. A relieved governor, Stefan Ingves, said last week it would be a “bonus” to return to parity in December and warned against staying negative for too long. The Swedish recantation follows the European Central Bank’s controversial move last month to further cut rates to -0.5%. Investors should take note because the Swedish canary may be signaling a shift in attitudes to...

    0
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    Gavekal Research

    Where Will Growth Come From Now?

    In the spring of 2003 Gavekal posited that China would become the new locomotive of world growth. But now, the days when China could be counted upon to gear up its balance sheet and pull global growth up by its bootstraps are coming to an end. And as global activity slows investors are asking “where will the growth come from"?

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    Draghi's Potent Legacy

    Mario Draghi threw the cat among the pigeons at last month’s fiery policy meeting of the European Central Bank by cutting interest rates and cranking up asset purchases. Today’s general council meeting and sign-off by the outgoing president should be quieter, but the circumstances of the baton-handing show how much the ECB’s reaction function changed under Draghi. That legacy poses a big challenge for his successor, Christine Lagarde, but he...

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    Europe's Brexit Booster

    Boris Johnson has secured a revised Brexit deal and the stage is set for a key Saturday vote in the House of Commons. On balance, there is a 70% chance of the vote passing as Labour leader Jeremy Corbyn seems unable to control his Brexit-supporting rebels, while Johnson looks to have persuaded his Brexiteer wing that it could be now or never.

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    Gavekal Research

    Video: The End Of The Trend?

    For the past few years, US treasuries, the US dollar and the oil price have all broadly traded in a range. In fact, the only bankable trend for investors has been the outperformance of US equities, without which global stock indexes would still be trading at 2006 levels. However, there are signs that the investment environment is changing.

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    Gavekal Research

    The Paris Project In A Keynesian Time

    Some time ago, I had gathered a team in Paris to develop a new venture that would apply macro research analysis to portfolio construction in a systematic way. Things are progressing well and I wanted to update readers on the initiative. The common thread is a rejection of forecasting and a reliance on market prices and economic data.

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    Gavekal Research

    The Age Of Range Trading

    It is a Gavekal adage that 10-year treasury yields, crude oil prices and the US dollar exchange rate are “master prices” that have an outsized impact on economic activity and financial markets. Yet as Louis notes, in recent years, these three prices have shown little by way of a structural trend. In this piece, he seeks to understand the meaning from this range-trading phenomenon.

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    Sizing Up The Brexit Risks

    The pound surged after Boris Johnson and Irish Prime Minister Leo Varadkar achieved a negotiating breakthrough on Thursday over arrangements for the Irish border. The question is: What next? Anatole argues that while these moves still point to a multi-pronged set of outcomes, at least there is now a measurable set of permutations.

    2
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    Gavekal Research

    Please, Your Majesty, Do Nothing

    Western democracies in the early 1990s stood unchallenged in the battle of big ideas. Alas, everything that has gone wrong in western economies over the last decade or so stems from the lessons that the technocracy took from this victory. Charles considers the mistakes and examines the investment consequences that must now follow.

    2
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call October 2019

    Vincent outlined EM Asia's "great moderation", as inflation is diverging from other emerging markets, creating opportunities in bonds. Udith argued that Indian growth may be bottoming out but a bad banking picture means that equities may have more downside. Tom addressed the remaking of Asian supply chains in light of the US-China trade war.

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    Gavekal Research

    At Home In The Range

    Almost a month after missile attacks on key Saudi Arabian oil production and processing facilities pushed benchmark global oil prices up by 20% overnight, the market has moved on. Saudi Arabia has defied industry expectations by continuing to supply oil to the market in abundant quantities. The current market pricing reflects that.

    0
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    Gavekal Research

    The German Spillover

    Perhaps the most remarkable thing about this year’s slump in manufacturing is how few negative spillover effects it has had on demand in the broader economy—until now. Services PMIs for both the eurozone as a whole and for Germany took a sharp turn south in September. In Germany, the deterioration is making a technical recession all but inevitable.

    0
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    Gavekal Research

    The Greater Good Versus Individual Liberty

    Yesterday Hong Kong's streets were again the stage for violent clashes between protesters and police. At the heart of the conflict is a showdown between the shared identity in Hong Kong shaped by the common law system inherited by the British and the common narrative in China emphasizing the "greater good" over individual liberties.

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    Gavekal Research

    The Upside For Europe

    The euro is trading at its weakest against the US dollar since May 2017. Whether it falls further from here or finds support around current levels to establish a base for a rebound will depend mainly on whether Europe’s economic performance continues to deteriorate, or whether upside surprises are likely in the months ahead.

    1
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    Gavekal Research

    Legal Is Not The Same As Legitimate

    Democracy is in trouble. Everywhere the cause is the same: a massive conflict between legitimacy and legality. For the last 100 years or more, the split between left and right left anchored the legitimacy of any democratic government. Unfortunately, over the last couple of decades or so, the left has betrayed the people, while the right has betrayed the nation.

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    Gavekal Research

    Black Zero Or Green New Deal?

    Investors and environmentalists alike got their hopes dashed on Friday. Their best-case scenario would have seen Berlin invoke a climatic emergency to override fiscal orthodoxy and roll out a stimulative program of green investment. In the event, the measures announced not only fell short of the green lobby’s expectations—they were budget-neutral.

    1
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    Gavekal Research

    The Industrial Disease (II)

    Last week, Charles examined the decline of the US industrial sector, introducing his “industrial Wicksellian spread” as an indicator of environmental conditions for industry. Now he looks at the probable causes of industrial deterioration, explains why neither monetary nor fiscal policy can help, and uses his toolkit to draw some important conclusions for portfolio investors.

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    Gavekal Research

    The Cost Of Cleaner Shipping

    Right now, investors concerned about energy prices are focused on the attacks on Saudi Arabia’s processing facilities. But a possible conflict in the Gulf will not be the only emergent factor likely to affect oil prices over the coming months. New rules for cleaner shipping fuels, known as “IMO 2020,” also have the potential to roil global petroleum markets.

    0
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    Gavekal Research

    Draghi's Fiscal Gift

    As he pushed interest rates still further into negative territory and announced the resumption of quantitative easing on Thursday, outgoing European Central Bank chief Mario Draghi made clear that he was passing on the baton of policy stimulus—not so much to his successor, but rather to Europe’s finance ministries.

    4
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    Gavekal Research

    The Industrial Disease (I)

    Something ails the industrial sector. Since the 2008 crisis, the growth of US industrial production has failed to keep pace with the growth of the overall US economy. In this paper, Charles examines the industrial sector’s malaise using tools derived from the theories of 19th century Swedish economist Knut Wicksell. His conclusions are disturbing.

    2
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    Gavekal Research

    The Three Waves Of Capitalism

    Three great forces drive capitalism and markets: the Schumpeterian, the Ricardian, and the Malthusian. Usually only one dominates at any one time. The flood of capital into tech indicates investors believe that Schumpeterian creative destruction will continue to drive returns over the coming years. But Louis argues that a new wave may be about to take over.

    15
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    Gavekal Research

    Up Against The Limit With The ECB

    German savers face “custody fees” when depositing big sums at the bank, or get clipped 50bp when buying a euro-denominated money market fund. Such outcomes explain why a growing number of economists oppose calls for the European Central Bank to cut rates further and restart quantitative easing when it meets tomorrow.

    1
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    Gavekal Research

    The Danger Of A Dumbbell Portfolio

    Both bond and equity markets are signaling investors' belief that monetary policy will not only stay easy for as far as the eye can see, but actually get easier in the coming weeks and months. But what if they end up getting wrong-footed in their expectations of another wave of interest rate cuts, quantitative easing and other uber-dovish monetary policy measures?

    4
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    Gavekal Research

    Video: Italian Politics Favors Bonds

    Yesterday Italy’s new government took office, the 66th since 1946. Meanwhile, Italian bond yields have reached record lows. Nick attributes this to two factors. First the global bond rally. Second, the shifting winds of Italian politics away from the Euroskeptics to the Europhiles, which bodes well for Italian-European budget negotiations.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call September 2019

    In yesterday’s conference call, Anatole Kaletsky, Will Denyer and Louis-Vincent Gave outlined reasons for recent dramatic moves in bond markets and made arguments for what comes next. Anatole also addressed Brexit developments and Louis discussed the situation in Hong Kong.

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    Gavekal Research

    Italian Politics And The Bond Market

    On Tuesday, members of Italy’s left wing populist 5-Star Movement lent their support to the formation of a new coalition government with the Democratic Party. The new government, to be led by Giuseppe Conte, technocrat prime minister in the previous coalition, still has to secure a confidence vote in Parliament. But that should go through in the next couple of weeks. If it does, right wing populist Matteo Salvini—Italy’s most prominent...

    0
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    Gavekal Research

    Strategy Monthly: The Message From Bonds

    Record low bond yields point to a deflationary catastrophe in the making. Yet growth data in the world’s two biggest economies remain decent. Could investors be reacting to a rupture in the international order? Gavekal analysts are not persuaded by such arguments and offer four alternative explanations for the “bond bubble”.

    0
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    Gavekal Research

    ‘Do Or Die’ Boris Is Bullish For Sterling

    Considering the political chaos that will descend this week on the UK, it may seem surprising that the pound has bounced back to its trade-weighted level just before Boris Johnson became prime minister. Or maybe it is not too surprising—if a “No Deal Brexit” is the only possible scenario that would justify a further weakening of sterling and other UK assets.

    1
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    Gavekal Research

    The Importance Of Oil

    The world’s fixed income markets are priced for a severe bout of demand destruction and deflation. Yet, outside Europe at least, growth in the world’s major economies continues to tick over. However, could a sudden oil price rise spark an uptick in inflation pressure that triggers an abrupt repricing in which bond yields spike sharply higher?

    0
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    Gavekal Research

    Europe’s Victimhood Culture

    The biggest threat to world economic growth today is not the US-China trade war, but German exceptionalism. Even as Germany has suffered the greatest growth downgrades of any major economy, its politicians have obstinately rejected any Keynesian fiscal expansion. Now calls are mounting for a policy U-turn, but Anatole isn’t holding his breath.

    11
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    Gavekal Research

    Video: The Anatomy Of The August Panic

    As more and more government bonds around the world slide into negative yield, investors can draw one of two conclusions: either the world faces an economic meltdown, or there is a buying panic in safe assets. But although there is indeed a synchronous global slowdown in growth, Louis favors the latter explanation.

    0
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    Germany’s Fiscal Firepower

    Uniquely among the world’s big economies, Germany runs a budget surplus, in accordance with the “debt brake” written into its constitution following the 2008-09 financial crisis. This means Berlin could, in theory, deploy considerable fiscal firepower even within the current rules, and a great deal more if it chose to bend or rewrite them.

    1
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    Gavekal Research

    German Banks And The Dollar

    I am certainly no technical analyst, but I do have a good memory. The story of major financial crises can be told with reference to the US dollar’s movements against the euro (and its antecedents). It now looks to have reached a significant juncture, especially with Italy moving toward another period of political instability.

    9
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    Gavekal Research

    The Diminishing Market Impact Of Tariffs

    After the US imposed its first major round of tariffs on Chinese goods last September, the S&P 500 sold off by -20%. After the second round went into force, it fell -6.8%. And since President Trump announced a third round, it has sold off by -6.1%. It seems each successive escalation in the trade war is having a smaller impact on the US stock market.

    2
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    Gavekal Research

    When The World Goes To Hell

    Anatole has previously argued that the correlation between inverted yield curves and recessions has very little predictive significance. In this piece he updates that view to argue that inverted yield curves have no predictive significance whatsoever. For this reason, he thinks that equity investors have gotten their reaction to recent developments about right, while bond investors are all in a muddle.

    5
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    The Surge In Anti-Fragile Assets

    The latest round of data releases appears to confirm fears that the world is facing another synchronous global downturn. If so, it will be different from other slowdowns, in that it will not have been caused by rising interest rates or higher energy prices. What’s more, it will be setting in when there is little prospect of a globally coordinated response, when monetary policy appears to have lost traction, and when asset prices are looking...

    3
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    What Germany Means For Europe

    Even before the US-China trade war escalated last week, Europe stood on shaky ground. We learnt yesterday that German industrial production for June fell -1.5%. Europe’s largest economy faces cyclical and structural challenges, and the question is whether it takes its neighbors down with it.

    0
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    Gavekal Research

    The Death Spiral Of Eurozone Banks

    For months Charles has told anyone who will listen that the real threat to global markets is the slow-motion implosion of the eurozone’s banking system. Each time the region's equity has hit a critical threshold an intervention has caused it to bounce off and delay the reckoning. The size of these rebounds has waned and this time there may be no respite.

    2
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    What Sterling’s Move Tells Us

    The sterling exchange rate is going down and the usual suspects say this is bad news. But the exchange rate is merely a price that helps allocate capital between the economy’s internal and external sectors, and so set the purchasing power of rentiers and entrepreneurs. Entrepreneurs do best when the currency is undervalued, while rentiers and consumers win out when it is overvalued.

    2
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    Strategy Monthly: Focus On The Fed, Not On US Tariff Threats

    Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.

    0
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    Gavekal Research

    Video: Enter Boris

    In the last week or so, the pound has fallen sharply to a two-and-a-half-year low against the US dollar. That’s all down to the new British government, headed by Boris Johnson, and his "do or die" Brexit campaign. But when a deal is finally struck, Britain’s strong economic fundamentals mean it is well placed for a boost in growth, along with the pound.

    0
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    Gavekal Research

    Sterling’s Information Void

    Since Boris Johnson became prime minister, the UK government’s promise of a “do or die” Brexit has caused sterling to slump -2.9% against the US dollar to about US$1.21. While the chances of Britain actually leaving the EU without a deal remain small, this outcome will remain unclear for some time. That presents risks, but great opportunities for those dealing in sterling.

    0
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    Gavekal Research

    Darwin Or Keynes?

    Keynes advised that at the outset of a recession, policymakers should drive down market interest rates in order to borrow from future demand. Today’s central bankers have adopted this approach as permanent policy. Unfortunately, permanent Keynesianism fatally interferes with the economic Darwinism of creative destruction that propels growth in a capitalist system—with dire consequences.

    5
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    Gavekal Research

    The Most That ECB Easing Can Do

    Mario Draghi fired no new bazooka on Thursday. But the European Central Bank president did signal the deployment of a whole arsenal of monetary weaponry in September. Such a package will cement the transition of the ECB under Draghi into a more active and more actively political institution, with a much more counter-cyclical policy stance.

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