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    Gavekal Research

    Do Bubbles Predict Or Project?

    With the second quarter data season now in full swing, the rebound in equity prices that followed the Covid-19 panic seems to have stalled. So, what happens now? In this piece, Anatole follows up on Louis’s recent efforts to define reasons for the surge in equity values and proposes a fresh explanation centered on the nature of bubbles.

    5
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    Gavekal Research

    Video: A Fiscal Cliff Approaches

    With the Covid-19 outbreak in the US still worsening, special unemployment benefits that have provided a lifeline for 17mn Americans stand to expire at the end of next week. Yet unlike in March, there is scant appetite in Washington DC for a swift bipartisan deal to extend support for the jobless. In this video interview, Yanmei explains what is at stake for the US economy if politicians cannot make a deal before heading off for their summer...

    0
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    Gavekal Research

    Living With Hard Times

    Even as the Covid-19 outbreak materially worsens in the US, the pricing of financial assets remains benign. Is this equanimity justified or are we just waiting for the next shoe to drop? Myself and Will Denyer have been in the constructive camp on US equities, even if we are now squeamish about valuations, and continue to think that markets have it about right.

    0
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    Gavekal Dragonomics

    The Marginal Impact Of Housing Renovation

    The State Council recently announced a nationwide target to renovate 39,000 antiquated residential compounds in 2020, improving accommodation for 7mn total households. In this Quick Take, Rosealea explains how the target will provide space for local governments to further tighten property policy without upsetting China’s economic recovery.

    0
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    Gavekal Research

    The US Dollar Starts To Break Down

    The US dollar is back to the panicked lows of March when Western economies were being locked down. Back then the prices of financial assets reflected a lack of liquidity, rather than fundamentals. Today central banks have ensured ample liquidity, so Louis explores various reasons that could explain the US dollar’s apparent breakdown.

    0
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    Gavekal Research

    Webinar: The Direction For Europe

    Anatole Kaletsky, Cedric Gemehl and Nick Andrews joined Louis Gave to talk about what lies in store for the European Union in light of Tuesdays agreement on a €750 billion Covid-19 recovery fund.

    0
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    Gavekal Research

    Europe's Deal

    Most of the attention paid to the European Union’s recovery fund deal, secured in the early hours of Tuesday morning, focused on how much of the agreed €750bn would be distributed as grants and how much as loans. That’s understandable. Haggling over this balance was one of the main reasons the talks dragged on into their fifth day. But as far as investors are concerned, the relative size of grants and loans is among the least significant aspects...

    1
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    Gavekal Research

    The Consequences Of ‘Worthless Cash’

    In the second quarter of this year, global equity markets registered their best quarterly performance in two decades. In this, the third paper of a series about the record-breaking rebound, I will consider the possibility that the present growth in monetary aggregates is leading investors to conclude that they have no alternative.

    5
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    Gavekal Dragonomics

    The Next Steps In US-China Decoupling

    As the US election approaches, the Trump Administration is intensifying pressure on China on all fronts. In this report, Dan outlines the executive-branch agencies tasked with implementing sanctions and restrictions, what they have accomplished so far, and what tools are at their disposal should Trump decide to further escalate the situation.

    0
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    Gavekal Research

    Toward A Renminbi-Gold Standard

    As the international trading and monetary order of the last 50 years continues to crumble, the endgame must be the US dollar losing its lofty position at the apex of the system. Louis and I have argued that this process began in and around 2005 as the US moved to “weaponize” the dollar, thereby ensuring the renminbi’s emergence as a competitor.

    5
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    Gavekal Research

    What Will Stop The Gold Bull Market?

    The sustained outperformance of very large-cap tech stocks means that any manager who substantially underweighted the sector has likely lost clients. The exception may be those who favored gold and gold miners, which have experienced a “stealth” bull market. I say stealth because the precious metals rally has garnered limited headlines, scant investor interest and fewer reflections on either its causes, or consequences.

    2
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    Gavekal Research

    Unpicking The Tourism Effect

    Despite a worsening Covid-19 situation in many big developing economies and concerns over central banks’ monetization responses, emerging market investors continue to climb the wall of worry, betting that a putative “second wave” does not stymie the recoveries of developed economies and China. But another challenge for EM economies is a collapse in foreign tourism.

    0
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    Gavekal Research

    A Long Autumn For Covid In The US

    Covid-19 has largely gone into the rear-view mirror in East Asia, and has been tamped down in Europe, but keeps dominating the headlines in the US. Infections in the current US wave are likely to peak in the first half of August, while deaths will peak in late August or early September. Recovery in sectors with high levels of human contact will continue to be retarded through the summer. About one-eighth of GDP, and a quarter of the workforce,...

    4
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    Gavekal Dragonomics

    The Recovery Tapers Off

    Although Q2 GDP growth rebounded strongly after Q1’s significant contraction, sequential growth slowed considerably into June. In this Quick Take, Thomas, Rosealea, Wei and Xiaoxi report on why despite this latest rebound it will be difficult for the country to maintain its upward momentum as it moves into Q3.

    0
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    Gavekal Research

    From Temporary To Permanent

    “Nothing,” Milton Friedman famously declared, “is so permanent as a temporary government program.” He was right, which is one reason Wednesday saw the euro climb to its highest against the US dollar since the first days of the international Covid outbreak in early March, while 10-year Italian government bond yields fell to their lowest. Investors are betting that the European Union’s €750bn “Next Generation EU,” proposed as a temporary facility...

    0
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    Gavekal Research

    Video: Singapore's Policy Path

    Just days after securing another five years in power at the ballot box, Singapore’s government announced that the island republic’s gross domestic product contracted a worse-than-expected -12.6% year-on-year in the second quarter. However, with large accumulated fiscal reserves, the government has considerable scope to spend in order to stimulate Singapore’s economy.

    0
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    Gavekal Research

    A Simmering War Over Digital Taxes

    The US and Europe are in a standoff over how to tax digital companies. The US Trade Representative on Friday announced tariffs on French cosmetics and handbags, to take effect next year unless France drops plans to tax American tech giants. The worry is that such a dispute spirals, causing a further degradation of the global trade architecture.

    0
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    Gavekal Research

    Pick Your Side

    The British government’s decision to block Huawei from the UK’s 5G mobile network, confirmed yesterday, is further evidence that the post-Covid world is splitting into two opposing security blocs. International distrust of China is hardening along ideological lines, spurring liberal nations to prioritize national security over economic growth.

    0
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    Gavekal Research

    Oil’s Unintended Consequences

    On Wednesday, ministers from the Opec+ oil exporting cartel will meet to decide whether to begin scaling back their production cuts, but with the prospect of a renewed increase in infection rates, it's safe to say they will adopt a cautious approach. More interesting is whether they will err on the side of excess caution, causing the oil price to rise.

    0
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    Gavekal Dragonomics

    A Bumpier Road To Semiconductor Supremacy

    The Chinese semiconductor industry has made substantial progress over the last year, making credible gains in both design and production—despite attempts by the US to stymie China’s advancement. In this report, Dan explains how the US has escalated its anti-China campaign and outlines the rough road ahead for the industry.

    2
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    Gavekal Research

    India’s Pharma Problem

    India, the world’s pharmacy, is in danger of running out of drugs. The source of the danger is India’s deteriorating relationship with China, which provides up to 70% of the bulk ingredients for India’s pharmaceutical industry. Most Indian pharma makers hold at least two months of stock, but if the situation is not resolved, the global pharma supply chain could be disrupted.

    0
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    Gavekal Research

    Webinar: China's Capital And Bond Markets

    On Tuesday morning Thomas Gatley and Wei He joined Arthur Kroeber to discuss the Chinese equity bull market and the major reversal in the bond market.

    0
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    Gavekal Dragonomics

    How To Burst A Bubble

    Chinese equities surge ahead, and officials are worried that markets are coming dangerously close to resembling the dramatic boom and bust of 2015. In this report, Thomas makes the case that the current rally has no basis in fundamentals and outlines how regulators are trying to guide equities back to reality without causing a panic.

    0
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    Gavekal Research

    Beyond Second Quarter Earnings

    The US 2Q20 reporting season gets into its stride this week, and for all but a fortunate few the earnings numbers will be abysmal. But abysmal numbers will come as no surprise to investors, and will have little impact on the market. A reasonable prospect of upside earnings surprises in 2H and upward revisions in earnings estimates will help support equities.

    0
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    Gavekal Research

    Buy Europe, Sell The UK

    In past crises the UK has emerged more quickly than the eurozone. In 2008-09, it restructured its banks, slashed interest rates and embraced quantitative easing before European policymakers had eaten breakfast. As a result, UK domestically-focused stocks outperformed those in the eurozone. Don’t count on a rerun in the aftermath of the Covid-19 crisis.

    0
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    Gavekal Research

    Have Equities Become A Bubble?

    Two weeks ago, Louis proposed three possible explanations for the exceptional performance of equity markets in the second quarter, one of which was that investors have taken leave of their senses. In this, the second paper of a three-part series, Louis asks if equity markets are in a bubble. And if so—crucially—what sort of bubble is it?

    13
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    Gavekal Dragonomics

    The Monetary Policy Emergency Is Over

    The Chinese government bond market has seen its biggest reversal in more than three years. Conflicting policy signals have made the priorities of China’s central bank difficult to decipher; in this report, Wei explains why it has now clearly returned to its “selective” easing mode of delivering targeted rather than broad-based economic support.

    2
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    Gavekal Research

    Testing The Boundaries Of QE

    One major emerging market central bank this week sailed boldly into waters others have so far feared to navigate, when Bank Indonesia agreed to buy IDR574trn (US$40bn or 3.6% of GDP) of government bonds in the primary market at below market interest rates, so beginning the direct monetary financing of the Indonesian government’s fiscal deficit.

    0
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    Gavekal Research

    Video: What To Make Of Britain’s £30bn Stimulus

    This week UK Chancellor of the Exchequer “Dishy” Rishi Sunak lived up to his media nickname, dishing out an additional £30bn in fiscal support and stimulus measures. In this short video interview, Nick assesses their likely impact.

    0
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    Gavekal Dragonomics

    Local Support For Housing Is Peaking

    National housing sales growth is likely to accelerate in June following May’s rebound on the back of supportive measures from local governments and easier access to credit. In this report, Rosealea outlines how the surge in sales might peak soon due to diminishing returns from local government stimulus as well as more cautious monetary easing.

    0
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    Gavekal Research

    Germany's Moment

    Could this be Germany’s moment? The prospect of a disgruntled Italy walking away from the European Union spurred a German move towards new burden-sharing arrangements, but the conditions have been brewing within Germany for a few years as it became clear that its old export-led development model was cooked. Such existential fears are driving a newly creative approach to Europe at a time when the EU’s biggest economy may be set to benefit from...

    0
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    Gavekal Research

    Webinar: A New European Dawn?

    Yesterday Nick and Cedric presented on the topic of their latest Strategy Monthly: A New European Dawn. In this they argue that Europe is finally embracing fundamental reform that should change the investment environment. Anatole offered his take on why the European Union is heading in a “Hamiltonian” direction.

    0
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    Gavekal Research

    Learning To Transact Through Covid

    The Covid-19 flare-up in the southern and western United States threatens to slow the country’s recovery, but it is unlikely to be a rerun of the severe economic contraction seen in March and April. Since Americans are learning to maintain economic activity during Covid-19, a Nike swoosh or “stairstep” recovery seems more likely than the feared W-shaped outcome.

    2
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    Gavekal Research

    Is This What Capital Flight Looks Like?

    The bearish scenario for Hong Kong was that a combination of protests and Beijing’s heavy hand would trigger the flight of capital—financial and human—jeopardizing the peg and the financial system. Yet despite months of protests, and Beijing’s subsequent clampdown, the financial elements of this doomsday scenario have completely failed to materialize.

    1
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    Gavekal Research

    India Eyes Up Uncle Sam

    After the border clash with Chinese troops on June 15, India is on the verge of a strategic reorientation towards the United States that will reshape security in Asia. A full formal military alliance with the US would be a red rag to the Chinese bull, and therefore remains unlikely. But India is set to deepen its strategic partnerships with the US and other like-minded countries, especially Japan and Australia. It will also weaken its ties with...

    0
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    Gavekal Research

    Behind The Bull Run In Chinese Stocks

    Chinese equity markets are bounding higher on ebullient animal spirits. The CSI 300 index is up some 12.5% YTD in renminbi terms Monday morning. While the sequential rebound in profits from the first quarter’s dire situation has been heartening, the prospects for year-on-year earnings growth cannot justify this exuberance.

    9
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    Gavekal Research

    An Upgrade For The Jeep Portfolio

    In the Covid-19 crisis, Charles’s “Jeep” portfolio, introduced at the end of 2017 and expounded on in mid-2019, has amply demonstrated its worth, outperforming a pure equity portfolio, but with much lower volatility. In this paper, Charles reviews the Jeep portfolio once again, upgrading its components to navigate a post-Covid world.

    0
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    Gavekal Research

    Time To Run With The Herd?

    When a herd of cattle is being hunted by a pack of wolves, the worst thing any cow or bull can do is show individualism and originality by running off in a different direction from the rest of the herd. In financial markets, “the trend is your friend” expresses the same evolutionary logic. Are markets now displaying non-rational herd behavior?

    4
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    Gavekal Dragonomics

    Japan And Korea Split On China's Rise

    Japan and South Korea have responded differently to China’s attempts to peel them away from the US. Japan continues to align closely with its ally, while South Korea is more ready to accept that China as the regional power. In this report, Yanmei and Dan explore the logic behind these decisions and what they mean for the regional power balance.

    6
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    Gavekal Research

    The Rising US Covid Risk

    In the coming weeks, the headlines about Covid-19 in the US are all but certain to get much worse as case numbers rocket in many southern and western states. Higher case numbers will be accompanied by more hospitalizations, stories of overloaded hospital systems and (probably) rising death tolls.

    0
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    Gavekal Research

    Strategy Monthly: A New European Dawn?

    European nations have managed to lay the ground for a putative fiscal union. In a change of tack, Germany has changed tack by embracing demand management policies. Its new approach should drive a more balanced and domestically-focused recovery that may lift the eurozone-wide return on invested capital. Nick and Cedric argue that this changed dynamic is likely to attract foreign capital and lift the euro against the US dollar.

    0
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    Gavekal Dragonomics

    The Uneven Rebound In Consumption

    The recovery of consumption in China is coming, but it will be an uneven one. In this piece, Thomas explains how the combination of recent negative surprises on public-health restrictions with positive surprises on jobs and income will shape the trajectories of different consumption categories, from food to autos to electronics.

    0
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    Gavekal Research

    Competing Reserves Of Value

    In order to function properly, any economic system must have one or more trusted reserves of value, so that participants can factor time into their calculations. In recent decades the world has offered investors three principal reserves of value:

    6
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    Gavekal Research

    Video: Singapore Beyond July's Election

    Although a new opposition political party is making Singapore’s current election season somewhat more interesting than past campaigns, the outcome is not in doubt: the ruling People’s Action Party will be confirmed in power for another five-year term. In this short video interview, Vincent looks beyond the July 10 poll to survey the economic and market outlook for the island republic.

    0
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    Gavekal Research

    A Rare Growth Story

    Economic good news stories are almost as rare as hens’ teeth these days—almost, but not quite. On Tuesday Vietnam’s General Statistics Office released its advanced 2Q20 GDP estimate showing 0.36% YoY growth, meaning Vietnam is likely to be one of the very few countries in the world to register any growth at all during the second quarter.

    0
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    Gavekal Research

    Webinar: Global Investment Roundtable, June 2020

    Yesterday Louis Gave, Will Denyer and Andrew Batson joined Arthur Kroeber at the Global Investment Roundtable. They discussed the economic growth and market situation in the US, the state of the Chinese recovery, and what a post-Covid-19 world might look like.

    0
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    Gavekal Research

    From Bullish To Neutral

    There has been a lot of talk about how the rally in US markets has been driven entirely by irrational sentiment. We disagree, and have since late March argued that the rebound in risk assets was rational. Our assessment rested on four financial and economic pillars. Today a reexamination of these pillars suggests a moderation of our bullish stance.

    0
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    Gavekal Dragonomics

    The US Takes Action Against Military Fusion

    New regulations from the US Department of Commerce which go into effect on Monday could deny US-origin technologies to a broad swath of Chinese companies. In this Quick Take, Dan explores which firms are most at risk of falling afoul of these regulations and how their supply chains might be affected.

    0
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    Gavekal Research

    Towards More Of The Same?

    Investors looking at the impressive rally in global equities since mid-March have been forced to come to one of three conclusions: (i) the Covid-19-induced halt to our economies will soon fade away like a bad dream, (ii) equity investors are crazy, or (iii) a growing number of investors think the cash they hold is bound to become worthless.

    13
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    Gavekal Research

    What's US$1.6trn More Or Less?

    As three months ago, the prime case for holding US risk assets is the liquidity support provided by policymakers. But while liquidity conditions remain extraordinarily easy, and will continue to do so as long as inflation expectations remain depressed, in one respect at least the potential of surplus liquidity to push asset markets higher may have been exaggerated.

    6
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    Gavekal Dragonomics

    The Future Of Hong Kong

    Whither Hong Kong? After a year of political turmoil, uncertainty about the city’s prospects is the highest it has been in decades. This 20-page DeepChina report examines Hong Kong’s historical trajectory, and concludes the city is in long-run decline—even though it will continue to be an important financial gateway between China and the world.

    0
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    Gavekal Research

    Please May I Have €10bn Too?

    Indulge me for a moment in a flight of fancy. Last week, the European Central Bank lent out €1.31trn to eurozone banks at a negative interest rate of -1%. Now, I am not a bank, but it is diverting to imagine that I might qualify for a small crumb of this funding, say a modest €10bn—because I know exactly what I would do with the money.

    16
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    Gavekal Research

    US Regional Outbreaks Hit A Key Threshold

    The southern United States is in the grip of a major wave of the Covid-19 pandemic. Until now, Arthur has taken the view that rising case numbers alone would not be enough to convince state governments to slow down or roll back economic reopening plans. However, the risks to this core scenario are mounting.

    0
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    Gavekal Research

    The US Approaches A Cliff Edge

    As the US starts to resume normal economic activity, a concern is that fiscal support is ended too early and the recovery is snuffed out. While European economies have extended many of their job protection schemes, the US faces a cliff edge at the end of July. If incomes suddenly crater, the worry is that spending plunges and the recovery takes on the feared W-shape.

    0
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    Gavekal Research

    Webinar: Global Update (French), June 2020

    In yesterday's webinar for our Francophone audience, Charles and Louis Gave, Cedric Gemehl and Didier Darcet updated viewers on their views of asset markets and government responses to the economic calamity caused by Covid-19.

    0
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    Gavekal Research

    Video: Behind The Resilience Of Hong Kong's Markets

    Hong Kong has been beset by a string of bad news, from mass street protests, through Covid-19, to national security legislation of unknown scope and severity imposed by the mainland. Yet you wouldn’t guess it from looking at the city’s property market—the world’s priciest—or its stock market where several mainland tech companies are lining up to do their initial public offerings. Vincent explains the disconnect.

    0
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    Gavekal Research

    A Friendlier Supply Chain Required

    Covid-19 has revealed reliance on Chinese supply chains as a serious national security risk. But shifting manufacturing of vital goods to other parts will be no easy task, especially when alternatives like Vietnam remain so dependent on imports from China themselves. Meanwhile, the pandemic has made other potential locations—notably India—less attractive.

    0
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    Gavekal Research

    The Club Med’s Cruel Summer

    France, Italy and Spain suffered the deepest contractions in their economic activity in the first quarter and through April. Yet government programs have successfully supported both business cash flows and household incomes. Beyond the immediate bounce-back from lockdown, however, their economic trajectories are set to diverge.

    0
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    Gavekal Research

    China Legislates For Hong Kong

    The summary of Hong Kong’s national security law released on Saturday is a tough read for advocates of a common law system. It represents a hybrid of China’s and Hong Kong’s legal systems that effectively ends the separation of powers between the executive and judiciary. How quickly the city changes as a result depends on the severity of enforcement.

    0
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    Gavekal Dragonomics

    The Most Cautious Of Central Banks

    China’s medium-term lending facility rate and the loan prime rate were left unchanged in June, while short-term market interest rates have risen. In this Quick Take, Xiaoxi argues that, though the PBOC is likely to cut policy interest rates further this year, the pace of rate cuts is likely to be slower in the second half than in the first.

    3
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    Gavekal Research

    The Next EM Policy Mistake

    Since bottoming out in late March, emerging market equities and bond markets have risen significantly. This snap-back stemmed from massive liquidity injections by global central banks. Investors were also cheered by a new paradigm of fused monetary and fiscal policy in economies which rarely had such flexibility. The worry is that this proves a trap for EMs.

    0
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    Gavekal Research

    From A Tax To A Subsidy

    There will be some hard bargaining ahead when the European Union’s 27 heads of government meet by video conference Friday in an attempt to thrash out details of the bloc’s proposed €750bn recovery fund. German chancellor Angela Merkel is urging a quick deal. But with the “frugal four” countries led by Dutch premier Mark Rutte holding out for strict conditions, a final agreement could yet take several months, with the fund unlikely to start...

    3
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    Gavekal Dragonomics

    Explaining The Iron Ore Surge

    Chinese iron ore prices have surged by 30% since May due to growing Chinese demand, shrinking Brazilian supply and increased logistics costs. In this Quick Take, Rosealea explains why prices are likely to remain elevated in the coming months but might fall precipitously in the second half of the year.

    0
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    Gavekal Dragonomics

    The Range Of US Sanctions

    US President Donald Trump has pledged a response to Beijing’s decision to impose national-security legislation on Hong Kong, and has now signed legislation to sanction officials involved in the crackdown on Uighurs in Xinjiang. In this piece, Dan outlines the various legal tools that the US can bring to bear and their possible effects.

    0
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    Gavekal Research

    Video: High Stakes In The Himalayas

    In this video, Udith argues that the mayhem seen on the India-China border this week will provide another catalyst for Indian nationalists who want to lessen the country’s reliance on China, even if that means accepting far slower economic growth.

    0
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    Gavekal Research

    Sticks And Stones May Break A Trade Relationship

    Monday night’s deadly face-off between Indian and Chinese soldiers in the Himalayan mountains threatens to rupture a burgeoning trading relationship between Asia’s two largest nations. Diplomats should be able to deescalate military tensions between the two nuclear-armed countries, but it may be harder to normalize economic ties.

    0
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    Gavekal Research

    The Market’s Perception Of Scarcity

    It is a long-running trope of Gavekal’s research that assets can have value either as tools or as jewels. Tools have efficiency value and jewels have scarcity value. The rule that seemed to govern the relative performance of these over the last 50 or so years appears to have broken down. Louis wonders if this is because investors have reversed their perceptions of what is "scarce" and what is "abundant".

    5
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    Gavekal Research

    The US Consumer Has Legs

    Another day, another upside surprise from the US data. For investors, the key question is whether this recovery will continue, or whether May’s bounce-back in consumption will prove a one-off flash in the pan, extinguished by a second wave of infections and long term unemployment. Happily, there are good reasons to expect the consumption recovery to have legs.

    1
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    Gavekal Research

    Webinar: Emerging Market Update, June 2020

    In yesterday’s webinar, Udith Sikand, Vincent Tsui and Tom Miller joined Arthur Kroeber to present the general outlook for emerging market assets and currencies, as well as discuss the situation in India.

    0
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    Gavekal Dragonomics

    Arbitrage Comes Out Of The Shadows

    The Covid-19 pandemic has shocked China’s financial regulators into allowing a substantial rebound in total credit growth. But they are not worried enough to abandon their strict control of shadow finance. As Xiaoxi explains in this piece, a recent bounce in the shadow finance numbers is due to a popular arbitrage which is now being contained.

    0
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    Gavekal Research

    A Dismal Best Case

    The crowds that Monday swarmed British shops, allowed to open for the first time in 12 weeks, at first sight bodes well for a V-shaped recovery. Yet despite plentiful accumulated savings and considerable pent-up demand, the UK’s consumption-driven economy faces formidable post-lockdown headwinds, with consequences for equities and sterling.

    1
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    Gavekal Research

    Five Features Of Market Madness

    Examining the frothy market action of last week, Anatole argues that crowd psychology is now driving moves in the US stock market. Five important lessons from the dotcom boom and bust of 1998-2000 indicate that if the Nasdaq composite breaks decisively through its recent high, there may be pots of money still to be made from the current bubble.

    19
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    Rotating Into US Small Caps

    Despite some states seeing a worrying rise in Covid-19 cases, a US economic recovery is gaining strength as lockdowns are lifted. Barring unforeseen setbacks, there are reasons to think that the US recovery sustains itself and the equity rally continues. There is, however, a solid macro argument for rotating to a different class of US stocks.

    4
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    Gavekal Dragonomics

    The Beginnings Of A Plateau

    China’s economic data for May continued April’s wider recovery; however, Thomas, Rosealea and Xiaoxi argue that this upward momentum is losing steam. Weak external demand, tapering industrial production and Beijing’s aversion to further monetary easing all support the idea that China’s post-Covid bounceback is starting to plateau.

    2
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    The Froth Comes Off

    Recent weeks saw telltale signs of markets getting silly: firms with no sales reaching U$26bn valuations; airline-focused exchange traded funds jumping from US$50mn in size in January to US$1.5bn, and bankrupt firms becoming five and 10 baggers. This kind of activity may lead to one of three conclusions.

    4
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    Wicksell And The Market Logic Of A New Inflationary Era

    On Wednesday, Charles argued that policy responses to the Covid-19 crisis may be forcing the US economy into an inflationary boom. In this piece, he deploys the Shiller P/E as a tool for assessing US equities. He connects these findings with his tried-and-tested Wicksellian macro approach to reach a set of portfolio construction recommendations.

    0
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    Gavekal Dragonomics

    Can Small-Business Lending Be Fixed?

    As China tries to get the economy back to normal, it is focusing more on the plight of small businesses, who have lost weeks or months of revenue to the pandemic. Yet it has resisted offering the loan guarantees other countries have employed. In this piece, Xiaoxi assesses the other tools China is using to boost lending to the smallest firms.

    4
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    The Derating Of The Dollar

    In the last four weeks as market participants have reassessed relative risk premiums, they have found it increasingly easy to identify currencies which at the margin are looking more attractive than the US dollar. As a result, the dollar has weakened both against developed world and emerging market currencies. This weakness is acquiring momentum, and may have further to run.

    0
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    Video: The Threat To Chinese Tech

    The US is deepening its effort to limit Chinese technology giant Huawei’s access to components that rely on American design, which may prevent Huawei from rolling out 5G networks. The US is also broadening its efforts to constrain Mainland tech firms by using sanctions that impact suppliers to China’s government and military.

    0
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    Gavekal Dragonomics

    The Property Balancing Act

    Local governments are balancing between encouraging housing construction and containing excess housing inventory. Although they have struck a balance so far, Rosealea argues that the growing vacancies in lower-tier cities coupled with depressed household consumption render current policies unsustainable in the long run.

    0
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    US Reopening Tested By Regional Covid Outbreaks

    Many US states begun to re-open their economies without getting their Covid-19 outbreaks firmly under control. They initially did this without experiencing a spike in infection levels, but the situation has now changed, writes Arthur. The question is whether this new wave of the epidemic proves severe enough to compel states to roll back economic reopening.

    4
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    Accelerating Into Inflation

    Long-time readers will be familiar with Gavekal’s Four Quadrants framework, which describes how the economy alternates between periods of inflation and deflation, and cycles from boom and bust and back again, and which we use to illustrate which asset classes investors should favor and when. Although this is one of Gavekal’s oldest frameworks, it provides an extremely useful way to think about how the macroeconomic environment is set to evolve...

    6
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    A Fed Reality Check

    Ahead of the FOMC meeting that concludes Wednesday, there has been a growing volume of chatter that the Federal Reserve is moving to scale back its easing measures. The talk has been further amplified by May’s surprisingly strong employment report, with some commentators even warning of an imminent taper tantrum in the markets.

    0
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    Gavekal Dragonomics

    US Politics Versus Chinese Stocks

    Financial markets are the latest field in which US-China political tensions are playing out. Thomas describes two lines of attack US hawks are pursuing against China: blocking Chinese firms from US equity markets and pressuring US asset managers to avoid Chinese equities. The risk associated with Chinese stocks has therefore materially increased.

    2
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    What US Payrolls Do And Do Not Mean

    May’s US payrolls report clearly came as a shock to many. Non-farm jobs climbed 2.51mn month-on-month, and the unemployment rate fell to 13.3%. Wrong-footed by the stronger-than-expected figures, investors rushed to bid up US equities. But while the payrolls are good news at the margin, it should not be taken as a reason to rush into equities.

    0
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    Gavekal Dragonomics

    A Charm Offensive For Supply Chains

    As multinationals in China face growing pressure to shift their supply chains elsewhere, China’s government is doing everything it can to hold on to them. As Dan explains in this piece, China’s ability to get businesses back on their feet after the Covid-19 lockdown is a great advertisement for its attractiveness as a place to do businesses.

    6
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    Europe’s Big Guns

    If the worry was that European Central Bank activism was threatened by German judicial chastisement, Christine Lagarde yesterday showed no sign of being cowed. The Pandemic Emergency Purchase Program was topped up to an almost bazooka-qualifying €1.35trn from €750bn and extended a further six months to June 2021. The move added fuel to the rally in euro assets. Rightly so.

    0
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    Picking Winners In Asian Currencies

    A terms of trade improvement and the relative resilience of electronics demand have helped support Asian currencies through the coronavirus crisis despite the deep contraction in world trade. Now as the world emerges from lockdown, any recovery in external demand, coupled with any revival of risk appetite that sees capital flow out of the safe haven US dollar, will be positive for Asian currencies.

    5
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    Video: The Upsurge In Oil

    The price of Brent crude oil has doubled in the past six weeks, supported by the beginning of a recovery in demand as economies come out of lockdown and by expectations that the Opec+ cartel will extend the deep production cuts it agreed in April. Tom weighs the forces likely to drive the oil market over the coming months.

    0
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    Europe Flexes Its Fiscal Muscles

    Another day, another big fiscal expansion from Germany. Yesterday, Berlin outlined a €130bn stimulus package, representing 3.8% of GDP. If there was any doubt, Europe has clearly ditched its decade-long infatuation with austerity and is back in the Keynesian camp. This situation is bullish for eurozone stocks and in time could yet spur a long-forgotten problem—inflation.

    0
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    To Rotate, Or Not To Rotate?

    This week readers have heard a variety of views from Gavekal partners on the outlook for equity markets. What is not in doubt is that since hitting a peak on February 20, US growth stocks have outperformed value plays by a whopping 17%. Wherever one stands on the macro situation, there certainly seems to be an argument for rotating.

    4
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    India Macro Update: End Of The Growth Story

    India has experienced a draconian lockdown that could result in output shrinking by -25-45% in the second quarter of the year. The result will be a sharp worsening in the fiscal deficit and a low structural growth rate that leaves India as just another emerging market rather than a growth story to rival China’s. Udith and Tom consider what it means for asset markets.

    0
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    Gavekal Dragonomics

    Webinar: China's Economic Outlook After The NPC

    China research director Andrew Batson was joined by China macroeconomist Wei He and Asia analyst Vincent Tsui to discuss the news from the National People's Congress and what it means for China's economic recovery, the likely direction of fiscal and monetary policy, and the consequences of Hong Kong's national security law.

    0
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    Gavekal Dragonomics

    A Property Rebound In May

    Property sales are quickly recovering from their Covid-19 crash, with upward momentum that should continue for several months to come. However, Rosealea argues there are growing risks that China’s property market will start overheating, forcing policymakers to step in and leading to a downwards drift by July/August at the earliest.

    0
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    The Case For Commodities

    For most of the last decade, we have been in a period of low investment in the commodity sector. Yet, over the next 20 years the global population will grow by almost 2bn—a 25% increase. Migration into cities will continue, with the world’s urban population growing by almost 50%, creating enormous demand for infrastructure.

    2
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    Strategy Monthly: Recovery And Its Risks

    As economies have begun to emerge from their coronavirus lockdowns, there remain two big near-term macro risks that could derail a recovery. On one hand, solid demand on top of massive central bank monetary expansion could fuel rising inflation. On the other, a big round of permanent job losses could dent demand and slow the economic recovery.

    0
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    Four Reasons To Fade The Rebound

    After advising readers not to buy into the March market rebound, Anatole has reviewed the case he made for doubting that a perfectly executed Keynesian recovery was likely—and he did this as Gavekal’s fully avowed Keynesian economist. After a dark night of the soul, he remains skeptical that economic activity will quickly return to anything resembling pre-Covid-19 normality.

    11
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    Gavekal Dragonomics

    The Chill On Corporate Capex

    The Covid-19 lockdown led to a historic collapse in corporate capital expenditure in early 2020, but what comes next? In this piece, Thomas introduces a new model for understanding China’s investment cycle. Private-sector capex should stay weak in the second half of 2020, lagging public-sector infrastructure spending, but rebound in 2021.

    0
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    As The World Reopens

    A few weeks ago, I outlined three scenarios that could unfold as the world reopened for business. Since then, it looks like the market is starting to tentatively position scenario #3 in which the world economy rips and inflation rises due to pent-up demand, budget deficits, low oil prices and money printing. This makes sense, but the rotation may soon face a number of challenges.

    0
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    The Renminbi As Collateral Damage

    The rise in US-China tensions over the past week is taking a toll on China’s currency, which has weakened to CNY7.15 to the dollar from around CNY7.10, approaching its lows of last September. This has raised a worrying question: is China about to use currency depreciation as a weapon in its widening dispute with the US?

    0
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