GLOBAL ECONOMICS AND POLITICS
Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.
Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.
Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.
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Since June 2011, United States personal saving as a percentage of disposable personal income has declined. Many observers believe a declining savings rate generally signals economic growth and thus is a reason for optimism. Though this sometimes may be true, it probably is not the case now. In today’s worldwide economic theater, feeble personal savings- and especially a slumping level- indicate that US economic growth for the near term and perhaps longer probably will be weak. The savings rate in recent years, not just recently, has been low relative to long run history. Given this, in the context of the rather gloomy current and near-term economic horizon, further cuts in the savings rate will warn of or confirm an economic downturn.
Declines in the US personal savings rate may herald or coincide with economic growth. The period from 1993 to 2007, and especially the enthusiastic time of 2004-2007, evidences this. The down shift in America’s personal savings rate from its 2008-2010 summits of 6.2pc/5.6pc indeed coincides with the current recovery. However, permanent prosperity probably has not returned. The further declines since June 2011, when interpreted alongside other indicators, probably indicate that a more ominous US economic future of sluggish growth and arguably a recession lies ahead.
First, history shows that a very low or declining savings rate does not necessarily translate into (equal, represent) happy healthy times of growth and prosperity. Let’s look back into the allegedly ancient landscape preceding World War 2. The Great Depression ran from August 1929 to March 1933 (43 months). Note that the savings rate collapsed during the downturn. The savings rate was 4.3pc in 1929 (the year of the stock marketplace peak), 4.0pc in 1930, and 3.7pc in 1931. It went negative in 1932 (-1.1pc) and 1933 (-1.7pc), with 1934 barely positive (.9pc).
A renewed downturn followed from May 1937 to June 1938. Personal savings fell from the 6.2pc of 1936 and 5.9pc in 1937 to 1.9pc in 1938, with 1938 the lowest yearly level until the 1.5pc of 2005.
Thus declines in the personal savings rate can occur during economic downturns, not just in upswings. The Depression shows that very low (even negative) savings rates can reflect fear and pessimism as well as joy and optimism. To interpret the current low savings rate and to make predictions regarding its future and implications, one must look at surrounding circumstances.
Despite estimated US 3Q11 real GDP growth of 2.5pc (annualized) and the sharp stock marketplace rally from its October 2011 depth, numerous signs indicate that consumer resources are stretched rather thin and probably will remains so for some time. America’s low savings rate suggests that many consumers now are fighting especially fervently to maintain a constant (“appropriate”) standard of living (“lifestyle”).
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Money Motions- Savings and Shifts (11-8-11)
Recent historically high nominal United States corporate profit levels are a key factor inspiring many to buy and hold US stocks. Bullish forecasts regarding future net earnings, especially when such predictions extend out to misty medium term or murky long run time horizons, sustain and bolster this enthusiastic ownership. In turn, stock rallies sometimes boost optimism regarding potential corporate profitability and overall economic growth, for many have faith that equity marketplaces are forward-looking indicators for “The Economy”.
Has the US entered a blessed New Era of very high corporate profitability that will stretch happily out into the indefinite future? Probably not. Has America revived the wonderful time of the Goldilocks economy? Probably not. Higher nominal corporate profits and ascending nominal stock prices, when accompanied by rising nominal GDP, can assist national confidence and encourage spending in the short term. However, since the nominal levels are not the real (genuine) ones, they do not translate into an equivalent amount of real and permanent prosperity.
Yet even if very elevated corporate profitability does not continue, what may have caused a sustained notable upward shift relative to long run history in the ratio of nominal US corporate profits to nominal GDP? To some extent, it reflects corporate cost-cutting measures and other battles to improve efficiency. The easy money policies of the Federal Reserve Board (sustained low interest rates; money printing) and its allies and massive deficit spending (stimulus) perhaps play roles. But picture the context of sluggish to declining real US household income, still-damaged consumer balance sheets, high unemployment, weak housing prices, and very low consumer confidence. With that domestic (home) background, high US nominal corporate profits- and especially a more elevated nominal profit versus GDP ratio- also arguably reflects economic globalization trends and profits captured from overseas. If so, then relatively high American corporate profits do not entirely reflect (do not fully represent) actual overall US prosperity (“Our Economy”), merely that of many of its corporations.
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US Corporate Profits- Patterns and Perspectives (11-1-11)
The United States real estate marketplace, despite some improvement relative to winter 2008-09’s abyss, remains in mournful shape. During the ongoing terrible global economic crisis, nervous politicians, fearful central bankers, and enthusiastic real estate business promoters have devoted much effort and creativity in their quest to rescue the real estate arena. How should we characterize their overall performance to date? Despite their numerous at-bats and vigorous swings at the real estate debacle, the financial and political guardians have often struck out and their overall batting average remains low.
Perhaps the real estate scene will become brighter. After all, central bankers and politicians always have upcoming opportunities to step up to the plate. They will keep swinging and whacking at real estate problems. Nevertheless, the still-feeble US real estate world underlines the fragile foundation and structure of the economic revival fabricated by the Federal Reserve (and its overseas central bank teammates) and political crews. Despite some progress, the shattering damage of the international economic disaster that commenced in 2007 has not been substantially fixed. The economic crisis persists and will continue for several more innings. Though the worldwide economic advance that emerged in spring 2009 reflects repairs and is not entirely a house of cards, it’s not entirely built on solid ground. Money printing and deficit spending are not genuine (enduring) cures for economic problems.
The recent slowdown in the overall economic landscape will hinder the US real estate recovery. Therefore American real estate prices will remain relatively weak.
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Still Swamped – US Real Estate (10-11-11)
In recent years, there’s been a close linkage between trends in the S+P 500, commodities “in general”, and the United States dollar. Recent weakness in commodity currencies versus the US dollar coincides with and thus warns of continued declines in commodity benchmarks such as the broad Goldman Sachs Commodity Index and key stock indices such as the S+P 500. The worldwide economic crisis that erupted in 2007 has not been substantially solved.
The price and time trends of the commodity currencies from the US dollar cross rate perspective intertwine closely with key moves in stock and commodity benchmarks. Viewing them as a group, the five currencies soared higher against the US dollar from late 2008/early 2009 for over two years, until spring 2011/July 2011. Commodities in general and the S+P 500 made key bottoms in winter 2009 around the time of those in commodity currencies. The S+P 500 and the broad S+P Goldman Sachs Commodity Index (GSCI) then advanced dramatically for over two years.
In 2011, double tops in the commodity currencies (late April/early May; late July) link closely with the equity and commodity summits. The drops from late July 2011 are noteworthy because the S+P 500 subsequently fell decisively under the summer 2008 1265/1313 range (the financial crisis accelerated from around that 2008 time) and beneath the 4/26/10 top at 1220.
Many observers have faith that a substantial QE3 action will rally the S+P 500 (and commodities). Won’t history repeat itself? However, maybe history will refuse to do so, and stocks will climb very little before resuming their decline. Money printing is not a genuine repair policy for real economic problems. Despite the fearful Fed’s determination to maintain an extremely low Federal Funds rate, a renewed money printing enterprise also eventually may inspire interest rate jumps in US debt playgrounds.
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Commodity Currencies and Economic Cracks (9-12-11)
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