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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CRAWLING FROM THE WRECKAGE: US STOCKS © Leo Haviland, April 13, 2020

“Crawlin’ from the wreckage, Crawlin’ from the wreckage
You’d think by now at least that half my brain would get the message…
Nothin’ ever happened ain’t happened before
I see it all through flashes of depression”. “Crawling from the Wreckage”, a Dave Edmunds song

“We’ve not seen anything of the sort before, that’s all. Personally, I find it interesting, yes, definitely interesting.” A character in Albert Camus’ novel “The Plague” (Part I)

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CONCLUSION

Everyone knows that the coronavirus pandemic and political (medical) responses to it have wreaked widespread and deep economic carnage around the globe. The coronavirus of course was not the only bearish phenomenon preceding and influencing the disastrous economic situation. The ultimate extent of the damage and the timing and extent of the recovery remain conjectural. 

Given the importance of the United States to the international economy, both Wall Street and Main Street spend much attention and energy focusing on America. Widely-watched American stock indices such as the S+P 500 and Dow Jones Industrial Average are benchmarks which to some extent probably reflect the overall health of and potential for the American economy. Thus in the current situation, levels and trends for these American equity marketplaces attract and sustain international fascination.  

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To many, the biological (medical) problem of the coronavirus makes it a poster child for the viewpoint that “this time is different” in its consequences for economic (financial, commercial) trends and outcomes. Obviously, disease playing a critical role in a terrible downturn is very rare. Yet economic history (including recessions and bear and bull trends in stock marketplaces) involves all sorts of “causes” with supply and demand consequences, so observers should not neglect or dismiss past periods as being unimportant to an analysis of the current economic situation. So arguably there are parallels between prior marketplace history and that of nowadays, even if “the past” did not involve a deadly virus. 

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Wall Street, politicians, and Main Street pray that the monumental monetary interventions by central banks such as the Federal Reserve and its partners (money printing and so forth) and dramatic fiscal actions not only will rescue the international economy from its current dire troubles (reduce the magnitude of a recession), but also will restore acceptable economic growth relatively quickly. The prior success in dealing with the appalling worldwide economic disaster of 2007-09 encourages widespread faith that these (and perhaps further) efforts and a “whatever it takes” policy attitude ultimately will succeed. 

Recall the glorious bull move in the S+P 500, sparked by sustained monetary easing (money printing; yield repression) and deficit spending, which ran for over ten years since 3/6/09’s major bottom at 667. Perhaps US stocks over some long run horizon (or even sooner) even will achieve new record highs! 

But maybe this time will be different for the global economy and stocks in comparison with the years following from the 2007-09 bloodbath. A satisfactory recovery (including moderate unemployment levels) may be very difficult to achieve anytime soon, even if more easing and deficit spending occur. 

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The S+P 500’s fearful collapse from 3394 on 2/19/20 to 3/23/20’s 2192 was 35.4 percent and lasted just over a month. Following its March low, the S+P 500 ferociously rallied 28.6 percent in two weeks to 2819 (4/9/20). A review of previous major bear trends for the US stock marketplace going back in time about 125 years does not show a single trend which ended in one month. Will this time be different? 

Will the extraordinarily accommodative policies of the Federal Reserve and its central banking comrades (assisted by gargantuan global deficit spending) make this time different, so that the bear trend for American stocks which commenced in mid-February 2020 endures only one month? Or, will instead the 3/23/20 S+P 500 low eventually be broken?

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Crawling from the Wreckage- US Stocks (4-13-20)

JAPAN: FINANCIAL ARCHERY, SHOOTING ARROWS © Leo Haviland October 5, 2018

The famous military philosopher and analyst Carl von Clausewitz states in “On War” (Book Two, chapter 3; italics in original): “Rather than comparing it [war] to art we could more accurately compare it to commerce, which is also a conflict of human interests and activities; and it is still closer to politics, which in turn may be considered as a kind of commerce on a larger scale.”

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OVERVIEW AND CONCLUSION

In late 2012, the Japanese political leadership dramatically unveiled its three “arrows” of easy money, flexible fiscal policy, and structural reform to improve the country’s economic performance. In practice, those Japanese political authorities generally represent major financial (corporate; commercial) interests (“Japan, Inc.”). The Bank of Japan’s policies since late 2012, though nominally independent of political and economic power centers, in practice reflects the goals of Japan’s substantial entrenched economic groups and the political representatives and bureaucrats aligned with them.

Monetary policy of course is not the only factor affecting GDP, inflation, and other intertwined variables. Yet Japan’s ongoing government fiscal deficit, though somewhat helpful for promoting growth and inflation, is not the most noteworthy element in the country’s policy array since end-2012. Moreover, the general government debt burden remains massive and likely will remain so for many years. According to the International Monetary Fund, Japan’s general government gross debt as a percent of GDP was 236.4 percent in 2017 (contrast the G-7 average of 118.6pc that year) and forecast at 236.0pc for 2018 and 234.2pc in 2019, dipping only slightly to 229.6pc by 2023 (“Fiscal Monitor”, April 2018, Table A7; the October 2018 update probably will not change Japan’s government debt as a percent of GDP statistics substantially). And structural reform in Japan, which usually crawls forward slowly, has been unremarkable.

The extremely easy monetary policy arrow embraced by the accommodative Japanese central bank for almost six years is the country’s critical weapon. The central bank chief faithfully and repeatedly proclaims that sustained inflation of two percent is a praiseworthy goal (as essentially do the sermons preached by other leading central banks such as the Federal Reserve Board and the European Central Bank). The Bank of Japan’s ongoing tools to achieve its aims include sustained yield repression and massive quantitative easing (money printing). So far, the Bank of Japan, despite its determination, has not come close to achieving two percent inflation. The consumer price trend in recent months manifests merely minor progress on that front. And although Japan’s quarterly GDP for April-June 2018 may signal enhanced year-on-year economic performance, International Monetary Fund forecasts are not as sunny.

Yet what else has the Bank of Japan (as a representative and reflection of the country’s political and economic generals) really battled to achieve via its remarkably lax monetary strategy? A notion of improved and acceptable economic growth and frequent reference to an iconic two percent “price stability target” do not offer a complete story. Moreover, the enthusiastic declaration of assorted monetary policy plans and tactics does not directly reveal important aspects about the economic (financial; commercial; marketplace) landscape within which the interrelated GDP and inflation goals are targeted and such extraordinary easy money programs are designed and applied.

In practice, what are the intermediate connections (means; methods) to the achievement of the allegedly ultimate ends of satisfactory growth and sufficient inflation? One key approach of the Bank of Japan’s magnificent scheme relates to currency depreciation, the other to stock marketplace appreciation. Japan’s central bank sentinel quietly has aimed to achieve the related objectives of Yen weakness and Japanese stock marketplace strength.

In recent times, Japan deliberately has kept a relatively low profile in foreign exchange, trade, and tariff conflicts. Compare the furious racket nowadays, especially since the advent of the Trump presidency, around the United States and China (and also in regard to the European Union, Mexico/Canada/NAFTA).

Nevertheless, for several years, Japan has waged a trade war (engaged in fierce currency competition) without capturing much international political attention or media coverage. The Bank of Japan (and its political and economic allies) in recent years has fought vigorously to depreciate the Yen (especially on an effective exchange rate basis) and thereby to bolster Japan’s current account surplus. Japan’s overall economic growth relies significantly on its net export situation. The Yen’s substantial retreat and its subsequent stay at a relatively low level and the significant expansion in the country’s current account surplus are glorious triumphs.

Since late 2012, the Bank of Japan also has struggled ferociously to rally the Japanese stock marketplace (boost corporate profits). As of early autumn 2018, this guardian has achieved significant victories in this campaign as well.

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Japan- Financial Archery, Shooting Arrows (10-5-18)

STOCK MARKETPLACE MANEUVERS: CONVERGENCE AND DIVERGENCE © Leo Haviland September 4, 2018

“Danger always strikes when everything seems fine.” From the movie “Seven Samurai” (Akira Kurosawa, director)

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OVERVIEW AND CONCLUSION

American stock indices inspire an assortment of competing stories regarding them, including reasons for their past, present, and future levels and trends. Narratives and explanations regarding a broad “national” stock marketplace indicator such as the S+P 500 often involve those of equity weathervanes elsewhere. Discussions of interest rates, currencies, commodities, and other financial indicators may interrelate with stock marketplace analysis. These tales frequently indicate the extent to which given marketplace domains converge and diverge (lead or lag) with each other.

Many descriptions and analyses regarding broad benchmarks such as the S+P 500 and Dow Jones Industrial Average appear relatively unique to the United States. However, economic regions and marketplaces around the world increasingly have intertwined during the course of globalization in recent decades.

Therefore the directional travels (bull and bear adventures) of America’s “overall” stock marketplace increasingly have tended to parallel (converge with) stocks of other significant advanced countries and regions. In the increasingly intertwined global economy, trends of emerging marketplace stocks “in general” have interrelated with and often (but not always) resembled those of leading advanced nations.

Various advanced nation and emerging marketplace stock indices achieved very important highs “together” early in first quarter 2018. However, in recent months, probably beginning around the end of first quarter 2018, the generally bullish trend of the S+P 500 and other noteworthy US equity marketplace benchmarks have diverged substantially from the bearish trend of emerging marketplace stocks. Climbing US interest rates and a renewed rally in the broad real trade-weighted dollar, plus increasing trade war rhetoric, encouraged the relative and overall feebleness in emerging marketplace stocks.

In addition, the S+P 500 and other US stock indices have diverged somewhat from those of other key advanced nations, though less substantially than relative to emerging stock marketplace realms. Nevertheless, important European and Japanese stock arenas currently remain under their January 2018 highs (and mid-May 2018 ones). The failure of these overseas stock battlegrounds to achieve new highs alongside American ones, when interpreted alongside the decline in emerging marketplace stocks (and in relation to other economic variables), further hints that American stock benchmarks probably are establishing an important price peak around current levels.

In this context, bearish indicators for American equities include the longer run trend of rising US interest rates (note the yield lows of  July 2016 and September 2017), mammoth global debt totals, expanding American federal government budget deficits (aided by tax “reform”), and the rally in the broad real trade-weighted US dollar above a critical height. The Federal Reserve and other key central banks are not displaying signs of further easing; instead, the bias is toward tightening (even if only at a rather glacial pace). Also, United States stock marketplace valuations arguably are high by historical standards. A global trade war (tariff fights), or at least noteworthy skirmishes, is underway.

Populist pressures have not disappeared in America or elsewhere. Economic, political, and other cultural divisions in America are significant. What if the US mid-term elections this autumn return the Democrats to power in the House of Representatives (and perhaps the Senate as well)? Concerns about the quality of US Presidential leadership remain widespread.

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The US tax “reform” legislation enacted in December 2017 has been a critical factor in creating the price divergence since around late first quarter 2018 between American stock price benchmarks and those elsewhere. The US corporate tax cut translated into higher reported earnings for American companies and thereby helped to rally American stocks. Other leading countries around the globe did not enact a similar generous gift for their corporations. Moreover, America’s tax reform likely further encouraged share buybacks by US corporations.

The second quarter 2018 blended earnings growth rate for the S+P 500 was 25.0 percent year-on-year (FactSet, “Earnings Insight”; 8/31/18). Thomson Reuters estimates S+P 500 2Q18 earnings soared 24.8pc (“S&P 500 Earnings Scorecard”; 8/28/18). Thomson Reuters data notes that 1Q18’s earnings likewise skyrocketed, up 26.6pc year-on-year (compare 4Q17’s boost of 14.8pc and 3Q17’s 8.5pc rise).

Both FactSet and Thomson Reuters forecast significant year-on-year earnings increases for the S+P 500 over the next two quarters of 2018. FactSet says analysts are projecting earnings will climb 20.0 percent in 3Q18 and 17.4pc in 4Q18. Thomson Reuters puts year-on-year earnings growth at roughly similar levels, with 3Q18 ballooning 22.3pc and 4Q18 up 20.3pc.

However, the rate of earnings increases slows in 2019. FactSet states earnings growth in 1Q19 will be 7.2pc year-on-year, with 2Q19 stretching up 7.5pc versus 2Q18. Thomson Reuters places 1Q19 growth at 8.2pc year-on-year, with that for 2Q19 up 9.3pc.

Perhaps the wonderful US corporate earnings of first half 2018 will be followed by the impressive earnings forecast for the balance of 2018. However, if notable shortfalls in actual earnings relative to such lofty current profit expectations occur, that probably will worry many stock bulls. Going forward, if forecasts for first half 2019 earnings for the S+P 500 are cut relative to current expectations, will that make S+P 500 bulls (“investors” and others) fearful. After all, the currently anticipated (conjectural) calendar 2019 earnings growth already dips significantly from those of calendar 2018’s quarters.

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Stock Marketplace Maneuvers- Convergence and Divergence (9-4-18)

AS THE FINANCIAL WORLD TURNS: COMMODITY AND OTHER MARKETPLACE DOMAINS © Leo Haviland April 2, 2018

Chuck Berry sings in “’Round and ’Round”:
“Well, the joint started rockin’
Goin’ round and round,
Yeah, reelin’ and a rockin’,
What a crazy sound,
Well, they never stopped rockin’,
’Till the moon went down”.

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OVERVIEW AND CONCLUSION

Many marketplace high priests enthusiastically proclaim proverbs on price relationships. For some heralds, these adages are only guidelines; however, for others, they represent high (or very high) probabilities. Such aphorisms include the links between the United States dollar and commodities “in general”, or between the US dollar and the S+P 500 or other stock indices. For example, one widely popular chant: “weak dollar equals strong commodities”, “strong dollar equals weak commodities”. For some, the word “equals” in this formula implies “is connected to”, or “associated with”.

Observers differ, often substantially, in their choice between as well as the assessment of the supposedly relevant variables (data, evidence) and analytical time horizons. Perspectives on past, current, and future convergence and divergence (lead/lag) relationships between financial marketplaces (and factors influencing them) likewise can vary significantly.

In practice, viewpoints regarding the role of the dollar in determining commodity price levels, trends, and turning points nevertheless differ, and often a great deal. After all, other financial marketplace realms (such as interest rates and stocks), diverse economic and political theaters, and a wide range of other phenomena interrelate with both the dollar (and other currencies) and assorted members of the commodities world. So a variety of competing stories and predictions about the dollar, commodities (whether in general or in regard to individual sectors such as petroleum or base metals), and other marketplaces exist and change.

Moreover, historical review indicates that trends for commodities “in general” can intertwine in various fashions with currencies (such as the United States dollar), as well as with interest rate benchmarks (picture the US 10 year government note), and stock playgrounds (the S+P 500 and related indices of advanced nations; emerging marketplace signposts). Moreover, marketplace history, whether for a given arena or the relationship between two or more fields, is not marketplace destiny.

For further related marketplace analysis of stock, interest rate, currency, and commodity fields, see other essays such as: “Global Stock Marketplaces: Winter of Discontent” (3/5/18); “There Will Be Blood: Financial Battlefields” (2/9/18); “Busload of Faith: Financial Marketplaces” (1/15/18); “Marketplace Vehicles: Going Mobile” (12/13/17); “History on Stage: Marketplace Scenes” (8/9/17).

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In any case, let’s now focus on the historical relationship between the broad real trade-weighted US dollar (“TWD”) and commodities in general over the past several years. The table below underlines that players should be on the watch for a fairly close coincidence in timing of major or other important turning points in those two wide realms. However, in the current context, they also should monitor TWD moves in relation to the critical height around 96.0. The broad real trade-weighted US dollar (“TWD”) recently fell decisively beneath crucial support around 96.2 to 96.6. The broad real TWD high during the global financial disaster was March 2009’s 96.6.

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What does an investigation of the petroleum, base metals, and agricultural commodity groups since their first quarter 2016 major lows unveil? Many marketplace turns have occurred around the same time. All these commodity battlefields made important highs in first quarter 2018; so did the S+P 500 and other important advanced nation and emerging marketplace stock indices.

Yet not all commodity sectors (or members within a group) necessarily dance (make turns) together. In principle and practice, potential divergence can develop and persist within the commodity universe.

However, whereas petroleum arguably very recently threatened to exceed its 1Q18 barriers, base metals and agriculture apparently did not. Determined and sustained crude oil output restraint by OPEC and its non-OPEC allies such as Russia has helped to draw down OECD petroleum industry inventories. Fears of supply interruption (Middle East tension, including the Iran nuclear issue; Libya; Nigeria; Venezuela) exist. Numerous prophets assert the world economy will remain robust. The further weakening of the dollar since around mid-year 2017 has inspired some petroleum bulls.

The net noncommercial long position of petroleum players (see the CFTC Commitments of Traders) expanded massively since mid-2017, and this net noncommercial buying probably played an important role in rallying oil prices. It remains very large and is vulnerable to liquidation.

Prices for the oil group probably will not break above their first quarter 2018 highs by much if at all. Neither will broad commodity indices such as the broad S&P Goldman Sachs Commodity Index or the Bloomberg Commodity Index. The 1Q18 peaks in the S+P 500 and MXEF stock indices are two year diagonal bull time moves from their 1Q16 major troughs. The GSCI and BCI’s first quarter 2018 highs likewise are two year diagonal ascents from their major bottoms of 1Q16.

Yet suppose the petroleum complex does attain new highs relative to those of 1Q18. As petroleum is an important part of many widely-watched commodity signposts (especially the broad S&P Goldman Sachs Commodity Index), that may boost such broad indices to levels above first quarter resistance.

It is important whether or not the base metals crew (copper, aluminum, zinc, and others) also achieves new highs, for both base metals and oil link closely to international economic growth trends (and arguably more “immediately” than agriculture does).

Many major highs (lows) for commodities “in general” have roughly coincided with major peaks (bottoms) in the S+P 500. But not all have. The 2007-2009 global economic disaster era displayed an exception. The major high in the S+P 500 (10/11/07 at 1576) preceded the GSCI’s pinnacle (7/3/08 at 894). However, the S+P 500’s final top, 5/19/08’s 1440, bordered the July 2018 commodities summit.

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Regardless of whether or not key commodity indices achieve highs above their first quarter 2018 plateau, the first quarter 2018 resistance for the S+P 500 and other advanced and emerging marketplace equity benchmarks probably will remain in place. As “There Will Be Blood: Financial Battlefields” (2/9/18) stated: “The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top.”

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As the Financial World Turns- Commodity and Other Marketplace Domains (4-2-18)