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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US ELECTION 2020: POLITICS, PANDEMIC, AND MARKETPLACES © Leo Haviland June 3, 2020

CULTURAL OVERVIEW: A HOUSE DIVIDED

Competing aphorisms and advice abound regarding the uncertainties, unpredictability, probabilities, risks, opportunities, and appropriate viewpoints and methods in marketplaces such as stocks, interest rates, currencies, commodities, and real estate. Political stages also fill with diverse adages, slogans, perspectives, approaches, insights, foresights, predictions, and explanations.

The American cultural scenes (economic, political, and social) and opinions regarding them interrelate, and these entangle relatively closely with numerous foreign ones in a globalized world. This reflects and encourages wide ranges in outlook and recommendations for behavior.

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American history reflects and describes a generally-shared culture, which the American Dream concept significantly reflects. However, over the span of about four centuries (and even in recent decades) that culture and interpretations of it have not been unchanging. The degree of consensus has varied. Moreover, not all groups have been equally able to participate in the economic, political, and social benefits (promises; valued “good” aspects) of the American Dream.

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Thus America, even when united, always has had some internal differences in viewpoint (including opinions on the proper applications of a generally shared cultural theory) and thus assorted episodes and varying degrees of conflict. Let’s concentrate on today’s political panorama, which reflects (is permeated by) economic phenomena and interests. Admittedly, we’re not dwelling in the Civil War era of the mid-19th century. And the present-day United States political landscape (its ideological and structural parameters) is not anarchic. Nevertheless, the nation’s current political situation displays extensive divisions across numerous fields. The number and sharpness of these splits arguably have been increasing over the past few decades, as well as increasing (or at least becoming more evident) since President Trump’s 2016 election campaign and triumph.

A rapid survey of the United States unveils a country significantly divided across belief (doctrinal) dimensions as well as group membership categories. Subjective views occur on a continuum. For example, not all so-called “conservative” opinions are identical. Or, a given “liberal” (or progressive or globalist) may support some “nationalist” policies. Of course not all members of a given racial (ethnic), sex, or age category embrace the same opinion on a given policy or set of them. Consequently, beliefs, groups, and individuals do not necessarily or inevitably all end up on the same side of a ledger. Moreover, definitions and applications of political and other cultural labels can and do change. How should we define and measure liberty, freedom, and equality?

Anyway, numerous divisions apparently exist. These reflect values, visions for what is “good”, “bad”, and “neutral”. Cultural values inescapably involve emotions, not just reasoning; and emotions permeate the reasoning.

Look not only at (and within) the leading political parties, the Democrats (blue) and Republicans (red). The political spectrum reveals a range of opinions from left-wing to right-wing. Populists (which include left and right sides in orientation) battle against the “establishment” and associated elites (“the Man”; an entrenched political/economic/social power structure). Nationalists (“Make America Great Again!” is one mantra) fight against globalists (and multiculturalists); conservatives (or alleged reactionaries) combat liberals (perhaps some of these are progressives) and socialists (radicals; anarchists). Assorted political and economic “haves” fight in assorted ways with “have-nots”. Ardent debates rage about economic inequality and opportunity as well as social mobility. Allegiance to “capitalism” and the “free market” (however defined) varies in scope and intensity. Other contentious issues include abortion, the environment (including climate change), health care, immigration, race relations, gun control, and international trade. Such viewpoints incorporate values and result in propaganda battles to advance aims and defeat foes.

Within American political life and its communities, note the language (metaphors) of war, battle, and violence. Also examine wordplay of love and friendship. For example, people may love (or hate) a political candidate or party and its policies.

Rather lofty US government deficit spending has become entrenched. And sometimes, like nowadays in the coronavirus era (which involves a war against the disease), most Americans appreciate a generous helping hand and support a large (expensive) economic rescue package. However, significant disagreement remains regarding the role and extent of the federal government in our lives. Fervent quarrels burst into the open as to the appropriateness of, relative importance of, and actual expenditure on specific programs.

What generic cultural classifications to which individuals belong nowadays reflect (and offer opportunities for and encourage) partisanship and rhetorical conflict? These are numerous. The body politic is fractured. Noteworthy divides exist on the basis of race/ethnic, sex/gender and sexuality, age/generation, geographical location (region of the country; urban/suburban/rural), religion/faith, and level of wealth/income.

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In politics, economics, and elsewhere in culture, although a subjective consensus sometimes develops and persists, participants also can and do disagree on what information (facts, evidence, factors, data, statistics) is relevant and on the relative importance of such variables, as well as on the proper means of organizing and evaluating such phenomena. Where widespread cultural divisions exist, as in America nowadays, such diverse debates (dissonance) relating to “the facts” at times can severely challenge the abilities of even knowledgeable and experienced forecasters to predict a particular outcome, such as the 2020 American Presidential election battle between Trump and Biden, with a high degree of confidence.

Moreover, to the extent that citizens have diminished faith in political institutions and leaders, this increases (encourages) the potential for cultural splits and wars. Arguments from authority may become less compelling to the “average citizen”; many disagreements tend to become harder to resolve. It’s often difficult for enemies to make peace. This situation can boost the amount and loudness of divisive rhetoric and thus make it significantly harder to predict some outcomes.

History shows that a willingness to compromise, listen closely to and respect opposing views and values, and practice substantial civility ebbs and flows on political stages, even when differences between rivals are substantial. However, the American political scene during the Trump regime generally manifests a weakening inclination to do so by many participants. This increases the rhetorical racket.

The information revolution obviously is a complex topic. Nevertheless, the voices unleashed nowadays in cultural domains via mass communication media create and sustain Towers of Babel. And the internet in particular enables a “democratic” explosion of voices seeking to achieve some form of power, to become or remain relevant and influential. The massive amount of allegedly relevant information potentially important to “appropriate” cultural decision-making and the proliferation of supposedly satisfactory gurus and guides (opinion-makers) thereby at times can exacerbate the difficulty of predicting political and economic outcomes.

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US Election 2020- Politics, Pandemic, and Marketplaces (6-3-20)

AMERICAN CONSUMERS: THE SHAPE WE’RE IN © Leo Haviland May 4, 2020

The Band sings in “The Shape I’m In”:
“Out of nine lives, I spent seven
Now, how in the world do you get to Heaven?
Oh, you don’t know the shape I’m in”.

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OVERVIEW AND CONCLUSION

 

Everyone knows that the coronavirus pandemic and political (medical) responses to it have wreaked widespread and deep economic destruction around the globe. The coronavirus, however, 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 international and American recovery remain conjectural.

America and its consumers obviously are not the only economic engines for the international economy. However, given substantial global economic interconnections, American economic conditions, trends, and policies significantly influence those elsewhere. US consumer spending represents about 68.0 percent of American GDP, a very sizable share (Federal Reserve Board; Z.1, “Financial Accounts of the United States”, Table F.2; 3/12/20). Consequently, regarding the prospects for United States economic growth, and thus output in other realms, much depends on the situation and attitudes of the American consumer.

American consumer spending and other “Main Street” variables intertwine with those around the globe, as well as with “business” (both big and small) and other economic, political, and social phenomena. For example, Federal Reserve and other central bank actions, government spending levels and trends, United States (and other) stock marketplace levels, American government and other interest rates, the dollar and other currencies, commodities, real estate, and assorted other economic, political, and social variables influence American consumer spending in a variety of fashions. These relationships and phenomena encouraging them can and do change, sometimes slowly, sometimes rapidly. Convergence and divergence (lead/lag) patterns between economic indicators as well as marketplaces likewise can shift or transform.

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Wall Street (and its financial media friends), politicians, and Main Street pray that the monumental monetary interventions by central banks such as the Federal Reserve and its allies (massive money printing and so forth) and dramatic fiscal deficit spending boosts not only will rescue the international economy from its current monumental troubles (reduce the magnitude of a recession), but also will restore acceptable economic growth relatively quickly, perhaps even before the end of the third quarter of 2020. Prior success in dealing with the dreadful worldwide economic disaster of 2007-09 encourages widespread faith that these (and perhaps further) efforts and a warlike “whatever it takes” monetary and governmental policy attitude ultimately will succeed.

Many economic high priests such as the International Monetary Fund predict a relatively strong and quick global recovery. In its World Economic Outlook (Table 1.1; April 2020), the IMF forecast a gloomy three percent drop in world output in 2020. However, global real GDP ascends sharply in 2021 by 5.8 percent. GDP retreats in advanced economies by -6.1pc year-on-year in 2020, but climbs 4.5pc in 2021. According to the IMF, US GDP collapses -5.9pc in 2020 but jumps 4.7pc in 2021. Emerging/developing marketplaces allegedly will suffer only a one percent fall in calendar 2020, with GDP growing a rapid 6.6pc in 2021 (compare 2019’s modest 3.7pc expansion). China supposedly will manage to grow 9.2 percent in 2021 (1.2pc in 2020), although its GDP fell -6.8pc year-on-year in 1Q20.

US corporate earnings depend on many phenomena, and of course not all corporations depend (directly) on consumer purchasing (whether by Americans or others) to the same extent. Yet US corporate earnings estimates from Wall Street pulpits, like the IMF’s vision, generally display optimism for calendar 2021 despite the sharp year-on-year falls expected for calendar 2020.

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However, a survey of several key US variables closely linked to the situation of the American consumer nevertheless suggest that the injury to the American consumer “in general” and thus the country’s overall economy has been and will continue to be severe. A very substantial portion of the general public is in rough shape. Numerous other consumers are fearful regarding their future. Between the terrifying unemployment situation (and at least the near term outlook for it) and a relatively high arithmetical household debt level prior to the coronavirus devastation, most American consumers probably will be cautious spenders for quite some time. Even if the coronavirus pandemic significantly subsides relatively soon, how rapidly will the shattered consumer sector race to resume its prior buying habits and thus boost GDP substantially? Moreover, the planned reopening of America’s economy probably will be gradual. And how quickly will firms, whether large or small, rehire a large number of laid-off workers? In addition, widespread worries about the ongoing and future coronavirus waves likely will persist, and people await the development of a proven vaccine and adequate testing.

Thus America’s economic recovery probably will be slow rather than fast (or even fairly quick on a sustained basis). Optimism heralded by the IMF and many other leading institutions, enthusiastic gospels from US “investment” gurus regarding magnificent corporate earnings in calendar 2021, and similar propaganda likely will be disappointed.

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American Consumers- the Shape We're In (5-4-20)

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)

FACING A WALL: EMERGING US DOLLAR WEAKNESS © Leo Haviland January 15, 2019

CONCLUSION AND OVERVIEW

The broad real trade-weighted United States dollar probably peaked at 103.2 in December 2018 (“TWD”; Federal Reserve Board, H.10; monthly average, March 1973=100). Significantly, that elevation links with the critical TWD pinnacle of December 2016 at 103.4/January 2017 at 103.3, thereby building a formidable double top barrier. This double top ends the glorious long-running major bull move which commenced in July 2011 at 80.5.

Unlike the broad real trade-weighted dollar, the broad nominal trade-weighted dollar has daily data. The broad nominal US dollar probably also formed twin peaks. It achieved an initial summit on 12/28/16 (at 128.9) and 1/3/17 (at 128.8). The nominal TWD’s recent high, 12/14/18 at 129.1, edged less than one percent beyond the 2016/17 summit.

The decline in the broad real trade-weighted dollar from its 103.2/103.4 summit probably will be fairly close to and quite possibly more than ten percent. This retreat likely will last at least for several months. The broad TWD’s wall of resistance at 103.2/103.4 probably will not be broken anytime soon. If it is, the breach likely will not be substantial; dollar depreciation will resume.

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What interrelated phenomena currently are sparking, or will tend to encourage, near term and long run US dollar weakness?

Growing faith that America’s Federal Reserve Board will slow down (at least for a while) its current program of raising the Federal Funds rate represents a key factor in the establishment of December 2018’s TWD ceiling. Both the Fed Chairman and other US central bank guardians recently spoke of the need for “patience” on the rate increase front. For example, note Chairman Powell’s remarks before the Economic Club of Washington, DC (see the NYTimes, 1/11/19, pB3). Read the transcript of his 1/4/19 comments in an Atlanta, GA conference with other past Fed Chairs.

By reducing the likelihood of (at least) near term boosts in the Federal Funds rate, and thereby cutting the probability of notable yield increases for US government debt securities, the Fed makes the US dollar less appealing (less likely to appreciate further) in the perspective of many marketplace players. The Fed’s less aggressive rate-raising scheme (at minimum, a pause in that “normalization” process) mitigates enthusiasm for the US dollar from those aiming to take advantage of interest rate yield differentials (as well as those hoping for appreciation in the value of other dollar-denominated assets such as American stocks or real estate relative to the foreign exchange value of the given home currency). Capital flows into the dollar may slow, or even reverse to some extent.

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Another consideration constructing a noteworthy broad real TWD top is emerging optimism that tariff battles and other aspects of trade wars between America and many of its key trading partners (especially China) will become less fierce. Both the US and China increasingly are nervous regardless the ability of their nations to maintain adequate real GDP increases.

The current United States China 90 day negotiation deadline is 3/1/19. The NYTimes reported signs of Chinese concessions (1/9/18, ppA1, 8). US trade deals with China and other noteworthy nations reduce the incentive for those countries to depreciate their currency relative to the dollar in order to maintain market share for their goods and services within America. Such deals with China may well be vague or not amount to much in actual practice, but even cosmetic progress on the trade war battlefields will tend to weaken the dollar.

Signs of an armistice with China would bolster confidence that US trade feuds with Europe (particularly Germany) will subside. For the near term, the late 2018 deal between the US Administration with Canada and Mexico changing NAFTA treaty arrangements has lessened marketplace agitation regarding trade conflicts in that arena. Whether Congress eventually will enact this deal or a version close to it remains uncertain.

The current US Administration may seek a weaker US dollar relative to current heights in order to stimulate the economy as election season 2020 approaches.

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The substantial and worsening United States debt situation, particularly in the federal sector as a result of the end-December 2017 tax “reform” legislation, nowadays encourages and increasingly will assist long run dollar depreciation. In its bearish implications for the broad real TWD, this ominous US debt variable at present is somewhat independent of near term Federal Reserve Board and other key central bank policy action and rhetoric as well as the outcome of trade negotiations. However, it nevertheless entangles with these phenomena.

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Facing a Wall- Emerging US Dollar Weakness (1-15-19)