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.

 

Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile




GAMES PEOPLE PLAY: AMERICAN REAL ESTATE © Leo Haviland August 28, 2016

“Home is the nicest word there is.” Laura Ingalls Wilder, author of the “Little House” books, which inspired the famed television show, “Little House on the Prairie”

****

OVERVIEW AND CONCLUSION

The United States real estate marketplace played a significant role in the worldwide economic disaster that erupted in mid-2007 and accelerated in 2008. That dreadful time and its consequences probably are not a distant memory within the perspectives of key central bankers and at least some politicians. Otherwise, the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, and other monetary gatekeepers would not have sustained various highly accommodative schemes for over seven years. Though international growth resumed around mid-2009, it generally has been erratic and modest. Despite unwavering devotion to their mandates, these sheriffs thus far have not delivered sufficient inflation relative to benchmarks such as the consumer price index. Although headline unemployment measures have plummeted in the United States, they remain fairly high in some nations.

The United States of course is not the whole world and American consumers do not represent the country’s entire economy. Yet because the US is a crucial player in the interconnected global economic (and political) theater, and because US consumer spending represents a majority of US GDP, the state of affairs for the US consumer has international consequences. Consumers represent about 68.3 percent of America’s GDP (2015 personal consumption expenditures relative to GDP; Federal Reserve Board, “Flow of Funds”, Z.1; 6/9/16). The household balance sheet level and trend (net worth) is an important variable in this scene. Although stock marketplace and real estate values matter a great deal to others (such as corporations and governments) beyond the “person on the street”, they are quite important to US household net worth and thus behavior (including spending patterns) and expectations (hopes) regarding the future.

Thus although US household net worth is not an explicit part of the Federal Reserve’s interpretation of its mandate (promoting maximum employment, stable prices, and moderate long-term interest rates) and related policy actions, it is very relevant to them. So therefore are stock marketplace and real estate values and trends. Home ownership is an important dimension of the ideology of the American Dream. Rising home and increasing stock marketplace prices to some extent bolster faith that the American Dream “in general” (as a whole) is succeeding. And what happens to American real estate still matters a great deal for the global economy.

Sustained yield repression and quantitative easing (money printing) by the Fed and its playmates not only have helped the S+P 500 and many other stock signposts to soar through the roof. These programs (assisted to some extent by deficit spending programs) also repaired much of the damage to America’s real estate landscape. Let’s survey the US real estate marketplace in this context, concentrating primarily on the consumer housing sector.

****

The dutiful Fed reviews assorted factors related to personal consumption expenditure (consumer price) inflation and other aspects of its mandate. Consumer price or personal consumption expenditure inflation targets of around two percent matter to the Fed and other central bank sheriffs. Yet sufficient (too low; too high) inflation (as well as deflation) can occur in other realms, including stocks and real estate.

Combine the monumental recovery in US real estate values with the towering rise in the value of stock marketplace assets. Although these are not the only parts of or phenomena influencing the US household balance sheet, current real estate and stock marketplace (particularly note the S+P 500) levels and trends appear more than adequate to justify a less accommodative Fed monetary policy. And US housing trends (including the rental situation) probably are placing substantial upward pressure on key consumer price benchmarks.

Recall the glorious American real estate spectacle before the mournful crash of the worldwide economic disaster. Although that Goldilocks Era for US real estate belongs to the past, the current housing situation recalls it.

The dovish Fed nevertheless will be cautious regarding boosts in the Federal Funds rate. Like other members of the global establishment (elites), it does not want populists (whether left wing or right wing; such as Donald Trump) to win power. To some extent, sustained substantial slumps in stocks and real estate prices tend to encourage populist enthusiasm. The Fed and its allies battle to avoid a sharp downturn in the S+P 500 or housing prices. The Fed meets 9/20-21, 11/1-2, and 12/13-14/16. The US Election Day is November 8. See “‘Populism’ and Central Banks” (7/12/16) and “Ticking Clocks: US Financial Marketplaces” (8/8/16).

FOLLOW THE LINK BELOW to download this article as a PDF file.
Games People Play- American Real Estate (8-28-16)

TICKING CLOCKS: US FINANCIAL MARKETPLACES (c) Leo Haviland August 8, 2016

“Isn’t it a pity…the wrong people always have money.” From “The Big Clock”, a 1948 American film noir (John Farrow, director)

****

CONCLUSION AND OVERVIEW

Ongoing yield repression by the Federal Reserve Bank, the European Central Bank, and their allies plays a crucial role in keeping the US Treasury 10 year note well beneath 6/11/15’s 2.50 percent interim yield top, as well as later and lower heights of 2.38pc (11/9/15) and 2.00pc (3/16/16). For the next few months, running up at least through America’s 2016 election period, it will be difficult for the UST 10 year to break above the resistance range of 2.00/2.50pc or much under its 7/6/16 low at 1.32pc.

The Fed leadership promotes caution regarding Fed Funds rate boosts. The NY Fed President recently argued “at the moment, for caution in raising U.S. short-term interest rates” (“The U.S. Economic Outlook and the Implications for Monetary Policy”; 7/31/16). A Fed Governor is “not in a hurry to lift rates”; he argues “for a ‘very gradual’ path for any rises” (Interview with Financial Times, 8/8/16, p2).

Economic growth in America, Europe, and Japan generally remains subdued. China, though it retains a comparatively strong real GDP rate, has slowed down. Despite massive money printing (quantitative easing) by assorted leading central banks at various times over the past seven to eight years, inflation yardsticks generally remain beneath the two percent target beloved by the Fed and its loyal allies. Ongoing government deficit spending, though less than during the global economic disaster era and the following few years, in recent times likewise has not sparked sustained substantial growth or sufficient inflation.

The broad real trade-weighted US dollar (“TWD”, monthly average; Fed H.10 statistics), though still lofty relative to its July 2011 major bottom around 80.5, remains beneath first quarter 2016’s 101.2 pinnacle. Central banks and finance ministers have been determined to keep the TWD beneath (or at least not much over) its January 2016 summit. For the next few months, they probably will continue to succeed in accomplishing this goal. The TWD also for the near term probably will not plummet more than 10 percent from its first quarter 2016 pinnacle.

****

Establishment icons such as the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan probably will retain their highly accommodative policies for the next several months (at least). They will persist in their path not merely because of failure to achieve inflation goals, relatively sluggish growth, fears about global economic troubles (such as the United Kingdom’s Brexit Leave vote fallout) or worries about assorted “headwinds”/”volatility”. So why else?

The economic and political “establishment” (elites) in America and overseas fervently battles to subdue both left-wing and right-wing “populist” advances. See “‘Populism’ and Central Banks” (7/12/16). These guiding lights do not want populist leaders, whether America’s Donald Trump or European (or other) left or right wing firebrands, to achieve power.

The S+P 500 and other global stock marketplace benchmarks have rallied sharply from their 1Q16 depths. The S+P 500 has edged above its 5/20/15 peak at 2135. But a sharp downturn in worldwide equities probably would help populist advocates of “Change” to claim that “the establishment” had inadequate or failing economic (and political and social) policies. So the US establishment and its overseas comrades do not want the S+P 500 and related equity marketplaces to collapse, especially during the countdown up to US Election Day (11/8/16). Keeping US government (and other) yields low and avoiding big moves in the US dollar intertwine with central bank (and other establishment) stock marketplace support and anti-populist strategies.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Ticking Clocks- US Financial Marketplaces (8-8-16)