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




SHAKIN’ ALL OVER: MARKETPLACE CONVERGENCE AND DIVERGENCE © Leo Haviland June 18, 2018

OVERVIEW AND CONCLUSION

Financial wizards not only offer competing opinions regarding past, current, and future trends for stock, interest rate, currency, and commodity marketplaces. Their rhetoric displays diverse viewpoints regarding alleged relationships within and between those categories. For example, within the global stock constellation, various apostles elect to compare the travels of the S+P 500 with those of the Nasdaq Composite or with an emerging marketplace stock benchmark. Alternatively, some visionaries herald their subjective insights and foresights about connections between stocks (such as the S+P 500) and interest rates (such as the United States 10 year government note), perhaps also including the US dollar and the commodities galaxy in their investigations.

Luminaries tell stories offering their cultural perspective regarding apparent convergence and divergence (lead/lag) relationships within and between marketplace domains. Viewpoints regarding convergence and divergence encompass not only price direction (trend), but also the timing (start and end date; duration) of a given move as well as the distance it travelled. In any case, these links (associations; patterns) can alter, sometimes substantially and occasionally permanently. Marketplace history, including that related to convergence and divergence, is not marketplace destiny, whether entirely or even partly.

****

History reveals that the S+P 500 and emerging marketplace stocks “in general” (MSCI Emerging Stock Markets Index, from Morgan Stanley; “MXEF”) often have had very important trend changes in the same direction “around” the same time.

After establishing important bottoms together in first quarter 2016, the key American stock indices and those of other important advanced nations and the “overall” emerging stock marketplace traded closely together from the directional and marketplace timing perspective. Though the bull moves since first quarter 2016 in these assorted domains did not all voyage the same distance, all were very substantial. Their rallies since around the time of the November 2016 United States Presidential election were impressive. Both emerging marketplace equities and the S+P 500 established important peaks in first quarter 2018 (MXEF 1279 on 1/29/18; S+P 500 2873 on 1/26/18).

Yet whereas since its first quarter 2018 summit prices for the emerging stock marketplace arena have eroded significantly and currently rest at their calendar 2018 lows, the S+P 500 has retraced much of its dive and now (6/15/18 close 2780; stock price data in this essay is through 6/15/18) stands only slightly over three percent from its 1Q18 top. This divergence, though not massive, is noteworthy. A similar but more extreme divergence between these stock benchmarks existed from spring 2011 (and note particularly since around second half 2014) through about May 2015. The S+P 500 kept going up and achieved new highs over its spring 2011 one, but the MXEF failed to do so.

After spring 2015, convergence developed, with a bear trend in the S+P 500 accompanying the existing downhill one in the emerging marketplace stock group. An important factor assisting this was the decisive climb in the broad real trade-weighted United States dollar (“TWD”) above its critical resistance around 96.6. A similar convergence is likely to occur in the present MXEF and S+P 500 marketplace relationship, with the significant divergence disappearing and both equity realms falling “together”.

US corporate earnings indeed have been quite strong, with share buybacks and mergers and acquisitions robust. Nevertheless, one bearish factor for stocks in the current landscape is the broad real trade-weighted dollar’s recent advance over the 96.2/96.6 barrier (compare 2015); also recall the TWD rally beginning in spring 2008 during the 2007-09 global economic disaster). The ascending US yield trend (which began in July 2016, accelerating in 1Q18) has encouraged the TWD’s modest rally in the past few months. Trade war talk and potential tariffs probably have assisted the TWD’s appreciation. The US is a net importer nation; some exporters (which include many developing nations) may depreciate their currency to maintain market share within the US.

Another bearish sign for both advanced nation and emerging marketplace stocks is the persistent climb in US Treasury yields. Rising global yields alongside a strengthening dollar is especially painful to emerging marketplace countries and thus their stock marketplaces. Many developing nations, including their corporations, have dollar-denominated debt. And underscore in this context another point: for America over the past century, sustained rising yields generally have led to American stock marketplace declines. Given the Federal Reserve Board’s ongoing tightening policy (and its normalizing balance sheet, as well as probable willingness to allow some overshooting of its two percent inflation target), growing substantial US federal deficits (aided by tax “reform” legislation enacted in December 2017), substantial US household credit demand, a low unemployment rate, and other factors, US government yields probably will tend to keep rising over the long run. The growing mountain of US public debt, including as a percentage of GDP, also tends to push up interest rates.

A confirming sign for equity feebleness in both the S+P 500 and the MXEF likely will be weakness in commodities prices. Commodities often have peaked (bottomed) around the same time as a crucial top (bottom) in important advanced nation or emerging marketplace stocks. However, there have sometimes been lags. Recall that in during the worldwide financial crisis following the glorious Goldilocks Era, commodities “in general” peaked after the S+P 500 and emerging marketplace stocks. The broad Goldman Sachs Commodity Index (“GSCI”) has declined since 5/22/18’s 498 high.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Shakin' All Over- Marketplace Convergence and Divergence (6-18-18)

STOCK MARKETPLACES: AT THE CROSSROADS © Leo Haviland, September 4, 2017

“Money beats soul, every time.” “Roadhouse Blues”, by The Doors, with John Lee Hooker

****

CONCLUSION AND OVERVIEW

Many observers (including stock owners) are complacent about prospects for the emergence of significant stock marketplace declines, particularly in regard to the United States stock arena. Even a ten percent drop in US equities would shock many audiences. The S+P 500 and related American benchmarks nevertheless have been in the process of establishing an important top. The glorious long run bull advance in American stocks which started with the S+P 500’s major bottom at 667 on 3/6/09 probably is at or near its end. The S+P 500’s record height to date is 8/8//17’s 2491. That S+P 500 elevation probably will not be exceeded by much, if at all.

American stocks “in general”, although not an isolated island, have their own “individual” stories, as do assorted other stock marketplaces, whether in relation to earnings, valuations, or other phenomena. Yet marketplace history in recent years suggests that prices of stock marketplace signposts for other advanced (developed) nations and for emerging marketplaces “in general” likely will accompany any notable downtrend (including a bear move) in US equities.

****

Admittedly, since first quarter 2016, and especially after around America’s November 2016 Presidential election, emerging stock marketplaces generally have rallied alongside the S+P 500 and its domestic comrades such as the Dow Jones Industrial Average, Nasdaq Composite, and Wilshire 5000. But the MSCI Emerging Stock Markets Index, from Morgan Stanley (“MXEF”), a guide for emerging stock marketplaces, is around major resistance and (unlike the S+P 500) well below all-time highs.

Owners of (particularly “investors”) American and international equities hopeful of enjoying further upward rides should note other significant yellow warning lights. In mid-year 2017, leading European and Japanese stock marketplaces established highs. The S+P 500’s 6/19/17 interim top at 2454 occurred around the time of these highs. However, these European and Japanese mid-2017 stock tops have not been broken. And the S+P 500’s August 2017 high exceeds its June 2017 one by only 1.5 percent.

But after their dreary troughs in first quarter 2016, didn’t Germany’s DAX and the United Kingdom’s FTSE exceed their spring 2015 plateaus, as did the S+P 500 (5/20/15 high 2135). Yes, but the April 2015 summit for a broader measure for European stock performance, the STOXX Europe 600 Index (“SXXP”), remains intact. Japan’s June 2015 Nikkei height likewise remains a roadblock.

The adventures of Canada’s S+P/Toronto Stock Exchange Composite Index (“SPTSX”) are also a bearish sign to worldwide stock marketplaces. It has failed to vault over its February 2017 top (established prior to the mid-2017 ones in Europe and Japan). Also, February 2017’s SPTSX plateau edged only 1.6 percent above its September 2014 pinnacle.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Stock Marketplaces- at the Crossroads (9-4-17)

ADVENTURES IN WONDERLAND: COMMODITY CURRENCIES © Leo Haviland September 26, 2016

“For, you see, so many out-of-the way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” Lewis Carroll, “Alice’s Adventures in Wonderland” (Chapter I)

****

OVERVIEW AND CONCLUSION

Concentrating on and comparing exchange rates of “commodity currencies” offers insight into assorted interrelated marketplace relationships. Since the shocking eruption and terrifying acceleration of the global economic crisis in late 2007/2008, the major price trends for eight “commodity currencies” roughly (and of course not precisely) have ventured forward in similar fashion on a broad real effective exchange rate (“EER”) basis. Over that time, this basket of assorted commodity currencies generally has intertwined in various ways with very significant trends in the broad real trade-weighted United States dollar (“TWD”), emerging marketplace stocks in general, and broad commodity indices such as the S&P Goldman Sachs Commodity Index (“GSCI”).

The substantial rally in the broad real trade-weighted United States dollar (“TWD”) that embarked in mid-2011 played a key part in encouraging (confirming) and accelerating bear movements in emerging marketplace stocks and commodities “in general”. The S+P 500’s monumental rally over its spring 2011 interim high diverged for about four years from the trends in emerging equity realms and commodities. However, the TWD’s late 2015 ascent above its March 2009 peak was a crucial event. This dollar climb helped propel the S+P 500 downhill following 5/20/15’s 2135 pinnacle in conjunction with the emerging stock marketplace and commodity trends.

In January/February2016, these linked price patterns reversed. The TWD has depreciated modestly and stocks (emerging marketplaces as well as those of America and other advanced nations) rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield initially ascended from its 1Q16 low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. These current marketplace interrelationships (“roughly trading together”) probably will persist for the near term, regardless of whether the pattern of mid-2015 to first quarter 2016 resumes or that since mid-first quarter 2016 continues. Marketplace history of course need not entirely or even substantially repeat itself.

****

Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are important to the economies of advanced countries such as Australia, Canada, and Norway, the currencies of these lands likewise can be labeled as commodity currencies.

The bearish currency paths (effective exchange rate basis) of key emerging and advanced nation commodity exporters up to first quarter 2016 resembled the similar trends among them during the 2007-09 worldwide economic disaster era. However, these commodity currencies depreciated notably more in that recent dive than during 2007-09’s extraordinary turmoil. In addition, the lows attained by most of them decisively pierced the floors achieved about seven years previously. Moreover, the TWD rallied more sharply in its bull leap to its January 2016 elevation than it did during the past crisis.

The feebleness up to the 1Q16 lows for the commodity currency group, as it involved both advanced and emerging marketplace domains (as it did in 2007-09), reflected an ongoing global (not merely emerging marketplace) crisis. Substantial debt and leverage troubles still confront today’s intertwined worldwide economy. The bear trip of many commodity currencies into early first quarter 2016, especially as it occurred alongside big bear moves in emerging marketplace stocks (and in the S+P 500 and other advanced stock battlefields) and despite long-running extremely lax monetary policies, underlined the fragility of the relatively feeble global GDP recovery.

Therefore key central bank wizards, concerned about slowing real GDP and terrified by “too low” inflation (or deflation) risks, have fought bravely to stop the TWD from appreciating beyond its January 2016 top and struggled nobly to encourage rallies in the S+P 500 and related stock marketplaces. Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. Indeed, rallies in the S+P 500 (and real estate) may help inflation expectations (and inflation signposts monitored by central banks such as consumer prices) to crawl upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices as well as appreciation by commodity currencies in general.

****

Noteworthy rallies in these commodity (exporter) currencies from their recent depths tend to confirm (inspire) climbs in commodities in general and emerging (and advanced) nation stock marketplaces. Renewed deterioration of the effective exchange rates of the commodity currency fraternity “in general” likely will coincide with renewed firming of the broad real trade-weighted US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the still-dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.

****

“He was an honest Man, and a good Sailor, but a little too positive in his own Opinions, which was the Cause of his Destruction, as it hath been of many others.” “Gulliver’s Travels”, by Jonathan Swift (Part IV, “A Voyage to the Country of the Houyhnhnms”, chapter 1)

****

Looking forward, numerous entangled and competing economic and political variables generate a substantial challenge for explaining and predicting the interconnected financial marketplaces in general, including the commodity currency landscape. The commodity currency group as a whole (“CC”) has appreciated roughly twelve percent from its late calendar 2015/first quarter 2016 depth. What does a review of the adventures in commodity currencies since the assorted late 2015/1Q16 bottoms in the context of other marketplace benchmarks portend? Commodity currencies in general probably are establishing a sideways range. The overall camp of EERs (apart from what may happen to individual ones) will not rally much (if at all) above recent highs. The CC camp eventually likely will renew its overall depreciation, with the various EERs heading toward their noteworthy lows attained several months ago.

Although the CC rally since its 1Q16 bottom retraces some of its prior collapse, the TWD itself has dropped only modestly from its peak and thus remains quite strong. Moreover, note the fall in the broad GSCI (and the petroleum complex) since early June 2016. A still-robust TWD not only underlines potential for renewed weakness in the CC complex, but also confirms commodity feebleness and warns of risks to the recent bull move in emerging marketplace stocks (and even to the astounding S+P 500). China is a key commodity importer. As China’s EER continues to ebb (while Japan’s has strengthened), the ability of the CC clan to produce only a moderate overall percentage rally in their collective EER to date hints that world economic growth remains sluggish. Emerging marketplace stocks in general, despite their rally since 1Q16, remain substantially beneath their September 2014 summit.

Although leading global central banks devotedly retain highly accommodative policies such as yield repression and money printing, the inability of US Treasury 10 year note yield to rise much above its 7/6/16 low at 1.32 percent tends to confirm this picture of unimpressive (and even slowing) global expansion. Optimists underscore the S+P 500’s rally to a new peak on 8/15/16 at 2194 from its 1Q16 trough. Yet that new record elevation merely neighbors May 2015’s plateau, exceeding it by just 2.8 percent.

****

There is significant marketplace and political talk of trade wars, growing protectionism, and anti-globalization. Much of this wordplay links to populist challenges to the so-called establishment (elites). But even some establishment politicians have become less enamored of free trade. Fears of trade conflicts and protectionist barriers weigh on the CC domain as a whole.

For commodity currencies, much depends on Federal Reserve policy. At present, although the Fed did not boost rates in September, it currently seems fairly likely to do so in December 2016 (assuming no dramatic drop in stocks occurs before then). Especially as the European Central Bank, Bank of England, and Bank of Japan remain married to their highly accommodative schemes, this Fed action will help to rally the TWD and thus tend to weaken the CC armada. Nevertheless, the Fed and other central banks probably will fight to keep the dollar from surpassing its 1Q16 summit; doing so helps to protect stock (and real estate) prices and thus to reduce populist political advances.

The result of the US Presidential election on November 8 naturally remains uncertain. Unlike the EERs of the other seven commodity currencies, the Mexico EER has slumped beneath its first quarter 2016 low. Mexico faces severe domestic political challenges, and ongoing low oil prices wound its economy. However, the increasing potential for a Trump victory and resulting trade conflicts and immigration disputes also have helped to push Mexico’s EER downhill. The Mexican peso crisis of the early 1990s should not be forgotten.

Significant ongoing American political divisions risk further weakness in the US dollar, regardless of who wins the exciting Presidential sweepstakes. The US has a long run budget challenge regardless of who emerges victorious. Though the TWD issue is complex, a Trump victory likely is more bearish for the TWD than a Clinton one. Comments from overseas (and numerous domestic) leaders suggest lack of confidence in Trump’s abilities and policies, which arguably would be reflected in reduced acquisition (or net selling) of dollar-denominated assets such as US government securities (and corporate debt) and American stocks. Trump’s budget proposals, if enacted, will likely expand the deficit considerably and thus probably would encourage interest rate rises. A Trump triumph likely would be bearish for the US dollar in general, even if the dollar rallied against the Mexican peso on a cross rate basis. However, though numerous respected forecasters predict a close outcome, Clinton probably will defeat Trump. In any case, all else equal, a Democratic victory increases the odds of a Fed rate hike in the near term.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Adventures in Wonderland- Commodity Currencies (9-26-16)

CHINA: BEHIND THE GREAT WALL (c) Leo Haviland June 7, 2016

“Seek truth from facts.” Mao Zedong and Deng Xiaoping

CONCLUSION

China’s era of miraculous economic growth has marched into history. Yet China’s real GDP output in the past few years, and even 2015, has been robust in comparison to that of most other nations. The majority of international financial wizards faithfully proclaim that Chinese GDP likely will remain strong, at over six percent for the next several years.

China’s GDP strength over the past three or four years nevertheless derived significantly from its widespread national willingness to boost debt (leverage) levels substantially. This significant debt expansion coincides with the current unwillingness or inability of the nation’s political and economic leadership to do much to subdue the debt issue. China’s continued debt building (perhaps assisted by other factors) perhaps will achieve its praiseworthy growth levels, at least for a while.

And trend shifts during first quarter 2016 in various stock (both advanced and emerging), interest rate, currency, and commodity marketplaces (particularly dramatic rallies in the S+P 500 and the petroleum complex) inspire optimism regarding global growth prospects. Despite potential for small rate increases by the widely-admired Federal Reserve, monetary policy in America and elsewhere likely will remain highly accommodative, thereby assisting expansion in developed nations and China.

****

However, review the patterns in China’s stock, central government 10 year note, and currency marketplaces. Those domains, when interpreted together and alongside a broad array of other key global financial marketplaces, not just the S+P 500 and oil, on balance nowadays suggest Chinese growth over the next few years probably will be less than most gurus expect. In today’s interconnected economic world, slower than anticipated Chinese economic expansion probably will be reflected by more sluggish growth elsewhere than generally forecast.

Politics and economics entangle in both advanced and emerging/developing nations. China’s political elite (notably its Communist party chiefs) seeks to ensure its own power and overall national political, economic, and social stability. Insufficient GDP growth and related widespread popular fears regarding income levels and economic inequality probably endangers these goals.

What do the political rhetoric and actions over the past few years (including recently) by China’s leaders reflect? Quite significantly, they portray increasing concern about their nation’s current and prospective economic situation, particularly its growth level and outlook.

To deflect and dilute growing popular concern about a weakening economic situation (slowdown; feebler growth than desired), and to maintain their political power and influence, China’s political leaders have acted vigorously on both the external and internal fronts. In the foreign sphere, they increasingly quarrel with other nations; on the internal landscape, efforts to control political and other social activities and dialogue have increased. These policies from China’s authorities tend to confirm the trends of slowing Chinese (and global) growth.

FOLLOW THE LINK BELOW to download this article as a PDF file.
China- Behind the Great Wall (6-7-16)