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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BASE METALS AND OTHER MARKETPLACE TRAVELS (c) Leo Haviland May 16, 2016

CONCLUSION

In the commodities constellation, base metals such as aluminum, copper, lead, nickel, and tin usually attract much less attention than the alluring stars of the petroleum complex. Nevertheless, base metals hold an important position in the global economic universe. Not only are they especially important for the economies of many emerging/developing countries (think of China, a huge base metals consumer), but also for several so-called advanced nations.

Of course history is not destiny. However, history reveals that major moves (trend changes) in the base metals complex (use the London Metal Exchange’s base metal index, “LMEX”, as a benchmark) nevertheless can offer important guidance for significant shifts in other marketplaces. Often LMEX major moves precede those in other financial realms.

The bear marketplace trend for base metals “in general” began in early 2011 and accelerated in 2014 and 2015. Base metals established an important bottom in mid-January 2016. This occurred alongside, though shortly before, troughs in commodities in general (and the petroleum complex in particular) and key lows in the S+P 500 and emerging marketplace stocks. The LMEX bottom also preceded the peak in the trade-weighted United States dollar and a significant yield low in the US Treasury 10 year note.

Emerging and developed countries closely interconnect in today’s international economy. So the base metals price rally since its first quarter 2016 low helped to spark optimism about improved global economic growth. However, the upward walk in base metals has been very modest compared to the sharp petroleum climb. In addition, recent LMEX highs roughly coincide with the April 2016 ones in the S+P 500 and emerging marketplace stocks. And US Treasury note yields have slipped lower since mid-March. Suppose noteworthy renewed weakness in base metals appears, with 1Q16 lows challenged or broken. This probably would signal (confirm) further slowing in real GDP expansion rates not only in China, but around the globe.

BASE METALS AND OTHER MARKETPLACES: 2007-09 REVISITED

Admittedly, in a review of several very important marketplace domains during the 2007-09 global economic crisis era, a notable time lag between the achievement of a crucial price point turning level (major high/major low) in a given arena in relation to those of various other arenas sometimes appears. Nevertheless, many significant trend changes in the LMEX base metal index, the broad Goldman Sachs Commodity Index, emerging marketplace stocks “in general”, the S+P 500, the broad real trade-weighted dollar, and the US Treasury 10 year note occurred around roughly the same time. Given the preceding analysis of the 2011-present period, this underscores the importance of watching base metals as a guide to (confirming indicator for) significant trend changes in these financial arenas.

The LMEX’s lofty May 2007 pinnacle preceded major highs in the broad GSCI (7/3/08 at 894), MXEF (11/1/07 at 1345), S+P 500 (10/11/07; 1576), and Shanghai Composite Index (10/16/07 at 6124), as well as the broad real trade-weighted dollar’s April 2008 major bottom. The LMEX’s high in early February 2011 also occurred prior to (although not long before) major peaks in the broad GSCI and MXEF. And quite significantly, the LMEX’s March and July 2008 very important secondary tops occurred close in time to the major low in the TWD, the final highs in the S+P 500 (5/19/08; 1440) and MXEF (5/19/08 at 1253), and the broad GSCI’s peak. In addition, the LMEX’s December 2008 major low occurred relatively near in time to turns in these marketplaces.

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Base Metals and Other Marketplace Travels (5-16-16)

GREAT EXPECTATIONS: THE FEDERAL RESERVE, INFLATION, AND POLITICS © Leo Haviland March 20, 2016

“I went home, with new matter for my thoughts, though with no relief from the old.” Charles Dickens’s novel, “Great Expectations” (Chapter 48)

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OVERVIEW

A deluge of money printing and ardent yield repression by leading central banks of course are not the only important potential sources of inflation. Assorted marketplace guides proclaim a variety of opinions regarding relevant inflationary factors and their relationships and consequences. And everyone knows that economic, political, and social conditions, programs, and challenges differ, often significantly, between countries.

Central banking mandates and interpretations regarding them are not precisely the same. Central banks do not have an easy job. In his story “A Christmas Carol” (Stave 3), Charles Dickens states: “it is always the person not in the predicament who knows what ought to have been done in it, and would unquestionably have done it too”.

However, all the bankers preach devotion to their mandate. The Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and the Swedish central bank for the past several years have shared a faith and proclaimed a gospel that achieving and sustaining about two percent inflation is a “good” goal. Thus many leading global central banks believe “too low” inflation (and of course deflation) is “not good” or is “bad”.

Central banking decisions, actions, and rhetoric around the globe have become increasingly interdependent since the eruption of the international economic disaster of 2007-09. Banking captains nobly stress their willingness to do whatever it takes and whatever they must, frequently pointing to their beloved toolkit of monetary measures. Thus they embarked on highly accommodative monetary policies such as yield repression and gigantic money printing and generously provided forward guidance. Yet despite their long-running and devoted odyssey aimed at achieving and sustaining the praiseworthy target of two percent inflation, the armada of central banks thus far has failed in its inflationary quest. Their great expectations have not generated great results.

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Since inflation (including too low inflation and deflation) concerns and wordplay are so significant for current marketplace analysis and trends, it pays to select and assess variables indicating whether a sufficient and sustained quantity of inflation is appearing or may soon do so. Observers can differ in their choices and viewpoints.

“Inflation”, however defined and measured, may appear earlier in one nation or region than another. Moreover, just because some or sufficient inflation (or deflation) emerges in one territory, they need not do so elsewhere. In any case, let’s focus on America. Not only does the United States play a crucial role on the world economic and political stage, but so does the Federal Reserve Board. Stock, interest rate, currency, and commodity marketplaces avidly monitor Fed statements, signals, and behavior. Finally, America nowadays apparently is (however slowly) showing signs of being a key leader in international GDP growth.

 

US POLITICS: BLEAK HOUSE

In Dickens’s “Great Expectations”, a character says: “’Ask no questions, and you’ll be told no lies.’” (Chapter 2)

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Most Americans have high (or at least moderate) confidence in and trust the US Federal Reserve Board. In contrast, many Americans nowadays have rather low expectations regarding US politicians “in general”. They distrust and have rather little confidence in most US political leaders. They question the willingness and ability of such representatives to work together to achieve desirable goals.

Focusing on central banks and their monetary measures aimed at achieving sufficient inflation should not cause observers to overlook political causes, including fiscal ones, of inflation and higher interest rates. And interest rates can rise for reasons other than, or in conjunction with, inflation pressures.

In any case, weak national political leadership and substantial political divisions do not guarantee rising interest rates, but they can encourage that development. They also can help to generate a weaker dollar.

The United States currently is a house divided. Income and asset inequality, immigration debates, views on health care, opinions on the appropriate size and role of government, international trade topics, climate change, and other issues inflame America’s political theater. In election year 2016, as in the prior few years, there has been greater than normal partisan strife.

These ongoing significant US political divisions risk further weakness in the US dollar. Underscore the current conflict between the Republican Congress and the Democratic President. Though the American political process has a long way to go until election season 2016 concludes, partisan warfare likely will persist. The House likely will remain Republican; the President probably will be a Democrat (Hillary Clinton). Control of the Senate is a close call.

The battles within the Republican camp look likely to persist for at least a few more months. Will there be a convention fight? “Trump warns Republican elders of ‘riots’ if they fail to back his candidacy”, headlines the Financial Times (3/17/16, p3). Although Trump has great confidence in his own talents, at present the majority of Americans apparently do not share that confidence. Suppose Donald Trump captures the Republican Presidential nomination. Imagine that he wins the Presidency. Comments from overseas leaders suggest lack of faith in Trump’s abilities and policies. Such foreign attitudes are a bearish factor for the dollar.

An ability to transcend partisan divisions only via big spending (fiscal irresponsibility) does not eliminate substantial underlying political factionalism. The massive addition to future US budget deficits agreed upon by Congress and the President in late December 2015 probably will tend to push up interest rates and is a bearish factor for the dollar. (See the Congressional Budget Office’s “Summary of The Budget and Economic Outlook: 2016 to 2026; 1/25/16. See also the NY Times, 12/17/15, pA29; NY Times, 12/19/15, ppA1, 13). In any event, America has a looming long run debt problem. And don’t debtors tend to like inflation?

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Great Expectations- the Federal Reserve, Inflation, and Politics (3-20-16)

AS THE WORLD BURNS: MARKETPLACES AND CENTRAL BANKS © Leo Haviland February 8, 2016

“To every thing there is a season, and a time to every purpose under the heaven.” Ecclesiastes, Chapter 3, verse 1 (King James Version)

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OVERVIEW AND CONCLUSION

To spark and sustain the worldwide economic recovery that began around first half 2009, the Federal Reserve Board and other major central banks warmly embraced highly accommodative monetary policies such as yield repression and money printing (quantitative easing). Who would want to repeat the horrors of the hellish worldwide economic disaster that erupted in 2007 and worsened dramatically after mid-year 2008? Therefore, often in recent years, after significant hints of feeble growth (or recession) or insufficient inflation (or signs of that evil, deflation) appeared, these high priests of the economic system offered further rhetoric or additional (or new) action to accomplish their aims and restore confidence. Such central banking efforts often succeeded. In any case, financial congregations (especially in American and other stock marketplaces) generally loudly hoped for, fervently encouraged, and joyfully praised such central bank rescue efforts.

However, around mid-2015, advanced nation stock benchmarks such as the S+P 500 peaked. Moreover, despite central bank wordplay and vigorous policy action, bear moves in these stock domains have persisted alongside renewed signs of economic weakness and “too low” inflation. Ongoing collapses in emerging marketplace stocks “in general”, the major bear move in commodities in general, and falling yields in the 10 year United States Treasury note accompanied tumbles in the S+P 500 and other advanced nation equities. The major bull move in the broad, real trade-weighted US dollar, which began in July 2011, has played a key role in these intertwined trends.

In the past few weeks, key global central banks once again preached sermons or engaged in actions aimed not only at creating sufficient inflation (defeating deflation) and ensuring sustained economic recovery. Stock marketplaces initially ascended higher after these recent efforts (recall their lows around January 20, 2016), and the US dollar weakened somewhat. The Federal Reserve Board and other guardian angels probably did not want the S+P 500 and related stock marketplaces to crash under their January 2016 lows. In addition, they probably did not want the United States dollar bull move to extend much (if at all) beyond its January 2016 high.

However, and although not much time has passed since these recent ardent central bank efforts, the S+P 500 and other stock landmarks have resumed their slumps. Ominously, many stock marketplaces have fallen under their August/September 2015 lows. In addition, the dollar still remains strong, commodities weak (despite talk about and hopes for OPEC petroleum production cuts), and US government yields (in a flight to quality) depressed. This vista warns that the Fed and other revered central banks are finding it more and more difficult to accomplish their various policy aims. It suggests that people (including devoted investors in US stocks) increasingly are losing faith in the ability of central banks to produce desirable outcomes.

Although it is a difficult marketplace call, these ongoing and interwoven marketplace trends probably will continue for a while longer. Admittedly, if these marketplace patterns persist and especially if they extend, watchers should beware of even more dramatic (and perhaps coordinated) central bank rescue action.

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For additional currency, stock, interest rate, and commodity marketplace analysis, see essays such as “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16), “Japanese Yen: Currency Adventures (2007-09 Revisited)” (1/14/16), “US Natural Gas” Caught in the Middle” (especially pp2-3), “America: A House Divided” (12/7/15), “Two-Stepping: US Government Securities” (12/1/16), “Commodities: Captivating Audiences” (10/12/15), and “Déjà Vu (Encore): US Marketplace History” (10/4/15).

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As the World Burns- Marketplaces and Central Banks (2-8-16)

JAPANESE YEN: CURRENCY ADVENTURES (2007-09 REVISITED) © Leo Haviland January 14, 2016

In Akira Kurosawa’s famous film “Yojimbo”, a farmer remarks: “Everybody’s after easy money.”

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CONCLUSION

In recent months, much marketplace and media attention regarding foreign exchange arenas has focused on the travels of the United States dollar, the Chinese renminbi, the Euro FX, and an assortment of emerging marketplace currencies. The Japanese Yen has captured relatively little of the limelight. But it should.

Marketplace history of course need not repeat itself, either completely or even partly, but players should not overlook or dismiss parallels. The Japanese Yen’s rally in the past few months reflects current (and points to further) worldwide economic weakness. Recall the Yen’s rally during the worldwide economic crisis of 2007-09.

During the acceleration of the global economic disaster of 2007-09, both the Japanese Yen and the United States dollar made major bull moves on a broad real trade-weighted (effective exchange rate) basis. The Yen tumbled dramatically from its 2011/2012 summits. But that bear move probably ceased in mid-2015. The modest rally in the Yen since June 2015 has coincided with the continued advance of the dollar’s broad real trade-weighted major bull move. Moreover, as during the 2007-09 crisis span, the Yen’s effective exchange rate climb has accompanied a rally in its cross rate against the dollar.

Not only is the current Yen bull trend a bearish sign for world economic growth. It also is a bearish indicator for the Nikkei, S+P 500, and other key stock benchmarks. As massive Yen depreciation alongside quantitative and qualitative easing (QQE) helped to propel the Nikkei (and thereby other stock marketplaces such as the S+P 500 higher), growing Yen strength (all else equal) tends to push the Nikkei and other stock realms lower. The Yen march upward since June 2015 coincides with slides in equities, a drop in the US Treasury 10 year note yield, and renewed sharp falls in commodities “in general” (and petroleum in particular).

BOTTOM LINES

On 1/14/16, the S+P 500 touched a low at 1879, very close to its 8/24/15 low at 1867. It then rallied, closing around 1922. The Nikkei’s 1/14/16 low at 16944 hovers right above its 9/29/15 trough. What about the Shanghai Composite? Its low on 1/14/16 at 2868 neighbors its 8/26/15 depth at 2851.

Previous essays have discussed the Federal Reserve Board’s effort to slow, halt, or reverse marketplace declines in the S+P 500. For example, see “Playing Percentages: Stock Marketplace Games” (7/13/15). In the current environment, stock slumps of around ten and 20 percent from an important plateau (such as the May 2015 one) are important guideline levels for the Fed. The Fed’s preferred method to stop downward moves of around ten percent is talk (wordplay) rather than action. Falls of around 20 percent (or more) increase the odds of action (perhaps even renewed quantitative easing).

Thus today’s speech from James Bullard, the President of the St. Louis Fed, is rhetoric aiming to support US (and perhaps other) stocks (“Oil Prices, Inflation and U.S. Monetary Policy”).

Such charming wordplay from the Fed (and its central banking allies) can induce rallies in the S+P 500. However, it probably will not stop the S+P 500 from resuming its bear move and breaking beneath its August 2015 bottom. The Nikkei will fall under its 9/29/15 low, and the Shanghai Composite will venture beneath its late August 2015 bottom. The broad real TWD will remain strong for at least the near term; the Japan EER will continue its modest rally, as will the Yen’s advance against the US dollar.

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For additional currency, stock, interest rate, and commodity marketplace analysis, see “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16) and earlier essays.

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Japanese Yen- Currency Adventures (2007-09 Revisited) (1-14-16)