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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MARKETPLACE FIREWORKS © Leo Haviland July 6, 2015

Statistics and stories constantly bombard marketplaces. In today’s marketplace environment, and especially when an especially enthralling news item bursts into view, many gurus and coaches scream about current or prospective crises, panics, and bubbles (overvaluation).

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Recent debt-related troubles in Greece and Puerto Rico and the collapse in the Chinese stock battleground are not isolated or entirely unique (special) marketplace events. They are signs and symptoms of widespread and intertwined marketplace phenomena. They are examples of and interconnected with current problems and related (linked) marketplace price movements around the globe.

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It is a truism that times change, but that does not mean that times necessarily are entirely or substantially different. Some historians may hearken back to the 2007-09 worldwide economic disaster; the United States real estate catastrophe and the demise of Lehman Brothers were not mere flare-ups. They did not stand alone. Debt, leverage, and credit problems were worldwide, even if they varied to some extent from place to place; their consequences erupted around the globe.

The Federal Reserve, European Central Bank, Bank of Japan, Bank of England, and China’s central bank have engaged for many years in highly accommodative monetary programs. Despite lax policies such as sustained yield repression and massive quantitative easing (money printing), international debt, leverage, and credit problems did not disappear. They persisted and have reappeared. These central bankers have provided cosmetic fixes, not permanent ones, to such difficulties. Remarkably easy money policies, aided by political deficit spending, have helped to spark and sustain worldwide GDP growth since around early 2009.

Yet that past success does not guarantee future triumphs. Is worldwide growth decelerating? Probably. Note the downward growth revisions in recent months for 2015 for the United States by the International Monetary Fund (Article IV Consultation, released 6/4/15) and the Fed (Economic Projections, 6/17/15). Indications of a Chinese slowdown preceded its recent stock tumble. There have been concerns about the property marketplace, shadow (and other) banking, and increasing debt. “China orders banks to keep lending to insolvent provincial projects” declares the front page of the Financial Times (5/16-17/15, p1). Note the continued bear marketplace trend in base metals in general. Through May 2015, China’s year-on-year electricity output was about flat, up only .2pc (National Bureau of Statistics).

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Some issues obviously matter more to some traders (and marketplace sectors) than others. But in today’s interconnected global marketplaces, various key stock, interest rate, currency, and commodity playgrounds intertwine in diverse and often-changing fashions. Moreover, these arenas are never separate from the “real” economy. So flashy economic stories about one marketplace or nation can spark or accelerate modest and sometimes even dramatic price travels in numerous venues.

And regardless of which exciting tales currently capture substantial trading and media attention, they usually reflect and interconnect with crucial (and so-called “underlying”) economic (financial, commercial) and political phenomena. These noteworthy variables, issues, trends, and opinions regarding them not only capture the attention of many marketplace players, but also necessarily remain major factors for Wall Street price action and Main Street prosperity.

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The debt and leverage (credit) problems in the United States and elsewhere which developed prior to yet culminated in the Goldilocks Era arguably remain unsolved, or have appeared in related forms. For example, America in general has a love affair with debt. The overall consumer debt burden has lightened somewhat since the darkest nights of the 2007-09 crisis. However, federal debt has jumped up. Thus America’s overall indebtedness remains quite significant. See the essay, “America’s Debt Culture” (4/6/15).

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Marketplace Fireworks (7-6-15)

MARKETPLACE PARTY TANTRUMS © Leo Haviland June 15, 2015

MARKETPLACE PARTIES

In action-packed Wall Street, whether in US stocks or another fascinating venue, winning money tends to attract attention. All else equal, and as a general rule, the more people in a given game there who capture and keep cash over time, the more likely it is that others will tend to join the particular party. Of course a gathering can get rather full, with “about everyone jammed into the room”. Or, for one or many reasons, the joyous event may become less fun, with the affair perhaps eventually ending, maybe even on a dismal note.
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The S+P 500’s long and monumental bull march following the dreary final days of the global economic disaster (major low 3/6/09 at 667) may persist, but it currently looks rather tired and seems to be ending. In any case, stock investors in general have enjoyed the engaging party (rally) in US equities. Interest rate bulls in key domains such as US and German government debt have celebrated substantial tumbles in yields relative to June 2007 heights. As the Goldilocks Era danced to its end, the 10 year US Treasury note peak was 5.32 percent on 6/13/07; the German 10 year government note top also occurred that day, at 4.70pc. During the worldwide economic recovery, many fortune seeking investors (and speculators) have raced after suitable returns by gobbling up lower-quality debt instruments.
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Competing coaches in Wall Street and Main Street assign a variety of reasons for the emergence, continuation, and ending of both general economic and specific marketplace bull and bear trends. Such wizards and their apostles advise and offer opportunities and warnings to eager audiences regarding marketplace phenomena, including important changes in central bank and fiscal policy. Guides and followers wonder and debate regarding what can spark, sustain, or alter the course of noteworthy price adventures within one or more stock, interest rate, currency, and commodity playgrounds.

Apparently dramatic price fluctuations and trend changes frequently inspire talk of volatility, spikes, mania, and panic. Colorful metaphors frequently punctuate descriptions and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk regarding potential reduction in quantitative easing (money printing) generated wordplay of a “taper tantrum”.

Sometimes preceding but often during or following particularly colorful displays of price patterns, marketplace and media ringleaders regale avid audiences with enthralling and excited language. Some speeches and arguments offer opinions regarding “fair (or true, real) value” (overvaluation and undervaluation; overshooting and undershooting; too high and too low, too rich/expensive or too cheap), natural (rational, reasonable, sensible) prices, and equilibrium.

Securities marketplaces in America and many other nations are of course very large and important to the so-called “real” economy, not merely the “financial” one. Assorted “investors” (buyers) own lots of stocks and interest rate instruments. Moreover, investment (especially in securities) has long been labeled as a reasonable, prudent, intelligent, logical, good, and praiseworthy practice. In general, selling of (or speculation in) securities (especially stocks) is less meritorious (and sometimes allegedly even bad); short-selling (especially of investment-grade equities) is often criticized as dangerous or bad.

Therefore, significant price declines in the S+P 500, and often in interest rate instruments (particularly in supposedly high-quality, investment grade government and corporate debt securities), generally inspires substantial dismay, including talk of “tantrums”. “Tantrum” language, when specifically applied to the stock and interest rate context, usually applies to price drops (bear trends). Bull moves in securities prices, even if they are of the same distance and duration as a bear trend, generally are not labeled as tantrums, for bull moves profit investors. Tantrums can ruin a wonderful party, right? Consequently, it pays to consider the potential regarding and to be on the lookout for the actual emergence of widespread and growing fears and talk about notable falls in securities prices.

Packs of Wall Street partygoers debate the definition, existence, causes, and cures of “overvaluation” phenomena such as “bubbles”. Recently, some players ask if the S+P 500, Chinese stocks, many key government bond playgrounds (picture those of the United States and Germany), and US home prices are bubbles (or overvalued and so on). Will a given bubble be burst or merely have some hot air taken out of it? To what extent will rising US Treasury and corporate debt rates dampen the United States (and international) recovery? Will climbing US government yields, or fears of them, pop a stock marketplace bubble?

This valuation rhetoric is particularly important when interpreted alongside rising nervousness regarding the worldwide economic recovery. After all, reduced GDP expansion may make it more challenging to generate corporate profits and therefore equity price gains.
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Frequent conversations nowadays regarding overvaluation and worries about international growth underline the merit of focusing on a handful of corners within several entangled marketplace scenes. That review may help money hunters to assess the risks of staying in or entering a particular marketplace ballpark. This brief survey indicates information regarding or price points within particular marketplace arenas that will not only may draw greater attention to and inflame action in them, but also likely will help trigger dramatic price moves in other playing fields.

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Marketplace Party Tantrums (6-15-15)

MARKETPLACE ENTANGLEMENTS: REVISITING 2008 © Leo Haviland December 14, 2014

Focus on the current scene for and apparent relationships between the United States Treasury 10 year note, the S+P 500, emerging stock marketplaces (“MXEF”; MSCI Emerging Stock Markets Index, from Morgan Stanley), the United States dollar, and commodities in general (“GSCI”; broad Goldman Sachs Commodity Index). Surely much has changed since the dreadful days of the worldwide economic disaster that emerged in 2007 and accelerated during 2008. One critical difference involves the extraordinary sustained monetary accommodation (notably yield repression and money printing) by the US Federal Reserve Board and its central bank allies in response to the 2007-2009 crisis. Yet arguably many significant debt and leverage problems that developed during the wonderful Goldilocks Era never were solved, merely patched up, downplayed with sunny rhetoric, or postponed. Also, arguably, new debt and leverage problems, partly motivated by the ravenous hunt for yield (return), have walked on the financial stage.

The present marketplace panorama rather closely resembles that of 2008 in many respects. However, the S+P 500 has not yet slumped significantly from its recent high on 12/5/14 at 2079. A notable fall in the S+P 500 from that level nevertheless probably will occur, underscoring (further creating) the parallel with the 2007-08 situation. If the S+P 500 surpasses its December 2014 high, it likely will not do so by much anytime soon. In any event, assuming the major trends underway for these other marketplaces essentially remain intact, the S+P 500 likely will fall significantly, although probably not nearly as dramatically as it did during the 2007-09 span.

Although cross rates between the US dollar and other currencies are important, the level and trend of the broad real trade-weighted dollar (“TWD”) is a better benchmark for overall dollar strength and weakness.

The broad real TWD created a major low around 80.5 in July 2011. After moving to around 83.5 in September 2011, it meandered sideways for nearly three years, with June 2012’s 86.3 the high during that span.

From about 84.8 in July 2014, it began to edge steadily up (recall the related timing of the UST’s 7/3/14 interim high at 2.69pc and the GSCI’s 6/23/14 high). However, in September 2014, the TWD reached 86.6, thus breaching its June 2012 interim top; for this September 2014 TWD level, keep in mind the MXEF’s top in early September 2014.

The TWD reached 87.6 in October 2014 and 89.0 in November 2014. Its November 2014 level thus edged over September 2008’s TWD bull move take-off point, thus further warning marketplace observers of parallels between current times and the 2007-09 global financial crisis. The stronger dollar, as in 2008, coincides with the bear move in the broad GSCI. Note the MXEF high on 11/27/14 at 1018.
Charts--Emerging-Marketplace-Stocks,-Mexican-Peso-(12-14-14,-for-essay-Marketplace-Entanglements--Revisiting-2008)-2
Charts--Emerging-Marketplace-Stocks,-Mexican-Peso-(12-14-14,-for-essay-Marketplace-Entanglements--Revisiting-2008)-1

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Marketplace Entanglements- Revisiting 2008 (12-14-14)
Charts- Emerging Marketplace Stocks, Mexican Peso (12-14-14, for essay Marketplace Entanglements- Revisiting 2008)

CURRENCIES: THE WAITING GAME © Leo Haviland November 4, 2013

Many academic, financial, and political circles have long been married to “free market” ideologies. Nevertheless, the manipulation, maneuvering, or managing of a nation’s currency level and trends often occupies the deliberations and behavior of that territory’s central bankers, finance ministers, and many politicians. As in their efforts to control or at least influence interest rates (or stock marketplace trends), sometimes their reasoning, actions, and targets are explicit, often they are implicit.

Currency considerations are not islands apart from interest rate, stock, real estate, commodity and other marketplaces. So policy makers enamored of free market propaganda do not necessarily restrict their efforts to affect economic results to their home currency (or that currency’s cross rate relationship to one or more key trading partners). For example, picture the Federal Reserve Board’s longstanding yield repression policy, which has pinned the Federal Funds rate close to the ground.

Although the majority of currency observers and strategists focus their attention on crucial cross rates such as the US dollar against the Euro FX, broad real trade-weighted (effective) exchange rates influence important national policymakers. Analysis of these trade-weighted measures can unveil signs as to important (even if implicit) levels watched by central bank, finance ministry, and political guardians. Such trade-weighted foreign exchange measures consequently provide instruction as to potential strategy responses or changes by these often-vigilant sentinels. National and international policymakers of course are not the only ones looking and waiting around in marketplace games; Wall Street and Main Street likewise wait, watch, and act. Because these broad foreign exchange indicators (and the underlying cross rates) interrelate with perspectives on and decisions relating to current and potential elevations of and movements in numerous interest rate, stock, and other marketplaces, they offer insight into past, present, and future levels and trends of these arenas.

Dollar weakness does not necessarily (inevitably; forever) encourage or reflect a strong American economy or continue to help propelling US equities upward. Suppose a significant run against the “dollar in general” (TWD) occurs, whether via Chinese renminbi, Japanese Yen, or Euro FX (or other currency) strength against the dollar. A TWD dollar dive (especially under the July 2011 low) could force the Fed to significantly reduce or even abandon its interest rate repression and quantitative easing (money printing) policies. Consequently the effort by many American leaders and businesses promoting further weakness in the dollar relative to the renminbi may have some enthralling consequences not only for the dollar in general, but also for American (and other international) interest rate and equity marketplaces.

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Currencies- the Waiting Game (11-4-13)