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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RUNNING FOR COVER: MARKETPLACE EXITS (c) Leo Haviland August 9, 2019

OVERVIEW AND CONCLUSIONS

The frantic price rally in several key marketplace benchmarks commencing around end year 2018 probably reflected a fervent hunt for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield seekers searched for sufficient return in domains such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex. Easy money policies and pronouncements by the Federal Reserve, European Central Bank, and their comrades greatly encouraged these eager yield searches.

That ferocious yield hunt has diminished and the associated price rally for these signposts in general probably is finished. The terrifying slip in the S+P 500 from 7/26/19’s 3028 summit, in conjunction with the renewed tumble in emerging marketplace equities and the retreat in petroleum prices, signals a reversal of the avid enthusiasm of the hunt for yield in these arenas. The recent plummeting interest rate in the US 10 year government note underlines this. Although the US Treasury note’s yield decline commenced in autumn 2018 at around 3.25 percent, and although chroniclers can attribute further erosion during early 2019 to central bank easy money talk and schemes, its recent dive beneath two percent likely represents a “flight to quality” stage for UST yields.

Therefore, dutiful marketplace pilgrims who raced to identify and achieve “good” (acceptable, reasonable) returns (by purchasing asset classes such as stocks and commodities) at the end of calendar 2018 and for several months thereafter in these sectors probably have started running for cover (begun to liquidate their long positions). Many other investors/owners in these marketplaces probably are running for the exits too.

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America and the rest of the world are in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in advanced nations in general), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is underway. Ongoing or further rounds of central bank easing probably will have limited effectiveness in maintaining adequate economic growth.

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Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Apparent marketplace convergence and divergence (lead/lag) relationships can and do change, sometimes dramatically. Nevertheless, especially since around autumn 2018, the relationship between the S+P 500, emerging stock marketplaces, the United States 10 year government note, petroleum, and the broad real-trade weighted US dollar in key respects increasingly has resembled that of the mid-2014 (and especially mid-2015) to first quarter 2016 time horizon. (One can trace the 2014/2015 trend relationship antecedents back to around spring 2011.)

In the prior era, noteworthy price divergence existed between the S+P 500 and emerging stock marketplaces. However, beginning sometime around late 2014, convergence (less divergence) began to develop between these realms. By spring 2015 (May 2015 high in the S+P 500; late April 2015 emerging stocks top), prices in these equity playgrounds had converged. Prices for both cratered thereafter until first quarter 2016.

Though yields for the United States Treasury 10 year note began to fall in early 2011, the accelerating drop from the yield highs of July 2014 and (especially) June 2015 was a critical factor in relation to stocks and other financial marketplaces. The initial key low yield for the UST occurred in first quarter 2016 (alongside stocks). The decline in commodities in general started in spring 2011, and raced downhill after June 2014’s interim top (and especially) after May 2015 (note the convergence with emerging marketplace stocks and eventually with the S+P 500). Commodities, like stocks, bottomed in first quarter 2016.

The gradually strengthening broad real trade-weighted US dollar intertwined with these various trends. After making a major bottom in July 2011, it gradually appreciated. The dollar’s climb after September 2014 was significant; its fourth quarter 2015 rally above March 2009’s financial crisis peak substantially influenced other financial battlegrounds (note the convergence between and sharp bear moves in the S+P 500 and emerging marketplace stocks), achieving a key high in first quarter 2016.

In both that past era as well as recently, UST 10 year yields dropped substantially. In those two periods, emerging marketplace stocks and commodities crumbled (and alongside each other).

Especially around late 2015, the bull move in the broad real trade-weighted dollar (“TWD”) became remarkably strong. Underline its violent charge above first quarter 2009’s financial crisis top. In the “current” marketplace (which includes many preceding months), the TWD likewise has been very robust. Though the TWD did not push through the economic disaster top recently, it has remained above it for many months. The key parallel between the two periods thus is a strong dollar, and one above the financial crisis high.

Underscore the significant divergence between the S+P 500 and emerging marketplace stocks in both epochs. After its spring 2011 interim top, the S+P 500 continued to attain new highs, peaking in spring 2015. In contrast, emerging marketplace stocks in general were in a sideways to down trend beginning in spring 2011 (though they eventually achieved price convergence with the S+P 500 by spring 2015).

What about the current stock landscape? The divergence between the S+P 500 and emerging marketplace equities probably began before autumn 2018. Emerging marketplace stocks started their bear descent in first quarter 2018. Although the S+P 500 made an important interim high in first quarter 2018, it attained new highs (though not much above the 1Q18 top in percentage terms) up through end July 2019. Therefore divergence between the S+P 500 began around late 1Q18 and continued into summer 2019.

Why the substantial divergence between the S+P 500 and emerging/developing nation equities beginning in early 2018? The passage of America’s tax “reform” legislation in late 2017 was a critical difference. American corporations have reaped major benefits (higher earnings/profits) from this, thus helping to propel the S+P 500 upward. Emerging stock marketplaces (and those of other advanced nations) did not receive such benevolent new legislation.

The S+P 500’s decline since its late July 2019 high probably is the start of price convergence between it and emerging marketplace stocks. Given the similarities of (parallels between) interrelated price movements involving emerging marketplace stocks, commodities (petroleum), the UST 10 year note yield, and the broad real trade-weighted dollar during both eras, convergence between the S+P 500 and emerging marketplace stocks is probable. Thus the S+P 500 probably is in, or soon will begin, a bear trend. Therefore the S+P 500 retreat will confirm the slowing down of the global economy. Keep in mind the spring 2015 association (linkage between) the S+P 500 and MXEF highs and the aftermath in those and other marketplaces.

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Running for Cover- Marketplace Exits (8-9-19)

US DOLLAR TRAVELS: CROSSTOWN TRAFFIC © Leo Haviland July 2, 2019

“But, darlin’ can’t you see my signals turn from green to red
And with you I can see a traffic jam straight up ahead”. Jimi Hendrix, “Crosstown Traffic”

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CONCLUSION

The broad real trade-weighted United States dollar’s December 2016 (at 103.3)/January 2017 (103.1) peak likely will remain intact (“TWD”; based on goods only; Federal Reserve Board, H.10; monthly average, March 1973=100). The high since then, December 2018’s crest at 102.0, stands slightly beneath this, as does May 2019’s 101.6 (June 2019 was 101.1). December 2018/May 2019’s plateau probably forms a double top in conjunction with December 2016/January 2017’s pinnacle. If the TWD breaks through the December 2016/January 2017 roadblock, it probably will not do so by much. The majestic long-running major bull charge in the dollar which commenced in July 2011 at 80.5 has reached the finish line, or soon will do so. 

Unlike the broad real trade-weighted dollar, the broad nominal trade-weighted dollar (goods only) has daily data. The broad nominal US dollar probably also formed twin peaks. It achieved an initial top on 12/28/16 (at 128.9) and 1/3/17 (128.8). The nominal TWD’s recent high, 5/31/19’s 129.6, edges only half of one percent over the 2016/17 high. 

The depreciation in the broad real trade-weighted dollar from its 103.3/103.1 elevation probably will be at least five percent, and very possibly ten percent. This retreat likely will last at least for several months. 

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The broad real trade-weighted dollar’s level and patterns are relevant for and interrelate with those in key stock, interest rate, commodity, and real estate marketplaces. The extent to which and reasons why foreign exchange levels and trends (whether for the US dollar or any other currency) converge and diverge from (lead/lag) those in stock, interest rate, commodity, and other marketplaces is a matter of subjective perspective. Opinions differ. 

For related marketplace analysis, see essays such as: “Petroleum: Rolling and Tumbling” (6/10/19); “Wall Street Talking, Yield Hunting, and Running for Cover” (5/14/19); “Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19); “American Economic Growth: Cycles, Yield Spreads, and Stocks” (3/4/19); “Facing a Wall: Emerging US Dollar Weakness” (1/15/19); “American Housing: a Marketplace Weathervane” (12/4/18); “Twists, Turns, and Turmoil: US and Other Government Note Trends” (11/12/18); “Japan: Financial Archery, Shooting Arrows” (10/5/18); “Stock Marketplace Maneuvers: Convergence and Divergence” (9/4/18); “China at a Crossroads: Economic and Political Danger Signs” (8/5/18); “Shakin’ All Over: Marketplace Convergence and Divergence” (6/18/18); “History on Stage: Marketplace Scenes” (8/9/17). 

ON THE ROAD AGAIN

“We’ll be watching out for trouble, yeah (All down the line)
And we keep the motor running, yeah (All down the line)”, The Rolling Stones, “All Down the Line” 

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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 not only will refrain from raising the Federal Funds rate anytime soon, but even may reduce it over the next several months, is a critical factor in the construction of the latest segment (December 2018 to the present) of the TWD’s resistance barrier. The Fed Chairman and other US central bank policemen speak of the need for “patience” on the rate increase front. The Fed eagerly promotes its “symmetric” two percent inflation objective (6/19/19 FOMC decision), which blows a horn that it may permit inflation to exceed (move symmetrically around) their revered two percent destination. 

By reducing the likelihood of near term boosts in the Federal Funds rate, and particularly by increasing the odds of lowering this signpost, the Fed gatekeeper thereby cuts the probability of yield increases for US government debt securities. The Fed thus makes the US dollar less appealing (less likely to appreciate further) in the perspective of many marketplace players. 

The Fed’s less aggressive rate scheme (at minimum, a pause in its “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). This is despite negative yields in German, Japanese, and other government debt securities. Capital flows into the dollar may slow, or even reverse to some extent. 

The yield for the US Treasury 10 year note, after topping around 3.25 percent in early October 2018, has backtracked further in recent months. The UST resumed its drop from 4/17/19’s minor top at 2.62pc, nosediving from 5/28/19’s 2.32pc elevation. Since late June 2019, its yield has bounced around 2.00pc. 

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The current United States Administration probably wants a weaker US dollar relative to its current elevation in order to stimulate the economy as the 2020 elections approach. President Trump claimed that the European Central Bank, by deliberately pushing down the Euro FX’s value against the dollar, has been unfair, making it easier for the Euro Area to compete against the US (New York Times, 6/19/19, ppA1, 9). Recall his complaints about China’s currency policies as well. The President’s repeated loud sirens that the Federal Reserve made mistakes by raising its policy rates, and instead should be lowering them also messages that the Administration wants the dollar to depreciate. 

Another consideration constructing a noteworthy broad real TWD top is mild, even if nervous, 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 United States and China increasingly are fearful regarding the ability of their nations to maintain adequate real GDP increases.

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US Dollar Travels- Crosstown Traffic (7-2-19)

PETROLEUM: ROLLING AND TUMBLING © Leo Haviland June 10, 2019

“Well, I rolled and I tumbled, cried the whole night long
Well, I woke up this mornin’, didn’t know right from wrong”. Muddy Waters, “Rollin’ and Tumblin’”

OVERVIEW AND CONCLUSION

Of course the petroleum universe “as a whole” has, as do its various individual crude oil streams and assorted refined products, “its own” past, present, and potential future supply/demand/inventory situation. However, the petroleum circus, including so-called specific oil-related variables affecting it, is not a domain entirely separate from other economic and political phenomena. For example, marketplace history reveals that price levels and trends for the petroleum complex intertwine in diverse ways with benchmark global stock, interest rate, and currency arenas, and with other commodity fields such as base and precious metals. These relationships, including convergence/divergence (and lead/lag) ones between the oil marketplace in general and these other financial playgrounds, can and do change, sometimes significantly.

Marketplace history need not repeat itself, either entirely or even partly. Visionaries differ in their perspectives on and conclusions regarding petroleum and other marketplaces, frequently substantially.

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OPEC is an important actor within the oil theater, as are its current producer allies such as Russia. The United States, given its ravenous demand for petroleum plus its booming crude oil output in recent years, also is an important petroleum player. But these entertainers are not independent of other stages and performers.

In the timing and direction of its major price moves, the global petroleum complex does not necessarily or always travel alongside the S+P 500 and other benchmark stock indices. A survey of the critical price turning points since early 2016 for the oil and equity realms nevertheless displays the close connection between petroleum and stock trends.

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For related marketplace analysis, see essays such as: “Wall Street Talking, Yield Hunting, and Running for Cover” (5/14/19); “Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19); “American Economic Growth: Cycles, Yield Spreads, and Stocks” (3/4/19); “Facing a Wall: Emerging US Dollar Weakness” (1/15/19); “American Housing: a Marketplace Weathervane” (12/4/18); “Twists, Turns, and Turmoil: US and Other Government Note Trends” (11/12/18); “Japan: Financial Archery, Shooting Arrows” (10/5/18); “Stock Marketplace Maneuvers: Convergence and Divergence” (9/4/18); “China at a Crossroads: Economic and Political Danger Signs” (8/5/18); “Shakin’ All Over: Marketplace Convergence and Divergence” (6/18/18); “History on Stage: Marketplace Scenes” (8/9/17).

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Petroleum- Rollling and Tumbling (6-10-19)

WALL STREET TALKING, YIELD HUNTING, AND RUNNING FOR COVER © Leo Haviland May 14, 2019

“‘Curiouser and curiouser!’ cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English).” “Alice’s Adventures in Wonderland”, by Lewis Carroll (Chapter II, “The Pool of Tears”)

CONCLUSION: GOLDILOCKS ERA, REVISITED

Historians should wonder if the Federal Reserve Board and its friends in central banking (and assorted comrades parading in some political corridors and media circles) nowadays are aiming to manufacture an updated version of the joyous last stage (ending in 2007) of the magnificent Goldilocks Era.

Lower United States Treasury yields and the sunny prospect of continued benevolent Federal Reserve policy reappeared around end December 2018/early January 2019. The rapid bull climb in the S+P 500 from then until the beginning of May 2019 to some extent reflected hopes of further (adequate) American and global economic expansion.

However, the frantic price rally in several key marketplace benchmarks commencing around end year 2018 also probably reflected an ardent quest for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield hunters searched for sufficient return in territories such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex.

Of course cultural history does not necessarily repeat itself, either entirely or even partly. Marketplace phenomena (conditions; variables), including relationships between them and perspectives on them, can and do change, sometimes dramatically. Rhetoric (stories) relating to economic and related playgrounds seek not only to explain viewpoints and situations, but also to guide behavior.

Later stages of economic expansions (so-called cycles) often are distinguished by what many players, including leading and widely-respected economic guardians and policymakers, decide to overlook or minimize.

This ardent quest for yield probably manifested that America is in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in other advanced nations), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is or soon will be underway.

“Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19) stated in regard to the S+P 500: “The September/October 2018 elevation [2941 (9/21/18)/2940 (10/3/18)] probably will not be broken by much, if at all.” The recent price declines in the S+P 500 (5/1/19 high 2954) and other advanced nation stocks, emerging marketplace stocks, emerging marketplace dollar-denominated sovereign debt, and the petroleum complex probably signal that many dutiful profit hunters (and probably some other investors/owners) have started running for cover (begun to liquidate their long positions).

FOLLOW THE LINK BELOW to download this article as a PDF file.
Wall Street Talking, Yield Hunting, and Running for Cover (5-14-19)