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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PLAYING PERCENTAGES: STOCK MARKETPLACE GAMES © Leo Haviland July 13, 2015

However, it can be helpful in assessing risks regarding and making marketplace bets on one or more financial marketplaces by taking a subjective look at (and comparing) their given percentage price moves in historical perspective.

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Between mid-April and mid-June 2015, an assortment of major stock marketplace benchmarks around the globe attained important highs. From these tops, the slumps have varied in percentage terms.

 

Of course these playgrounds are diverse; supply/demand considerations regarding each of them are not necessarily identical or even closely similar. Also, for any given stock marketplace, head coaches, players, and those on the sidelines create a great number of competing perspectives and pronounce diverse opinions regarding past, current, and future price levels and trends for a battlefield such as the S+P 500. In establishing and managing their actual marketplace wagers, these observers likewise display a panorama of positions regarding the relationship of a particular stock marketplace to particular economic variables, including other stock, interest rate, currency, and commodity domains.

 

Nevertheless, in today’s interdependent global economy, this relatively close timing linkage since spring 2015 between the S+P 500 and many other stock signposts probably warns that further declines in them probably (and roughly) will occur together from the timing standpoint. “Marketplace Party Tantrums” (6/15/15) stated: “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.”

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For predicting (and explaining) price action and trends and other marketplace phenomena, appraising and playing the odds often requires judging probabilities regarding the statements and actions of relevant marketplace participants. Focus on the S+P 500. Suppose the S+P 500 continues to slump from 5/20/15’s all-time high of 2135. Obviously the Fed will look at more than US stocks in making policy decisions. But what do the Fed’s actions since the advent of the worldwide financial crisis in 2007, and in light of its probable view regarding current and near term economic conditions, suggest this guardian will do if faced by this equity downturn?

 

A five percent tumble from the S+P 500’s May 2015 peak to around 2028 probably would not prompt Fed easing action. A ten percent slide to about 1922 probably would significantly upset the bullish stock crew (especially investors), producing widespread cries for help. The 10pc fall likely would induce heartwarming Fed wordplay aiming to steady prices, and it probably would delay the Fed’s plan to take any next upward step in the Federal Funds rate. It is a close call as to whether a ten percent loss in US stocks would change Fed policy more significantly than this. However, the Fed might move more dramatically (such as via another round of quantitative easing) if it also seriously feared economic weakness in America and around the globe.

 

A decline of around 20 percent or more in the S+P 500 to around 1708 or lower probably would confirm a “tantrum” in stocks. In stocks, a sustained 20pc fall satisfies many definitions of a bear trend. Most audiences (particularly in America) label bearish stock trends as “bad”. Most stock bulls (especially the praiseworthy “investment” teams and their devoted friends) would be angry at or terrified by such substantial price plummeting. Thus a majority of US stock investors and other fans of rising stock prices surely would want significant steps taken to stop the fall and restart the S+P 500’s marathon bull trend. Many politicians would be fearful, the financial media loud and agitated. This turmoil and talk probably would stretch beyond America.

 

In any case, suppose around a 20pc stock fall occurred, and that it looked likely to be sustained. Such widespread fears and demands, given the Fed’s devoted allegiance to and pursuit of its statutory mandate, probably would inspire frantic Fed action to rescue and rally the stock marketplace. The greater the fall beneath 20pc, the more determined the Fed’s efforts will become. Their actions at some point could include another round of quantitative easing.

 

Nowadays, would Fed intervention after stocks declined 20 percent (or more) succeed? Much depends on whether success means merely stopping the decline, or if it implies sending prices near to or higher than the prior peak. The Fed since the major low in March 2009 indeed has succeeded in arresting declines of approximately that amount in 2010 (17.1pc) and 2011 (21.6pc) and propelling the S+P 500 to new bull heights. However, marketplace history is not marketplace destiny. In addition, during the worldwide economic disaster, it did not stop the cratering from 2007’s summit at 20pc. Past success in marketplace games does not necessarily win future victories, even if the Fed may be more determined to use weapons such as money printing than it was in the early stages of the financial crisis. In any case, it is conjectural whether the Fed could stop a S+P 500 decline at 20pc as easily as it did in 2010 and 2011. And even if the Fed is able to steady S+P 500 prices at around 20pc (or lower), it probably will be more difficult than it was after the 2010 and 2011 slumps to rally the index to new highs anytime soon thereafter.

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Suppose the S+P 500 managed to achieve new highs above the 2135 level. The Fed probably would respond in the fashion described if faced with such five, ten, and twenty (or more) percent descents.

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Playing Percentages- Stock Marketplace Games (7-13-15)

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)

US INFLATION SIGNALS © Leo Haviland June 7, 2015

In their noble war to generate sufficient inflation, insure economic recovery, and slash unemployment, central bankers in America, Europe, and Japan have fought with extraordinary weapons such as monumental money printing and longstanding interest rate yield repression. On the inflation front, they battle furiously to achieve and sustain an inflation target of about two percent. This allegedly good (desirable, reasonable, prudent) goal contrasts not only with bad “excessive” inflation, but also with bad “too low” inflation and evil (or at least really bad) of deflation.

For several months, widely-watched inflationary yardsticks such as the consumer price index indicated too low inflation or inflamed worries regarding deflation. The consequences of the 2007-2009 international economic disaster probably have not disappeared, and the dramatic slump in petroleum prices after mid-2014 has troubled many inflation seekers. In any event, most economic forecasters, including central banking captains, have postponed the achievement of sufficient inflation as measured by such signposts rather far out into the future. Consequently, marketplace warriors, political leaders, and the financial media have focused relatively little on other gauges warning of notable potential for increased inflation in benchmarks such as the consumer price index.
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The worldwide global economy of course is interconnected and complex. Numerous variables intertwine to produce any given inflation level and trend. Inflation acceleration need not appear first or strongest in beloved indicators such as consumer prices or personal consumption expenditures. Although the United States is not a financial island, focus on the American landscape.

“Inflation” is not confined to measures such as the CPI or personal consumption expenditures; “the economy” includes other inflation benchmarks. Various indicators signal there is more inflation “around” in the US than most believe. Underline American wage increases. Note central bank and marketplace murmurings regarding high valuations or so-called asset bubbles; keep in mind the climbs in US equities and home prices from their financial crisis depths. Money supply growth remains robust. The steely determination of the Fed and its central banking allies to achieve their inflation objectives heralds that monetary policy probably will remain quite lax for some time even if the US eventually raises rates. These factors collectively warn that at least in America, deflationary forces “in general” have found strong adversaries. The recent spike in key interest rates such as the 10 year US government note (and the German Bund) in part reflects this inflation.

Despite the recent rate of change in US consumer prices and personal consumption expenditures, probably neither deflation nor dangerously low inflation are on the American horizon. In addition, sustained “too low” inflation in America probably should not be a worry for the near term. Nevertheless, although a sustained jump in PCE and CPI inflation rates much beyond the Fed’s desired two percent target currently appears unlikely, “sufficient” inflation in America may be achieved faster than many predict.
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“Flights to quality”, hunts for suitable yield (return), and other supply/demand considerations, not just low inflation statistics, can rally prices of debt securities. Yet did sustained central bank yield repression create or at least encourage “too low” yields for (a price “bubble” in) key government debt securities such as those of the United States and Germany? In the Eurozone, the terrifying enemy called deflation neared. The European Central Bank fired back with a huge quantitative easing (money printing) plan involving government debt securities. Some European government security interest rate yields went negative.

However, was a US (and German) debt security price bubble recently popped?

The 10 year US government note established an important yield low at 1.64 percent on 1/30/15, above 7/25/12’s major bottom at 1.38pc. Since January 2015’s valley, the US 10 year rate shot up about 50 percent to 6/5/15’s 2.44pc. The 1/2/14 summit at 3.05pc represents important resistance. In any case, what should the yield on US 10 year government notes be if inflation (such as in the PCE) is 1.5 percent or higher?

The 10 year German government note made a key bottom on 4/17/15 close to zero, at .05 percent (not long after the UST 10 year note made a minor low at 1.80pc on 4/3/15). Bund yields thereafter blasted higher, reaching almost one percent on 6/4/15. The Japanese 10 year JGB made a significant trough in 2015 shortly before the UST’s, on 1/20/15 at .20 percent.

US stocks advanced victoriously from their March 2009 major low for many reasons, including strong corporate earnings and share buybacks. Yet money printing and yield repression also assisted the S+P 500’s mighty ascent. So if US stocks recently reached “too high” levels, perhaps rising interest rates (or growing fears of them) will inspire those equities to retreat (burst their bubble).

Regardless of whether or not American government note yields recently were (or are still) “too low”, the recent sharp increase in UST 10 year note rates may reflect not just a “technical correction” or a growing belief that the Federal Funds rate (and thus yields in US government securities) will rise in the relatively near future. That noteworthy UST yield leap probably also warns that US inflation “in general” has grown or will do so soon.

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US Inflation Signals (6-7-15)