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)

LOOKING BACKWARD, GAZING FORWARD: US CORPORATE PROFITS AND FINANCIAL TRENDS (c) Leo Haviland May 3, 2016

“And I’ll be taking care of business, every day
Taking care of business, every way”. Taking Care of Business”, by Bachman-Turner Overdrive

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CONCLUSION AND OVERVIEW

For a majority of earnest soothsayers, American corporate profitability is an important factor for US stock marketplace levels and travels. Use the S+P 500 as a benchmark for United States equities in general. In second quarter 2015, US after-tax corporate profits peaked (annualized basis). The S+P 500’s record pinnacle occurred alongside this, on 5/20/15 at 2135. It mournfully plummeted about 15.2 percent to its 1812 (1/20/16)/1810 (2/11/16) depth. Despite the S+P 500’s subsequent sharp rally, the current and near-term after-tax corporate profit trend likely will make it challenging for the S+P 500 to ascend much above (or even over) its May 2015 peak during the next several months. History reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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To explain past and current United States stock marketplace levels and trends, and in offering prophecies regarding future heights and patterns, diverse wizards tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and approaches, including the particular variables they select and arrange.

American and other corporations win or lose given amounts of money for all sorts of reasons. Factors influencing earnings and profitability change, as do the relative importance and interconnections of these variables. Long run inflation increases generally increase nominal values in general. Also, central bank policies, tax regimes, wage trends, and productivity (innovation; efficiency) developments influence sales and profits. The altitudes and paths of the US dollar, interest rate yields, and commodity prices also are relevant in various ways and degrees to particular corporations. Unemployment rates, fiscal situations (budget deficits), debt levels and trends (government, corporate, and consumer), regulatory structures, and population growth matter. America is not an island apart from the rest of the world; globalization has increased in recent decades.

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Admittedly, the ongoing (extraordinary) very lax monetary policy of the Federal Reserve Board and other central bank guardians such as the European Central Bank, Bank of England, Bank of Japan, and China’s central bank helps underpin equity prices in America and elsewhere. Stock-owning audiences around the globe (particularly the praiseworthy investment community) as well as Wall Street institutions, public corporations, and the financial media friends generally adore massive money printing (quantitative easing) and sustained yield repression. Low interest rate yields for US Treasury securities (and negative yields for many government debt obligations elsewhere) encourage fervent scrambles for acceptable returns elsewhere. These often-alluring territories include stock realms (hunting for dividends and potential capital gain), corporate debt, and commodities. American inflation has been quite modest in recent years. Yet as nominal prices in general (all else equal) tend to rise alongside (or on a lagged basis) a climb in US nominal GDP, so will a nominally priced index such as the S+P 500.

The S+P 500’s retreat beginning in May 2015 interrelated with the preceding bear trends in emerging marketplace stocks and commodities (notably petroleum) and a further bull charge in the broad real trade-weighted dollar (“TWD”). Significantly, the S+P 500 (and stocks of other key advanced nations), emerging marketplace equities (“MXEF”, MSCI Emerging Stock Markets Index, from Morgan Stanley; 1/21/16 at 687), and commodities in general (broad GSCI at 268 on 1/20/16) all attained significant troughs around the same time in first quarter 2016. The US Treasury 10 year note yield low was 2/11/16 at 1.53 percent. The TWD established its recent high alongside these marketplaces in January 2016. This interconnection across assorted marketplaces assisted the rally in the S+P 500 from its January/February lows.

Thus to some extent, the recent weakness in the broad real trade-weighted dollar encouraged the ascent of the S+P 500. In any case, central banks did not want the TWD to ascend by much, if at all, over its January 2016 high. They likewise wanted to arrest stock marketplace declines.

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However, suppose the TWD declines further from current levels, perhaps ten percent or more from its January 2016 elevation. Although the first stage of dollar decline has managed to spark and assist a S+P 500 rally, additional sustained depreciation eventually may undermine equity prices. Besides, even if the TWD fall from its January plateau does not reach ten percent, the S+P 500 nevertheless may slide lower. Marketplace history reveals that a weaker dollar does not inevitably (or necessarily) push US stocks upward. And also suppose US interest rates or inflation expectations sustain modest climbs. Rising US Treasury yields can help to lead S+P 500 prices lower. Assume commodities in general manage to hold onto much of their recent gains.

In this environment, further suppose US corporate profits (and those in related regions) continue to remain sluggish (or decline further). Then the S+P 500’s fall from its high probably will be significant, even though the Federal Reserve and its trusty allies will intervene with rhetoric and action to prevent dramatic stock marketplace drops (particularly watch the 20 percent bear market definition threshold).

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Looking Backward, Gazing Forward- US Corporate Profits and Financial Trends (5-3-16)

FANTASTIC VOYAGES: THE US DOLLAR AND COMMODITY CURRENCIES © Leo Haviland April 3, 2016

In the 1966 movie “Fantastic Voyage”, the character Cora declares: “We’re going to see things no one has ever seen before. Just think about it.” (Richard Fleischer, director)

In “On the Road” (original scroll version), Jack Kerouac writes: “But no matter, the road is life.”

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CONCLUSION AND OVERVIEW

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 majestic 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 2015 ascent above its March 2009 peak was a crucial event; this dollar climb helped propel the S+P 500 downhill following its 5/20/15 pinnacle at 2135 in conjunction with the emerging stock marketplace and commodity trends.

In January/February2016, these linked price patterns partly reversed. The TWD has depreciated and stocks (emerging marketplaces as well as those of America and other advanced nations) have rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield ascended from its low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. Highly accommodative central bank rhetoric and action by the Federal Reserve Board and its allies aimed at achieving their targeted two percent inflation destination will continue for an extended period. For example, note the Fed’s 3/16/16 meeting and its Chairman’s very dovish speech, “The Outlook, Uncertainty, and Monetary Policy” (3/29/16). Underline the expansion of the European Central Bank’s easing scheme (most recently 3/10/16) and the lax policies of the Bank of Japan. Consequently, the 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.

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Concentrating on and comparing exchange rates of “commodity currencies” alongside the broad real trade-weighted dollar trend offers additional notable insight into the assorted interconnected marketplace relationships. Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are significant 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 important 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 their recent dive than during the 2007-09 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 move to its January 2016 elevation than it did during the past crisis.

The feebleness in recent times 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, underlines the fragility of the relatively feeble global GDP recovery.

Thus noteworthy rallies in these commodity (exporter) currencies from their recent depths will 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 US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the current dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.

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Therefore key central bank captains, concerned about slowing real GDP and terrified by “too low” inflation (deflation) risks, have fought to stop the TWD from appreciating beyond its January 2016 top and struggled 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 motor upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices in general.

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Fantastic Voyages- the US Dollar and Commodity Currencies (4-3-16)

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)