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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AMERICA’S DEBT CULTURE © Leo Haviland April 6, 2015

America continues to have a love affair with debt. The nation has achieved remarkably little progress in improving its comprehensive (all-inclusive) debt situation since 2009’s very elevated debt relative to nominal GDP percentage. Increasing federal indebtedness has substantially though not entirely outweighed modest improvements in the consumer and state and local government domains. As the national government is a representative (democratic; “We, the People”) one, the country has not significantly mended its troubling overall debt problem.

A review of total American credit marketplace debt portrays the development and entrenchment of a national culture of debt. The long run trend toward greater debt holdings (and tolerance of debt) probably indicates and intertwines with a growing bias toward consumption and spending rather than saving. The increasing borrowing and massive debt accumulation arguably in part also probably reflect an increasingly widespread sense of entitlement to American Dream goals of the “good life” and a “better life”.
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Total United States credit marketplace debt at end 2014 stood at about $58.7 trillion (Federal Reserve Board, “Financial Accounts of the United States”, Z.1 data; 3/12/15). The total includes US household, financial and non-financial business, and government debt, plus the relatively small foreign/rest of the world category. Compare 2001’s $29.2tr. Thus America’s credit marketplace debt has doubled in roughly a dozen years, and there has been no yearly fall in the sum since 2001.

What does a long run examination of total United States credit marketplace debt as a percent of nominal GDP reveal? Review the post-World War Two landscape. For over five decades, from the early 1950s up through the glorious Goldilocks Era that ended in 2007, and for a couple of years thereafter, total US indebtedness as a percentage of nominal GDP climbed steadily and substantially.

The bottom in overall US credit marketplace debt as a percent of GDP was 1951’s 129.5 percent. It inexorably edged up for about thirty years. It then started to accelerate from 1981’s 164.1pc. In 1985, it reached 200.3pc, with 1998’s 257.4pc, and 2001’s 275.1pc. In 2003, that measure attained 298.2pc. As debt became increasingly popular, it joyously soared during the blissful Goldilocks period to 346.1pc in 2007. As the gloomy American (and global) financial crisis emerged and proceeded, total US credit marketplace debt peaked at 362.0pc in 2009.

Despite pillow talk from many pundits about improving American debt conditions, that gigantic percentage has fallen only modestly since 2009. It slipped to 349.7pc of nominal GDP in 2010, and 340.6pc in 2012. However, it has diminished very little since then, with 2013 at 338.0pc and 2014 at 337.1pc. Significantly, 2014’s percentage remains not far from the heavenly Goldilocks Era 346.1pc height of 2007.

Another statistic further underscores the growth and persistence of America’s debt culture. Not only is the current credit marketplace debt as a percent of GDP level still historically high and close to the Goldilocks plateau. The arithmetic drop of 24.9 percentage points from the five years 2009 to 2014 (362.0pc less 337.1pc) is only about half the 47.9 point increase over the four years from 2003-07 (298.2 versus 346.1).
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The Federal Reserve’s long-running extraordinary and very easy monetary policy (notably money printing/quantitative easing and interest rate yield repression) seek not only to ignite and sustain economic recovery and buy time for serious action in the federal and other debt realms. The Fed has battled to boost inflation to a supposedly sufficient level, while it has simultaneously repressed debt securities yields. Its artful strategies reflect the central bank’s ardent devotion on behalf of the constituency of debtors (borrowers) relative to the one of savers (creditors).

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America's Debt Culture (4-6-15)

THE METALS MARKETPLACE GAME: TOUCHING BASE (c) Leo Haviland March 16, 2015

Base metals such as aluminum, copper, lead, nickel, and tin capture far fewer headlines than the alluring stars of the petroleum complex. Nevertheless, base metals play an important position in the global economic game. Base metals are very significant not only to the economies of emerging/developing countries (think of China), but also to numerous so-called advanced nations. Despite assorted twists and turns, base metals “in general” (use the London Metal Exchange’s base metal index, “LMEX”, as a benchmark) have been in a bear path since early 2011. The renewed price meltdown in base metals over the past several months underscores recent and probable future slowdowns in real GDP growth rates in developing nations such as China. However, as emerging and developed nations closely interconnect in today’s international economy, base metal weakness probably also points to reductions in future output rates for advanced nations.

In the 2007-09 global economic crisis era and its aftermath up to the present, many significant trend changes in base metals, gold, the broad Goldman Sachs Commodity Index (and the petroleum complex), and the emerging marketplace stocks arena “in general” have occurred around roughly the same time.

The broad real trade-weighted United States dollar’s trend does not lock base metals prices, or those of any other playground, into a particular pattern. Nevertheless, the gradual strengthening of the dollar since mid-2011 roughly intertwines with the large bear move in base metals, gold’s bloody stumble since its September 2011 peak, and monumental declines in the broad GSCI (and the petroleum complex).

Emerging marketplace stocks in general, like benchmarks for base metals and commodities in general, have slumped in recent months. Further declines in the LMEX and the broad GSCI, especially when accompanied by US dollar rallies, will be a bearish warning sign (confirmation) for emerging marketplace stocks. Further noteworthy erosion in emerging marketplace stock prices likewise will be ominous for stock marketplaces of advanced nations.

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The Metals Marketplace Game-Touching Base (March 16, 2015)

THE FOREIGN EXCHANGE BATTLEFIELD: ADVANCES AND RETREATS © Leo Haviland March 5, 2015

Marketplace history of course need not entirely or even substantially repeat itself. In recent years, devoted central bank generals, via diverse strategies such as sustained yield repression and massive money printing, have battled fervently to ensure sustained economic growth, manufacture sufficient inflation, and slash unemployment. Politicians have fought fiercely to ensure recovery, especially by deploying their deficit spending arsenal.

However, recall the emergence and acceleration of 2007-09”s worldwide economic crisis. And ask to what extent the serious debt and leverage problems of the Goldilocks Era genuinely have been cured.

The recent sustained advance of the United States broad real trade-weighted dollar (“TWD”) warns of erosion in global economic output rates. The TWD probably will continue to appreciate.

The substantial depreciation of the Euro Area and Japan real effective exchange rates (“EER”) likewise flag weakening (and oncoming reductions in) worldwide real GDP rates. So does the slump in the Canadian EER; Canada’s dive partly reflects the murderous price collapse in the commodities sector. Though Australia is not a G-7 nation, like Canada it is a developed nation and a major commodity producer. Its EER likewise has tumbled.

The United Kingdom’s EER has been fairly powerful in recent months. In part, this probably reflects the comparative economic weakness of its key trading partner, the Euro Area.

Both the US dollar and Chinese renminbi real EERs marched higher during the darker days of the fearful 2007-09 disaster. Their present-day EER patterns, though not identical, likewise have been bullish; this intertwining further indicates the likelihood that growth rates in international GDP will surrender ground. Although the Chinese EER trend has been bullish in recent months, the renminbi has retreated against the US dollar; this renminbi cross rate weakness points to a slowing Chinese economy.
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The essay, “Crumbling BRICS: a Currency Perspective” (2-11-15), studies the effective exchange rates for Brazil, Russia, India, China, and South Africa (plus Mexico). Its analysis supports the key arguments and conclusions related to the advanced nations.

On 3/6/15, the S+P 500 celebrates the sixth anniversary of its 3/6/09 major low at 667. The stock marketplace rally since March 2009 obviously has been explosive. However, the TWD’s current trend and level, when interpreted alongside the real EERs of other G-7 advanced nations and China (and alongside other factors such as emerging stock marketplace, commodity, and interest rate trends), indicate that the S+ P 500 probably has established a notable top (2/25/15 high 2120) or will do so in the near future.

“Crumbling BRICS” states: “Recall the acceleration of the worldwide economic crisis (and decline in the S+P 500) in 2008 as the broad real TWD appreciated. The S+P 500’s major peak occurred 10/11/07 at 1576, but its final high was 5/19/08 at 1440, close in time to the April 2008 TWD bottom. The S+P 500 collapsed from around 1313 (8/18/08)/1265 (9/19/08). The S+P 500’s major bottom at 667 on 3/6/09 occurred the same month as the broad real TWD pinnacle.”

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The Foreign Exchange Battlefield- Advances and Retreats (3-5-15)

CRUMBLING BRICS: A CURRENCY PERSPECTIVE © Leo Haviland February 11, 2015

Assorted marketplace wizards around the globe for many years have praised past and predicted future stellar (or at least rather robust) growth for key emerging and developing nations. These countries not only display cultural diversity. They also manifest a significant range in economic development, arrangements, focus, and strengths. Though many embrace democracy to some extent, their political characteristics and stability are far from uniform. Despite this variety, the popular BRIC acronym, standing for Brazil, Russia, India, and China (now including South Africa), coined by Goldman Sachs nearly 15 years ago, acts as a rough shorthand summary for much if not all of the emerging/developing nation group.

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Marketplace history of course need not entirely or even substantially repeat itself. However, the recent appreciation of the United States broad real trade-weighted dollar (“TWD”) warns of erosion in global economic output rates.

The TWD established a major bottom at 84.2 in April 2008 (Federal Reserve Board, H.10; monthly average, March 1973=100). After climbing to 86.7 in August 2008 and 88.8 in September 2008, it bounded to over 93.8 in October 2008. Recall the noteworthy acceleration of the worldwide financial crisis after mid-September/October 2008. Its March 2009 pinnacle around 96.9 represented a 15.1 percent bull advance relative to April 2008.

After deteriorating to its major trough around 80.5 in July 2011, the TWD meandered sideways within a narrow range for about the next three years. Its high over that span was June 2012’s 86.3. Yet in recent months, as it did beginning in April 2008, the broad real trade-weighted dollar has marched steadily higher. A five percent bull move in the TWD from its July 2011 trough at 80.5 equals about 84.5, a ten percent climb about 88.6. A fifteen pc rally gives 92.6, a 20pc leap about 96.6.

September 2014’s 86.6 broke through June 2012’s barrier, with December 2014’s attaining 90.5. January 2015’s 92.4 rose 2.1 percent over December 2014. The TWD’s 14.8 percent ascent from the July 2011 depth rivals its April 2008 to March 2009 move. Significantly, its January 2015 level neighbors that of October 2008 and is not too distant from March 2009’s 96.9 elevation.

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What do FX movements (trade-weighted, effective exchange rates) within the BRICS universe reveal nowadays? Their recent travels differ to some extent from the 2007-09 crisis adventures. However, as during the darker days of the worldwide economic disaster, the current currency voyages of Brazil, Russia, India, and South Africa generally display depreciation. As in the earlier period, however, China’s currency has rallied recently on an effective exchange rate basis. Looking forward, these currency patterns alongside TWD strength do not merely confirm the TWD bull move, but also emphasize the likelihood of further slowing of global real GDP.

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Crumbling BRICS- a Currency Perspective (2-11-15)