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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EUROZONE: ITS CURRENCY UNDER ASSAULT © Leo Haviland July 9, 2012

The bloody retreat in the Euro currency that began in spring 2011 signaled a slowdown in the worldwide economic recovery that commenced around early 2009. The Euro FX’s mournful slump does not merely reflect Europe’s sovereign debt and banking crisis. In an interconnected international economy, Europe does not fight alone. Thus Euro FX weakness underscores the ongoing global economic disaster that emerged in 2007. The Euro currency’s further breakdown since late winter 2012 warns audiences of growing worldwide economic feebleness. The Euro FX will continue to depreciate.

European policy makers and some other viewers likewise pay attention to measures of the real European effective exchange rate (CPI deflated; first quarter 1999 equals 100; “EER”). This effective exchange rate probably is superior to cross rates (such as the one against the US dollar) as an indicator of Eurozone currency strength/weakness (and the Eurozone crisis). The European Central Bank provides data for the 17 Euro area countries against a group of 20 trading partners.

The EER established its major high in April 2008 at 111.8 (monthly average). The low during the October 2008 to April 2009 period, during which the Euro FX cross against the US dollar touched lows, was November 2008’s 102.8. However, after marching up to 111.2 in October 2009 (thus bordering on the April 2008 pinnacle), the EER started traveling downhill. On an effective exchange rate basis, it made an important bottom in June 2010 at 98.1. Although it retrenched and climbed to an April 2011 height at 103.4, this April elevation only slightly exceeded the November 2008 depth.

Under almost relentless assault, the Euro EER measure has crumbled since April 2011. This sustained bear move thus emphasizes the weakness of the global economic recovery. For June 2012, this real effective exchange rate is about 94.8. This decisively breaks beneath the key floor of June 2010 at 98.1 (the December 2011 level also was 98.1; a 10pc fall form April 2008 is 100.6). The Euro effective exchange rate erosion in very recent months, and particularly the shattering of June 2010 support, reflect both the fearsome Eurozone crisis (and recession in many European nations) and confirm the deteriorating prospects on the international front.

Further significant depreciation of the Euro FX may well turn out to be part of the solution for the Eurozone’s ongoing sovereign debt (banking; economic; debt, leverage; political) crisis.

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Eurozone- Its Currency Under Assault (7-9-12)

EUROPE’S HAPPY DAYS © Leo Haviland July 2, 2012

The European Council’s economic summit concluding on June 29, 2012 seemingly was a stellar success. First- and importantly given the modest (or low) expectations preceding the meetings, the rendezvous did not end in disastrous collapse. Players did not exit uttering unpleasant comments about or noisy threats toward their fellows.

Participants did not merely stress their desire to stabilize (protect) the European Monetary Union. Pacts, declarations, statements, and remarks by participants and politicians offered near-term support for the Spanish banking (sovereign debt) problem (though quite a few details remain).

Spanish banks will be recapitalized directly via the EFSF/ESM (the ESM stage assumes the ESM going into effect). Thus bailout money for this purpose will not go to the Spanish government, reducing Spain’s potential government indebtedness.

In addition, leaders made promises regarding European banking supervision. There also now are greater hopes for Europe-wide bank deposit insurance. Moreover, the extensive official statements related to budgets, fiscal union, and related matters were hopeful hymns to many enraptured audiences.

And no one can deny the sunny revival movements expressed via the sharp stock, interest rate, currency, and commodity forums following the conference.

However, a review of the lyrics in the documents issued by or directly related to this important European Council gathering shows that leaders made little progress in solving the underlying economic (fiscal, debt; structural, political) problems confronting Europe (and particularly the Eurozone). Thus widespread happiness regarding this summit probably will not persist. This money summit arguably makes more urgent appeals than prior ones. It does speak fondly of road maps, architecture, and building blocks. Talk of unified banking supervision and deposit insurance is some progress. However, as in other recent summits, fundamental problems are handled with vague language and nebulous standards. Issues of how to resolve such ambiguity thus permeate the documents. And binding mechanisms by which to effectively enforce current (and any future) fiscal standards for the various nations remain lacking.

The summit documents and related songs of confidence may buy politicians, central bankers, and other economic officials some time. However, the result is about the same as that from other recent European choruses- not much fundamental advance toward solving debt and leverage problems for Europe as a whole. It is way too soon to shout hallelujah. The persistence of the crisis (and especially further worsening of it) eventually may speed progress toward a solution. 

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Europe’s Happy Days (7-2-12)

MARKETPLACE CLIFFS © Leo Haviland June 25, 2012

Ongoing and mounting concern regarding European problems, especially within the sovereign debt and banking sector, has distracted many marketplace observers from concentrating closely on similar major American issues. The global economic crisis is a long way from being surmounted. Fiscal, banking, debt, and leverage challenges in Europe and the United States (and elsewhere) remain substantial. For the near term, the international crisis probably will worsen. Many perceive the S+P 500 as a rough benchmark measure for overall economic strength. The S+P 500 will head downhill, perhaps precipitously at times. It probably will decisively break beneath its early June 2012 low at 1267.

The International Monetary Fund’s “Fiscal Monitor” (“FM”, April 2012) provides helpful numbers. Analysts can debate which tables illuminate the situation best. Events since April 2012 would adjust the data somewhat.

The FM “general government” tables include state and local government debt with that of the national governments. Look at Table 1, General Government Balance. The United States was -9.6pc (a deficit) of GDP in 2011. The FM predicts -8.1pc in 2012 and -6.3pc in 2013. The overall Euro area deficit is actually lower for these years than the American one; it was -4.1pc in 2011, with -3.2pc for 2012, and -2.7pc in 2013. The US deficit falls only to -4.4pc in 2017, notably above the Euro area’s -1.1pc that year. What about some specific Euro area nations about which many tremble? In 2012, Italy’s general government balance is -2.4 percent, well under that of America’s. Portugal’s 2012 hole was -4.5pc. Spain’s 2012 balance, -6.0pc, also is beneath America’s (though an update to the FM probably would raise Spain’s deficit, placing it closer to the US 2012 range).

Review Table 7, General Government Gross Debt. The US gross debt was 102.9pc of GDP in 2011 (soaring from 66.6pc in 2006). The IMF predicts it will be 106.6pc in 2012 and 110.2pc in 2013. It stays at a plateau with 2017’s 113.0. Thus there is no progress in reducing it. Moreover, the US gross debt percentage exceeds that of the Euro area. Euro area gross debt was 88.1pc of GDP in 2011. The FM predicts 90.0pc in 2012, 91.0pc in 2013, and 86.9pc in 2017. Thus the US fiscal situation is worse than that of the Euro area as whole from this viewpoint as well.

In addition, note the US’s 2012 out to 2017 gross debt levels in comparison with those of Euro area crisis/bailout nations other than Greece. Admittedly Greece’s gigantic 153.2pc is larger, and its problems interrelate with those of the Eurozone as a whole. In 2012, Italy’s debt is 123.4pc of GDP, Spain’s 79.0pc. That of Ireland is 113.1pc, Portugal’s 112.4 pc. The average for 2012 of Italy, Spain, Ireland, and Portugal is 107.0pc. However, this is almost exactly that of the US’s 2012 debt of 106.6pc.

So this perspective underlines that as the Euro area has a scary fiscal (sovereign debt) problem, so therefore does the US.

Yet travel further and look at US total credit marketplace debt US (nonfinancial, financial, and rest of the world sectors combined), not government debt alone. In 1951, it was about 132.4pc of nominal GDP. It ascended gradually to 168.1pc by 1981. It climbed to 250.8pc in 1995, marching to just under 300 percent in 2002. During the marvelous Goldilocks Era economy, total US credit marketplace debt flew even higher, touching 362.8pc of GDP in 2007. It advanced more as the economic crisis emerged, reaching a pinnacle of 381.6pc in 2009.

So where is this total credit marketplace debt now? At the end of 1Q12, it remained at a very lofty altitude, 353.6pc. Not only does the long run increase in total credit marketplace debt display devotion to (economic reliance on) debt. The only slight slide from the 2009 peak to the 1Q12 level indicates that at some point more debt reduction (deleveraging) for “America as a whole” lies ahead, and thus a significant probability of a weaker economy (and even recession).

FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Marketplace Cliffs (6-25-12)

STOCK AND COMMODITY CROSSROADS © Leo Haviland June 12, 2012

In diverse ways, many financial marketplace pilgrims monitor the equity realm and the commodities universe “together”. In recent years, significant price trends in commodities “in general” (use the broad Goldman Sachs Commodity Index as a signpost) roughly have paralleled those of the S+P 500. Noteworthy bull voyages in the GSCI have commenced at “around” the same time as those in the S+P 500. The same perspective appears for bear trips. Intersections between equity benchmarks and commodities contribute to the ongoing worldwide economic crisis story.

Some narrower stock sector indices such as the XOI, OSX, CRX, XNG, and XLE stand at a crossroads between commodities related to them and to wider equity indicators like the S+P 500. Thus many narrow equity domains intersect with (have links to) the so-called overall United States (and global) economy as well as to the important commodities related to that given sector. Thus an equity index composed of corporations involved in the petroleum industry reflects to some extent price levels and trends in “underlying” (related) oil prices. Thus some narrow United States stock sector indices at times can offer useful perspectives on (confirm, reflect) past, current, and future paths for wider stock indices such as the S+P 500 and the broad GSCI.

Scan the attached chart analysis. The broad GSCI chart displays price and time links between commodities and the S+P 500 from mid-2008 (and the acceleration of the worldwide economic disaster) through the recovery and up to the present. See several important equity sector indices, the XOI, OSX, XNG, and CRX, in this context. These four narrow equity indicators contain different members. Their price and time routes are not exact duplicates. Yet significantly, especially when interpreted together, the patterns of the XOI and its friends resemble that of the S+P 500 and the broad GSCI.

This viewpoint does more than underline that the international economic crisis that walked onstage in 2007 remains far from solved. Take a look at the price level from the start of May 2012 to now in these stock and commodity charts alongside their prices during mid to late summer 2008. The 5/1/12 and thereafter levels are around ranges from which prices collapsed as the economic disaster worsened in late 2008. The world of course is not exactly the same now as then. Many observers contend that central bankers, finance ministers, and politicians have gained experience as the global economic crisis has unfolded.

Nevertheless, though stock and commodity marketplaces in 2012 or thereafter may not repeat the accelerated descent of late 2008, that period of four years ago should not be forgotten. Keep the attached chart of the S+P 500 from the sunset of the blissful Goldilocks Era in 2007 to the marketplace bottom on 3/6/09 at 667 in mind.

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Stock and Commodity Crossroads (6-12-12)
Stock and Commodity Crossroads- Charts (6-12-12)