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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In various forms and fashions, accounting greatly matters in cultural domains. Economic realms employ professional accountants and other measurers and judges of accuracy (and compliance, responsibility, and virtue), but money meadows are not the only field involving accountability. In financial playgrounds- as in politics, war, romance, and elsewhere- it’s important to carefully evaluate the truth, quality, and implications of accounts and other storytelling.
Despite the ongoing excitement of the European sovereign debt crisis, European banks are not the only ones facing significant challenges. Thus some gloomy bystanders perhaps want to avoid renewed scans of America’s banks in the context of real estate and derivatives.
Sometimes the titanic numbers of billions and trillions mask the crucial importance of what’s going on in the provinces of smaller quantities. US real median household income in 2010 was about $49,400, a 2.3pc slide from 2009. Since 2007, real income has tumbled 6.4pc. It is 7.1pc under the median household income peak in 1999, back to the 1996 level of $49.1m.
According to the US Treasury’s recent TIC statistics (9/16/11), major foreign holders (official and others) of Treasury securities (these include bills, notes, and bonds) held about $4.48 trillion of them in July 2011. This is down slightly from June 2011’s $4.50tr and May’s $4.51tr. They held $4.45tr in January 2011. In sum, they’ve essentially not been net buyers for several months. Even relative to July 2010, they’ve been mediocre net buyers. Foreigners held $4.13tr in July 2010; July 2011 thus represents a meager add-on of only about $353 billion to the year-ago month.
Though money supply data are only one variable relevant to inflation, they have started to hint that the future inflationary picture will be less pretty than ardent Fed professors proclaim. Even in a sluggish or recessionary economy, and even if some deflationary forces at home or overseas are strong, that does not prove that inflation will not increase. And inflation perhaps will float considerably higher than many predict.
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Show Me the Money! (9-19-11)
In recent years, there’s been a close linkage between trends in the S+P 500, commodities “in general”, and the United States dollar. Recent weakness in commodity currencies versus the US dollar coincides with and thus warns of continued declines in commodity benchmarks such as the broad Goldman Sachs Commodity Index and key stock indices such as the S+P 500. The worldwide economic crisis that erupted in 2007 has not been substantially solved.
The price and time trends of the commodity currencies from the US dollar cross rate perspective intertwine closely with key moves in stock and commodity benchmarks. Viewing them as a group, the five currencies soared higher against the US dollar from late 2008/early 2009 for over two years, until spring 2011/July 2011. Commodities in general and the S+P 500 made key bottoms in winter 2009 around the time of those in commodity currencies. The S+P 500 and the broad S+P Goldman Sachs Commodity Index (GSCI) then advanced dramatically for over two years.
In 2011, double tops in the commodity currencies (late April/early May; late July) link closely with the equity and commodity summits. The drops from late July 2011 are noteworthy because the S+P 500 subsequently fell decisively under the summer 2008 1265/1313 range (the financial crisis accelerated from around that 2008 time) and beneath the 4/26/10 top at 1220.
Many observers have faith that a substantial QE3 action will rally the S+P 500 (and commodities). Won’t history repeat itself? However, maybe history will refuse to do so, and stocks will climb very little before resuming their decline. Money printing is not a genuine repair policy for real economic problems. Despite the fearful Fed’s determination to maintain an extremely low Federal Funds rate, a renewed money printing enterprise also eventually may inspire interest rate jumps in US debt playgrounds.
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Commodity Currencies and Economic Cracks (9-12-11)
The level and trend of the Conference Board’s Consumer Confidence Index alongside this nosedive in the S+P 500 indicates that the US economy and the S+P 500 probably will slump further over the next several months. If so, then the worldwide economy will slow alongside America’s, as will many other equity arenas. Given the close links between the S+P 500 and overall commodity marketplace trends in recent years, commodity players should monitor the Consumer Confidence Index.
After the first quarter of 2009, both the S+P 500 and the Conference Board’s Consumer Confidence Index (“CCI”) rose sharply. The S+P 500’s race to its 5/2/11 peak at 1371 more than doubled its 3/6/09 low at 667. At this 5/2/11 altitude, it was about 87 percent of its 10/11/07 major high, and just 4.8pc beneath its final pre-crisis top at 1440 on 5/19/08.
The CCI’s February 2011 high at 72.0 indeed represents a steep ascent from its February 2009 25.3 valley. Yet it nevertheless fell well short of the 111.9 July 2007 top. Moreover, this winter 2011 CCI elevation was only modestly above the 61.4 level of March 2003- when the S+P 500 achieved a major low at 789 (3/12/03) miles underneath 2011’s various S+P 500 heights. In addition, since February 2011- when the S+P 500 made an initial top at 1344 on 2/18/11, the CCI has ebbed lower. It fell under 60 in June (57.6) and July (59.2) and tumbled to 44.5 in August.
However, given the sharp fall in the S+P 500 from its February, May, and July 2011 highs (8/9/11 low at 1101 is almost a twenty percent drop from 1371; 9/2/11 close about 1173), the S+P 500 and CCI now are confirming each other in a bearish path.
Note the S+P 500 plateau on 3/24/00 at 1553 was not far from the October 2007 summit (Dow Jones Industrial Average high 1/14/00 around 11,910). In contrast, the February 2011 Confidence Index level lurks far beneath (only 50 percent of) the 144.7 achieved in January 2000. This underscores the current weakness of consumer net worth and the related mournful consumer attitude.
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Consumer Confidence and US Stocks (9-6-11)
The 10 year versus two year spread on the United States government yield curve offers some insight into major economic and financial marketplace trends. US Treasury 10 year note spread relationships versus other instruments of similar maturity further confirm or signal major marketplace trends. The US of course is not the only nation with a yield curve, and America’s debt playground is not the only relevant one. America is not the only country with painful fiscal troubles. However, both the UST 10/2 yield curve differential and important 10 year UST note intermarket spreads underline recent trends in stock benchmarks such as the S+P 500 (and in commodities “in general”). They also warn of US (and worldwide) economic weakness ahead.
Across various parts of the yield curve, traders and other observers compare instruments of similar maturity. A popular time benchmark is 10 years. Given the variety of nations and marketplace sectors, potential quality comparisons are numerous. A survey of a handful underlines the ability of such spreads to shed light on economic conditions and various marketplace trends.
However, history is not destiny in spreads, including this German/US sovereign spread. Admittedly Treasuries offer some an apparent safe haven against the crumbling of parts of the international banking (financial) system. Yet with the US ten year yielding about two percent and current US inflation levels around that, and with the Fed determined to create inflation of around two percent, how eager will Chinese, Japanese, and other holders of US government debt be to keep being net buyers of it? We all know that shorter term UST yields are even less. What if foreigners become net sellers of Treasuries? Or, suppose the US dollar weakens sharply from current levels. What if this is not only on a broad real trade-weighted basis, but also against the Euro FX as well? What if America engages in another substantial round of money printing (or some other clever easing), and that the European Central Bank does not follow suit?
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Yield Curves and Spreads- Making a Difference (8-22-11)
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