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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Note the nearness in time of noteworthy marketplace turns in Japanese and American government notes and bonds in recent years. See those in equities as well.
In fragile, deteriorating, or desperate economic times, who do businesses and individuals call for support or salvation? Central bank firefighters and agile politicians head rescue lists of many firms and consumers.
What if Japanese owners decide to liquidate, or be smaller net buyers, of US Treasury securities? All else equal, this will make it harder for the US to finance its gaping fiscal deficit. What happens to United States interest rates and the dollar if other asset holders, not just Japanese ones, buy US Treasuries with less enthusiasm, or become net sellers? If this scenario emerges, the friendly Federal Reserve (a buyer of last resort) could elect to embark on yet another round of quantitative easing (money printing) sometime after the current round ends in June 2011.
As the broad real trade-weighted dollar (“TWD”) in recent months has attained historic lows (1973-present), further TWD feebleness (which probably would involve a resumed Yen rally versus the dollar) helps to make US asset holders in general (not just Japanese players) rather uneasy. How tolerant will foreigners remain of US dollar weakness, the American fiscal circus, and inflationary risks from extravagant Fed money printing? What if foreign buying of US assets in general, not just US Treasuries, dwindles or becomes net selling? In this script, the slumping dollar and increasing US interest rates help to undermine US stock prices.
US equities probably will keep edging up for while longer, breaking the 2/18/11 S+P 500 level of 1344. However, they probably will not ascend much above this. A five percent rally above 1344 carries to about 1410. Recall the final high in the last bull move at 1440 (5/19/08) and the initial high just over 1460 (2/22/07). Twice the March 2009 low of 667 is 1334. Stock bull moves can last a long time, but a two year rally (especially with a doubling of the index) is substantial in time terms. Though the adage that “timing is everything” is inescapable, a noteworthy high in the next few months looks likely.
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Agricultural Prices and Inflation (Desperate Housewives, Episode 9 )
The supply/demand picture of agricultural playgrounds such as wheat, corn, soybeans, cotton, sugar, coffee, and cattle of course vary. Yet depending on the arenas and situation, fundamentals and price trends of a given agricultural commodity may substantially or increasingly intertwine with one or more other agricultural ones. The landscape of agriculture (though energy costs matter to it) is not typically viewed as the realm of energy. The fertile fields of so-called financial arenas like equities, interest rates, and currencies do not officially incorporate farming or energy. Nevertheless, agriculture is not an economic island entirely or even substantially separate from energy and financial provinces. Recent history underlines that the agriculture complex “in general” does not inevitably or always possess such independence. Not only traders in energy (and base and precious metals), but also foreign exchange, equity, and interest rate players, should monitor agricultural price levels and trends.
Governments and international organizations build numerous yardsticks to measure inflation. Not only do these indicators within a nation vary in the importance they assign to agricultural phenomena. Benchmarks between countries can differ, perhaps substantially. Picture a consumer price index of an advanced (industrialized; OECD) nation in contrast with one of a relatively poor developing country. Despite such variations, elevated and rising agricultural prices alongside similar patterns in the petroleum complex (and many metals) make it increasingly difficult for central bankers, finance ministers, and their political friends to claim that inflation levels will remain low. The withering of the United States dollar (broad, real trade-weighted basis; “TWD”) has assisted rallies in commodity prices.
The longer food- and other agricultural and energy prices- stay lofty, the more difficult it is to claim that so-called core inflation will remain (is) unaffected by them. Consequently, interest rate gatekeepers around the globe- even America’s stubborn Federal Reserve Board- face more and more pressure to boost policy rates.
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Agricultural Prices and Inflation (Desperate Housewives, Episode 8 )
Gold reached an all-time high of $1431 per ounce on 12/7/10 (COMEX nearest futures continuation). Will gold ever fall from the heavens back to earth, or at least toward earth?
With the exception of the recent rounds of Middle Eastern turmoil, many fundamental factors related to gold are old news. Thus a review of price and time analysis warns that gold probably will establish a noteworthy top soon. Calendar March 2011 is a likely time.
Think of the familiar chant: weak US dollar equals (results in; is paralleled by) strong gold, strong dollar means weak gold. Recall a related popular mantra in recent years. Weak dollar makes for strong US (and many other) equities, with a strong dollar reflected by declining or feeble equities. Some historical perspectives indicate that these ritualistic refrains often have merit. The dusty past also indicates that such financial perspectives are not Natural laws. Is a very weak US dollar (reflected by high gold prices, perhaps) in a rising interest rate environment bullish for the S+P 500 and similar stock benchmarks? Not necessarily, and not forever.
Although the dollar’s dreary dive often encourages gold to fly higher (and let’s keep viewing gold in US dollar terms), what about a very weak dollar? How enthusiastic will foreigners (and many Americans) remain in regard to the financing of the US fiscal deficit disaster? Sooner or later, the current significant dollar weakness- and certainly another round of noteworthy dollar depreciation- alongside rising interest rates will undermine the US and global economic recovery and create a bear trend for equities. These interrelated variables will reverse gold’s ascent and create (or accelerate) a bear marketplace for gold (and eventually commodities “in general”).
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Gold- Back to the Future
The sustained economic rescue and repair efforts by America’s resolute yet fearful central bank and politicians and their overseas allies will continue to encourage rising US interest rates. The Federal Reserve’s seeds of very low Federal Funds rates and its quantitative easing deluge play crucial roles. As part of its heated quest to propel a recovery and rehabilitate injured consumer net worth, the Fed scrambles to create some inflation. Congress and the President, enamored of stimulus, place fiscal discipline aside in the tool shed for the foreseeable future.
Such US regulatory and political permissiveness erodes the broad real trade-weighted dollar. Rising interest rates and a slipping dollar tend to diminish the appetite of foreigners for US securities in general and debt ones in particular.
Are climbing interest rates a sign of the success of “green shoots” economic policies? Many weathervanes proclaim them as such. Yet over the next several months, higher yields will tend to reflect and encourage economic weakness.
Take the US 10 year government note as a benchmark for rate trends. Yields will test the 400/430 range, probably by end-June 2011 at the latest.
The likelihood of an eventual move in the 10 year Treasury toward 500/550 is higher than many believe. In that regard, inaction regarding the deficit rot and a substantial wilting of the US dollar are key ingredients. Moreover, the Fed’s deliberate cultivation of some inflation creates the danger of more than sufficient inflation. The Fed and many other watchdogs display minimal concern about inflation hints from high-flying equity and commodity marketplaces. Signs of more than adequate money floating around trouble them little. Recall the sluggish analysis and action of such guardians in the prelude to and dawn and early afternoon of the economic crisis that emerged in 2007. Will exit strategies to preclude so-called excessive inflation be rapid or forceful enough to preclude marketplace tragedies?
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American Debt Gardens- Higher Yields (Desperate Housewives, Episode 7)
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