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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THERE WILL BE BLOOD: FINANCIAL BATTLEFIELDS © Leo Haviland February 9, 2018

The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).

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CONCLUSION

The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.

Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.

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The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.

Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).

Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.

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There Will Be Blood- Financial Battlefields (2-9-18)

BUSLOAD OF FAITH: FINANCIAL MARKETPLACES © Leo Haviland, January 15, 2018

In his song “Busload of Faith”, Lou Reed chants: “you need a busload of faith to get by”.

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CONCLUSION

The United States 10 year government note is a widely-watched marketplace benchmark and guide. It ended its major bull move in summer 2016, establishing a yield bottom on 7/6/16 at 1.32 percent. Although the rate for the US Treasury 10 year note has walked peacefully sideways in a fairly narrow path over the past year or so, its yield nevertheless on balance has crept upward from its 9/8/17 interim trough at just over two percent toward its critical barrier around 2.65pc. In the UST’s bear move, the UST yield probably will pierce this 2.65pc target in the near term, with 1/2/14’s 3.05pc elevation the next height in sight.

After establishing a major top in December 2016/January 2017 at 103.2, the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; monthly average) slipped 7.8 percent to 95.2 in September 2017, slightly below crucial support around 96.2 to 96.6. Despite a slight bounce for a couple of months following that September depth, the TWD has renewed its bearish assault on 96.2/96.6 and probably will break decisively beneath that floor (and September 2017’s minor low) relatively soon.

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Economic phenomena and fields interrelate in various fashions. Apparent links and relationships between financial (and political) variables and trends (including convergence/divergence and lead/lag ones) of course can change, sometimes dramatically. In any case, although marketplace history is not marketplace destiny, historical analysis still can offer guidance regarding future probabilities.

The current intertwined relationship and trends of rising US Treasury yields alongside the weakening United States dollar likely is of substantial significance for financial marketplaces in general, not just US government interest rates and key currencies.

History signals that climbing US interest rate yields often precede (connect with; lead to) pinnacles in the Dow Jones Industrial Average and the S+P 500. In the current economic and political landscape, further feebleness in the broad real trade-weighted US dollar probably will warn of (or confirm) important tops in advanced nation and emerging marketplace stock marketplace benchmarks.

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See “Marketplace Vehicles: Going Mobile” (12/13/17), “History on Stage: Marketplace Scenes” (8/9/17), and other essays.

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Busload of Faith- Financial Marketplaces (1-15-18)

MARKETPLACE VEHICLES: GOING MOBILE © Leo Haviland, December 13, 2017

The Cars ask in their song “Drive”:
“Who’s gonna tell you when it’s too late
Who’s gonna tell you things aren’t so great”?

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CONCLUSION AND OVERVIEW

To the majority of Wall Street marketplace observers, price fluctuations for at least the past few months in many key benchmarks such as the United States government 10 year note, the broad real US trade-weighted dollar, and the S+P 500 generally have seemed relatively peaceful. Many players are rather complacent. However, history reveals that the relative lack of dramatic movement (“volatility”) according to such perspectives of course does preclude greater and ongoing violent future swings. Though the outward landscape of the given financial realm may seem calm, powerful intertwined and shifting forces may lurk beneath, perhaps eventually and possibly suddenly causing substantial tremors in one or more economic (and political) domains.

Confidence yardsticks for US consumers and small businesses are high. American unemployment has slipped substantially in recent years. Yet the fierce political conflicts around the globe between assorted camps, including various right and left wing populist crews and diverse establishment (elite) groups, hint at and probably reflect strong, entangled, and contending variables in economic spheres. The long-running accommodative monetary schemes by the key global central banks such as the Federal Reserve Board, European Central Bank, Bank of England, and Bank of Japan reflect not only their devotion to their interpretation of their beloved legislative mandates. Sustained marketplace manipulation programs such as yield repression and money printing (quantitative easing) also aim at sparking and sustaining economic outcomes favorable to (or at least protective of) the economic and political interests of “the establishment”. Central banks do not want the establishment’s boat to get rocked too much or capsize!

In America and many other regions around the world, sharp cultural divisions involve more than just economic (or “class”) quarrels and concerns regarding financial opportunities and mobility. Partisan feuds involve politics, whether Democrats versus Republicans, liberal versus conservative, the quality of the current Presidential leadership, and so on. Yet fervent debates and frequent anger on Main Street regarding issues relating to race/ethnicity, sex/gender, age, religion, geography, the environment, and so on probably reflect economic (political) splits and consequently hint at the potential for marketplaces to become inflamed.

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In any case, the US Treasury 10 year note and the broad real trade-weighted dollar (“TWD”) are two important marketplace vehicles currently near critical levels. The key US 10 government note height is around 2.65 percent, that in the TWD around 96.2 to 96.6. A sustained rise in the UST above that level or a decisive TWD breakdown under 96.0 (and especially if both events occurred) might reflect and probably would increase price volatility in those fields. Such significant moves in rates and the dollar probably also would spark a substantial reversal of the current bull trend in the S+P 500 (and related advanced and emerging marketplace stock arenas). Commodities “in general” in this scenario likely would decline as well.

The enthusiastic “buy the dips” chorus for US equities likely will not remain forever fashionable or successful. What happens if the American Congress does not enact tax “reform” in the near future? Suppose observers focus more closely on the long run US federal budget deficit and debt issues (and debt problems in China, Japan, and elsewhere)? What if US corporate earnings do not sustain notable growth? Will such events (or a US dollar decline; or higher interest rates or central bank threats of these; or some other phenomenon such as trade wars, the North Korea nuclear issue, or further petroleum price rallies) help to stop the train of the glorious long bull market trend for the S+P 500?

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Marketplace Vehicles- Going Mobile (12-13-17)
Charts- Trade-Weighted US Dollar and UST 10 Year Note (for essay Marketplace Vehicles- Going Mobile, 12-13-17)

TREND RELATIONSHIPS: US AND CHINESE STOCKS AND THE INTERNET SECTOR © Leo Haviland, November 27, 2017

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“Away from baseball, I had a lot of fun, and much of it came in pitting myself against the odds found in the financial world, which are somewhat longer against success than getting a base hit.” The Hall of Fame star Ty Cobb, “My Life in Baseball”

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The price movements and levels of various leading “internet-related” stocks attract the attention of and story-telling by assorted stock marketplace strategists and media guides around the globe.

Attached are several charts.

Charts 1-5 constitute America’s FAANG army (Apple, Amazon, Facebook, Google, and Netflix). Charts 7-9 cover the large Chinese internet groups labeled BATs (Baidu, Alibaba, and Tencent). Although these bar charts are weekly, the handwritten price and date noted is for the actual trading day.

During the past two and a half years, a review of the dates and lines noted on the graphs of this array of internet companies manifests a similarity “in general” (for the group) as to noteworthy price trend shifts (or accelerations) “around” several critical marketplace turns. These key time points include: mid-2015 high; late August 2015 low; late year 2015 drop-off; first quarter 2016 bottom; dramatic rally after the 11/8/16 election.

Not every stock necessarily closely fits the given key turning point noted, but the majority did. Of course not all travelled the same percentage distance. Nevertheless, there has been some tendency for the group members to “confirm” each other’s trend.

Sometimes a given stock, stock sector, or broad marketplace may lead (lag) another (the convergence/divergence issue).

This trend and timing linkage for the FAANGs and BATs provides guidance for anticipating and evaluating movements in broad indices such as the S+P 500 and China’s Shanghai Composite. United States and Chinese benchmarks do not always voyage together, but they have frequently done so (see the notes on chart 1).

The internet sector and broad equity stock indices are not necessarily divorced from movements in other stock sector domains (such as “financial” or “retail”) and their members. Many scouts closely monitor noteworthy financial corporations such as Goldman Sachs. The GS chart is at page 6 (unlike the other eight graphs, this one is monthly).

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A noteworthy decline in this internet stock group “in general”, whenever this happens, probably will occur around the same time. Given the widespread importance and allure of the internet playground (and the “technology” territory), such an important sectoral shift by the FAANGs and BATs likely will develop around the time of one in the S+P 500 and Shanghai Composite (and perhaps for other related broad stock indices of advanced and emerging/developing nations as well). As always, watch for price leads (lags). For the S+P 500, given its glorious long-running bull move, a decline of about ten percent (or more) would worry many observers.

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Keep an eye on rising interest rates for (and other signs of tighter credit in) the United States and China (and in other key nations). What if the United States does not enact tax “reform”? A significant portion of the rally in the overall US stock marketplace since the November 2016 election probably has derived from optimism regarding the passage of a massive tax cut package (particularly for corporations). Yet watch debt trends in America (especially if the so-called reform becomes law) and China. The adventures of the broad real trade-weighted dollar, especially if it breaches important support and resistance levels, also intertwines with and can significantly influence trends in stocks, interest rates, and commodities.

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Trend Relationships- US and Chinese Stocks- the Internet Sector (11-27-17)
Charts- Trend Relationships- US and Chinese Stocks and the Internet Sector (11-24-17)