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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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)

MARKETPLACE TANTRUMS (AND OTHER SIGNS, SOUNDS, AND FURY) © Leo Haviland, July 11, 2017

“In the day we sweat it out in the streets of a runaway American dream”, sings Bruce Springsteen in “Born to Run”.

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CONCLUSION

Wizards in Wall Street and coaches on Main Street offer a variety of competing descriptions of and reasons for the emergence, continuation, and ending of economic trends, including bull and bear patterns in stock, interest rate, currency, and commodity marketplaces. Apparently dramatic price fluctuations and trend changes frequently inspire heated language of volatility, spikes, crashes, mania, and panic. Colorful metaphors frequently punctuate the tales and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk about a potential reduction in quantitative easing (money printing) in conjunction with marketplace movements generated wordplay of a “taper tantrum”.

In recent weeks, international financial marketplaces and media have worried that central bank policy tightening (or threats of such action) will ignite a taper tantrum akin to what occurred around late spring 2013. That fearsome event saw stocks plummeting and interest rate yields rising rather rapidly in the United States and elsewhere around the globe.

Not only is the Federal Reserve in the process of slowly raising the Federal Funds rate and chirping about diminishing the size of its gargantuan balance sheet. The European Central Bank and others have hinted about reducing the extent of their highly accommodative monetary policies. The ECB is buying €60 billion in mostly government bonds each month via quantitative easing. Will the ECB taper its purchases in 2018?

The Financial Times headlined: “Confusion as Carney [Bank of England Governor] and Draghi [ECB President] struggle to clarify stimulus exit” and “‘Taper tantrum’ echoes” (6/29/17, p1). “End of cheap money leaves central bankers lost for words” and “Officials struggle to convey policy direction precisely to avoid further ‘taper tantrums’” (FT, 6/29/17, p3). “Central bank retreat from QE gathers pace”; “Sudden hawkish shift in policy across the globe has analysts talking of new ‘taper tantrum’” (FT, 7/5/17, p20).

Central bank language and behavior (whether by the Fed or one of its allies) expressing willingness to reduce (or cease) very easy money schemes indeed increase the chances of rising yields in key debt signposts such as the US Treasury 10 year note and boost the likelihood of a decline in important stock benchmarks such as the S+P 500.

Though central banks nowadays may (as in 2013 and at other historical points) spark or accelerate noteworthy trends in securities (and other) marketplaces, the central bank policy factor nevertheless intertwines with numerous other economic and political phenomena. And one or more of such other variables significantly may help to inspire a noisy marketplace “tantrum”. Not all marketplace tantrums are “taper tantrums”.

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Marketplace Tantrums (and Other Signs, Sounds, and Fury) (7-11-17)

ADVENTURES IN WONDERLAND: COMMODITY CURRENCIES © Leo Haviland September 26, 2016

“For, you see, so many out-of-the way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” Lewis Carroll, “Alice’s Adventures in Wonderland” (Chapter I)

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OVERVIEW AND CONCLUSION

Concentrating on and comparing exchange rates of “commodity currencies” offers insight into assorted interrelated marketplace relationships. Since the shocking eruption and terrifying acceleration of the global economic crisis in late 2007/2008, the major price trends for eight “commodity currencies” roughly (and of course not precisely) have ventured forward in similar fashion on a broad real effective exchange rate (“EER”) basis. Over that time, this basket of assorted commodity currencies generally has intertwined in various ways with very significant trends in the broad real trade-weighted United States dollar (“TWD”), emerging marketplace stocks in general, and broad commodity indices such as the S&P Goldman Sachs Commodity Index (“GSCI”).

The substantial rally in the broad real trade-weighted United States dollar (“TWD”) that embarked in mid-2011 played a key part in encouraging (confirming) and accelerating bear movements in emerging marketplace stocks and commodities “in general”. The S+P 500’s monumental rally over its spring 2011 interim high diverged for about four years from the trends in emerging equity realms and commodities. However, the TWD’s late 2015 ascent above its March 2009 peak was a crucial event. This dollar climb helped propel the S+P 500 downhill following 5/20/15’s 2135 pinnacle in conjunction with the emerging stock marketplace and commodity trends.

In January/February2016, these linked price patterns reversed. The TWD has depreciated modestly and stocks (emerging marketplaces as well as those of America and other advanced nations) rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield initially ascended from its 1Q16 low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. These current marketplace interrelationships (“roughly trading together”) probably will persist for the near term, regardless of whether the pattern of mid-2015 to first quarter 2016 resumes or that since mid-first quarter 2016 continues. Marketplace history of course need not entirely or even substantially repeat itself.

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Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are important to the economies of advanced countries such as Australia, Canada, and Norway, the currencies of these lands likewise can be labeled as commodity currencies.

The bearish currency paths (effective exchange rate basis) of key emerging and advanced nation commodity exporters up to first quarter 2016 resembled the similar trends among them during the 2007-09 worldwide economic disaster era. However, these commodity currencies depreciated notably more in that recent dive than during 2007-09’s extraordinary turmoil. In addition, the lows attained by most of them decisively pierced the floors achieved about seven years previously. Moreover, the TWD rallied more sharply in its bull leap to its January 2016 elevation than it did during the past crisis.

The feebleness up to the 1Q16 lows for the commodity currency group, as it involved both advanced and emerging marketplace domains (as it did in 2007-09), reflected an ongoing global (not merely emerging marketplace) crisis. Substantial debt and leverage troubles still confront today’s intertwined worldwide economy. The bear trip of many commodity currencies into early first quarter 2016, especially as it occurred alongside big bear moves in emerging marketplace stocks (and in the S+P 500 and other advanced stock battlefields) and despite long-running extremely lax monetary policies, underlined the fragility of the relatively feeble global GDP recovery.

Therefore key central bank wizards, concerned about slowing real GDP and terrified by “too low” inflation (or deflation) risks, have fought bravely to stop the TWD from appreciating beyond its January 2016 top and struggled nobly to encourage rallies in the S+P 500 and related stock marketplaces. Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. Indeed, rallies in the S+P 500 (and real estate) may help inflation expectations (and inflation signposts monitored by central banks such as consumer prices) to crawl upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices as well as appreciation by commodity currencies in general.

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Noteworthy rallies in these commodity (exporter) currencies from their recent depths tend to confirm (inspire) climbs in commodities in general and emerging (and advanced) nation stock marketplaces. Renewed deterioration of the effective exchange rates of the commodity currency fraternity “in general” likely will coincide with renewed firming of the broad real trade-weighted US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the still-dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.

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“He was an honest Man, and a good Sailor, but a little too positive in his own Opinions, which was the Cause of his Destruction, as it hath been of many others.” “Gulliver’s Travels”, by Jonathan Swift (Part IV, “A Voyage to the Country of the Houyhnhnms”, chapter 1)

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Looking forward, numerous entangled and competing economic and political variables generate a substantial challenge for explaining and predicting the interconnected financial marketplaces in general, including the commodity currency landscape. The commodity currency group as a whole (“CC”) has appreciated roughly twelve percent from its late calendar 2015/first quarter 2016 depth. What does a review of the adventures in commodity currencies since the assorted late 2015/1Q16 bottoms in the context of other marketplace benchmarks portend? Commodity currencies in general probably are establishing a sideways range. The overall camp of EERs (apart from what may happen to individual ones) will not rally much (if at all) above recent highs. The CC camp eventually likely will renew its overall depreciation, with the various EERs heading toward their noteworthy lows attained several months ago.

Although the CC rally since its 1Q16 bottom retraces some of its prior collapse, the TWD itself has dropped only modestly from its peak and thus remains quite strong. Moreover, note the fall in the broad GSCI (and the petroleum complex) since early June 2016. A still-robust TWD not only underlines potential for renewed weakness in the CC complex, but also confirms commodity feebleness and warns of risks to the recent bull move in emerging marketplace stocks (and even to the astounding S+P 500). China is a key commodity importer. As China’s EER continues to ebb (while Japan’s has strengthened), the ability of the CC clan to produce only a moderate overall percentage rally in their collective EER to date hints that world economic growth remains sluggish. Emerging marketplace stocks in general, despite their rally since 1Q16, remain substantially beneath their September 2014 summit.

Although leading global central banks devotedly retain highly accommodative policies such as yield repression and money printing, the inability of US Treasury 10 year note yield to rise much above its 7/6/16 low at 1.32 percent tends to confirm this picture of unimpressive (and even slowing) global expansion. Optimists underscore the S+P 500’s rally to a new peak on 8/15/16 at 2194 from its 1Q16 trough. Yet that new record elevation merely neighbors May 2015’s plateau, exceeding it by just 2.8 percent.

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There is significant marketplace and political talk of trade wars, growing protectionism, and anti-globalization. Much of this wordplay links to populist challenges to the so-called establishment (elites). But even some establishment politicians have become less enamored of free trade. Fears of trade conflicts and protectionist barriers weigh on the CC domain as a whole.

For commodity currencies, much depends on Federal Reserve policy. At present, although the Fed did not boost rates in September, it currently seems fairly likely to do so in December 2016 (assuming no dramatic drop in stocks occurs before then). Especially as the European Central Bank, Bank of England, and Bank of Japan remain married to their highly accommodative schemes, this Fed action will help to rally the TWD and thus tend to weaken the CC armada. Nevertheless, the Fed and other central banks probably will fight to keep the dollar from surpassing its 1Q16 summit; doing so helps to protect stock (and real estate) prices and thus to reduce populist political advances.

The result of the US Presidential election on November 8 naturally remains uncertain. Unlike the EERs of the other seven commodity currencies, the Mexico EER has slumped beneath its first quarter 2016 low. Mexico faces severe domestic political challenges, and ongoing low oil prices wound its economy. However, the increasing potential for a Trump victory and resulting trade conflicts and immigration disputes also have helped to push Mexico’s EER downhill. The Mexican peso crisis of the early 1990s should not be forgotten.

Significant ongoing American political divisions risk further weakness in the US dollar, regardless of who wins the exciting Presidential sweepstakes. The US has a long run budget challenge regardless of who emerges victorious. Though the TWD issue is complex, a Trump victory likely is more bearish for the TWD than a Clinton one. Comments from overseas (and numerous domestic) leaders suggest lack of confidence in Trump’s abilities and policies, which arguably would be reflected in reduced acquisition (or net selling) of dollar-denominated assets such as US government securities (and corporate debt) and American stocks. Trump’s budget proposals, if enacted, will likely expand the deficit considerably and thus probably would encourage interest rate rises. A Trump triumph likely would be bearish for the US dollar in general, even if the dollar rallied against the Mexican peso on a cross rate basis. However, though numerous respected forecasters predict a close outcome, Clinton probably will defeat Trump. In any case, all else equal, a Democratic victory increases the odds of a Fed rate hike in the near term.

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Adventures in Wonderland- Commodity Currencies (9-26-16)

GAMES PEOPLE PLAY: AMERICAN REAL ESTATE © Leo Haviland August 28, 2016

“Home is the nicest word there is.” Laura Ingalls Wilder, author of the “Little House” books, which inspired the famed television show, “Little House on the Prairie”

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OVERVIEW AND CONCLUSION

The United States real estate marketplace played a significant role in the worldwide economic disaster that erupted in mid-2007 and accelerated in 2008. That dreadful time and its consequences probably are not a distant memory within the perspectives of key central bankers and at least some politicians. Otherwise, the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, and other monetary gatekeepers would not have sustained various highly accommodative schemes for over seven years. Though international growth resumed around mid-2009, it generally has been erratic and modest. Despite unwavering devotion to their mandates, these sheriffs thus far have not delivered sufficient inflation relative to benchmarks such as the consumer price index. Although headline unemployment measures have plummeted in the United States, they remain fairly high in some nations.

The United States of course is not the whole world and American consumers do not represent the country’s entire economy. Yet because the US is a crucial player in the interconnected global economic (and political) theater, and because US consumer spending represents a majority of US GDP, the state of affairs for the US consumer has international consequences. Consumers represent about 68.3 percent of America’s GDP (2015 personal consumption expenditures relative to GDP; Federal Reserve Board, “Flow of Funds”, Z.1; 6/9/16). The household balance sheet level and trend (net worth) is an important variable in this scene. Although stock marketplace and real estate values matter a great deal to others (such as corporations and governments) beyond the “person on the street”, they are quite important to US household net worth and thus behavior (including spending patterns) and expectations (hopes) regarding the future.

Thus although US household net worth is not an explicit part of the Federal Reserve’s interpretation of its mandate (promoting maximum employment, stable prices, and moderate long-term interest rates) and related policy actions, it is very relevant to them. So therefore are stock marketplace and real estate values and trends. Home ownership is an important dimension of the ideology of the American Dream. Rising home and increasing stock marketplace prices to some extent bolster faith that the American Dream “in general” (as a whole) is succeeding. And what happens to American real estate still matters a great deal for the global economy.

Sustained yield repression and quantitative easing (money printing) by the Fed and its playmates not only have helped the S+P 500 and many other stock signposts to soar through the roof. These programs (assisted to some extent by deficit spending programs) also repaired much of the damage to America’s real estate landscape. Let’s survey the US real estate marketplace in this context, concentrating primarily on the consumer housing sector.

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The dutiful Fed reviews assorted factors related to personal consumption expenditure (consumer price) inflation and other aspects of its mandate. Consumer price or personal consumption expenditure inflation targets of around two percent matter to the Fed and other central bank sheriffs. Yet sufficient (too low; too high) inflation (as well as deflation) can occur in other realms, including stocks and real estate.

Combine the monumental recovery in US real estate values with the towering rise in the value of stock marketplace assets. Although these are not the only parts of or phenomena influencing the US household balance sheet, current real estate and stock marketplace (particularly note the S+P 500) levels and trends appear more than adequate to justify a less accommodative Fed monetary policy. And US housing trends (including the rental situation) probably are placing substantial upward pressure on key consumer price benchmarks.

Recall the glorious American real estate spectacle before the mournful crash of the worldwide economic disaster. Although that Goldilocks Era for US real estate belongs to the past, the current housing situation recalls it.

The dovish Fed nevertheless will be cautious regarding boosts in the Federal Funds rate. Like other members of the global establishment (elites), it does not want populists (whether left wing or right wing; such as Donald Trump) to win power. To some extent, sustained substantial slumps in stocks and real estate prices tend to encourage populist enthusiasm. The Fed and its allies battle to avoid a sharp downturn in the S+P 500 or housing prices. The Fed meets 9/20-21, 11/1-2, and 12/13-14/16. The US Election Day is November 8. See “‘Populism’ and Central Banks” (7/12/16) and “Ticking Clocks: US Financial Marketplaces” (8/8/16).

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Games People Play- American Real Estate (8-28-16)