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 “Ticket to Ride”, The Beatles sing:
I don’t know why she’s riding so high
She ought to think twice
She ought to do right by me
Before she gets to saying goodbye”.
CONCLUSION AND OVERVIEW
In offering enthusiastic audiences explanations of past, current, and future United States stock marketplace levels and travels, diverse marketplace preachers tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and methods, including the particular variables they select and arrange. For a majority of devoted visionaries, American corporate profitability is a very important factor.
After-tax US corporate profits soared after reaching a trough in fourth quarter 2015, not long before the S+P 500’s major bottom in first quarter 2016. The noteworthy profit climb since 4Q15 surely encouraged the S+P 500 to jump from its 1Q16 trough.
Yet Trump’s remarkable triumph in November 2016’s Presidential election created (or at least magnified) faith that United States after-tax corporate profits would increase significantly in calendar 2017 and 2018. The S+P 500 galloped 15.2 percent higher from 11/4/16’s 2084 low to 3/1/17’s 2401 elevation. Thus hopes for greater profits probably greatly assisted the S+P 500’s sharp rally.
What is a key tenet (especially in the post-election period) in the gospel promoting a viewpoint of growing American corporate profitability and an entangled bull stock climb? Much centers on hopes that the Republican-controlled Congress will enact noteworthy corporate tax cuts. Related optimism for marketplace earnings (and stock) bulls includes possibilities for repatriation of corporate cash hoards, dramatic boosts in domestic infrastructure spending, and reduced regulatory burdens.
However, current sharp divides on the American political scene (including within the Republican congregation) and widespread lack of confidence in (and hostility toward) the President will make it very difficult for a notable change in the corporate (and individual) tax code to become law. Passage of legislation encouraging earnings repatriation is not assured. Moreover, neither is a monumental infrastructure spending scheme.
In addition, despite the fierce climbs in recent calendar quarters, profit highs for recent full calendar years do not manifest a clear trend toward moving to new heights. Full calendar year profits over the past few years have been about flat.
Disappointment relative to widely-forecast profitability gains may inspire S+P 500 price retreats. In any case, history reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.
What is too high (too low), high (low), overvalued (undervalued), or reasonable/rational/average/normal (unreasonable, irrational, atypical/abnormal) for stock prices or other economic indicators is a matter of opinion. However, and even though stock valuations can appear very elevated relative for an extended period of time, some marketplace gurus nowadays proclaim that some measures show US stock valuations are on the lofty side.
Also, elevated share buyback levels also have helped to propel US equities higher. There are hints this pattern will not persist.
Current low US stock marketplace volatility, high American consumer confidence, and evidence that financial stress remains below average have reflected (and encouraged) the majestic bull climb in the S+P 500. Observers nevertheless should watch for changes in such measures.
A warning light for S+P 500 bulls is the failure the S+P 500 to motor much above the early March 2017 high. The subsequent record high is 5/16/17’s 2406. If the S+P 500 continues to find ventures much beyond that March 2017 elevation challenging, this arguably will signal that current optimism regarding future corporate profit gains may be ebbing, that the S+P 500 bull trend is tiring, or both.
So the failure of America to enact important corporate tax “reform” (tax cuts) or embark on a glorious infrastructure spending voyage may not greatly diminish future earnings expectations (or even actual levels) or significantly wound the S+P 500. But they might.
In addition, challenges to the bullish trend in US equities may come from the long run upward trend of US government interest rates (note the Fed’s tightening plan). Or, concern about US federal budget deficits (or debt problems elsewhere in the world) may march into view. Hopes for higher (or at least not falling) energy prices likely underpin hopes for higher corporate earnings (and profits) in that key financial sector. But commodities “in general” (and petroleum in particular) have fallen from their 1Q17 highs. Anticipated oil output levels from OPEC and its non-OPEC comrades probably will not significantly reduce still-high OECD industry inventories for at least the next several months. The broad real trade-weighted US dollar established highs in December 2016/January 2017, though it has slipped only modestly since then. Contrary to what many believe, increasing US dollar depreciation may help lead to or confirm weakness in the US stock marketplace.
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Ticket to Ride- US Corporate Profits and S+P 500 Trends (5-17-17)
CONCLUSION AND OVERVIEW
Not only have emerging marketplace growth rates slowed. Many sentinels fear the substantial fall in emerging marketplace equities and currencies has “reached crisis proportions”. (Financial Times, 9/8/15, p3; citing the Institute of International Finance). The World Bank’s chief economist warned the Federal Reserve risks creating “panic and turmoil” in emerging marketplaces if it raises rates in its September 2015 meeting (Financial Times, 9/9/15, p1). However, in today’s globalized economy, central bankers and other important regulators and politicians also fear insufficient growth in many advanced nations. They also worry about further substantial increases in the United States dollar and drops in stock benchmarks such as the S+P 500. Some probably dread that an international crisis akin to the 2007-09 one, even if much less devastating, is underway or may soon appear.
The verbal barrage recently unleashed since late August 2015 by key central bankers and their comrades displays their fears and goals regarding these financial fronts. In any case, their enthusiastic wordplay at times raises marketplace hopes significantly. Their windy talk perhaps for the near term will stabilize the dollar around its recent highs and stop benchmark stock marketplaces from substantially breaching the lows reached in the past few weeks.
However, the foundations of worldwide growth nevertheless remain shaky, despite about seven years of highly accommodative monetary policy by the Fed and its allies. In addition, substantial debt and leverage troubles still confront today’s intertwined global economy. Consequently, this magnificent rhetorical display aiming to boost real global economic growth, significantly alter currency patterns (reverse the dollar’s strength, or at least significantly slow its appreciation) and substantially rally (or at least successfully support) stocks probably will not achieve long-lasting success.
The sustained rally in the broad real trade-weighted US dollar since mid-2011, and particularly its recent climb slightly beyond March 2009’s crucial peak, has played a key part in encouraging (confirming) weakness in emerging marketplace stocks and commodities “in general”. The S+P 500’s slide since its 5/20/15 pinnacle indicates that its major trend probably will not diverge significantly from those of emerging equity marketplaces.
Focusing on the trials and tribulations of emerging/developing countries and their stock and foreign exchange playgrounds indeed helps analysis of other marketplaces around the globe. However, concentrating on and comparing exchange rates of “commodity currencies” offers additional notable insight into various interrelated financial marketplace trends. “Commodity currencies”, associated with countries with large amounts of commodity exports, are not restricted to emerging nations. Commodity exports are significant to the economies of advanced nations such as Australia, Canada, and Norway, so they likewise can be labeled as commodity currencies.
Paying attention to the currency trends of important emerging and advanced nation commodity exporters highlights the similar trends among them during the 2007-09 worldwide economic disaster era as well as nowadays. Such past and current collective effective exchange rate weakness contrasts with the robust strength of the trade-weighted US dollar. The feebleness both in 2007-09 and in recent times for the commodity currency group, as it involves both advanced and emerging marketplace domains, hints at global (not merely emerging marketplace) crisis. The exchange rates of many commodity exporters are at or near their lows achieved during 2008-09.
Thus noteworthy rallies, if any, in these commodity (exporter) currencies from their recent depths will 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” probably will coincide with renewed (additional) firming of the US dollar. Such depreciation in the commodity currency camp likely will signal worsening of the current dangerous global economic situation and another round of declines in global stock marketplaces.
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Marketplace Twists and Shouts- as the World Turns (9-10-15)
In recent months, economic and political excitement within assorted emerging, developing, and frontier nations have entranced most marketplace observers and captured the attention of numerous politicians in the United States and other so-called advanced nations. In contrast, Japan, having once been in the limelight, nowadays stands in the background of the international financial theater. However, Japan currently deserves more of a starring role.
Japan’s changing political leadership in late 2012 and the subsequent major new round of substantial monetary laxness encouraged major- and intertwined- Japanese Yen weakness and Japanese equity (Nikkei) strength. The new Japanese policies, the Nikkei’s stratospheric rally, and the Yen’s rapid bear tumble probably helped to encourage global economic optimism in general as well as rallies in the S+P 500 and many other key world stock marketplaces in particular.
Yet at present, many players nevertheless increasingly take for granted Japan’s extraordinary monetary easing actions of early 2013 (and related other parts of “Abenomics”) and their marketplace consequences. Clairvoyants likewise currently place comparatively little emphasis on Japan’s current sluggish GDP prospects. They also do not underline that both the Japanese Yen and Nikkei apparently entered into a sideways trend beginning around late May 2013.
Of course diverse and entangled variables influence economic levels and trends (and storytelling about them), whether in Japan or elsewhere. But because Japan rather recently ventured on such extraordinary monetary easing, signs of mediocre Japanese economic performance warn that other very lax central bank policies increasingly will have diminished growth benefits as time passes. For example, the International Monetary Fund predicts Japan’s calendar 2015 real GDP will increase merely one percent. Japan also has not escaped its gloomy government spending and debt situation. The sideways trends in the Nikkei and Yen arguably reflect such current (potential) Japanese performance.
The recent high in Japanese stocks and bottom in the Yen probably will not be broken by much if at all any time soon. Also, a notable (even if not major) decline in the Nikkei from its recent peak alongside a rally in the Yen relative to its recent low will be a bearish sign for the world economy as well as for the S+P 500 and many other stock marketplaces.
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Japan- the Land of the Setting Sun (3-7-14)
Charts- Japanese Yen and Nikkei (3-7-14)
The long running bull march in the Japanese Yen from early summer 2007 to the current time generally coincides with a continuing worldwide economic crisis. The Yen’s robust strength mirrors the failure by central bankers and politicians around the globe to cure the lamentable financial ills. National policies often differ. The international guardians frequently coordinate their rescue and stimulus programs. Yet measures such as deficit spending, money printing, efforts to keep government interest rates near the floor, and struggles to maneuver currency rates merely have patched and postponed severe problems, not genuinely repaired them. Worrisome debt and leverage issues revealed in 2007-08 lurk on in various forms.
The rally in the Japanese Yen on an effective exchange rate basis since around July 2011 warns that an acceleration of the worldwide crisis, as in mid-2008, may be underway or very near to commencing. Significantly, the climb in the Yen cross rate versus the US dollar since mid- March 2012 also fits the ongoing international economic weakness story. Recall that as the world economy deteriorated more and more quickly around mid-2008, not only did the US dollar rally on a broad real trade-weighted basis, but also the dollar weakened relative to the Yen. The strong dollar equals weak stocks (and weak commodities in general), weak dollar equals strong equities (and bullish commodities) chant remains popular.
The world and perspectives on it are not immutable, so 2012 does not precisely duplicate 2008. Yet given the experience of 2008, what does a rally by the dollar in general, if accompanied by a rally in the Yen (effective exchange rate), and especially if the Yen also marched higher against the dollar on a cross basis, portend? This would hint that the disturbing international crisis is in the process of becoming more fearful. And since March 2012, that seems to be what has been happening.
The current dangerous situation in the ongoing worldwide economic crisis, if it further worsens (and it probably will worsen to some extent, even if the deterioration is not nearly as severe as in 2008), will be sufficiently severe to induce policy makers around the globe to take further substantial steps in their struggles to provide long-lasting remedies. Perhaps such actions by central bankers and political leaders may occur relatively soon. These may issue from individual nations in somewhat piecemeal fashion. Yet there is a substantial chance that intervention will be relatively coordinated, especially if an encore of second half 2008 looks more and more to be underway.
But in the meantime, for the near term, the Japanese Yen probably will keep rallying on an effective exchange rate basis; it probably will breach the 1/16/12 daily low of 187.5. The Yen likely will retest the Y75 level against the dollar. However, the US dollar (TWD) will remain fairly strong. The bear trend in worldwide equities and commodities in general therefore probably is not over. Renewed sustained weakness in both the Yen and the dollar would indicate an easing of the current stage of the global crisis.
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2008 Revisited- Japanese Yen Strength, Global Economic Weakness (6-4-12)