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.
Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.
A dialogue from a movie about 40 years ago, “Being There” (1979; Hal Ashby, director):
*US President “Bobby”: “Mr. Gardner…do you think that we can stimulate growth through temporary incentives?”
*Chance the Gardener [a well-meaning yet rather simple-minded and uneducated fellow who nevertheless gains a respected position in elevated Washington circles]: “As long as the roots are not severed, all is well. And all will be well in the garden…In the garden, growth has its seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.”
*Benjamin Rand: “I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.”
Over a decade ago in late winter, the beloved former Federal Reserve Chairman Ben Bernanke earnestly proclaimed, following various monetary easing measures and shortly after what turned out to be a major stock marketplace bottom (S+P 500 low on 3/6/09 at 667): “And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back….I do see green shoots.” (60 Minutes, CBS, 3/15/09).
Everyone knows that the American and international economy thereafter recovered from the eviscerating global financial disaster of 2007-09. Stock investors and their allies (including central banks) admired, applauded, and promoted the S+P 500’s heavenly ascent from its March 2009 depth to its February 2020 peak (2/19/20 at 3394), an era during which its price soared over five times its March 2009 elevation.
Economic domains, including Wall Street financial fields, are cultural phenomena, not Natural ones. However, the Fed Chairman’s inspiring springtime-related “green shoots” metaphor implies a seasonal opposite. It suggests that the United States and other nations can reveal signs of an oncoming autumn (and even an impending winter) in their economic (financial, commercial, business) territories. In any case, central bankers and politicians have not abolished slowdowns (or recessions) or bear moves in American stock marketplaces.
Not long before the S+P 500’s majestic 3394 high on 2/19/20, the essay “Critical Conditions and Economic Turning Points” (2/5/20) concluded: “In any event, the coronavirus is not the only phenomenon warning of (helping to create) eventual significant American stock marketplace price feebleness. Prior to the coronavirus’s dramatic move into the spotlight, several bearish signs for US stocks (in addition to the widespread complacency regarding the risk of a downtrend) existed.” “Critical Conditions and Economic Turning Points” summarized and analyzed an extensive list of these danger signals. Please refer to it for details.
“Critical Conditions” underlined: “With the passage of time following 2007-09’s global economic disaster, memories regarding the accompanying bloody bear trend in America’s stock marketplace benchmarks such as the S+P 500 gradually yet significantly faded. As the S+P 500 ascended, and especially as it advanced to and sustained record highs, widespread sermons declared that we should “buy the dip”. This aligned with the venerable proverb regarding the reasonableness of buying and holding United States stocks for the “long run”.”
“Of course since the S+P 500’s major bottom on 3/6/09 at 667, a few bloody stock price slides in that signpost (and “related” global equity yardsticks) terrified stock “investors” and their allies, including central banks such as the Federal Reserve, American politicians, and the financial media. Yet as the S+P 500 achieved a record height quite recently with 1/22/20’s 3338 (2/5/20’s level matched this), such advice definitely looked excellent to many stock owners and observers!”
“Besides, as they have numerous times over the past eleven years, won’t beloved central bank physicians such as the Federal Reserve Board (under the guise of fulfilling their mandate), European Central Bank, the Bank of England, China’s central bank, and the Bank of Japan rescue stocks and generate rallies in them? Not only soothing rhetoric, but also yield repression and quantitative easing (money printing) remain antidotes for stock price drops, right? And politicians might assist via new tax cuts, boosts in infrastructure spending, or similar schemes.”
“Thus the majority of US stock marketplace players have focused more on the rewards of owning than the dangers of doing so. Substantial complacency reigns regarding the potential for noteworthy American and other stock marketplace price declines.”
“Government actions to prevent the spread of the virus will tend to hamper economic growth. Fearful consumers and nervous corporations may slow their spending. The wider the reach and the longer the persistence of the ailment, the greater the economic damage. And economic (financial) weapons such as money printing and yield repression available to the Fed and its friends obviously do not halt epidemics or cure diseases (or fears of them).”
FOLLOW THE LINK BELOW to download this article as a PDF file.
Global Economic Troubles and Marketplace Turns- Being There (3-2-20)
The broad real trade-weighted United States dollar probably will remain weak. Continuing its major long run bear trend from its March 2009 high, it probably will challenge its record low of July 2011. Why?
Among assorted bearish factors, focus on two which are becoming increasingly significant. First, the Federal Reserve Board in its September 2013 meeting displayed its absence of a genuine forward guidance plan and a lack of an authentic comprehensive exit strategy. Thus marketplace faith in the Fed has declined and will do so further in the aftermath of that September gathering. Keep in mind that feeble (vague) Fed guidance and decreased confidence in the Fed occurs amidst ongoing (and long-running) gigantic money printing and interest rate repression. The central bank is doggedly determined to keep pinning the Federal Funds rate near the floor (and thus below current inflation rates and announced Fed inflation targets) for some time. So how attractive are and will be United States Treasury yields for much over much of the government yield curve? Second, America’s national political players currently display weak fiscal (economic) leadership, especially as the debt ceiling limit beckons.
The Federal Reserve Board’s overall exit strategy for its extraordinary sustained accommodative policy remains far more a sketch than a complete design or coherent practical plan. Prior to its September 2013 assembly, central bank communicators strongly hinted the Fed soon would reduce its massive money printing campaign. Yet the illustrious Federal Reserve Board generals surprised the great majority of observers by not cutting back on quantitative easing. Moreover, these Fed luminaries also underlined their flexible attentiveness to a wide array of intertwining variables which will influence their tapering and other decisions. The ever-watchful Fed thus implicitly demonstrated that its loudly-proclaimed forward guidance wordplay offers Fed watchers at best only modest enlightenment and direction. America’s central bank consequently did more than increase marketplace uncertainty. The Fed wounded its own marketplace credibility. By damaging its credibility, the Fed reduces the widespread belief that it can engineer or at least significantly influence “good” economic outcomes.
Unfortunately, the significant shortfall in forward guidance from the guiding lights at the Federal Reserve currently coincides with a badly fractured American national political scene. Of course politicians and parties disagree and compete vigorously. Yet in the United States in recent years, significant philosophical divisions, diverse and often well-entrenched interests, and quests by political players to capture attention and win elections have combined to create ongoing “overall” feeble national political leadership. Strong political individuals in combination do not necessary make a strong collective group.
Failing to satisfactorily resolve the funding and (especially) the debt ceiling issues (and related deficit spending questions) will call in question America’s political leadership as a whole. All else equal, growing doubts about the quality of that leadership (and related fiscal policies) tend to undermine confidence in the US dollar. Besides these current feuds, America’s national political leaders continue to make no progress in resolving or even significantly mitigating the country’s looming long run fiscal deficit problem. Debt crises do not occur only in emerging or developing nations or in countries on the European “periphery”.
FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Forward Guidance and the US Dollar (9-23-13)
Nevertheless, compare the first several years of the US Treasury yield curve relative to current and forecast inflation statistics from the CBO. Real returns look negative. The two year UST note is about .25pc, with the five year UST .65pc (under one percent). So although US inflation has been low, the Fed’s yield repression interest rate policy (whatever its merits), which probably will extend at least through end 2014, tends to cheat savers in UST (and assist the US government debtor- “We, the people”, in a representative government). Lower interest rates for the UST benchmark help to slash yields for (lower real costs for) and thus benefit other debtors/borrowers (state, local, corporate, household). Creditors/lenders correspondingly suffer via reduced real return relative to inflation. Admittedly, marketplace gardeners can argue that the Fed’s current interest rate agenda benefits “all of us” over the long run.
The Fed’s ongoing worries about unemployment in particular (and economic strength in general) underline (reflect) its willingness to suppress policy rates.
Perspectives on the output gap intertwine with analysis of and opinions regarding appropriate employment and unemployment levels. Sustained high unemployment levels may reflect a large output gap, if the economy’s productive potential remains as substantial as most economic wizards believe. However, sustained high unemployment in the face of determined longstanding Federal Reserve easing (and political deficit spending) argues that the output gap (long run productive potential) is significantly less than the IMF and Federal Reserve contend. Suppose the output gap is less than the widespread faith. Then allegedly “normal” (long run) unemployment may be greater than the Fed asserts.
So suppose unemployment unfortunately will tend to remain historically high (above current theories regarding “normal” levels) in part due to the reduction in productive potential (GDP). If so, the Fed’s well-intentioned highly accommodative policies eventually run a noteworthy risk of helping greater than desirable inflation to blossom, even if this takes an extended time to develop.
Current high unemployment levels, as well as trends in some employment measures going back to calendar 2000 (and thus preceding the economic disaster that emerged in 2007), suggest that “normal” unemployment levels probably are quite a bit higher than the Fed and many others believe. If so, America’s productive potential and its output gap also probably are less than the Fed argues.
Dig into some other key employment statistics (from the BLS; Labor Force Statistics from the Current Population Survey). Again look further backward in time than the dawn of the economic crisis in 2007. Like the official and U-6 unemployment data, both the employment-population ratio and the civilian labor force participation rate suggest that there has been a secular decline in America’s “employability potential” and productive capacity.
FOLLOW THE LINK BELOW to download this market essay as a PDF file.
The Growth Game- US Unemployment and Federal Reserve Policies (9-10-12)