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 marketplaces and elsewhere in culture, there are many gaps. We deal with information gaps. Individuals and institutions seek to fill in holes in their knowledge by gathering additional information and evaluating what they have accumulated.
Politicians demonstrate credibility and leadership gaps. The US fiscal deficit disaster situation is merely one of many examples.
One very important gap discussed by the International Monetary Fund, the Federal Reserve Board, and other economic players is the output gap. Why not investigate that topic? The Fed and other key players make key decisions significantly influenced by their views on this measure.
Output gap estimates about any given current and future output gap situation (and therefore to some extent even regarding past gaps) probably are much less reliable than the Fed’s orations on the subject would have its audiences believe. The Fed is making decisions that are significantly based on very conjectural resource slack information.
Moreover, some evidence indicates the US output gap is less extreme than the Fed believes. What follows? The Fed’s sustained effort to pin interest rates near the floor (and thus beneath even low inflation levels) as well as its past money printing (quantitative easing) adventures fought to ignite and sustain economic recovery. However, if it has overestimated the US output gap significantly, its policies have increased the risk of creating not only inflation (however long it may take for that to appear), but also more inflation than it and many others see as desirable.
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Slacking Off – Output Gaps and Fed Easing (10-25-11)
Burning passion for another is not the only love which makes us shake. When fear of losing substantial sums creeps up on numerous money lovers in intertwined financial playgrounds, both the players and their marketplaces can quiver violently.
Many pundits define a bear marketplace as a 20 percent slide from a noteworthy price top. Though the S+P 500 nosedived about 20 percent from its 5/2/11 high around 1371 to its 8/9/11 low near 1100, it then rallied sharply. On 8/9/11, the United States 10 year Treasury note touched yield lows of just over two percent. This matched the bottom achieved on 12/18/08 during the previous “flight to quality” panic in the (still-running) economic crisis that erupted in 2007. Given this equity and debt support, will things calm down much? No. The economic and political scenery has not sufficiently changed. Relationships within and between various financial arenas and their variables probably will vary to some extent as time passes, but the current entangled key financial factors will remain powerful, volatile, and intertwined. Although there will be occasional intermissions, turmoil in and between key equity, interest rate, currency, and commodity theaters therefore will not cease anytime soon.
Why place blind faith in the 2013 low rate policy, for the Fed confesses it changes its viewpoints? In addition, consider the Fed’s policy track record relative to its “original” expectations. Economic growth has been considerably lower than the Fed “had expected”. The Fed “now expects” a slower pace of recovery. Just as the Fed this month adjusted its policy by speaking of low Fed Funds through mid-2013, it eventually may alter its present course. Historians recall that the Fed’s quantitative easing floods likewise represented policy changes due to marketplace developments. Besides, how accurate were the Fed’s economic forecasts in 2007 and 2008, at the dawn and during the early stages of the acceleration of the economic crisis? So as Fed expectations change, so may its actions, whether on rates, quantitative easing, or otherwise.
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Furious Financial Fluctuations (8-15-11)
Especially if noteworthy economic variables- including so-called political ones- warn of or reveal substantial financial danger or injury, many marketplace participants preach “flight to quality” doctrines. What represents a supposed “safe haven” sector varies according to viewpoint and era. Inflation often is feared. Or, how could a severe recession or deflation injure us? Political unrest and military conflict sometimes surface.
Many gurus designate gold as a worthy store of value. We all saw it skyrocket over $1500. Clairvoyants devote much attention to government notes and bonds as an escape hatch if a dangerous downturn beckons or is underway. In terrifying recent times, those of the United States and Germany often have allured traders.
Instead, concentrate awhile on the Swiss Franc. Switzerland indeed is a rather small nation. However, this mountainous land has a very long history of and reputation for financial stability, which it battles fiercely to protect. The fluctuations of the Swiss Franc against the Euro FX are not precisely the same as its trajectories relative to the US dollar. In recent years, the major levels and trends of Switzerland’s actively traded currency nevertheless reflect worldwide (particularly European and American) economic disaster fears and recovery hopes.
Fear and hope interrelate in marketplaces, as elsewhere. Yet suppose one equates marketplace “flights to quality (safety)” with fear. Then there is a counterpart to the flight to quality outlook. Its opposite is the hopeful “flights of fancy” vision. Especially when policy interest rates are kept near rock bottom levels for extended periods (and all else equal), pursuits of profit via other paths of potential returns often become quite fervent. Suppose money printing occurs as well. All else equal, massive money printing tends to boost nominal prices of “assets”, including stocks, commodities, and low-rated (junk; many emerging marketplace) bonds.
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Flight Paths (The Money Jungle, Part Five)
The S+P 500 is at or near an important high in price and time terms. Watch the major resistance of 1440 (the May 2008 final high before the acceleration of the worldwide economic crisis), plus or minus five percent. Commodities “in general” likewise have achieved or soon will make a noteworthy top. Suppose these reversals haven’t begun yet. What is a guideline for the latest time for them? At the risk of being attacked by hunters armed with hindsight wisdom, let’s climb out on a limb and say midsummer 2011. However, the Federal Reserve and its allies will rush to the rescue and strive to prevent any sustained major fall in equities.
What about the broad real trade weighted dollar (“TWD”)? For the near term, its April 2011 level of 81.3 represents a low or is close to one, with its timing linked to that in stocks and commodities. The United States 10 year note yield will continue to meander sideways. However, yields eventually will move higher and attack the four percent barrier.
In recent years, the linkage between equities, commodities, the broad real trade weighted dollar, and interest rates has been close.
Focus first on price and time notes for these arenas in the period of the dismal depth of the worldwide financial crisis.
Timing may not be everything, but it’s pretty important in both music and marketplaces.
What does this forest of data for stocks, commodities in general, and the broad real trade weighted dollar portend for their current and future environment? There have been two alternating marketplace songs in recent years. Strong stocks/strong commodities/weak dollar has been one clear tune, with sagging stocks/cratering commodities/strong dollar the alternative one. It is very likely that a major or any very significant high in stocks and commodities will occur around the same time (within a couple of months). That peak probably will happen around the time of an important low for the dollar.
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The Money Jungle (Part One)
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