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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“Big boss man, can’t you hear me when I call?” “Big Boss Man” (Al Smith and Luther Dixon), performed by Elvis Presley, the Grateful Dead, and others
OVERVIEW AND CONCLUSION
The United Kingdom’s recent shocking referendum vote to leave the European Union not only sparked ferocious marketplace fluctuations. It did not merely underscore ongoing and widespread unease regarding mediocre economic growth and insufficient inflation in many nations inside and outside of Europe.
Brexit also highlighted previously existing and growing fears among many global economic and political elites (“the establishment”) and their disciples about increasing “populism” and its potential consequences. These worries extend beyond the troubles of the European Union and the Eurozone and nervousness regarding their fracturing or break-up. The British departure outcome probably inflamed populist ambitions in other countries. In any case, substantial divisiveness and partisan fervor are not confined to Europe or the United States. See “America: a House Divided” (12/7/15).
The “establishment”, like “populism”, is diverse rather than monolithic. Even among the advanced OECD nations such as the United States and those seeking to emulate them, it is not the same everywhere. Mainstream political parties and their economic agendas are not precisely identical, even though such different groups (such as Democrats and Republicans) can belong to the same establishment. What is an establishment (or populist or other anti-establishment) view can change over time.
Different cultures of course will have leaders, but their particular “establishment” ideologies may be significantly and perhaps dramatically different. The current Chinese establishment’s guiding faith in part overlaps with (resembles) but nevertheless is not identical to the creed prevailing in the United States establishment. Or, compare a primitive rural culture and that of a modern Western industrial nation.
However, as a rough and admittedly simplified guideline, one can summarize the ruling Western economic ideology of the post-World War Two period. It is a “capitalism” that in principle generally adores free (open) markets for goods and services, free trade, and free movement of capital, as well as (subject to immigration concerns) fairly free movement of people. Such economic goals (and political and social gospels related to them) are labeled and valued as good and desirable by the so-called establishment. Often they are honored as being rational, reasonable, intelligent, sensible, and prudent. In the post-World War Two span, these good outcomes have intertwined with globalization, which the elites (power structure), likewise generally (on balance) bless. Therefore these authorities view populism, at least to the extent it endangers such good capitalism and the related “structure (arrangement) of things”, as generally bad (or less good; inferior).
The establishment responded to the British outcome with passionate rhetoric. The dangers of supposedly overly left-wing or right-wing movements, or excessively nationalistic or protectionist ones, or fringe or radical groups must be handled somehow, right? Or so such currently empowered elites advise audiences.
Leading central banks and regulators such as the European Central Bank, Federal Reserve Board, Bank of England, and International Monetary Fund of course stress their devotion to their assorted mandates. Indeed their noble quest to secure praiseworthy aims such as stable prices (sufficient inflation), maximum employment, and economic growth are on behalf of “all of us”. Yet such loosely-defined legislative directives in practice provide these economic high priests wide scope for their interpretation.
In practice, central bankers, even if widely-revered, generally reflect the key economic and political doctrines and ambitions of traditional (current establishment) leaders. And “populism”, though one cannot define it scientifically, though its historical and current international appearance is not everywhere the same, still can “shake the existing economic and political situation and its institutional structures up a lot”. And such resulting uncertainty and disruption (and especially big changes) on balance would be bad (or at least not very good), right? So the Brexit vote was a bad (undesirable and unfortunate) outcome. Populist pressure, especially if it involved challenging the independence of central banks, might even make it more difficult for central bankers to achieve their beloved mandates. Leading central banks nowadays consequently want to preserve the basic structure and trends of the post-World War Two world “order”, to preclude revolutionary or even mildly substantial changes in it.
Therefore, the British “Leave” vote and its aftermath probably will encourage various leading central banks such as the Fed, ECB, Bank of England, and their allies to battle even more fiercely than before against populist menaces. Continued sluggish growth (or a recession), rising unemployment, or a renewed sovereign or private sector debt crisis (whether in Europe or around the globe), would inflame populist ardor, particularly given anger over widespread economic inequality. The central banks therefore likely will sustain existing highly accommodative policies such as yield repression and money printing for longer than previously anticipated, perhaps expanding them “if necessary”.
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Populism and Central Banks (7-12-16)
“And I’ll be taking care of business, every day
Taking care of business, every way”. Taking Care of Business”, by Bachman-Turner Overdrive
CONCLUSION AND OVERVIEW
For a majority of earnest soothsayers, American corporate profitability is an important factor for US stock marketplace levels and travels. Use the S+P 500 as a benchmark for United States equities in general. In second quarter 2015, US after-tax corporate profits peaked (annualized basis). The S+P 500’s record pinnacle occurred alongside this, on 5/20/15 at 2135. It mournfully plummeted about 15.2 percent to its 1812 (1/20/16)/1810 (2/11/16) depth. Despite the S+P 500’s subsequent sharp rally, the current and near-term after-tax corporate profit trend likely will make it challenging for the S+P 500 to ascend much above (or even over) its May 2015 peak during the next several months. History reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.
To explain past and current United States stock marketplace levels and trends, and in offering prophecies regarding future heights and patterns, diverse wizards tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and approaches, including the particular variables they select and arrange.
American and other corporations win or lose given amounts of money for all sorts of reasons. Factors influencing earnings and profitability change, as do the relative importance and interconnections of these variables. Long run inflation increases generally increase nominal values in general. Also, central bank policies, tax regimes, wage trends, and productivity (innovation; efficiency) developments influence sales and profits. The altitudes and paths of the US dollar, interest rate yields, and commodity prices also are relevant in various ways and degrees to particular corporations. Unemployment rates, fiscal situations (budget deficits), debt levels and trends (government, corporate, and consumer), regulatory structures, and population growth matter. America is not an island apart from the rest of the world; globalization has increased in recent decades.
Admittedly, the ongoing (extraordinary) very lax monetary policy of the Federal Reserve Board and other central bank guardians such as the European Central Bank, Bank of England, Bank of Japan, and China’s central bank helps underpin equity prices in America and elsewhere. Stock-owning audiences around the globe (particularly the praiseworthy investment community) as well as Wall Street institutions, public corporations, and the financial media friends generally adore massive money printing (quantitative easing) and sustained yield repression. Low interest rate yields for US Treasury securities (and negative yields for many government debt obligations elsewhere) encourage fervent scrambles for acceptable returns elsewhere. These often-alluring territories include stock realms (hunting for dividends and potential capital gain), corporate debt, and commodities. American inflation has been quite modest in recent years. Yet as nominal prices in general (all else equal) tend to rise alongside (or on a lagged basis) a climb in US nominal GDP, so will a nominally priced index such as the S+P 500.
The S+P 500’s retreat beginning in May 2015 interrelated with the preceding bear trends in emerging marketplace stocks and commodities (notably petroleum) and a further bull charge in the broad real trade-weighted dollar (“TWD”). Significantly, the S+P 500 (and stocks of other key advanced nations), emerging marketplace equities (“MXEF”, MSCI Emerging Stock Markets Index, from Morgan Stanley; 1/21/16 at 687), and commodities in general (broad GSCI at 268 on 1/20/16) all attained significant troughs around the same time in first quarter 2016. The US Treasury 10 year note yield low was 2/11/16 at 1.53 percent. The TWD established its recent high alongside these marketplaces in January 2016. This interconnection across assorted marketplaces assisted the rally in the S+P 500 from its January/February lows.
Thus to some extent, the recent weakness in the broad real trade-weighted dollar encouraged the ascent of the S+P 500. In any case, central banks did not want the TWD to ascend by much, if at all, over its January 2016 high. They likewise wanted to arrest stock marketplace declines.
However, suppose the TWD declines further from current levels, perhaps ten percent or more from its January 2016 elevation. Although the first stage of dollar decline has managed to spark and assist a S+P 500 rally, additional sustained depreciation eventually may undermine equity prices. Besides, even if the TWD fall from its January plateau does not reach ten percent, the S+P 500 nevertheless may slide lower. Marketplace history reveals that a weaker dollar does not inevitably (or necessarily) push US stocks upward. And also suppose US interest rates or inflation expectations sustain modest climbs. Rising US Treasury yields can help to lead S+P 500 prices lower. Assume commodities in general manage to hold onto much of their recent gains.
In this environment, further suppose US corporate profits (and those in related regions) continue to remain sluggish (or decline further). Then the S+P 500’s fall from its high probably will be significant, even though the Federal Reserve and its trusty allies will intervene with rhetoric and action to prevent dramatic stock marketplace drops (particularly watch the 20 percent bear market definition threshold).
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Looking Backward, Gazing Forward- US Corporate Profits and Financial Trends (5-3-16)
As America travels toward Labor Day, it pays to review the nation’s consumer confidence. Assorted measures perform as signposts to assess consumer attitudes and actions. For many, the United States stock marketplace (think of an “overall” benchmark such as the S+P 500) is one. The Conference Board’s United States Consumer Confidence Index is another widely watched indicator. Trends for the United States stock battleground do not precisely mirror those in the Consumer Confidence Index (“CCI”). Weathervanes such as the S+P 500 of course do not derive all their revenues or influences directly from Main Street dwellers or from American sources. The US, as the ongoing worldwide economic crisis that emerged in mid-2007 underscores, intertwines with Europe, China, Japan, and other countries around the globe. However, over the past several decades, there has been a rough link in the major patterns of the S+P 500 and the CCI. And many believe that major trends in US equities tend to parallel those of the American economy as a whole.
Stare at the S+P 500’s extensive ascent from its March 2009 abyss to its current new rally height on 8/21/12 over 1425, particularly the noteworthy stage from the October 2011 depth at 1075. Grandstanders might believe United States consumers generally are rather joyous, or that they soon will become so. The CCI indeed has climbed significantly from its February 2009 valley of 25.3 (the deepest of the 1967-present period). However, the CCI’s subsequent highs around 72.0 (February 2011 and February 2012) lurk far beneath those of 2000 and 2007 (January 2000’s 144.7 and July 2007’s 111.9). July 2012 flutters at a modest 65.9.
Admittedly the US CCI is only one yardstick for consumer confidence and thus to some extent of the strength and duration of economic recovery in America and elsewhere. Maybe sustained higher US equities and at least partial solutions to various troubles facing consumers (including those overseas) will encourage a significant CCI move over 72.0.
However, the feeble rally in the CCI in comparison with the S+P 500 since February 2009, and particularly after autumn 2011, raises significant questions regarding the present and future strength of the American economy (and even of the S+P 500). After all, US consumers are a substantial percentage (around 70 percent) of American GDP. Current US consumer confidence in context warns of economic weakness, or at least sustained sluggishness.
Summer 2012’s recent S+P 500 bull march to new highs over 1425 may continue a while longer. Yet the link between the S+P 500 and “the economy as a whole” is probably notably less than it was a several years ago. But the S+P 500 is not isolated from the economy. So this sustained mediocre (or renewed weakness in) the CCI is ominous for US stocks in general, particularly if other key consumer indicators such as housing, employment, and wages do not soon show substantial strength. Or, suppose there is not major progress on the American fiscal front.
The Gallup News Service recently polled Americans regarding their “confidence” in various “institutions in American society” (June 7-10, 2012). The category created by adding together the answers “great deal” and quite a lot” reveals dispiriting trends and levels that reflect current mediocre consumer confidence levels (as well as the broad erosion in confidence from the January 2000 CCI peak). Relatively weak consumer (Main Street) confidence in several key political and social institutions parallels many worries regarding America’s economic situation.
And anyways, America’s current national deficit and debt situation and its probable near term and long run fiscal prospects justify significant consumer concerns. Moreover, the housing, earnings, unemployment, and household debt factors also help to explain mediocre consumer confidence, both in absolute terms and relative to the S+P 500’s heights.
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US Consumer Confidence- Many Happy Returns (8-23-12)
US Consumer Confidence Chart (8-23-12)