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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HOME ON THE RANGE: FINANCIAL BATTLEGROUNDS © Leo Haviland April 1, 2023

“Weapons change, but strategy remains strategy, on the New York Stock Exchange as on the battlefield.” Edwin Lefevre, “Reminiscences of a Stock Operator”

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CONCLUSION

In America and many other important countries around the globe, uncertainties and risks regarding numerous intertwined economic and political variables and marketplaces appear especially substantial at present. In particular, inflationary and recessionary (deflationary) forces currently engage in a fierce battle for supremacy.

Monetary tightening by the Federal Reserve Board and its central banking allies has helped to cut lofty consumer price inflation levels. However, inflation remains undefeated. It hovers well above targets aimed at by these noble guardians. Yet in comparison with ongoing high actual consumer price inflation, inflationary expectations for longer run time spans generally have remained moderate. But massive public debt challenges America and many other leading nations nevertheless arguably signal the eventual advent of even higher interest rates. And given the ongoing Russian/Ukraine conflict and an effort by OPEC+ to support prices, how probable is it that petroleum and other commodity prices will ascend again?

Higher interest rates have diminished worldwide GDP growth prospects and raised recessionary fears. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession and will strive to avoid that eventuality.

The United States dollar, though it has depreciated from its major high achieved in autumn 2022, arguably remains “too strong”. However, history shows that a variety of nations elect to engage in competitive depreciation and trade wars to bolster their country’s GDP.

Unemployment in the United States remains low, which helps consumer confidence. Sunny Wall Street rhetoric regarding allegedly favorable long run nominal earnings prospects for American stocks bolsters enthusiastic “search for yield” activity by investors and other fortune-hunters. Yet Fed and other central tightening and economic sluggishness may reverse this healthy unemployment situation and dim corporate earnings prospects. Consumer net worth levels and trends are important in this context. A strong and growing household balance sheet encourages consumer spending and thereby economic growth. Consumers, the major component of American GDP, unfortunately have endured damage to their balance sheet from the fall in the stocks (S+P 500 peak in January 2022) as well as a year-on-year decline in home prices over the past several months. Recent shocking banking collapses in America and Europe hint of fragilities and uncertainties facing diverse economic arenas and the value of their assets.

Persistent fierce partisan conflicts range across numerous economic, political, and other cultural dimensions. This makes it difficult for politicians to compromise (witness America’s federal legislative circus) and thus significantly to alter ongoing marketplace trends and relationships via resolute substantive action.

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Given these contending considerations, critical benchmark financial battlegrounds such as the United States Treasury 10 year note, US dollar, and the S+P 500 for the near term therefore probably will travel sideways for the near term. Price trends for commodities “in general” probably will converge with those of the S+P 500 and other key global stock marketplaces, although occasionally this relationship may display divergence.

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Home on the Range- Financial Battlegrounds (4-1-23)-1

MARKETPLACE RELATIONSHIPS: LIFE DURING WARTIME © Leo Haviland March 7, 2022

In Mario Vargas Llosa’s novel “The War of the End of the World” (Part III, chapter II), the Baron de Canabrava declares: “‘The times are out of joint…Even the most intelligent people are unable to make their way through the jungle we’re living in.’”

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CONCLUSION AND OVERVIEW

Russia’s invasion of Ukraine halted, but did not end, the major trend for rising yields in the United States Treasury marketplace which commenced in March 2020 and accelerated in early August 2021. Despite this “flight to quality” (safe haven) pause, the long run pattern for increasing UST rates eventually will resume. Substantial inflation in America and the OECD relative to recent interest rate levels as well as globally high government (and other) debt levels will propel UST rates upward. Previous essays pointed not only to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a long run rising yield environment is an international phenomenon.

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Convergence and divergence (lead/lag) patterns between marketplaces can change or transform, sometimes dramatically. Marketplace history does not necessarily repeat itself, either entirely or even partly. Marketplace history nevertheless provides guidance regarding the probabilities of future relationships.

“History on Stage: Marketplace Scenes” (8/9/17) and subsequent essays updating it (such as 3/9/21’s “Truth and Consequences: Rising American Interest Rates”, “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21), “American Inflation and Interest Rates: Painting Pictures” (5/4/21), and “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) emphasized: “Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span, and the arithmetical (basis point) change has not always been large.” The US Treasury marketplace has been an important standard for this analysis. The 10 year UST note is a key benchmark.

What about trends for the S+P 500 and other advanced nation stock battlegrounds? Quite some time prior to Russia’s 2/24/22 attack on Ukraine, rising interest rates and tumbling emerging equity marketplaces warned that the S+P 500 probably would fall significantly. “Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded that “the S+P 500 probably has established a notable top or soon will do so”. “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) stated: “The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.” “The S+P 500 price probably will decline further and establish new lows beneath the January 2022 trough. The development of a bear trend (decline of at least 20 percent) also is probable.”

Significantly, the S+P 500’s 1/4/22 high at 4819 and its initial 12.4 percent correction to 1/24/22’s 4223 preceded Russia’s late February 2022 invasion by several weeks. Thus that attack did not initiate significant S+P 500 weakness. In addition to the rising yields (increasing inflation; as well as lofty debt levels and outlook) and feeble emerging stock marketplaces, arguably high valuations from the historic perspective for the S+P 500 also existed prior to the Russia/Ukraine war. The strong United States dollar prior to the attack also pointed to stock marketplace weakness. The US dollar remains robust. The vicious bull spike in petroleum, wheat, and many other commodities since the invasion further undermines the S+P 500 and related stock domains. Looking forward, the S+P 500 probably will continue to retreat.

As “Paradise Lost” stated, the UST 10 year note yield probably will climb to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher summit. The Federal Reserve and other heroic central banking generals probably will not deploy substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.

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Marketplace Relationships- Life During Wartime (3-7-22)

JAPAN: FINANCIAL ARCHERY, SHOOTING ARROWS © Leo Haviland October 5, 2018

The famous military philosopher and analyst Carl von Clausewitz states in “On War” (Book Two, chapter 3; italics in original): “Rather than comparing it [war] to art we could more accurately compare it to commerce, which is also a conflict of human interests and activities; and it is still closer to politics, which in turn may be considered as a kind of commerce on a larger scale.”

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OVERVIEW AND CONCLUSION

In late 2012, the Japanese political leadership dramatically unveiled its three “arrows” of easy money, flexible fiscal policy, and structural reform to improve the country’s economic performance. In practice, those Japanese political authorities generally represent major financial (corporate; commercial) interests (“Japan, Inc.”). The Bank of Japan’s policies since late 2012, though nominally independent of political and economic power centers, in practice reflects the goals of Japan’s substantial entrenched economic groups and the political representatives and bureaucrats aligned with them.

Monetary policy of course is not the only factor affecting GDP, inflation, and other intertwined variables. Yet Japan’s ongoing government fiscal deficit, though somewhat helpful for promoting growth and inflation, is not the most noteworthy element in the country’s policy array since end-2012. Moreover, the general government debt burden remains massive and likely will remain so for many years. According to the International Monetary Fund, Japan’s general government gross debt as a percent of GDP was 236.4 percent in 2017 (contrast the G-7 average of 118.6pc that year) and forecast at 236.0pc for 2018 and 234.2pc in 2019, dipping only slightly to 229.6pc by 2023 (“Fiscal Monitor”, April 2018, Table A7; the October 2018 update probably will not change Japan’s government debt as a percent of GDP statistics substantially). And structural reform in Japan, which usually crawls forward slowly, has been unremarkable.

The extremely easy monetary policy arrow embraced by the accommodative Japanese central bank for almost six years is the country’s critical weapon. The central bank chief faithfully and repeatedly proclaims that sustained inflation of two percent is a praiseworthy goal (as essentially do the sermons preached by other leading central banks such as the Federal Reserve Board and the European Central Bank). The Bank of Japan’s ongoing tools to achieve its aims include sustained yield repression and massive quantitative easing (money printing). So far, the Bank of Japan, despite its determination, has not come close to achieving two percent inflation. The consumer price trend in recent months manifests merely minor progress on that front. And although Japan’s quarterly GDP for April-June 2018 may signal enhanced year-on-year economic performance, International Monetary Fund forecasts are not as sunny.

Yet what else has the Bank of Japan (as a representative and reflection of the country’s political and economic generals) really battled to achieve via its remarkably lax monetary strategy? A notion of improved and acceptable economic growth and frequent reference to an iconic two percent “price stability target” do not offer a complete story. Moreover, the enthusiastic declaration of assorted monetary policy plans and tactics does not directly reveal important aspects about the economic (financial; commercial; marketplace) landscape within which the interrelated GDP and inflation goals are targeted and such extraordinary easy money programs are designed and applied.

In practice, what are the intermediate connections (means; methods) to the achievement of the allegedly ultimate ends of satisfactory growth and sufficient inflation? One key approach of the Bank of Japan’s magnificent scheme relates to currency depreciation, the other to stock marketplace appreciation. Japan’s central bank sentinel quietly has aimed to achieve the related objectives of Yen weakness and Japanese stock marketplace strength.

In recent times, Japan deliberately has kept a relatively low profile in foreign exchange, trade, and tariff conflicts. Compare the furious racket nowadays, especially since the advent of the Trump presidency, around the United States and China (and also in regard to the European Union, Mexico/Canada/NAFTA).

Nevertheless, for several years, Japan has waged a trade war (engaged in fierce currency competition) without capturing much international political attention or media coverage. The Bank of Japan (and its political and economic allies) in recent years has fought vigorously to depreciate the Yen (especially on an effective exchange rate basis) and thereby to bolster Japan’s current account surplus. Japan’s overall economic growth relies significantly on its net export situation. The Yen’s substantial retreat and its subsequent stay at a relatively low level and the significant expansion in the country’s current account surplus are glorious triumphs.

Since late 2012, the Bank of Japan also has struggled ferociously to rally the Japanese stock marketplace (boost corporate profits). As of early autumn 2018, this guardian has achieved significant victories in this campaign as well.

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Japan- Financial Archery, Shooting Arrows (10-5-18)