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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CRUMBLING BRICS: A CURRENCY PERSPECTIVE © Leo Haviland February 11, 2015

Assorted marketplace wizards around the globe for many years have praised past and predicted future stellar (or at least rather robust) growth for key emerging and developing nations. These countries not only display cultural diversity. They also manifest a significant range in economic development, arrangements, focus, and strengths. Though many embrace democracy to some extent, their political characteristics and stability are far from uniform. Despite this variety, the popular BRIC acronym, standing for Brazil, Russia, India, and China (now including South Africa), coined by Goldman Sachs nearly 15 years ago, acts as a rough shorthand summary for much if not all of the emerging/developing nation group.

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Marketplace history of course need not entirely or even substantially repeat itself. However, the recent appreciation of the United States broad real trade-weighted dollar (“TWD”) warns of erosion in global economic output rates.

The TWD established a major bottom at 84.2 in April 2008 (Federal Reserve Board, H.10; monthly average, March 1973=100). After climbing to 86.7 in August 2008 and 88.8 in September 2008, it bounded to over 93.8 in October 2008. Recall the noteworthy acceleration of the worldwide financial crisis after mid-September/October 2008. Its March 2009 pinnacle around 96.9 represented a 15.1 percent bull advance relative to April 2008.

After deteriorating to its major trough around 80.5 in July 2011, the TWD meandered sideways within a narrow range for about the next three years. Its high over that span was June 2012’s 86.3. Yet in recent months, as it did beginning in April 2008, the broad real trade-weighted dollar has marched steadily higher. A five percent bull move in the TWD from its July 2011 trough at 80.5 equals about 84.5, a ten percent climb about 88.6. A fifteen pc rally gives 92.6, a 20pc leap about 96.6.

September 2014’s 86.6 broke through June 2012’s barrier, with December 2014’s attaining 90.5. January 2015’s 92.4 rose 2.1 percent over December 2014. The TWD’s 14.8 percent ascent from the July 2011 depth rivals its April 2008 to March 2009 move. Significantly, its January 2015 level neighbors that of October 2008 and is not too distant from March 2009’s 96.9 elevation.

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What do FX movements (trade-weighted, effective exchange rates) within the BRICS universe reveal nowadays? Their recent travels differ to some extent from the 2007-09 crisis adventures. However, as during the darker days of the worldwide economic disaster, the current currency voyages of Brazil, Russia, India, and South Africa generally display depreciation. As in the earlier period, however, China’s currency has rallied recently on an effective exchange rate basis. Looking forward, these currency patterns alongside TWD strength do not merely confirm the TWD bull move, but also emphasize the likelihood of further slowing of global real GDP.

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Crumbling BRICS- a Currency Perspective (2-11-15)

CHINA: ITS GREAT GROWTH STORY GROWS OLD © Leo Haviland June 23, 2014

Much of the world currently displays nearly unblinking faith in the expertise of key central bank guardians such as the Federal Reserve Board, European Central Bank, Bank of Japan, and Bank of England. These illuminated central bankers supposedly will continue to play substantial and successful roles in engineering further economic growth via easy money schemes such as interest rate yield repression, quantitative easing (even if money printing ends in America or elsewhere, the securities buying operation may not be unwound quickly, if at all), and forward guidance wordplay. The Fed wizard in particular also surely has an almost pain-free and coherent exit strategy from its longstanding highly accommodative programs, right?

Ongoing trust in such marvelous central bank talent finds a counterpart in widespread belief that the Chinese economic growth miracle will continue for the long run, or at least the foreseeable future. Significant government deficit spending and relaxed credit policies indeed sparked much Chinese growth in recent years. However, Chinese real GDP growth probably has slowed more than many believe. Assorted intertwined variables hint at this reduced expansion and suggest that the slowdown in its growth rate probably will continue over the medium term. Given China’s crucial role in the interdependent global economy, this relative weakness in its GDP growth should have ominous implications for growth elsewhere.

Admittedly, China’s official and private sector debt scene is murky. Yet the edging down of its real GDP growth is occurring in an environment of its increasingly troubling debt and credit situation. All else equal, efforts to solve or at least mitigate debt and credit problems probably will result in greater than expected (desired) cuts in the country’s economic growth rate.

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China- Its Great Growth Story Grows Old (6-23-14)
Charts- China (6-23-14, for essay China- Its Great Growth Story Grows Old)

CURRENCIES: THE WAITING GAME © Leo Haviland November 4, 2013

Many academic, financial, and political circles have long been married to “free market” ideologies. Nevertheless, the manipulation, maneuvering, or managing of a nation’s currency level and trends often occupies the deliberations and behavior of that territory’s central bankers, finance ministers, and many politicians. As in their efforts to control or at least influence interest rates (or stock marketplace trends), sometimes their reasoning, actions, and targets are explicit, often they are implicit.

Currency considerations are not islands apart from interest rate, stock, real estate, commodity and other marketplaces. So policy makers enamored of free market propaganda do not necessarily restrict their efforts to affect economic results to their home currency (or that currency’s cross rate relationship to one or more key trading partners). For example, picture the Federal Reserve Board’s longstanding yield repression policy, which has pinned the Federal Funds rate close to the ground.

Although the majority of currency observers and strategists focus their attention on crucial cross rates such as the US dollar against the Euro FX, broad real trade-weighted (effective) exchange rates influence important national policymakers. Analysis of these trade-weighted measures can unveil signs as to important (even if implicit) levels watched by central bank, finance ministry, and political guardians. Such trade-weighted foreign exchange measures consequently provide instruction as to potential strategy responses or changes by these often-vigilant sentinels. National and international policymakers of course are not the only ones looking and waiting around in marketplace games; Wall Street and Main Street likewise wait, watch, and act. Because these broad foreign exchange indicators (and the underlying cross rates) interrelate with perspectives on and decisions relating to current and potential elevations of and movements in numerous interest rate, stock, and other marketplaces, they offer insight into past, present, and future levels and trends of these arenas.

Dollar weakness does not necessarily (inevitably; forever) encourage or reflect a strong American economy or continue to help propelling US equities upward. Suppose a significant run against the “dollar in general” (TWD) occurs, whether via Chinese renminbi, Japanese Yen, or Euro FX (or other currency) strength against the dollar. A TWD dollar dive (especially under the July 2011 low) could force the Fed to significantly reduce or even abandon its interest rate repression and quantitative easing (money printing) policies. Consequently the effort by many American leaders and businesses promoting further weakness in the dollar relative to the renminbi may have some enthralling consequences not only for the dollar in general, but also for American (and other international) interest rate and equity marketplaces.

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Currencies- the Waiting Game (11-4-13)

ANOTHER MARKETPLACE TAPERING TALE: THE CHINA STORY © Leo Haviland September 9, 2013

The China economic miracle of recent years has astounded global gurus. Economic policy makers and watchers inside and outside of China forecast its likely continuation. In the intertwined global economy, such sunny predictions about China also aim at boosting confidence regarding international economic growth prospects. Admittedly some Chinese indicators show display reasons for such optimism. And the Financial Times recently remarked “almost everyone agrees that there is little sign that the global economic crisis is about to have a Chinese third act to follow the US and eurozone, which starred in Acts One and Two.” (7/24/13, p6).

Unfortunately, the so-called “real”, “underlying”, and “overall” China economic scene nevertheless is relatively opaque and challenging to understand. Telling any story about the nation’s economy, whether bullish or bearish, requires caution, and audiences should listen to these viewpoints with some skepticism. Many Chinese statistical indicators arguably are difficult to assemble comprehensively as well as to interpret (whether by the Chinese government or outside experts). How accurate is official Chinese economic information? Political considerations perhaps influence the substance of some Chinese data reports.

Moreover, several other signs from or related to China suggest that China’s real GDP growth has tapered faster than many believe. Besides, it may taper a fair amount beneath generally predicted levels of over 7.5 percent. Like the United States and many other nations since the emergence of the worldwide economic disaster, China embarked upon and sustained highly accommodative monetary campaigns and huge deficit spending adventures. Might GDP expansion diminish if these policies (and related credit creation and leverage) are slowed or reversed? Even though China’s overall government debt as a percentage of GDP is less than that of the United States, much of Europe, and Japan, why should China entirely escape the debt challenges and related unpleasant consequences endured by these nations? In contrast to most conventional wisdom, China nowadays probably faces some significant systemic financial (economic) problems.

China’s embrace of debt and credit in recent years is a widespread cultural phenomenon.

If things were going wonderfully within the Chinese economic (and political) system, why would the nation’s leaders underscore territorial quarrels with other nations? Recall the recent squabbles with Japan over tiny islands (Daioyu) controlled by Japan.

What’s the bottom line? China apparently has generated a fair amount of its economic growth from easy money and massive deficit spending (credit, debt, and leverage). It consequently faces a significant challenge of maintaining its high GDP growth rates while tapering accommodative monetary and fiscal deficit policies. In addition, China confronts a modest yet apparently growing systemic problem (risk) tied into these accommodative monetary and fiscal programs and the related lending, leverage, and bad debt issues. Perhaps Chinese control over its economy (especially given that economy’s close connection with the global one) is much less than many claim. Looking forward, Chinese growth probably will taper more than most believe. In any event, one should not have blind faith in the continuation (repetition) of the recent extraordinary Chinese growth story.

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Another Marketplace Tapering Tale- the China Story (9-9-13)