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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THE NEW WORLD?! US ELECTION AFTERMATH © Leo Haviland November 15, 2016

In “The New World”, the band X sings:
“Honest to goodness
The bars weren’t open this morning
They must have been voting for the president of something…
It was better before
Before they voted for what’s-his-name
This was supposed to be the new world”.

“Don’t stop thinking about tomorrow
Don’t stop, it’ll soon be here
It’ll be, better than before
Yesterday’s gone, yesterday’s gone”. Fleetwood Mac, “Don’t Stop”

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OVERVIEW AND CONCLUSION

What marketplace consequences will ensue from Donald Trump’s surprising “populist” victory? Much obviously depends on how successfully the new President implements his campaign agenda. Some aspects of his plans in principle and practice require clarification. And he might elect to change his current political views and aims. However, at present one should assume this leader generally will seek to accomplish the broad outlines of his recent messages, particularly in the economic arena.

In trade and several other matters, the President retains substantial freedom relative to Congress. However, even though the Republicans control the Senate and House of Representatives, passage of the new President’s proposed legislation is not guaranteed. The Republican Party has significant divisions. Senate Democrats, as they control well over 40 seats, likely can block many executive branch proposals.

Moreover, in a globalized and multipolar world, America’s political and economic fields, even after dramatic change such as that represented by Trump’s triumph, of course do not move independently of other realms. In addition, numerous assorted and entangled variables and trends, not just those closely linked to the 2016 election and American political (economic) scene, influence financial marketplaces in the United States and elsewhere. Besides, benchmark interest rate, currency, stock, and commodity benchmarks themselves intertwine. The economic game, like the political one, moves as it plays.

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With such complexities and caveats in mind, let’s concentrate on three key parts of the American and global financial marketplace pictures, the United States Treasury 10 year note, the broad real trade-weighted US dollar (“TWD”), and the S+P 500. The long run yield trend for the UST probably is up. In the near term, the dollar will challenge and perhaps break modestly above its January 2016 high. However, as time passes and the new President and his friends fight to implement his policies, the trade-weighted dollar probably will embark upon a notable bear trend. Though it is a very difficult call, the S+P 500 probably will not surpass 8/15/16’s record high at 2194 by more than five percent.

To some extent, and although not exclusively, the patterns of rising interest rates and the (eventually) weaker dollar probably will derive from a growing lack of domestic and international confidence in American political and economic leadership and policies. America’s ongoing severe political and other cultural divisions likely will interrelate with this eroding trust. The passing and outcome of America’s Election Day 11/8/16 did not bury the nation’s substantial conflicts. Widespread support for Trump and Sanders showed that American “populist” ideologies, whether within so-called right wing/conservative congregations or left wing/liberal fraternities, likely will not soon surrender their attractiveness or fervor. But the “establishment” (elites) have not fled the battleground or abandoned their doctrines.

UPCOMING MARKETPLACE ADVENTURES

“Fasten your seatbelts, it’s going to be a bumpy night!” advises Margo Channing in the movie “All About Eve” (Joseph Mankiewicz, director)

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The aftermath of Trump’s victory saw the UST 10 year note yield jump sharply, breaking above 3/16/16’s 2.00 percent. Yet recall that UST yields had been climbing higher several months prior to his win; recall 7/6/16’s 1.32 percent bottom. US inflation expectations also have ascended since early summer. The St. Louis Fed’s measure of expected inflation (on average) for the five year period that begins five years from today has risen from 1.41 percent (7/5/16) to over two pc recently (11/10/16’s 2.06pc).

Why should US Treasury 10 year note yields keep rising from current levels around 2.25 percent?

First, America’s debt was rather lofty and likely to trend higher over the next decade (and probably thereafter) even before Trump’s win. See the Congressional Budget Office’s “An Update to the Budget and Economic Outlook: 2016 to 2026” (8/23/16; this study did not include Trump’s plans). Second, and very importantly, most experts believe Trump’s (Republican) tax and spending (think of infrastructure projects to help make America great again) proposals, if enacted, will result in even more massive budgets deficits. Gaping budget holes, especially those lasting for several years, represent a demand for cash to fill them. Who will do so, and at what price? For many months (a long time before the November 2016 election), foreign official institutions have been notable and consistent net sellers of UST notes and bonds (next Treasury International System/TIC release is 11/16/16). See the essay “Running for Cover: Foreign Official Holdings of US Treasury Securities” (10/13/16).

Moreover, the Federal Reserve Board, which has for several years repressed the Federal Funds rate (and thus the government yield curve) at artificially low levels, again has hinted it will gradually normalize rates. The next Fed meeting is 12/13-14/16. Admittedly, inflation benchmarks such as the consumer price index and personal consumption expenditures have not marched above the Fed’s beloved two percent target. The Fed nevertheless nowadays likely will be more inclined to push rates higher. Not only is the election past, but also the likelihood of monumental US fiscal stimulus (huge budget deficits) encourages rate hikes. In addition, headline unemployment is around the Fed’s goal. Asset prices such as stocks (S+P 500) and real estate have soared from their international economic disaster depths.

In his political apprenticeship on the campaign trails, Trump criticized Fed rate suppression. Perhaps he should have been more careful regarding the higher policy rates for which he implicitly asked. Since Trump and others criticized the Fed for keeping rates on the ground floor, they hardly can complain (at least for a while) about upward Federal Funds rate moves.

In addition, keep in mind that the Fed for several years engaged in mammoth money printing (quantitative easing). Although the Fed ceased QE, it has not reversed its money printing actions. Thus though some inflation measures (such as the CPI) are low, even before the election 2016 outcome, there arguably was potential for eventual inflation ascents as a consequence of the Fed’s ardent QE monetary stimulus. Assuming the new US political regime enacts hefty individual (and corporate) tax cuts and embarks on its infrastructure schemes, Trump’s festive tax and spending party will intertwine with this earlier Fed money printing extravaganza. Also, the European Central Bank and Bank of Japan continue to print money.

Signs of US wage inflation have appeared. There remains some pressure to boost the minimum wage. Would a big infrastructure plan, if it occurs a time of low headline unemployment, lift labor prices? Also, suppose the US deports a significant number of illegal (undocumented foreign) workers; that will tend to push wages and thus interest rates higher, though gurus can quarrel as to how much.

Suppose inflation marches higher and sustains levels around the Fed’s two percent weathervane. To (finally) give savers (creditors) a decent return relative to inflation, UST rates obviously should be above that goal. Focus on the UST 10 year. A one pc premium (100 basis points) makes the UST 10 year yield 3.00pc, well above current levels. The 6/11/15 top was 2.50pc. Above that stands 1/2/14’s 3.05pc peak. A two pc premium makes the UST 4.00pc. Obviously, no guarantee exists that the inflation level, if it advances, will halt at two percent (or that the Fed immediately will fight vigorously to contain inflation once it touches two pc).

Suppose US government (and many other related) interest rates rise from low levels. Will current debt holders start to run for the exits? Supply from those sellers of “old” debt may supplement the US government’s effort to sell “new” securities to finance tax cuts and spending programs.

Finally, suppose America imposes tariffs to ensure “fair” trade. Viewed alone, this perhaps will tend to increase the price of goods and services sold in the US. Of course other nations may respond. Some may cut prices to retain access to the American marketplace. Or, a genuine trade war could help weaken world (and US) GDP and keep prices and rates low.

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The New World- US Election Aftermath (11-15-16)

US ELECTION 2016: ROLLING AND TUMBLING © Leo Haviland November 6, 2016

Muddy Waters’ blues song “Rollin’ and Tumblin’” declares:
“Well, I rolled and I tumbled, cried the whole night long
Well, I woke up this mornin’, didn’t know right from wrong”

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OVERVIEW

Who will or should be the next American President? Will the Democrat camp, the Republican crew, or neither party, capture both the Senate and the House of Representatives? In the aftermath of 2016’s fevered campaign, will the apparently defeated Presidential candidate seriously complain of rigging or request recounts?

In any case, America’s Election Day 11/8/16 results probably will not repair, remedy, or resolve the nation’s severe political and other cultural divisions. In contrast to such ideological and practical splits, marketplace preachers generally agree the Presidential (especially) and Senate/House voting outcomes probably will have important price consequences for American (and related) stock and interest rate arenas as well as the United States dollar and many commodities. Yet financial wizards (as do politicians) differ in their perspectives and gospels. Thus assorted monetary apostles and their devoted partisans nevertheless heatedly debate what the near term and long run financial and other economic repercussions of US Election 2016 will be for America and around the globe.

Despite the uncertainty of US 11/8/16 political outcomes and the variety of competing viewpoints and rhetoric regarding related economic (commercial, financial) implications, why not offer an opinion regarding important price levels to watch in several key marketplaces? That price framework offers subjective guidance for monitoring, assessing, and dealing with intertwined political and economic results, trends, and risks.

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The record high for the S+P 500 is 8/15/16’s 2194 (a 20pc rally from 2/11/16’s bottom at 1810 is 2172; 1/20/16 low 1812). A five percent rally over this is about 2304. The important 5/20/15 high was 2135. A five percent fall from 8/15/16’s plateau is 2084 (note 11/4/16’s close at 2085); 2082 was 12/19/15’s notable drop-off point. A 10pc retreat from the August 2016 summit gives 1975 (1992 was the 6/27/16 low; the UK held its Brexit referendum on 6/23/16), and a 20pc dive 1755. Note the price gap around 2040 (6/28/16 to 6/29/16). Support also may emerge around 1870 (8/24/15 low 1867; 9/29/15 trough 1872).

The shocking Brexit “Leave” result did not merely reflect populist gains. The S+P 500 responded with a sharp (although brief) 5.7pc breakdown (6/23/16 at 2113 to 6/27/16’s low).

PARTING SHOTS

“Here once the embattled farmers stood,
And fired the shot heard round the world.” Ralph Waldo Emerson’s “Concord Hymn” (1837), referring to the first shot of the American Revolutionary War

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Though America’s official Thanksgiving Day arrives 11/24/16, many Americans and others will be thankful with the departure of Election Day 11/8/16.

Suppose Clinton wins the Presidency. Her campaign proposals include increasing taxation on the top-earning “haves” and a more burdensome capital gains tax regime. Suppose Trump triumphs. Most experts believe his tax and spending proposals, if enacted, will result in massive budget deficits. And whoever prevails, a substantial potential for ongoing sectarian conflict and legislative gridlock remains.

Most cultural observers would characterize Clinton’s victory as one for the “establishment” congregation. Some would deem a Trump win revolutionary (or reactionary). In any case, the widespread support for Trump and Sanders indicates that American “populist” viewpoints, whether within the so-called right wing/conservative domain or the left wing/liberal realm, probably will not lose much of their attractiveness or fervor anytime soon.

Besides, significant populist movements (whether rightist, leftist, or some other label) exist in Europe and elsewhere. Therefore populist enthusiasm probably will continue to cause some nervous days and sleepless nights for much of the international economic and political establishment (elite). Political and economic divisions, turmoil, and fears will continue to produce occasional dramas within entangled stock, interest rate, currency, and commodity (and real estate) marketplaces.

Suppose persuasive populist parties campaigning on a platform of “Change” win overall national power (or at least substantial practical influence) in one or more key countries. To what extent would such success encourage or confirm a dramatic shift in long run patterns for many marketplaces?

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US Election 2016- Rolling and Tumbling (11-6-16)

US ELECTION YEAR POLITICS AND FEDERAL RESERVE RATE MOVES (c) Leo Haviland May 22, 2016

The Fed cherishes the institutional self-perception of its independence from US political dramas. It therefore likewise does not want to be accused by its economic constituency (the so-called general public, and particularly important politicians) of playing favorites or otherwise being entangled within domestic politics.

My intuition is that in US Presidential election years, all else equal, the Fed generally prefers to delay noteworthy policy moves (Federal Funds rate changes and so forth) as Election Day nears. The window prior to the vote during which this guardian probably will not engage in important policy action is narrower than six months; around two or three months is my guess. In September (picture Labor Day)/October/very early November, the election battle is in full swing and thus probably too close. May/June are essentially pre-convention, so the Fed will seem less prejudiced (unfair, disruptive) if it acted then. July/August “as a rule” are distant enough so that the Fed would not be troubled about acting within them.

A likely qualifying consideration: when the US electorate is very divided and political tempers high, as nowadays, the Fed will be particularly wary about acting close to the election.

In 2016, the Republican convention is July 18-21, the Democratic assembly July 25-28. America votes 11/8/16.

In the current landscape (assume no emerging US economic weakness and no widespread fears of a global financial meltdown), these considerations and political dates make a Fed Funds increase in 2016 more likely than not in June (6/14-15 meeting) or July (7/26-27).

A rate hike is unlikely in the Fed’s September 20-21 meeting. Though the first formal presidential debate occurs after this (on 9/26/16), 9/20-21 is well after the conventions and only six weeks before Election Day. A rate boost is very unlikely in the Fed’s November 1-2 gathering. The December post-election Fed meeting (12/13-14/16) is a likely date, all else equal, for a Fed policy action.

Here’s a chronicle of Federal Funds rate shifts. It does not clearly unveil a bias against rate changes as the election approaches. The 2008 crisis situation of rate-cutting was exceptional.

https://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

However, despite this murky history, the current Fed regime probably will do its best not to raise rates in the two or three months before the 2016 vote. This particular Fed crew is an especially cautious (and dovish) group. It repeatedly has underlined it will move only very gradually to normalize policy. The heated US political universe this year, which very likely will remain so, probably will encourage their reluctance to raise rates as the election approaches.

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US Election Year Politics and Federal Reserve Rate Moves (5-22-16)

AMERICA: A HOUSE DIVIDED © Leo Haviland December 7, 2015

Before Abraham Lincoln became President and the outbreak of the American Civil War, he stressed regarding the slavery issue: “A house divided against itself cannot stand.” (Speech, “A House Divided”; Springfield, Illinois, June 16, 1858). He added: “I do not expect the house to fall—but I do expect it will cease to be divided.” Lincoln’s “house divided” metaphor traces back to the Bible. Jesus warned (Matthew 12:25; see also Mark 3:24-25): “Every kingdom divided against itself is brought to desolation; and every city or house divided against itself shall not stand.”

CONCLUSION AND OVERVIEW

From colonial times to the present, America always has had political divisions. History reveals that such differences- whether based on political ideology, economic viewpoints and interests, religious or other social opinions, “human nature”, overseas events, or other phenomena- can vary in substance and intensity. Although sharing of the American Dream culture helps to unite Americans, diverse visions regarding the Dream’s content exist, evolve, and are debated. Political wars, battles, fights, feuds, quarrels, squabbles, and disagreements never disappear entirely even though that rhetoric can differ in quantity, severity, scope, and quality.

Doomsday or other terribly bleak scenarios have appeared within American political discussions. However, nowadays “civilization as we know it” is not ending (even if it arguably has deteriorated), economic growth continues (though often fitfully), and so-called “core values” expressed by the American Dream remain (in various fashions) shared. America nowadays obviously is not as divided as it was during its long and bloody Civil War. The American scene did not banish physical violence as part of the process of resolving notable national or regional disagreements. Recall wars with Indians, labor (union) fights, and the civil rights movement. Yet significant internal national conflicts, especially after the Second World War, increasingly have been resolved within a comparatively peaceful political process, including the passage and interpretation of laws.

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However, a brief survey of the United States political realm from the national perspective nowadays suggests that America’s political house over the past several years probably has become more divided than usual. It probably will remain so for quite some time, and at least through the 2016 election campaign.

Political fights often can express (reflect) economic phenomena, including diverging doctrines and competing practical interests. What does the recent picture display? Political battles and resultant significant legislative gridlock within the American political realm has coincided with sluggish real GDP growth, weak average household income, an elevated poverty level, and increasing economic inequality.

Is increasing political conflict confined to the American domain? Political (as well as economic, social, and religious) divisions of course exist around the globe. Reasons for fights over power within the United States are not necessarily the same as those inspiring political conflicts elsewhere. And cultural analysis must beware of overgeneralization and oversimplification. The world as a whole is not completely falling to pieces. Yet it nevertheless seems that political hostilities within and between many nations (and between groups with different views and aims) around the globe, as in the US, have increased in the past few years. This trend, especially if it worsens, arguably endangers international (and American) economic expansion. Severe and heated political divisions not only often reflect economic problems, but also can create or magnify economic (and political) risks. World history (for example, after the First World War) reveals that substantial and widespread economic distress and fears can greatly assist the rise of rather extreme political (economic) views, whether far left, far right, ultranationalist, fringe, and so forth.

In recent years, in the United States and many other advanced nations, insufficient economic output, political divisions, or both increasingly have encouraged faith in and reliance on central banks to spark and sustain economic growth.

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America- a House Divided (12-7-15)