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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CASH AND CAPITAL CACHES © Leo Haviland, March 6, 2012

Everyone knows that money shifts into, within, and between geographic regions and broad financial sectors (stocks, interest rates, foreign exchange, commodities, real estate) sometimes are substantial or even “dramatic”. Price movements and other statistics indicate this. However, seldom is it underlined how gigantic capital marketplaces are.

Would it matter much if American stocks weakened on a sustained basis around ten percent? Such an US equity decline is a noteworthy absolute sum and large from the GDP and net worth perspective as well. US stock marketplace capitalization at end 2010 was $17.3 trillion. Suppose one uses 2011 US GDP at around $15.1tr (Bureau of Economic Analysis; the 2010 level in the IMF table is $14.5tr). A ten percent equity dive equals about 11.5pc of GDP (1.73/15.1 trillion).

Take another view using Federal Reserve data. According to the Federal Reserve’s “Flow of Funds” (Z.1, Tables B.100.e and B.100; 12/8/11, next release 3/8/12) 2Q11’s equity shares for households (and nonprofit organizations) were about $19.2tr. A ten percent equity dive equals around 12.7pc of GDP (1.92/15.1). End February 2012 US stock valuations probably are roughly around that 2Q11 total. A ten pc slump in stocks (using US equities as the benchmark for all stock holdings by US households) of $1.92tr equals around 12.7pc of 2011 nominal GDP (1.92/15.1), or around 3.2 percent of 2Q11’s household net worth of just under $60 trillion (3Q11 $57.4tr is most recent Z.1 information). US end 3Q11 household net worth still remains beneath end 2007’s over $65.1tr.

With consumers around 70 percent of the US economy, the Fed’s assorted accommodative monetary policies during the ongoing worldwide economic crisis that emerged in 2007 have sought to boost (and sustain rallies in) equity prices.

However, what does the fairly strong TWD in 1Q09 versus its April 2008 trough alongside the absence of any significant increase in the percentage of worldwide US dollar holdings over that time span indicate? It strongly suggests that something more may have been going on in (“behind”) these official reserve patterns than the consequences of US dollar appreciation. A reasonable conjecture is that it reflects a determination by developing/emerging nations in general not to expand their exposure to the US dollar. Given the longer run trend of their declining US dollar claims, they even arguably are trying to reduce their US dollar claims regardless of dollar fluctuations.

Note the recent coincidence in time of a bottoming of yields in the “flight to quality” destination. Compare the 10 year government notes of the United States, Germany, and Japan. Recent UST 10 year note lows were 1.67pc on 9/23/11 and 1.79pc on 1/31/12. The Japanese JGB 10 year low was 1/16/12 at .94pc (compare JGB bottoms at .83pc 10/7/10, .44pc 6/11/03, and .72pc 10/2/98). The German 10 year government note valley at 1.64pc on 9/23/11 was the same day as the UST note one. It made another trough at 1.74pc on 1/13/12 (about the time of Japan’s mid January 2012 low), as well as one at end January (1.78pc on 1/31/12; compare US 10 year).

Suppose there is some inflation, and that low nominal yields result in very low real (or even negative) yields. In the absence of another round of flight to quality concerns, how eager will official and private players be to own (or at least to be substantial net purchasers going forward) of government debt of these nations?

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Cash and Capital Caches (3-6-12)

UNITED KINGDOM- GETTING POUNDED © Leo Haviland, January 10, 2012

As the fifth largest economy in the world and as a major center of international finance, the United Kingdom is not alone. It remains entwined with the long-running worldwide economic crisis. Although challenges to the British economy intertwine with those confronting the Eurozone, they do not duplicate these. England’s financial problems are not as severe as Greece’s, but they are not minor; England’s present situation and near term prospects do not look as strong as Germany’s. The British Pound will continue to depreciate over the next few months. This decline parallels that of the Euro FX. Bearish trends in the Pound, like those in the Euro currency, portend or confirm weakness in worldwide equities and commodities.

The Euro area currently is almost 16.4pc of the broad real trade-weighted dollar (“TWD”). It was 18.6pc in 2001. The Pound is a comparatively modest part of the TWD. The United Kingdom in 2012 (and 2011) is about 3.5 percent of the broad real TWD (compare 2001’s 5.6pc). Currency trading generals nevertheless closely monitor the cross rate between the US Dollar and the British Pound.

The Pound arguably has been in a major bear pattern for some time. The crucial plateau during the worldwide financial crisis period was attained 11/9/07 around 2.116. Although marketplace history is not marketplace destiny, keep in mind the popular chant, “weak US dollar equals strong US stocks, strong US dollar equals weak US stocks”. This British Pound top versus the dollar occurred about a month after the S+P 500’s major high on 10/11/07 at 1576. Important resistance for Sterling is about 1.665 (see the 4/28/11 high, adjacent in time to the S+P 500 pinnacle at 1371 on 5/2/11 and the Euro FX’s 1.494 5/4/11 summit versus the dollar). Also note around 1.700 (see the 8/5/09 level; compare the later timing of the Euro FX high at 11/25/09 at 1.514). The 10/28/11 top was about 1.615.

The Pound versus dollar cross rate settled around 1.543 at the end of last week, close to the 1.538 low of 10/6/11. The October 2011 level is beneath 1.563 (a fifty percent rally from the all-time low close on 2/26/85). The 1.500 level (about a ten percent drop from the 4/28/11 top) probably will be tested and broken. Though it is distant from today’s price, the key bottom around 1.430 (see the 5/20/10 low) eventually will be neared and perhaps challenged. Noteworthy additional Pound support is around 1.350 to 1.380. The 1/23/09 intraday low was about 1.350, the 3/9/09 close about 1.376 (Euro FX final cross rate low versus the greenback was 3/4/09 at 1.246). Recall the major low in the S+P 500 on 3/6/09 at 667. A 20pc fall from 1.665 is 1.332.

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United Kingdom- Getting Pounded (1-10-12)

EUROZONE- BREAKING UP IS HARD TO DO © Leo Haviland, January 3, 2012

The decline in the Euro FX does more than reflect Europe’s sovereign debt and banking crisis. Europe does not stand or act alone. Euro currency weakness underlines the continuing epic worldwide economic disaster that emerged in 2007. The sustained slump in the Euro FX since spring 2011 warns that the worldwide economic recovery that began around early 2009 is slowing. Some headway has been made in containing Eurozone (and other European) problems, but that progress has been insufficient and it probably will remain so for at least several more months. The Euro FX will depreciate further from current levels.

First, despite the major sovereign debt and banking problems, the Eurozone’s political and economic leadership has the political desire and (ultimately) sufficient economic power to preserve the Eurozone. This means keeping even members such as Greece within it. The problems of the so-called peripheral nations in key respects have become those of the entire fraternity. The Eurozone may rely on outside economic help from the International Monetary Fund or other countries to help pay for the repairs. However, the region as a whole will, “if push comes to shove”, resolve the thorny difficulties itself. And even if Greece did exit the Eurozone, remaining Eurozone members probably would band together to keep the Eurozone intact.

For some time, the so-called fixes may involve pushing the problem (dangers) off to a more distant future. The buying-time strategies (hoping that economic recovery eventually will enable a genuine escape) of course will have some costs. For example, picture inflation risks, slower growth, and some suffering by creditors.

The substantial role of the Euro FX in official reserves underlines the importance of the Eurozone and its Euro FX in the world economic order. Most of the world surely does not want the Euro FX to disappear entirely, or to suffer a massive depreciation (as opposed to a further small or even a modest depreciation). Thus at some point (“if really necessary”), the world outside of Europe would ultimately bail out Europe.

Consequently the declines in the Euro FX over the past several months confirm worldwide economic sluggishness (and slumps in stock marketplaces and commodities). So further falls in the Euro FX may reflect- or help lead to- even more declines in equity and commodity playgrounds. That additional Euro FX debasement may even reflect or accelerate an economic downturn (not just stagnation) in some regions, and not just European territories. Thus Euro FX currency depreciation alone will not solve the Eurozone’s (or overall European) problems.

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Eurozone- Breaking Up Is Hard To Do (1-3-12)

China: Currencies, Commodities, and US Treasuries, November 22, 2010

Since America continues to issue more and more debt, sustained patterns of reduced net Chinese buying (and of course net selling) of US Treasury securities is a bearish factor for US government note and bond prices. And quite unsettling for those worthy financial watchdogs who yearn to keep US interest rate levels low! What if other nations behave the same as China? In any event, perhaps other foreign sources or Americans will replace Chinese demand.

But perhaps the Federal Reserve will be the key incremental American buyer of such US debt securities via its beloved quantitative easing (monetary printing) extravaganza. The Fed clearly is willing to gobble up US  government notes and bonds. And who knows, the Fed may even renew its taste for mortgage-backed securities.

FOLLOW THE LINK BELOW to download this market essay as a PDF file.

China- Currencies, Commodities, and US Treasuries