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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In recent years, there’s been a close linkage between trends in the S+P 500, commodities “in general”, and the United States dollar. Recent weakness in commodity currencies versus the US dollar coincides with and thus warns of continued declines in commodity benchmarks such as the broad Goldman Sachs Commodity Index and key stock indices such as the S+P 500. The worldwide economic crisis that erupted in 2007 has not been substantially solved.
The price and time trends of the commodity currencies from the US dollar cross rate perspective intertwine closely with key moves in stock and commodity benchmarks. Viewing them as a group, the five currencies soared higher against the US dollar from late 2008/early 2009 for over two years, until spring 2011/July 2011. Commodities in general and the S+P 500 made key bottoms in winter 2009 around the time of those in commodity currencies. The S+P 500 and the broad S+P Goldman Sachs Commodity Index (GSCI) then advanced dramatically for over two years.
In 2011, double tops in the commodity currencies (late April/early May; late July) link closely with the equity and commodity summits. The drops from late July 2011 are noteworthy because the S+P 500 subsequently fell decisively under the summer 2008 1265/1313 range (the financial crisis accelerated from around that 2008 time) and beneath the 4/26/10 top at 1220.
Many observers have faith that a substantial QE3 action will rally the S+P 500 (and commodities). Won’t history repeat itself? However, maybe history will refuse to do so, and stocks will climb very little before resuming their decline. Money printing is not a genuine repair policy for real economic problems. Despite the fearful Fed’s determination to maintain an extremely low Federal Funds rate, a renewed money printing enterprise also eventually may inspire interest rate jumps in US debt playgrounds.
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Commodity Currencies and Economic Cracks (9-12-11)
The level and trend of the Conference Board’s Consumer Confidence Index alongside this nosedive in the S+P 500 indicates that the US economy and the S+P 500 probably will slump further over the next several months. If so, then the worldwide economy will slow alongside America’s, as will many other equity arenas. Given the close links between the S+P 500 and overall commodity marketplace trends in recent years, commodity players should monitor the Consumer Confidence Index.
After the first quarter of 2009, both the S+P 500 and the Conference Board’s Consumer Confidence Index (“CCI”) rose sharply. The S+P 500’s race to its 5/2/11 peak at 1371 more than doubled its 3/6/09 low at 667. At this 5/2/11 altitude, it was about 87 percent of its 10/11/07 major high, and just 4.8pc beneath its final pre-crisis top at 1440 on 5/19/08.
The CCI’s February 2011 high at 72.0 indeed represents a steep ascent from its February 2009 25.3 valley. Yet it nevertheless fell well short of the 111.9 July 2007 top. Moreover, this winter 2011 CCI elevation was only modestly above the 61.4 level of March 2003- when the S+P 500 achieved a major low at 789 (3/12/03) miles underneath 2011’s various S+P 500 heights. In addition, since February 2011- when the S+P 500 made an initial top at 1344 on 2/18/11, the CCI has ebbed lower. It fell under 60 in June (57.6) and July (59.2) and tumbled to 44.5 in August.
However, given the sharp fall in the S+P 500 from its February, May, and July 2011 highs (8/9/11 low at 1101 is almost a twenty percent drop from 1371; 9/2/11 close about 1173), the S+P 500 and CCI now are confirming each other in a bearish path.
Note the S+P 500 plateau on 3/24/00 at 1553 was not far from the October 2007 summit (Dow Jones Industrial Average high 1/14/00 around 11,910). In contrast, the February 2011 Confidence Index level lurks far beneath (only 50 percent of) the 144.7 achieved in January 2000. This underscores the current weakness of consumer net worth and the related mournful consumer attitude.
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Consumer Confidence and US Stocks (9-6-11)
Yet despite these economic rescue and repair programs, the continued substantial overall weakness in the US real estate marketplace reflects and warns of trouble. In particular, what do the housing sector and its consequences for the consumer balance sheet suggest? One should view real estate in the context of consumer confidence. The foundation for and structure of the recovery fabricated by the homespun policies of the Fed and the political herd is fragile. Although progress has been made, the shattering damage of the international economic disaster that commenced in 2007 has not been fixed. Though the worldwide economic recovery that emerged in spring 2009 is not entirely a house of cards, it’s also not entirely built on solid ground.
Nominal GDP growth is better than none at all, right? All else equal, money printing does not over time breed permanent real GDP growth. Also, deficit spending borrows from the future to spend in the present; it may boost current output, but at the end of the day, this factor primarily involves a shift of money between players and across time. All else equal, even if a slump in the broad real US trade weighted dollar benefits the US economy, that tends to undermine those of many of its trading partners. Holding policy interest rates such as Fed Funds low does not preclude higher yields later. Don’t those substantially in debt or suffering injury to their net worth often endorse easy money policies? Despite optimism indicated by rosy prices in the S+P 500 and lofty corporate profits, US real economic growth probably will be mediocre looking forward from now. What happens to American real estate still matters a great deal for the global economy.
Given the still-weak home and commercial real estate marketplaces, the net worth of many banking institutions probably is vulnerable to marking-to-market of existing real estate loan portfolios. Renewed economic weakness of course would worsen that problem. In any event, banks nervous about their capital strength will not hurry to significantly expand their overall lending.
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American Real Estate (The Money Jungle, Part Two)
Many intertwined factors of course influence economic and stock marketplace levels and trends. Both Wall Street and Main Street know United States consumer spending greatly affects United States economic growth and significantly influences that elsewhere. In general, won’t happy and confident consumers tend to spend more freely? As Memorial Day weekend beckons, why not remember key consumer confidence measures? The Conference Board asserts that its “Consumer Confidence Index ® (CCI) is a barometer of the health of the U.S. economy from the perspective of the consumer.” (“Technical Note- February 2011”).
A review of the Conference Board’s Consumer Confidence Index over the past four decades reveals that this measure sometimes can provide helpful guidance regarding the identification (confirmation) of major highs, lows and trends in US equity benchmarks such as the S+P 500. Given the close ties between stock and overall commodity marketplace trends in recent years, commodity players should monitor the Confidence Index.
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US Consumer Confidence and Stocks
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