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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EMERGING MARKETS, COMMODITIES, BITCOIN, AND THE S+P 500: TRAVELS AND SIGNS © Leo Haviland December 3, 2019

The movie “They Shoot Horses, Don’t They?” (Sydney Pollack, director) depicts a Depression Era dance contest marathon with a noteworthy monetary prize for the winning couple left standing. The master of ceremonies declares: “And believe me, these wonderful kids [the “kids” are all adults] deserve your cheers, because each one of them is fighting down pain, exhaustion, weariness, struggling to keep going, battling to win. And isn’t that the American Way?”

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OVERVIEW AND CONCLUSION

Since around first quarter 2018, the price trends in emerging marketplace stocks “in general” and emerging marketplace sovereign debt securities in general have made important highs and lows at roughly the same time. Thus, for example, around year-end 2018, prices (not yields) for sovereign emerging marketplace bonds attained important lows (yields had been rising) alongside troughs in emerging marketplace stocks. United States high-yield corporate bonds have moved in a similar pattern over that time span. Key commodity sectors such as the petroleum complex and base metals likewise have established important highs (lows) around the same time as those in emerging marketplace equities and sovereign debt. The timing of these assorted shifts of course is not always exactly the same, only approximately so. 

Unlike emerging marketplace stocks, during calendar 2018 and calendar 2019, America’s S+P 500 has marched to new highs. Despite this price divergence, many key turns in the interim trends for the S+P 500 occurred “around” the same time as those in emerging marketplace stocks, as well as in emerging sovereign marketplace debt (in both dollar-denominated and local currency arenas), US high-yield corporate bonds, and commodities. 

As the S+P 500 was sinking lower in late 2018, the Federal Reserve Board lifeguard jumped to the rescue and unveiled its monetary “patience” doctrine. It cut the Federal Funds rate three times during calendar 2019. Central banking allies such as the European Central Bank enhanced or maintained existing easy money schemes. Beginning around end-year 2018, this accommodative monetary policy (encouraged by widespread negative yields in advanced nation government debt domains), inspired waves of “investors” (speculators, traders) to hunt, more avidly than ever, for sufficient (good, reasonable, acceptable) “yields” (“returns”) in other provinces. These districts around the globe included emerging marketplace securities, high-yielding corporate debt, and even commodities. 

The exciting cryptocurrency frontier, which includes stars such as Bitcoin, attracts interest from assorted financial pioneers and the economic media (and even central bankers at times). In the opinion of some observers, Bitcoin belongs to some variety of “asset” class. In any case, since “around” first quarter 2018, despite Bitcoin’s wild price adventures, critical turns in its price action have occurred around the same time as in emerging marketplace securities, high-yield US business debt, commodities (petroleum and base metals), and even the S+P 500. 

During 2019, the S+P 500 continued its heavenly climb. Nevertheless, at various points during calendar 2019, emerging marketplace securities, US corporate debt, commodities, and Bitcoin established interim highs and began to retreat. For example, note Brent/North Sea crude oil’s 4/25/19 summit at $75.60 (S+P 500 interim top 5/1/19 at 2954). Thus the run-up in these asset prices which commenced around end calendar 2018/early calendar 2019 probably is over. 

Significantly, emerging marketplace stock, emerging marketplace sovereign debt securities, high-yield US corporate debt, and petroleum and base metals (still “trading together”) renewed their price declines in September 2019. Take a look at Bitcoin too. Given that global economic (and political) spheres intertwine, this pattern signals a top in the S+P 500 and the probability that the S+P 500 (and other advanced nation stock battlefields) will decline alongside (converge with ongoing bearish price patterns in) emerging marketplace securities and related domains such as commodities. 

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The United States dollar, as measured by its broad real effective exchange rate, has remained sufficiently strong to be a factor tending to undermine prices in dollar-denominated emerging marketplace sovereign debt securities as well as dollar-denominated emerging marketplace corporate debt instruments. Rising dollar-denominated yields, especially as the United States dollar generally has remained strong in recent months, tends to push emerging marketplace equity prices lower. Related to this, prices also gradually have fallen since early September 2019 in the US Treasury 10 year note (low yield 1.43 percent on 9/3/19). Also, US corporate earnings have been relatively flat for calendar 2019 year-on-year, suggesting that the joyous tax “reform” enacted at end calendar 2017 is losing power and thus the capability to propel the S+P 500 even higher. Even if America and China agree on a partial trade deal in the near future, will trade conflicts involving them and others disappear? 

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Emerging Markets, Commodities, Bitcoin, and the S+P 500- Travels and Signs (12-3-19)

TRADE WARS AND CURRENCY TRENDS IN THE TRUMP ERA © Leo Haviland November 7, 2019

“All I ever asked for was an unfair advantage”, said an oil trader to me many years ago.

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The United States dollar, as measured by its broad real effective exchange rate, probably has started a bear trend and will decline a notable amount from its recent high.

The United States dollar’s glorious bull charge has lasted for a very long time, over eight years, dating back to July 2011. Marketplace history is not marketplace destiny, but the duration of and the distance travelled in the dollar rally is comparable to other extensive ones of the past few decades.

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Trade Wars and Currency Trends in the Trump Era (11-7-19)

EUROZONE UNDER SIEGE: CURRENCY TRENDS AND POLITICS © Leo Haviland, March 20, 2017

“Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away.
War, children, it’s just a shot away”. “Gimme Shelter”, The Rolling Stones

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OVERVIEW AND CONCLUSION

 

“America First!” and “Make America Great Again!” anthems inspire President Trump and many of his populist supporters. Many Americans of course have slogans, doctrines, and plans dramatically different from those of the President and his populist allies (and his establishment comrades). Despite America’s sharp and wide-ranging partisan divisions, most Americans believe that America should be great (whatever that may mean in practice). They also agree that America’s President and Congress (and other federal institutions), all else equal, should consider the country’s needs first. Perhaps a majority of “We the People of the United States” retain faith that America in some fashion should be first (the leading nation) around the globe as well.

 

Nowadays Europe, like America, has a so-called establishment (various elites) battling fiercely against an array of populist adversaries. Yet the European establishment includes not only most leaders (and the bureaucracy) of the European Union and the Eurozone (and the European Central Bank), but also the political (economic) establishments of most of Europe’s individual countries. So even though the European Union and Eurozone comprise various independent countries, and even though these nations contain diverse sets of right and left wing (and radical) political parties and economic ideologies, the overall European “establishment” ardently will promote “Europe First!” and “Eurozone First!” doctrines, particularly when the risks of European Union and (especially) Eurozone breakup appear rather high. Thus Europe/Eurozone preservation goals can trump narrower nationalist aims. Populist threats obviously are one source of such grave risks, which the United Kingdom’s June 2016 Brexit “Leave” vote underscored. However, Europe’s sovereign debt (banking; recall Greece and the European “periphery”) crisis a few years ago reveals that other issues may motivate the European establishment to rally fiercely around a banner and fervently embrace policies to keep Europe unified.

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Napoleon: “In forming the plan of a campaign, it is requisite to foresee everything the enemy may do, and to be prepared with the necessary means to counteract it.”

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The European establishments do not necessarily or always plan and act together. Yet despite their diversity, they are closing ranks, making statements and endorsing programs to ensure substantial European unity and their own places in power structures. On the national political front in several individual countries, this has included a shift to the right (particularly on the immigration issue). This mitigates some of the appeal of right wing (pro-nationalist; anti-globalist) populist candidates.

In the Eurozone context, a too frail Euro FX can reflect dangers to the Eurozone’s integrity. America is a key European trading partner. The Trump camp forcefully proclaims its hostility to excessive weakness of the Euro FX and other currencies (such as the Chinese renminbi) relative to the dollar. The Trump regime (and many other Americans) probably would be pleased with a somewhat weaker dollar relative to its recent lofty high. So on the trade and currency landscape, some European mainstream leaders in response have suggested they want neither trade wars nor further Euro FX currency depreciation. Related to this, what does the ECB’s March 2017 hint that it eventually will modify its current highly accommodative monetary policy indicate? It likewise probably signals a willingness to bolster the Euro FX.

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The Bank for International Settlements provides broad real effective exchange rates (“EER”) for the Eurozone (Euro FX area) and numerous other nations. The current sideways pattern in the Euro FX broad real effective exchange rate (“EER”) probably will persist for the short term. But as the 2017 European election calendar marches forward, the Euro FX EER probably will embark on a moderate bull trend. Major Euro FX EER support is well-entrenched and will not be broken by much, if at all. This Euro FX appreciation will occur not only on an EER basis, but also in the Euro FX cross rate relationship versus the US dollar. In general, determined efforts by the European establishment to retain power (defeat populists; avoid further European breakup) and bolster the Euro FX probably will succeed (at least for the next several months, and perhaps quite a bit longer).

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Eurozone Under Siege- Currency Trends and Politics (3-20-17)

EASING COMES, EASING GOES: US GOVERNMENT INTEREST RATES © Leo Haviland, March 13, 2017

In “Uncle John’s Band”, the Grateful Dead sing: “‘Cause when life looks like easy street, there is danger at your door”.

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OVERVIEW

Many marketplace generals nowadays have faith that rising United States government interest rates reflects both sustained adequate American economic growth and the likely development of inflation sufficient to satisfy the Federal Reserve Board’s two percent yardstick. In addition to GDP growth and rising inflation and inflation expectations, observers also should focus on other issues and their consequence for assorted marketplace trends and relationships.

Viewpoints of natural (equilibrium, fair or true value, normal, average, appropriate) prices and price overshooting or undershooting (expensive, cheap; too high, too low) reflect subjective opinions, not science. In any case, relatively few observers ask whether the Federal Reserve guardian will permit inflation benchmarks to exceed for a relatively long time (and somewhat decisively) its adored two percent signpost. Such overshooting by notable inflation variables will tend to propel government yields higher than many expect. The US Consumer Price Index (CPI-U) jumped 2.5 percent year-on-year in January 2017. Will personal consumption expenditure (PCE) inflation also overshoot the Fed’s two percent target?

The Fed likely will tolerate inflation target overshooting for some time because it wants to be confident that the achievement of its inflation goal will be durable. Such an indulgent policy regarding overshooting still permits the Fed to engage in gradual increases in policy rates (Federal Funds), especially as asset prices (such as American stocks and real estate) have soared since their dismal global economic crisis lows and as the prospective US fiscal outlook appears rather expansionary (and even overly stimulative).

Also, trust in the ability of the Fed and its allies such as the European Central Bank to manage inflation is widespread. How many audiences worry whether the years of devoted yield repression have created a reservoir of pent-up inflation, which the Fed’s gradual rollback of accommodation (permitting higher Federal Funds and government rates) will unveil and reflect?

America has a substantial public debt. Not much attention focuses on the likelihood and implications of growing American federal budget deficits, even without any legislative changes, over the next decade and beyond. See the US Congressional Budget Office’s “The Budget and Economic Outlook; 2017 to 2027” (1/24/17), as well as “Federal Debt and the Statutory Limit” (3/7/17). According to the NY Times (3/10/17, pA21), on 3/13/17 the CBO is expected to release its judgment on the proposed House Republican legislation, the American Health Care Act, aiming to repeal and replace the Affordable Care Act (Obamacare).

Moreover, the media, politicians, and Wall Street have spent much attention on President’s Trump’s potential tax “reform” and express hope regarding his misty infrastructure plans. But not many pundits stress that Trump’s tax scheme (even without reference to Obamacare), if enacted, likely will cause massive rises in budget deficits. The Fed may elect to raise rates more quickly (aggressively) than some predict if Congress adopts much or all of the fiscal scheme of Trump and his comrades. In any case, most people do not ask how enthusiastic foreigners (who own a huge slice of Treasury debt) will be to keep financing growing budget shortfalls. The Fed sheriff, unlike the European Central Bank and Bank of Japan, is no longer wedded to quantitative easing (securities purchasing tied into money printing), so it will not rush to add many UST obligations to its balance sheet.

Also, all else equal, substantial questions regarding national leadership quality can undermine both political and economic confidence in that nation. This situation can encourage higher interest rates, a weaker currency, or both. Donald Trump lacks government insider experience. Domestic and international faith in his political leadership ability (and in the US Congress as a whole) is not high. In the film “Easy Rider” (director Dennis Hopper) a character underlines that “it’s real hard to be free when you are bought and sold in the marketplace.”

Fierce, widespread, and substantial ongoing partisan political (economic) divisions likewise risk weakening America’s currency and promoting increased government interest rates. Trump’s victory did not unite an already significantly divided America. In America, there are liberals (progressives) and conservatives (traditionalists). Populists (both left and right wing) confront the establishment (elites). Globalists contend with nationalists.

Trump’s “Make America Great Again!” and “America First” slogans and many of his policy pronouncements obviously appeal to large numbers of Americans. However, they do not attract or inspire many (and arguably a majority of) citizens. Though both the House and Senate are Republican-controlled, not all Republicans warmly support Trump and his policies. Although Trump triumphed in the Electoral College, he decisively lost the popular vote tally. The popular vote outcome obviously reflects America’s sharp political divisions. Also, the Russian President “directed a vast cyberattack aimed at denying Hillary Clinton the presidency and installing Donald J. Trump in the Oval Office, the nation’s top intelligence agencies said in an extraordinary report” (NYTimes, 1/7/17, ppA1, 11). Trump’s popular vote defeat and the report on Russian political interference undermine Trump’s political “legitimacy” (faith in it) and thus his ability to lead effectively.

America has other substantial splits and fractures. It has rich versus poor, haves versus have-nots. Look at the nation’s substantial economic inequality. Consider divisions relating to race (ethnicity), gender, religion, age, geographic region, and urban/rural. Fiery quarrels rage over tax and spending policies and priorities, health care (Obamacare), trade policies, the appropriate degree of economic regulation, abortion rights, gun ownership, and environmental issues such as climate change.

With such ongoing, wide-ranging, and seemingly intractable American divisions and related passionate debates and accusations, worries increase regarding “how anything (good; productive; necessary) can get done”. Escalating doubts relating to leadership and concerns regarding the consequences of persistent divisiveness can encourage growing fears at home and abroad regarding the nation’s current and potential political and economic outlook. This horizon consequently may not necessarily encourage a “flight to quality” by buyers into the government debt securities of that country. Instead, particularly when inflation also is increasing and budget deficits likely will rise, low (deteriorating) confidence can spur interest rate rises.

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Easing Comes, Easing Goes- US Government Interest Rates (3-13-17)