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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CHINA: BEHIND THE GREAT WALL (c) Leo Haviland June 7, 2016

“Seek truth from facts.” Mao Zedong and Deng Xiaoping

CONCLUSION

China’s era of miraculous economic growth has marched into history. Yet China’s real GDP output in the past few years, and even 2015, has been robust in comparison to that of most other nations. The majority of international financial wizards faithfully proclaim that Chinese GDP likely will remain strong, at over six percent for the next several years.

China’s GDP strength over the past three or four years nevertheless derived significantly from its widespread national willingness to boost debt (leverage) levels substantially. This significant debt expansion coincides with the current unwillingness or inability of the nation’s political and economic leadership to do much to subdue the debt issue. China’s continued debt building (perhaps assisted by other factors) perhaps will achieve its praiseworthy growth levels, at least for a while.

And trend shifts during first quarter 2016 in various stock (both advanced and emerging), interest rate, currency, and commodity marketplaces (particularly dramatic rallies in the S+P 500 and the petroleum complex) inspire optimism regarding global growth prospects. Despite potential for small rate increases by the widely-admired Federal Reserve, monetary policy in America and elsewhere likely will remain highly accommodative, thereby assisting expansion in developed nations and China.

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However, review the patterns in China’s stock, central government 10 year note, and currency marketplaces. Those domains, when interpreted together and alongside a broad array of other key global financial marketplaces, not just the S+P 500 and oil, on balance nowadays suggest Chinese growth over the next few years probably will be less than most gurus expect. In today’s interconnected economic world, slower than anticipated Chinese economic expansion probably will be reflected by more sluggish growth elsewhere than generally forecast.

Politics and economics entangle in both advanced and emerging/developing nations. China’s political elite (notably its Communist party chiefs) seeks to ensure its own power and overall national political, economic, and social stability. Insufficient GDP growth and related widespread popular fears regarding income levels and economic inequality probably endangers these goals.

What do the political rhetoric and actions over the past few years (including recently) by China’s leaders reflect? Quite significantly, they portray increasing concern about their nation’s current and prospective economic situation, particularly its growth level and outlook.

To deflect and dilute growing popular concern about a weakening economic situation (slowdown; feebler growth than desired), and to maintain their political power and influence, China’s political leaders have acted vigorously on both the external and internal fronts. In the foreign sphere, they increasingly quarrel with other nations; on the internal landscape, efforts to control political and other social activities and dialogue have increased. These policies from China’s authorities tend to confirm the trends of slowing Chinese (and global) growth.

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China- Behind the Great Wall (6-7-16)

AMERICA’S DEBT CULTURE © Leo Haviland April 6, 2015

America continues to have a love affair with debt. The nation has achieved remarkably little progress in improving its comprehensive (all-inclusive) debt situation since 2009’s very elevated debt relative to nominal GDP percentage. Increasing federal indebtedness has substantially though not entirely outweighed modest improvements in the consumer and state and local government domains. As the national government is a representative (democratic; “We, the People”) one, the country has not significantly mended its troubling overall debt problem.

A review of total American credit marketplace debt portrays the development and entrenchment of a national culture of debt. The long run trend toward greater debt holdings (and tolerance of debt) probably indicates and intertwines with a growing bias toward consumption and spending rather than saving. The increasing borrowing and massive debt accumulation arguably in part also probably reflect an increasingly widespread sense of entitlement to American Dream goals of the “good life” and a “better life”.
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Total United States credit marketplace debt at end 2014 stood at about $58.7 trillion (Federal Reserve Board, “Financial Accounts of the United States”, Z.1 data; 3/12/15). The total includes US household, financial and non-financial business, and government debt, plus the relatively small foreign/rest of the world category. Compare 2001’s $29.2tr. Thus America’s credit marketplace debt has doubled in roughly a dozen years, and there has been no yearly fall in the sum since 2001.

What does a long run examination of total United States credit marketplace debt as a percent of nominal GDP reveal? Review the post-World War Two landscape. For over five decades, from the early 1950s up through the glorious Goldilocks Era that ended in 2007, and for a couple of years thereafter, total US indebtedness as a percentage of nominal GDP climbed steadily and substantially.

The bottom in overall US credit marketplace debt as a percent of GDP was 1951’s 129.5 percent. It inexorably edged up for about thirty years. It then started to accelerate from 1981’s 164.1pc. In 1985, it reached 200.3pc, with 1998’s 257.4pc, and 2001’s 275.1pc. In 2003, that measure attained 298.2pc. As debt became increasingly popular, it joyously soared during the blissful Goldilocks period to 346.1pc in 2007. As the gloomy American (and global) financial crisis emerged and proceeded, total US credit marketplace debt peaked at 362.0pc in 2009.

Despite pillow talk from many pundits about improving American debt conditions, that gigantic percentage has fallen only modestly since 2009. It slipped to 349.7pc of nominal GDP in 2010, and 340.6pc in 2012. However, it has diminished very little since then, with 2013 at 338.0pc and 2014 at 337.1pc. Significantly, 2014’s percentage remains not far from the heavenly Goldilocks Era 346.1pc height of 2007.

Another statistic further underscores the growth and persistence of America’s debt culture. Not only is the current credit marketplace debt as a percent of GDP level still historically high and close to the Goldilocks plateau. The arithmetic drop of 24.9 percentage points from the five years 2009 to 2014 (362.0pc less 337.1pc) is only about half the 47.9 point increase over the four years from 2003-07 (298.2 versus 346.1).
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The Federal Reserve’s long-running extraordinary and very easy monetary policy (notably money printing/quantitative easing and interest rate yield repression) seek not only to ignite and sustain economic recovery and buy time for serious action in the federal and other debt realms. The Fed has battled to boost inflation to a supposedly sufficient level, while it has simultaneously repressed debt securities yields. Its artful strategies reflect the central bank’s ardent devotion on behalf of the constituency of debtors (borrowers) relative to the one of savers (creditors).

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America's Debt Culture (4-6-15)

OF HUMAN BONDAGE- GOVERNMENT NOTE MARKETPLACES © Leo Haviland, April 9, 2012

Recent patterns in key government interest rate marketplaces warn that the worldwide economic crisis remains far from over.

Since around mid-March 2012, compare the trend of falling rates in government notes (10 year) of “flight to quality”/”safe haven” nations such as the USA, Germany, and Japan (and even the UK) with that of rising yields in several other European nations (not just Italy and Spain).

Note this rate pattern in government debt instruments alongside the recent high in the S+P 500 at 4/2/12 at 1422 as well as related weakness in commodities “in general”. See “The Worldwide Economic Growth Story: Chinese and Indian Stocks Alongside Commodities” (4/2/12).

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Of Human Bondage- Government Note Marketplaces (4-9-12)
Government Note Marketplaces (4-9-12) 

FLIGHT PATHS (THE MONEY JUNGLE, PART FIVE) © Leo Haviland, June 27, 2011

Especially if noteworthy economic variables- including so-called political ones- warn of or reveal substantial financial danger or injury, many marketplace participants preach “flight to quality” doctrines. What represents a supposed “safe haven” sector varies according to viewpoint and era. Inflation often is feared. Or, how could a severe recession or deflation injure us? Political unrest and military conflict sometimes surface.

Many gurus designate gold as a worthy store of value. We all saw it skyrocket over $1500. Clairvoyants devote much attention to government notes and bonds as an escape hatch if a dangerous downturn beckons or is underway. In terrifying recent times, those of the United States and Germany often have allured traders.

Instead, concentrate awhile on the Swiss Franc. Switzerland indeed is a rather small nation. However, this mountainous land has a very long history of and reputation for financial stability, which it battles fiercely to protect. The fluctuations of the Swiss Franc against the Euro FX are not precisely the same as its trajectories relative to the US dollar. In recent years, the major levels and trends of Switzerland’s actively traded currency nevertheless reflect worldwide (particularly European and American) economic disaster fears and recovery hopes.

Fear and hope interrelate in marketplaces, as elsewhere. Yet suppose one equates marketplace “flights to quality (safety)” with fear. Then there is a counterpart to the flight to quality outlook. Its opposite is the hopeful “flights of fancy” vision. Especially when policy interest rates are kept near rock bottom levels for extended periods (and all else equal), pursuits of profit via other paths of potential returns often become quite fervent. Suppose money printing occurs as well. All else equal, massive money printing tends to boost nominal prices of “assets”, including stocks, commodities, and low-rated (junk; many emerging marketplace) bonds.

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Flight Paths (The Money Jungle, Part Five)