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 their noble war to generate sufficient inflation, insure economic recovery, and slash unemployment, central bankers in America, Europe, and Japan have fought with extraordinary weapons such as monumental money printing and longstanding interest rate yield repression. On the inflation front, they battle furiously to achieve and sustain an inflation target of about two percent. This allegedly good (desirable, reasonable, prudent) goal contrasts not only with bad “excessive” inflation, but also with bad “too low” inflation and evil (or at least really bad) of deflation.
For several months, widely-watched inflationary yardsticks such as the consumer price index indicated too low inflation or inflamed worries regarding deflation. The consequences of the 2007-2009 international economic disaster probably have not disappeared, and the dramatic slump in petroleum prices after mid-2014 has troubled many inflation seekers. In any event, most economic forecasters, including central banking captains, have postponed the achievement of sufficient inflation as measured by such signposts rather far out into the future. Consequently, marketplace warriors, political leaders, and the financial media have focused relatively little on other gauges warning of notable potential for increased inflation in benchmarks such as the consumer price index.
The worldwide global economy of course is interconnected and complex. Numerous variables intertwine to produce any given inflation level and trend. Inflation acceleration need not appear first or strongest in beloved indicators such as consumer prices or personal consumption expenditures. Although the United States is not a financial island, focus on the American landscape.
“Inflation” is not confined to measures such as the CPI or personal consumption expenditures; “the economy” includes other inflation benchmarks. Various indicators signal there is more inflation “around” in the US than most believe. Underline American wage increases. Note central bank and marketplace murmurings regarding high valuations or so-called asset bubbles; keep in mind the climbs in US equities and home prices from their financial crisis depths. Money supply growth remains robust. The steely determination of the Fed and its central banking allies to achieve their inflation objectives heralds that monetary policy probably will remain quite lax for some time even if the US eventually raises rates. These factors collectively warn that at least in America, deflationary forces “in general” have found strong adversaries. The recent spike in key interest rates such as the 10 year US government note (and the German Bund) in part reflects this inflation.
Despite the recent rate of change in US consumer prices and personal consumption expenditures, probably neither deflation nor dangerously low inflation are on the American horizon. In addition, sustained “too low” inflation in America probably should not be a worry for the near term. Nevertheless, although a sustained jump in PCE and CPI inflation rates much beyond the Fed’s desired two percent target currently appears unlikely, “sufficient” inflation in America may be achieved faster than many predict.
“Flights to quality”, hunts for suitable yield (return), and other supply/demand considerations, not just low inflation statistics, can rally prices of debt securities. Yet did sustained central bank yield repression create or at least encourage “too low” yields for (a price “bubble” in) key government debt securities such as those of the United States and Germany? In the Eurozone, the terrifying enemy called deflation neared. The European Central Bank fired back with a huge quantitative easing (money printing) plan involving government debt securities. Some European government security interest rate yields went negative.
However, was a US (and German) debt security price bubble recently popped?
The 10 year US government note established an important yield low at 1.64 percent on 1/30/15, above 7/25/12’s major bottom at 1.38pc. Since January 2015’s valley, the US 10 year rate shot up about 50 percent to 6/5/15’s 2.44pc. The 1/2/14 summit at 3.05pc represents important resistance. In any case, what should the yield on US 10 year government notes be if inflation (such as in the PCE) is 1.5 percent or higher?
The 10 year German government note made a key bottom on 4/17/15 close to zero, at .05 percent (not long after the UST 10 year note made a minor low at 1.80pc on 4/3/15). Bund yields thereafter blasted higher, reaching almost one percent on 6/4/15. The Japanese 10 year JGB made a significant trough in 2015 shortly before the UST’s, on 1/20/15 at .20 percent.
US stocks advanced victoriously from their March 2009 major low for many reasons, including strong corporate earnings and share buybacks. Yet money printing and yield repression also assisted the S+P 500’s mighty ascent. So if US stocks recently reached “too high” levels, perhaps rising interest rates (or growing fears of them) will inspire those equities to retreat (burst their bubble).
Regardless of whether or not American government note yields recently were (or are still) “too low”, the recent sharp increase in UST 10 year note rates may reflect not just a “technical correction” or a growing belief that the Federal Funds rate (and thus yields in US government securities) will rise in the relatively near future. That noteworthy UST yield leap probably also warns that US inflation “in general” has grown or will do so soon.
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US Inflation Signals (6-7-15)
In the current environment, many central bankers in so-called advanced nations such as the US, Europe, Japan, and the United Kingdom (and in many other places around the globe) have adopted an inflation ideology. The IMF’s leading light heralds in her speech: “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.” For OECD-type (advanced) countries, one can summarize the current version of that beloved doctrine: “moderate inflation of around two percent is good, lower than that is not very good (or maybe even a little bit bad), and deflation is definitely bad.” It is unclear how much inflation (in the opinion of marketplace generals these days) would be inappropriate (bad), but arguably over five percent on a sustained basis definitely would be bad (evil; monstrous).
Suppose worldwide deflationary forces remain very significant. Perhaps credit (and debt) and leverage problems developed during the Goldilocks Era (and probably during quite a few years before then) have not been solved. Suppose the worldwide economic crisis that emerged in 2007 and accelerated in 2008 did not create sufficient deflation to remedy the inflationary issues previously built up. Then lax monetary policy at best (even if accompanied by substantial deficit spending) may create mediocre real economic growth, generate less than desired (sufficient) inflation, and only modestly improve the dismal unemployment picture.
The trends of recent years show declines in real US median (and mean) income. Commodities have been in a downtrend since their peaks in spring 2011. Of course commodities are only one part of consumer price indices. And wages and incomes are not the same as consumer prices. Yet these trends in US income and the broad GSCI indicate that “inflation in general” (including such measures as the consumer price index, PCE, and GDP deflator) is strongly entrenched at low levels. In addition, unless the Fed and other central banks embark on even more massive easing than they have done thus far, this income and commodity evidence (especially when interpreted alongside the low rates of CPI-type inflation) suggests that it probably will be very difficult for “inflation in general” to rise much if at all from current low levels. And “very low” inflation (or even deflation) eventually may appear outside of the real income and commodity territories (especially if US and related interest rates leap higher).
In any event, the US income statistics and broad GSCI bear trend indicate that despite all the Fed (and other central bank) easing, the creation of sustained “sufficient” consumer price (or PCE) inflation remains a huge challenge. Given the intertwining of inflation policies and phenomena (and forecasts) with those of real GDP and unemployment, these notable wage and commodity trends hint that real GDP increases probably will be less than regulators and politicians (not just in the US) aim for, and that unemployment probably will not fall as much as desired.
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Inflation Hopes, Deflation Fears, Marketplace Signs (1-20-14)
Chart- Broad GSCI (for essay, Inflation Hopes, Deflation Fears…) (1-20-14)
In love and commerce, taking implies giving. On Valentine’s Day and throughout the year, undoubtedly the prudent Federal Reserve remembers the benefits of having and needs of both debtors and creditors. This regulatory chaperone surely would declare that they passionately strive to perform their very best (do what’s most reasonable according to their interpretation of their regulatory duties) for all parties concerned. Besides, they must balance competing interests. Besides again, the Fed has a long run horizon. The Fed’s recent policies nevertheless imply not only an ethics of inflation, but also manifest somewhat greater affection for debtors than creditors.
Japan’s general government gross debt as a percent of its GDP is gigantic, at 241.0 percent for 2012 (IMF, Fiscal Monitor Update, Table 1, 1/24/12). This dwarfs America’s 107.6pc and the Euro area’s 91.1pc. Japan’s general government debt has been huge for several years. How does it keep financing this massive total? And if Japan can keep doing it, doesn’t America really have a lot of room to go (and time to wait)?
Japan may have more domestic savings than America, or be more of a nation of savers from an overall cultural perspective. Japan has run a current account surplus for quite some time, in direct contrast to the bulging United States current account deficit. (See the September 2011 World Economic Outlook, Statistical Appendix, Table A10.)
However, Japan’s ability to accumulate and finance its big general government deficit also may be due to its more favorable treatment of creditors. And despite low interest rates! Creditors of the Japanese government have earned, and have earned for quite some time, a net positive return due to deflation alongside low government interest rates.
So how long will the Fed and US Treasury get away with offering negative (or very low) real returns on US government debt?
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Sweet Talking, Slick Banking- Federal Reserve Policy (2-14-12)