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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The major bull charge by the Japanese 10 year government bond (JGB) to lower yields probably ended in late July 2012, or will do so soon. The Japanese Yen’s long run bull trend (effective exchange rate basis, Bank of England data) likewise probably ceased in midsummer 2012.
Four significant inflationary variables have or likely will entangle with the massive Japanese easing to date. First, major central banks around the world via various methods have engaged in extravagant easing. Consider the money printing (QE1, 2, 3), low interest rates, and other accommodative weapons of the United States Federal Reserve. The economic wizards at the Fed have heralded they will not change to a tightening course anytime soon. Don’t forget the European Central Bank’s gradual even if roundabout surrender to easy money principles (especially over the last year). Recall the generous central bankers of China, the United Kingdom, and Switzerland. In the interconnected global economy, the more widespread and sustained the money printing and related policies, the more likely that there eventually will be upward price moves in consumer prices (and similar measures) as well as interest rate increases.
A more specific focus on the Japanese situation reveals the three other considerations. For starters, the Japanese business community (exporters especially) has become extremely upset (not merely worried) by the Yen’s sustained strength. This dismay increased due to a recent noteworthy GDP slump. Business interests (Japan, Inc.) significantly influence Japanese political policies. Second, Japan likely will enshrine a new governing political party after its December 2012 elections. These incoming political leaders apparently seek an even easier monetary policy than presently exists.
The third relates to the towering Japanese government debt and ongoing substantial budget deficits. Most political pundits and marketplace mavens bemoan the looming United States fiscal cliff. Japan, unlike America, wins praise as being a nation of savers (creditors) rather than debtors (borrowers). However, the Japanese government, unlike its citizens, does not incarnate thriftiness.
The current and medium term Japanese fiscal outlook, even without a change in government policies, is no cause for complacency. The Japanese political (economic) establishment, regardless of party, engages in brinkmanship, for it has shown little inclination to subdue that substantial deficit spending and massive and growing government debt. Compare the United States awesome near term and long run federal debt vista. Thus Japan probably already is fairly close to the border of a fiscal crisis. Read the rest of this entry »
What does travel through the diverse forests of Brazil, Russia, India, and China (the so- called “BRIC” nations) reveal?
Though the BRICs are key sources of world growth, they also reflect global growth patterns. BRIC territories do not possess sufficient independent firepower to propel the overall world economy significantly and permanently forward. In recent months, BRIC stocks have declined substantially. This BRIC equity weakness warns of current and further upcoming economic slowdowns not only in those countries, but sluggishness and even downturns elsewhere.
BRIC currency trends relative to the US dollar interrelate with this story told by equity playgrounds. Recent weakness in these BRIC foreign exchange cross rates reflect and confirm the fragility in BRIC stock benchmarks.
The key point is that Chinese currency appreciation, which had been slow yet persistent, now seems to be taking a breather. In the context of China’s substantial bear trend in equities, and given China’s status as a major exporter nation with massive foreign exchange reserves (a large bankroll to solve minor problems), what does this currency “non-appreciation”/modest depreciation against the US dollar suggest?
It indicates difficulties facing China finally have become quite significant- and more substantial than most China watchers recognize. In other words, China’s economic challenges (such as inflation, rising wages, weak property prices, substantial local government debt) may have grown to become a “fairly big problem”, even if Chinese authorities have not confessed to this. However, China did cut its reserve requirement ratio recently. So even if China’s stock marketplace is not an ideal benchmark for assessing “the overall Chinese economy”, at some point its stock price level and trend, when interpreted alongside other variables, can identify (coincide with) noteworthy Chinese economic problems.
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The House of BRICs – How Solid (12-13-11)
Recent historically high nominal United States corporate profit levels are a key factor inspiring many to buy and hold US stocks. Bullish forecasts regarding future net earnings, especially when such predictions extend out to misty medium term or murky long run time horizons, sustain and bolster this enthusiastic ownership. In turn, stock rallies sometimes boost optimism regarding potential corporate profitability and overall economic growth, for many have faith that equity marketplaces are forward-looking indicators for “The Economy”.
Has the US entered a blessed New Era of very high corporate profitability that will stretch happily out into the indefinite future? Probably not. Has America revived the wonderful time of the Goldilocks economy? Probably not. Higher nominal corporate profits and ascending nominal stock prices, when accompanied by rising nominal GDP, can assist national confidence and encourage spending in the short term. However, since the nominal levels are not the real (genuine) ones, they do not translate into an equivalent amount of real and permanent prosperity.
Yet even if very elevated corporate profitability does not continue, what may have caused a sustained notable upward shift relative to long run history in the ratio of nominal US corporate profits to nominal GDP? To some extent, it reflects corporate cost-cutting measures and other battles to improve efficiency. The easy money policies of the Federal Reserve Board (sustained low interest rates; money printing) and its allies and massive deficit spending (stimulus) perhaps play roles. But picture the context of sluggish to declining real US household income, still-damaged consumer balance sheets, high unemployment, weak housing prices, and very low consumer confidence. With that domestic (home) background, high US nominal corporate profits- and especially a more elevated nominal profit versus GDP ratio- also arguably reflects economic globalization trends and profits captured from overseas. If so, then relatively high American corporate profits do not entirely reflect (do not fully represent) actual overall US prosperity (“Our Economy”), merely that of many of its corporations.
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US Corporate Profits- Patterns and Perspectives (11-1-11)
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)
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