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)

US TAX REFORM: PROPAGANDA AND PROSPECTS © Leo Haviland October 9, 2017

Genevieve Larkin exclaims in the film “Gold Diggers of 1937”: “It’s so hard to be good under the capitalist system!” (Lloyd Bacon, director)

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CONCLUSION AND OVERVIEW

The most recent American corporate and individual tax “reform” proposal sketched by the President and Republican Congressional leadership is merely a “framework”. These ringleaders and their acolytes proclaim that genuine legislative planning and serious negotiations will create a robust document, a beneficial bill suitable for passage. However, the overall explicit and implicit policy substance (partisan aims) incorporated in the current outline probably will not become law. Even if a few elements of the “reform” scheme manage to pass the House and Senate and become law, at most this will represent modest tinkering with rather than major changes in the current tax code.

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Why will the corporate and individual tax reform program advocated by the President and others generally fail to be enacted? First, partisan political divisions in America in general and Congress in particular are too severe. Although the Republicans control both Houses of Congress, their Senate majority is slim. Whereas Congressional Democrats for the most part have held ranks since the 2016 election, Republican unity, particularly within the Senate, has been fragile. Not all Republicans adopt the same (or Trump’s policies).

The corporate and individual tax code reflects a diversity of political (cultural) viewpoints. Consequently, perspectives regarding as well as campaigns to transform, modify, or preserve critical aspects of it reflect opinions. Thus competing cultural camps with assorted outlooks and aims engage in heated rhetorical battles to advance their interests. Moreover, these proposed so-called tax reforms represent significant ideological approaches, not merely cosmetic fixes and updates.

In recent years, compromise in Congress in various critical policy matters has appeared with less frequency and generally only grudgingly. If the Senate cannot repeal (or repeal and replace) Obamacare (Affordable Care Act), how will they manage to make substantial alterations in an extremely complex document such as the United States tax code? Donald Trump’s remarkable and shocking Presidential triumph in America’s 11/8/16 election has not been followed by Congressional passage of his legislative agenda (Inauguration Day was 1/20/17). Why will Democrats help President Trump and Republicans win a notable legislative victory on taxation with election 2018 coming into view?

In the United States, even though labels are not definitive and groups can overlap, look further at and beyond the “political” sphere. America of course has never been entirely homogeneous or unified. The widely-shared American Dream has been expressed and implemented in various ways. Yet America’s disagreements and debates currently are wide-ranging. The lines between and within camps are not always clear; moreover, individuals may be loyal (belong) to various (and often competing) categories.

In any case, the long list of America’s noteworthy splits and fractures makes it especially changing to enact wide-ranging changes in the core taxation (and spending, including entitlements) policy arena. There are liberals (progressives), conservatives (traditionalists), centrists (moderates), and independents. Populists (both left and right wing) confront the establishment (elites). Globalists contend with nationalists.

America, as a house divided, has rich versus poor, haves versus have-nots. Highlight the nation’s substantial economic inequality. Is America nowadays a Gilded Age era? Are economic and social mobility increasing?

Consider divisions relating to race (ethnicity), gender/sexuality, religion, age, geographic region, and urban/rural. Fierce quarrels rage not only over tax and spending policies, but also over health care. Heated fights occur on trade and tariff issues, economic regulation (how much is appropriate), abortion rights, immigration, gun ownership, and environmental fields such as climate change.

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Moreover, President Trump probably will be unable to lead the contending camps inside and outside Congress toward a realization of his tax “reform” plan. Some circles fervently admire Trump. His “Make America Great Again!” and “America First” slogans and many of his policy pronouncements obviously appeal to large numbers of Americans. Yet he nowadays lacks sufficient influence over Congress as a whole, including parts of the Republican caucus. And among the nation in general, his popularity is quite low. Many observers see him as erratic in his outlook and imprudent and insensitive in his opinions and actions.

Moreover, Donald Trump lacks government insider experience. Rhetoric and behavior (and talents) suitable for running a successful family-owned business, a reality television show, or even a successful Presidential campaign are not necessarily appropriate (adequate; likely to succeed) in regard to leading a country well or inspiring Congress to adopt his policy agenda.

Although Trump won 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 reports on Russian political interference undermine Trump’s political “legitimacy” (faith in it) and thus his ability to lead effectively.

The President’s continued unwillingness to release his own tax returns makes it challenging for some to agree with his reform package. Might he or his family benefit from the proposed framework?

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Over three decades have passed since the last notable US tax reform (Tax Reform Act of 1986). Even though many gurus complain about parts of the current personal and corporate tax system, there does not appear to be a widespread consensus as to how to dramatically overhaul it.

Keep in mind that the individual and corporate tax codes are not merely long and complicated. It is a rhetorical structure reflecting a large and complicated society. Its lengthy enshrined provisions and interpretations of them therefore frequently represent competing visions and values. America’s current tax laws took a long time to reach their current structure. The US from the vantage points of both individuals and corporations of course is a diverse and complex country; this parallels the complexity of the global economy, with which the nation is enmeshed. Some “special interests” will fight vigorously for the proposed “reform” (or parts of it), but other crews will lobby heatedly against all or many of its provisions. These considerations also make it very difficult, and particularly unlikely in the current domestic American political environment, for substantial tax changes (“reform” of whatever fashion) to occur.

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US Tax Reform- Propaganda and Prospects (10-9-17)

HISTORY ON STAGE: MARKETPLACE SCENES © Leo Haviland, August 9, 2017

“People think of history in the long term, but history, in fact, is a very sudden thing.” Philip Roth’s novel, “American Pastoral”

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OVERVIEW AND CONCLUSION

Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span, and the arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.

The US Treasury 10 year note’s 7/6/16 major bottom at 1.32 percent probably ushered in an extended period of rising rates, which probably will connect with (lead to) a peak in the DJIA and S+P 500. This subsequent upward yield shift is only partly on stage, and so far its entrance has been modest. Despite the massive amount of money printing in recent years by the central banking fraternity, the ultimate extent of the rate increase may not be massive. The yield repression (and quantitative easing) era that began during the dark ages of the global economic disaster has not exited. The heavy hand of central bank yield repression (manipulation) not only was extraordinary, but still looms large.

Yet the Federal Reserve has started to raise the Federal Funds rate modestly and given orations about normalizing policy further by reducing the size of its bloated balance sheet. In recent months, monetary tightening talk relating to some other central banks such as the European Central Bank has increased. Moreover, marketplace “tantrums” involving tumbling equities can result from various intertwined causes, not just central bank wordplay and behavior. Yet worries about a “taper tantrum” involving falling stocks as a result of “tightening” of (reduced laxity in) central bank policy schemes nevertheless also have escalated.

Thus in the current marketplace horizon, not only the reality of somewhat higher government rates, but also (alternatively) the widespread perception of an emerging substantial threat of such (or further) yield climbs (whether induced by central bank policy shifts or otherwise), eventually can help to push stock marketplace benchmarks downhill.

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Lead/lag (convergence/divergence) relationships between marketplace arenas are not written in stone. What role does the broad real trade-weighted US dollar play? History unveils that sometimes a rising TWD accompanies rising stocks, but sometimes it links with falling stocks. Sometimes TWD depreciation connects with climbing stocks, sometimes with slumping equity signposts.

In the current marketplace theater, audiences nevertheless should monitor the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; March 1973=100; monthly average) closely. The TWD provides further insight regarding probabilities of the S+P 500 (and DJIA; and other advanced nation and emerging equity marketplace) trends. Increasing UST yields do not always (necessarily) mandate appreciation of the TWD. The steady depreciation of the broad real-trade weighted United States dollar since around first quarter 2017 currently entangles with the modest ascent in US 10 year Treasury note rates that began in early July 2016.

Given global central bank yield repression (and other easy money policies), arithmetic moves in the UST 10 year government note (and in short term rates) may appear (at least initially) to be rather minor. Also, rising American interest rates (or fears of this) may not be the only source for a stock marketplace tumble. A weakening TWD can assist US stock marketplace weakness, particularly if other factors exist (such as fiscal/budget or other debt troubles, severe cultural divisions, significant political quarrels, and issues regarding the quality of Presidential leadership). The TWD made a major high in December 2016/January 2017 around 102.8. It currently is around 96.8, a 5.8 percent decline. Though this depreciation is not massive, it is significant. Around 96.0 is crucial support; a sustained breach under this level probably will encourage weakness in the S+P 500 and Dow Jones Industrial Average.

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History on Stage- Marketplace Scenes (8-9-17)