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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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Monday, December 7th, 2015

AMERICA: A HOUSE DIVIDED © Leo Haviland December 7, 2015

Before Abraham Lincoln became President and the outbreak of the American Civil War, he stressed regarding the slavery issue: “A house divided against itself cannot stand.” (Speech, “A House Divided”; Springfield, Illinois, June 16, 1858). He added: “I do not expect the house to fall—but I do expect it will cease to be divided.” Lincoln’s “house divided” metaphor traces back to the Bible. Jesus warned (Matthew 12:25; see also Mark 3:24-25): “Every kingdom divided against itself is brought to desolation; and every city or house divided against itself shall not stand.”

CONCLUSION AND OVERVIEW

From colonial times to the present, America always has had political divisions. History reveals that such differences- whether based on political ideology, economic viewpoints and interests, religious or other social opinions, “human nature”, overseas events, or other phenomena- can vary in substance and intensity. Although sharing of the American Dream culture helps to unite Americans, diverse visions regarding the Dream’s content exist, evolve, and are debated. Political wars, battles, fights, feuds, quarrels, squabbles, and disagreements never disappear entirely even though that rhetoric can differ in quantity, severity, scope, and quality.

Doomsday or other terribly bleak scenarios have appeared within American political discussions. However, nowadays “civilization as we know it” is not ending (even if it arguably has deteriorated), economic growth continues (though often fitfully), and so-called “core values” expressed by the American Dream remain (in various fashions) shared. America nowadays obviously is not as divided as it was during its long and bloody Civil War. The American scene did not banish physical violence as part of the process of resolving notable national or regional disagreements. Recall wars with Indians, labor (union) fights, and the civil rights movement. Yet significant internal national conflicts, especially after the Second World War, increasingly have been resolved within a comparatively peaceful political process, including the passage and interpretation of laws.

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However, a brief survey of the United States political realm from the national perspective nowadays suggests that America’s political house over the past several years probably has become more divided than usual. It probably will remain so for quite some time, and at least through the 2016 election campaign.

Political fights often can express (reflect) economic phenomena, including diverging doctrines and competing practical interests. What does the recent picture display? Political battles and resultant significant legislative gridlock within the American political realm has coincided with sluggish real GDP growth, weak average household income, an elevated poverty level, and increasing economic inequality.

Is increasing political conflict confined to the American domain? Political (as well as economic, social, and religious) divisions of course exist around the globe. Reasons for fights over power within the United States are not necessarily the same as those inspiring political conflicts elsewhere. And cultural analysis must beware of overgeneralization and oversimplification. The world as a whole is not completely falling to pieces. Yet it nevertheless seems that political hostilities within and between many nations (and between groups with different views and aims) around the globe, as in the US, have increased in the past few years. This trend, especially if it worsens, arguably endangers international (and American) economic expansion. Severe and heated political divisions not only often reflect economic problems, but also can create or magnify economic (and political) risks. World history (for example, after the First World War) reveals that substantial and widespread economic distress and fears can greatly assist the rise of rather extreme political (economic) views, whether far left, far right, ultranationalist, fringe, and so forth.

In recent years, in the United States and many other advanced nations, insufficient economic output, political divisions, or both increasingly have encouraged faith in and reliance on central banks to spark and sustain economic growth.

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America- a House Divided (12-7-15)

Saturday, January 3rd, 2015

DO WHAT WE MUST: EUROZONE THEATRICS © Leo Haviland January 3, 2015

In the relatively near future, the European Central Bank probably will declare it will embark on more extensive quantitative easing (money printing) via purchasing Eurozone sovereign debt in secondary marketplaces. Assorted intertwined variables invite dramatic action. First, the ECB’s creative measures of the past several months have accomplished little. Think of negative policy interest rates. Marketplace response to the Targeted Longer Term Refinancing Operations (TLTRO) has been uninspiring. The ECB underscores its determination to significantly expand its balance sheet. Nevertheless, its current money printing scheme, which purchases asset-backed securities and covered bonds, thus far appears relatively modest to most audiences.

Moreover, the ECB’s fear of insufficient inflation (the deflation spectre) has increased in recent weeks, partly due to the continued bloody tumble in the petroleum complex. In its early December 2014 meeting, it underlined the Eurozone’s mediocre economic growth realities and prospects.

Potential for notable social unrest on the European scene exists. Unemployment remains stubbornly elevated. Difficulties, especially in Greece, but potentially elsewhere, recall the European periphery crisis. Greek political troubles erupted again, with a crucial election being held in late January 2015. Greece’s leading left-wing opposition party has a significant chance of winning that contest. That party wants to renegotiate and reduce the nation’s monstrous debt. Will it continue reforms of the economy and state administration desired by creditors? At times, though less so recently, this leftist group has displayed some hostility to the country’s remaining in the Euro FX circle.

Despite the Eurozone’s noble struggle to create adequate inflation (avoid deflation), its success on that front probably will be limited. Inflation and long term government interest rates in key nations such as Germany probably will not sustain substantial increases even if the ECB races down the path of massive money printing via buying of government debt securities. Keep in mind Japan’s history. The United States still falls short of the Federal Reserve’s inflation target despite sustained massive easing. Remember as well America’s experience after it ceased (or steadily “tapered”) quantitative easing rounds; the 10 year United States Treasury note yield declined.

In recent months, the Euro FX has weakened, both against the United States dollar and on an effective exchange rate basis. This currency relationship and bear trend will continue. Nowadays, part of the ECB’s inexorable determination to “do what we must” pursuant to its interpretation of its mandate involves a willingness to let the Euro FX slump. In any event, even if massive ECB money printing and currency feebleness manage to achieve an inflation goal (and higher interest rates), they likely will not generate enduring significant Eurozone economic growth.

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Do What We Must- Eurozone Theatrics (1-3-15)

Monday, December 1st, 2014

The Euro FX and Japanese Yen for several months have been weakening together, both against the US dollar and on an effective exchange rate basis. This currency relationship and bear trend will continue. Despite the Eurozone’s and Japan’s brave quests to create sufficient inflation (escape deflation), their success probably will be limited; inflation and longer term government interest rates probably will not sustain significant increases. However, even if substantial currency depreciation and massive money printing manage to achieve an inflation goal (and higher interest rates), they likely will not generate sustained economic growth.

Given that both the Eurozone and Japan suffer from low growth and deflationary challenges and fears, is weakness in the Euro FX connected with (encouraging that of) the Japanese Yen? Is the Yen’s swoon helping to depreciate the Euro FX? Are Japan and the Eurozone (and other nations) engaged in competitive devaluations (currency wars) to bolster growth?

One sign of the obstacles facing the Eurozone and Japan in their quest to boost inflation (and generate higher interest rates) is the recent behavior of the UST 10 year government note. American GDP recently has been robust, rising at an annual rate of 4.6 percent in 2Q14 and 3.9pc in 3Q14. However, the UST 10 year yield around 2.20pc remains well beneath its 1/2/14 top at 3.05pc. Admittedly the UST yield bounced up from the 1.86pc low of 10/15/14. But even since that mid-October 2014 depth, yields traveled up to only around 2.40pc, never piercing the important resistance around that level. The failure of UST yields to rally may signal future mediocre US (and worldwide) economic growth since yields generally advance during recovery (or hope of one).

Take the broad Goldman Sachs Commodity Index (GSCI) as a benchmark for commodities “in general”. It collapsed, of course aided by price dives in the petroleum complex, from 6/23/14’s interim high around 673 to under 520 recently. If sustained, this bloody price retreat will cut many statistical measures of inflation (and perhaps reduce inflation expectations). Thus it may encourage European and Japanese (and other) policy makers to embark on especially accommodative monetary policies. For example, the ECB may decide it has more need (justification) to quickly engage in massive QE, perhaps even by sovereign debt buying.

However, this GSCI weakness also may indicate underlying and ongoing risks to global economic growth as well as the difficulty of generating sufficient inflation in general. Moreover, sustained declines in petroleum prices may create crises in some producing nations that in turn spill over into other nations. For example, think of Russia (the ruble has moved over 50 versus the dollar), Nigeria, and Venezuela.