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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EUROZONE UNDER SIEGE: CURRENCY TRENDS AND POLITICS © Leo Haviland, March 20, 2017

“Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away.
War, children, it’s just a shot away”. “Gimme Shelter”, The Rolling Stones

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OVERVIEW AND CONCLUSION

 

“America First!” and “Make America Great Again!” anthems inspire President Trump and many of his populist supporters. Many Americans of course have slogans, doctrines, and plans dramatically different from those of the President and his populist allies (and his establishment comrades). Despite America’s sharp and wide-ranging partisan divisions, most Americans believe that America should be great (whatever that may mean in practice). They also agree that America’s President and Congress (and other federal institutions), all else equal, should consider the country’s needs first. Perhaps a majority of “We the People of the United States” retain faith that America in some fashion should be first (the leading nation) around the globe as well.

 

Nowadays Europe, like America, has a so-called establishment (various elites) battling fiercely against an array of populist adversaries. Yet the European establishment includes not only most leaders (and the bureaucracy) of the European Union and the Eurozone (and the European Central Bank), but also the political (economic) establishments of most of Europe’s individual countries. So even though the European Union and Eurozone comprise various independent countries, and even though these nations contain diverse sets of right and left wing (and radical) political parties and economic ideologies, the overall European “establishment” ardently will promote “Europe First!” and “Eurozone First!” doctrines, particularly when the risks of European Union and (especially) Eurozone breakup appear rather high. Thus Europe/Eurozone preservation goals can trump narrower nationalist aims. Populist threats obviously are one source of such grave risks, which the United Kingdom’s June 2016 Brexit “Leave” vote underscored. However, Europe’s sovereign debt (banking; recall Greece and the European “periphery”) crisis a few years ago reveals that other issues may motivate the European establishment to rally fiercely around a banner and fervently embrace policies to keep Europe unified.

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Napoleon: “In forming the plan of a campaign, it is requisite to foresee everything the enemy may do, and to be prepared with the necessary means to counteract it.”

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The European establishments do not necessarily or always plan and act together. Yet despite their diversity, they are closing ranks, making statements and endorsing programs to ensure substantial European unity and their own places in power structures. On the national political front in several individual countries, this has included a shift to the right (particularly on the immigration issue). This mitigates some of the appeal of right wing (pro-nationalist; anti-globalist) populist candidates.

In the Eurozone context, a too frail Euro FX can reflect dangers to the Eurozone’s integrity. America is a key European trading partner. The Trump camp forcefully proclaims its hostility to excessive weakness of the Euro FX and other currencies (such as the Chinese renminbi) relative to the dollar. The Trump regime (and many other Americans) probably would be pleased with a somewhat weaker dollar relative to its recent lofty high. So on the trade and currency landscape, some European mainstream leaders in response have suggested they want neither trade wars nor further Euro FX currency depreciation. Related to this, what does the ECB’s March 2017 hint that it eventually will modify its current highly accommodative monetary policy indicate? It likewise probably signals a willingness to bolster the Euro FX.

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The Bank for International Settlements provides broad real effective exchange rates (“EER”) for the Eurozone (Euro FX area) and numerous other nations. The current sideways pattern in the Euro FX broad real effective exchange rate (“EER”) probably will persist for the short term. But as the 2017 European election calendar marches forward, the Euro FX EER probably will embark on a moderate bull trend. Major Euro FX EER support is well-entrenched and will not be broken by much, if at all. This Euro FX appreciation will occur not only on an EER basis, but also in the Euro FX cross rate relationship versus the US dollar. In general, determined efforts by the European establishment to retain power (defeat populists; avoid further European breakup) and bolster the Euro FX probably will succeed (at least for the next several months, and perhaps quite a bit longer).

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Eurozone Under Siege- Currency Trends and Politics (3-20-17)

EASING COMES, EASING GOES: US GOVERNMENT INTEREST RATES © Leo Haviland, March 13, 2017

In “Uncle John’s Band”, the Grateful Dead sing: “‘Cause when life looks like easy street, there is danger at your door”.

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OVERVIEW

Many marketplace generals nowadays have faith that rising United States government interest rates reflects both sustained adequate American economic growth and the likely development of inflation sufficient to satisfy the Federal Reserve Board’s two percent yardstick. In addition to GDP growth and rising inflation and inflation expectations, observers also should focus on other issues and their consequence for assorted marketplace trends and relationships.

Viewpoints of natural (equilibrium, fair or true value, normal, average, appropriate) prices and price overshooting or undershooting (expensive, cheap; too high, too low) reflect subjective opinions, not science. In any case, relatively few observers ask whether the Federal Reserve guardian will permit inflation benchmarks to exceed for a relatively long time (and somewhat decisively) its adored two percent signpost. Such overshooting by notable inflation variables will tend to propel government yields higher than many expect. The US Consumer Price Index (CPI-U) jumped 2.5 percent year-on-year in January 2017. Will personal consumption expenditure (PCE) inflation also overshoot the Fed’s two percent target?

The Fed likely will tolerate inflation target overshooting for some time because it wants to be confident that the achievement of its inflation goal will be durable. Such an indulgent policy regarding overshooting still permits the Fed to engage in gradual increases in policy rates (Federal Funds), especially as asset prices (such as American stocks and real estate) have soared since their dismal global economic crisis lows and as the prospective US fiscal outlook appears rather expansionary (and even overly stimulative).

Also, trust in the ability of the Fed and its allies such as the European Central Bank to manage inflation is widespread. How many audiences worry whether the years of devoted yield repression have created a reservoir of pent-up inflation, which the Fed’s gradual rollback of accommodation (permitting higher Federal Funds and government rates) will unveil and reflect?

America has a substantial public debt. Not much attention focuses on the likelihood and implications of growing American federal budget deficits, even without any legislative changes, over the next decade and beyond. See the US Congressional Budget Office’s “The Budget and Economic Outlook; 2017 to 2027” (1/24/17), as well as “Federal Debt and the Statutory Limit” (3/7/17). According to the NY Times (3/10/17, pA21), on 3/13/17 the CBO is expected to release its judgment on the proposed House Republican legislation, the American Health Care Act, aiming to repeal and replace the Affordable Care Act (Obamacare).

Moreover, the media, politicians, and Wall Street have spent much attention on President’s Trump’s potential tax “reform” and express hope regarding his misty infrastructure plans. But not many pundits stress that Trump’s tax scheme (even without reference to Obamacare), if enacted, likely will cause massive rises in budget deficits. The Fed may elect to raise rates more quickly (aggressively) than some predict if Congress adopts much or all of the fiscal scheme of Trump and his comrades. In any case, most people do not ask how enthusiastic foreigners (who own a huge slice of Treasury debt) will be to keep financing growing budget shortfalls. The Fed sheriff, unlike the European Central Bank and Bank of Japan, is no longer wedded to quantitative easing (securities purchasing tied into money printing), so it will not rush to add many UST obligations to its balance sheet.

Also, all else equal, substantial questions regarding national leadership quality can undermine both political and economic confidence in that nation. This situation can encourage higher interest rates, a weaker currency, or both. Donald Trump lacks government insider experience. Domestic and international faith in his political leadership ability (and in the US Congress as a whole) is not high. In the film “Easy Rider” (director Dennis Hopper) a character underlines that “it’s real hard to be free when you are bought and sold in the marketplace.”

Fierce, widespread, and substantial ongoing partisan political (economic) divisions likewise risk weakening America’s currency and promoting increased government interest rates. Trump’s victory did not unite an already significantly divided America. In America, there are liberals (progressives) and conservatives (traditionalists). Populists (both left and right wing) confront the establishment (elites). Globalists contend with nationalists.

Trump’s “Make America Great Again!” and “America First” slogans and many of his policy pronouncements obviously appeal to large numbers of Americans. However, they do not attract or inspire many (and arguably a majority of) citizens. Though both the House and Senate are Republican-controlled, not all Republicans warmly support Trump and his policies. Although Trump triumphed 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 the report on Russian political interference undermine Trump’s political “legitimacy” (faith in it) and thus his ability to lead effectively.

America has other substantial splits and fractures. It has rich versus poor, haves versus have-nots. Look at the nation’s substantial economic inequality. Consider divisions relating to race (ethnicity), gender, religion, age, geographic region, and urban/rural. Fiery quarrels rage over tax and spending policies and priorities, health care (Obamacare), trade policies, the appropriate degree of economic regulation, abortion rights, gun ownership, and environmental issues such as climate change.

With such ongoing, wide-ranging, and seemingly intractable American divisions and related passionate debates and accusations, worries increase regarding “how anything (good; productive; necessary) can get done”. Escalating doubts relating to leadership and concerns regarding the consequences of persistent divisiveness can encourage growing fears at home and abroad regarding the nation’s current and potential political and economic outlook. This horizon consequently may not necessarily encourage a “flight to quality” by buyers into the government debt securities of that country. Instead, particularly when inflation also is increasing and budget deficits likely will rise, low (deteriorating) confidence can spur interest rate rises.

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Easing Comes, Easing Goes- US Government Interest Rates (3-13-17)

RHETORIC AND GLOBAL CURRENCY TRENDS © Leo Haviland, February 13, 2017

In the movie “Casablanca”, Signor Ferrari asks the proprietor of Rick’s Café Americain: “My dear Rick, when will you realize that in this world today isolationism is no longer a practical policy?” (Michael Curtiz, director)

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DIVIDING LINES

On America’s 2016 election campaign trail and thereafter, President Donald Trump’s impassioned populist rhetoric has encompassed striking slogans such as “Make America Great Again!” and “America First!” All United States patriots of course want their country to be great. Such wordplay, however, especially appeals to citizens wary of or hostile to phenomena such as “the establishment” (elites), globalization, and (overly) free trade.

Many of America’s current and proposed domestic programs and their consequences are not divorced from international ones. Lines between (and definitions of) “domestic” and “international” are not necessarily clear. Many so-called “economic” issues interrelate with political, military, and social arenas. Prior to America’s recent national election season, many observers across the political spectrum lamented the country’s (and world’s) substantial income and wealth inequality. In any case, let’s concentrate primarily on the international trade and currency front, even though other assorted US domestic as well as a range of global issues significantly entangle with it.

Most Americans praise “free markets” and “capitalism” as “good”, but they also want them to be “fair”. A currency level and trend can symbolize relative power and its changes. Thus a “strong” dollar may be praiseworthy (and excite national pride), and the country should not permit the greenback to become “too weak” or “feeble”. But why should Americans tolerate evils such as “unfair trade” and a “too strong” dollar? As in competitive sports, isn’t it right to have a “level playing field”? Surely massive persistent trade (or current account) deficits between two nations suggest something inappropriate in policies and practices may be going on! Can’t some protectionism for American industries be good, at least in the right circumstances?

Thus America’s President and many of his supporters loudly warn of changes in tariffs and taxes. They squawk about walking away from, tearing up, or renegotiating trade agreements. They hint America will respond to the currency manipulation or excessive depreciation engaged in by its trading partners.

However, all economic (political) language, policies, and behavior related to notions of goodness, fairness, and reasonableness (rationality) merely represent personal perspectives. So whether a given trade agreement such as the North American Free Trade Agreement (NAFTA) or the Trans-Pacific Partnership (TPP) trade deal treats the US fairly or appropriately, whether it is good or bad for America, is a matter of opinion. Whether a given US dollar cross rate (such as that between the dollar and the Chinese renminbi) or broad real trade-weighted US dollar level are “good”, “bad”, “too high” (“expensive”; “overshooting”), “too low” (“cheap”; “undershooting”), or “fairly (reasonably, appropriately) valued” (or near some allegedly natural, rational, logical, or equilibrium price) likewise express opinions.

Moreover, in the deeply interconnected and complex global economy and multipolar political world, even the mighty and zealous United States cannot institute many of its key programs on others without expecting a notable response (push-back) from others threatened or infuriated by them. After all, other countries around the globe, whether implicitly or explicitly, also generally place their nation first and foremost in their political and economic calculations. Most foreign countries (their leaders) do not want to seem too timid in their dealings with America. And not all Americans, or even all Republicans, applaud or even support the President’s policies, which themselves may change as time passes and negotiations proceed.
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A nation and its internal political groupings often manifest significant partisan quarrels, which sometimes become ferocious. Everyone knows that history likewise displays a continuum, from relative peace and harmony to various expressions of war, battle, and violence. America’s notable current divisions are wide-ranging. Divides exist within economics and politics, but also involve topics such as age, race, religion, gender, sexual orientation, and geography.

Widespread talk on the international stage of competitive depreciation, currency wars, and trade battles reflects the increasing strains on and within an increasingly fractured “global economic order”. The significant and wide-ranging internal economic divisions within America (and many other leading nations) to some extent mirrors and encourages such international economic (and political) tensions and changes.

Multilateral diplomatic discussions do not necessarily result in better (or worse) outcomes than bilateral ones. The current American Administration apparently prefers in the international economic (and political) realm to conclude one-on-one deals between countries (their strong leaders).

Some guides declare “life is a game.” Regardless of the faith of some luminaries, not all economic (or political or other cultural) arenas and interactions (including negotiations) are zero-sum games, or necessarily have clear winners and losers. Both (or most; or all) sides in a financial contest (whether commerce/business in general or international trade and currency in particular) may turn out to be winners (or losers) to varying extents. In any event, it is conceivable that particular sets of economic policies and responses to them can result (whether sooner or later) in unhappy (costly) outcomes for the nation promoting them, or even for numerous or a majority of countries (including those not directly participating in the fascinating discussions and artful deals on the main table).

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Rhetoric and Global Currency Trends (2-13-17)

“POPULISM” AND CENTRAL BANKS © Leo Haviland, July 12, 2016

“Big boss man, can’t you hear me when I call?” “Big Boss Man” (Al Smith and Luther Dixon), performed by Elvis Presley, the Grateful Dead, and others

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OVERVIEW AND CONCLUSION

The United Kingdom’s recent shocking referendum vote to leave the European Union not only sparked ferocious marketplace fluctuations. It did not merely underscore ongoing and widespread unease regarding mediocre economic growth and insufficient inflation in many nations inside and outside of Europe.

Brexit also highlighted previously existing and growing fears among many global economic and political elites (“the establishment”) and their disciples about increasing “populism” and its potential consequences. These worries extend beyond the troubles of the European Union and the Eurozone and nervousness regarding their fracturing or break-up. The British departure outcome probably inflamed populist ambitions in other countries. In any case, substantial divisiveness and partisan fervor are not confined to Europe or the United States. See “America: a House Divided” (12/7/15).

The “establishment”, like “populism”, is diverse rather than monolithic. Even among the advanced OECD nations such as the United States and those seeking to emulate them, it is not the same everywhere. Mainstream political parties and their economic agendas are not precisely identical, even though such different groups (such as Democrats and Republicans) can belong to the same establishment. What is an establishment (or populist or other anti-establishment) view can change over time.

Different cultures of course will have leaders, but their particular “establishment” ideologies may be significantly and perhaps dramatically different. The current Chinese establishment’s guiding faith in part overlaps with (resembles) but nevertheless is not identical to the creed prevailing in the United States establishment. Or, compare a primitive rural culture and that of a modern Western industrial nation.

However, as a rough and admittedly simplified guideline, one can summarize the ruling Western economic ideology of the post-World War Two period. It is a “capitalism” that in principle generally adores free (open) markets for goods and services, free trade, and free movement of capital, as well as (subject to immigration concerns) fairly free movement of people. Such economic goals (and political and social gospels related to them) are labeled and valued as good and desirable by the so-called establishment. Often they are honored as being rational, reasonable, intelligent, sensible, and prudent. In the post-World War Two span, these good outcomes have intertwined with globalization, which the elites (power structure), likewise generally (on balance) bless. Therefore these authorities view populism, at least to the extent it endangers such good capitalism and the related “structure (arrangement) of things”, as generally bad (or less good; inferior).

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The establishment responded to the British outcome with passionate rhetoric. The dangers of supposedly overly left-wing or right-wing movements, or excessively nationalistic or protectionist ones, or fringe or radical groups must be handled somehow, right? Or so such currently empowered elites advise audiences.

Leading central banks and regulators such as the European Central Bank, Federal Reserve Board, Bank of England, and International Monetary Fund of course stress their devotion to their assorted mandates. Indeed their noble quest to secure praiseworthy aims such as stable prices (sufficient inflation), maximum employment, and economic growth are on behalf of “all of us”. Yet such loosely-defined legislative directives in practice provide these economic high priests wide scope for their interpretation.

In practice, central bankers, even if widely-revered, generally reflect the key economic and political doctrines and ambitions of traditional (current establishment) leaders. And “populism”, though one cannot define it scientifically, though its historical and current international appearance is not everywhere the same, still can “shake the existing economic and political situation and its institutional structures up a lot”. And such resulting uncertainty and disruption (and especially big changes) on balance would be bad (or at least not very good), right? So the Brexit vote was a bad (undesirable and unfortunate) outcome. Populist pressure, especially if it involved challenging the independence of central banks, might even make it more difficult for central bankers to achieve their beloved mandates. Leading central banks nowadays consequently want to preserve the basic structure and trends of the post-World War Two world “order”, to preclude revolutionary or even mildly substantial changes in it.

Therefore, the British “Leave” vote and its aftermath probably will encourage various leading central banks such as the Fed, ECB, Bank of England, and their allies to battle even more fiercely than before against populist menaces. Continued sluggish growth (or a recession), rising unemployment, or a renewed sovereign or private sector debt crisis (whether in Europe or around the globe), would inflame populist ardor, particularly given anger over widespread economic inequality. The central banks therefore likely will sustain existing highly accommodative policies such as yield repression and money printing for longer than previously anticipated, perhaps expanding them “if necessary”.

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Populism and Central Banks (7-12-16)