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 FOREIGN EXCHANGE BATTLEFIELD: ADVANCES AND RETREATS © Leo Haviland March 5, 2015

Marketplace history of course need not entirely or even substantially repeat itself. In recent years, devoted central bank generals, via diverse strategies such as sustained yield repression and massive money printing, have battled fervently to ensure sustained economic growth, manufacture sufficient inflation, and slash unemployment. Politicians have fought fiercely to ensure recovery, especially by deploying their deficit spending arsenal.

However, recall the emergence and acceleration of 2007-09”s worldwide economic crisis. And ask to what extent the serious debt and leverage problems of the Goldilocks Era genuinely have been cured.

The recent sustained advance of the United States broad real trade-weighted dollar (“TWD”) warns of erosion in global economic output rates. The TWD probably will continue to appreciate.

The substantial depreciation of the Euro Area and Japan real effective exchange rates (“EER”) likewise flag weakening (and oncoming reductions in) worldwide real GDP rates. So does the slump in the Canadian EER; Canada’s dive partly reflects the murderous price collapse in the commodities sector. Though Australia is not a G-7 nation, like Canada it is a developed nation and a major commodity producer. Its EER likewise has tumbled.

The United Kingdom’s EER has been fairly powerful in recent months. In part, this probably reflects the comparative economic weakness of its key trading partner, the Euro Area.

Both the US dollar and Chinese renminbi real EERs marched higher during the darker days of the fearful 2007-09 disaster. Their present-day EER patterns, though not identical, likewise have been bullish; this intertwining further indicates the likelihood that growth rates in international GDP will surrender ground. Although the Chinese EER trend has been bullish in recent months, the renminbi has retreated against the US dollar; this renminbi cross rate weakness points to a slowing Chinese economy.
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The essay, “Crumbling BRICS: a Currency Perspective” (2-11-15), studies the effective exchange rates for Brazil, Russia, India, China, and South Africa (plus Mexico). Its analysis supports the key arguments and conclusions related to the advanced nations.

On 3/6/15, the S+P 500 celebrates the sixth anniversary of its 3/6/09 major low at 667. The stock marketplace rally since March 2009 obviously has been explosive. However, the TWD’s current trend and level, when interpreted alongside the real EERs of other G-7 advanced nations and China (and alongside other factors such as emerging stock marketplace, commodity, and interest rate trends), indicate that the S+ P 500 probably has established a notable top (2/25/15 high 2120) or will do so in the near future.

“Crumbling BRICS” states: “Recall the acceleration of the worldwide economic crisis (and decline in the S+P 500) in 2008 as the broad real TWD appreciated. The S+P 500’s major peak occurred 10/11/07 at 1576, but its final high was 5/19/08 at 1440, close in time to the April 2008 TWD bottom. The S+P 500 collapsed from around 1313 (8/18/08)/1265 (9/19/08). The S+P 500’s major bottom at 667 on 3/6/09 occurred the same month as the broad real TWD pinnacle.”

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The Foreign Exchange Battlefield- Advances and Retreats (3-5-15)

WHATEVER IT TAKES: RECENT EUROZONE AND JAPANESE ADVENTURES © Leo Haviland December 1, 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.

Charts--FX-and-10-Yr-Govt-Note-of-Eurozone-and-Japan-(12-1-14,-for-essay-Whatever-It-Takes)-1

Charts--FX-and-10-Yr-Govt-Note-of-Eurozone-and-Japan-(12-1-14,-for-essay-Whatever-It-Takes)-2

Charts--FX-and-10-Yr-Govt-Note-of-Eurozone-and-Japan-(12-1-14,-for-essay-Whatever-It-Takes)-3

Charts--FX-and-10-Yr-Govt-Note-of-Eurozone-and-Japan-(12-1-14,-for-essay-Whatever-It-Takes)-4

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Whatever It Takes- Recent Eurozone and Japanese Adventures (12-1-14)
Charts- FX and 10 Yr Govt Note of Eurozone and Japan (12-1-14, for essay Whatever It Takes)

EUROZONE: RUNNING IN CIRCLES © Leo Haviland November 18, 2013

Nevertheless, although the Euro Area “in general” is not entirely out of gas and running on empty, it is running in place. Its economic performance for the next few years probably will be sluggish. There will be little or no economic growth, general government debt will remain quite high, and unemployment will stay very lofty.

The Eurozone economy is going nowhere fast on the road to recovery. Of course differences between individual nations exist; Germany is not Greece.

For the stock arena, take the SXXP index of 600 European stocks (though it includes United Kingdom and other non-Euro Area companies) as a benchmark (Bloomberg symbol is SXXP). This vehicle, like America’s S+P 500, has not moved in a sideways pattern, but instead has (despite some sharp twists and turns) flown sky-high since its 3/9/09 major low at 155.4 (S+P 500 major trough 3/6/09 at 667). The bottom line is that the probable path of European equities probably is closely bound with that of American stocks.

With the SXXP now around 325.0, what’s the rundown on some SXXP levels to monitor? Recall 332.9, the 5/19/08 high. The final top in the S+P 500, after its 10/11/07 pinnacle at 1576, also occurred 5/19/08 (at 1440). If prices fall from current levels, note that twice the 3/9/09 bottom is 310.8; keep an eye on 2/18/11’s 292.2 if prices stumble further. Unlike the S+P 500, the SXXP has not escaped above its 2007 peaks. Are prices for European equities circling back to their former record heights? In any event, if European stock prices venture even higher from current levels, watch 10/11/07’s summit at 391.3 and the major pinnacle of 401.0 on 7/13/07.
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Eurozone- Running in Circles (11-18-13)
Chart- German Govt 10 Year Note (for essay, Eurozone- Running in Circles) (11-18-13)

AMERICAN MARKETPLACES: AT THE CROSSROADS © Leo Haviland October 15, 2012

The world’s long-running economic crisis of course has not limited itself to either one nation or one region. However, at its outset in 2007, most did not anticipate the scope or length of the disaster. Weren’t potential risks to the international economy rather modest? Weren’t issues related to the United States real estate marketplace mostly relevant only to that domain and that nation, and likely to be restricted to them? Yet substantial debt and leverage (and other intertwined issues) and their consequences were not confined either to American territory or the real estate playground.

The recent Eurozone chapters of this terrible trouble supposedly started with so-called peripheral nations such as Greece, Portugal, and Ireland. Countries such as Greece indeed first captured headlines. However, that does not demonstrate that causes of Eurozone problems necessarily started only in them. In any event, “difficulties on the periphery” engulfed the rest of Europe and traveled around the globe.

Despite broad concerns regarding worldwide economic problems and risks, despite the widespread past and current fascination with the European scene, suppose one focuses on aspects of the American stage, beginning with some highlights involving the United States alongside Canada and Mexico in the foreign exchange context. This survey of America and its geographic neighbors underlines the weakness of the United States dollar and the size of America’s fiscal troubles. This suggests the merit of inquiring into US currency, stock, interest rate, and commodity marketplace past and future relationships in the context of Federal Reserve easing policies and America’s fiscal problems.

The broad real trade-weighted dollar probably will continue to weaken. The dangerous United States fiscal situation probably will not be genuinely fixed in the next several months. A full- fledged threat of a federal fiscal catastrophe likely will be necessary for sufficient progress in that sphere to occur. Though the United States is not the center of the universe, the effects of further dollar feebleness and the worsening of the country’s fiscal crisis will radiate worldwide.

The S+P 500 has made or soon will make a significant peak.

Thus the emerging (current) story and trend appears to be: weaker dollar (TWD), weaker S+P 500, and higher government rates (UST 10 year benchmark). This vision admittedly is dramatically different from the current popular faith in these marketplace relationships.




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American Marketplaces- At the Crossroads (10-15-12)
Charts- US Dollar v Canadian Dollar, Mexican Peso (10-15-12)