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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EXIT STRATEGIES: THE FED, US TREASURIES, AND US STOCKS (c) Leo Haviland July 14, 2014

Does the Federal Reserve Board have a coherent detailed exit plan from its long-running extraordinary and highly accommodative monetary policy? No. Is it likely to devise one soon? No. Is it nevertheless likely to continue to stress its ability to prudently manufacture and implement a suitable exit program? Yes.

The Fed’s broad and unspecific principles do not create a genuine and practical exit strategy. Neither do fervent hymns proclaiming devotion to its legislative mandate. Neither does rhetoric about studying numerous, intertwining, changing, and complex variables and eloquence regarding its diligent monitoring of the economic landscape. Adherence to forward guidance wordplay is not an adequate substitute for a practical strategy. The Fed’s policy exit generally will be reactive, with its decisions and actions that of a follower rather than a leader.

Why does the Fed battle to create expectations that it has, or at least can and (when necessary) readily will develop, a suitable exit program? The central bank wants audiences to have faith that it can substantially influence the creation of desirable economic outcomes. Exit guidelines fortify marketplace and political hopes that a vigilant, wise, and sufficiently experienced Fed really (or at least very probably) knows how and when it can retreat gracefully from its glorious easy money programs without endangering United States (and worldwide) economic growth and the central bank’s inflation and employment targets.

The Fed’s quest to create confidence in its exit strategy also fights to promote confidence that American interest rates will not rise too far or too fast. Why fear a bear move in debt securities? Higher rates would weigh on economic growth. They would wound owners of US Treasury and other debt securities, which could inspire many “investors” to flee from these marketplaces (especially from longer-dated debt). Such escapes of course could lead to even higher yields. Besides, why risk sitting around awaiting capital loss when the Fed promises higher rates- unless such hikes occur very slowly and with sufficient warning? Given the huge foreign ownership of US Treasury securities, net foreign selling (or even reduced net buying) of them could make funding of the nation’s budget deficits increasingly difficult (especially in later years), particularly as the Fed soon will no longer be ravenously buying US Treasuries.

Moreover, the Fed also does not want a sharp sustained bear tumble in the US stock marketplace. The enormous stock bull move has helped to rebuild household net worth and sparked rises in consumer and business confidence and activity. After the Fed ended the first two rounds of money printing, the S+P 500 dropped. The gradual tapering of its current mammoth debt securities acquisition adventure underlines its fears of another run to the exits by stock owning audiences.

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Exit Strategies- the Fed, US Treasuries, and US Stocks (7-14-14)

FEDERAL RESERVE EXIT STRATEGIES © Leo Haviland February 21, 2013

Federal Reserve Board generals have underlined that they indeed possess an exit strategy for their ongoing extraordinary easing program. Such confident rhetoric regarding an escape plan indeed helps to boost the morale of many economic and political observers of marketplace battlefields. Didn’t its entrance strategy work? The Fed Funds rate has stayed near the ground floor since late 2008, United States Treasury yields have collapsed relative to their 2007 heights, and US equities (use the S+P 500 as a signpost) have soared from their March 2009 abyss.

Yet marketplace combatants should be wary of the Fed’s exit strategy design as well as its tactical implementation. It is not a detailed and finished blueprint. In actual practice, the exit strategy involves significant risk, and it probably will not be put into practice nearly as timely or smoothly as propaganda from the Fed leadership hints. How rapid, coherent, and helpful were the Fed’s policy viewpoints and actions in the early stages of the worldwide economic crisis? As the Fed’s marketplace entrance strategy and maneuvers were very remarkable and evolved over time, why should its exit plan and its application be any more “orderly”?

Yet why should the Fed’s exit strategy be without some significant pain to UST and stock owners? There’s at least a significant risk of notable wounds. After all, the rally in debt and equity prices assisted by the Fed’s massive marketplace easing generally enriched and thus pleased owners of American stocks and UST (and many other debt instruments). Besides, we know the noble Fed is not the only significant policy maker and fighter on the US (and international) economic battlefield. Thus its practical control over marketplace outcomes has significant limits.

To what extent is the Fed Chairman accurate? Is the Fed Chairman trying to minimize the role of the Fed in financing (money printing for) the deficit and to understate potential overall exit strategy issues?

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Federal Reserve Exit Strategies (2-21-13)