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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FACING A WALL: EMERGING US DOLLAR WEAKNESS © Leo Haviland January 15, 2019

CONCLUSION AND OVERVIEW

The broad real trade-weighted United States dollar probably peaked at 103.2 in December 2018 (“TWD”; Federal Reserve Board, H.10; monthly average, March 1973=100). Significantly, that elevation links with the critical TWD pinnacle of December 2016 at 103.4/January 2017 at 103.3, thereby building a formidable double top barrier. This double top ends the glorious long-running major bull move which commenced in July 2011 at 80.5.

Unlike the broad real trade-weighted dollar, the broad nominal trade-weighted dollar has daily data. The broad nominal US dollar probably also formed twin peaks. It achieved an initial summit on 12/28/16 (at 128.9) and 1/3/17 (at 128.8). The nominal TWD’s recent high, 12/14/18 at 129.1, edged less than one percent beyond the 2016/17 summit.

The decline in the broad real trade-weighted dollar from its 103.2/103.4 summit probably will be fairly close to and quite possibly more than ten percent. This retreat likely will last at least for several months. The broad TWD’s wall of resistance at 103.2/103.4 probably will not be broken anytime soon. If it is, the breach likely will not be substantial; dollar depreciation will resume.

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What interrelated phenomena currently are sparking, or will tend to encourage, near term and long run US dollar weakness?

Growing faith that America’s Federal Reserve Board will slow down (at least for a while) its current program of raising the Federal Funds rate represents a key factor in the establishment of December 2018’s TWD ceiling. Both the Fed Chairman and other US central bank guardians recently spoke of the need for “patience” on the rate increase front. For example, note Chairman Powell’s remarks before the Economic Club of Washington, DC (see the NYTimes, 1/11/19, pB3). Read the transcript of his 1/4/19 comments in an Atlanta, GA conference with other past Fed Chairs.

By reducing the likelihood of (at least) near term boosts in the Federal Funds rate, and thereby cutting the probability of notable yield increases for US government debt securities, the Fed makes the US dollar less appealing (less likely to appreciate further) in the perspective of many marketplace players. The Fed’s less aggressive rate-raising scheme (at minimum, a pause in that “normalization” process) mitigates enthusiasm for the US dollar from those aiming to take advantage of interest rate yield differentials (as well as those hoping for appreciation in the value of other dollar-denominated assets such as American stocks or real estate relative to the foreign exchange value of the given home currency). Capital flows into the dollar may slow, or even reverse to some extent.

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Another consideration constructing a noteworthy broad real TWD top is emerging optimism that tariff battles and other aspects of trade wars between America and many of its key trading partners (especially China) will become less fierce. Both the US and China increasingly are nervous regardless the ability of their nations to maintain adequate real GDP increases.

The current United States China 90 day negotiation deadline is 3/1/19. The NYTimes reported signs of Chinese concessions (1/9/18, ppA1, 8). US trade deals with China and other noteworthy nations reduce the incentive for those countries to depreciate their currency relative to the dollar in order to maintain market share for their goods and services within America. Such deals with China may well be vague or not amount to much in actual practice, but even cosmetic progress on the trade war battlefields will tend to weaken the dollar.

Signs of an armistice with China would bolster confidence that US trade feuds with Europe (particularly Germany) will subside. For the near term, the late 2018 deal between the US Administration with Canada and Mexico changing NAFTA treaty arrangements has lessened marketplace agitation regarding trade conflicts in that arena. Whether Congress eventually will enact this deal or a version close to it remains uncertain.

The current US Administration may seek a weaker US dollar relative to current heights in order to stimulate the economy as election season 2020 approaches.

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The substantial and worsening United States debt situation, particularly in the federal sector as a result of the end-December 2017 tax “reform” legislation, nowadays encourages and increasingly will assist long run dollar depreciation. In its bearish implications for the broad real TWD, this ominous US debt variable at present is somewhat independent of near term Federal Reserve Board and other key central bank policy action and rhetoric as well as the outcome of trade negotiations. However, it nevertheless entangles with these phenomena.

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Facing a Wall- Emerging US Dollar Weakness (1-15-19)

AMERICA THE DEBTOR © Leo Haviland March 17, 2014

In recent weeks, much marketplace and media attention has underlined growing United States household net worth as well as decreasing household indebtedness as a percentage of GDP. Pundits proclaim that federal budget deficits have substantially declined from the towering heights of only a couple of years ago. Hasn’t the American and worldwide economy generally improved since the dreadful times of late 2008/early 2009? Americans point to the stratospheric rise of the S+P 500 since its March 2009 major low around 667. And look at those great US corporate earnings of the past couple of years! All such talk surely encourages optimism regarding the American financial situation, as has the related sustained highly accommodative monetary policy rhetoric and action of the Federal Reserve Board and its central banking comrades around the globe. Yet although Fed policies such as gargantuan money printing, severe interest rate repression, and fancy wordplay regarding forward guidance have boosted morale and purchased time for action on America’s major debt problem, they have not bought a solution to that issue.

 

To better perceive and assess America’s debt challenge, sentinels should adopt a wider perspective, focusing on the overall United States debt situation over a long historical period. For over five decades, from the early 1950s up through the glorious Goldilocks Era that ended in 2007, and for a couple of years thereafter, total US indebtedness as a percentage of nominal GDP climbed steadily and substantially.

 

Remarkably little progress has been made in the comprehensive (all-inclusive) US debt situation since 2009’s very lofty percentage. Increasing federal indebtedness has substantially though not entirely outweighed improvements in the consumer and state and local government sectors. Since the national government is a representative (democratic; “We, the People”) one, the general US debt situation has not mended significantly. In addition, although the federal budget deficits will remain relatively small (at least compared to the mammoth gaps of a few years ago), they gradually expand after the next few years. The ongoing substantial US debt mountain consequently remains a long run burden on, and probably also a near term problem for, US and international economic growth.

 

This review of total American credit marketplace debt portrays the development of a national culture of debt. The long run trend probably indicates a growing bias toward consumption and spending rather than saving. The increasing borrowing and massive debt accumulation arguably in part also probably reflect an increasingly widespread sense of entitlement to American Dream goals of the “good life” and a “better life”.

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America the Debtor (3-17-14)