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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As the fifth largest economy in the world and as a major center of international finance, the United Kingdom is not alone. It remains entwined with the long-running worldwide economic crisis. Although challenges to the British economy intertwine with those confronting the Eurozone, they do not duplicate these. England’s financial problems are not as severe as Greece’s, but they are not minor; England’s present situation and near term prospects do not look as strong as Germany’s. The British Pound will continue to depreciate over the next few months. This decline parallels that of the Euro FX. Bearish trends in the Pound, like those in the Euro currency, portend or confirm weakness in worldwide equities and commodities.
The Euro area currently is almost 16.4pc of the broad real trade-weighted dollar (“TWD”). It was 18.6pc in 2001. The Pound is a comparatively modest part of the TWD. The United Kingdom in 2012 (and 2011) is about 3.5 percent of the broad real TWD (compare 2001’s 5.6pc). Currency trading generals nevertheless closely monitor the cross rate between the US Dollar and the British Pound.
The Pound arguably has been in a major bear pattern for some time. The crucial plateau during the worldwide financial crisis period was attained 11/9/07 around 2.116. Although marketplace history is not marketplace destiny, keep in mind the popular chant, “weak US dollar equals strong US stocks, strong US dollar equals weak US stocks”. This British Pound top versus the dollar occurred about a month after the S+P 500’s major high on 10/11/07 at 1576. Important resistance for Sterling is about 1.665 (see the 4/28/11 high, adjacent in time to the S+P 500 pinnacle at 1371 on 5/2/11 and the Euro FX’s 1.494 5/4/11 summit versus the dollar). Also note around 1.700 (see the 8/5/09 level; compare the later timing of the Euro FX high at 11/25/09 at 1.514). The 10/28/11 top was about 1.615.
The Pound versus dollar cross rate settled around 1.543 at the end of last week, close to the 1.538 low of 10/6/11. The October 2011 level is beneath 1.563 (a fifty percent rally from the all-time low close on 2/26/85). The 1.500 level (about a ten percent drop from the 4/28/11 top) probably will be tested and broken. Though it is distant from today’s price, the key bottom around 1.430 (see the 5/20/10 low) eventually will be neared and perhaps challenged. Noteworthy additional Pound support is around 1.350 to 1.380. The 1/23/09 intraday low was about 1.350, the 3/9/09 close about 1.376 (Euro FX final cross rate low versus the greenback was 3/4/09 at 1.246). Recall the major low in the S+P 500 on 3/6/09 at 667. A 20pc fall from 1.665 is 1.332.
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United Kingdom- Getting Pounded (1-10-12)
The decline in the Euro FX does more than reflect Europe’s sovereign debt and banking crisis. Europe does not stand or act alone. Euro currency weakness underlines the continuing epic worldwide economic disaster that emerged in 2007. The sustained slump in the Euro FX since spring 2011 warns that the worldwide economic recovery that began around early 2009 is slowing. Some headway has been made in containing Eurozone (and other European) problems, but that progress has been insufficient and it probably will remain so for at least several more months. The Euro FX will depreciate further from current levels.
First, despite the major sovereign debt and banking problems, the Eurozone’s political and economic leadership has the political desire and (ultimately) sufficient economic power to preserve the Eurozone. This means keeping even members such as Greece within it. The problems of the so-called peripheral nations in key respects have become those of the entire fraternity. The Eurozone may rely on outside economic help from the International Monetary Fund or other countries to help pay for the repairs. However, the region as a whole will, “if push comes to shove”, resolve the thorny difficulties itself. And even if Greece did exit the Eurozone, remaining Eurozone members probably would band together to keep the Eurozone intact.
For some time, the so-called fixes may involve pushing the problem (dangers) off to a more distant future. The buying-time strategies (hoping that economic recovery eventually will enable a genuine escape) of course will have some costs. For example, picture inflation risks, slower growth, and some suffering by creditors.
The substantial role of the Euro FX in official reserves underlines the importance of the Eurozone and its Euro FX in the world economic order. Most of the world surely does not want the Euro FX to disappear entirely, or to suffer a massive depreciation (as opposed to a further small or even a modest depreciation). Thus at some point (“if really necessary”), the world outside of Europe would ultimately bail out Europe.
Consequently the declines in the Euro FX over the past several months confirm worldwide economic sluggishness (and slumps in stock marketplaces and commodities). So further falls in the Euro FX may reflect- or help lead to- even more declines in equity and commodity playgrounds. That additional Euro FX debasement may even reflect or accelerate an economic downturn (not just stagnation) in some regions, and not just European territories. Thus Euro FX currency depreciation alone will not solve the Eurozone’s (or overall European) problems.
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Eurozone- Breaking Up Is Hard To Do (1-3-12)
Especially if noteworthy economic variables- including so-called political ones- warn of or reveal substantial financial danger or injury, many marketplace participants preach “flight to quality” doctrines. What represents a supposed “safe haven” sector varies according to viewpoint and era. Inflation often is feared. Or, how could a severe recession or deflation injure us? Political unrest and military conflict sometimes surface.
Many gurus designate gold as a worthy store of value. We all saw it skyrocket over $1500. Clairvoyants devote much attention to government notes and bonds as an escape hatch if a dangerous downturn beckons or is underway. In terrifying recent times, those of the United States and Germany often have allured traders.
Instead, concentrate awhile on the Swiss Franc. Switzerland indeed is a rather small nation. However, this mountainous land has a very long history of and reputation for financial stability, which it battles fiercely to protect. The fluctuations of the Swiss Franc against the Euro FX are not precisely the same as its trajectories relative to the US dollar. In recent years, the major levels and trends of Switzerland’s actively traded currency nevertheless reflect worldwide (particularly European and American) economic disaster fears and recovery hopes.
Fear and hope interrelate in marketplaces, as elsewhere. Yet suppose one equates marketplace “flights to quality (safety)” with fear. Then there is a counterpart to the flight to quality outlook. Its opposite is the hopeful “flights of fancy” vision. Especially when policy interest rates are kept near rock bottom levels for extended periods (and all else equal), pursuits of profit via other paths of potential returns often become quite fervent. Suppose money printing occurs as well. All else equal, massive money printing tends to boost nominal prices of “assets”, including stocks, commodities, and low-rated (junk; many emerging marketplace) bonds.
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Flight Paths (The Money Jungle, Part Five)
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