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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CHINA: ITS GREAT GROWTH STORY GROWS OLD © Leo Haviland June 23, 2014

Much of the world currently displays nearly unblinking faith in the expertise of key central bank guardians such as the Federal Reserve Board, European Central Bank, Bank of Japan, and Bank of England. These illuminated central bankers supposedly will continue to play substantial and successful roles in engineering further economic growth via easy money schemes such as interest rate yield repression, quantitative easing (even if money printing ends in America or elsewhere, the securities buying operation may not be unwound quickly, if at all), and forward guidance wordplay. The Fed wizard in particular also surely has an almost pain-free and coherent exit strategy from its longstanding highly accommodative programs, right?

Ongoing trust in such marvelous central bank talent finds a counterpart in widespread belief that the Chinese economic growth miracle will continue for the long run, or at least the foreseeable future. Significant government deficit spending and relaxed credit policies indeed sparked much Chinese growth in recent years. However, Chinese real GDP growth probably has slowed more than many believe. Assorted intertwined variables hint at this reduced expansion and suggest that the slowdown in its growth rate probably will continue over the medium term. Given China’s crucial role in the interdependent global economy, this relative weakness in its GDP growth should have ominous implications for growth elsewhere.

Admittedly, China’s official and private sector debt scene is murky. Yet the edging down of its real GDP growth is occurring in an environment of its increasingly troubling debt and credit situation. All else equal, efforts to solve or at least mitigate debt and credit problems probably will result in greater than expected (desired) cuts in the country’s economic growth rate.

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China- Its Great Growth Story Grows Old (6-23-14)
Charts- China (6-23-14, for essay China- Its Great Growth Story Grows Old)

AMERICAN CORPORATE PROFITS AND THE S+P 500 (c) Leo Haviland August 1, 2012

In recent decades, the overall United States debt outstanding relative to nominal GDP has substantially increased. America’s national willingness to accumulate debt (borrow and spend) generally has played an important role in the generation of its economic growth. It of course is not the sole factor. This national debt increase thereby has tended to boost (be a bullish factor for) equity prices, at least up to now. A significant cut in America’s debt burden (deleveraging) probably will promote a decline in the nominal after-tax profit to GDP ratio from current elevated levels. This reduction also may encourage a slowing of after-tax profit rises, or even encourage an actual decline in profitability levels. These processes in turn probably would be bearish for US equities. Debt levels and trends are not the only factor influencing US GDP, corporate profits, and stock levels and patterns. Will American corporate profits forever keep rising? History is not destiny, but they often have declined.

Besides, growing debt does not inevitably guarantee economic health, corporate profitability, or soaring stocks, whether in America or anywhere else. Sustained Federal Reserve monetary easing buys time and sells hope, but it does not solve the US national debt problem. History reveals that at some point more and more national debt can generate grave problems. America probably is at or very near the danger level from its current and near-term debt situation, not just over the so- called long run horizon.

Let’s place American after-tax profits in the context of economic output. The average United States yearly ATP level relative to nominal GDP from 1946 to 2011 is about 6.2 percent. However, during the marvelous Goldilocks economy, and even up to the present despite the ongoing worldwide economic crisis, this indicator has been remarkably strong. Recall lows of

3.1pc in 1986 and just under 5.0pc in 2001. Before the 2004 to the present period, the last high over eight percent was 1950’s 8.6pc. From 1951 through 2004, it exceeded seven pc only three times (1978, 1979 and 2004). Over 2004-2011’s span, the average jumped to 9.0 percent.

The ratio in 2004 was 7.8pc, rising to 9.7pc in 2005 and 10.1pc in 2006. Calendar 2006 thus established a new pinnacle (going all the way back to 1929 not just 1946). In the year the global financial crisis emerged, 2007, it remained high, at 9.2pc. Even in 2008’s savage US and worldwide downturn, accompanied by the plummeting S+P 500, ATP relative to GDP were almost 7.4pc. The S+P 500 reached a major low on 3/6/09 at 667. In 2009, that ATP/GDP relationship was 8.4pc. What about the fairly sunny recovery years thereafter? The ATP total for 2010 bordered ten pc of nominal GDP, with 2011 elevated at 9.8pc.

What was the ratio of ATP for first quarter 2012 relative to GDP? Nominal 1Q12 GDP was about $15.48 trillion (annualized). Corporate profits were about $1.67 trillion (annualized). This is about 10.8pc of 1Q12 nominal GDP, thus marching beyond 2006’s joyous Goldilocks Era height to establish a new record height for that measure.

Though 2Q12’s earning reporting season has not ended, news reports suggest the nominal ATP level is approximately in line with 1Q12’s, and maybe even a couple of percentage points higher. US 2Q12 nominal GDP inched up to about $15.60 trillion from 1Q12’s $15.48tr. Thus the nominal ATP/GDP ratio probably remains around record levels.

Alongside these lofty 2012 profit levels, the S+P 500 attained new highs relative to its 2009 abyss (4/2/12 at 1422, 5/1/12 at 1415). These spring 2012 levels neighbor the S+P 500’s final summit at 1440 on 5/19/08, though they remain quite a bit beneath the major high on 10/11/07 at 1576.

An army of intertwined variables interrelate to propel the S+P 500 up, down, or sideways. However, suppose ATP slide lower relative to first half 2012 heights and that the ATP to GDP relationship retreats to fairly near the long run 6.2 percent average. All else equal, this probably will be a bearish factor for the S+P 500.

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American Corporate Profits and the S+P 500 (8-1-12)

EUROZONE- BREAKING UP IS HARD TO DO © Leo Haviland, January 3, 2012

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)