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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JAPAN: FINANCIAL ARCHERY, SHOOTING ARROWS © Leo Haviland October 5, 2018

The famous military philosopher and analyst Carl von Clausewitz states in “On War” (Book Two, chapter 3; italics in original): “Rather than comparing it [war] to art we could more accurately compare it to commerce, which is also a conflict of human interests and activities; and it is still closer to politics, which in turn may be considered as a kind of commerce on a larger scale.”

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OVERVIEW AND CONCLUSION

In late 2012, the Japanese political leadership dramatically unveiled its three “arrows” of easy money, flexible fiscal policy, and structural reform to improve the country’s economic performance. In practice, those Japanese political authorities generally represent major financial (corporate; commercial) interests (“Japan, Inc.”). The Bank of Japan’s policies since late 2012, though nominally independent of political and economic power centers, in practice reflects the goals of Japan’s substantial entrenched economic groups and the political representatives and bureaucrats aligned with them.

Monetary policy of course is not the only factor affecting GDP, inflation, and other intertwined variables. Yet Japan’s ongoing government fiscal deficit, though somewhat helpful for promoting growth and inflation, is not the most noteworthy element in the country’s policy array since end-2012. Moreover, the general government debt burden remains massive and likely will remain so for many years. According to the International Monetary Fund, Japan’s general government gross debt as a percent of GDP was 236.4 percent in 2017 (contrast the G-7 average of 118.6pc that year) and forecast at 236.0pc for 2018 and 234.2pc in 2019, dipping only slightly to 229.6pc by 2023 (“Fiscal Monitor”, April 2018, Table A7; the October 2018 update probably will not change Japan’s government debt as a percent of GDP statistics substantially). And structural reform in Japan, which usually crawls forward slowly, has been unremarkable.

The extremely easy monetary policy arrow embraced by the accommodative Japanese central bank for almost six years is the country’s critical weapon. The central bank chief faithfully and repeatedly proclaims that sustained inflation of two percent is a praiseworthy goal (as essentially do the sermons preached by other leading central banks such as the Federal Reserve Board and the European Central Bank). The Bank of Japan’s ongoing tools to achieve its aims include sustained yield repression and massive quantitative easing (money printing). So far, the Bank of Japan, despite its determination, has not come close to achieving two percent inflation. The consumer price trend in recent months manifests merely minor progress on that front. And although Japan’s quarterly GDP for April-June 2018 may signal enhanced year-on-year economic performance, International Monetary Fund forecasts are not as sunny.

Yet what else has the Bank of Japan (as a representative and reflection of the country’s political and economic generals) really battled to achieve via its remarkably lax monetary strategy? A notion of improved and acceptable economic growth and frequent reference to an iconic two percent “price stability target” do not offer a complete story. Moreover, the enthusiastic declaration of assorted monetary policy plans and tactics does not directly reveal important aspects about the economic (financial; commercial; marketplace) landscape within which the interrelated GDP and inflation goals are targeted and such extraordinary easy money programs are designed and applied.

In practice, what are the intermediate connections (means; methods) to the achievement of the allegedly ultimate ends of satisfactory growth and sufficient inflation? One key approach of the Bank of Japan’s magnificent scheme relates to currency depreciation, the other to stock marketplace appreciation. Japan’s central bank sentinel quietly has aimed to achieve the related objectives of Yen weakness and Japanese stock marketplace strength.

In recent times, Japan deliberately has kept a relatively low profile in foreign exchange, trade, and tariff conflicts. Compare the furious racket nowadays, especially since the advent of the Trump presidency, around the United States and China (and also in regard to the European Union, Mexico/Canada/NAFTA).

Nevertheless, for several years, Japan has waged a trade war (engaged in fierce currency competition) without capturing much international political attention or media coverage. The Bank of Japan (and its political and economic allies) in recent years has fought vigorously to depreciate the Yen (especially on an effective exchange rate basis) and thereby to bolster Japan’s current account surplus. Japan’s overall economic growth relies significantly on its net export situation. The Yen’s substantial retreat and its subsequent stay at a relatively low level and the significant expansion in the country’s current account surplus are glorious triumphs.

Since late 2012, the Bank of Japan also has struggled ferociously to rally the Japanese stock marketplace (boost corporate profits). As of early autumn 2018, this guardian has achieved significant victories in this campaign as well.

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Japan- Financial Archery, Shooting Arrows (10-5-18)

MARKETPLACE TANTRUMS (AND OTHER SIGNS, SOUNDS, AND FURY) © Leo Haviland, July 11, 2017

“In the day we sweat it out in the streets of a runaway American dream”, sings Bruce Springsteen in “Born to Run”.

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CONCLUSION

Wizards in Wall Street and coaches on Main Street offer a variety of competing descriptions of and reasons for the emergence, continuation, and ending of economic trends, including bull and bear patterns in stock, interest rate, currency, and commodity marketplaces. Apparently dramatic price fluctuations and trend changes frequently inspire heated language of volatility, spikes, crashes, mania, and panic. Colorful metaphors frequently punctuate the tales and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk about a potential reduction in quantitative easing (money printing) in conjunction with marketplace movements generated wordplay of a “taper tantrum”.

In recent weeks, international financial marketplaces and media have worried that central bank policy tightening (or threats of such action) will ignite a taper tantrum akin to what occurred around late spring 2013. That fearsome event saw stocks plummeting and interest rate yields rising rather rapidly in the United States and elsewhere around the globe.

Not only is the Federal Reserve in the process of slowly raising the Federal Funds rate and chirping about diminishing the size of its gargantuan balance sheet. The European Central Bank and others have hinted about reducing the extent of their highly accommodative monetary policies. The ECB is buying €60 billion in mostly government bonds each month via quantitative easing. Will the ECB taper its purchases in 2018?

The Financial Times headlined: “Confusion as Carney [Bank of England Governor] and Draghi [ECB President] struggle to clarify stimulus exit” and “‘Taper tantrum’ echoes” (6/29/17, p1). “End of cheap money leaves central bankers lost for words” and “Officials struggle to convey policy direction precisely to avoid further ‘taper tantrums’” (FT, 6/29/17, p3). “Central bank retreat from QE gathers pace”; “Sudden hawkish shift in policy across the globe has analysts talking of new ‘taper tantrum’” (FT, 7/5/17, p20).

Central bank language and behavior (whether by the Fed or one of its allies) expressing willingness to reduce (or cease) very easy money schemes indeed increase the chances of rising yields in key debt signposts such as the US Treasury 10 year note and boost the likelihood of a decline in important stock benchmarks such as the S+P 500.

Though central banks nowadays may (as in 2013 and at other historical points) spark or accelerate noteworthy trends in securities (and other) marketplaces, the central bank policy factor nevertheless intertwines with numerous other economic and political phenomena. And one or more of such other variables significantly may help to inspire a noisy marketplace “tantrum”. Not all marketplace tantrums are “taper tantrums”.

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Marketplace Tantrums (and Other Signs, Sounds, and Fury) (7-11-17)

THE CURTAIN RISES: 2016 MARKETPLACE THEATERS © Leo Haviland January 4, 2016

Shakespeare proclaims in “As You Like It” (Act II, Scene VII):

“All the world’s a stage,

And all the men and women merely players”.

THE 2016 WORLDWIDE ECONOMIC STAGE

As the 2016 international economic (and political) drama commences, the worldwide economy not only is sluggish, but also feebler than most forecasters assert. International real GDP, as well as that in the United States, has a notable chance of slowing down further than many expect (the International Monetary Fund predicts real global output will increase 3.6 percent in calendar 2016; “World Economic Outlook”, Chapter 1, Table 1.1).

The ability of the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, China’s central bank, and their friends to engineer their versions of desirable outcomes via highly accommodative policies has diminished. Beloved schemes such as quantitative easing (money printing) and yield repression and related rhetoric are becoming less influential. Ongoing significant political divisions and conflicts (America’s troubling carnival represents only one example) likely will make it challenging for political leaders to significantly promote substantial (adequate) growth.

The failure of longer term US government yields such as the UST 10 year note to rise substantially despite the Fed’s recent modest boost in the Federal Funds rate represents a noteworthy warning sign regarding American and global financial prospects. Note also very low sovereign yields in much of the Eurozone (picture Germany); Japanese government rates remain near the ground floor. However, yields of less creditworthy debt instruments, whether sovereign or corporate, probably will continue to climb in 2016, another ominous indication.

For the near term at least, the broad real trade-weighted US dollar probably will remain strong. Emerging marketplace equities and commodities “in general” likely will persist in bear trends. What does the rally of the dollar above its late August/September 2015 heights signal? What does the collapse of benchmark commodity indices such as the broad GSCI beneath their late August 2015 lows portend? These warn not only of worldwide economic weakness, but also of further declines in the S+P 500. Note that emerging marketplace stocks hover fairly closely to their 2015 depths. The S+P 500 probably will remain in a sideways to bearish trend.

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The Curtain Rises- 2016 Marketplace Theaters (1-4-16)

EUROPEAN DEBT DANGERS: SELLING SOLUTIONS, BUYING TIME…YIELDING RESULTS? © Leo Haviland, January 17, 2012

Though global marketplaces and their problems intertwine, let’s concentrate on recent European debt developments and related statements alongside a review of several European interest rate spread relationships. This inquiry underlines that the heated efforts by European (and American and other) economic (political) generals have yielded only partial progress in vanquishing the challenges of the worldwide international crisis. So the worldwide international economic crisis probably will march onward for quite some time. And there is more than a little chance that it will worsen.

A review of yield spreads between the 10 year government debt of Germany and the key Eurozone nations of Spain and Italy over the past year or so underlines the gradually growing sovereign debt and banking stresses on Europe (and therefore on other territories and marketplaces). In addition, these widening European spread trends, especially when reviewed in the context of stock marketplace, currency, and commodity ones, point out the limited (merely partial) successes of efforts to solve the European sovereign debt and banking crisis in particular (and the worldwide economic disaster in general). These spreads warn of dangers to European (and global) economic growth.

Compare the timing of the German 10 year’s high on 4/11/11 at 3.51pc with the April 2011 lows in the German 10 year’s spread against Spanish, Italian, and Hungarian government debt. Keep in mind the pattern of higher lows in the Spanish/German and Italian/German spreads since mid-April 2011. For this mid-April 2011 timing perspective and its aftermath, remember the S+P 500’s high around then (on 5/12/11 at 1371) and that in the broad Goldman Sachs Commodity Index (4/11/11 and 5/2/11 at 762).

Euro FX weakness also reflects the Eurozone (European) crisis. Note the rough parallel since spring 2011 between the declining Euro currency (peak versus the US dollar 5/4/11 at 1.4940) and the gradual widening of the Spanish/German and Italian/German 10 year government spreads.

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European Debt Dangers- Selling Solutions, Buying Time…Yielding Results (1-17-12)