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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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)

MARKETPLACES AND POLICIES- MAKING CONNECTIONS © Leo Haviland, November 29, 2011

Since the current economic crisis emerged in 2007, a rough pattern has been that major movements and levels in US Treasury ten year note yields have preceded or coincided with those in the S+P 500. Thus, “in general”, plummeting UST yields have been paralleled by diving stock prices. And rising interest rates are connected to rallies in stocks. So in today’s world, gurus and guides often underline that higher and higher UST rates fit an economic recovery (health) scenario. In contrast, collapsing rates indicate looming (or actual) disaster; hence the popularity of flight to quality and safe haven commentary in regard to UST. Such relationships between the UST 10 year note and stocks (and variables allegedly bound to them) of course help forecasters to assess probabilities for and predict important debt and equity trend changes. Looking forward, this ongoing pattern may well persist.

Yet at some point, and arguably within the next several months, the present relationship between the US ten year and the S+P 500 may change. Thus rising UST yields eventually may coincide with sinking stocks. What key trading levels for the 10 year should one keep an eye out for? Such trigger point ranges will vary over time. So anyway, what guidelines for nowadays? If the US 10 year note yield floats decisively above the 2.50 percent level, and if stocks rally very little as that yield barrier is breached, that would hint the current (2007-2011) UST/S+P 500 relationship is altering.

As the global economic crisis flows on and on, many of its intertwined actions and participants (and thus marketplace relationships) may remain relatively unchanging. But they are not stagnant. Today’s marketplace voyagers should wonder if the crisis has drifted closer and closer to a new round of difficulties. Look at European yields, and place Germany on the sidelines. Focus instead on Greece, Portugal, Ireland, Spain, and Italy. These countries show that severe economic problems (and downturns) are not always or inevitably associated with falling (or low) government interest rates.

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Marketplaces and Policies – Making Connections (11-29-11)

SLACKING OFF- OUTPUT GAPS AND FED EASING © Leo Haviland, October 25, 2011

In marketplaces and elsewhere in culture, there are many gaps. We deal with information gaps. Individuals and institutions seek to fill in holes in their knowledge by gathering additional information and evaluating what they have accumulated.

Politicians demonstrate credibility and leadership gaps. The US fiscal deficit disaster situation is merely one of many examples.

One very important gap discussed by the International Monetary Fund, the Federal Reserve Board, and other economic players is the output gap. Why not investigate that topic? The Fed and other key players make key decisions significantly influenced by their views on this measure.

Output gap estimates about any given current and future output gap situation (and therefore to some extent even regarding past gaps) probably are much less reliable than the Fed’s orations on the subject would have its audiences believe. The Fed is making decisions that are significantly based on very conjectural resource slack information.

Moreover, some evidence indicates the US output gap is less extreme than the Fed believes. What follows? The Fed’s sustained effort to pin interest rates near the floor (and thus beneath even low inflation levels) as well as its past money printing (quantitative easing) adventures fought to ignite and sustain economic recovery. However, if it has overestimated the US output gap significantly, its policies have increased the risk of creating not only inflation (however long it may take for that to appear), but also more inflation than it and many others see as desirable.

FOLLOW THE LINK BELOW to download this market essay as a PDF file.

Slacking Off – Output Gaps and Fed Easing (10-25-11)