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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Nevertheless, although the Euro Area “in general” is not entirely out of gas and running on empty, it is running in place. Its economic performance for the next few years probably will be sluggish. There will be little or no economic growth, general government debt will remain quite high, and unemployment will stay very lofty.
The Eurozone economy is going nowhere fast on the road to recovery. Of course differences between individual nations exist; Germany is not Greece.
For the stock arena, take the SXXP index of 600 European stocks (though it includes United Kingdom and other non-Euro Area companies) as a benchmark (Bloomberg symbol is SXXP). This vehicle, like America’s S+P 500, has not moved in a sideways pattern, but instead has (despite some sharp twists and turns) flown sky-high since its 3/9/09 major low at 155.4 (S+P 500 major trough 3/6/09 at 667). The bottom line is that the probable path of European equities probably is closely bound with that of American stocks.
With the SXXP now around 325.0, what’s the rundown on some SXXP levels to monitor? Recall 332.9, the 5/19/08 high. The final top in the S+P 500, after its 10/11/07 pinnacle at 1576, also occurred 5/19/08 (at 1440). If prices fall from current levels, note that twice the 3/9/09 bottom is 310.8; keep an eye on 2/18/11’s 292.2 if prices stumble further. Unlike the S+P 500, the SXXP has not escaped above its 2007 peaks. Are prices for European equities circling back to their former record heights? In any event, if European stock prices venture even higher from current levels, watch 10/11/07’s summit at 391.3 and the major pinnacle of 401.0 on 7/13/07.
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Eurozone- Running in Circles (11-18-13)
Chart- German Govt 10 Year Note (for essay, Eurozone- Running in Circles) (11-18-13)
Many observers point to booming corporate profits as a key reason for the splendid rally in United States stocks since March 2009’s dreary depth. The Federal Reserve’s generous highly accommodative monetary policy since late 2008, highlighted by sustained rock-bottom interest rates (yield repression) and several rounds of spectacular money printing, nevertheless coincides with this climb in corporate profits and the marvelous S+P 500 advance.
Many marketplace clairvoyants, including quite a few regulators, worry little about borrowing levels (and leverage) in the context of the wonderful ascent in American stocks. However, they should.
Soothsayers should examine New York Stock Exchange (NYSE Euronext) margin debt levels alongside the timing of Federal Reserve policy innovation and very important trend change points in the S+P 500. In recent years, pinnacles of NYSE margin debt have occurred close in time to those in US stocks; valleys in that debt roughly have coincided with S+P 500 troughs. Glancing back to the 2000 stock top and the depths of 2002/2003 shows a similar pattern. For the recent bull trend in American since first quarter 2009, underscore the Fed’s policy actions (and a couple
of European Central Bank ones) alongside these turning points in margin debt and American stocks. The most recent statistics (for January 2013) and the probable current margin debt levels are very elevated from the historical perspective. They consequently should concern marketplace watchers, even if many sentinels retain faith that there remains scope for even more margin debt and that lax Fed policies and booming corporate profits will persist.
Anyway, survey NYSE margin debt, Fed actions, and S+P 500 trends together. As in the joyous rally to the highs in US equities in 2007-08, judging from the NYSE margin debt statistics, a fair amount of leverage probably has encouraged the bull move in US equities since the March 2009 lows. That includes the recent S+P 500 spike since June 2012. The friendly Fed and its devoted allies probably deserve a hefty share, though not all, of the credit for these margin borrowing leaps since the equity abyss of first quarter 2009. And especially if US Treasury yields are low, why not search enthusiastically for yield (return) in US stocks?
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Margin Debt, Fed Policy, and Recent American Stock Price Trends (3-18-13)
Since mid-2008, commodities “in general” and United States stocks “as a whole” have moved roughly in the same direction at around the same time. In this convergence process (relationship), noteworthy bull (bear) moves in US equities find parallels in those in the commodity arena. Thus significant marketplace rallies (declines) have tended to occur around the same time.
However, this perspective is not the only vantage point by which to assess the often close relationship between US equities and the commodities complex. There also is another, longer run view by which one can examine the relationship between them. Since spring 2011, commodities have ventured down (or sideways to down). However, key American stock benchmarks such as the S+P 500 have attained new highs, first in April 2012, then September 2012, and again in January 2013. Thus despite the convergence at assorted timely turning points since spring/ summer 2008, and even though the two territories continue to trade together to some extent, arguably there has been noteworthy divergence in their overall relationships (their trends) since May 2011.
Now recall several of 2007-08’s details. US equities peaked in October 2007, almost nine months before the commodity one in early summer 2008. Only after the final stock marketplace
summit in May 2008 did equities and commodities trade in close tandem. The current longer run relationship thus perhaps likewise reveals divergence, but with the commodity peak to date appearing well before any major S+P 500 one.
In contrast to 2007-08, what if the major peak in commodities is well before that in stocks (and the lag is likewise so great as to suggest divergence)? Suppose- and this admittedly is a key suppose- eventually commodities and US stocks will trade together over the long run. After all, so-called marketplace relationships can change dramatically, whether from the convergence/ divergence (lead/lag) perspective or otherwise. What does continued divergence, the failure of commodities to near or exceed its spring 2011 heights, suggest?
The 2007-08 relationship warns that the current continued failure of commodities to confirm the equity rally eventually will reveal a notable decline in stocks. Since the duration between the spring 2011 commodities top and today’s new highs in the S+P 500 is almost 20 months, whereas that between October 2007’s stock pinnacle and the broad GSCI’s summit in July 2008 was about nine months, the failure of the broad GSCI to achieve new heights should warn equity bulls that a decline may be fairly near in time.
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Commodities and US Stocks- Convergence and Divergence (1-28-13)
S+P 500 Chart (1-28-13, for essay on Commodities and US Stocks)
The long running bull march in the Japanese Yen from early summer 2007 to the current time generally coincides with a continuing worldwide economic crisis. The Yen’s robust strength mirrors the failure by central bankers and politicians around the globe to cure the lamentable financial ills. National policies often differ. The international guardians frequently coordinate their rescue and stimulus programs. Yet measures such as deficit spending, money printing, efforts to keep government interest rates near the floor, and struggles to maneuver currency rates merely have patched and postponed severe problems, not genuinely repaired them. Worrisome debt and leverage issues revealed in 2007-08 lurk on in various forms.
The rally in the Japanese Yen on an effective exchange rate basis since around July 2011 warns that an acceleration of the worldwide crisis, as in mid-2008, may be underway or very near to commencing. Significantly, the climb in the Yen cross rate versus the US dollar since mid- March 2012 also fits the ongoing international economic weakness story. Recall that as the world economy deteriorated more and more quickly around mid-2008, not only did the US dollar rally on a broad real trade-weighted basis, but also the dollar weakened relative to the Yen. The strong dollar equals weak stocks (and weak commodities in general), weak dollar equals strong equities (and bullish commodities) chant remains popular.
The world and perspectives on it are not immutable, so 2012 does not precisely duplicate 2008. Yet given the experience of 2008, what does a rally by the dollar in general, if accompanied by a rally in the Yen (effective exchange rate), and especially if the Yen also marched higher against the dollar on a cross basis, portend? This would hint that the disturbing international crisis is in the process of becoming more fearful. And since March 2012, that seems to be what has been happening.
The current dangerous situation in the ongoing worldwide economic crisis, if it further worsens (and it probably will worsen to some extent, even if the deterioration is not nearly as severe as in 2008), will be sufficiently severe to induce policy makers around the globe to take further substantial steps in their struggles to provide long-lasting remedies. Perhaps such actions by central bankers and political leaders may occur relatively soon. These may issue from individual nations in somewhat piecemeal fashion. Yet there is a substantial chance that intervention will be relatively coordinated, especially if an encore of second half 2008 looks more and more to be underway.
But in the meantime, for the near term, the Japanese Yen probably will keep rallying on an effective exchange rate basis; it probably will breach the 1/16/12 daily low of 187.5. The Yen likely will retest the Y75 level against the dollar. However, the US dollar (TWD) will remain fairly strong. The bear trend in worldwide equities and commodities in general therefore probably is not over. Renewed sustained weakness in both the Yen and the dollar would indicate an easing of the current stage of the global crisis.
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2008 Revisited- Japanese Yen Strength, Global Economic Weakness (6-4-12)
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