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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“I have been passing my life in guessing what I might meet with beyond the next hill, or around the next corner.” Wellington, the British military commander who defeated Napoleon in the battle of Waterloo (“Dictionary of Military and Naval Quotations”, ed. Robert Heinl, Jr.)
Cultural observers differ in their subjective perspectives, arguments, and conclusions regarding economic phenomena, including the prices of and variables relating to interest rate, stock, foreign exchange, commodity, real estate, and other marketplaces. They consequently develop and express a variety of personal views as to whether a given financial price or price relationship level (or trend), or an economic (commercial; business) or political situation substantially relevant to them, has reached or soon will attain a very important point or stage. Thus figuratively speaking, a marketplace (its level and trend) or an economic (or political scene) is or shortly will be at a crossroads. For example, the S+P 500, inflation, Federal Reserve policy, or the American federal fiscal situation can arrive at a crossroads.
Looking forward, people ask “what will happen from here?” People devotedly select, review, and weigh information to ascertain (develop personal opinions regarding) probabilities for a range of potential outcomes in the aftermath of this key situation. They differ in their views of “the” past and “the” present. In their forecasting (risk evaluation) process, some sentinels analyze the distance and duration a given price move has traveled or eventually (potentially) may move. In various fashions, prophets assess perceived interrelationships between interest rate, stock, foreign exchange, and other marketplaces.
Hence competitive financial arenas fill with diverse and enthusiastic bulls and bears (and neutral players) talking and acting in a variety of ways. Arrays of investors and speculators and traders and hedgers and risk managers ardently promote and behave according to competing viewpoints and probability assessments. Typically, each player views its own subjective analysis and outlook as “reasonable”, and probably at least as reasonable (intelligent, rational) as that of others. Consequently, we hear fervent rhetoric and see artful pictures relating not only to probabilities, but also patterns and trends, support and resistance, critical levels and turning points, breakout and breakdown, continuation and reversal, convergence and divergence, and lead and lags.
Many believe that some cultural situations are more difficult to predict than others. In any case, imagine future hypothetical (potential) events regarding a given marketplace (such as the S+P 500 or the United States Treasury 10 year note) or a particular economic or political battlefield (such as “the” US or global economy; American political wars). For some particular potential outcomes (including a related process creating it), many marketplace warriors will label the result as unlikely or very unlikely or unusual (against the odds; having little chance), or even unreasonable, irrational, extraordinary, incredible, unbelievable, astounding, surprising, crazy, impossible, and so forth.
Nevertheless, cultural history, including that of marketplaces, of course evidences that what many (or even the great majority of) clairvoyants viewed as very unlikely to occur indeed has happened. So in practice, many scouts look out for and consider so-called “tail risks” (subjectively highly unlikely outcomes) to some degree. A trader once said: “In commodities, the impossible happens at least once a year.” Besides, what will be highly unlikely or surprising to one cultural observer may not be so to another.
Let’s review several financial marketplaces which appear to be at or near a crossroads.
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Marketplace Crossroads (9-4-23)
“Weapons change, but strategy remains strategy, on the New York Stock Exchange as on the battlefield.” Edwin Lefevre, “Reminiscences of a Stock Operator”
In America and many other important countries around the globe, uncertainties and risks regarding numerous intertwined economic and political variables and marketplaces appear especially substantial at present. In particular, inflationary and recessionary (deflationary) forces currently engage in a fierce battle for supremacy.
Monetary tightening by the Federal Reserve Board and its central banking allies has helped to cut lofty consumer price inflation levels. However, inflation remains undefeated. It hovers well above targets aimed at by these noble guardians. Yet in comparison with ongoing high actual consumer price inflation, inflationary expectations for longer run time spans generally have remained moderate. But massive public debt challenges America and many other leading nations nevertheless arguably signal the eventual advent of even higher interest rates. And given the ongoing Russian/Ukraine conflict and an effort by OPEC+ to support prices, how probable is it that petroleum and other commodity prices will ascend again?
Higher interest rates have diminished worldwide GDP growth prospects and raised recessionary fears. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession and will strive to avoid that eventuality.
The United States dollar, though it has depreciated from its major high achieved in autumn 2022, arguably remains “too strong”. However, history shows that a variety of nations elect to engage in competitive depreciation and trade wars to bolster their country’s GDP.
Unemployment in the United States remains low, which helps consumer confidence. Sunny Wall Street rhetoric regarding allegedly favorable long run nominal earnings prospects for American stocks bolsters enthusiastic “search for yield” activity by investors and other fortune-hunters. Yet Fed and other central tightening and economic sluggishness may reverse this healthy unemployment situation and dim corporate earnings prospects. Consumer net worth levels and trends are important in this context. A strong and growing household balance sheet encourages consumer spending and thereby economic growth. Consumers, the major component of American GDP, unfortunately have endured damage to their balance sheet from the fall in the stocks (S+P 500 peak in January 2022) as well as a year-on-year decline in home prices over the past several months. Recent shocking banking collapses in America and Europe hint of fragilities and uncertainties facing diverse economic arenas and the value of their assets.
Persistent fierce partisan conflicts range across numerous economic, political, and other cultural dimensions. This makes it difficult for politicians to compromise (witness America’s federal legislative circus) and thus significantly to alter ongoing marketplace trends and relationships via resolute substantive action.
Given these contending considerations, critical benchmark financial battlegrounds such as the United States Treasury 10 year note, US dollar, and the S+P 500 for the near term therefore probably will travel sideways for the near term. Price trends for commodities “in general” probably will converge with those of the S+P 500 and other key global stock marketplaces, although occasionally this relationship may display divergence.
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Home on the Range- Financial Battlegrounds (4-1-23)-1
“Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away.
War, children, it’s just a shot away”. “Gimme Shelter”, The Rolling Stones
OVERVIEW AND CONCLUSION
“America First!” and “Make America Great Again!” anthems inspire President Trump and many of his populist supporters. Many Americans of course have slogans, doctrines, and plans dramatically different from those of the President and his populist allies (and his establishment comrades). Despite America’s sharp and wide-ranging partisan divisions, most Americans believe that America should be great (whatever that may mean in practice). They also agree that America’s President and Congress (and other federal institutions), all else equal, should consider the country’s needs first. Perhaps a majority of “We the People of the United States” retain faith that America in some fashion should be first (the leading nation) around the globe as well.
Nowadays Europe, like America, has a so-called establishment (various elites) battling fiercely against an array of populist adversaries. Yet the European establishment includes not only most leaders (and the bureaucracy) of the European Union and the Eurozone (and the European Central Bank), but also the political (economic) establishments of most of Europe’s individual countries. So even though the European Union and Eurozone comprise various independent countries, and even though these nations contain diverse sets of right and left wing (and radical) political parties and economic ideologies, the overall European “establishment” ardently will promote “Europe First!” and “Eurozone First!” doctrines, particularly when the risks of European Union and (especially) Eurozone breakup appear rather high. Thus Europe/Eurozone preservation goals can trump narrower nationalist aims. Populist threats obviously are one source of such grave risks, which the United Kingdom’s June 2016 Brexit “Leave” vote underscored. However, Europe’s sovereign debt (banking; recall Greece and the European “periphery”) crisis a few years ago reveals that other issues may motivate the European establishment to rally fiercely around a banner and fervently embrace policies to keep Europe unified.
Napoleon: “In forming the plan of a campaign, it is requisite to foresee everything the enemy may do, and to be prepared with the necessary means to counteract it.”
The European establishments do not necessarily or always plan and act together. Yet despite their diversity, they are closing ranks, making statements and endorsing programs to ensure substantial European unity and their own places in power structures. On the national political front in several individual countries, this has included a shift to the right (particularly on the immigration issue). This mitigates some of the appeal of right wing (pro-nationalist; anti-globalist) populist candidates.
In the Eurozone context, a too frail Euro FX can reflect dangers to the Eurozone’s integrity. America is a key European trading partner. The Trump camp forcefully proclaims its hostility to excessive weakness of the Euro FX and other currencies (such as the Chinese renminbi) relative to the dollar. The Trump regime (and many other Americans) probably would be pleased with a somewhat weaker dollar relative to its recent lofty high. So on the trade and currency landscape, some European mainstream leaders in response have suggested they want neither trade wars nor further Euro FX currency depreciation. Related to this, what does the ECB’s March 2017 hint that it eventually will modify its current highly accommodative monetary policy indicate? It likewise probably signals a willingness to bolster the Euro FX.
The Bank for International Settlements provides broad real effective exchange rates (“EER”) for the Eurozone (Euro FX area) and numerous other nations. The current sideways pattern in the Euro FX broad real effective exchange rate (“EER”) probably will persist for the short term. But as the 2017 European election calendar marches forward, the Euro FX EER probably will embark on a moderate bull trend. Major Euro FX EER support is well-entrenched and will not be broken by much, if at all. This Euro FX appreciation will occur not only on an EER basis, but also in the Euro FX cross rate relationship versus the US dollar. In general, determined efforts by the European establishment to retain power (defeat populists; avoid further European breakup) and bolster the Euro FX probably will succeed (at least for the next several months, and perhaps quite a bit longer).
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Eurozone Under Siege- Currency Trends and Politics (3-20-17)