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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AMERICAN HOUSING: A MARKETPLACE WEATHERVANE © Leo Haviland December 4, 2018

“What You Own”, a song from the musical “Rent” (by Jonathan Larson), declares: “You’re living in America at the end of the millennium- you’re living in America, where it’s like the twilight zone.”

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OVERVIEW AND CONCLUSION

American home prices have enjoyed a joyous climb since their dismal lows following the global economic disaster of 2007-09. However, United States home prices “in general” (“overall”) now probably are establishing an important peak. At least a modest reversal of the magnificent long-run bullish United States home price trend probably is near.

What is a high (too high), low (too low), expensive, cheap, average, good, bad, neutral, normal, typical, reasonable, commonsense, appropriate, fair value, overvalued, undervalued, natural, equilibrium, rational, irrational, or bubble level for prices or any other marketplace variable is a matter of opinion. Subjective perspectives differ. In any case, current US home price levels nevertheless appear quite high, particularly in comparison to the lofty heights of the amazing Goldilocks Era. As current American home price levels (even if only in nominal terms) hover around or float significantly above those of the Goldilocks Era, this hints that such prices probably are vulnerable to a noteworthy bearish move. Moreover, measures of global home prices and US commercial real estate also have surpassed their highs from about a decade ago and thus arguably likewise may suffer declines.

Many United States housing indicators in general currently appear fairly strong, particularly in relation to their weakness during or in the aftermath of the global economic crisis. Nevertheless, assorted American housing variables as well as other phenomena related to actual home price levels probably warn of upcoming declines in American home (and arguably other real estate) prices. A couple of US home price surveys have reported price declines for very recent months. US housing affordability has declined. New single-family home sales display signs of weakness, as do new privately-owned housing starts. American government interest rate yields, as well as US mortgage rates, have edged up. The Federal Reserve Board as of now likely will continue to tighten and raise rates for a while longer. Overall household debt, though not yet burdensome (at least for many), now exceeds the pinnacle reached ten years ago in 3Q08. The economic stimulus from America’s December 2017 tax “reform” probably is fading. US consumer confidence dipped in November 2018.

Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Convergence and divergence (lead/lag) relationships between marketplace trends and other variables can shift or transform, sometimes dramatically. Price and time trends for the American stock marketplace and US housing prices do not move precisely together. However, the international 2007-09 crisis experience (which in part strongly linked to US real estate issues) indicates that prices for US stocks and housing probably will peak around the same time, or at least “more or less together” (a lag of several months between the stock high and the home price pinnacle). The S+P 500 probably established a major high in autumn 2018 (9/21/18 at 2941, 10/3/18 at 2940; the broad S&P Goldman Sachs Commodity Index peaked 10/3/18 at 504). That autumn equity summit in the S+P 500 bordered 1/26/18’s interim top at 2873. Ongoing weakness in US (and international) stock marketplaces will help to undermine American home prices.

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American Housing- a Marketplace Weathervane (12-4-18)

GAMES PEOPLE PLAY: AMERICAN REAL ESTATE © Leo Haviland August 28, 2016

“Home is the nicest word there is.” Laura Ingalls Wilder, author of the “Little House” books, which inspired the famed television show, “Little House on the Prairie”

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OVERVIEW AND CONCLUSION

The United States real estate marketplace played a significant role in the worldwide economic disaster that erupted in mid-2007 and accelerated in 2008. That dreadful time and its consequences probably are not a distant memory within the perspectives of key central bankers and at least some politicians. Otherwise, the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, and other monetary gatekeepers would not have sustained various highly accommodative schemes for over seven years. Though international growth resumed around mid-2009, it generally has been erratic and modest. Despite unwavering devotion to their mandates, these sheriffs thus far have not delivered sufficient inflation relative to benchmarks such as the consumer price index. Although headline unemployment measures have plummeted in the United States, they remain fairly high in some nations.

The United States of course is not the whole world and American consumers do not represent the country’s entire economy. Yet because the US is a crucial player in the interconnected global economic (and political) theater, and because US consumer spending represents a majority of US GDP, the state of affairs for the US consumer has international consequences. Consumers represent about 68.3 percent of America’s GDP (2015 personal consumption expenditures relative to GDP; Federal Reserve Board, “Flow of Funds”, Z.1; 6/9/16). The household balance sheet level and trend (net worth) is an important variable in this scene. Although stock marketplace and real estate values matter a great deal to others (such as corporations and governments) beyond the “person on the street”, they are quite important to US household net worth and thus behavior (including spending patterns) and expectations (hopes) regarding the future.

Thus although US household net worth is not an explicit part of the Federal Reserve’s interpretation of its mandate (promoting maximum employment, stable prices, and moderate long-term interest rates) and related policy actions, it is very relevant to them. So therefore are stock marketplace and real estate values and trends. Home ownership is an important dimension of the ideology of the American Dream. Rising home and increasing stock marketplace prices to some extent bolster faith that the American Dream “in general” (as a whole) is succeeding. And what happens to American real estate still matters a great deal for the global economy.

Sustained yield repression and quantitative easing (money printing) by the Fed and its playmates not only have helped the S+P 500 and many other stock signposts to soar through the roof. These programs (assisted to some extent by deficit spending programs) also repaired much of the damage to America’s real estate landscape. Let’s survey the US real estate marketplace in this context, concentrating primarily on the consumer housing sector.

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The dutiful Fed reviews assorted factors related to personal consumption expenditure (consumer price) inflation and other aspects of its mandate. Consumer price or personal consumption expenditure inflation targets of around two percent matter to the Fed and other central bank sheriffs. Yet sufficient (too low; too high) inflation (as well as deflation) can occur in other realms, including stocks and real estate.

Combine the monumental recovery in US real estate values with the towering rise in the value of stock marketplace assets. Although these are not the only parts of or phenomena influencing the US household balance sheet, current real estate and stock marketplace (particularly note the S+P 500) levels and trends appear more than adequate to justify a less accommodative Fed monetary policy. And US housing trends (including the rental situation) probably are placing substantial upward pressure on key consumer price benchmarks.

Recall the glorious American real estate spectacle before the mournful crash of the worldwide economic disaster. Although that Goldilocks Era for US real estate belongs to the past, the current housing situation recalls it.

The dovish Fed nevertheless will be cautious regarding boosts in the Federal Funds rate. Like other members of the global establishment (elites), it does not want populists (whether left wing or right wing; such as Donald Trump) to win power. To some extent, sustained substantial slumps in stocks and real estate prices tend to encourage populist enthusiasm. The Fed and its allies battle to avoid a sharp downturn in the S+P 500 or housing prices. The Fed meets 9/20-21, 11/1-2, and 12/13-14/16. The US Election Day is November 8. See “‘Populism’ and Central Banks” (7/12/16) and “Ticking Clocks: US Financial Marketplaces” (8/8/16).

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Games People Play- American Real Estate (8-28-16)

STILL SWAMPED- US REAL ESTATE © Leo Haviland, October 11, 2011

The United States real estate marketplace, despite some improvement relative to winter 2008-09’s abyss, remains in mournful shape. During the ongoing terrible global economic crisis, nervous politicians, fearful central bankers, and enthusiastic real estate business promoters have devoted much effort and creativity in their quest to rescue the real estate arena. How should we characterize their overall performance to date? Despite their numerous at-bats and vigorous swings at the real estate debacle, the financial and political guardians have often struck out and their overall batting average remains low.

Perhaps the real estate scene will become brighter. After all, central bankers and politicians always have upcoming opportunities to step up to the plate. They will keep swinging and whacking at real estate problems. Nevertheless, the still-feeble US real estate world underlines the fragile foundation and structure of the economic revival fabricated by the Federal Reserve (and its overseas central bank teammates) and political crews. Despite some progress, the shattering damage of the international economic disaster that commenced in 2007 has not been substantially fixed. The economic crisis persists and will continue for several more innings. Though the worldwide economic advance that emerged in spring 2009 reflects repairs and is not entirely a house of cards, it’s not entirely built on solid ground. Money printing and deficit spending are not genuine (enduring) cures for economic problems.

The recent slowdown in the overall economic landscape will hinder the US real estate recovery. Therefore American real estate prices will remain relatively weak.

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Still Swamped – US Real Estate (10-11-11)

AMERICAN REAL ESTATE (THE MONEY JUNGLE, PART TWO) © Leo Haviland, June 2, 2011

Yet despite these economic rescue and repair programs, the continued substantial overall weakness in the US real estate marketplace reflects and warns of trouble. In particular, what do the housing sector and its consequences for the consumer balance sheet suggest? One should view real estate in the context of consumer confidence. The foundation for and structure of the recovery fabricated by the homespun policies of the Fed and the political herd is fragile. Although progress has been made, the shattering damage of the international economic disaster that commenced in 2007 has not been fixed. Though the worldwide economic recovery that emerged in spring 2009 is not entirely a house of cards, it’s also not entirely built on solid ground.

Nominal GDP growth is better than none at all, right? All else equal, money printing does not over time breed permanent real GDP growth. Also, deficit spending borrows from the future to spend in the present; it may boost current output, but at the end of the day, this factor primarily involves a shift of money between players and across time. All else equal, even if a slump in the broad real US trade weighted dollar benefits the US economy, that tends to undermine those of many of its trading partners. Holding policy interest rates such as Fed Funds low does not preclude higher yields later. Don’t those substantially in debt or suffering injury to their net worth often endorse easy money policies? Despite optimism indicated by rosy prices in the S+P 500 and lofty corporate profits, US real economic growth probably will be mediocre looking forward from now. What happens to American real estate still matters a great deal for the global economy.

Given the still-weak home and commercial real estate marketplaces, the net worth of many banking institutions probably is vulnerable to marking-to-market of existing real estate loan portfolios. Renewed economic weakness of course would worsen that problem. In any event, banks nervous about their capital strength will not hurry to significantly expand their overall lending.

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American Real Estate (The Money Jungle, Part Two)