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.


 

Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile





HISTORY ON STAGE: MARKETPLACE SCENES © Leo Haviland, August 9, 2017

“People think of history in the long term, but history, in fact, is a very sudden thing.” Philip Roth’s novel, “American Pastoral”

 ****

OVERVIEW AND CONCLUSION

Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span, and the arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.

The US Treasury 10 year note’s 7/6/16 major bottom at 1.32 percent probably ushered in an extended period of rising rates, which probably will connect with (lead to) a peak in the DJIA and S+P 500. This subsequent upward yield shift is only partly on stage, and so far its entrance has been modest. Despite the massive amount of money printing in recent years by the central banking fraternity, the ultimate extent of the rate increase may not be massive. The yield repression (and quantitative easing) era that began during the dark ages of the global economic disaster has not exited. The heavy hand of central bank yield repression (manipulation) not only was extraordinary, but still looms large.

Yet the Federal Reserve has started to raise the Federal Funds rate modestly and given orations about normalizing policy further by reducing the size of its bloated balance sheet. In recent months, monetary tightening talk relating to some other central banks such as the European Central Bank has increased. Moreover, marketplace “tantrums” involving tumbling equities can result from various intertwined causes, not just central bank wordplay and behavior. Yet worries about a “taper tantrum” involving falling stocks as a result of “tightening” of (reduced laxity in) central bank policy schemes nevertheless also have escalated.

Thus in the current marketplace horizon, not only the reality of somewhat higher government rates, but also (alternatively) the widespread perception of an emerging substantial threat of such (or further) yield climbs (whether induced by central bank policy shifts or otherwise), eventually can help to push stock marketplace benchmarks downhill.

****

Lead/lag (convergence/divergence) relationships between marketplace arenas are not written in stone. What role does the broad real trade-weighted US dollar play? History unveils that sometimes a rising TWD accompanies rising stocks, but sometimes it links with falling stocks. Sometimes TWD depreciation connects with climbing stocks, sometimes with slumping equity signposts.

In the current marketplace theater, audiences nevertheless should monitor the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; March 1973=100; monthly average) closely. The TWD provides further insight regarding probabilities of the S+P 500 (and DJIA; and other advanced nation and emerging equity marketplace) trends. Increasing UST yields do not always (necessarily) mandate appreciation of the TWD. The steady depreciation of the broad real-trade weighted United States dollar since around first quarter 2017 currently entangles with the modest ascent in US 10 year Treasury note rates that began in early July 2016.

Given global central bank yield repression (and other easy money policies), arithmetic moves in the UST 10 year government note (and in short term rates) may appear (at least initially) to be rather minor. Also, rising American interest rates (or fears of this) may not be the only source for a stock marketplace tumble. A weakening TWD can assist US stock marketplace weakness, particularly if other factors exist (such as fiscal/budget or other debt troubles, severe cultural divisions, significant political quarrels, and issues regarding the quality of Presidential leadership). The TWD made a major high in December 2016/January 2017 around 102.8. It currently is around 96.8, a 5.8 percent decline. Though this depreciation is not massive, it is significant. Around 96.0 is crucial support; a sustained breach under this level probably will encourage weakness in the S+P 500 and Dow Jones Industrial Average.

FOLLOW THE LINK BELOW to download this article as a PDF file.
History on Stage- Marketplace Scenes (8-9-17)

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)