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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ON THE ROAD: MARKETPLACE TRAFFIC © Leo Haviland May 1, 2023

“The highway is for gamblers, better use your sense

Take what you have gathered from coincidence”. “It’s All Over Now, Baby Blue”, Bob Dylan

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CONCLUSION AND OVERVIEW

Given an array of intersecting considerations, critical benchmark financial battlegrounds such as the United States Treasury 10 year note, US dollar, and the S+P 500 probably will continue to 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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In America and many other key countries around the globe, uncertainties and risks regarding numerous entangled economic and political variables and marketplaces appear especially substantial nowadays. In particular, inflationary and recessionary (deflationary) forces currently grapple in an intense and shifting fight for supremacy. 

Monetary tightening by the Federal Reserve Board and its central banking comrades has helped to slash lofty consumer price inflation levels. However, despite some deceleration, significant inflation persists. Both headline and core (excluding food and energy) inflation motor well above targets  aimed at by these monetary police officers. Yet in comparison with ongoing substantial actual consumer price inflation, inflationary expectations for longer run time spans generally have remained moderate. But monumental public debt challenges confronting America and many other leading nations nevertheless arguably signal the eventual advent of even higher interest rates. And given the 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 milepost reached 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 sparks enthusiastic “search for yield” activity by investors and other fortune-seekers. Yet Fed and other central bank tightening and economic sluggishness may reverse this healthy unemployment situation and dim corporate earnings prospects. Consumer net worth levels and patterns 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 the decline in home prices since mid-2022. The recent shocking banking collapses in America and Europe warn of fragilities and uncertainties facing diverse economic arenas and the value of their assets. 

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Bruce Springsteen’s song “Born to Run” proclaims: “In the day we sweat it out on the streets of a runaway American dream”.

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. 

However, the current US legislative traffic jam regarding raising the country’s debt ceiling, if it results in default, probably will cause the S+P 500 and related “search for yield” playgrounds to veer off their current sideways paths and tumble downhill. The risk of a default, even if brief and rapidly resolved, probably is greater than what most of Wall Street, Main Street, and the political scene believes. 

In this “game of chicken” between Republicans and Democrats (and between sects within each of these parties), each of the raging sides claims to espouse high (“reasonable”; “sensible”, “good”) principles. This brinkmanship endangers the economy. The wreck of a sizeable stock marketplace plunge and spiking recessionary fears probably will terrify politicians (and scare and infuriate their constituents), thus inspiring the nation’s leaders to overcome the legislative gridlock and enact a debt ceiling increase. 

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On the Road- Marketplace Traffic (5-1-23)

MARKETPLACE EXPECTATIONS AND OUTCOMES © Leo Haviland September 5, 2022

“Are you gonna bark all day little doggie? Or are you gonna bite? Mr. Blonde asks Mr. White in “Reservoir Dogs” (Quentin Tarantino, director), after their gang’s jewelry heist went disastrously wrong.

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OVERVIEW AND CONCLUSION

The Federal Reserve watchdog and its central banking companions, after a very lengthy delay, finally awoke to widespread evidence that substantial consumer price inflation was not a temporary or transitory phenomenon. The Fed guardian generally has evaded taking responsibility for its important role in creating substantial inflation (not just in consumer prices, but also in stocks and numerous other asset classes) via its mammoth money printing and yield repression schemes. But to restore and preserve its inflation-fighting credibility and sustain its marketplace reputation, in recent months the Fed noisily has raised policy rates (and significantly reduced yield repression) and started to shrink its engorged balance sheet.

The Fed’s need to manifest genuine loyalty to its legislative mandate of stable prices (which other central bankers have echoed) thus has provoked it to do some nipping, and even a little biting, of “investors” and other owners in the S+P 500 and other “search for yield” marketplaces such as corporate bonds and US dollar-denominated foreign sovereign debt. Fed Chairman Jerome Powell’s 8/26/22 Jackson Hole, Wyoming speech (“Monetary Policy and Price Stability”) further emphasized its rediscovered inflation-fighting enthusiasm. The Chairman confesses: “Inflation is running well above 2 percent, and high inflation has continued to spread through the economy.” The Chairman barks: “overarching focus right now is to bring inflation back down to our 2 percent goal”; “Restoring price stability will take some time and requires using our tools forcefully”; “estimates of longer-run neutral are not a place to stop or pause”; this restrictive policy stance likely must be maintained “for some time”; after all, “The longer the current bout of high inflation continues, the greater the chance that expectations of high inflation will become entrenched.” Note the dogged determination expressed by this trusty guardian!

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“Summertime Blues, Marketplace Views” (8/6/22) states: “Despite growing concerns about a United States (and global) economic slowdown or slump, and despite potential for occasional “flights to quality” into supposed safe havens such as the United States Treasury 10 year note and the German Bund, the long run major trend for higher UST and other benchmark international government yields probably remains intact.” Regarding the S+P 500, that essay concludes: “Although the current rally in the S+P 500 may persist for a while longer, the downtrend which commenced in January 2022 probably will resume. The S+P 500’s June 2022 low probably will be challenged.”

The Fed’s late August 2022 wordplay has encouraged the previously existing trends of higher United States Treasury yields and declining prices for the S+P 500 and related search for yield (return) arenas such as emerging marketplace stocks, corporate bonds, and US dollar-denominated sovereign debt. Prices for commodities “in general” also have withered.

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Marketplace Expectations and Outcomes (9-5-22)

STOCK MARKETPLACES: AT THE CROSSROADS © Leo Haviland, September 4, 2017

“Money beats soul, every time.” “Roadhouse Blues”, by The Doors, with John Lee Hooker

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CONCLUSION AND OVERVIEW

Many observers (including stock owners) are complacent about prospects for the emergence of significant stock marketplace declines, particularly in regard to the United States stock arena. Even a ten percent drop in US equities would shock many audiences. The S+P 500 and related American benchmarks nevertheless have been in the process of establishing an important top. The glorious long run bull advance in American stocks which started with the S+P 500’s major bottom at 667 on 3/6/09 probably is at or near its end. The S+P 500’s record height to date is 8/8//17’s 2491. That S+P 500 elevation probably will not be exceeded by much, if at all.

American stocks “in general”, although not an isolated island, have their own “individual” stories, as do assorted other stock marketplaces, whether in relation to earnings, valuations, or other phenomena. Yet marketplace history in recent years suggests that prices of stock marketplace signposts for other advanced (developed) nations and for emerging marketplaces “in general” likely will accompany any notable downtrend (including a bear move) in US equities.

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Admittedly, since first quarter 2016, and especially after around America’s November 2016 Presidential election, emerging stock marketplaces generally have rallied alongside the S+P 500 and its domestic comrades such as the Dow Jones Industrial Average, Nasdaq Composite, and Wilshire 5000. But the MSCI Emerging Stock Markets Index, from Morgan Stanley (“MXEF”), a guide for emerging stock marketplaces, is around major resistance and (unlike the S+P 500) well below all-time highs.

Owners of (particularly “investors”) American and international equities hopeful of enjoying further upward rides should note other significant yellow warning lights. In mid-year 2017, leading European and Japanese stock marketplaces established highs. The S+P 500’s 6/19/17 interim top at 2454 occurred around the time of these highs. However, these European and Japanese mid-2017 stock tops have not been broken. And the S+P 500’s August 2017 high exceeds its June 2017 one by only 1.5 percent.

But after their dreary troughs in first quarter 2016, didn’t Germany’s DAX and the United Kingdom’s FTSE exceed their spring 2015 plateaus, as did the S+P 500 (5/20/15 high 2135). Yes, but the April 2015 summit for a broader measure for European stock performance, the STOXX Europe 600 Index (“SXXP”), remains intact. Japan’s June 2015 Nikkei height likewise remains a roadblock.

The adventures of Canada’s S+P/Toronto Stock Exchange Composite Index (“SPTSX”) are also a bearish sign to worldwide stock marketplaces. It has failed to vault over its February 2017 top (established prior to the mid-2017 ones in Europe and Japan). Also, February 2017’s SPTSX plateau edged only 1.6 percent above its September 2014 pinnacle.

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Stock Marketplaces- at the Crossroads (9-4-17)

FANTASTIC VOYAGES: THE US DOLLAR AND COMMODITY CURRENCIES © Leo Haviland April 3, 2016

In the 1966 movie “Fantastic Voyage”, the character Cora declares: “We’re going to see things no one has ever seen before. Just think about it.” (Richard Fleischer, director)

In “On the Road” (original scroll version), Jack Kerouac writes: “But no matter, the road is life.”

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CONCLUSION AND OVERVIEW

The substantial rally in the broad real trade-weighted United States dollar (“TWD”) that embarked in mid-2011 played a key part in encouraging (confirming) and accelerating bear movements in emerging marketplace stocks and commodities “in general”. The S+P 500’s majestic rally over its spring 2011 interim high diverged for about four years from the trends in emerging equity realms and commodities. However, the TWD’s 2015 ascent above its March 2009 peak was a crucial event; this dollar climb helped propel the S+P 500 downhill following its 5/20/15 pinnacle at 2135 in conjunction with the emerging stock marketplace and commodity trends.

In January/February2016, these linked price patterns partly reversed. The TWD has depreciated and stocks (emerging marketplaces as well as those of America and other advanced nations) have rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield ascended from its low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. Highly accommodative central bank rhetoric and action by the Federal Reserve Board and its allies aimed at achieving their targeted two percent inflation destination will continue for an extended period. For example, note the Fed’s 3/16/16 meeting and its Chairman’s very dovish speech, “The Outlook, Uncertainty, and Monetary Policy” (3/29/16). Underline the expansion of the European Central Bank’s easing scheme (most recently 3/10/16) and the lax policies of the Bank of Japan. Consequently, the current marketplace interrelationships (“roughly trading together”) probably will persist for the near term, regardless of whether the pattern of mid-2015 to first quarter 2016 resumes or that since mid-first quarter 2016 continues. Marketplace history of course need not entirely or even substantially repeat itself.

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Concentrating on and comparing exchange rates of “commodity currencies” alongside the broad real trade-weighted dollar trend offers additional notable insight into the assorted interconnected marketplace relationships. Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are significant to the economies of advanced countries such as Australia, Canada, and Norway, the currencies of these lands likewise can be labeled as commodity currencies.

The bearish currency paths (effective exchange rate basis) of important emerging and advanced nation commodity exporters up to first quarter 2016 resembled the similar trends among them during the 2007-09 worldwide economic disaster era. However, these commodity currencies depreciated notably more in their recent dive than during the 2007-09 turmoil. In addition, the lows attained by most of them decisively pierced the floors achieved about seven years previously. Moreover, the TWD rallied more sharply in its bull move to its January 2016 elevation than it did during the past crisis.

The feebleness in recent times for the commodity currency group, as it involved both advanced and emerging marketplace domains (as it did in 2007-09), reflected an ongoing global (not merely emerging marketplace) crisis. Substantial debt and leverage troubles still confront today’s intertwined worldwide economy. The bear trip of many commodity currencies into early first quarter 2016, especially as it occurred alongside big bear moves in emerging marketplace stocks (and in the S+P 500 and other advanced stock battlefields) and despite long-running extremely lax monetary policies, underlines the fragility of the relatively feeble global GDP recovery.

Thus noteworthy rallies in these commodity (exporter) currencies from their recent depths will tend to confirm (inspire) climbs in commodities in general and emerging (and advanced) nation stock marketplaces. Renewed deterioration of the effective exchange rates of the commodity currency fraternity “in general” likely will coincide with renewed firming of the US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the current dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.

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Therefore key central bank captains, concerned about slowing real GDP and terrified by “too low” inflation (deflation) risks, have fought to stop the TWD from appreciating beyond its January 2016 top and struggled to encourage rallies in the S+P 500 and related stock marketplaces. Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. Indeed, rallies in the S+P 500 (and real estate) may help inflation expectations (and inflation signposts monitored by central banks such as consumer prices) to motor upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices in general.

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Fantastic Voyages- the US Dollar and Commodity Currencies (4-3-16)