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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THERE WILL BE BLOOD: FINANCIAL BATTLEFIELDS © Leo Haviland February 9, 2018

The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).

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CONCLUSION

The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.

Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.

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The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.

Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).

Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.

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There Will Be Blood- Financial Battlefields (2-9-18)

MARKETPLACE TANTRUMS (AND OTHER SIGNS, SOUNDS, AND FURY) © Leo Haviland, July 11, 2017

“In the day we sweat it out in the streets of a runaway American dream”, sings Bruce Springsteen in “Born to Run”.

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CONCLUSION

Wizards in Wall Street and coaches on Main Street offer a variety of competing descriptions of and reasons for the emergence, continuation, and ending of economic trends, including bull and bear patterns in stock, interest rate, currency, and commodity marketplaces. Apparently dramatic price fluctuations and trend changes frequently inspire heated language of volatility, spikes, crashes, mania, and panic. Colorful metaphors frequently punctuate the tales and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk about a potential reduction in quantitative easing (money printing) in conjunction with marketplace movements generated wordplay of a “taper tantrum”.

In recent weeks, international financial marketplaces and media have worried that central bank policy tightening (or threats of such action) will ignite a taper tantrum akin to what occurred around late spring 2013. That fearsome event saw stocks plummeting and interest rate yields rising rather rapidly in the United States and elsewhere around the globe.

Not only is the Federal Reserve in the process of slowly raising the Federal Funds rate and chirping about diminishing the size of its gargantuan balance sheet. The European Central Bank and others have hinted about reducing the extent of their highly accommodative monetary policies. The ECB is buying €60 billion in mostly government bonds each month via quantitative easing. Will the ECB taper its purchases in 2018?

The Financial Times headlined: “Confusion as Carney [Bank of England Governor] and Draghi [ECB President] struggle to clarify stimulus exit” and “‘Taper tantrum’ echoes” (6/29/17, p1). “End of cheap money leaves central bankers lost for words” and “Officials struggle to convey policy direction precisely to avoid further ‘taper tantrums’” (FT, 6/29/17, p3). “Central bank retreat from QE gathers pace”; “Sudden hawkish shift in policy across the globe has analysts talking of new ‘taper tantrum’” (FT, 7/5/17, p20).

Central bank language and behavior (whether by the Fed or one of its allies) expressing willingness to reduce (or cease) very easy money schemes indeed increase the chances of rising yields in key debt signposts such as the US Treasury 10 year note and boost the likelihood of a decline in important stock benchmarks such as the S+P 500.

Though central banks nowadays may (as in 2013 and at other historical points) spark or accelerate noteworthy trends in securities (and other) marketplaces, the central bank policy factor nevertheless intertwines with numerous other economic and political phenomena. And one or more of such other variables significantly may help to inspire a noisy marketplace “tantrum”. Not all marketplace tantrums are “taper tantrums”.

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Marketplace Tantrums (and Other Signs, Sounds, and Fury) (7-11-17)

US DOLLAR THEATRICS: DEPRECIATING ACTS © Leo Haviland, June 7, 2017

“Gonna leave this brokedown palace
On my hands and my knees I will roll, roll, roll”. The Grateful Dead, “Brokedown Palace”

CONCLUSION AND OVERVIEW

The gradual depreciation of the broad real trade-weighted United States dollar (“TWD”; Federal Reserve Board, H.10 statistics; monthly average; March 1973=100) that began in December 2016/January 2017 at about 102.8 probably will continue for at least the next several months. Dollar cross rate patterns against assorted individual currencies (such as the Euro FX, Chinese renminbi, and Japanese Yen) are not necessarily the same. In principle and practice, the dollar may rally against one counterpart while getting feebler against another. Nevertheless, the similar weakness in recent months of the dollar’s cross rate versus several key American trading partners manifests the widespread underpinnings of the growing overall dollar breakdown. Gold’s bull climb since December 2016 roughly coincides with and reflects (confirms) the greenback’s erosion.

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Various entangled factors influence foreign exchange levels and patterns, with monetary policy of course being a key variable. Over the past few months and looking forward, underline the US Federal Reserve Board’s willingness to tighten monetary policy by raising the Federal Funds rate; it also hints at the eventual reduction of its bloated balance sheet. Moreover, such Fed action and its forward guidance wordplay contrasts with the ongoing highly accommodative policy of many key central banks (such as the European Central Bank and Bank of Japan). Yet the dollar nevertheless has weakened. In this context, the TWD’s slump over the past few months therefore portends future dollar depreciation. The Fed meets 6/13-14/17, 7/25-26/17, and 9/19-20/17.

Moreover, most believe that US real GDP growth will remain relatively strong. The dollar’s downturn in New Year 2017 is ominous from this perspective as well.

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The 1/20/17 inauguration of President Trump very closely connects in time with the TWD peak. Is this merely a coincidence? Probably not.

Comments during the 2016 election season and its aftermath by Trump and some members of the supporting cast allied with him indicate that he probably wanted some dollar depreciation to help boost US economic growth. Note their criticism of some key European trading partners and China. Isn’t it unfair to the US if the Euro FX or Chinese renminbi are “excessively weak”?

But much more than a willingness by the Trump Administration to permit some dollar bearishness probably explains the dollar’s decline in calendar 2017. After all, the US dollar rallied for several weeks after Trump’s November 2016 victory.

America’s notable political, economic, racial, religious, age, gender, and other divisions and related quarrels preceded Trump’s political showmanship and electoral triumph. But such conflicts arguably have worsened since Trump took office.

Examine the ongoing intensity of the carnival of media coverage relating to such divisions, even after the contentious national election. Look at ferocious debates over Obamacare, fiscal priorities, immigration policy, and climate change. In Washington’s political circus, note the significant disagreements in Congress on assorted key issues. The Republicans control the Presidency, House, and Senate, but they squabble. How likely will there be significant tax “reform” or substantial new infrastructure spending? The degree and scope of Russian involvement in American politics, including relationships with some people within or linked to the Trump Administration, capture headlines.

America’s highly partisan budget battles likely will continue, and its existing long run debt problems will not magically evaporate. Moreover, marketplace wizards generally agree that the enactment of the President’s budget plan (sketch) will widen the deficit dramatically relative to current trends. Of course other nations have big debt problems. Look at Japan’s mammoth government debt, and see China corporate debt (and property, local government, and shadow banking issues). Yet America’s increased indebtedness, particularly if Trump’s vision becomes law, is “newer news” than what has been going on within Japanese and Chinese debt festivals.

In addition, US consumer indebtedness is not small, and it has been creeping higher in absolute terms. The New York Fed reported that total US indebtedness as of end first quarter 2017 was about $12.7 trillion. This placed overall household debt $50 billion above its prior peak of third quarter 2008, and 14.1 percent higher than the trough attained in 2Q13.

And very significantly, many people at home and abroad believe President Trump’s leadership has been and likely will remain erratic. Compare his language and behavior with that of his predecessors.

Given the nation’s significant political (and other interrelated cultural) conflicts and doubts regarding the quality and predictability of Presidential- and Congressional- leadership and action, and “all else equal”, this makes the United States dollar (dollar-denominated assets) somewhat less attractive to hold. Widespread falling (low) public confidence in many US politicians, political processes, and political institutions eventually can generate falling confidence (and thus declines) in the dollar.

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Thus, in recent months, the victory of an apparently populist leader in America contrasts with the maintenance of power by the establishment in most key American trading partners. And the American President’s rhetoric and actions (at least to some extent) not only are divisive, but also seem rather erratic and confused to many

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US Dollar Theatrics- Depreciating Acts (6-7-17)

TICKET TO RIDE: US CORPORATE PROFITS AND S+P 500 TRENDS (c) Leo Haviland, May 17, 2017

In “Ticket to Ride”, The Beatles sing:
I don’t know why she’s riding so high
She ought to think twice
She ought to do right by me
Before she gets to saying goodbye”.

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CONCLUSION AND OVERVIEW

In offering enthusiastic audiences explanations of past, current, and future United States stock marketplace levels and travels, diverse marketplace preachers tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and methods, including the particular variables they select and arrange. For a majority of devoted visionaries, American corporate profitability is a very important factor.

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After-tax US corporate profits soared after reaching a trough in fourth quarter 2015, not long before the S+P 500’s major bottom in first quarter 2016. The noteworthy profit climb since 4Q15 surely encouraged the S+P 500 to jump from its 1Q16 trough.

Yet Trump’s remarkable triumph in November 2016’s Presidential election created (or at least magnified) faith that United States after-tax corporate profits would increase significantly in calendar 2017 and 2018. The S+P 500 galloped 15.2 percent higher from 11/4/16’s 2084 low to 3/1/17’s 2401 elevation. Thus hopes for greater profits probably greatly assisted the S+P 500’s sharp rally.

What is a key tenet (especially in the post-election period) in the gospel promoting a viewpoint of growing American corporate profitability and an entangled bull stock climb? Much centers on hopes that the Republican-controlled Congress will enact noteworthy corporate tax cuts. Related optimism for marketplace earnings (and stock) bulls includes possibilities for repatriation of corporate cash hoards, dramatic boosts in domestic infrastructure spending, and reduced regulatory burdens.

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However, current sharp divides on the American political scene (including within the Republican congregation) and widespread lack of confidence in (and hostility toward) the President will make it very difficult for a notable change in the corporate (and individual) tax code to become law. Passage of legislation encouraging earnings repatriation is not assured. Moreover, neither is a monumental infrastructure spending scheme.

In addition, despite the fierce climbs in recent calendar quarters, profit highs for recent full calendar years do not manifest a clear trend toward moving to new heights. Full calendar year profits over the past few years have been about flat.

Disappointment relative to widely-forecast profitability gains may inspire S+P 500 price retreats. In any case, history reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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What is too high (too low), high (low), overvalued (undervalued), or reasonable/rational/average/normal (unreasonable, irrational, atypical/abnormal) for stock prices or other economic indicators is a matter of opinion. However, and even though stock valuations can appear very elevated relative for an extended period of time, some marketplace gurus nowadays proclaim that some measures show US stock valuations are on the lofty side.

Also, elevated share buyback levels also have helped to propel US equities higher. There are hints this pattern will not persist.

Current low US stock marketplace volatility, high American consumer confidence, and evidence that financial stress remains below average have reflected (and encouraged) the majestic bull climb in the S+P 500. Observers nevertheless should watch for changes in such measures.

A warning light for S+P 500 bulls is the failure the S+P 500 to motor much above the early March 2017 high. The subsequent record high is 5/16/17’s 2406. If the S+P 500 continues to find ventures much beyond that March 2017 elevation challenging, this arguably will signal that current optimism regarding future corporate profit gains may be ebbing, that the S+P 500 bull trend is tiring, or both.

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So the failure of America to enact important corporate tax “reform” (tax cuts) or embark on a glorious infrastructure spending voyage may not greatly diminish future earnings expectations (or even actual levels) or significantly wound the S+P 500. But they might.

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In addition, challenges to the bullish trend in US equities may come from the long run upward trend of US government interest rates (note the Fed’s tightening plan). Or, concern about US federal budget deficits (or debt problems elsewhere in the world) may march into view. Hopes for higher (or at least not falling) energy prices likely underpin hopes for higher corporate earnings (and profits) in that key financial sector. But commodities “in general” (and petroleum in particular) have fallen from their 1Q17 highs. Anticipated oil output levels from OPEC and its non-OPEC comrades probably will not significantly reduce still-high OECD industry inventories for at least the next several months. The broad real trade-weighted US dollar established highs in December 2016/January 2017, though it has slipped only modestly since then. Contrary to what many believe, increasing US dollar depreciation may help lead to or confirm weakness in the US stock marketplace.

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Ticket to Ride- US Corporate Profits and S+P 500 Trends (5-17-17)