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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TREND RELATIONSHIPS: US AND CHINESE STOCKS AND THE INTERNET SECTOR © Leo Haviland, November 27, 2017

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“Away from baseball, I had a lot of fun, and much of it came in pitting myself against the odds found in the financial world, which are somewhat longer against success than getting a base hit.” The Hall of Fame star Ty Cobb, “My Life in Baseball”

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The price movements and levels of various leading “internet-related” stocks attract the attention of and story-telling by assorted stock marketplace strategists and media guides around the globe.

Attached are several charts.

Charts 1-5 constitute America’s FAANG army (Apple, Amazon, Facebook, Google, and Netflix). Charts 7-9 cover the large Chinese internet groups labeled BATs (Baidu, Alibaba, and Tencent). Although these bar charts are weekly, the handwritten price and date noted is for the actual trading day.

During the past two and a half years, a review of the dates and lines noted on the graphs of this array of internet companies manifests a similarity “in general” (for the group) as to noteworthy price trend shifts (or accelerations) “around” several critical marketplace turns. These key time points include: mid-2015 high; late August 2015 low; late year 2015 drop-off; first quarter 2016 bottom; dramatic rally after the 11/8/16 election.

Not every stock necessarily closely fits the given key turning point noted, but the majority did. Of course not all travelled the same percentage distance. Nevertheless, there has been some tendency for the group members to “confirm” each other’s trend.

Sometimes a given stock, stock sector, or broad marketplace may lead (lag) another (the convergence/divergence issue).

This trend and timing linkage for the FAANGs and BATs provides guidance for anticipating and evaluating movements in broad indices such as the S+P 500 and China’s Shanghai Composite. United States and Chinese benchmarks do not always voyage together, but they have frequently done so (see the notes on chart 1).

The internet sector and broad equity stock indices are not necessarily divorced from movements in other stock sector domains (such as “financial” or “retail”) and their members. Many scouts closely monitor noteworthy financial corporations such as Goldman Sachs. The GS chart is at page 6 (unlike the other eight graphs, this one is monthly).

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A noteworthy decline in this internet stock group “in general”, whenever this happens, probably will occur around the same time. Given the widespread importance and allure of the internet playground (and the “technology” territory), such an important sectoral shift by the FAANGs and BATs likely will develop around the time of one in the S+P 500 and Shanghai Composite (and perhaps for other related broad stock indices of advanced and emerging/developing nations as well). As always, watch for price leads (lags). For the S+P 500, given its glorious long-running bull move, a decline of about ten percent (or more) would worry many observers.

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Keep an eye on rising interest rates for (and other signs of tighter credit in) the United States and China (and in other key nations). What if the United States does not enact tax “reform”? A significant portion of the rally in the overall US stock marketplace since the November 2016 election probably has derived from optimism regarding the passage of a massive tax cut package (particularly for corporations). Yet watch debt trends in America (especially if the so-called reform becomes law) and China. The adventures of the broad real trade-weighted dollar, especially if it breaches important support and resistance levels, also intertwines with and can significantly influence trends in stocks, interest rates, and commodities.

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Trend Relationships- US and Chinese Stocks- the Internet Sector (11-27-17)
Charts- Trend Relationships- US and Chinese Stocks and the Internet Sector (11-24-17)

US TAX REFORM: PROPAGANDA AND PROSPECTS © Leo Haviland October 9, 2017

Genevieve Larkin exclaims in the film “Gold Diggers of 1937”: “It’s so hard to be good under the capitalist system!” (Lloyd Bacon, director)

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CONCLUSION AND OVERVIEW

The most recent American corporate and individual tax “reform” proposal sketched by the President and Republican Congressional leadership is merely a “framework”. These ringleaders and their acolytes proclaim that genuine legislative planning and serious negotiations will create a robust document, a beneficial bill suitable for passage. However, the overall explicit and implicit policy substance (partisan aims) incorporated in the current outline probably will not become law. Even if a few elements of the “reform” scheme manage to pass the House and Senate and become law, at most this will represent modest tinkering with rather than major changes in the current tax code.

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Why will the corporate and individual tax reform program advocated by the President and others generally fail to be enacted? First, partisan political divisions in America in general and Congress in particular are too severe. Although the Republicans control both Houses of Congress, their Senate majority is slim. Whereas Congressional Democrats for the most part have held ranks since the 2016 election, Republican unity, particularly within the Senate, has been fragile. Not all Republicans adopt the same (or Trump’s policies).

The corporate and individual tax code reflects a diversity of political (cultural) viewpoints. Consequently, perspectives regarding as well as campaigns to transform, modify, or preserve critical aspects of it reflect opinions. Thus competing cultural camps with assorted outlooks and aims engage in heated rhetorical battles to advance their interests. Moreover, these proposed so-called tax reforms represent significant ideological approaches, not merely cosmetic fixes and updates.

In recent years, compromise in Congress in various critical policy matters has appeared with less frequency and generally only grudgingly. If the Senate cannot repeal (or repeal and replace) Obamacare (Affordable Care Act), how will they manage to make substantial alterations in an extremely complex document such as the United States tax code? Donald Trump’s remarkable and shocking Presidential triumph in America’s 11/8/16 election has not been followed by Congressional passage of his legislative agenda (Inauguration Day was 1/20/17). Why will Democrats help President Trump and Republicans win a notable legislative victory on taxation with election 2018 coming into view?

In the United States, even though labels are not definitive and groups can overlap, look further at and beyond the “political” sphere. America of course has never been entirely homogeneous or unified. The widely-shared American Dream has been expressed and implemented in various ways. Yet America’s disagreements and debates currently are wide-ranging. The lines between and within camps are not always clear; moreover, individuals may be loyal (belong) to various (and often competing) categories.

In any case, the long list of America’s noteworthy splits and fractures makes it especially changing to enact wide-ranging changes in the core taxation (and spending, including entitlements) policy arena. There are liberals (progressives), conservatives (traditionalists), centrists (moderates), and independents. Populists (both left and right wing) confront the establishment (elites). Globalists contend with nationalists.

America, as a house divided, has rich versus poor, haves versus have-nots. Highlight the nation’s substantial economic inequality. Is America nowadays a Gilded Age era? Are economic and social mobility increasing?

Consider divisions relating to race (ethnicity), gender/sexuality, religion, age, geographic region, and urban/rural. Fierce quarrels rage not only over tax and spending policies, but also over health care. Heated fights occur on trade and tariff issues, economic regulation (how much is appropriate), abortion rights, immigration, gun ownership, and environmental fields such as climate change.

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Moreover, President Trump probably will be unable to lead the contending camps inside and outside Congress toward a realization of his tax “reform” plan. Some circles fervently admire Trump. His “Make America Great Again!” and “America First” slogans and many of his policy pronouncements obviously appeal to large numbers of Americans. Yet he nowadays lacks sufficient influence over Congress as a whole, including parts of the Republican caucus. And among the nation in general, his popularity is quite low. Many observers see him as erratic in his outlook and imprudent and insensitive in his opinions and actions.

Moreover, Donald Trump lacks government insider experience. Rhetoric and behavior (and talents) suitable for running a successful family-owned business, a reality television show, or even a successful Presidential campaign are not necessarily appropriate (adequate; likely to succeed) in regard to leading a country well or inspiring Congress to adopt his policy agenda.

Although Trump won in the Electoral College, he decisively lost the popular vote tally. The popular vote outcome obviously reflects America’s sharp political divisions. Also, the Russian President “directed a vast cyberattack aimed at denying Hillary Clinton the presidency and installing Donald J. Trump in the Oval Office, the nation’s top intelligence agencies said in an extraordinary report” (NYTimes, 1/7/17, ppA1, 11). Trump’s popular vote defeat and reports on Russian political interference undermine Trump’s political “legitimacy” (faith in it) and thus his ability to lead effectively.

The President’s continued unwillingness to release his own tax returns makes it challenging for some to agree with his reform package. Might he or his family benefit from the proposed framework?

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Over three decades have passed since the last notable US tax reform (Tax Reform Act of 1986). Even though many gurus complain about parts of the current personal and corporate tax system, there does not appear to be a widespread consensus as to how to dramatically overhaul it.

Keep in mind that the individual and corporate tax codes are not merely long and complicated. It is a rhetorical structure reflecting a large and complicated society. Its lengthy enshrined provisions and interpretations of them therefore frequently represent competing visions and values. America’s current tax laws took a long time to reach their current structure. The US from the vantage points of both individuals and corporations of course is a diverse and complex country; this parallels the complexity of the global economy, with which the nation is enmeshed. Some “special interests” will fight vigorously for the proposed “reform” (or parts of it), but other crews will lobby heatedly against all or many of its provisions. These considerations also make it very difficult, and particularly unlikely in the current domestic American political environment, for substantial tax changes (“reform” of whatever fashion) to occur.

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US Tax Reform- Propaganda and Prospects (10-9-17)

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)