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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The broad real trade-weighted United States dollar probably will remain weak. Continuing its major long run bear trend from its March 2009 high, it probably will challenge its record low of July 2011. Why?
Among assorted bearish factors, focus on two which are becoming increasingly significant. First, the Federal Reserve Board in its September 2013 meeting displayed its absence of a genuine forward guidance plan and a lack of an authentic comprehensive exit strategy. Thus marketplace faith in the Fed has declined and will do so further in the aftermath of that September gathering. Keep in mind that feeble (vague) Fed guidance and decreased confidence in the Fed occurs amidst ongoing (and long-running) gigantic money printing and interest rate repression. The central bank is doggedly determined to keep pinning the Federal Funds rate near the floor (and thus below current inflation rates and announced Fed inflation targets) for some time. So how attractive are and will be United States Treasury yields for much over much of the government yield curve? Second, America’s national political players currently display weak fiscal (economic) leadership, especially as the debt ceiling limit beckons.
The Federal Reserve Board’s overall exit strategy for its extraordinary sustained accommodative policy remains far more a sketch than a complete design or coherent practical plan. Prior to its September 2013 assembly, central bank communicators strongly hinted the Fed soon would reduce its massive money printing campaign. Yet the illustrious Federal Reserve Board generals surprised the great majority of observers by not cutting back on quantitative easing. Moreover, these Fed luminaries also underlined their flexible attentiveness to a wide array of intertwining variables which will influence their tapering and other decisions. The ever-watchful Fed thus implicitly demonstrated that its loudly-proclaimed forward guidance wordplay offers Fed watchers at best only modest enlightenment and direction. America’s central bank consequently did more than increase marketplace uncertainty. The Fed wounded its own marketplace credibility. By damaging its credibility, the Fed reduces the widespread belief that it can engineer or at least significantly influence “good” economic outcomes.
Unfortunately, the significant shortfall in forward guidance from the guiding lights at the Federal Reserve currently coincides with a badly fractured American national political scene. Of course politicians and parties disagree and compete vigorously. Yet in the United States in recent years, significant philosophical divisions, diverse and often well-entrenched interests, and quests by political players to capture attention and win elections have combined to create ongoing “overall” feeble national political leadership. Strong political individuals in combination do not necessary make a strong collective group.
Failing to satisfactorily resolve the funding and (especially) the debt ceiling issues (and related deficit spending questions) will call in question America’s political leadership as a whole. All else equal, growing doubts about the quality of that leadership (and related fiscal policies) tend to undermine confidence in the US dollar. Besides these current feuds, America’s national political leaders continue to make no progress in resolving or even significantly mitigating the country’s looming long run fiscal deficit problem. Debt crises do not occur only in emerging or developing nations or in countries on the European “periphery”.
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Forward Guidance and the US Dollar (9-23-13)
The China economic miracle of recent years has astounded global gurus. Economic policy makers and watchers inside and outside of China forecast its likely continuation. In the intertwined global economy, such sunny predictions about China also aim at boosting confidence regarding international economic growth prospects. Admittedly some Chinese indicators show display reasons for such optimism. And the Financial Times recently remarked “almost everyone agrees that there is little sign that the global economic crisis is about to have a Chinese third act to follow the US and eurozone, which starred in Acts One and Two.” (7/24/13, p6).
Unfortunately, the so-called “real”, “underlying”, and “overall” China economic scene nevertheless is relatively opaque and challenging to understand. Telling any story about the nation’s economy, whether bullish or bearish, requires caution, and audiences should listen to these viewpoints with some skepticism. Many Chinese statistical indicators arguably are difficult to assemble comprehensively as well as to interpret (whether by the Chinese government or outside experts). How accurate is official Chinese economic information? Political considerations perhaps influence the substance of some Chinese data reports.
Moreover, several other signs from or related to China suggest that China’s real GDP growth has tapered faster than many believe. Besides, it may taper a fair amount beneath generally predicted levels of over 7.5 percent. Like the United States and many other nations since the emergence of the worldwide economic disaster, China embarked upon and sustained highly accommodative monetary campaigns and huge deficit spending adventures. Might GDP expansion diminish if these policies (and related credit creation and leverage) are slowed or reversed? Even though China’s overall government debt as a percentage of GDP is less than that of the United States, much of Europe, and Japan, why should China entirely escape the debt challenges and related unpleasant consequences endured by these nations? In contrast to most conventional wisdom, China nowadays probably faces some significant systemic financial (economic) problems.
China’s embrace of debt and credit in recent years is a widespread cultural phenomenon.
If things were going wonderfully within the Chinese economic (and political) system, why would the nation’s leaders underscore territorial quarrels with other nations? Recall the recent squabbles with Japan over tiny islands (Daioyu) controlled by Japan.
What’s the bottom line? China apparently has generated a fair amount of its economic growth from easy money and massive deficit spending (credit, debt, and leverage). It consequently faces a significant challenge of maintaining its high GDP growth rates while tapering accommodative monetary and fiscal deficit policies. In addition, China confronts a modest yet apparently growing systemic problem (risk) tied into these accommodative monetary and fiscal programs and the related lending, leverage, and bad debt issues. Perhaps Chinese control over its economy (especially given that economy’s close connection with the global one) is much less than many claim. Looking forward, Chinese growth probably will taper more than most believe. In any event, one should not have blind faith in the continuation (repetition) of the recent extraordinary Chinese growth story.
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Another Marketplace Tapering Tale- the China Story (9-9-13)
The Federal Reserve Board continues to stress via its wonderful forward guidance strategy that it will keep policy rates extremely low. However, the sustained rally in United States Treasury government yields shows that marketplace confidence in the Fed’s ability to manage (repress) interest rates, especially at the long end of the yield curve, has fallen. Look at the UST 10 year note. Not only did its yield bottom around 1.38 percent on 7/25/12. Not only did yields climb further from lows near 1.55pc (11/16/12 and 12/6/12). They have spiked from 5/1/13’s 1.61pc, touching 2.75pc 7/8/13. And this spike has continued even after the Fed underlined in recent weeks that it would not “taper” its money printing (and other easy money games) too quickly.
The ability of central bank maneuvers to sustain substantial economic growth (and repress government yields and rally the S+P 500 and related equities) probably has weakened.
Rising sovereign debt yields do not always reflect or portend economic growth (recovery) or higher stock marketplace prices. In the current marketplace playing field, rising interest rates in America (and elsewhere) also seem to be “leading” equity marketplace declines. Suppose the US government 10 year rate marches higher from current levels (or even if it stays relatively high versus its summer 2012 and May 2013 bottoms). Suppose the S+P 500 is unable to exceed (or break much above) its May 2013 height and that it declines beneath its late June 2013 low around 1560. The rising yields and falling equities will underscore that the easy money game of the Fed and its central banking allies increasingly strains credibility and thus has diminished substantially in its effectiveness.
In any event, it nevertheless stretches credibility to claim that these recent ECB and BoE statements represent a change of genuine significance. They appear to be clever ploys to boost confidence in the ability of the central banks to help guide and sustain recovery. How likely was (is) it that the ECB or the BoE were (are) going to raise rates anytime soon? Not only is much of Europe in recession, but Europe’s economic crisis (including sovereign and banking debt and related bailout issues) persists. Noteworthy troubles still loom in Greece, Ireland, Portugal, Cyprus, as well as in Spain and arguably in Italy. Moreover, recall the ECB President’s inspiring “whatever it takes” talk about a year ago (7/26/12); people gave substantial credence to that open-ended proclamation.
Consequently, these recent ECB and BoE remarks, like the cheerleading comments by Federal Reserve and Chinese officials after the June 2013 stock marketplace lows, look like a sign of weakness. Are the ECB and BoE losing some of their hold on the distant section of the yield curve? Yes. Again underscore the steady creep higher in longer run government rates in the United States (and many other arenas) despite keeping Federal Funds near the ground.
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The Federal Reserve and other central banking all-stars around the globe have teamed up. In varying fashions, and frequently led by the Fed, they vigorously practice accommodative strategies to tackle economic weakness and to spark and sustain economic recovery.
The Fed’s trusty playbook, for example, currently insists on the wisdom of keeping policy (Federal Funds) interest rates pinned to the floor. Much of the UST yield curve offers negative returns relative to inflation. The Fed thus deliberately encourages some American and other yield hunters to avoid, diversify away from, or leave US Treasury debt in search of better returns elsewhere. Many other central banks link arms with the Fed under the low interest rate banner.
Thus many players race into or cart more funds into other debt arenas.
Keep focusing primarily on America for a moment. Those yearning for return trot into domains beyond the interest rate one. If US government yields are going to stay at exceptionally low levels into 2014, why not give stocks an even closer look! Besides, even though not all equities pay dividends, some do. The unending search for yield (return) inspires pilgrims to venture into (or more robustly into) stock marketplaces (use the S+P 500 as a benchmark). Also, surely people have not forgotten the anthem that US stocks are an excellent long run investment.
What are investment, speculation, and gambling? In stocks, interest rates, real estate, and elsewhere, investment rhetoric encourages and often persuades people to embrace a given investment perspective and to act accordingly. Since investment generally is associated with notions such as reasonableness, prudence, and goodness, many people race to be investors (join some investment team) and wear the honored investment crown. And those promoting particular financial instruments compete fiercely to attach an investment label of some sort on what they want others to buy and hold. Thus in recent years, the commodity world has found numerous cheerleaders for concepts that commodities (“in general”) are (can be) an investment, an alternative investment, or an asset class. Think also of the potential diversification benefits for your portfolio of stocks and interest rate holdings. In any event, various assorted commodity investment advocates have won quite a few victories for their ownership cause.
Suppose groundskeeping central bankers mow down the yields of government securities to very low nominal levels (and especially suppose those returns are negative relative to inflation). Those central bankers thereby encourage “investors” in government debt (and those with deposits at bank and money market funds) to seek “investment” returns elsewhere. So why not entertain commodities as a marvelous investment buying opportunity?
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Commodity Playgrounds- Chasing Returns (2-21-12)
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