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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AMERICA DIVIDED AND DOLLAR DEPRECIATION © Leo Haviland September 7, 2021

Pogo, created by the cartoonist Walt Kelly, is a possum living in Georgia’s Okefenokee Swamp. About 50 years ago, Pogo proclaimed: “We have met the enemy and he is us.”

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OVERVIEW AND CONCLUSION

For many decades, the United States dollar has led the foreign exchange field as the key currency for global trade as well as financial reserves. Over that time span, the greenback’s predominance to a significant extent encouraged, sustained, and reflected widespread (although not unlimited) American and global faith in the wisdom and goodness of American cultural values and the persuasive and practical ability of the nation to be a (and sometimes the) critical guiding force in international affairs. Although the dollar obviously has had numerous extended periods of appreciation and depreciation since the free market currency dealing regime began in the early 1970s, the dollar’s crucial role in the increasingly intertwined global economic system has seldom been significantly questioned or challenged for over an extended period of time.

Using the Federal Reserve’s real “Broad Dollar Index” (which is a monthly average) as a signpost, the US dollar “in general”, for almost ten years, from its major bottom in July 2011 until April 2020, the overall trend of the dollar in general was bullish. The US dollar “in general” depreciated until “around” January 2021. It rallied for several months thereafter, with August 2021 being the high since then. From a long run historical perspective, August 2021’s real Broad Dollar Index level is rather strong.

However, when interpreted alongside phenomena such as America’s government debt level and trend, ascending United States inflation, and the nation’s ongoing cultural divisions and the recent increase in net dissatisfaction among the US public regarding the country’s direction, a review of various important currency cross rate trends against the dollar suggest that “overall” weakness in the US dollar has resumed (beginning around late August 2021) or will do so in the near future.

Take a related vantage point. Given the Federal Reserve’s determined effort to repress (pin at a very low level) the Federal Funds rate and US Treasury yields despite numerous inflationary signs, a probable outcome (consequence; outlet) for that central bank scheme in the context of these assorted variables is a depreciating dollar.

In this context, if the real Broad Dollar Index (“BDI”) moved toward or underneath its March 2009 international economic disaster peak at 101.5, that probably will help to precipitate a “weak United States dollar equals weak US stocks” scenario.

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An underlying factor promoting a dollar tumble is the gradually declining share of America as a percentage of worldwide GDP. Also, both political parties, not just the current US Administration, and especially in the coronavirus era, likely want the real Broad Dollar Index to stay beneath its April 2020 summit at 113.6. They also probably prefer a renewed fall in the BDI from August 2021’s 107.3 elevation. The great majority of the country’s politicians preach their allegiance to a strong dollar, but they also endorse economic growth.

Several additional phenomena make the dollar particularly vulnerable nowadays. First, although many major nations have increased their government debt burdens in recent years, America’s public debt situation has worsened significantly more than most others since 2019. Moreover, America already faced widening federal budget deficits encouraged by the tax “reform” enacted at end 2017. Plus don’t overlook the ongoing ominous long run debt burden, looming from factors such as an aging population. How easily will America service its debt situation? In addition, the current Administration’s infrastructure proposals, if a significant proportion of them become law, probably will boost America’s debt as a percentage of GDP. Will there be a political fight over raising the nation’s debt ceiling? And America’s corporate and individual indebtedness also is substantial.

Second, using the Consumer Price Index (CPI-U, all items) as a benchmark, American “inflation” in recent months has exceeded that of other leading nations. The Fed continues to maintain a highly accommodative monetary policy. This beloved guardian has merely murmured about tapering its massive quantitative easing (money printing) scheme, and it remains reluctant to raise policy rates significantly anytime soon. Due to the Fed’s yield repression, nowadays US Treasury yields across the yield curve relative to the current US CPI level offer a negative real return. This negative return situation of course (all else equal) tends to make UST ownership rather unattractive for many marketplace participants.

Whether because of ascending US interest rates, a descending dollar or both, suppose foreigners become smaller buyers, or even net sellers, of US Treasury securities. Such overseas action would not be an endorsement of America.

Another bearish indicator for the US dollar exists: the intensity and breadth of America’s cultural divisions has increased in recent times. Though the Trump era reflected and enhanced these splits, they remain very significant across various fields. America’s ongoing substantial cultural battles in economic, political, and social arenas reflect reduced national unity and tend to undermine domestic confidence. American confidence in the nation’s overall direction has slumped in recent months. As US citizen faith in the country’s situation declines, so probably likewise will (or has) that of foreigners in regard to America. To some extent, faith in America and its institutions is reflected by a willingness to own substantial amounts of dollar-denominated assets.

An additional feature can intertwine with these variables to undermine the dollar, especially over the long run. In recent years, the strong international belief in the reliability (and leading role) of America as a trading and military partner probably has eroded somewhat. Some of this may reflect the declining US share of worldwide GDP. Former President Trump’s often erratic behavior, bold wordplay, and frequent disregard for the truth assisted this fall in confidence process. Also, ongoing America First (Make America Great Again) movements and an apparently diminished American enthusiasm for multilateralism and globalization probably reduce confidence in other players that America will be “as committed” a partner. For example, trade conflicts, even if they now are less strident than during the Trump presidency, have not evaporated. The dismal American withdrawal process from Afghanistan troubles many overseas observers. In addition, the persistence of America’s fervent and substantial cultural divides to some extent risk injuring foreign faith in the reliability and effectiveness of America on the international scene.

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Declining faith in American assets (and its cultural institutions and its economic and political leadership) can inspire shifts away from such assets. American marketplaces will not be completely avoided given their importance, but players can diversify away from them to some extent. Not only Americans but also foreigners own massive sums of dollar-denominated assets (debt instruments, stock in public and private companies, real estate; dollar deposits). Such portfolio changes (especially given America’s slowly declining importance in the global economy) will tend to make the dollar feeble.

Suppose nations and corporations increasingly elect, whether for commercial or political reasons, to avoid using the dollar as the currency via which they transact business. That will injure the dollar.

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America Divided and Dollar Depreciation (9-7-21)

BORN TO BE WILD: AMERICAN ECONOMIC AND POLITICAL BATTLEFIELDS © Leo Haviland November 2, 2020

President Donald Trump’s “Inaugural Address” (1/20/17): “This American carnage stops right here and stops right now.”

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OVERVIEW AND CONCLUSION

Marketplace connections and patterns, including convergence and divergence (lead/lag) relationships between financial realms, are complex and not necessarily precise. They can shift or even transform sometimes dramatically. Marketplace history is not marketplace destiny; history does not necessarily repeat itself, either entirely or even partly.

“Adventures in Marketland: Hunting for Return” (10/6/20) and “Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) display the intertwined price trends in assorted financial fields in recent times. Such interrelated territories include United States and other stocks, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities “in general”. Prices in the S+P 500 and other benchmark US and global stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time. They frequently have climbed in bull markets (and fallen in bear markets) “together”. These thus have alternatively reflected bullish enthusiasm as “investors” and other traders hunted for adequate return (“yield”), and dismal bearish scenes as they scrambled frantically for safety. For example, the magnificent bull moves in the S+P 500 and these “related” financial areas established important tops in early to mid-first quarter 2020 (S+P 500 on 2/19/20 at 3394). Their subsequent murderous bear crashes entangled, finishing around the same time, around late March 2020 (S+P 500 on 3/23/20 at 2192). The ensuing price rallies in the S+P 500 and these assorted other key provinces thereafter united, establishing peaks around early September 2020 (S+P 500 top on 9/2/20 at 3588; subsequent lower high 10/12/20 at 3550). See those essays for a detailed presentation of these price moves and their relationships since first quarter 2020.

“Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) concluded that various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together. “Adventures in Marketland” reemphasized this bearish outlook.

What bearish factors for the S+P 500 and various related marketplaces (other stock signposts, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities such as petroleum and metals) did “Marketplace Maneuvers” and “Adventures in Marketland” emphasize? They include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears have grown of a political crisis and legal fights if President Trump disputes the November 2020 voting outcome. Other warning signals of notable price falls in the S+P 500 and various associated battlegrounds include vulnerable United States (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes) than many believe (even with ongoing Fed yield repression), and weakness in the US dollar.

This bearish trend in the S+P 500 probably will continue. Even if Congress answers widespread fervent prayers and enacts another large deficit spending (stimulus) package, the S+P 500’s 9/2/20 peak probably will not be broken by much, if at all. Given recent relationships, a sustained fall in the S+P 500 probably connects with declines in the prices of the other asset sectors currently closely linked to it.

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As always, in the context of these various marketplaces, money-seekers should monitor US Treasury and other high-quality government debt yield levels and trends as well as US dollar and other currency patterns.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Born to Be Wild- American Economic and Political Battlefields (11-2-20)

DOLLAR DEPRECIATION AND THE AMERICAN DREAM © Leo Haviland August 11, 2020

In the film “Wall Street” (Oliver Stone, director), Gordon Gekko claims: “It’s all about bucks, the rest is conversation.”

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DOLLAR DEPRECIATION DANGERS

For many decades, the United States dollar has led the foreign exchange field as the key currency for global trade as well as financial reserves. Over that time span, the greenback’s predominance to a significant extent encouraged, sustained, and reflected widespread (although not unlimited) American and global faith in the wisdom and goodness of American cultural values and the persuasive and practical ability of the nation to be a (and sometimes the) critical guiding force in international affairs. Although the dollar obviously has had numerous extended periods of appreciation and depreciation since the free market currency dealing regime began in the early 1970s, the dollar’s crucial role in the increasingly intertwined global economic system has seldom been significantly questioned or challenged for over an extended period of time. For almost ten years, from its major bottom in July 2011 until April 2020, the overall trend of the dollar in general was bullish.

Therefore few gurus fear a significant depreciation in the US dollar from its relatively lofty April 2020 high. However, the probability of a noteworthy dollar slump is much greater than most believe.

An underlying factor promoting a dollar tumble is the gradually declining share of America as a percentage of world GDP. Also, both political parties, not just the current US Administration, and especially in the coronavirus era, probably want the dollar to weaken from its recent summit. The great majority of the country’s politicians preach their allegiance to a strong dollar, but they also endorse economic growth.

Two additional phenomena make the dollar particularly vulnerable nowadays. First, although many leading nations have increased their government debt burdens in recent years, America’s situation probably has worsened significantly more than most others in recent months. Moreover, America already faced widening federal budget deficits encouraged by the tax “reform” enacted at end 2017. Plus don’t overlook the ongoing ominous long run debt burden, looming from factors such as an aging population. How easily will America service its debt situation? And America’s corporate and individual indebtedness also is substantial.

Second, the intensity and breadth of America’s cultural divisions has increased in recent times, especially during the Trump era. American confidence in the nation’s overall direction has slumped in recent months. As US citizen faith in the country’s situation declines, so probably likewise will (or has) that of foreigners in regard to America.

Declining faith in American assets (and its cultural institutions and leadership) can inspire shifts away from such assets. American marketplaces will not be completely avoided given their importance, but players can diversify away from them to some extent. Not only Americans but also foreigners own massive sums of dollar-denominated assets (debt instruments, stock in public and private companies, real estate; dollar deposits). Such portfolio changes (especially given America’s slowly declining importance in the global economy) will tend to make the dollar feeble.

Suppose nations and corporations increasingly elect, whether for commercial or political reasons, to avoid using the dollar as the currency via which they transact business. That will injure the dollar.

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A five percent fall in the “overall” dollar level from its April 2020 high may not make much difference in the near term for US stocks and debt securities. However, a roughly five percent dollar drop is a warning sign for them, and especially for stocks. All else equal, a weaker dollar tends to boost the nominal price of dollar-denominated assets such as stocks and commodities. But history shows that this relationship is not inevitable. Phenomena other than dollar depreciation influence US securities trends. Keep in view the considerations described above undermining the dollar, and thus the desire to hold dollar-denominated instruments.

Admittedly, strong American corporate earnings encourage buying (and holding) of US stocks. But the coronavirus situation and responses to it have devastated calendar 2020 earnings. Suppose that contrary to widespread hopes and predictions, calendar 2021 corporate earnings do not rebound significantly (sufficiently) from dismal 2020 depths. What if the prayed-for V-shaped economic recovery does not emerge? If corporate earnings remain relatively modest (or slide) going forward, and if the dollar continues to weaken from its April 2020 height, dollar depreciation probably will intertwine with an equity slump.

A sustained dollar tumble approaching ten percent (and especially a fall greater than ten percent) probably will help to push the S+P 500 and related stock prices quite a bit lower. Many equate strong (high; rising) United States stocks over the long run as a signal or proof of the triumphant progress of the American Dream’s economic, political, and social principles. Therefore a linked and sustained decline in both the dollar and American stocks probably would damage to some extent the persuasive rhetoric of the current version American Dream itself.

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Even if US government debt yields in this scenario initially slump from around current low levels due to a renewed “flight to quality”, and even if the Federal Reserve and its central banking teammates maintain their quantitative easing and yield repression schemes, inflationary forces (encouraged by money printing; see the huge increase in America’s money supply) and heated demand for credit eventually can push government (and corporate) interest rates upward. On the US interest rate front, suppose foreigners become smaller buyers, or even net sellers, of US Treasury securities. Such overseas action would not be an endorsement of America. Due to yield repression, UST real returns currently are negative.

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Dollar Depreciation and the American Dream (8-11-20)

DIVERGENCE AND CONVERGENCE: US STOCKS AND AMERICAN POLITICS © Leo Haviland July 11, 2020

William Butler Yeats said in his poem “The Second Coming”:
“Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.”

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OVERVIEW AND CONCLUSION

Numerous United States stock marketplace and economic wizards share a common faith that levels and trends in broad-based equity benchmarks such as the S+P 500 adequately represent the nation’s overall current economic “reality”, signal (forecast) the country’s future economic conditions, or both. Conversely, the present-day or prospective economic situation (or both) allegedly are built into or forecast S+P 500 and related stock signposts elevations and trends. Leading promoters of this creed frequently also are apostles of stock investment (buying), especially over the misty long run. Thus strong (bullish) US stocks supposedly equal, reflect, or confirm (at least to a substantial extent and at some point in time) a robust economy.

Assorted economic (commercial; business) variables around the globe of course influence patterns in American (and other international) stock marketplaces. So do political and other cultural factors. The perspectives on, analytical methods regarding, and arguments and conclusions relating to such cultural phenomena nevertheless are entirely subjective (matters of opinion; not scientific). Thus reasonable gurus can and do vary in their enlightened views regarding issues such as how to organize “the” past, present, and future, as well as in their causation and probability assessments regarding one or more marketplaces. This contrasts with the objective (Natural; true for all) sciences such as biology, chemistry, physics, mathematics, and mechanical engineering.

A given financial marketplace such as the S+P 500 and data (variables, facts, factors, evidence, statistics) related to it converge and diverge (lead/lag) in a variety of fashions. Existing relationships can change, sometimes dramatically. Marketplace history is not marketplace destiny.

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The S+P 500 rapidly crashed about 35.4 percent in only one month from its 2/19/20 pinnacle at 3394 to its dismal 3/23/20 trough at 2192. However, it thereafter skyrocketed nearly 47.5 percent to 6/8/20’s 3233, only about five percent beneath 2/19/20’s height. The S+P 500’s current level around 3185 neighbors the early June 2020 high. Generous money printing (quantitative easing) and yield repression (and other assistance) from the beloved Federal Reserve and its central banking allies substantially contributed to the spike from March 2020’s depth. So did massive deficit spending. Substantial bull moves in various important “technology” stocks within the S+P 500, and the related climb in the technologically-composed Nasdaq Composite Index, greatly assisted the upward march and sustained strength in the S+P 500.

Although the Nasdaq Composite Index and many leading (popular; large-capitalization) technology stocks achieved new highs very recently, several actual or probable divergences (and some convergences) within or linked to the S+P 500 stock playground warn that it will be difficult for the S+P 500 to surpass its lofty February 2020 peak by much, if at all, over the next several months. These factors not only probably will undermine the S+P 500 and induce it to start declining, but also will inspire a related fall in the Nasdaq Composite Index.

DIVERGENCE: AMERICAN STOCKS

The poet Wallace Stevens declared: “Nothing is itself taken alone. Things are because of interrelations or interactions.”

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Various forms of divergence (and convergence) relevant to stock marketplaces exist.

These include how a given marketplace recently has moved, or is travelling, relative to its past (or “overall”) history. It can include relationships between “the” stock marketplace (such as the S+P 500 benchmark) and other stock indices (both domestic and foreign), marketplace sectors (such as technology, energy, or finance; emerging marketplace stocks) or particular stocks. An apparent existing relationship between United States stocks and other financial territories such as interest rates (picture the US Treasury marketplace or high-yield corporate debt), the US dollar, and key commodities such as petroleum and base metals can change, sometimes dramatically. For the S+P 500, a stock sector, or an individual equity, its level, trend, and valuation can seem to converge or diverge with its earnings (or other variables).

To what extent has or will America’s coronavirus history, current trends, and future probabilities intersect with the S+P 500? Recall the vicious economic decline and sharp stock slumps during first quarter 2020 as the coronavirus spread worldwide and in America. Yet the significant increase in recent weeks in the America’s coronavirus infection rate contrasts with the persistent strength in the S+P 500, and with the Nasdaq Composite Index’s stellar ascent to all-time highs.

Significant divisions (divergence) and heated conflicts nowadays exist in America’s political and other cultural theaters. Political phenomena of course intertwine with economic ones, including financial marketplaces such as stocks. To some extent, the rally (“high” prices) in American stock benchmarks such as the S+P 500 diverges from the likely enactment (reality) of corporate and capital gain tax increases. In America’s upcoming November 2020 national election, Biden very likely will defeat Trump. The Democrats should retain control of the House of Representatives. The Democrats probably will gain Senate seats, and they have a very good chance of capturing the Senate. This unification of Democratic power on the national level not only will be a dramatic change in government. Tax policies embraced by Biden and the Democrats likely will be bearish factors for the S+P 500.

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Divergence and Convergence- US Stocks and American Politics (7-11-20)