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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RUNNING FOR COVER: FINANCIAL MARKETPLACE ADVENTURES © Leo Haviland May 3, 2022

A character in the film “It’s a Mad Mad Mad Mad World” reasons: “Now look, let’s be sensible about this thing. There’s money in this for all of us. Right? There’s enough for you, there’s enough for you, and for me, and for you, and there’s enough for…” [They all race to their cars]. (Stanley Kramer, director)

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CONCLUSION

Sustained rising United States Treasury interest rates and a strong US dollar have played critical roles in creating the January 2022 price peak for and subsequent declines in the S+P 500. Increasing yields not only in America but also within emerging marketplaces, as well as the powerful dollar, assisted the construction of the earlier high (around February 2021) for emerging marketplace stocks in general. The ongoing UST and other yield climbs of recent months alongside the strong dollar have reestablished long run price and time convergence between the S+P 500 and emerging marketplace equities. The major trend toward higher US and other rates, alongside the high US dollar, and interrelating with the downward trends in the S+P 500 (and other advanced nation stocks) and emerging marketplace equities, probably have created summits for commodities “in general”.

The price spike in commodities (enlist the broad S&P GSCI as a benchmark) beginning in December 2021/early 2022 of course underscored inflationary fears, which assisted the rise in interest rates, thus helping to precipitate down moves in the S+P 500 and other stock marketplaces. However, the rising UST (and international) yield trend and strong dollar situation preceded the Russian invasion of Ukraine in late February 2022.

For a long time, yield repression by the Federal Reserve and its central banking friends created negative real returns relative to inflation for US Treasury and many other global debt securities. This very easy money policy (assisted by gigantic money printing/quantitative easing) and enormous US (and other) government deficit spending (especially after the advent of the coronavirus pandemic in early 2020) generated enthusiastic quests for yield (adequate return) by investors and other traders in stocks, lower-quality debt instruments (such as corporate and emerging marketplace sovereign bonds), and commodities. This helped to produce monumental bull trends in these playgrounds. Wall Street and the financial media eagerly promoted the reasonableness of these yield hunts. The sleepy Fed watchdog and other virtuous central bankers were long complacent about inflationary dangers, labeling inflationary signs as temporary, transitory, the result of supply bottlenecks, and so forth. Nowadays, these more vigilant guardian bankers, alarmed by the highest inflation in several decades, have commenced a rate-raising campaign.

Thus the sunny “search for yield” landscape for the S+P 500 and associated stock, debt, and many commodity marketplaces has darkened. An anxious “run for cover” liquidation of assets by many investors and other owners probably has been underway. Compared to the time just prior to the 2020 coronavirus pandemic (and the 2007-09 global economic crisis), the Federal Reserve (and other central bankers) and the American and other national governments probably have much less ability to readily rescue the S+P 500 and other “search for yield” marketplaces.

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Previous essays noted that the S+P 500 probably peaked on 1/4/22 at 4819. Looking forward, the S+P 500 probably will venture significantly beneath 5/2/22’s 4063 low. The bear trend in emerging stock marketplaces will continue. Over the long run, given the American (and global) inflation and debt situation, the yield for the US Treasury 10 year note probably will ascend above its recent high around three percent, although occasional “flights to quality (safe havens)” and thus interim yield declines may emerge. Remember that the dollar rallied from April 2008 to March 2009, alongside the S+P 500’s collapse from its important mid-May 2018 interim high (S+P 500 major high October 2007) to its major bottom in March 2009. However, and although it is a difficult call, the current bull trend for the United States real Broad Dollar Index probably will attain its summit in the near future. Commodities in general (spot; nearest futures basis) probably made a major high in early March 2022 and will continue to retreat, although there may be brief price leaps above previous tops in “have-to-have” (very low inventory) situations.

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Running for Cover- Financial Marketplace Adventures (5-3-22)

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)

RUNNING FOR COVER: MARKETPLACE EXITS (c) Leo Haviland August 9, 2019

OVERVIEW AND CONCLUSIONS

The frantic price rally in several key marketplace benchmarks commencing around end year 2018 probably reflected a fervent hunt for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield seekers searched for sufficient return in domains such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex. Easy money policies and pronouncements by the Federal Reserve, European Central Bank, and their comrades greatly encouraged these eager yield searches.

That ferocious yield hunt has diminished and the associated price rally for these signposts in general probably is finished. The terrifying slip in the S+P 500 from 7/26/19’s 3028 summit, in conjunction with the renewed tumble in emerging marketplace equities and the retreat in petroleum prices, signals a reversal of the avid enthusiasm of the hunt for yield in these arenas. The recent plummeting interest rate in the US 10 year government note underlines this. Although the US Treasury note’s yield decline commenced in autumn 2018 at around 3.25 percent, and although chroniclers can attribute further erosion during early 2019 to central bank easy money talk and schemes, its recent dive beneath two percent likely represents a “flight to quality” stage for UST yields.

Therefore, dutiful marketplace pilgrims who raced to identify and achieve “good” (acceptable, reasonable) returns (by purchasing asset classes such as stocks and commodities) at the end of calendar 2018 and for several months thereafter in these sectors probably have started running for cover (begun to liquidate their long positions). Many other investors/owners in these marketplaces probably are running for the exits too.

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America and the rest of the world are in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in advanced nations in general), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is underway. Ongoing or further rounds of central bank easing probably will have limited effectiveness in maintaining adequate economic growth.

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Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Apparent marketplace convergence and divergence (lead/lag) relationships can and do change, sometimes dramatically. Nevertheless, especially since around autumn 2018, the relationship between the S+P 500, emerging stock marketplaces, the United States 10 year government note, petroleum, and the broad real-trade weighted US dollar in key respects increasingly has resembled that of the mid-2014 (and especially mid-2015) to first quarter 2016 time horizon. (One can trace the 2014/2015 trend relationship antecedents back to around spring 2011.)

In the prior era, noteworthy price divergence existed between the S+P 500 and emerging stock marketplaces. However, beginning sometime around late 2014, convergence (less divergence) began to develop between these realms. By spring 2015 (May 2015 high in the S+P 500; late April 2015 emerging stocks top), prices in these equity playgrounds had converged. Prices for both cratered thereafter until first quarter 2016.

Though yields for the United States Treasury 10 year note began to fall in early 2011, the accelerating drop from the yield highs of July 2014 and (especially) June 2015 was a critical factor in relation to stocks and other financial marketplaces. The initial key low yield for the UST occurred in first quarter 2016 (alongside stocks). The decline in commodities in general started in spring 2011, and raced downhill after June 2014’s interim top (and especially) after May 2015 (note the convergence with emerging marketplace stocks and eventually with the S+P 500). Commodities, like stocks, bottomed in first quarter 2016.

The gradually strengthening broad real trade-weighted US dollar intertwined with these various trends. After making a major bottom in July 2011, it gradually appreciated. The dollar’s climb after September 2014 was significant; its fourth quarter 2015 rally above March 2009’s financial crisis peak substantially influenced other financial battlegrounds (note the convergence between and sharp bear moves in the S+P 500 and emerging marketplace stocks), achieving a key high in first quarter 2016.

In both that past era as well as recently, UST 10 year yields dropped substantially. In those two periods, emerging marketplace stocks and commodities crumbled (and alongside each other).

Especially around late 2015, the bull move in the broad real trade-weighted dollar (“TWD”) became remarkably strong. Underline its violent charge above first quarter 2009’s financial crisis top. In the “current” marketplace (which includes many preceding months), the TWD likewise has been very robust. Though the TWD did not push through the economic disaster top recently, it has remained above it for many months. The key parallel between the two periods thus is a strong dollar, and one above the financial crisis high.

Underscore the significant divergence between the S+P 500 and emerging marketplace stocks in both epochs. After its spring 2011 interim top, the S+P 500 continued to attain new highs, peaking in spring 2015. In contrast, emerging marketplace stocks in general were in a sideways to down trend beginning in spring 2011 (though they eventually achieved price convergence with the S+P 500 by spring 2015).

What about the current stock landscape? The divergence between the S+P 500 and emerging marketplace equities probably began before autumn 2018. Emerging marketplace stocks started their bear descent in first quarter 2018. Although the S+P 500 made an important interim high in first quarter 2018, it attained new highs (though not much above the 1Q18 top in percentage terms) up through end July 2019. Therefore divergence between the S+P 500 began around late 1Q18 and continued into summer 2019.

Why the substantial divergence between the S+P 500 and emerging/developing nation equities beginning in early 2018? The passage of America’s tax “reform” legislation in late 2017 was a critical difference. American corporations have reaped major benefits (higher earnings/profits) from this, thus helping to propel the S+P 500 upward. Emerging stock marketplaces (and those of other advanced nations) did not receive such benevolent new legislation.

The S+P 500’s decline since its late July 2019 high probably is the start of price convergence between it and emerging marketplace stocks. Given the similarities of (parallels between) interrelated price movements involving emerging marketplace stocks, commodities (petroleum), the UST 10 year note yield, and the broad real trade-weighted dollar during both eras, convergence between the S+P 500 and emerging marketplace stocks is probable. Thus the S+P 500 probably is in, or soon will begin, a bear trend. Therefore the S+P 500 retreat will confirm the slowing down of the global economy. Keep in mind the spring 2015 association (linkage between) the S+P 500 and MXEF highs and the aftermath in those and other marketplaces.

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Running for Cover- Marketplace Exits (8-9-19)

US DOLLAR TRAVELS: CROSSTOWN TRAFFIC © Leo Haviland July 2, 2019

“But, darlin’ can’t you see my signals turn from green to red
And with you I can see a traffic jam straight up ahead”. Jimi Hendrix, “Crosstown Traffic”

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CONCLUSION

The broad real trade-weighted United States dollar’s December 2016 (at 103.3)/January 2017 (103.1) peak likely will remain intact (“TWD”; based on goods only; Federal Reserve Board, H.10; monthly average, March 1973=100). The high since then, December 2018’s crest at 102.0, stands slightly beneath this, as does May 2019’s 101.6 (June 2019 was 101.1). December 2018/May 2019’s plateau probably forms a double top in conjunction with December 2016/January 2017’s pinnacle. If the TWD breaks through the December 2016/January 2017 roadblock, it probably will not do so by much. The majestic long-running major bull charge in the dollar which commenced in July 2011 at 80.5 has reached the finish line, or soon will do so. 

Unlike the broad real trade-weighted dollar, the broad nominal trade-weighted dollar (goods only) has daily data. The broad nominal US dollar probably also formed twin peaks. It achieved an initial top on 12/28/16 (at 128.9) and 1/3/17 (128.8). The nominal TWD’s recent high, 5/31/19’s 129.6, edges only half of one percent over the 2016/17 high. 

The depreciation in the broad real trade-weighted dollar from its 103.3/103.1 elevation probably will be at least five percent, and very possibly ten percent. This retreat likely will last at least for several months. 

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The broad real trade-weighted dollar’s level and patterns are relevant for and interrelate with those in key stock, interest rate, commodity, and real estate marketplaces. The extent to which and reasons why foreign exchange levels and trends (whether for the US dollar or any other currency) converge and diverge from (lead/lag) those in stock, interest rate, commodity, and other marketplaces is a matter of subjective perspective. Opinions differ. 

For related marketplace analysis, see essays such as: “Petroleum: Rolling and Tumbling” (6/10/19); “Wall Street Talking, Yield Hunting, and Running for Cover” (5/14/19); “Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19); “American Economic Growth: Cycles, Yield Spreads, and Stocks” (3/4/19); “Facing a Wall: Emerging US Dollar Weakness” (1/15/19); “American Housing: a Marketplace Weathervane” (12/4/18); “Twists, Turns, and Turmoil: US and Other Government Note Trends” (11/12/18); “Japan: Financial Archery, Shooting Arrows” (10/5/18); “Stock Marketplace Maneuvers: Convergence and Divergence” (9/4/18); “China at a Crossroads: Economic and Political Danger Signs” (8/5/18); “Shakin’ All Over: Marketplace Convergence and Divergence” (6/18/18); “History on Stage: Marketplace Scenes” (8/9/17). 

ON THE ROAD AGAIN

“We’ll be watching out for trouble, yeah (All down the line)
And we keep the motor running, yeah (All down the line)”, The Rolling Stones, “All Down the Line” 

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What interrelated phenomena currently are sparking, or will tend to encourage, near term and long run US dollar weakness? 

Growing faith that America’s Federal Reserve Board not only will refrain from raising the Federal Funds rate anytime soon, but even may reduce it over the next several months, is a critical factor in the construction of the latest segment (December 2018 to the present) of the TWD’s resistance barrier. The Fed Chairman and other US central bank policemen speak of the need for “patience” on the rate increase front. The Fed eagerly promotes its “symmetric” two percent inflation objective (6/19/19 FOMC decision), which blows a horn that it may permit inflation to exceed (move symmetrically around) their revered two percent destination. 

By reducing the likelihood of near term boosts in the Federal Funds rate, and particularly by increasing the odds of lowering this signpost, the Fed gatekeeper thereby cuts the probability of yield increases for US government debt securities. The Fed thus makes the US dollar less appealing (less likely to appreciate further) in the perspective of many marketplace players. 

The Fed’s less aggressive rate scheme (at minimum, a pause in its “normalization” process) mitigates enthusiasm for the US dollar from those aiming to take advantage of interest rate yield differentials (as well as those hoping for appreciation in the value of other dollar-denominated assets such as American stocks or real estate relative to the foreign exchange value of the given home currency). This is despite negative yields in German, Japanese, and other government debt securities. Capital flows into the dollar may slow, or even reverse to some extent. 

The yield for the US Treasury 10 year note, after topping around 3.25 percent in early October 2018, has backtracked further in recent months. The UST resumed its drop from 4/17/19’s minor top at 2.62pc, nosediving from 5/28/19’s 2.32pc elevation. Since late June 2019, its yield has bounced around 2.00pc. 

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The current United States Administration probably wants a weaker US dollar relative to its current elevation in order to stimulate the economy as the 2020 elections approach. President Trump claimed that the European Central Bank, by deliberately pushing down the Euro FX’s value against the dollar, has been unfair, making it easier for the Euro Area to compete against the US (New York Times, 6/19/19, ppA1, 9). Recall his complaints about China’s currency policies as well. The President’s repeated loud sirens that the Federal Reserve made mistakes by raising its policy rates, and instead should be lowering them also messages that the Administration wants the dollar to depreciate. 

Another consideration constructing a noteworthy broad real TWD top is mild, even if nervous, optimism that tariff battles and other aspects of trade wars between America and many of its key trading partners (especially China) will become less fierce. Both the United States and China increasingly are fearful regarding the ability of their nations to maintain adequate real GDP increases.

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US Dollar Travels- Crosstown Traffic (7-2-19)