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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AS THE WORLD BURNS: MARKETPLACES AND CENTRAL BANKS © Leo Haviland February 8, 2016

“To every thing there is a season, and a time to every purpose under the heaven.” Ecclesiastes, Chapter 3, verse 1 (King James Version)

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OVERVIEW AND CONCLUSION

To spark and sustain the worldwide economic recovery that began around first half 2009, the Federal Reserve Board and other major central banks warmly embraced highly accommodative monetary policies such as yield repression and money printing (quantitative easing). Who would want to repeat the horrors of the hellish worldwide economic disaster that erupted in 2007 and worsened dramatically after mid-year 2008? Therefore, often in recent years, after significant hints of feeble growth (or recession) or insufficient inflation (or signs of that evil, deflation) appeared, these high priests of the economic system offered further rhetoric or additional (or new) action to accomplish their aims and restore confidence. Such central banking efforts often succeeded. In any case, financial congregations (especially in American and other stock marketplaces) generally loudly hoped for, fervently encouraged, and joyfully praised such central bank rescue efforts.

However, around mid-2015, advanced nation stock benchmarks such as the S+P 500 peaked. Moreover, despite central bank wordplay and vigorous policy action, bear moves in these stock domains have persisted alongside renewed signs of economic weakness and “too low” inflation. Ongoing collapses in emerging marketplace stocks “in general”, the major bear move in commodities in general, and falling yields in the 10 year United States Treasury note accompanied tumbles in the S+P 500 and other advanced nation equities. The major bull move in the broad, real trade-weighted US dollar, which began in July 2011, has played a key role in these intertwined trends.

In the past few weeks, key global central banks once again preached sermons or engaged in actions aimed not only at creating sufficient inflation (defeating deflation) and ensuring sustained economic recovery. Stock marketplaces initially ascended higher after these recent efforts (recall their lows around January 20, 2016), and the US dollar weakened somewhat. The Federal Reserve Board and other guardian angels probably did not want the S+P 500 and related stock marketplaces to crash under their January 2016 lows. In addition, they probably did not want the United States dollar bull move to extend much (if at all) beyond its January 2016 high.

However, and although not much time has passed since these recent ardent central bank efforts, the S+P 500 and other stock landmarks have resumed their slumps. Ominously, many stock marketplaces have fallen under their August/September 2015 lows. In addition, the dollar still remains strong, commodities weak (despite talk about and hopes for OPEC petroleum production cuts), and US government yields (in a flight to quality) depressed. This vista warns that the Fed and other revered central banks are finding it more and more difficult to accomplish their various policy aims. It suggests that people (including devoted investors in US stocks) increasingly are losing faith in the ability of central banks to produce desirable outcomes.

Although it is a difficult marketplace call, these ongoing and interwoven marketplace trends probably will continue for a while longer. Admittedly, if these marketplace patterns persist and especially if they extend, watchers should beware of even more dramatic (and perhaps coordinated) central bank rescue action.

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For additional currency, stock, interest rate, and commodity marketplace analysis, see essays such as “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16), “Japanese Yen: Currency Adventures (2007-09 Revisited)” (1/14/16), “US Natural Gas” Caught in the Middle” (especially pp2-3), “America: A House Divided” (12/7/15), “Two-Stepping: US Government Securities” (12/1/16), “Commodities: Captivating Audiences” (10/12/15), and “Déjà Vu (Encore): US Marketplace History” (10/4/15).

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As the World Burns- Marketplaces and Central Banks (2-8-16)

TALKING THE TALK: MARKETPLACE PARALLELS © Leo Haviland October 19, 2014

Marketplace history of course does not necessarily repeat itself, either in whole or in part. However, sometimes it does. In any case, it should not be forgotten. Storytellers reveal (construct, create) parallels (and differences) between the marketplace past and present, not only to explain ancient times and the current situation, but also to predict future phenomena.

Coincidentally, the S+P 500’s recent high at 2019 on 9/19/14 occurred almost exactly on the sixth anniversary of Lehman Brothers’ 9/15/08 bankruptcy filing. Around the time of that autumn 2008 event, the fearsome worldwide economic crisis that emerged in mid-2007 accelerated.

Yet not so coincidentally, many recent intertwined dramatic marketplace moves in interest rate, stock, currency, and commodity arenas bear significant resemblance to those of the 2007-09 theater. Why? Problems now echo those of the prior period. Some troubles represented by that supposedly distant past have not been sufficiently fixed. In addition, some excesses of that long ago time, even if in somewhat different ways, have reappeared.

In regard to the current vista, underline several trend interrelations between key playgrounds. Focus on the time dimension in this context. Note not only the US Treasury 10 year note’s yield decline since its 1/2/14 top at 3.05pc (and the narrowing of the 10 year less two year UST spread), but also the UST’s yield slump from 9/19/14’s 2.65pc and its break under key support around 2.40 percent. The S+P 500 fell nearly ten percent following 9/19/14’s 2019 plateau. In addition, the recent peak in emerging marketplace stocks (“MXEF”; MSCI Emerging Stock Markets Index, from Morgan Stanley) on 9/4/14 at 1104 occurred close in time to both the S+P 500’s recent high as well as the rally in the broad real trade-weighted US dollar. Moreover, recall the sharp retreat in the broad Goldman Sachs Commodity Index since 6/23/14’s 673 interim top, particularly its recent decisive break under important support at 595/612.

The current and future marketplace theater probably will not duplicate the scope of the 2007-09 global economic disaster. Nevertheless, despite the passage of several years, significant deficit spending by America and other key nations, and widespread extraordinary central bank easy money policies (conjure up the Federal Reserve’s yield repression and money printing schemes), we have not entirely escaped the horrific days of the 2007-09 era.

The major bull move from the S+P 500’s 10/10/02 bottom at around 769 to 2007’s lofty 10/11/07 major high at 1576 lasted five years. The October 2002 bottom times two is 1538, or within about three percent the October 2007 peak. Since the S+P 500 achieved its major bottom on 3/6/09 at 667, its bull move has run about five and a half years, even longer than 2002-07’s advance. Whereas S+P 500 prices doubled over the 2002-07 span, 9/19/14’s height at 2019 triples March 2009’s major bottom (doubles 7/1/10’s 1011 trough; and jumps about 50 percent over 11/16/12’s 1343 low).

Given that the S+P 500’s major bull move since March 2009 was even longer-lasting and stratospheric than the preceding one, observers should be watchful for a very noteworthy S+P 500 decline, extending (or greater than) the one that so far since 9/19/14 has reached around ten percent. With parallels between the 2007-09 world and the current environment in mind (given the recent moves in the UST 10 year, emerging marketplace stocks, the broad real trade-weighted dollar, and the broad GSCI), the S+P 500’s 9/19/14 height probably represents an important top. If that top is broken, it probably will not be exceeded by much.

Incidentally, for those seeking further timing parallels in the S+P 500, the 9/19/14 date is not far from the October 2002 and 2007 calendar tops and bottoms (10/10/02; 10/11/07), but also 10/4/11’s important low at 1075.

Looking forward, since history need not repeat itself, the Fed’s eloquence and actions may not always achieve the goals the Fed diligently seeks. Continued or even increased easing, whether by the Fed or other important central banks, do not inevitably produce rallies in the S+P 500 (or a continued economic recovery).

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Talking the Talk- Marketplace Parallels (10-19-14) (1)
Charts- Ten Yr UST, S+P 500, GSCI, Corp Bond (10-19-14, for essay Talking the Talk- Marketplace Parallels)