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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FANTASTIC VOYAGES: THE US DOLLAR AND COMMODITY CURRENCIES © Leo Haviland April 3, 2016

In the 1966 movie “Fantastic Voyage”, the character Cora declares: “We’re going to see things no one has ever seen before. Just think about it.” (Richard Fleischer, director)

In “On the Road” (original scroll version), Jack Kerouac writes: “But no matter, the road is life.”

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CONCLUSION AND OVERVIEW

The substantial rally in the broad real trade-weighted United States dollar (“TWD”) that embarked in mid-2011 played a key part in encouraging (confirming) and accelerating bear movements in emerging marketplace stocks and commodities “in general”. The S+P 500’s majestic rally over its spring 2011 interim high diverged for about four years from the trends in emerging equity realms and commodities. However, the TWD’s 2015 ascent above its March 2009 peak was a crucial event; this dollar climb helped propel the S+P 500 downhill following its 5/20/15 pinnacle at 2135 in conjunction with the emerging stock marketplace and commodity trends.

In January/February2016, these linked price patterns partly reversed. The TWD has depreciated and stocks (emerging marketplaces as well as those of America and other advanced nations) have rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield ascended from its low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. Highly accommodative central bank rhetoric and action by the Federal Reserve Board and its allies aimed at achieving their targeted two percent inflation destination will continue for an extended period. For example, note the Fed’s 3/16/16 meeting and its Chairman’s very dovish speech, “The Outlook, Uncertainty, and Monetary Policy” (3/29/16). Underline the expansion of the European Central Bank’s easing scheme (most recently 3/10/16) and the lax policies of the Bank of Japan. Consequently, the current marketplace interrelationships (“roughly trading together”) probably will persist for the near term, regardless of whether the pattern of mid-2015 to first quarter 2016 resumes or that since mid-first quarter 2016 continues. Marketplace history of course need not entirely or even substantially repeat itself.

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Concentrating on and comparing exchange rates of “commodity currencies” alongside the broad real trade-weighted dollar trend offers additional notable insight into the assorted interconnected marketplace relationships. Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are significant to the economies of advanced countries such as Australia, Canada, and Norway, the currencies of these lands likewise can be labeled as commodity currencies.

The bearish currency paths (effective exchange rate basis) of important emerging and advanced nation commodity exporters up to first quarter 2016 resembled the similar trends among them during the 2007-09 worldwide economic disaster era. However, these commodity currencies depreciated notably more in their recent dive than during the 2007-09 turmoil. In addition, the lows attained by most of them decisively pierced the floors achieved about seven years previously. Moreover, the TWD rallied more sharply in its bull move to its January 2016 elevation than it did during the past crisis.

The feebleness in recent times for the commodity currency group, as it involved both advanced and emerging marketplace domains (as it did in 2007-09), reflected an ongoing global (not merely emerging marketplace) crisis. Substantial debt and leverage troubles still confront today’s intertwined worldwide economy. The bear trip of many commodity currencies into early first quarter 2016, especially as it occurred alongside big bear moves in emerging marketplace stocks (and in the S+P 500 and other advanced stock battlefields) and despite long-running extremely lax monetary policies, underlines the fragility of the relatively feeble global GDP recovery.

Thus noteworthy rallies in these commodity (exporter) currencies from their recent depths will tend to confirm (inspire) climbs in commodities in general and emerging (and advanced) nation stock marketplaces. Renewed deterioration of the effective exchange rates of the commodity currency fraternity “in general” likely will coincide with renewed firming of the US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the current dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.

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Therefore key central bank captains, concerned about slowing real GDP and terrified by “too low” inflation (deflation) risks, have fought to stop the TWD from appreciating beyond its January 2016 top and struggled to encourage rallies in the S+P 500 and related stock marketplaces. Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. Indeed, rallies in the S+P 500 (and real estate) may help inflation expectations (and inflation signposts monitored by central banks such as consumer prices) to motor upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices in general.

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Fantastic Voyages- the US Dollar and Commodity Currencies (4-3-16)

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)

CRUMBLING BRICS: A CURRENCY PERSPECTIVE © Leo Haviland February 11, 2015

Assorted marketplace wizards around the globe for many years have praised past and predicted future stellar (or at least rather robust) growth for key emerging and developing nations. These countries not only display cultural diversity. They also manifest a significant range in economic development, arrangements, focus, and strengths. Though many embrace democracy to some extent, their political characteristics and stability are far from uniform. Despite this variety, the popular BRIC acronym, standing for Brazil, Russia, India, and China (now including South Africa), coined by Goldman Sachs nearly 15 years ago, acts as a rough shorthand summary for much if not all of the emerging/developing nation group.

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Marketplace history of course need not entirely or even substantially repeat itself. However, the recent appreciation of the United States broad real trade-weighted dollar (“TWD”) warns of erosion in global economic output rates.

The TWD established a major bottom at 84.2 in April 2008 (Federal Reserve Board, H.10; monthly average, March 1973=100). After climbing to 86.7 in August 2008 and 88.8 in September 2008, it bounded to over 93.8 in October 2008. Recall the noteworthy acceleration of the worldwide financial crisis after mid-September/October 2008. Its March 2009 pinnacle around 96.9 represented a 15.1 percent bull advance relative to April 2008.

After deteriorating to its major trough around 80.5 in July 2011, the TWD meandered sideways within a narrow range for about the next three years. Its high over that span was June 2012’s 86.3. Yet in recent months, as it did beginning in April 2008, the broad real trade-weighted dollar has marched steadily higher. A five percent bull move in the TWD from its July 2011 trough at 80.5 equals about 84.5, a ten percent climb about 88.6. A fifteen pc rally gives 92.6, a 20pc leap about 96.6.

September 2014’s 86.6 broke through June 2012’s barrier, with December 2014’s attaining 90.5. January 2015’s 92.4 rose 2.1 percent over December 2014. The TWD’s 14.8 percent ascent from the July 2011 depth rivals its April 2008 to March 2009 move. Significantly, its January 2015 level neighbors that of October 2008 and is not too distant from March 2009’s 96.9 elevation.

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What do FX movements (trade-weighted, effective exchange rates) within the BRICS universe reveal nowadays? Their recent travels differ to some extent from the 2007-09 crisis adventures. However, as during the darker days of the worldwide economic disaster, the current currency voyages of Brazil, Russia, India, and South Africa generally display depreciation. As in the earlier period, however, China’s currency has rallied recently on an effective exchange rate basis. Looking forward, these currency patterns alongside TWD strength do not merely confirm the TWD bull move, but also emphasize the likelihood of further slowing of global real GDP.

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Crumbling BRICS- a Currency Perspective (2-11-15)

THE HOUSE OF BRICS- HOW SOLID? © Leo Haviland, December 13, 2011

What does travel through the diverse forests of Brazil, Russia, India, and China (the so- called “BRIC” nations) reveal?

Though the BRICs are key sources of world growth, they also reflect global growth patterns. BRIC territories do not possess sufficient independent firepower to propel the overall world economy significantly and permanently forward. In recent months, BRIC stocks have declined substantially. This BRIC equity weakness warns of current and further upcoming economic slowdowns not only in those countries, but sluggishness and even downturns elsewhere.

BRIC currency trends relative to the US dollar interrelate with this story told by equity playgrounds. Recent weakness in these BRIC foreign exchange cross rates reflect and confirm the fragility in BRIC stock benchmarks.

The key point is that Chinese currency appreciation, which had been slow yet persistent, now seems to be taking a breather. In the context of China’s substantial bear trend in equities, and given China’s status as a major exporter nation with massive foreign exchange reserves (a large bankroll to solve minor problems), what does this currency “non-appreciation”/modest depreciation against the US dollar suggest?

It indicates difficulties facing China finally have become quite significant- and more substantial than most China watchers recognize. In other words, China’s economic challenges (such as inflation, rising wages, weak property prices, substantial local government debt) may have grown to become a “fairly big problem”, even if Chinese authorities have not confessed to this. However, China did cut its reserve requirement ratio recently. So even if China’s stock marketplace is not an ideal benchmark for assessing “the overall Chinese economy”, at some point its stock price level and trend, when interpreted alongside other variables, can identify (coincide with) noteworthy Chinese economic problems.

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The House of BRICs – How Solid (12-13-11)