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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MARKETPLACE PARTY TANTRUMS © Leo Haviland June 15, 2015

MARKETPLACE PARTIES

In action-packed Wall Street, whether in US stocks or another fascinating venue, winning money tends to attract attention. All else equal, and as a general rule, the more people in a given game there who capture and keep cash over time, the more likely it is that others will tend to join the particular party. Of course a gathering can get rather full, with “about everyone jammed into the room”. Or, for one or many reasons, the joyous event may become less fun, with the affair perhaps eventually ending, maybe even on a dismal note.
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The S+P 500’s long and monumental bull march following the dreary final days of the global economic disaster (major low 3/6/09 at 667) may persist, but it currently looks rather tired and seems to be ending. In any case, stock investors in general have enjoyed the engaging party (rally) in US equities. Interest rate bulls in key domains such as US and German government debt have celebrated substantial tumbles in yields relative to June 2007 heights. As the Goldilocks Era danced to its end, the 10 year US Treasury note peak was 5.32 percent on 6/13/07; the German 10 year government note top also occurred that day, at 4.70pc. During the worldwide economic recovery, many fortune seeking investors (and speculators) have raced after suitable returns by gobbling up lower-quality debt instruments.
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Competing coaches in Wall Street and Main Street assign a variety of reasons for the emergence, continuation, and ending of both general economic and specific marketplace bull and bear trends. Such wizards and their apostles advise and offer opportunities and warnings to eager audiences regarding marketplace phenomena, including important changes in central bank and fiscal policy. Guides and followers wonder and debate regarding what can spark, sustain, or alter the course of noteworthy price adventures within one or more stock, interest rate, currency, and commodity playgrounds.

Apparently dramatic price fluctuations and trend changes frequently inspire talk of volatility, spikes, mania, and panic. Colorful metaphors frequently punctuate descriptions and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk regarding potential reduction in quantitative easing (money printing) generated wordplay of a “taper tantrum”.

Sometimes preceding but often during or following particularly colorful displays of price patterns, marketplace and media ringleaders regale avid audiences with enthralling and excited language. Some speeches and arguments offer opinions regarding “fair (or true, real) value” (overvaluation and undervaluation; overshooting and undershooting; too high and too low, too rich/expensive or too cheap), natural (rational, reasonable, sensible) prices, and equilibrium.

Securities marketplaces in America and many other nations are of course very large and important to the so-called “real” economy, not merely the “financial” one. Assorted “investors” (buyers) own lots of stocks and interest rate instruments. Moreover, investment (especially in securities) has long been labeled as a reasonable, prudent, intelligent, logical, good, and praiseworthy practice. In general, selling of (or speculation in) securities (especially stocks) is less meritorious (and sometimes allegedly even bad); short-selling (especially of investment-grade equities) is often criticized as dangerous or bad.

Therefore, significant price declines in the S+P 500, and often in interest rate instruments (particularly in supposedly high-quality, investment grade government and corporate debt securities), generally inspires substantial dismay, including talk of “tantrums”. “Tantrum” language, when specifically applied to the stock and interest rate context, usually applies to price drops (bear trends). Bull moves in securities prices, even if they are of the same distance and duration as a bear trend, generally are not labeled as tantrums, for bull moves profit investors. Tantrums can ruin a wonderful party, right? Consequently, it pays to consider the potential regarding and to be on the lookout for the actual emergence of widespread and growing fears and talk about notable falls in securities prices.

Packs of Wall Street partygoers debate the definition, existence, causes, and cures of “overvaluation” phenomena such as “bubbles”. Recently, some players ask if the S+P 500, Chinese stocks, many key government bond playgrounds (picture those of the United States and Germany), and US home prices are bubbles (or overvalued and so on). Will a given bubble be burst or merely have some hot air taken out of it? To what extent will rising US Treasury and corporate debt rates dampen the United States (and international) recovery? Will climbing US government yields, or fears of them, pop a stock marketplace bubble?

This valuation rhetoric is particularly important when interpreted alongside rising nervousness regarding the worldwide economic recovery. After all, reduced GDP expansion may make it more challenging to generate corporate profits and therefore equity price gains.
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Frequent conversations nowadays regarding overvaluation and worries about international growth underline the merit of focusing on a handful of corners within several entangled marketplace scenes. That review may help money hunters to assess the risks of staying in or entering a particular marketplace ballpark. This brief survey indicates information regarding or price points within particular marketplace arenas that will not only may draw greater attention to and inflame action in them, but also likely will help trigger dramatic price moves in other playing fields.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Marketplace Party Tantrums (6-15-15)

CHINA: ITS GREAT GROWTH STORY GROWS OLD © Leo Haviland June 23, 2014

Much of the world currently displays nearly unblinking faith in the expertise of key central bank guardians such as the Federal Reserve Board, European Central Bank, Bank of Japan, and Bank of England. These illuminated central bankers supposedly will continue to play substantial and successful roles in engineering further economic growth via easy money schemes such as interest rate yield repression, quantitative easing (even if money printing ends in America or elsewhere, the securities buying operation may not be unwound quickly, if at all), and forward guidance wordplay. The Fed wizard in particular also surely has an almost pain-free and coherent exit strategy from its longstanding highly accommodative programs, right?

Ongoing trust in such marvelous central bank talent finds a counterpart in widespread belief that the Chinese economic growth miracle will continue for the long run, or at least the foreseeable future. Significant government deficit spending and relaxed credit policies indeed sparked much Chinese growth in recent years. However, Chinese real GDP growth probably has slowed more than many believe. Assorted intertwined variables hint at this reduced expansion and suggest that the slowdown in its growth rate probably will continue over the medium term. Given China’s crucial role in the interdependent global economy, this relative weakness in its GDP growth should have ominous implications for growth elsewhere.

Admittedly, China’s official and private sector debt scene is murky. Yet the edging down of its real GDP growth is occurring in an environment of its increasingly troubling debt and credit situation. All else equal, efforts to solve or at least mitigate debt and credit problems probably will result in greater than expected (desired) cuts in the country’s economic growth rate.

FOLLOW THE LINK BELOW to download this article as a PDF file.
China- Its Great Growth Story Grows Old (6-23-14)
Charts- China (6-23-14, for essay China- Its Great Growth Story Grows Old)

SHOWING THE WAY: BASE METALS © Leo Haviland October 15, 2013

Industrial metals such as copper and aluminum of course have different supply/demand fundamentals. They intertwine in diverse ways with significant movements in interest rate and currencies, especially the United States dollar. The overall base metals complex often travels in the same fashion (direction) as precious metals. Yet focus on global stock marketplaces in relation to base metals “in general”. Significantly, from the later stages of the glorious Goldilocks Era to its dreadful decline, from the ensuing worldwide recovery up to the present, trends in base metals “in general” very often show the way or confirm trends in key global stock marketplaces.

Price trends in base metals indeed have been closely tied to the China growth story. Yet significant marketplace trend changes in base metals also fit those in emerging stock marketplaces as a whole. The voyage of the base metals complex since roughly mid to late 2007 closely resembles that of emerging marketplaces “in general”. What about in relation to America’s S+P 500? Since its high on 2/14/11 at 4478, the London Metal Exchange base metal index (“LMEX”) has been in a massive bear trend, falling about 35.0 percent to its 6./24/13 low. In contrast, the S+P 500’s glittering advance has continued up to a 1730 high on 9/19/13. But as before 2011, the timing of the S+P 500’s turning points from 2011 to the present in its overall upward climb generally fit rather closely to those in the LMEX index.

The sustained decline in the base metals battleground “in general” since first quarter 2011 continues to signal slower growth in emerging marketplaces in general and in China in particular. Note the continued lowering of growth estimates for China in recent months. In addition, despite the overall directional price trend divergence between the LMEX and the S+P 500, the sustained base metal weakness warns that growth probably will be weak in advanced nations, and that the glowing strength in the S+P 500 will not be eternal.
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STILL HEADING DOWN: EMERGING STOCK MARKETPLACES AND COMMODITIES © Leo Haviland October 7, 2013

From the end of the Goldilocks Era in mid-2007 to the depths of the worldwide economic crisis in late 2008 and early 2009 and onward through the ensuing global recovery up to now, “overall” emerging stock marketplaces and commodities “in general” generally have traveled together. The emerging stock marketplace and commodities domains have been in a sideways to bearish trend since their spring 2011 peaks. In the wake of Federal Reserve Board tapering talk, they established interim lows in late June 2013. Yet despite the notable rally since then, in recent weeks they probably have resumed their interrelated downtrends. These bear moves probably will continue. Within the commodities realm, the tumble of the petroleum complex is especially noteworthy.

The bull and bear adventures and timing relationships between emerging stocks and the broad GSCI are not perfect. However, in recent years they have been rather close. Since the peaks in spring 2011, note the pattern of lower and lower highs as the downtrends have proceeded.

Petroleum constitutes an important part of the broad GSCI and many other commodity indices. The petroleum story and its supply/demand situation are important components for the emerging marketplace growth theme. However, note the late summer 2013 reversal of the petroleum bull move that began around a late June 2013 take-off point. In addition, the overall worldwide petroleum situation is bearish. Weakness in various corners of the oil marketplace in recent weeks suggests that commodities “in general” probably will continue to venture lower over the next few months. So what does the historically close association between trends in emerging stock marketplaces and commodities in general suggest? The renewed bear trend in petroleum since late summer 2013 indicates that the MXEF will continue to drift lower as well.
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