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)

RHETORIC AND GLOBAL CURRENCY TRENDS © Leo Haviland, February 13, 2017

In the movie “Casablanca”, Signor Ferrari asks the proprietor of Rick’s Café Americain: “My dear Rick, when will you realize that in this world today isolationism is no longer a practical policy?” (Michael Curtiz, director)

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DIVIDING LINES

On America’s 2016 election campaign trail and thereafter, President Donald Trump’s impassioned populist rhetoric has encompassed striking slogans such as “Make America Great Again!” and “America First!” All United States patriots of course want their country to be great. Such wordplay, however, especially appeals to citizens wary of or hostile to phenomena such as “the establishment” (elites), globalization, and (overly) free trade.

Many of America’s current and proposed domestic programs and their consequences are not divorced from international ones. Lines between (and definitions of) “domestic” and “international” are not necessarily clear. Many so-called “economic” issues interrelate with political, military, and social arenas. Prior to America’s recent national election season, many observers across the political spectrum lamented the country’s (and world’s) substantial income and wealth inequality. In any case, let’s concentrate primarily on the international trade and currency front, even though other assorted US domestic as well as a range of global issues significantly entangle with it.

Most Americans praise “free markets” and “capitalism” as “good”, but they also want them to be “fair”. A currency level and trend can symbolize relative power and its changes. Thus a “strong” dollar may be praiseworthy (and excite national pride), and the country should not permit the greenback to become “too weak” or “feeble”. But why should Americans tolerate evils such as “unfair trade” and a “too strong” dollar? As in competitive sports, isn’t it right to have a “level playing field”? Surely massive persistent trade (or current account) deficits between two nations suggest something inappropriate in policies and practices may be going on! Can’t some protectionism for American industries be good, at least in the right circumstances?

Thus America’s President and many of his supporters loudly warn of changes in tariffs and taxes. They squawk about walking away from, tearing up, or renegotiating trade agreements. They hint America will respond to the currency manipulation or excessive depreciation engaged in by its trading partners.

However, all economic (political) language, policies, and behavior related to notions of goodness, fairness, and reasonableness (rationality) merely represent personal perspectives. So whether a given trade agreement such as the North American Free Trade Agreement (NAFTA) or the Trans-Pacific Partnership (TPP) trade deal treats the US fairly or appropriately, whether it is good or bad for America, is a matter of opinion. Whether a given US dollar cross rate (such as that between the dollar and the Chinese renminbi) or broad real trade-weighted US dollar level are “good”, “bad”, “too high” (“expensive”; “overshooting”), “too low” (“cheap”; “undershooting”), or “fairly (reasonably, appropriately) valued” (or near some allegedly natural, rational, logical, or equilibrium price) likewise express opinions.

Moreover, in the deeply interconnected and complex global economy and multipolar political world, even the mighty and zealous United States cannot institute many of its key programs on others without expecting a notable response (push-back) from others threatened or infuriated by them. After all, other countries around the globe, whether implicitly or explicitly, also generally place their nation first and foremost in their political and economic calculations. Most foreign countries (their leaders) do not want to seem too timid in their dealings with America. And not all Americans, or even all Republicans, applaud or even support the President’s policies, which themselves may change as time passes and negotiations proceed.
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A nation and its internal political groupings often manifest significant partisan quarrels, which sometimes become ferocious. Everyone knows that history likewise displays a continuum, from relative peace and harmony to various expressions of war, battle, and violence. America’s notable current divisions are wide-ranging. Divides exist within economics and politics, but also involve topics such as age, race, religion, gender, sexual orientation, and geography.

Widespread talk on the international stage of competitive depreciation, currency wars, and trade battles reflects the increasing strains on and within an increasingly fractured “global economic order”. The significant and wide-ranging internal economic divisions within America (and many other leading nations) to some extent mirrors and encourages such international economic (and political) tensions and changes.

Multilateral diplomatic discussions do not necessarily result in better (or worse) outcomes than bilateral ones. The current American Administration apparently prefers in the international economic (and political) realm to conclude one-on-one deals between countries (their strong leaders).

Some guides declare “life is a game.” Regardless of the faith of some luminaries, not all economic (or political or other cultural) arenas and interactions (including negotiations) are zero-sum games, or necessarily have clear winners and losers. Both (or most; or all) sides in a financial contest (whether commerce/business in general or international trade and currency in particular) may turn out to be winners (or losers) to varying extents. In any event, it is conceivable that particular sets of economic policies and responses to them can result (whether sooner or later) in unhappy (costly) outcomes for the nation promoting them, or even for numerous or a majority of countries (including those not directly participating in the fascinating discussions and artful deals on the main table).

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Rhetoric and Global Currency Trends (2-13-17)

RUNNING FOR COVER: FOREIGN OFFICIAL HOLDINGS OF US TREASURY SECURITIES © Leo Haviland October 13, 2016

“I know what gold does to men’s souls,” says a grizzled prospector in the movie, “The Treasure of the Sierra Madre” (John Huston, director)

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OVERVIEW AND CONCLUSION

Foreigners hold a massive quantity and substantial share of United States Treasury securities. Such foreign ownership of and trading activity in UST therefore is an important variable for US government interest rate levels and trends, which in turn intertwine with yield elevations and movements in other American debt playgrounds. And of course to some extent, and in various (and sometimes changing) fashions and degrees, given the importance of America within the global economy, UST yields interrelate with and influence yields overseas, as well as assorted currency, stock, and commodity marketplace levels and trends.

Federal Reserve Board (and other key central bank) policy, inflation trends (in America and other major nations), equity adventures (for the S+P 500 and other important advanced nation and emerging marketplace benchmarks), and the strength of the US dollar will influence decisions by current and potential overseas owners of UST. So will numerous other economic as well as political factors such as the America’s November 8, 2016 election and its aftermath.

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Many marketplace visionaries focus primarily on the grand total of foreign holdings of United States Treasury securities, ascents and descents in that sum, and that amount’s relative share of US debt outstanding. This indeed can provide observers with helpful information.

Yet in regard to UST ownership by overseas entities, the foreign official and private sectors do not necessarily behave the same way. Sometimes this distinction appears significant enough over time to monitor closely.

Thus concentrating on the grand total of foreign holdings and shifts in that statistic risk overlooking an important pattern which appeared in recent months within those holdings. What is that pattern? The net foreign official holdings have fallen not only as a percentage of overall foreign holdings, but also in absolute levels. This substantial official exodus is important.

Suppose not only that such noteworthy net UST liquidation by the foreign official sector persists, but also that the overseas private sector decides to reduce its net buying significantly, or to become a net seller. All else equal, that will help to push UST yields higher.

Selecting variables regarding as well as presenting explanations (“causes”) for marketplace and other cultural phenomena reflect the subjective viewpoint and rhetoric of the given storyteller. And marketplace history does not necessarily entirely or even partly repeat itself. Net foreign official selling (or net buying) of US Treasury securities of course is not always or the only factor relevant to American stock marketplace trends. Marketplace participants nevertheless should note that sometimes over roughly the past two decades (since 1997), substantial net foreign official selling of UST can be associated with a decline in the S+P 500.

US federal budget deficits indeed have plummeted from their pinnacles reached due to the global economic disaster. But they have not disappeared. And they probably will increase in subsequent years. So looking forward (and all else equal), if substantial net foreign selling of UST by both the foreign official and private groups exists, that will make it increasingly difficult for the American government to finance looming budget deficits. Will this eventually encourage UST yield rises? Perhaps the US public will help to fill the deficit financing gap, but it may take higher rates (better real returns) than currently exist to inspire them.

 

A DELUGE OF DEBT

“‘A Ti-tan iv Fi-nance,’ said Mr. Dooley, ‘is a man that’s got more money thin he can carry without bein’ disordherly. They’se no intoxicant in th’ wurruld, Hinnissy, like money.’” (Finley Peter Dunne’s “Mr. Dooley” commenting “On Wall Street”; spelling as in the original)

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There are various measures of US federal (national) indebtedness. Also, reports regarding breakdowns in debt ownership at times vary in their presentation. But regardless of the analytical perspective embraced, foreign ownership of UST is substantial in absolute and percentage of debt terms.

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Running for Cover- Foreign Official Holdings of US Treasury Securities (10-13-16)