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.
Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.
The broad real trade-weighted United States dollar probably will remain weak. Continuing its major long run bear trend from its March 2009 high, it probably will challenge its record low of July 2011. Why?
Among assorted bearish factors, focus on two which are becoming increasingly significant. First, the Federal Reserve Board in its September 2013 meeting displayed its absence of a genuine forward guidance plan and a lack of an authentic comprehensive exit strategy. Thus marketplace faith in the Fed has declined and will do so further in the aftermath of that September gathering. Keep in mind that feeble (vague) Fed guidance and decreased confidence in the Fed occurs amidst ongoing (and long-running) gigantic money printing and interest rate repression. The central bank is doggedly determined to keep pinning the Federal Funds rate near the floor (and thus below current inflation rates and announced Fed inflation targets) for some time. So how attractive are and will be United States Treasury yields for much over much of the government yield curve? Second, America’s national political players currently display weak fiscal (economic) leadership, especially as the debt ceiling limit beckons.
The Federal Reserve Board’s overall exit strategy for its extraordinary sustained accommodative policy remains far more a sketch than a complete design or coherent practical plan. Prior to its September 2013 assembly, central bank communicators strongly hinted the Fed soon would reduce its massive money printing campaign. Yet the illustrious Federal Reserve Board generals surprised the great majority of observers by not cutting back on quantitative easing. Moreover, these Fed luminaries also underlined their flexible attentiveness to a wide array of intertwining variables which will influence their tapering and other decisions. The ever-watchful Fed thus implicitly demonstrated that its loudly-proclaimed forward guidance wordplay offers Fed watchers at best only modest enlightenment and direction. America’s central bank consequently did more than increase marketplace uncertainty. The Fed wounded its own marketplace credibility. By damaging its credibility, the Fed reduces the widespread belief that it can engineer or at least significantly influence “good” economic outcomes.
Unfortunately, the significant shortfall in forward guidance from the guiding lights at the Federal Reserve currently coincides with a badly fractured American national political scene. Of course politicians and parties disagree and compete vigorously. Yet in the United States in recent years, significant philosophical divisions, diverse and often well-entrenched interests, and quests by political players to capture attention and win elections have combined to create ongoing “overall” feeble national political leadership. Strong political individuals in combination do not necessary make a strong collective group.
Failing to satisfactorily resolve the funding and (especially) the debt ceiling issues (and related deficit spending questions) will call in question America’s political leadership as a whole. All else equal, growing doubts about the quality of that leadership (and related fiscal policies) tend to undermine confidence in the US dollar. Besides these current feuds, America’s national political leaders continue to make no progress in resolving or even significantly mitigating the country’s looming long run fiscal deficit problem. Debt crises do not occur only in emerging or developing nations or in countries on the European “periphery”.
FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Forward Guidance and the US Dollar (9-23-13)
The China economic miracle of recent years has astounded global gurus. Economic policy makers and watchers inside and outside of China forecast its likely continuation. In the intertwined global economy, such sunny predictions about China also aim at boosting confidence regarding international economic growth prospects. Admittedly some Chinese indicators show display reasons for such optimism. And the Financial Times recently remarked “almost everyone agrees that there is little sign that the global economic crisis is about to have a Chinese third act to follow the US and eurozone, which starred in Acts One and Two.” (7/24/13, p6).
Unfortunately, the so-called “real”, “underlying”, and “overall” China economic scene nevertheless is relatively opaque and challenging to understand. Telling any story about the nation’s economy, whether bullish or bearish, requires caution, and audiences should listen to these viewpoints with some skepticism. Many Chinese statistical indicators arguably are difficult to assemble comprehensively as well as to interpret (whether by the Chinese government or outside experts). How accurate is official Chinese economic information? Political considerations perhaps influence the substance of some Chinese data reports.
Moreover, several other signs from or related to China suggest that China’s real GDP growth has tapered faster than many believe. Besides, it may taper a fair amount beneath generally predicted levels of over 7.5 percent. Like the United States and many other nations since the emergence of the worldwide economic disaster, China embarked upon and sustained highly accommodative monetary campaigns and huge deficit spending adventures. Might GDP expansion diminish if these policies (and related credit creation and leverage) are slowed or reversed? Even though China’s overall government debt as a percentage of GDP is less than that of the United States, much of Europe, and Japan, why should China entirely escape the debt challenges and related unpleasant consequences endured by these nations? In contrast to most conventional wisdom, China nowadays probably faces some significant systemic financial (economic) problems.
China’s embrace of debt and credit in recent years is a widespread cultural phenomenon.
If things were going wonderfully within the Chinese economic (and political) system, why would the nation’s leaders underscore territorial quarrels with other nations? Recall the recent squabbles with Japan over tiny islands (Daioyu) controlled by Japan.
What’s the bottom line? China apparently has generated a fair amount of its economic growth from easy money and massive deficit spending (credit, debt, and leverage). It consequently faces a significant challenge of maintaining its high GDP growth rates while tapering accommodative monetary and fiscal deficit policies. In addition, China confronts a modest yet apparently growing systemic problem (risk) tied into these accommodative monetary and fiscal programs and the related lending, leverage, and bad debt issues. Perhaps Chinese control over its economy (especially given that economy’s close connection with the global one) is much less than many claim. Looking forward, Chinese growth probably will taper more than most believe. In any event, one should not have blind faith in the continuation (repetition) of the recent extraordinary Chinese growth story.
FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Another Marketplace Tapering Tale- the China Story (9-9-13)
View Leo Haviland’s profile