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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EMERGING MARKETPLACES, UNVEILING DANGER © Leo Haviland December 2, 2021

In the film “The Deer Hunter” (Michael Cimino, director), a character asks: “Did you ever think life would turn out like this?”

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OVERVIEW AND CONCLUSION

Prices for both emerging marketplace stocks and emerging marketplace debt securities “in general” peaked in first quarter 2021. The price tops (yield bottoms) in key emerging marketplace interest rate instruments (around early January 2021) preceded mid-February 2021’s summit in “overall” emerging marketplace equities. Emerging marketplace debt securities established interim price troughs in March 2021, and their prices thereafter rallied (yields fell) for several months. However, yields for those benchmark interest rate securities thereafter have climbed, and that has coincided with slumping prices for emerging marketplace stocks. Moreover, stocks for these developing nations have made a pattern of lower and lower interim highs since February 2021.

This price convergence between emerging marketplace stock and debt securities probably will continue, and prices in both arenas will continue to decline.

The latest coronavirus variant (Omicron) can encourage falls in both advanced nation and emerging stock marketplace prices, but it is not the only bearish factor for them. Rising interest rates and massive debt also play critical roles in this theater. Substantial global inflation and increasing debt burdens encourage higher interest rates around the world, despite the efforts of leading central banks such as the Federal Reserve Board and its allies to repress yields. The Fed’s recent tapering scheme and its related rhetoric portend eventual increases in policy rates (Fed Funds) and higher yields in the United States Treasury field and elsewhere. Moreover, long run United States interest rate history shows that noteworthy yield increases lead to peaks for and subsequent declines in American signposts such as the S+P 500 and Dow Jones Industrial Average.

The recent rally in the US dollar undermines prices for emerging marketplace debt instruments (both dollar-denominated sovereign and corporate fields) and thereby emerging marketplace stocks. All else equal, rising interest rates (particularly in the US dollar domain), especially when linked with US dollar appreciation, increase burdens on emerging marketplace sovereign and corporate borrowers.

Convergence and divergence (lead/lag) patterns between marketplaces can change or transform, sometimes dramatically. Marketplace history does not necessarily repeat itself, either entirely or even partly. But marketplace history nevertheless provides guidance regarding the probabilities of future relationships.

America’s S+P 500 and stocks in other advanced nations soared to new highs after February 2021 while emerging marketplace equities have marched downhill (price divergence). However, the chronicle of those two broad marketplace realms at least since the Goldilocks Era of the mid-2000s reveals that their price and time trends tend to coincide. Over the long run, these arenas are bullish (or bearish) “together”. In the current environment of rising American and international yields, that warns of eventual price convergence between the S+P 500 and emerging marketplace stocks. The S+P 500’s record high, 11/22/21’s 4744, occurred near in time to prior interim highs in developing nation equities. These intertwined patterns warn that the S+P 500 probably has established a notable top or soon will do so.

Many pundits label commodities in general as an “asset class”. Like stocks as well as low grade debt securities around the globe, and likewise assisted by yield repression (with UST yields low relative to inflation) and gigantic money printing, the commodities arena in recent years has represented a landscape in which “investors” and other players hunting for good (acceptable, sufficient) “returns” (“yields”) avidly foraged and bought. Sustained falls in commodity prices in general probably will link to (confirm) price slumps in both advanced and emerging marketplace stocks.

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Recall past financial crises in the past few decades in emerging (developing) nations (for example, Mexico; “Asian” financial crisis) and other important countries (Russia; Greece and several other Eurozone countries) which substantially influenced marketplace trends in more advanced nations. The “Mexican Peso” crisis emerged in December 1994, the terrifying “Asian” problem in July 1997. Russia’s calamity began around August 1998. The fearsome Eurozone debt troubles walked on stage in late 2009/2010. The coronavirus pandemic obviously has been a very severe global economic problem which has generated international responses by central bankers, politicians, and others. However, at present, no crisis similar to these various past national or regional ones, and which eventually might significantly affect the “world as a whole”, has spread on a sustained basis substantially beyond local (regional) boundaries. However, given current international inflation and debt trends, traders and policy-makers should not overlook minimize signs of and the potential for a genuine, wide-ranging economic crisis (perhaps sparked or exacerbated by the coronavirus situation).

Nowadays, consider country candidates for such dangers like Brazil, South Africa, Pakistan, and Turkey. For many emerging marketplace nations, their significant economic, political, and social divisions and related internecine conflicts can make it especially difficult for them to solve major economic challenges. After all, America is not the only country with significant internal “culture wars”. Though China’s troubled corporate real estate sector is not a nation, its massive size and influence makes it analogous to one. Those with long memories undoubtedly recall the “surprising” (“shocking”) problem uncovered in the United States housing (and related mortgage securities) marketplace (and other areas) during the 2007-09 worldwide economic disaster. Nowadays, if such a substantial predicament appears and is not quickly contained, it likely will be bearish for stock marketplaces around the globe.

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Emerging Marketplaces, Unveiling Danger (12-2-21)

AMERICAN CONSUMERS: THE SHAPE WE’RE IN © Leo Haviland May 4, 2020

The Band sings in “The Shape I’m In”:
“Out of nine lives, I spent seven
Now, how in the world do you get to Heaven?
Oh, you don’t know the shape I’m in”.

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OVERVIEW AND CONCLUSION

 

Everyone knows that the coronavirus pandemic and political (medical) responses to it have wreaked widespread and deep economic destruction around the globe. The coronavirus, however, was not the only bearish phenomenon preceding and influencing the disastrous economic situation. The ultimate extent of the damage and the timing and extent of the international and American recovery remain conjectural.

America and its consumers obviously are not the only economic engines for the international economy. However, given substantial global economic interconnections, American economic conditions, trends, and policies significantly influence those elsewhere. US consumer spending represents about 68.0 percent of American GDP, a very sizable share (Federal Reserve Board; Z.1, “Financial Accounts of the United States”, Table F.2; 3/12/20). Consequently, regarding the prospects for United States economic growth, and thus output in other realms, much depends on the situation and attitudes of the American consumer.

American consumer spending and other “Main Street” variables intertwine with those around the globe, as well as with “business” (both big and small) and other economic, political, and social phenomena. For example, Federal Reserve and other central bank actions, government spending levels and trends, United States (and other) stock marketplace levels, American government and other interest rates, the dollar and other currencies, commodities, real estate, and assorted other economic, political, and social variables influence American consumer spending in a variety of fashions. These relationships and phenomena encouraging them can and do change, sometimes slowly, sometimes rapidly. Convergence and divergence (lead/lag) patterns between economic indicators as well as marketplaces likewise can shift or transform.

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Wall Street (and its financial media friends), politicians, and Main Street pray that the monumental monetary interventions by central banks such as the Federal Reserve and its allies (massive money printing and so forth) and dramatic fiscal deficit spending boosts not only will rescue the international economy from its current monumental troubles (reduce the magnitude of a recession), but also will restore acceptable economic growth relatively quickly, perhaps even before the end of the third quarter of 2020. Prior success in dealing with the dreadful worldwide economic disaster of 2007-09 encourages widespread faith that these (and perhaps further) efforts and a warlike “whatever it takes” monetary and governmental policy attitude ultimately will succeed.

Many economic high priests such as the International Monetary Fund predict a relatively strong and quick global recovery. In its World Economic Outlook (Table 1.1; April 2020), the IMF forecast a gloomy three percent drop in world output in 2020. However, global real GDP ascends sharply in 2021 by 5.8 percent. GDP retreats in advanced economies by -6.1pc year-on-year in 2020, but climbs 4.5pc in 2021. According to the IMF, US GDP collapses -5.9pc in 2020 but jumps 4.7pc in 2021. Emerging/developing marketplaces allegedly will suffer only a one percent fall in calendar 2020, with GDP growing a rapid 6.6pc in 2021 (compare 2019’s modest 3.7pc expansion). China supposedly will manage to grow 9.2 percent in 2021 (1.2pc in 2020), although its GDP fell -6.8pc year-on-year in 1Q20.

US corporate earnings depend on many phenomena, and of course not all corporations depend (directly) on consumer purchasing (whether by Americans or others) to the same extent. Yet US corporate earnings estimates from Wall Street pulpits, like the IMF’s vision, generally display optimism for calendar 2021 despite the sharp year-on-year falls expected for calendar 2020.

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However, a survey of several key US variables closely linked to the situation of the American consumer nevertheless suggest that the injury to the American consumer “in general” and thus the country’s overall economy has been and will continue to be severe. A very substantial portion of the general public is in rough shape. Numerous other consumers are fearful regarding their future. Between the terrifying unemployment situation (and at least the near term outlook for it) and a relatively high arithmetical household debt level prior to the coronavirus devastation, most American consumers probably will be cautious spenders for quite some time. Even if the coronavirus pandemic significantly subsides relatively soon, how rapidly will the shattered consumer sector race to resume its prior buying habits and thus boost GDP substantially? Moreover, the planned reopening of America’s economy probably will be gradual. And how quickly will firms, whether large or small, rehire a large number of laid-off workers? In addition, widespread worries about the ongoing and future coronavirus waves likely will persist, and people await the development of a proven vaccine and adequate testing.

Thus America’s economic recovery probably will be slow rather than fast (or even fairly quick on a sustained basis). Optimism heralded by the IMF and many other leading institutions, enthusiastic gospels from US “investment” gurus regarding magnificent corporate earnings in calendar 2021, and similar propaganda likely will be disappointed.

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American Consumers- the Shape We're In (5-4-20)

THE CURTAIN RISES: 2016 MARKETPLACE THEATERS © Leo Haviland January 4, 2016

Shakespeare proclaims in “As You Like It” (Act II, Scene VII):

“All the world’s a stage,

And all the men and women merely players”.

THE 2016 WORLDWIDE ECONOMIC STAGE

As the 2016 international economic (and political) drama commences, the worldwide economy not only is sluggish, but also feebler than most forecasters assert. International real GDP, as well as that in the United States, has a notable chance of slowing down further than many expect (the International Monetary Fund predicts real global output will increase 3.6 percent in calendar 2016; “World Economic Outlook”, Chapter 1, Table 1.1).

The ability of the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, China’s central bank, and their friends to engineer their versions of desirable outcomes via highly accommodative policies has diminished. Beloved schemes such as quantitative easing (money printing) and yield repression and related rhetoric are becoming less influential. Ongoing significant political divisions and conflicts (America’s troubling carnival represents only one example) likely will make it challenging for political leaders to significantly promote substantial (adequate) growth.

The failure of longer term US government yields such as the UST 10 year note to rise substantially despite the Fed’s recent modest boost in the Federal Funds rate represents a noteworthy warning sign regarding American and global financial prospects. Note also very low sovereign yields in much of the Eurozone (picture Germany); Japanese government rates remain near the ground floor. However, yields of less creditworthy debt instruments, whether sovereign or corporate, probably will continue to climb in 2016, another ominous indication.

For the near term at least, the broad real trade-weighted US dollar probably will remain strong. Emerging marketplace equities and commodities “in general” likely will persist in bear trends. What does the rally of the dollar above its late August/September 2015 heights signal? What does the collapse of benchmark commodity indices such as the broad GSCI beneath their late August 2015 lows portend? These warn not only of worldwide economic weakness, but also of further declines in the S+P 500. Note that emerging marketplace stocks hover fairly closely to their 2015 depths. The S+P 500 probably will remain in a sideways to bearish trend.

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The Curtain Rises- 2016 Marketplace Theaters (1-4-16)

FINANCIAL FOREST FIRES: US GOVERNMENT DEBT (c) Leo Haviland August 15, 2012

The United States Federal Reserve Board and its central banking allies have furiously battled the fierce financial forest fires of the ongoing worldwide economic crisis that emerged five years ago. As the disaster developed and traveled across the financial landscape, their accommodative approaches evolved. Although central bank methods have varied to some extent, they generally have included deluges of money printing and pinning nominal policy rates (Federal Funds and so forth) close to the ground. These central bank actions not only helped to spark and sustain economic recovery, but also bought politicians time to solve, or at least substantially mitigate, troubling fiscal deficit problems.

Nevertheless, debt levels and deficit spending in America and many other countries generally remain substantial. Efforts targeted to assist recovery partly explain the size of gaping fiscal deficits of recent years. Yet in America and many other nations, they arguably reflect and are structurally sustained by a culture of entitlement. This culture, although not universally shared, extends across the economic spectrum. In any event, government budget deficits in the United States are not a new phenomenon.

However, even without specifically concentrating on its long term fiscal challenges, the US probably is much closer these days to a big debt problem than many believe. Focusing on the near term US government deficit and debt situation in the context of several other nations highlights the danger.

Everyone knows of the Eurozone (Euro Area) crisis. America’s fiscal balances are much more in deficit over the 2008-2017 span than the overall Euro Area’s.

However, from the general government gross debt viewpoint, and especially with a view on 2012 and thereafter, the US problem looks at least as fearsome as the overall Eurozone difficulty. First, the US level exceeds the European height every year, from 2008 out to 2017. Second, the IMF indicates a fall for the Euro Area after 2013, but not for the US.

Inflation is not the only potential source of higher interest rates. The lesson of the Eurozone sovereign debt crisis shows that government interest rates can climb sharply in crisis nations (Greece, Portugal, Ireland, Spain, Italy) even if inflation is moderate. Ability to pay debts (and borrow money), not just inflation levels and trends, matters for interest rate levels (and sovereign credit spread differentials). A badly stretched debtor may have to pay up to find money, right? So rising government interest rates in some cases may reflect a dreadful debt crisis, not a sunny economic recovery.

Closely nearing or reaching a point of no return on the US fiscal front therefore probably would be reflected by a spike in UST yields. The 10 year US Treasury note offers a benchmark for US yield watchers. In recent years, rising government interest rates often have been roughly tied to ascending US stocks (S+P 500), not just an economic recovery. If US equity benchmarks such as the S+P 500 start to decline significantly, and roughly “alongside” the increase in yields (thereby breaking from the guideline UST/stock relationship of recent times), that probably would confirm the existence of a debt crisis.

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Financial Forest Fires- US Government Debt (8-15-12)
US Treasury 10 Year Note Chart (8-15-12)