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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US DOLLAR TRAVELS: CROSSTOWN TRAFFIC © Leo Haviland July 2, 2019

“But, darlin’ can’t you see my signals turn from green to red
And with you I can see a traffic jam straight up ahead”. Jimi Hendrix, “Crosstown Traffic”

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CONCLUSION

The broad real trade-weighted United States dollar’s December 2016 (at 103.3)/January 2017 (103.1) peak likely will remain intact (“TWD”; based on goods only; Federal Reserve Board, H.10; monthly average, March 1973=100). The high since then, December 2018’s crest at 102.0, stands slightly beneath this, as does May 2019’s 101.6 (June 2019 was 101.1). December 2018/May 2019’s plateau probably forms a double top in conjunction with December 2016/January 2017’s pinnacle. If the TWD breaks through the December 2016/January 2017 roadblock, it probably will not do so by much. The majestic long-running major bull charge in the dollar which commenced in July 2011 at 80.5 has reached the finish line, or soon will do so. 

Unlike the broad real trade-weighted dollar, the broad nominal trade-weighted dollar (goods only) has daily data. The broad nominal US dollar probably also formed twin peaks. It achieved an initial top on 12/28/16 (at 128.9) and 1/3/17 (128.8). The nominal TWD’s recent high, 5/31/19’s 129.6, edges only half of one percent over the 2016/17 high. 

The depreciation in the broad real trade-weighted dollar from its 103.3/103.1 elevation probably will be at least five percent, and very possibly ten percent. This retreat likely will last at least for several months. 

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The broad real trade-weighted dollar’s level and patterns are relevant for and interrelate with those in key stock, interest rate, commodity, and real estate marketplaces. The extent to which and reasons why foreign exchange levels and trends (whether for the US dollar or any other currency) converge and diverge from (lead/lag) those in stock, interest rate, commodity, and other marketplaces is a matter of subjective perspective. Opinions differ. 

For related marketplace analysis, see essays such as: “Petroleum: Rolling and Tumbling” (6/10/19); “Wall Street Talking, Yield Hunting, and Running for Cover” (5/14/19); “Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19); “American Economic Growth: Cycles, Yield Spreads, and Stocks” (3/4/19); “Facing a Wall: Emerging US Dollar Weakness” (1/15/19); “American Housing: a Marketplace Weathervane” (12/4/18); “Twists, Turns, and Turmoil: US and Other Government Note Trends” (11/12/18); “Japan: Financial Archery, Shooting Arrows” (10/5/18); “Stock Marketplace Maneuvers: Convergence and Divergence” (9/4/18); “China at a Crossroads: Economic and Political Danger Signs” (8/5/18); “Shakin’ All Over: Marketplace Convergence and Divergence” (6/18/18); “History on Stage: Marketplace Scenes” (8/9/17). 

ON THE ROAD AGAIN

“We’ll be watching out for trouble, yeah (All down the line)
And we keep the motor running, yeah (All down the line)”, The Rolling Stones, “All Down the Line” 

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What interrelated phenomena currently are sparking, or will tend to encourage, near term and long run US dollar weakness? 

Growing faith that America’s Federal Reserve Board not only will refrain from raising the Federal Funds rate anytime soon, but even may reduce it over the next several months, is a critical factor in the construction of the latest segment (December 2018 to the present) of the TWD’s resistance barrier. The Fed Chairman and other US central bank policemen speak of the need for “patience” on the rate increase front. The Fed eagerly promotes its “symmetric” two percent inflation objective (6/19/19 FOMC decision), which blows a horn that it may permit inflation to exceed (move symmetrically around) their revered two percent destination. 

By reducing the likelihood of near term boosts in the Federal Funds rate, and particularly by increasing the odds of lowering this signpost, the Fed gatekeeper thereby cuts the probability of yield increases for US government debt securities. The Fed thus makes the US dollar less appealing (less likely to appreciate further) in the perspective of many marketplace players. 

The Fed’s less aggressive rate scheme (at minimum, a pause in its “normalization” process) mitigates enthusiasm for the US dollar from those aiming to take advantage of interest rate yield differentials (as well as those hoping for appreciation in the value of other dollar-denominated assets such as American stocks or real estate relative to the foreign exchange value of the given home currency). This is despite negative yields in German, Japanese, and other government debt securities. Capital flows into the dollar may slow, or even reverse to some extent. 

The yield for the US Treasury 10 year note, after topping around 3.25 percent in early October 2018, has backtracked further in recent months. The UST resumed its drop from 4/17/19’s minor top at 2.62pc, nosediving from 5/28/19’s 2.32pc elevation. Since late June 2019, its yield has bounced around 2.00pc. 

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The current United States Administration probably wants a weaker US dollar relative to its current elevation in order to stimulate the economy as the 2020 elections approach. President Trump claimed that the European Central Bank, by deliberately pushing down the Euro FX’s value against the dollar, has been unfair, making it easier for the Euro Area to compete against the US (New York Times, 6/19/19, ppA1, 9). Recall his complaints about China’s currency policies as well. The President’s repeated loud sirens that the Federal Reserve made mistakes by raising its policy rates, and instead should be lowering them also messages that the Administration wants the dollar to depreciate. 

Another consideration constructing a noteworthy broad real TWD top is mild, even if nervous, optimism that tariff battles and other aspects of trade wars between America and many of its key trading partners (especially China) will become less fierce. Both the United States and China increasingly are fearful regarding the ability of their nations to maintain adequate real GDP increases.

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US Dollar Travels- Crosstown Traffic (7-2-19)

MARKETPLACE TANTRUMS (AND OTHER SIGNS, SOUNDS, AND FURY) © Leo Haviland, July 11, 2017

“In the day we sweat it out in the streets of a runaway American dream”, sings Bruce Springsteen in “Born to Run”.

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CONCLUSION

Wizards in Wall Street and coaches on Main Street offer a variety of competing descriptions of and reasons for the emergence, continuation, and ending of economic trends, including bull and bear patterns in stock, interest rate, currency, and commodity marketplaces. Apparently dramatic price fluctuations and trend changes frequently inspire heated language of volatility, spikes, crashes, mania, and panic. Colorful metaphors frequently punctuate the tales and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk about a potential reduction in quantitative easing (money printing) in conjunction with marketplace movements generated wordplay of a “taper tantrum”.

In recent weeks, international financial marketplaces and media have worried that central bank policy tightening (or threats of such action) will ignite a taper tantrum akin to what occurred around late spring 2013. That fearsome event saw stocks plummeting and interest rate yields rising rather rapidly in the United States and elsewhere around the globe.

Not only is the Federal Reserve in the process of slowly raising the Federal Funds rate and chirping about diminishing the size of its gargantuan balance sheet. The European Central Bank and others have hinted about reducing the extent of their highly accommodative monetary policies. The ECB is buying €60 billion in mostly government bonds each month via quantitative easing. Will the ECB taper its purchases in 2018?

The Financial Times headlined: “Confusion as Carney [Bank of England Governor] and Draghi [ECB President] struggle to clarify stimulus exit” and “‘Taper tantrum’ echoes” (6/29/17, p1). “End of cheap money leaves central bankers lost for words” and “Officials struggle to convey policy direction precisely to avoid further ‘taper tantrums’” (FT, 6/29/17, p3). “Central bank retreat from QE gathers pace”; “Sudden hawkish shift in policy across the globe has analysts talking of new ‘taper tantrum’” (FT, 7/5/17, p20).

Central bank language and behavior (whether by the Fed or one of its allies) expressing willingness to reduce (or cease) very easy money schemes indeed increase the chances of rising yields in key debt signposts such as the US Treasury 10 year note and boost the likelihood of a decline in important stock benchmarks such as the S+P 500.

Though central banks nowadays may (as in 2013 and at other historical points) spark or accelerate noteworthy trends in securities (and other) marketplaces, the central bank policy factor nevertheless intertwines with numerous other economic and political phenomena. And one or more of such other variables significantly may help to inspire a noisy marketplace “tantrum”. Not all marketplace tantrums are “taper tantrums”.

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Marketplace Tantrums (and Other Signs, Sounds, and Fury) (7-11-17)

US DOLLAR THEATRICS: DEPRECIATING ACTS © Leo Haviland, June 7, 2017

“Gonna leave this brokedown palace
On my hands and my knees I will roll, roll, roll”. The Grateful Dead, “Brokedown Palace”

CONCLUSION AND OVERVIEW

The gradual depreciation of the broad real trade-weighted United States dollar (“TWD”; Federal Reserve Board, H.10 statistics; monthly average; March 1973=100) that began in December 2016/January 2017 at about 102.8 probably will continue for at least the next several months. Dollar cross rate patterns against assorted individual currencies (such as the Euro FX, Chinese renminbi, and Japanese Yen) are not necessarily the same. In principle and practice, the dollar may rally against one counterpart while getting feebler against another. Nevertheless, the similar weakness in recent months of the dollar’s cross rate versus several key American trading partners manifests the widespread underpinnings of the growing overall dollar breakdown. Gold’s bull climb since December 2016 roughly coincides with and reflects (confirms) the greenback’s erosion.

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Various entangled factors influence foreign exchange levels and patterns, with monetary policy of course being a key variable. Over the past few months and looking forward, underline the US Federal Reserve Board’s willingness to tighten monetary policy by raising the Federal Funds rate; it also hints at the eventual reduction of its bloated balance sheet. Moreover, such Fed action and its forward guidance wordplay contrasts with the ongoing highly accommodative policy of many key central banks (such as the European Central Bank and Bank of Japan). Yet the dollar nevertheless has weakened. In this context, the TWD’s slump over the past few months therefore portends future dollar depreciation. The Fed meets 6/13-14/17, 7/25-26/17, and 9/19-20/17.

Moreover, most believe that US real GDP growth will remain relatively strong. The dollar’s downturn in New Year 2017 is ominous from this perspective as well.

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The 1/20/17 inauguration of President Trump very closely connects in time with the TWD peak. Is this merely a coincidence? Probably not.

Comments during the 2016 election season and its aftermath by Trump and some members of the supporting cast allied with him indicate that he probably wanted some dollar depreciation to help boost US economic growth. Note their criticism of some key European trading partners and China. Isn’t it unfair to the US if the Euro FX or Chinese renminbi are “excessively weak”?

But much more than a willingness by the Trump Administration to permit some dollar bearishness probably explains the dollar’s decline in calendar 2017. After all, the US dollar rallied for several weeks after Trump’s November 2016 victory.

America’s notable political, economic, racial, religious, age, gender, and other divisions and related quarrels preceded Trump’s political showmanship and electoral triumph. But such conflicts arguably have worsened since Trump took office.

Examine the ongoing intensity of the carnival of media coverage relating to such divisions, even after the contentious national election. Look at ferocious debates over Obamacare, fiscal priorities, immigration policy, and climate change. In Washington’s political circus, note the significant disagreements in Congress on assorted key issues. The Republicans control the Presidency, House, and Senate, but they squabble. How likely will there be significant tax “reform” or substantial new infrastructure spending? The degree and scope of Russian involvement in American politics, including relationships with some people within or linked to the Trump Administration, capture headlines.

America’s highly partisan budget battles likely will continue, and its existing long run debt problems will not magically evaporate. Moreover, marketplace wizards generally agree that the enactment of the President’s budget plan (sketch) will widen the deficit dramatically relative to current trends. Of course other nations have big debt problems. Look at Japan’s mammoth government debt, and see China corporate debt (and property, local government, and shadow banking issues). Yet America’s increased indebtedness, particularly if Trump’s vision becomes law, is “newer news” than what has been going on within Japanese and Chinese debt festivals.

In addition, US consumer indebtedness is not small, and it has been creeping higher in absolute terms. The New York Fed reported that total US indebtedness as of end first quarter 2017 was about $12.7 trillion. This placed overall household debt $50 billion above its prior peak of third quarter 2008, and 14.1 percent higher than the trough attained in 2Q13.

And very significantly, many people at home and abroad believe President Trump’s leadership has been and likely will remain erratic. Compare his language and behavior with that of his predecessors.

Given the nation’s significant political (and other interrelated cultural) conflicts and doubts regarding the quality and predictability of Presidential- and Congressional- leadership and action, and “all else equal”, this makes the United States dollar (dollar-denominated assets) somewhat less attractive to hold. Widespread falling (low) public confidence in many US politicians, political processes, and political institutions eventually can generate falling confidence (and thus declines) in the dollar.

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Thus, in recent months, the victory of an apparently populist leader in America contrasts with the maintenance of power by the establishment in most key American trading partners. And the American President’s rhetoric and actions (at least to some extent) not only are divisive, but also seem rather erratic and confused to many

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US Dollar Theatrics- Depreciating Acts (6-7-17)

TICKET TO RIDE: US CORPORATE PROFITS AND S+P 500 TRENDS (c) Leo Haviland, May 17, 2017

In “Ticket to Ride”, The Beatles sing:
I don’t know why she’s riding so high
She ought to think twice
She ought to do right by me
Before she gets to saying goodbye”.

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CONCLUSION AND OVERVIEW

In offering enthusiastic audiences explanations of past, current, and future United States stock marketplace levels and travels, diverse marketplace preachers tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and methods, including the particular variables they select and arrange. For a majority of devoted visionaries, American corporate profitability is a very important factor.

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After-tax US corporate profits soared after reaching a trough in fourth quarter 2015, not long before the S+P 500’s major bottom in first quarter 2016. The noteworthy profit climb since 4Q15 surely encouraged the S+P 500 to jump from its 1Q16 trough.

Yet Trump’s remarkable triumph in November 2016’s Presidential election created (or at least magnified) faith that United States after-tax corporate profits would increase significantly in calendar 2017 and 2018. The S+P 500 galloped 15.2 percent higher from 11/4/16’s 2084 low to 3/1/17’s 2401 elevation. Thus hopes for greater profits probably greatly assisted the S+P 500’s sharp rally.

What is a key tenet (especially in the post-election period) in the gospel promoting a viewpoint of growing American corporate profitability and an entangled bull stock climb? Much centers on hopes that the Republican-controlled Congress will enact noteworthy corporate tax cuts. Related optimism for marketplace earnings (and stock) bulls includes possibilities for repatriation of corporate cash hoards, dramatic boosts in domestic infrastructure spending, and reduced regulatory burdens.

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However, current sharp divides on the American political scene (including within the Republican congregation) and widespread lack of confidence in (and hostility toward) the President will make it very difficult for a notable change in the corporate (and individual) tax code to become law. Passage of legislation encouraging earnings repatriation is not assured. Moreover, neither is a monumental infrastructure spending scheme.

In addition, despite the fierce climbs in recent calendar quarters, profit highs for recent full calendar years do not manifest a clear trend toward moving to new heights. Full calendar year profits over the past few years have been about flat.

Disappointment relative to widely-forecast profitability gains may inspire S+P 500 price retreats. In any case, history reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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What is too high (too low), high (low), overvalued (undervalued), or reasonable/rational/average/normal (unreasonable, irrational, atypical/abnormal) for stock prices or other economic indicators is a matter of opinion. However, and even though stock valuations can appear very elevated relative for an extended period of time, some marketplace gurus nowadays proclaim that some measures show US stock valuations are on the lofty side.

Also, elevated share buyback levels also have helped to propel US equities higher. There are hints this pattern will not persist.

Current low US stock marketplace volatility, high American consumer confidence, and evidence that financial stress remains below average have reflected (and encouraged) the majestic bull climb in the S+P 500. Observers nevertheless should watch for changes in such measures.

A warning light for S+P 500 bulls is the failure the S+P 500 to motor much above the early March 2017 high. The subsequent record high is 5/16/17’s 2406. If the S+P 500 continues to find ventures much beyond that March 2017 elevation challenging, this arguably will signal that current optimism regarding future corporate profit gains may be ebbing, that the S+P 500 bull trend is tiring, or both.

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So the failure of America to enact important corporate tax “reform” (tax cuts) or embark on a glorious infrastructure spending voyage may not greatly diminish future earnings expectations (or even actual levels) or significantly wound the S+P 500. But they might.

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In addition, challenges to the bullish trend in US equities may come from the long run upward trend of US government interest rates (note the Fed’s tightening plan). Or, concern about US federal budget deficits (or debt problems elsewhere in the world) may march into view. Hopes for higher (or at least not falling) energy prices likely underpin hopes for higher corporate earnings (and profits) in that key financial sector. But commodities “in general” (and petroleum in particular) have fallen from their 1Q17 highs. Anticipated oil output levels from OPEC and its non-OPEC comrades probably will not significantly reduce still-high OECD industry inventories for at least the next several months. The broad real trade-weighted US dollar established highs in December 2016/January 2017, though it has slipped only modestly since then. Contrary to what many believe, increasing US dollar depreciation may help lead to or confirm weakness in the US stock marketplace.

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Ticket to Ride- US Corporate Profits and S+P 500 Trends (5-17-17)