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.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile





US TREASURY YIELDS, FED MANEUVERS, AND FISCAL GAMES© Leo Haviland June 5, 2023

“Now if there’s a smile on my face
It’s only there trying to fool the public”. “The Tears of a Clown”, a song by Smokey Robinson
and the Miracles

***

CONCLUSION AND OVERVIEW

The United States Treasury 10 year note yield probably will continue to travel sideways for the near term.

***

In America and many other key countries around the globe, uncertainties and risks regarding numerous entangled economic and political variables and marketplaces remain substantial. In particular, inflationary and recessionary (deflationary) forces battle for supremacy.

Monetary tightening by the Federal Reserve Board and its central banking allies has helped to cut lofty consumer price inflation levels. However, significant inflation persists in America. Both headline and core (excluding food and energy) inflation float well above targets aimed at by these guardians. Price indices for United States personal consumption expenditures services for the past several months have remained high. Yet in comparison with actual consumer price inflation, inflationary expectations for longer run time spans have remained moderate. Unemployment in the US remains low, assisting consumer confidence and thus household spending, thereby tending to keep interest rate yields relatively high. Given the Russian/Ukraine conflict and OPEC+ willingness to support prices, how probable is it that petroleum and other commodity prices will ascend again?


America’s recent resolution of the heated battle over raising the debt ceiling avoided default. However, despite celebratory talk by many about how that new legislation displayed fiscal responsibility, the new law accomplished very little in substance toward reducing the towering public debt challenges confronting America. The massive and increasing public (and overall) debt in the United States (and many other leading countries) signal the eventual arrival of even higher interest rates.


Higher interest rates have diminished worldwide GDP growth prospects and boosted recessionary fears. History indicates that a negatively sloped US Treasury yield curve (short term rates higher than long term ones), such as has existed in America for over six months, portends a recession. Though history need not repeat itself, either entirely or even partly, significant disinflations induced by monetary policy tightening connect with recessions. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession or a substantial fall in the S+P 500 and will strive to avoid those eventualities. The shocking banking collapses a few months ago in America and Europe seem largely forgotten. However, they warn of dangerous fragilities facing banking systems and diverse marketplace arenas, especially if US rates resume their ascent or price feebleness in commercial real estate assets becomes even more worrisome. The United States dollar, the leading international reserve currency, has depreciated from its major high milepost reached in autumn 2022 but arguably remains “very strong”. This robustness helps to make US Treasuries (and other dollar-denominated assets) relatively appealing to some overseas players. Prices of emerging marketplace stocks and interest rate instruments remain vulnerable to rising UST yields and
dollar strength. Also, even in an inflationary environment, fearful “flights to quality” (buying UST) sometimes emerge.

FOLLOW THE LINK BELOW to download this article as a PDF file.
US Treasury Yields, Fed Maneuvers, and Fiscal Games (6-5-23)

“POPULISM” AND CENTRAL BANKS © Leo Haviland, July 12, 2016

“Big boss man, can’t you hear me when I call?” “Big Boss Man” (Al Smith and Luther Dixon), performed by Elvis Presley, the Grateful Dead, and others

****

OVERVIEW AND CONCLUSION

The United Kingdom’s recent shocking referendum vote to leave the European Union not only sparked ferocious marketplace fluctuations. It did not merely underscore ongoing and widespread unease regarding mediocre economic growth and insufficient inflation in many nations inside and outside of Europe.

Brexit also highlighted previously existing and growing fears among many global economic and political elites (“the establishment”) and their disciples about increasing “populism” and its potential consequences. These worries extend beyond the troubles of the European Union and the Eurozone and nervousness regarding their fracturing or break-up. The British departure outcome probably inflamed populist ambitions in other countries. In any case, substantial divisiveness and partisan fervor are not confined to Europe or the United States. See “America: a House Divided” (12/7/15).

The “establishment”, like “populism”, is diverse rather than monolithic. Even among the advanced OECD nations such as the United States and those seeking to emulate them, it is not the same everywhere. Mainstream political parties and their economic agendas are not precisely identical, even though such different groups (such as Democrats and Republicans) can belong to the same establishment. What is an establishment (or populist or other anti-establishment) view can change over time.

Different cultures of course will have leaders, but their particular “establishment” ideologies may be significantly and perhaps dramatically different. The current Chinese establishment’s guiding faith in part overlaps with (resembles) but nevertheless is not identical to the creed prevailing in the United States establishment. Or, compare a primitive rural culture and that of a modern Western industrial nation.

However, as a rough and admittedly simplified guideline, one can summarize the ruling Western economic ideology of the post-World War Two period. It is a “capitalism” that in principle generally adores free (open) markets for goods and services, free trade, and free movement of capital, as well as (subject to immigration concerns) fairly free movement of people. Such economic goals (and political and social gospels related to them) are labeled and valued as good and desirable by the so-called establishment. Often they are honored as being rational, reasonable, intelligent, sensible, and prudent. In the post-World War Two span, these good outcomes have intertwined with globalization, which the elites (power structure), likewise generally (on balance) bless. Therefore these authorities view populism, at least to the extent it endangers such good capitalism and the related “structure (arrangement) of things”, as generally bad (or less good; inferior).

****

The establishment responded to the British outcome with passionate rhetoric. The dangers of supposedly overly left-wing or right-wing movements, or excessively nationalistic or protectionist ones, or fringe or radical groups must be handled somehow, right? Or so such currently empowered elites advise audiences.

Leading central banks and regulators such as the European Central Bank, Federal Reserve Board, Bank of England, and International Monetary Fund of course stress their devotion to their assorted mandates. Indeed their noble quest to secure praiseworthy aims such as stable prices (sufficient inflation), maximum employment, and economic growth are on behalf of “all of us”. Yet such loosely-defined legislative directives in practice provide these economic high priests wide scope for their interpretation.

In practice, central bankers, even if widely-revered, generally reflect the key economic and political doctrines and ambitions of traditional (current establishment) leaders. And “populism”, though one cannot define it scientifically, though its historical and current international appearance is not everywhere the same, still can “shake the existing economic and political situation and its institutional structures up a lot”. And such resulting uncertainty and disruption (and especially big changes) on balance would be bad (or at least not very good), right? So the Brexit vote was a bad (undesirable and unfortunate) outcome. Populist pressure, especially if it involved challenging the independence of central banks, might even make it more difficult for central bankers to achieve their beloved mandates. Leading central banks nowadays consequently want to preserve the basic structure and trends of the post-World War Two world “order”, to preclude revolutionary or even mildly substantial changes in it.

Therefore, the British “Leave” vote and its aftermath probably will encourage various leading central banks such as the Fed, ECB, Bank of England, and their allies to battle even more fiercely than before against populist menaces. Continued sluggish growth (or a recession), rising unemployment, or a renewed sovereign or private sector debt crisis (whether in Europe or around the globe), would inflame populist ardor, particularly given anger over widespread economic inequality. The central banks therefore likely will sustain existing highly accommodative policies such as yield repression and money printing for longer than previously anticipated, perhaps expanding them “if necessary”.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Populism and Central Banks (7-12-16)

LIVING ON BORROWED TIME- AMERICA THE DEBTOR © Leo Haviland November 12, 2012

Economic experts, political pundits, and marketplace wizards have made much of America’s looming federal “fiscal cliff”. It has become commonplace to declare that not only for the near term, but also for the misty long run horizon, difficult decisions await the Washington leadership. Of course the nation has assets. However, there has been much less emphasis on America’s “debt hole”, the enormous indebtedness of America as a whole (not just the federal government situation) as a percentage of nominal GDP.

The debt growth trend in recent decades and its mountainous overall level argue that a culture of debt (and entitlement) exists in the United States. Rising debt as a percentage of GDP preceded its acceleration during the glorious Goldilocks Era that ended around mid to late 2007. Since the so-called recovery began to motor forward in 2009, overall United States indebtedness has not declined much. Though consumer indebtedness has declined modestly in the past few years, federal indebtedness has skyrocketed. Thus in a representative government, people (“we, the people”) correspondingly remain very indebted.

And is the President or any of the Congressional Democrats or Republicans in their undoubtedly brilliant “plans” talking of the merit of engineering budget surpluses at any time in the next several years (if ever)? In addition, smoothly singing its mandate hymn, the financial fire-fighting Federal Reserve devotedly has assisted debtors by repressing interest rate yields, printing money (quantitative easing), and other measures. This highly accommodative and sustained central banking liberality not only assists debtors. The Fed thereby provides short term benefits such as boosting GDP, rallying the US stock marketplace, reducing unemployment, and buying time for a fiscal solution. Might there be some long run costs to such supposedly prudent Fed actions? For example, these generally popular Fed policies nevertheless also reflect and encourage the debt culture and delay difficult (responsible) political decision-making and consequently some amount of painful reckoning.

What is the more probable outlook? Perhaps patching over the US’s debt problem, particularly on the federal landscape, will occur, thus easing fears regarding the outbreak of a financial disaster. On the federal fiscal front, the passing of and results of the 2012 election may spark bipartisan efforts that result in a temporary fix of existing difficulties. However, as before the election, there is a Democratic President, Democratic Senate, and a Republican House of Representatives. Remember the lyrics of a famous anthem by The Who: “Meet the new boss Same as the old boss” (“Won’t Get Fooled Again”). And in the Senate, the Democratic majority is several seats short of the 60 votes necessary to stop legislative debates. Even to induce an attractive temporary fix, it is more likely that fearsome existing debt troubles probably will have to worsen further. And don’t overlook the need to raise the debt ceiling again.
Read the rest of this entry »