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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The long running bull march in the Japanese Yen from early summer 2007 to the current time generally coincides with a continuing worldwide economic crisis. The Yen’s robust strength mirrors the failure by central bankers and politicians around the globe to cure the lamentable financial ills. National policies often differ. The international guardians frequently coordinate their rescue and stimulus programs. Yet measures such as deficit spending, money printing, efforts to keep government interest rates near the floor, and struggles to maneuver currency rates merely have patched and postponed severe problems, not genuinely repaired them. Worrisome debt and leverage issues revealed in 2007-08 lurk on in various forms.
The rally in the Japanese Yen on an effective exchange rate basis since around July 2011 warns that an acceleration of the worldwide crisis, as in mid-2008, may be underway or very near to commencing. Significantly, the climb in the Yen cross rate versus the US dollar since mid- March 2012 also fits the ongoing international economic weakness story. Recall that as the world economy deteriorated more and more quickly around mid-2008, not only did the US dollar rally on a broad real trade-weighted basis, but also the dollar weakened relative to the Yen. The strong dollar equals weak stocks (and weak commodities in general), weak dollar equals strong equities (and bullish commodities) chant remains popular.
The world and perspectives on it are not immutable, so 2012 does not precisely duplicate 2008. Yet given the experience of 2008, what does a rally by the dollar in general, if accompanied by a rally in the Yen (effective exchange rate), and especially if the Yen also marched higher against the dollar on a cross basis, portend? This would hint that the disturbing international crisis is in the process of becoming more fearful. And since March 2012, that seems to be what has been happening.
The current dangerous situation in the ongoing worldwide economic crisis, if it further worsens (and it probably will worsen to some extent, even if the deterioration is not nearly as severe as in 2008), will be sufficiently severe to induce policy makers around the globe to take further substantial steps in their struggles to provide long-lasting remedies. Perhaps such actions by central bankers and political leaders may occur relatively soon. These may issue from individual nations in somewhat piecemeal fashion. Yet there is a substantial chance that intervention will be relatively coordinated, especially if an encore of second half 2008 looks more and more to be underway.
But in the meantime, for the near term, the Japanese Yen probably will keep rallying on an effective exchange rate basis; it probably will breach the 1/16/12 daily low of 187.5. The Yen likely will retest the Y75 level against the dollar. However, the US dollar (TWD) will remain fairly strong. The bear trend in worldwide equities and commodities in general therefore probably is not over. Renewed sustained weakness in both the Yen and the dollar would indicate an easing of the current stage of the global crisis.
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2008 Revisited- Japanese Yen Strength, Global Economic Weakness (6-4-12)
The Japanese Yen has remained powerful relative to other currencies “in general” since autumn 2010. On an effective exchange rate basis, as well as against the United States dollar in particular, the Yen is around major resistance. However, the Yen probably will advance further over the next several months. Though many intertwining variables influence currency levels and trends, the fragility of the current worldwide recovery and the continuation of the global financial crisis that erupted in 2007 will play a key role in the continued Yen rally.
Assume America resolves its current battles related to the federal debt ceiling. Proposals likely to be enacted, though representing progress in cutting deficits over the next decade, are modest. In addition, these Washington fiscal fixes will not be significant in relation to the scope of the underlying long run deficit problem. Therefore, any Yen weakness derived from short-term solutions of United States fiscal deficit issues probably will be temporary.
US policy makers preach their desire for a strong dollar from time to time. Their practices over many months, however, underline their desire for (or at least toleration of) a rather weak TWD. The weak dollar policy may help to boost growth and reduce unemployment, right? Don’t many developing nations want their home currency to be relatively weak? One method by which the US can better compete with many developing (and other) nations, at least in some trade domains, is to depreciate its currency.
Roughly speaking, Japan is a creditor nation. Roughly speaking, and despite its wealth, America is a debtor nation.
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The Strong Yen, the Weak Dollar, a Shaky World (8-2-11)
Note the nearness in time of noteworthy marketplace turns in Japanese and American government notes and bonds in recent years. See those in equities as well.
In fragile, deteriorating, or desperate economic times, who do businesses and individuals call for support or salvation? Central bank firefighters and agile politicians head rescue lists of many firms and consumers.
What if Japanese owners decide to liquidate, or be smaller net buyers, of US Treasury securities? All else equal, this will make it harder for the US to finance its gaping fiscal deficit. What happens to United States interest rates and the dollar if other asset holders, not just Japanese ones, buy US Treasuries with less enthusiasm, or become net sellers? If this scenario emerges, the friendly Federal Reserve (a buyer of last resort) could elect to embark on yet another round of quantitative easing (money printing) sometime after the current round ends in June 2011.
As the broad real trade-weighted dollar (“TWD”) in recent months has attained historic lows (1973-present), further TWD feebleness (which probably would involve a resumed Yen rally versus the dollar) helps to make US asset holders in general (not just Japanese players) rather uneasy. How tolerant will foreigners remain of US dollar weakness, the American fiscal circus, and inflationary risks from extravagant Fed money printing? What if foreign buying of US assets in general, not just US Treasuries, dwindles or becomes net selling? In this script, the slumping dollar and increasing US interest rates help to undermine US stock prices.
US equities probably will keep edging up for while longer, breaking the 2/18/11 S+P 500 level of 1344. However, they probably will not ascend much above this. A five percent rally above 1344 carries to about 1410. Recall the final high in the last bull move at 1440 (5/19/08) and the initial high just over 1460 (2/22/07). Twice the March 2009 low of 667 is 1334. Stock bull moves can last a long time, but a two year rally (especially with a doubling of the index) is substantial in time terms. Though the adage that “timing is everything” is inescapable, a noteworthy high in the next few months looks likely.
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Agricultural Prices and Inflation (Desperate Housewives, Episode 9 )
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