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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LOOKING BACKWARD, GAZING FORWARD: US CORPORATE PROFITS AND FINANCIAL TRENDS (c) Leo Haviland May 3, 2016

“And I’ll be taking care of business, every day
Taking care of business, every way”. Taking Care of Business”, by Bachman-Turner Overdrive

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CONCLUSION AND OVERVIEW

For a majority of earnest soothsayers, American corporate profitability is an important factor for US stock marketplace levels and travels. Use the S+P 500 as a benchmark for United States equities in general. In second quarter 2015, US after-tax corporate profits peaked (annualized basis). The S+P 500’s record pinnacle occurred alongside this, on 5/20/15 at 2135. It mournfully plummeted about 15.2 percent to its 1812 (1/20/16)/1810 (2/11/16) depth. Despite the S+P 500’s subsequent sharp rally, the current and near-term after-tax corporate profit trend likely will make it challenging for the S+P 500 to ascend much above (or even over) its May 2015 peak during the next several months. History reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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To explain past and current United States stock marketplace levels and trends, and in offering prophecies regarding future heights and patterns, diverse wizards tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and approaches, including the particular variables they select and arrange.

American and other corporations win or lose given amounts of money for all sorts of reasons. Factors influencing earnings and profitability change, as do the relative importance and interconnections of these variables. Long run inflation increases generally increase nominal values in general. Also, central bank policies, tax regimes, wage trends, and productivity (innovation; efficiency) developments influence sales and profits. The altitudes and paths of the US dollar, interest rate yields, and commodity prices also are relevant in various ways and degrees to particular corporations. Unemployment rates, fiscal situations (budget deficits), debt levels and trends (government, corporate, and consumer), regulatory structures, and population growth matter. America is not an island apart from the rest of the world; globalization has increased in recent decades.

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Admittedly, the ongoing (extraordinary) very lax monetary policy of the Federal Reserve Board and other central bank guardians such as the European Central Bank, Bank of England, Bank of Japan, and China’s central bank helps underpin equity prices in America and elsewhere. Stock-owning audiences around the globe (particularly the praiseworthy investment community) as well as Wall Street institutions, public corporations, and the financial media friends generally adore massive money printing (quantitative easing) and sustained yield repression. Low interest rate yields for US Treasury securities (and negative yields for many government debt obligations elsewhere) encourage fervent scrambles for acceptable returns elsewhere. These often-alluring territories include stock realms (hunting for dividends and potential capital gain), corporate debt, and commodities. American inflation has been quite modest in recent years. Yet as nominal prices in general (all else equal) tend to rise alongside (or on a lagged basis) a climb in US nominal GDP, so will a nominally priced index such as the S+P 500.

The S+P 500’s retreat beginning in May 2015 interrelated with the preceding bear trends in emerging marketplace stocks and commodities (notably petroleum) and a further bull charge in the broad real trade-weighted dollar (“TWD”). Significantly, the S+P 500 (and stocks of other key advanced nations), emerging marketplace equities (“MXEF”, MSCI Emerging Stock Markets Index, from Morgan Stanley; 1/21/16 at 687), and commodities in general (broad GSCI at 268 on 1/20/16) all attained significant troughs around the same time in first quarter 2016. The US Treasury 10 year note yield low was 2/11/16 at 1.53 percent. The TWD established its recent high alongside these marketplaces in January 2016. This interconnection across assorted marketplaces assisted the rally in the S+P 500 from its January/February lows.

Thus to some extent, the recent weakness in the broad real trade-weighted dollar encouraged the ascent of the S+P 500. In any case, central banks did not want the TWD to ascend by much, if at all, over its January 2016 high. They likewise wanted to arrest stock marketplace declines.

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However, suppose the TWD declines further from current levels, perhaps ten percent or more from its January 2016 elevation. Although the first stage of dollar decline has managed to spark and assist a S+P 500 rally, additional sustained depreciation eventually may undermine equity prices. Besides, even if the TWD fall from its January plateau does not reach ten percent, the S+P 500 nevertheless may slide lower. Marketplace history reveals that a weaker dollar does not inevitably (or necessarily) push US stocks upward. And also suppose US interest rates or inflation expectations sustain modest climbs. Rising US Treasury yields can help to lead S+P 500 prices lower. Assume commodities in general manage to hold onto much of their recent gains.

In this environment, further suppose US corporate profits (and those in related regions) continue to remain sluggish (or decline further). Then the S+P 500’s fall from its high probably will be significant, even though the Federal Reserve and its trusty allies will intervene with rhetoric and action to prevent dramatic stock marketplace drops (particularly watch the 20 percent bear market definition threshold).

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Looking Backward, Gazing Forward- US Corporate Profits and Financial Trends (5-3-16)

US SHARE BUYBACKS: OFF TO THE RACES © Leo Haviland May 3, 2015

How best to explain the monumental ascent in key United States stock benchmarks such as the S+P 500 that began in March 2009? What factors should guide marketplace handicappers in their opinions as to whether or not that bull climb will continue? Marketplace guides select between and evaluate assorted and intertwining variables. Their perspectives and arguments differ. However, considerations such as corporate earnings, sustained highly accommodative monetary policy (interest rate yield repression and money printing), and deficit spending stand out on many lists. In today’s global scene, numerous clairvoyants extend their horizons to include other nations to help understand US equity price levels and patterns. Analysts of American stock movements may also rely on interest rate, US dollar, and commodity price levels and trends. Many players harness technical analysis of marketplace phenomena (for example, picture bar charts and moving averages) to their review.

Some gurus include share buybacks by US corporations in their inventory of bullish factors. Such marketplace observers typically focus on the last several years (or recent calendar quarters) and the billion dollar programs of noteworthy firms.

However, to better assess the influence of share buybacks by US companies, investigators should review them primarily from the standpoint of net, rather than gross, buybacks. The focus should be on whether or not there are net share buybacks (in other words, negative net issues) over a given time span. After all, some firms issue new stock. Moreover, explorers should review buybacks over a long run history as well as in relation to after-tax corporate profits and nominal GDP. Let’s concentrate on the Federal Reserve Board’s nonfinancial corporate business category. When reviewed in the context of corporate profits, but also (and especially) from the standpoint of nominal GDP, US net share buybacks in this domain in recent years have been very substantial. This inquiry reveals not only that net share buybacks (negative net issues) have played a particularly prominent role within that US equity arena in recent times. The noteworthy net buybacks (negative net issues) situation has persisted for a few decades. This longstanding accumulation of shares via net buybacks probably has reduced the amount of shares and thereby probably has had increasingly bullish consequences for US stocks in general.

Even if net share buybacks persist, a significant slowdown in their pace (reduction in their level) probably would be a bearish warning sign for equity signposts such as the S+P 500.
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The sustained yield repression scheme of the Federal Reserve Board and its central banking allies not only has helped to encourage many fortune hunters seeking reasonable (good) returns (yields) to purchase equities. It also has lowered corporate borrowing costs. To what extent do net share buybacks, arguably often financed by corporate debt issues, reflect a widely-embraced management opinion that investment opportunities are relatively unattractive? In this context, remember that many corporations nowadays have large cash hoards not being directly invested in their business.

Everyone knows that corporations can raise funds via issuing stock or debt securities, or by borrowing from banks or similar entities. Diverse motivations surely explain share buybacks. Yet at some companies, executive compensation links to the firm’s share price and earnings per share. So perhaps some undoubtedly altruistic corporate leaders nevertheless have an alluring incentive spurring them to reduce the number of shares outstanding.

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US Share Buybacks- Off to the Races (5-3-15)

AMERICA’S DEBT CULTURE © Leo Haviland April 6, 2015

America continues to have a love affair with debt. The nation has achieved remarkably little progress in improving its comprehensive (all-inclusive) debt situation since 2009’s very elevated debt relative to nominal GDP percentage. Increasing federal indebtedness has substantially though not entirely outweighed modest improvements in the consumer and state and local government domains. As the national government is a representative (democratic; “We, the People”) one, the country has not significantly mended its troubling overall debt problem.

A review of total American credit marketplace debt portrays the development and entrenchment of a national culture of debt. The long run trend toward greater debt holdings (and tolerance of debt) probably indicates and intertwines with a growing bias toward consumption and spending rather than saving. The increasing borrowing and massive debt accumulation arguably in part also probably reflect an increasingly widespread sense of entitlement to American Dream goals of the “good life” and a “better life”.
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Total United States credit marketplace debt at end 2014 stood at about $58.7 trillion (Federal Reserve Board, “Financial Accounts of the United States”, Z.1 data; 3/12/15). The total includes US household, financial and non-financial business, and government debt, plus the relatively small foreign/rest of the world category. Compare 2001’s $29.2tr. Thus America’s credit marketplace debt has doubled in roughly a dozen years, and there has been no yearly fall in the sum since 2001.

What does a long run examination of total United States credit marketplace debt as a percent of nominal GDP reveal? Review the post-World War Two landscape. For over five decades, from the early 1950s up through the glorious Goldilocks Era that ended in 2007, and for a couple of years thereafter, total US indebtedness as a percentage of nominal GDP climbed steadily and substantially.

The bottom in overall US credit marketplace debt as a percent of GDP was 1951’s 129.5 percent. It inexorably edged up for about thirty years. It then started to accelerate from 1981’s 164.1pc. In 1985, it reached 200.3pc, with 1998’s 257.4pc, and 2001’s 275.1pc. In 2003, that measure attained 298.2pc. As debt became increasingly popular, it joyously soared during the blissful Goldilocks period to 346.1pc in 2007. As the gloomy American (and global) financial crisis emerged and proceeded, total US credit marketplace debt peaked at 362.0pc in 2009.

Despite pillow talk from many pundits about improving American debt conditions, that gigantic percentage has fallen only modestly since 2009. It slipped to 349.7pc of nominal GDP in 2010, and 340.6pc in 2012. However, it has diminished very little since then, with 2013 at 338.0pc and 2014 at 337.1pc. Significantly, 2014’s percentage remains not far from the heavenly Goldilocks Era 346.1pc height of 2007.

Another statistic further underscores the growth and persistence of America’s debt culture. Not only is the current credit marketplace debt as a percent of GDP level still historically high and close to the Goldilocks plateau. The arithmetic drop of 24.9 percentage points from the five years 2009 to 2014 (362.0pc less 337.1pc) is only about half the 47.9 point increase over the four years from 2003-07 (298.2 versus 346.1).
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The Federal Reserve’s long-running extraordinary and very easy monetary policy (notably money printing/quantitative easing and interest rate yield repression) seek not only to ignite and sustain economic recovery and buy time for serious action in the federal and other debt realms. The Fed has battled to boost inflation to a supposedly sufficient level, while it has simultaneously repressed debt securities yields. Its artful strategies reflect the central bank’s ardent devotion on behalf of the constituency of debtors (borrowers) relative to the one of savers (creditors).

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America's Debt Culture (4-6-15)

AMERICA THE DEBTOR © Leo Haviland March 17, 2014

In recent weeks, much marketplace and media attention has underlined growing United States household net worth as well as decreasing household indebtedness as a percentage of GDP. Pundits proclaim that federal budget deficits have substantially declined from the towering heights of only a couple of years ago. Hasn’t the American and worldwide economy generally improved since the dreadful times of late 2008/early 2009? Americans point to the stratospheric rise of the S+P 500 since its March 2009 major low around 667. And look at those great US corporate earnings of the past couple of years! All such talk surely encourages optimism regarding the American financial situation, as has the related sustained highly accommodative monetary policy rhetoric and action of the Federal Reserve Board and its central banking comrades around the globe. Yet although Fed policies such as gargantuan money printing, severe interest rate repression, and fancy wordplay regarding forward guidance have boosted morale and purchased time for action on America’s major debt problem, they have not bought a solution to that issue.

 

To better perceive and assess America’s debt challenge, sentinels should adopt a wider perspective, focusing on the overall United States debt situation over a long historical period. For over five decades, from the early 1950s up through the glorious Goldilocks Era that ended in 2007, and for a couple of years thereafter, total US indebtedness as a percentage of nominal GDP climbed steadily and substantially.

 

Remarkably little progress has been made in the comprehensive (all-inclusive) US debt situation since 2009’s very lofty percentage. Increasing federal indebtedness has substantially though not entirely outweighed improvements in the consumer and state and local government sectors. Since the national government is a representative (democratic; “We, the People”) one, the general US debt situation has not mended significantly. In addition, although the federal budget deficits will remain relatively small (at least compared to the mammoth gaps of a few years ago), they gradually expand after the next few years. The ongoing substantial US debt mountain consequently remains a long run burden on, and probably also a near term problem for, US and international economic growth.

 

This review of total American credit marketplace debt portrays the development of a national culture of debt. The long run trend probably indicates a growing bias toward consumption and spending rather than saving. The increasing borrowing and massive debt accumulation arguably in part also probably reflect an increasingly widespread sense of entitlement to American Dream goals of the “good life” and a “better life”.

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America the Debtor (3-17-14)