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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“We hope you will enjoy the show”, sing The Beatles in “Sgt. Pepper’s Lonely Hearts Club Band
CONCLUSION
“Inflation” (deflation; stable prices) can appear in various diverse economic arenas. The United States consumer price index measure of course covers somewhat different ground from producer price yardsticks, and both of these weathervanes differ from asset price realms such as the S+P 500 and homes. However, these assorted inflation domains and phenomena influencing them in various ways are not entirely separate.
Despite its enthusiastic claims of surveying assorted inflation indicators and marketplaces, the beloved Federal Reserve Board focuses primarily on consumer-level inflation, as measured by indices such as personal consumption expenditure prices.
The US obviously is not an independent island in the interconnected global economy, though it plays a critical part. However, American “inflation” in the general sense of the term (and even if one excludes the asset price territory of the S+P 500 and homes) is more widespread and less well-anchored than the Fed and armies of its devoted followers (especially the investment fraternity and the financial advisors and media who assist it) believe. The ongoing long run trend for rising US Treasury yields (see the UST 10 year note rate) evidences this trend of sustained and increasing US inflation. Inflation will force the Fed to weaken its longstanding tenacious yield repression program.
Demand for credit relative to its supply of course affects US Treasury and other interest rate levels and trends. America’s federal debt situation of enormous budget deficits (massive spending) probably will continue to propel both inflation and UST yields higher.
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American Inflation and Interest Rates- Painting Pictures (5-4-21)
“Honest to goodness, the tears have been falling
All over this country’s face
It was better before, before they voted for What’s-His-Name
This was supposed to be the new world…
All we need is money
Just give us what you can spare”. X the Band’s 1983 song, “The New World”
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Financial observers often seek to ascertain a relationship between apparent trends involving stock, interest rate, currency, and commodity marketplaces. This involves subjective historical reviews as to the extent to which the price and time trends (patterns) of two or more marketplaces tend to converge or diverge. Some viewpoints may indicate that trends for a given marketplace tend to lead (or lag) those of another. For example, people investigate linkages between two United States technology stocks. Or, traders and analysts seek to establish the relationship (extent of convergence or divergence) between emerging marketplace stocks “in general” and the S+P 500.
The marketplace arenas studied are not necessarily the same. To what extent do significant increases in United States Treasury interest rates precede (lead to) eventual noteworthy declines in the S+P 500?
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Since cultural (subjective) perspectives, arguments, predictions, and actions regarding marketplace and other phenomena and their interrelations diverge (and converge) to various extents over time, emerging stock marketplaces “as a whole” and the S+P 500 do not necessarily trade identically or even very closely in price direction and timing terms. Of course marketplace history is not marketplace destiny, either completely or partially. Relationships within and between financial fields can shift or transform, sometimes dramatically. And these stock theaters have their own supply/demand situations and intertwine with other financial realms and assorted variables in diverse ways. However, over the past couple of decades, important price highs (and lows) and related trend shifts for the overall emerging stock marketplace and the S+P 500 have tended to occur at around the same time, sometimes within a few days, generally within a couple of months.
In first quarter 2020, prices for emerging stock marketplaces began to fall shortly before the S+P 500. They thereafter collapsed and reached a major bottom “together” in late March 2020. Over subsequent months, ferocious bull moves emerged in both districts.
However, since around early March 2021, prices for emerging stock marketplaces have diverged somewhat from the S+P 500. The emerging stock theater stands around seven percent beneath its mid-February 2021 top, whereas the S+P 500 has marched relentlessly to record heights. Will this divergence persist for an extended period?
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Financial Marketplaces- Convergence and Divergence Stories (4-6-21)
“The past is never dead. It’s not even past.” “Requiem for a Nun” (Act 1, Scene 3), by William Faulkner
CONCLUSION
Faith in the appealing proverb “don’t underestimate or fight the Federal Reserve Board” has become increasingly deep and widespread in recent years, and especially within stock investment congregations. This dogma underlines that mighty guardian’s powers and its willingness to employ them, not only to assist and even rescue the economy, but also to eventually halt substantial stock declines in the S+P 500. The Fed’s past successes have built and reinforced reliance by economic players as well as political leaders on it.
The Fed has other central banking allies in its noble efforts. Also, at times efforts by national political leaders in the United States and elsewhere, when dangerous and terrifying situations threaten, enact major assistance packages (such as avalanches of deficit spending).
If underestimation of the Fed is possible, then so is overestimation of it. The Fed of course is not the only performer on the economic and political stage, and marketplace and other cultural conditions can evolve, change significantly, or become extreme. Therefore, the great confidence in the Fed nowadays has an implicit corollary. Fed devotees and marketplace watchers “should not overestimate the Fed and its powers.” For example, the revered Fed probably does not have unlimited power to keep Federal Funds rates and United States Treasury yields repressed.
Not only may inflation propel interest rates higher than currently expected or desired. So can massive deficit spending and huge debt, especially if created by the US federal government.
The major yield increase trend in the United States Treasury marketplace (enlist the UST 10 year note as a benchmark) which commenced with 3/9/20’s .31 percent low probably will continue. A notable target for the UST 10 year is around the 3.26 percent top attained on 10/19/18. Even if over the so-called long run the UST 10 year yield does not eventually ascend to 2007’s seemingly ancient high (5.32pc; 6/13/07), attaining such an elevation is considerably more probable than most marketplace preachers proclaim.
Marketplace history of course is not marketplace destiny. Assorted variables in addition to interest rate levels and trends influence stock prices. However, many times over the past century, significantly increasing United States interest rate yields have preceded a noteworthy pinnacle in and the start of bear trends for key stock marketplace signposts such as the Dow Jones Industrial Average and S+P 500. The yield rise in the UST 10 year note since its March 2020 bottom probably signals that the S+P 500 has established a significant top or soon will do so.
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Truth and Consequences- Rising American Interest Rates (3-9-21)
“The Great Game: the Story of Wall Street….An original two-hour documentary event that spans the 200-year history of American capitalism.” NYTimes (over 20 years ago; 5/28/00; p13) regarding a CNBC television program broadcast 5/29/00
CONCLUSION
Financial marketplace investors, speculators, traders, hedgers, analysts, risk managers, and media have enjoyed, endured, or suffered an adventurous 2020! Substantial ongoing political and other cultural divisions and associated conflicts in the United States and elsewhere intertwined with and often enhanced the marketplace circuses. The coronavirus pandemic and the feverish economic (political) responses to its actual and potential ravages of course magnified agitation within marketplace playgrounds.
What are several key existing marketplace patterns worth watching by marketplace players as 2020’s finish line nears and calendar 2021’s competitions beckon?
First, prices in the S+P 500 and other benchmark US and global stock indices, lower-grade interest rate instruments within corporate fields ( and low-quality foreign dollar-denominated sovereign debt), and commodities “in general” often have risen (or fallen) at roughly the same time. They generally have climbed in significant bull ascents (and fallen in noteworthy bear retreats) “together”. These entangled domains thus have alternatively reflected joyous bullish enthusiasm as “investors” and other traders hunted for adequate return (“yield”), and scary bearish scenes as they scrambled frantically for safety. Whether the existing bull trend for American stocks in general (use the S+P 500 as a benchmark) persists is especially important for these connected landscapes.
Despite strenuous yield repression by the Federal Reserve Board and its central bank teammates, United States Treasury yields, using the UST 10 year note as a signpost, probably have commenced a long run increase. Despite widespread global desires for a sufficiently feeble home currency to promote economic recovery and growth, and the related willingness to engage in competitive depreciation to accomplish this, spring 2020 unveiled the onset of substantial US dollar weakness. Although the US dollar (using the Fed’s “Broad Dollar Index” as the yardstick) already has dived about ten percent from its peak, its long run pattern probably will remain down.
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Games People Play- Financial Arenas (12-1-20)
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