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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FINANCIAL AGITATION ©Leo Haviland October 3, 2023

RISING AMERICAN INTEREST RATES, FALLING US STOCKS

Listen to “Agitation”, jazz music from Miles Davis.

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Let’s focus on the American horizon and the exciting US Treasury and S+P 500 marketplaces. 

Since around spring 2020, and particularly since August 2022, and especially in recent months, the UST marketplace has suffered noteworthy capital destruction due to falling prices. A glorious bull move in the  S+P 500 followed 3/23/20’s dismal bottom at 2192. The S+P 500 thereafter exploded upward, more than doubling, to establish a thrilling record high on 1/4/22 at 4819. After an agonizing bear slump to October 2022’s bottom, a significant joyful stock rally ensued. The S+P 500 approached January 2022’s peak, reaching a summit on 7/27/23 at 4607. The S+P 500 probably has commenced a bear trend, though its slump from its July 2023 peak has been moderate thus far. 

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“Long Run Historical Entanglement: US Interest Rate and Stock Trends” (7/6/23) concluded: “Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span. The arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.”

“Given the historic pattern in which UST [US Treasury; focus on the UST 10 year note] yield increases “lead” to peaks in key American stock benchmarks such as the S+P 500, do signs of a noteworthy rising yield trend exist on the interest rate front? Yes.” And “the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak will probably occur relatively soon, probably within the next few weeks or months. However, even if the S+P 500 continues to climb, it probably will not exceed its January 2022 peak by much if at all.” 

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The UST 10 year note yield increased since 3/9/20’s major bottom at .31 percent, accelerating upward from 8/4/21’s 1.13pc to 6/14/22’s 3.50 pc. The S+P 500 peaked during this rising yield trend on 1/4/22 at 4819. The UST 10 year note yield, after sliding down to 8/2/22’s 2.51 percent resumed its yield ascent. It made another important interim yield low with 4/6/23’s 3.25pc. With 8/22/23’s 4.37 percent, the UST 10 year pierced 10/21/22’s 4.34 percent high, achieved around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. The UST 10 year note price kept falling, and the UST yield reached 4.81 percent on 10/3/23. A dramatic UST 10 year yield climb over five percent and toward 6/13/07’s 5.32 percent Goldilocks Era summit would further unnerve many UST (and stock) holders. 

In some circumstances, rising interest rates can indicate or portend adequate (good) real GDP growth, and thus from some perspectives (up to some point), increasing UST yields (falling debt prices) are designated as “good”. And investors in interest rate instruments of course want a decent (and real) return relative to inflation, so rising yields have been a blessing for many of them, at least to some extent. 

However, many institutions and individuals bought low-yielding UST during the Fed’s yield repression era. Their interest income during the past couple of years likely fell beneath inflation heights represented by the consumer price index. Many of these interest rate instrument owners probably have suffered some noteworthy mark-to-market damage to their principal; so have numerous other recent buyers given the rising rate trend of recent months. Nowadays, the average maturity of total outstanding marketable UST debt is about six years. 

From the price perspective, review the CME’s UST 10 year note (nearest futures continuation contract) as a rough guide to the capital consequences of recent trends. (In practice, this contract sometimes prices relative to deliverable grade instruments with a maturity somewhat different from ten years.) The UST 10 year peaked at about 140-22 on 3/9/20. Its recent low is 10/3/23’s 106-20 (as of 300pm EST), an eviscerating 24.2 percent tumble (and beneath 10/21/22’s 108-26). From 8/2/22’s interim price high of 122-02, 10/3/23’s level drops 12.6 percent. Excitement (emotions) will increase if the price heads closer to 104-00 (6/13/07 price bottom 104-04; 6/28/06 low 104-01). 

The CME UST five year note’s price peak (nearest futures continuation) occurred at about 126-08 on 8/7/20 (126-07 on 1/8/21). It nosedived 17.2 percent to 10/3/23’s 104-18 (under 10/21/22’s roughly 105-15). An attack on price support around 103-00 (7/5/06; 103-02 on 6/13/07) will boost anxiety. 

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In America, a substantial amount of household net worth resides in debt securities (not only in US Treasuries) and equity shares (not just the S+P 500 playground). Read the fine print of the Federal Reserve’s Z.1, “Financial Accounts of the United States” (9/8/23; see Tables B.101, B.101.e, and B.101.h). As of end 2Q23, total assets for households and nonprofit organizations combined were about $174.4 trillion (net worth was $154.3 trillion), the great majority of which resided in the household domain. As of end 2Q23, for households and nonprofit organizations combined, debt securities at market value were about $10.9 trillion, or around 6.2 percent of total assets (9.3pc of total financial assets). Equity shares in 2Q23 had a value of about 44.7 trillion dollars, or 25.6 percent of total assets (almost 38.3pc of total financial assets). 

Consumers represent about two-thirds of United States GDP. If they suffer substantial wounds to their net worth, to what extent will they slash their spending? 

Many Wall Street and Main Street stock investment communities preach the wisdom of buying good (or high) quality American stocks for some version of the misty long run. To what extent are such stock bulls married to their positions? 

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For the twenty-two US stock marketplace “bear” trends summarized in “US Stocks Over the Long Run: Bear Marketplace History” (8/4/23), the average percentage decline from the peak to the trough is about 33.9 percent. The average duration of the descent from the summit to the bottom is approximately 14.2 months. 

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Financial Agitation (10-3-23)

MARKETPLACE CROSSROADS © Leo Haviland September 4, 2023

“I have been passing my life in guessing what I might meet with beyond the next hill, or around the next corner.” Wellington, the British military commander who defeated Napoleon in the battle of Waterloo (“Dictionary of Military and Naval Quotations”, ed. Robert Heinl, Jr.)

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OVERVIEW

Cultural observers differ in their subjective perspectives, arguments, and conclusions regarding economic phenomena, including the prices of and variables relating to interest rate, stock, foreign exchange, commodity, real estate, and other marketplaces. They consequently develop and express a variety of personal views as to whether a given financial price or price relationship level (or trend), or an economic (commercial; business) or political situation substantially relevant to them, has reached or soon will attain a very important point or stage. Thus figuratively speaking, a marketplace (its level and trend) or an economic (or political scene) is or shortly will be at a crossroads. For example, the S+P 500, inflation, Federal Reserve policy, or the American federal fiscal situation can arrive at a crossroads. 

Looking forward, people ask “what will happen from here?” People devotedly select, review, and weigh information to ascertain (develop personal opinions regarding) probabilities for a range of potential outcomes in the aftermath of this key situation. They differ in their views of “the” past and “the” present. In their forecasting (risk evaluation) process, some sentinels analyze the distance and duration a given price move has traveled or eventually (potentially) may move. In various fashions, prophets assess perceived interrelationships between interest rate, stock, foreign exchange, and other marketplaces. 

Hence competitive financial arenas fill with diverse and enthusiastic bulls and bears (and neutral players) talking and acting in a variety of ways. Arrays of investors and speculators and traders and hedgers and risk managers ardently promote and behave according to competing viewpoints and probability assessments. Typically, each player views its own subjective analysis and outlook as “reasonable”, and probably at least as reasonable (intelligent, rational) as that of others. Consequently, we hear fervent rhetoric and see artful pictures relating not only to probabilities, but also patterns and trends, support and resistance, critical levels and turning points, breakout and breakdown, continuation and reversal, convergence and divergence, and lead and lags. 

Many believe that some cultural situations are more difficult to predict than others. In any case, imagine future hypothetical (potential) events regarding a given marketplace (such as the S+P 500 or the United States Treasury 10 year note) or a particular economic or political battlefield (such as “the” US or global economy; American political wars). For some particular potential outcomes (including a related process creating it), many marketplace warriors will label the result as unlikely or very unlikely or unusual (against the odds; having little chance), or even unreasonable, irrational, extraordinary, incredible, unbelievable, astounding, surprising, crazy, impossible, and so forth. 

Nevertheless, cultural history, including that of marketplaces, of course evidences that what many (or even the great majority of) clairvoyants viewed as very unlikely to occur indeed has happened. So in practice, many scouts look out for and consider so-called “tail risks” (subjectively highly unlikely outcomes) to some degree. A trader once said: “In commodities, the impossible happens at least once a year.” Besides, what will be highly unlikely or surprising to one cultural observer may not be so to another. 

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Let’s review several financial marketplaces which appear to be at or near a crossroads. 

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Marketplace Crossroads (9-4-23)

US STOCKS OVER THE LONG RUN: BEAR MARKETPLACE HISTORY © Leo Haviland, August 4, 2023

“It’s déjà vu all over again!”, declared Yogi Berra, a famous baseball star.

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OVERVIEW AND CONCLUSION

Given the great significance of the United States within the global economy, both Wall Street and Main Street spend much attention and energy focusing on the American economic scene. Benchmark American stock indices such as the S+P 500 and Dow Jones Industrial Average to some extent probably reflect the overall health of and potential for the American economy. 

United States stock marketplace trends and phenomena intertwine with those of other global stock arenas. Prices and trends for (and assorted other economic, political, and social variables influencing) US signpost stock indices such as the S+P 500 and Dow Jones Industrial Average interrelate with those of key American and global interest rate, currency, commodity, real estate, and other economic domains. History reveals that these cultural relationships can and do change, sometimes slowly, sometimes rapidly. Convergence and divergence (lead/lag) patterns between marketplaces can and do shift or transform. 

Price levels and trends for these key American equity marketplaces therefore attract and sustain widespread and domestic international attention. 

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US interest rate, dollar, commodity, real estate, and other marketplace trends entangle with and influence American stock trends. 

“Long Run Historical Entanglement: US Interest Rate and Stock Trends” (7/6/23) concluded: “Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span. The arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.”

“Given the historic pattern in which UST [US Treasury; focus on the UST 10 year note] yield increases “lead” to peaks in key American stock benchmarks such as the S+P 500, do signs of a noteworthy rising yield trend exist on the interest rate front? Yes.” And “the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak probably will occur relatively soon, probably within the next few weeks or months. However, even if the S+P 500 continues to climb, it probably will not exceed its January 2022 peak by much if at all.” 

The UST 10 year note yield broke through 3/2/23’s 4.09 percent interim high with 8/3/23’s 4.20 percent high. It thus is approaching 10/21/22’s 4.34 percent top, attained around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. 

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Given the importance of price trends in widely watched US equity indices such as the S+P 500 and Dow Jones Industrial Average, stock and other marketplace players and observers should review and assess long run bear (and bull) marketplace history for those American benchmarks. 

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US Stocks Over the Long Run- Bear Marketplace History (8-4-23)

LONG RUN HISTORICAL ENTANGLEMENT: US INTEREST RATE AND STOCK TRENDS © Leo Haviland July 6, 2023

“The past is never dead. It’s not even past.” “Requiem for a Nun” (Act 1, Scene 3), by William Faulkner

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CONCLUSION AND OVERVIEW

Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span. The arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle. 

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The US Treasury 10 year note yield established a major bottom at .31 percent on 3/9/20. Its sustained yield increase thereafter, and especially from 8/4/21’s 1.13 percent, helped lead to the major high in the S+P 500 on 1/4/22 at 4819. After an extended span of engaging in yield repression (and money printing), the Federal Reserve finally recognized that inflation was not a temporary or transitory phenomenon and began raising rates. The timing of a critical interim UST 10 year note yield high, 6/14/22’s 3.50 percent, extended well the stock marketplace peak, as did the UST’s second summit at 4.34 percent on 10/21/22. Arguably, an only gradual reduction of yield repression while immersed in an inflationary environment was one factor for the extensive duration of the yield increase after the S+P 500’s January 2022 crest. In any event, the S+P 500 tumbled sharply in its bear trend, reaching a major bottom on 10/13/22 at 3492, close in time the UST’s high (as well as the autumn 2022 peak in the US dollar). For a bear trend from the long run historical perspective, that nine and one-half months and 27.5 percent decline in the S+P 500 was modest in time and distance terms. 

The S+P 500’s rally since October 2022’s valley has carried it to within about 7.5 percent of its glorious January 2022 summit. Given the historic pattern in which UST yield increases “lead” to peaks in key American stock benchmarks such as the S+P 500, do signs of a noteworthy rising yield trend exist on the interest rate front? Yes. 

First, the UST 10 year note made several interim lows around 3.30 percent in first half 2023, with yields escalating moderately from 4/6/23’s 3.25 percent. The subsequent UST 10 year high since then is 7/6/23’s 4.08 percent (as of 1200 noon EST on 7/6/23). In addition, the existence of only a modest yield decline from October 2022’s 4.34pc high indicates that the pattern of rising UST 10 year note (and other UST) yields which emerged in March 2020 and accelerated thereafter probably remains intact. Also, core inflation remains persistently above the targets of the Fed and other central bankers. US unemployment remains low. The Fed and other leading central bank luminaries have hinted strongly at further increases in policy rates, and they appear determined (in the absence of an economic crisis) to maintain their tightening schemes for an extended time period. Such boosts in the Federal Funds level (and thus in short term UST instruments) probably will push the UST 10 year yield higher. Moreover, monumental long run federal debt problems confront America; all else equal, huge credit demand tends to boost interest rates. 

In addition, the UST 10 year note’s major yield bottom in March 2020 began from a peak around fifteen percent almost 40 years before, in 1981. That seemingly ancient UST yield history does not mandate the development of a substantial yield increase over a very long time span for the ensuing vista commencing in 2020. However, by comparison, a yield increase of about four percent in about two and one-half years, from March 2020 to October 2022, is moderate but not extraordinary, especially given the Fed’s yield repression history (and related money printing) and the developing (and current) inflationary situation. From this perspective, an eventual climb in the UST 10 year note yield above October 2022’s 4.34 percent high is probable. 

Therefore, the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak probably will occur relatively soon, probably within the next few weeks or months. However, even if the S+P 500 continues to climb, it probably will not exceed its January 2022 peak by much if at all. 

Why might the S+P 500 remain fairly strong in the near term? First, the UST 10 year yield increase since April 2023 has been only moderate. Moreover, in America, and in general for other advanced nations, government yields relative to consumer price inflation remain low or negative. Also, US corporate earnings optimism for 4Q2023 and thereafter is strong. In addition, we live in a nominal world, and quoted stock prices obviously belong in that realm. Real GDP growth can be disappointing. However, all else equal, rising nominal GDP, increasing money supply, and higher nominal prices for goods and services in general will tend to be reflected in higher nominal corporate earnings and stock prices. Stock share buybacks have been substantial. US consumer confidence is fairly high (June 2023 at 109.7, 1985=100; Conference Board). Sales prices of existing single-family homes, after peaking in June 2022, have rallied since January 2023 (National Association of Realtors). 

The UST 10 year yield currently is challenging 3/2/23’s 4.09 percent interim high. That perhaps will be sufficient to notably weaken the S+P 500. However, the UST 10 year note yield probably will need to approach or exceed 10/21/22’s 4.34 percent top to induce a very substantial fall in the S+P 500.

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Long Run Historical Entanglement- US Interest Rate and Stock Trends (7-6-23)-1