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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Many observers point to booming corporate profits as a key reason for the splendid rally in United States stocks since March 2009’s dreary depth. The Federal Reserve’s generous highly accommodative monetary policy since late 2008, highlighted by sustained rock-bottom interest rates (yield repression) and several rounds of spectacular money printing, nevertheless coincides with this climb in corporate profits and the marvelous S+P 500 advance.
Many marketplace clairvoyants, including quite a few regulators, worry little about borrowing levels (and leverage) in the context of the wonderful ascent in American stocks. However, they should.
Soothsayers should examine New York Stock Exchange (NYSE Euronext) margin debt levels alongside the timing of Federal Reserve policy innovation and very important trend change points in the S+P 500. In recent years, pinnacles of NYSE margin debt have occurred close in time to those in US stocks; valleys in that debt roughly have coincided with S+P 500 troughs. Glancing back to the 2000 stock top and the depths of 2002/2003 shows a similar pattern. For the recent bull trend in American since first quarter 2009, underscore the Fed’s policy actions (and a couple
of European Central Bank ones) alongside these turning points in margin debt and American stocks. The most recent statistics (for January 2013) and the probable current margin debt levels are very elevated from the historical perspective. They consequently should concern marketplace watchers, even if many sentinels retain faith that there remains scope for even more margin debt and that lax Fed policies and booming corporate profits will persist.
Anyway, survey NYSE margin debt, Fed actions, and S+P 500 trends together. As in the joyous rally to the highs in US equities in 2007-08, judging from the NYSE margin debt statistics, a fair amount of leverage probably has encouraged the bull move in US equities since the March 2009 lows. That includes the recent S+P 500 spike since June 2012. The friendly Fed and its devoted allies probably deserve a hefty share, though not all, of the credit for these margin borrowing leaps since the equity abyss of first quarter 2009. And especially if US Treasury yields are low, why not search enthusiastically for yield (return) in US stocks?
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Margin Debt, Fed Policy, and Recent American Stock Price Trends (3-18-13)
The Federal Reserve and other central banking all-stars around the globe have teamed up. In varying fashions, and frequently led by the Fed, they vigorously practice accommodative strategies to tackle economic weakness and to spark and sustain economic recovery.
The Fed’s trusty playbook, for example, currently insists on the wisdom of keeping policy (Federal Funds) interest rates pinned to the floor. Much of the UST yield curve offers negative returns relative to inflation. The Fed thus deliberately encourages some American and other yield hunters to avoid, diversify away from, or leave US Treasury debt in search of better returns elsewhere. Many other central banks link arms with the Fed under the low interest rate banner.
Thus many players race into or cart more funds into other debt arenas.
Keep focusing primarily on America for a moment. Those yearning for return trot into domains beyond the interest rate one. If US government yields are going to stay at exceptionally low levels into 2014, why not give stocks an even closer look! Besides, even though not all equities pay dividends, some do. The unending search for yield (return) inspires pilgrims to venture into (or more robustly into) stock marketplaces (use the S+P 500 as a benchmark). Also, surely people have not forgotten the anthem that US stocks are an excellent long run investment.
What are investment, speculation, and gambling? In stocks, interest rates, real estate, and elsewhere, investment rhetoric encourages and often persuades people to embrace a given investment perspective and to act accordingly. Since investment generally is associated with notions such as reasonableness, prudence, and goodness, many people race to be investors (join some investment team) and wear the honored investment crown. And those promoting particular financial instruments compete fiercely to attach an investment label of some sort on what they want others to buy and hold. Thus in recent years, the commodity world has found numerous cheerleaders for concepts that commodities (“in general”) are (can be) an investment, an alternative investment, or an asset class. Think also of the potential diversification benefits for your portfolio of stocks and interest rate holdings. In any event, various assorted commodity investment advocates have won quite a few victories for their ownership cause.
Suppose groundskeeping central bankers mow down the yields of government securities to very low nominal levels (and especially suppose those returns are negative relative to inflation). Those central bankers thereby encourage “investors” in government debt (and those with deposits at bank and money market funds) to seek “investment” returns elsewhere. So why not entertain commodities as a marvelous investment buying opportunity?
FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Commodity Playgrounds- Chasing Returns (2-21-12)
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