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 CAN’T GET NO SATISFACTION: CULTURAL TRENDS AND FINANCIAL MARKETPLACES © Leo Haviland July 13, 2022

In “Satisfaction”, The Rolling Stones sing: “I can’t get no satisfaction.”

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CONCLUSION AND OVERVIEW

“Economic” confidence and satisfaction levels and trends interrelate with patterns of and anticipations regarding “economic” performance. These variables entangle with and influence price trends in stocks and other financial marketplaces. Thus consumer (Main Street) confidence and similar measures can confirm, lead (or lag), or be an omen for future movements in GDP, inflation, the S+P 500, interest rates, and so on.

Declines in American economic confidence in recent times confirm deterioration in the nation’s (and global) economic condition. The severity of those confidence slumps probably warns of further ongoing economic challenges in the future. These looming difficulties include not only the perpetuation of relatively high inflation for quite some time, but also slowing and perhaps even falling GDP growth. Since America is a leading economic nation in the intertwined global economy, what happens there substantially influences and reflects economic performance elsewhere.

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Regarding and within cultural fields, definitions, propositions, interpretations, arguments, and conclusions are subjective (opinions). So-called “economic” (financial, commercial, business) arenas and analysis regarding them are not objective (scientific). In any case, as they are cultural phenomena, economic realms are not isolated from “political” and “social” ones. They interrelate with them, and sometimes very substantially.

Evidence of substantial (and in recent times, increasing) “overall” (including but not necessarily limited to political or economic) dissatisfaction within America are not unique to that country. However, since overall and political measures of declining confidence within and regarding the United States both include and extend beyond the economic battleground, at present they consequently probably corroborate current and herald upcoming economic troubles (economic weakness; still rather lofty inflation) for the US.

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Marketplace history is not marketplace destiny, either entirely or even partly. Relationships between marketplaces and variables can change, sometimes dramatically. Nevertheless, keep in mind that if prices for assorted “search for yield (return)” marketplaces such as stocks (picture the S+P 500) and lower-grade debt can climb “together” (roughly around the same time), they also can retreat together.

“Runs for cover” in recent months increasingly have replaced “searches for yield” in the global securities playground by worried “investors” and other nervous owners. Price declines in American and other stock marketplaces have interrelated with higher yields for (price slumps in) corporate debt securities and emerging marketplace sovereign US dollar-denominated notes and bonds.

The devastating price collapse in Bitcoin and many other cryptocurrencies surely has dismayed many yield-hunters on Main Street.

Declines in American confidence and satisfaction assist and confirm the price falls in recent months in the S+P 500 and other “search for yield” playgrounds such as corporate and low-grade sovereign debt. Thus confidence destruction has interrelated with capital destruction (loss of money) by “investors” and other owners) in stock and interest rate securities marketplaces. From the historical perspective, slumps in as well as very low levels for some of the confidence (“happiness”; optimism) indicators probably signal further price drops in the S+P 500 and interconnected search for yield marketplaces.

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The beloved Federal Reserve and its central banking friends finally recognized that consumer price inflation is not a temporary or transitory phenomenon and have elected to raise policy rates (end, or at least reduce, yield repression) and shrink their bloated balance sheets. Yet inflation probably will not drop significantly for some time. Besides, how much faith exists that the Federal Reserve will (or can) control and even reduce consumer price inflation anytime soon? How much trust should we place in the Fed’s abilities? The Fed helped to create inflation (and not just in consumer prices, but also in assets) via its sustained massive money printing and ongoing yield repression, and the Fed did not quickly perceive the extent and durability of consumer price inflation.

Long run history shows that significantly rising American interest rates for benchmarks such as the US Treasury 10 year note lead to bear marketplaces in the S+P 500.The US stock marketplace has declined significantly since its January 2022 peak. Home price appreciation, a key factor pleasing many consumers, probably will decelerate, and perhaps even cease. The Ukraine/Russia war continues to drag on. Despite recent declines from lofty heights, prices for commodities in general remain elevated from the pre-war perspective. Global government debt is substantial, and fearsome long-run debt problems for America and many other countries beckon. American and international GDP growth has slowed. Stagflation and even recession fears have increased. The coronavirus problem, though less terrifying, has not disappeared.

Therefore many American Main Street confidence indicators probably will decline, or at least remain relatively weak, over at least the next several months.

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We Can't Get No Satisfaction- Cultural Trends and Financial Marketplaces (7-13-22)

GIMME SHELTER (AND FOOD AND FUEL) © Leo Haviland June 5, 2022

In “Gimme Shelter”, The Rolling Stones sing:
“Ooh, a storm is threatening
My very life today
If I don’t get some shelter
Ooh yeah I’m gonna fade away”

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CONCLUSION AND OVERVIEW

Not long after the end of the 2007-09 global economic disaster, American home prices embarked upon a sustained and substantial bull move. Economic growth, population increases, the American Dream’s ideology praising home ownership, widespread faith that a home represents a long run store of value, and tax incentives for home acquisition encouraged that rally. In recent years, the Federal Reserve’s sustained interest rate yield repression and extravagant money printing policies also boosted the consumer’s ability (reduced the cost) and inclination to buy homes. Homes, like stocks and corporate bonds and even many commodities, became part of the “search for yield” universe. The dramatic home price rally has not been confined to America.

The international coronavirus epidemic which emerged around first quarter 2020, made working in the office (or learning at school) appear dangerous. This inspired a ravenous appetite to acquire homes (or more space or quality at home) to escape health risks, encouraging the latest stages of the bullish house trend. Both central bankers and governments acted frantically to restore and ensure economic recovery and growth. Thus housing prices, benefited not only by the beloved Fed’s easy money policies, but also from monumental federal deficit spending.

Moreover, given the acceleration and substantial levels of American and international consumer price inflation over the past year or so, the general public increasingly has seen home ownership as an “inflation hedge”, not just as an indication of American Dream success and “the good life”.

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Over the next several months, the intersection of the current major trend of increasing American and other interest rates alongside a gradually weakening United States (and worldwide) economy probably will significantly reduce the rate of American home price increases. Fears that a notable slowdown (or stagflation), and maybe even a recession, have developed. Even the ivory-towered Federal Reserve finally espied widespread and sustained inflation. So central bankers nowadays are engaging in monetary tightening. Further rounds of mammoth government deficit spending currently are unlikely. Public debt in the US and elsewhere rose immensely due to the huge government expenditures related to the coronavirus pandemic and the related quest to create and sustain economic recovery. As the US November 2022 election approaches, that country is unlikely to agree anytime soon on another similar deficit spending spree to spark economic growth. Some signs of moderation in housing statistics hint that home price increases probably will slow and that prices will level off. Thus the peak in American home prices will lag that in the S+P 500.

In regard to the present robust bull price pattern for US homes, there is a greater probability than most audiences believe that US home price increases will slow substantially. Nominal house prices eventually may even fall some. It surely is unpopular (and arguably heretical) nowadays to suggest that American and other national house prices eventually may decline. Yet history, including the passage from the Goldilocks Era to the global economic crisis period, demonstrates that home values, like other asset prices, can fall significantly.

“Runs for cover” increasingly are replacing “searches for yield” in the global securities playground by “investors” and other owners. Price declines in American and other stock marketplaces have interrelated with higher yields for (price slumps in) corporate debt securities and emerging marketplace US dollar-denominated sovereign notes and bonds.

Further declines in US consumer confidence probably will take place. Sustained lofty consumer price inflation (encouraged not only by core CPI components such as shelter, but also by high levels in food and fuel prices) distress consumers. At some point, generalized inflation accompanied by higher US Treasury and mortgage yields can slash home buying enthusiasm, especially if home-owning affordability tumbles. Although history shows that price and time relationships for the S+P 500 and US home prices are not precise, and though equities and houses have different supply/demand situations, stocks and home prices roughly “trade together” over the misty long run. In addition, substantial declines (and increases) in American consumer confidence intertwine with (confirm) major trends in the S+P 500. Consumer confidence has been slipping for several months; the S+P 500 probably established a major peak in early January 2022, and its decline of around twenty percent fits the conventional definition of a bear market.

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Gimme Shelter (and Food and Fuel) (6-5-22)

RUNNING FOR COVER: FINANCIAL MARKETPLACE ADVENTURES © Leo Haviland May 3, 2022

A character in the film “It’s a Mad Mad Mad Mad World” reasons: “Now look, let’s be sensible about this thing. There’s money in this for all of us. Right? There’s enough for you, there’s enough for you, and for me, and for you, and there’s enough for…” [They all race to their cars]. (Stanley Kramer, director)

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CONCLUSION

Sustained rising United States Treasury interest rates and a strong US dollar have played critical roles in creating the January 2022 price peak for and subsequent declines in the S+P 500. Increasing yields not only in America but also within emerging marketplaces, as well as the powerful dollar, assisted the construction of the earlier high (around February 2021) for emerging marketplace stocks in general. The ongoing UST and other yield climbs of recent months alongside the strong dollar have reestablished long run price and time convergence between the S+P 500 and emerging marketplace equities. The major trend toward higher US and other rates, alongside the high US dollar, and interrelating with the downward trends in the S+P 500 (and other advanced nation stocks) and emerging marketplace equities, probably have created summits for commodities “in general”.

The price spike in commodities (enlist the broad S&P GSCI as a benchmark) beginning in December 2021/early 2022 of course underscored inflationary fears, which assisted the rise in interest rates, thus helping to precipitate down moves in the S+P 500 and other stock marketplaces. However, the rising UST (and international) yield trend and strong dollar situation preceded the Russian invasion of Ukraine in late February 2022.

For a long time, yield repression by the Federal Reserve and its central banking friends created negative real returns relative to inflation for US Treasury and many other global debt securities. This very easy money policy (assisted by gigantic money printing/quantitative easing) and enormous US (and other) government deficit spending (especially after the advent of the coronavirus pandemic in early 2020) generated enthusiastic quests for yield (adequate return) by investors and other traders in stocks, lower-quality debt instruments (such as corporate and emerging marketplace sovereign bonds), and commodities. This helped to produce monumental bull trends in these playgrounds. Wall Street and the financial media eagerly promoted the reasonableness of these yield hunts. The sleepy Fed watchdog and other virtuous central bankers were long complacent about inflationary dangers, labeling inflationary signs as temporary, transitory, the result of supply bottlenecks, and so forth. Nowadays, these more vigilant guardian bankers, alarmed by the highest inflation in several decades, have commenced a rate-raising campaign.

Thus the sunny “search for yield” landscape for the S+P 500 and associated stock, debt, and many commodity marketplaces has darkened. An anxious “run for cover” liquidation of assets by many investors and other owners probably has been underway. Compared to the time just prior to the 2020 coronavirus pandemic (and the 2007-09 global economic crisis), the Federal Reserve (and other central bankers) and the American and other national governments probably have much less ability to readily rescue the S+P 500 and other “search for yield” marketplaces.

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Previous essays noted that the S+P 500 probably peaked on 1/4/22 at 4819. Looking forward, the S+P 500 probably will venture significantly beneath 5/2/22’s 4063 low. The bear trend in emerging stock marketplaces will continue. Over the long run, given the American (and global) inflation and debt situation, the yield for the US Treasury 10 year note probably will ascend above its recent high around three percent, although occasional “flights to quality (safe havens)” and thus interim yield declines may emerge. Remember that the dollar rallied from April 2008 to March 2009, alongside the S+P 500’s collapse from its important mid-May 2018 interim high (S+P 500 major high October 2007) to its major bottom in March 2009. However, and although it is a difficult call, the current bull trend for the United States real Broad Dollar Index probably will attain its summit in the near future. Commodities in general (spot; nearest futures basis) probably made a major high in early March 2022 and will continue to retreat, although there may be brief price leaps above previous tops in “have-to-have” (very low inventory) situations.

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Running for Cover- Financial Marketplace Adventures (5-3-22)

MARKETPLACE TRENDS AND ENTANGLEMENTS © Leo Haviland April 4, 2022

Bob Dylan says in “The Times They Are A-Changin’”:
“There’s a battle outside and it is ragin’
It’ll soon shake your windows and rattle your walls
For the times they are a-changin’”

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CONCLUSION

Marketplace history of course is not marketplace destiny, whether for one financial realm or the relationships between assorted domains. Although traditions and the analytical time horizon and the scope of allegedly relevant variables remain critical, the cultural past in its major fields such as economics and politics need not repeat itself, either completely or even partly. Yet sometimes current and potential economic and other cultural situations apparently manifest sufficient important similarities to “the past” so that many observers can perceive patterns helping to explain “the present” and to forecast future probabilities. Thus from the standpoint of many subjective perspectives, marketplace history (like other history) often does recur to a substantial extent. Such alleged historical similarity, as it is not objective (scientific), also consequently permits a great variety of competitive storytelling about it.

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The 2022 landscape for the United States dollar, the US Treasury 10 year note, commodities “in general”, and the S+P 500 resembles that of around early 2020. The United States dollar currently hints that it may have established an important peak or that it will soon do so. The real Broad Dollar Index’s height (see the Federal Reserve Board, H.10) borders its March/April 2020 highs. Arguably commodities in general began a notable decline in early 2022. Using the broad S&P GSCI as a benchmark, the spot/physical/cash (as well as the nearest futures continuation) commodities complex (including the key petroleum arena) peaked in early January 2020 alongside a strengthening US dollar. A pattern of increasing US Treasury yields (take the 10 year note as the signpost) preceded the early 2020 stock pinnacles (S+P 500 on 2/19/20; emerging marketplaces in general on 1/13/20) as well as the commodities one. Marketplace chronicles unveil a significant yield increase in the UST 10 year note (and other important debt security benchmarks) prior to (and following) the S+P 500’s very significant high (perhaps a major top) 1/4/22 at 4819. As in 2020, the 2022 highs in stocks and commodities entangled with both rising yields and a strong dollar.

In summary, although their future levels and trends admittedly are cloudy and uncertain, what are probable trends for these marketplaces? The United States real Broad Dollar Index probably has attained its pinnacle or will do so in the near future. Commodities in general (spot; nearest futures basis) probably made a major high in early March 2022 and will continue to retreat. Although it is a difficult call, the S+P 500 likely peaked in January 2022, and it probably will venture beneath late February 2022’s 4115 low. Over the long run, given the American (and global) inflation and debt situation, the yield for the US Treasury 10 year note will ascend above its recent high around 2.55 percent, although occasional “flights to quality” and thus interim yield declines may emerge.

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Arguments in marketplaces and elsewhere in cultural life that “this time is different” are inescapable and often persuasive. Of course the coronavirus pandemic played a major role in the first quarter 2020 collapse in global stocks and commodities. However, the rising interest rates and strong dollar variables still played an important part in those 2020 marketplace declines. And the American and international inflation and debt troubles of 2022 (“nowadays”) far exceed those existing around January 2020. The Russian invasion of Ukraine obviously makes aspects of the recent commodities situation different from 2020; global petroleum prices, for example, though “high” prior to the Russia/Ukraine conflict, probably would not have skyrocketed in its absence. And in regard to historic and potential future marketplace relationships and related risk assessments, we should not forget 2007-09, the ending of the Goldilocks Era and its dismal aftermath, the global economic disaster. The S+P 500’s summit (October 2007) diverged for several months from the peak in commodities in general (July 2008), although the trends of those two financial sectors thereafter converged. Also, as US and other stocks began their terrifying descent in spring 2008 until March 2009, the dollar rallied.

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Marketplace Trends and Entanglements (4-4-22)