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 FIREWORKS: ACCELERATING AMERICAN INFLATION © Leo Haviland July 3, 2021

Prince sings in “Let’s Go Crazy”:
“Dearly beloved, we have gathered here today
To get through this thing called life.”

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CONCLUSION

The Federal Reserve Board and its central banking comrades obviously are not omnipotent. They also are not scientifically objective in their definitions, perspectives, methods, arguments, and conclusions. Neither is the Fed (its policies) the only important variable influencing inflation levels and patterns in America and elsewhere. Many intertwined phenomena in the United States and around the globe, including massive government deficit spending, matter.

Yet given the Federal Reserve’s success with its yield repression strategy (and its quantitative easing/money printing scheme), many observers have great confidence in the central bank’s insight, foresight, and talent for creating and managing “good” United States (and global) economic outcomes. These desirable results include not only adequate US economic growth and stable prices, but also bullish stock marketplace (use the S+P 500 as the benchmark) and home price moves.

The Fed’s long-running marketplace maneuvers, and especially its yield repression policy, have helped to create a culture strongly oriented (married, metaphorically speaking) to the existence and persistence of low Federal Funds and United States Treasury rates. In general, stock owners and securities issuers (corporations and sovereigns), as well as Wall Street enterprises who serve and profit from them, love low interest rates.

“Inflation” (deflation; stable prices) appears in various diverse economic arenas. The Fed itself and the great majority of Fed watchers on Wall Street and Main Street believe the Fed will achieve its praiseworthy goal of stable prices. Thus inflation will not climb “too high” or go “out of control”. Similarly, benchmark US Treasury interest rates also will not increase “too much” (“too far”; or “too fast”).

Since the coronavirus pandemic emerged during first quarter 2020, as part of its highly accommodative monetary policy, the Federal Reserve has purchased a huge quantity of US Treasury securities (as well as agency mortgage-backed securities). This extraordinary and ongoing net acquisition program has assisted its effort to ensure low marketplace yields. But observers should examine the Fed’s UST purchasing process and its consequences in more depth. It has significantly increased the Fed’s already sizable percentage share of the outstanding marketable (and held by the public) UST world. This noteworthy jump in the Fed’s arithmetic and percentage market share holdings of UST probably therefore has decreased the “free supply” (readily available inventory) of UST. Despite accelerating US inflation in recent months, the large reduction in the free supply of marketable UST probably has helped to keep benchmark UST yields (such as for the 10 year UST note) low.

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“American Inflation and Interest Rates: Painting Pictures” (5/4/21) stressed that 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 Federal Reserve Board and armies of its devoted followers (especially investment sects and the financial advisors and media who assist them) believe.

Acceleration in assorted American inflation signposts has occurred in recent months. This probably shows that Fed programs have played, and continue to perform, a critical role in enabling US inflation to rise sharply. Though inflation in measures such as the Consumer Price Index is not yet “out of control”, the Fed at present has less control over this upward trend. Recent significant increases in key inflation benchmarks such as the CPI are not “transitory”. Despite the Fed’s dogmatic adherence to its yield repression approach, the Fed’s various current policies and its related rhetoric will find it very challenging to contain the increasing inflationary pressures.

Rising inflation will force the Fed to taper its ravenous US Treasury and mortgage securities buying program, and gradually abandon its longstanding tenacious yield repression strategy, sooner than it currently desires and plans. Despite the Fed’s yield repression, money printing, and wordplay (including forward guidance), America’s widespread, persistent, and growing inflation severely challenges faith in the Fed’s long run power to block significantly higher interest rates. The Federal Funds rate and UST yields (including those on the shorter end of the yield curve) probably will have to increase faster and further than the Fed shepherd currently wants and predicts. UST yields will resume their long run upward path. Sustained ascending American inflation has a strong likelihood of undermining and reversing bullish price trends in various “search for yield” marketplaces such as stocks.

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Financial Fireworks- Accelerating American Inflation (7-3-21)

MARKETPLACE ROLLING AND TUMBLING: US DOLLAR DEPRECIATION © Leo Haviland June 1, 2021

The rap music group, “Wu-Tang Clan” sings in “C.R.E.A.M.”: “Cash, Rules, Everything, Around, Me C.R.E.A.M. Get the money Dollar, dollar bill y’all.”

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CONCLUSION

The United States dollar commenced a bear trend in spring 2020. Its depreciation probably will continue over the long run.

“Dollar Depreciation and the American Dream” (8/11/20) warned of and analyzed various reasons for a significant depreciation in the real Broad Dollar Index (Federal Reserve Board, H.10) from its lofty April 2020 high at 113.7. These factors generally remain in place. “American Inflation and Interest Rates: Painting Pictures” (5/4/21) stated: “Suppose United States inflation in assorted key indicators such as the Consumer Price Index continues to climb, and that America’s federal budget deficit and debt situation remains very dangerous. Suppose the Federal Reserve remained unwilling to tighten its current highly accommodative policies. Though much depends on other variables, including the economic and political situation in and prospects for other important countries around the globe, this scenario probably will tend to weaken the US dollar.”

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January 2021’s real Broad Dollar Index at 103.3 approached a critical support level, March 2009’s 101.6 peak during the 2007-09 worldwide economic disaster (May 2021’s height is 104.1). A sustained break beneath March 2009’s elevation probably will be important for numerous economic playgrounds. Why? That dollar depreciation likely will occur alongside rising American inflation indicators and the major expansion of American federal indebtedness of recent years (with further national spending extravagance looming). This situation probably will increase pressure on the Fed to significantly reduce (taper) its quantitative easing (money printing) program as well as to boost the Federal Funds rate and thereby US Treasury yields. Climbing UST interest rates accompanied by a tumbling dollar probably will reduce the avid “search for yield/return” in the S+P 500, dollar-denominated debt securities (such as US corporate bonds) and other dollar-priced assets (including many commodities). These developments probably will trigger and sustain slumps in the S+P 500 and “related” asset arenas.

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Marketplace Rolling and Tumbling- US Dollar Depreciation (6-1-21)

AMERICAN INFLATION AND INTEREST RATES: PAINTING PICTURES © Leo Haviland May 4, 2021

“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)

FINANCIAL MARKETPLACES: CONVERGENCE AND DIVERGENCE STORIES © Leo Haviland April 6, 2021

“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)