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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BORN TO BE WILD: AMERICAN ECONOMIC AND POLITICAL BATTLEFIELDS © Leo Haviland November 2, 2020

President Donald Trump’s “Inaugural Address” (1/20/17): “This American carnage stops right here and stops right now.”

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OVERVIEW AND CONCLUSION

Marketplace connections and patterns, including convergence and divergence (lead/lag) relationships between financial realms, are complex and not necessarily precise. They can shift or even transform sometimes dramatically. Marketplace history is not marketplace destiny; history does not necessarily repeat itself, either entirely or even partly.

“Adventures in Marketland: Hunting for Return” (10/6/20) and “Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) display the intertwined price trends in assorted financial fields in recent times. Such interrelated territories include United States and other stocks, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities “in general”. Prices in the S+P 500 and other benchmark US and global stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time. They frequently have climbed in bull markets (and fallen in bear markets) “together”. These thus have alternatively reflected bullish enthusiasm as “investors” and other traders hunted for adequate return (“yield”), and dismal bearish scenes as they scrambled frantically for safety. For example, the magnificent bull moves in the S+P 500 and these “related” financial areas established important tops in early to mid-first quarter 2020 (S+P 500 on 2/19/20 at 3394). Their subsequent murderous bear crashes entangled, finishing around the same time, around late March 2020 (S+P 500 on 3/23/20 at 2192). The ensuing price rallies in the S+P 500 and these assorted other key provinces thereafter united, establishing peaks around early September 2020 (S+P 500 top on 9/2/20 at 3588; subsequent lower high 10/12/20 at 3550). See those essays for a detailed presentation of these price moves and their relationships since first quarter 2020.

“Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) concluded that various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together. “Adventures in Marketland” reemphasized this bearish outlook.

What bearish factors for the S+P 500 and various related marketplaces (other stock signposts, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities such as petroleum and metals) did “Marketplace Maneuvers” and “Adventures in Marketland” emphasize? They include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears have grown of a political crisis and legal fights if President Trump disputes the November 2020 voting outcome. Other warning signals of notable price falls in the S+P 500 and various associated battlegrounds include vulnerable United States (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes) than many believe (even with ongoing Fed yield repression), and weakness in the US dollar.

This bearish trend in the S+P 500 probably will continue. Even if Congress answers widespread fervent prayers and enacts another large deficit spending (stimulus) package, the S+P 500’s 9/2/20 peak probably will not be broken by much, if at all. Given recent relationships, a sustained fall in the S+P 500 probably connects with declines in the prices of the other asset sectors currently closely linked to it.

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As always, in the context of these various marketplaces, money-seekers should monitor US Treasury and other high-quality government debt yield levels and trends as well as US dollar and other currency patterns.

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Born to Be Wild- American Economic and Political Battlefields (11-2-20)

ADVENTURES IN MARKETLAND: HUNTING FOR RETURN © Leo Haviland October 6, 2020

In the movie, “The Hustler” (Robert Rossen, director), a character stresses: “Look, you wanna hustle pool, don’t you? This game isn’t like football. Nobody pays you for yardage. When you hustle you keep score real simple. The end of the game you count up your money. That’s how you find out who’s best. That’s the only way.”

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CONCLUSION

 

During the era of sustained global yield repression engineered by America’s trusty Federal Reserve Board and its central banking comrades, “investors” and other traders generally have engaged in enthusiastic hunts for adequate return (“yield”) in assorted financial fields. These territories include United States and other stocks, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities “in general”.

Convergence and divergence (lead/lag) relationships between realms such as the S+P 500, American corporate debt, and the petroleum complex are a matter of subjective perspective. The connections and patterns are complex and not necessarily precise; they can shift or even transform. Nevertheless, within this accommodative policy yield environment, often involving monumental money printing (quantitative easing) strategies and other generous monetary schemes, price trends in the S+P 500 and these other marketplaces frequently have been similar. Prices in these benchmark stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time They have climbed in bull markets (and fallen in bear markets) “together”. For example, the magnificent bull moves for US stocks and these “related” financial areas peaked in early to mid-first quarter 2020. Their subsequent bloody bear crashes intertwined, ending at around the same time. The ensuing price rallies in these assorted key districts generally embarked around late March 2020, and their subsequent bullish patterns thereafter interrelated. The S+P 500’s attained its record high on 9/2/20 at 3588.

“Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) concluded: “various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together.” Noteworthy interconnected price falls followed the S+P 500’s September 2020 summit. Even if Congress answers widespread fervent prayers and enacts another large deficit spending (stimulus) package, the S+P 500’s 9/2/20 peak probably will not be broken by much, if at all.

What bearish factors did “Marketplace Maneuvers” identify? They include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). The Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears are growing of a political crisis if President Trump disputes the November voting outcome.

Other warning signals of notable price falls in the S+P 500 and various related marketplaces are vulnerable US (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes) than many believe (even with ongoing Fed yield repression), and the weakness in the US dollar.

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Adventures in Marketland- Hunting for Return (10-6-20)

MARKETPLACE MANEUVERS: SEARCHING FOR YIELD, RUNNING FOR COVER © Leo Haviland September 7, 2020

In the novel “The Gilded Age” (chapter 7), by Mark Twain and Charles Dudley Warner, Colonel Sellers exclaims: “Si Hawkins has been a good friend to me, and I believe I can say that whenever I’ve had a chance to put him into a good thing I’ve done it, and done it pretty cheerfully too. I put him into that sugar speculation—what a grand thing that was, if we hadn’t held on too long.”

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OVERVIEW AND CONCLUSION

Diverse, changing, and interrelated marketplace variables of course encourage price rallies and declines in assorted financial domains. Central bank monetary policies, national deficit spending and debt levels, currency trends, and the recent coronavirus pandemic of course are on the list.

Yet focus on United States Treasury rates only slightly above or beneath benchmark inflation indicators such as consumer price or personal consumption expenditure indices. In other leading government rate realms, such as German ones, note negative nominal interest rates. During the era of global central bank policy yield repression by America’s beloved Federal Reserve Board and the friendly central banks of other major advanced nations, “investors” and other traders generally have engaged in ravenous searches for adequate return (“yield”) in assorted financial marketplaces. These playgrounds include United States and other stocks, lower-grade foreign dollar-denominated sovereign debt, corporate notes and bonds, and commodities.

During this repressive policy yield environment, and often encouraged by massive money printing (quantitative easing) and other accommodative monetary programs, price trends in the S+P 500 and these other marketplaces frequently have been similar. They have risen in bull markets (and fallen in bear markets) “together”. Convergence and divergence (lead/lag) relationships between fields such as the S+P 500, US corporate bonds, and crude oil are a matter of subjective perspective. The connections and patterns are complex and not necessarily precise; they can modify or even transform. But in recent years, prices in these benchmark stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time. For example, prices for US stocks and other financial domains enjoyed glorious rallies which peaked in early to mid-first quarter 2020. Their murderous bear crashes commence at around the same time; numerous investors and other buyers (owners) frantically ran for cover and pleaded for help. The ensuing price rallies in these assorted key generally embarked around late March 2020, and their subsequent bullish patterns thereafter have intertwined.

However, various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together. These bearish factors include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). Also, the Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears are growing of a political crisis if President Trump disputes the November voting outcome.

Other warning signs of notable price falls in the S+P 500 and various related marketplaces include vulnerable US (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes, and even with ongoing Fed yield repression) than many believe, and the recent weakness in the US dollar. The likelihood of a substantial new US Congressional stimulus package has ebbed.

The S+P 500 (and especially “technology” stocks; see the Nasdaq Composite Index) probably has been the bull leader for the various asset classes “as a whole” since its 3/23/20 bottom at 2192. For US equities, laments of “where do I put my money?” enthusiastic comments that “there’s a lot of cash around looking for a home”, and venerable rhetoric regarding the reasonableness of buying and holding United States stocks for the “long run” persist. Gurus as well as media cheerleaders still say: “buy the dip” and “don’t miss the train.” Yet such aphorisms and even massive money printing do not inevitably keep asset prices rising.

Despite the Federal Reserve’s late August 2020 promulgation of a revised and even more accommodative policy doctrine, it essentially codified rather than changed the practice of its easing policy of the preceding months. See the Fed’s 8/27/20 “Statement on Longer-Run Goals and Monetary Strategy” and the Fed Chairman’s speech, “New Economic Challenges and the Fed’s Monetary Policy Review” (8/27/20). In any case, the Fed guardian is unlikely to race to the rescue of the US stock marketplace with the S+P 500 hovering around its all-time high.

For detailed further discussion of stock, interest rate, currency, and commodity marketplaces and the political scene, see other essays such as “Dollar Depreciation and the American Dream” (8/11/20); “Divergence and Convergence: US Stocks and American Politics (7/11/20); “US Election 2020: Politics, Pandemic, and Marketplaces” (6/3/20); “American Consumers: the Shape We’re In” (5/4/20); “Crawling from the Wreckage: US Stocks” (4/13/20); “Global Economic Troubles and Marketplace Turns: Being There” (3/2/20); “Critical Conditions and Economic Turning Points” (2/5/20); “Ringing in the New Year: US and Other Government Note Trends” (1/6/20).

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Marketplace Maneuvers- Searching for Yield, Running for Cover (9-7-20)(1)

DOLLAR DEPRECIATION AND THE AMERICAN DREAM © Leo Haviland August 11, 2020

In the film “Wall Street” (Oliver Stone, director), Gordon Gekko claims: “It’s all about bucks, the rest is conversation.”

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DOLLAR DEPRECIATION DANGERS

For many decades, the United States dollar has led the foreign exchange field as the key currency for global trade as well as financial reserves. Over that time span, the greenback’s predominance to a significant extent encouraged, sustained, and reflected widespread (although not unlimited) American and global faith in the wisdom and goodness of American cultural values and the persuasive and practical ability of the nation to be a (and sometimes the) critical guiding force in international affairs. Although the dollar obviously has had numerous extended periods of appreciation and depreciation since the free market currency dealing regime began in the early 1970s, the dollar’s crucial role in the increasingly intertwined global economic system has seldom been significantly questioned or challenged for over an extended period of time. For almost ten years, from its major bottom in July 2011 until April 2020, the overall trend of the dollar in general was bullish.

Therefore few gurus fear a significant depreciation in the US dollar from its relatively lofty April 2020 high. However, the probability of a noteworthy dollar slump is much greater than most believe.

An underlying factor promoting a dollar tumble is the gradually declining share of America as a percentage of world GDP. Also, both political parties, not just the current US Administration, and especially in the coronavirus era, probably want the dollar to weaken from its recent summit. The great majority of the country’s politicians preach their allegiance to a strong dollar, but they also endorse economic growth.

Two additional phenomena make the dollar particularly vulnerable nowadays. First, although many leading nations have increased their government debt burdens in recent years, America’s situation probably has worsened significantly more than most others in recent months. Moreover, America already faced widening federal budget deficits encouraged by the tax “reform” enacted at end 2017. Plus don’t overlook the ongoing ominous long run debt burden, looming from factors such as an aging population. How easily will America service its debt situation? And America’s corporate and individual indebtedness also is substantial.

Second, the intensity and breadth of America’s cultural divisions has increased in recent times, especially during the Trump era. American confidence in the nation’s overall direction has slumped in recent months. As US citizen faith in the country’s situation declines, so probably likewise will (or has) that of foreigners in regard to America.

Declining faith in American assets (and its cultural institutions and leadership) can inspire shifts away from such assets. American marketplaces will not be completely avoided given their importance, but players can diversify away from them to some extent. Not only Americans but also foreigners own massive sums of dollar-denominated assets (debt instruments, stock in public and private companies, real estate; dollar deposits). Such portfolio changes (especially given America’s slowly declining importance in the global economy) will tend to make the dollar feeble.

Suppose nations and corporations increasingly elect, whether for commercial or political reasons, to avoid using the dollar as the currency via which they transact business. That will injure the dollar.

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A five percent fall in the “overall” dollar level from its April 2020 high may not make much difference in the near term for US stocks and debt securities. However, a roughly five percent dollar drop is a warning sign for them, and especially for stocks. All else equal, a weaker dollar tends to boost the nominal price of dollar-denominated assets such as stocks and commodities. But history shows that this relationship is not inevitable. Phenomena other than dollar depreciation influence US securities trends. Keep in view the considerations described above undermining the dollar, and thus the desire to hold dollar-denominated instruments.

Admittedly, strong American corporate earnings encourage buying (and holding) of US stocks. But the coronavirus situation and responses to it have devastated calendar 2020 earnings. Suppose that contrary to widespread hopes and predictions, calendar 2021 corporate earnings do not rebound significantly (sufficiently) from dismal 2020 depths. What if the prayed-for V-shaped economic recovery does not emerge? If corporate earnings remain relatively modest (or slide) going forward, and if the dollar continues to weaken from its April 2020 height, dollar depreciation probably will intertwine with an equity slump.

A sustained dollar tumble approaching ten percent (and especially a fall greater than ten percent) probably will help to push the S+P 500 and related stock prices quite a bit lower. Many equate strong (high; rising) United States stocks over the long run as a signal or proof of the triumphant progress of the American Dream’s economic, political, and social principles. Therefore a linked and sustained decline in both the dollar and American stocks probably would damage to some extent the persuasive rhetoric of the current version American Dream itself.

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Even if US government debt yields in this scenario initially slump from around current low levels due to a renewed “flight to quality”, and even if the Federal Reserve and its central banking teammates maintain their quantitative easing and yield repression schemes, inflationary forces (encouraged by money printing; see the huge increase in America’s money supply) and heated demand for credit eventually can push government (and corporate) interest rates upward. On the US interest rate front, suppose foreigners become smaller buyers, or even net sellers, of US Treasury securities. Such overseas action would not be an endorsement of America. Due to yield repression, UST real returns currently are negative.

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Dollar Depreciation and the American Dream (8-11-20)