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)