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 AGITATION ©Leo Haviland October 3, 2023

RISING AMERICAN INTEREST RATES, FALLING US STOCKS

Listen to “Agitation”, jazz music from Miles Davis.

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Let’s focus on the American horizon and the exciting US Treasury and S+P 500 marketplaces. 

Since around spring 2020, and particularly since August 2022, and especially in recent months, the UST marketplace has suffered noteworthy capital destruction due to falling prices. A glorious bull move in the  S+P 500 followed 3/23/20’s dismal bottom at 2192. The S+P 500 thereafter exploded upward, more than doubling, to establish a thrilling record high on 1/4/22 at 4819. After an agonizing bear slump to October 2022’s bottom, a significant joyful stock rally ensued. The S+P 500 approached January 2022’s peak, reaching a summit on 7/27/23 at 4607. The S+P 500 probably has commenced a bear trend, though its slump from its July 2023 peak has been moderate thus far. 

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“Long Run Historical Entanglement: US Interest Rate and Stock Trends” (7/6/23) concluded: “Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span. The arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.”

“Given the historic pattern in which UST [US Treasury; focus on the UST 10 year note] yield increases “lead” to peaks in key American stock benchmarks such as the S+P 500, do signs of a noteworthy rising yield trend exist on the interest rate front? Yes.” And “the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak will probably occur relatively soon, probably within the next few weeks or months. However, even if the S+P 500 continues to climb, it probably will not exceed its January 2022 peak by much if at all.” 

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The UST 10 year note yield increased since 3/9/20’s major bottom at .31 percent, accelerating upward from 8/4/21’s 1.13pc to 6/14/22’s 3.50 pc. The S+P 500 peaked during this rising yield trend on 1/4/22 at 4819. The UST 10 year note yield, after sliding down to 8/2/22’s 2.51 percent resumed its yield ascent. It made another important interim yield low with 4/6/23’s 3.25pc. With 8/22/23’s 4.37 percent, the UST 10 year pierced 10/21/22’s 4.34 percent high, achieved around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. The UST 10 year note price kept falling, and the UST yield reached 4.81 percent on 10/3/23. A dramatic UST 10 year yield climb over five percent and toward 6/13/07’s 5.32 percent Goldilocks Era summit would further unnerve many UST (and stock) holders. 

In some circumstances, rising interest rates can indicate or portend adequate (good) real GDP growth, and thus from some perspectives (up to some point), increasing UST yields (falling debt prices) are designated as “good”. And investors in interest rate instruments of course want a decent (and real) return relative to inflation, so rising yields have been a blessing for many of them, at least to some extent. 

However, many institutions and individuals bought low-yielding UST during the Fed’s yield repression era. Their interest income during the past couple of years likely fell beneath inflation heights represented by the consumer price index. Many of these interest rate instrument owners probably have suffered some noteworthy mark-to-market damage to their principal; so have numerous other recent buyers given the rising rate trend of recent months. Nowadays, the average maturity of total outstanding marketable UST debt is about six years. 

From the price perspective, review the CME’s UST 10 year note (nearest futures continuation contract) as a rough guide to the capital consequences of recent trends. (In practice, this contract sometimes prices relative to deliverable grade instruments with a maturity somewhat different from ten years.) The UST 10 year peaked at about 140-22 on 3/9/20. Its recent low is 10/3/23’s 106-20 (as of 300pm EST), an eviscerating 24.2 percent tumble (and beneath 10/21/22’s 108-26). From 8/2/22’s interim price high of 122-02, 10/3/23’s level drops 12.6 percent. Excitement (emotions) will increase if the price heads closer to 104-00 (6/13/07 price bottom 104-04; 6/28/06 low 104-01). 

The CME UST five year note’s price peak (nearest futures continuation) occurred at about 126-08 on 8/7/20 (126-07 on 1/8/21). It nosedived 17.2 percent to 10/3/23’s 104-18 (under 10/21/22’s roughly 105-15). An attack on price support around 103-00 (7/5/06; 103-02 on 6/13/07) will boost anxiety. 

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In America, a substantial amount of household net worth resides in debt securities (not only in US Treasuries) and equity shares (not just the S+P 500 playground). Read the fine print of the Federal Reserve’s Z.1, “Financial Accounts of the United States” (9/8/23; see Tables B.101, B.101.e, and B.101.h). As of end 2Q23, total assets for households and nonprofit organizations combined were about $174.4 trillion (net worth was $154.3 trillion), the great majority of which resided in the household domain. As of end 2Q23, for households and nonprofit organizations combined, debt securities at market value were about $10.9 trillion, or around 6.2 percent of total assets (9.3pc of total financial assets). Equity shares in 2Q23 had a value of about 44.7 trillion dollars, or 25.6 percent of total assets (almost 38.3pc of total financial assets). 

Consumers represent about two-thirds of United States GDP. If they suffer substantial wounds to their net worth, to what extent will they slash their spending? 

Many Wall Street and Main Street stock investment communities preach the wisdom of buying good (or high) quality American stocks for some version of the misty long run. To what extent are such stock bulls married to their positions? 

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For the twenty-two US stock marketplace “bear” trends summarized in “US Stocks Over the Long Run: Bear Marketplace History” (8/4/23), the average percentage decline from the peak to the trough is about 33.9 percent. The average duration of the descent from the summit to the bottom is approximately 14.2 months. 

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FOLLOW THE LINK BELOW to download this article as a PDF file.
Financial Agitation (10-3-23)

TWISTS, TURNS, AND TURMOIL: US AND OTHER GOVERNMENT NOTE TRENDS © Leo Haviland November 12, 2018

In “The Age of Anxiety”, the poet W.H. Auden remarks: “Gradually for each in turn the darkness begins to dissolve and their vision to take shape.”

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OVERVIEW AND CONCLUSION

Since summer 2016, using the 10 year central government note as a benchmark, global interest rate yields for leading nations “in general” gradually have risen. The United States has been the key nation propelling “overall” debt yields upward. Also since summer 2016, marketplace trend twists and turns from the price and time perspective for this assortment of nations usually has been fairly close.

Relatively strong American economic growth and tightening Federal Reserve Board policies have played important roles in the worldwide rate increase process. The reduction of central bank yield repression is and will remain a crucial factor underpinning the long run yield increase trend. Even the European Central Bank and Bank of Japan, which have ongoing lax monetary policies, suggest they eventually will become slightly less accommodative.

Significant global credit demand in an environment where overall global debt (government, corporate, household) already is substantial also is an important element tending to boost global yields. The international government debt level as a percentage of GDP nowadays is much greater than at the advent of the 2007-09 global economic disaster. For many countries, including America, there is little likelihood for notable government debt reduction anytime soon.

Expanding United States federal budget deficits resulting from December 2017’s exciting tax “reform” legislation probably have encouraged the ascent in American yields. Given the importance of America in the interconnected global economy, the US national budget deficit and debt level trends as a percentage of GDP not only will continue to generate US Treasury rate climbs over the long run, but also will assist a global upswing in yields. America’s tax reform scheme exacerbated the already massive long run federal budget problem (big deficits alongside entitlement spending, etc.; higher demand for credit). By helping to push American US government interest rates higher, the tax reform magnifies the country’s monumental debt challenge.

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Despite the broadly similar rising yield trend direction and convergence links (connections, associations) across the central (federal) government note marketplaces since summer 2016, the pattern of course is not always perfect. Also, as time passes, divergence within this “overall upward trend” may emerge. For example, whereas the US Treasury 10 year note’s yield high to date since summer 2016 is 10/9/18’s 3.26 percent,  the German Bund (81 percent on 2/8/18) and China’s 10 year central government note (11/22/17’s 4.04pc) attained their highs many months earlier. In addition, rate climbs are not all necessarily the same in distance or speed terms. For countries engaged in substantial yield repression, the advance may be fairly small and slow for quite a while.

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Fearful “flights to quality” occasionally may inspire yield falls in so-called safe haven government debt instruments issued by nations such as America, Germany, and Japan. Central banks likely will become (or remain) highly accommodative if the global recovery appears seriously threatened. The reality of or omens pointing to feebler than expected (desired) GDP growth (in conjunction with other variables) may spark such yield declines, and perhaps also induce renewed accommodative central bank actions (or at least soothing rhetoric from such earnest guardians).

In the current marketplace situation, additional notable erosion in the prices of global stock marketplace benchmarks from their calendar 2018 summits might also inspire relatively significant retreats in debt yields. For example, a decline in the S+P 500 of nearly twenty percent or more from its autumn 2018 peak could connect with government yield declines (and perhaps with the emergence of central bank propaganda or action to rally stock prices).

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The major (long run) trend for US government interest rate yields, and for other nations around the globe, probably remains up. Despite tumultuous twists and turns, the long run upward march in government interest rate yields which commenced around the middle of 2016 likely will remain intact. The UST 10 year note’s 3.26 percent high yield will be exceeded.

However, the declines in global stock marketplaces (especially the S+P 500’s slump since its September 2018/October 2018 peak), especially if interpreted alongside the failure of German and Chinese 10 year government notes to establish yield new yield highs close in time to those in the UST (and other important countries), warn that a temporary halt to (or noteworthy slowdown in) the overall global pattern of rising government rates (including in America) is being established. Some yield declines in government notes may be rather dramatic. However, based upon a perspective of a long run extending for several years from now, such yield descents probably will be temporary.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Twists, Turns, and Turmoil- US and Other Government Note Trends (11-12-18)