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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MARKETPLACE TRAVELS: POTENTIAL BUMPS IN THE ROAD ©Leo Haviland April 2, 2024

The Federal Reserve Chairman (Jerome Powell) recently stated that the path to the Fed’s two percent inflation target was “sometimes bumpy”. (Remarks at the 3/29/24 “Macroeconomics and Monetary Policy Conference”, San Francisco Fed; see Financial Times, 3/30/24, p1)

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STARTING POINTS

Since around end December 2023, global inflationary forces probably have become stronger (or at least more firmly entrenched). Note the increase in the United States Treasury 10 year note yield and prices for commodities “in general” since then. Recent consumer price index measures, despite having fallen from their peaks, remain fairly distant from the Federal Reserve Board’s targets. The Fed therefore will find it difficult to reduce its Federal Funds policy rate nearly as much as many marketplace participants hope. The US dollar has remained strong, appreciating slightly since year end 2023; this suggests that American interest rate yields probably will remain rather high. America’s substantial national debt problems remain unsolved (as does China’s), with little prospect of progress anytime soon. Ongoing large federal government budget deficits and high and growing debt as a percentage of GDP tend to boost interest rate yields higher. 

Many times over the past century, significantly increasing United States interest rate yields 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. Marketplace opinions regarding substantial growth in US corporate earnings prospects for calendar years 2024 and 2025 look very optimistic. Whereas the S+P 500’s towering bull move carried into March 2024, US existing single-family home prices remain beneath their June 2023 peak. 

The US national political scene in general and election season 2024 in particular add to financial marketplace risks. 

Bitcoin and gold trends offer insight into patterns and prospects for other marketplaces, including the S+P 500. 

US INFLATION AND INTEREST RATES: RISKY BUSINESS

In the classic American film, “All About Eve” (Joseph Mankiewicz, director), the actress Margo Channing (played by Bette Davis) declares: “Fasten your seat belts. It’s going to be a bumpy night.” 

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The Wall Street securities investment communities and their political and media allies have applauded lower United States inflation rates. Widespread faith exists that the trusty Federal Reserve will achieve its two percent inflation target fairly soon. Stock owners have been especially enthusiastic as the S+P 500 has flown to new highs in the hopes of further drops in key inflation measures and notable cuts by the Federal Reserve in the Fed Funds rate. 

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Marketplace Travels- Potential Bumps in the Road (4-2-24)

EMERGING MARKETS, COMMODITIES, BITCOIN, AND THE S+P 500: TRAVELS AND SIGNS © Leo Haviland December 3, 2019

The movie “They Shoot Horses, Don’t They?” (Sydney Pollack, director) depicts a Depression Era dance contest marathon with a noteworthy monetary prize for the winning couple left standing. The master of ceremonies declares: “And believe me, these wonderful kids [the “kids” are all adults] deserve your cheers, because each one of them is fighting down pain, exhaustion, weariness, struggling to keep going, battling to win. And isn’t that the American Way?”

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OVERVIEW AND CONCLUSION

Since around first quarter 2018, the price trends in emerging marketplace stocks “in general” and emerging marketplace sovereign debt securities in general have made important highs and lows at roughly the same time. Thus, for example, around year-end 2018, prices (not yields) for sovereign emerging marketplace bonds attained important lows (yields had been rising) alongside troughs in emerging marketplace stocks. United States high-yield corporate bonds have moved in a similar pattern over that time span. Key commodity sectors such as the petroleum complex and base metals likewise have established important highs (lows) around the same time as those in emerging marketplace equities and sovereign debt. The timing of these assorted shifts of course is not always exactly the same, only approximately so. 

Unlike emerging marketplace stocks, during calendar 2018 and calendar 2019, America’s S+P 500 has marched to new highs. Despite this price divergence, many key turns in the interim trends for the S+P 500 occurred “around” the same time as those in emerging marketplace stocks, as well as in emerging sovereign marketplace debt (in both dollar-denominated and local currency arenas), US high-yield corporate bonds, and commodities. 

As the S+P 500 was sinking lower in late 2018, the Federal Reserve Board lifeguard jumped to the rescue and unveiled its monetary “patience” doctrine. It cut the Federal Funds rate three times during calendar 2019. Central banking allies such as the European Central Bank enhanced or maintained existing easy money schemes. Beginning around end-year 2018, this accommodative monetary policy (encouraged by widespread negative yields in advanced nation government debt domains), inspired waves of “investors” (speculators, traders) to hunt, more avidly than ever, for sufficient (good, reasonable, acceptable) “yields” (“returns”) in other provinces. These districts around the globe included emerging marketplace securities, high-yielding corporate debt, and even commodities. 

The exciting cryptocurrency frontier, which includes stars such as Bitcoin, attracts interest from assorted financial pioneers and the economic media (and even central bankers at times). In the opinion of some observers, Bitcoin belongs to some variety of “asset” class. In any case, since “around” first quarter 2018, despite Bitcoin’s wild price adventures, critical turns in its price action have occurred around the same time as in emerging marketplace securities, high-yield US business debt, commodities (petroleum and base metals), and even the S+P 500. 

During 2019, the S+P 500 continued its heavenly climb. Nevertheless, at various points during calendar 2019, emerging marketplace securities, US corporate debt, commodities, and Bitcoin established interim highs and began to retreat. For example, note Brent/North Sea crude oil’s 4/25/19 summit at $75.60 (S+P 500 interim top 5/1/19 at 2954). Thus the run-up in these asset prices which commenced around end calendar 2018/early calendar 2019 probably is over. 

Significantly, emerging marketplace stock, emerging marketplace sovereign debt securities, high-yield US corporate debt, and petroleum and base metals (still “trading together”) renewed their price declines in September 2019. Take a look at Bitcoin too. Given that global economic (and political) spheres intertwine, this pattern signals a top in the S+P 500 and the probability that the S+P 500 (and other advanced nation stock battlefields) will decline alongside (converge with ongoing bearish price patterns in) emerging marketplace securities and related domains such as commodities. 

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The United States dollar, as measured by its broad real effective exchange rate, has remained sufficiently strong to be a factor tending to undermine prices in dollar-denominated emerging marketplace sovereign debt securities as well as dollar-denominated emerging marketplace corporate debt instruments. Rising dollar-denominated yields, especially as the United States dollar generally has remained strong in recent months, tends to push emerging marketplace equity prices lower. Related to this, prices also gradually have fallen since early September 2019 in the US Treasury 10 year note (low yield 1.43 percent on 9/3/19). Also, US corporate earnings have been relatively flat for calendar 2019 year-on-year, suggesting that the joyous tax “reform” enacted at end calendar 2017 is losing power and thus the capability to propel the S+P 500 even higher. Even if America and China agree on a partial trade deal in the near future, will trade conflicts involving them and others disappear? 

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Emerging Markets, Commodities, Bitcoin, and the S+P 500- Travels and Signs (12-3-19)

US NATURAL GAS INVENTORY: THE PRODUCING REGION SCENERY © Leo Haviland May 6, 2013

When United States natural gas 2013 build season ends this autumn, inventories in the key Producing Region probably will be around 1200bcf, plus or minus five percent (1140bcf to 1260bcf range). Based upon historic inventory patterns, especially those of 2006 to the present, most marketplace participants probably would view around 1200bcf as average. Unlike build season 2012, the Producing Region will not confront notable containment issues this year.

Suppose a bear trend for NYMEX natural gas (nearest futures continuation) emerged from the recent highs over 440. One time to look for an important bottom is in late August/calendar September 2013.

Historical review of Producing Region inventory levels and trends alongside NYMEX natural gas price trends and levels reveals a rough pattern. Assume that gas prices establish an important peak. Although the history is relatively brief, there is a seasonal tendency for natural gas prices (NYMEX nearest futures continuation) to establish important bottoms sometime around late calendar August through calendar September and thus in the later stage of Producing Region (and US) build season. See the table above. Several of these lows were major trend change points.

This is a guideline, not a destiny.

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Natural Gas Inventory- the Producing Region Scenery (5-6-13)

MARKETPLACES AND POLICIES- MAKING CONNECTIONS © Leo Haviland, November 29, 2011

Since the current economic crisis emerged in 2007, a rough pattern has been that major movements and levels in US Treasury ten year note yields have preceded or coincided with those in the S+P 500. Thus, “in general”, plummeting UST yields have been paralleled by diving stock prices. And rising interest rates are connected to rallies in stocks. So in today’s world, gurus and guides often underline that higher and higher UST rates fit an economic recovery (health) scenario. In contrast, collapsing rates indicate looming (or actual) disaster; hence the popularity of flight to quality and safe haven commentary in regard to UST. Such relationships between the UST 10 year note and stocks (and variables allegedly bound to them) of course help forecasters to assess probabilities for and predict important debt and equity trend changes. Looking forward, this ongoing pattern may well persist.

Yet at some point, and arguably within the next several months, the present relationship between the US ten year and the S+P 500 may change. Thus rising UST yields eventually may coincide with sinking stocks. What key trading levels for the 10 year should one keep an eye out for? Such trigger point ranges will vary over time. So anyway, what guidelines for nowadays? If the US 10 year note yield floats decisively above the 2.50 percent level, and if stocks rally very little as that yield barrier is breached, that would hint the current (2007-2011) UST/S+P 500 relationship is altering.

As the global economic crisis flows on and on, many of its intertwined actions and participants (and thus marketplace relationships) may remain relatively unchanging. But they are not stagnant. Today’s marketplace voyagers should wonder if the crisis has drifted closer and closer to a new round of difficulties. Look at European yields, and place Germany on the sidelines. Focus instead on Greece, Portugal, Ireland, Spain, and Italy. These countries show that severe economic problems (and downturns) are not always or inevitably associated with falling (or low) government interest rates.

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Marketplaces and Policies – Making Connections (11-29-11)