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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US STOCKS OVER THE LONG RUN: BEAR MARKETPLACE HISTORY © Leo Haviland, August 4, 2023

“It’s déjà vu all over again!”, declared Yogi Berra, a famous baseball star.

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OVERVIEW AND CONCLUSION

Given the great significance of the United States within the global economy, both Wall Street and Main Street spend much attention and energy focusing on the American economic scene. Benchmark American stock indices such as the S+P 500 and Dow Jones Industrial Average to some extent probably reflect the overall health of and potential for the American economy. 

United States stock marketplace trends and phenomena intertwine with those of other global stock arenas. Prices and trends for (and assorted other economic, political, and social variables influencing) US signpost stock indices such as the S+P 500 and Dow Jones Industrial Average interrelate with those of key American and global interest rate, currency, commodity, real estate, and other economic domains. History reveals that these cultural relationships can and do change, sometimes slowly, sometimes rapidly. Convergence and divergence (lead/lag) patterns between marketplaces can and do shift or transform. 

Price levels and trends for these key American equity marketplaces therefore attract and sustain widespread and domestic international attention. 

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US interest rate, dollar, commodity, real estate, and other marketplace trends entangle with and influence American stock trends. 

“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 probably will 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.” 

The UST 10 year note yield broke through 3/2/23’s 4.09 percent interim high with 8/3/23’s 4.20 percent high. It thus is approaching 10/21/22’s 4.34 percent top, attained around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. 

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Given the importance of price trends in widely watched US equity indices such as the S+P 500 and Dow Jones Industrial Average, stock and other marketplace players and observers should review and assess long run bear (and bull) marketplace history for those American benchmarks. 

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US Stocks Over the Long Run- Bear Marketplace History (8-4-23)

CRITICAL CONDITIONS IN FINANCIAL MARKETPLACES © Leo Haviland November 13, 2022

The Rolling Stones sing in “All Down the Line”:
“We’ll be watching out for trouble, yeah
(All down the line)
And we’d better keep the motor running, yeah
(All down the line)”

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OVERVIEW AND CONCLUSION

Financial marketplace trends entangle in diverse fashions, which of course can change, and sometimes dramatically. Convergence and divergence (lead/lag) relationships between them can and do evolve, sometimes significantly. An increasing reversal of a given ongoing prior set of patterns between one or more key interest rate, stock, currency, and commodity marketplaces thus can attract growing attention and accelerate price moves in the new directions.

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In general, since around the beginning of calendar 2022, as American and other key global government interest rates continued to rise (enlist the United States Treasury note as a benchmark), the S+P 500 (and other advanced nation and emerging marketplace stock playgrounds) declined. Growing fears regarding substantial and persistent consumer price (and other) inflation by the Federal Reserve and its central banking allies and the linked policy response of raising Federal Funds and similar rates played key roles in the yield climbs and stock price falls. Bear trends for other “search for yield” assets such as corporate bonds and United States dollar-denominated emerging marketplace corporate debt converged with those of the S+P 500 and emerging marketplace stocks. Commodities “in general” (“overall”) of course do not always trade “together” in the same direction around the same time as the S+P 500. Nevertheless, in broad brush terms since around late first quarter 2022, their downward price and time trends converged. A very strong US dollar encouraged the relationships of higher US Treasury yields, descending stock prices, and eroding prices for commodities “in general”.

However, the US 10 year note yield achieved an important high on 10/21/22 at 4.34 percent. Using the Federal Reserve Board’s nominal Broad Dollar Index as a weathervane, the dollar peaked at 128.6 on 9/27/22 and 10/19/22. The S+P 500 established a trough in its bear trend with 10/13/22’s 3492. Based on the S+P GSCI, commodities in general attained an important low on 9/28/22 at 591.8. Note the roughly similar times (and thus the convergence) of these marketplace turns, which thereafter reversed, at least temporarily, the preceding substantial trends.

What key changes in central bank policy and marketplace inflation yardsticks encouraged the recent slump in the UST 10 year yield, the depreciation in the US dollar, and the jump in the S+P 500 and the prices of related hunt for yield (adequate return) battlefields? First, various members of the Federal Reserve leadership hinted that future rate increases would slow in extent (be fifty basis points or less rather than 75bp). See the Financial Times summary of officials leaning that way (11/12-13/22, p2). The Fed probably will tolerate a brief recession to defeat inflation, but it (and of course the general public and politicians) likely would hate a severe one. In today’s international and intertwined economy, further substantial price falls (beneath recent lows) in the stock and corporate debt arenas (and other search for yield interest rate territories), and even greater weakness than has thus far appeared in home prices, plus a “too strong” US dollar, are a recipe for a fairly severe recession. Hence the Fed’s recent rhetorical murmurings aim to stabilize marketplaces (and encourage consumer and business confidence and spending) and avoid a substantial GDP drop.

Second, US consumer price inflation for October 2022 stood at “only” 7.7 percent year-on-year. This rate fell short of expectations for that month and declined from heights exceeding eight percent in the several preceding months. This sparked hopes that American (and maybe even global) inflation would continue to decline even more in the future, and that the Federal Reserve and other central bank guardians would engage in less fierce tightening trends.

Of course the Fed policy hints and US consumer inflation statistics do not stand apart from other variables. Might China ease its restrictive Covid-fighting policy, thus enabling the country’s GDP to expand more rapidly?

The trends for commodities in general (employ an index such as the broad S+P GSCI) and the petroleum complex in particular sometimes have diverged substantially for a while from that of the S+P 500. After all, petroleum, wheat, and base metals have their own supply/demand and inventory situations. The broad S+P GSCI stabilized in early autumn 2022 due to a determined effort by OPEC to rally petroleum prices via production cuts. And over the long run, the S+P 500 and commodities tend to trade together. OPEC+’s ability to successfully defend a Brent/North Sea crude oil price around 83 dollars per barrel (nearest futures continuation) depends substantially on interest rate and stock levels and trends, as well as the extent of US dollar strength.

The “too strong” US dollar during calendar 2022 encouraged price declines in assorted search for yield asset classes, including emerging marketplace stocks and debt instruments as well as commodities. The recent depreciation of the US dollar thus has interrelated with (confirmed) the price rallies in recent days in the S+P 500 and other marketplaces. Yet the Federal Reserve probably will remain sufficiently vigorous in comparison with other central banks in its fight against inflation, which should tend to keep the dollar strong, even if it stays beneath its recent high.

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Investors in (and other owners of) stocks and other search for yield realms and their financial and media friends joyously applauded recent price rallies. However, to what extent will these bullish moves persist?

US consumer price and other key global inflation indicators remain very high relative to current central bank policy rates. Not only does the US CPI-U all items year-on-year percentage increase of 7.7 percent for October 2022 substantially exceed UST 10 year yields over four percent, but so does October 2022’s 6.3 percent year-on-year increase in the CPI-U less food and energy.

Imagine consumer price inflation staying at only 4.5 percent. To give investors a 50 basis point return relative to inflation, the UST should yield five percent. Thus the Fed will continue to push rates higher in its serious battle against inflation, and eventually the rising UST yield pattern probably will reappear, persisting until there are signs of much lower inflation or a notable recession.

Although marketplace history is not marketplace destiny, history reveals that significant climbs in key US interest rate signposts (such as the UST 10 year) tend to precede substantial falls in US stock benchmarks such as the S+P 500. Thus the S+P 500 probably will resume its decline, although it will be difficult for it to breach its October 2022 depth by much in the absence of a sustained global recession. So a return to rising UST rates, all else equal, probably will keep the dollar fairly powerful from the long run historic perspective, even though the dollar will find it challenging to exceed its recent highs by much (if at all) for very long.

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Critical Conditions in Financial Marketplaces (11-13-22)

MARKETPLACE TRENDS AND ENTANGLEMENTS © Leo Haviland April 4, 2022

Bob Dylan says in “The Times They Are A-Changin’”:
“There’s a battle outside and it is ragin’
It’ll soon shake your windows and rattle your walls
For the times they are a-changin’”

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CONCLUSION

Marketplace history of course is not marketplace destiny, whether for one financial realm or the relationships between assorted domains. Although traditions and the analytical time horizon and the scope of allegedly relevant variables remain critical, the cultural past in its major fields such as economics and politics need not repeat itself, either completely or even partly. Yet sometimes current and potential economic and other cultural situations apparently manifest sufficient important similarities to “the past” so that many observers can perceive patterns helping to explain “the present” and to forecast future probabilities. Thus from the standpoint of many subjective perspectives, marketplace history (like other history) often does recur to a substantial extent. Such alleged historical similarity, as it is not objective (scientific), also consequently permits a great variety of competitive storytelling about it.

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The 2022 landscape for the United States dollar, the US Treasury 10 year note, commodities “in general”, and the S+P 500 resembles that of around early 2020. The United States dollar currently hints that it may have established an important peak or that it will soon do so. The real Broad Dollar Index’s height (see the Federal Reserve Board, H.10) borders its March/April 2020 highs. Arguably commodities in general began a notable decline in early 2022. Using the broad S&P GSCI as a benchmark, the spot/physical/cash (as well as the nearest futures continuation) commodities complex (including the key petroleum arena) peaked in early January 2020 alongside a strengthening US dollar. A pattern of increasing US Treasury yields (take the 10 year note as the signpost) preceded the early 2020 stock pinnacles (S+P 500 on 2/19/20; emerging marketplaces in general on 1/13/20) as well as the commodities one. Marketplace chronicles unveil a significant yield increase in the UST 10 year note (and other important debt security benchmarks) prior to (and following) the S+P 500’s very significant high (perhaps a major top) 1/4/22 at 4819. As in 2020, the 2022 highs in stocks and commodities entangled with both rising yields and a strong dollar.

In summary, although their future levels and trends admittedly are cloudy and uncertain, what are probable trends for these marketplaces? The United States real Broad Dollar Index probably has attained its pinnacle or will do so in the near future. Commodities in general (spot; nearest futures basis) probably made a major high in early March 2022 and will continue to retreat. Although it is a difficult call, the S+P 500 likely peaked in January 2022, and it probably will venture beneath late February 2022’s 4115 low. Over the long run, given the American (and global) inflation and debt situation, the yield for the US Treasury 10 year note will ascend above its recent high around 2.55 percent, although occasional “flights to quality” and thus interim yield declines may emerge.

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Arguments in marketplaces and elsewhere in cultural life that “this time is different” are inescapable and often persuasive. Of course the coronavirus pandemic played a major role in the first quarter 2020 collapse in global stocks and commodities. However, the rising interest rates and strong dollar variables still played an important part in those 2020 marketplace declines. And the American and international inflation and debt troubles of 2022 (“nowadays”) far exceed those existing around January 2020. The Russian invasion of Ukraine obviously makes aspects of the recent commodities situation different from 2020; global petroleum prices, for example, though “high” prior to the Russia/Ukraine conflict, probably would not have skyrocketed in its absence. And in regard to historic and potential future marketplace relationships and related risk assessments, we should not forget 2007-09, the ending of the Goldilocks Era and its dismal aftermath, the global economic disaster. The S+P 500’s summit (October 2007) diverged for several months from the peak in commodities in general (July 2008), although the trends of those two financial sectors thereafter converged. Also, as US and other stocks began their terrifying descent in spring 2008 until March 2009, the dollar rallied.

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Marketplace Trends and Entanglements (4-4-22)

WALL STREET TALKING, YIELD HUNTING, AND RUNNING FOR COVER © Leo Haviland May 14, 2019

“‘Curiouser and curiouser!’ cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English).” “Alice’s Adventures in Wonderland”, by Lewis Carroll (Chapter II, “The Pool of Tears”)

CONCLUSION: GOLDILOCKS ERA, REVISITED

Historians should wonder if the Federal Reserve Board and its friends in central banking (and assorted comrades parading in some political corridors and media circles) nowadays are aiming to manufacture an updated version of the joyous last stage (ending in 2007) of the magnificent Goldilocks Era.

Lower United States Treasury yields and the sunny prospect of continued benevolent Federal Reserve policy reappeared around end December 2018/early January 2019. The rapid bull climb in the S+P 500 from then until the beginning of May 2019 to some extent reflected hopes of further (adequate) American and global economic expansion.

However, the frantic price rally in several key marketplace benchmarks commencing around end year 2018 also probably reflected an ardent quest for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield hunters searched for sufficient return in territories such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex.

Of course cultural history does not necessarily repeat itself, either entirely or even partly. Marketplace phenomena (conditions; variables), including relationships between them and perspectives on them, can and do change, sometimes dramatically. Rhetoric (stories) relating to economic and related playgrounds seek not only to explain viewpoints and situations, but also to guide behavior.

Later stages of economic expansions (so-called cycles) often are distinguished by what many players, including leading and widely-respected economic guardians and policymakers, decide to overlook or minimize.

This ardent quest for yield probably manifested that America is in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in other advanced nations), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is or soon will be underway.

“Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19) stated in regard to the S+P 500: “The September/October 2018 elevation [2941 (9/21/18)/2940 (10/3/18)] probably will not be broken by much, if at all.” The recent price declines in the S+P 500 (5/1/19 high 2954) and other advanced nation stocks, emerging marketplace stocks, emerging marketplace dollar-denominated sovereign debt, and the petroleum complex probably signal that many dutiful profit hunters (and probably some other investors/owners) have started running for cover (begun to liquidate their long positions).

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Wall Street Talking, Yield Hunting, and Running for Cover (5-14-19)