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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GIMME SHELTER (AND FOOD AND FUEL) © Leo Haviland June 5, 2022

In “Gimme Shelter”, The Rolling Stones sing:
“Ooh, a storm is threatening
My very life today
If I don’t get some shelter
Ooh yeah I’m gonna fade away”

****

CONCLUSION AND OVERVIEW

Not long after the end of the 2007-09 global economic disaster, American home prices embarked upon a sustained and substantial bull move. Economic growth, population increases, the American Dream’s ideology praising home ownership, widespread faith that a home represents a long run store of value, and tax incentives for home acquisition encouraged that rally. In recent years, the Federal Reserve’s sustained interest rate yield repression and extravagant money printing policies also boosted the consumer’s ability (reduced the cost) and inclination to buy homes. Homes, like stocks and corporate bonds and even many commodities, became part of the “search for yield” universe. The dramatic home price rally has not been confined to America.

The international coronavirus epidemic which emerged around first quarter 2020, made working in the office (or learning at school) appear dangerous. This inspired a ravenous appetite to acquire homes (or more space or quality at home) to escape health risks, encouraging the latest stages of the bullish house trend. Both central bankers and governments acted frantically to restore and ensure economic recovery and growth. Thus housing prices, benefited not only by the beloved Fed’s easy money policies, but also from monumental federal deficit spending.

Moreover, given the acceleration and substantial levels of American and international consumer price inflation over the past year or so, the general public increasingly has seen home ownership as an “inflation hedge”, not just as an indication of American Dream success and “the good life”.

****

Over the next several months, the intersection of the current major trend of increasing American and other interest rates alongside a gradually weakening United States (and worldwide) economy probably will significantly reduce the rate of American home price increases. Fears that a notable slowdown (or stagflation), and maybe even a recession, have developed. Even the ivory-towered Federal Reserve finally espied widespread and sustained inflation. So central bankers nowadays are engaging in monetary tightening. Further rounds of mammoth government deficit spending currently are unlikely. Public debt in the US and elsewhere rose immensely due to the huge government expenditures related to the coronavirus pandemic and the related quest to create and sustain economic recovery. As the US November 2022 election approaches, that country is unlikely to agree anytime soon on another similar deficit spending spree to spark economic growth. Some signs of moderation in housing statistics hint that home price increases probably will slow and that prices will level off. Thus the peak in American home prices will lag that in the S+P 500.

In regard to the present robust bull price pattern for US homes, there is a greater probability than most audiences believe that US home price increases will slow substantially. Nominal house prices eventually may even fall some. It surely is unpopular (and arguably heretical) nowadays to suggest that American and other national house prices eventually may decline. Yet history, including the passage from the Goldilocks Era to the global economic crisis period, demonstrates that home values, like other asset prices, can fall significantly.

“Runs for cover” increasingly are replacing “searches for yield” in the global securities playground by “investors” and other owners. Price declines in American and other stock marketplaces have interrelated with higher yields for (price slumps in) corporate debt securities and emerging marketplace US dollar-denominated sovereign notes and bonds.

Further declines in US consumer confidence probably will take place. Sustained lofty consumer price inflation (encouraged not only by core CPI components such as shelter, but also by high levels in food and fuel prices) distress consumers. At some point, generalized inflation accompanied by higher US Treasury and mortgage yields can slash home buying enthusiasm, especially if home-owning affordability tumbles. Although history shows that price and time relationships for the S+P 500 and US home prices are not precise, and though equities and houses have different supply/demand situations, stocks and home prices roughly “trade together” over the misty long run. In addition, substantial declines (and increases) in American consumer confidence intertwine with (confirm) major trends in the S+P 500. Consumer confidence has been slipping for several months; the S+P 500 probably established a major peak in early January 2022, and its decline of around twenty percent fits the conventional definition of a bear market.

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Gimme Shelter (and Food and Fuel) (6-5-22)

THE CURTAIN RISES: 2016 MARKETPLACE THEATERS © Leo Haviland January 4, 2016

Shakespeare proclaims in “As You Like It” (Act II, Scene VII):

“All the world’s a stage,

And all the men and women merely players”.

THE 2016 WORLDWIDE ECONOMIC STAGE

As the 2016 international economic (and political) drama commences, the worldwide economy not only is sluggish, but also feebler than most forecasters assert. International real GDP, as well as that in the United States, has a notable chance of slowing down further than many expect (the International Monetary Fund predicts real global output will increase 3.6 percent in calendar 2016; “World Economic Outlook”, Chapter 1, Table 1.1).

The ability of the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, China’s central bank, and their friends to engineer their versions of desirable outcomes via highly accommodative policies has diminished. Beloved schemes such as quantitative easing (money printing) and yield repression and related rhetoric are becoming less influential. Ongoing significant political divisions and conflicts (America’s troubling carnival represents only one example) likely will make it challenging for political leaders to significantly promote substantial (adequate) growth.

The failure of longer term US government yields such as the UST 10 year note to rise substantially despite the Fed’s recent modest boost in the Federal Funds rate represents a noteworthy warning sign regarding American and global financial prospects. Note also very low sovereign yields in much of the Eurozone (picture Germany); Japanese government rates remain near the ground floor. However, yields of less creditworthy debt instruments, whether sovereign or corporate, probably will continue to climb in 2016, another ominous indication.

For the near term at least, the broad real trade-weighted US dollar probably will remain strong. Emerging marketplace equities and commodities “in general” likely will persist in bear trends. What does the rally of the dollar above its late August/September 2015 heights signal? What does the collapse of benchmark commodity indices such as the broad GSCI beneath their late August 2015 lows portend? These warn not only of worldwide economic weakness, but also of further declines in the S+P 500. Note that emerging marketplace stocks hover fairly closely to their 2015 depths. The S+P 500 probably will remain in a sideways to bearish trend.

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The Curtain Rises- 2016 Marketplace Theaters (1-4-16)

FEDERAL RESERVE EXIT STRATEGIES © Leo Haviland February 21, 2013

Federal Reserve Board generals have underlined that they indeed possess an exit strategy for their ongoing extraordinary easing program. Such confident rhetoric regarding an escape plan indeed helps to boost the morale of many economic and political observers of marketplace battlefields. Didn’t its entrance strategy work? The Fed Funds rate has stayed near the ground floor since late 2008, United States Treasury yields have collapsed relative to their 2007 heights, and US equities (use the S+P 500 as a signpost) have soared from their March 2009 abyss.

Yet marketplace combatants should be wary of the Fed’s exit strategy design as well as its tactical implementation. It is not a detailed and finished blueprint. In actual practice, the exit strategy involves significant risk, and it probably will not be put into practice nearly as timely or smoothly as propaganda from the Fed leadership hints. How rapid, coherent, and helpful were the Fed’s policy viewpoints and actions in the early stages of the worldwide economic crisis? As the Fed’s marketplace entrance strategy and maneuvers were very remarkable and evolved over time, why should its exit plan and its application be any more “orderly”?

Yet why should the Fed’s exit strategy be without some significant pain to UST and stock owners? There’s at least a significant risk of notable wounds. After all, the rally in debt and equity prices assisted by the Fed’s massive marketplace easing generally enriched and thus pleased owners of American stocks and UST (and many other debt instruments). Besides, we know the noble Fed is not the only significant policy maker and fighter on the US (and international) economic battlefield. Thus its practical control over marketplace outcomes has significant limits.

To what extent is the Fed Chairman accurate? Is the Fed Chairman trying to minimize the role of the Fed in financing (money printing for) the deficit and to understate potential overall exit strategy issues?

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Federal Reserve Exit Strategies (2-21-13)