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 EXPECTATIONS AND OUTCOMES © Leo Haviland September 5, 2022

“Are you gonna bark all day little doggie? Or are you gonna bite? Mr. Blonde asks Mr. White in “Reservoir Dogs” (Quentin Tarantino, director), after their gang’s jewelry heist went disastrously wrong.

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OVERVIEW AND CONCLUSION

The Federal Reserve watchdog and its central banking companions, after a very lengthy delay, finally awoke to widespread evidence that substantial consumer price inflation was not a temporary or transitory phenomenon. The Fed guardian generally has evaded taking responsibility for its important role in creating substantial inflation (not just in consumer prices, but also in stocks and numerous other asset classes) via its mammoth money printing and yield repression schemes. But to restore and preserve its inflation-fighting credibility and sustain its marketplace reputation, in recent months the Fed noisily has raised policy rates (and significantly reduced yield repression) and started to shrink its engorged balance sheet.

The Fed’s need to manifest genuine loyalty to its legislative mandate of stable prices (which other central bankers have echoed) thus has provoked it to do some nipping, and even a little biting, of “investors” and other owners in the S+P 500 and other “search for yield” marketplaces such as corporate bonds and US dollar-denominated foreign sovereign debt. Fed Chairman Jerome Powell’s 8/26/22 Jackson Hole, Wyoming speech (“Monetary Policy and Price Stability”) further emphasized its rediscovered inflation-fighting enthusiasm. The Chairman confesses: “Inflation is running well above 2 percent, and high inflation has continued to spread through the economy.” The Chairman barks: “overarching focus right now is to bring inflation back down to our 2 percent goal”; “Restoring price stability will take some time and requires using our tools forcefully”; “estimates of longer-run neutral are not a place to stop or pause”; this restrictive policy stance likely must be maintained “for some time”; after all, “The longer the current bout of high inflation continues, the greater the chance that expectations of high inflation will become entrenched.” Note the dogged determination expressed by this trusty guardian!

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“Summertime Blues, Marketplace Views” (8/6/22) states: “Despite growing concerns about a United States (and global) economic slowdown or slump, and despite potential for occasional “flights to quality” into supposed safe havens such as the United States Treasury 10 year note and the German Bund, the long run major trend for higher UST and other benchmark international government yields probably remains intact.” Regarding the S+P 500, that essay concludes: “Although the current rally in the S+P 500 may persist for a while longer, the downtrend which commenced in January 2022 probably will resume. The S+P 500’s June 2022 low probably will be challenged.”

The Fed’s late August 2022 wordplay has encouraged the previously existing trends of higher United States Treasury yields and declining prices for the S+P 500 and related search for yield (return) arenas such as emerging marketplace stocks, corporate bonds, and US dollar-denominated sovereign debt. Prices for commodities “in general” also have withered.

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Marketplace Expectations and Outcomes (9-5-22)

SHAKIN’ ALL OVER: MARKETPLACE FEARS © Leo Haviland August 13, 2015

China’s recent shocking currency devaluation underscores not only that country’s ongoing growth slowdown, but also its leaders’ fears that real GDP expansion rates will ebb further. China of course is not the only emerging/developing nation nervous about insufficient output or even recessions. Trends in the broad real trade-weighted US dollar, emerging stock marketplaces, and commodities “in general” signal (confirm) slowing growth in both emerging and OECD economies. Moreover, recent pronouncements by the International Monetary Fund regarding the central bank policies of key advanced countries manifest widespread worries about growth in these well-developed territories. Despite about seven years of highly accommodative monetary policies such as yield repression and money printing (and frequently bolstered by hefty deficit spending), the foundations of worldwide growth increasingly look shaky.

China’s devaluation assists the long-running bull charge in the broad real trade-weighted US dollar (“TWD”). China represents about 21.3 percent of the TWD (Federal Reserve, H.10).

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Are central banks and politicians always devoted to so-called “free markets”? To what extent do they restrict themselves from entering into and manipulating marketplaces?

In any case, the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England have long been married (roughly seven years) to highly accommodative monetary policies. They do not seem to be in a rush to change them substantially anytime soon. The Fed’s apparent willingness to make a minor (gradual) boost in the Federal Funds rate in the near term is not a dramatic shift in its highly accommodative policy.

Inflation (and interest rate) and unemployment targets are not divorced from opinions regarding what constitutes sufficient (appropriate; desirable) real GDP growth levels and trends. An economic boom currently does not exist in the OECD in general. So if substantial “normalization” of monetary policy is not imminent among key advanced nations, then arguably central bankers believe that prospective growth GDP probably will remain rather feeble for at least the near term.

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Former Federal Reserve Chairman Alan Greenspan coined the phrase, “irrational exuberance” (Speech, “The Challenge of Central Banking in a Democratic Society, 12/5/96). About two decades later, this financial guardian proclaimed (Bloomberg Television interview, 8/10/15): “I think we have a pending bond market bubble.” Of course, as in 1996, defining and identifying a bubble and predicting when (and why and how) it will pop and the consequences of such an event remains challenging.

Flights to quality can play a role in creating low interest rate yields, particularly in the safe haven government debt securities of countries such as the United States and Germany. However, sustained yield suppression by the Federal Reserve, the European Central Bank, and others, which motivates avid searches for yield (return) in assorted financial playgrounds (including stocks), surely encourages low interest rates in both government and many other debt arenas. Think of corporate bonds. In any case, suppose there is a bond price bubble (“too high” or “overvalued” bond prices; too depressed yields) in the United States. So presumably as various marketplaces interconnect in today’s global economy, if American bond prices are at bubble levels, then arguably prices in other realms, as in the S+P 500, some real estate sectors, or the art world (painting), consequently could be inflated.

Were the S+P 500, US real estate, and art at the end of the Goldilocks Era in 2007 rather lofty?

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Shakin' All Over- Marketplace Fears (8-13-15)