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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In “Satisfaction”, The Rolling Stones sing: “I can’t get no satisfaction.”
CONCLUSION AND OVERVIEW
“Economic” confidence and satisfaction levels and trends interrelate with patterns of and anticipations regarding “economic” performance. These variables entangle with and influence price trends in stocks and other financial marketplaces. Thus consumer (Main Street) confidence and similar measures can confirm, lead (or lag), or be an omen for future movements in GDP, inflation, the S+P 500, interest rates, and so on.
Declines in American economic confidence in recent times confirm deterioration in the nation’s (and global) economic condition. The severity of those confidence slumps probably warns of further ongoing economic challenges in the future. These looming difficulties include not only the perpetuation of relatively high inflation for quite some time, but also slowing and perhaps even falling GDP growth. Since America is a leading economic nation in the intertwined global economy, what happens there substantially influences and reflects economic performance elsewhere.
Regarding and within cultural fields, definitions, propositions, interpretations, arguments, and conclusions are subjective (opinions). So-called “economic” (financial, commercial, business) arenas and analysis regarding them are not objective (scientific). In any case, as they are cultural phenomena, economic realms are not isolated from “political” and “social” ones. They interrelate with them, and sometimes very substantially.
Evidence of substantial (and in recent times, increasing) “overall” (including but not necessarily limited to political or economic) dissatisfaction within America are not unique to that country. However, since overall and political measures of declining confidence within and regarding the United States both include and extend beyond the economic battleground, at present they consequently probably corroborate current and herald upcoming economic troubles (economic weakness; still rather lofty inflation) for the US.
Marketplace history is not marketplace destiny, either entirely or even partly. Relationships between marketplaces and variables can change, sometimes dramatically. Nevertheless, keep in mind that if prices for assorted “search for yield (return)” marketplaces such as stocks (picture the S+P 500) and lower-grade debt can climb “together” (roughly around the same time), they also can retreat together.
“Runs for cover” in recent months increasingly have replaced “searches for yield” in the global securities playground by worried “investors” and other nervous owners. Price declines in American and other stock marketplaces have interrelated with higher yields for (price slumps in) corporate debt securities and emerging marketplace sovereign US dollar-denominated notes and bonds.
The devastating price collapse in Bitcoin and many other cryptocurrencies surely has dismayed many yield-hunters on Main Street.
Declines in American confidence and satisfaction assist and confirm the price falls in recent months in the S+P 500 and other “search for yield” playgrounds such as corporate and low-grade sovereign debt. Thus confidence destruction has interrelated with capital destruction (loss of money) by “investors” and other owners) in stock and interest rate securities marketplaces. From the historical perspective, slumps in as well as very low levels for some of the confidence (“happiness”; optimism) indicators probably signal further price drops in the S+P 500 and interconnected search for yield marketplaces.
The beloved Federal Reserve and its central banking friends finally recognized that consumer price inflation is not a temporary or transitory phenomenon and have elected to raise policy rates (end, or at least reduce, yield repression) and shrink their bloated balance sheets. Yet inflation probably will not drop significantly for some time. Besides, how much faith exists that the Federal Reserve will (or can) control and even reduce consumer price inflation anytime soon? How much trust should we place in the Fed’s abilities? The Fed helped to create inflation (and not just in consumer prices, but also in assets) via its sustained massive money printing and ongoing yield repression, and the Fed did not quickly perceive the extent and durability of consumer price inflation.
Long run history shows that significantly rising American interest rates for benchmarks such as the US Treasury 10 year note lead to bear marketplaces in the S+P 500.The US stock marketplace has declined significantly since its January 2022 peak. Home price appreciation, a key factor pleasing many consumers, probably will decelerate, and perhaps even cease. The Ukraine/Russia war continues to drag on. Despite recent declines from lofty heights, prices for commodities in general remain elevated from the pre-war perspective. Global government debt is substantial, and fearsome long-run debt problems for America and many other countries beckon. American and international GDP growth has slowed. Stagflation and even recession fears have increased. The coronavirus problem, though less terrifying, has not disappeared.
Therefore many American Main Street confidence indicators probably will decline, or at least remain relatively weak, over at least the next several months.
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We Can't Get No Satisfaction- Cultural Trends and Financial Marketplaces (7-13-22)
The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).
The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.
Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.
The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.
Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).
Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.
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There Will Be Blood- Financial Battlefields (2-9-18)
In his song “Busload of Faith”, Lou Reed chants: “you need a busload of faith to get by”.
The United States 10 year government note is a widely-watched marketplace benchmark and guide. It ended its major bull move in summer 2016, establishing a yield bottom on 7/6/16 at 1.32 percent. Although the rate for the US Treasury 10 year note has walked peacefully sideways in a fairly narrow path over the past year or so, its yield nevertheless on balance has crept upward from its 9/8/17 interim trough at just over two percent toward its critical barrier around 2.65pc. In the UST’s bear move, the UST yield probably will pierce this 2.65pc target in the near term, with 1/2/14’s 3.05pc elevation the next height in sight.
After establishing a major top in December 2016/January 2017 at 103.2, the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; monthly average) slipped 7.8 percent to 95.2 in September 2017, slightly below crucial support around 96.2 to 96.6. Despite a slight bounce for a couple of months following that September depth, the TWD has renewed its bearish assault on 96.2/96.6 and probably will break decisively beneath that floor (and September 2017’s minor low) relatively soon.
Economic phenomena and fields interrelate in various fashions. Apparent links and relationships between financial (and political) variables and trends (including convergence/divergence and lead/lag ones) of course can change, sometimes dramatically. In any case, although marketplace history is not marketplace destiny, historical analysis still can offer guidance regarding future probabilities.
The current intertwined relationship and trends of rising US Treasury yields alongside the weakening United States dollar likely is of substantial significance for financial marketplaces in general, not just US government interest rates and key currencies.
History signals that climbing US interest rate yields often precede (connect with; lead to) pinnacles in the Dow Jones Industrial Average and the S+P 500. In the current economic and political landscape, further feebleness in the broad real trade-weighted US dollar probably will warn of (or confirm) important tops in advanced nation and emerging marketplace stock marketplace benchmarks.
See “Marketplace Vehicles: Going Mobile” (12/13/17), “History on Stage: Marketplace Scenes” (8/9/17), and other essays.
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Busload of Faith- Financial Marketplaces (1-15-18)