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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FINANCIAL FIREWORKS: ACCELERATING AMERICAN INFLATION © Leo Haviland July 3, 2021

Prince sings in “Let’s Go Crazy”:
“Dearly beloved, we have gathered here today
To get through this thing called life.”

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CONCLUSION

The Federal Reserve Board and its central banking comrades obviously are not omnipotent. They also are not scientifically objective in their definitions, perspectives, methods, arguments, and conclusions. Neither is the Fed (its policies) the only important variable influencing inflation levels and patterns in America and elsewhere. Many intertwined phenomena in the United States and around the globe, including massive government deficit spending, matter.

Yet given the Federal Reserve’s success with its yield repression strategy (and its quantitative easing/money printing scheme), many observers have great confidence in the central bank’s insight, foresight, and talent for creating and managing “good” United States (and global) economic outcomes. These desirable results include not only adequate US economic growth and stable prices, but also bullish stock marketplace (use the S+P 500 as the benchmark) and home price moves.

The Fed’s long-running marketplace maneuvers, and especially its yield repression policy, have helped to create a culture strongly oriented (married, metaphorically speaking) to the existence and persistence of low Federal Funds and United States Treasury rates. In general, stock owners and securities issuers (corporations and sovereigns), as well as Wall Street enterprises who serve and profit from them, love low interest rates.

“Inflation” (deflation; stable prices) appears in various diverse economic arenas. The Fed itself and the great majority of Fed watchers on Wall Street and Main Street believe the Fed will achieve its praiseworthy goal of stable prices. Thus inflation will not climb “too high” or go “out of control”. Similarly, benchmark US Treasury interest rates also will not increase “too much” (“too far”; or “too fast”).

Since the coronavirus pandemic emerged during first quarter 2020, as part of its highly accommodative monetary policy, the Federal Reserve has purchased a huge quantity of US Treasury securities (as well as agency mortgage-backed securities). This extraordinary and ongoing net acquisition program has assisted its effort to ensure low marketplace yields. But observers should examine the Fed’s UST purchasing process and its consequences in more depth. It has significantly increased the Fed’s already sizable percentage share of the outstanding marketable (and held by the public) UST world. This noteworthy jump in the Fed’s arithmetic and percentage market share holdings of UST probably therefore has decreased the “free supply” (readily available inventory) of UST. Despite accelerating US inflation in recent months, the large reduction in the free supply of marketable UST probably has helped to keep benchmark UST yields (such as for the 10 year UST note) low.

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“American Inflation and Interest Rates: Painting Pictures” (5/4/21) stressed that American “inflation” in the general sense of the term (and even if one excludes the asset price territory of the S+P 500 and homes) is more widespread and less well-anchored than the Federal Reserve Board and armies of its devoted followers (especially investment sects and the financial advisors and media who assist them) believe.

Acceleration in assorted American inflation signposts has occurred in recent months. This probably shows that Fed programs have played, and continue to perform, a critical role in enabling US inflation to rise sharply. Though inflation in measures such as the Consumer Price Index is not yet “out of control”, the Fed at present has less control over this upward trend. Recent significant increases in key inflation benchmarks such as the CPI are not “transitory”. Despite the Fed’s dogmatic adherence to its yield repression approach, the Fed’s various current policies and its related rhetoric will find it very challenging to contain the increasing inflationary pressures.

Rising inflation will force the Fed to taper its ravenous US Treasury and mortgage securities buying program, and gradually abandon its longstanding tenacious yield repression strategy, sooner than it currently desires and plans. Despite the Fed’s yield repression, money printing, and wordplay (including forward guidance), America’s widespread, persistent, and growing inflation severely challenges faith in the Fed’s long run power to block significantly higher interest rates. The Federal Funds rate and UST yields (including those on the shorter end of the yield curve) probably will have to increase faster and further than the Fed shepherd currently wants and predicts. UST yields will resume their long run upward path. Sustained ascending American inflation has a strong likelihood of undermining and reversing bullish price trends in various “search for yield” marketplaces such as stocks.

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Financial Fireworks- Accelerating American Inflation (7-3-21)

AMERICAN HOUSING: A MARKETPLACE WEATHERVANE © Leo Haviland December 4, 2018

“What You Own”, a song from the musical “Rent” (by Jonathan Larson), declares: “You’re living in America at the end of the millennium- you’re living in America, where it’s like the twilight zone.”

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OVERVIEW AND CONCLUSION

American home prices have enjoyed a joyous climb since their dismal lows following the global economic disaster of 2007-09. However, United States home prices “in general” (“overall”) now probably are establishing an important peak. At least a modest reversal of the magnificent long-run bullish United States home price trend probably is near.

What is a high (too high), low (too low), expensive, cheap, average, good, bad, neutral, normal, typical, reasonable, commonsense, appropriate, fair value, overvalued, undervalued, natural, equilibrium, rational, irrational, or bubble level for prices or any other marketplace variable is a matter of opinion. Subjective perspectives differ. In any case, current US home price levels nevertheless appear quite high, particularly in comparison to the lofty heights of the amazing Goldilocks Era. As current American home price levels (even if only in nominal terms) hover around or float significantly above those of the Goldilocks Era, this hints that such prices probably are vulnerable to a noteworthy bearish move. Moreover, measures of global home prices and US commercial real estate also have surpassed their highs from about a decade ago and thus arguably likewise may suffer declines.

Many United States housing indicators in general currently appear fairly strong, particularly in relation to their weakness during or in the aftermath of the global economic crisis. Nevertheless, assorted American housing variables as well as other phenomena related to actual home price levels probably warn of upcoming declines in American home (and arguably other real estate) prices. A couple of US home price surveys have reported price declines for very recent months. US housing affordability has declined. New single-family home sales display signs of weakness, as do new privately-owned housing starts. American government interest rate yields, as well as US mortgage rates, have edged up. The Federal Reserve Board as of now likely will continue to tighten and raise rates for a while longer. Overall household debt, though not yet burdensome (at least for many), now exceeds the pinnacle reached ten years ago in 3Q08. The economic stimulus from America’s December 2017 tax “reform” probably is fading. US consumer confidence dipped in November 2018.

Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Convergence and divergence (lead/lag) relationships between marketplace trends and other variables can shift or transform, sometimes dramatically. Price and time trends for the American stock marketplace and US housing prices do not move precisely together. However, the international 2007-09 crisis experience (which in part strongly linked to US real estate issues) indicates that prices for US stocks and housing probably will peak around the same time, or at least “more or less together” (a lag of several months between the stock high and the home price pinnacle). The S+P 500 probably established a major high in autumn 2018 (9/21/18 at 2941, 10/3/18 at 2940; the broad S&P Goldman Sachs Commodity Index peaked 10/3/18 at 504). That autumn equity summit in the S+P 500 bordered 1/26/18’s interim top at 2873. Ongoing weakness in US (and international) stock marketplaces will help to undermine American home prices.

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American Housing- a Marketplace Weathervane (12-4-18)

US INFLATION SIGNALS © Leo Haviland June 7, 2015

In their noble war to generate sufficient inflation, insure economic recovery, and slash unemployment, central bankers in America, Europe, and Japan have fought with extraordinary weapons such as monumental money printing and longstanding interest rate yield repression. On the inflation front, they battle furiously to achieve and sustain an inflation target of about two percent. This allegedly good (desirable, reasonable, prudent) goal contrasts not only with bad “excessive” inflation, but also with bad “too low” inflation and evil (or at least really bad) of deflation.

For several months, widely-watched inflationary yardsticks such as the consumer price index indicated too low inflation or inflamed worries regarding deflation. The consequences of the 2007-2009 international economic disaster probably have not disappeared, and the dramatic slump in petroleum prices after mid-2014 has troubled many inflation seekers. In any event, most economic forecasters, including central banking captains, have postponed the achievement of sufficient inflation as measured by such signposts rather far out into the future. Consequently, marketplace warriors, political leaders, and the financial media have focused relatively little on other gauges warning of notable potential for increased inflation in benchmarks such as the consumer price index.
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The worldwide global economy of course is interconnected and complex. Numerous variables intertwine to produce any given inflation level and trend. Inflation acceleration need not appear first or strongest in beloved indicators such as consumer prices or personal consumption expenditures. Although the United States is not a financial island, focus on the American landscape.

“Inflation” is not confined to measures such as the CPI or personal consumption expenditures; “the economy” includes other inflation benchmarks. Various indicators signal there is more inflation “around” in the US than most believe. Underline American wage increases. Note central bank and marketplace murmurings regarding high valuations or so-called asset bubbles; keep in mind the climbs in US equities and home prices from their financial crisis depths. Money supply growth remains robust. The steely determination of the Fed and its central banking allies to achieve their inflation objectives heralds that monetary policy probably will remain quite lax for some time even if the US eventually raises rates. These factors collectively warn that at least in America, deflationary forces “in general” have found strong adversaries. The recent spike in key interest rates such as the 10 year US government note (and the German Bund) in part reflects this inflation.

Despite the recent rate of change in US consumer prices and personal consumption expenditures, probably neither deflation nor dangerously low inflation are on the American horizon. In addition, sustained “too low” inflation in America probably should not be a worry for the near term. Nevertheless, although a sustained jump in PCE and CPI inflation rates much beyond the Fed’s desired two percent target currently appears unlikely, “sufficient” inflation in America may be achieved faster than many predict.
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“Flights to quality”, hunts for suitable yield (return), and other supply/demand considerations, not just low inflation statistics, can rally prices of debt securities. Yet did sustained central bank yield repression create or at least encourage “too low” yields for (a price “bubble” in) key government debt securities such as those of the United States and Germany? In the Eurozone, the terrifying enemy called deflation neared. The European Central Bank fired back with a huge quantitative easing (money printing) plan involving government debt securities. Some European government security interest rate yields went negative.

However, was a US (and German) debt security price bubble recently popped?

The 10 year US government note established an important yield low at 1.64 percent on 1/30/15, above 7/25/12’s major bottom at 1.38pc. Since January 2015’s valley, the US 10 year rate shot up about 50 percent to 6/5/15’s 2.44pc. The 1/2/14 summit at 3.05pc represents important resistance. In any case, what should the yield on US 10 year government notes be if inflation (such as in the PCE) is 1.5 percent or higher?

The 10 year German government note made a key bottom on 4/17/15 close to zero, at .05 percent (not long after the UST 10 year note made a minor low at 1.80pc on 4/3/15). Bund yields thereafter blasted higher, reaching almost one percent on 6/4/15. The Japanese 10 year JGB made a significant trough in 2015 shortly before the UST’s, on 1/20/15 at .20 percent.

US stocks advanced victoriously from their March 2009 major low for many reasons, including strong corporate earnings and share buybacks. Yet money printing and yield repression also assisted the S+P 500’s mighty ascent. So if US stocks recently reached “too high” levels, perhaps rising interest rates (or growing fears of them) will inspire those equities to retreat (burst their bubble).

Regardless of whether or not American government note yields recently were (or are still) “too low”, the recent sharp increase in UST 10 year note rates may reflect not just a “technical correction” or a growing belief that the Federal Funds rate (and thus yields in US government securities) will rise in the relatively near future. That noteworthy UST yield leap probably also warns that US inflation “in general” has grown or will do so soon.

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US Inflation Signals (6-7-15)

STILL SWAMPED- US REAL ESTATE © Leo Haviland, October 11, 2011

The United States real estate marketplace, despite some improvement relative to winter 2008-09’s abyss, remains in mournful shape. During the ongoing terrible global economic crisis, nervous politicians, fearful central bankers, and enthusiastic real estate business promoters have devoted much effort and creativity in their quest to rescue the real estate arena. How should we characterize their overall performance to date? Despite their numerous at-bats and vigorous swings at the real estate debacle, the financial and political guardians have often struck out and their overall batting average remains low.

Perhaps the real estate scene will become brighter. After all, central bankers and politicians always have upcoming opportunities to step up to the plate. They will keep swinging and whacking at real estate problems. Nevertheless, the still-feeble US real estate world underlines the fragile foundation and structure of the economic revival fabricated by the Federal Reserve (and its overseas central bank teammates) and political crews. Despite some progress, the shattering damage of the international economic disaster that commenced in 2007 has not been substantially fixed. The economic crisis persists and will continue for several more innings. Though the worldwide economic advance that emerged in spring 2009 reflects repairs and is not entirely a house of cards, it’s not entirely built on solid ground. Money printing and deficit spending are not genuine (enduring) cures for economic problems.

The recent slowdown in the overall economic landscape will hinder the US real estate recovery. Therefore American real estate prices will remain relatively weak.

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Still Swamped – US Real Estate (10-11-11)