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 AGITATION ©Leo Haviland October 3, 2023

RISING AMERICAN INTEREST RATES, FALLING US STOCKS

Listen to “Agitation”, jazz music from Miles Davis.

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Let’s focus on the American horizon and the exciting US Treasury and S+P 500 marketplaces. 

Since around spring 2020, and particularly since August 2022, and especially in recent months, the UST marketplace has suffered noteworthy capital destruction due to falling prices. A glorious bull move in the  S+P 500 followed 3/23/20’s dismal bottom at 2192. The S+P 500 thereafter exploded upward, more than doubling, to establish a thrilling record high on 1/4/22 at 4819. After an agonizing bear slump to October 2022’s bottom, a significant joyful stock rally ensued. The S+P 500 approached January 2022’s peak, reaching a summit on 7/27/23 at 4607. The S+P 500 probably has commenced a bear trend, though its slump from its July 2023 peak has been moderate thus far. 

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“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 will probably 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.” 

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The UST 10 year note yield increased since 3/9/20’s major bottom at .31 percent, accelerating upward from 8/4/21’s 1.13pc to 6/14/22’s 3.50 pc. The S+P 500 peaked during this rising yield trend on 1/4/22 at 4819. The UST 10 year note yield, after sliding down to 8/2/22’s 2.51 percent resumed its yield ascent. It made another important interim yield low with 4/6/23’s 3.25pc. With 8/22/23’s 4.37 percent, the UST 10 year pierced 10/21/22’s 4.34 percent high, achieved around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. The UST 10 year note price kept falling, and the UST yield reached 4.81 percent on 10/3/23. A dramatic UST 10 year yield climb over five percent and toward 6/13/07’s 5.32 percent Goldilocks Era summit would further unnerve many UST (and stock) holders. 

In some circumstances, rising interest rates can indicate or portend adequate (good) real GDP growth, and thus from some perspectives (up to some point), increasing UST yields (falling debt prices) are designated as “good”. And investors in interest rate instruments of course want a decent (and real) return relative to inflation, so rising yields have been a blessing for many of them, at least to some extent. 

However, many institutions and individuals bought low-yielding UST during the Fed’s yield repression era. Their interest income during the past couple of years likely fell beneath inflation heights represented by the consumer price index. Many of these interest rate instrument owners probably have suffered some noteworthy mark-to-market damage to their principal; so have numerous other recent buyers given the rising rate trend of recent months. Nowadays, the average maturity of total outstanding marketable UST debt is about six years. 

From the price perspective, review the CME’s UST 10 year note (nearest futures continuation contract) as a rough guide to the capital consequences of recent trends. (In practice, this contract sometimes prices relative to deliverable grade instruments with a maturity somewhat different from ten years.) The UST 10 year peaked at about 140-22 on 3/9/20. Its recent low is 10/3/23’s 106-20 (as of 300pm EST), an eviscerating 24.2 percent tumble (and beneath 10/21/22’s 108-26). From 8/2/22’s interim price high of 122-02, 10/3/23’s level drops 12.6 percent. Excitement (emotions) will increase if the price heads closer to 104-00 (6/13/07 price bottom 104-04; 6/28/06 low 104-01). 

The CME UST five year note’s price peak (nearest futures continuation) occurred at about 126-08 on 8/7/20 (126-07 on 1/8/21). It nosedived 17.2 percent to 10/3/23’s 104-18 (under 10/21/22’s roughly 105-15). An attack on price support around 103-00 (7/5/06; 103-02 on 6/13/07) will boost anxiety. 

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In America, a substantial amount of household net worth resides in debt securities (not only in US Treasuries) and equity shares (not just the S+P 500 playground). Read the fine print of the Federal Reserve’s Z.1, “Financial Accounts of the United States” (9/8/23; see Tables B.101, B.101.e, and B.101.h). As of end 2Q23, total assets for households and nonprofit organizations combined were about $174.4 trillion (net worth was $154.3 trillion), the great majority of which resided in the household domain. As of end 2Q23, for households and nonprofit organizations combined, debt securities at market value were about $10.9 trillion, or around 6.2 percent of total assets (9.3pc of total financial assets). Equity shares in 2Q23 had a value of about 44.7 trillion dollars, or 25.6 percent of total assets (almost 38.3pc of total financial assets). 

Consumers represent about two-thirds of United States GDP. If they suffer substantial wounds to their net worth, to what extent will they slash their spending? 

Many Wall Street and Main Street stock investment communities preach the wisdom of buying good (or high) quality American stocks for some version of the misty long run. To what extent are such stock bulls married to their positions? 

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For the twenty-two US stock marketplace “bear” trends summarized in “US Stocks Over the Long Run: Bear Marketplace History” (8/4/23), the average percentage decline from the peak to the trough is about 33.9 percent. The average duration of the descent from the summit to the bottom is approximately 14.2 months. 

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Financial Agitation (10-3-23)

MARKETPLACE CROSSROADS © Leo Haviland September 4, 2023

“I have been passing my life in guessing what I might meet with beyond the next hill, or around the next corner.” Wellington, the British military commander who defeated Napoleon in the battle of Waterloo (“Dictionary of Military and Naval Quotations”, ed. Robert Heinl, Jr.)

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OVERVIEW

Cultural observers differ in their subjective perspectives, arguments, and conclusions regarding economic phenomena, including the prices of and variables relating to interest rate, stock, foreign exchange, commodity, real estate, and other marketplaces. They consequently develop and express a variety of personal views as to whether a given financial price or price relationship level (or trend), or an economic (commercial; business) or political situation substantially relevant to them, has reached or soon will attain a very important point or stage. Thus figuratively speaking, a marketplace (its level and trend) or an economic (or political scene) is or shortly will be at a crossroads. For example, the S+P 500, inflation, Federal Reserve policy, or the American federal fiscal situation can arrive at a crossroads. 

Looking forward, people ask “what will happen from here?” People devotedly select, review, and weigh information to ascertain (develop personal opinions regarding) probabilities for a range of potential outcomes in the aftermath of this key situation. They differ in their views of “the” past and “the” present. In their forecasting (risk evaluation) process, some sentinels analyze the distance and duration a given price move has traveled or eventually (potentially) may move. In various fashions, prophets assess perceived interrelationships between interest rate, stock, foreign exchange, and other marketplaces. 

Hence competitive financial arenas fill with diverse and enthusiastic bulls and bears (and neutral players) talking and acting in a variety of ways. Arrays of investors and speculators and traders and hedgers and risk managers ardently promote and behave according to competing viewpoints and probability assessments. Typically, each player views its own subjective analysis and outlook as “reasonable”, and probably at least as reasonable (intelligent, rational) as that of others. Consequently, we hear fervent rhetoric and see artful pictures relating not only to probabilities, but also patterns and trends, support and resistance, critical levels and turning points, breakout and breakdown, continuation and reversal, convergence and divergence, and lead and lags. 

Many believe that some cultural situations are more difficult to predict than others. In any case, imagine future hypothetical (potential) events regarding a given marketplace (such as the S+P 500 or the United States Treasury 10 year note) or a particular economic or political battlefield (such as “the” US or global economy; American political wars). For some particular potential outcomes (including a related process creating it), many marketplace warriors will label the result as unlikely or very unlikely or unusual (against the odds; having little chance), or even unreasonable, irrational, extraordinary, incredible, unbelievable, astounding, surprising, crazy, impossible, and so forth. 

Nevertheless, cultural history, including that of marketplaces, of course evidences that what many (or even the great majority of) clairvoyants viewed as very unlikely to occur indeed has happened. So in practice, many scouts look out for and consider so-called “tail risks” (subjectively highly unlikely outcomes) to some degree. A trader once said: “In commodities, the impossible happens at least once a year.” Besides, what will be highly unlikely or surprising to one cultural observer may not be so to another. 

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Let’s review several financial marketplaces which appear to be at or near a crossroads. 

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Marketplace Crossroads (9-4-23)

RINGING IN THE NEW YEAR: US AND OTHER GOVERNMENT NOTE TRENDS © Leo Haviland January 6, 2020

“Time present and time past

Are both perhaps present in time future,

And time future contained in time past.” T.S. Eliot’s poem, “Burnt Norton”

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CONCLUSION

Since summer 2016, the marketplace yield trends for government 10 year notes of the United States and many of its key trading partners generally have resembled each other. Given today’s interconnected global economy, the crucial role of the United States within it, and the roughly similar central bank policy strategies for these nations, this pattern probably will continue.

Over the past three and one-half years, at times some moderate divergence appeared within that group. For example, yield highs for China’s 10 year government note (11/27/17’s 4.04 percent) and the German Bund (2/8/18’s .81 percent) preceded America’s critical yield top on 10/9/18 at 3.26 percent. But even when yield highs (lows) occurred at different times for some sovereigns relative to others, directional shifts in yield for the entire group tended to happen around the same time. Thus China’s 9/21/18 interim high at 3.71 percent and Germany’s on 10/10/18 at .58pc align with the UST yield pinnacle on 10/9/18.

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The United States Treasury 10 year note yield completed a triple bottom during this era. Recall 7/5/12’s 1.38 percent trough. Then see 7/6/16’s 1.32 percent major low and 9/3/19’s 1.43pc. September 2019’s UST depth probably commenced an extended period of rising government (as well as other) interest rates for America and its important trading partners “in general”. Widespread and determined devotion by leading central banks to a gospel of sufficient inflation (the Federal Reserve’s two percent target is a key benchmark) and adequate GDP growth (and low unemployment) encourages this. Given America’s great importance within the world economy, its large current national debt and looming massive future fiscal deficits tend to propel UST interest rates (and thus American corporate yields) upward, and thereby help to raise government yields of many of its global trading partners.

Current central bank caution (including maintaining some yield repression and quantitative easing/money printing) may inhibit a rapid and large yield ascent for the US Treasury 10 year and its companions. In addition, rate climbs for the assorted 10 year government notes will not all necessarily be the same in distance or speed terms. And fearful “flights to quality” at times can depress government debt yields of “safe haven” nations such as America and Germany. For America’s 10 year Treasury note, significant resistance exists around two percent.

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Ringing in the New Year- US and Other Government Note Trends (1-6-20)

EMERGING MARKETS, COMMODITIES, BITCOIN, AND THE S+P 500: TRAVELS AND SIGNS © Leo Haviland December 3, 2019

The movie “They Shoot Horses, Don’t They?” (Sydney Pollack, director) depicts a Depression Era dance contest marathon with a noteworthy monetary prize for the winning couple left standing. The master of ceremonies declares: “And believe me, these wonderful kids [the “kids” are all adults] deserve your cheers, because each one of them is fighting down pain, exhaustion, weariness, struggling to keep going, battling to win. And isn’t that the American Way?”

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OVERVIEW AND CONCLUSION

Since around first quarter 2018, the price trends in emerging marketplace stocks “in general” and emerging marketplace sovereign debt securities in general have made important highs and lows at roughly the same time. Thus, for example, around year-end 2018, prices (not yields) for sovereign emerging marketplace bonds attained important lows (yields had been rising) alongside troughs in emerging marketplace stocks. United States high-yield corporate bonds have moved in a similar pattern over that time span. Key commodity sectors such as the petroleum complex and base metals likewise have established important highs (lows) around the same time as those in emerging marketplace equities and sovereign debt. The timing of these assorted shifts of course is not always exactly the same, only approximately so. 

Unlike emerging marketplace stocks, during calendar 2018 and calendar 2019, America’s S+P 500 has marched to new highs. Despite this price divergence, many key turns in the interim trends for the S+P 500 occurred “around” the same time as those in emerging marketplace stocks, as well as in emerging sovereign marketplace debt (in both dollar-denominated and local currency arenas), US high-yield corporate bonds, and commodities. 

As the S+P 500 was sinking lower in late 2018, the Federal Reserve Board lifeguard jumped to the rescue and unveiled its monetary “patience” doctrine. It cut the Federal Funds rate three times during calendar 2019. Central banking allies such as the European Central Bank enhanced or maintained existing easy money schemes. Beginning around end-year 2018, this accommodative monetary policy (encouraged by widespread negative yields in advanced nation government debt domains), inspired waves of “investors” (speculators, traders) to hunt, more avidly than ever, for sufficient (good, reasonable, acceptable) “yields” (“returns”) in other provinces. These districts around the globe included emerging marketplace securities, high-yielding corporate debt, and even commodities. 

The exciting cryptocurrency frontier, which includes stars such as Bitcoin, attracts interest from assorted financial pioneers and the economic media (and even central bankers at times). In the opinion of some observers, Bitcoin belongs to some variety of “asset” class. In any case, since “around” first quarter 2018, despite Bitcoin’s wild price adventures, critical turns in its price action have occurred around the same time as in emerging marketplace securities, high-yield US business debt, commodities (petroleum and base metals), and even the S+P 500. 

During 2019, the S+P 500 continued its heavenly climb. Nevertheless, at various points during calendar 2019, emerging marketplace securities, US corporate debt, commodities, and Bitcoin established interim highs and began to retreat. For example, note Brent/North Sea crude oil’s 4/25/19 summit at $75.60 (S+P 500 interim top 5/1/19 at 2954). Thus the run-up in these asset prices which commenced around end calendar 2018/early calendar 2019 probably is over. 

Significantly, emerging marketplace stock, emerging marketplace sovereign debt securities, high-yield US corporate debt, and petroleum and base metals (still “trading together”) renewed their price declines in September 2019. Take a look at Bitcoin too. Given that global economic (and political) spheres intertwine, this pattern signals a top in the S+P 500 and the probability that the S+P 500 (and other advanced nation stock battlefields) will decline alongside (converge with ongoing bearish price patterns in) emerging marketplace securities and related domains such as commodities. 

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The United States dollar, as measured by its broad real effective exchange rate, has remained sufficiently strong to be a factor tending to undermine prices in dollar-denominated emerging marketplace sovereign debt securities as well as dollar-denominated emerging marketplace corporate debt instruments. Rising dollar-denominated yields, especially as the United States dollar generally has remained strong in recent months, tends to push emerging marketplace equity prices lower. Related to this, prices also gradually have fallen since early September 2019 in the US Treasury 10 year note (low yield 1.43 percent on 9/3/19). Also, US corporate earnings have been relatively flat for calendar 2019 year-on-year, suggesting that the joyous tax “reform” enacted at end calendar 2017 is losing power and thus the capability to propel the S+P 500 even higher. Even if America and China agree on a partial trade deal in the near future, will trade conflicts involving them and others disappear? 

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Emerging Markets, Commodities, Bitcoin, and the S+P 500- Travels and Signs (12-3-19)