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 TRAVELS: POTENTIAL BUMPS IN THE ROAD ©Leo Haviland April 2, 2024

The Federal Reserve Chairman (Jerome Powell) recently stated that the path to the Fed’s two percent inflation target was “sometimes bumpy”. (Remarks at the 3/29/24 “Macroeconomics and Monetary Policy Conference”, San Francisco Fed; see Financial Times, 3/30/24, p1)

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STARTING POINTS

Since around end December 2023, global inflationary forces probably have become stronger (or at least more firmly entrenched). Note the increase in the United States Treasury 10 year note yield and prices for commodities “in general” since then. Recent consumer price index measures, despite having fallen from their peaks, remain fairly distant from the Federal Reserve Board’s targets. The Fed therefore will find it difficult to reduce its Federal Funds policy rate nearly as much as many marketplace participants hope. The US dollar has remained strong, appreciating slightly since year end 2023; this suggests that American interest rate yields probably will remain rather high. America’s substantial national debt problems remain unsolved (as does China’s), with little prospect of progress anytime soon. Ongoing large federal government budget deficits and high and growing debt as a percentage of GDP tend to boost interest rate yields higher. 

Many times over the past century, significantly increasing United States interest rate yields 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. Marketplace opinions regarding substantial growth in US corporate earnings prospects for calendar years 2024 and 2025 look very optimistic. Whereas the S+P 500’s towering bull move carried into March 2024, US existing single-family home prices remain beneath their June 2023 peak. 

The US national political scene in general and election season 2024 in particular add to financial marketplace risks. 

Bitcoin and gold trends offer insight into patterns and prospects for other marketplaces, including the S+P 500. 

US INFLATION AND INTEREST RATES: RISKY BUSINESS

In the classic American film, “All About Eve” (Joseph Mankiewicz, director), the actress Margo Channing (played by Bette Davis) declares: “Fasten your seat belts. It’s going to be a bumpy night.” 

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The Wall Street securities investment communities and their political and media allies have applauded lower United States inflation rates. Widespread faith exists that the trusty Federal Reserve will achieve its two percent inflation target fairly soon. Stock owners have been especially enthusiastic as the S+P 500 has flown to new highs in the hopes of further drops in key inflation measures and notable cuts by the Federal Reserve in the Fed Funds rate. 

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Marketplace Travels- Potential Bumps in the Road (4-2-24)

LONG RUN HISTORICAL ENTANGLEMENT: US INTEREST RATE AND STOCK TRENDS © Leo Haviland July 6, 2023

“The past is never dead. It’s not even past.” “Requiem for a Nun” (Act 1, Scene 3), by William Faulkner

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CONCLUSION AND OVERVIEW

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. 

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The US Treasury 10 year note yield established a major bottom at .31 percent on 3/9/20. Its sustained yield increase thereafter, and especially from 8/4/21’s 1.13 percent, helped lead to the major high in the S+P 500 on 1/4/22 at 4819. After an extended span of engaging in yield repression (and money printing), the Federal Reserve finally recognized that inflation was not a temporary or transitory phenomenon and began raising rates. The timing of a critical interim UST 10 year note yield high, 6/14/22’s 3.50 percent, extended well the stock marketplace peak, as did the UST’s second summit at 4.34 percent on 10/21/22. Arguably, an only gradual reduction of yield repression while immersed in an inflationary environment was one factor for the extensive duration of the yield increase after the S+P 500’s January 2022 crest. In any event, the S+P 500 tumbled sharply in its bear trend, reaching a major bottom on 10/13/22 at 3492, close in time the UST’s high (as well as the autumn 2022 peak in the US dollar). For a bear trend from the long run historical perspective, that nine and one-half months and 27.5 percent decline in the S+P 500 was modest in time and distance terms. 

The S+P 500’s rally since October 2022’s valley has carried it to within about 7.5 percent of its glorious January 2022 summit. Given the historic pattern in which UST 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. 

First, the UST 10 year note made several interim lows around 3.30 percent in first half 2023, with yields escalating moderately from 4/6/23’s 3.25 percent. The subsequent UST 10 year high since then is 7/6/23’s 4.08 percent (as of 1200 noon EST on 7/6/23). In addition, the existence of only a modest yield decline from October 2022’s 4.34pc high indicates that the pattern of rising UST 10 year note (and other UST) yields which emerged in March 2020 and accelerated thereafter probably remains intact. Also, core inflation remains persistently above the targets of the Fed and other central bankers. US unemployment remains low. The Fed and other leading central bank luminaries have hinted strongly at further increases in policy rates, and they appear determined (in the absence of an economic crisis) to maintain their tightening schemes for an extended time period. Such boosts in the Federal Funds level (and thus in short term UST instruments) probably will push the UST 10 year yield higher. Moreover, monumental long run federal debt problems confront America; all else equal, huge credit demand tends to boost interest rates. 

In addition, the UST 10 year note’s major yield bottom in March 2020 began from a peak around fifteen percent almost 40 years before, in 1981. That seemingly ancient UST yield history does not mandate the development of a substantial yield increase over a very long time span for the ensuing vista commencing in 2020. However, by comparison, a yield increase of about four percent in about two and one-half years, from March 2020 to October 2022, is moderate but not extraordinary, especially given the Fed’s yield repression history (and related money printing) and the developing (and current) inflationary situation. From this perspective, an eventual climb in the UST 10 year note yield above October 2022’s 4.34 percent high is probable. 

Therefore, the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak probably will 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. 

Why might the S+P 500 remain fairly strong in the near term? First, the UST 10 year yield increase since April 2023 has been only moderate. Moreover, in America, and in general for other advanced nations, government yields relative to consumer price inflation remain low or negative. Also, US corporate earnings optimism for 4Q2023 and thereafter is strong. In addition, we live in a nominal world, and quoted stock prices obviously belong in that realm. Real GDP growth can be disappointing. However, all else equal, rising nominal GDP, increasing money supply, and higher nominal prices for goods and services in general will tend to be reflected in higher nominal corporate earnings and stock prices. Stock share buybacks have been substantial. US consumer confidence is fairly high (June 2023 at 109.7, 1985=100; Conference Board). Sales prices of existing single-family homes, after peaking in June 2022, have rallied since January 2023 (National Association of Realtors). 

The UST 10 year yield currently is challenging 3/2/23’s 4.09 percent interim high. That perhaps will be sufficient to notably weaken the S+P 500. However, the UST 10 year note yield probably will need to approach or exceed 10/21/22’s 4.34 percent top to induce a very substantial fall in the S+P 500.

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Long Run Historical Entanglement- US Interest Rate and Stock Trends (7-6-23)-1

US TREASURY YIELDS, FED MANEUVERS, AND FISCAL GAMES© Leo Haviland June 5, 2023

“Now if there’s a smile on my face
It’s only there trying to fool the public”. “The Tears of a Clown”, a song by Smokey Robinson
and the Miracles

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CONCLUSION AND OVERVIEW

The United States Treasury 10 year note yield probably will continue to travel sideways for the near term.

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In America and many other key countries around the globe, uncertainties and risks regarding numerous entangled economic and political variables and marketplaces remain substantial. In particular, inflationary and recessionary (deflationary) forces battle for supremacy.

Monetary tightening by the Federal Reserve Board and its central banking allies has helped to cut lofty consumer price inflation levels. However, significant inflation persists in America. Both headline and core (excluding food and energy) inflation float well above targets aimed at by these guardians. Price indices for United States personal consumption expenditures services for the past several months have remained high. Yet in comparison with actual consumer price inflation, inflationary expectations for longer run time spans have remained moderate. Unemployment in the US remains low, assisting consumer confidence and thus household spending, thereby tending to keep interest rate yields relatively high. Given the Russian/Ukraine conflict and OPEC+ willingness to support prices, how probable is it that petroleum and other commodity prices will ascend again?


America’s recent resolution of the heated battle over raising the debt ceiling avoided default. However, despite celebratory talk by many about how that new legislation displayed fiscal responsibility, the new law accomplished very little in substance toward reducing the towering public debt challenges confronting America. The massive and increasing public (and overall) debt in the United States (and many other leading countries) signal the eventual arrival of even higher interest rates.


Higher interest rates have diminished worldwide GDP growth prospects and boosted recessionary fears. History indicates that a negatively sloped US Treasury yield curve (short term rates higher than long term ones), such as has existed in America for over six months, portends a recession. Though history need not repeat itself, either entirely or even partly, significant disinflations induced by monetary policy tightening connect with recessions. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession or a substantial fall in the S+P 500 and will strive to avoid those eventualities. The shocking banking collapses a few months ago in America and Europe seem largely forgotten. However, they warn of dangerous fragilities facing banking systems and diverse marketplace arenas, especially if US rates resume their ascent or price feebleness in commercial real estate assets becomes even more worrisome. The United States dollar, the leading international reserve currency, has depreciated from its major high milepost reached in autumn 2022 but arguably remains “very strong”. This robustness helps to make US Treasuries (and other dollar-denominated assets) relatively appealing to some overseas players. Prices of emerging marketplace stocks and interest rate instruments remain vulnerable to rising UST yields and
dollar strength. Also, even in an inflationary environment, fearful “flights to quality” (buying UST) sometimes emerge.

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US Treasury Yields, Fed Maneuvers, and Fiscal Games (6-5-23)

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)