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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THE FEAR FACTOR: FINANCIAL BATTLEFIELDS © Leo Haviland January 5, 2021

“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions such as they have in Japan over the past decade?” Alan Greenspan, Chairman of the United States Federal Reserve Board, Speech to the American Enterprise Institute for Public Policy Research, “The Challenge of Central Banking in a Democratic Society” (12/5/96)

Voltaire’s 18th century novel, “Candide, or Optimism”, depicts a character who believes that all is for the best in the allegedly best of all possible worlds.

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OVERVIEW AND CONCLUSION

In recent times, prices in the S+P 500 and other benchmark United States and global stock indices, lower-grade interest rate instruments within corporate fields (and low-quality foreign dollar-denominated sovereign debt), and commodities “in general” often have risen (or fallen) at roughly the same time. They generally have climbed in significant bull ascents (and fallen in noteworthy bear retreats) “together”. These entangled domains therefore have alternatively reflected joyous bullish enthusiasm as “investors” and other traders avidly hunted for adequate return (“yield”), and terrifying bearish scenes as they raced fearfully for safety. Whether the existing bull trend for American stocks in general (use the S+P 500 as a benchmark) persists is especially important for realms connected with the S+P 500.

Actions by and rhetoric from the Federal Reserve Board and its central banking allies around the globe since the calamitous price crashes during first quarter 2020 restored investor (buying) confidence and generated price rallies in the S+P 500 and related marketplace playgrounds. In response to the economic (and political) challenges of the ravaging coronavirus era, gargantuan deficit spending by the United States and its foreign comrades also assisted these bullish price moves. Based on this as well as past experience (especially in regard to the merciful Fed), marketplace captains and their troops dealing in the S+P 500 and intertwined provinces once again have great faith that these marketplaces will not fall “too far”, or for “very long”. Bullish financial media fight especially hard to promote, justify, and sustain stock marketplace investment and price rallies in particular. In regard to equities in particular, propaganda speaking of “buy and hold for the long run” and “buy the dip” inspired entrenched investors and often sparked new buying. Thus, and despite occasional worries, significant complacency gradually has developed over the past several months in assorted stock marketplaces and “asset classes” tied to them.

Complacency regarding US Treasury yield trends has bolstered the relative calm and bullish optimism in the S+P 500. Strenuous yield repression (and money printing/quantitative easing) by the Federal Reserve Board and its central bank teammates not only assisted the S+P 500 rally, but also boosted belief that US Treasury yields will not shift much higher (and definitely will not rise “too high”) over the next couple of years.

Moreover, (for many months) easygoing stock bulls have had happy visions of recovering corporate earnings for calendar 2021 and rather robust ones thereafter. Numerous S+P 500 bull advocates do not worry much about or downplay risks of historically “high” valuations. “This time is different”, right? Most of these sunny forecasters generally see possibilities for further significant economic stimulus plans (deficit spending) during the upcoming Biden Administration. Encouraged by the development of coronavirus vaccines, they are optimistic regarding the eventual emergence of a V-shaped recovery, or at least an adequate one.

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This relative complacency through end-year 2020 in the S+P 500 and many other Wall Street marketplace territories (as the upward price trends evidence) contrasts with the ongoing economic agitation in the wider (“real”; Main Street) arena. Picture, for example, issues of economic inequality and the sharp divide between the “haves” and “have-nots”. Also, underline in America and elsewhere assorted and widespread political splits and heated wordplay. This rhetoric is not merely in regard to establishment/elites versus an array of left (liberal; progressive; keep in mind accusatory weapons such as the labels “socialist”, “communist”, and “Marxist”) and right wing (conservative; reactionary) populist (or “radical” or “fringe”) movements. In the United States, concepts of “identity politics” link to cultural wars involving assorted factors such as race/ethnicity, sex/gender/sexuality, age, religion, and geographic region/urban/suburban/rural. Diverse patriots brawl over the relative merits of nationalism and globalization, capitalism and socialism, and so forth. Though in stock and other fields bulls and bears always battle to some extent, the relative peace and tranquility in many Wall Street marketplaces contrasts with the turmoil and hostility permeating the wider cultural vista.

The dangers of weaker than forecast corporate earnings and lofty valuations for American stocks “in general” probably are significantly greater than the “consensus” wisdom promulgated by stock marketplace bulls. Figuratively speaking, US stock prices around current levels probably have “built in” a substantial amount of predicted earnings growth for calendar 2021 and 2022. Many corporations and small businesses remain under pressure. Year-end 2020 buying of stocks to have further equities on the books by definition is finished. The relatively slow implementation of the coronavirus vaccine is one consideration weighing on the recovery, corporate earnings, and valuation. It likely will take at least several months to vaccinate a substantial share of the global population, including within the United States and other advance nations. Besides, the coronavirus problem is bad and may be worsening. So its burden on economic output and employment levels probably will continue for the next several months

Moreover, despite the complacency regarding United States Treasury yield levels and trends, using the UST 10 year note as a signpost, UST yields probably have commenced a long run increase. Despite widespread global desires for a sufficiently feeble home currency to promote economic recovery and growth, and the related willingness to engage in competitive depreciation to accomplish this, spring 2020 unveiled the onset of substantial US dollar weakness. Although the US dollar (using the Fed’s “Broad Dollar Index” as the yardstick) has withered about ten percent from its peak, its long run pattern probably will remain down.

As “Games People Play: Financial Arenas” (12/1/20) emphasized, these interest rate and currency considerations also warn of a notable decline in the S+P 500. The probable eventual notable climb in US interest rate yields likely will connect with a weaker US dollar. The Fed and the incoming Democratic Administration (and debtors in general) probably want higher American inflation (including higher wages). Massive and rising US (and global) government debt is an important warning sign in this context. American household debt is huge in arithmetic terms, and this will put pressure on much of the nation if the economic recovery is not robust.

Marketplaces, marketplace relationships, and the relative importance (and interrelations) of their variables obviously can and do change over time. However, cultural history can influence “current” marketplace perceptions and decisions, especially when cultural (economic, political, social) conditions are at least significantly similar. Though numerous phenomena were involved in the stock marketplace crashes of 1929 and 2007-09, both occurred in an era of significant debt and leverage. That debt and leverage situation arguably fits the global situation nowadays as well.

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Significant fear likely soon will return to the S+P 500, other stock signposts (including those in emerging marketplaces), US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and many commodities.

What’s the bottom line for the S+P 500’s future trend? Although it is a difficult call, the S+P 500 probably will start a significant correction, and perhaps even a bear trend, in the near future. A five percent move in the S+P 500 over 3588, the important 9/2/20 interim high at 3588, gives 3767, and it probably will be difficult to breach that level by much on a sustained basis. The S+P 500’s high to date, 1/4/21’s 3770, exceeded the 9/2/20 top by 5.1 percent.

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The Fear Factor- Financial Battlefields (1-5-21)

MARKETPLACE MANEUVERS: SEARCHING FOR YIELD, RUNNING FOR COVER © Leo Haviland September 7, 2020

In the novel “The Gilded Age” (chapter 7), by Mark Twain and Charles Dudley Warner, Colonel Sellers exclaims: “Si Hawkins has been a good friend to me, and I believe I can say that whenever I’ve had a chance to put him into a good thing I’ve done it, and done it pretty cheerfully too. I put him into that sugar speculation—what a grand thing that was, if we hadn’t held on too long.”

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OVERVIEW AND CONCLUSION

Diverse, changing, and interrelated marketplace variables of course encourage price rallies and declines in assorted financial domains. Central bank monetary policies, national deficit spending and debt levels, currency trends, and the recent coronavirus pandemic of course are on the list.

Yet focus on United States Treasury rates only slightly above or beneath benchmark inflation indicators such as consumer price or personal consumption expenditure indices. In other leading government rate realms, such as German ones, note negative nominal interest rates. During the era of global central bank policy yield repression by America’s beloved Federal Reserve Board and the friendly central banks of other major advanced nations, “investors” and other traders generally have engaged in ravenous searches for adequate return (“yield”) in assorted financial marketplaces. These playgrounds include United States and other stocks, lower-grade foreign dollar-denominated sovereign debt, corporate notes and bonds, and commodities.

During this repressive policy yield environment, and often encouraged by massive money printing (quantitative easing) and other accommodative monetary programs, price trends in the S+P 500 and these other marketplaces frequently have been similar. They have risen in bull markets (and fallen in bear markets) “together”. Convergence and divergence (lead/lag) relationships between fields such as the S+P 500, US corporate bonds, and crude oil are a matter of subjective perspective. The connections and patterns are complex and not necessarily precise; they can modify or even transform. But in recent years, prices in these benchmark stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time. For example, prices for US stocks and other financial domains enjoyed glorious rallies which peaked in early to mid-first quarter 2020. Their murderous bear crashes commence at around the same time; numerous investors and other buyers (owners) frantically ran for cover and pleaded for help. The ensuing price rallies in these assorted key generally embarked around late March 2020, and their subsequent bullish patterns thereafter have intertwined.

However, various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together. These bearish factors include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). Also, the Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears are growing of a political crisis if President Trump disputes the November voting outcome.

Other warning signs of notable price falls in the S+P 500 and various related marketplaces include vulnerable US (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes, and even with ongoing Fed yield repression) than many believe, and the recent weakness in the US dollar. The likelihood of a substantial new US Congressional stimulus package has ebbed.

The S+P 500 (and especially “technology” stocks; see the Nasdaq Composite Index) probably has been the bull leader for the various asset classes “as a whole” since its 3/23/20 bottom at 2192. For US equities, laments of “where do I put my money?” enthusiastic comments that “there’s a lot of cash around looking for a home”, and venerable rhetoric regarding the reasonableness of buying and holding United States stocks for the “long run” persist. Gurus as well as media cheerleaders still say: “buy the dip” and “don’t miss the train.” Yet such aphorisms and even massive money printing do not inevitably keep asset prices rising.

Despite the Federal Reserve’s late August 2020 promulgation of a revised and even more accommodative policy doctrine, it essentially codified rather than changed the practice of its easing policy of the preceding months. See the Fed’s 8/27/20 “Statement on Longer-Run Goals and Monetary Strategy” and the Fed Chairman’s speech, “New Economic Challenges and the Fed’s Monetary Policy Review” (8/27/20). In any case, the Fed guardian is unlikely to race to the rescue of the US stock marketplace with the S+P 500 hovering around its all-time high.

For detailed further discussion of stock, interest rate, currency, and commodity marketplaces and the political scene, see other essays such as “Dollar Depreciation and the American Dream” (8/11/20); “Divergence and Convergence: US Stocks and American Politics (7/11/20); “US Election 2020: Politics, Pandemic, and Marketplaces” (6/3/20); “American Consumers: the Shape We’re In” (5/4/20); “Crawling from the Wreckage: US Stocks” (4/13/20); “Global Economic Troubles and Marketplace Turns: Being There” (3/2/20); “Critical Conditions and Economic Turning Points” (2/5/20); “Ringing in the New Year: US and Other Government Note Trends” (1/6/20).

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Marketplace Maneuvers- Searching for Yield, Running for Cover (9-7-20)(1)

CRITICAL CONDITIONS AND ECONOMIC TURNING POINTS © Leo Haviland February 5, 2020

“Just Dropped In (To See What Condition My Condition Was In)”, a Mickey Newbury song performed by Kenny Rogers

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CONCLUSION

With the passage of time following 2007-09’s global economic disaster, memories regarding the accompanying bloody bear trend in America’s stock marketplace benchmarks such as the S+P 500 gradually yet significantly faded. As the S+P 500 ascended, and especially as it advanced to and sustained record highs, widespread sermons declared that we should “buy the dip”. This aligned with the venerable proverb regarding the reasonableness of buying and holding United States stocks for the “long run”. What constitutes a “dip” or the “long run” is debatable, a matter of subjective perspective (opinion). How substantial a drop from some key elevation justifies buying? Is it one percent, five percent, ten percent, or twenty percent or greater? Is the long run one year, five years, or ten or more?
Of course since the S+P 500’s major bottom on 3/6/09 at 667, a few bloody stock price slides in that signpost (and “related” global equity yardsticks) terrified stock “investors” and their allies, including central banks such as the Federal Reserve, American politicians, and the financial media. Yet as the S+P 500 achieved a record height quite recently with 1/22/20’s 3338 (2/5/20’s level matched this), such advice definitely looked excellent to many stock owners and observers! Besides, as they have numerous times over the past eleven years, won’t beloved central bank physicians such as the Federal Reserve Board (under the guise of fulfilling their mandate), European Central Bank, the Bank of England, China’s central bank, and the Bank of Japan rescue stocks and generate rallies in them? Not only soothing rhetoric, but also yield repression and quantitative easing (money printing) remain antidotes for stock price drops, right? And politicians might assist via new tax cuts, boosts in infrastructure spending, or similar schemes. Thus the majority of US stock marketplace players have focused more on the rewards of owning than the dangers of doing so. Substantial complacency reigns regarding the potential for noteworthy American and other stock marketplace price declines.

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The recent emergence within China of a deadly coronavirus and its spread elsewhere around the globe helped to push US and other equities downhill. Whether this medical problem will injure the S+P 500 and other global stocks significantly (and for a sustained period of time) remains uncertain. Government actions to prevent the spread of the virus will tend to hamper economic growth. Fearful consumers and nervous corporations may slow their spending. The wider the reach and the longer the persistence of the ailment, the greater the economic damage. And economic (financial) weapons such as money printing and yield repression available to the Fed and its friends obviously do not halt epidemics or cure diseases (or fears of them).Though the S+P 500 descended to 3215 on 1/31/20, the index recovered, touching 3338 again on 2/5/20.

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Critical Conditions and Economic Turning Points (2-5-20)

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)