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 RELATIONSHIPS: LIFE DURING WARTIME © Leo Haviland March 7, 2022

In Mario Vargas Llosa’s novel “The War of the End of the World” (Part III, chapter II), the Baron de Canabrava declares: “‘The times are out of joint…Even the most intelligent people are unable to make their way through the jungle we’re living in.’”

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CONCLUSION AND OVERVIEW

Russia’s invasion of Ukraine halted, but did not end, the major trend for rising yields in the United States Treasury marketplace which commenced in March 2020 and accelerated in early August 2021. Despite this “flight to quality” (safe haven) pause, the long run pattern for increasing UST rates eventually will resume. Substantial inflation in America and the OECD relative to recent interest rate levels as well as globally high government (and other) debt levels will propel UST rates upward. Previous essays pointed not only to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a long run rising yield environment is an international phenomenon.

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Convergence and divergence (lead/lag) patterns between marketplaces can change or transform, sometimes dramatically. Marketplace history does not necessarily repeat itself, either entirely or even partly. Marketplace history nevertheless provides guidance regarding the probabilities of future relationships.

“History on Stage: Marketplace Scenes” (8/9/17) and subsequent essays updating it (such as 3/9/21’s “Truth and Consequences: Rising American Interest Rates”, “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21), “American Inflation and Interest Rates: Painting Pictures” (5/4/21), and “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) emphasized: “Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak 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, and the arithmetical (basis point) change has not always been large.” The US Treasury marketplace has been an important standard for this analysis. The 10 year UST note is a key benchmark.

What about trends for the S+P 500 and other advanced nation stock battlegrounds? Quite some time prior to Russia’s 2/24/22 attack on Ukraine, rising interest rates and tumbling emerging equity marketplaces warned that the S+P 500 probably would fall significantly. “Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded that “the S+P 500 probably has established a notable top or soon will do so”. “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) stated: “The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.” “The S+P 500 price probably will decline further and establish new lows beneath the January 2022 trough. The development of a bear trend (decline of at least 20 percent) also is probable.”

Significantly, the S+P 500’s 1/4/22 high at 4819 and its initial 12.4 percent correction to 1/24/22’s 4223 preceded Russia’s late February 2022 invasion by several weeks. Thus that attack did not initiate significant S+P 500 weakness. In addition to the rising yields (increasing inflation; as well as lofty debt levels and outlook) and feeble emerging stock marketplaces, arguably high valuations from the historic perspective for the S+P 500 also existed prior to the Russia/Ukraine war. The strong United States dollar prior to the attack also pointed to stock marketplace weakness. The US dollar remains robust. The vicious bull spike in petroleum, wheat, and many other commodities since the invasion further undermines the S+P 500 and related stock domains. Looking forward, the S+P 500 probably will continue to retreat.

As “Paradise Lost” stated, the UST 10 year note yield probably will climb to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher summit. The Federal Reserve and other heroic central banking generals probably will not deploy substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.

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Marketplace Relationships- Life During Wartime (3-7-22)

PARADISE LOST: THE DEPARTURE OF LOW INTEREST RATES © Leo Haviland February 9, 2022

Kenneth Burke remarks in “A Grammar of Motives”: “And so one can seek more and more money, as a symbolic way of attaining immortality.”

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CONCLUSION AND OVERVIEW

In both stock and debt marketplace domains (and especially in stock arenas), securities owners (particularly “investors”) and their central banking, political, and media allies adore bullish price trends and employ artful rhetoric to promote them. Bullish enthusiasm for low yields in debt marketplaces of course has its limits. Central bankers (and stock investors and Wall Street and Main Street) do not want recessions or deflation and consequently “too low” interest rates, which are “bad” for (reflect or portend feebleness in) “the economy” and equities. But sometimes even negative nominal yields for government debt of leading advanced nations (such as Germany) allegedly are reasonable and praiseworthy. Moreover, for stock marketplaces, bull moves almost always are joyful and good!

All else equal, for equity realms such as America’s S+P 500, low (but not overly depressed) arithmetic interest rates and widespread faith that this rate pattern probably will persist for the foreseeable future tend to give birth to and sustain bullish stock trends. Over the past several years (and despite the horrifying stock price crash in first quarter 2020), ongoing and successful yield repression (enhanced by money printing and fortified by accommodative sermons) by the revered Federal Reserve Board and its trusty friends, and often aided by massive government deficit/”stimulus” spending, encouraged major bull climbs in the United States stock marketplace. In addition, low interest rates (often negative in real terms) in advanced countries such as the United States inspired financial pilgrims avidly searching for adequate “yield” (return) to purchase corporate debt securities and other “asset classes” such as commodities.

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Previous essays discussed key stock, interest rate, currency, and commodity marketplaces and their relationships, as well as the political scene. See essays “Emerging Marketplaces, Unveiling Danger” (12/2/21); “Hunting for Yield: Stocks, Interest Rates, Commodities, and Bitcoin” (11/7/21); “Rising Global Interest Rates and the Stock Marketplace Battlefield” (10/5/21); “America Divided and Dollar Depreciation” (9/7/21); “Great Expectations: Convergence and Divergence in Stock Playgrounds” (8/14/21); “Financial Fireworks: Accelerating American Inflation” (7/3/21); “Marketplace Rolling and Tumbling: US Dollar Depreciation” (6/1/21); “American Inflation and Interest Rates: Painting Pictures” (5/4/21); “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21); “Truth and Consequences: Rising American Interest Rates” (3/9/21).

Several months ago, that analysis concluded that the signpost United States Treasury 10 year note yield had established a major bottom. Essays emphasized, in contrast to the opinion of the majority of central bankers, the likelihood that substantial global inflation likely would persist. Higher inflation alongside massive and increasing international debt burdens probably would encourage higher interest rates around the world.

Also, long run United States interest rate history (use the UST 10 year note as a benchmark) reveals that noteworthy yield increases lead to peaks for and subsequent declines in American stock benchmarks such as the S+P 500 and Dow Jones Industrial Average.

Investigation pointed to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a rising rate environment has become a global phenomenon. Given not only the upward march of yields in the UST 10 year note, but also the international trend of rising rates, the probability of a peak in the S+P 500 and related leading nations increased.

 

America’s S+P 500 and stocks in other advanced nations soared to new highs after February 2021 while emerging marketplace equities have marched downhill (price divergence). However, the chronicle of those two broad marketplace realms at least since the Goldilocks Era of the mid-2000s reveals that their price and time trends tend to coincide. Over the long run, these landscapes are bullish (or bearish) “together”. In the current constellation of rising American and international yields, in both government and corporate areas, that warned of eventual price convergence between the S+P 500 and emerging marketplace stocks. The S+P 500’s record high in early January 2022 occurred near in time to interim highs in developing nation equities.

“Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded: “These intertwined patterns warn that the S+P 500 probably has established a notable top or soon will do so”.

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The longer run viewpoints of “Emerging Marketplaces, Unveiling Dangers” and related recent essays remain intact. The paradise of low interest rates in the United States and around the globe will continue to disappear. This ominous upward yield shift in the UST 10 year note and elsewhere endangers the heavenly bull move in the S+P 500 and related stock marketplaces. The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.

The UST 10 year note yield probably will ascend to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher elevation. The Federal Reserve and other high priests of central banking probably will not engage in substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.

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Paradise Lost- the Departure of Low Interest Rates (2-9-22)

AMERICAN ECONOMIC GROWTH: CYCLES, YIELD SPREADS, AND STOCKS © Leo Haviland March 4, 2019

In “Back in the U.S.A.”, Chuck Berry sings: “Yes, I’m so glad I’m livin’ in the U.S.A. Anything you want, we got right here in the U.S.A.”

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OVERVIEW AND CONCLUSION

Marketplace and other cultural analysts create meaningful relationships between variables and groups of phenomena. As subjective perspectives differ, these faithful inquirers identify, define, select, assess, and organize evidence (data; facts; factors) in a variety of fashions. This results in diverse propositions, arguments, and conclusions, and thus an array of competing stories.

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In its discussion of America’s 4Q18 GDP growth, the NYTimes (3/1/19, pB1) stated that “most economists do not expect a recession this year.”

America’s current economic expansion is very long by historical standards. Of course history need not repeat itself. Conditions, including associations and patterns between variables, can and do change over time. Marketplace convergence and divergence trends (and lead/lag relationships) are not inevitable; they can shift, sometimes dramatically. However, devoted study of the ongoing economic expansion should not divorce itself from previous economic growth and decline episodes and patterns.

Interest rate yield relationships offer insight into economic history and prospects. Particularly given the remarkable length of America’s recent glorious real GDP expansion, marketplace clairvoyants should review the long run historical relationship between yields for lower-grade United States corporate bonds and the ten year US Treasury note in the context of American economic growth and recession cycles. The recent widening yield spread trend for this credit relationship warns that a US recession (or at least significantly lower growth than generally forecast), whether in calendar 2019 or not long thereafter, is more likely than most wizards anticipate. Moreover, current trends in the US Treasury yield curve, when placed in historic perspective, also underline the looming potential for an American economic downturn (or considerably slower growth than most soothsayers predict).

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American Economic Growth- Cycles, Yield Spreads, and Stocks (3-4-19)