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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GREAT EXPECTATIONS: MARKETPLACE FIREWORKS©Leo Haviland July 3, 2024

In Charles Dickens’s novel “Great Expectations”, a character says: “‘Ask no questions, and you’ll
be told no lies.’”

CONCLUSION

Since around end December 2023, global inflationary forces have remained rather persistent. Note the moderate increase in the United States Treasury 10 year note yield since then. Recent consumer price index measures, despite having fallen from their peaks, stand fairly distant from the Federal Reserve Board’s inflation target. Commodity prices “in general” clearly exceed their December 2023 trough. For at least the near term, 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 modestly since year end 2023; this pattern suggests that American interest rate yields probably will remain rather high. America’s substantial and worsening national debt problems remain unsolved, with little prospect of progress anytime soon. Towering massive 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. Although the S+P 500 has achieved a new all-time high this week, a “too strong” US dollar alongside rising US Treasury yields increases the probability for a fall in stocks. Marketplace opinions regarding substantial growth in US corporate earnings prospects for calendar years 2024 and 2025 look very optimistic.

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

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

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Great Expectations Marketplace Fireworks

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)

FINANCIAL PLAYGROUNDS: THE MONEY GAMES © Leo Haviland January 2, 2024

“The Great Game: The Story of Wall Street…An original two-hour documentary event that spans the 200-year history of American capitalism.” (New York Times; 5/28/00, p13; regarding a CNBC television program)

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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. See “Long Run Historical Entanglement: US Interest Rate and Stock Trends” (7/6/23). 

Of course, since marketplace history indicates that ongoing relationships can shift or transform, the current patterns between the US Treasury 10 year note yield and the S+P 500 (and the US dollar) can change. 

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In any case, will the long run pattern of rising UST 10 year note yields resume in the near term, thus leading to eventual S+P 500 declines? The Fed Chairman’s 12/13/23 comments do not explicitly rule out future Fed Funds increases. Or, even if the UST 10 year note yield does not exceed its 10/23/23 pinnacle at 5.02 percent in the near term, suppose its yield climbs toward that height. 

Alternatively, suppose the UST 10 year note yield does not in the near term make a new high around or above 10/23/23’s 5.02 percent, or climb fairly close to 10/23/23’s yield top. Does the recent slump in UST yields portend not only future Fed easing, but also a recession (rather than a soft landing)? Monitor commodity price weakness in that regard. Therefore, from this perspective, the rise in the UST 10 year yield up to 5.02 percent on 10/23/23 has been leading to a later high in the S+P 500 than the July 2023 one. In this scenario, the S+P 500 price rivals or surpasses its January 2022 peak. 

Thus will a new bear marketplace trend for the S+P 500 involving multiple tops emerge? In addition to those of January 2022 and July 2023, will another one be created near those heights? The S+P 500’s record peak is 1/4/22’s 4819. The S+P 500’s 12/28/23 high at 4793 almost matches this. The 7/27/23 elevation is only 4.4 percent distant from the major price resistance imposed by 1/4/22’s summit (4607/4819 is 95.6pc). A five percent decline from January 2022’s pinnacle equals 4578, close to 7/27/23’s 4607 height. The 4578 level stands midway between important prior S+P 500 interim tops at 4639 (3/29/22) and 4513 (4/21/22) attained amidst the bear move which began in January 2022. A 33 percent rally from 10/13/22’s trough equals 4655. The S+P 500 probably will not exceed its January 2022 peak by much if at all. A five percent venture over 1/4/22’s 4819 equals 5060. 

The Dow Jones Industrial Average’s record high is 1/2/24’s 37790, about 2.3 percent over 1/5/22’s 36953 pinnacle. 

Looking forward over the horizon, arguably “around” end-year 2023/during first quarter 2024 is a time when a key top in the S+P 500 will appear. Incremental year-end stock buying “to put stuff on the books” (or to discard losing short positions) by definition finished a few days ago. Will the US have a federal government shutdown during first quarter 2024 due to a legislative logjam? What if the inflation rate does not  keep falling toward the Fed’s two percent target? Will the Fed in any case keep its policy rates lofty for many more months? 

History shows that the S+P 500 has achieved several important peaks and bottoms during first quarter. As for major highs, the record S+P 500 price to date of 4819 occurred 1/4/22. Recall 2/19/20’s 3394 pinnacle. The S+P 500’s established a major high over two decades ago on 3/24/00 at 1553. Going back 50 years, the S+P 500 peaked around 121.7 on 1/11/73 (the Dow Jones Industrial Average crown occurred on 1/11/73 at 1067.2). What about major bottoms? A peak around first quarter 2024 would be a four year diagonal bull move from the coronavirus disaster major low of first quarter 2020, 3/23/20’s 2192. The 12/26/18 key bottom at 2347 neighbors the first quarter. The 2/11/16 trough at 1810 (1/20/16 at 1812) was very important. Also in regard to the calendar first quarter window, remember the aftermath of the Goldilocks Era; the worldwide economic disaster bottom for the S+P 500 was 3/6/09’s 667. The final low following 3/24/00’s summit was 3/12/03’s 788 (10/10/02 bottom at 769).

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Financial Playgrounds- the Money Games (1-2-24)

HUNTING FOR YIELD: STOCKS, INTEREST RATES, COMMODITIES, AND BITCOIN © Leo Haviland November 7, 2021

“‘Because I want you to know that we’re on our way to Las Vegas to find the American Dream.’” Hunter S. Thompson’s novel, “Fear and Loathing in Las Vegas: A Savage Journey to the Heart of the American Dream”

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OVERVIEW

 

In recent years, fervent yield repression (with resulting low United States Treasury yields relative to inflation) by the Federal Reserve and its central banking comrades, often assisted by money printing (quantitative easing), and accompanied by artful easy money rhetoric, often have encouraged epic quests for adequate “yield” (return) and bullish trends in stocks and assorted other (“related”) marketplace domains. Especially since the emergence of the coronavirus pandemic in March 2020 and the related economic and worldwide stock marketplace crashes, the revered Fed and other central bank wizards, in addition to expanding magnificent money printing programs, have promoted and enforced a yield repression regime.

The heroic Fed earnestly and repeatedly declares its devoted allegiance to its legislatively mandated goals of “maximum employment” and “stable prices”. However, how often does the venerated Fed even mention the third aspect of its monetary policy objectives, “moderate long-term interest rates”? The Fed is eager to deflate (repress) UST yields, and seems happy (even ecstatic) to greatly inflate S+P 500 and home prices. Do the magnificent climbs in stocks and homes represent “stable prices”?

American inflation rates in March 2020 and many months thereafter obviously were lower than those of recent months. Yet even around March 2020 and the next several months, real returns from benchmark United States Treasury instruments across the yield curve were small or negative in comparison to the Consumer Price Index. What about more recent times? The UST 10 year yield is about 1.46 percent, but for the past several months, US CPI-U inflation has surpassed five percent. This negative return situation (which encourages borrowers and debtors but thereby cheats savers and creditors) of course (all else equal) tends to make UST ownership unattractive for many marketplace participants.

What has resulted from keeping yields low and often negative in real terms relative to the current Consumer Price Index and similar inflation gauges? Not only have central bankers assisted spenders (consumption) and helped debtors, but also they have encouraged avid searches for adequate (sufficient) “yield” (“return”) in the S+P 500 (and other international equity realms), emerging marketplace dollar-denominated sovereign debt, corporate debt, as well as in other “asset classes” such as homes, commodities “in general”, and many cryptocurrencies such as Bitcoin. The enthusiastic buying by eager and sometimes frantic yield-hunters has generated meteoric price rallies in the S+P 500 and these other realms since their dismal March 2020 bottoms.

Investment rhetoric encourages price rallies in marketplaces, especially in stocks. Thus Wall Street leaders, supported by the loyal financial media, loudly applaud “investment”, “investors”, and bull moves. Assorted investment generals and their loyal troops perennially fight to identify stocks (especially American ones) as well as other praiseworthy asset classes to buy (or keep holding).

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Widespread marketplace faith still exists in the power of the Fed and its trusty friends to engineer and appropriately manage interest rate yield outcomes, especially in the government securities marketplace. Fed epistles and hymns proclaim its praiseworthy pilgrimage of pursuing the goal of an inflation average of two percent over some misty version of the long run, as well as its noble intention to keep long term inflation expectations “well anchored” at two percent.

The Fed and other central banking magicians and evangelical finance ministers have repeatedly claimed (prayed) that recent inflationary signs in America and elsewhere in recent months are merely “transitory”, “temporary”, or the “result of special factors” (such as high prices for used cars; or, supply bottlenecks). However, this inflation viewpoint probably is wrong.

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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. But marketplace history nevertheless provides guidance regarding the probabilities of future patterns.

Increases in benchmark high-grade government interest rates (such as US Treasuries) and higher yields for lower-quality debt securities (such as corporate bonds and emerging marketplace sovereign debt) probably will weaken the S+P 500 and related advanced nation stock marketplaces. Very elevated government debt levels in America and many other leading nations will help to undermine stocks. Price divergence between the S+P 500 and emerging marketplace stocks (which since February 2021 have not soared to new highs, but instead have declined) also warns of potential weakness in the S+P 500.

Price and time trends for commodities “in general” probably will intertwine with and track those of the S+P 500 and other stock marketplaces.

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Cryptocurrencies in recent years have attracted widespread attention and increased “investor” and other trading (and regulatory) attention. Despite the great variety of cryptocurrencies, Bitcoin is a well-known and actively-traded representative of the crypto trading arena. The overall “search for yield” financial environment  reflected in the bullish price trend in the S+P 500 and elsewhere has assisted Bitcoin’s price ascent. An important additional factor, but not the only one, supporting Bitcoin’s heavenly price leap has been growing inflation and fears that it may increase further. Of course the supply/demand/available inventory situation of Bitcoin is important, and an exciting new marketplace such as Bitcoin can attract additional buyers into its domain, especially when prices have tended to soar upward significantly. Also, Bitcoin offers people a means by which to hide their assets and money movements from government and other regulatory eyes. And fears about American and other government debt levels and trends probably also have been an important consideration fueling Bitcoin’s climb.

These inflation and debt concerns intertwine with wariness regarding the trustworthiness of political and economic leaders and institutions (including banks). Some cryptocurrency participants probably worry about the long run strength of the US dollar, and perhaps other leading currencies as well. Persistent cultural divisions in America and numerous other nations, helps to build and sustain distrust about institutions and leaders.

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Bitcoin’s price rise since its creation about a dozen years ago (around the time of the global economic disaster of 2007-09) astonishes observers. However, underline also that since around first quarter 2020, Bitcoin’s price and time trends often have paralleled those in the S+P 500 and related stock marketplaces.

Bitcoin’s celestial advance to date probably constitutes a danger signal regarding the international financial system and thereby potential economic growth. Nevertheless, Bitcoin and other cryptocurrencies are not integral to the current or near-term functioning of the financial system and the global economy. Moreover, worldwide economic and political leaders have long demonstrated an ability to support traditional global economic (financial, commercial, business) and political arrangements. For example, note the interrelated responses around the globe in 2008-09 and thereafter to the worldwide economic crisis, as well as actions in late first quarter 2020 and thereafter to the fearsome economic downturn (and the 1Q20 stock marketplace crash). Consequently, for the near term horizon at least, if the S+P 500 and related stock marketplaces fall significantly in price, then the Bitcoin price probably will decline (whether at around the same time or eventually) as well.

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Hunting for Yield- Stocks, Interest Rates, Commodities, and Bitcoin (11-7-21)