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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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)

GAMESTOP AND GAME SPOTS: MARKETPLACE AND OTHER CULTURAL PLAYGROUNDS © Leo Haviland February 13, 2021

In “The Biggest Game in Town”, A. Alvarez writes: “Mickey Appleman remarked to me that a lot of people don’t fit in where they are, but Las Vegas takes anybody.”

James McManus declares in “Positively Fifth Street”: “Las Vegas…attracts more annual pilgrims than any destination but Mecca.”

OVERVIEW

Wall Street inhabitants and other observers often label Wall Street as a game. Stock, interest rate, currency, and commodity marketplaces likewise are games with assorted players.

GameStop Corporation’s stock trades publicly on the New York Stock Exchange, a respected venue. GameStop’s website, advertisements, and Annual Report include a catchy slogan, “power to the players”. The firm says: “we are a family of preferred destinations for gaming, collectibles and consumer electronics”.

Though GameStop is a significant business enterprise, over the years it generally has not won substantial Main Street attention beyond those following the industry sector to which it belongs. However, GameStop’s recent explosive flight and bloody fall in recent weeks captured front page headlines around the globe. Recall its spring 2020 bottom at less than five dollars per share (2.57 on 4/3/20). From a much higher interim trough at 20.03 on 1/13/21, GameStop marched quickly upward in its bull campaign, more than doubling by its close at 43.03 on 1/21/21. The stock thereafter skyrocketed to 1/28/21’s 483 pinnacle (about 24 times 1/13/21’s depth). On this wild upward ride, a couple of big hedge funds with short positions in GameStop (betting that the GameStop price would slump) apparently got squeezed by a wave of (primarily) Main Street buyers (longs) and had to pay stratospheric prices to escape their short position. Despite the enthusiastic buying spearheaded by the retail (Main Street) crew, not long thereafter GameStop cratered over ninety percent to its subsequent low, at 46.52 on 2/9/21. The pattern of trading in the S+P 500, which reached a new high at 3937 on 2/12/21 in its massive bull charge since 3/23/20’s major bottom at 2192 (though that depressing key trough was close in time to GameStop’s 4/3/20 one), has not closely resembled that of GameStop.

Remarkable (unusual) moves in relatively unknown stocks often attract a modest amount of Wall Street and Main Street (retail) attention. However, the excitement around GameStop’s recent dramatic price action, and especially the related widespread blizzard of wordplay involving GameStop from numerous leading Wall Street stock marketplace wizards, investment and other trading gurus, venerable financial regulators, and sage financial and mainstream media commentators, indicate the relevance of the GameStop phenomenon to other more important cultural matters in economic, finance, and elsewhere.

The extensive passionate interest around GameStop points out that variable’s importance as a factor to consider in connection with overall American (and global) stock marketplace trends and the growing democratization of financial playgrounds. Taking a look at GameStop also offers insight into America’s economic and other cultural divisions and conflicts, the American Dream, and financial rhetoric (including metaphors).

CONCLUSION

Many orations about GameStop’s meteoric stock price rise and its subsequent collapse have involved talk of Main Street (retail; “the little guys”) “versus” Wall Street (typically including institutional “professionals”, “big guns” such as banks, investment banks, and larger money managers and financial (wealth management) advisors.

However, although the large GameStop shorts who got killed were Wall Street pros (insiders), the majority of Wall Street money in stocks (including hedge funds and other money managers) is on the buy (ownership) side. Most institutions (regardless of whether one labels them as an “investor” or some breed of investor, speculator or trader) are net owners of stock who, all else equal and as a guideline, want prices in the S+P 500 (and other stock signposts and individual equities around the world) to rise. So do their banking, investment banking, and financial media allies. Likewise, most of the various communities of Main Street stock owners (typically Wall Street and the media honors these financial pilgrims as “investors”) want stock prices to climb.

Consequently, from the standpoint of stock price action, assuming the existence of a Wall Street versus Main Street battle is erroneous, or at least highly misleading. If retail (investors, traders, speculators) sticks a knife into a few hedge funds (or other institutions) short a stock (or stock sector; index) via encouraging a stock price rise in the given supply/demand situation, that almost surely is not damaging Wall Street institutions as a whole. Despite retail enthusiasm and pride in such a victory, neither Wall Street, capitalism, nor “The Man” suffer much if at all.

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In the stock game, Wall Street loves retail players. Why? Main Street buys and holds stocks. Even when it does not own them for a long time, the majority of Main Street initiates its marketplace position by buying, not selling. Sometimes Main Street is a net seller, but as a rule of thumb it owns equities. It is a truism that all else equal, incremental net buying of equities by Main Street inhabitants will tend to move stock prices upward. That helps Wall Street institutional stock owners to make money from such rising prices. Plus significant retail participation in equity playgrounds provides Wall Street and the corporations they serve with an audience to whom it can sell new issues of stock.

Consider most Wall Street stock recommendations. Doesn’t Wall Street usually advise both professional and Main Street audiences to buy, or at least to hold? How many stock research analysts and advisers (brokers) advise their clients to go short? Of all recommendations, in the array of buy, hold, or sell, what percentage are sell ones? Generally speaking, most Wall Street and Main Street participants in the cultural world of marketplaces, in regard to stocks, applaud upward (bullish) stock price moves and “high” prices as “good”. Conversely, all else equal, most assert that it is “bad” if stocks fall (enter a bear trend) or are “low”.

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In marketplaces, notions of probability and causation reflect opinions. But nevertheless ask a question about Main Street’s role in Wall Street during the past several years, especially since the coronavirus pandemic emerged about a year ago. To what extent has the growing ability of Main Street fortune (financial security, wealth)-seekers to readily access stock marketplaces tended to elevate equity prices? Probably by a great deal. Overall US corporate earnings realities in recent months were feeble; their probable future prospects have not rocketed up to the extent of the S+P 500’s leap. So by propelling stock prices higher, Main Street thereby probably has played a critical role in stretching valuation measures upward significantly relative to what they otherwise would be.

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Wall Street has sold itself to America and the rest of the world as a good (reasonable) place for institutional and Main Street players seeking to make money (receive an acceptable/adequate/good financial return) to put and keep their money. Investment wordplay is a critical aspect of Wall Street sales pitches. Especially in the securities landscape, in stocks and interest rate instruments, Wall Street seeks owners (buyers), and especially it hunts for, honors, and praises “investors” and “investment”. The basic definition of the investment label in Wall Street (and on Main Street) means buying (owning) something. In general Many on Main Street (and Wall Street) have devoted faith that prices for US stocks (“in general”; at least those of investment grade) will continue to rise over the misty long run.

What is one of Wall Street’s greatest fears in regard to Main Street? It is the departure of retail owners of securities (especially stock investors, and particularly stock investors buying and holding for the so-called long run. Hence Wall Street gospels diligently and cleverly promote and solicit stock buying. From Wall Street’s view (not only banks, investment banks and big money managers and financial advisors, but also publicly-held corporations in general), a dramatic reduction of net buying by Main Street of stocks in general (particularly American ones) would be ominous, but an actual sustained substantial run for the exits by retail sects (Main Street becoming a net stock seller) would be dreadful (bad).

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GameStop and Game Spots- Marketplace and Other Cultural Playgrounds (2-13-21)

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)