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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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)

DOLLAR DEPRECIATION AND THE AMERICAN DREAM © Leo Haviland August 11, 2020

In the film “Wall Street” (Oliver Stone, director), Gordon Gekko claims: “It’s all about bucks, the rest is conversation.”

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DOLLAR DEPRECIATION DANGERS

For many decades, the United States dollar has led the foreign exchange field as the key currency for global trade as well as financial reserves. Over that time span, the greenback’s predominance to a significant extent encouraged, sustained, and reflected widespread (although not unlimited) American and global faith in the wisdom and goodness of American cultural values and the persuasive and practical ability of the nation to be a (and sometimes the) critical guiding force in international affairs. Although the dollar obviously has had numerous extended periods of appreciation and depreciation since the free market currency dealing regime began in the early 1970s, the dollar’s crucial role in the increasingly intertwined global economic system has seldom been significantly questioned or challenged for over an extended period of time. For almost ten years, from its major bottom in July 2011 until April 2020, the overall trend of the dollar in general was bullish.

Therefore few gurus fear a significant depreciation in the US dollar from its relatively lofty April 2020 high. However, the probability of a noteworthy dollar slump is much greater than most believe.

An underlying factor promoting a dollar tumble is the gradually declining share of America as a percentage of world GDP. Also, both political parties, not just the current US Administration, and especially in the coronavirus era, probably want the dollar to weaken from its recent summit. The great majority of the country’s politicians preach their allegiance to a strong dollar, but they also endorse economic growth.

Two additional phenomena make the dollar particularly vulnerable nowadays. First, although many leading nations have increased their government debt burdens in recent years, America’s situation probably has worsened significantly more than most others in recent months. Moreover, America already faced widening federal budget deficits encouraged by the tax “reform” enacted at end 2017. Plus don’t overlook the ongoing ominous long run debt burden, looming from factors such as an aging population. How easily will America service its debt situation? And America’s corporate and individual indebtedness also is substantial.

Second, the intensity and breadth of America’s cultural divisions has increased in recent times, especially during the Trump era. American confidence in the nation’s overall direction has slumped in recent months. As US citizen faith in the country’s situation declines, so probably likewise will (or has) that of foreigners in regard to America.

Declining faith in American assets (and its cultural institutions and leadership) can inspire shifts away from such assets. American marketplaces will not be completely avoided given their importance, but players can diversify away from them to some extent. Not only Americans but also foreigners own massive sums of dollar-denominated assets (debt instruments, stock in public and private companies, real estate; dollar deposits). Such portfolio changes (especially given America’s slowly declining importance in the global economy) will tend to make the dollar feeble.

Suppose nations and corporations increasingly elect, whether for commercial or political reasons, to avoid using the dollar as the currency via which they transact business. That will injure the dollar.

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A five percent fall in the “overall” dollar level from its April 2020 high may not make much difference in the near term for US stocks and debt securities. However, a roughly five percent dollar drop is a warning sign for them, and especially for stocks. All else equal, a weaker dollar tends to boost the nominal price of dollar-denominated assets such as stocks and commodities. But history shows that this relationship is not inevitable. Phenomena other than dollar depreciation influence US securities trends. Keep in view the considerations described above undermining the dollar, and thus the desire to hold dollar-denominated instruments.

Admittedly, strong American corporate earnings encourage buying (and holding) of US stocks. But the coronavirus situation and responses to it have devastated calendar 2020 earnings. Suppose that contrary to widespread hopes and predictions, calendar 2021 corporate earnings do not rebound significantly (sufficiently) from dismal 2020 depths. What if the prayed-for V-shaped economic recovery does not emerge? If corporate earnings remain relatively modest (or slide) going forward, and if the dollar continues to weaken from its April 2020 height, dollar depreciation probably will intertwine with an equity slump.

A sustained dollar tumble approaching ten percent (and especially a fall greater than ten percent) probably will help to push the S+P 500 and related stock prices quite a bit lower. Many equate strong (high; rising) United States stocks over the long run as a signal or proof of the triumphant progress of the American Dream’s economic, political, and social principles. Therefore a linked and sustained decline in both the dollar and American stocks probably would damage to some extent the persuasive rhetoric of the current version American Dream itself.

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Even if US government debt yields in this scenario initially slump from around current low levels due to a renewed “flight to quality”, and even if the Federal Reserve and its central banking teammates maintain their quantitative easing and yield repression schemes, inflationary forces (encouraged by money printing; see the huge increase in America’s money supply) and heated demand for credit eventually can push government (and corporate) interest rates upward. On the US interest rate front, suppose foreigners become smaller buyers, or even net sellers, of US Treasury securities. Such overseas action would not be an endorsement of America. Due to yield repression, UST real returns currently are negative.

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Dollar Depreciation and the American Dream (8-11-20)

DIVERGENCE AND CONVERGENCE: US STOCKS AND AMERICAN POLITICS © Leo Haviland July 11, 2020

William Butler Yeats said in his poem “The Second Coming”:
“Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.”

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OVERVIEW AND CONCLUSION

Numerous United States stock marketplace and economic wizards share a common faith that levels and trends in broad-based equity benchmarks such as the S+P 500 adequately represent the nation’s overall current economic “reality”, signal (forecast) the country’s future economic conditions, or both. Conversely, the present-day or prospective economic situation (or both) allegedly are built into or forecast S+P 500 and related stock signposts elevations and trends. Leading promoters of this creed frequently also are apostles of stock investment (buying), especially over the misty long run. Thus strong (bullish) US stocks supposedly equal, reflect, or confirm (at least to a substantial extent and at some point in time) a robust economy.

Assorted economic (commercial; business) variables around the globe of course influence patterns in American (and other international) stock marketplaces. So do political and other cultural factors. The perspectives on, analytical methods regarding, and arguments and conclusions relating to such cultural phenomena nevertheless are entirely subjective (matters of opinion; not scientific). Thus reasonable gurus can and do vary in their enlightened views regarding issues such as how to organize “the” past, present, and future, as well as in their causation and probability assessments regarding one or more marketplaces. This contrasts with the objective (Natural; true for all) sciences such as biology, chemistry, physics, mathematics, and mechanical engineering.

A given financial marketplace such as the S+P 500 and data (variables, facts, factors, evidence, statistics) related to it converge and diverge (lead/lag) in a variety of fashions. Existing relationships can change, sometimes dramatically. Marketplace history is not marketplace destiny.

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The S+P 500 rapidly crashed about 35.4 percent in only one month from its 2/19/20 pinnacle at 3394 to its dismal 3/23/20 trough at 2192. However, it thereafter skyrocketed nearly 47.5 percent to 6/8/20’s 3233, only about five percent beneath 2/19/20’s height. The S+P 500’s current level around 3185 neighbors the early June 2020 high. Generous money printing (quantitative easing) and yield repression (and other assistance) from the beloved Federal Reserve and its central banking allies substantially contributed to the spike from March 2020’s depth. So did massive deficit spending. Substantial bull moves in various important “technology” stocks within the S+P 500, and the related climb in the technologically-composed Nasdaq Composite Index, greatly assisted the upward march and sustained strength in the S+P 500.

Although the Nasdaq Composite Index and many leading (popular; large-capitalization) technology stocks achieved new highs very recently, several actual or probable divergences (and some convergences) within or linked to the S+P 500 stock playground warn that it will be difficult for the S+P 500 to surpass its lofty February 2020 peak by much, if at all, over the next several months. These factors not only probably will undermine the S+P 500 and induce it to start declining, but also will inspire a related fall in the Nasdaq Composite Index.

DIVERGENCE: AMERICAN STOCKS

The poet Wallace Stevens declared: “Nothing is itself taken alone. Things are because of interrelations or interactions.”

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Various forms of divergence (and convergence) relevant to stock marketplaces exist.

These include how a given marketplace recently has moved, or is travelling, relative to its past (or “overall”) history. It can include relationships between “the” stock marketplace (such as the S+P 500 benchmark) and other stock indices (both domestic and foreign), marketplace sectors (such as technology, energy, or finance; emerging marketplace stocks) or particular stocks. An apparent existing relationship between United States stocks and other financial territories such as interest rates (picture the US Treasury marketplace or high-yield corporate debt), the US dollar, and key commodities such as petroleum and base metals can change, sometimes dramatically. For the S+P 500, a stock sector, or an individual equity, its level, trend, and valuation can seem to converge or diverge with its earnings (or other variables).

To what extent has or will America’s coronavirus history, current trends, and future probabilities intersect with the S+P 500? Recall the vicious economic decline and sharp stock slumps during first quarter 2020 as the coronavirus spread worldwide and in America. Yet the significant increase in recent weeks in the America’s coronavirus infection rate contrasts with the persistent strength in the S+P 500, and with the Nasdaq Composite Index’s stellar ascent to all-time highs.

Significant divisions (divergence) and heated conflicts nowadays exist in America’s political and other cultural theaters. Political phenomena of course intertwine with economic ones, including financial marketplaces such as stocks. To some extent, the rally (“high” prices) in American stock benchmarks such as the S+P 500 diverges from the likely enactment (reality) of corporate and capital gain tax increases. In America’s upcoming November 2020 national election, Biden very likely will defeat Trump. The Democrats should retain control of the House of Representatives. The Democrats probably will gain Senate seats, and they have a very good chance of capturing the Senate. This unification of Democratic power on the national level not only will be a dramatic change in government. Tax policies embraced by Biden and the Democrats likely will be bearish factors for the S+P 500.

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Divergence and Convergence- US Stocks and American Politics (7-11-20)