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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In “Life During Wartime”, the Talking Heads sing: “This ain’t no party, this ain’t no disco, this ain’t no fooling around.”
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CONCLUSION
Looking forward, United States Treasury yields probably will continue to rise. So will yields for government debt in Germany and other advanced nations. In general, yields of emerging market sovereign debt securities probably will keep climbing as well. US dollar-denominated corporate debt yields also will ascend. Substantial inflation and massive government debt are important variables for this rising interest rate outlook. Increasing yields for this array of debt securities around the globe probably have created (led to) an important top around early September 2021 for the American stock battlefield (S+P 500 high 9/2/21 at 4546) and related advanced nation and emerging marketplace stock arenas, or will soon do so. There is a significant probability that the S+P 500 and related equity domains have commenced or soon will begin bear trends.
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Rising Global Interest Rates and the Stock Marketplace Battlefield (10-5-21)
“Time present and time past
Are both perhaps present in time future,
And time future contained in time past.” T.S. Eliot’s poem, “Burnt Norton”
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CONCLUSION
Since summer 2016, the marketplace yield trends for government 10 year notes of the United States and many of its key trading partners generally have resembled each other. Given today’s interconnected global economy, the crucial role of the United States within it, and the roughly similar central bank policy strategies for these nations, this pattern probably will continue.
Over the past three and one-half years, at times some moderate divergence appeared within that group. For example, yield highs for China’s 10 year government note (11/27/17’s 4.04 percent) and the German Bund (2/8/18’s .81 percent) preceded America’s critical yield top on 10/9/18 at 3.26 percent. But even when yield highs (lows) occurred at different times for some sovereigns relative to others, directional shifts in yield for the entire group tended to happen around the same time. Thus China’s 9/21/18 interim high at 3.71 percent and Germany’s on 10/10/18 at .58pc align with the UST yield pinnacle on 10/9/18.
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The United States Treasury 10 year note yield completed a triple bottom during this era. Recall 7/5/12’s 1.38 percent trough. Then see 7/6/16’s 1.32 percent major low and 9/3/19’s 1.43pc. September 2019’s UST depth probably commenced an extended period of rising government (as well as other) interest rates for America and its important trading partners “in general”. Widespread and determined devotion by leading central banks to a gospel of sufficient inflation (the Federal Reserve’s two percent target is a key benchmark) and adequate GDP growth (and low unemployment) encourages this. Given America’s great importance within the world economy, its large current national debt and looming massive future fiscal deficits tend to propel UST interest rates (and thus American corporate yields) upward, and thereby help to raise government yields of many of its global trading partners.
Current central bank caution (including maintaining some yield repression and quantitative easing/money printing) may inhibit a rapid and large yield ascent for the US Treasury 10 year and its companions. In addition, rate climbs for the assorted 10 year government notes will not all necessarily be the same in distance or speed terms. And fearful “flights to quality” at times can depress government debt yields of “safe haven” nations such as America and Germany. For America’s 10 year Treasury note, significant resistance exists around two percent.
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Ringing in the New Year- US and Other Government Note Trends (1-6-20)
The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).
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CONCLUSION
The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.
Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.
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The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.
Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).
Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.
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There Will Be Blood- Financial Battlefields (2-9-18)
Although China’s economy of course differs from those of other major nations around the globe, it intertwines with them. However, China’s huge debt securities marketplace receives relatively little attention from traders, analysts, and the media in comparison to those of the United States, the Euro Area, and Japan.
Debt, stock, currency, and commodity marketplace observers concentrating on matters such as Federal Reserve Board policy and the S+P 500’s level and trend should extend their vision to include Chinese interest rates. China’s 10 year government note, after establishing bottoms at 3.24 percent on 7/12/12 and 3.41pc on 5/10/13, has raced higher. After a brief stop at 4.02pc on 10/8/13, the note decisively crashed through 2011’s 4.10pc barrier, recently breaking through 2007-08’s wall around 4.60pc to reach its recent high of 4.70pc on 11/21/13. The one year government note yield likewise has ascended significantly. Chinese government interest rates probably will continue to climb higher.
Near-universal optimism reigns regarding China’s economic situation and prospects. Even if the national economy is relatively robust, it may be less so than many believe.
Given China’s obvious importance to the world economy, a greater than expected slowdown in the marvelous Chinese growth rate, in part due to sustained higher yields, probably would entangle with and undermine recovery prospects in other territories. Moreover, since the end of the joyous Goldilocks Era and during the dreadful international economic crisis and the subsequent recovery, many turning points in the 10 year Chinese government note have occurred around the same time as those in benchmark 10 year US Treasury and German government notes. Thus despite the yield repression policy tightly embraced by the Federal Reserve and its central banking allies, the notable ascent in Chinese government interest rate yields underlines that the overall long run trend for yields in most key nations is probably higher.
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Chinese Rates- Opening the Gates (12-2-13)
Chart- Chinese Government 10 Year Note (for essay, Chinese Rates- Opening the Gates) (12-2-13)
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