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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AMERICAN INFLATION AND INTEREST RATES: PAINTING PICTURES © Leo Haviland May 4, 2021

“We hope you will enjoy the show”, sing The Beatles in “Sgt. Pepper’s Lonely Hearts Club Band

CONCLUSION

“Inflation” (deflation; stable prices) can appear in various diverse economic arenas. The United States consumer price index measure of course covers somewhat different ground from producer price yardsticks, and both of these weathervanes differ from asset price realms such as the S+P 500 and homes. However, these assorted inflation domains and phenomena influencing them in various ways are not entirely separate.

Despite its enthusiastic claims of surveying assorted inflation indicators and marketplaces, the beloved Federal Reserve Board focuses primarily on consumer-level inflation, as measured by indices such as personal consumption expenditure prices.

The US obviously is not an independent island in the interconnected global economy, though it plays a critical part. However, American “inflation” in the general sense of the term (and even if one excludes the asset price territory of the S+P 500 and homes) is more widespread and less well-anchored than the Fed and armies of its devoted followers (especially the investment fraternity and the financial advisors and media who assist it) believe. The ongoing long run trend for rising US Treasury yields (see the UST 10 year note rate) evidences this trend of sustained and increasing US inflation. Inflation will force the Fed to weaken its longstanding tenacious yield repression program.

Demand for credit relative to its supply of course affects US Treasury and other interest rate levels and trends. America’s federal debt situation of enormous budget deficits (massive spending) probably will continue to propel both inflation and UST yields higher.

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American Inflation and Interest Rates- Painting Pictures (5-4-21)

FINANCIAL MARKETPLACES: CONVERGENCE AND DIVERGENCE STORIES © Leo Haviland April 6, 2021

“Honest to goodness, the tears have been falling
All over this country’s face
It was better before, before they voted for What’s-His-Name
This was supposed to be the new world…
All we need is money
Just give us what you can spare”. X the Band’s 1983 song, “The New World”

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Financial observers often seek to ascertain a relationship between apparent trends involving stock, interest rate, currency, and commodity marketplaces. This involves subjective historical reviews as to the extent to which the price and time trends (patterns) of two or more marketplaces tend to converge or diverge. Some viewpoints may indicate that trends for a given marketplace tend to lead (or lag) those of another. For example, people investigate linkages between two United States technology stocks. Or, traders and analysts seek to establish the relationship (extent of convergence or divergence) between emerging marketplace stocks “in general” and the S+P 500.

The marketplace arenas studied are not necessarily the same. To what extent do significant increases in United States Treasury interest rates precede (lead to) eventual noteworthy declines in the S+P 500?

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Since cultural (subjective) perspectives, arguments, predictions, and actions regarding marketplace and other phenomena and their interrelations diverge (and converge) to various extents over time, emerging stock marketplaces “as a whole” and the S+P 500 do not necessarily trade identically or even very closely in price direction and timing terms. Of course marketplace history is not marketplace destiny, either completely or partially. Relationships within and between financial fields can shift or transform, sometimes dramatically. And these stock theaters have their own supply/demand situations and intertwine with other financial realms and assorted variables in diverse ways. However, over the past couple of decades, important price highs (and lows) and related trend shifts for the overall emerging stock marketplace and the S+P 500 have tended to occur at around the same time, sometimes within a few days, generally within a couple of months.

In first quarter 2020, prices for emerging stock marketplaces began to fall shortly before the S+P 500. They thereafter collapsed and reached a major bottom “together” in late March 2020. Over subsequent months, ferocious bull moves emerged in both districts.

However, since around early March 2021, prices for emerging stock marketplaces have diverged somewhat from the S+P 500. The emerging stock theater stands around seven percent beneath its mid-February 2021 top, whereas the S+P 500 has marched relentlessly to record heights. Will this divergence persist for an extended period?

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Financial Marketplaces- Convergence and Divergence Stories (4-6-21)

GAMES PEOPLE PLAY: FINANCIAL ARENAS © Leo Haviland December 1, 2020

“The Great Game: the Story of Wall Street….An original two-hour documentary event that spans the 200-year history of American capitalism.” NYTimes (over 20 years ago; 5/28/00; p13) regarding a CNBC television program broadcast 5/29/00

CONCLUSION

Financial marketplace investors, speculators, traders, hedgers, analysts, risk managers, and media have enjoyed, endured, or suffered an adventurous 2020! Substantial ongoing political and other cultural divisions and associated conflicts in the United States and elsewhere intertwined with and often enhanced the marketplace circuses. The coronavirus pandemic and the feverish economic (political) responses to its actual and potential ravages of course magnified agitation within marketplace playgrounds.

What are several key existing marketplace patterns worth watching by marketplace players as 2020’s finish line nears and calendar 2021’s competitions beckon?

First, prices in the S+P 500 and other benchmark US 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 thus have alternatively reflected joyous bullish enthusiasm as “investors” and other traders hunted for adequate return (“yield”), and scary bearish scenes as they scrambled frantically 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 these connected landscapes.

Despite strenuous yield repression by the Federal Reserve Board and its central bank teammates, United States Treasury yields, using the UST 10 year note as a signpost, 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) already has dived about ten percent from its peak, its long run pattern probably will remain down.

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Games People Play- Financial Arenas (12-1-20)

BORN TO BE WILD: AMERICAN ECONOMIC AND POLITICAL BATTLEFIELDS © Leo Haviland November 2, 2020

President Donald Trump’s “Inaugural Address” (1/20/17): “This American carnage stops right here and stops right now.”

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OVERVIEW AND CONCLUSION

Marketplace connections and patterns, including convergence and divergence (lead/lag) relationships between financial realms, are complex and not necessarily precise. They can shift or even transform sometimes dramatically. Marketplace history is not marketplace destiny; history does not necessarily repeat itself, either entirely or even partly.

“Adventures in Marketland: Hunting for Return” (10/6/20) and “Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) display the intertwined price trends in assorted financial fields in recent times. Such interrelated territories include United States and other stocks, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities “in general”. Prices in the S+P 500 and other benchmark US and global stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time. They frequently have climbed in bull markets (and fallen in bear markets) “together”. These thus have alternatively reflected bullish enthusiasm as “investors” and other traders hunted for adequate return (“yield”), and dismal bearish scenes as they scrambled frantically for safety. For example, the magnificent bull moves in the S+P 500 and these “related” financial areas established important tops in early to mid-first quarter 2020 (S+P 500 on 2/19/20 at 3394). Their subsequent murderous bear crashes entangled, finishing around the same time, around late March 2020 (S+P 500 on 3/23/20 at 2192). The ensuing price rallies in the S+P 500 and these assorted other key provinces thereafter united, establishing peaks around early September 2020 (S+P 500 top on 9/2/20 at 3588; subsequent lower high 10/12/20 at 3550). See those essays for a detailed presentation of these price moves and their relationships since first quarter 2020.

“Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) concluded that various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together. “Adventures in Marketland” reemphasized this bearish outlook.

What bearish factors for the S+P 500 and various related marketplaces (other stock signposts, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities such as petroleum and metals) did “Marketplace Maneuvers” and “Adventures in Marketland” emphasize? They include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears have grown of a political crisis and legal fights if President Trump disputes the November 2020 voting outcome. Other warning signals of notable price falls in the S+P 500 and various associated battlegrounds include vulnerable United States (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes) than many believe (even with ongoing Fed yield repression), and weakness in the US dollar.

This bearish trend in the S+P 500 probably will continue. Even if Congress answers widespread fervent prayers and enacts another large deficit spending (stimulus) package, the S+P 500’s 9/2/20 peak probably will not be broken by much, if at all. Given recent relationships, a sustained fall in the S+P 500 probably connects with declines in the prices of the other asset sectors currently closely linked to it.

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As always, in the context of these various marketplaces, money-seekers should monitor US Treasury and other high-quality government debt yield levels and trends as well as US dollar and other currency patterns.

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Born to Be Wild- American Economic and Political Battlefields (11-2-20)