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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ADVENTURES IN MARKETLAND: HUNTING FOR RETURN © Leo Haviland October 6, 2020

In the movie, “The Hustler” (Robert Rossen, director), a character stresses: “Look, you wanna hustle pool, don’t you? This game isn’t like football. Nobody pays you for yardage. When you hustle you keep score real simple. The end of the game you count up your money. That’s how you find out who’s best. That’s the only way.”

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CONCLUSION

 

During the era of sustained global yield repression engineered by America’s trusty Federal Reserve Board and its central banking comrades, “investors” and other traders generally have engaged in enthusiastic hunts for adequate return (“yield”) in assorted financial fields. These territories include United States and other stocks, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities “in general”.

Convergence and divergence (lead/lag) relationships between realms such as the S+P 500, American corporate debt, and the petroleum complex are a matter of subjective perspective. The connections and patterns are complex and not necessarily precise; they can shift or even transform. Nevertheless, within this accommodative policy yield environment, often involving monumental money printing (quantitative easing) strategies and other generous monetary schemes, price trends in the S+P 500 and these other marketplaces frequently have been similar. Prices in these benchmark stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time They have climbed in bull markets (and fallen in bear markets) “together”. For example, the magnificent bull moves for US stocks and these “related” financial areas peaked in early to mid-first quarter 2020. Their subsequent bloody bear crashes intertwined, ending at around the same time. The ensuing price rallies in these assorted key districts generally embarked around late March 2020, and their subsequent bullish patterns thereafter interrelated. The S+P 500’s attained its record high on 9/2/20 at 3588.

“Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) concluded: “various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together.” Noteworthy interconnected price falls followed the S+P 500’s September 2020 summit. 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.

What bearish factors did “Marketplace Maneuvers” identify? 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). The 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 are growing of a political crisis if President Trump disputes the November voting outcome.

Other warning signals of notable price falls in the S+P 500 and various related marketplaces are vulnerable US (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 the weakness in the US dollar.

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Adventures in Marketland- Hunting for Return (10-6-20)

MARKETPLACE MANEUVERS: SEARCHING FOR YIELD, RUNNING FOR COVER © Leo Haviland September 7, 2020

In the novel “The Gilded Age” (chapter 7), by Mark Twain and Charles Dudley Warner, Colonel Sellers exclaims: “Si Hawkins has been a good friend to me, and I believe I can say that whenever I’ve had a chance to put him into a good thing I’ve done it, and done it pretty cheerfully too. I put him into that sugar speculation—what a grand thing that was, if we hadn’t held on too long.”

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OVERVIEW AND CONCLUSION

Diverse, changing, and interrelated marketplace variables of course encourage price rallies and declines in assorted financial domains. Central bank monetary policies, national deficit spending and debt levels, currency trends, and the recent coronavirus pandemic of course are on the list.

Yet focus on United States Treasury rates only slightly above or beneath benchmark inflation indicators such as consumer price or personal consumption expenditure indices. In other leading government rate realms, such as German ones, note negative nominal interest rates. During the era of global central bank policy yield repression by America’s beloved Federal Reserve Board and the friendly central banks of other major advanced nations, “investors” and other traders generally have engaged in ravenous searches for adequate return (“yield”) in assorted financial marketplaces. These playgrounds include United States and other stocks, lower-grade foreign dollar-denominated sovereign debt, corporate notes and bonds, and commodities.

During this repressive policy yield environment, and often encouraged by massive money printing (quantitative easing) and other accommodative monetary programs, price trends in the S+P 500 and these other marketplaces frequently have been similar. They have risen in bull markets (and fallen in bear markets) “together”. Convergence and divergence (lead/lag) relationships between fields such as the S+P 500, US corporate bonds, and crude oil are a matter of subjective perspective. The connections and patterns are complex and not necessarily precise; they can modify or even transform. But in recent years, prices in these benchmark stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time. For example, prices for US stocks and other financial domains enjoyed glorious rallies which peaked in early to mid-first quarter 2020. Their murderous bear crashes commence at around the same time; numerous investors and other buyers (owners) frantically ran for cover and pleaded for help. The ensuing price rallies in these assorted key generally embarked around late March 2020, and their subsequent bullish patterns thereafter have intertwined.

However, various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together. These bearish factors 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). Also, the 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 are growing of a political crisis if President Trump disputes the November voting outcome.

Other warning signs of notable price falls in the S+P 500 and various related marketplaces include vulnerable US (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, and even with ongoing Fed yield repression) than many believe, and the recent weakness in the US dollar. The likelihood of a substantial new US Congressional stimulus package has ebbed.

The S+P 500 (and especially “technology” stocks; see the Nasdaq Composite Index) probably has been the bull leader for the various asset classes “as a whole” since its 3/23/20 bottom at 2192. For US equities, laments of “where do I put my money?” enthusiastic comments that “there’s a lot of cash around looking for a home”, and venerable rhetoric regarding the reasonableness of buying and holding United States stocks for the “long run” persist. Gurus as well as media cheerleaders still say: “buy the dip” and “don’t miss the train.” Yet such aphorisms and even massive money printing do not inevitably keep asset prices rising.

Despite the Federal Reserve’s late August 2020 promulgation of a revised and even more accommodative policy doctrine, it essentially codified rather than changed the practice of its easing policy of the preceding months. See the Fed’s 8/27/20 “Statement on Longer-Run Goals and Monetary Strategy” and the Fed Chairman’s speech, “New Economic Challenges and the Fed’s Monetary Policy Review” (8/27/20). In any case, the Fed guardian is unlikely to race to the rescue of the US stock marketplace with the S+P 500 hovering around its all-time high.

For detailed further discussion of stock, interest rate, currency, and commodity marketplaces and the political scene, see other essays such as “Dollar Depreciation and the American Dream” (8/11/20); “Divergence and Convergence: US Stocks and American Politics (7/11/20); “US Election 2020: Politics, Pandemic, and Marketplaces” (6/3/20); “American Consumers: the Shape We’re In” (5/4/20); “Crawling from the Wreckage: US Stocks” (4/13/20); “Global Economic Troubles and Marketplace Turns: Being There” (3/2/20); “Critical Conditions and Economic Turning Points” (2/5/20); “Ringing in the New Year: US and Other Government Note Trends” (1/6/20).

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Marketplace Maneuvers- Searching for Yield, Running for Cover (9-7-20)(1)

RUNNING FOR COVER: MARKETPLACE EXITS (c) Leo Haviland August 9, 2019

OVERVIEW AND CONCLUSIONS

The frantic price rally in several key marketplace benchmarks commencing around end year 2018 probably reflected a fervent hunt for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield seekers searched for sufficient return in domains such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex. Easy money policies and pronouncements by the Federal Reserve, European Central Bank, and their comrades greatly encouraged these eager yield searches.

That ferocious yield hunt has diminished and the associated price rally for these signposts in general probably is finished. The terrifying slip in the S+P 500 from 7/26/19’s 3028 summit, in conjunction with the renewed tumble in emerging marketplace equities and the retreat in petroleum prices, signals a reversal of the avid enthusiasm of the hunt for yield in these arenas. The recent plummeting interest rate in the US 10 year government note underlines this. Although the US Treasury note’s yield decline commenced in autumn 2018 at around 3.25 percent, and although chroniclers can attribute further erosion during early 2019 to central bank easy money talk and schemes, its recent dive beneath two percent likely represents a “flight to quality” stage for UST yields.

Therefore, dutiful marketplace pilgrims who raced to identify and achieve “good” (acceptable, reasonable) returns (by purchasing asset classes such as stocks and commodities) at the end of calendar 2018 and for several months thereafter in these sectors probably have started running for cover (begun to liquidate their long positions). Many other investors/owners in these marketplaces probably are running for the exits too.

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America and the rest of the world are in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in advanced nations in general), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is underway. Ongoing or further rounds of central bank easing probably will have limited effectiveness in maintaining adequate economic growth.

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Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Apparent marketplace convergence and divergence (lead/lag) relationships can and do change, sometimes dramatically. Nevertheless, especially since around autumn 2018, the relationship between the S+P 500, emerging stock marketplaces, the United States 10 year government note, petroleum, and the broad real-trade weighted US dollar in key respects increasingly has resembled that of the mid-2014 (and especially mid-2015) to first quarter 2016 time horizon. (One can trace the 2014/2015 trend relationship antecedents back to around spring 2011.)

In the prior era, noteworthy price divergence existed between the S+P 500 and emerging stock marketplaces. However, beginning sometime around late 2014, convergence (less divergence) began to develop between these realms. By spring 2015 (May 2015 high in the S+P 500; late April 2015 emerging stocks top), prices in these equity playgrounds had converged. Prices for both cratered thereafter until first quarter 2016.

Though yields for the United States Treasury 10 year note began to fall in early 2011, the accelerating drop from the yield highs of July 2014 and (especially) June 2015 was a critical factor in relation to stocks and other financial marketplaces. The initial key low yield for the UST occurred in first quarter 2016 (alongside stocks). The decline in commodities in general started in spring 2011, and raced downhill after June 2014’s interim top (and especially) after May 2015 (note the convergence with emerging marketplace stocks and eventually with the S+P 500). Commodities, like stocks, bottomed in first quarter 2016.

The gradually strengthening broad real trade-weighted US dollar intertwined with these various trends. After making a major bottom in July 2011, it gradually appreciated. The dollar’s climb after September 2014 was significant; its fourth quarter 2015 rally above March 2009’s financial crisis peak substantially influenced other financial battlegrounds (note the convergence between and sharp bear moves in the S+P 500 and emerging marketplace stocks), achieving a key high in first quarter 2016.

In both that past era as well as recently, UST 10 year yields dropped substantially. In those two periods, emerging marketplace stocks and commodities crumbled (and alongside each other).

Especially around late 2015, the bull move in the broad real trade-weighted dollar (“TWD”) became remarkably strong. Underline its violent charge above first quarter 2009’s financial crisis top. In the “current” marketplace (which includes many preceding months), the TWD likewise has been very robust. Though the TWD did not push through the economic disaster top recently, it has remained above it for many months. The key parallel between the two periods thus is a strong dollar, and one above the financial crisis high.

Underscore the significant divergence between the S+P 500 and emerging marketplace stocks in both epochs. After its spring 2011 interim top, the S+P 500 continued to attain new highs, peaking in spring 2015. In contrast, emerging marketplace stocks in general were in a sideways to down trend beginning in spring 2011 (though they eventually achieved price convergence with the S+P 500 by spring 2015).

What about the current stock landscape? The divergence between the S+P 500 and emerging marketplace equities probably began before autumn 2018. Emerging marketplace stocks started their bear descent in first quarter 2018. Although the S+P 500 made an important interim high in first quarter 2018, it attained new highs (though not much above the 1Q18 top in percentage terms) up through end July 2019. Therefore divergence between the S+P 500 began around late 1Q18 and continued into summer 2019.

Why the substantial divergence between the S+P 500 and emerging/developing nation equities beginning in early 2018? The passage of America’s tax “reform” legislation in late 2017 was a critical difference. American corporations have reaped major benefits (higher earnings/profits) from this, thus helping to propel the S+P 500 upward. Emerging stock marketplaces (and those of other advanced nations) did not receive such benevolent new legislation.

The S+P 500’s decline since its late July 2019 high probably is the start of price convergence between it and emerging marketplace stocks. Given the similarities of (parallels between) interrelated price movements involving emerging marketplace stocks, commodities (petroleum), the UST 10 year note yield, and the broad real trade-weighted dollar during both eras, convergence between the S+P 500 and emerging marketplace stocks is probable. Thus the S+P 500 probably is in, or soon will begin, a bear trend. Therefore the S+P 500 retreat will confirm the slowing down of the global economy. Keep in mind the spring 2015 association (linkage between) the S+P 500 and MXEF highs and the aftermath in those and other marketplaces.

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Running for Cover- Marketplace Exits (8-9-19)

FACING A WALL: EMERGING US DOLLAR WEAKNESS © Leo Haviland January 15, 2019

CONCLUSION AND OVERVIEW

The broad real trade-weighted United States dollar probably peaked at 103.2 in December 2018 (“TWD”; Federal Reserve Board, H.10; monthly average, March 1973=100). Significantly, that elevation links with the critical TWD pinnacle of December 2016 at 103.4/January 2017 at 103.3, thereby building a formidable double top barrier. This double top ends the glorious long-running major bull move which commenced in July 2011 at 80.5.

Unlike the broad real trade-weighted dollar, the broad nominal trade-weighted dollar has daily data. The broad nominal US dollar probably also formed twin peaks. It achieved an initial summit on 12/28/16 (at 128.9) and 1/3/17 (at 128.8). The nominal TWD’s recent high, 12/14/18 at 129.1, edged less than one percent beyond the 2016/17 summit.

The decline in the broad real trade-weighted dollar from its 103.2/103.4 summit probably will be fairly close to and quite possibly more than ten percent. This retreat likely will last at least for several months. The broad TWD’s wall of resistance at 103.2/103.4 probably will not be broken anytime soon. If it is, the breach likely will not be substantial; dollar depreciation will resume.

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What interrelated phenomena currently are sparking, or will tend to encourage, near term and long run US dollar weakness?

Growing faith that America’s Federal Reserve Board will slow down (at least for a while) its current program of raising the Federal Funds rate represents a key factor in the establishment of December 2018’s TWD ceiling. Both the Fed Chairman and other US central bank guardians recently spoke of the need for “patience” on the rate increase front. For example, note Chairman Powell’s remarks before the Economic Club of Washington, DC (see the NYTimes, 1/11/19, pB3). Read the transcript of his 1/4/19 comments in an Atlanta, GA conference with other past Fed Chairs.

By reducing the likelihood of (at least) near term boosts in the Federal Funds rate, and thereby cutting the probability of notable yield increases for US government debt securities, the Fed makes the US dollar less appealing (less likely to appreciate further) in the perspective of many marketplace players. The Fed’s less aggressive rate-raising scheme (at minimum, a pause in that “normalization” process) mitigates enthusiasm for the US dollar from those aiming to take advantage of interest rate yield differentials (as well as those hoping for appreciation in the value of other dollar-denominated assets such as American stocks or real estate relative to the foreign exchange value of the given home currency). Capital flows into the dollar may slow, or even reverse to some extent.

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Another consideration constructing a noteworthy broad real TWD top is emerging optimism that tariff battles and other aspects of trade wars between America and many of its key trading partners (especially China) will become less fierce. Both the US and China increasingly are nervous regardless the ability of their nations to maintain adequate real GDP increases.

The current United States China 90 day negotiation deadline is 3/1/19. The NYTimes reported signs of Chinese concessions (1/9/18, ppA1, 8). US trade deals with China and other noteworthy nations reduce the incentive for those countries to depreciate their currency relative to the dollar in order to maintain market share for their goods and services within America. Such deals with China may well be vague or not amount to much in actual practice, but even cosmetic progress on the trade war battlefields will tend to weaken the dollar.

Signs of an armistice with China would bolster confidence that US trade feuds with Europe (particularly Germany) will subside. For the near term, the late 2018 deal between the US Administration with Canada and Mexico changing NAFTA treaty arrangements has lessened marketplace agitation regarding trade conflicts in that arena. Whether Congress eventually will enact this deal or a version close to it remains uncertain.

The current US Administration may seek a weaker US dollar relative to current heights in order to stimulate the economy as election season 2020 approaches.

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The substantial and worsening United States debt situation, particularly in the federal sector as a result of the end-December 2017 tax “reform” legislation, nowadays encourages and increasingly will assist long run dollar depreciation. In its bearish implications for the broad real TWD, this ominous US debt variable at present is somewhat independent of near term Federal Reserve Board and other key central bank policy action and rhetoric as well as the outcome of trade negotiations. However, it nevertheless entangles with these phenomena.

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Facing a Wall- Emerging US Dollar Weakness (1-15-19)