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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MARKETPLACE CROSSROADS © Leo Haviland September 4, 2023

“I have been passing my life in guessing what I might meet with beyond the next hill, or around the next corner.” Wellington, the British military commander who defeated Napoleon in the battle of Waterloo (“Dictionary of Military and Naval Quotations”, ed. Robert Heinl, Jr.)

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OVERVIEW

Cultural observers differ in their subjective perspectives, arguments, and conclusions regarding economic phenomena, including the prices of and variables relating to interest rate, stock, foreign exchange, commodity, real estate, and other marketplaces. They consequently develop and express a variety of personal views as to whether a given financial price or price relationship level (or trend), or an economic (commercial; business) or political situation substantially relevant to them, has reached or soon will attain a very important point or stage. Thus figuratively speaking, a marketplace (its level and trend) or an economic (or political scene) is or shortly will be at a crossroads. For example, the S+P 500, inflation, Federal Reserve policy, or the American federal fiscal situation can arrive at a crossroads. 

Looking forward, people ask “what will happen from here?” People devotedly select, review, and weigh information to ascertain (develop personal opinions regarding) probabilities for a range of potential outcomes in the aftermath of this key situation. They differ in their views of “the” past and “the” present. In their forecasting (risk evaluation) process, some sentinels analyze the distance and duration a given price move has traveled or eventually (potentially) may move. In various fashions, prophets assess perceived interrelationships between interest rate, stock, foreign exchange, and other marketplaces. 

Hence competitive financial arenas fill with diverse and enthusiastic bulls and bears (and neutral players) talking and acting in a variety of ways. Arrays of investors and speculators and traders and hedgers and risk managers ardently promote and behave according to competing viewpoints and probability assessments. Typically, each player views its own subjective analysis and outlook as “reasonable”, and probably at least as reasonable (intelligent, rational) as that of others. Consequently, we hear fervent rhetoric and see artful pictures relating not only to probabilities, but also patterns and trends, support and resistance, critical levels and turning points, breakout and breakdown, continuation and reversal, convergence and divergence, and lead and lags. 

Many believe that some cultural situations are more difficult to predict than others. In any case, imagine future hypothetical (potential) events regarding a given marketplace (such as the S+P 500 or the United States Treasury 10 year note) or a particular economic or political battlefield (such as “the” US or global economy; American political wars). For some particular potential outcomes (including a related process creating it), many marketplace warriors will label the result as unlikely or very unlikely or unusual (against the odds; having little chance), or even unreasonable, irrational, extraordinary, incredible, unbelievable, astounding, surprising, crazy, impossible, and so forth. 

Nevertheless, cultural history, including that of marketplaces, of course evidences that what many (or even the great majority of) clairvoyants viewed as very unlikely to occur indeed has happened. So in practice, many scouts look out for and consider so-called “tail risks” (subjectively highly unlikely outcomes) to some degree. A trader once said: “In commodities, the impossible happens at least once a year.” Besides, what will be highly unlikely or surprising to one cultural observer may not be so to another. 

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Let’s review several financial marketplaces which appear to be at or near a crossroads. 

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Marketplace Crossroads (9-4-23)

SUMMERTIME BLUES, MARKETPLACE VIEWS © Leo Haviland August 6, 2022

In “Summertime Blues”, The Who complain:
“Well, I’m gonna raise a fuss
I’m gonna raise a holler
‘Bout workin’ all summer
Just to try to earn a dollar.”

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OVERVIEW AND CONCLUSION

Within and regarding marketplaces and other economic realms, as in other cultural domains, diverse storytellers create and promote competing perspectives, explanations, and forecasts. In this process, the selection and weighing of variables (“facts”, data, evidence, and factors) differs, sometimes considerably. Thus rhetorical crosscurrents and a range of marketplace actions in stocks, interest rates, foreign exchange, and commodities battlegrounds inescapably exist. And since opinions can persist or change, so can significant marketplace trends and relationships, sometimes dramatically.

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In today’s entangled global financial marketplaces, battling viewpoints frequently involve assessments of inflation (especially in consumer price measures) and fears regarding recession (or at least stagflation).

Long run American marketplace history shows that substantially rising United States interest rates in key benchmarks such as the United States Treasury 10 year note leads to bear marketplaces in the S+P 500 and Dow Jones Industrial Average. UST 10 year yields began rising in early March 2020, accelerating upward following 8/4/21’s 1.13 percent trough as American (and worldwide) consumer price inflation became very significant. The S+P 500 peaked 1/4/22 at 4819, plummeting almost 25 percent collapse to its mid-June 2022 low.

A “too strong” US dollar also interrelated with (encouraged) ongoing price weakness in both emerging marketplace equities and dollar-denominated sovereign debt securities (both emerging marketplace equities and debt prices peaked in first quarter 2021). The very strong dollar and price slumps in emerging marketplace securities also helped to undermine the S+P 500. Prices for commodities “in general” climbed substantially after December 2021 (Russia invaded Ukraine 2/24/22), magnifying inflation concerns and levels and thus assisting the price decline in global stock marketplaces. Though commodities peaked in early March 2022, on balance they remained quite high until around mid-June 2022.

As prices tumbled in the S+P 500 and related financial arenas (such as emerging marketplace stocks; corporate bonds and US dollar-denominated emerging market sovereign debt), avid “searches for yield/return” transformed into fearful “runs for cover”. Consumer (Main Street) and small business confidence destruction interrelated with capital destruction (loss of money) by “investors” and other owners) in stock and interest rate securities marketplaces.

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However, during the past few weeks, the S+P 500 has rallied vigorously, about 14.6 percent from 6/17/22’s 3637 to 8/3/22’s 4167. Given the high consumer price inflation pattern as well as concerns about feeble economic growth, what intertwined factors probably played key roles in this S+P 500 ascent?

Within the context of a long run trend for increasing yields, a modest interim yield decline in the UST 10 year can help to spark a notable rally in the S+P 500. Note the timing of the recent yield top in the UST 10 year note, 6/14/22’s 3.50 percent in conjunction with the S+P 500’s 6/17/22 trough at 3637. Also, perhaps the renewed slide in the overall commodities field (especially the petroleum complex) since its June 2022 interim highs allayed the inflationary concerns of some marketplace participants.

Share buybacks, disappearance of substantial stock “overvaluation” in yardsticks such as price/earnings ratios, and ongoing optimism that nominal corporate earnings growth will continue over the long run (perhaps keeping pace with the Consumer Price Index) also helped to motivate an interim bull move in the American stocks. Perhaps short covering in American stocks further inflamed the ascent.

What other interrelated phenomena probably have promoted the S+P 500’s summer rally, especially after the second low on 7/14/22 at 3722? The US dollar’s depreciation since mid-July 2022, although not substantial in percentage terms, arguably has inspired some buyers to venture into American stock playgrounds.

Wall Street and its economic and political allies have long popularized, often as part of American Dream wordplay, the outlook that over the misty long run, American stocks in general (the S+P 500; investment grade equities) will keep rising (at least in nominal terms). Thus the roughly 25 percent slump in the S+P 500 since its majestic January 2022 pinnacle perhaps looked to many “investors” like a good buying opportunity over the misty long run, especially as the UST 10 year yield arguably fell sufficiently from its mid-June 2022 crest to mitigate (at least to some extent) concerns regarding inflation (and Fed rate-raising).

Everyone knows that the American stock marketplace is an investment realm greatly favored by Main Street retail players. Wall Street and Main Street guides and their friends in financial media diligently advise Main Street on the merits (goodness; reasonableness) of investment in United States stocks (especially over the long run) as a means of achieving economic security and wealth.

Institutional players of course play critical roles in US and stock and interest rate securities marketplaces. But retail customers have a very substantial impact on stock price levels and trends. Moreover, in contrast with the situation of several years ago, in regard to the equity securities of key US corporations in general (and many Exchange Traded Funds/ETFs), Main Street over the past few years has benefited from rapid execution (internet) and low (or no) commissions. As the coronavirus pandemic emerged in 2020 and persisted into 2021, apparently many Main Street dwellers ventured into the US stock marketplace (not just large capitalization S+P 500-type firms). Many of these Main Street adventurers (investors, speculators, traders) were new participants in the stock trading game. Also, in an era of significantly rising (and high) consumer prices (note the trend since around mid-2021), probably stocks—like homes—can be an inflation hedge for some devoted financial pilgrims. Besides, speculators and traders, not only investors, seek to identify and profit from “good bargains” in stocks (and other marketplaces).

Many regiments of Main Street inhabitants raced into the exciting cryptocurrency wonderland during the global pandemic (and after the crash in the S+P 500 and Bitcoin to their March 2020 bottoms). Though cryptocurrencies generally have not yet won the honored “investment” badge, some believe cryptocurrencies (or at least some brands of it) are a “good investment” and “worth owning for a while”. In any case, many people have sought to make money by trading cryptocurrencies, usually initiating positions from the buying (long) side.

Despite America’s ferocious cultural wars across numerous economic, political, and social parameters, and despite declining consumer (and small business) confidence and widespread dissatisfaction with the overall direction of the country, American consumers in general (or at least the crucial high-earning and substantial net worth segment, the “haves”, have enjoyed substantial jumps in their nominal (and probably real) net worth in recent years.

The US and global stock marketplaces are far larger than cryptocurrency ones. But picture as well the noteworthy upward flight in recent weeks within another territory favored by some Main Street retail players: Bitcoin. Note the roughly similar timing shifts (trend changes) since first quarter 2020 for Bitcoin and the S+P 500. However, the impressive 40.3 percent upward march in Bitcoin from 6/20/22’s 17579 (another low 7/13/22 at 18892) to its recent high on 8/1/22 at 24658 probably encouraged to some extent the price rallies in the S+P 500 (and some other search for yield marketplaces).

Despite the withering slump in the S+P 500 since its 1/4/22 top and the bloodbath in many cryptocurrencies (Bitcoin peak 11/20/21 at 69000; note interim tops on 12/27/21 at 52100 and 3/28/22 at 48236 occurred alongside highs in the S+P 500), overall US household net worth (and thus nowadays probably still remains quite high. Thus “buying power” remained available from a substantial portion the Main Street (general public).

Some of this Main Street (retail) buying power, even in the face of notable CPI inflation and recession concerns, probably enthusiastically jumped from the sidelines into action in the S+P 500 (and other US equities) and some related playing fields, including Bitcoin, in recent weeks.

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Institutional buying surely assisted the price rallies in the S+P 500 from its June 2022 and July 2022 troughs. But did institutional (Wall Street) money (insight and action) “lead” Main Street players into buying the S+P 500 around then? Probably not in a major way. Note the gloomy economic outlooks of the World Bank and International Monetary Fund released at that time. In addition, see the “dire” pessimism of “259 fund managers responsible for more than $700 billion in investments” [in other words, institutional/Wall Street types] manifested via a survey conducted between 7/8 to 7/15/22 by the Bank of America (cited on 7/19/22 by the NY Times website).

According to that Bank of America monthly review, optimism about global growth staggered to a record low, beneath levels in the immediate aftermath of the 2008 Lehman Brothers collapse. The share of respondents who believed a recession was likely was the highest since April 2020 (as the coronavirus pandemic emerged).

However, these institutional investors apparently were holding the most cash since October 2001, (after the 9/11 attacks), over 20 years ago. Consequently Wall Street (institutional) influence probably decided to put some of that extra cash to work and thus assisted (jumped aboard) the S+P 500’s rally from its June/July 2022 valleys.

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Summertime Blues, Marketplace Views (8-6-22)

COMMODITY CURRENCIES IN CONTEXT: A FINANCIAL WARNING SIGN © Leo Haviland May 1, 2018

“All poker is a form of social Darwinism: the fit survive, the weak go broke.” A. Alvarez, “The Biggest Game in Town”

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OVERVIEW AND CONCLUSION

The Bank for International Settlements provides broad real effective exchange rates (“EER”) for numerous currencies around the globe. Within the BIS statistics are several nations who are important exporters of widely-traded commodities such as petroleum, base and precious metals, and agricultural products such as soybeans. Concentrating on and comparing the broad real effective exchange rates of eight freely-traded currencies widely labeled as “commodity currencies” offers insight into assorted interrelated financial marketplace relationships. The overall patterns of this array of assorted export-related commodity currencies often has intertwined in various ways with very significant trends in broad commodity indices such as the S&P Goldman Sachs Commodity Index (“GSCI”) and the Bloomberg Commodity Index (“BCI”), the broad real trade-weighted United States dollar (“TWD”), emerging marketplace stocks in general (as well as the S+P 500), and key interest rate benchmarks such as the 10 year US Treasury note.

In assessing and interpreting the role of and implications indicated by the commodity currency platoon in financial battlefields, marketplace guides should highlight several preliminary considerations. The various commodity currencies (“CC”) do not all move at precisely the same time or travel the same percentage distance in a given direction. Although they generally move roughly together within an overall major trend for the group, an individual member may venture in a different direction for quite some time. Although the path in recent months of the various CCs “together” generally has been sideways, their individual movements have not been identical.

Of course the various commodity currency countries are not all alike. So a given guru can tell somewhat different stories about each of them and their currency. Not all CC nations are equally important within the international trade arena. The various domains do not rely to the same extent on commodities within their export packages. And not all are reliant on a given commodity sector (such as petroleum) as part of their commodity output. Some CC nations produce notable amounts of manufactured goods. In addition, some countries probably are more vulnerable to currency and trade wars than others.

Moreover, the intertwined relationships between currencies (whether the CC EERs or others such as the broad real trade-weighted United States dollar), commodities “in general”, stock marketplaces (advanced nation signposts such as the S+P 500; the emerging marketplace field in general), and interest rates can and do change. Relationships between CC EERs and the broad real trade-weighted dollar (“TWD”) can shift. The TWD’s intertwining and relationship to interest rate, equity, and commodities in general is complex. In addition, although subjective perspectives identify apparent convergence and divergence (lead/lag) relationships between financial territories, these connections (links, associations) can alter, sometimes substantially. Marketplace history is not marketplace destiny, whether entirely or even partly.

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Commodities “in general” surpassed their first quarter 2017 peaks in first quarter 2018 (and April 2018), rapidly climbing from a notable mid-year 2017 trough. The majority of commodity currencies established an EER top in (or around) 1Q17. In contrast to commodities in general, the effective exchange rates of the various commodity currency club members either have not exceeded that top established in (around) 1Q17, or have not done so by much. In addition, the CC group’s EERs generally did not climb much, if at all, from around mid-year 2017. This CC EER pattern (some divergence from commodities in general) warns that a significant top in commodities  probably is near. In the past, highs for the commodity currency EERs linked to highs for commodities in general.

Relevant to this marketplace viewpoint regarding the commodity currency EERs and commodities “in general” is the upward trend in US Treasury note yields. Recall not only the major bottom in the UST 10 year note around 1.32 percent on 7/6/16, but especially underline for the CC (and global stock marketplaces) the yield climb from its 9/8/17 interim trough at just over two percent. The Federal Reserve Board has been raising the Federal Funds rate and gradually reducing the size of its bloated balance sheet. The UST 10 year note broke out in first quarter 2018 above critical resistance at 2.65pc; the UST 10 year  recently bordered 1/2/14’s 3.05pc barrier (3.03pc on 4/25/18; the two year UST note also has climbed, reaching 2.50pc on 4/25/18). Also supporting this outlook for commodities is the 1Q18 peak in the S+P 500 (1/26/18 at 2873) and the MSCI Emerging Stock Markets Index (from Morgan Stanley; “MXEF”; 1/29/18 at 1279).

Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. These include buying commodities as an “asset class”. What happens to commodities when key central banks begin to end their beloved yield repression schemes, or hint that they will do so?

Marketplace history indeed shows that sometimes there has been divergence between commodities “in general” and stock benchmarks such as the S+P 500 for a while. Recall the 2007-09 global economic disaster era. The S+P 500 peaked 10/11/07 at 1576 (MXEF summit 11/1/07 at 1345), prior to the broad GSCI’s pinnacle in July 2008 (7/3/08 at 894). Yet recall that the July 2008 GSCI peak occurred close in time to the noteworthy S+P 500 interim high on 5/19/08 at 1440, as well as the lower S+P 500 tops of 8/11/08 (1313) and 9/19/08 (1265). And note the timing linkage between the broad GSCI and S+P 500 in the past couple of years. Not only did they make major lows around the same time in first quarter 2016 (broad GSCI at 268 on 1/20/16; S+P 500 on 1/20/16 at 1812 and 2/11/16 at 1810). They both accelerated upward in their bull moves around the same time in mid-year 2017; the GSCI low was 351 on 6/21/17, with that in the S+P 500 6/29/17’s 2406 (8/21/17 at 2417). The broad GSCI slumped from its initial high at 466 on 1/25/18, which linked to the S+P 500’s high on 1/26/18; although the GSCI since has hopped over its 1Q18 interim top, it thus far has not done so by much (480 on 4/19/18).

Thus the failure of the EERs for the CC group as a whole to advance much over the past year and especially since mid-year 2017 (with no decisive overall new highs for the group in general in 1Q18) probably has implications for both commodity and equity trends.

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Commodity Currencies in Context- a Financial Warning Sign (5-1-18)

CURRENCIES: THE WAITING GAME © Leo Haviland November 4, 2013

Many academic, financial, and political circles have long been married to “free market” ideologies. Nevertheless, the manipulation, maneuvering, or managing of a nation’s currency level and trends often occupies the deliberations and behavior of that territory’s central bankers, finance ministers, and many politicians. As in their efforts to control or at least influence interest rates (or stock marketplace trends), sometimes their reasoning, actions, and targets are explicit, often they are implicit.

Currency considerations are not islands apart from interest rate, stock, real estate, commodity and other marketplaces. So policy makers enamored of free market propaganda do not necessarily restrict their efforts to affect economic results to their home currency (or that currency’s cross rate relationship to one or more key trading partners). For example, picture the Federal Reserve Board’s longstanding yield repression policy, which has pinned the Federal Funds rate close to the ground.

Although the majority of currency observers and strategists focus their attention on crucial cross rates such as the US dollar against the Euro FX, broad real trade-weighted (effective) exchange rates influence important national policymakers. Analysis of these trade-weighted measures can unveil signs as to important (even if implicit) levels watched by central bank, finance ministry, and political guardians. Such trade-weighted foreign exchange measures consequently provide instruction as to potential strategy responses or changes by these often-vigilant sentinels. National and international policymakers of course are not the only ones looking and waiting around in marketplace games; Wall Street and Main Street likewise wait, watch, and act. Because these broad foreign exchange indicators (and the underlying cross rates) interrelate with perspectives on and decisions relating to current and potential elevations of and movements in numerous interest rate, stock, and other marketplaces, they offer insight into past, present, and future levels and trends of these arenas.

Dollar weakness does not necessarily (inevitably; forever) encourage or reflect a strong American economy or continue to help propelling US equities upward. Suppose a significant run against the “dollar in general” (TWD) occurs, whether via Chinese renminbi, Japanese Yen, or Euro FX (or other currency) strength against the dollar. A TWD dollar dive (especially under the July 2011 low) could force the Fed to significantly reduce or even abandon its interest rate repression and quantitative easing (money printing) policies. Consequently the effort by many American leaders and businesses promoting further weakness in the dollar relative to the renminbi may have some enthralling consequences not only for the dollar in general, but also for American (and other international) interest rate and equity marketplaces.

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Currencies- the Waiting Game (11-4-13)