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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PARADISE LOST: THE DEPARTURE OF LOW INTEREST RATES © Leo Haviland February 9, 2022

Kenneth Burke remarks in “A Grammar of Motives”: “And so one can seek more and more money, as a symbolic way of attaining immortality.”

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CONCLUSION AND OVERVIEW

In both stock and debt marketplace domains (and especially in stock arenas), securities owners (particularly “investors”) and their central banking, political, and media allies adore bullish price trends and employ artful rhetoric to promote them. Bullish enthusiasm for low yields in debt marketplaces of course has its limits. Central bankers (and stock investors and Wall Street and Main Street) do not want recessions or deflation and consequently “too low” interest rates, which are “bad” for (reflect or portend feebleness in) “the economy” and equities. But sometimes even negative nominal yields for government debt of leading advanced nations (such as Germany) allegedly are reasonable and praiseworthy. Moreover, for stock marketplaces, bull moves almost always are joyful and good!

All else equal, for equity realms such as America’s S+P 500, low (but not overly depressed) arithmetic interest rates and widespread faith that this rate pattern probably will persist for the foreseeable future tend to give birth to and sustain bullish stock trends. Over the past several years (and despite the horrifying stock price crash in first quarter 2020), ongoing and successful yield repression (enhanced by money printing and fortified by accommodative sermons) by the revered Federal Reserve Board and its trusty friends, and often aided by massive government deficit/”stimulus” spending, encouraged major bull climbs in the United States stock marketplace. In addition, low interest rates (often negative in real terms) in advanced countries such as the United States inspired financial pilgrims avidly searching for adequate “yield” (return) to purchase corporate debt securities and other “asset classes” such as commodities.

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Previous essays discussed key stock, interest rate, currency, and commodity marketplaces and their relationships, as well as the political scene. See essays “Emerging Marketplaces, Unveiling Danger” (12/2/21); “Hunting for Yield: Stocks, Interest Rates, Commodities, and Bitcoin” (11/7/21); “Rising Global Interest Rates and the Stock Marketplace Battlefield” (10/5/21); “America Divided and Dollar Depreciation” (9/7/21); “Great Expectations: Convergence and Divergence in Stock Playgrounds” (8/14/21); “Financial Fireworks: Accelerating American Inflation” (7/3/21); “Marketplace Rolling and Tumbling: US Dollar Depreciation” (6/1/21); “American Inflation and Interest Rates: Painting Pictures” (5/4/21); “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21); “Truth and Consequences: Rising American Interest Rates” (3/9/21).

Several months ago, that analysis concluded that the signpost United States Treasury 10 year note yield had established a major bottom. Essays emphasized, in contrast to the opinion of the majority of central bankers, the likelihood that substantial global inflation likely would persist. Higher inflation alongside massive and increasing international debt burdens probably would encourage higher interest rates around the world.

Also, long run United States interest rate history (use the UST 10 year note as a benchmark) reveals that noteworthy yield increases lead to peaks for and subsequent declines in American stock benchmarks such as the S+P 500 and Dow Jones Industrial Average.

Investigation pointed to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a rising rate environment has become a global phenomenon. Given not only the upward march of yields in the UST 10 year note, but also the international trend of rising rates, the probability of a peak in the S+P 500 and related leading nations increased.

 

America’s S+P 500 and stocks in other advanced nations soared to new highs after February 2021 while emerging marketplace equities have marched downhill (price divergence). However, the chronicle of those two broad marketplace realms at least since the Goldilocks Era of the mid-2000s reveals that their price and time trends tend to coincide. Over the long run, these landscapes are bullish (or bearish) “together”. In the current constellation of rising American and international yields, in both government and corporate areas, that warned of eventual price convergence between the S+P 500 and emerging marketplace stocks. The S+P 500’s record high in early January 2022 occurred near in time to interim highs in developing nation equities.

“Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded: “These intertwined patterns warn that the S+P 500 probably has established a notable top or soon will do so”.

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The longer run viewpoints of “Emerging Marketplaces, Unveiling Dangers” and related recent essays remain intact. The paradise of low interest rates in the United States and around the globe will continue to disappear. This ominous upward yield shift in the UST 10 year note and elsewhere endangers the heavenly bull move in the S+P 500 and related stock marketplaces. The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.

The UST 10 year note yield probably will ascend to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher elevation. The Federal Reserve and other high priests of central banking probably will not engage in substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.

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Paradise Lost- the Departure of Low Interest Rates (2-9-22)

EMERGING MARKETPLACES, UNVEILING DANGER © Leo Haviland December 2, 2021

In the film “The Deer Hunter” (Michael Cimino, director), a character asks: “Did you ever think life would turn out like this?”

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OVERVIEW AND CONCLUSION

Prices for both emerging marketplace stocks and emerging marketplace debt securities “in general” peaked in first quarter 2021. The price tops (yield bottoms) in key emerging marketplace interest rate instruments (around early January 2021) preceded mid-February 2021’s summit in “overall” emerging marketplace equities. Emerging marketplace debt securities established interim price troughs in March 2021, and their prices thereafter rallied (yields fell) for several months. However, yields for those benchmark interest rate securities thereafter have climbed, and that has coincided with slumping prices for emerging marketplace stocks. Moreover, stocks for these developing nations have made a pattern of lower and lower interim highs since February 2021.

This price convergence between emerging marketplace stock and debt securities probably will continue, and prices in both arenas will continue to decline.

The latest coronavirus variant (Omicron) can encourage falls in both advanced nation and emerging stock marketplace prices, but it is not the only bearish factor for them. Rising interest rates and massive debt also play critical roles in this theater. Substantial global inflation and increasing debt burdens encourage higher interest rates around the world, despite the efforts of leading central banks such as the Federal Reserve Board and its allies to repress yields. The Fed’s recent tapering scheme and its related rhetoric portend eventual increases in policy rates (Fed Funds) and higher yields in the United States Treasury field and elsewhere. Moreover, long run United States interest rate history shows that noteworthy yield increases lead to peaks for and subsequent declines in American signposts such as the S+P 500 and Dow Jones Industrial Average.

The recent rally in the US dollar undermines prices for emerging marketplace debt instruments (both dollar-denominated sovereign and corporate fields) and thereby emerging marketplace stocks. All else equal, rising interest rates (particularly in the US dollar domain), especially when linked with US dollar appreciation, increase burdens on emerging marketplace sovereign and corporate borrowers.

Convergence and divergence (lead/lag) patterns between marketplaces can change or transform, sometimes dramatically. Marketplace history does not necessarily repeat itself, either entirely or even partly. But marketplace history nevertheless provides guidance regarding the probabilities of future relationships.

America’s S+P 500 and stocks in other advanced nations soared to new highs after February 2021 while emerging marketplace equities have marched downhill (price divergence). However, the chronicle of those two broad marketplace realms at least since the Goldilocks Era of the mid-2000s reveals that their price and time trends tend to coincide. Over the long run, these arenas are bullish (or bearish) “together”. In the current environment of rising American and international yields, that warns of eventual price convergence between the S+P 500 and emerging marketplace stocks. The S+P 500’s record high, 11/22/21’s 4744, occurred near in time to prior interim highs in developing nation equities. These intertwined patterns warn that the S+P 500 probably has established a notable top or soon will do so.

Many pundits label commodities in general as an “asset class”. Like stocks as well as low grade debt securities around the globe, and likewise assisted by yield repression (with UST yields low relative to inflation) and gigantic money printing, the commodities arena in recent years has represented a landscape in which “investors” and other players hunting for good (acceptable, sufficient) “returns” (“yields”) avidly foraged and bought. Sustained falls in commodity prices in general probably will link to (confirm) price slumps in both advanced and emerging marketplace stocks.

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Recall past financial crises in the past few decades in emerging (developing) nations (for example, Mexico; “Asian” financial crisis) and other important countries (Russia; Greece and several other Eurozone countries) which substantially influenced marketplace trends in more advanced nations. The “Mexican Peso” crisis emerged in December 1994, the terrifying “Asian” problem in July 1997. Russia’s calamity began around August 1998. The fearsome Eurozone debt troubles walked on stage in late 2009/2010. The coronavirus pandemic obviously has been a very severe global economic problem which has generated international responses by central bankers, politicians, and others. However, at present, no crisis similar to these various past national or regional ones, and which eventually might significantly affect the “world as a whole”, has spread on a sustained basis substantially beyond local (regional) boundaries. However, given current international inflation and debt trends, traders and policy-makers should not overlook minimize signs of and the potential for a genuine, wide-ranging economic crisis (perhaps sparked or exacerbated by the coronavirus situation).

Nowadays, consider country candidates for such dangers like Brazil, South Africa, Pakistan, and Turkey. For many emerging marketplace nations, their significant economic, political, and social divisions and related internecine conflicts can make it especially difficult for them to solve major economic challenges. After all, America is not the only country with significant internal “culture wars”. Though China’s troubled corporate real estate sector is not a nation, its massive size and influence makes it analogous to one. Those with long memories undoubtedly recall the “surprising” (“shocking”) problem uncovered in the United States housing (and related mortgage securities) marketplace (and other areas) during the 2007-09 worldwide economic disaster. Nowadays, if such a substantial predicament appears and is not quickly contained, it likely will be bearish for stock marketplaces around the globe.

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Emerging Marketplaces, Unveiling Danger (12-2-21)

THERE WILL BE BLOOD: FINANCIAL BATTLEFIELDS © Leo Haviland February 9, 2018

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)

BUSLOAD OF FAITH: FINANCIAL MARKETPLACES © Leo Haviland, January 15, 2018

In his song “Busload of Faith”, Lou Reed chants: “you need a busload of faith to get by”.

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CONCLUSION

The United States 10 year government note is a widely-watched marketplace benchmark and guide. It ended its major bull move in summer 2016, establishing a yield bottom on 7/6/16 at 1.32 percent. Although the rate for the US Treasury 10 year note has walked peacefully sideways in a fairly narrow path over the past year or so, its yield nevertheless on balance has crept upward from its 9/8/17 interim trough at just over two percent toward its critical barrier around 2.65pc. In the UST’s bear move, the UST yield probably will pierce this 2.65pc target in the near term, with 1/2/14’s 3.05pc elevation the next height in sight.

After establishing a major top in December 2016/January 2017 at 103.2, the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; monthly average) slipped 7.8 percent to 95.2 in September 2017, slightly below crucial support around 96.2 to 96.6. Despite a slight bounce for a couple of months following that September depth, the TWD has renewed its bearish assault on 96.2/96.6 and probably will break decisively beneath that floor (and September 2017’s minor low) relatively soon.

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Economic phenomena and fields interrelate in various fashions. Apparent links and relationships between financial (and political) variables and trends (including convergence/divergence and lead/lag ones) of course can change, sometimes dramatically. In any case, although marketplace history is not marketplace destiny, historical analysis still can offer guidance regarding future probabilities.

The current intertwined relationship and trends of rising US Treasury yields alongside the weakening United States dollar likely is of substantial significance for financial marketplaces in general, not just US government interest rates and key currencies.

History signals that climbing US interest rate yields often precede (connect with; lead to) pinnacles in the Dow Jones Industrial Average and the S+P 500. In the current economic and political landscape, further feebleness in the broad real trade-weighted US dollar probably will warn of (or confirm) important tops in advanced nation and emerging marketplace stock marketplace benchmarks.

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See “Marketplace Vehicles: Going Mobile” (12/13/17), “History on Stage: Marketplace Scenes” (8/9/17), and other essays.

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Busload of Faith- Financial Marketplaces (1-15-18)