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 “Gimme Shelter”, The Rolling Stones sing:
“Ooh, a storm is threatening
My very life today
If I don’t get some shelter
Ooh yeah I’m gonna fade away”
CONCLUSION AND OVERVIEW
Not long after the end of the 2007-09 global economic disaster, American home prices embarked upon a sustained and substantial bull move. Economic growth, population increases, the American Dream’s ideology praising home ownership, widespread faith that a home represents a long run store of value, and tax incentives for home acquisition encouraged that rally. In recent years, the Federal Reserve’s sustained interest rate yield repression and extravagant money printing policies also boosted the consumer’s ability (reduced the cost) and inclination to buy homes. Homes, like stocks and corporate bonds and even many commodities, became part of the “search for yield” universe. The dramatic home price rally has not been confined to America.
The international coronavirus epidemic which emerged around first quarter 2020, made working in the office (or learning at school) appear dangerous. This inspired a ravenous appetite to acquire homes (or more space or quality at home) to escape health risks, encouraging the latest stages of the bullish house trend. Both central bankers and governments acted frantically to restore and ensure economic recovery and growth. Thus housing prices, benefited not only by the beloved Fed’s easy money policies, but also from monumental federal deficit spending.
Moreover, given the acceleration and substantial levels of American and international consumer price inflation over the past year or so, the general public increasingly has seen home ownership as an “inflation hedge”, not just as an indication of American Dream success and “the good life”.
Over the next several months, the intersection of the current major trend of increasing American and other interest rates alongside a gradually weakening United States (and worldwide) economy probably will significantly reduce the rate of American home price increases. Fears that a notable slowdown (or stagflation), and maybe even a recession, have developed. Even the ivory-towered Federal Reserve finally espied widespread and sustained inflation. So central bankers nowadays are engaging in monetary tightening. Further rounds of mammoth government deficit spending currently are unlikely. Public debt in the US and elsewhere rose immensely due to the huge government expenditures related to the coronavirus pandemic and the related quest to create and sustain economic recovery. As the US November 2022 election approaches, that country is unlikely to agree anytime soon on another similar deficit spending spree to spark economic growth. Some signs of moderation in housing statistics hint that home price increases probably will slow and that prices will level off. Thus the peak in American home prices will lag that in the S+P 500.
In regard to the present robust bull price pattern for US homes, there is a greater probability than most audiences believe that US home price increases will slow substantially. Nominal house prices eventually may even fall some. It surely is unpopular (and arguably heretical) nowadays to suggest that American and other national house prices eventually may decline. Yet history, including the passage from the Goldilocks Era to the global economic crisis period, demonstrates that home values, like other asset prices, can fall significantly.
“Runs for cover” increasingly are replacing “searches for yield” in the global securities playground by “investors” and other owners. Price declines in American and other stock marketplaces have interrelated with higher yields for (price slumps in) corporate debt securities and emerging marketplace US dollar-denominated sovereign notes and bonds.
Further declines in US consumer confidence probably will take place. Sustained lofty consumer price inflation (encouraged not only by core CPI components such as shelter, but also by high levels in food and fuel prices) distress consumers. At some point, generalized inflation accompanied by higher US Treasury and mortgage yields can slash home buying enthusiasm, especially if home-owning affordability tumbles. Although history shows that price and time relationships for the S+P 500 and US home prices are not precise, and though equities and houses have different supply/demand situations, stocks and home prices roughly “trade together” over the misty long run. In addition, substantial declines (and increases) in American consumer confidence intertwine with (confirm) major trends in the S+P 500. Consumer confidence has been slipping for several months; the S+P 500 probably established a major peak in early January 2022, and its decline of around twenty percent fits the conventional definition of a bear market.
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Gimme Shelter (and Food and Fuel) (6-5-22)
A character in the film “It’s a Mad Mad Mad Mad World” reasons: “Now look, let’s be sensible about this thing. There’s money in this for all of us. Right? There’s enough for you, there’s enough for you, and for me, and for you, and there’s enough for…” [They all race to their cars]. (Stanley Kramer, director)
Sustained rising United States Treasury interest rates and a strong US dollar have played critical roles in creating the January 2022 price peak for and subsequent declines in the S+P 500. Increasing yields not only in America but also within emerging marketplaces, as well as the powerful dollar, assisted the construction of the earlier high (around February 2021) for emerging marketplace stocks in general. The ongoing UST and other yield climbs of recent months alongside the strong dollar have reestablished long run price and time convergence between the S+P 500 and emerging marketplace equities. The major trend toward higher US and other rates, alongside the high US dollar, and interrelating with the downward trends in the S+P 500 (and other advanced nation stocks) and emerging marketplace equities, probably have created summits for commodities “in general”.
The price spike in commodities (enlist the broad S&P GSCI as a benchmark) beginning in December 2021/early 2022 of course underscored inflationary fears, which assisted the rise in interest rates, thus helping to precipitate down moves in the S+P 500 and other stock marketplaces. However, the rising UST (and international) yield trend and strong dollar situation preceded the Russian invasion of Ukraine in late February 2022.
For a long time, yield repression by the Federal Reserve and its central banking friends created negative real returns relative to inflation for US Treasury and many other global debt securities. This very easy money policy (assisted by gigantic money printing/quantitative easing) and enormous US (and other) government deficit spending (especially after the advent of the coronavirus pandemic in early 2020) generated enthusiastic quests for yield (adequate return) by investors and other traders in stocks, lower-quality debt instruments (such as corporate and emerging marketplace sovereign bonds), and commodities. This helped to produce monumental bull trends in these playgrounds. Wall Street and the financial media eagerly promoted the reasonableness of these yield hunts. The sleepy Fed watchdog and other virtuous central bankers were long complacent about inflationary dangers, labeling inflationary signs as temporary, transitory, the result of supply bottlenecks, and so forth. Nowadays, these more vigilant guardian bankers, alarmed by the highest inflation in several decades, have commenced a rate-raising campaign.
Thus the sunny “search for yield” landscape for the S+P 500 and associated stock, debt, and many commodity marketplaces has darkened. An anxious “run for cover” liquidation of assets by many investors and other owners probably has been underway. Compared to the time just prior to the 2020 coronavirus pandemic (and the 2007-09 global economic crisis), the Federal Reserve (and other central bankers) and the American and other national governments probably have much less ability to readily rescue the S+P 500 and other “search for yield” marketplaces.
Previous essays noted that the S+P 500 probably peaked on 1/4/22 at 4819. Looking forward, the S+P 500 probably will venture significantly beneath 5/2/22’s 4063 low. The bear trend in emerging stock marketplaces will continue. Over the long run, given the American (and global) inflation and debt situation, the yield for the US Treasury 10 year note probably will ascend above its recent high around three percent, although occasional “flights to quality (safe havens)” and thus interim yield declines may emerge. Remember that the dollar rallied from April 2008 to March 2009, alongside the S+P 500’s collapse from its important mid-May 2018 interim high (S+P 500 major high October 2007) to its major bottom in March 2009. However, and although it is a difficult call, the current bull trend for the United States real Broad Dollar Index probably will attain its summit in the near future. Commodities in general (spot; nearest futures basis) probably made a major high in early March 2022 and will continue to retreat, although there may be brief price leaps above previous tops in “have-to-have” (very low inventory) situations.
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Running for Cover- Financial Marketplace Adventures (5-3-22)
Bob Dylan says in “The Times They Are A-Changin’”:
“There’s a battle outside and it is ragin’
It’ll soon shake your windows and rattle your walls
For the times they are a-changin’”
Marketplace history of course is not marketplace destiny, whether for one financial realm or the relationships between assorted domains. Although traditions and the analytical time horizon and the scope of allegedly relevant variables remain critical, the cultural past in its major fields such as economics and politics need not repeat itself, either completely or even partly. Yet sometimes current and potential economic and other cultural situations apparently manifest sufficient important similarities to “the past” so that many observers can perceive patterns helping to explain “the present” and to forecast future probabilities. Thus from the standpoint of many subjective perspectives, marketplace history (like other history) often does recur to a substantial extent. Such alleged historical similarity, as it is not objective (scientific), also consequently permits a great variety of competitive storytelling about it.
The 2022 landscape for the United States dollar, the US Treasury 10 year note, commodities “in general”, and the S+P 500 resembles that of around early 2020. The United States dollar currently hints that it may have established an important peak or that it will soon do so. The real Broad Dollar Index’s height (see the Federal Reserve Board, H.10) borders its March/April 2020 highs. Arguably commodities in general began a notable decline in early 2022. Using the broad S&P GSCI as a benchmark, the spot/physical/cash (as well as the nearest futures continuation) commodities complex (including the key petroleum arena) peaked in early January 2020 alongside a strengthening US dollar. A pattern of increasing US Treasury yields (take the 10 year note as the signpost) preceded the early 2020 stock pinnacles (S+P 500 on 2/19/20; emerging marketplaces in general on 1/13/20) as well as the commodities one. Marketplace chronicles unveil a significant yield increase in the UST 10 year note (and other important debt security benchmarks) prior to (and following) the S+P 500’s very significant high (perhaps a major top) 1/4/22 at 4819. As in 2020, the 2022 highs in stocks and commodities entangled with both rising yields and a strong dollar.
In summary, although their future levels and trends admittedly are cloudy and uncertain, what are probable trends for these marketplaces? The United States real Broad Dollar Index probably has attained its pinnacle or will do so in the near future. Commodities in general (spot; nearest futures basis) probably made a major high in early March 2022 and will continue to retreat. Although it is a difficult call, the S+P 500 likely peaked in January 2022, and it probably will venture beneath late February 2022’s 4115 low. Over the long run, given the American (and global) inflation and debt situation, the yield for the US Treasury 10 year note will ascend above its recent high around 2.55 percent, although occasional “flights to quality” and thus interim yield declines may emerge.
Arguments in marketplaces and elsewhere in cultural life that “this time is different” are inescapable and often persuasive. Of course the coronavirus pandemic played a major role in the first quarter 2020 collapse in global stocks and commodities. However, the rising interest rates and strong dollar variables still played an important part in those 2020 marketplace declines. And the American and international inflation and debt troubles of 2022 (“nowadays”) far exceed those existing around January 2020. The Russian invasion of Ukraine obviously makes aspects of the recent commodities situation different from 2020; global petroleum prices, for example, though “high” prior to the Russia/Ukraine conflict, probably would not have skyrocketed in its absence. And in regard to historic and potential future marketplace relationships and related risk assessments, we should not forget 2007-09, the ending of the Goldilocks Era and its dismal aftermath, the global economic disaster. The S+P 500’s summit (October 2007) diverged for several months from the peak in commodities in general (July 2008), although the trends of those two financial sectors thereafter converged. Also, as US and other stocks began their terrifying descent in spring 2008 until March 2009, the dollar rallied.
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Marketplace Trends and Entanglements (4-4-22)