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 TANTRUMS (AND OTHER SIGNS, SOUNDS, AND FURY) © Leo Haviland, July 11, 2017

“In the day we sweat it out in the streets of a runaway American dream”, sings Bruce Springsteen in “Born to Run”.

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CONCLUSION

Wizards in Wall Street and coaches on Main Street offer a variety of competing descriptions of and reasons for the emergence, continuation, and ending of economic trends, including bull and bear patterns in stock, interest rate, currency, and commodity marketplaces. Apparently dramatic price fluctuations and trend changes frequently inspire heated language of volatility, spikes, crashes, mania, and panic. Colorful metaphors frequently punctuate the tales and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk about a potential reduction in quantitative easing (money printing) in conjunction with marketplace movements generated wordplay of a “taper tantrum”.

In recent weeks, international financial marketplaces and media have worried that central bank policy tightening (or threats of such action) will ignite a taper tantrum akin to what occurred around late spring 2013. That fearsome event saw stocks plummeting and interest rate yields rising rather rapidly in the United States and elsewhere around the globe.

Not only is the Federal Reserve in the process of slowly raising the Federal Funds rate and chirping about diminishing the size of its gargantuan balance sheet. The European Central Bank and others have hinted about reducing the extent of their highly accommodative monetary policies. The ECB is buying €60 billion in mostly government bonds each month via quantitative easing. Will the ECB taper its purchases in 2018?

The Financial Times headlined: “Confusion as Carney [Bank of England Governor] and Draghi [ECB President] struggle to clarify stimulus exit” and “‘Taper tantrum’ echoes” (6/29/17, p1). “End of cheap money leaves central bankers lost for words” and “Officials struggle to convey policy direction precisely to avoid further ‘taper tantrums’” (FT, 6/29/17, p3). “Central bank retreat from QE gathers pace”; “Sudden hawkish shift in policy across the globe has analysts talking of new ‘taper tantrum’” (FT, 7/5/17, p20).

Central bank language and behavior (whether by the Fed or one of its allies) expressing willingness to reduce (or cease) very easy money schemes indeed increase the chances of rising yields in key debt signposts such as the US Treasury 10 year note and boost the likelihood of a decline in important stock benchmarks such as the S+P 500.

Though central banks nowadays may (as in 2013 and at other historical points) spark or accelerate noteworthy trends in securities (and other) marketplaces, the central bank policy factor nevertheless intertwines with numerous other economic and political phenomena. And one or more of such other variables significantly may help to inspire a noisy marketplace “tantrum”. Not all marketplace tantrums are “taper tantrums”.

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Marketplace Tantrums (and Other Signs, Sounds, and Fury) (7-11-17)

MARKETPLACE PARTY TANTRUMS © Leo Haviland June 15, 2015

MARKETPLACE PARTIES

In action-packed Wall Street, whether in US stocks or another fascinating venue, winning money tends to attract attention. All else equal, and as a general rule, the more people in a given game there who capture and keep cash over time, the more likely it is that others will tend to join the particular party. Of course a gathering can get rather full, with “about everyone jammed into the room”. Or, for one or many reasons, the joyous event may become less fun, with the affair perhaps eventually ending, maybe even on a dismal note.
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The S+P 500’s long and monumental bull march following the dreary final days of the global economic disaster (major low 3/6/09 at 667) may persist, but it currently looks rather tired and seems to be ending. In any case, stock investors in general have enjoyed the engaging party (rally) in US equities. Interest rate bulls in key domains such as US and German government debt have celebrated substantial tumbles in yields relative to June 2007 heights. As the Goldilocks Era danced to its end, the 10 year US Treasury note peak was 5.32 percent on 6/13/07; the German 10 year government note top also occurred that day, at 4.70pc. During the worldwide economic recovery, many fortune seeking investors (and speculators) have raced after suitable returns by gobbling up lower-quality debt instruments.
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Competing coaches in Wall Street and Main Street assign a variety of reasons for the emergence, continuation, and ending of both general economic and specific marketplace bull and bear trends. Such wizards and their apostles advise and offer opportunities and warnings to eager audiences regarding marketplace phenomena, including important changes in central bank and fiscal policy. Guides and followers wonder and debate regarding what can spark, sustain, or alter the course of noteworthy price adventures within one or more stock, interest rate, currency, and commodity playgrounds.

Apparently dramatic price fluctuations and trend changes frequently inspire talk of volatility, spikes, mania, and panic. Colorful metaphors frequently punctuate descriptions and explanations. The Federal Reserve Board Chairman’s May and June 2013 tapering talk regarding potential reduction in quantitative easing (money printing) generated wordplay of a “taper tantrum”.

Sometimes preceding but often during or following particularly colorful displays of price patterns, marketplace and media ringleaders regale avid audiences with enthralling and excited language. Some speeches and arguments offer opinions regarding “fair (or true, real) value” (overvaluation and undervaluation; overshooting and undershooting; too high and too low, too rich/expensive or too cheap), natural (rational, reasonable, sensible) prices, and equilibrium.

Securities marketplaces in America and many other nations are of course very large and important to the so-called “real” economy, not merely the “financial” one. Assorted “investors” (buyers) own lots of stocks and interest rate instruments. Moreover, investment (especially in securities) has long been labeled as a reasonable, prudent, intelligent, logical, good, and praiseworthy practice. In general, selling of (or speculation in) securities (especially stocks) is less meritorious (and sometimes allegedly even bad); short-selling (especially of investment-grade equities) is often criticized as dangerous or bad.

Therefore, significant price declines in the S+P 500, and often in interest rate instruments (particularly in supposedly high-quality, investment grade government and corporate debt securities), generally inspires substantial dismay, including talk of “tantrums”. “Tantrum” language, when specifically applied to the stock and interest rate context, usually applies to price drops (bear trends). Bull moves in securities prices, even if they are of the same distance and duration as a bear trend, generally are not labeled as tantrums, for bull moves profit investors. Tantrums can ruin a wonderful party, right? Consequently, it pays to consider the potential regarding and to be on the lookout for the actual emergence of widespread and growing fears and talk about notable falls in securities prices.

Packs of Wall Street partygoers debate the definition, existence, causes, and cures of “overvaluation” phenomena such as “bubbles”. Recently, some players ask if the S+P 500, Chinese stocks, many key government bond playgrounds (picture those of the United States and Germany), and US home prices are bubbles (or overvalued and so on). Will a given bubble be burst or merely have some hot air taken out of it? To what extent will rising US Treasury and corporate debt rates dampen the United States (and international) recovery? Will climbing US government yields, or fears of them, pop a stock marketplace bubble?

This valuation rhetoric is particularly important when interpreted alongside rising nervousness regarding the worldwide economic recovery. After all, reduced GDP expansion may make it more challenging to generate corporate profits and therefore equity price gains.
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Frequent conversations nowadays regarding overvaluation and worries about international growth underline the merit of focusing on a handful of corners within several entangled marketplace scenes. That review may help money hunters to assess the risks of staying in or entering a particular marketplace ballpark. This brief survey indicates information regarding or price points within particular marketplace arenas that will not only may draw greater attention to and inflame action in them, but also likely will help trigger dramatic price moves in other playing fields.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Marketplace Party Tantrums (6-15-15)