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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FINANCIAL FIREWORKS: ACCELERATING AMERICAN INFLATION © Leo Haviland July 3, 2021

Prince sings in “Let’s Go Crazy”:
“Dearly beloved, we have gathered here today
To get through this thing called life.”

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CONCLUSION

The Federal Reserve Board and its central banking comrades obviously are not omnipotent. They also are not scientifically objective in their definitions, perspectives, methods, arguments, and conclusions. Neither is the Fed (its policies) the only important variable influencing inflation levels and patterns in America and elsewhere. Many intertwined phenomena in the United States and around the globe, including massive government deficit spending, matter.

Yet given the Federal Reserve’s success with its yield repression strategy (and its quantitative easing/money printing scheme), many observers have great confidence in the central bank’s insight, foresight, and talent for creating and managing “good” United States (and global) economic outcomes. These desirable results include not only adequate US economic growth and stable prices, but also bullish stock marketplace (use the S+P 500 as the benchmark) and home price moves.

The Fed’s long-running marketplace maneuvers, and especially its yield repression policy, have helped to create a culture strongly oriented (married, metaphorically speaking) to the existence and persistence of low Federal Funds and United States Treasury rates. In general, stock owners and securities issuers (corporations and sovereigns), as well as Wall Street enterprises who serve and profit from them, love low interest rates.

“Inflation” (deflation; stable prices) appears in various diverse economic arenas. The Fed itself and the great majority of Fed watchers on Wall Street and Main Street believe the Fed will achieve its praiseworthy goal of stable prices. Thus inflation will not climb “too high” or go “out of control”. Similarly, benchmark US Treasury interest rates also will not increase “too much” (“too far”; or “too fast”).

Since the coronavirus pandemic emerged during first quarter 2020, as part of its highly accommodative monetary policy, the Federal Reserve has purchased a huge quantity of US Treasury securities (as well as agency mortgage-backed securities). This extraordinary and ongoing net acquisition program has assisted its effort to ensure low marketplace yields. But observers should examine the Fed’s UST purchasing process and its consequences in more depth. It has significantly increased the Fed’s already sizable percentage share of the outstanding marketable (and held by the public) UST world. This noteworthy jump in the Fed’s arithmetic and percentage market share holdings of UST probably therefore has decreased the “free supply” (readily available inventory) of UST. Despite accelerating US inflation in recent months, the large reduction in the free supply of marketable UST probably has helped to keep benchmark UST yields (such as for the 10 year UST note) low.

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“American Inflation and Interest Rates: Painting Pictures” (5/4/21) stressed that American “inflation” in the general sense of the term (and even if one excludes the asset price territory of the S+P 500 and homes) is more widespread and less well-anchored than the Federal Reserve Board and armies of its devoted followers (especially investment sects and the financial advisors and media who assist them) believe.

Acceleration in assorted American inflation signposts has occurred in recent months. This probably shows that Fed programs have played, and continue to perform, a critical role in enabling US inflation to rise sharply. Though inflation in measures such as the Consumer Price Index is not yet “out of control”, the Fed at present has less control over this upward trend. Recent significant increases in key inflation benchmarks such as the CPI are not “transitory”. Despite the Fed’s dogmatic adherence to its yield repression approach, the Fed’s various current policies and its related rhetoric will find it very challenging to contain the increasing inflationary pressures.

Rising inflation will force the Fed to taper its ravenous US Treasury and mortgage securities buying program, and gradually abandon its longstanding tenacious yield repression strategy, sooner than it currently desires and plans. Despite the Fed’s yield repression, money printing, and wordplay (including forward guidance), America’s widespread, persistent, and growing inflation severely challenges faith in the Fed’s long run power to block significantly higher interest rates. The Federal Funds rate and UST yields (including those on the shorter end of the yield curve) probably will have to increase faster and further than the Fed shepherd currently wants and predicts. UST yields will resume their long run upward path. Sustained ascending American inflation has a strong likelihood of undermining and reversing bullish price trends in various “search for yield” marketplaces such as stocks.

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Financial Fireworks- Accelerating American Inflation (7-3-21)

GAMESTOP AND GAME SPOTS: MARKETPLACE AND OTHER CULTURAL PLAYGROUNDS © Leo Haviland February 13, 2021

In “The Biggest Game in Town”, A. Alvarez writes: “Mickey Appleman remarked to me that a lot of people don’t fit in where they are, but Las Vegas takes anybody.”

James McManus declares in “Positively Fifth Street”: “Las Vegas…attracts more annual pilgrims than any destination but Mecca.”

OVERVIEW

Wall Street inhabitants and other observers often label Wall Street as a game. Stock, interest rate, currency, and commodity marketplaces likewise are games with assorted players.

GameStop Corporation’s stock trades publicly on the New York Stock Exchange, a respected venue. GameStop’s website, advertisements, and Annual Report include a catchy slogan, “power to the players”. The firm says: “we are a family of preferred destinations for gaming, collectibles and consumer electronics”.

Though GameStop is a significant business enterprise, over the years it generally has not won substantial Main Street attention beyond those following the industry sector to which it belongs. However, GameStop’s recent explosive flight and bloody fall in recent weeks captured front page headlines around the globe. Recall its spring 2020 bottom at less than five dollars per share (2.57 on 4/3/20). From a much higher interim trough at 20.03 on 1/13/21, GameStop marched quickly upward in its bull campaign, more than doubling by its close at 43.03 on 1/21/21. The stock thereafter skyrocketed to 1/28/21’s 483 pinnacle (about 24 times 1/13/21’s depth). On this wild upward ride, a couple of big hedge funds with short positions in GameStop (betting that the GameStop price would slump) apparently got squeezed by a wave of (primarily) Main Street buyers (longs) and had to pay stratospheric prices to escape their short position. Despite the enthusiastic buying spearheaded by the retail (Main Street) crew, not long thereafter GameStop cratered over ninety percent to its subsequent low, at 46.52 on 2/9/21. The pattern of trading in the S+P 500, which reached a new high at 3937 on 2/12/21 in its massive bull charge since 3/23/20’s major bottom at 2192 (though that depressing key trough was close in time to GameStop’s 4/3/20 one), has not closely resembled that of GameStop.

Remarkable (unusual) moves in relatively unknown stocks often attract a modest amount of Wall Street and Main Street (retail) attention. However, the excitement around GameStop’s recent dramatic price action, and especially the related widespread blizzard of wordplay involving GameStop from numerous leading Wall Street stock marketplace wizards, investment and other trading gurus, venerable financial regulators, and sage financial and mainstream media commentators, indicate the relevance of the GameStop phenomenon to other more important cultural matters in economic, finance, and elsewhere.

The extensive passionate interest around GameStop points out that variable’s importance as a factor to consider in connection with overall American (and global) stock marketplace trends and the growing democratization of financial playgrounds. Taking a look at GameStop also offers insight into America’s economic and other cultural divisions and conflicts, the American Dream, and financial rhetoric (including metaphors).

CONCLUSION

Many orations about GameStop’s meteoric stock price rise and its subsequent collapse have involved talk of Main Street (retail; “the little guys”) “versus” Wall Street (typically including institutional “professionals”, “big guns” such as banks, investment banks, and larger money managers and financial (wealth management) advisors.

However, although the large GameStop shorts who got killed were Wall Street pros (insiders), the majority of Wall Street money in stocks (including hedge funds and other money managers) is on the buy (ownership) side. Most institutions (regardless of whether one labels them as an “investor” or some breed of investor, speculator or trader) are net owners of stock who, all else equal and as a guideline, want prices in the S+P 500 (and other stock signposts and individual equities around the world) to rise. So do their banking, investment banking, and financial media allies. Likewise, most of the various communities of Main Street stock owners (typically Wall Street and the media honors these financial pilgrims as “investors”) want stock prices to climb.

Consequently, from the standpoint of stock price action, assuming the existence of a Wall Street versus Main Street battle is erroneous, or at least highly misleading. If retail (investors, traders, speculators) sticks a knife into a few hedge funds (or other institutions) short a stock (or stock sector; index) via encouraging a stock price rise in the given supply/demand situation, that almost surely is not damaging Wall Street institutions as a whole. Despite retail enthusiasm and pride in such a victory, neither Wall Street, capitalism, nor “The Man” suffer much if at all.

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In the stock game, Wall Street loves retail players. Why? Main Street buys and holds stocks. Even when it does not own them for a long time, the majority of Main Street initiates its marketplace position by buying, not selling. Sometimes Main Street is a net seller, but as a rule of thumb it owns equities. It is a truism that all else equal, incremental net buying of equities by Main Street inhabitants will tend to move stock prices upward. That helps Wall Street institutional stock owners to make money from such rising prices. Plus significant retail participation in equity playgrounds provides Wall Street and the corporations they serve with an audience to whom it can sell new issues of stock.

Consider most Wall Street stock recommendations. Doesn’t Wall Street usually advise both professional and Main Street audiences to buy, or at least to hold? How many stock research analysts and advisers (brokers) advise their clients to go short? Of all recommendations, in the array of buy, hold, or sell, what percentage are sell ones? Generally speaking, most Wall Street and Main Street participants in the cultural world of marketplaces, in regard to stocks, applaud upward (bullish) stock price moves and “high” prices as “good”. Conversely, all else equal, most assert that it is “bad” if stocks fall (enter a bear trend) or are “low”.

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In marketplaces, notions of probability and causation reflect opinions. But nevertheless ask a question about Main Street’s role in Wall Street during the past several years, especially since the coronavirus pandemic emerged about a year ago. To what extent has the growing ability of Main Street fortune (financial security, wealth)-seekers to readily access stock marketplaces tended to elevate equity prices? Probably by a great deal. Overall US corporate earnings realities in recent months were feeble; their probable future prospects have not rocketed up to the extent of the S+P 500’s leap. So by propelling stock prices higher, Main Street thereby probably has played a critical role in stretching valuation measures upward significantly relative to what they otherwise would be.

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Wall Street has sold itself to America and the rest of the world as a good (reasonable) place for institutional and Main Street players seeking to make money (receive an acceptable/adequate/good financial return) to put and keep their money. Investment wordplay is a critical aspect of Wall Street sales pitches. Especially in the securities landscape, in stocks and interest rate instruments, Wall Street seeks owners (buyers), and especially it hunts for, honors, and praises “investors” and “investment”. The basic definition of the investment label in Wall Street (and on Main Street) means buying (owning) something. In general Many on Main Street (and Wall Street) have devoted faith that prices for US stocks (“in general”; at least those of investment grade) will continue to rise over the misty long run.

What is one of Wall Street’s greatest fears in regard to Main Street? It is the departure of retail owners of securities (especially stock investors, and particularly stock investors buying and holding for the so-called long run. Hence Wall Street gospels diligently and cleverly promote and solicit stock buying. From Wall Street’s view (not only banks, investment banks and big money managers and financial advisors, but also publicly-held corporations in general), a dramatic reduction of net buying by Main Street of stocks in general (particularly American ones) would be ominous, but an actual sustained substantial run for the exits by retail sects (Main Street becoming a net stock seller) would be dreadful (bad).

FOLLOW THE LINK BELOW to download this article as a PDF file.
GameStop and Game Spots- Marketplace and Other Cultural Playgrounds (2-13-21)