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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LONG RUN HISTORICAL ENTANGLEMENT: US INTEREST RATE AND STOCK TRENDS © Leo Haviland July 6, 2023

“The past is never dead. It’s not even past.” “Requiem for a Nun” (Act 1, Scene 3), by William Faulkner

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CONCLUSION AND OVERVIEW

Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span. The arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle. 

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The US Treasury 10 year note yield established a major bottom at .31 percent on 3/9/20. Its sustained yield increase thereafter, and especially from 8/4/21’s 1.13 percent, helped lead to the major high in the S+P 500 on 1/4/22 at 4819. After an extended span of engaging in yield repression (and money printing), the Federal Reserve finally recognized that inflation was not a temporary or transitory phenomenon and began raising rates. The timing of a critical interim UST 10 year note yield high, 6/14/22’s 3.50 percent, extended well the stock marketplace peak, as did the UST’s second summit at 4.34 percent on 10/21/22. Arguably, an only gradual reduction of yield repression while immersed in an inflationary environment was one factor for the extensive duration of the yield increase after the S+P 500’s January 2022 crest. In any event, the S+P 500 tumbled sharply in its bear trend, reaching a major bottom on 10/13/22 at 3492, close in time the UST’s high (as well as the autumn 2022 peak in the US dollar). For a bear trend from the long run historical perspective, that nine and one-half months and 27.5 percent decline in the S+P 500 was modest in time and distance terms. 

The S+P 500’s rally since October 2022’s valley has carried it to within about 7.5 percent of its glorious January 2022 summit. Given the historic pattern in which UST yield increases “lead” to peaks in key American stock benchmarks such as the S+P 500, do signs of a noteworthy rising yield trend exist on the interest rate front? Yes. 

First, the UST 10 year note made several interim lows around 3.30 percent in first half 2023, with yields escalating moderately from 4/6/23’s 3.25 percent. The subsequent UST 10 year high since then is 7/6/23’s 4.08 percent (as of 1200 noon EST on 7/6/23). In addition, the existence of only a modest yield decline from October 2022’s 4.34pc high indicates that the pattern of rising UST 10 year note (and other UST) yields which emerged in March 2020 and accelerated thereafter probably remains intact. Also, core inflation remains persistently above the targets of the Fed and other central bankers. US unemployment remains low. The Fed and other leading central bank luminaries have hinted strongly at further increases in policy rates, and they appear determined (in the absence of an economic crisis) to maintain their tightening schemes for an extended time period. Such boosts in the Federal Funds level (and thus in short term UST instruments) probably will push the UST 10 year yield higher. Moreover, monumental long run federal debt problems confront America; all else equal, huge credit demand tends to boost interest rates. 

In addition, the UST 10 year note’s major yield bottom in March 2020 began from a peak around fifteen percent almost 40 years before, in 1981. That seemingly ancient UST yield history does not mandate the development of a substantial yield increase over a very long time span for the ensuing vista commencing in 2020. However, by comparison, a yield increase of about four percent in about two and one-half years, from March 2020 to October 2022, is moderate but not extraordinary, especially given the Fed’s yield repression history (and related money printing) and the developing (and current) inflationary situation. From this perspective, an eventual climb in the UST 10 year note yield above October 2022’s 4.34 percent high is probable. 

Therefore, the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak probably will occur relatively soon, probably within the next few weeks or months. However, even if the S+P 500 continues to climb, it probably will not exceed its January 2022 peak by much if at all. 

Why might the S+P 500 remain fairly strong in the near term? First, the UST 10 year yield increase since April 2023 has been only moderate. Moreover, in America, and in general for other advanced nations, government yields relative to consumer price inflation remain low or negative. Also, US corporate earnings optimism for 4Q2023 and thereafter is strong. In addition, we live in a nominal world, and quoted stock prices obviously belong in that realm. Real GDP growth can be disappointing. However, all else equal, rising nominal GDP, increasing money supply, and higher nominal prices for goods and services in general will tend to be reflected in higher nominal corporate earnings and stock prices. Stock share buybacks have been substantial. US consumer confidence is fairly high (June 2023 at 109.7, 1985=100; Conference Board). Sales prices of existing single-family homes, after peaking in June 2022, have rallied since January 2023 (National Association of Realtors). 

The UST 10 year yield currently is challenging 3/2/23’s 4.09 percent interim high. That perhaps will be sufficient to notably weaken the S+P 500. However, the UST 10 year note yield probably will need to approach or exceed 10/21/22’s 4.34 percent top to induce a very substantial fall in the S+P 500.

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Long Run Historical Entanglement- US Interest Rate and Stock Trends (7-6-23)-1

WALL STREET MARKETPLACES: FASTEN YOUR SEAT BELTS © Leo Haviland December 5, 2022

In the classic American film, “All About Eve” (Joseph Mankiewicz, director), the actress Margo Channing (played by Bette Davis) declares: “Fasten your seat belts. It’s going to be a bumpy night.”

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OVERVIEW

In general, from around the beginning of calendar 2022 until mid-October, as American and other key global government interest rates continued to rise (enlist the United States Treasury note as a benchmark), the S+P 500 (and other advanced nation and emerging marketplace stock playgrounds) declined. Growing fears regarding substantial and persistent consumer price (and other) inflation by the Federal Reserve and its central banking allies and the linked policy response of raising Federal Funds and similar rates played key roles in the yield climbs and stock price falls. Bear trends for other “search for yield” assets such as corporate bonds and United States dollar-denominated emerging marketplace corporate debt converged with those of the S+P 500 and emerging marketplace stocks. Commodities “in general” (“overall”) of course do not always trade “together” in the same direction around the same time as the S+P 500. Nevertheless, in broad brush terms since around late first quarter 2022, their downward price and time trends converged. A very strong US dollar encouraged the relationships of higher US Treasury yields, descending stock prices, and eroding prices for commodities “in general”.

However, the US 10 year note yield achieved an important high on 10/21/22 at 4.34 percent. Using the Federal Reserve Board’s nominal Broad Dollar Index as a weathervane, the dollar peaked at 128.6 on 9/27/22 and 10/19/22. The S+P 500 established a trough in its bear trend with 10/13/22’s 3492. Based on the S+P GSCI, commodities in general attained an important low on 9/28/22 at 591.8, holding at 591.1 on 11/28/22. Note the roughly similar times (and thus the convergence) of these marketplace turns, which thereafter reversed, at least temporarily, the preceding substantial trends.

What key changes in central bank policy and marketplace inflation yardsticks encouraged the recent slump in the UST 10 year yield, the depreciation in the US dollar, and the jump in the S+P 500 and the prices of related hunt for yield (adequate return) battlefields? First, various members of the Federal Reserve leadership hinted that future rate increases would slow in extent (be fifty basis points or less rather than 75bp). See the Financial Times summary of officials leaning that way (11/12-13/22, p2). The Fed probably will tolerate a brief recession to defeat inflation, but it (and of course the general public and politicians) likely would hate a severe one. In today’s international and intertwined economy, further substantial price falls (beneath October 2022 lows) in the stock and corporate debt arenas (and other search for yield interest rate territories), and even greater weakness than has thus far appeared in home prices, plus a “too strong” US dollar, are a recipe for a fairly severe recession. Hence the Fed’s recent rhetorical murmurings aim to stabilize marketplaces (and encourage consumer and business confidence and spending) and avoid a substantial GDP drop.

Second, US consumer price inflation for October 2022 stood at “only” 7.7 percent year-on-year. This rate fell short of expectations for that month and declined from heights exceeding eight percent in the several preceding months. This sparked hopes that American (and maybe even global) inflation would continue to decline even more in the future, and that the Federal Reserve and other central bank guardians would engage in less fierce tightening trends.

Of course the Fed policy hints and US consumer inflation statistics do not stand apart from other variables. Might China ease its restrictive Covid-fighting policy, thus enabling the country’s GDP to expand more rapidly?

Trends for commodities in general (employ an index such as the broad S+P GSCI) and the petroleum complex in particular sometimes have diverged substantially for a while from that of the S+P 500. After all, petroleum, wheat, and base metals have their own supply/demand and inventory situations. The broad S+P GSCI has battled to stabilize during autumn 2022 in response to the determined effort by OPEC+ to rally petroleum prices via production cuts. And over the long run, the S+P 500 and commodities tend to trade together. OPEC+’s ability to successfully defend a Brent/North Sea crude oil price around 83 dollars per barrel (nearest futures continuation) depends substantially on interest rate and stock levels and trends, as well as the extent of US dollar strength.

The “too strong” US dollar during calendar 2022 encouraged price declines in assorted search for yield asset classes, including emerging marketplace stocks and debt instruments as well as commodities. The depreciation of the US dollar in the past couple of months thus interrelated with (confirmed) the price rallies in the S+P 500 and other marketplaces. Yet the Federal Reserve probably will remain sufficiently enthusiastic in comparison with other central banks in its fight against inflation, which should tend to keep the dollar strong, even if it stays beneath its calendar 2022 high.

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Investors in (and other owners of) stocks and other search for yield realms and their financial and media friends joyously applauded recent price rallies. However, to what extent will these bullish moves persist?

US consumer price and other key global inflation indicators remain very high relative to current central bank policy rates. Not only does the US CPI-U all items year-on-year percentage increase of 7.7 percent for October 2022 substantially exceed UST 10 year yields over four percent, but so does October 2022’s 6.3 percent year-on-year increase in the CPI-U less food and energy.

Imagine consumer price inflation staying at only 4.5 percent. To give investors a 50 basis point return relative to inflation, the UST 10 year should yield five percent. Thus the Fed will continue to push rates higher in its serious war against excessive inflation, and eventually the rising UST yield pattern probably will reappear eventually, persisting until there are signs of much lower inflation or a notable recession.

Although marketplace history is not marketplace destiny, history reveals that significant climbs in key US interest rate signposts (such as the UST 10 year) tend to precede substantial falls in US stock benchmarks such as the S+P 500. Thus the S+P 500 probably will resume its decline, although it will be difficult for it to breach its October 2022 depth by much in the absence of a sustained global recession. So a return to rising UST rates, all else equal, probably will keep the dollar fairly powerful from the long run historic perspective, although the dollar will find it challenging to surpass its recent high by much (if at all) for very long.

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Wall Street Marketplaces- Fasten Your Seat Belts (12-5-22)

HISTORY ON STAGE: MARKETPLACE SCENES © Leo Haviland, August 9, 2017

“People think of history in the long term, but history, in fact, is a very sudden thing.” Philip Roth’s novel, “American Pastoral”

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OVERVIEW AND CONCLUSION

Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span, and the arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.

The US Treasury 10 year note’s 7/6/16 major bottom at 1.32 percent probably ushered in an extended period of rising rates, which probably will connect with (lead to) a peak in the DJIA and S+P 500. This subsequent upward yield shift is only partly on stage, and so far its entrance has been modest. Despite the massive amount of money printing in recent years by the central banking fraternity, the ultimate extent of the rate increase may not be massive. The yield repression (and quantitative easing) era that began during the dark ages of the global economic disaster has not exited. The heavy hand of central bank yield repression (manipulation) not only was extraordinary, but still looms large.

Yet the Federal Reserve has started to raise the Federal Funds rate modestly and given orations about normalizing policy further by reducing the size of its bloated balance sheet. In recent months, monetary tightening talk relating to some other central banks such as the European Central Bank has increased. Moreover, marketplace “tantrums” involving tumbling equities can result from various intertwined causes, not just central bank wordplay and behavior. Yet worries about a “taper tantrum” involving falling stocks as a result of “tightening” of (reduced laxity in) central bank policy schemes nevertheless also have escalated.

Thus in the current marketplace horizon, not only the reality of somewhat higher government rates, but also (alternatively) the widespread perception of an emerging substantial threat of such (or further) yield climbs (whether induced by central bank policy shifts or otherwise), eventually can help to push stock marketplace benchmarks downhill.

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Lead/lag (convergence/divergence) relationships between marketplace arenas are not written in stone. What role does the broad real trade-weighted US dollar play? History unveils that sometimes a rising TWD accompanies rising stocks, but sometimes it links with falling stocks. Sometimes TWD depreciation connects with climbing stocks, sometimes with slumping equity signposts.

In the current marketplace theater, audiences nevertheless should monitor the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; March 1973=100; monthly average) closely. The TWD provides further insight regarding probabilities of the S+P 500 (and DJIA; and other advanced nation and emerging equity marketplace) trends. Increasing UST yields do not always (necessarily) mandate appreciation of the TWD. The steady depreciation of the broad real-trade weighted United States dollar since around first quarter 2017 currently entangles with the modest ascent in US 10 year Treasury note rates that began in early July 2016.

Given global central bank yield repression (and other easy money policies), arithmetic moves in the UST 10 year government note (and in short term rates) may appear (at least initially) to be rather minor. Also, rising American interest rates (or fears of this) may not be the only source for a stock marketplace tumble. A weakening TWD can assist US stock marketplace weakness, particularly if other factors exist (such as fiscal/budget or other debt troubles, severe cultural divisions, significant political quarrels, and issues regarding the quality of Presidential leadership). The TWD made a major high in December 2016/January 2017 around 102.8. It currently is around 96.8, a 5.8 percent decline. Though this depreciation is not massive, it is significant. Around 96.0 is crucial support; a sustained breach under this level probably will encourage weakness in the S+P 500 and Dow Jones Industrial Average.

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History on Stage- Marketplace Scenes (8-9-17)

THE NEW WORLD?! US ELECTION AFTERMATH © Leo Haviland November 15, 2016

In “The New World”, the band X sings:
“Honest to goodness
The bars weren’t open this morning
They must have been voting for the president of something…
It was better before
Before they voted for what’s-his-name
This was supposed to be the new world”.

“Don’t stop thinking about tomorrow
Don’t stop, it’ll soon be here
It’ll be, better than before
Yesterday’s gone, yesterday’s gone”. Fleetwood Mac, “Don’t Stop”

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OVERVIEW AND CONCLUSION

What marketplace consequences will ensue from Donald Trump’s surprising “populist” victory? Much obviously depends on how successfully the new President implements his campaign agenda. Some aspects of his plans in principle and practice require clarification. And he might elect to change his current political views and aims. However, at present one should assume this leader generally will seek to accomplish the broad outlines of his recent messages, particularly in the economic arena.

In trade and several other matters, the President retains substantial freedom relative to Congress. However, even though the Republicans control the Senate and House of Representatives, passage of the new President’s proposed legislation is not guaranteed. The Republican Party has significant divisions. Senate Democrats, as they control well over 40 seats, likely can block many executive branch proposals.

Moreover, in a globalized and multipolar world, America’s political and economic fields, even after dramatic change such as that represented by Trump’s triumph, of course do not move independently of other realms. In addition, numerous assorted and entangled variables and trends, not just those closely linked to the 2016 election and American political (economic) scene, influence financial marketplaces in the United States and elsewhere. Besides, benchmark interest rate, currency, stock, and commodity benchmarks themselves intertwine. The economic game, like the political one, moves as it plays.

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With such complexities and caveats in mind, let’s concentrate on three key parts of the American and global financial marketplace pictures, the United States Treasury 10 year note, the broad real trade-weighted US dollar (“TWD”), and the S+P 500. The long run yield trend for the UST probably is up. In the near term, the dollar will challenge and perhaps break modestly above its January 2016 high. However, as time passes and the new President and his friends fight to implement his policies, the trade-weighted dollar probably will embark upon a notable bear trend. Though it is a very difficult call, the S+P 500 probably will not surpass 8/15/16’s record high at 2194 by more than five percent.

To some extent, and although not exclusively, the patterns of rising interest rates and the (eventually) weaker dollar probably will derive from a growing lack of domestic and international confidence in American political and economic leadership and policies. America’s ongoing severe political and other cultural divisions likely will interrelate with this eroding trust. The passing and outcome of America’s Election Day 11/8/16 did not bury the nation’s substantial conflicts. Widespread support for Trump and Sanders showed that American “populist” ideologies, whether within so-called right wing/conservative congregations or left wing/liberal fraternities, likely will not soon surrender their attractiveness or fervor. But the “establishment” (elites) have not fled the battleground or abandoned their doctrines.

UPCOMING MARKETPLACE ADVENTURES

“Fasten your seatbelts, it’s going to be a bumpy night!” advises Margo Channing in the movie “All About Eve” (Joseph Mankiewicz, director)

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The aftermath of Trump’s victory saw the UST 10 year note yield jump sharply, breaking above 3/16/16’s 2.00 percent. Yet recall that UST yields had been climbing higher several months prior to his win; recall 7/6/16’s 1.32 percent bottom. US inflation expectations also have ascended since early summer. The St. Louis Fed’s measure of expected inflation (on average) for the five year period that begins five years from today has risen from 1.41 percent (7/5/16) to over two pc recently (11/10/16’s 2.06pc).

Why should US Treasury 10 year note yields keep rising from current levels around 2.25 percent?

First, America’s debt was rather lofty and likely to trend higher over the next decade (and probably thereafter) even before Trump’s win. See the Congressional Budget Office’s “An Update to the Budget and Economic Outlook: 2016 to 2026” (8/23/16; this study did not include Trump’s plans). Second, and very importantly, most experts believe Trump’s (Republican) tax and spending (think of infrastructure projects to help make America great again) proposals, if enacted, will result in even more massive budgets deficits. Gaping budget holes, especially those lasting for several years, represent a demand for cash to fill them. Who will do so, and at what price? For many months (a long time before the November 2016 election), foreign official institutions have been notable and consistent net sellers of UST notes and bonds (next Treasury International System/TIC release is 11/16/16). See the essay “Running for Cover: Foreign Official Holdings of US Treasury Securities” (10/13/16).

Moreover, the Federal Reserve Board, which has for several years repressed the Federal Funds rate (and thus the government yield curve) at artificially low levels, again has hinted it will gradually normalize rates. The next Fed meeting is 12/13-14/16. Admittedly, inflation benchmarks such as the consumer price index and personal consumption expenditures have not marched above the Fed’s beloved two percent target. The Fed nevertheless nowadays likely will be more inclined to push rates higher. Not only is the election past, but also the likelihood of monumental US fiscal stimulus (huge budget deficits) encourages rate hikes. In addition, headline unemployment is around the Fed’s goal. Asset prices such as stocks (S+P 500) and real estate have soared from their international economic disaster depths.

In his political apprenticeship on the campaign trails, Trump criticized Fed rate suppression. Perhaps he should have been more careful regarding the higher policy rates for which he implicitly asked. Since Trump and others criticized the Fed for keeping rates on the ground floor, they hardly can complain (at least for a while) about upward Federal Funds rate moves.

In addition, keep in mind that the Fed for several years engaged in mammoth money printing (quantitative easing). Although the Fed ceased QE, it has not reversed its money printing actions. Thus though some inflation measures (such as the CPI) are low, even before the election 2016 outcome, there arguably was potential for eventual inflation ascents as a consequence of the Fed’s ardent QE monetary stimulus. Assuming the new US political regime enacts hefty individual (and corporate) tax cuts and embarks on its infrastructure schemes, Trump’s festive tax and spending party will intertwine with this earlier Fed money printing extravaganza. Also, the European Central Bank and Bank of Japan continue to print money.

Signs of US wage inflation have appeared. There remains some pressure to boost the minimum wage. Would a big infrastructure plan, if it occurs a time of low headline unemployment, lift labor prices? Also, suppose the US deports a significant number of illegal (undocumented foreign) workers; that will tend to push wages and thus interest rates higher, though gurus can quarrel as to how much.

Suppose inflation marches higher and sustains levels around the Fed’s two percent weathervane. To (finally) give savers (creditors) a decent return relative to inflation, UST rates obviously should be above that goal. Focus on the UST 10 year. A one pc premium (100 basis points) makes the UST 10 year yield 3.00pc, well above current levels. The 6/11/15 top was 2.50pc. Above that stands 1/2/14’s 3.05pc peak. A two pc premium makes the UST 4.00pc. Obviously, no guarantee exists that the inflation level, if it advances, will halt at two percent (or that the Fed immediately will fight vigorously to contain inflation once it touches two pc).

Suppose US government (and many other related) interest rates rise from low levels. Will current debt holders start to run for the exits? Supply from those sellers of “old” debt may supplement the US government’s effort to sell “new” securities to finance tax cuts and spending programs.

Finally, suppose America imposes tariffs to ensure “fair” trade. Viewed alone, this perhaps will tend to increase the price of goods and services sold in the US. Of course other nations may respond. Some may cut prices to retain access to the American marketplace. Or, a genuine trade war could help weaken world (and US) GDP and keep prices and rates low.

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The New World- US Election Aftermath (11-15-16)