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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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)

HUNTING FOR YIELD: STOCKS, INTEREST RATES, COMMODITIES, AND BITCOIN © Leo Haviland November 7, 2021

“‘Because I want you to know that we’re on our way to Las Vegas to find the American Dream.’” Hunter S. Thompson’s novel, “Fear and Loathing in Las Vegas: A Savage Journey to the Heart of the American Dream”

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OVERVIEW

 

In recent years, fervent yield repression (with resulting low United States Treasury yields relative to inflation) by the Federal Reserve and its central banking comrades, often assisted by money printing (quantitative easing), and accompanied by artful easy money rhetoric, often have encouraged epic quests for adequate “yield” (return) and bullish trends in stocks and assorted other (“related”) marketplace domains. Especially since the emergence of the coronavirus pandemic in March 2020 and the related economic and worldwide stock marketplace crashes, the revered Fed and other central bank wizards, in addition to expanding magnificent money printing programs, have promoted and enforced a yield repression regime.

The heroic Fed earnestly and repeatedly declares its devoted allegiance to its legislatively mandated goals of “maximum employment” and “stable prices”. However, how often does the venerated Fed even mention the third aspect of its monetary policy objectives, “moderate long-term interest rates”? The Fed is eager to deflate (repress) UST yields, and seems happy (even ecstatic) to greatly inflate S+P 500 and home prices. Do the magnificent climbs in stocks and homes represent “stable prices”?

American inflation rates in March 2020 and many months thereafter obviously were lower than those of recent months. Yet even around March 2020 and the next several months, real returns from benchmark United States Treasury instruments across the yield curve were small or negative in comparison to the Consumer Price Index. What about more recent times? The UST 10 year yield is about 1.46 percent, but for the past several months, US CPI-U inflation has surpassed five percent. This negative return situation (which encourages borrowers and debtors but thereby cheats savers and creditors) of course (all else equal) tends to make UST ownership unattractive for many marketplace participants.

What has resulted from keeping yields low and often negative in real terms relative to the current Consumer Price Index and similar inflation gauges? Not only have central bankers assisted spenders (consumption) and helped debtors, but also they have encouraged avid searches for adequate (sufficient) “yield” (“return”) in the S+P 500 (and other international equity realms), emerging marketplace dollar-denominated sovereign debt, corporate debt, as well as in other “asset classes” such as homes, commodities “in general”, and many cryptocurrencies such as Bitcoin. The enthusiastic buying by eager and sometimes frantic yield-hunters has generated meteoric price rallies in the S+P 500 and these other realms since their dismal March 2020 bottoms.

Investment rhetoric encourages price rallies in marketplaces, especially in stocks. Thus Wall Street leaders, supported by the loyal financial media, loudly applaud “investment”, “investors”, and bull moves. Assorted investment generals and their loyal troops perennially fight to identify stocks (especially American ones) as well as other praiseworthy asset classes to buy (or keep holding).

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Widespread marketplace faith still exists in the power of the Fed and its trusty friends to engineer and appropriately manage interest rate yield outcomes, especially in the government securities marketplace. Fed epistles and hymns proclaim its praiseworthy pilgrimage of pursuing the goal of an inflation average of two percent over some misty version of the long run, as well as its noble intention to keep long term inflation expectations “well anchored” at two percent.

The Fed and other central banking magicians and evangelical finance ministers have repeatedly claimed (prayed) that recent inflationary signs in America and elsewhere in recent months are merely “transitory”, “temporary”, or the “result of special factors” (such as high prices for used cars; or, supply bottlenecks). However, this inflation viewpoint probably is wrong.

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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 patterns.

Increases in benchmark high-grade government interest rates (such as US Treasuries) and higher yields for lower-quality debt securities (such as corporate bonds and emerging marketplace sovereign debt) probably will weaken the S+P 500 and related advanced nation stock marketplaces. Very elevated government debt levels in America and many other leading nations will help to undermine stocks. Price divergence between the S+P 500 and emerging marketplace stocks (which since February 2021 have not soared to new highs, but instead have declined) also warns of potential weakness in the S+P 500.

Price and time trends for commodities “in general” probably will intertwine with and track those of the S+P 500 and other stock marketplaces.

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Cryptocurrencies in recent years have attracted widespread attention and increased “investor” and other trading (and regulatory) attention. Despite the great variety of cryptocurrencies, Bitcoin is a well-known and actively-traded representative of the crypto trading arena. The overall “search for yield” financial environment  reflected in the bullish price trend in the S+P 500 and elsewhere has assisted Bitcoin’s price ascent. An important additional factor, but not the only one, supporting Bitcoin’s heavenly price leap has been growing inflation and fears that it may increase further. Of course the supply/demand/available inventory situation of Bitcoin is important, and an exciting new marketplace such as Bitcoin can attract additional buyers into its domain, especially when prices have tended to soar upward significantly. Also, Bitcoin offers people a means by which to hide their assets and money movements from government and other regulatory eyes. And fears about American and other government debt levels and trends probably also have been an important consideration fueling Bitcoin’s climb.

These inflation and debt concerns intertwine with wariness regarding the trustworthiness of political and economic leaders and institutions (including banks). Some cryptocurrency participants probably worry about the long run strength of the US dollar, and perhaps other leading currencies as well. Persistent cultural divisions in America and numerous other nations, helps to build and sustain distrust about institutions and leaders.

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Bitcoin’s price rise since its creation about a dozen years ago (around the time of the global economic disaster of 2007-09) astonishes observers. However, underline also that since around first quarter 2020, Bitcoin’s price and time trends often have paralleled those in the S+P 500 and related stock marketplaces.

Bitcoin’s celestial advance to date probably constitutes a danger signal regarding the international financial system and thereby potential economic growth. Nevertheless, Bitcoin and other cryptocurrencies are not integral to the current or near-term functioning of the financial system and the global economy. Moreover, worldwide economic and political leaders have long demonstrated an ability to support traditional global economic (financial, commercial, business) and political arrangements. For example, note the interrelated responses around the globe in 2008-09 and thereafter to the worldwide economic crisis, as well as actions in late first quarter 2020 and thereafter to the fearsome economic downturn (and the 1Q20 stock marketplace crash). Consequently, for the near term horizon at least, if the S+P 500 and related stock marketplaces fall significantly in price, then the Bitcoin price probably will decline (whether at around the same time or eventually) as well.

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Hunting for Yield- Stocks, Interest Rates, Commodities, and Bitcoin (11-7-21)