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.


 

Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile





AMERICAN INFLATION AND INTEREST RATES: PAINTING PICTURES © Leo Haviland May 4, 2021

“We hope you will enjoy the show”, sing The Beatles in “Sgt. Pepper’s Lonely Hearts Club Band

CONCLUSION

“Inflation” (deflation; stable prices) can appear in various diverse economic arenas. The United States consumer price index measure of course covers somewhat different ground from producer price yardsticks, and both of these weathervanes differ from asset price realms such as the S+P 500 and homes. However, these assorted inflation domains and phenomena influencing them in various ways are not entirely separate.

Despite its enthusiastic claims of surveying assorted inflation indicators and marketplaces, the beloved Federal Reserve Board focuses primarily on consumer-level inflation, as measured by indices such as personal consumption expenditure prices.

The US obviously is not an independent island in the interconnected global economy, though it plays a critical part. However, 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 Fed and armies of its devoted followers (especially the investment fraternity and the financial advisors and media who assist it) believe. The ongoing long run trend for rising US Treasury yields (see the UST 10 year note rate) evidences this trend of sustained and increasing US inflation. Inflation will force the Fed to weaken its longstanding tenacious yield repression program.

Demand for credit relative to its supply of course affects US Treasury and other interest rate levels and trends. America’s federal debt situation of enormous budget deficits (massive spending) probably will continue to propel both inflation and UST yields higher.

FOLLOW THE LINK BELOW to download this article as a PDF file.
American Inflation and Interest Rates- Painting Pictures (5-4-21)

WALL STREET TALKING, YIELD HUNTING, AND RUNNING FOR COVER © Leo Haviland May 14, 2019

“‘Curiouser and curiouser!’ cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English).” “Alice’s Adventures in Wonderland”, by Lewis Carroll (Chapter II, “The Pool of Tears”)

CONCLUSION: GOLDILOCKS ERA, REVISITED

Historians should wonder if the Federal Reserve Board and its friends in central banking (and assorted comrades parading in some political corridors and media circles) nowadays are aiming to manufacture an updated version of the joyous last stage (ending in 2007) of the magnificent Goldilocks Era.

Lower United States Treasury yields and the sunny prospect of continued benevolent Federal Reserve policy reappeared around end December 2018/early January 2019. The rapid bull climb in the S+P 500 from then until the beginning of May 2019 to some extent reflected hopes of further (adequate) American and global economic expansion.

However, the frantic price rally in several key marketplace benchmarks commencing around end year 2018 also probably reflected an ardent quest for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield hunters searched for sufficient return in territories such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex.

Of course cultural history does not necessarily repeat itself, either entirely or even partly. Marketplace phenomena (conditions; variables), including relationships between them and perspectives on them, can and do change, sometimes dramatically. Rhetoric (stories) relating to economic and related playgrounds seek not only to explain viewpoints and situations, but also to guide behavior.

Later stages of economic expansions (so-called cycles) often are distinguished by what many players, including leading and widely-respected economic guardians and policymakers, decide to overlook or minimize.

This ardent quest for yield probably manifested that America is in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in other advanced nations), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is or soon will be underway.

“Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19) stated in regard to the S+P 500: “The September/October 2018 elevation [2941 (9/21/18)/2940 (10/3/18)] probably will not be broken by much, if at all.” The recent price declines in the S+P 500 (5/1/19 high 2954) and other advanced nation stocks, emerging marketplace stocks, emerging marketplace dollar-denominated sovereign debt, and the petroleum complex probably signal that many dutiful profit hunters (and probably some other investors/owners) have started running for cover (begun to liquidate their long positions).

FOLLOW THE LINK BELOW to download this article as a PDF file.
Wall Street Talking, Yield Hunting, and Running for Cover (5-14-19)

AMERICAN YIELD QUESTS: US TREASURY AND CORPORATE RATES (c) Leo Haviland, December 20, 2012

For several years, in response to the terrifying ongoing international economic crisis, the Federal Reserve Board, European Central Bank, and many other key central banks have played Santa Claus to the global economy in general and debtors (borrowers) in particular. Suppose marketplace stargazers scan the constellation of accommodative Fed policies. These include the blessings of ground level interest rates (Federal Funds) and three sparkling rounds of money printing. The Fed joyously promises to continue offering its bountiful gifts for quite some time!

Not to be outdone, American and other politicians chattering and sometimes laboring in their workshops, engage in massive deficit spending designed to launch and preserve economic recovery.

In any event, the UST 10 year note established a major bottom several months ago, at 1.38 percent on 7/25/12. Note that on 12/12/12 the beneficent Federal Reserve not only reaffirmed its two percent long run inflation target, but also indicated it would tolerate inflation projections of 2.5pc for up to two years ahead. Ascending UST rates suggest that the US corporate realm likewise in general will have higher rates.

Take Moody’s Baa index of bonds as a benchmark for US lower quality corporate bonds, yet nevertheless “investment grade”.

Based upon this Baa corporate signpost, US lower quality corporate bond rates have been creeping up lately. They probably established a very significant trough around 4.5 percent in November 2012, or will do so soon. Using daily data (and the extra decimal point) that bottom was 4.42 percent on 11/8/12 (12/18/12 close 4.76pc).

In the US credit arena nowadays, a widening yield spread between lower quality corporate debt and UST might reflect that the hunt for better yields beyond the UST field probably has reached an end.

US-Treasury-10-Year-Note-Chart-(12-20-12)


FOLLOW THE LINK BELOW to download this market essay as a PDF file.

American Yield Quests- US Treasury and Corporate Rates (12-20-12)

US Treasury 10 Year Note Chart (12-20-12)