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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GREAT EXPECTATIONS: MARKETPLACE FIREWORKS©Leo Haviland July 3, 2024

In Charles Dickens’s novel “Great Expectations”, a character says: “‘Ask no questions, and you’ll
be told no lies.’”

CONCLUSION

Since around end December 2023, global inflationary forces have remained rather persistent. Note the moderate increase in the United States Treasury 10 year note yield since then. Recent consumer price index measures, despite having fallen from their peaks, stand fairly distant from the Federal Reserve Board’s inflation target. Commodity prices “in general” clearly exceed their December 2023 trough. For at least the near term, the Fed therefore will find it difficult to reduce its Federal Funds policy rate nearly as much as many marketplace participants hope. The US dollar has remained strong, appreciating modestly since year end 2023; this pattern suggests that American interest rate yields probably will remain rather high. America’s substantial and worsening national debt problems remain unsolved, with little prospect of progress anytime soon. Towering massive federal government budget deficits and high and growing debt as a percentage of GDP tend to boost interest rate yields higher.

Many times over the past century, significantly increasing United States interest rate yields 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. Although the S+P 500 has achieved a new all-time high this week, a “too strong” US dollar alongside rising US Treasury yields increases the probability for a fall in stocks. Marketplace opinions regarding substantial growth in US corporate earnings prospects for calendar years 2024 and 2025 look very optimistic.

Bitcoin and gold trends offer insight into patterns and prospects for other marketplaces, including the S+P 500.

The US national political scene in general and election season 2024 in particular add to financial marketplace risks.

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Great Expectations Marketplace Fireworks

MARKETPLACE TRAVELS: POTENTIAL BUMPS IN THE ROAD ©Leo Haviland April 2, 2024

The Federal Reserve Chairman (Jerome Powell) recently stated that the path to the Fed’s two percent inflation target was “sometimes bumpy”. (Remarks at the 3/29/24 “Macroeconomics and Monetary Policy Conference”, San Francisco Fed; see Financial Times, 3/30/24, p1)

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STARTING POINTS

Since around end December 2023, global inflationary forces probably have become stronger (or at least more firmly entrenched). Note the increase in the United States Treasury 10 year note yield and prices for commodities “in general” since then. Recent consumer price index measures, despite having fallen from their peaks, remain fairly distant from the Federal Reserve Board’s targets. The Fed therefore will find it difficult to reduce its Federal Funds policy rate nearly as much as many marketplace participants hope. The US dollar has remained strong, appreciating slightly since year end 2023; this suggests that American interest rate yields probably will remain rather high. America’s substantial national debt problems remain unsolved (as does China’s), with little prospect of progress anytime soon. Ongoing large federal government budget deficits and high and growing debt as a percentage of GDP tend to boost interest rate yields higher. 

Many times over the past century, significantly increasing United States interest rate yields 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. Marketplace opinions regarding substantial growth in US corporate earnings prospects for calendar years 2024 and 2025 look very optimistic. Whereas the S+P 500’s towering bull move carried into March 2024, US existing single-family home prices remain beneath their June 2023 peak. 

The US national political scene in general and election season 2024 in particular add to financial marketplace risks. 

Bitcoin and gold trends offer insight into patterns and prospects for other marketplaces, including the S+P 500. 

US INFLATION AND INTEREST RATES: RISKY BUSINESS

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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The Wall Street securities investment communities and their political and media allies have applauded lower United States inflation rates. Widespread faith exists that the trusty Federal Reserve will achieve its two percent inflation target fairly soon. Stock owners have been especially enthusiastic as the S+P 500 has flown to new highs in the hopes of further drops in key inflation measures and notable cuts by the Federal Reserve in the Fed Funds rate. 

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Marketplace Travels- Potential Bumps in the Road (4-2-24)

FINANCIAL BATTLEGROUNDS: AN AGE OF ANXIETY (CONTINUED) © Leo Haviland November 1, 2023

W.H. Auden’s poem “The Age of Anxiety” asserts: “When the historical process breaks down and armies organize with their embossed debates the ensuing void which they can never consecrate, when necessity is associated with horror and freedom with boredom, then it looks good to the bar business.” (Part One, Prologue). And the character Rosetta states (Part One): “Numbers and nightmares have news value.”

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FINANCIAL AGITATION

Financial marketplaces and other cultural battlegrounds always include and reflect diverse and contending perspectives and actions. They also inescapably involve values and emotions. In culture, values and emotions permeate viewpoints, thought processes, and behavior. 

Within and regarding the competitive interest rate, stock, foreign exchange, and commodity arenas (and other economic fields), marketplace perspectives (outlooks; orientations), arguments, and conclusions are always subjective, matters of opinion. So are the selection and assessment of variables (facts, factors, evidence, information). Although agreement often is widespread, so is disagreement. Views compete. After all, marketplaces have bulls and bears, long and medium and short term traders, various advocates of fundamental and technical methods, and so forth. Opinions regarding history, probability, and causation differ. Hence prices and price relationships fluctuate, sometimes dramatically. In addition, rhetoric aims to persuade audiences (including oneself) that a given goal, view, or action is good (or “reasonable”, “rational”, prudent, wise; or better than alternatives), less good, neutral, or bad. In cultural fields, this uncertainty of viewpoint and the differences in behavior create agitation, though levels of excitement/emotion (relative calmness) differ. Anxiety can vary in intensity for a given individual or an “overall” community over time, or between a person and group at any given time. 

For some marketplace participants, apparent cascades of diverse and often changing information can increase agitation (anxiety). “How does one keep up with it all? Information sure travels fast these days.” Perceptions (faith) that “the world” (or some part of it) has become more complex can boost anxiety (tension). 

Trading risks and uncertainty of outcome generate agitation and anxiety; enthusiasm, greed, fear, and hope abound. Investors and other courageous trading warriors fervently battle to win the valued (good) American Dream cultural goals of wealth and financial security. Making money and achieving wealth (financial security) makes many people happy and feel successful. Making and having sufficient money is a means to the “good life” and a “better life”. Marketplace playgrounds can be exciting and entertaining too! In quests to make money and avoid losing it, many devoted fortune seekers compare their performance with that of others, which enhances ongoing inevitable passions. 

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In general, large armies of securities “investors” and other owners in stock and interest rate realms (especially in stocks) love high and rising prices and hate low and falling ones. After all, those security assets represent big money (trillions of dollars and other currencies). Wall Street’s key role in capital formation and investment (wealth management) encourages it to promote bullish outlooks in securities marketplaces (particularly in stocks). Consequently, a significant price decline (and of course especially a sustained one) in both equity and interest rate arenas is especially agitating (in the sense of being upsetting, a source of unhappiness) to securities owners in America (and around the globe) and their Wall Street, financial media, and political comrades. Substantial wealth destruction due to bloody securities price declines also can damage economic growth, perhaps helping to produce a recession. What if house prices also slump? 

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Rising United States interest rates have helped to propel (lead) the S+P 500 lower. The S+P 500 currently is attempting to hold support at around a ten percent decline from its late July 2023 peak. However, long run American stock marketplace history indicates that large and scary falls occur; the average percentage retreat from the peak to the trough is roughly 33.9 percent. The average duration of the descent from the summit to the bottom runs approximately 14.2 months. Marketplace history of course does not have to repeat itself. However, as a bear marketplace trend for the S+P 500 probably commenced in late July 2023, and as the decline thus far only has been 10.9 percent over three months, its bear campaign has quite a bit more distance and time to travel downhill. 

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Some would argue that the financial (economic), political, and social worlds, both in America and around the globe, are especially agitated (anxious) nowadays. In any case, “the cultural situation” does not appear peaceful in many respects. 

Since “economic”, “political”, and “social” fields are entirely cultural (subjective), they are not objectively (scientifically) different territories. In any case, culture wars across economic, political, and social dimensions in America arguably are diverse and intense at present and likely to remain so for quite some time. All else equal, this suggests that the resulting agitation and anxiety make it challenging for American politicians to adequately resolve their differences and solve important problems (such as those relating to government spending). This is particularly true as the nation’s 2024 election approaches. Cultural wars thereby significantly influence interest rate, stock, and other financial marketplaces. 

Cultural feuds also exist in other leading nations. Moreover, especially in today’s globalized and multipolar world, cultural hostilities can and do cross national boundaries, which in turn can directly affect financial marketplaces, which increase anxiety (agitation) regarding and within them. Picture the rich versus poor divide, democracy versus authoritarianism, capitalism (free markets) against socialism, and religious differences. Those wars of course can be military, as the violent Russia/Ukraine and Hamas/Israel situations demonstrate.

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Financial Battlegrounds- an Age of Anxiety (Continued) (11-1-23)

FINANCIAL AGITATION ©Leo Haviland October 3, 2023

RISING AMERICAN INTEREST RATES, FALLING US STOCKS

Listen to “Agitation”, jazz music from Miles Davis.

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Let’s focus on the American horizon and the exciting US Treasury and S+P 500 marketplaces. 

Since around spring 2020, and particularly since August 2022, and especially in recent months, the UST marketplace has suffered noteworthy capital destruction due to falling prices. A glorious bull move in the  S+P 500 followed 3/23/20’s dismal bottom at 2192. The S+P 500 thereafter exploded upward, more than doubling, to establish a thrilling record high on 1/4/22 at 4819. After an agonizing bear slump to October 2022’s bottom, a significant joyful stock rally ensued. The S+P 500 approached January 2022’s peak, reaching a summit on 7/27/23 at 4607. The S+P 500 probably has commenced a bear trend, though its slump from its July 2023 peak has been moderate thus far. 

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“Long Run Historical Entanglement: US Interest Rate and Stock Trends” (7/6/23) concluded: “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.”

“Given the historic pattern in which UST [US Treasury; focus on the UST 10 year note] 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.” And “the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak will probably 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.” 

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The UST 10 year note yield increased since 3/9/20’s major bottom at .31 percent, accelerating upward from 8/4/21’s 1.13pc to 6/14/22’s 3.50 pc. The S+P 500 peaked during this rising yield trend on 1/4/22 at 4819. The UST 10 year note yield, after sliding down to 8/2/22’s 2.51 percent resumed its yield ascent. It made another important interim yield low with 4/6/23’s 3.25pc. With 8/22/23’s 4.37 percent, the UST 10 year pierced 10/21/22’s 4.34 percent high, achieved around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. The UST 10 year note price kept falling, and the UST yield reached 4.81 percent on 10/3/23. A dramatic UST 10 year yield climb over five percent and toward 6/13/07’s 5.32 percent Goldilocks Era summit would further unnerve many UST (and stock) holders. 

In some circumstances, rising interest rates can indicate or portend adequate (good) real GDP growth, and thus from some perspectives (up to some point), increasing UST yields (falling debt prices) are designated as “good”. And investors in interest rate instruments of course want a decent (and real) return relative to inflation, so rising yields have been a blessing for many of them, at least to some extent. 

However, many institutions and individuals bought low-yielding UST during the Fed’s yield repression era. Their interest income during the past couple of years likely fell beneath inflation heights represented by the consumer price index. Many of these interest rate instrument owners probably have suffered some noteworthy mark-to-market damage to their principal; so have numerous other recent buyers given the rising rate trend of recent months. Nowadays, the average maturity of total outstanding marketable UST debt is about six years. 

From the price perspective, review the CME’s UST 10 year note (nearest futures continuation contract) as a rough guide to the capital consequences of recent trends. (In practice, this contract sometimes prices relative to deliverable grade instruments with a maturity somewhat different from ten years.) The UST 10 year peaked at about 140-22 on 3/9/20. Its recent low is 10/3/23’s 106-20 (as of 300pm EST), an eviscerating 24.2 percent tumble (and beneath 10/21/22’s 108-26). From 8/2/22’s interim price high of 122-02, 10/3/23’s level drops 12.6 percent. Excitement (emotions) will increase if the price heads closer to 104-00 (6/13/07 price bottom 104-04; 6/28/06 low 104-01). 

The CME UST five year note’s price peak (nearest futures continuation) occurred at about 126-08 on 8/7/20 (126-07 on 1/8/21). It nosedived 17.2 percent to 10/3/23’s 104-18 (under 10/21/22’s roughly 105-15). An attack on price support around 103-00 (7/5/06; 103-02 on 6/13/07) will boost anxiety. 

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In America, a substantial amount of household net worth resides in debt securities (not only in US Treasuries) and equity shares (not just the S+P 500 playground). Read the fine print of the Federal Reserve’s Z.1, “Financial Accounts of the United States” (9/8/23; see Tables B.101, B.101.e, and B.101.h). As of end 2Q23, total assets for households and nonprofit organizations combined were about $174.4 trillion (net worth was $154.3 trillion), the great majority of which resided in the household domain. As of end 2Q23, for households and nonprofit organizations combined, debt securities at market value were about $10.9 trillion, or around 6.2 percent of total assets (9.3pc of total financial assets). Equity shares in 2Q23 had a value of about 44.7 trillion dollars, or 25.6 percent of total assets (almost 38.3pc of total financial assets). 

Consumers represent about two-thirds of United States GDP. If they suffer substantial wounds to their net worth, to what extent will they slash their spending? 

Many Wall Street and Main Street stock investment communities preach the wisdom of buying good (or high) quality American stocks for some version of the misty long run. To what extent are such stock bulls married to their positions? 

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For the twenty-two US stock marketplace “bear” trends summarized in “US Stocks Over the Long Run: Bear Marketplace History” (8/4/23), the average percentage decline from the peak to the trough is about 33.9 percent. The average duration of the descent from the summit to the bottom is approximately 14.2 months. 

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Financial Agitation (10-3-23)