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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CRITICAL CONDITIONS AND ECONOMIC TURNING POINTS © Leo Haviland February 5, 2020

“Just Dropped In (To See What Condition My Condition Was In)”, a Mickey Newbury song performed by Kenny Rogers

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CONCLUSION

With the passage of time following 2007-09’s global economic disaster, memories regarding the accompanying bloody bear trend in America’s stock marketplace benchmarks such as the S+P 500 gradually yet significantly faded. As the S+P 500 ascended, and especially as it advanced to and sustained record highs, widespread sermons declared that we should “buy the dip”. This aligned with the venerable proverb regarding the reasonableness of buying and holding United States stocks for the “long run”. What constitutes a “dip” or the “long run” is debatable, a matter of subjective perspective (opinion). How substantial a drop from some key elevation justifies buying? Is it one percent, five percent, ten percent, or twenty percent or greater? Is the long run one year, five years, or ten or more?
Of course since the S+P 500’s major bottom on 3/6/09 at 667, a few bloody stock price slides in that signpost (and “related” global equity yardsticks) terrified stock “investors” and their allies, including central banks such as the Federal Reserve, American politicians, and the financial media. Yet as the S+P 500 achieved a record height quite recently with 1/22/20’s 3338 (2/5/20’s level matched this), such advice definitely looked excellent to many stock owners and observers! Besides, as they have numerous times over the past eleven years, won’t beloved central bank physicians such as the Federal Reserve Board (under the guise of fulfilling their mandate), European Central Bank, the Bank of England, China’s central bank, and the Bank of Japan rescue stocks and generate rallies in them? Not only soothing rhetoric, but also yield repression and quantitative easing (money printing) remain antidotes for stock price drops, right? And politicians might assist via new tax cuts, boosts in infrastructure spending, or similar schemes. Thus the majority of US stock marketplace players have focused more on the rewards of owning than the dangers of doing so. Substantial complacency reigns regarding the potential for noteworthy American and other stock marketplace price declines.

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The recent emergence within China of a deadly coronavirus and its spread elsewhere around the globe helped to push US and other equities downhill. Whether this medical problem will injure the S+P 500 and other global stocks significantly (and for a sustained period of time) remains uncertain. Government actions to prevent the spread of the virus will tend to hamper economic growth. Fearful consumers and nervous corporations may slow their spending. The wider the reach and the longer the persistence of the ailment, the greater the economic damage. And economic (financial) weapons such as money printing and yield repression available to the Fed and its friends obviously do not halt epidemics or cure diseases (or fears of them).Though the S+P 500 descended to 3215 on 1/31/20, the index recovered, touching 3338 again on 2/5/20.

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Critical Conditions and Economic Turning Points (2-5-20)

RINGING IN THE NEW YEAR: US AND OTHER GOVERNMENT NOTE TRENDS © Leo Haviland January 6, 2020

“Time present and time past

Are both perhaps present in time future,

And time future contained in time past.” T.S. Eliot’s poem, “Burnt Norton”

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CONCLUSION

Since summer 2016, the marketplace yield trends for government 10 year notes of the United States and many of its key trading partners generally have resembled each other. Given today’s interconnected global economy, the crucial role of the United States within it, and the roughly similar central bank policy strategies for these nations, this pattern probably will continue.

Over the past three and one-half years, at times some moderate divergence appeared within that group. For example, yield highs for China’s 10 year government note (11/27/17’s 4.04 percent) and the German Bund (2/8/18’s .81 percent) preceded America’s critical yield top on 10/9/18 at 3.26 percent. But even when yield highs (lows) occurred at different times for some sovereigns relative to others, directional shifts in yield for the entire group tended to happen around the same time. Thus China’s 9/21/18 interim high at 3.71 percent and Germany’s on 10/10/18 at .58pc align with the UST yield pinnacle on 10/9/18.

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The United States Treasury 10 year note yield completed a triple bottom during this era. Recall 7/5/12’s 1.38 percent trough. Then see 7/6/16’s 1.32 percent major low and 9/3/19’s 1.43pc. September 2019’s UST depth probably commenced an extended period of rising government (as well as other) interest rates for America and its important trading partners “in general”. Widespread and determined devotion by leading central banks to a gospel of sufficient inflation (the Federal Reserve’s two percent target is a key benchmark) and adequate GDP growth (and low unemployment) encourages this. Given America’s great importance within the world economy, its large current national debt and looming massive future fiscal deficits tend to propel UST interest rates (and thus American corporate yields) upward, and thereby help to raise government yields of many of its global trading partners.

Current central bank caution (including maintaining some yield repression and quantitative easing/money printing) may inhibit a rapid and large yield ascent for the US Treasury 10 year and its companions. In addition, rate climbs for the assorted 10 year government notes will not all necessarily be the same in distance or speed terms. And fearful “flights to quality” at times can depress government debt yields of “safe haven” nations such as America and Germany. For America’s 10 year Treasury note, significant resistance exists around two percent.

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Ringing in the New Year- US and Other Government Note Trends (1-6-20)

ADVENTURES IN STOCK LAND: THE S+P 500 AND OTHER DOMAINS © Leo Haviland October 3, 2019

“For, you see, so many out-of-the way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” Lewis Carroll, “Alice’s Adventures in Wonderland” (Chapter I)

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CONCLUSION

The S+P 500 probably started a bear trend following its summer 2019 highs at 3028 (7/26/19)/3022 (9/19/19). A survey of the S+P 500 over the past several years alongside trends for other key advanced nation stocks, travels of emerging marketplace equities, and patterns in several other financial marketplaces underscores this.

This United States equity benchmark thus finally links more closely with the extensive bear trend in emerging marketplace stocks “in general” which embarked after first quarter 2018. The essay “Running for Cover: Marketplace Exits” (8/9/19) stated: “The S+P 500’s decline since its late July 2019 high probably is the start of price convergence between it and emerging marketplace stocks.” And: “the S+P 500 probably is in, or soon will begin, a bear trend.”

The S+P 500’s price divergence relative to leading equity signposts in other developed nations over roughly the past year and a half was significantly less than that relative to emerging marketplaces. However, nowadays it appears likely that prices for notable American, European, Japanese, and Canadian stock playgrounds will continue to retreat together.

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An ardent hunt for “yield” (“return”) in various financial marketplaces (not just stocks) began around end-year 2018. Recall the S+P 500’s 12/26/18 valley at 2347 and the Federal Reserve promulgation of its monetary policy principles of “patience”. In addition to buying the S+P 500, yield pilgrims searched for reasonable (sufficient) return in domains 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 commodities sector (witness the petroleum complex).

That frantic quest for adequate yield (return) likewise probably is finished, even though yield-seeking (especially in a low or even negative interest rate environment) of course has not disappeared entirely. As “Running for Cover” (8/9/19) stated, players who raced to identify and achieve “good” returns (by purchasing asset classes such as stocks and commodities) at the end of calendar 2018 and for several months thereafter in these sectors probably have started running for cover (begun to liquidate their long positions). Many other investors/owners in these marketplaces probably are running for the exits too.

The US Treasury 10 year note’s yield decline began in autumn 2018 at around 3.25 percent. Marketplace coaches may attribute interest rate drops in early 2019 to factors such as central bank easy money wordplay and schemes. However, the UST’s yield fall from 5/28/19’s height near 2.30pc also represents a “flight to quality” stage for UST yields. That yield withering, especially its dive beneath two percent, is a bearish signal for American and other stocks.

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Other bearish signs for the S+P 500 and related stock marketplaces include recent mediocre United States corporate earnings, the inversion of the US Treasury yield curve, ongoing international trade wars, substantial global indebtedness, the waning power of the Federal Reserve and its central banking friends to maneuver stock prices higher, and populist pressures in America and abroad.

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Adventures in Stock Land- the S+P 500 and Other Domains (10-3-19)

BUSLOAD OF FAITH: FINANCIAL MARKETPLACES © Leo Haviland, January 15, 2018

In his song “Busload of Faith”, Lou Reed chants: “you need a busload of faith to get by”.

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CONCLUSION

The United States 10 year government note is a widely-watched marketplace benchmark and guide. It ended its major bull move in summer 2016, establishing a yield bottom on 7/6/16 at 1.32 percent. Although the rate for the US Treasury 10 year note has walked peacefully sideways in a fairly narrow path over the past year or so, its yield nevertheless on balance has crept upward from its 9/8/17 interim trough at just over two percent toward its critical barrier around 2.65pc. In the UST’s bear move, the UST yield probably will pierce this 2.65pc target in the near term, with 1/2/14’s 3.05pc elevation the next height in sight.

After establishing a major top in December 2016/January 2017 at 103.2, the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; monthly average) slipped 7.8 percent to 95.2 in September 2017, slightly below crucial support around 96.2 to 96.6. Despite a slight bounce for a couple of months following that September depth, the TWD has renewed its bearish assault on 96.2/96.6 and probably will break decisively beneath that floor (and September 2017’s minor low) relatively soon.

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Economic phenomena and fields interrelate in various fashions. Apparent links and relationships between financial (and political) variables and trends (including convergence/divergence and lead/lag ones) of course can change, sometimes dramatically. In any case, although marketplace history is not marketplace destiny, historical analysis still can offer guidance regarding future probabilities.

The current intertwined relationship and trends of rising US Treasury yields alongside the weakening United States dollar likely is of substantial significance for financial marketplaces in general, not just US government interest rates and key currencies.

History signals that climbing US interest rate yields often precede (connect with; lead to) pinnacles in the Dow Jones Industrial Average and the S+P 500. In the current economic and political landscape, further feebleness in the broad real trade-weighted US dollar probably will warn of (or confirm) important tops in advanced nation and emerging marketplace stock marketplace benchmarks.

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See “Marketplace Vehicles: Going Mobile” (12/13/17), “History on Stage: Marketplace Scenes” (8/9/17), and other essays.

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Busload of Faith- Financial Marketplaces (1-15-18)