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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“Are you gonna bark all day little doggie? Or are you gonna bite? Mr. Blonde asks Mr. White in “Reservoir Dogs” (Quentin Tarantino, director), after their gang’s jewelry heist went disastrously wrong.
OVERVIEW AND CONCLUSION
The Federal Reserve watchdog and its central banking companions, after a very lengthy delay, finally awoke to widespread evidence that substantial consumer price inflation was not a temporary or transitory phenomenon. The Fed guardian generally has evaded taking responsibility for its important role in creating substantial inflation (not just in consumer prices, but also in stocks and numerous other asset classes) via its mammoth money printing and yield repression schemes. But to restore and preserve its inflation-fighting credibility and sustain its marketplace reputation, in recent months the Fed noisily has raised policy rates (and significantly reduced yield repression) and started to shrink its engorged balance sheet.
The Fed’s need to manifest genuine loyalty to its legislative mandate of stable prices (which other central bankers have echoed) thus has provoked it to do some nipping, and even a little biting, of “investors” and other owners in the S+P 500 and other “search for yield” marketplaces such as corporate bonds and US dollar-denominated foreign sovereign debt. Fed Chairman Jerome Powell’s 8/26/22 Jackson Hole, Wyoming speech (“Monetary Policy and Price Stability”) further emphasized its rediscovered inflation-fighting enthusiasm. The Chairman confesses: “Inflation is running well above 2 percent, and high inflation has continued to spread through the economy.” The Chairman barks: “overarching focus right now is to bring inflation back down to our 2 percent goal”; “Restoring price stability will take some time and requires using our tools forcefully”; “estimates of longer-run neutral are not a place to stop or pause”; this restrictive policy stance likely must be maintained “for some time”; after all, “The longer the current bout of high inflation continues, the greater the chance that expectations of high inflation will become entrenched.” Note the dogged determination expressed by this trusty guardian!
“Summertime Blues, Marketplace Views” (8/6/22) states: “Despite growing concerns about a United States (and global) economic slowdown or slump, and despite potential for occasional “flights to quality” into supposed safe havens such as the United States Treasury 10 year note and the German Bund, the long run major trend for higher UST and other benchmark international government yields probably remains intact.” Regarding the S+P 500, that essay concludes: “Although the current rally in the S+P 500 may persist for a while longer, the downtrend which commenced in January 2022 probably will resume. The S+P 500’s June 2022 low probably will be challenged.”
The Fed’s late August 2022 wordplay has encouraged the previously existing trends of higher United States Treasury yields and declining prices for the S+P 500 and related search for yield (return) arenas such as emerging marketplace stocks, corporate bonds, and US dollar-denominated sovereign debt. Prices for commodities “in general” also have withered.
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Marketplace Expectations and Outcomes (9-5-22)
Prince sings in “Let’s Go Crazy”:
“Dearly beloved, we have gathered here today
To get through this thing called life.”
The Federal Reserve Board and its central banking comrades obviously are not omnipotent. They also are not scientifically objective in their definitions, perspectives, methods, arguments, and conclusions. Neither is the Fed (its policies) the only important variable influencing inflation levels and patterns in America and elsewhere. Many intertwined phenomena in the United States and around the globe, including massive government deficit spending, matter.
Yet given the Federal Reserve’s success with its yield repression strategy (and its quantitative easing/money printing scheme), many observers have great confidence in the central bank’s insight, foresight, and talent for creating and managing “good” United States (and global) economic outcomes. These desirable results include not only adequate US economic growth and stable prices, but also bullish stock marketplace (use the S+P 500 as the benchmark) and home price moves.
The Fed’s long-running marketplace maneuvers, and especially its yield repression policy, have helped to create a culture strongly oriented (married, metaphorically speaking) to the existence and persistence of low Federal Funds and United States Treasury rates. In general, stock owners and securities issuers (corporations and sovereigns), as well as Wall Street enterprises who serve and profit from them, love low interest rates.
“Inflation” (deflation; stable prices) appears in various diverse economic arenas. The Fed itself and the great majority of Fed watchers on Wall Street and Main Street believe the Fed will achieve its praiseworthy goal of stable prices. Thus inflation will not climb “too high” or go “out of control”. Similarly, benchmark US Treasury interest rates also will not increase “too much” (“too far”; or “too fast”).
Since the coronavirus pandemic emerged during first quarter 2020, as part of its highly accommodative monetary policy, the Federal Reserve has purchased a huge quantity of US Treasury securities (as well as agency mortgage-backed securities). This extraordinary and ongoing net acquisition program has assisted its effort to ensure low marketplace yields. But observers should examine the Fed’s UST purchasing process and its consequences in more depth. It has significantly increased the Fed’s already sizable percentage share of the outstanding marketable (and held by the public) UST world. This noteworthy jump in the Fed’s arithmetic and percentage market share holdings of UST probably therefore has decreased the “free supply” (readily available inventory) of UST. Despite accelerating US inflation in recent months, the large reduction in the free supply of marketable UST probably has helped to keep benchmark UST yields (such as for the 10 year UST note) low.
“American Inflation and Interest Rates: Painting Pictures” (5/4/21) stressed that 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 Federal Reserve Board and armies of its devoted followers (especially investment sects and the financial advisors and media who assist them) believe.
Acceleration in assorted American inflation signposts has occurred in recent months. This probably shows that Fed programs have played, and continue to perform, a critical role in enabling US inflation to rise sharply. Though inflation in measures such as the Consumer Price Index is not yet “out of control”, the Fed at present has less control over this upward trend. Recent significant increases in key inflation benchmarks such as the CPI are not “transitory”. Despite the Fed’s dogmatic adherence to its yield repression approach, the Fed’s various current policies and its related rhetoric will find it very challenging to contain the increasing inflationary pressures.
Rising inflation will force the Fed to taper its ravenous US Treasury and mortgage securities buying program, and gradually abandon its longstanding tenacious yield repression strategy, sooner than it currently desires and plans. Despite the Fed’s yield repression, money printing, and wordplay (including forward guidance), America’s widespread, persistent, and growing inflation severely challenges faith in the Fed’s long run power to block significantly higher interest rates. The Federal Funds rate and UST yields (including those on the shorter end of the yield curve) probably will have to increase faster and further than the Fed shepherd currently wants and predicts. UST yields will resume their long run upward path. Sustained ascending American inflation has a strong likelihood of undermining and reversing bullish price trends in various “search for yield” marketplaces such as stocks.
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Financial Fireworks- Accelerating American Inflation (7-3-21)