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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Kenneth Burke remarks in “A Grammar of Motives”: “And so one can seek more and more money, as a symbolic way of attaining immortality.”
CONCLUSION AND OVERVIEW
In both stock and debt marketplace domains (and especially in stock arenas), securities owners (particularly “investors”) and their central banking, political, and media allies adore bullish price trends and employ artful rhetoric to promote them. Bullish enthusiasm for low yields in debt marketplaces of course has its limits. Central bankers (and stock investors and Wall Street and Main Street) do not want recessions or deflation and consequently “too low” interest rates, which are “bad” for (reflect or portend feebleness in) “the economy” and equities. But sometimes even negative nominal yields for government debt of leading advanced nations (such as Germany) allegedly are reasonable and praiseworthy. Moreover, for stock marketplaces, bull moves almost always are joyful and good!
All else equal, for equity realms such as America’s S+P 500, low (but not overly depressed) arithmetic interest rates and widespread faith that this rate pattern probably will persist for the foreseeable future tend to give birth to and sustain bullish stock trends. Over the past several years (and despite the horrifying stock price crash in first quarter 2020), ongoing and successful yield repression (enhanced by money printing and fortified by accommodative sermons) by the revered Federal Reserve Board and its trusty friends, and often aided by massive government deficit/”stimulus” spending, encouraged major bull climbs in the United States stock marketplace. In addition, low interest rates (often negative in real terms) in advanced countries such as the United States inspired financial pilgrims avidly searching for adequate “yield” (return) to purchase corporate debt securities and other “asset classes” such as commodities.
Previous essays discussed key stock, interest rate, currency, and commodity marketplaces and their relationships, as well as the political scene. See essays “Emerging Marketplaces, Unveiling Danger” (12/2/21); “Hunting for Yield: Stocks, Interest Rates, Commodities, and Bitcoin” (11/7/21); “Rising Global Interest Rates and the Stock Marketplace Battlefield” (10/5/21); “America Divided and Dollar Depreciation” (9/7/21); “Great Expectations: Convergence and Divergence in Stock Playgrounds” (8/14/21); “Financial Fireworks: Accelerating American Inflation” (7/3/21); “Marketplace Rolling and Tumbling: US Dollar Depreciation” (6/1/21); “American Inflation and Interest Rates: Painting Pictures” (5/4/21); “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21); “Truth and Consequences: Rising American Interest Rates” (3/9/21).
Several months ago, that analysis concluded that the signpost United States Treasury 10 year note yield had established a major bottom. Essays emphasized, in contrast to the opinion of the majority of central bankers, the likelihood that substantial global inflation likely would persist. Higher inflation alongside massive and increasing international debt burdens probably would encourage higher interest rates around the world.
Also, long run United States interest rate history (use the UST 10 year note as a benchmark) reveals that noteworthy yield increases lead to peaks for and subsequent declines in American stock benchmarks such as the S+P 500 and Dow Jones Industrial Average.
Investigation pointed to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a rising rate environment has become a global phenomenon. Given not only the upward march of yields in the UST 10 year note, but also the international trend of rising rates, the probability of a peak in the S+P 500 and related leading nations increased.
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 landscapes are bullish (or bearish) “together”. In the current constellation of rising American and international yields, in both government and corporate areas, that warned of eventual price convergence between the S+P 500 and emerging marketplace stocks. The S+P 500’s record high in early January 2022 occurred near in time to interim highs in developing nation equities.
“Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded: “These intertwined patterns warn that the S+P 500 probably has established a notable top or soon will do so”.
The longer run viewpoints of “Emerging Marketplaces, Unveiling Dangers” and related recent essays remain intact. The paradise of low interest rates in the United States and around the globe will continue to disappear. This ominous upward yield shift in the UST 10 year note and elsewhere endangers the heavenly bull move in the S+P 500 and related stock marketplaces. The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.
The UST 10 year note yield probably will ascend to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher elevation. The Federal Reserve and other high priests of central banking probably will not engage in substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.
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Paradise Lost- the Departure of Low Interest Rates (2-9-22)
In the film “The Deer Hunter” (Michael Cimino, director), a character asks: “Did you ever think life would turn out like this?”
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.
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)
“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)
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.
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.
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)
In “The Age of Anxiety”, the poet W.H. Auden remarks: “Gradually for each in turn the darkness begins to dissolve and their vision to take shape.”
OVERVIEW AND CONCLUSION
Since summer 2016, using the 10 year central government note as a benchmark, global interest rate yields for leading nations “in general” gradually have risen. The United States has been the key nation propelling “overall” debt yields upward. Also since summer 2016, marketplace trend twists and turns from the price and time perspective for this assortment of nations usually has been fairly close.
Relatively strong American economic growth and tightening Federal Reserve Board policies have played important roles in the worldwide rate increase process. The reduction of central bank yield repression is and will remain a crucial factor underpinning the long run yield increase trend. Even the European Central Bank and Bank of Japan, which have ongoing lax monetary policies, suggest they eventually will become slightly less accommodative.
Significant global credit demand in an environment where overall global debt (government, corporate, household) already is substantial also is an important element tending to boost global yields. The international government debt level as a percentage of GDP nowadays is much greater than at the advent of the 2007-09 global economic disaster. For many countries, including America, there is little likelihood for notable government debt reduction anytime soon.
Expanding United States federal budget deficits resulting from December 2017’s exciting tax “reform” legislation probably have encouraged the ascent in American yields. Given the importance of America in the interconnected global economy, the US national budget deficit and debt level trends as a percentage of GDP not only will continue to generate US Treasury rate climbs over the long run, but also will assist a global upswing in yields. America’s tax reform scheme exacerbated the already massive long run federal budget problem (big deficits alongside entitlement spending, etc.; higher demand for credit). By helping to push American US government interest rates higher, the tax reform magnifies the country’s monumental debt challenge.
Despite the broadly similar rising yield trend direction and convergence links (connections, associations) across the central (federal) government note marketplaces since summer 2016, the pattern of course is not always perfect. Also, as time passes, divergence within this “overall upward trend” may emerge. For example, whereas the US Treasury 10 year note’s yield high to date since summer 2016 is 10/9/18’s 3.26 percent, the German Bund (81 percent on 2/8/18) and China’s 10 year central government note (11/22/17’s 4.04pc) attained their highs many months earlier. In addition, rate climbs are not all necessarily the same in distance or speed terms. For countries engaged in substantial yield repression, the advance may be fairly small and slow for quite a while.
Fearful “flights to quality” occasionally may inspire yield falls in so-called safe haven government debt instruments issued by nations such as America, Germany, and Japan. Central banks likely will become (or remain) highly accommodative if the global recovery appears seriously threatened. The reality of or omens pointing to feebler than expected (desired) GDP growth (in conjunction with other variables) may spark such yield declines, and perhaps also induce renewed accommodative central bank actions (or at least soothing rhetoric from such earnest guardians).
In the current marketplace situation, additional notable erosion in the prices of global stock marketplace benchmarks from their calendar 2018 summits might also inspire relatively significant retreats in debt yields. For example, a decline in the S+P 500 of nearly twenty percent or more from its autumn 2018 peak could connect with government yield declines (and perhaps with the emergence of central bank propaganda or action to rally stock prices).
The major (long run) trend for US government interest rate yields, and for other nations around the globe, probably remains up. Despite tumultuous twists and turns, the long run upward march in government interest rate yields which commenced around the middle of 2016 likely will remain intact. The UST 10 year note’s 3.26 percent high yield will be exceeded.
However, the declines in global stock marketplaces (especially the S+P 500’s slump since its September 2018/October 2018 peak), especially if interpreted alongside the failure of German and Chinese 10 year government notes to establish yield new yield highs close in time to those in the UST (and other important countries), warn that a temporary halt to (or noteworthy slowdown in) the overall global pattern of rising government rates (including in America) is being established. Some yield declines in government notes may be rather dramatic. However, based upon a perspective of a long run extending for several years from now, such yield descents probably will be temporary.
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Twists, Turns, and Turmoil- US and Other Government Note Trends (11-12-18)