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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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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FOLLOW THE LINK BELOW to download this article as a PDF file.
Financial Agitation (10-3-23)

US STOCKS OVER THE LONG RUN: BEAR MARKETPLACE HISTORY © Leo Haviland, August 4, 2023

“It’s déjà vu all over again!”, declared Yogi Berra, a famous baseball star.

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OVERVIEW AND CONCLUSION

Given the great significance of the United States within the global economy, both Wall Street and Main Street spend much attention and energy focusing on the American economic scene. Benchmark American stock indices such as the S+P 500 and Dow Jones Industrial Average to some extent probably reflect the overall health of and potential for the American economy. 

United States stock marketplace trends and phenomena intertwine with those of other global stock arenas. Prices and trends for (and assorted other economic, political, and social variables influencing) US signpost stock indices such as the S+P 500 and Dow Jones Industrial Average interrelate with those of key American and global interest rate, currency, commodity, real estate, and other economic domains. History reveals that these cultural relationships can and do change, sometimes slowly, sometimes rapidly. Convergence and divergence (lead/lag) patterns between marketplaces can and do shift or transform. 

Price levels and trends for these key American equity marketplaces therefore attract and sustain widespread and domestic international attention. 

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US interest rate, dollar, commodity, real estate, and other marketplace trends entangle with and influence American stock trends. 

“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 probably will 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.” 

The UST 10 year note yield broke through 3/2/23’s 4.09 percent interim high with 8/3/23’s 4.20 percent high. It thus is approaching 10/21/22’s 4.34 percent top, attained around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. 

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Given the importance of price trends in widely watched US equity indices such as the S+P 500 and Dow Jones Industrial Average, stock and other marketplace players and observers should review and assess long run bear (and bull) marketplace history for those American benchmarks. 

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FOLLOW THE LINK BELOW to download this article as a PDF file.
US Stocks Over the Long Run- Bear Marketplace History (8-4-23)

WE CAN’T GET NO SATISFACTION: CULTURAL TRENDS AND FINANCIAL MARKETPLACES © Leo Haviland July 13, 2022

In “Satisfaction”, The Rolling Stones sing: “I can’t get no satisfaction.”

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CONCLUSION AND OVERVIEW

“Economic” confidence and satisfaction levels and trends interrelate with patterns of and anticipations regarding “economic” performance. These variables entangle with and influence price trends in stocks and other financial marketplaces. Thus consumer (Main Street) confidence and similar measures can confirm, lead (or lag), or be an omen for future movements in GDP, inflation, the S+P 500, interest rates, and so on.

Declines in American economic confidence in recent times confirm deterioration in the nation’s (and global) economic condition. The severity of those confidence slumps probably warns of further ongoing economic challenges in the future. These looming difficulties include not only the perpetuation of relatively high inflation for quite some time, but also slowing and perhaps even falling GDP growth. Since America is a leading economic nation in the intertwined global economy, what happens there substantially influences and reflects economic performance elsewhere.

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Regarding and within cultural fields, definitions, propositions, interpretations, arguments, and conclusions are subjective (opinions). So-called “economic” (financial, commercial, business) arenas and analysis regarding them are not objective (scientific). In any case, as they are cultural phenomena, economic realms are not isolated from “political” and “social” ones. They interrelate with them, and sometimes very substantially.

Evidence of substantial (and in recent times, increasing) “overall” (including but not necessarily limited to political or economic) dissatisfaction within America are not unique to that country. However, since overall and political measures of declining confidence within and regarding the United States both include and extend beyond the economic battleground, at present they consequently probably corroborate current and herald upcoming economic troubles (economic weakness; still rather lofty inflation) for the US.

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Marketplace history is not marketplace destiny, either entirely or even partly. Relationships between marketplaces and variables can change, sometimes dramatically. Nevertheless, keep in mind that if prices for assorted “search for yield (return)” marketplaces such as stocks (picture the S+P 500) and lower-grade debt can climb “together” (roughly around the same time), they also can retreat together.

“Runs for cover” in recent months increasingly have replaced “searches for yield” in the global securities playground by worried “investors” and other nervous owners. Price declines in American and other stock marketplaces have interrelated with higher yields for (price slumps in) corporate debt securities and emerging marketplace sovereign US dollar-denominated notes and bonds.

The devastating price collapse in Bitcoin and many other cryptocurrencies surely has dismayed many yield-hunters on Main Street.

Declines in American confidence and satisfaction assist and confirm the price falls in recent months in the S+P 500 and other “search for yield” playgrounds such as corporate and low-grade sovereign debt. Thus confidence destruction has interrelated with capital destruction (loss of money) by “investors” and other owners) in stock and interest rate securities marketplaces. From the historical perspective, slumps in as well as very low levels for some of the confidence (“happiness”; optimism) indicators probably signal further price drops in the S+P 500 and interconnected search for yield marketplaces.

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The beloved Federal Reserve and its central banking friends finally recognized that consumer price inflation is not a temporary or transitory phenomenon and have elected to raise policy rates (end, or at least reduce, yield repression) and shrink their bloated balance sheets. Yet inflation probably will not drop significantly for some time. Besides, how much faith exists that the Federal Reserve will (or can) control and even reduce consumer price inflation anytime soon? How much trust should we place in the Fed’s abilities? The Fed helped to create inflation (and not just in consumer prices, but also in assets) via its sustained massive money printing and ongoing yield repression, and the Fed did not quickly perceive the extent and durability of consumer price inflation.

Long run history shows that significantly rising American interest rates for benchmarks such as the US Treasury 10 year note lead to bear marketplaces in the S+P 500.The US stock marketplace has declined significantly since its January 2022 peak. Home price appreciation, a key factor pleasing many consumers, probably will decelerate, and perhaps even cease. The Ukraine/Russia war continues to drag on. Despite recent declines from lofty heights, prices for commodities in general remain elevated from the pre-war perspective. Global government debt is substantial, and fearsome long-run debt problems for America and many other countries beckon. American and international GDP growth has slowed. Stagflation and even recession fears have increased. The coronavirus problem, though less terrifying, has not disappeared.

Therefore many American Main Street confidence indicators probably will decline, or at least remain relatively weak, over at least the next several months.

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We Can't Get No Satisfaction- Cultural Trends and Financial Marketplaces (7-13-22)

RUNNING FOR COVER: FOREIGN OFFICIAL HOLDINGS OF US TREASURY SECURITIES © Leo Haviland October 13, 2016

“I know what gold does to men’s souls,” says a grizzled prospector in the movie, “The Treasure of the Sierra Madre” (John Huston, director)

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OVERVIEW AND CONCLUSION

Foreigners hold a massive quantity and substantial share of United States Treasury securities. Such foreign ownership of and trading activity in UST therefore is an important variable for US government interest rate levels and trends, which in turn intertwine with yield elevations and movements in other American debt playgrounds. And of course to some extent, and in various (and sometimes changing) fashions and degrees, given the importance of America within the global economy, UST yields interrelate with and influence yields overseas, as well as assorted currency, stock, and commodity marketplace levels and trends.

Federal Reserve Board (and other key central bank) policy, inflation trends (in America and other major nations), equity adventures (for the S+P 500 and other important advanced nation and emerging marketplace benchmarks), and the strength of the US dollar will influence decisions by current and potential overseas owners of UST. So will numerous other economic as well as political factors such as the America’s November 8, 2016 election and its aftermath.

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Many marketplace visionaries focus primarily on the grand total of foreign holdings of United States Treasury securities, ascents and descents in that sum, and that amount’s relative share of US debt outstanding. This indeed can provide observers with helpful information.

Yet in regard to UST ownership by overseas entities, the foreign official and private sectors do not necessarily behave the same way. Sometimes this distinction appears significant enough over time to monitor closely.

Thus concentrating on the grand total of foreign holdings and shifts in that statistic risk overlooking an important pattern which appeared in recent months within those holdings. What is that pattern? The net foreign official holdings have fallen not only as a percentage of overall foreign holdings, but also in absolute levels. This substantial official exodus is important.

Suppose not only that such noteworthy net UST liquidation by the foreign official sector persists, but also that the overseas private sector decides to reduce its net buying significantly, or to become a net seller. All else equal, that will help to push UST yields higher.

Selecting variables regarding as well as presenting explanations (“causes”) for marketplace and other cultural phenomena reflect the subjective viewpoint and rhetoric of the given storyteller. And marketplace history does not necessarily entirely or even partly repeat itself. Net foreign official selling (or net buying) of US Treasury securities of course is not always or the only factor relevant to American stock marketplace trends. Marketplace participants nevertheless should note that sometimes over roughly the past two decades (since 1997), substantial net foreign official selling of UST can be associated with a decline in the S+P 500.

US federal budget deficits indeed have plummeted from their pinnacles reached due to the global economic disaster. But they have not disappeared. And they probably will increase in subsequent years. So looking forward (and all else equal), if substantial net foreign selling of UST by both the foreign official and private groups exists, that will make it increasingly difficult for the American government to finance looming budget deficits. Will this eventually encourage UST yield rises? Perhaps the US public will help to fill the deficit financing gap, but it may take higher rates (better real returns) than currently exist to inspire them.

 

A DELUGE OF DEBT

“‘A Ti-tan iv Fi-nance,’ said Mr. Dooley, ‘is a man that’s got more money thin he can carry without bein’ disordherly. They’se no intoxicant in th’ wurruld, Hinnissy, like money.’” (Finley Peter Dunne’s “Mr. Dooley” commenting “On Wall Street”; spelling as in the original)

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There are various measures of US federal (national) indebtedness. Also, reports regarding breakdowns in debt ownership at times vary in their presentation. But regardless of the analytical perspective embraced, foreign ownership of UST is substantial in absolute and percentage of debt terms.

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Running for Cover- Foreign Official Holdings of US Treasury Securities (10-13-16)