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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HUNTING FOR YIELD: THE THRILL IS GONE © Leo Haviland October 4, 2022

BB King complains “The thrill is gone” in his song named after that lyric.

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OVERVIEW AND CONCLUSION

 

Financial warriors in securities and other marketplaces always hunt for adequate yield (sufficient return) on their capital. Especially in Wall Street’s stock and interest rate realms, the majority of institutions and individuals (not the market-makers) eagerly searching for yield are owners, thus initiating their positions from the buying side. Most of these owners on Wall Street and Main Street seeking wealth and economic security grant themselves or receive the honored cultural designation of “investor”, with their long positions generally labeled as investments. Especially in stock and debt arenas, “investment” is deemed “good”. On Main Street, homeowners likewise as a rule view their property as an investment. And since the appealing investment badge and related rhetoric excites interest and encourages action, such as buying and holding, Wall Street guides and their media and political comrades enthusiastically and liberally employ investment wordplay, especially in stock and interest rate territories. Given the persuasiveness of investment talk, many Wall Street wizards often extend the label to other asset classes such as commodities “in general”, perhaps calling them “alternative investments”.

Of course therefore on Wall Street, investors generally are happy (joyous, pleased) when asset prices rise (especially in stocks) on a sustained basis, and sad (depressed, unhappy, angry) when such prices decline. Thus for stocks, high and rising prices (and bull market trends) are “good”, whereas low and falling prices (and bear markets) are “bad”. However, investment rhetoric and devotion to ownership do not abolish price risk. So capital preservation matters too. Because broad, longer-run directional price patterns are not necessarily a one-way street, numerous investors during a noteworthy price decline fearfully run for cover, selling some or all of their positions (or at least not buying more for their portfolio, even an allegedly well-diversified one).

Moreover, increasing fears regarding whether economic growth will be adequate can make investors (and others) considerably more nervous about holding on to a given quantity of assets. Uncertainty itself (as well as price “volatility”), if sufficiently substantial, can help to inspire many to flee out of assets which now appear to be “too risky”!

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In any case, the bear marketplace trend in the S+P 500 which commenced in January 2022 (and related slumps in other advanced nation equity arenas) and significantly rising yields (falling prices) in the US Treasury marketplace (as well as in other sovereign and corporate debt landscapes around the globe) thus have disturbed, dismayed, and injured many investors (and other owners). That stocks and bonds have collapsed “together” in recent months is especially upsetting! Note also the long-running retreat in emerging marketplace stocks. Commodities “in general” have cratered from their first quarter 2022 highs. In recent months, even United States home prices have declined moderately. This scary financial carnage surely has substantially reduced financial net worth around the world, and especially within the consumer (household) sector. The US dollar, which is part of this capital destruction story, not only has remained very strong for quite some time, but also recently climbed to new highs.

In today’s international and intertwined economy, the interrelated substantial price falls in the stock and bond marketplaces, and the potential for even greater weakness than has thus far appeared in home prices, plus a “too strong” US dollar, are a recipe for recession. The net worth destruction resulting from substantial price falls in these assets probably indicates a significantly greater probability of recession, not merely an extended period of mediocre real GDP growth (or stagflation), in America and many other leading economies, than most forecasters assert. Although commodities are not a substantial part of household net worth, their significant price slump in recent months not only confirms the price downturn in the S+P 500 and related stock marketplaces, but also warns of underlying economic feebleness. Note recent year-on-year declines in US petroleum consumption.

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“Marketplace Expectations and Outcomes” (9/5/22) restated the viewpoint of “Summertime Blues, Marketplace Views” (8/6/22): “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, the essays concluded: “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.”

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Marketplace history is not marketplace destiny, and convergence and divergence patterns between stocks, interest rates, and other arenas can shift, sometimes dramatically. However, despite the S+P 500’s ferocious rally after 9/30/22’s 3584 trough, it and other related stock marketplaces probably will fall beneath their recent lows eventually. The US Treasury 10 year note yield, given ongoing lofty inflation levels around the globe and the determined effort of the Federal Reserve and other central bankers to reduce inflation to acceptable heights, probably over time will climb higher, exceeding its recent high around four percent. Consumer price inflation probably will remain lofty for at least a few more months on a year-on-year basis. However, within that rising yield trend, UST prices occasionally may rally due to nervous “flights to quality”.

A victorious fight against the evil of excessive inflation probably requires a recession. If a notable global recession emerges (or if fears regarding the development of one grow substantially), then central bankers probably will slow or even halt their current rate-raising program.

Suppose OPEC and its allies engineer a notable rally in petroleum prices from current levels which lasts for a while, or that the Russia/Ukraine war induces a renewed rally in energy (and perhaps other) commodity prices. Such ascents in commodities prices (if they indeed occur) will help to keep consumer prices high and thereby tend to induce central banks to sustain their current policy tightening (interest rate boosting) programs.

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Hunting for Yield- the Thrill is Gone (10-4-22)

ADVENTURES IN MARKETLAND: HUNTING FOR RETURN © Leo Haviland October 6, 2020

In the movie, “The Hustler” (Robert Rossen, director), a character stresses: “Look, you wanna hustle pool, don’t you? This game isn’t like football. Nobody pays you for yardage. When you hustle you keep score real simple. The end of the game you count up your money. That’s how you find out who’s best. That’s the only way.”

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CONCLUSION

 

During the era of sustained global yield repression engineered by America’s trusty Federal Reserve Board and its central banking comrades, “investors” and other traders generally have engaged in enthusiastic hunts for adequate return (“yield”) in assorted financial fields. These territories include United States and other stocks, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities “in general”.

Convergence and divergence (lead/lag) relationships between realms such as the S+P 500, American corporate debt, and the petroleum complex are a matter of subjective perspective. The connections and patterns are complex and not necessarily precise; they can shift or even transform. Nevertheless, within this accommodative policy yield environment, often involving monumental money printing (quantitative easing) strategies and other generous monetary schemes, price trends in the S+P 500 and these other marketplaces frequently have been similar. Prices in these benchmark stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time They have climbed in bull markets (and fallen in bear markets) “together”. For example, the magnificent bull moves for US stocks and these “related” financial areas peaked in early to mid-first quarter 2020. Their subsequent bloody bear crashes intertwined, ending at around the same time. The ensuing price rallies in these assorted key districts generally embarked around late March 2020, and their subsequent bullish patterns thereafter interrelated. The S+P 500’s attained its record high on 9/2/20 at 3588.

“Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) concluded: “various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together.” Noteworthy interconnected price falls followed the S+P 500’s September 2020 summit. Even if Congress answers widespread fervent prayers and enacts another large deficit spending (stimulus) package, the S+P 500’s 9/2/20 peak probably will not be broken by much, if at all.

What bearish factors did “Marketplace Maneuvers” identify? They include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). The Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears are growing of a political crisis if President Trump disputes the November voting outcome.

Other warning signals of notable price falls in the S+P 500 and various related marketplaces are vulnerable US (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes) than many believe (even with ongoing Fed yield repression), and the weakness in the US dollar.

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Adventures in Marketland- Hunting for Return (10-6-20)

GOLD AND GOLDILOCKS: 2017 MARKETPLACES © Leo Haviland, January 10, 2017

“I think I’ll go to sleep and dream about piles of gold getting bigger and bigger and bigger.” Fred C. Dobbs, in the 1948 movie, “The Treasure of the Sierra Madre” (John Huston, director)

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CONCLUSION

The extent to which important financial playgrounds intertwine and their alleged trends converge or diverge (or, lead or lag) are matters of opinion, as are perspectives on and reasons for such relationships and movements. Apparent convergence/divergence and lead/lag patterns between currency, interest rate, stock, and commodity marketplaces nevertheless offer guidance to players seeking to explain, predict, or profit from financial price movements. Marketplace history need not repeat itself, either entirely or even in part. Thus these relationships can change, sometimes dramatically. Fundamental supply/demand factors and trends are not written in stone. And competing historians and clairvoyants do not necessarily share the same perspectives or tell the same stories regarding either a given financial playground or its relationships to other arenas.

The relationships between gold and the US dollar, as well as those between gold and other commodities and stock and interest rate marketplaces, are complex. Often, gold prices travel in roughly similar fashion to those of base metals in general and the overall petroleum complex. Yet sometimes substantial fears regarding financial meltdown (asset value destruction) or striking worries about political evolution or disruption also can influence gold’s supply/demand and price profile, and thereby gold’s interrelations with commodities as well as currency and securities marketplaces. In any case, significant gold price trend changes often precede or roughly coincide (or “confirm”) those elsewhere.

Gold probably established an important low not long ago, at $1124 on 12/15/16. Suppose this gold rally continues for at least the near term. The gold ascent probably warns of peaks in the broad real trade-weighted United States dollar (“TWD”) and the S+P 500. The current divergence between the S+P 500 and emerging marketplace nation stocks in recent months likewise warns of these trend shifts. Relevant to this viewpoint, the 10 year United States Treasury note yield established a major low at 1.32 percent on 7/6/16. In addition, suppose gold’s recent climb eventually coincides with a renewed slump in the LMEX base metals index (London Metal Exchange) from its 11/28/16 top at 2857, and at least a modest tumble in benchmark petroleum prices. That probably will interrelate with this scenario of US dollar weakness and erosion of S+P 500 and emerging marketplace stock prices.

The American political theater is relevant to this outlook for gold price and its relationship to the US dollar and other marketplaces. Trump’s remarkable Presidential victory and his likely policies probably have increased fears in both American and international domains regarding the quality of America’s political leadership and the consequences of its economic (political) philosophy. Moreover, the nation’s various sharp cultural divisions and related partisan political conflicts will not disappear anytime soon.

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Gold and Goldilocks- 2017 Marketplaces (1-10-17)

MARKETPLACE CLIFFS © Leo Haviland June 25, 2012

Ongoing and mounting concern regarding European problems, especially within the sovereign debt and banking sector, has distracted many marketplace observers from concentrating closely on similar major American issues. The global economic crisis is a long way from being surmounted. Fiscal, banking, debt, and leverage challenges in Europe and the United States (and elsewhere) remain substantial. For the near term, the international crisis probably will worsen. Many perceive the S+P 500 as a rough benchmark measure for overall economic strength. The S+P 500 will head downhill, perhaps precipitously at times. It probably will decisively break beneath its early June 2012 low at 1267.

The International Monetary Fund’s “Fiscal Monitor” (“FM”, April 2012) provides helpful numbers. Analysts can debate which tables illuminate the situation best. Events since April 2012 would adjust the data somewhat.

The FM “general government” tables include state and local government debt with that of the national governments. Look at Table 1, General Government Balance. The United States was -9.6pc (a deficit) of GDP in 2011. The FM predicts -8.1pc in 2012 and -6.3pc in 2013. The overall Euro area deficit is actually lower for these years than the American one; it was -4.1pc in 2011, with -3.2pc for 2012, and -2.7pc in 2013. The US deficit falls only to -4.4pc in 2017, notably above the Euro area’s -1.1pc that year. What about some specific Euro area nations about which many tremble? In 2012, Italy’s general government balance is -2.4 percent, well under that of America’s. Portugal’s 2012 hole was -4.5pc. Spain’s 2012 balance, -6.0pc, also is beneath America’s (though an update to the FM probably would raise Spain’s deficit, placing it closer to the US 2012 range).

Review Table 7, General Government Gross Debt. The US gross debt was 102.9pc of GDP in 2011 (soaring from 66.6pc in 2006). The IMF predicts it will be 106.6pc in 2012 and 110.2pc in 2013. It stays at a plateau with 2017’s 113.0. Thus there is no progress in reducing it. Moreover, the US gross debt percentage exceeds that of the Euro area. Euro area gross debt was 88.1pc of GDP in 2011. The FM predicts 90.0pc in 2012, 91.0pc in 2013, and 86.9pc in 2017. Thus the US fiscal situation is worse than that of the Euro area as whole from this viewpoint as well.

In addition, note the US’s 2012 out to 2017 gross debt levels in comparison with those of Euro area crisis/bailout nations other than Greece. Admittedly Greece’s gigantic 153.2pc is larger, and its problems interrelate with those of the Eurozone as a whole. In 2012, Italy’s debt is 123.4pc of GDP, Spain’s 79.0pc. That of Ireland is 113.1pc, Portugal’s 112.4 pc. The average for 2012 of Italy, Spain, Ireland, and Portugal is 107.0pc. However, this is almost exactly that of the US’s 2012 debt of 106.6pc.

So this perspective underlines that as the Euro area has a scary fiscal (sovereign debt) problem, so therefore does the US.

Yet travel further and look at US total credit marketplace debt US (nonfinancial, financial, and rest of the world sectors combined), not government debt alone. In 1951, it was about 132.4pc of nominal GDP. It ascended gradually to 168.1pc by 1981. It climbed to 250.8pc in 1995, marching to just under 300 percent in 2002. During the marvelous Goldilocks Era economy, total US credit marketplace debt flew even higher, touching 362.8pc of GDP in 2007. It advanced more as the economic crisis emerged, reaching a pinnacle of 381.6pc in 2009.

So where is this total credit marketplace debt now? At the end of 1Q12, it remained at a very lofty altitude, 353.6pc. Not only does the long run increase in total credit marketplace debt display devotion to (economic reliance on) debt. The only slight slide from the 2009 peak to the 1Q12 level indicates that at some point more debt reduction (deleveraging) for “America as a whole” lies ahead, and thus a significant probability of a weaker economy (and even recession).

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Marketplace Cliffs (6-25-12)