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.
Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.
In the classic American film, “All About Eve” (Joseph Mankiewicz, director), the actress Margo Channing (played by Bette Davis) declares: “Fasten your seat belts. It’s going to be a bumpy night.”
In general, from around the beginning of calendar 2022 until mid-October, as American and other key global government interest rates continued to rise (enlist the United States Treasury note as a benchmark), the S+P 500 (and other advanced nation and emerging marketplace stock playgrounds) declined. Growing fears regarding substantial and persistent consumer price (and other) inflation by the Federal Reserve and its central banking allies and the linked policy response of raising Federal Funds and similar rates played key roles in the yield climbs and stock price falls. Bear trends for other “search for yield” assets such as corporate bonds and United States dollar-denominated emerging marketplace corporate debt converged with those of the S+P 500 and emerging marketplace stocks. Commodities “in general” (“overall”) of course do not always trade “together” in the same direction around the same time as the S+P 500. Nevertheless, in broad brush terms since around late first quarter 2022, their downward price and time trends converged. A very strong US dollar encouraged the relationships of higher US Treasury yields, descending stock prices, and eroding prices for commodities “in general”.
However, the US 10 year note yield achieved an important high on 10/21/22 at 4.34 percent. Using the Federal Reserve Board’s nominal Broad Dollar Index as a weathervane, the dollar peaked at 128.6 on 9/27/22 and 10/19/22. The S+P 500 established a trough in its bear trend with 10/13/22’s 3492. Based on the S+P GSCI, commodities in general attained an important low on 9/28/22 at 591.8, holding at 591.1 on 11/28/22. Note the roughly similar times (and thus the convergence) of these marketplace turns, which thereafter reversed, at least temporarily, the preceding substantial trends.
What key changes in central bank policy and marketplace inflation yardsticks encouraged the recent slump in the UST 10 year yield, the depreciation in the US dollar, and the jump in the S+P 500 and the prices of related hunt for yield (adequate return) battlefields? First, various members of the Federal Reserve leadership hinted that future rate increases would slow in extent (be fifty basis points or less rather than 75bp). See the Financial Times summary of officials leaning that way (11/12-13/22, p2). The Fed probably will tolerate a brief recession to defeat inflation, but it (and of course the general public and politicians) likely would hate a severe one. In today’s international and intertwined economy, further substantial price falls (beneath October 2022 lows) in the stock and corporate debt arenas (and other search for yield interest rate territories), and even greater weakness than has thus far appeared in home prices, plus a “too strong” US dollar, are a recipe for a fairly severe recession. Hence the Fed’s recent rhetorical murmurings aim to stabilize marketplaces (and encourage consumer and business confidence and spending) and avoid a substantial GDP drop.
Second, US consumer price inflation for October 2022 stood at “only” 7.7 percent year-on-year. This rate fell short of expectations for that month and declined from heights exceeding eight percent in the several preceding months. This sparked hopes that American (and maybe even global) inflation would continue to decline even more in the future, and that the Federal Reserve and other central bank guardians would engage in less fierce tightening trends.
Of course the Fed policy hints and US consumer inflation statistics do not stand apart from other variables. Might China ease its restrictive Covid-fighting policy, thus enabling the country’s GDP to expand more rapidly?
Trends for commodities in general (employ an index such as the broad S+P GSCI) and the petroleum complex in particular sometimes have diverged substantially for a while from that of the S+P 500. After all, petroleum, wheat, and base metals have their own supply/demand and inventory situations. The broad S+P GSCI has battled to stabilize during autumn 2022 in response to the determined effort by OPEC+ to rally petroleum prices via production cuts. And over the long run, the S+P 500 and commodities tend to trade together. OPEC+’s ability to successfully defend a Brent/North Sea crude oil price around 83 dollars per barrel (nearest futures continuation) depends substantially on interest rate and stock levels and trends, as well as the extent of US dollar strength.
The “too strong” US dollar during calendar 2022 encouraged price declines in assorted search for yield asset classes, including emerging marketplace stocks and debt instruments as well as commodities. The depreciation of the US dollar in the past couple of months thus interrelated with (confirmed) the price rallies in the S+P 500 and other marketplaces. Yet the Federal Reserve probably will remain sufficiently enthusiastic in comparison with other central banks in its fight against inflation, which should tend to keep the dollar strong, even if it stays beneath its calendar 2022 high.
Investors in (and other owners of) stocks and other search for yield realms and their financial and media friends joyously applauded recent price rallies. However, to what extent will these bullish moves persist?
US consumer price and other key global inflation indicators remain very high relative to current central bank policy rates. Not only does the US CPI-U all items year-on-year percentage increase of 7.7 percent for October 2022 substantially exceed UST 10 year yields over four percent, but so does October 2022’s 6.3 percent year-on-year increase in the CPI-U less food and energy.
Imagine consumer price inflation staying at only 4.5 percent. To give investors a 50 basis point return relative to inflation, the UST 10 year should yield five percent. Thus the Fed will continue to push rates higher in its serious war against excessive inflation, and eventually the rising UST yield pattern probably will reappear eventually, persisting until there are signs of much lower inflation or a notable recession.
Although marketplace history is not marketplace destiny, history reveals that significant climbs in key US interest rate signposts (such as the UST 10 year) tend to precede substantial falls in US stock benchmarks such as the S+P 500. Thus the S+P 500 probably will resume its decline, although it will be difficult for it to breach its October 2022 depth by much in the absence of a sustained global recession. So a return to rising UST rates, all else equal, probably will keep the dollar fairly powerful from the long run historic perspective, although the dollar will find it challenging to surpass its recent high by much (if at all) for very long.
FOLLOW THE LINK BELOW to download this article as a PDF file.
Wall Street Marketplaces- Fasten Your Seat Belts (12-5-22)
The Cars ask in their song “Drive”:
“Who’s gonna tell you when it’s too late
Who’s gonna tell you things aren’t so great”?
CONCLUSION AND OVERVIEW
To the majority of Wall Street marketplace observers, price fluctuations for at least the past few months in many key benchmarks such as the United States government 10 year note, the broad real US trade-weighted dollar, and the S+P 500 generally have seemed relatively peaceful. Many players are rather complacent. However, history reveals that the relative lack of dramatic movement (“volatility”) according to such perspectives of course does preclude greater and ongoing violent future swings. Though the outward landscape of the given financial realm may seem calm, powerful intertwined and shifting forces may lurk beneath, perhaps eventually and possibly suddenly causing substantial tremors in one or more economic (and political) domains.
Confidence yardsticks for US consumers and small businesses are high. American unemployment has slipped substantially in recent years. Yet the fierce political conflicts around the globe between assorted camps, including various right and left wing populist crews and diverse establishment (elite) groups, hint at and probably reflect strong, entangled, and contending variables in economic spheres. The long-running accommodative monetary schemes by the key global central banks such as the Federal Reserve Board, European Central Bank, Bank of England, and Bank of Japan reflect not only their devotion to their interpretation of their beloved legislative mandates. Sustained marketplace manipulation programs such as yield repression and money printing (quantitative easing) also aim at sparking and sustaining economic outcomes favorable to (or at least protective of) the economic and political interests of “the establishment”. Central banks do not want the establishment’s boat to get rocked too much or capsize!
In America and many other regions around the world, sharp cultural divisions involve more than just economic (or “class”) quarrels and concerns regarding financial opportunities and mobility. Partisan feuds involve politics, whether Democrats versus Republicans, liberal versus conservative, the quality of the current Presidential leadership, and so on. Yet fervent debates and frequent anger on Main Street regarding issues relating to race/ethnicity, sex/gender, age, religion, geography, the environment, and so on probably reflect economic (political) splits and consequently hint at the potential for marketplaces to become inflamed.
In any case, the US Treasury 10 year note and the broad real trade-weighted dollar (“TWD”) are two important marketplace vehicles currently near critical levels. The key US 10 government note height is around 2.65 percent, that in the TWD around 96.2 to 96.6. A sustained rise in the UST above that level or a decisive TWD breakdown under 96.0 (and especially if both events occurred) might reflect and probably would increase price volatility in those fields. Such significant moves in rates and the dollar probably also would spark a substantial reversal of the current bull trend in the S+P 500 (and related advanced and emerging marketplace stock arenas). Commodities “in general” in this scenario likely would decline as well.
The enthusiastic “buy the dips” chorus for US equities likely will not remain forever fashionable or successful. What happens if the American Congress does not enact tax “reform” in the near future? Suppose observers focus more closely on the long run US federal budget deficit and debt issues (and debt problems in China, Japan, and elsewhere)? What if US corporate earnings do not sustain notable growth? Will such events (or a US dollar decline; or higher interest rates or central bank threats of these; or some other phenomenon such as trade wars, the North Korea nuclear issue, or further petroleum price rallies) help to stop the train of the glorious long bull market trend for the S+P 500?
FOLLOW THE LINK BELOW to download this article as a PDF file.
Marketplace Vehicles- Going Mobile (12-13-17)
Charts- Trade-Weighted US Dollar and UST 10 Year Note (for essay Marketplace Vehicles- Going Mobile, 12-13-17)
Via its rhetoric and September 2015 managerial decision to delay a Fed Funds rate increase, the Federal Reserve has battled to halt the S+P 500’s decline relative to its May 2015 peak at around ten percent. Hints by the European Central Bank and Japanese policymakers regarding their potential willingness to embark on additional quantitative easing interrelate with this Fed quest. However, the International Monetary Fund head warns: “global growth will likely be weaker this year than last, with only a modest acceleration expected in 2016”; “we see global growth that is disappointing and uneven” (“Managing the Transition to a Healthier Global Economy”; 9/30/15). The World Trade Organization cut its 2015 forecast of global trade expansion from 3.3 percent to 2.8pc, lowering that for 2016 to 3.9pc from 4.0pc (9/30/15). The WTO says risks to this prediction are on the downside.
Worldwide economic growth probably will be feebler than the IMF expects. In today’s intertwined international economy, this overall economic weakness, which is not confined to emerging/developing nations, will help to undermine American GDP growth. The S+P 500 will remain volatile, but it probably will continue to decline, eventually breaking beneath its August 2015 low. The broad real trade-weighted United States dollar will stay relatively strong.
Marketplace history for US stocks and other financial domains obviously need not repeat itself, either in whole or in part. A slump in the S+P 500 of roughly twenty percent or more from its spring 2015 pinnacle nevertheless probably would inspire memories of 2007-09. After all, not only is the dollar strong, but also emerging marketplace stocks and commodities “in general” have collapsed over the past few years, and notably since second half 2014.
The strong US dollar, the substantial tumble in emerging stock marketplaces, and the crash in commodities in general reflect (confirm; encourage) global economic weakness (slowing growth). Overall debt levels as a percentage of nominal GDP in America (and many other places) remain elevated despite the economic recovery since 2009. The United States has made no progress in reducing its long run federal fiscal deficit problem. These trends are ominous bearish indicators for the S+P 500. What other variables currently or potentially confirm the probability of economic weakness in the US (and elsewhere)? Let’s focus on the US economic and political scene.
The broad real trade-weighted US dollar (“TWD”) established a major bottom at 80.5 in July 2011 (Federal Reserve, H.10; monthly average). By September 2015, it had run up to 97.9. Not only does September 2015 exceed March 2009’s 96.9 high, attained at the depths of the worldwide economic disaster (and alongside the S+P 500’s March 2009 major low at 667). The TWD’s 21.6 percent appreciation in its current bull move exceeds the 15.1pc TWD advance during from April 2008 to March 2009. Keep in mind that although the S+P 500’s major high in October 2007 at 1576 preceded April 2008’s TWD trough, its 5/19/08 final top at 1440 roughly coincided with that April 2008 TWD low.
Review Moody’s Baa index of corporate bonds (this signpost includes all industries, not just the industrial sector; average maturity 30 years, minimum maturity 20 years; Federal Reserve, H.15). Despite the Fed’s continued unwillingness to raise the Federal Funds rate, such yield repression in recent months has not prevented the modest yet rather steady rise in medium-grade US corporate debt yields. In addition, the yield spread between that corporate debt index and the 30 year US Treasury bond has widened. Although these rate moves have not shifted as dramatically as they did during the worldwide financial crisis, they likewise warn of (confirm) US (and global) economic weakness.
FOLLOW THE LINK BELOW to download this article as a PDF file.
Deja Vu (Encore)- US Marketplace History (10-4-15)
The United States real estate marketplace, despite some improvement relative to winter 2008-09’s abyss, remains in mournful shape. During the ongoing terrible global economic crisis, nervous politicians, fearful central bankers, and enthusiastic real estate business promoters have devoted much effort and creativity in their quest to rescue the real estate arena. How should we characterize their overall performance to date? Despite their numerous at-bats and vigorous swings at the real estate debacle, the financial and political guardians have often struck out and their overall batting average remains low.
Perhaps the real estate scene will become brighter. After all, central bankers and politicians always have upcoming opportunities to step up to the plate. They will keep swinging and whacking at real estate problems. Nevertheless, the still-feeble US real estate world underlines the fragile foundation and structure of the economic revival fabricated by the Federal Reserve (and its overseas central bank teammates) and political crews. Despite some progress, the shattering damage of the international economic disaster that commenced in 2007 has not been substantially fixed. The economic crisis persists and will continue for several more innings. Though the worldwide economic advance that emerged in spring 2009 reflects repairs and is not entirely a house of cards, it’s not entirely built on solid ground. Money printing and deficit spending are not genuine (enduring) cures for economic problems.
The recent slowdown in the overall economic landscape will hinder the US real estate recovery. Therefore American real estate prices will remain relatively weak.
FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Still Swamped – US Real Estate (10-11-11)