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 FIREWORKS: ACCELERATING AMERICAN INFLATION © Leo Haviland July 3, 2021

Prince sings in “Let’s Go Crazy”:
“Dearly beloved, we have gathered here today
To get through this thing called life.”

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CONCLUSION

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.

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“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)

MARKETPLACE ROLLING AND TUMBLING: US DOLLAR DEPRECIATION © Leo Haviland June 1, 2021

The rap music group, “Wu-Tang Clan” sings in “C.R.E.A.M.”: “Cash, Rules, Everything, Around, Me C.R.E.A.M. Get the money Dollar, dollar bill y’all.”

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CONCLUSION

The United States dollar commenced a bear trend in spring 2020. Its depreciation probably will continue over the long run.

“Dollar Depreciation and the American Dream” (8/11/20) warned of and analyzed various reasons for a significant depreciation in the real Broad Dollar Index (Federal Reserve Board, H.10) from its lofty April 2020 high at 113.7. These factors generally remain in place. “American Inflation and Interest Rates: Painting Pictures” (5/4/21) stated: “Suppose United States inflation in assorted key indicators such as the Consumer Price Index continues to climb, and that America’s federal budget deficit and debt situation remains very dangerous. Suppose the Federal Reserve remained unwilling to tighten its current highly accommodative policies. Though much depends on other variables, including the economic and political situation in and prospects for other important countries around the globe, this scenario probably will tend to weaken the US dollar.”

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January 2021’s real Broad Dollar Index at 103.3 approached a critical support level, March 2009’s 101.6 peak during the 2007-09 worldwide economic disaster (May 2021’s height is 104.1). A sustained break beneath March 2009’s elevation probably will be important for numerous economic playgrounds. Why? That dollar depreciation likely will occur alongside rising American inflation indicators and the major expansion of American federal indebtedness of recent years (with further national spending extravagance looming). This situation probably will increase pressure on the Fed to significantly reduce (taper) its quantitative easing (money printing) program as well as to boost the Federal Funds rate and thereby US Treasury yields. Climbing UST interest rates accompanied by a tumbling dollar probably will reduce the avid “search for yield/return” in the S+P 500, dollar-denominated debt securities (such as US corporate bonds) and other dollar-priced assets (including many commodities). These developments probably will trigger and sustain slumps in the S+P 500 and “related” asset arenas.

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Marketplace Rolling and Tumbling- US Dollar Depreciation (6-1-21)

THERE WILL BE BLOOD: FINANCIAL BATTLEFIELDS © Leo Haviland February 9, 2018

The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).

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CONCLUSION

The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.

Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.

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The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.

Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).

Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.

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There Will Be Blood- Financial Battlefields (2-9-18)

BUSLOAD OF FAITH: FINANCIAL MARKETPLACES © Leo Haviland, January 15, 2018

In his song “Busload of Faith”, Lou Reed chants: “you need a busload of faith to get by”.

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CONCLUSION

The United States 10 year government note is a widely-watched marketplace benchmark and guide. It ended its major bull move in summer 2016, establishing a yield bottom on 7/6/16 at 1.32 percent. Although the rate for the US Treasury 10 year note has walked peacefully sideways in a fairly narrow path over the past year or so, its yield nevertheless on balance has crept upward from its 9/8/17 interim trough at just over two percent toward its critical barrier around 2.65pc. In the UST’s bear move, the UST yield probably will pierce this 2.65pc target in the near term, with 1/2/14’s 3.05pc elevation the next height in sight.

After establishing a major top in December 2016/January 2017 at 103.2, the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; monthly average) slipped 7.8 percent to 95.2 in September 2017, slightly below crucial support around 96.2 to 96.6. Despite a slight bounce for a couple of months following that September depth, the TWD has renewed its bearish assault on 96.2/96.6 and probably will break decisively beneath that floor (and September 2017’s minor low) relatively soon.

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Economic phenomena and fields interrelate in various fashions. Apparent links and relationships between financial (and political) variables and trends (including convergence/divergence and lead/lag ones) of course can change, sometimes dramatically. In any case, although marketplace history is not marketplace destiny, historical analysis still can offer guidance regarding future probabilities.

The current intertwined relationship and trends of rising US Treasury yields alongside the weakening United States dollar likely is of substantial significance for financial marketplaces in general, not just US government interest rates and key currencies.

History signals that climbing US interest rate yields often precede (connect with; lead to) pinnacles in the Dow Jones Industrial Average and the S+P 500. In the current economic and political landscape, further feebleness in the broad real trade-weighted US dollar probably will warn of (or confirm) important tops in advanced nation and emerging marketplace stock marketplace benchmarks.

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See “Marketplace Vehicles: Going Mobile” (12/13/17), “History on Stage: Marketplace Scenes” (8/9/17), and other essays.

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Busload of Faith- Financial Marketplaces (1-15-18)