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)

RISING GLOBAL INTEREST RATES AND THE STOCK MARKETPLACE BATTLEFIELD © Leo Haviland October 5, 2021

In “Life During Wartime”, the Talking Heads sing: “This ain’t no party, this ain’t no disco, this ain’t no fooling around.”

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CONCLUSION

Looking forward, United States Treasury yields probably will continue to rise. So will yields for government debt in Germany and other advanced nations. In general, yields of emerging market sovereign debt securities probably will keep climbing as well. US dollar-denominated corporate debt yields also will ascend. Substantial inflation and massive government debt are important variables for this rising interest rate outlook. Increasing yields for this array of debt securities around the globe probably have created (led to) an important top around early September 2021 for the American stock battlefield (S+P 500 high 9/2/21 at 4546) and related advanced nation and emerging marketplace stock arenas, or will soon do so. There is a significant probability that the S+P 500 and related equity domains have commenced or soon will begin bear trends.

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Rising Global Interest Rates and the Stock Marketplace Battlefield (10-5-21)

GREAT EXPECTATIONS: CONVERGENCE AND DIVERGENCE IN STOCK PLAYGROUNDS © Leo Haviland August 14, 2021

In Charles Dickens’s “Great Expectations” (Chapter 2), a character says: “Ask no questions, and you’ll be told no lies.”

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STOCKS: THE EMERGENCE OF SOME NOTABLE DIVERGENCE

In first quarter 2020, prices for an array of stock marketplaces cratered at approximately the same time as the S+P 500. They thereafter reached a major bottom “together” in late March 2020. Over subsequent months, magnificent bull moves occurred.

However, since around early mid-February 2021, prices for the S+P 500, European stock indices in general, and broad international benchmarks (including American stocks and those of other countries), have diverged from emerging stock marketplaces in general, China’s Shanghai Composite Index, and Japan’s Nikkei signpost.

Some important and widely-watched American large capitalization stocks have retreated fairly significantly in recent months despite the S+P 500’s onward march to new highs. If more marketplace leaders within the large capitalization stock fraternity (especially American ones) begin to decline, the greater the odds of price convergence between that group (picture the S+P 500) and small cap stocks (in the US and elsewhere), emerging marketplace stock realms (including China), and Japanese equities

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Great Expectations- Convergence and Divergence in Stock Playgrounds (8-14-21)

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)