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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TALKING THE TALK: MARKETPLACE PARALLELS © Leo Haviland October 19, 2014

Marketplace history of course does not necessarily repeat itself, either in whole or in part. However, sometimes it does. In any case, it should not be forgotten. Storytellers reveal (construct, create) parallels (and differences) between the marketplace past and present, not only to explain ancient times and the current situation, but also to predict future phenomena.

Coincidentally, the S+P 500’s recent high at 2019 on 9/19/14 occurred almost exactly on the sixth anniversary of Lehman Brothers’ 9/15/08 bankruptcy filing. Around the time of that autumn 2008 event, the fearsome worldwide economic crisis that emerged in mid-2007 accelerated.

Yet not so coincidentally, many recent intertwined dramatic marketplace moves in interest rate, stock, currency, and commodity arenas bear significant resemblance to those of the 2007-09 theater. Why? Problems now echo those of the prior period. Some troubles represented by that supposedly distant past have not been sufficiently fixed. In addition, some excesses of that long ago time, even if in somewhat different ways, have reappeared.

In regard to the current vista, underline several trend interrelations between key playgrounds. Focus on the time dimension in this context. Note not only the US Treasury 10 year note’s yield decline since its 1/2/14 top at 3.05pc (and the narrowing of the 10 year less two year UST spread), but also the UST’s yield slump from 9/19/14’s 2.65pc and its break under key support around 2.40 percent. The S+P 500 fell nearly ten percent following 9/19/14’s 2019 plateau. In addition, the recent peak in emerging marketplace stocks (“MXEF”; MSCI Emerging Stock Markets Index, from Morgan Stanley) on 9/4/14 at 1104 occurred close in time to both the S+P 500’s recent high as well as the rally in the broad real trade-weighted US dollar. Moreover, recall the sharp retreat in the broad Goldman Sachs Commodity Index since 6/23/14’s 673 interim top, particularly its recent decisive break under important support at 595/612.

The current and future marketplace theater probably will not duplicate the scope of the 2007-09 global economic disaster. Nevertheless, despite the passage of several years, significant deficit spending by America and other key nations, and widespread extraordinary central bank easy money policies (conjure up the Federal Reserve’s yield repression and money printing schemes), we have not entirely escaped the horrific days of the 2007-09 era.

The major bull move from the S+P 500’s 10/10/02 bottom at around 769 to 2007’s lofty 10/11/07 major high at 1576 lasted five years. The October 2002 bottom times two is 1538, or within about three percent the October 2007 peak. Since the S+P 500 achieved its major bottom on 3/6/09 at 667, its bull move has run about five and a half years, even longer than 2002-07’s advance. Whereas S+P 500 prices doubled over the 2002-07 span, 9/19/14’s height at 2019 triples March 2009’s major bottom (doubles 7/1/10’s 1011 trough; and jumps about 50 percent over 11/16/12’s 1343 low).

Given that the S+P 500’s major bull move since March 2009 was even longer-lasting and stratospheric than the preceding one, observers should be watchful for a very noteworthy S+P 500 decline, extending (or greater than) the one that so far since 9/19/14 has reached around ten percent. With parallels between the 2007-09 world and the current environment in mind (given the recent moves in the UST 10 year, emerging marketplace stocks, the broad real trade-weighted dollar, and the broad GSCI), the S+P 500’s 9/19/14 height probably represents an important top. If that top is broken, it probably will not be exceeded by much.

Incidentally, for those seeking further timing parallels in the S+P 500, the 9/19/14 date is not far from the October 2002 and 2007 calendar tops and bottoms (10/10/02; 10/11/07), but also 10/4/11’s important low at 1075.

Looking forward, since history need not repeat itself, the Fed’s eloquence and actions may not always achieve the goals the Fed diligently seeks. Continued or even increased easing, whether by the Fed or other important central banks, do not inevitably produce rallies in the S+P 500 (or a continued economic recovery).

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Talking the Talk- Marketplace Parallels (10-19-14) (1)
Charts- Ten Yr UST, S+P 500, GSCI, Corp Bond (10-19-14, for essay Talking the Talk- Marketplace Parallels)

THROWING CURVES: THE FRIENDLY FED’S YIELD CURVE GAME © Leo Haviland March 5, 2013

In professional sports such as baseball and Wall Street’s competitive marketplaces, history is not destiny. However, “the past” and variables apparently relevant to it need not be discarded as being of little or no importance, relevance, or guidance for current and future playgrounds. During the worldwide economic crisis that dawned in mid-2007 and the ensuing recovery, noteworthy moves in the 10 year less two year United States government yield spread often have roughly coincided with significant Federal Reserve Board policy decisions (and several months ago with major European Central Bank ones). These US Treasury yield curve ventures (trend changes) generally have occurred around the same time as significant moves in the US Treasury 10 year note and the US stock marketplace (S+P 500). Many lows in the 10/2 UST yield curve spread have tied up with (occurred within a few months of) important S+P 500 bottoms; pinnacles in the spread likewise link up somewhat closely in time with plateaus in the US stock playground.

The UST 10 year less two year spread probably established a major bottom on 7/24/12 at 117 basis points (10 year yield higher than two year return, so a positive yield curve; short rates over long rates creates a negative yield curve).

What would a further notable widening of the spread (steepening of the curve, more positive slope) from current heights around 165 basis points suggest to avid financial marketplace fans? Perhaps a sustained move in this 10/2 UST spread over around 200 to 210 basis points will indicate a renewed (further) strengthening of the US (and worldwide) economic recovery.

However, that upward path over 200/210 basis points instead may warn of impending economic weakness. This viewpoint is not necessarily as off base as some may claim. One needs to focus on whether America is a key source of and significant spark for likely global (not just US) feebleness.

In that regard, recall the shift from 6/12/08’s 117 basis point low (same as 7/24/12’s) up to 11/13/ 08’s 262bp as the financial crisis raced forward (Lehman Brothers bankruptcy 9/15/08). The US housing and financial leverage (banking system) problems were critical issues (though of course not confined to the US), even though the US (and the world in general) did not in mid-2008 yet face major fiscal troubles.

Why might the 10/2 UST spread widen (as in mid-June to mid-November 2008) nowadays or in the near or medium term? In some circumstances, there can be a dismal widening of the UST spread (and higher long term rates) accompanied by little or no economic growth (or even a recession). Suppose the current US (and international) economic horizon darkened significantly. Assume a big fiscal difficulty in the US is a major factor in this bleak outlook. Then maybe this time around, when economic downturn risks in general still loom large, there will not be as nearly as substantial a flight to quality into UST as there was at end 2008 (after mid-November) and as there has been at subsequent economic (downturn) crisis periods since then up to the present time. Thus this setup probably would produce an outcome for the 10/2 yield spread very unlike its pattern during the previous substantial financial deteriorations of the mid-November 2008 to the present time span. Many players (especially international ones) may not view the UST as wonderful quality (especially when nominal yields are so mediocre) if the US may or does become the star of a fearsome fiscal problem and related systemic economic crisis.

Yet the history of the past several years also warns that a slump in the 10/2 UST spread back close to around the July 2012 bottom probably signals US (and global) economic weakness as well.
US-Treasury-10-Year-versus-2-Year-Note-Chart-(3-5-13)
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Throwing Curves- the Friendly Fed’s Yield Curve Game (3-5-13)
US Treasury 10 Year versus 2 Year Note Chart (3-5-13)

MARKETPLACES AND POLICIES- MAKING CONNECTIONS © Leo Haviland, November 29, 2011

Since the current economic crisis emerged in 2007, a rough pattern has been that major movements and levels in US Treasury ten year note yields have preceded or coincided with those in the S+P 500. Thus, “in general”, plummeting UST yields have been paralleled by diving stock prices. And rising interest rates are connected to rallies in stocks. So in today’s world, gurus and guides often underline that higher and higher UST rates fit an economic recovery (health) scenario. In contrast, collapsing rates indicate looming (or actual) disaster; hence the popularity of flight to quality and safe haven commentary in regard to UST. Such relationships between the UST 10 year note and stocks (and variables allegedly bound to them) of course help forecasters to assess probabilities for and predict important debt and equity trend changes. Looking forward, this ongoing pattern may well persist.

Yet at some point, and arguably within the next several months, the present relationship between the US ten year and the S+P 500 may change. Thus rising UST yields eventually may coincide with sinking stocks. What key trading levels for the 10 year should one keep an eye out for? Such trigger point ranges will vary over time. So anyway, what guidelines for nowadays? If the US 10 year note yield floats decisively above the 2.50 percent level, and if stocks rally very little as that yield barrier is breached, that would hint the current (2007-2011) UST/S+P 500 relationship is altering.

As the global economic crisis flows on and on, many of its intertwined actions and participants (and thus marketplace relationships) may remain relatively unchanging. But they are not stagnant. Today’s marketplace voyagers should wonder if the crisis has drifted closer and closer to a new round of difficulties. Look at European yields, and place Germany on the sidelines. Focus instead on Greece, Portugal, Ireland, Spain, and Italy. These countries show that severe economic problems (and downturns) are not always or inevitably associated with falling (or low) government interest rates.

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Marketplaces and Policies – Making Connections (11-29-11)

THANKSGIVING MARKETPLACES- SEVERAL SERVINGS © Leo Haviland, November 22, 2011

As Thanksgiving Day approaches and many prepare for holiday gatherings and festive feedings with family, friends, neighbors, and colleagues, several less-noticed marketplace courses deserve attention from marketplace travelers. United States Treasury International Capital (“TIC”) data reveal that gaping American federal fiscal deficits probably will find it difficult to lure sufficient foreign funds. Recent TIC evidence may warn of stock marketplace trend changes. Also, do foreign visitors find direct ownership (“investment”) in America highly appealing these days? What do New York Stock Exchange margin data unveil about major equity moves? Commodity Futures Trading Commission information on agricultural Index Traders not only offers a window on commodity price patterns in general. Perhaps surprisingly, that Index Trader information can illuminate and confirm marketplace voyages by stock benchmarks such as the S+P 500.

Since its 2009 depth, the high for agricultural Index Trader net long open interest occurred in 2010, at about 1.63 million contracts on 8/10/10. However, this quantity is not much above the more recent high net long position of 1.53mm on 4/26/11, which was close in time to the S+P 500 and broad GSCI elevations. By 10/4/11, the date of lows in the S+P 500 and the broad GSCI, the net IT long open interest had fallen to around 1.30mm. This equals about a 14.9pc dip from the 4/ 26/11 height. On 11/15/11, net IT was about 1.33mm contracts.

The recent percentage decline in IT length of nearly fifteen percent is fairly close to the initial fall of 16.7pc during 2008 (from 5/13/08 to 9/16/08). What would a sharp and sustained decline in the net IT long position under its 10/4/11 level indicate? It probably will coincide with declines in commodities in general and stocks, thus confirming a worsening of the worldwide economic crisis.

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Thanksgiving Marketplaces – Several Servings (11-22-11)