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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THE FEAR FACTOR: FINANCIAL BATTLEFIELDS © Leo Haviland January 5, 2021

“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions such as they have in Japan over the past decade?” Alan Greenspan, Chairman of the United States Federal Reserve Board, Speech to the American Enterprise Institute for Public Policy Research, “The Challenge of Central Banking in a Democratic Society” (12/5/96)

Voltaire’s 18th century novel, “Candide, or Optimism”, depicts a character who believes that all is for the best in the allegedly best of all possible worlds.

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OVERVIEW AND CONCLUSION

In recent times, prices in the S+P 500 and other benchmark United States and global stock indices, lower-grade interest rate instruments within corporate fields (and low-quality foreign dollar-denominated sovereign debt), and commodities “in general” often have risen (or fallen) at roughly the same time. They generally have climbed in significant bull ascents (and fallen in noteworthy bear retreats) “together”. These entangled domains therefore have alternatively reflected joyous bullish enthusiasm as “investors” and other traders avidly hunted for adequate return (“yield”), and terrifying bearish scenes as they raced fearfully for safety. Whether the existing bull trend for American stocks in general (use the S+P 500 as a benchmark) persists is especially important for realms connected with the S+P 500.

Actions by and rhetoric from the Federal Reserve Board and its central banking allies around the globe since the calamitous price crashes during first quarter 2020 restored investor (buying) confidence and generated price rallies in the S+P 500 and related marketplace playgrounds. In response to the economic (and political) challenges of the ravaging coronavirus era, gargantuan deficit spending by the United States and its foreign comrades also assisted these bullish price moves. Based on this as well as past experience (especially in regard to the merciful Fed), marketplace captains and their troops dealing in the S+P 500 and intertwined provinces once again have great faith that these marketplaces will not fall “too far”, or for “very long”. Bullish financial media fight especially hard to promote, justify, and sustain stock marketplace investment and price rallies in particular. In regard to equities in particular, propaganda speaking of “buy and hold for the long run” and “buy the dip” inspired entrenched investors and often sparked new buying. Thus, and despite occasional worries, significant complacency gradually has developed over the past several months in assorted stock marketplaces and “asset classes” tied to them.

Complacency regarding US Treasury yield trends has bolstered the relative calm and bullish optimism in the S+P 500. Strenuous yield repression (and money printing/quantitative easing) by the Federal Reserve Board and its central bank teammates not only assisted the S+P 500 rally, but also boosted belief that US Treasury yields will not shift much higher (and definitely will not rise “too high”) over the next couple of years.

Moreover, (for many months) easygoing stock bulls have had happy visions of recovering corporate earnings for calendar 2021 and rather robust ones thereafter. Numerous S+P 500 bull advocates do not worry much about or downplay risks of historically “high” valuations. “This time is different”, right? Most of these sunny forecasters generally see possibilities for further significant economic stimulus plans (deficit spending) during the upcoming Biden Administration. Encouraged by the development of coronavirus vaccines, they are optimistic regarding the eventual emergence of a V-shaped recovery, or at least an adequate one.

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This relative complacency through end-year 2020 in the S+P 500 and many other Wall Street marketplace territories (as the upward price trends evidence) contrasts with the ongoing economic agitation in the wider (“real”; Main Street) arena. Picture, for example, issues of economic inequality and the sharp divide between the “haves” and “have-nots”. Also, underline in America and elsewhere assorted and widespread political splits and heated wordplay. This rhetoric is not merely in regard to establishment/elites versus an array of left (liberal; progressive; keep in mind accusatory weapons such as the labels “socialist”, “communist”, and “Marxist”) and right wing (conservative; reactionary) populist (or “radical” or “fringe”) movements. In the United States, concepts of “identity politics” link to cultural wars involving assorted factors such as race/ethnicity, sex/gender/sexuality, age, religion, and geographic region/urban/suburban/rural. Diverse patriots brawl over the relative merits of nationalism and globalization, capitalism and socialism, and so forth. Though in stock and other fields bulls and bears always battle to some extent, the relative peace and tranquility in many Wall Street marketplaces contrasts with the turmoil and hostility permeating the wider cultural vista.

The dangers of weaker than forecast corporate earnings and lofty valuations for American stocks “in general” probably are significantly greater than the “consensus” wisdom promulgated by stock marketplace bulls. Figuratively speaking, US stock prices around current levels probably have “built in” a substantial amount of predicted earnings growth for calendar 2021 and 2022. Many corporations and small businesses remain under pressure. Year-end 2020 buying of stocks to have further equities on the books by definition is finished. The relatively slow implementation of the coronavirus vaccine is one consideration weighing on the recovery, corporate earnings, and valuation. It likely will take at least several months to vaccinate a substantial share of the global population, including within the United States and other advance nations. Besides, the coronavirus problem is bad and may be worsening. So its burden on economic output and employment levels probably will continue for the next several months

Moreover, despite the complacency regarding United States Treasury yield levels and trends, using the UST 10 year note as a signpost, UST yields probably have commenced a long run increase. Despite widespread global desires for a sufficiently feeble home currency to promote economic recovery and growth, and the related willingness to engage in competitive depreciation to accomplish this, spring 2020 unveiled the onset of substantial US dollar weakness. Although the US dollar (using the Fed’s “Broad Dollar Index” as the yardstick) has withered about ten percent from its peak, its long run pattern probably will remain down.

As “Games People Play: Financial Arenas” (12/1/20) emphasized, these interest rate and currency considerations also warn of a notable decline in the S+P 500. The probable eventual notable climb in US interest rate yields likely will connect with a weaker US dollar. The Fed and the incoming Democratic Administration (and debtors in general) probably want higher American inflation (including higher wages). Massive and rising US (and global) government debt is an important warning sign in this context. American household debt is huge in arithmetic terms, and this will put pressure on much of the nation if the economic recovery is not robust.

Marketplaces, marketplace relationships, and the relative importance (and interrelations) of their variables obviously can and do change over time. However, cultural history can influence “current” marketplace perceptions and decisions, especially when cultural (economic, political, social) conditions are at least significantly similar. Though numerous phenomena were involved in the stock marketplace crashes of 1929 and 2007-09, both occurred in an era of significant debt and leverage. That debt and leverage situation arguably fits the global situation nowadays as well.

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Significant fear likely soon will return to the S+P 500, other stock signposts (including those in emerging marketplaces), US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and many commodities.

What’s the bottom line for the S+P 500’s future trend? Although it is a difficult call, the S+P 500 probably will start a significant correction, and perhaps even a bear trend, in the near future. A five percent move in the S+P 500 over 3588, the important 9/2/20 interim high at 3588, gives 3767, and it probably will be difficult to breach that level by much on a sustained basis. The S+P 500’s high to date, 1/4/21’s 3770, exceeded the 9/2/20 top by 5.1 percent.

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The Fear Factor- Financial Battlefields (1-5-21)

CRITICAL CONDITIONS AND ECONOMIC TURNING POINTS © Leo Haviland February 5, 2020

“Just Dropped In (To See What Condition My Condition Was In)”, a Mickey Newbury song performed by Kenny Rogers

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CONCLUSION

With the passage of time following 2007-09’s global economic disaster, memories regarding the accompanying bloody bear trend in America’s stock marketplace benchmarks such as the S+P 500 gradually yet significantly faded. As the S+P 500 ascended, and especially as it advanced to and sustained record highs, widespread sermons declared that we should “buy the dip”. This aligned with the venerable proverb regarding the reasonableness of buying and holding United States stocks for the “long run”. What constitutes a “dip” or the “long run” is debatable, a matter of subjective perspective (opinion). How substantial a drop from some key elevation justifies buying? Is it one percent, five percent, ten percent, or twenty percent or greater? Is the long run one year, five years, or ten or more?
Of course since the S+P 500’s major bottom on 3/6/09 at 667, a few bloody stock price slides in that signpost (and “related” global equity yardsticks) terrified stock “investors” and their allies, including central banks such as the Federal Reserve, American politicians, and the financial media. Yet as the S+P 500 achieved a record height quite recently with 1/22/20’s 3338 (2/5/20’s level matched this), such advice definitely looked excellent to many stock owners and observers! Besides, as they have numerous times over the past eleven years, won’t beloved central bank physicians such as the Federal Reserve Board (under the guise of fulfilling their mandate), European Central Bank, the Bank of England, China’s central bank, and the Bank of Japan rescue stocks and generate rallies in them? Not only soothing rhetoric, but also yield repression and quantitative easing (money printing) remain antidotes for stock price drops, right? And politicians might assist via new tax cuts, boosts in infrastructure spending, or similar schemes. Thus the majority of US stock marketplace players have focused more on the rewards of owning than the dangers of doing so. Substantial complacency reigns regarding the potential for noteworthy American and other stock marketplace price declines.

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The recent emergence within China of a deadly coronavirus and its spread elsewhere around the globe helped to push US and other equities downhill. Whether this medical problem will injure the S+P 500 and other global stocks significantly (and for a sustained period of time) remains uncertain. Government actions to prevent the spread of the virus will tend to hamper economic growth. Fearful consumers and nervous corporations may slow their spending. The wider the reach and the longer the persistence of the ailment, the greater the economic damage. And economic (financial) weapons such as money printing and yield repression available to the Fed and its friends obviously do not halt epidemics or cure diseases (or fears of them).Though the S+P 500 descended to 3215 on 1/31/20, the index recovered, touching 3338 again on 2/5/20.

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Critical Conditions and Economic Turning Points (2-5-20)

ADVENTURES IN STOCK LAND: THE S+P 500 AND OTHER DOMAINS © Leo Haviland October 3, 2019

“For, you see, so many out-of-the way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” Lewis Carroll, “Alice’s Adventures in Wonderland” (Chapter I)

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CONCLUSION

The S+P 500 probably started a bear trend following its summer 2019 highs at 3028 (7/26/19)/3022 (9/19/19). A survey of the S+P 500 over the past several years alongside trends for other key advanced nation stocks, travels of emerging marketplace equities, and patterns in several other financial marketplaces underscores this.

This United States equity benchmark thus finally links more closely with the extensive bear trend in emerging marketplace stocks “in general” which embarked after first quarter 2018. The essay “Running for Cover: Marketplace Exits” (8/9/19) stated: “The S+P 500’s decline since its late July 2019 high probably is the start of price convergence between it and emerging marketplace stocks.” And: “the S+P 500 probably is in, or soon will begin, a bear trend.”

The S+P 500’s price divergence relative to leading equity signposts in other developed nations over roughly the past year and a half was significantly less than that relative to emerging marketplaces. However, nowadays it appears likely that prices for notable American, European, Japanese, and Canadian stock playgrounds will continue to retreat together.

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An ardent hunt for “yield” (“return”) in various financial marketplaces (not just stocks) began around end-year 2018. Recall the S+P 500’s 12/26/18 valley at 2347 and the Federal Reserve promulgation of its monetary policy principles of “patience”. In addition to buying the S+P 500, yield pilgrims searched for reasonable (sufficient) return in domains such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the commodities sector (witness the petroleum complex).

That frantic quest for adequate yield (return) likewise probably is finished, even though yield-seeking (especially in a low or even negative interest rate environment) of course has not disappeared entirely. As “Running for Cover” (8/9/19) stated, players who raced to identify and achieve “good” returns (by purchasing asset classes such as stocks and commodities) at the end of calendar 2018 and for several months thereafter in these sectors probably have started running for cover (begun to liquidate their long positions). Many other investors/owners in these marketplaces probably are running for the exits too.

The US Treasury 10 year note’s yield decline began in autumn 2018 at around 3.25 percent. Marketplace coaches may attribute interest rate drops in early 2019 to factors such as central bank easy money wordplay and schemes. However, the UST’s yield fall from 5/28/19’s height near 2.30pc also represents a “flight to quality” stage for UST yields. That yield withering, especially its dive beneath two percent, is a bearish signal for American and other stocks.

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Other bearish signs for the S+P 500 and related stock marketplaces include recent mediocre United States corporate earnings, the inversion of the US Treasury yield curve, ongoing international trade wars, substantial global indebtedness, the waning power of the Federal Reserve and its central banking friends to maneuver stock prices higher, and populist pressures in America and abroad.

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Adventures in Stock Land- the S+P 500 and Other Domains (10-3-19)

GLOBAL STOCK MARKETPLACES: WINTER OF DISCONTENT © Leo Haviland March 5, 2018

“I’m goin’ down the road feelin’ bad
I don’t want to be treated this-a-way.” Bill Monroe, the Grateful Dead, and other musicians have performed versions of the traditional song, “Goin’ Down the Road Feelin’ Bad”

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OVERVIEW AND CONCLUSION

American stock indices “in general” inspire an assortment of stories regarding them, including reasons for their past, present, and future levels and trends. Many of these descriptions and analyses regarding broad benchmarks such as the S+P 500 and Dow Jones Industrial Average appear relatively unique to the United States. However, economic regions and financial marketplaces around the world have increasingly intertwined during the course of globalization in recent decades, and especially during the past several years.

Therefore the directional travels (bull and bear adventures) of America’s stock marketplace increasingly have tended to parallel those of other significant advanced countries and regions. In recent years, the trends of emerging marketplace stocks “in general” increasingly have interconnected with those of leading advanced nations. Consequently, narratives and explanations regarding a broad “national” stock marketplace indicator such as the S+P 500 often involve those of equity barometers elsewhere (as well as interest rate, currency, and commodity movements).

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History underscores that across the fields of these various stock marketplace signposts, the timing of key price turns and the duration and extent (percentage distance travelled) of very important trend moves are not always exactly the same or extremely close. But they often are.

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After establishing important bottoms together in first quarter 2016 (and during the preceding price decline), the key American stock indices and those of other important advanced nations and the “overall” emerging stock marketplace have traded closely together from the directional and marketplace timing perspective. Though the bull moves since first quarter 2016 in these assorted domains did not all cover the same distance, all were very substantial. Their rallies since around the time of the November 2016 United States Presidential election were impressive. Investors and other stock owners, Wall Street, and the financial media cheered the majestic ascent. Heated advice to “buy the dip” became widespread as the S+P 500 climbed and as price declines tended to become less substantial in percentage terms.

However, the glorious bull move in American and other related stock marketplace halted in first quarter 2018. A mournful “correction”, a decline of roughly ten percent, ensued. The disturbing decline in the S+P 500 and other significant global stock marketplace indices probably will continue. However, if the S+P 500 and other equity benchmarks manage to surpass their January 2018 highs, they probably will not do so by much.

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For further economic and political analysis, see “There Will Be Blood: Financial Battlefields” (2/9/18), “Busload of Faith: Financial Marketplaces” (1/15/18), “Marketplace Vehicles: Going Mobile” (12/13/17), “History on Stage: Marketplace Scenes” (8/9/17), and other essays.

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Global Stock Marketplaces- Winter of Discontent (3-5-18)