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.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile





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.

****

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”!

****

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.

****

 

“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.”

****

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.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Hunting for Yield- the Thrill is Gone (10-4-22)

WALL STREET TALKING, YIELD HUNTING, AND RUNNING FOR COVER © Leo Haviland May 14, 2019

“‘Curiouser and curiouser!’ cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English).” “Alice’s Adventures in Wonderland”, by Lewis Carroll (Chapter II, “The Pool of Tears”)

CONCLUSION: GOLDILOCKS ERA, REVISITED

Historians should wonder if the Federal Reserve Board and its friends in central banking (and assorted comrades parading in some political corridors and media circles) nowadays are aiming to manufacture an updated version of the joyous last stage (ending in 2007) of the magnificent Goldilocks Era.

Lower United States Treasury yields and the sunny prospect of continued benevolent Federal Reserve policy reappeared around end December 2018/early January 2019. The rapid bull climb in the S+P 500 from then until the beginning of May 2019 to some extent reflected hopes of further (adequate) American and global economic expansion.

However, the frantic price rally in several key marketplace benchmarks commencing around end year 2018 also probably reflected an ardent quest for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield hunters searched for sufficient return in territories 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 petroleum complex.

Of course cultural history does not necessarily repeat itself, either entirely or even partly. Marketplace phenomena (conditions; variables), including relationships between them and perspectives on them, can and do change, sometimes dramatically. Rhetoric (stories) relating to economic and related playgrounds seek not only to explain viewpoints and situations, but also to guide behavior.

Later stages of economic expansions (so-called cycles) often are distinguished by what many players, including leading and widely-respected economic guardians and policymakers, decide to overlook or minimize.

This ardent quest for yield probably manifested that America is in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in other advanced nations), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is or soon will be underway.

“Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19) stated in regard to the S+P 500: “The September/October 2018 elevation [2941 (9/21/18)/2940 (10/3/18)] probably will not be broken by much, if at all.” The recent price declines in the S+P 500 (5/1/19 high 2954) and other advanced nation stocks, emerging marketplace stocks, emerging marketplace dollar-denominated sovereign debt, and the petroleum complex probably signal that many dutiful profit hunters (and probably some other investors/owners) have started running for cover (begun to liquidate their long positions).

FOLLOW THE LINK BELOW to download this article as a PDF file.
Wall Street Talking, Yield Hunting, and Running for Cover (5-14-19)

ECONOMIC GROWTH FEARS: STOCK AND INTEREST RATE ADVENTURES © Leo Haviland April 2, 2019

In “Alice’s Adventures in Wonderland”, Lewis Carroll declares: “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.” (Chapter I, “Down the Rabbit-Hole”)

****

OVERVIEW AND CONCLUSIONS

History reveals that sustained rises in United State government interest rates generally (eventually) are bearish for the US stock marketplace. The United States Treasury 10 year note yield made a major bottom on 7/6/16 at 1.32 percent, an important interim low on 9/8/17 at 2.01pc, and a critical high in early October 2018 at 3.26pc. Japan’s 10 year government note yield peaked around then, on 10/4/18 at .17 percent. Germany’s 10 year government note rate established an interim high at .58pc on 10/10/18 (having built an earlier top at .81pc on 2/8/18). China’s 10 year central government note’s yield high occurred earlier (4.04pc on 11/22/17), but its lower yield high at 3.71pc on 9/21/18 connected with those in America, Japan, and Germany.

The S+P 500 attained its summit around the same time as the yield highs in the UST 10 year note, constructing a double top on 9/21/18 at 2941 and 10/3/08 at 2940.

****

Subsequent yield declines in the UST 10 year note and the 10 year government debt of other key global realms such as Germany, Japan, and China accompanied a slump in the S+P 500 and many other benchmark stock indices. The Federal Reserve, European Central Bank, and other central bank engineers initially were fairly complacent. However, around mid-December 2018, the rate for the UST 10 year decisively retreated beneath about 2.80 percent. Also around then, the S+P 500, after tumbling from 2800’s temporary high (12/3/18), cratered beneath 2650 (a ten percent fall from the autumn 2018 high). Note the subsequent change in direction for Fed policy orations and actions.

****

These fearful events (and other variables) portended weaker real GDP growth (and maybe even a recession) in America and other advanced nations, and an undesirable slowdown in China and other key emerging marketplaces. Stock owners (especially investors) and their investment banking and media allies in the United States and elsewhere screamed, troubled by the prospect of a twenty percent or more decline (satisfying a classic definition of a bear trend) in the S+P 500. Many politicians around the globe screeched, expressing concerns about economic dangers (more quietly, some worried about potential for increased populist pressures).

This unsettling scenario sparked the trusty Federal Reserve to halt its Federal Funds rate-raising policy (part of its normalization scheme), to underline that it would maintain a hefty balance sheet laden with debt securities, and to preach a much-welcomed sermon that for the near term it will be “patient”. The European Central Bank and other devoted central banking comrades promised continued easy money programs.

Some might wonder if the Fed and its friends in central banking (and in some political corridors) nowadays are aiming to produce an updated version of the joyous days (“irrational exuberance”, perhaps) of 2006-07 during the Goldilocks Era.

In any case, the central bank easing rhetoric and policy shift helped to rally equities and boosted confidence in growth prospects. The S+P 500 hit a floor on 12/26/18 at 2347 (20 percent fall from the autumn high equals 2353) and thereafter rose sharply. Many other global stock marketplaces established troughs around then, rallying dramatically in first quarter 2019. The UST 10 year yield touched 2.54 percent on 1/4/19. It thereafter climbed to 2.80pc on 1/18/19 (2.77pc high 3/14/19).

Given the reappearance of lower UST rates and the sunny prospect of continued benevolent Federal Reserve policy, arguably some of the feverish rally in the S+P 500 and other international stocks since around end December 2018/early January 2019 has reflected not only hopes of further (adequate) economic expansion, but also a frantic hunt for suitable returns (“yield”) outside of the interest rate securities field. The time of the broad S&P Goldman Sachs Commodity Index (“GSCI”)’s bottom neighbored that in the S+P 500, 12/26/18 at 366. Note also the price rally in US dollar-denominated emerging marketplace sovereign debt securities.

The broad real trade-weighted US dollar’s rally from its January 2018 bottom at 94.6 (Federal Reserve, H.10; goods only; monthly average, March 1973=100) established a high in December 2018 at 103.2 (recall the major top of 103.4 (December 2016)/103.2 (January 2017). The dollar’s stop in its bull charge and its slight decline thereafter (about 1.4 percent) probably has helped to inspire the stock marketplace rally and related quests for returns in other landscapes. The combination of the drop in US government yields and the cessation of the US dollar’s upward march probably (especially) encouraged the recent price climbs in the stocks and government notes of many emerging marketplaces.

****

For the S+P 500, the lower tax rates legislated via America’s end-2017 corporate tax “reform” spiked US corporate earnings and encouraged massive share buybacks. Although the tax reform will continue to support earnings to some extent, substantial year-on-year growth for (at least most of) 2019 earnings currently looks unlikely. Suppose marketplace enthusiasm generates a forceful challenge to the S+P 500’s autumn 2018 high occurs. The September/October 2018 elevation probably will not be broken by much, if at all. A one percent breach of 2941 gives 2970, a five percent advance over it equals 3088.

If further notable share buybacks and determined digging around for yields (“good returns”) are playing critical roles in the recent S+P 500 (and other stock) rallies, perhaps the S+P 500’s recent strength does not reflect the darkening vista for the American economy. US and other stock marketplace climbs from current levels do not preclude increasing economic feebleness in America and elsewhere.

****

FOLLOW THE LINK BELOW to download this article as a PDF file.
Economic Growth Fears- Stock and Interest Rate Adventures (4-2-19) (1)

AMERICAN ECONOMIC GROWTH: CYCLES, YIELD SPREADS, AND STOCKS © Leo Haviland March 4, 2019

In “Back in the U.S.A.”, Chuck Berry sings: “Yes, I’m so glad I’m livin’ in the U.S.A. Anything you want, we got right here in the U.S.A.”

****

OVERVIEW AND CONCLUSION

Marketplace and other cultural analysts create meaningful relationships between variables and groups of phenomena. As subjective perspectives differ, these faithful inquirers identify, define, select, assess, and organize evidence (data; facts; factors) in a variety of fashions. This results in diverse propositions, arguments, and conclusions, and thus an array of competing stories.

****

In its discussion of America’s 4Q18 GDP growth, the NYTimes (3/1/19, pB1) stated that “most economists do not expect a recession this year.”

America’s current economic expansion is very long by historical standards. Of course history need not repeat itself. Conditions, including associations and patterns between variables, can and do change over time. Marketplace convergence and divergence trends (and lead/lag relationships) are not inevitable; they can shift, sometimes dramatically. However, devoted study of the ongoing economic expansion should not divorce itself from previous economic growth and decline episodes and patterns.

Interest rate yield relationships offer insight into economic history and prospects. Particularly given the remarkable length of America’s recent glorious real GDP expansion, marketplace clairvoyants should review the long run historical relationship between yields for lower-grade United States corporate bonds and the ten year US Treasury note in the context of American economic growth and recession cycles. The recent widening yield spread trend for this credit relationship warns that a US recession (or at least significantly lower growth than generally forecast), whether in calendar 2019 or not long thereafter, is more likely than most wizards anticipate. Moreover, current trends in the US Treasury yield curve, when placed in historic perspective, also underline the looming potential for an American economic downturn (or considerably slower growth than most soothsayers predict).

 ***

FOLLOW THE LINK BELOW to download this article as a PDF file.
American Economic Growth- Cycles, Yield Spreads, and Stocks (3-4-19)