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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SUMMERTIME BLUES, MARKETPLACE VIEWS © Leo Haviland August 6, 2022

In “Summertime Blues”, The Who complain:
“Well, I’m gonna raise a fuss
I’m gonna raise a holler
‘Bout workin’ all summer
Just to try to earn a dollar.”

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OVERVIEW AND CONCLUSION

Within and regarding marketplaces and other economic realms, as in other cultural domains, diverse storytellers create and promote competing perspectives, explanations, and forecasts. In this process, the selection and weighing of variables (“facts”, data, evidence, and factors) differs, sometimes considerably. Thus rhetorical crosscurrents and a range of marketplace actions in stocks, interest rates, foreign exchange, and commodities battlegrounds inescapably exist. And since opinions can persist or change, so can significant marketplace trends and relationships, sometimes dramatically.

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In today’s entangled global financial marketplaces, battling viewpoints frequently involve assessments of inflation (especially in consumer price measures) and fears regarding recession (or at least stagflation).

Long run American marketplace history shows that substantially rising United States interest rates in key benchmarks such as the United States Treasury 10 year note leads to bear marketplaces in the S+P 500 and Dow Jones Industrial Average. UST 10 year yields began rising in early March 2020, accelerating upward following 8/4/21’s 1.13 percent trough as American (and worldwide) consumer price inflation became very significant. The S+P 500 peaked 1/4/22 at 4819, plummeting almost 25 percent collapse to its mid-June 2022 low.

A “too strong” US dollar also interrelated with (encouraged) ongoing price weakness in both emerging marketplace equities and dollar-denominated sovereign debt securities (both emerging marketplace equities and debt prices peaked in first quarter 2021). The very strong dollar and price slumps in emerging marketplace securities also helped to undermine the S+P 500. Prices for commodities “in general” climbed substantially after December 2021 (Russia invaded Ukraine 2/24/22), magnifying inflation concerns and levels and thus assisting the price decline in global stock marketplaces. Though commodities peaked in early March 2022, on balance they remained quite high until around mid-June 2022.

As prices tumbled in the S+P 500 and related financial arenas (such as emerging marketplace stocks; corporate bonds and US dollar-denominated emerging market sovereign debt), avid “searches for yield/return” transformed into fearful “runs for cover”. Consumer (Main Street) and small business confidence destruction interrelated with capital destruction (loss of money) by “investors” and other owners) in stock and interest rate securities marketplaces.

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However, during the past few weeks, the S+P 500 has rallied vigorously, about 14.6 percent from 6/17/22’s 3637 to 8/3/22’s 4167. Given the high consumer price inflation pattern as well as concerns about feeble economic growth, what intertwined factors probably played key roles in this S+P 500 ascent?

Within the context of a long run trend for increasing yields, a modest interim yield decline in the UST 10 year can help to spark a notable rally in the S+P 500. Note the timing of the recent yield top in the UST 10 year note, 6/14/22’s 3.50 percent in conjunction with the S+P 500’s 6/17/22 trough at 3637. Also, perhaps the renewed slide in the overall commodities field (especially the petroleum complex) since its June 2022 interim highs allayed the inflationary concerns of some marketplace participants.

Share buybacks, disappearance of substantial stock “overvaluation” in yardsticks such as price/earnings ratios, and ongoing optimism that nominal corporate earnings growth will continue over the long run (perhaps keeping pace with the Consumer Price Index) also helped to motivate an interim bull move in the American stocks. Perhaps short covering in American stocks further inflamed the ascent.

What other interrelated phenomena probably have promoted the S+P 500’s summer rally, especially after the second low on 7/14/22 at 3722? The US dollar’s depreciation since mid-July 2022, although not substantial in percentage terms, arguably has inspired some buyers to venture into American stock playgrounds.

Wall Street and its economic and political allies have long popularized, often as part of American Dream wordplay, the outlook that over the misty long run, American stocks in general (the S+P 500; investment grade equities) will keep rising (at least in nominal terms). Thus the roughly 25 percent slump in the S+P 500 since its majestic January 2022 pinnacle perhaps looked to many “investors” like a good buying opportunity over the misty long run, especially as the UST 10 year yield arguably fell sufficiently from its mid-June 2022 crest to mitigate (at least to some extent) concerns regarding inflation (and Fed rate-raising).

Everyone knows that the American stock marketplace is an investment realm greatly favored by Main Street retail players. Wall Street and Main Street guides and their friends in financial media diligently advise Main Street on the merits (goodness; reasonableness) of investment in United States stocks (especially over the long run) as a means of achieving economic security and wealth.

Institutional players of course play critical roles in US and stock and interest rate securities marketplaces. But retail customers have a very substantial impact on stock price levels and trends. Moreover, in contrast with the situation of several years ago, in regard to the equity securities of key US corporations in general (and many Exchange Traded Funds/ETFs), Main Street over the past few years has benefited from rapid execution (internet) and low (or no) commissions. As the coronavirus pandemic emerged in 2020 and persisted into 2021, apparently many Main Street dwellers ventured into the US stock marketplace (not just large capitalization S+P 500-type firms). Many of these Main Street adventurers (investors, speculators, traders) were new participants in the stock trading game. Also, in an era of significantly rising (and high) consumer prices (note the trend since around mid-2021), probably stocks—like homes—can be an inflation hedge for some devoted financial pilgrims. Besides, speculators and traders, not only investors, seek to identify and profit from “good bargains” in stocks (and other marketplaces).

Many regiments of Main Street inhabitants raced into the exciting cryptocurrency wonderland during the global pandemic (and after the crash in the S+P 500 and Bitcoin to their March 2020 bottoms). Though cryptocurrencies generally have not yet won the honored “investment” badge, some believe cryptocurrencies (or at least some brands of it) are a “good investment” and “worth owning for a while”. In any case, many people have sought to make money by trading cryptocurrencies, usually initiating positions from the buying (long) side.

Despite America’s ferocious cultural wars across numerous economic, political, and social parameters, and despite declining consumer (and small business) confidence and widespread dissatisfaction with the overall direction of the country, American consumers in general (or at least the crucial high-earning and substantial net worth segment, the “haves”, have enjoyed substantial jumps in their nominal (and probably real) net worth in recent years.

The US and global stock marketplaces are far larger than cryptocurrency ones. But picture as well the noteworthy upward flight in recent weeks within another territory favored by some Main Street retail players: Bitcoin. Note the roughly similar timing shifts (trend changes) since first quarter 2020 for Bitcoin and the S+P 500. However, the impressive 40.3 percent upward march in Bitcoin from 6/20/22’s 17579 (another low 7/13/22 at 18892) to its recent high on 8/1/22 at 24658 probably encouraged to some extent the price rallies in the S+P 500 (and some other search for yield marketplaces).

Despite the withering slump in the S+P 500 since its 1/4/22 top and the bloodbath in many cryptocurrencies (Bitcoin peak 11/20/21 at 69000; note interim tops on 12/27/21 at 52100 and 3/28/22 at 48236 occurred alongside highs in the S+P 500), overall US household net worth (and thus nowadays probably still remains quite high. Thus “buying power” remained available from a substantial portion the Main Street (general public).

Some of this Main Street (retail) buying power, even in the face of notable CPI inflation and recession concerns, probably enthusiastically jumped from the sidelines into action in the S+P 500 (and other US equities) and some related playing fields, including Bitcoin, in recent weeks.

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Institutional buying surely assisted the price rallies in the S+P 500 from its June 2022 and July 2022 troughs. But did institutional (Wall Street) money (insight and action) “lead” Main Street players into buying the S+P 500 around then? Probably not in a major way. Note the gloomy economic outlooks of the World Bank and International Monetary Fund released at that time. In addition, see the “dire” pessimism of “259 fund managers responsible for more than $700 billion in investments” [in other words, institutional/Wall Street types] manifested via a survey conducted between 7/8 to 7/15/22 by the Bank of America (cited on 7/19/22 by the NY Times website).

According to that Bank of America monthly review, optimism about global growth staggered to a record low, beneath levels in the immediate aftermath of the 2008 Lehman Brothers collapse. The share of respondents who believed a recession was likely was the highest since April 2020 (as the coronavirus pandemic emerged).

However, these institutional investors apparently were holding the most cash since October 2001, (after the 9/11 attacks), over 20 years ago. Consequently Wall Street (institutional) influence probably decided to put some of that extra cash to work and thus assisted (jumped aboard) the S+P 500’s rally from its June/July 2022 valleys.

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Summertime Blues, Marketplace Views (8-6-22)

AMERICAN CONSUMERS: THE SHAPE WE’RE IN © Leo Haviland May 4, 2020

The Band sings in “The Shape I’m In”:
“Out of nine lives, I spent seven
Now, how in the world do you get to Heaven?
Oh, you don’t know the shape I’m in”.

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OVERVIEW AND CONCLUSION

 

Everyone knows that the coronavirus pandemic and political (medical) responses to it have wreaked widespread and deep economic destruction around the globe. The coronavirus, however, was not the only bearish phenomenon preceding and influencing the disastrous economic situation. The ultimate extent of the damage and the timing and extent of the international and American recovery remain conjectural.

America and its consumers obviously are not the only economic engines for the international economy. However, given substantial global economic interconnections, American economic conditions, trends, and policies significantly influence those elsewhere. US consumer spending represents about 68.0 percent of American GDP, a very sizable share (Federal Reserve Board; Z.1, “Financial Accounts of the United States”, Table F.2; 3/12/20). Consequently, regarding the prospects for United States economic growth, and thus output in other realms, much depends on the situation and attitudes of the American consumer.

American consumer spending and other “Main Street” variables intertwine with those around the globe, as well as with “business” (both big and small) and other economic, political, and social phenomena. For example, Federal Reserve and other central bank actions, government spending levels and trends, United States (and other) stock marketplace levels, American government and other interest rates, the dollar and other currencies, commodities, real estate, and assorted other economic, political, and social variables influence American consumer spending in a variety of fashions. These relationships and phenomena encouraging them can and do change, sometimes slowly, sometimes rapidly. Convergence and divergence (lead/lag) patterns between economic indicators as well as marketplaces likewise can shift or transform.

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Wall Street (and its financial media friends), politicians, and Main Street pray that the monumental monetary interventions by central banks such as the Federal Reserve and its allies (massive money printing and so forth) and dramatic fiscal deficit spending boosts not only will rescue the international economy from its current monumental troubles (reduce the magnitude of a recession), but also will restore acceptable economic growth relatively quickly, perhaps even before the end of the third quarter of 2020. Prior success in dealing with the dreadful worldwide economic disaster of 2007-09 encourages widespread faith that these (and perhaps further) efforts and a warlike “whatever it takes” monetary and governmental policy attitude ultimately will succeed.

Many economic high priests such as the International Monetary Fund predict a relatively strong and quick global recovery. In its World Economic Outlook (Table 1.1; April 2020), the IMF forecast a gloomy three percent drop in world output in 2020. However, global real GDP ascends sharply in 2021 by 5.8 percent. GDP retreats in advanced economies by -6.1pc year-on-year in 2020, but climbs 4.5pc in 2021. According to the IMF, US GDP collapses -5.9pc in 2020 but jumps 4.7pc in 2021. Emerging/developing marketplaces allegedly will suffer only a one percent fall in calendar 2020, with GDP growing a rapid 6.6pc in 2021 (compare 2019’s modest 3.7pc expansion). China supposedly will manage to grow 9.2 percent in 2021 (1.2pc in 2020), although its GDP fell -6.8pc year-on-year in 1Q20.

US corporate earnings depend on many phenomena, and of course not all corporations depend (directly) on consumer purchasing (whether by Americans or others) to the same extent. Yet US corporate earnings estimates from Wall Street pulpits, like the IMF’s vision, generally display optimism for calendar 2021 despite the sharp year-on-year falls expected for calendar 2020.

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However, a survey of several key US variables closely linked to the situation of the American consumer nevertheless suggest that the injury to the American consumer “in general” and thus the country’s overall economy has been and will continue to be severe. A very substantial portion of the general public is in rough shape. Numerous other consumers are fearful regarding their future. Between the terrifying unemployment situation (and at least the near term outlook for it) and a relatively high arithmetical household debt level prior to the coronavirus devastation, most American consumers probably will be cautious spenders for quite some time. Even if the coronavirus pandemic significantly subsides relatively soon, how rapidly will the shattered consumer sector race to resume its prior buying habits and thus boost GDP substantially? Moreover, the planned reopening of America’s economy probably will be gradual. And how quickly will firms, whether large or small, rehire a large number of laid-off workers? In addition, widespread worries about the ongoing and future coronavirus waves likely will persist, and people await the development of a proven vaccine and adequate testing.

Thus America’s economic recovery probably will be slow rather than fast (or even fairly quick on a sustained basis). Optimism heralded by the IMF and many other leading institutions, enthusiastic gospels from US “investment” gurus regarding magnificent corporate earnings in calendar 2021, and similar propaganda likely will be disappointed.

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American Consumers- the Shape We're In (5-4-20)

AMERICAN HOUSING: A MARKETPLACE WEATHERVANE © Leo Haviland December 4, 2018

“What You Own”, a song from the musical “Rent” (by Jonathan Larson), declares: “You’re living in America at the end of the millennium- you’re living in America, where it’s like the twilight zone.”

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OVERVIEW AND CONCLUSION

American home prices have enjoyed a joyous climb since their dismal lows following the global economic disaster of 2007-09. However, United States home prices “in general” (“overall”) now probably are establishing an important peak. At least a modest reversal of the magnificent long-run bullish United States home price trend probably is near.

What is a high (too high), low (too low), expensive, cheap, average, good, bad, neutral, normal, typical, reasonable, commonsense, appropriate, fair value, overvalued, undervalued, natural, equilibrium, rational, irrational, or bubble level for prices or any other marketplace variable is a matter of opinion. Subjective perspectives differ. In any case, current US home price levels nevertheless appear quite high, particularly in comparison to the lofty heights of the amazing Goldilocks Era. As current American home price levels (even if only in nominal terms) hover around or float significantly above those of the Goldilocks Era, this hints that such prices probably are vulnerable to a noteworthy bearish move. Moreover, measures of global home prices and US commercial real estate also have surpassed their highs from about a decade ago and thus arguably likewise may suffer declines.

Many United States housing indicators in general currently appear fairly strong, particularly in relation to their weakness during or in the aftermath of the global economic crisis. Nevertheless, assorted American housing variables as well as other phenomena related to actual home price levels probably warn of upcoming declines in American home (and arguably other real estate) prices. A couple of US home price surveys have reported price declines for very recent months. US housing affordability has declined. New single-family home sales display signs of weakness, as do new privately-owned housing starts. American government interest rate yields, as well as US mortgage rates, have edged up. The Federal Reserve Board as of now likely will continue to tighten and raise rates for a while longer. Overall household debt, though not yet burdensome (at least for many), now exceeds the pinnacle reached ten years ago in 3Q08. The economic stimulus from America’s December 2017 tax “reform” probably is fading. US consumer confidence dipped in November 2018.

Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Convergence and divergence (lead/lag) relationships between marketplace trends and other variables can shift or transform, sometimes dramatically. Price and time trends for the American stock marketplace and US housing prices do not move precisely together. However, the international 2007-09 crisis experience (which in part strongly linked to US real estate issues) indicates that prices for US stocks and housing probably will peak around the same time, or at least “more or less together” (a lag of several months between the stock high and the home price pinnacle). The S+P 500 probably established a major high in autumn 2018 (9/21/18 at 2941, 10/3/18 at 2940; the broad S&P Goldman Sachs Commodity Index peaked 10/3/18 at 504). That autumn equity summit in the S+P 500 bordered 1/26/18’s interim top at 2873. Ongoing weakness in US (and international) stock marketplaces will help to undermine American home prices.

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American Housing- a Marketplace Weathervane (12-4-18)

GAMES PEOPLE PLAY: AMERICAN REAL ESTATE © Leo Haviland August 28, 2016

“Home is the nicest word there is.” Laura Ingalls Wilder, author of the “Little House” books, which inspired the famed television show, “Little House on the Prairie”

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OVERVIEW AND CONCLUSION

The United States real estate marketplace played a significant role in the worldwide economic disaster that erupted in mid-2007 and accelerated in 2008. That dreadful time and its consequences probably are not a distant memory within the perspectives of key central bankers and at least some politicians. Otherwise, the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, and other monetary gatekeepers would not have sustained various highly accommodative schemes for over seven years. Though international growth resumed around mid-2009, it generally has been erratic and modest. Despite unwavering devotion to their mandates, these sheriffs thus far have not delivered sufficient inflation relative to benchmarks such as the consumer price index. Although headline unemployment measures have plummeted in the United States, they remain fairly high in some nations.

The United States of course is not the whole world and American consumers do not represent the country’s entire economy. Yet because the US is a crucial player in the interconnected global economic (and political) theater, and because US consumer spending represents a majority of US GDP, the state of affairs for the US consumer has international consequences. Consumers represent about 68.3 percent of America’s GDP (2015 personal consumption expenditures relative to GDP; Federal Reserve Board, “Flow of Funds”, Z.1; 6/9/16). The household balance sheet level and trend (net worth) is an important variable in this scene. Although stock marketplace and real estate values matter a great deal to others (such as corporations and governments) beyond the “person on the street”, they are quite important to US household net worth and thus behavior (including spending patterns) and expectations (hopes) regarding the future.

Thus although US household net worth is not an explicit part of the Federal Reserve’s interpretation of its mandate (promoting maximum employment, stable prices, and moderate long-term interest rates) and related policy actions, it is very relevant to them. So therefore are stock marketplace and real estate values and trends. Home ownership is an important dimension of the ideology of the American Dream. Rising home and increasing stock marketplace prices to some extent bolster faith that the American Dream “in general” (as a whole) is succeeding. And what happens to American real estate still matters a great deal for the global economy.

Sustained yield repression and quantitative easing (money printing) by the Fed and its playmates not only have helped the S+P 500 and many other stock signposts to soar through the roof. These programs (assisted to some extent by deficit spending programs) also repaired much of the damage to America’s real estate landscape. Let’s survey the US real estate marketplace in this context, concentrating primarily on the consumer housing sector.

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The dutiful Fed reviews assorted factors related to personal consumption expenditure (consumer price) inflation and other aspects of its mandate. Consumer price or personal consumption expenditure inflation targets of around two percent matter to the Fed and other central bank sheriffs. Yet sufficient (too low; too high) inflation (as well as deflation) can occur in other realms, including stocks and real estate.

Combine the monumental recovery in US real estate values with the towering rise in the value of stock marketplace assets. Although these are not the only parts of or phenomena influencing the US household balance sheet, current real estate and stock marketplace (particularly note the S+P 500) levels and trends appear more than adequate to justify a less accommodative Fed monetary policy. And US housing trends (including the rental situation) probably are placing substantial upward pressure on key consumer price benchmarks.

Recall the glorious American real estate spectacle before the mournful crash of the worldwide economic disaster. Although that Goldilocks Era for US real estate belongs to the past, the current housing situation recalls it.

The dovish Fed nevertheless will be cautious regarding boosts in the Federal Funds rate. Like other members of the global establishment (elites), it does not want populists (whether left wing or right wing; such as Donald Trump) to win power. To some extent, sustained substantial slumps in stocks and real estate prices tend to encourage populist enthusiasm. The Fed and its allies battle to avoid a sharp downturn in the S+P 500 or housing prices. The Fed meets 9/20-21, 11/1-2, and 12/13-14/16. The US Election Day is November 8. See “‘Populism’ and Central Banks” (7/12/16) and “Ticking Clocks: US Financial Marketplaces” (8/8/16).

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Games People Play- American Real Estate (8-28-16)