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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FINANCIAL MARKETPLACE ADVENTURES: BACK TO THE FUTURE©Leo Haviland October 2, 2024

In the movie “Back to the Future” (director, Robert Zemeckis), Dr. Emmett Brown warns: 

“No! Marty! We’ve already agreed that having information about the future can be extremely dangerous. Even if your intentions are good, it can backfire drastically!”

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CONCLUSION

In recent months, United States inflation benchmarks such as the Consumer Price Index have receded toward the Federal Reserve’s two percent objective. Commodity prices “in general” in mid-September 2024 briefly slumped beneath December 2023’s trough. Note the significant decline in the United States Treasury 10 year note yield since 4/25/24’s 4.74 percent top. For at least the near term, the Fed’s September 2024 Economic Projections encourage faith in many marketplace players that the Fed will reduce its Federal Funds policy rate substantially by the end of calendar 2025. Thus intertwined factors such as lower inflation statistics, anticipated Fed policy, falling UST yields, modest US dollar weakness relative to an earlier “too strong” level, and a move in the S+P 500 to a new record high (9/26/24’s 5767) inspire belief that the American (and global) economy will keep expanding (or at least have a “soft landing” and escape recession). Widespread optimism regarding future American corporate earnings exists. The Wall Street securities investment communities and their corporate, political, and media allies have applauded both the decline in US Treasury yields and the stratospheric bull marketplace trend in US and other stock playgrounds.

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Nevertheless, the United States (and global) economy probably will slow down substantially and may not escape a recession. Fed monetary policy was significantly restrictive for an extended time span until recently, and it probably remains mildly so. Though American inflation is more subdued, it has not disappeared. The Fed’s two percent target has not been achieved. Shelter and services inflation remain lofty. Also, suppose Middle East unrest sparks a sustained rally in petroleum prices. These considerations might encourage the Fed to ease monetary policy more cautiously. 

In addition, American unemployment, though still fairly low, has climbed since April 2023. Existing single-family home prices dipped since June 2024. The US Treasury yield curve is inverted (short term rates above long term ones); history reveals this phenomenon often has preceded a recession. The long term and arguably even the near term US fiscal situation and its management are dangerous. 

Out on Main Street, in contrast to Wall Street’s exuberance, measures of Main Street optimism are mediocre. Arguably many people on Main Street already are living in recessionary times, partly because of the high inflation of the past few years. Some of former President Trump’s enduring political appeal probably derives from the divergence between Wall Street (and other elite group) prosperity and Main Street economic realities. 

Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The UST 10 year note’s yield increase from 12/27/23’s 3.78 percent interim low up to 4/25/24’s high probably warns of an impending decline in the S+P 500, especially since the Federal Reserve’s real Broad Dollar Index has remained strong in recent months. The S+P 500 price probably will not exceed its late September 2024 high by much, if at all, and the S+P 500 will begin at least a moderate decline in the relatively near future. 

Commodities “in general” have plummeted substantially from their first quarter 2022 pinnacle, whereas the S+P 500 has ventured to new highs. This massive decline in commodities as well as its notable divergence from the bullish S+P 500 trend since the S+P 500’s major low on 10/13/22 at 3492, when interpreted alongside other bearish (recessionary) warning signs, probably point to approaching economic weakness and a fall in the S+P 500. 

The UST 10 year note yield probably will decline beneath 9/17/24’s 3.60 percent low. The US dollar probably will decline from current levels and challenge key support in the real Broad Dollar Index, April 2020’s 113.4 elevation (recall also December 2023’s 113.8). These trends will confirm economic feebleness. 

The American national political scene in general and election season 2024 in particular add to financial marketplace risks. Major turmoil, including a persistent and determined refusal by a leading party and its Presidential candidate and many of their devotees to accept the Presidential election results, probably would be bearish for US stocks and the dollar. These political battles might cause a “flight to quality” and thus push UST yields lower. However, although America is not a developing/emerging marketplace nation, as in those other countries, fierce ongoing political conflict also could produce a yield spike. A US federal budget deficit crisis also could cause yields to increase sharply.

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Financial Marketplace Adventures- Back to the Future (10-2-24)

GREAT EXPECTATIONS: MARKETPLACE FIREWORKS©Leo Haviland July 3, 2024

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

CONCLUSION

Since around end December 2023, global inflationary forces have remained rather persistent. Note the moderate increase in the United States Treasury 10 year note yield since then. Recent consumer price index measures, despite having fallen from their peaks, stand fairly distant from the Federal Reserve Board’s inflation target. Commodity prices “in general” clearly exceed their December 2023 trough. For at least the near term, the Fed therefore will find it difficult to reduce its Federal Funds policy rate nearly as much as many marketplace participants hope. The US dollar has remained strong, appreciating modestly since year end 2023; this pattern suggests that American interest rate yields probably will remain rather high. America’s substantial and worsening national debt problems remain unsolved, with little prospect of progress anytime soon. Towering massive federal government budget deficits and high and growing debt as a percentage of GDP tend to boost interest rate yields higher.

Many times over the past century, significantly increasing United States interest rate yields have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. Although the S+P 500 has achieved a new all-time high this week, a “too strong” US dollar alongside rising US Treasury yields increases the probability for a fall in stocks. Marketplace opinions regarding substantial growth in US corporate earnings prospects for calendar years 2024 and 2025 look very optimistic.

Bitcoin and gold trends offer insight into patterns and prospects for other marketplaces, including the S+P 500.

The US national political scene in general and election season 2024 in particular add to financial marketplace risks.

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Great Expectations Marketplace Fireworks

MARKETPLACE TRAVELS: POTENTIAL BUMPS IN THE ROAD ©Leo Haviland April 2, 2024

The Federal Reserve Chairman (Jerome Powell) recently stated that the path to the Fed’s two percent inflation target was “sometimes bumpy”. (Remarks at the 3/29/24 “Macroeconomics and Monetary Policy Conference”, San Francisco Fed; see Financial Times, 3/30/24, p1)

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STARTING POINTS

Since around end December 2023, global inflationary forces probably have become stronger (or at least more firmly entrenched). Note the increase in the United States Treasury 10 year note yield and prices for commodities “in general” since then. Recent consumer price index measures, despite having fallen from their peaks, remain fairly distant from the Federal Reserve Board’s targets. The Fed therefore will find it difficult to reduce its Federal Funds policy rate nearly as much as many marketplace participants hope. The US dollar has remained strong, appreciating slightly since year end 2023; this suggests that American interest rate yields probably will remain rather high. America’s substantial national debt problems remain unsolved (as does China’s), with little prospect of progress anytime soon. Ongoing large federal government budget deficits and high and growing debt as a percentage of GDP tend to boost interest rate yields higher. 

Many times over the past century, significantly increasing United States interest rate yields have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. Marketplace opinions regarding substantial growth in US corporate earnings prospects for calendar years 2024 and 2025 look very optimistic. Whereas the S+P 500’s towering bull move carried into March 2024, US existing single-family home prices remain beneath their June 2023 peak. 

The US national political scene in general and election season 2024 in particular add to financial marketplace risks. 

Bitcoin and gold trends offer insight into patterns and prospects for other marketplaces, including the S+P 500. 

US INFLATION AND INTEREST RATES: RISKY BUSINESS

In the classic American film, “All About Eve” (Joseph Mankiewicz, director), the actress Margo Channing (played by Bette Davis) declares: “Fasten your seat belts. It’s going to be a bumpy night.” 

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The Wall Street securities investment communities and their political and media allies have applauded lower United States inflation rates. Widespread faith exists that the trusty Federal Reserve will achieve its two percent inflation target fairly soon. Stock owners have been especially enthusiastic as the S+P 500 has flown to new highs in the hopes of further drops in key inflation measures and notable cuts by the Federal Reserve in the Fed Funds rate. 

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Marketplace Travels- Potential Bumps in the Road (4-2-24)

FINANCIAL PLAYGROUNDS: THE MONEY GAMES © Leo Haviland January 2, 2024

“The Great Game: The Story of Wall Street…An original two-hour documentary event that spans the 200-year history of American capitalism.” (New York Times; 5/28/00, p13; regarding a CNBC television program)

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Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span. The arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle. See “Long Run Historical Entanglement: US Interest Rate and Stock Trends” (7/6/23). 

Of course, since marketplace history indicates that ongoing relationships can shift or transform, the current patterns between the US Treasury 10 year note yield and the S+P 500 (and the US dollar) can change. 

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In any case, will the long run pattern of rising UST 10 year note yields resume in the near term, thus leading to eventual S+P 500 declines? The Fed Chairman’s 12/13/23 comments do not explicitly rule out future Fed Funds increases. Or, even if the UST 10 year note yield does not exceed its 10/23/23 pinnacle at 5.02 percent in the near term, suppose its yield climbs toward that height. 

Alternatively, suppose the UST 10 year note yield does not in the near term make a new high around or above 10/23/23’s 5.02 percent, or climb fairly close to 10/23/23’s yield top. Does the recent slump in UST yields portend not only future Fed easing, but also a recession (rather than a soft landing)? Monitor commodity price weakness in that regard. Therefore, from this perspective, the rise in the UST 10 year yield up to 5.02 percent on 10/23/23 has been leading to a later high in the S+P 500 than the July 2023 one. In this scenario, the S+P 500 price rivals or surpasses its January 2022 peak. 

Thus will a new bear marketplace trend for the S+P 500 involving multiple tops emerge? In addition to those of January 2022 and July 2023, will another one be created near those heights? The S+P 500’s record peak is 1/4/22’s 4819. The S+P 500’s 12/28/23 high at 4793 almost matches this. The 7/27/23 elevation is only 4.4 percent distant from the major price resistance imposed by 1/4/22’s summit (4607/4819 is 95.6pc). A five percent decline from January 2022’s pinnacle equals 4578, close to 7/27/23’s 4607 height. The 4578 level stands midway between important prior S+P 500 interim tops at 4639 (3/29/22) and 4513 (4/21/22) attained amidst the bear move which began in January 2022. A 33 percent rally from 10/13/22’s trough equals 4655. The S+P 500 probably will not exceed its January 2022 peak by much if at all. A five percent venture over 1/4/22’s 4819 equals 5060. 

The Dow Jones Industrial Average’s record high is 1/2/24’s 37790, about 2.3 percent over 1/5/22’s 36953 pinnacle. 

Looking forward over the horizon, arguably “around” end-year 2023/during first quarter 2024 is a time when a key top in the S+P 500 will appear. Incremental year-end stock buying “to put stuff on the books” (or to discard losing short positions) by definition finished a few days ago. Will the US have a federal government shutdown during first quarter 2024 due to a legislative logjam? What if the inflation rate does not  keep falling toward the Fed’s two percent target? Will the Fed in any case keep its policy rates lofty for many more months? 

History shows that the S+P 500 has achieved several important peaks and bottoms during first quarter. As for major highs, the record S+P 500 price to date of 4819 occurred 1/4/22. Recall 2/19/20’s 3394 pinnacle. The S+P 500’s established a major high over two decades ago on 3/24/00 at 1553. Going back 50 years, the S+P 500 peaked around 121.7 on 1/11/73 (the Dow Jones Industrial Average crown occurred on 1/11/73 at 1067.2). What about major bottoms? A peak around first quarter 2024 would be a four year diagonal bull move from the coronavirus disaster major low of first quarter 2020, 3/23/20’s 2192. The 12/26/18 key bottom at 2347 neighbors the first quarter. The 2/11/16 trough at 1810 (1/20/16 at 1812) was very important. Also in regard to the calendar first quarter window, remember the aftermath of the Goldilocks Era; the worldwide economic disaster bottom for the S+P 500 was 3/6/09’s 667. The final low following 3/24/00’s summit was 3/12/03’s 788 (10/10/02 bottom at 769).

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Financial Playgrounds- the Money Games (1-2-24)