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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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)

US DOLLAR VOYAGES: ADVENTURES IN WONDERLAND © Leo Haviland December 3, 2023

In Lewis Carroll’s “Alice’s Adventures in Wonderland”: “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”)

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CONCLUSION

“US Dollar and Other Marketplace Adventures” (2/5/23) stated: “Based upon the Federal Reserve Board’s real and nominal Broad Dollar Indices, the United States dollar probably established a major top in autumn 2022.” This remains the case. 

The US dollar also probably made an important interim top during October 2023. 

Variables encouraging US dollar weakness include America’s declining share of global GDP in an increasingly multipolar world. In addition, the nation’s federal debt situation is fearsome and worsening, especially from the long run perspective. America’s severe political  divisions, ongoing and wide-ranging culture wars, and the upcoming 2024 national election season make substantive fiscal solutions unlikely anytime soon. Ideological splits and battles of course do not confine themselves to the United States. However, the severity of those in America, as well as substantially diminished faith in many American institutions, help to encourage dollar weakness. The very uncertain outcome in America’s 11/5/24 election makes ownership of the US dollar and dollar-denominated assets seem increasingly risky. The potential for legal (including Constitutional) troubles relating to Trump’s Presidential candidacy are part of this worrisome picture. 

After US and international consumer price inflation soared in 2022, the Federal Reserve has been a leader in the quest to reduce it to tolerable levels. Its monetary policy tightening program (including rapid boosts to the Federal Funds rate, cutting the size of its enormous balance sheet, and hawkish rhetoric) has played a key role in creating and maintaining a very strong dollar. To the extent the Fed changes its policy to a less restrictive stance, its leadership role probably will tend to depreciate the dollar.

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US Dollar Voyages- Adventures in Wonderland (12-3-23)

AMERICA DIVIDED AND DOLLAR DEPRECIATION © Leo Haviland September 7, 2021

Pogo, created by the cartoonist Walt Kelly, is a possum living in Georgia’s Okefenokee Swamp. About 50 years ago, Pogo proclaimed: “We have met the enemy and he is us.”

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OVERVIEW AND CONCLUSION

For many decades, the United States dollar has led the foreign exchange field as the key currency for global trade as well as financial reserves. Over that time span, the greenback’s predominance to a significant extent encouraged, sustained, and reflected widespread (although not unlimited) American and global faith in the wisdom and goodness of American cultural values and the persuasive and practical ability of the nation to be a (and sometimes the) critical guiding force in international affairs. Although the dollar obviously has had numerous extended periods of appreciation and depreciation since the free market currency dealing regime began in the early 1970s, the dollar’s crucial role in the increasingly intertwined global economic system has seldom been significantly questioned or challenged for over an extended period of time.

Using the Federal Reserve’s real “Broad Dollar Index” (which is a monthly average) as a signpost, the US dollar “in general”, for almost ten years, from its major bottom in July 2011 until April 2020, the overall trend of the dollar in general was bullish. The US dollar “in general” depreciated until “around” January 2021. It rallied for several months thereafter, with August 2021 being the high since then. From a long run historical perspective, August 2021’s real Broad Dollar Index level is rather strong.

However, when interpreted alongside phenomena such as America’s government debt level and trend, ascending United States inflation, and the nation’s ongoing cultural divisions and the recent increase in net dissatisfaction among the US public regarding the country’s direction, a review of various important currency cross rate trends against the dollar suggest that “overall” weakness in the US dollar has resumed (beginning around late August 2021) or will do so in the near future.

Take a related vantage point. Given the Federal Reserve’s determined effort to repress (pin at a very low level) the Federal Funds rate and US Treasury yields despite numerous inflationary signs, a probable outcome (consequence; outlet) for that central bank scheme in the context of these assorted variables is a depreciating dollar.

In this context, if the real Broad Dollar Index (“BDI”) moved toward or underneath its March 2009 international economic disaster peak at 101.5, that probably will help to precipitate a “weak United States dollar equals weak US stocks” scenario.

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An underlying factor promoting a dollar tumble is the gradually declining share of America as a percentage of worldwide GDP. Also, both political parties, not just the current US Administration, and especially in the coronavirus era, likely want the real Broad Dollar Index to stay beneath its April 2020 summit at 113.6. They also probably prefer a renewed fall in the BDI from August 2021’s 107.3 elevation. The great majority of the country’s politicians preach their allegiance to a strong dollar, but they also endorse economic growth.

Several additional phenomena make the dollar particularly vulnerable nowadays. First, although many major nations have increased their government debt burdens in recent years, America’s public debt situation has worsened significantly more than most others since 2019. Moreover, America already faced widening federal budget deficits encouraged by the tax “reform” enacted at end 2017. Plus don’t overlook the ongoing ominous long run debt burden, looming from factors such as an aging population. How easily will America service its debt situation? In addition, the current Administration’s infrastructure proposals, if a significant proportion of them become law, probably will boost America’s debt as a percentage of GDP. Will there be a political fight over raising the nation’s debt ceiling? And America’s corporate and individual indebtedness also is substantial.

Second, using the Consumer Price Index (CPI-U, all items) as a benchmark, American “inflation” in recent months has exceeded that of other leading nations. The Fed continues to maintain a highly accommodative monetary policy. This beloved guardian has merely murmured about tapering its massive quantitative easing (money printing) scheme, and it remains reluctant to raise policy rates significantly anytime soon. Due to the Fed’s yield repression, nowadays US Treasury yields across the yield curve relative to the current US CPI level offer a negative real return. This negative return situation of course (all else equal) tends to make UST ownership rather unattractive for many marketplace participants.

Whether because of ascending US interest rates, a descending dollar or both, suppose foreigners become smaller buyers, or even net sellers, of US Treasury securities. Such overseas action would not be an endorsement of America.

Another bearish indicator for the US dollar exists: the intensity and breadth of America’s cultural divisions has increased in recent times. Though the Trump era reflected and enhanced these splits, they remain very significant across various fields. America’s ongoing substantial cultural battles in economic, political, and social arenas reflect reduced national unity and tend to undermine domestic confidence. American confidence in the nation’s overall direction has slumped in recent months. As US citizen faith in the country’s situation declines, so probably likewise will (or has) that of foreigners in regard to America. To some extent, faith in America and its institutions is reflected by a willingness to own substantial amounts of dollar-denominated assets.

An additional feature can intertwine with these variables to undermine the dollar, especially over the long run. In recent years, the strong international belief in the reliability (and leading role) of America as a trading and military partner probably has eroded somewhat. Some of this may reflect the declining US share of worldwide GDP. Former President Trump’s often erratic behavior, bold wordplay, and frequent disregard for the truth assisted this fall in confidence process. Also, ongoing America First (Make America Great Again) movements and an apparently diminished American enthusiasm for multilateralism and globalization probably reduce confidence in other players that America will be “as committed” a partner. For example, trade conflicts, even if they now are less strident than during the Trump presidency, have not evaporated. The dismal American withdrawal process from Afghanistan troubles many overseas observers. In addition, the persistence of America’s fervent and substantial cultural divides to some extent risk injuring foreign faith in the reliability and effectiveness of America on the international scene.

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Declining faith in American assets (and its cultural institutions and its economic and political leadership) can inspire shifts away from such assets. American marketplaces will not be completely avoided given their importance, but players can diversify away from them to some extent. Not only Americans but also foreigners own massive sums of dollar-denominated assets (debt instruments, stock in public and private companies, real estate; dollar deposits). Such portfolio changes (especially given America’s slowly declining importance in the global economy) will tend to make the dollar feeble.

Suppose nations and corporations increasingly elect, whether for commercial or political reasons, to avoid using the dollar as the currency via which they transact business. That will injure the dollar.

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America Divided and Dollar Depreciation (9-7-21)