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)

DOLLAR DEPRECIATION AND THE AMERICAN DREAM © Leo Haviland August 11, 2020

In the film “Wall Street” (Oliver Stone, director), Gordon Gekko claims: “It’s all about bucks, the rest is conversation.”

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DOLLAR DEPRECIATION DANGERS

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. For almost ten years, from its major bottom in July 2011 until April 2020, the overall trend of the dollar in general was bullish.

Therefore few gurus fear a significant depreciation in the US dollar from its relatively lofty April 2020 high. However, the probability of a noteworthy dollar slump is much greater than most believe.

An underlying factor promoting a dollar tumble is the gradually declining share of America as a percentage of world GDP. Also, both political parties, not just the current US Administration, and especially in the coronavirus era, probably want the dollar to weaken from its recent summit. The great majority of the country’s politicians preach their allegiance to a strong dollar, but they also endorse economic growth.

Two additional phenomena make the dollar particularly vulnerable nowadays. First, although many leading nations have increased their government debt burdens in recent years, America’s situation probably has worsened significantly more than most others in recent months. 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? And America’s corporate and individual indebtedness also is substantial.

Second, the intensity and breadth of America’s cultural divisions has increased in recent times, especially during the Trump era. 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.

Declining faith in American assets (and its cultural institutions and 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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A five percent fall in the “overall” dollar level from its April 2020 high may not make much difference in the near term for US stocks and debt securities. However, a roughly five percent dollar drop is a warning sign for them, and especially for stocks. All else equal, a weaker dollar tends to boost the nominal price of dollar-denominated assets such as stocks and commodities. But history shows that this relationship is not inevitable. Phenomena other than dollar depreciation influence US securities trends. Keep in view the considerations described above undermining the dollar, and thus the desire to hold dollar-denominated instruments.

Admittedly, strong American corporate earnings encourage buying (and holding) of US stocks. But the coronavirus situation and responses to it have devastated calendar 2020 earnings. Suppose that contrary to widespread hopes and predictions, calendar 2021 corporate earnings do not rebound significantly (sufficiently) from dismal 2020 depths. What if the prayed-for V-shaped economic recovery does not emerge? If corporate earnings remain relatively modest (or slide) going forward, and if the dollar continues to weaken from its April 2020 height, dollar depreciation probably will intertwine with an equity slump.

A sustained dollar tumble approaching ten percent (and especially a fall greater than ten percent) probably will help to push the S+P 500 and related stock prices quite a bit lower. Many equate strong (high; rising) United States stocks over the long run as a signal or proof of the triumphant progress of the American Dream’s economic, political, and social principles. Therefore a linked and sustained decline in both the dollar and American stocks probably would damage to some extent the persuasive rhetoric of the current version American Dream itself.

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Even if US government debt yields in this scenario initially slump from around current low levels due to a renewed “flight to quality”, and even if the Federal Reserve and its central banking teammates maintain their quantitative easing and yield repression schemes, inflationary forces (encouraged by money printing; see the huge increase in America’s money supply) and heated demand for credit eventually can push government (and corporate) interest rates upward. On the US interest rate front, suppose foreigners become smaller buyers, or even net sellers, of US Treasury securities. Such overseas action would not be an endorsement of America. Due to yield repression, UST real returns currently are negative.

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Dollar Depreciation and the American Dream (8-11-20)

US TAX REFORM: PROPAGANDA AND PROSPECTS © Leo Haviland October 9, 2017

Genevieve Larkin exclaims in the film “Gold Diggers of 1937”: “It’s so hard to be good under the capitalist system!” (Lloyd Bacon, director)

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CONCLUSION AND OVERVIEW

The most recent American corporate and individual tax “reform” proposal sketched by the President and Republican Congressional leadership is merely a “framework”. These ringleaders and their acolytes proclaim that genuine legislative planning and serious negotiations will create a robust document, a beneficial bill suitable for passage. However, the overall explicit and implicit policy substance (partisan aims) incorporated in the current outline probably will not become law. Even if a few elements of the “reform” scheme manage to pass the House and Senate and become law, at most this will represent modest tinkering with rather than major changes in the current tax code.

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Why will the corporate and individual tax reform program advocated by the President and others generally fail to be enacted? First, partisan political divisions in America in general and Congress in particular are too severe. Although the Republicans control both Houses of Congress, their Senate majority is slim. Whereas Congressional Democrats for the most part have held ranks since the 2016 election, Republican unity, particularly within the Senate, has been fragile. Not all Republicans adopt the same (or Trump’s policies).

The corporate and individual tax code reflects a diversity of political (cultural) viewpoints. Consequently, perspectives regarding as well as campaigns to transform, modify, or preserve critical aspects of it reflect opinions. Thus competing cultural camps with assorted outlooks and aims engage in heated rhetorical battles to advance their interests. Moreover, these proposed so-called tax reforms represent significant ideological approaches, not merely cosmetic fixes and updates.

In recent years, compromise in Congress in various critical policy matters has appeared with less frequency and generally only grudgingly. If the Senate cannot repeal (or repeal and replace) Obamacare (Affordable Care Act), how will they manage to make substantial alterations in an extremely complex document such as the United States tax code? Donald Trump’s remarkable and shocking Presidential triumph in America’s 11/8/16 election has not been followed by Congressional passage of his legislative agenda (Inauguration Day was 1/20/17). Why will Democrats help President Trump and Republicans win a notable legislative victory on taxation with election 2018 coming into view?

In the United States, even though labels are not definitive and groups can overlap, look further at and beyond the “political” sphere. America of course has never been entirely homogeneous or unified. The widely-shared American Dream has been expressed and implemented in various ways. Yet America’s disagreements and debates currently are wide-ranging. The lines between and within camps are not always clear; moreover, individuals may be loyal (belong) to various (and often competing) categories.

In any case, the long list of America’s noteworthy splits and fractures makes it especially changing to enact wide-ranging changes in the core taxation (and spending, including entitlements) policy arena. There are liberals (progressives), conservatives (traditionalists), centrists (moderates), and independents. Populists (both left and right wing) confront the establishment (elites). Globalists contend with nationalists.

America, as a house divided, has rich versus poor, haves versus have-nots. Highlight the nation’s substantial economic inequality. Is America nowadays a Gilded Age era? Are economic and social mobility increasing?

Consider divisions relating to race (ethnicity), gender/sexuality, religion, age, geographic region, and urban/rural. Fierce quarrels rage not only over tax and spending policies, but also over health care. Heated fights occur on trade and tariff issues, economic regulation (how much is appropriate), abortion rights, immigration, gun ownership, and environmental fields such as climate change.

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Moreover, President Trump probably will be unable to lead the contending camps inside and outside Congress toward a realization of his tax “reform” plan. Some circles fervently admire Trump. His “Make America Great Again!” and “America First” slogans and many of his policy pronouncements obviously appeal to large numbers of Americans. Yet he nowadays lacks sufficient influence over Congress as a whole, including parts of the Republican caucus. And among the nation in general, his popularity is quite low. Many observers see him as erratic in his outlook and imprudent and insensitive in his opinions and actions.

Moreover, Donald Trump lacks government insider experience. Rhetoric and behavior (and talents) suitable for running a successful family-owned business, a reality television show, or even a successful Presidential campaign are not necessarily appropriate (adequate; likely to succeed) in regard to leading a country well or inspiring Congress to adopt his policy agenda.

Although Trump won in the Electoral College, he decisively lost the popular vote tally. The popular vote outcome obviously reflects America’s sharp political divisions. Also, the Russian President “directed a vast cyberattack aimed at denying Hillary Clinton the presidency and installing Donald J. Trump in the Oval Office, the nation’s top intelligence agencies said in an extraordinary report” (NYTimes, 1/7/17, ppA1, 11). Trump’s popular vote defeat and reports on Russian political interference undermine Trump’s political “legitimacy” (faith in it) and thus his ability to lead effectively.

The President’s continued unwillingness to release his own tax returns makes it challenging for some to agree with his reform package. Might he or his family benefit from the proposed framework?

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Over three decades have passed since the last notable US tax reform (Tax Reform Act of 1986). Even though many gurus complain about parts of the current personal and corporate tax system, there does not appear to be a widespread consensus as to how to dramatically overhaul it.

Keep in mind that the individual and corporate tax codes are not merely long and complicated. It is a rhetorical structure reflecting a large and complicated society. Its lengthy enshrined provisions and interpretations of them therefore frequently represent competing visions and values. America’s current tax laws took a long time to reach their current structure. The US from the vantage points of both individuals and corporations of course is a diverse and complex country; this parallels the complexity of the global economy, with which the nation is enmeshed. Some “special interests” will fight vigorously for the proposed “reform” (or parts of it), but other crews will lobby heatedly against all or many of its provisions. These considerations also make it very difficult, and particularly unlikely in the current domestic American political environment, for substantial tax changes (“reform” of whatever fashion) to occur.

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US Tax Reform- Propaganda and Prospects (10-9-17)

MARKETPLACE ENTANGLEMENTS: REVISITING 2008 © Leo Haviland December 14, 2014

Focus on the current scene for and apparent relationships between the United States Treasury 10 year note, the S+P 500, emerging stock marketplaces (“MXEF”; MSCI Emerging Stock Markets Index, from Morgan Stanley), the United States dollar, and commodities in general (“GSCI”; broad Goldman Sachs Commodity Index). Surely much has changed since the dreadful days of the worldwide economic disaster that emerged in 2007 and accelerated during 2008. One critical difference involves the extraordinary sustained monetary accommodation (notably yield repression and money printing) by the US Federal Reserve Board and its central bank allies in response to the 2007-2009 crisis. Yet arguably many significant debt and leverage problems that developed during the wonderful Goldilocks Era never were solved, merely patched up, downplayed with sunny rhetoric, or postponed. Also, arguably, new debt and leverage problems, partly motivated by the ravenous hunt for yield (return), have walked on the financial stage.

The present marketplace panorama rather closely resembles that of 2008 in many respects. However, the S+P 500 has not yet slumped significantly from its recent high on 12/5/14 at 2079. A notable fall in the S+P 500 from that level nevertheless probably will occur, underscoring (further creating) the parallel with the 2007-08 situation. If the S+P 500 surpasses its December 2014 high, it likely will not do so by much anytime soon. In any event, assuming the major trends underway for these other marketplaces essentially remain intact, the S+P 500 likely will fall significantly, although probably not nearly as dramatically as it did during the 2007-09 span.

Although cross rates between the US dollar and other currencies are important, the level and trend of the broad real trade-weighted dollar (“TWD”) is a better benchmark for overall dollar strength and weakness.

The broad real TWD created a major low around 80.5 in July 2011. After moving to around 83.5 in September 2011, it meandered sideways for nearly three years, with June 2012’s 86.3 the high during that span.

From about 84.8 in July 2014, it began to edge steadily up (recall the related timing of the UST’s 7/3/14 interim high at 2.69pc and the GSCI’s 6/23/14 high). However, in September 2014, the TWD reached 86.6, thus breaching its June 2012 interim top; for this September 2014 TWD level, keep in mind the MXEF’s top in early September 2014.

The TWD reached 87.6 in October 2014 and 89.0 in November 2014. Its November 2014 level thus edged over September 2008’s TWD bull move take-off point, thus further warning marketplace observers of parallels between current times and the 2007-09 global financial crisis. The stronger dollar, as in 2008, coincides with the bear move in the broad GSCI. Note the MXEF high on 11/27/14 at 1018.
Charts--Emerging-Marketplace-Stocks,-Mexican-Peso-(12-14-14,-for-essay-Marketplace-Entanglements--Revisiting-2008)-2
Charts--Emerging-Marketplace-Stocks,-Mexican-Peso-(12-14-14,-for-essay-Marketplace-Entanglements--Revisiting-2008)-1

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Marketplace Entanglements- Revisiting 2008 (12-14-14)
Charts- Emerging Marketplace Stocks, Mexican Peso (12-14-14, for essay Marketplace Entanglements- Revisiting 2008)