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)

ON THE ROAD: MARKETPLACE TRAFFIC © Leo Haviland May 1, 2023

“The highway is for gamblers, better use your sense

Take what you have gathered from coincidence”. “It’s All Over Now, Baby Blue”, Bob Dylan

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CONCLUSION AND OVERVIEW

Given an array of intersecting considerations, critical benchmark financial battlegrounds such as the United States Treasury 10 year note, US dollar, and the S+P 500 probably will continue to travel sideways for the near term. Price trends for commodities “in general” probably will converge with those of the S+P 500 and other key global stock marketplaces, although occasionally this relationship may display divergence. 

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In America and many other key countries around the globe, uncertainties and risks regarding numerous entangled economic and political variables and marketplaces appear especially substantial nowadays. In particular, inflationary and recessionary (deflationary) forces currently grapple in an intense and shifting fight for supremacy. 

Monetary tightening by the Federal Reserve Board and its central banking comrades has helped to slash lofty consumer price inflation levels. However, despite some deceleration, significant inflation persists. Both headline and core (excluding food and energy) inflation motor well above targets  aimed at by these monetary police officers. Yet in comparison with ongoing substantial actual consumer price inflation, inflationary expectations for longer run time spans generally have remained moderate. But monumental public debt challenges confronting America and many other leading nations nevertheless arguably signal the eventual advent of even higher interest rates. And given the Russian/Ukraine conflict and an effort by OPEC+ to support prices, how probable is it that petroleum and other commodity prices will ascend again? 

Higher interest rates have diminished worldwide GDP growth prospects and raised recessionary fears. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession and will strive to avoid that eventuality. 

The United States dollar, though it has depreciated from its major high milepost reached in autumn 2022, arguably remains “too strong”. However, history shows that a variety of nations elect to engage in competitive depreciation and trade wars to bolster their country’s GDP. 

Unemployment in the United States remains low, which helps consumer confidence. Sunny Wall Street rhetoric regarding allegedly favorable long run nominal earnings prospects for American stocks sparks enthusiastic “search for yield” activity by investors and other fortune-seekers. Yet Fed and other central bank tightening and economic sluggishness may reverse this healthy unemployment situation and dim corporate earnings prospects. Consumer net worth levels and patterns are important in this context. A strong and growing household balance sheet encourages consumer spending and thereby economic growth. Consumers, the major component of American GDP, unfortunately have endured damage to their balance sheet from the fall in the stocks (S+P 500 peak in January 2022) as well as the decline in home prices since mid-2022. The recent shocking banking collapses in America and Europe warn of fragilities and uncertainties facing diverse economic arenas and the value of their assets. 

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Bruce Springsteen’s song “Born to Run” proclaims: “In the day we sweat it out on the streets of a runaway American dream”.

Persistent fierce partisan conflicts range across numerous economic, political, and other cultural dimensions. This makes it difficult for politicians to compromise (witness America’s federal legislative circus), and thus significantly to alter ongoing marketplace trends and relationships via resolute substantive action. 

However, the current US legislative traffic jam regarding raising the country’s debt ceiling, if it results in default, probably will cause the S+P 500 and related “search for yield” playgrounds to veer off their current sideways paths and tumble downhill. The risk of a default, even if brief and rapidly resolved, probably is greater than what most of Wall Street, Main Street, and the political scene believes. 

In this “game of chicken” between Republicans and Democrats (and between sects within each of these parties), each of the raging sides claims to espouse high (“reasonable”; “sensible”, “good”) principles. This brinkmanship endangers the economy. The wreck of a sizeable stock marketplace plunge and spiking recessionary fears probably will terrify politicians (and scare and infuriate their constituents), thus inspiring the nation’s leaders to overcome the legislative gridlock and enact a debt ceiling increase. 

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On the Road- Marketplace Traffic (5-1-23)

STOCK MARKETPLACES: AT THE CROSSROADS © Leo Haviland, September 4, 2017

“Money beats soul, every time.” “Roadhouse Blues”, by The Doors, with John Lee Hooker

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CONCLUSION AND OVERVIEW

Many observers (including stock owners) are complacent about prospects for the emergence of significant stock marketplace declines, particularly in regard to the United States stock arena. Even a ten percent drop in US equities would shock many audiences. The S+P 500 and related American benchmarks nevertheless have been in the process of establishing an important top. The glorious long run bull advance in American stocks which started with the S+P 500’s major bottom at 667 on 3/6/09 probably is at or near its end. The S+P 500’s record height to date is 8/8//17’s 2491. That S+P 500 elevation probably will not be exceeded by much, if at all.

American stocks “in general”, although not an isolated island, have their own “individual” stories, as do assorted other stock marketplaces, whether in relation to earnings, valuations, or other phenomena. Yet marketplace history in recent years suggests that prices of stock marketplace signposts for other advanced (developed) nations and for emerging marketplaces “in general” likely will accompany any notable downtrend (including a bear move) in US equities.

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Admittedly, since first quarter 2016, and especially after around America’s November 2016 Presidential election, emerging stock marketplaces generally have rallied alongside the S+P 500 and its domestic comrades such as the Dow Jones Industrial Average, Nasdaq Composite, and Wilshire 5000. But the MSCI Emerging Stock Markets Index, from Morgan Stanley (“MXEF”), a guide for emerging stock marketplaces, is around major resistance and (unlike the S+P 500) well below all-time highs.

Owners of (particularly “investors”) American and international equities hopeful of enjoying further upward rides should note other significant yellow warning lights. In mid-year 2017, leading European and Japanese stock marketplaces established highs. The S+P 500’s 6/19/17 interim top at 2454 occurred around the time of these highs. However, these European and Japanese mid-2017 stock tops have not been broken. And the S+P 500’s August 2017 high exceeds its June 2017 one by only 1.5 percent.

But after their dreary troughs in first quarter 2016, didn’t Germany’s DAX and the United Kingdom’s FTSE exceed their spring 2015 plateaus, as did the S+P 500 (5/20/15 high 2135). Yes, but the April 2015 summit for a broader measure for European stock performance, the STOXX Europe 600 Index (“SXXP”), remains intact. Japan’s June 2015 Nikkei height likewise remains a roadblock.

The adventures of Canada’s S+P/Toronto Stock Exchange Composite Index (“SPTSX”) are also a bearish sign to worldwide stock marketplaces. It has failed to vault over its February 2017 top (established prior to the mid-2017 ones in Europe and Japan). Also, February 2017’s SPTSX plateau edged only 1.6 percent above its September 2014 pinnacle.

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Stock Marketplaces- at the Crossroads (9-4-17)

2008 REVISITED: JAPANESE YEN STRENGTH, GLOBAL ECONOMIC WEAKNESS (c) Leo Haviland June 4, 2012

The long running bull march in the Japanese Yen from early summer 2007 to the current time generally coincides with a continuing worldwide economic crisis. The Yen’s robust strength mirrors the failure by central bankers and politicians around the globe to cure the lamentable financial ills. National policies often differ. The international guardians frequently coordinate their rescue and stimulus programs. Yet measures such as deficit spending, money printing, efforts to keep government interest rates near the floor, and struggles to maneuver currency rates merely have patched and postponed severe problems, not genuinely repaired them. Worrisome debt and leverage issues revealed in 2007-08 lurk on in various forms.

The rally in the Japanese Yen on an effective exchange rate basis since around July 2011 warns that an acceleration of the worldwide crisis, as in mid-2008, may be underway or very near to commencing. Significantly, the climb in the Yen cross rate versus the US dollar since mid- March 2012 also fits the ongoing international economic weakness story. Recall that as the world economy deteriorated more and more quickly around mid-2008, not only did the US dollar rally on a broad real trade-weighted basis, but also the dollar weakened relative to the Yen. The strong dollar equals weak stocks (and weak commodities in general), weak dollar equals strong equities (and bullish commodities) chant remains popular.

The world and perspectives on it are not immutable, so 2012 does not precisely duplicate 2008. Yet given the experience of 2008, what does a rally by the dollar in general, if accompanied by a rally in the Yen (effective exchange rate), and especially if the Yen also marched higher against the dollar on a cross basis, portend? This would hint that the disturbing international crisis is in the process of becoming more fearful. And since March 2012, that seems to be what has been happening.

The current dangerous situation in the ongoing worldwide economic crisis, if it further worsens (and it probably will worsen to some extent, even if the deterioration is not nearly as severe as in 2008), will be sufficiently severe to induce policy makers around the globe to take further substantial steps in their struggles to provide long-lasting remedies. Perhaps such actions by central bankers and political leaders may occur relatively soon. These may issue from individual nations in somewhat piecemeal fashion. Yet there is a substantial chance that intervention will be relatively coordinated, especially if an encore of second half 2008 looks more and more to be underway.

But in the meantime, for the near term, the Japanese Yen probably will keep rallying on an effective exchange rate basis; it probably will breach the 1/16/12 daily low of 187.5. The Yen likely will retest the Y75 level against the dollar. However, the US dollar (TWD) will remain fairly strong. The bear trend in worldwide equities and commodities in general therefore probably is not over. Renewed sustained weakness in both the Yen and the dollar would indicate an easing of the current stage of the global crisis.

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2008 Revisited- Japanese Yen Strength, Global Economic Weakness (6-4-12)