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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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

US STOCKS OVER THE LONG RUN: BEAR MARKETPLACE HISTORY © Leo Haviland, August 4, 2023

“It’s déjà vu all over again!”, declared Yogi Berra, a famous baseball star.

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OVERVIEW AND CONCLUSION

Given the great significance of the United States within the global economy, both Wall Street and Main Street spend much attention and energy focusing on the American economic scene. Benchmark American stock indices such as the S+P 500 and Dow Jones Industrial Average to some extent probably reflect the overall health of and potential for the American economy. 

United States stock marketplace trends and phenomena intertwine with those of other global stock arenas. Prices and trends for (and assorted other economic, political, and social variables influencing) US signpost stock indices such as the S+P 500 and Dow Jones Industrial Average interrelate with those of key American and global interest rate, currency, commodity, real estate, and other economic domains. History reveals that these cultural relationships can and do change, sometimes slowly, sometimes rapidly. Convergence and divergence (lead/lag) patterns between marketplaces can and do shift or transform. 

Price levels and trends for these key American equity marketplaces therefore attract and sustain widespread and domestic international attention. 

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US interest rate, dollar, commodity, real estate, and other marketplace trends entangle with and influence American stock trends. 

“Long Run Historical Entanglement: US Interest Rate and Stock Trends” (7/6/23) concluded: “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.”

“Given the historic pattern in which UST [US Treasury; focus on the UST 10 year note] yield increases “lead” to peaks in key American stock benchmarks such as the S+P 500, do signs of a noteworthy rising yield trend exist on the interest rate front? Yes.” And “the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak probably will occur relatively soon, probably within the next few weeks or months. However, even if the S+P 500 continues to climb, it probably will not exceed its January 2022 peak by much if at all.” 

The UST 10 year note yield broke through 3/2/23’s 4.09 percent interim high with 8/3/23’s 4.20 percent high. It thus is approaching 10/21/22’s 4.34 percent top, attained around the time of the S+P 500’s crucial trough on 10/13/22 at 3492. 

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Given the importance of price trends in widely watched US equity indices such as the S+P 500 and Dow Jones Industrial Average, stock and other marketplace players and observers should review and assess long run bear (and bull) marketplace history for those American benchmarks. 

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US Stocks Over the Long Run- Bear Marketplace History (8-4-23)

DÉJÀ VU (ENCORE): US MARKETPLACE HISTORY © Leo Haviland October 4, 2015

CONCLUSION 

Via its rhetoric and September 2015 managerial decision to delay a Fed Funds rate increase, the Federal Reserve has battled to halt the S+P 500’s decline relative to its May 2015 peak at around ten percent. Hints by the European Central Bank and Japanese policymakers regarding their potential willingness to embark on additional quantitative easing interrelate with this Fed quest. However, the International Monetary Fund head warns: “global growth will likely be weaker this year than last, with only a modest acceleration expected in 2016”; “we see global growth that is disappointing and uneven” (“Managing the Transition to a Healthier Global Economy”; 9/30/15). The World Trade Organization cut its 2015 forecast of global trade expansion from 3.3 percent to 2.8pc, lowering that for 2016 to 3.9pc from 4.0pc (9/30/15). The WTO says risks to this prediction are on the downside.

 

Worldwide economic growth probably will be feebler than the IMF expects. In today’s intertwined international economy, this overall economic weakness, which is not confined to emerging/developing nations, will help to undermine American GDP growth. The S+P 500 will remain volatile, but it probably will continue to decline, eventually breaking beneath its August 2015 low. The broad real trade-weighted United States dollar will stay relatively strong.

 

Marketplace history for US stocks and other financial domains obviously need not repeat itself, either in whole or in part. A slump in the S+P 500 of roughly twenty percent or more from its spring 2015 pinnacle nevertheless probably would inspire memories of 2007-09. After all, not only is the dollar strong, but also emerging marketplace stocks and commodities “in general” have collapsed over the past few years, and notably since second half 2014.

 

The strong US dollar, the substantial tumble in emerging stock marketplaces, and the crash in commodities in general reflect (confirm; encourage) global economic weakness (slowing growth). Overall debt levels as a percentage of nominal GDP in America (and many other places) remain elevated despite the economic recovery since 2009. The United States has made no progress in reducing its long run federal fiscal deficit problem. These trends are ominous bearish indicators for the S+P 500. What other variables currently or potentially confirm the probability of economic weakness in the US (and elsewhere)? Let’s focus on the US economic and political scene.

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The broad real trade-weighted US dollar (“TWD”) established a major bottom at 80.5 in July 2011 (Federal Reserve, H.10; monthly average). By September 2015, it had run up to 97.9. Not only does September 2015 exceed March 2009’s 96.9 high, attained at the depths of the worldwide economic disaster (and alongside the S+P 500’s March 2009 major low at 667). The TWD’s 21.6 percent appreciation in its current bull move exceeds the 15.1pc TWD advance during from April 2008 to March 2009. Keep in mind that although the S+P 500’s major high in October 2007 at 1576 preceded April 2008’s TWD trough, its 5/19/08 final top at 1440 roughly coincided with that April 2008 TWD low.

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Review Moody’s Baa index of corporate bonds (this signpost includes all industries, not just the industrial sector; average maturity 30 years, minimum maturity 20 years; Federal Reserve, H.15). Despite the Fed’s continued unwillingness to raise the Federal Funds rate, such yield repression in recent months has not prevented the modest yet rather steady rise in medium-grade US corporate debt yields. In addition, the yield spread between that corporate debt index and the 30 year US Treasury bond has widened. Although these rate moves have not shifted as dramatically as they did during the worldwide financial crisis, they likewise warn of (confirm) US (and global) economic weakness.

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Deja Vu (Encore)- US Marketplace History (10-4-15)