I start my newsletter on a sad note this quarter. On June 22nd, former Federal Reserve Chairman, Alan Greenspan, died at the age of 100. He served as Fed Chairman from August, 1987 until his term expired at the end of January, 2006. He was Fed Chairman during my formative years at Meridian Bank in Reading. He guided us through the crash of 1987, the S&L crisis of the 1980s and early 1990s, the CRE crisis of 1990, the tech stock bubble of 2000-2001, September 11th and subsequent recession, and left his position before the housing crisis grew into the Great Recession of 2008. I’m still mad at him for raising interest rates so much in 1994. On the positive side, he guided us to ten consecutive years of GDP growth from 1991 to 2001. I, like most investors and banking industry professionals, had a love-hate relationship with him. But to many of us, he will always be the Maestro.
Iran
The primary issue is the
danger to shipping in the Strait of Hormuz as Iran fired upon and threatened
ships there. The US set up a blockade so
that Iranian oil could not leave the country, pressuring their economy. While the US does not face oil and gas
shortages, many countries do. Europe
imports 95% of its oil, China 75%, and Japan 99%.
The US is trying to
negotiate with Iran and has a fragile 60-day ceasefire, but can we trust this
global threat? They use short- and long-range
ballistic missiles and drones to threaten their region and the world. They threaten ships in the Strait, support
terrorists like Hezbollah and Hamas, continue to seek nuclear weapons, and kill
thousands of their own people as they did earlier this year. Can we even trust them to not build a nuclear
weapon? I think not. Stock markets don’t trust them either, judging
from recent volatility.
Change Has Come to the
Fed- Finally
Kevin Warsh was sworn in
as new Federal Reserve Chairman on May 22nd at the White House (as
Greenspan had been in 1987) and a new era began. Warsh served on the Fed’s Board of Governors
previously, from February, 2006 to March, 2011.
Like Greenspan, he believes productivity should be a major factor in
monetary policy decisions and that the Fed should not just rely on published
data and rules of thumb like the Phillips curve. Artificial Intelligence right now is expected
to lead to another productivity boom, just as the personal computer and the
Internet did in the 1990s. It was no
surprise that there was no change in rates at Warsh’s first meeting while he
contemplates what to change at the Fed.
Jerome Powell’s term as
Chairman expired in May but, like company that doesn’t know when to leave a
party, he insisted on staying on the Board of Governors. It is a highly unusual move and last occurred
in 1948, when Fed Chairman, Marriner Eccles, refused to leave the Board when
his chairmanship ended despite a request by President Truman to step down. Why do we give separate Chair and Board terms
to these obnoxious people? On May 31st,
Powell received the Profiles in Courage award from the JFK Presidential
Library. For what exactly?
Chairman Warsh is setting
up five working groups to review monetary policy and operations, how to
communicate to markets and to the public, data sources and potential new ones,
productivity and job growth, and inflation measures and targets. Hopefully he dumps the SEP, or Summary of
Economic Projections, because it is often ridiculous, senseless, and more
inaccurate than accurate. (For this
quarter, Warsh did not provide any projections; the other 18 FOMC members did). Does it bother anyone that they project
inflation to fall but it always takes two years to get to target? Does it bother anyone that they project low
GDP growth, but don’t project lower rates?
Some of My Favorite
Economic Indicators
Leading Economic
Indicators (LEI)- Could we be seeing the bottoming and reversal of the nearly
four-year negative cycle in the LEI? May’s
index was +.1%, following April’s rise of +.3%.
March was down -.6% likely due to the shock of the Iran conflict, and
February rose +.3%. The index had
declined in 39 of the last 47 months.
We’ve seen three increases- all this year and five months of no change
in 2024 to 2026. LEI had signaled
recession many times in those 39 months, but like the inverted yield curves of
2022 to 2024, a sustained downturn in GDP never occurred.
Inflation- The Iran
conflict led to a spike in oil prices from $68 to $111.50 in April and we have
seen prices fall back in May and June when hopes of an end to the conflict are
at their highest. However, headline and
core (ex. food and energy) prices that were trending down toward targets are
now uncomfortably high. CPI for May
y-o-y was +4.2% and core was +2.9%. PCE
in May was +4.1% and core was +3.4%. PPI
for May was +6.5% and core was +4.9%. It
feels like 2022-2023 all over again, but the measures are all expected to
decline as oil prices and the slower moving gas prices drop back down to
pre-conflict levels. We are still in the
unnatural and unprecedented situation where PCE is too close to or greater than
CPI; May PCE of +4.1% is just .1% under
CPI of +4.2%. May core PCE of +3.4% is
.50% greater than May core CPI of +2.9%.
CPI is supposed to be .50% higher than PCE in a normal
relationship. I’m currently reviewing
the “Truflation” measure, which is a real-time y-o-y estimate for CPI, started
in December, 2021. For you Bloomberg
users, the ticker is TRUFUS44.
Real GDP- The Atlanta
Fed’s GDP Now is currently at +2.5% for 2Q26.
GDP had improved in 1Q26 to +2.1%, following +.5% in 4Q25. Nominal GDP was +5.1% in 1Q26, falling from
+5.8% in 4Q25.
Moody’s Beige Book Index-
The June, 2026 Beige Book showed a lot of improvement. Ten districts increased, one was flat, and
one declined, which sadly was our own Philadelphia district. The Moody’s index improved to 36.1 in June,
following 25.0 in April, and 16.7 in March.
M2 Money Supply- M2 y-o-y
growth was unexpectedly stronger in May at +5.6%, following April +4.7%, March
+4.3%, and February +4.3%. Finally,
May’s growth is close to the average nominal GDP growth of +5.5% for 1Q26 and
4Q25. We saw outright declines from
December, 2022 to March, 2024 that were hurtful to growth. The velocity of money has been flat at 1.41
in 1Q26, 4Q25, and 3Q25. (Remember GDP=M
x V).
Spacex and the Markets
Spacex completed the
largest IPO in history on June 12th, priced at $135 per share. Trading opened at $152.75, hit a trading high
of $225 within days, and slowly faded back to $153 on June 26th. Elon Musk became the first trillionaire with
that issuance. The market cap stands at $2.0 trillion.
Spacex isn’t the only
stock to rise and then fall back this quarter.
After stocks fell in March and April, prices rallied in May into June,
before turning down as we see volatility with Iran and quarter-end
repositioning. The S&P 500 forward
PE ratio is about 23 (19 to 24 is typical in a bull market). AI investment and buildout will take an
estimated three to five years and should lead to increased productivity,
increased corporate profits, and increased GDP growth, albeit with potential increased
job losses. With the pool of available
workers growing steadily and now at 14,063,000, this could spell bad news for
the labor market. Inflation will likely
decline in this scenario. (Warsh knows).
Don’t forget bonds. They’ve been very volatile with a tendency
toward rising rates most of the quarter.
During 2Q26, the 2-year Treasury yield rose 30 basis points to 4.09%, the
5-year Treasury rose 20 basis points to 4.13%, and the 10-year Treasury rose 5
basis points to 4.37% (after peaking at 4.50% with worries about the budget
deficit, US debt/GDP at 122.8%, and uncertainty over term premiums). Mortgage rates remain stubbornly high. Watch out. The curve is flattening.
World Cup
Soccer fans have taken
the US by storm, with an estimated 1 million to 5 million fans visiting the US,
Canada, and Mexico for the matches.
Among the favorites are USA with Pulisic, France with MBappe (my
personal favorite), Argentina with Messi (the greatest), England with Kane, and
Norway with Haaland. My niece got to go
to the Ghana match in Philadelphia yesterday to cheer on her home country. It has been exciting to watch some of the
matches, but the 0-0 ties are a little trying.
It’s truly exciting as foreign visitors are praising the great time they
are having in America.
Large Hadron Collider
CERN has scheduled
another long shutdown (LS3) for the LHC starting tomorrow to increase its
capacity; this shutdown will last until June, 2030. Other shutdowns included the September, 2008
one right after the LHC was started up on September 10, 2008, due to electrical
issues and helium leaks and coincided with the Great Recession. A temporary shutdown occurred in November,
2009 when a bird dropped a baguette into the electrical substation. LS1 was from February, 2013 for two years,
and LS2 was from December, 2018 for over three years, coinciding with the
covid-19 pandemic. We will wait for
what’s next. In all these years, I only
remember one important discovery, that of the Higgs Boson particle in
2012. Perhaps they don’t tell us
everything. Why would they keep spending
extreme amount of money on the LHC?
Maybe they will someday tell us.
Italy- Here We Come!!
This summer, we will
visit Milan, Lake Como, Florence, Pisa, Tuscany towns of Chianti and San
Gimignano, Cinque Terre, and Rome. We
are just praying that the 100+ degree heat wave ends before we go. We have an excellent Italian travel agent who
took care of all details- large and small.
I highly recommend her and if you plan a trip to Italia, let me know and
I’ll give you contact information.
The Italian economy is
producing just +.5% GDP growth despite its strength in manufacturing. Unemployment is 5.7%. Government debt is putting a drag on growth,
with the debt/GDP ratio of 133.3%; US growth is also slowed by its ratio of
122.8%. Prime Minister, Giorgia Meloni,
has her hands full trying to improve the economy while navigating the EU
rules.
So, for now, arrivederci!
Thanks for reading! As always, I appreciate your support! Viva l’Italia! DLJ 06/28/26
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.
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