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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AS THE WORLD TURNS: MARKETPLACE BATTLEFIELDS ©Leo Haviland January 1, 2025

In “A Short History of Financial Euphoria”, John Kenneth Galbraith comments: “The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich. And it is equally protected by the will to ignore, exorcise, or condemn those who express doubts.” (Chapter 1, “The Speculative Episode”)

“‘A Ti-tan iv Fi-nance,’ said Mr. Dooley, ‘is a man that’s got more money thin he can carry without bein’ disordherly. They’se no intoxicant in th’ wurruld, Hinnissy, like money.’” (Finley Peter Dunne’s “Mr. Dooley” commenting “On Wall Street”; spelling as in the original)

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CONCLUSION

United States inflation benchmarks such as the Consumer Price Index have receded toward the Federal Reserve’s two percent objective. For at least the near term, the Fed’s December 2024 Economic Projections encourage faith in many marketplace players that the Fed will reduce its Federal Funds policy rate further by the end of calendar 2025. These intertwined factors, accompanied by the move in the S+P 500 to a new record high (12/6/24’s 6100), bullish optimism regarding US corporate earnings for 2025 and beyond, and hope that the incoming Trump Administration successfully will promote economic growth inspire belief that the American (and global) economy will keep expanding adequately (or at least have a “soft landing” and escape recession).

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However, despite ongoing moderate (but still too high) inflation as well as inflationary proposals embraced by the incoming American Administration (Inauguration Day is 1/20/25), the United States (and global) economy probably eventually will slow down substantially. It may not escape a recession. Forces warning of an American and international economic slowdown are widespread. What are some of these factors?

Fed monetary policy was significantly restrictive for an extended time span until recently, and it probably will remain mildly so for at least the near term. The Federal Reserve Board recently adopted a cautious strategy regarding further rate cuts, which will tend to encourage economic sluggishness. Though American inflation is more subdued, it has not disappeared. The Fed’s two percent target has not been achieved. Shelter and services inflation remain lofty. The potential enactment of at least the essence (broad outlines) of tax, tariff, and immigration policies promoted by President-elect Trump represent noteworthy inflationary risks. Middle East unrest may spark a sustained rally in petroleum prices; that potentiality also tends to encourage the Fed to ease monetary policy gingerly.

In addition, the long term and arguably even the near term US fiscal situation and its management are dangerous. Massive fiscal expansionism over an extensive time span arguably at some point can begin to endanger rather than bolster economic growth, in part because the combination of substantial deficit spending and a very large government debt as a percentage of GDP tends to boost interest rates, especially longer term ones. Significant American deficit spending and debt levels represent ongoing problems, and upcoming debates regarding them and the debt ceiling loom. Note that despite the Fed’s easing, the UST 10 year note’s yield’s increase from 9/17/24’s 3.60 percent low, as well as from 12/6/24’s post-US national election trough at 4.13pc. America is not a developing/emerging marketplace country. Yet as in those other countries, mammoth and growing US federal debt, especially in conjunction with fierce ongoing US political conflict and other phenomena, could produce a further yield jump. With 12/26/24’s 4/64 percent high, the UST 10 year note yield has neared 4/25/24’s important top at 4.74pc, which is fairly close to 10/23/23’s 5.02pc peak. Over the next few months, there is a substantial chance that the UST 10 year’s October 2023 summit will be attacked and broken.

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 UST 10 year note’s yield increase from 9/17/24’s 3.60 percent interim low, and especially alongside the recent runup stage from 12/6/24’s 4.13pc to 12/26/24’s 4.64pc probably warns of a significant decline in the S+P 500 from 12/6/24’s 6100, especially since the Federal Reserve’s real Broad Dollar Index has rallied in recent months and is now probably “too strong”. The S+P 500 price probably will not exceed its December 2024 high by much, if at all.

Though the “overall” US dollar may remain strong for a while longer due to relatively lofty US interest rates, the real Broad Dollar Index probably will begin to decline from around current levels, which have reached the major resistance barriers of autumn 2022. It eventually will retreat toward its key support at April 2020’s 113.4 elevation (recall also December 2023’s 113.8).

The increasing yield trend in the US T 10 year note since its September 2024 valley (and particularly its rise from 12/6/24’s 4.13 percent low) allied with the sharp appreciation in the US dollar since September 2024 (to what is probably a “too strong” level) have undermined emerging marketplace stock and bond prices. Price and time divergence of course can exist between the securities trend of emerging (developing) nations and those of advanced nations such as the US. However, history shows that in an intertwined global economy, sustained price trends in emerging marketplace stocks and bonds can converge with (parallel) those in the stock and bond battlegrounds of advanced nations. Therefore, this price weakness in emerging marketplace securities is a bearish sign for US stock and bond prices (including UST instruments, unless there eventually is a “flight to quality” into them) and global GDP growth.

US existing single-family home prices dipped after June 2024, a portent of economic weakness. In addition, American unemployment, though still fairly low, has climbed since April 2023. Commodities “in general” have plummeted substantially from their first quarter 2022 pinnacle, whereas the S+P 500 has ventured to new highs. This massive decline in commodities as well as its notable divergence from the bullish S+P 500 trend since the S+P 500’s major low on 10/13/22 at 3492, when interpreted alongside other bearish (recessionary) warning signs, probably point to approaching economic weakness and a fall in the S+P 500. As the cryptocurrency Bitcoin and gold prices in recent years have often made significant price turns roughly around the same time as the S+P 500, continuation of their recent erosion will be an ominous bear sign for US stocks.

Until recently, the US Treasury yield curve was inverted (short term rates above long term ones); history reveals this phenomenon often has preceded a recession. Over the longer run, if the American economy slows substantially or enters a recession, the UST 10 year probably will challenge 9/17/24’s 3.60 percent low.

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In contrast to the S+P 500’s exuberance over the past year or so (and especially since 8/5/24’s 5116 trough), recent measures of Main Street optimism are mediocre. Arguably many people on Main Street already are living in recessionary times, partly because of the high inflation of the past few years. Some of former President Trump’s enduring political appeal (and his recent election triumph) probably derives from the divergence between Wall Street (and other elite group) prosperity and Main Street economic realities. Given consumer uneasiness, the recent trend of rising US Treasury 10 year note rates, and the narrowness of the Republican majority in the new House of Representatives, the incoming Trump regime probably has only a narrow time window during which it can enact policies which it hopes will maintain or increase economic growth.

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As the World Turns- Marketplace Battlefields (1-1-25)

A BEAR TREND’S END: US NATURAL GAS © Leo Haviland September 4, 2019

Alvin Toffler’s “Future Shock” (Chapter I) notes: “Future shock…the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time.”

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CONCLUSION

The ferocious bear trend in NYMEX natural gas (nearest futures continuation) that commenced after 11/14/18’s 4.929 peak probably ended with 8/5/19’s 2.029 low. If not, it likely will finish fairly soon. Assuming normal weather, major support around 1.90/2.00 probably will hold. For the near term, noteworthy resistance stands around 2.50/2.55, with 3.05/3.10 an important target. If United States winter weather is significantly colder than normal, an advance toward 4.00 looms.

Marketplace history of course is not marketplace destiny. Based on historical major bear trends for NYMEX natural gas (nearest futures), the current bear trend has lasted sufficiently long in price (distance) and time terms for that trend to end and for a bull move to emerge. A critical variable supporting this viewpoint is the overall United States natural gas inventory situation. From the days coverage perspective, America’s natural gas inventory outlook is bullish.

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A Bear Trend's End- US Natural Gas (9-4-19)

AMERICAN ECONOMIC GROWTH: CYCLES, YIELD SPREADS, AND STOCKS © Leo Haviland March 4, 2019

In “Back in the U.S.A.”, Chuck Berry sings: “Yes, I’m so glad I’m livin’ in the U.S.A. Anything you want, we got right here in the U.S.A.”

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OVERVIEW AND CONCLUSION

Marketplace and other cultural analysts create meaningful relationships between variables and groups of phenomena. As subjective perspectives differ, these faithful inquirers identify, define, select, assess, and organize evidence (data; facts; factors) in a variety of fashions. This results in diverse propositions, arguments, and conclusions, and thus an array of competing stories.

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In its discussion of America’s 4Q18 GDP growth, the NYTimes (3/1/19, pB1) stated that “most economists do not expect a recession this year.”

America’s current economic expansion is very long by historical standards. Of course history need not repeat itself. Conditions, including associations and patterns between variables, can and do change over time. Marketplace convergence and divergence trends (and lead/lag relationships) are not inevitable; they can shift, sometimes dramatically. However, devoted study of the ongoing economic expansion should not divorce itself from previous economic growth and decline episodes and patterns.

Interest rate yield relationships offer insight into economic history and prospects. Particularly given the remarkable length of America’s recent glorious real GDP expansion, marketplace clairvoyants should review the long run historical relationship between yields for lower-grade United States corporate bonds and the ten year US Treasury note in the context of American economic growth and recession cycles. The recent widening yield spread trend for this credit relationship warns that a US recession (or at least significantly lower growth than generally forecast), whether in calendar 2019 or not long thereafter, is more likely than most wizards anticipate. Moreover, current trends in the US Treasury yield curve, when placed in historic perspective, also underline the looming potential for an American economic downturn (or considerably slower growth than most soothsayers predict).

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American Economic Growth- Cycles, Yield Spreads, and Stocks (3-4-19)

AS THE WORLD BURNS: MARKETPLACES AND CENTRAL BANKS © Leo Haviland February 8, 2016

“To every thing there is a season, and a time to every purpose under the heaven.” Ecclesiastes, Chapter 3, verse 1 (King James Version)

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OVERVIEW AND CONCLUSION

To spark and sustain the worldwide economic recovery that began around first half 2009, the Federal Reserve Board and other major central banks warmly embraced highly accommodative monetary policies such as yield repression and money printing (quantitative easing). Who would want to repeat the horrors of the hellish worldwide economic disaster that erupted in 2007 and worsened dramatically after mid-year 2008? Therefore, often in recent years, after significant hints of feeble growth (or recession) or insufficient inflation (or signs of that evil, deflation) appeared, these high priests of the economic system offered further rhetoric or additional (or new) action to accomplish their aims and restore confidence. Such central banking efforts often succeeded. In any case, financial congregations (especially in American and other stock marketplaces) generally loudly hoped for, fervently encouraged, and joyfully praised such central bank rescue efforts.

However, around mid-2015, advanced nation stock benchmarks such as the S+P 500 peaked. Moreover, despite central bank wordplay and vigorous policy action, bear moves in these stock domains have persisted alongside renewed signs of economic weakness and “too low” inflation. Ongoing collapses in emerging marketplace stocks “in general”, the major bear move in commodities in general, and falling yields in the 10 year United States Treasury note accompanied tumbles in the S+P 500 and other advanced nation equities. The major bull move in the broad, real trade-weighted US dollar, which began in July 2011, has played a key role in these intertwined trends.

In the past few weeks, key global central banks once again preached sermons or engaged in actions aimed not only at creating sufficient inflation (defeating deflation) and ensuring sustained economic recovery. Stock marketplaces initially ascended higher after these recent efforts (recall their lows around January 20, 2016), and the US dollar weakened somewhat. The Federal Reserve Board and other guardian angels probably did not want the S+P 500 and related stock marketplaces to crash under their January 2016 lows. In addition, they probably did not want the United States dollar bull move to extend much (if at all) beyond its January 2016 high.

However, and although not much time has passed since these recent ardent central bank efforts, the S+P 500 and other stock landmarks have resumed their slumps. Ominously, many stock marketplaces have fallen under their August/September 2015 lows. In addition, the dollar still remains strong, commodities weak (despite talk about and hopes for OPEC petroleum production cuts), and US government yields (in a flight to quality) depressed. This vista warns that the Fed and other revered central banks are finding it more and more difficult to accomplish their various policy aims. It suggests that people (including devoted investors in US stocks) increasingly are losing faith in the ability of central banks to produce desirable outcomes.

Although it is a difficult marketplace call, these ongoing and interwoven marketplace trends probably will continue for a while longer. Admittedly, if these marketplace patterns persist and especially if they extend, watchers should beware of even more dramatic (and perhaps coordinated) central bank rescue action.

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For additional currency, stock, interest rate, and commodity marketplace analysis, see essays such as “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16), “Japanese Yen: Currency Adventures (2007-09 Revisited)” (1/14/16), “US Natural Gas” Caught in the Middle” (especially pp2-3), “America: A House Divided” (12/7/15), “Two-Stepping: US Government Securities” (12/1/16), “Commodities: Captivating Audiences” (10/12/15), and “Déjà Vu (Encore): US Marketplace History” (10/4/15).

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As the World Burns- Marketplaces and Central Banks (2-8-16)