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)

HUNTING FOR YIELD: STOCKS, INTEREST RATES, COMMODITIES, AND BITCOIN © Leo Haviland November 7, 2021

“‘Because I want you to know that we’re on our way to Las Vegas to find the American Dream.’” Hunter S. Thompson’s novel, “Fear and Loathing in Las Vegas: A Savage Journey to the Heart of the American Dream”

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OVERVIEW

 

In recent years, fervent yield repression (with resulting low United States Treasury yields relative to inflation) by the Federal Reserve and its central banking comrades, often assisted by money printing (quantitative easing), and accompanied by artful easy money rhetoric, often have encouraged epic quests for adequate “yield” (return) and bullish trends in stocks and assorted other (“related”) marketplace domains. Especially since the emergence of the coronavirus pandemic in March 2020 and the related economic and worldwide stock marketplace crashes, the revered Fed and other central bank wizards, in addition to expanding magnificent money printing programs, have promoted and enforced a yield repression regime.

The heroic Fed earnestly and repeatedly declares its devoted allegiance to its legislatively mandated goals of “maximum employment” and “stable prices”. However, how often does the venerated Fed even mention the third aspect of its monetary policy objectives, “moderate long-term interest rates”? The Fed is eager to deflate (repress) UST yields, and seems happy (even ecstatic) to greatly inflate S+P 500 and home prices. Do the magnificent climbs in stocks and homes represent “stable prices”?

American inflation rates in March 2020 and many months thereafter obviously were lower than those of recent months. Yet even around March 2020 and the next several months, real returns from benchmark United States Treasury instruments across the yield curve were small or negative in comparison to the Consumer Price Index. What about more recent times? The UST 10 year yield is about 1.46 percent, but for the past several months, US CPI-U inflation has surpassed five percent. This negative return situation (which encourages borrowers and debtors but thereby cheats savers and creditors) of course (all else equal) tends to make UST ownership unattractive for many marketplace participants.

What has resulted from keeping yields low and often negative in real terms relative to the current Consumer Price Index and similar inflation gauges? Not only have central bankers assisted spenders (consumption) and helped debtors, but also they have encouraged avid searches for adequate (sufficient) “yield” (“return”) in the S+P 500 (and other international equity realms), emerging marketplace dollar-denominated sovereign debt, corporate debt, as well as in other “asset classes” such as homes, commodities “in general”, and many cryptocurrencies such as Bitcoin. The enthusiastic buying by eager and sometimes frantic yield-hunters has generated meteoric price rallies in the S+P 500 and these other realms since their dismal March 2020 bottoms.

Investment rhetoric encourages price rallies in marketplaces, especially in stocks. Thus Wall Street leaders, supported by the loyal financial media, loudly applaud “investment”, “investors”, and bull moves. Assorted investment generals and their loyal troops perennially fight to identify stocks (especially American ones) as well as other praiseworthy asset classes to buy (or keep holding).

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Widespread marketplace faith still exists in the power of the Fed and its trusty friends to engineer and appropriately manage interest rate yield outcomes, especially in the government securities marketplace. Fed epistles and hymns proclaim its praiseworthy pilgrimage of pursuing the goal of an inflation average of two percent over some misty version of the long run, as well as its noble intention to keep long term inflation expectations “well anchored” at two percent.

The Fed and other central banking magicians and evangelical finance ministers have repeatedly claimed (prayed) that recent inflationary signs in America and elsewhere in recent months are merely “transitory”, “temporary”, or the “result of special factors” (such as high prices for used cars; or, supply bottlenecks). However, this inflation viewpoint probably is wrong.

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Convergence and divergence (lead/lag) patterns between marketplaces can change or transform, sometimes dramatically. Marketplace history does not necessarily repeat itself, either entirely or even partly. But marketplace history nevertheless provides guidance regarding the probabilities of future patterns.

Increases in benchmark high-grade government interest rates (such as US Treasuries) and higher yields for lower-quality debt securities (such as corporate bonds and emerging marketplace sovereign debt) probably will weaken the S+P 500 and related advanced nation stock marketplaces. Very elevated government debt levels in America and many other leading nations will help to undermine stocks. Price divergence between the S+P 500 and emerging marketplace stocks (which since February 2021 have not soared to new highs, but instead have declined) also warns of potential weakness in the S+P 500.

Price and time trends for commodities “in general” probably will intertwine with and track those of the S+P 500 and other stock marketplaces.

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Cryptocurrencies in recent years have attracted widespread attention and increased “investor” and other trading (and regulatory) attention. Despite the great variety of cryptocurrencies, Bitcoin is a well-known and actively-traded representative of the crypto trading arena. The overall “search for yield” financial environment  reflected in the bullish price trend in the S+P 500 and elsewhere has assisted Bitcoin’s price ascent. An important additional factor, but not the only one, supporting Bitcoin’s heavenly price leap has been growing inflation and fears that it may increase further. Of course the supply/demand/available inventory situation of Bitcoin is important, and an exciting new marketplace such as Bitcoin can attract additional buyers into its domain, especially when prices have tended to soar upward significantly. Also, Bitcoin offers people a means by which to hide their assets and money movements from government and other regulatory eyes. And fears about American and other government debt levels and trends probably also have been an important consideration fueling Bitcoin’s climb.

These inflation and debt concerns intertwine with wariness regarding the trustworthiness of political and economic leaders and institutions (including banks). Some cryptocurrency participants probably worry about the long run strength of the US dollar, and perhaps other leading currencies as well. Persistent cultural divisions in America and numerous other nations, helps to build and sustain distrust about institutions and leaders.

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Bitcoin’s price rise since its creation about a dozen years ago (around the time of the global economic disaster of 2007-09) astonishes observers. However, underline also that since around first quarter 2020, Bitcoin’s price and time trends often have paralleled those in the S+P 500 and related stock marketplaces.

Bitcoin’s celestial advance to date probably constitutes a danger signal regarding the international financial system and thereby potential economic growth. Nevertheless, Bitcoin and other cryptocurrencies are not integral to the current or near-term functioning of the financial system and the global economy. Moreover, worldwide economic and political leaders have long demonstrated an ability to support traditional global economic (financial, commercial, business) and political arrangements. For example, note the interrelated responses around the globe in 2008-09 and thereafter to the worldwide economic crisis, as well as actions in late first quarter 2020 and thereafter to the fearsome economic downturn (and the 1Q20 stock marketplace crash). Consequently, for the near term horizon at least, if the S+P 500 and related stock marketplaces fall significantly in price, then the Bitcoin price probably will decline (whether at around the same time or eventually) as well.

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Hunting for Yield- Stocks, Interest Rates, Commodities, and Bitcoin (11-7-21)

GOLD AND GOLDILOCKS: 2017 MARKETPLACES © Leo Haviland, January 10, 2017

“I think I’ll go to sleep and dream about piles of gold getting bigger and bigger and bigger.” Fred C. Dobbs, in the 1948 movie, “The Treasure of the Sierra Madre” (John Huston, director)

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CONCLUSION

The extent to which important financial playgrounds intertwine and their alleged trends converge or diverge (or, lead or lag) are matters of opinion, as are perspectives on and reasons for such relationships and movements. Apparent convergence/divergence and lead/lag patterns between currency, interest rate, stock, and commodity marketplaces nevertheless offer guidance to players seeking to explain, predict, or profit from financial price movements. Marketplace history need not repeat itself, either entirely or even in part. Thus these relationships can change, sometimes dramatically. Fundamental supply/demand factors and trends are not written in stone. And competing historians and clairvoyants do not necessarily share the same perspectives or tell the same stories regarding either a given financial playground or its relationships to other arenas.

The relationships between gold and the US dollar, as well as those between gold and other commodities and stock and interest rate marketplaces, are complex. Often, gold prices travel in roughly similar fashion to those of base metals in general and the overall petroleum complex. Yet sometimes substantial fears regarding financial meltdown (asset value destruction) or striking worries about political evolution or disruption also can influence gold’s supply/demand and price profile, and thereby gold’s interrelations with commodities as well as currency and securities marketplaces. In any case, significant gold price trend changes often precede or roughly coincide (or “confirm”) those elsewhere.

Gold probably established an important low not long ago, at $1124 on 12/15/16. Suppose this gold rally continues for at least the near term. The gold ascent probably warns of peaks in the broad real trade-weighted United States dollar (“TWD”) and the S+P 500. The current divergence between the S+P 500 and emerging marketplace nation stocks in recent months likewise warns of these trend shifts. Relevant to this viewpoint, the 10 year United States Treasury note yield established a major low at 1.32 percent on 7/6/16. In addition, suppose gold’s recent climb eventually coincides with a renewed slump in the LMEX base metals index (London Metal Exchange) from its 11/28/16 top at 2857, and at least a modest tumble in benchmark petroleum prices. That probably will interrelate with this scenario of US dollar weakness and erosion of S+P 500 and emerging marketplace stock prices.

The American political theater is relevant to this outlook for gold price and its relationship to the US dollar and other marketplaces. Trump’s remarkable Presidential victory and his likely policies probably have increased fears in both American and international domains regarding the quality of America’s political leadership and the consequences of its economic (political) philosophy. Moreover, the nation’s various sharp cultural divisions and related partisan political conflicts will not disappear anytime soon.

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Gold and Goldilocks- 2017 Marketplaces (1-10-17)

SHOWING THE WAY: BASE METALS © Leo Haviland October 15, 2013

Industrial metals such as copper and aluminum of course have different supply/demand fundamentals. They intertwine in diverse ways with significant movements in interest rate and currencies, especially the United States dollar. The overall base metals complex often travels in the same fashion (direction) as precious metals. Yet focus on global stock marketplaces in relation to base metals “in general”. Significantly, from the later stages of the glorious Goldilocks Era to its dreadful decline, from the ensuing worldwide recovery up to the present, trends in base metals “in general” very often show the way or confirm trends in key global stock marketplaces.

Price trends in base metals indeed have been closely tied to the China growth story. Yet significant marketplace trend changes in base metals also fit those in emerging stock marketplaces as a whole. The voyage of the base metals complex since roughly mid to late 2007 closely resembles that of emerging marketplaces “in general”. What about in relation to America’s S+P 500? Since its high on 2/14/11 at 4478, the London Metal Exchange base metal index (“LMEX”) has been in a massive bear trend, falling about 35.0 percent to its 6./24/13 low. In contrast, the S+P 500’s glittering advance has continued up to a 1730 high on 9/19/13. But as before 2011, the timing of the S+P 500’s turning points from 2011 to the present in its overall upward climb generally fit rather closely to those in the LMEX index.

The sustained decline in the base metals battleground “in general” since first quarter 2011 continues to signal slower growth in emerging marketplaces in general and in China in particular. Note the continued lowering of growth estimates for China in recent months. In addition, despite the overall directional price trend divergence between the LMEX and the S+P 500, the sustained base metal weakness warns that growth probably will be weak in advanced nations, and that the glowing strength in the S+P 500 will not be eternal.
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