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)

HOME ON THE RANGE: FINANCIAL BATTLEGROUNDS © Leo Haviland April 1, 2023

“Weapons change, but strategy remains strategy, on the New York Stock Exchange as on the battlefield.” Edwin Lefevre, “Reminiscences of a Stock Operator”

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CONCLUSION

In America and many other important countries around the globe, uncertainties and risks regarding numerous intertwined economic and political variables and marketplaces appear especially substantial at present. In particular, inflationary and recessionary (deflationary) forces currently engage in a fierce battle for supremacy.

Monetary tightening by the Federal Reserve Board and its central banking allies has helped to cut lofty consumer price inflation levels. However, inflation remains undefeated. It hovers well above targets aimed at by these noble guardians. Yet in comparison with ongoing high actual consumer price inflation, inflationary expectations for longer run time spans generally have remained moderate. But massive public debt challenges America and many other leading nations nevertheless arguably signal the eventual advent of even higher interest rates. And given the ongoing 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 achieved 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 bolsters enthusiastic “search for yield” activity by investors and other fortune-hunters. Yet Fed and other central tightening and economic sluggishness may reverse this healthy unemployment situation and dim corporate earnings prospects. Consumer net worth levels and trends 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 a year-on-year decline in home prices over the past several months. Recent shocking banking collapses in America and Europe hint of fragilities and uncertainties facing diverse economic arenas and the value of their assets.

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.

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Given these contending considerations, critical benchmark financial battlegrounds such as the United States Treasury 10 year note, US dollar, and the S+P 500 for the near term therefore probably will 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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Home on the Range- Financial Battlegrounds (4-1-23)-1

MARKETPLACE RELATIONSHIPS: LIFE DURING WARTIME © Leo Haviland March 7, 2022

In Mario Vargas Llosa’s novel “The War of the End of the World” (Part III, chapter II), the Baron de Canabrava declares: “‘The times are out of joint…Even the most intelligent people are unable to make their way through the jungle we’re living in.’”

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CONCLUSION AND OVERVIEW

Russia’s invasion of Ukraine halted, but did not end, the major trend for rising yields in the United States Treasury marketplace which commenced in March 2020 and accelerated in early August 2021. Despite this “flight to quality” (safe haven) pause, the long run pattern for increasing UST rates eventually will resume. Substantial inflation in America and the OECD relative to recent interest rate levels as well as globally high government (and other) debt levels will propel UST rates upward. Previous essays pointed not only to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a long run rising yield environment is an international phenomenon.

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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. Marketplace history nevertheless provides guidance regarding the probabilities of future relationships.

“History on Stage: Marketplace Scenes” (8/9/17) and subsequent essays updating it (such as 3/9/21’s “Truth and Consequences: Rising American Interest Rates”, “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21), “American Inflation and Interest Rates: Painting Pictures” (5/4/21), and “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) emphasized: “Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak 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, and the arithmetical (basis point) change has not always been large.” The US Treasury marketplace has been an important standard for this analysis. The 10 year UST note is a key benchmark.

What about trends for the S+P 500 and other advanced nation stock battlegrounds? Quite some time prior to Russia’s 2/24/22 attack on Ukraine, rising interest rates and tumbling emerging equity marketplaces warned that the S+P 500 probably would fall significantly. “Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded that “the S+P 500 probably has established a notable top or soon will do so”. “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) stated: “The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.” “The S+P 500 price probably will decline further and establish new lows beneath the January 2022 trough. The development of a bear trend (decline of at least 20 percent) also is probable.”

Significantly, the S+P 500’s 1/4/22 high at 4819 and its initial 12.4 percent correction to 1/24/22’s 4223 preceded Russia’s late February 2022 invasion by several weeks. Thus that attack did not initiate significant S+P 500 weakness. In addition to the rising yields (increasing inflation; as well as lofty debt levels and outlook) and feeble emerging stock marketplaces, arguably high valuations from the historic perspective for the S+P 500 also existed prior to the Russia/Ukraine war. The strong United States dollar prior to the attack also pointed to stock marketplace weakness. The US dollar remains robust. The vicious bull spike in petroleum, wheat, and many other commodities since the invasion further undermines the S+P 500 and related stock domains. Looking forward, the S+P 500 probably will continue to retreat.

As “Paradise Lost” stated, the UST 10 year note yield probably will climb to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher summit. The Federal Reserve and other heroic central banking generals probably will not deploy substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.

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Marketplace Relationships- Life During Wartime (3-7-22)

RISING GLOBAL INTEREST RATES AND THE STOCK MARKETPLACE BATTLEFIELD © Leo Haviland October 5, 2021

In “Life During Wartime”, the Talking Heads sing: “This ain’t no party, this ain’t no disco, this ain’t no fooling around.”

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CONCLUSION

Looking forward, United States Treasury yields probably will continue to rise. So will yields for government debt in Germany and other advanced nations. In general, yields of emerging market sovereign debt securities probably will keep climbing as well. US dollar-denominated corporate debt yields also will ascend. Substantial inflation and massive government debt are important variables for this rising interest rate outlook. Increasing yields for this array of debt securities around the globe probably have created (led to) an important top around early September 2021 for the American stock battlefield (S+P 500 high 9/2/21 at 4546) and related advanced nation and emerging marketplace stock arenas, or will soon do so. There is a significant probability that the S+P 500 and related equity domains have commenced or soon will begin bear trends.

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Rising Global Interest Rates and the Stock Marketplace Battlefield (10-5-21)