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.

 

Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile




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)

****

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).

****

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.

****

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.

FOLLOW THE LINK BELOW to download this article as a PDF file.
As the World Turns- Marketplace Battlefields (1-1-25)

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.

****

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. 

****

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. 

****

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. 

****

FOLLOW THE LINK BELOW to download this article as a PDF file.
US Stocks Over the Long Run- Bear Marketplace History (8-4-23)

US NATURAL GAS: CAUGHT IN THE MIDDLE © Leo Haviland February 1, 2016

“So much trouble in the world…
The way earthly thin’s are goin’
Anything can happen”. Bob Marley and the Wailers, “So Much Trouble in the World”

 ****

CONCLUSION AND OVERVIEW

In economics, politics, and other cultural fields, players create a variety of competing perspectives. They select between and arrange a variety of diverse variables to produce their arguments and conclusions. In commodity, currency, interest rate, and stock marketplaces, bulls and bears therefore tell a variety of contending stories. In natural gas as in other marketplace battlegrounds, an array of speakers creates assorted viewpoints fighting to attract attention and persuade eager audiences.

****

 

“Dangerous Times in US Natural Gas” (11/2/15) concluded: “The probable range for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a relatively broad avenue between major support at 1.65/1.90 and significant resistance at 3.10/3.45.” The NYMEX natural gas major bear trend that followed 2/24/14’s major peak at 6.493 smashed through 4/27/15’s 2.443 minor low, 10/27/15’s 1.948 interim low, and the last prior major bottom (1.902 on 4/19/12), crashing to 1.684 on 12/18/15. Assuming normal weather for the balance of winter 2015-16 and spring/summer 2016, this range probably will persist for the next several months as well.

The high since December 2015’s low is 1/8/16’s 2.495. What would enable US natural gas prices (nearest futures) to sustain travels over 3.00? It probably will require significantly colder temperatures for the balance of winter, a blazing spring and summer, or (and especially) noteworthy cuts in natural gas production. Stronger than expected US (and global) economic growth would help rally natural gas prices. A major bull move in commodities “in general” (and especially in the petroleum complex) and a significant reversal of the major bull move in the broad real trade-weighted US dollar to some extent would assist a bull move in natural gas.

However, a somewhat significant containment risk (supplies too high relative to available storage capacity), nevertheless exists for US natural gas around the end of calendar 2016 build season. If containment fears grow stronger, and especially if actual problems develop, the 1.65 floor could be broken. In addition, US economic weakness (especially if accompanied by similar slumps around the globe), renewed feebleness in commodities (particularly in the petroleum world), and a continued strong trade-weighted US dollar would help to keep US natural gas prices under pressure.

****

Historical analysis indicates the major bear trend in US natural gas from February 2014 to December 2015 voyaged sufficiently far in price and duration terms to conclude that a trend shift from bearish to sideways occurred with December 2015’s low. However, the dramatic February 2014 to October 2015 price tumble is not the greatest or longest on record. So a further descent in NYMEX natural gas would not be unprecedented.

Anticipated end March 2016 gas inventories probably will be high in both arithmetic (bcf) and days coverage terms, a bearish consideration. However, based upon US Energy Information Administration (EIA) anticipated end October 2016’s 52.1 days coverage level slides 3.4 days beneath the 2006-15 end October average of 55.5 days and 1.5 days under 1990-2015’s 53.6 days.

Nevertheless, modest days coverage levels for October 2016 does not eliminate a containment danger; one should focus closely on arithmetic levels. The days coverage perspective of course does not provide a complete viewpoint on the natural gas inventory situation and related price risks. After all, arithmetic quantities (bcf) of gas must be put in arithmetic storage places. Especially if little new natural gas storage capacity has been (and is being) created, containment problems could emerge around the end of the 2016 inventory build season (roughly around end October 2016). And currently, the containment risks for the end of build season 2016 are not insubstantial; this bearish potentiality weighs on prices.

Yet sustained low natural gas prices could reduce production more than some soothsayers forecast. This would help reduce containment risks. Note the big drop in US natural gas rig counts. A sustained slump back under 2.00 might boost electric power switching from coal to gas.

Everyone knows that much can happen between now and 2017, whether in natural gas or elsewhere. Yet based upon the EIA’s bcf prediction, natural gas days coverage at end October 2017 probably will be less than average, a bullish factor. And the EIA’s bcf arithmetic inventory forecast for end October 2017 implies there probably will not be a containment problem around the end of build season 2017.

****

Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” marketplaces and variables. Trend changes in NYMEX natural gas need not roughly coincide with one in the petroleum complex or commodities in general, or currency, stock, or interest rate playgrounds.

However, especially since mid-to-late June 2014 (NYMEX natural gas nearest futures interim high 6/16/14 at 4.886) and into calendar 2015 (gas interim top 5/19/15 at 3.105), bearish natural gas price movements intertwined with those in the petroleum complex (and commodities in general) and the bull move in the broad real trade-weighted US dollar. Such natural gas retreats to some extent paralleled slumps in emerging marketplace stocks. Note also the timing coincidence between May 2015’s natural gas top and the S+P 500’s 5/20/15 peak at 2135. In regard to the timing of the S+P 500’s May 2015 high, note that the nominal broad trade-weighted dollar (Federal Reserve, H.10, which has daily data) made an interim low at 112.8 on 5/15/15 before appreciating further.

See “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16), “Japanese Yen: Currency Adventures (2007-09 Revisited)” (1/14/16), “Commodities: Captivating Audiences” (10/12/15), and various related essays.

Natural gas prices indeed can trade “on their own”. But suppose a sustained bull move finally appeared in commodities “in general” (especially petroleum). Worldwide OECD industry and United States petroleum stocks are very elevated. OPEC next meets 6/2/16. It remains determined to capture market share and induce output cutbacks by high-cost oil producers around the world (including some American and Canadian ones). But is crude oil under 30 dollars a barrel “irrational”? The chairman of Saudi Arabia’s state oil company, Aramco said: “’The market has overshot on the low side and it is inevitable that it will start turning up’”, predicting higher prices by the end of the year.” (Financial Times, 1/22/16, p20). Will OPEC reach agreement with non-OPEC nations such as Russia to boost prices? Might OPEC hold an emergency meeting?

Key global central banks battle to ensure economic growth, create sufficient inflation (avoid deflation), and reduce unemployment. The European Central Bank recently suggested it might ease its already highly accommodative policies further (ECB Statement and Press Conference, 1/21/16). The Bank of Japan recently (1/29/16) eased its lax monetary policy even further, adopting negative interest rates. Will the Federal Reserve delay additional interest rate increases?

The Fed and its allies probably do not want the S+P 500 and related stock marketplaces to crash under their January 2016 lows. They also probably do not want the dollar’s bull move to extend much (if at all) beyond its January 2016 high. The US dollar’s major bull trend has been long and powerful. From its July 2011 major low around 80.5 to the recent January 2016 high at 101.2, the broad real trade-weighted dollar has climbed 25.8 percent (Federal Reserve, H.10; monthly average). What will happen to natural gas prices if the S+P 500 (and emerging marketplace stocks “in general”) rallied substantially? What if the US broad real trade-weighted dollar weakens notably (even if it remains relatively strong)?

FOLLOW THE LINK BELOW to download this article as a PDF file.
US Natural Gas- Caught in the Middle (2-1-16)

DANGEROUS TIMES IN US NATURAL GAS © Leo Haviland November 2, 2015

The probable range for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a relatively broad avenue between major support at 1.65/1.90 and significant resistance at 3.10/3.45. For prices to sustain voyages over 3.00, it probably will require a significantly colder than normal winter or noteworthy cuts in natural gas production. A containment risk (supplies too high relative to available storage), although currently not probable, nevertheless lurks for the end of calendar 2016 build season, especially if 2015-16’s winter is warmer than usual. If significant containment problems develop, and perhaps even if the potential for significant containment difficulties significantly increases, the 1.65 to 1.90 floor could be broken.

****

The NYMEX natural gas major bear trend that followed 2/24/14’s major peak at 6.493 smashed through 4/27/15’s 2.443 low, tumbling to 1.948 on 10/27/15 (near NYMEX contract expiration; many key troughs have occurred around contract expiration). The late October 2015 depth borders the last prior major bottom, 1.902 on 4/19/12. Historical analysis indicates the bear trend from February 2014 to October 2015 travelled sufficiently far in price and duration terms to look for a trend shift from bearish to neutral or bullish. In addition, the most recent Commitments of Traders reports for key natural gas contracts reveal a massive net noncommercial short position. Many significant marketplace trend changes in natural gas roughly coincide with very elevated net long or short noncommercial positions. Current and (assuming normal weather) anticipated upcoming natural gas days coverage through winter 2015-16 and the 2016 build season appear fairly close to historical averages, particularly in the context of NYMEX natural gas prices well under 3.00.

However, the dramatic February 2014 to October 2015 price tumble is not the greatest or longest on record. So a further descent in NYMEX natural gas would not be unprecedented. Moreover, the days coverage perspective of course does not provide a complete viewpoint on the natural gas inventory situation and related price risks. After all, arithmetic quantities (bcf) of gas must be put in arithmetic storage places. And currently, the containment risks for the end of build season 2016 are not insubstantial; this bearish potentiality weighs on prices.

****

Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” factors. Trend changes in NYMEX natural gas need not coincide with one in the petroleum complex or in commodities in general.

However, especially since mid-to-late June 2014 (NYMEX natural gas nearest futures interim high 6/16/14 at 4.886) and into calendar 2015 (gas interim top 5/19/15 at 3.105), bearish natural gas price movements have intertwined with those in the petroleum complex (and commodities in general) and the bull move in the broad real trade-weighted US dollar. Such natural gas retreats to some extent have paralleled slumps in emerging marketplace stocks. Note also the timing coincidence between May 2015’s natural gas top and the S+P 500’s 5/20/15 high at 2135. See “Commodities: Captivating Audiences” (10/12/15) and other recent essays.

Worldwide OECD industry and United States petroleum stocks are very elevated. OPEC next meets 12/4/15. It remains determined to capture market share and induce output cutbacks by high-cost oil producers around the world (including some American and Canadian ones). Thus even if petroleum manages to rally further from its recent lows, it likely will remain relatively weak. The broad real trade-weighted United States dollar edged slightly lower (about one percent) to 97.0 in October 2015 from its September 2015 bull move high at 98.0 (Federal Reserve, H.10; monthly average), but it probably will remain relatively strong for the near term. Weak oil and a strong dollar, all else equal, are bearish factors for American natural gas prices.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Dangerous Times in US Natural Gas (November 2, 2015)