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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SHAKIN’ ALL OVER: FINANCIAL AND POLITICAL TURMOIL©Leo Haviland April 1, 2025

The Guess Who sing in “Shakin’ All Over”: 
“That’s when I get the chills all over me
Quivers down my backbone
I got the shakes in my thigh bone
I got the shivers in my knee bone
Shakin’ all over”.

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CONCLUSION

The United States (and global) economy probably will slow down substantially. The risk of a recession is substantial. Forces warning of American and international economic weakness are widespread. What are some of these factors? 

United States inflation benchmarks such as the Consumer Price Index have receded toward the Federal Reserve’s two percent objective, but they remain far enough above that target to preclude near term easing by the Fed in the absence of substantial economic weakness. The Fed has adopted a cautious strategy regarding further rate cuts. Moreover, this guardian may need to raise rates if inflation increases more than expected. 

The optimistic rhetoric regarding and devoted faith in the strategies of “Make America Great Again” (“MAGA”) and “America First” do not preclude substantial economic (and political) dangers resulting from the implementation of those programs. The essence (broad outlines) of President Trump’s probable tariff plans (which currently appear more extreme than most had expected he would impose), will generate inflation, damage consumer and business confidence, and (at least for the near term) hamper domestic (and worldwide) economic growth. Substantial protectionism does not necessarily create beneficial outcomes. America’s trading partners will retaliate. Everyone remembers that trade (tariff) wars encouraged the Great Depression to begin in 1929. In addition, the tax and immigration policies embraced by Trump and his allies represent noteworthy inflationary risks. 

Also, the long term and arguably even the near term US fiscal situation and its management are dangerous. American deficit spending and debt levels represent ongoing problems. These challenges preceded Trump’s inauguration on 1/20/25, but despite spirited talk of and hunts for fiscal savings, the current Administration’s schemes probably will worsen the nation’s debt situation. 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 fierce debates regarding spending and the debt ceiling loom. 

America is not a developing/emerging marketplace nation. Yet as in those other countries, mammoth and growing US federal debt, especially in conjunction with fierce ongoing US political conflict and inflationary phenomena (encouraged by massive US tariffs), could produce a further noteworthy yield jump. There is a substantial chance that the UST 10 year’s October 2023 summit will be attacked over the next several months. However, if the American economy threatens to or actually enters a recession, the UST 10 year probably will assault 9/17/24’s 3.60 percent low. 

The essay “As the World Turns: Marketplace Battlefields” (1/1/25) emphasized: “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.” 

Note the S+P 500’s 5.4 percent initial dip from 12/6/24’s elevation to 1/13/25’s 5773. The UST 10 year yield nevertheless continued its climb after 12/6/24’s 4.13pc interim low to reach 1/14/25’s 4.81pc. The S+P 500 peaked not long thereafter, on 2/19/25 at 6147. This S+P 500 pinnacle surpassed 12/6/24’s interim high by less than one percent. With 1/14/25’s 4.81 percent high, the UST 10 year note yield traveled above 4/25/24’s important top at 4.74pc and neared 10/23/23’s 5.02pc peak. The S+P 500 collapsed from 2/19/25’s pinnacle to 3/31/25’s 5489, a 10.7pc slump in merely six weeks. The S+P 500’s 3/31/25 low probably will be broken, even if Trump chooses to make his upcoming 4/2/25 Liberation Day tariff regime less burdensome in order to support stock prices. Though bullish optimism about corporate earnings for calendar years 2025 and 2026 persists, and even if the Trump Administration manages to engineer a noteworthy tax cut and reduce government spending to some extent, an eventual bear move in the S+P 500 of around 20 percent or more from February 2025’s peak will be unsurprising. History shows that most US bear stock trends do not end in less than two months. 

A substantial and persistent decline in the S+P 500 would warn of (or confirm) an economic downturn.

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Shakin' All Over- Financial and Political Turmoil (4-1-25)

WALL STREET MARKETPLACES: FASTEN YOUR SEAT BELTS © Leo Haviland December 5, 2022

In the classic American film, “All About Eve” (Joseph Mankiewicz, director), the actress Margo Channing (played by Bette Davis) declares: “Fasten your seat belts. It’s going to be a bumpy night.”

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OVERVIEW

In general, from around the beginning of calendar 2022 until mid-October, as American and other key global government interest rates continued to rise (enlist the United States Treasury note as a benchmark), the S+P 500 (and other advanced nation and emerging marketplace stock playgrounds) declined. Growing fears regarding substantial and persistent consumer price (and other) inflation by the Federal Reserve and its central banking allies and the linked policy response of raising Federal Funds and similar rates played key roles in the yield climbs and stock price falls. Bear trends for other “search for yield” assets such as corporate bonds and United States dollar-denominated emerging marketplace corporate debt converged with those of the S+P 500 and emerging marketplace stocks. Commodities “in general” (“overall”) of course do not always trade “together” in the same direction around the same time as the S+P 500. Nevertheless, in broad brush terms since around late first quarter 2022, their downward price and time trends converged. A very strong US dollar encouraged the relationships of higher US Treasury yields, descending stock prices, and eroding prices for commodities “in general”.

However, the US 10 year note yield achieved an important high on 10/21/22 at 4.34 percent. Using the Federal Reserve Board’s nominal Broad Dollar Index as a weathervane, the dollar peaked at 128.6 on 9/27/22 and 10/19/22. The S+P 500 established a trough in its bear trend with 10/13/22’s 3492. Based on the S+P GSCI, commodities in general attained an important low on 9/28/22 at 591.8, holding at 591.1 on 11/28/22. Note the roughly similar times (and thus the convergence) of these marketplace turns, which thereafter reversed, at least temporarily, the preceding substantial trends.

What key changes in central bank policy and marketplace inflation yardsticks encouraged the recent slump in the UST 10 year yield, the depreciation in the US dollar, and the jump in the S+P 500 and the prices of related hunt for yield (adequate return) battlefields? First, various members of the Federal Reserve leadership hinted that future rate increases would slow in extent (be fifty basis points or less rather than 75bp). See the Financial Times summary of officials leaning that way (11/12-13/22, p2). The Fed probably will tolerate a brief recession to defeat inflation, but it (and of course the general public and politicians) likely would hate a severe one. In today’s international and intertwined economy, further substantial price falls (beneath October 2022 lows) in the stock and corporate debt arenas (and other search for yield interest rate territories), and even greater weakness than has thus far appeared in home prices, plus a “too strong” US dollar, are a recipe for a fairly severe recession. Hence the Fed’s recent rhetorical murmurings aim to stabilize marketplaces (and encourage consumer and business confidence and spending) and avoid a substantial GDP drop.

Second, US consumer price inflation for October 2022 stood at “only” 7.7 percent year-on-year. This rate fell short of expectations for that month and declined from heights exceeding eight percent in the several preceding months. This sparked hopes that American (and maybe even global) inflation would continue to decline even more in the future, and that the Federal Reserve and other central bank guardians would engage in less fierce tightening trends.

Of course the Fed policy hints and US consumer inflation statistics do not stand apart from other variables. Might China ease its restrictive Covid-fighting policy, thus enabling the country’s GDP to expand more rapidly?

Trends for commodities in general (employ an index such as the broad S+P GSCI) and the petroleum complex in particular sometimes have diverged substantially for a while from that of the S+P 500. After all, petroleum, wheat, and base metals have their own supply/demand and inventory situations. The broad S+P GSCI has battled to stabilize during autumn 2022 in response to the determined effort by OPEC+ to rally petroleum prices via production cuts. And over the long run, the S+P 500 and commodities tend to trade together. OPEC+’s ability to successfully defend a Brent/North Sea crude oil price around 83 dollars per barrel (nearest futures continuation) depends substantially on interest rate and stock levels and trends, as well as the extent of US dollar strength.

The “too strong” US dollar during calendar 2022 encouraged price declines in assorted search for yield asset classes, including emerging marketplace stocks and debt instruments as well as commodities. The depreciation of the US dollar in the past couple of months thus interrelated with (confirmed) the price rallies in the S+P 500 and other marketplaces. Yet the Federal Reserve probably will remain sufficiently enthusiastic in comparison with other central banks in its fight against inflation, which should tend to keep the dollar strong, even if it stays beneath its calendar 2022 high.

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Investors in (and other owners of) stocks and other search for yield realms and their financial and media friends joyously applauded recent price rallies. However, to what extent will these bullish moves persist?

US consumer price and other key global inflation indicators remain very high relative to current central bank policy rates. Not only does the US CPI-U all items year-on-year percentage increase of 7.7 percent for October 2022 substantially exceed UST 10 year yields over four percent, but so does October 2022’s 6.3 percent year-on-year increase in the CPI-U less food and energy.

Imagine consumer price inflation staying at only 4.5 percent. To give investors a 50 basis point return relative to inflation, the UST 10 year should yield five percent. Thus the Fed will continue to push rates higher in its serious war against excessive inflation, and eventually the rising UST yield pattern probably will reappear eventually, persisting until there are signs of much lower inflation or a notable recession.

Although marketplace history is not marketplace destiny, history reveals that significant climbs in key US interest rate signposts (such as the UST 10 year) tend to precede substantial falls in US stock benchmarks such as the S+P 500. Thus the S+P 500 probably will resume its decline, although it will be difficult for it to breach its October 2022 depth by much in the absence of a sustained global recession. So a return to rising UST rates, all else equal, probably will keep the dollar fairly powerful from the long run historic perspective, although the dollar will find it challenging to surpass its recent high by much (if at all) for very long.

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Wall Street Marketplaces- Fasten Your Seat Belts (12-5-22)