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)

THERE WILL BE BLOOD: FINANCIAL BATTLEFIELDS © Leo Haviland February 9, 2018

The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).

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CONCLUSION

The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.

Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.

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The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.

Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).

Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.

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There Will Be Blood- Financial Battlefields (2-9-18)

US NATURAL GAS- THERE HAS BEEN AND WILL BE BLOOD © Leo Haviland, January 31, 2012

What is the outlook for NYMEX natural gas prices (nearest futures continuation)? Even though current natural gas oversupply is substantial and will remain so for at least a few more months, the long run bear trend probably ended with the 1/23/12 low around 223. Admittedly, warmer than normal weather for the balance of this winter may inspire an attack on or even a slight breach of the January bottom. However, production cutbacks and higher demand gradually will erode much of the mountainous oversupply and help to ignite a rally.

Suppose announced production cuts motivated by prices crashing under 275 or so do not substantially materialize. Then first quarter 2012 lows may be challenged in late August/calendar September 2012. Regulatory issues, fuel switching, economic growth, anticipated drilling rates, weather issues, oil price levels, long run gas export potential, and alternative “investment” in commodities complicate predictions and boost the likelihood of violent price swings.

Prices should oscillate within a broad range for quite some time. With support at 200/225, where is resistance? Look at 320/335, then 360/370 and 405/415. Above that loom 460 and 500/520. A band from around 200/225 to 500/520 admittedly seems very wide. Yet although 2012 is not 2009/10, recall that prices blasted much higher in a bull campaign lasting only four months, from 9/4/09’s 241 to 1/7/10’s 611. A foray up to the middle section of the broad range, 360 to 415, over the next several months is likely.

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Natural Gas- There Has Been and Will Be Blood (1-31-12)