Building global deflationary forces is slowing the global economy and is disrupting the demand for equities and commodities.
The good news is: First, the U.S. economic trend relative to most other countries remains positive, due to attention to detail related to ongoing U.S. fiscal, monetary, and trade policies; and, Second, the U.S. and global economy in the aggregate are not close to a serious recession, just a re-balancing of the global fiscal, monetary, trade, and military rules. Expect market volatility and misdirection for a period. How long? I expect two to six-plus months. A better estimate can be made later in the year.
Chinese and Russian Aggression: Two key factors are driving the global slowdown. One is the building Chinese and Russian economic, technological, financial, and military aggression. Both China and Russia are becoming increasingly predatory and problematic to U.S. and global growth and the security of all countries.
China and Russia, in a very calculated and purposeful manner, crossed the line with their ongoing aggressive economic, social, political, and military behavior.
Another key factor weighing heavily on global growth, and one deserving of a series of articles, is building financial instability in many European countries and the European Union.
U.S. Response to Predatory Behavior
The U.S. President, congressional and central bank leadership are continually focused on maintaining U.S. global economic, military, and political leadership to provide a counterbalance to authoritarian regimes like China and Russia.
China and Russian make no apologies for their aggressive tactics for several reasons, which we will touch on below.
“Authoritarianism is a form of government characterized by strong central power and limited political freedoms. Individual freedoms are subordinate to the state, and there is no constitutional accountability under an authoritarian regime.”
It is important to understand the reasons why political leaders embrace certain leadership styles and political ideology. Consider the following:
Iconic Leaders. China’s President Xi Jinping and Russia’s President Vladimir Putin are two of the world’s most iconic world leaders. They have dominant personalities. They have highly calculated proactive survival and growth strategies, not only for themselves, but their countries.
Status quo in their world shows weakness, vulnerability and often leads to loss of control, loss of power, or even loss of a leader’s life; therefore, they have a plan and they push their positions with no apologies.
President Xi and President Putin were born post World War II as their respective countries emerged from the rubble of the “Great World War.”
World War II. During World War II, Russia lost more than 20 million citizens, and China lost 16 million or more. President Xi and President Putin and citizens of both countries would likely say today they never received just and total retribution for their devastating losses and sacrifice.
It’s certainly fair to say neither President Xi nor Putin have any intention of mass murder in their homeland happening again on their watch. The consequences of anyone invading their homeland would be catastrophic for the intruding country.
The United States World War II losses exceeded 420,000 and 700,000 wounded. Global World War II losses were more than 80 million.
Chinese Global Supremacy
China’s leadership has a defined set of goals for their country:
First, total and complete global technological supremacy by 2025, which is only seven years from now. If China can achieve technological supremacy by 2025, then;
Second, they can become the world’s “financial capitol” by 2035; and, Third, China’s plan is to be the world’s “military power” by 2047.
Question: What if China already has global technological supremacy? Answer. Simply move China’s timeline up by seven years across the board, maybe more. Yes, the U.S. President, Congress, and central bank leadership have weighty responsibilities.
Russia’s economic and social challenges weigh heavily on President Putin and his leadership. That said, Russian citizens have nightmarish World War II memories, so they applaud President’s Putin global military activities, especially their president’s aggressive military strategy of heavily leaning on a weakening Eastern Europe, and his strategic goals related to the Middle East.
See: USA Today headline: Trump says U.S. will pull out of nuke treaty with Russia that limited number of missiles.
Market expectations over the next several weeks.
- U.S. 10-Year Treasury. Yield Sideways to Down - As U.S. and global equity markets continue correcting upside gains, the demand for U.S. 10-Year Treasuries is likely to pull the yield slightly lower. Beyond this ongoing equity corrective process, yield will regain upside momentum, due to inflationary global growth expectations and other factors. Charts (A1-A4)
- U.S. Dollar. Sideways to Down - The U.S. Dollar moves sideways to down against the Euro over the next few weeks. That said, beyond near-term corrective activity, dollar strength could be a major issue into the middle of next year. Charts (A5-A13)
- U.S. Equities. Sideways to Down - Most U.S. equity markets likely need to finish correcting upside gains before moving higher. Several policy factors will determine near-term price strength or weakness in U.S. equity markets. It would be desirable for price excess to be removed from these markets before moving higher. Charts (A14-A18)
- Global Equities. Sideways to Down – Near-term, ongoing policy discussions between the U.S. and its economic and trading partners likely limit upside potential of many of these markets. The Global equity index (EFA), emerging markets (EEM), and frontier markets (FM) mostly sideways to down over the next several weeks. The strongest and most stable index will likely be the global index, followed by the emerging market index, and the frontier index will likely be the weakest index over the next several weeks. Charts (A19-A29)
- $WTIC Oil. Sideways to Down - $WTIC oil prices have potential downside weakness in the $65 per barrel area. That said, this market soon will be more bullish than bearish. (October 21, 2018 - $69.28), Charts (B6-B9)
- Soybeans. Sideways, Retest Lows, Define Trading Range - Soybeans (October 19, 2018 - $8.57 per bushel) have not been able to overcome heavy resistance. Potential global money flows leaving global equity markets do not appear to be a catalyst for providing additional near-term soybean price lift. Until soybean prices hold above $9.00 per bushel, I remain more concerned about the downside than the upside. Charts (B10-B13)
- Corn. Neutral to Bearish - This market does not need to end the week of October 22, 2018, below $3.64 per bushel. Ending the week below $3.64 per bushel suggests potential downside to $3.23 per bushel. (October 19, 2018, $3.67 per bushel). Charts (B14-B17)
- Wheat. Neutral to Bearish - Wheat is simply moving sideways with a downside bias. If wheat ends the week of October 22, 2018, below $5.00 per bushel, wheat likely has some serious weakness. (October 19, 2018 - $5.14) (B14-B17)
- Long Grain Rice. Neutral – An optimist would say we have price potential to $11.71 this week or week beginning October 22, 2018, while a pessimist would point out fundamentals will weigh heavy on this market without significant new business. (Chart B18-B20)
- Cotton. Potentially Bullish, but make-or-break week, global deflation maybe about to punish this market. Key consideration: If cotton can remain above December 77.86 cents per pound, this market has potential to regain upside price momentum, given today’s global economic setting. Finishing the week of October 22, 2018, below 77.86 cents per pound would likely indicate additional price weakness ahead (October 19 – 77.92-cents per pound). Charts (B21-B24)
- Livestock. Price Trend Bullish - Lean Hogs, Feeder Cattle and Live Cattle remain bullish.
- Gold and Silver. Neutral - Gold and silver could find some near-term price support, especially if the dollar continues to correct its upside move.
Tax Cuts Video: Attorney Kristine Tidgren: The Impact of the Tax Cuts and Jobs Act on Agriculture, October 11, 2018. Kristine Tidgren, Attorney and Director, Center for Agricultural Law and Taxation, Iowa State University, reviewed the impact of the Tax Cuts and Jobs Act on farming businesses.
Video Link: https://bit.ly/2E2BEla
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected]
Download Slide Show for charts and expanded details, Click Download Link