Bobby Coats and Nathan Smith at Southern Regional Economic Conference.
Bobby Coats, right, University of Arkansas, and Nathan Smith, Clemson University, visit at the Southern Regional Economic Conference in Atlanta in September, 2017.

Business cycle likely extended one to three years

Corn, soybeans and cotton cautiously bullish; rice correcting; wheat needs to hold support for the week beginning Oct. 2, 2017.

What to expect from the markets this week, October 2, 2017

Market “Near Term” Snap Shot

  • Rice: Price action appears to be corrective
  • Cotton: Cautiously Bullish
  • Soybeans: Struggling to regaining bullish momentum, closing above $10.22 and holding implies a likely price bottom in place
  • Corn: Cautiously Bullish
  • Wheat: Holding current price levels implies a building bullish bias
  • 10-year Treasury Yield: The 10-Year US Treasury Yield: Sideways-Trading-Range on expectation of U.S. and Global fiscal simulative activities
  • S. Dollar: Possible corrective activity likely, before the door opens to a decline to 87 or lower
  • Oil $WTIC: Near term price floor likely in place. The $45 to $50 trading range giving way to an upside potential of $55 or higher
  • $CRB Commodity Index: Cautiously optimistic as this index builds a base to move higher, large dependence on oil prices
  • S&P 500: Primary trend remains up, but cautionary time period with momentum waning and consolidation needed
  • Global Equities Excluding U.S. and Canada: Primary trend remains up, but a cautionary time period with momentum ever so slowly declining
  • Feeder Cattle: Moving higher

Business Cycle Likely Extended One to Three-plus Years

I spent a considerable amount of time in the first half of 2017 studying the possibilities of a U.S. and/or Chinese recession, and its likely impact on domestic and global markets.

Since 1929, the U.S. has gone through 28 business cycles or 28 periods of economic growth and economic contraction.

The last recession began in December 2007 and ended in June 2009. The key recession catalyst was the “Subprime Mortgage Crisis” which led to the 2008 Financial Crisis.

The current economic growth period began in July 2009 and is the third longest in U.S. history at almost 100 months. The second longest business cycle expansion period was 106 months and the longest was 120 months.

The problem with the current business cycle expansion phase is that the U.S. and global economies are mired down by a mountain of debt in each and every economy. This has led to “Chronic Slow Growth” and this has led to economic paralysis both in the U.S. and throughout the world. 

The U.S. Government and central bank (Federal Reserve Board) and their global counterparts have no option but through fiscal, monetary, trade and regulatory policy to take the necessary steps to move away from:

  • Chronic low growth to a stimulative reflation economic setting with 2-percent-plus growth for developed countries and much higher for emerging and developing economies.

WHY?

  • Deflation must be minimized and
  • The concerns of “populists” movements must be addressed

My interpretation of the Fed’s expectation is through an orchestrated global total policy effort the potential exists to:

  • Extend the current business cycle 1 to 3-plus years
  • Fed Funds Rate will remain below previous decade’s level
  • Fed’s median projections for Fed Funds Rate is
    • 4% for 2017 end
    • 1% for 2018 end
    • 7% for 2019 end
    • 9% for 2020 end – return to the old normal
  • Fed will begin balance sheet normalization in October 2017 with a burn rate of 10 billion monthly for the current 4 months
    • Impacting or raising longer term interest rates

Therefore, as we have stated before, expect “synchronized global growth to continue emerging” providing adequate U.S. and global growth and stability. Presently, individual countries, regional and global economic, social and political dynamics suggest U.S. and global growth can be extended.  

The economic, social, political and military challenges and costs of achieving “Synchronized Global Growth” are extremely large; the cost of not achieving domestic and global growth objectives are multiple times larger.  

Now a word of caution: Beware “October 2017.” October has a tendency to be a consolidation or corrective period in many markets. In addition, the seventh year of a decade from a historical perspective is a time of caution, which is why all should have highly professional market advisers. 

In addition to the following “Expanded near term market outlook considerations for week beginning Oct. 2, 2017”

  • Download slide show for charts and expanded details by clicking on the download button at the bottom of this file.

This Week’s Select Summary Considerations:

  • 10-Year US Treasury Yield:
    • The 10-Year US Treasury Yield: Remains in a Sideways-Trading-Range on expectation of U.S. and Global market intervention activities achieve target objectives of extending growth phase of business cycle
    • What could move the yield lower? Demand, Economic Weakness, Event Risk Concerns, or Other Market Concerns/Factors could take the yield lower
  • S. Dollar Index:
    • Possible corrective activity likely, but once complete the door is open for a decline to 87 or lower
    • Given global macro considerations coupled with no significant global anomaly event moving forward this index may have some serious weakness
    • Unless Middle East, North Korean, European, Venezuelan or other anomaly events start to dominate market participant decisions, then we are still in search of a low for the dollar
  • CRB Index:
    • Cautiously optimistic as this index builds a base to move higher
    • Global Government and Central Bank actual and anticipated intervention are giving every indication of bearing fruit
    • Bigger Picture: Though dangerously spastic, global macro and growth forces in general remain supportive of the commodity sector
  • $WTIC Light Crude Oil:
    • Consideration now needs to be given to a near term price floor being in place. The ongoing sideways choppy price action likely more bullish than bearish this week. The $45 to $50 trading range may give way to an upside potential of $55 or higher.
    • A complex, volatile and an uncertain market that deserves a great deal of respect in a world with building economic, social, political and homeland security uncertainties
    • North Korea, market structure, geopolitical considerations and building possibilities of a Venezuelan civil war are just some of the supportive factors
  • Soybeans:
    • Ever so slowly trying to regaining bullish momentum, closing above $10.22 and holding implies a likely price bottom in place
    • A Cautionary Consideration: Potentially a challenging time period for many global equity and commodity markets with a need for corrective price action; therefore do not rule out a retest of the $9.00 area or potentially lower into the $8.35 area
  • Corn:
    • Appears to have some upside bullish price potential, but prices need to reach and hold $3.69
    • Assume bearish until price action becomes more supportive of a bullish case and give consideration to prices moving to their previous 2016 lows of $3.15 or below
  • Long Grain Rice:
    • Price action appears to be corrective
    • Remain aware of potential near term uncertain global economic crosscurrents related to currencies, bonds, equities and commodities as they go through a rebalancing process
  • Cotton:
    • Cotton needs to hold 67-cents if a potential bullish bias is to remain a near term consideration
  • Wheat:
    • Holding $4.39 implies a building bullish bias
    • Primary trend remains up
    • A cautionary time period with momentum waning and consolidation needed
    • Allow price action to provide guidance
  • QQQ NASDAQ Power Shares:
    • Consolidation needed
    • Near term remain cautious of this index with momentum slowing
    • Allow price action to provide guidance
    • Primary trend remains up
  • EFA iShares ETF - Global Equities Excluding U.S. and Canada:
    • Primary trend remains up
    • A cautionary time period with momentum ever so slowly declining
    • Allow price action to provide guidance
  • EEM iShares ETF, Emerging Market Equities:
    • A cautionary time period
    • Allow price action to provide guidance

Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System, Cooperative Extension Service. Dr. Coats e-mail: recoats@uark.edu.

DISCLAIMER-FOR-EDUCATIONAL-PURPOSES

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