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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BOND YIELD PERSPECTIVES: EASING COMES, EASING GOES © Leo Haviland September 1, 2014

The dreadful economic crisis which emerged throughout the interconnected global economy after the departure of the Goldilocks Era in mid-2007 saw its darkest times in late 2008/early 2009. Politicians and central bankers around the globe took decisive action to escape and repair the disaster and to spark and sustain recovery. From late 2008/early 2009 through the ensuing years, dramatic United States Federal Reserve policy action, and especially massive quantitative easing (money printing), often has been associated with rising interest rates in the ten year US Treasury note. The ending of quantitative easing has connected with declines in the 10 year UST yield.

In the American theater, the past several years indicate that rising UST 10 year yields tie in with the reality of (or hopes for) at least a moderate economic recovery. Slumping UST rates are bound to the existence of (or fears about) more feeble US (and international) growth (or even worries that a downturn may occur). History of course need not repeat itself, and viewpoints change. Nevertheless, and despite America’s strong 2Q14 GDP expansion, the decline in UST 10 year yields over the course of the Fed’s current slow tapering program suggests that US and worldwide economic growth probably is and will remain mediocre.

The European Central Bank probably will embark on a modest money printing adventure in the relatively near future. However, all else equal, that decision likely will boost- but not substantially- the key German sovereign 10 year note yield (and 10 year government note yields in America and many other key nations).
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Bond Yield Perspectives- Easing Comes, Easing Goes (9-1-14)
Charts- Ten Year Notes (9-1-14, for essay Bond Yield Perspectives- Easing Comes, Easing Goes)

US NATURAL GAS: SEASONS COME, SEASONS GO © Leo Haviland August 17, 2014

Assume normal weather for the balance of the United States natural gas 2014 stock build season and the following 2014-15 winter draw period. Then the NYMEX natural gas complex in general probably will trade in a sideways trend. The broad range is roughly 5.00/5.20 to 3.38/3.55 (NYMEX nearest futures continuation contract).

Unless the upcoming winter is much warmer than normal (or fears grow that it will be), or unless gas production spikes more than most prophets predict, then prices for NYMEX nearest futures probably will not test major support around 3.00/3.13 during the next several months. Recall the 3.05 low on 1/2/13 (and the gap relative to the 3.046 high on 9/26/12) as well as 2/15/13’s 3.125 low and 8/8/13’s 3.129 bottom. Given the low days coverage inventory situation, the NYMEX nearest futures continuation contract probably will challenge the 5.00/5.20 range during this upcoming draw season if the winter is significantly colder than normal (or concerns increase that it will be) or if production gains turn out to be notably less than the EIA’s current forecast.

Since very important gas marketplace bottoms generally do not occur in late July, and as the current build season apparently will add a record amount of net supplies to United States working gas inventory, natural gas in the very near term probably will travel a bit (though not a lot) beneath 7/29/14’s low around 3.72. The withering 42.7 percent bear march from 2/24/14’s 6.493 summit, although substantial, is not as extensive as several past ones. A five percent move under the 3.72 depth gives about 3.54; important support rests around 3.38 (11/5/13 low).

However, the NYMEX natural gas marketplace has achieved quite a few significant bottoms in late calendar August and calendar September. Although history of course does not necessarily repeat itself, look for a key trough around then. Moreover, despite the big jump in United States natural gas production in calendar 2014, with a further moderate increase expected in 2015, natural gas days coverage at the end of October 2014 will be significantly below average. Even by end March 2015, inventory days coverage will be below average (normal, typical, desired, reasonable, prudent) levels, though less so than at end October. And though much can happen between now and October 2015, days coverage then arguably will remain under average levels.
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US Natural Gas- Seasons Come, Seasons Go (8-17-14)
Charts- Natural Gas (8-17-14, for essay US Natural Gas- Seasons Come, Seasons Go)

COMMODITY MARKETPLACE TRAVELS (c) Leo Haviland August 1, 2014

Of course not all commodities (or commodity sectors) move exactly alike. Often their trends (or important turning points within them) dramatically differ. Supply/demand situations vary. However, using the S+P broad Goldman Sachs Commodity Index as a benchmark since 2011, commodities “in general” have traveled sideways, and arguably sideways to down.

Unlike the broad GSCI, the S+P 500 has soared higher relative to its spring 2011 elevation (5/2/11 at 1371). However, like the broad GSCI, emerging stock marketplaces (“MSCI Emerging Stock Markets Index”; MXEF, from Morgan Stanley) remain under their spring 2011 peak (4/27/11’s 1212). Yet despite that notable difference between the S+P 500 and commodities in general (and the MXEF) trends relative to spring 2011, these marketplaces often have made many price turns in the same overall direction at roughly the same time (as they did for several years prior to 2011).

So in the current context in relation to the S+P 500, underline the broad GSCI’s decline from its 6/23/14 interim top at 673. That occurred a few weeks before the S+P 500’s all-time high to date, 1991 on 7/24/14. Further declines in the broad GSCI would be a bearish warning sign for the S+P 500 (and emerging marketplace stocks). The GSCI has important support around 595/612. Also note 10/4/11’s 573 (S+P 500 bottom 10/4/11 at 1075) and 6/22/12’s 556 (S+P 500 low 6/4/12 at 1267).
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Commodity Marketplace Travels (8-1-14)
Commodity Charts (8-1-14, for essay Commodity Marketplace Travels)

EXIT STRATEGIES: THE FED, US TREASURIES, AND US STOCKS (c) Leo Haviland July 14, 2014

Does the Federal Reserve Board have a coherent detailed exit plan from its long-running extraordinary and highly accommodative monetary policy? No. Is it likely to devise one soon? No. Is it nevertheless likely to continue to stress its ability to prudently manufacture and implement a suitable exit program? Yes.

The Fed’s broad and unspecific principles do not create a genuine and practical exit strategy. Neither do fervent hymns proclaiming devotion to its legislative mandate. Neither does rhetoric about studying numerous, intertwining, changing, and complex variables and eloquence regarding its diligent monitoring of the economic landscape. Adherence to forward guidance wordplay is not an adequate substitute for a practical strategy. The Fed’s policy exit generally will be reactive, with its decisions and actions that of a follower rather than a leader.

Why does the Fed battle to create expectations that it has, or at least can and (when necessary) readily will develop, a suitable exit program? The central bank wants audiences to have faith that it can substantially influence the creation of desirable economic outcomes. Exit guidelines fortify marketplace and political hopes that a vigilant, wise, and sufficiently experienced Fed really (or at least very probably) knows how and when it can retreat gracefully from its glorious easy money programs without endangering United States (and worldwide) economic growth and the central bank’s inflation and employment targets.

The Fed’s quest to create confidence in its exit strategy also fights to promote confidence that American interest rates will not rise too far or too fast. Why fear a bear move in debt securities? Higher rates would weigh on economic growth. They would wound owners of US Treasury and other debt securities, which could inspire many “investors” to flee from these marketplaces (especially from longer-dated debt). Such escapes of course could lead to even higher yields. Besides, why risk sitting around awaiting capital loss when the Fed promises higher rates- unless such hikes occur very slowly and with sufficient warning? Given the huge foreign ownership of US Treasury securities, net foreign selling (or even reduced net buying) of them could make funding of the nation’s budget deficits increasingly difficult (especially in later years), particularly as the Fed soon will no longer be ravenously buying US Treasuries.

Moreover, the Fed also does not want a sharp sustained bear tumble in the US stock marketplace. The enormous stock bull move has helped to rebuild household net worth and sparked rises in consumer and business confidence and activity. After the Fed ended the first two rounds of money printing, the S+P 500 dropped. The gradual tapering of its current mammoth debt securities acquisition adventure underlines its fears of another run to the exits by stock owning audiences.

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Exit Strategies- the Fed, US Treasuries, and US Stocks (7-14-14)