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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US DOLLAR THEATRICS: DEPRECIATING ACTS © Leo Haviland, June 7, 2017

“Gonna leave this brokedown palace
On my hands and my knees I will roll, roll, roll”. The Grateful Dead, “Brokedown Palace”

CONCLUSION AND OVERVIEW

The gradual depreciation of the broad real trade-weighted United States dollar (“TWD”; Federal Reserve Board, H.10 statistics; monthly average; March 1973=100) that began in December 2016/January 2017 at about 102.8 probably will continue for at least the next several months. Dollar cross rate patterns against assorted individual currencies (such as the Euro FX, Chinese renminbi, and Japanese Yen) are not necessarily the same. In principle and practice, the dollar may rally against one counterpart while getting feebler against another. Nevertheless, the similar weakness in recent months of the dollar’s cross rate versus several key American trading partners manifests the widespread underpinnings of the growing overall dollar breakdown. Gold’s bull climb since December 2016 roughly coincides with and reflects (confirms) the greenback’s erosion.

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Various entangled factors influence foreign exchange levels and patterns, with monetary policy of course being a key variable. Over the past few months and looking forward, underline the US Federal Reserve Board’s willingness to tighten monetary policy by raising the Federal Funds rate; it also hints at the eventual reduction of its bloated balance sheet. Moreover, such Fed action and its forward guidance wordplay contrasts with the ongoing highly accommodative policy of many key central banks (such as the European Central Bank and Bank of Japan). Yet the dollar nevertheless has weakened. In this context, the TWD’s slump over the past few months therefore portends future dollar depreciation. The Fed meets 6/13-14/17, 7/25-26/17, and 9/19-20/17.

Moreover, most believe that US real GDP growth will remain relatively strong. The dollar’s downturn in New Year 2017 is ominous from this perspective as well.

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The 1/20/17 inauguration of President Trump very closely connects in time with the TWD peak. Is this merely a coincidence? Probably not.

Comments during the 2016 election season and its aftermath by Trump and some members of the supporting cast allied with him indicate that he probably wanted some dollar depreciation to help boost US economic growth. Note their criticism of some key European trading partners and China. Isn’t it unfair to the US if the Euro FX or Chinese renminbi are “excessively weak”?

But much more than a willingness by the Trump Administration to permit some dollar bearishness probably explains the dollar’s decline in calendar 2017. After all, the US dollar rallied for several weeks after Trump’s November 2016 victory.

America’s notable political, economic, racial, religious, age, gender, and other divisions and related quarrels preceded Trump’s political showmanship and electoral triumph. But such conflicts arguably have worsened since Trump took office.

Examine the ongoing intensity of the carnival of media coverage relating to such divisions, even after the contentious national election. Look at ferocious debates over Obamacare, fiscal priorities, immigration policy, and climate change. In Washington’s political circus, note the significant disagreements in Congress on assorted key issues. The Republicans control the Presidency, House, and Senate, but they squabble. How likely will there be significant tax “reform” or substantial new infrastructure spending? The degree and scope of Russian involvement in American politics, including relationships with some people within or linked to the Trump Administration, capture headlines.

America’s highly partisan budget battles likely will continue, and its existing long run debt problems will not magically evaporate. Moreover, marketplace wizards generally agree that the enactment of the President’s budget plan (sketch) will widen the deficit dramatically relative to current trends. Of course other nations have big debt problems. Look at Japan’s mammoth government debt, and see China corporate debt (and property, local government, and shadow banking issues). Yet America’s increased indebtedness, particularly if Trump’s vision becomes law, is “newer news” than what has been going on within Japanese and Chinese debt festivals.

In addition, US consumer indebtedness is not small, and it has been creeping higher in absolute terms. The New York Fed reported that total US indebtedness as of end first quarter 2017 was about $12.7 trillion. This placed overall household debt $50 billion above its prior peak of third quarter 2008, and 14.1 percent higher than the trough attained in 2Q13.

And very significantly, many people at home and abroad believe President Trump’s leadership has been and likely will remain erratic. Compare his language and behavior with that of his predecessors.

Given the nation’s significant political (and other interrelated cultural) conflicts and doubts regarding the quality and predictability of Presidential- and Congressional- leadership and action, and “all else equal”, this makes the United States dollar (dollar-denominated assets) somewhat less attractive to hold. Widespread falling (low) public confidence in many US politicians, political processes, and political institutions eventually can generate falling confidence (and thus declines) in the dollar.

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Thus, in recent months, the victory of an apparently populist leader in America contrasts with the maintenance of power by the establishment in most key American trading partners. And the American President’s rhetoric and actions (at least to some extent) not only are divisive, but also seem rather erratic and confused to many

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US Dollar Theatrics- Depreciating Acts (6-7-17)

TICKET TO RIDE: US CORPORATE PROFITS AND S+P 500 TRENDS (c) Leo Haviland, May 17, 2017

In “Ticket to Ride”, The Beatles sing:
I don’t know why she’s riding so high
She ought to think twice
She ought to do right by me
Before she gets to saying goodbye”.

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CONCLUSION AND OVERVIEW

In offering enthusiastic audiences explanations of past, current, and future United States stock marketplace levels and travels, diverse marketplace preachers tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and methods, including the particular variables they select and arrange. For a majority of devoted visionaries, American corporate profitability is a very important factor.

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After-tax US corporate profits soared after reaching a trough in fourth quarter 2015, not long before the S+P 500’s major bottom in first quarter 2016. The noteworthy profit climb since 4Q15 surely encouraged the S+P 500 to jump from its 1Q16 trough.

Yet Trump’s remarkable triumph in November 2016’s Presidential election created (or at least magnified) faith that United States after-tax corporate profits would increase significantly in calendar 2017 and 2018. The S+P 500 galloped 15.2 percent higher from 11/4/16’s 2084 low to 3/1/17’s 2401 elevation. Thus hopes for greater profits probably greatly assisted the S+P 500’s sharp rally.

What is a key tenet (especially in the post-election period) in the gospel promoting a viewpoint of growing American corporate profitability and an entangled bull stock climb? Much centers on hopes that the Republican-controlled Congress will enact noteworthy corporate tax cuts. Related optimism for marketplace earnings (and stock) bulls includes possibilities for repatriation of corporate cash hoards, dramatic boosts in domestic infrastructure spending, and reduced regulatory burdens.

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However, current sharp divides on the American political scene (including within the Republican congregation) and widespread lack of confidence in (and hostility toward) the President will make it very difficult for a notable change in the corporate (and individual) tax code to become law. Passage of legislation encouraging earnings repatriation is not assured. Moreover, neither is a monumental infrastructure spending scheme.

In addition, despite the fierce climbs in recent calendar quarters, profit highs for recent full calendar years do not manifest a clear trend toward moving to new heights. Full calendar year profits over the past few years have been about flat.

Disappointment relative to widely-forecast profitability gains may inspire S+P 500 price retreats. In any case, history reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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What is too high (too low), high (low), overvalued (undervalued), or reasonable/rational/average/normal (unreasonable, irrational, atypical/abnormal) for stock prices or other economic indicators is a matter of opinion. However, and even though stock valuations can appear very elevated relative for an extended period of time, some marketplace gurus nowadays proclaim that some measures show US stock valuations are on the lofty side.

Also, elevated share buyback levels also have helped to propel US equities higher. There are hints this pattern will not persist.

Current low US stock marketplace volatility, high American consumer confidence, and evidence that financial stress remains below average have reflected (and encouraged) the majestic bull climb in the S+P 500. Observers nevertheless should watch for changes in such measures.

A warning light for S+P 500 bulls is the failure the S+P 500 to motor much above the early March 2017 high. The subsequent record high is 5/16/17’s 2406. If the S+P 500 continues to find ventures much beyond that March 2017 elevation challenging, this arguably will signal that current optimism regarding future corporate profit gains may be ebbing, that the S+P 500 bull trend is tiring, or both.

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So the failure of America to enact important corporate tax “reform” (tax cuts) or embark on a glorious infrastructure spending voyage may not greatly diminish future earnings expectations (or even actual levels) or significantly wound the S+P 500. But they might.

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In addition, challenges to the bullish trend in US equities may come from the long run upward trend of US government interest rates (note the Fed’s tightening plan). Or, concern about US federal budget deficits (or debt problems elsewhere in the world) may march into view. Hopes for higher (or at least not falling) energy prices likely underpin hopes for higher corporate earnings (and profits) in that key financial sector. But commodities “in general” (and petroleum in particular) have fallen from their 1Q17 highs. Anticipated oil output levels from OPEC and its non-OPEC comrades probably will not significantly reduce still-high OECD industry inventories for at least the next several months. The broad real trade-weighted US dollar established highs in December 2016/January 2017, though it has slipped only modestly since then. Contrary to what many believe, increasing US dollar depreciation may help lead to or confirm weakness in the US stock marketplace.

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Ticket to Ride- US Corporate Profits and S+P 500 Trends (5-17-17)

MARKETPLACE VOLATILITY: CALM BEFORE THE STORM © Leo Haviland, May 8, 2017

“Danger always strikes when everything seems fine.” From the movie “Seven Samurai” (Akira Kurosawa, director)

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CONCLUSION AND OVERVIEW

In World War One on the Western front, after the initial stages in the horrific conflict, for an extended period little net change occurred in the location of the front lines dividing the entrenched armies. For a long time, neither camp won a decisive breakthrough victory despite significant planning, extensive maneuvers, ferocious battles, great expense, and ongoing long-running carnage. The contending forces were at roughly equal strength.

In a given marketplace, the bulls and bears can be locked in vicious combat for an extended period (with bullish and bearish factors in approximate balance). This will tend to keep prices in a (relatively) quiet overall sideways trend for quite some time, even if some short term fluctuations seem striking. If bullish forces (even if powerful) have only slightly more strength than bearish ones, the upward trend will tend to be slow; the bear slide will be rather peaceful if bearish factors possess only a slight advantage.

Breakouts are not inevitable in either war (or politics) or financial marketplaces.

However, the current relatively (outwardly) calm price situation for the S+P 500, United States 10 year government note, and the broad real trade-weighted US dollar probably will not persist. Volatility likely will increase in these playgrounds in the fairly near future. The recent bloody fall in the petroleum marketplace is one warning flag portending this prospective volatility jump.

The political scene represents another danger signal. Politics of course often reflects and influences economic outcomes (and vice versa). The political arena can signal that “lots is going on under the surface” in the economic realm. The assorted and substantial divisions and fierce fights within the American political scene (as well as similar quarrels overseas) also hint that increased volatility looms on the marketplace horizon. Populist conflict with the establishment (elites) has not disappeared in either America or overseas. How strong is the quality of the American President’s leadership, and how volatile is his temper, and how coherent and consistent are his policies? What if America and other key nations engage in passionate trade wars?

Current and forecast US federal budget deficits and burdens, already noteworthy, probably will explode if some form of President Trump’s murky tax “reform plan” becomes law. But what happens to the joyous “Trump rally” in stocks if his tax scheme and massive infrastructure spending plans are not enacted? What if US corporate earnings hoards buried overseas are not persuaded via beneficial tax legislation to return home? What if US share buyback rates slow significantly? “US share buyback plan approvals plunge” (Financial Times website, 5/1/17). Although stock valuations can appear very elevated relative for an extended period of time, some marketplace captains nowadays proclaim that some measures show stock valuations are on the lofty side. Besides, legislative gridlock itself can spark changes in or accelerate existing economic trends.

The long run path for US government interest rate yields probably is upward, despite their recent near-term sideways motion. The Federal Reserve Board is gradually ending yield repression and boosting rates, and it may be willing to permit “overshooting” relative to its beloved two percent inflation target. The Fed murmurs about reducing the size of its balance sheet. Recent very lax monetary policy by the European Central Bank (including negative rates and money printing) has continued despite the Fed’s slight policy tightening. What if the ECB cautions that it will become less accommodative? Also, watch GDP growth trends, inflation levels, and interest rates elsewhere; for example, note China’s effort to rein in excesses in shadow banking and its property playground.

Judging from recent months, the US dollar’s majestic bull trend seems to have halted. What happens to other marketplaces if the dollar begins a noteworthy retreat? Suppose foreigners become less willing to purchase, or become net sellers of, US Treasury securities?

Will conflicts involving North Korea, the Middle East, or elsewhere (note internal strife in Russia and Venezuela) escalate?

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From the long run historical vantage point, the VIX volatility index for the S+P 500 is very low nowadays. A sustained upward charge in this yardstick probably will help confirm the existence of a top in the S+P 500. In this context, watch US consumer confidence trends. Enthusiastic peaks in consumer confidence at times have occurred around the time as those in the S+P 500; consumer despair has occurred close to a bottom in the S+P 500.

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Marketplace Volatility- Calm Before the Storm (5-8-17)

US NATURAL GAS: HOME ON THE RANGE © Leo Haviland, April 15, 2017

The classic American song “Home on the Range” requests:
“Oh give me a home where the buffalo roam,
Where the deer and the antelope play,
Where seldom is heard a discouraging word,
And the skies are not cloudy all day.”

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CONCLUSION AND OVERVIEW

Did the major bull trend for NYMEX natural gas (nearest futures continuation) that started with 3/4/16’s dismal 1.611 depth finish with 12/28/16’s 3.994 top? Although it is a difficult call, assuming normal weather and moderate United States economic growth, it will be hard for the NYMEX front month price to exceed the high neighboring 4.00 by much (if at all) over the next few months. However, significant support rests around 2.50 (lows 8/12/16 at 2.523, 11/9/16 at 2.546, and 2/22/17 at 2.522; high 1/8/16 at 2.495).

The bull trends that began around first quarter 2012 (4/19/12’s 1.902) and during 1Q16 display many similarities, including their commencement following substantial oversupply conditions. Yet bearish signs exist in regard to the 2016 bull charge. The distance and duration travelled by 2016’s bull climb up to its December 2016 height, though less than average for major bull natural gas moves in NYMEX natural gas (nearest futures continuation), was within the historical range. Several previous major peaks in NYMEX natural gas occurred in calendar December. Current US natural gas inventories are above average. The CFTC’s net long commercial position is very high and consequently vulnerable to liquidation. And the 2012 rally showed an interim high in springtime (5/1/13 at 4.444).

As always, audiences should be cautious about linking natural gas price patterns with those in petroleum and other financial marketplaces. And apparent convergence/divergence (lead/lag) relationships between marketplaces can change, sometimes dramatically. However, these other playgrounds currently suggest that natural gas will struggle to advance above 12/28/16’s 3.994 anytime soon. See “The Oil Battlefield: Evolution, Relationships, and Prices” (4/10/17). Note also “Eurozone Under Siege: Currency Trends and Politics” (3/20/17), “Easing Comes, Easing Goes: US Government Interest Rates” (3/13/17), “Rhetoric and Global Currency Trends” (2/13/17), “Gold and Goldilocks: 2017 Marketplaces” (1/10/17), “Back to the Future: the Marketplace Time Machine” (12/13/16). Even the price gap from 3.568 (1/3/17) to 3.690 (12/30/16) represents a formidable near term roadblock.

However, what does looking further around the corner reveal? Everyone knows “much can happen” over the next six months and thereafter. Yet US natural gas days coverage at the end of inventory build season 2017 (October 2017) probably will be slightly bullish, with that (in the admittedly even cloudier distant horizon) at end build season 2018 more so. Thus an eventual retest of a ceiling around 4.00/4.10 is a reasonable conjecture. Looking ahead over the next several months, it probably will take a much colder than normal winter 2017-18 for the price to stay above 4.00/4.10 for long, and especially to spike above resistance at 4.45 to 4.55. Recall that winter 2013-14 required a freeze and resultant sharp stock draw to soar above the May 2013 and 12/23/13 (4.532) highs. Remember too the price collapse from 11/10/14’s 4.544.

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US Natural Gas- Home on the Range (4-15-17)