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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GAMES PEOPLE PLAY: AMERICAN REAL ESTATE © Leo Haviland August 28, 2016

“Home is the nicest word there is.” Laura Ingalls Wilder, author of the “Little House” books, which inspired the famed television show, “Little House on the Prairie”

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OVERVIEW AND CONCLUSION

The United States real estate marketplace played a significant role in the worldwide economic disaster that erupted in mid-2007 and accelerated in 2008. That dreadful time and its consequences probably are not a distant memory within the perspectives of key central bankers and at least some politicians. Otherwise, the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, and other monetary gatekeepers would not have sustained various highly accommodative schemes for over seven years. Though international growth resumed around mid-2009, it generally has been erratic and modest. Despite unwavering devotion to their mandates, these sheriffs thus far have not delivered sufficient inflation relative to benchmarks such as the consumer price index. Although headline unemployment measures have plummeted in the United States, they remain fairly high in some nations.

The United States of course is not the whole world and American consumers do not represent the country’s entire economy. Yet because the US is a crucial player in the interconnected global economic (and political) theater, and because US consumer spending represents a majority of US GDP, the state of affairs for the US consumer has international consequences. Consumers represent about 68.3 percent of America’s GDP (2015 personal consumption expenditures relative to GDP; Federal Reserve Board, “Flow of Funds”, Z.1; 6/9/16). The household balance sheet level and trend (net worth) is an important variable in this scene. Although stock marketplace and real estate values matter a great deal to others (such as corporations and governments) beyond the “person on the street”, they are quite important to US household net worth and thus behavior (including spending patterns) and expectations (hopes) regarding the future.

Thus although US household net worth is not an explicit part of the Federal Reserve’s interpretation of its mandate (promoting maximum employment, stable prices, and moderate long-term interest rates) and related policy actions, it is very relevant to them. So therefore are stock marketplace and real estate values and trends. Home ownership is an important dimension of the ideology of the American Dream. Rising home and increasing stock marketplace prices to some extent bolster faith that the American Dream “in general” (as a whole) is succeeding. And what happens to American real estate still matters a great deal for the global economy.

Sustained yield repression and quantitative easing (money printing) by the Fed and its playmates not only have helped the S+P 500 and many other stock signposts to soar through the roof. These programs (assisted to some extent by deficit spending programs) also repaired much of the damage to America’s real estate landscape. Let’s survey the US real estate marketplace in this context, concentrating primarily on the consumer housing sector.

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The dutiful Fed reviews assorted factors related to personal consumption expenditure (consumer price) inflation and other aspects of its mandate. Consumer price or personal consumption expenditure inflation targets of around two percent matter to the Fed and other central bank sheriffs. Yet sufficient (too low; too high) inflation (as well as deflation) can occur in other realms, including stocks and real estate.

Combine the monumental recovery in US real estate values with the towering rise in the value of stock marketplace assets. Although these are not the only parts of or phenomena influencing the US household balance sheet, current real estate and stock marketplace (particularly note the S+P 500) levels and trends appear more than adequate to justify a less accommodative Fed monetary policy. And US housing trends (including the rental situation) probably are placing substantial upward pressure on key consumer price benchmarks.

Recall the glorious American real estate spectacle before the mournful crash of the worldwide economic disaster. Although that Goldilocks Era for US real estate belongs to the past, the current housing situation recalls it.

The dovish Fed nevertheless will be cautious regarding boosts in the Federal Funds rate. Like other members of the global establishment (elites), it does not want populists (whether left wing or right wing; such as Donald Trump) to win power. To some extent, sustained substantial slumps in stocks and real estate prices tend to encourage populist enthusiasm. The Fed and its allies battle to avoid a sharp downturn in the S+P 500 or housing prices. The Fed meets 9/20-21, 11/1-2, and 12/13-14/16. The US Election Day is November 8. See “‘Populism’ and Central Banks” (7/12/16) and “Ticking Clocks: US Financial Marketplaces” (8/8/16).

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Games People Play- American Real Estate (8-28-16)

TICKING CLOCKS: US FINANCIAL MARKETPLACES (c) Leo Haviland August 8, 2016

“Isn’t it a pity…the wrong people always have money.” From “The Big Clock”, a 1948 American film noir (John Farrow, director)

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CONCLUSION AND OVERVIEW

Ongoing yield repression by the Federal Reserve Bank, the European Central Bank, and their allies plays a crucial role in keeping the US Treasury 10 year note well beneath 6/11/15’s 2.50 percent interim yield top, as well as later and lower heights of 2.38pc (11/9/15) and 2.00pc (3/16/16). For the next few months, running up at least through America’s 2016 election period, it will be difficult for the UST 10 year to break above the resistance range of 2.00/2.50pc or much under its 7/6/16 low at 1.32pc.

The Fed leadership promotes caution regarding Fed Funds rate boosts. The NY Fed President recently argued “at the moment, for caution in raising U.S. short-term interest rates” (“The U.S. Economic Outlook and the Implications for Monetary Policy”; 7/31/16). A Fed Governor is “not in a hurry to lift rates”; he argues “for a ‘very gradual’ path for any rises” (Interview with Financial Times, 8/8/16, p2).

Economic growth in America, Europe, and Japan generally remains subdued. China, though it retains a comparatively strong real GDP rate, has slowed down. Despite massive money printing (quantitative easing) by assorted leading central banks at various times over the past seven to eight years, inflation yardsticks generally remain beneath the two percent target beloved by the Fed and its loyal allies. Ongoing government deficit spending, though less than during the global economic disaster era and the following few years, in recent times likewise has not sparked sustained substantial growth or sufficient inflation.

The broad real trade-weighted US dollar (“TWD”, monthly average; Fed H.10 statistics), though still lofty relative to its July 2011 major bottom around 80.5, remains beneath first quarter 2016’s 101.2 pinnacle. Central banks and finance ministers have been determined to keep the TWD beneath (or at least not much over) its January 2016 summit. For the next few months, they probably will continue to succeed in accomplishing this goal. The TWD also for the near term probably will not plummet more than 10 percent from its first quarter 2016 pinnacle.

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Establishment icons such as the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan probably will retain their highly accommodative policies for the next several months (at least). They will persist in their path not merely because of failure to achieve inflation goals, relatively sluggish growth, fears about global economic troubles (such as the United Kingdom’s Brexit Leave vote fallout) or worries about assorted “headwinds”/”volatility”. So why else?

The economic and political “establishment” (elites) in America and overseas fervently battles to subdue both left-wing and right-wing “populist” advances. See “‘Populism’ and Central Banks” (7/12/16). These guiding lights do not want populist leaders, whether America’s Donald Trump or European (or other) left or right wing firebrands, to achieve power.

The S+P 500 and other global stock marketplace benchmarks have rallied sharply from their 1Q16 depths. The S+P 500 has edged above its 5/20/15 peak at 2135. But a sharp downturn in worldwide equities probably would help populist advocates of “Change” to claim that “the establishment” had inadequate or failing economic (and political and social) policies. So the US establishment and its overseas comrades do not want the S+P 500 and related equity marketplaces to collapse, especially during the countdown up to US Election Day (11/8/16). Keeping US government (and other) yields low and avoiding big moves in the US dollar intertwine with central bank (and other establishment) stock marketplace support and anti-populist strategies.

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Ticking Clocks- US Financial Marketplaces (8-8-16)

“POPULISM” AND CENTRAL BANKS © Leo Haviland, July 12, 2016

“Big boss man, can’t you hear me when I call?” “Big Boss Man” (Al Smith and Luther Dixon), performed by Elvis Presley, the Grateful Dead, and others

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OVERVIEW AND CONCLUSION

The United Kingdom’s recent shocking referendum vote to leave the European Union not only sparked ferocious marketplace fluctuations. It did not merely underscore ongoing and widespread unease regarding mediocre economic growth and insufficient inflation in many nations inside and outside of Europe.

Brexit also highlighted previously existing and growing fears among many global economic and political elites (“the establishment”) and their disciples about increasing “populism” and its potential consequences. These worries extend beyond the troubles of the European Union and the Eurozone and nervousness regarding their fracturing or break-up. The British departure outcome probably inflamed populist ambitions in other countries. In any case, substantial divisiveness and partisan fervor are not confined to Europe or the United States. See “America: a House Divided” (12/7/15).

The “establishment”, like “populism”, is diverse rather than monolithic. Even among the advanced OECD nations such as the United States and those seeking to emulate them, it is not the same everywhere. Mainstream political parties and their economic agendas are not precisely identical, even though such different groups (such as Democrats and Republicans) can belong to the same establishment. What is an establishment (or populist or other anti-establishment) view can change over time.

Different cultures of course will have leaders, but their particular “establishment” ideologies may be significantly and perhaps dramatically different. The current Chinese establishment’s guiding faith in part overlaps with (resembles) but nevertheless is not identical to the creed prevailing in the United States establishment. Or, compare a primitive rural culture and that of a modern Western industrial nation.

However, as a rough and admittedly simplified guideline, one can summarize the ruling Western economic ideology of the post-World War Two period. It is a “capitalism” that in principle generally adores free (open) markets for goods and services, free trade, and free movement of capital, as well as (subject to immigration concerns) fairly free movement of people. Such economic goals (and political and social gospels related to them) are labeled and valued as good and desirable by the so-called establishment. Often they are honored as being rational, reasonable, intelligent, sensible, and prudent. In the post-World War Two span, these good outcomes have intertwined with globalization, which the elites (power structure), likewise generally (on balance) bless. Therefore these authorities view populism, at least to the extent it endangers such good capitalism and the related “structure (arrangement) of things”, as generally bad (or less good; inferior).

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The establishment responded to the British outcome with passionate rhetoric. The dangers of supposedly overly left-wing or right-wing movements, or excessively nationalistic or protectionist ones, or fringe or radical groups must be handled somehow, right? Or so such currently empowered elites advise audiences.

Leading central banks and regulators such as the European Central Bank, Federal Reserve Board, Bank of England, and International Monetary Fund of course stress their devotion to their assorted mandates. Indeed their noble quest to secure praiseworthy aims such as stable prices (sufficient inflation), maximum employment, and economic growth are on behalf of “all of us”. Yet such loosely-defined legislative directives in practice provide these economic high priests wide scope for their interpretation.

In practice, central bankers, even if widely-revered, generally reflect the key economic and political doctrines and ambitions of traditional (current establishment) leaders. And “populism”, though one cannot define it scientifically, though its historical and current international appearance is not everywhere the same, still can “shake the existing economic and political situation and its institutional structures up a lot”. And such resulting uncertainty and disruption (and especially big changes) on balance would be bad (or at least not very good), right? So the Brexit vote was a bad (undesirable and unfortunate) outcome. Populist pressure, especially if it involved challenging the independence of central banks, might even make it more difficult for central bankers to achieve their beloved mandates. Leading central banks nowadays consequently want to preserve the basic structure and trends of the post-World War Two world “order”, to preclude revolutionary or even mildly substantial changes in it.

Therefore, the British “Leave” vote and its aftermath probably will encourage various leading central banks such as the Fed, ECB, Bank of England, and their allies to battle even more fiercely than before against populist menaces. Continued sluggish growth (or a recession), rising unemployment, or a renewed sovereign or private sector debt crisis (whether in Europe or around the globe), would inflame populist ardor, particularly given anger over widespread economic inequality. The central banks therefore likely will sustain existing highly accommodative policies such as yield repression and money printing for longer than previously anticipated, perhaps expanding them “if necessary”.

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Populism and Central Banks (7-12-16)

PARALLELS IN US NATURAL GAS: 2012 AND 2016 BUILD SEASONS © Leo Haviland, July 4, 2016

OVERVIEW AND CONCLUSION

Cultural viewpoints (including variables selected, organized, and assessed) regarding the past and present or focused on an anticipated future reflect opinions, not science. Moreover, marketplaces “themselves” are not unchanging or Natural phenomena. In any case, marketplace history does not necessarily repeat itself, whether entirely, partly, or at all.

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The United States natural gas build season spans roughly from the end of calendar March to the end of calendar October. America’s natural gas 2016 inventory build season, including its price trends, although it has several more months to run, nevertheless presents several parallels with 2012’s build season. Assuming inventory forecasts for the balance of the 2016 build season come true, one crucial similarity between 2012 and 2016 will be substantially diminishing US natural gas oversupply over the course of build season.

The winters of 2011-12 and 2015-16 not only ended with massive supplies, but also completed long-running major bear trends. In commodity arenas, all else equal, and absent some revolutionary developments on the supply or demand side, there is some tendency for gigantic oversupply (mammoth inventories) accompanied by sustained depressed prices eventually to be reversed by falling production, increasing demand, or both. In natural gas, if prolonged bullish weather patterns appear (such as a torrid summer or frigid winter), they obviously can help to minimize the bearish oversupply situation or transform it to a bullish one.

Also, although natural gas price trends do not always closely intertwine with those of the petroleum marketplace (or commodities “in general”), or with other financial playgrounds such as stocks, currencies (especially the US dollar), and American government and other benchmark interest rates, they can entangle with them. In second half 2012, important stock and commodity marketplaces rallied and the dollar paused in its appreciation. In mid-first quarter 2016, a similar “overall” phenomenon occurred. In both time periods, ongoing or anticipated (eventual) monetary easing by key central banks likely assisted the bull moves in stocks and commodities, including natural gas.

Finally, at times the CFTC’s Commitments of Traders reveals patterns for noncommercial participants (investors, speculators) in natural gas relevant for assessing price trends. The net noncommercial positions in the later stages of the bear trends which ended in 2012 and 2016 present roughly similar patterns.

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From the historical distance (price move) perspective, ten major NYMEX natural gas bear moves prior to 2014-16’s tumble traveled an average of 65.9 percent. For the seven collapses beginning with the December 1996 one, the average downturn is 70.4pc. From the time parameter, the average decline for the 10 big bear moves was about nine and three-quarter months. For the most recent seven major bear moves preceding the one that began in February 2014, the duration averages about eleven and one-quarter.

The collapse from 2/24/14’s 6.493 major high to 3/4/16’s 1.611 low was 75.2 percent and just over 24 months. Thus the price move traveled moderately farther than average. Significantly, the two year decline since February 2014’s summit was more than twice as long as average major bear trends, surpassed only by the January 2010 to April 2012 crash (during which the price fell 68.9pc). Thus from the interrelated price and time variables (nearest futures continuation basis), and though history is not destiny, a major change from the long-running bear trend that commenced in February 2014 probably occurred following 3/4/16’s low.

Also note that March 2016’s 1.611 level stands within a range of other important support. Recall not only 4/19/12’s major low at 1.902, but also the double bottom of 1.85 (1/28/02)/1.76 (9/26/01), a trough at 1.735 on 9/5/96 alongside a low at 2/24/97 at 1.68, and 1998-99’s bottom (8/27/98 at 1.61/2/26/99 at 1.625). Also, the March 2016 trough did not break 12/18/15’s interim low at 1.684 by much.

Moreover, from a calendar day viewpoint, March 4 is within several days of the February dates for the important late February bottoms of 1997 (2/24/97 at 1.68) and 1999 (2/26/99 at 1.625). In addition, the March 2016 low is a two year diagonal time move relative to the late February 2014’s pinnacle.

“US Natural Gas: Traveling Forward” (6/13/16) emphasized: “The United States natural gas (NYMEX nearest futures continuation basis) major bear trend that followed 2/24/14’s major peak at 6.493 ended with 3/4/16’s 1.611 bottom. What if a torrid summer 2016 dramatically reduces the stock build total and thus helps containment fears for end build season 2016 to disappear? Then prices likely will not revisit the 1.60/1.90 range, but instead will maintain their ascent toward [the significant resistance range of] 3.10/3.45… The US natural gas supply/demand perspective over the so-called long run is moderately bullish. Assuming normal winter 2016-17 weather, moderate US economic growth, and no renewed collapse in the overall commodities complex (particularly petroleum), gas prices probably will march higher.”

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Parallels in US Natural Gas- 2012 and 2016 Build Seasons (7-4-16)