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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PETROLEUM: ROLLING AND TUMBLING © Leo Haviland June 10, 2019

“Well, I rolled and I tumbled, cried the whole night long
Well, I woke up this mornin’, didn’t know right from wrong”. Muddy Waters, “Rollin’ and Tumblin’”

OVERVIEW AND CONCLUSION

Of course the petroleum universe “as a whole” has, as do its various individual crude oil streams and assorted refined products, “its own” past, present, and potential future supply/demand/inventory situation. However, the petroleum circus, including so-called specific oil-related variables affecting it, is not a domain entirely separate from other economic and political phenomena. For example, marketplace history reveals that price levels and trends for the petroleum complex intertwine in diverse ways with benchmark global stock, interest rate, and currency arenas, and with other commodity fields such as base and precious metals. These relationships, including convergence/divergence (and lead/lag) ones between the oil marketplace in general and these other financial playgrounds, can and do change, sometimes significantly.

Marketplace history need not repeat itself, either entirely or even partly. Visionaries differ in their perspectives on and conclusions regarding petroleum and other marketplaces, frequently substantially.

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OPEC is an important actor within the oil theater, as are its current producer allies such as Russia. The United States, given its ravenous demand for petroleum plus its booming crude oil output in recent years, also is an important petroleum player. But these entertainers are not independent of other stages and performers.

In the timing and direction of its major price moves, the global petroleum complex does not necessarily or always travel alongside the S+P 500 and other benchmark stock indices. A survey of the critical price turning points since early 2016 for the oil and equity realms nevertheless displays the close connection between petroleum and stock trends.

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For related marketplace analysis, see essays such as: “Wall Street Talking, Yield Hunting, and Running for Cover” (5/14/19); “Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19); “American Economic Growth: Cycles, Yield Spreads, and Stocks” (3/4/19); “Facing a Wall: Emerging US Dollar Weakness” (1/15/19); “American Housing: a Marketplace Weathervane” (12/4/18); “Twists, Turns, and Turmoil: US and Other Government Note Trends” (11/12/18); “Japan: Financial Archery, Shooting Arrows” (10/5/18); “Stock Marketplace Maneuvers: Convergence and Divergence” (9/4/18); “China at a Crossroads: Economic and Political Danger Signs” (8/5/18); “Shakin’ All Over: Marketplace Convergence and Divergence” (6/18/18); “History on Stage: Marketplace Scenes” (8/9/17).

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Petroleum- Rollling and Tumbling (6-10-19)

WALL STREET TALKING, YIELD HUNTING, AND RUNNING FOR COVER © Leo Haviland May 14, 2019

“‘Curiouser and curiouser!’ cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English).” “Alice’s Adventures in Wonderland”, by Lewis Carroll (Chapter II, “The Pool of Tears”)

CONCLUSION: GOLDILOCKS ERA, REVISITED

Historians should wonder if the Federal Reserve Board and its friends in central banking (and assorted comrades parading in some political corridors and media circles) nowadays are aiming to manufacture an updated version of the joyous last stage (ending in 2007) of the magnificent Goldilocks Era.

Lower United States Treasury yields and the sunny prospect of continued benevolent Federal Reserve policy reappeared around end December 2018/early January 2019. The rapid bull climb in the S+P 500 from then until the beginning of May 2019 to some extent reflected hopes of further (adequate) American and global economic expansion.

However, the frantic price rally in several key marketplace benchmarks commencing around end year 2018 also probably reflected an ardent quest for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield hunters searched for sufficient return in territories such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex.

Of course cultural history does not necessarily repeat itself, either entirely or even partly. Marketplace phenomena (conditions; variables), including relationships between them and perspectives on them, can and do change, sometimes dramatically. Rhetoric (stories) relating to economic and related playgrounds seek not only to explain viewpoints and situations, but also to guide behavior.

Later stages of economic expansions (so-called cycles) often are distinguished by what many players, including leading and widely-respected economic guardians and policymakers, decide to overlook or minimize.

This ardent quest for yield probably manifested that America is in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in other advanced nations), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is or soon will be underway.

“Economic Growth Fears: Stock and Interest Rate Adventures” (4/2/19) stated in regard to the S+P 500: “The September/October 2018 elevation [2941 (9/21/18)/2940 (10/3/18)] probably will not be broken by much, if at all.” The recent price declines in the S+P 500 (5/1/19 high 2954) and other advanced nation stocks, emerging marketplace stocks, emerging marketplace dollar-denominated sovereign debt, and the petroleum complex probably signal that many dutiful profit hunters (and probably some other investors/owners) have started running for cover (begun to liquidate their long positions).

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Wall Street Talking, Yield Hunting, and Running for Cover (5-14-19)

ECONOMIC GROWTH FEARS: STOCK AND INTEREST RATE ADVENTURES © Leo Haviland April 2, 2019

In “Alice’s Adventures in Wonderland”, Lewis Carroll declares: “For, you see, so many out-of-the-way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” (Chapter I, “Down the Rabbit-Hole”)

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OVERVIEW AND CONCLUSIONS

History reveals that sustained rises in United State government interest rates generally (eventually) are bearish for the US stock marketplace. The United States Treasury 10 year note yield made a major bottom on 7/6/16 at 1.32 percent, an important interim low on 9/8/17 at 2.01pc, and a critical high in early October 2018 at 3.26pc. Japan’s 10 year government note yield peaked around then, on 10/4/18 at .17 percent. Germany’s 10 year government note rate established an interim high at .58pc on 10/10/18 (having built an earlier top at .81pc on 2/8/18). China’s 10 year central government note’s yield high occurred earlier (4.04pc on 11/22/17), but its lower yield high at 3.71pc on 9/21/18 connected with those in America, Japan, and Germany.

The S+P 500 attained its summit around the same time as the yield highs in the UST 10 year note, constructing a double top on 9/21/18 at 2941 and 10/3/08 at 2940.

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Subsequent yield declines in the UST 10 year note and the 10 year government debt of other key global realms such as Germany, Japan, and China accompanied a slump in the S+P 500 and many other benchmark stock indices. The Federal Reserve, European Central Bank, and other central bank engineers initially were fairly complacent. However, around mid-December 2018, the rate for the UST 10 year decisively retreated beneath about 2.80 percent. Also around then, the S+P 500, after tumbling from 2800’s temporary high (12/3/18), cratered beneath 2650 (a ten percent fall from the autumn 2018 high). Note the subsequent change in direction for Fed policy orations and actions.

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These fearful events (and other variables) portended weaker real GDP growth (and maybe even a recession) in America and other advanced nations, and an undesirable slowdown in China and other key emerging marketplaces. Stock owners (especially investors) and their investment banking and media allies in the United States and elsewhere screamed, troubled by the prospect of a twenty percent or more decline (satisfying a classic definition of a bear trend) in the S+P 500. Many politicians around the globe screeched, expressing concerns about economic dangers (more quietly, some worried about potential for increased populist pressures).

This unsettling scenario sparked the trusty Federal Reserve to halt its Federal Funds rate-raising policy (part of its normalization scheme), to underline that it would maintain a hefty balance sheet laden with debt securities, and to preach a much-welcomed sermon that for the near term it will be “patient”. The European Central Bank and other devoted central banking comrades promised continued easy money programs.

Some might wonder if the Fed and its friends in central banking (and in some political corridors) nowadays are aiming to produce an updated version of the joyous days (“irrational exuberance”, perhaps) of 2006-07 during the Goldilocks Era.

In any case, the central bank easing rhetoric and policy shift helped to rally equities and boosted confidence in growth prospects. The S+P 500 hit a floor on 12/26/18 at 2347 (20 percent fall from the autumn high equals 2353) and thereafter rose sharply. Many other global stock marketplaces established troughs around then, rallying dramatically in first quarter 2019. The UST 10 year yield touched 2.54 percent on 1/4/19. It thereafter climbed to 2.80pc on 1/18/19 (2.77pc high 3/14/19).

Given the reappearance of lower UST rates and the sunny prospect of continued benevolent Federal Reserve policy, arguably some of the feverish rally in the S+P 500 and other international stocks since around end December 2018/early January 2019 has reflected not only hopes of further (adequate) economic expansion, but also a frantic hunt for suitable returns (“yield”) outside of the interest rate securities field. The time of the broad S&P Goldman Sachs Commodity Index (“GSCI”)’s bottom neighbored that in the S+P 500, 12/26/18 at 366. Note also the price rally in US dollar-denominated emerging marketplace sovereign debt securities.

The broad real trade-weighted US dollar’s rally from its January 2018 bottom at 94.6 (Federal Reserve, H.10; goods only; monthly average, March 1973=100) established a high in December 2018 at 103.2 (recall the major top of 103.4 (December 2016)/103.2 (January 2017). The dollar’s stop in its bull charge and its slight decline thereafter (about 1.4 percent) probably has helped to inspire the stock marketplace rally and related quests for returns in other landscapes. The combination of the drop in US government yields and the cessation of the US dollar’s upward march probably (especially) encouraged the recent price climbs in the stocks and government notes of many emerging marketplaces.

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For the S+P 500, the lower tax rates legislated via America’s end-2017 corporate tax “reform” spiked US corporate earnings and encouraged massive share buybacks. Although the tax reform will continue to support earnings to some extent, substantial year-on-year growth for (at least most of) 2019 earnings currently looks unlikely. Suppose marketplace enthusiasm generates a forceful challenge to the S+P 500’s autumn 2018 high occurs. The September/October 2018 elevation probably will not be broken by much, if at all. A one percent breach of 2941 gives 2970, a five percent advance over it equals 3088.

If further notable share buybacks and determined digging around for yields (“good returns”) are playing critical roles in the recent S+P 500 (and other stock) rallies, perhaps the S+P 500’s recent strength does not reflect the darkening vista for the American economy. US and other stock marketplace climbs from current levels do not preclude increasing economic feebleness in America and elsewhere.

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Economic Growth Fears- Stock and Interest Rate Adventures (4-2-19) (1)

AMERICAN ECONOMIC GROWTH: CYCLES, YIELD SPREADS, AND STOCKS © Leo Haviland March 4, 2019

In “Back in the U.S.A.”, Chuck Berry sings: “Yes, I’m so glad I’m livin’ in the U.S.A. Anything you want, we got right here in the U.S.A.”

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OVERVIEW AND CONCLUSION

Marketplace and other cultural analysts create meaningful relationships between variables and groups of phenomena. As subjective perspectives differ, these faithful inquirers identify, define, select, assess, and organize evidence (data; facts; factors) in a variety of fashions. This results in diverse propositions, arguments, and conclusions, and thus an array of competing stories.

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In its discussion of America’s 4Q18 GDP growth, the NYTimes (3/1/19, pB1) stated that “most economists do not expect a recession this year.”

America’s current economic expansion is very long by historical standards. Of course history need not repeat itself. Conditions, including associations and patterns between variables, can and do change over time. Marketplace convergence and divergence trends (and lead/lag relationships) are not inevitable; they can shift, sometimes dramatically. However, devoted study of the ongoing economic expansion should not divorce itself from previous economic growth and decline episodes and patterns.

Interest rate yield relationships offer insight into economic history and prospects. Particularly given the remarkable length of America’s recent glorious real GDP expansion, marketplace clairvoyants should review the long run historical relationship between yields for lower-grade United States corporate bonds and the ten year US Treasury note in the context of American economic growth and recession cycles. The recent widening yield spread trend for this credit relationship warns that a US recession (or at least significantly lower growth than generally forecast), whether in calendar 2019 or not long thereafter, is more likely than most wizards anticipate. Moreover, current trends in the US Treasury yield curve, when placed in historic perspective, also underline the looming potential for an American economic downturn (or considerably slower growth than most soothsayers predict).

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American Economic Growth- Cycles, Yield Spreads, and Stocks (3-4-19)