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.


 

Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile





SEASONS COME, SEASONS GO: US NATURAL GAS © Leo Haviland February 5, 2019

“The Times They Are A-Changin’”, a Bob Dylan song

CONCLUSION AND OVERVIEW

The vicious bear slump in NYMEX natural gas (nearest futures continuation) that started after 11/14/18’s 4.929 peak probably will end between mid-February and early March 2019. Assuming normal weather for the balance of winter 2019, major support around 2.40/2.50 probably will hold. Above-average temperatures for the rest of this winter increase the risk of a  moderate breach of the 2.40/2.50 floor.

Looking forward over the next several months, NYMEX natural gas (nearest futures) probably will remain in a sideways trend between 2.40/2.50 and 3.20/3.45. However, higher than anticipated United States natural gas production, reduced demand due to milder than expected summer weather, or American economic feebleness may inspire an assault on the lower end of that range. Many important lows in nearest futures continuation have occurred in late August/calendar September.

****

What is a “low”, “high”, or “normal” (average, reasonable) inventory is a matter of opinion. In any case, over the past two years, the United States natural gas industry probably has shifted toward a lower level of desired (appropriate, reasonable, normal, prudent, sufficient) stock holding relative to long run historical averages. Structural changes in the US natural gas marketplace have encouraged more widespread (and more aggressive) adoption of a “just-in-time” (lower inventories in days coverage terms) inventory management approach instead of a “just-in-case” (relatively higher stockpiles) method.

Why? One likely factor has been faith that gas production (in 2018, 2019, and thereafter) would remain far greater than that of calendar 2017. Many players therefore probably believe there “always (or almost always) will be enough gas around” to satisfy demand, even during peak consumption periods. Another variable likely encouraging lower inventory in days coverage terms is the substantial expansion of America’s pipeline infrastructure. Thus it has (will) become easier to move sufficient gas to many locations where it is needed. In addition, the growing share of renewables in total US electricity generation arguably to some extent reduces the amount of necessary natural gas inventories.

****

Assume an entrenched change in natural gas inventory management practices to the just-in-time orientation. Assume also that from the days coverage perspective (stocks relative to consumption), the “reasonable” level of industry holdings has tumbled by several days relative to historical days coverage benchmarks. Nevertheless, anticipated October 2019 (and October 2020) United States natural gas inventories from the days coverage perspective are substantially lower than the historical average. The natural gas inventory situation therefore is somewhat bullish, particularly from the perspective regarding the close of build seasons at end October 2019 and end October 2020.

Suppose US natural gas output does not surpass current expectations, economic growth remains moderate, weather remains normal, and commodity prices in general (especially in the petroleum complex) do not collapse. This natural gas inventory situation, assuming it persists, makes it probable that the marketplace eventually will attack and surpass 3.20/3.45.

Although prospects for US natural gas days coverage at end October 2019 and October 2020 at present currently are fairly bullish, end March 2020 inventories appear sufficient. It consequently may be difficult to sustain moves over 3.45/3.70.

Despite the explosive price leap to nearly 5.000 in mid-November 2018, the shattering collapse from mid-December (12/10/18 high at 4.666), signals that many natural gas marketplace participants probably remain complacent regarding the availability of supplies, even in regard to periods of expected or actual high demand. The current sideways trends and relatively modest price heights for the summer 2019 and winter 2019-2020 calendar strips likewise reflect little worry regarding prospective supply availability 

However, picture a significantly colder than usual winter (or widespread belief this will occur). A colder than normal winter 2019/20 (or winter 2020/21), assuming low end-October days coverage, boosts the risks of very low inventories at the end of winter and thus substantial (even if brief in duration) bull charges. US natural gas inventories were very low in days coverage terms at end-October 2018. Fears that available supplies (whether in days coverage or arithmetical terms) are or may become tight can prompt feverish scrambles to procure them. Recall the spike from 9/10/18’s 2.752 and 10/29/18’s 3.100 up to November 2018’s summit. In any case, the most probable time for any flight toward or above 4.00/4.10 is close to or during winter.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Seasons Come, Seasons Go- US Natural Gas (2-5-19)

FACING A WALL: EMERGING US DOLLAR WEAKNESS © Leo Haviland January 15, 2019

CONCLUSION AND OVERVIEW

The broad real trade-weighted United States dollar probably peaked at 103.2 in December 2018 (“TWD”; Federal Reserve Board, H.10; monthly average, March 1973=100). Significantly, that elevation links with the critical TWD pinnacle of December 2016 at 103.4/January 2017 at 103.3, thereby building a formidable double top barrier. This double top ends the glorious long-running major bull move which commenced in July 2011 at 80.5.

Unlike the broad real trade-weighted dollar, the broad nominal trade-weighted dollar has daily data. The broad nominal US dollar probably also formed twin peaks. It achieved an initial summit on 12/28/16 (at 128.9) and 1/3/17 (at 128.8). The nominal TWD’s recent high, 12/14/18 at 129.1, edged less than one percent beyond the 2016/17 summit.

The decline in the broad real trade-weighted dollar from its 103.2/103.4 summit probably will be fairly close to and quite possibly more than ten percent. This retreat likely will last at least for several months. The broad TWD’s wall of resistance at 103.2/103.4 probably will not be broken anytime soon. If it is, the breach likely will not be substantial; dollar depreciation will resume.

****

What interrelated phenomena currently are sparking, or will tend to encourage, near term and long run US dollar weakness?

Growing faith that America’s Federal Reserve Board will slow down (at least for a while) its current program of raising the Federal Funds rate represents a key factor in the establishment of December 2018’s TWD ceiling. Both the Fed Chairman and other US central bank guardians recently spoke of the need for “patience” on the rate increase front. For example, note Chairman Powell’s remarks before the Economic Club of Washington, DC (see the NYTimes, 1/11/19, pB3). Read the transcript of his 1/4/19 comments in an Atlanta, GA conference with other past Fed Chairs.

By reducing the likelihood of (at least) near term boosts in the Federal Funds rate, and thereby cutting the probability of notable yield increases for US government debt securities, the Fed makes the US dollar less appealing (less likely to appreciate further) in the perspective of many marketplace players. The Fed’s less aggressive rate-raising scheme (at minimum, a pause in that “normalization” process) mitigates enthusiasm for the US dollar from those aiming to take advantage of interest rate yield differentials (as well as those hoping for appreciation in the value of other dollar-denominated assets such as American stocks or real estate relative to the foreign exchange value of the given home currency). Capital flows into the dollar may slow, or even reverse to some extent.

****

Another consideration constructing a noteworthy broad real TWD top is emerging optimism that tariff battles and other aspects of trade wars between America and many of its key trading partners (especially China) will become less fierce. Both the US and China increasingly are nervous regardless the ability of their nations to maintain adequate real GDP increases.

The current United States China 90 day negotiation deadline is 3/1/19. The NYTimes reported signs of Chinese concessions (1/9/18, ppA1, 8). US trade deals with China and other noteworthy nations reduce the incentive for those countries to depreciate their currency relative to the dollar in order to maintain market share for their goods and services within America. Such deals with China may well be vague or not amount to much in actual practice, but even cosmetic progress on the trade war battlefields will tend to weaken the dollar.

Signs of an armistice with China would bolster confidence that US trade feuds with Europe (particularly Germany) will subside. For the near term, the late 2018 deal between the US Administration with Canada and Mexico changing NAFTA treaty arrangements has lessened marketplace agitation regarding trade conflicts in that arena. Whether Congress eventually will enact this deal or a version close to it remains uncertain.

The current US Administration may seek a weaker US dollar relative to current heights in order to stimulate the economy as election season 2020 approaches.

****

The substantial and worsening United States debt situation, particularly in the federal sector as a result of the end-December 2017 tax “reform” legislation, nowadays encourages and increasingly will assist long run dollar depreciation. In its bearish implications for the broad real TWD, this ominous US debt variable at present is somewhat independent of near term Federal Reserve Board and other key central bank policy action and rhetoric as well as the outcome of trade negotiations. However, it nevertheless entangles with these phenomena.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Facing a Wall- Emerging US Dollar Weakness (1-15-19)

AMERICAN HOUSING: A MARKETPLACE WEATHERVANE © Leo Haviland December 4, 2018

“What You Own”, a song from the musical “Rent” (by Jonathan Larson), declares: “You’re living in America at the end of the millennium- you’re living in America, where it’s like the twilight zone.”

****

OVERVIEW AND CONCLUSION

American home prices have enjoyed a joyous climb since their dismal lows following the global economic disaster of 2007-09. However, United States home prices “in general” (“overall”) now probably are establishing an important peak. At least a modest reversal of the magnificent long-run bullish United States home price trend probably is near.

What is a high (too high), low (too low), expensive, cheap, average, good, bad, neutral, normal, typical, reasonable, commonsense, appropriate, fair value, overvalued, undervalued, natural, equilibrium, rational, irrational, or bubble level for prices or any other marketplace variable is a matter of opinion. Subjective perspectives differ. In any case, current US home price levels nevertheless appear quite high, particularly in comparison to the lofty heights of the amazing Goldilocks Era. As current American home price levels (even if only in nominal terms) hover around or float significantly above those of the Goldilocks Era, this hints that such prices probably are vulnerable to a noteworthy bearish move. Moreover, measures of global home prices and US commercial real estate also have surpassed their highs from about a decade ago and thus arguably likewise may suffer declines.

Many United States housing indicators in general currently appear fairly strong, particularly in relation to their weakness during or in the aftermath of the global economic crisis. Nevertheless, assorted American housing variables as well as other phenomena related to actual home price levels probably warn of upcoming declines in American home (and arguably other real estate) prices. A couple of US home price surveys have reported price declines for very recent months. US housing affordability has declined. New single-family home sales display signs of weakness, as do new privately-owned housing starts. American government interest rate yields, as well as US mortgage rates, have edged up. The Federal Reserve Board as of now likely will continue to tighten and raise rates for a while longer. Overall household debt, though not yet burdensome (at least for many), now exceeds the pinnacle reached ten years ago in 3Q08. The economic stimulus from America’s December 2017 tax “reform” probably is fading. US consumer confidence dipped in November 2018.

Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Convergence and divergence (lead/lag) relationships between marketplace trends and other variables can shift or transform, sometimes dramatically. Price and time trends for the American stock marketplace and US housing prices do not move precisely together. However, the international 2007-09 crisis experience (which in part strongly linked to US real estate issues) indicates that prices for US stocks and housing probably will peak around the same time, or at least “more or less together” (a lag of several months between the stock high and the home price pinnacle). The S+P 500 probably established a major high in autumn 2018 (9/21/18 at 2941, 10/3/18 at 2940; the broad S&P Goldman Sachs Commodity Index peaked 10/3/18 at 504). That autumn equity summit in the S+P 500 bordered 1/26/18’s interim top at 2873. Ongoing weakness in US (and international) stock marketplaces will help to undermine American home prices.

FOLLOW THE LINK BELOW to download this article as a PDF file.
American Housing- a Marketplace Weathervane (12-4-18)

TWISTS, TURNS, AND TURMOIL: US AND OTHER GOVERNMENT NOTE TRENDS © Leo Haviland November 12, 2018

In “The Age of Anxiety”, the poet W.H. Auden remarks: “Gradually for each in turn the darkness begins to dissolve and their vision to take shape.”

****

OVERVIEW AND CONCLUSION

Since summer 2016, using the 10 year central government note as a benchmark, global interest rate yields for leading nations “in general” gradually have risen. The United States has been the key nation propelling “overall” debt yields upward. Also since summer 2016, marketplace trend twists and turns from the price and time perspective for this assortment of nations usually has been fairly close.

Relatively strong American economic growth and tightening Federal Reserve Board policies have played important roles in the worldwide rate increase process. The reduction of central bank yield repression is and will remain a crucial factor underpinning the long run yield increase trend. Even the European Central Bank and Bank of Japan, which have ongoing lax monetary policies, suggest they eventually will become slightly less accommodative.

Significant global credit demand in an environment where overall global debt (government, corporate, household) already is substantial also is an important element tending to boost global yields. The international government debt level as a percentage of GDP nowadays is much greater than at the advent of the 2007-09 global economic disaster. For many countries, including America, there is little likelihood for notable government debt reduction anytime soon.

Expanding United States federal budget deficits resulting from December 2017’s exciting tax “reform” legislation probably have encouraged the ascent in American yields. Given the importance of America in the interconnected global economy, the US national budget deficit and debt level trends as a percentage of GDP not only will continue to generate US Treasury rate climbs over the long run, but also will assist a global upswing in yields. America’s tax reform scheme exacerbated the already massive long run federal budget problem (big deficits alongside entitlement spending, etc.; higher demand for credit). By helping to push American US government interest rates higher, the tax reform magnifies the country’s monumental debt challenge.

****

Despite the broadly similar rising yield trend direction and convergence links (connections, associations) across the central (federal) government note marketplaces since summer 2016, the pattern of course is not always perfect. Also, as time passes, divergence within this “overall upward trend” may emerge. For example, whereas the US Treasury 10 year note’s yield high to date since summer 2016 is 10/9/18’s 3.26 percent,  the German Bund (81 percent on 2/8/18) and China’s 10 year central government note (11/22/17’s 4.04pc) attained their highs many months earlier. In addition, rate climbs are not all necessarily the same in distance or speed terms. For countries engaged in substantial yield repression, the advance may be fairly small and slow for quite a while.

****

Fearful “flights to quality” occasionally may inspire yield falls in so-called safe haven government debt instruments issued by nations such as America, Germany, and Japan. Central banks likely will become (or remain) highly accommodative if the global recovery appears seriously threatened. The reality of or omens pointing to feebler than expected (desired) GDP growth (in conjunction with other variables) may spark such yield declines, and perhaps also induce renewed accommodative central bank actions (or at least soothing rhetoric from such earnest guardians).

In the current marketplace situation, additional notable erosion in the prices of global stock marketplace benchmarks from their calendar 2018 summits might also inspire relatively significant retreats in debt yields. For example, a decline in the S+P 500 of nearly twenty percent or more from its autumn 2018 peak could connect with government yield declines (and perhaps with the emergence of central bank propaganda or action to rally stock prices).

****

The major (long run) trend for US government interest rate yields, and for other nations around the globe, probably remains up. Despite tumultuous twists and turns, the long run upward march in government interest rate yields which commenced around the middle of 2016 likely will remain intact. The UST 10 year note’s 3.26 percent high yield will be exceeded.

However, the declines in global stock marketplaces (especially the S+P 500’s slump since its September 2018/October 2018 peak), especially if interpreted alongside the failure of German and Chinese 10 year government notes to establish yield new yield highs close in time to those in the UST (and other important countries), warn that a temporary halt to (or noteworthy slowdown in) the overall global pattern of rising government rates (including in America) is being established. Some yield declines in government notes may be rather dramatic. However, based upon a perspective of a long run extending for several years from now, such yield descents probably will be temporary.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Twists, Turns, and Turmoil- US and Other Government Note Trends (11-12-18)