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





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).

FOLLOW THE LINK BELOW to download this article as a PDF file.
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”)

****

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.

****

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.

****

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.

****

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.

****

FOLLOW THE LINK BELOW to download this article as a PDF file.
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.”

****

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.

****

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).

 ***

FOLLOW THE LINK BELOW to download this article as a PDF file.
American Economic Growth- Cycles, Yield Spreads, and Stocks (3-4-19)

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)