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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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)

THE OIL BATTLEFIELD: EVOLUTION, RELATIONSHIPS, AND PRICES © Leo Haviland, April 10, 2017

In “Street Fighting Man”, The Rolling Stones sing:
“Everywhere I hear the sound of marching, charging feet, boy
‘Cause summer’s here and the time is right for fighting in the street, boy”.

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OVERVIEW AND CONCLUSION

The continued determination of leading OPEC members (such as Saudi Arabia) and some key non-OPEC oil producing nations (such as Russia) to subdue their crude oil output will underpin petroleum prices. The Saudis and their allies will not readily sacrifice their long-sought production restraint agreement achieved with several important non-OPEC exporters in late 2016. Assuming supply discipline by key producers and moderate global economic growth, supply/demand estimates indicate that OECD (advanced nations such as the United States) industry inventories by the end of calendar 2018 will have declined to around “normal” levels in days coverage terms.

Even gigantic producers such as Saudi Arabia and Russia (for political as well as economic reasons) need to generate at least moderate income. Given its planned sale of shares in Aramco via an initial public offering, does Saudi Arabia want a renewed collapse in petroleum prices to $40 Brent/North Sea or less? Given its need for revenues, global political ambitions, and signs of domestic unrest, does Russia want petroleum prices to plummet sharply?

Other political worries help to bolster oil prices. Some (as usual) relate to the Middle East. North Korea’s nuclear program captures headlines. What if Venezuelan political turmoil results in a supply interruption?

However, current OECD petroleum industry inventories remain far above average. Even by end calendar 2017, they probably will be several days above normal. And end calendar 2018 obviously is a long time from now. Compliance with the OPEC/non-OPEC output guidelines by several individual countries has not been universal. And going forward, production discipline should not be taken for granted. Will Iraq and Iran moderate their production? What if Nigerian or Libyan production increases? Also, the net noncommercial position in the petroleum complex, which played a very important part in the explosive oil bull move in oil that began in first quarter 2016, is still quite high and vulnerable to liquidation.

History reveals that petroleum price levels and trends intertwine with currency, interest rate, stock and other commodity marketplaces (particularly base and precious metals) in a variety of ways. The current interrelationship between petroleum and these other arenas probably warns that it will be difficult for petroleum prices to sustain advances much above their first quarter 2017 highs.

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Using NYMEX crude oil (nearest futures continuation) as a benchmark, petroleum prices for the next several months likely will stay in a broad range. Major support exists at around $38.00/$42.00. Significant resistance exists between $52.00/$55.25.

However, assuming ordinary international economic growth, what if OPEC/non-OPEC production discipline continues for the next year and a half (or marketplace faith increases that such restraint will persist)? In this scenario, if (and this “if” is a very important if) no sustained significant weakness in global stock marketplaces (and intertwining/confirming patterns in the US dollar, interest rates, and metals) develops, then NYMEX crude oil prices probably will attack the $60.75/$65.00 range.

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The Oil Battlefield- Evolution, Relationships, and Prices (4-10-17)

EUROZONE UNDER SIEGE: CURRENCY TRENDS AND POLITICS © Leo Haviland, March 20, 2017

“Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away.
War, children, it’s just a shot away”. “Gimme Shelter”, The Rolling Stones

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OVERVIEW AND CONCLUSION

 

“America First!” and “Make America Great Again!” anthems inspire President Trump and many of his populist supporters. Many Americans of course have slogans, doctrines, and plans dramatically different from those of the President and his populist allies (and his establishment comrades). Despite America’s sharp and wide-ranging partisan divisions, most Americans believe that America should be great (whatever that may mean in practice). They also agree that America’s President and Congress (and other federal institutions), all else equal, should consider the country’s needs first. Perhaps a majority of “We the People of the United States” retain faith that America in some fashion should be first (the leading nation) around the globe as well.

 

Nowadays Europe, like America, has a so-called establishment (various elites) battling fiercely against an array of populist adversaries. Yet the European establishment includes not only most leaders (and the bureaucracy) of the European Union and the Eurozone (and the European Central Bank), but also the political (economic) establishments of most of Europe’s individual countries. So even though the European Union and Eurozone comprise various independent countries, and even though these nations contain diverse sets of right and left wing (and radical) political parties and economic ideologies, the overall European “establishment” ardently will promote “Europe First!” and “Eurozone First!” doctrines, particularly when the risks of European Union and (especially) Eurozone breakup appear rather high. Thus Europe/Eurozone preservation goals can trump narrower nationalist aims. Populist threats obviously are one source of such grave risks, which the United Kingdom’s June 2016 Brexit “Leave” vote underscored. However, Europe’s sovereign debt (banking; recall Greece and the European “periphery”) crisis a few years ago reveals that other issues may motivate the European establishment to rally fiercely around a banner and fervently embrace policies to keep Europe unified.

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Napoleon: “In forming the plan of a campaign, it is requisite to foresee everything the enemy may do, and to be prepared with the necessary means to counteract it.”

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The European establishments do not necessarily or always plan and act together. Yet despite their diversity, they are closing ranks, making statements and endorsing programs to ensure substantial European unity and their own places in power structures. On the national political front in several individual countries, this has included a shift to the right (particularly on the immigration issue). This mitigates some of the appeal of right wing (pro-nationalist; anti-globalist) populist candidates.

In the Eurozone context, a too frail Euro FX can reflect dangers to the Eurozone’s integrity. America is a key European trading partner. The Trump camp forcefully proclaims its hostility to excessive weakness of the Euro FX and other currencies (such as the Chinese renminbi) relative to the dollar. The Trump regime (and many other Americans) probably would be pleased with a somewhat weaker dollar relative to its recent lofty high. So on the trade and currency landscape, some European mainstream leaders in response have suggested they want neither trade wars nor further Euro FX currency depreciation. Related to this, what does the ECB’s March 2017 hint that it eventually will modify its current highly accommodative monetary policy indicate? It likewise probably signals a willingness to bolster the Euro FX.

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The Bank for International Settlements provides broad real effective exchange rates (“EER”) for the Eurozone (Euro FX area) and numerous other nations. The current sideways pattern in the Euro FX broad real effective exchange rate (“EER”) probably will persist for the short term. But as the 2017 European election calendar marches forward, the Euro FX EER probably will embark on a moderate bull trend. Major Euro FX EER support is well-entrenched and will not be broken by much, if at all. This Euro FX appreciation will occur not only on an EER basis, but also in the Euro FX cross rate relationship versus the US dollar. In general, determined efforts by the European establishment to retain power (defeat populists; avoid further European breakup) and bolster the Euro FX probably will succeed (at least for the next several months, and perhaps quite a bit longer).

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Eurozone Under Siege- Currency Trends and Politics (3-20-17)