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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TWO-STEPPING: US GOVERNMENT SECURITIES © Leo Haviland December 1, 2015

In the film noir “Double Indemnity” (Billy Wilder, director), Walter Neff describes the murder tale as “Kind of a crazy story with a crazy twist to it.”

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OVERVIEW AND CONCLUSION

Over the last seven years, through the last stage of the bloody worldwide economic crisis and the ensuing often fitful recovery, through dramatic and sometimes violent swings in assorted financial playgrounds, America’s heroic Federal Reserve ferociously has pinned the Federal Funds rate to the ground.

Many marketplace clairvoyants believe this widely-beloved guardian relatively soon will cautiously begin prodding the Funds rate higher. The next Fed gatherings are 12/15-16/15, 1/26-27/16, and 3/15-16/16. Maybe the courageous Fed will lift the rate up 25 basis points in its December 2015 meeting! In any case, as the widely-watched United States government two year note resides near the Fed Funds rate from the yield curve perspective, the two year US Treasury level and trend in part reflect marketplace opinions regarding Fed policy shifts and inflation.

In any case, the recent elevations in the two year US Treasury note a few basis points over .90 percent probably will not be broken by much in the near future. There indeed are some signs that United States inflation has edged toward the Fed’s two percent target. The Fed also proclaims its desire to normalize its highly accommodative policy. Yet the Fed embraces a gradual approach and does not want to make any missteps. Also, the international economy (look at the Eurozone and China) has slowed. So the Fed probably will patiently assess the consequences of its rate move for the United States (and global) economy and marketplaces (such as the S+P 500 and the US dollar).

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Yield levels and relationships obviously can fluctuate for all sorts of reasons. However, the falling rate trend for the US 10 year government note since early 2014 contrasts with the rising one for the UST two year note. The drop in 10 year UST yields, as it is occurring in the face of some US inflation and rising two year rates and artful Fed pillow talk about normalizing policy, arguably reflects economic weakness (mediocre GDP growth) in the US or elsewhere. In today’s interconnected world, feebleness elsewhere influences the American scene.

Note a related warning signal of actual or impending US economic weakness consistent with the fall in 10 year UST yields. Since the advent of money printing in the US in late 2008/early 2009, narrowing of the 10 year less two year spread roughly has coincided with the ending of that quantitative easing. This spread tightening (becoming less positive) in turn has reflected slower economic growth (or worries regarding potential weakness or recession). The agile Fed announced the actual first round of “tapering” (gradual ending of its latest QE venture) on 12/13/13, after several reductions in the QE program, tapering finished at end October 2014. The Treasury spread currently is close to its July 2012 depth.

Is a hunt for yield, fearful flight to quality, or need to own high-grade collateral more focused on the long end of the US government yield curve than the short end? Perhaps, but not necessarily. As the ECB extends its money printing program, is a shortage of long dated Eurozone government debt not only pushing yields there lower, but also thereby reducing yields for the UST long term instruments such as the 10 year? Perhaps. But economic weakness remains the most convincing reason for the sustained decline in UST 10 year yields since early 2014.

Consistent with the fall in the US 10 year yield and the narrowing of the 10 year versus two year yield spread, additional flags indicating weakness for the worldwide economy beckon. Although the S+P 500 remains high, emerging marketplace stocks in general and commodities continue to join hands in long-running substantial bear trends. The durable bull trend in the broad real trade-weighted dollar generally has danced in tune with the bear ones in emerging marketplace stocks and commodities.

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Two-Stepping- US Government Securities (12-1-15)

TREACHEROUS DAYS: WAITING ON CENTRAL BANKS © Leo Haviland November 10, 2015

RESCUE ME

Fortunately, economic and political generals apparently banished the terrifying international economic disaster that erupted in mid-2007. Highly accommodative monetary policies such as yield repression and money printing embraced by major central banks such as the Federal Reserve Board, European Central Bank, Bank of England, and Bank of Japan have played crucial parts in sparking and sustaining financial recovery. China’s leaders also have greatly aided the rescue from the dreadful crisis.

Has everyone equally shared the plentiful bounty provided by the economic recovery? In general, large corporations, Wall Street and its legislative and media allies, and S+P 500 “investors” have been especially enthusiastic apostles for easy money schemes.

Unfortunately, global economic growth arguably has slowed in recent months. The International Monetary Fund’s “World Economic Outlook” weathervane says worldwide GDP expanded 3.4 percent in 2014; it slips to 3.1pc in 2015 (October 2015, Table 1.1). Though the IMF predicts 2016 world growth ascends to 3.6pc, it cut its Julye 2015 predictions for both calendar 2015 and 2016 by .2pc. Low consumer price inflation arguably in part reflects mediocre growth. The IMF says consumer prices in advanced economies edge up merely .3 percent in 2015, and only 1.2pc in 2016. Compare 2014’s 1.4pc CPI rise.

World indebtedness remains lofty. Look at Japan’s colossal general government debt. Has the Greek debt quagmire been escaped, or merely masked by supposed saviors? Even in the United States, overall national indebtedness is still very high by historical standards, and America has achieved no progress on its long-run fiscal difficulties. Talk of currency wars and competitive devaluation persist. The European Central Bank, IMF, and others guides continually speak of the need for various member states to embark on significant structural reforms.

In some domains, is social unrest increasing, or at least risks of such activities? In many realms, and not only in regions with high unemployment, partisan conflicts between left and right wing parties (or other factions) seem especially contentious nowadays. The United States national scene currently offers little reason for optimism that its assorted feuding Democratic and Republican high priests genuinely will solve problems.

Interest rate, currency, stock, commodity, and other commercial marketplaces anxiously await critical upcoming decisions by the glorious Federal Reserve and other key central banks. Central banks have significant scope as to how they interpret and apply their policy mandates. To some extent, the Fed and its central banking friends perform as an additional branch of government. Given the noteworthy collective success thus far by central banks in helping the world to escape from the 2007-09 nightmare, many central banks presently seem to be more productive and flexible economic problem-solvers and guides than their political counterparts. Nevertheless, central bank viewpoints on economic phenomena (including their interrelations and consequences) are matters of opinion, not science. So as America’s Thanksgiving and the year-end holiday season nears, most risk-taking financial pilgrims and beleaguered political leaders around the globe are holding on, gratefully remembering, fervently praising, and anxiously praying for the continuance of the roughly seven years of highly accommodative monetary policies of the major central banks.

AMERICA: ADDICTED TO EASY MONEY

The Velvet Underground chant in “I’m Waiting for the Man”:

“I’m just lookin’ for a dear, dear friend of mine

I’m waiting for my man…

He’s never early, he’s always late

First thing you learn is you always gotta wait”.

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The world is addicted to the sustained easy money policies and rhetoric promoted by significant central banks. Debtors are particularly fond of yield suppression and money printing. Nowadays, owners of US (and many other) stocks love low interest rates. Also, yield suppression tends to generate price gains in government (picture US and German 10 year government notes) and many corporate debt securities.

The United States is especially enamored of the highly accommodative policies espoused by the Federal Reserve (and its overseas allies). Not only has the Fed’s lax program persisted for about seven years. Underscore the fixation of marketplaces and media on potential and actual Fed statements, including forward guidance wordplay. Finally, stress how fearful they (and the Fed) are regarding the timing and consequences of a slight withdrawal of the wonderful stimulus.

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In any event, the broad real trade-weighted US dollar (“TWD”; Fed H.10) will stay strong, probably achieving new highs in its current major bull move (major bottom 80.5 in July 2011). The S+P 500 probably will renew its decline from its 5/20/15 peak at 2135. If the S+P 500 manages to ascend over its 5/20/15 peak at 2135, it will not do so by much. The major bear trends in emerging marketplaces and commodities probably will remain intact, particularly if the TWD remains powerful.

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Treacherous Days- Waiting on Central Banks (November 10, 2015)

DANGEROUS TIMES IN US NATURAL GAS © Leo Haviland November 2, 2015

The probable range for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a relatively broad avenue between major support at 1.65/1.90 and significant resistance at 3.10/3.45. For prices to sustain voyages over 3.00, it probably will require a significantly colder than normal winter or noteworthy cuts in natural gas production. A containment risk (supplies too high relative to available storage), although currently not probable, nevertheless lurks for the end of calendar 2016 build season, especially if 2015-16’s winter is warmer than usual. If significant containment problems develop, and perhaps even if the potential for significant containment difficulties significantly increases, the 1.65 to 1.90 floor could be broken.

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The NYMEX natural gas major bear trend that followed 2/24/14’s major peak at 6.493 smashed through 4/27/15’s 2.443 low, tumbling to 1.948 on 10/27/15 (near NYMEX contract expiration; many key troughs have occurred around contract expiration). The late October 2015 depth borders the last prior major bottom, 1.902 on 4/19/12. Historical analysis indicates the bear trend from February 2014 to October 2015 travelled sufficiently far in price and duration terms to look for a trend shift from bearish to neutral or bullish. In addition, the most recent Commitments of Traders reports for key natural gas contracts reveal a massive net noncommercial short position. Many significant marketplace trend changes in natural gas roughly coincide with very elevated net long or short noncommercial positions. Current and (assuming normal weather) anticipated upcoming natural gas days coverage through winter 2015-16 and the 2016 build season appear fairly close to historical averages, particularly in the context of NYMEX natural gas prices well under 3.00.

However, the dramatic February 2014 to October 2015 price tumble is not the greatest or longest on record. So a further descent in NYMEX natural gas would not be unprecedented. Moreover, the days coverage perspective of course does not provide a complete viewpoint on the natural gas inventory situation and related price risks. After all, arithmetic quantities (bcf) of gas must be put in arithmetic storage places. And currently, the containment risks for the end of build season 2016 are not insubstantial; this bearish potentiality weighs on prices.

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Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” factors. Trend changes in NYMEX natural gas need not coincide with one in the petroleum complex or in commodities in general.

However, especially since mid-to-late June 2014 (NYMEX natural gas nearest futures interim high 6/16/14 at 4.886) and into calendar 2015 (gas interim top 5/19/15 at 3.105), bearish natural gas price movements have intertwined with those in the petroleum complex (and commodities in general) and the bull move in the broad real trade-weighted US dollar. Such natural gas retreats to some extent have paralleled slumps in emerging marketplace stocks. Note also the timing coincidence between May 2015’s natural gas top and the S+P 500’s 5/20/15 high at 2135. See “Commodities: Captivating Audiences” (10/12/15) and other recent essays.

Worldwide OECD industry and United States petroleum stocks are very elevated. OPEC next meets 12/4/15. It remains determined to capture market share and induce output cutbacks by high-cost oil producers around the world (including some American and Canadian ones). Thus even if petroleum manages to rally further from its recent lows, it likely will remain relatively weak. The broad real trade-weighted United States dollar edged slightly lower (about one percent) to 97.0 in October 2015 from its September 2015 bull move high at 98.0 (Federal Reserve, H.10; monthly average), but it probably will remain relatively strong for the near term. Weak oil and a strong dollar, all else equal, are bearish factors for American natural gas prices.

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Dangerous Times in US Natural Gas (November 2, 2015)

COMMODITIES: CAPTIVATING AUDIENCES © Leo Haviland October 12, 2015

OVERVIEW AND CONCLUSION

The Federal Reserve Board is a widely-watched star economic performer. Elvis Presley sings in “Jailhouse Rock” that “Everybody in the whole cell block Was dancin’ to the Jailhouse Rock”. The Fed’s actual and anticipated soulful lyrics and mesmerizing policy moves likewise attract, enthrall, and inspire Wall Street, Main Street, and political audiences. The Federal Reserve Board congregates 10/27-28/15 and 12/15-16/15.

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Though major stock, interest rate, and currency marketplaces typically grab the lion’s share of marketplace and media attention, recently commodities “in general” have marched to center stage alongside them. Central bankers, finance ministers, and other leading economic players pay close attention to the analysis and forecasts of the International Monetary Fund. October 2015’s featured cover page titles of the IMF’s “World Economic Outlook” (“Adjusting to Lower Commodity Prices”) and “Fiscal Monitor” (“The Commodities Roller Coaster”) evidences this increased fascination with commodities.

Individual commodities such as crude oil, copper, and corn, as well as commodity sectors such as the petroleum complex, of course have their own supply/demand and inventory pictures. Perspectives on these can and do differ between observers. Yet commodity price trends in general are hostage not only to their own supply/demand situation and general economic growth trends, but also to movements in equities, interest rates, and foreign exchange. Particularly over the past several months, stock and other financial playgrounds more closely have intertwined with noteworthy travels in crucial commodity theaters such as petroleum and base metals. Such increasingly strong ties developed in the past during similar sustained dramatic commodity price adventures.

The current significant link between commodities in general (use the broad Goldman Sachs Commodity Index as a benchmark; the “GSCI” is heavily petroleum-weighted) and other key arenas such as the S+P 500, emerging stock marketplaces in general (“MXEF”; MSCI emerging stock markets index, from Morgan Stanley), and the broad real trade-weighted United States dollar (“TWD”) probably will persist at least for the next several months. Stocks, the dollar, and the GSCI probably will all move in a sideways path for the near term. The Fed and its allies do not want the S+P 500 to collapse twenty percent or more (and maybe not even much more than ten percent) from its May 2015 summit. They also do not want the TWD to break out above its September 2015 high (that barrier slightly exceeds the crucial March 2009 major top).

However, the bear move in the S+P 500 that emerged in May 2015 eventually will resume. The US dollar, though its rally from its July 2011 major low has paused, will remain relatively strong. OECD petroleum industry inventories in days coverage terms are very high from the historical perspective. Despite some crude oil production cuts in the United States and elsewhere, overall oil industry inventories likely will remain quite elevated through calendar 2016. So even if in the near term the broad GSCI rallies further from its current level (which likely would occur alongside a further modest S+P 500 ascent and dollar slide from their current altitudes), it probably ultimately will challenge its late August 2015 low.

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As the enrapturing Goldilocks Era ended, stocks peaked before commodities. The S+P 500’s major high was 10/11/07’s 1576, with that in emerging marketplaces (MXEF) alongside it on 11/1/07 at 1345. The broad GSCI made its major peak on 7/3/08 at 894 (the Bloomberg Commodity Index (“BCI”) top also was on 7/3/08, at 238.5). However, this was close in time to the S+P 500’s final peak at 1440 on 5/19/08 (and the MXEF’s final top at 1253 on 5/19/08), and not long after the TWD’s important April 2008 low near 84.2 (Fed H.10; monthly average). The GSCI’s 2/19/09 major low at 306 (BCI bottom 2/26/99 at 74.2) occurred near the S+P 500’s major bottom, 3/6/09 at 667, which occurred alongside the TWD’s March 2009 major top at 96.9. The MXEF’s major trough occurred 10/28/08 at 446, its final low 3/3/09 at 471.

During the worldwide economic recovery that set sail around 2009, neither commodities in general nor the MXEF surpassed their 2008 plateau.

The major high in commodities in general and the MXEF (spring 2011) and their important 2014 interim tops occurred before the S+P 500’s May 2015 height. This pattern differs from the 2007-08 one. In late spring 2015, the S+P 500 (as did China’s Shanghai Composite stock index) nevertheless joined (encouraged) the slump in the MXEF and commodities alongside an acceleration of US dollar strength. Thereafter, as in the speeding up of the global economic crisis after around mid-2008, the S+P 500, MXEF, and broad GSCI retreated together in conjunction with TWD appreciation. Also note the similar late August 2015 troughs in commodities and stocks. Though more recent data from the Fed on the TWD eventually will emerge, key US dollar cross rates in the past couple of weeks hint the broad TWD perhaps has slipped a bit since its September 2015 high.

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Is OPEC’s new policy of reducing high-cost (non-OPEC) production succeeding? Some, but not a great deal so far. Despite the dive in drilling rig counts, OECD days coverage levels and the worldwide supply/demand balance for 2015 and 2016 reveal plentiful petroleum.

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Commodities- Captivating Audiences (10-12-15)