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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What is the outlook for United States natural gas prices (NYMEX nearest futures continuation)? Assume normal weather. From now through winter 2013-14, and probably for at least several months thereafter, the marketplace will be trapped in a sideways pattern.
From now through winter 2013-14, near term (on balance) bearish considerations and longer term (net) bullish ones intertwine to bottle up US natural gas prices. The American natural gas supply/demand situation from the production and consumption sides for the remainder of 2013 and calendar 2014 on balance is slightly bearish. Inventory days coverage becomes somewhat more bearish at end March 2014 relative to end October 2013. Natural gas demand from the key electric power sector arguably will not ascend much in the near term unless prices sustain dips under 350. Electricity demand for calendar 2014 grows very little year-on-year. To what extent will increasing supplies of energy from renewable sources put a lid on gas demand?
However, substantial US LNG exports represent a key bullish prospect for the relatively distant future. Coal plant retirements should underpin natural gas prices over the long run. The nation does not appear to be rushing to construct new nuclear power facilities. Although Mexico is currently a modest outlet for American gas exports, it is a growing one. Over the long run, what about demand for natural gas powered vehicles?
Recall spring 2013’s important highs just under 445 (4/18/13 at 443; 5/1/13 at 444) as well as the significant lows around 305 to 313 (305 on 1/2/13; 313 on 2/15/13 and 8/8/13). Between now and the close of winter 2013-14, the broad price range probably extends from roughly 280/310 to 440/460. Around 350 is a so-called equilibrium point within this price tunnel. It will take abnormal weather to provoke breaks of the extremes of this range during winter 2013-14, especially the high end (or beneath 280). Assuming this upcoming winter is neither unusually warm nor surprisingly cold, in general this price band probably will persist for at least a few months after winter departs. However, within the next several months, a test of the NYMEX nearest futures calendar 2013 lows around 305/313 is probable.
In any event, the long term price pattern for natural gas is sideways as well, though the top of the range probably extends to around 500/530 (or higher), with the amount of LNG exports, the extent of natural gas production increases at higher price levels (particularly at 400 and up), and the extent of US economic growth being crucial considerations.
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The broad real trade-weighted United States dollar probably will remain weak. Continuing its major long run bear trend from its March 2009 high, it probably will challenge its record low of July 2011. Why?
Among assorted bearish factors, focus on two which are becoming increasingly significant. First, the Federal Reserve Board in its September 2013 meeting displayed its absence of a genuine forward guidance plan and a lack of an authentic comprehensive exit strategy. Thus marketplace faith in the Fed has declined and will do so further in the aftermath of that September gathering. Keep in mind that feeble (vague) Fed guidance and decreased confidence in the Fed occurs amidst ongoing (and long-running) gigantic money printing and interest rate repression. The central bank is doggedly determined to keep pinning the Federal Funds rate near the floor (and thus below current inflation rates and announced Fed inflation targets) for some time. So how attractive are and will be United States Treasury yields for much over much of the government yield curve? Second, America’s national political players currently display weak fiscal (economic) leadership, especially as the debt ceiling limit beckons.
The Federal Reserve Board’s overall exit strategy for its extraordinary sustained accommodative policy remains far more a sketch than a complete design or coherent practical plan. Prior to its September 2013 assembly, central bank communicators strongly hinted the Fed soon would reduce its massive money printing campaign. Yet the illustrious Federal Reserve Board generals surprised the great majority of observers by not cutting back on quantitative easing. Moreover, these Fed luminaries also underlined their flexible attentiveness to a wide array of intertwining variables which will influence their tapering and other decisions. The ever-watchful Fed thus implicitly demonstrated that its loudly-proclaimed forward guidance wordplay offers Fed watchers at best only modest enlightenment and direction. America’s central bank consequently did more than increase marketplace uncertainty. The Fed wounded its own marketplace credibility. By damaging its credibility, the Fed reduces the widespread belief that it can engineer or at least significantly influence “good” economic outcomes.
Unfortunately, the significant shortfall in forward guidance from the guiding lights at the Federal Reserve currently coincides with a badly fractured American national political scene. Of course politicians and parties disagree and compete vigorously. Yet in the United States in recent years, significant philosophical divisions, diverse and often well-entrenched interests, and quests by political players to capture attention and win elections have combined to create ongoing “overall” feeble national political leadership. Strong political individuals in combination do not necessary make a strong collective group.
Failing to satisfactorily resolve the funding and (especially) the debt ceiling issues (and related deficit spending questions) will call in question America’s political leadership as a whole. All else equal, growing doubts about the quality of that leadership (and related fiscal policies) tend to undermine confidence in the US dollar. Besides these current feuds, America’s national political leaders continue to make no progress in resolving or even significantly mitigating the country’s looming long run fiscal deficit problem. Debt crises do not occur only in emerging or developing nations or in countries on the European “periphery”.
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Forward Guidance and the US Dollar (9-23-13)
The China economic miracle of recent years has astounded global gurus. Economic policy makers and watchers inside and outside of China forecast its likely continuation. In the intertwined global economy, such sunny predictions about China also aim at boosting confidence regarding international economic growth prospects. Admittedly some Chinese indicators show display reasons for such optimism. And the Financial Times recently remarked “almost everyone agrees that there is little sign that the global economic crisis is about to have a Chinese third act to follow the US and eurozone, which starred in Acts One and Two.” (7/24/13, p6).
Unfortunately, the so-called “real”, “underlying”, and “overall” China economic scene nevertheless is relatively opaque and challenging to understand. Telling any story about the nation’s economy, whether bullish or bearish, requires caution, and audiences should listen to these viewpoints with some skepticism. Many Chinese statistical indicators arguably are difficult to assemble comprehensively as well as to interpret (whether by the Chinese government or outside experts). How accurate is official Chinese economic information? Political considerations perhaps influence the substance of some Chinese data reports.
Moreover, several other signs from or related to China suggest that China’s real GDP growth has tapered faster than many believe. Besides, it may taper a fair amount beneath generally predicted levels of over 7.5 percent. Like the United States and many other nations since the emergence of the worldwide economic disaster, China embarked upon and sustained highly accommodative monetary campaigns and huge deficit spending adventures. Might GDP expansion diminish if these policies (and related credit creation and leverage) are slowed or reversed? Even though China’s overall government debt as a percentage of GDP is less than that of the United States, much of Europe, and Japan, why should China entirely escape the debt challenges and related unpleasant consequences endured by these nations? In contrast to most conventional wisdom, China nowadays probably faces some significant systemic financial (economic) problems.
China’s embrace of debt and credit in recent years is a widespread cultural phenomenon.
If things were going wonderfully within the Chinese economic (and political) system, why would the nation’s leaders underscore territorial quarrels with other nations? Recall the recent squabbles with Japan over tiny islands (Daioyu) controlled by Japan.
What’s the bottom line? China apparently has generated a fair amount of its economic growth from easy money and massive deficit spending (credit, debt, and leverage). It consequently faces a significant challenge of maintaining its high GDP growth rates while tapering accommodative monetary and fiscal deficit policies. In addition, China confronts a modest yet apparently growing systemic problem (risk) tied into these accommodative monetary and fiscal programs and the related lending, leverage, and bad debt issues. Perhaps Chinese control over its economy (especially given that economy’s close connection with the global one) is much less than many claim. Looking forward, Chinese growth probably will taper more than most believe. In any event, one should not have blind faith in the continuation (repetition) of the recent extraordinary Chinese growth story.
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Another Marketplace Tapering Tale- the China Story (9-9-13)
Given the proximity of the Federal Funds rate to the short end of the government yield curve, the Fed generally has more ability to manipulate (strongly influence) yields for Treasury Bills and short term notes than instruments such as the UST 10 year note and 30 year bond. The two year UST note generally receives much less media attention than longer duration government debt. Even most interest rate insiders these days concentrate much more on the long end of the curve than on the two year. However, financial heralds also should focus on short term American interest rate yield levels and trends, because in the current marketplace landscape, signs of bottoming and rising rates in this important segment of the UST yield curve confirm the higher yield trend in the 10 year UST and other long-dated securities.
After the UST two year reached a major low near the ground at .14pc on 9/20/11, it reaffirmed this depth with subsequent lows at .19pc on 7/23/12 and 5/3/13. The UST two year note thereby established a major bottom alongside that in the 10 year note. Admittedly the two year yield has not spiraled upward as dramatically as the 10 year’s, for the Fed conductor has not relaxed its tight grip on the Fed Funds rate baton. This relative quiet in and the low absolute level in the two year tend to create faith in and complacency regarding the Fed’s powers and the effectiveness of its methods. Very low short term government rates and promises to continue them arguably encouraged some complacency, not merely happy enthusiasm, in equity halls such as the S+P 500 as well. The S+P 500 was all jazzed up through much of calendar 2013, attaining its recent high around 1710 on 8/2/13. Yet this intertwined yield low and rising rate pattern at both ends of the government yield curve warns of weakness in the Fed’s near term ability or willingness (or both) to keep repressing short term yields to very low levels.
The bear move of higher US interest rates probably will continue, even if that venture is jagged and perhaps occasionally interrupted by forceful Fed action (or wordplay) or flight to quality fears. Marketplace history is not marketplace destiny. But in the current context, historical review suggests that a sustained substantial climb in US government interest rates such as the one currently underway probably will encourage a decline in the S+P 500. After all, sustained yield declines in US government rates helped to rally American stocks, so might sustained yield rallies help to reverse some of that equity bull charge?
Increasing government interest rates do not always indicate economic strength or point to (confirm) rallies in stock marketplaces. Recall the rather recent big-time crisis on the so-called “European periphery” that captured the limelight, as well as the experiences of many emerging marketplaces.
Anyway, increasing United States government interest rates are not always (necessarily) a sign of American economic recovery and strength, or of a bull move in stock benchmarks such as the S+P 500. The extent to and reasons why which UST rate levels and trends coincide (converge) with or lead (lag) those of those in the S+P 500 are matters of opinion. In any event, review the following table, which covers the past 25 years or so. Putting several substantial moves in the UST two year note in a spotlight alongside those in the S+P 500 indicate that sustained significant ascents in UST rates often eventually link to notable peaks in the US stock marketplace. The tops in yields are “roughly around the same time” as bull highs in US equities. UST 10 year moves are consistent with this perspective as well.
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