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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US CONSUMER CONFIDENCE: MANY HAPPY RETURNS? (c) Leo Haviland August 23, 2012

As America travels toward Labor Day, it pays to review the nation’s consumer confidence. Assorted measures perform as signposts to assess consumer attitudes and actions. For many, the United States stock marketplace (think of an “overall” benchmark such as the S+P 500) is one. The Conference Board’s United States Consumer Confidence Index is another widely watched indicator. Trends for the United States stock battleground do not precisely mirror those in the Consumer Confidence Index (“CCI”). Weathervanes such as the S+P 500 of course do not derive all their revenues or influences directly from Main Street dwellers or from American sources. The US, as the ongoing worldwide economic crisis that emerged in mid-2007 underscores, intertwines with Europe, China, Japan, and other countries around the globe. However, over the past several decades, there has been a rough link in the major patterns of the S+P 500 and the CCI. And many believe that major trends in US equities tend to parallel those of the American economy as a whole.

Stare at the S+P 500’s extensive ascent from its March 2009 abyss to its current new rally height on 8/21/12 over 1425, particularly the noteworthy stage from the October 2011 depth at 1075. Grandstanders might believe United States consumers generally are rather joyous, or that they soon will become so. The CCI indeed has climbed significantly from its February 2009 valley of 25.3 (the deepest of the 1967-present period). However, the CCI’s subsequent highs around 72.0 (February 2011 and February 2012) lurk far beneath those of 2000 and 2007 (January 2000’s 144.7 and July 2007’s 111.9). July 2012 flutters at a modest 65.9.

Admittedly the US CCI is only one yardstick for consumer confidence and thus to some extent of the strength and duration of economic recovery in America and elsewhere. Maybe sustained higher US equities and at least partial solutions to various troubles facing consumers (including those overseas) will encourage a significant CCI move over 72.0.

However, the feeble rally in the CCI in comparison with the S+P 500 since February 2009, and particularly after autumn 2011, raises significant questions regarding the present and future strength of the American economy (and even of the S+P 500). After all, US consumers are a substantial percentage (around 70 percent) of American GDP. Current US consumer confidence in context warns of economic weakness, or at least sustained sluggishness.

Summer 2012’s recent S+P 500 bull march to new highs over 1425 may continue a while longer. Yet the link between the S+P 500 and “the economy as a whole” is probably notably less than it was a several years ago. But the S+P 500 is not isolated from the economy. So this sustained mediocre (or renewed weakness in) the CCI is ominous for US stocks in general, particularly if other key consumer indicators such as housing, employment, and wages do not soon show substantial strength. Or, suppose there is not major progress on the American fiscal front.

The Gallup News Service recently polled Americans regarding their “confidence” in various “institutions in American society” (June 7-10, 2012). The category created by adding together the answers “great deal” and quite a lot” reveals dispiriting trends and levels that reflect current mediocre consumer confidence levels (as well as the broad erosion in confidence from the January 2000 CCI peak). Relatively weak consumer (Main Street) confidence in several key political and social institutions parallels many worries regarding America’s economic situation.

And anyways, America’s current national deficit and debt situation and its probable near term and long run fiscal prospects justify significant consumer concerns. Moreover, the housing, earnings, unemployment, and household debt factors also help to explain mediocre consumer confidence, both in absolute terms and relative to the S+P 500’s heights.

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US Consumer Confidence- Many Happy Returns (8-23-12)
US Consumer Confidence Chart (8-23-12)

FINANCIAL FOREST FIRES: US GOVERNMENT DEBT (c) Leo Haviland August 15, 2012

The United States Federal Reserve Board and its central banking allies have furiously battled the fierce financial forest fires of the ongoing worldwide economic crisis that emerged five years ago. As the disaster developed and traveled across the financial landscape, their accommodative approaches evolved. Although central bank methods have varied to some extent, they generally have included deluges of money printing and pinning nominal policy rates (Federal Funds and so forth) close to the ground. These central bank actions not only helped to spark and sustain economic recovery, but also bought politicians time to solve, or at least substantially mitigate, troubling fiscal deficit problems.

Nevertheless, debt levels and deficit spending in America and many other countries generally remain substantial. Efforts targeted to assist recovery partly explain the size of gaping fiscal deficits of recent years. Yet in America and many other nations, they arguably reflect and are structurally sustained by a culture of entitlement. This culture, although not universally shared, extends across the economic spectrum. In any event, government budget deficits in the United States are not a new phenomenon.

However, even without specifically concentrating on its long term fiscal challenges, the US probably is much closer these days to a big debt problem than many believe. Focusing on the near term US government deficit and debt situation in the context of several other nations highlights the danger.

Everyone knows of the Eurozone (Euro Area) crisis. America’s fiscal balances are much more in deficit over the 2008-2017 span than the overall Euro Area’s.

However, from the general government gross debt viewpoint, and especially with a view on 2012 and thereafter, the US problem looks at least as fearsome as the overall Eurozone difficulty. First, the US level exceeds the European height every year, from 2008 out to 2017. Second, the IMF indicates a fall for the Euro Area after 2013, but not for the US.

Inflation is not the only potential source of higher interest rates. The lesson of the Eurozone sovereign debt crisis shows that government interest rates can climb sharply in crisis nations (Greece, Portugal, Ireland, Spain, Italy) even if inflation is moderate. Ability to pay debts (and borrow money), not just inflation levels and trends, matters for interest rate levels (and sovereign credit spread differentials). A badly stretched debtor may have to pay up to find money, right? So rising government interest rates in some cases may reflect a dreadful debt crisis, not a sunny economic recovery.

Closely nearing or reaching a point of no return on the US fiscal front therefore probably would be reflected by a spike in UST yields. The 10 year US Treasury note offers a benchmark for US yield watchers. In recent years, rising government interest rates often have been roughly tied to ascending US stocks (S+P 500), not just an economic recovery. If US equity benchmarks such as the S+P 500 start to decline significantly, and roughly “alongside” the increase in yields (thereby breaking from the guideline UST/stock relationship of recent times), that probably would confirm the existence of a debt crisis.

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Financial Forest Fires- US Government Debt (8-15-12)
US Treasury 10 Year Note Chart (8-15-12)

AMERICAN CORPORATE PROFITS AND THE S+P 500 (c) Leo Haviland August 1, 2012

In recent decades, the overall United States debt outstanding relative to nominal GDP has substantially increased. America’s national willingness to accumulate debt (borrow and spend) generally has played an important role in the generation of its economic growth. It of course is not the sole factor. This national debt increase thereby has tended to boost (be a bullish factor for) equity prices, at least up to now. A significant cut in America’s debt burden (deleveraging) probably will promote a decline in the nominal after-tax profit to GDP ratio from current elevated levels. This reduction also may encourage a slowing of after-tax profit rises, or even encourage an actual decline in profitability levels. These processes in turn probably would be bearish for US equities. Debt levels and trends are not the only factor influencing US GDP, corporate profits, and stock levels and patterns. Will American corporate profits forever keep rising? History is not destiny, but they often have declined.

Besides, growing debt does not inevitably guarantee economic health, corporate profitability, or soaring stocks, whether in America or anywhere else. Sustained Federal Reserve monetary easing buys time and sells hope, but it does not solve the US national debt problem. History reveals that at some point more and more national debt can generate grave problems. America probably is at or very near the danger level from its current and near-term debt situation, not just over the so- called long run horizon.

Let’s place American after-tax profits in the context of economic output. The average United States yearly ATP level relative to nominal GDP from 1946 to 2011 is about 6.2 percent. However, during the marvelous Goldilocks economy, and even up to the present despite the ongoing worldwide economic crisis, this indicator has been remarkably strong. Recall lows of

3.1pc in 1986 and just under 5.0pc in 2001. Before the 2004 to the present period, the last high over eight percent was 1950’s 8.6pc. From 1951 through 2004, it exceeded seven pc only three times (1978, 1979 and 2004). Over 2004-2011’s span, the average jumped to 9.0 percent.

The ratio in 2004 was 7.8pc, rising to 9.7pc in 2005 and 10.1pc in 2006. Calendar 2006 thus established a new pinnacle (going all the way back to 1929 not just 1946). In the year the global financial crisis emerged, 2007, it remained high, at 9.2pc. Even in 2008’s savage US and worldwide downturn, accompanied by the plummeting S+P 500, ATP relative to GDP were almost 7.4pc. The S+P 500 reached a major low on 3/6/09 at 667. In 2009, that ATP/GDP relationship was 8.4pc. What about the fairly sunny recovery years thereafter? The ATP total for 2010 bordered ten pc of nominal GDP, with 2011 elevated at 9.8pc.

What was the ratio of ATP for first quarter 2012 relative to GDP? Nominal 1Q12 GDP was about $15.48 trillion (annualized). Corporate profits were about $1.67 trillion (annualized). This is about 10.8pc of 1Q12 nominal GDP, thus marching beyond 2006’s joyous Goldilocks Era height to establish a new record height for that measure.

Though 2Q12’s earning reporting season has not ended, news reports suggest the nominal ATP level is approximately in line with 1Q12’s, and maybe even a couple of percentage points higher. US 2Q12 nominal GDP inched up to about $15.60 trillion from 1Q12’s $15.48tr. Thus the nominal ATP/GDP ratio probably remains around record levels.

Alongside these lofty 2012 profit levels, the S+P 500 attained new highs relative to its 2009 abyss (4/2/12 at 1422, 5/1/12 at 1415). These spring 2012 levels neighbor the S+P 500’s final summit at 1440 on 5/19/08, though they remain quite a bit beneath the major high on 10/11/07 at 1576.

An army of intertwined variables interrelate to propel the S+P 500 up, down, or sideways. However, suppose ATP slide lower relative to first half 2012 heights and that the ATP to GDP relationship retreats to fairly near the long run 6.2 percent average. All else equal, this probably will be a bearish factor for the S+P 500.

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American Corporate Profits and the S+P 500 (8-1-12)

US NATURAL GAS: BURNING UP (c) Leo Haviland July 23, 2012

Focus on natural gas days coverage levels for end October 2012 (around the close of inventory build season) and end March 2013 (approximate end of draw period) in the context of price history. Assume normal weather and relatively lofty petroleum prices. What does this perspective reveal? This not only indicates that April 2012’s 190 was a major low and that major support exists around 220/240 (NYMEX nearest futures continuation). It also justifies a challenge on significant resistance around 317/330. An ascent above that range sometime in the next several months will be difficult but not surprising.

However, days coverage probably will have to sustain a decline in its excess relative to its long run average (1990-2011) to around three days or fewer for natural gas to significantly challenge major resistance looming around 400. The sustained reduction in days coverage to such levels likely will occur eventually, even if it does not occur by the end of March 2013.

However, the duration of about three months from 4/19/12 to date is about that of the 2010 and 2011 spring rallies. This time element warns that one should be cautious about declaring a further big upward move lies in store for the very near term, especially given the proximity of the 317/337 resistance.

But the 2009/early 2010 period teaches an important lesson for natural gas. It strongly suggests that elimination of containment fears, when followed by a dramatic reduction in days coverage, can help to propel natural gas prices much higher (and perhaps quite quickly). Inventory prospects several months out, not just the current (or very near term), matter.

So from the inventory days coverage standpoint, and particularly when read relative to the 2009 context and its eventual price rally from 241, what follows? This huge reduction in oversupply from March 2012 to October 2012 strongly indicates that there was a major low in April 2012 (not a mere interim bottom), that prices will not easily (if at all) come back to that level, and that a major bull move from that April 2012 low (not a mere interim rally) is underway.

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Natural Gas- Burning Up (7-23-12)
Natural Gas Chart (NYMEX nearest futures)(7-23-12)