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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OVERVIEW AND CONCLUSION
Cultural viewpoints (including variables selected, organized, and assessed) regarding the past and present or focused on an anticipated future reflect opinions, not science. Moreover, marketplaces “themselves” are not unchanging or Natural phenomena. In any case, marketplace history does not necessarily repeat itself, whether entirely, partly, or at all.
The United States natural gas build season spans roughly from the end of calendar March to the end of calendar October. America’s natural gas 2016 inventory build season, including its price trends, although it has several more months to run, nevertheless presents several parallels with 2012’s build season. Assuming inventory forecasts for the balance of the 2016 build season come true, one crucial similarity between 2012 and 2016 will be substantially diminishing US natural gas oversupply over the course of build season.
The winters of 2011-12 and 2015-16 not only ended with massive supplies, but also completed long-running major bear trends. In commodity arenas, all else equal, and absent some revolutionary developments on the supply or demand side, there is some tendency for gigantic oversupply (mammoth inventories) accompanied by sustained depressed prices eventually to be reversed by falling production, increasing demand, or both. In natural gas, if prolonged bullish weather patterns appear (such as a torrid summer or frigid winter), they obviously can help to minimize the bearish oversupply situation or transform it to a bullish one.
Also, although natural gas price trends do not always closely intertwine with those of the petroleum marketplace (or commodities “in general”), or with other financial playgrounds such as stocks, currencies (especially the US dollar), and American government and other benchmark interest rates, they can entangle with them. In second half 2012, important stock and commodity marketplaces rallied and the dollar paused in its appreciation. In mid-first quarter 2016, a similar “overall” phenomenon occurred. In both time periods, ongoing or anticipated (eventual) monetary easing by key central banks likely assisted the bull moves in stocks and commodities, including natural gas.
Finally, at times the CFTC’s Commitments of Traders reveals patterns for noncommercial participants (investors, speculators) in natural gas relevant for assessing price trends. The net noncommercial positions in the later stages of the bear trends which ended in 2012 and 2016 present roughly similar patterns.
From the historical distance (price move) perspective, ten major NYMEX natural gas bear moves prior to 2014-16’s tumble traveled an average of 65.9 percent. For the seven collapses beginning with the December 1996 one, the average downturn is 70.4pc. From the time parameter, the average decline for the 10 big bear moves was about nine and three-quarter months. For the most recent seven major bear moves preceding the one that began in February 2014, the duration averages about eleven and one-quarter.
The collapse from 2/24/14’s 6.493 major high to 3/4/16’s 1.611 low was 75.2 percent and just over 24 months. Thus the price move traveled moderately farther than average. Significantly, the two year decline since February 2014’s summit was more than twice as long as average major bear trends, surpassed only by the January 2010 to April 2012 crash (during which the price fell 68.9pc). Thus from the interrelated price and time variables (nearest futures continuation basis), and though history is not destiny, a major change from the long-running bear trend that commenced in February 2014 probably occurred following 3/4/16’s low.
Also note that March 2016’s 1.611 level stands within a range of other important support. Recall not only 4/19/12’s major low at 1.902, but also the double bottom of 1.85 (1/28/02)/1.76 (9/26/01), a trough at 1.735 on 9/5/96 alongside a low at 2/24/97 at 1.68, and 1998-99’s bottom (8/27/98 at 1.61/2/26/99 at 1.625). Also, the March 2016 trough did not break 12/18/15’s interim low at 1.684 by much.
Moreover, from a calendar day viewpoint, March 4 is within several days of the February dates for the important late February bottoms of 1997 (2/24/97 at 1.68) and 1999 (2/26/99 at 1.625). In addition, the March 2016 low is a two year diagonal time move relative to the late February 2014’s pinnacle.
“US Natural Gas: Traveling Forward” (6/13/16) emphasized: “The United States natural gas (NYMEX nearest futures continuation basis) major bear trend that followed 2/24/14’s major peak at 6.493 ended with 3/4/16’s 1.611 bottom. What if a torrid summer 2016 dramatically reduces the stock build total and thus helps containment fears for end build season 2016 to disappear? Then prices likely will not revisit the 1.60/1.90 range, but instead will maintain their ascent toward [the significant resistance range of] 3.10/3.45… The US natural gas supply/demand perspective over the so-called long run is moderately bullish. Assuming normal winter 2016-17 weather, moderate US economic growth, and no renewed collapse in the overall commodities complex (particularly petroleum), gas prices probably will march higher.”
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Parallels in US Natural Gas- 2012 and 2016 Build Seasons (7-4-16)
Bob Dylan’s song “All Along the Watchtower” states:
“’There must be some way out of here,’ said the joker to the thief
“’There’s too much confusion, I can’t get no relief’”.
The United States natural gas (NYMEX nearest futures continuation basis) major bear trend that followed 2/24/14’s major peak at 6.493 ended with 3/4/16’s 1.611 bottom. For the next several months, however, natural gas likely will remain in a sideways pattern. The probable range for the United States natural gas marketplace remains a relatively broad avenue between major support at 1.60/1.90 and significant resistance at 3.10/3.45. This sideways outlook partly results from two currently contending marketplace stories.
For the near term, substantial natural gas oversupply exists, weighing on prices. Containment risks still loom for end of build season 2016. If noteworthy containment problems erupt, March 2016’s bottom may be attacked, even though current prices hover significantly above 1.60/1.90 and even if an assault on that support does not last for much time. What if a torrid summer 2016 dramatically reduces the stock build total and thus helps containment fears for end build season 2016 to disappear? Then prices likely will not revisit the 1.60/1.90 range, but instead will maintain their ascent toward 3.10/3.45.
The US natural gas supply/demand perspective over the so-called long run is moderately bullish. Assuming normal winter 2016-17 weather, moderate US economic growth, and no renewed collapse in the overall commodities complex (particularly petroleum), gas prices probably will march higher.
NATURAL GAS: (PARTLY) DANCING IN STEP WITH OTHER MARKETPLACES
Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” marketplaces and variables. Trend changes in NYMEX natural gas need not roughly coincide with one in the petroleum complex or commodities in general, or currency, stock, or interest rate playgrounds.
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 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 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 peak at 2135. In regard to the timing of the S+P 500’s May 2015 high, the nominal broad trade-weighted dollar (Federal Reserve, H.10, which has daily data) made an interim low at 112.8 on 5/15/15 before appreciating further.
The recent low in NYMEX natural gas nearest futures, 3/4/16’s 1.611, occurred fairly close in time to the first quarter 2016 peak in US dollar and an assortment of notable intertwined 1Q16 lows in other important marketplaces. The trend shifts (price reversals) in first quarter 2016 in various marketplaces assisted the upward move in natural gas that emerged in early March 2016.
**The broad real trade-weighted United States dollar (monthly average) peaked at 101.2 in January 2016; the nominal TWD (which has daily data) established a top 1/20/16 at 126.2 (Federal Reserve, H.10).
**NYMEX crude oil (nearest futures continuation): bottoms $26.19 on 1/20/16 and $26.05 on 2/11/16.
**Broad Goldman Sachs Commodity Index (GSCI): 268 on 1/20/16. January 2016’s GSCI low occurred midway between the calendar month times of its 2008-09 bottom (12/24/08 at 308 and 2/19/09 at 306).
**S+P 500: Note the sharp rally from lows of 1812 on 1/20/16 and 1810 on 2/11/16.
**MXEF (MSCI emerging stock markets index; Morgan Stanley): 687 on 1/21/16, 708 on 2/12/16.
**Ten year US Treasury note: 1.53 percent yield low 2/11/16.
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US Natural Gas- Traveling Forward (6-13-16)
“Seek truth from facts.” Mao Zedong and Deng Xiaoping
China’s era of miraculous economic growth has marched into history. Yet China’s real GDP output in the past few years, and even 2015, has been robust in comparison to that of most other nations. The majority of international financial wizards faithfully proclaim that Chinese GDP likely will remain strong, at over six percent for the next several years.
China’s GDP strength over the past three or four years nevertheless derived significantly from its widespread national willingness to boost debt (leverage) levels substantially. This significant debt expansion coincides with the current unwillingness or inability of the nation’s political and economic leadership to do much to subdue the debt issue. China’s continued debt building (perhaps assisted by other factors) perhaps will achieve its praiseworthy growth levels, at least for a while.
And trend shifts during first quarter 2016 in various stock (both advanced and emerging), interest rate, currency, and commodity marketplaces (particularly dramatic rallies in the S+P 500 and the petroleum complex) inspire optimism regarding global growth prospects. Despite potential for small rate increases by the widely-admired Federal Reserve, monetary policy in America and elsewhere likely will remain highly accommodative, thereby assisting expansion in developed nations and China.
However, review the patterns in China’s stock, central government 10 year note, and currency marketplaces. Those domains, when interpreted together and alongside a broad array of other key global financial marketplaces, not just the S+P 500 and oil, on balance nowadays suggest Chinese growth over the next few years probably will be less than most gurus expect. In today’s interconnected economic world, slower than anticipated Chinese economic expansion probably will be reflected by more sluggish growth elsewhere than generally forecast.
Politics and economics entangle in both advanced and emerging/developing nations. China’s political elite (notably its Communist party chiefs) seeks to ensure its own power and overall national political, economic, and social stability. Insufficient GDP growth and related widespread popular fears regarding income levels and economic inequality probably endangers these goals.
What do the political rhetoric and actions over the past few years (including recently) by China’s leaders reflect? Quite significantly, they portray increasing concern about their nation’s current and prospective economic situation, particularly its growth level and outlook.
To deflect and dilute growing popular concern about a weakening economic situation (slowdown; feebler growth than desired), and to maintain their political power and influence, China’s political leaders have acted vigorously on both the external and internal fronts. In the foreign sphere, they increasingly quarrel with other nations; on the internal landscape, efforts to control political and other social activities and dialogue have increased. These policies from China’s authorities tend to confirm the trends of slowing Chinese (and global) growth.
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China- Behind the Great Wall (6-7-16)
Burning passion for another is not the only love which makes us shake. When fear of losing substantial sums creeps up on numerous money lovers in intertwined financial playgrounds, both the players and their marketplaces can quiver violently.
Many pundits define a bear marketplace as a 20 percent slide from a noteworthy price top. Though the S+P 500 nosedived about 20 percent from its 5/2/11 high around 1371 to its 8/9/11 low near 1100, it then rallied sharply. On 8/9/11, the United States 10 year Treasury note touched yield lows of just over two percent. This matched the bottom achieved on 12/18/08 during the previous “flight to quality” panic in the (still-running) economic crisis that erupted in 2007. Given this equity and debt support, will things calm down much? No. The economic and political scenery has not sufficiently changed. Relationships within and between various financial arenas and their variables probably will vary to some extent as time passes, but the current entangled key financial factors will remain powerful, volatile, and intertwined. Although there will be occasional intermissions, turmoil in and between key equity, interest rate, currency, and commodity theaters therefore will not cease anytime soon.
Why place blind faith in the 2013 low rate policy, for the Fed confesses it changes its viewpoints? In addition, consider the Fed’s policy track record relative to its “original” expectations. Economic growth has been considerably lower than the Fed “had expected”. The Fed “now expects” a slower pace of recovery. Just as the Fed this month adjusted its policy by speaking of low Fed Funds through mid-2013, it eventually may alter its present course. Historians recall that the Fed’s quantitative easing floods likewise represented policy changes due to marketplace developments. Besides, how accurate were the Fed’s economic forecasts in 2007 and 2008, at the dawn and during the early stages of the acceleration of the economic crisis? So as Fed expectations change, so may its actions, whether on rates, quantitative easing, or otherwise.
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Furious Financial Fluctuations (8-15-11)