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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DOLLAR DEPRECIATION AND THE AMERICAN DREAM © Leo Haviland August 11, 2020

In the film “Wall Street” (Oliver Stone, director), Gordon Gekko claims: “It’s all about bucks, the rest is conversation.”

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DOLLAR DEPRECIATION DANGERS

For many decades, the United States dollar has led the foreign exchange field as the key currency for global trade as well as financial reserves. Over that time span, the greenback’s predominance to a significant extent encouraged, sustained, and reflected widespread (although not unlimited) American and global faith in the wisdom and goodness of American cultural values and the persuasive and practical ability of the nation to be a (and sometimes the) critical guiding force in international affairs. Although the dollar obviously has had numerous extended periods of appreciation and depreciation since the free market currency dealing regime began in the early 1970s, the dollar’s crucial role in the increasingly intertwined global economic system has seldom been significantly questioned or challenged for over an extended period of time. For almost ten years, from its major bottom in July 2011 until April 2020, the overall trend of the dollar in general was bullish.

Therefore few gurus fear a significant depreciation in the US dollar from its relatively lofty April 2020 high. However, the probability of a noteworthy dollar slump is much greater than most believe.

An underlying factor promoting a dollar tumble is the gradually declining share of America as a percentage of world GDP. Also, both political parties, not just the current US Administration, and especially in the coronavirus era, probably want the dollar to weaken from its recent summit. The great majority of the country’s politicians preach their allegiance to a strong dollar, but they also endorse economic growth.

Two additional phenomena make the dollar particularly vulnerable nowadays. First, although many leading nations have increased their government debt burdens in recent years, America’s situation probably has worsened significantly more than most others in recent months. Moreover, America already faced widening federal budget deficits encouraged by the tax “reform” enacted at end 2017. Plus don’t overlook the ongoing ominous long run debt burden, looming from factors such as an aging population. How easily will America service its debt situation? And America’s corporate and individual indebtedness also is substantial.

Second, the intensity and breadth of America’s cultural divisions has increased in recent times, especially during the Trump era. American confidence in the nation’s overall direction has slumped in recent months. As US citizen faith in the country’s situation declines, so probably likewise will (or has) that of foreigners in regard to America.

Declining faith in American assets (and its cultural institutions and leadership) can inspire shifts away from such assets. American marketplaces will not be completely avoided given their importance, but players can diversify away from them to some extent. Not only Americans but also foreigners own massive sums of dollar-denominated assets (debt instruments, stock in public and private companies, real estate; dollar deposits). Such portfolio changes (especially given America’s slowly declining importance in the global economy) will tend to make the dollar feeble.

Suppose nations and corporations increasingly elect, whether for commercial or political reasons, to avoid using the dollar as the currency via which they transact business. That will injure the dollar.

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A five percent fall in the “overall” dollar level from its April 2020 high may not make much difference in the near term for US stocks and debt securities. However, a roughly five percent dollar drop is a warning sign for them, and especially for stocks. All else equal, a weaker dollar tends to boost the nominal price of dollar-denominated assets such as stocks and commodities. But history shows that this relationship is not inevitable. Phenomena other than dollar depreciation influence US securities trends. Keep in view the considerations described above undermining the dollar, and thus the desire to hold dollar-denominated instruments.

Admittedly, strong American corporate earnings encourage buying (and holding) of US stocks. But the coronavirus situation and responses to it have devastated calendar 2020 earnings. Suppose that contrary to widespread hopes and predictions, calendar 2021 corporate earnings do not rebound significantly (sufficiently) from dismal 2020 depths. What if the prayed-for V-shaped economic recovery does not emerge? If corporate earnings remain relatively modest (or slide) going forward, and if the dollar continues to weaken from its April 2020 height, dollar depreciation probably will intertwine with an equity slump.

A sustained dollar tumble approaching ten percent (and especially a fall greater than ten percent) probably will help to push the S+P 500 and related stock prices quite a bit lower. Many equate strong (high; rising) United States stocks over the long run as a signal or proof of the triumphant progress of the American Dream’s economic, political, and social principles. Therefore a linked and sustained decline in both the dollar and American stocks probably would damage to some extent the persuasive rhetoric of the current version American Dream itself.

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Even if US government debt yields in this scenario initially slump from around current low levels due to a renewed “flight to quality”, and even if the Federal Reserve and its central banking teammates maintain their quantitative easing and yield repression schemes, inflationary forces (encouraged by money printing; see the huge increase in America’s money supply) and heated demand for credit eventually can push government (and corporate) interest rates upward. On the US interest rate front, suppose foreigners become smaller buyers, or even net sellers, of US Treasury securities. Such overseas action would not be an endorsement of America. Due to yield repression, UST real returns currently are negative.

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Dollar Depreciation and the American Dream (8-11-20)

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)

ROLLIN’ AND TUMBLIN’ IN US NATURAL GAS © Leo Haviland April 20, 2015

In all marketplace battlefields, a wide variety of storytellers select between (and emphasize differently) an array of variables. They thereby generate diverse bullish and bearish arguments that heatedly compete for allegiance and action. And analysis and trading always are difficult enterprises. However, in the United States natural gas universe nowadays, the noise, smoke, and uncertainty produced by these diverse variables and conflicting perspectives and recommendations make it especially challenging to boldly swear unquestioning loyalty to a particular marketplace viewpoint.

What does historical analysis of major United States natural gas bear marketplace moves (NYMEX nearest futures continuation basis) in the context of days coverage reveal regarding the ending of the major bear trend that emerged in late February 2014? Perhaps 4/13/15’s 2.475 low was an important trough; however, several days of course remain in April and many key bottoms have occurred around contract expiration. If a noteworthy bottom is not established in calendar April 2015, the most probable time for a major low is in late August/calendar September 2015. NYMEX natural gas reached many important bottoms in late calendar August and September. However, a final low in late summer 2015 would stretch out the February 2014 bear marketplace trend substantially longer than the historical average.

In any case, if NYMEX natural gas prices pierce 4/13/15’s low (nearest futures continuation), that level probably will not be broken by much. Substantial support lurks around 2.40 and 2.20/2.15.
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End March 2015’s 20.0 days of coverage (1471bcf divided by about 73.5bcf/day of full calendar year 2014 consumption), though way up from March 2014’s 12.0 days coverage, dips slightly under the 21.8 days end March 1990-2014 average. It also falls a notable, though not extreme, 4.1 days beneath the nine year 2006-14 average. Thus despite the notable arithmetic stock increase during calendar 2014 build season, the national days coverage inventory picture at the end of winter 2014-15 draw season is slightly bullish.

What’s the bottom line in regard to the natural gas bear trend that began in February 2014 if one concentrates on the natural gas inventory variable? With the NYMEX nearest futures natural gas price currently well under 4.00, this end winter 2014-15 inventory factor “taken by itself”, looks neutral to supportive for gas prices. This fundamental consideration should be interpreted alongside the marketplace history relating to price and time factors.

End October 2015’s 49.5 days coverage level slides 6.3 days beneath the 2006-14 end October average of 55.8 days and 4.1 days under 1990-2014’s 53.6 days. This end October 2015 days coverage total therefore is bullish (even if not wildly so given prospects of increased natural gas production).

Look further out in the murky future to March and October 2016. Although much of course can happen between now and then, potential days coverage nevertheless does not suggest notable oversupply relative to historic averages.

The EIA forecasts end March 2016 inventory at 1704bcf and end October 2016 stocks at 3923bcf. Days cover at end March 2016 will be around 22.3 days (1704bcf/76.3bcf/d). Though this is slightly (.5 day) above the 21.8 day 1990-2014 average, it is 1.8 day less than 2006-14’s 24.1 day average. October 2016’s hypothetical days coverage is 51.7 days (3923bcf/75.8bcf/d. This is about 1.9 days under the 1990-2014 average for that calendar month and 4.1 days beneath 2006-14’s 55.8 day average.

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Rollin' and Tumblin' in US Natural Gas (4-20-15)

FED UP: OTHER EXIT STRATEGIES (c) Leo Haviland June 10, 2013

The Federal Reserve Board proclaimed in June 2011 a framework of principles for an exit strategy from its extraordinary and highly accommodative monetary policy. Are their exit principles in the process of changing a little bit, and might they do so relatively soon? It seems so.

The Fed is not the only financial visionary with an exit strategy. Participants in debt, stock, currency, commodity, real estate, and other marketplaces also possess exit (and entrance) schemes and tactics.

What signs probably warn that (for whatever reason, including a potential change in Fed policy) there is a noteworthy (substantial) exit underway from long positions in the UST?

Those on the alert for bulls to exit (bears to enter) the UST corral should monitor German and Japanese sovereign debt marketplace yields. Also remember debt yields and trends for European “periphery” and emerging marketplace nations.

Of course US dollar, S+P 500, and commodity trends entangle with and help to explain exits from (and entrances into) UST (and other interest rate) playgrounds. How much convergence and divergence has there been and will there be between falling (and rising) UST yields and past and future S+P 500 patterns? If UST rates keep rising higher and higher (suppose they exceed the high achieved in the past few weeks), will the S+P 500 inevitably continue to move up and up? Other questions loom. If the Fed keeps repressing UST yields, what will the jury decide for the US dollar (either on a broad, real trade-weighted basis, or in individual crosses against the Euro FX, Japanese Yen, Chinese renminbi, and so forth).

Thus it apparently has become increasingly difficult (at least at low nominal yield levels) to captivate foreigners into buying UST notes and bonds (and T-bills too). The slowdown in overseas net buying of UST probably occurred after March 2013 as well. In this context, note the steady rise in rates since July 2012’s bottom (and the 1.55pc low on 11/16/12 and 1.56pc on 12/6/12). And after all, the US does have some inflation (now around 1.5 percent) and the first several years of the UST yield curve offers no (or very little) real return to foreigners or anyone else. The seven year note now yields around 1.60pc. Even the 10 year’s return is mediocre.

US-Treasury-10-Year-Note-Chart-(6-10-13,-for-the-Fed-Up-essay)
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Fed Up- Other Exit Strategies (6-10-13)
US Treasury 10 Year Note Chart (6-10-13)