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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President Donald Trump’s “Inaugural Address” (1/20/17): “This American carnage stops right here and stops right now.”
OVERVIEW AND CONCLUSION
Marketplace connections and patterns, including convergence and divergence (lead/lag) relationships between financial realms, are complex and not necessarily precise. They can shift or even transform sometimes dramatically. Marketplace history is not marketplace destiny; history does not necessarily repeat itself, either entirely or even partly.
“Adventures in Marketland: Hunting for Return” (10/6/20) and “Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) display the intertwined price trends in assorted financial fields in recent times. Such interrelated territories include United States and other stocks, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities “in general”. Prices in the S+P 500 and other benchmark US and global stock indices, lower-grade interest rate instruments, and commodities often have risen (or fallen) at roughly the same time. They frequently have climbed in bull markets (and fallen in bear markets) “together”. These thus have alternatively reflected bullish enthusiasm as “investors” and other traders hunted for adequate return (“yield”), and dismal bearish scenes as they scrambled frantically for safety. For example, the magnificent bull moves in the S+P 500 and these “related” financial areas established important tops in early to mid-first quarter 2020 (S+P 500 on 2/19/20 at 3394). Their subsequent murderous bear crashes entangled, finishing around the same time, around late March 2020 (S+P 500 on 3/23/20 at 2192). The ensuing price rallies in the S+P 500 and these assorted other key provinces thereafter united, establishing peaks around early September 2020 (S+P 500 top on 9/2/20 at 3588; subsequent lower high 10/12/20 at 3550). See those essays for a detailed presentation of these price moves and their relationships since first quarter 2020.
“Marketplace Maneuvers: Searching for Yield, Running for Cover” (9/7/20) concluded that various phenomena indicate that these marketplaces are at or near important price highs and probably have started to or soon will decline together. “Adventures in Marketland” reemphasized this bearish outlook.
What bearish factors for the S+P 500 and various related marketplaces (other stock signposts, US corporate bonds, lower-grade foreign dollar-denominated sovereign debt, and commodities such as petroleum and metals) did “Marketplace Maneuvers” and “Adventures in Marketland” emphasize? They include the probability of a feeble global recovery (the recovery will not be V-shaped), the persistence of the coronavirus problem for at least the next several months, and lofty American stock marketplace valuations (and the substantial risk of disappointing late 2020 and calendar 2021 corporate earnings). Democrats probably will triumph in the 11/3/20 American national election, which portends a reversal of the corporate tax “reform” legislation as well as the enactment of increased taxes on high-earning individuals and the passage of capital gains taxes. Also on the US national political scene, fears have grown of a political crisis and legal fights if President Trump disputes the November 2020 voting outcome. Other warning signals of notable price falls in the S+P 500 and various associated battlegrounds include vulnerable United States (and other) households (reduced consumer spending) and endangered small businesses, massive and rising government debt, a greater risk of rising US interest rates (at least in the corporate and low-quality sovereign landscapes) than many believe (even with ongoing Fed yield repression), and weakness in the US dollar.
This bearish trend in the S+P 500 probably will continue. Even if Congress answers widespread fervent prayers and enacts another large deficit spending (stimulus) package, the S+P 500’s 9/2/20 peak probably will not be broken by much, if at all. Given recent relationships, a sustained fall in the S+P 500 probably connects with declines in the prices of the other asset sectors currently closely linked to it.
As always, in the context of these various marketplaces, money-seekers should monitor US Treasury and other high-quality government debt yield levels and trends as well as US dollar and other currency patterns.
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Born to Be Wild- American Economic and Political Battlefields (11-2-20)
“(All down the line.) We’ll be watching out for trouble, yeah.”
The Rolling Stones, “All Down the Line”
NYMEX natural gas (nearest futures continuation) probably will remain in a sideways trend between 2.40/2.50 and 3.20/3.45 over the next few months. However, United States natural gas inventories from the days coverage perspective (stocks relative to consumption) are much lower than the historical average. Suppose economic growth remains moderate and that commodity prices in general (and those in the petroleum complex in particular) do not collapse. This natural gas inventory situation, assuming it persists, makes it probable that the marketplace eventually will ascend over 3.20/3.45 toward major resistance around 4.00/4.10. The most likely achievement of a flight to 4.00/4.10 is around winter, whether that of winter 2018-19 or thereafter. A colder than normal winter (or even belief such will occur) boosts the chances of such a spike. If widespread expectations of upcoming massive US natural gas production increases are disappointed, that also likely will rally prices above 3.20/3.45 and toward 4.00/4.10.
Over the past year or two, the natural gas industry probably has shifted toward a lower level of desired (“appropriate”, “reasonable”, “normal”, “prudent”, “sufficient”) stock holding relative to historical averages. Why? One factor probably is faith that calendar 2018 (and subsequent) gas production will remain far over that of calendar 2017. So many players probably believe there “always (or almost always) will be enough gas around”. Another variable likely encouraging lower inventory in days coverage terms is the substantial expansion of America’s pipeline infrastructure. Thus it has (will) become easier to move sufficient gas to many locations where it is needed. Moreover, the growing share of renewables in total US electricity generation arguably to some extent reduces the amount of necessary natural gas inventories.
These structural changes in the US natural gas marketplace apparently have shifted the natural gas inventory management approach to more of a “just in time” (lower inventories) relative to a “just in case” (higher stockpiles) method.
However, the natural gas inventory situation nevertheless appears somewhat bullish. Even if the “reasonable” level of industry holdings of natural gas inventories has tumbled relative to historical benchmarks in days coverage by a few days, prospective levels for October 2018 and October 2019 nevertheless appear “low” relative to “normal” totals, particularly from the perspective of the winter stock draw period.
Arguably many natural gas marketplace participants are overly complacent regarding the availability of supplies, particularly in periods of high demand. Imagine a colder than normal winter. Emerging worries that available supply (whether in days coverage or arithmetical terms) is or may be tight can inspire heated scrambles to procure it.
Energy Information Administration (“EIA”) statistics indicate that calendar 2019 US liquefied natural gas (LNG) net exports will be substantial (notably higher than net LNG exports in 2017 and 2018). This net foreign demand for LNG will tend to tighten the US inventory situation. Also note that in calendar 2017 and 2018, America was a net importer of natural gas via pipeline; in calendar 2019, the US becomes a net exporter via pipeline.
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US Natural Gas- Waiting for Fireworks (7-3-18)
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)
Not only does recent Middle East political turmoil flood the news. Actual supply interruptions, as well as conjectural ones, of course influence petroleum and other trading and hedging behavior.Increasing petroleum consumption in non-OECD (developing) nations, though it is challenging to measure, is a bullish factor. There’s probably been a shift within the petroleum industry from a rather confident “just-in-time” orientation to a more fearful “just-in case” bias regarding preferred levels of inventory holding. Moreover, keep in mind the continued bullish effects of the weak United States dollar, low policy interest rates in America and many other OECD nations, noteworthy quantitative easing (money printing), and the global economic recovery story in general and associated rallies in stock marketplaces. Moreover, to many soothsayers onWall Street and beyond, commodities (particularly petroleum) are a new asset class. This faith inspires “alternative investment” (buy and hold for the long run) in that universe, thus tightening petroleum free supply and pushing prices higher.
By around calendar 1996, US petroleum statistics suggest a move to lower inventory holdings in days coverage terms, probably at least due to widespread faith in the appropriateness of just-in-time inventory management.
So the longer that US (and OECD) holdings such as those of March 2011 remain high relative to the 1996-10 period, the more it seems that there has been a partial shift (by at least some industry members) to a just-in-case approach. Given what may happen in the oil world, why not hold a bit more around “than usual”. Players may grab an three or four days extra now relative to just-in-time needs, as versus say 10 or more days in the distant past.
Both the 2008 and 1987 eras hint that any major (final) high in the petroleum complex will be fairly near in time (within a few months, either before or after) one in United States equities.
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Inside the Petroleum Jungle (Desperate Housewives, Episode 10)