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.

 

Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile




GREAT EXPECTATIONS: CONVERGENCE AND DIVERGENCE IN STOCK PLAYGROUNDS © Leo Haviland August 14, 2021

In Charles Dickens’s “Great Expectations” (Chapter 2), a character says: “Ask no questions, and you’ll be told no lies.”

****

STOCKS: THE EMERGENCE OF SOME NOTABLE DIVERGENCE

In first quarter 2020, prices for an array of stock marketplaces cratered at approximately the same time as the S+P 500. They thereafter reached a major bottom “together” in late March 2020. Over subsequent months, magnificent bull moves occurred.

However, since around early mid-February 2021, prices for the S+P 500, European stock indices in general, and broad international benchmarks (including American stocks and those of other countries), have diverged from emerging stock marketplaces in general, China’s Shanghai Composite Index, and Japan’s Nikkei signpost.

Some important and widely-watched American large capitalization stocks have retreated fairly significantly in recent months despite the S+P 500’s onward march to new highs. If more marketplace leaders within the large capitalization stock fraternity (especially American ones) begin to decline, the greater the odds of price convergence between that group (picture the S+P 500) and small cap stocks (in the US and elsewhere), emerging marketplace stock realms (including China), and Japanese equities

FOLLOW THE LINK BELOW to download this article as a PDF file.
Great Expectations- Convergence and Divergence in Stock Playgrounds (8-14-21)

US NATURAL GAS: A VIEW OF THE PAST, A VISION OF A FUTURE © Leo Haviland, January 21, 2017

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”.

 ****

CONCLUSION AND OVERVIEW

Is the major bull trend for NYMEX natural gas (nearest futures continuation) that began in early March 2016 finished? Probably not, though it is a difficult call. In any event, assuming normal weather and moderate United States economic growth, it nevertheless will be very hard for the NYMEX front month price to exceed 12/28/16’s high bordering 4.00 by much (if at all) anytime soon.

 ****

The probable longer run bullish US natural gas inventory situation suggests the likelihood of eventual further moderate rises in NYMEX natural gas prices (nearest futures continuation). The days coverage perspective underlines this, particularly in light of anticipated stockpiles at end October 2017 and thereafter. A comparison of the recent bull move that started in March 2016 to the prior major bull move inaugurated on 4/19/12 at 1.902 offers insight into past and potential trends.

Marketplace history does not necessarily repeat itself, whether entirely, partly, or at all. But all else equal, since 2016’s natural gas rally was less than average in time and (percentage) distance terms, this also indicates the move that commenced in March 2016 probably has more time and price to run. NYMEX natural gas (nearest futures continuation) rallied about 148 percent in about ten months from its 3/4/16 bottom at 1.611 to its 12/28/16 high at 3.994. The distance and duration for eleven major bull moves in NYMEX natural gas (nearest futures continuation) since trading began in 1990 is about 246 percent and twelve months and three weeks.

Some bull voyages took a very long time to complete. For example, the April 2012 to February 2014 advance lasted about twenty-two months and a week. September 2003-December 2005’s flight took 26 months and three weeks; the August 1998 to December 2000 adventure was 28 months.

****

However, the move above December 2016’s height may not be substantial and could take at least a few months to occur. Why?

First, US natural gas inventories in days coverage terms at end March 2017, though they likely will slip slightly below those at end March 2013, nevertheless will hover around end March long run averages.

A few major (over 120 percent) bull charges were shorter in extent or briefer in time than 2016’s leap, so an assertion that the 2016 rally ended in December 2016 is not “unreasonable”. Besides, the NYMEX natural gas 26 year trading history is relatively short; compare wheat or the Dow Jones Industrial Average. In any case, one big bull move voyaged up around 123.5 percent, another 129.2pc. For the time horizon parameter, three major bull moves from 1990 to the present were completed quickly. One finished in about two months, another in about three and a half months, and a third in four months. In this context, and although marketplace history is not marketplace destiny, several major peaks in NYMEX natural gas occurred in calendar December, with another one in early January. NYMEX natural gas often attains its major peaks and valleys around the day of the actual nearest futures contract expiration.

The CFTC’s Commitments of Traders reveals a massive net noncommercial long position in the natural gas complex. An elevated net noncommercial position in natural gas has often (but not always) been associated with key marketplace trend changes. The current net noncommercial long position in the petroleum complex likewise is extremely large from the historical standpoint. Both natural gas and petroleum currently are vulnerable to liquidation by the net noncommercial long fraternity, which would tend to pressure prices.

For predicting NYMEX natural gas price trends, monitor those in the petroleum complex. NYMEX crude oil’s 2/11/16 trough at $26.05 (nearest futures continuation) occurred shortly before the NYMEX natural gas bottom on 3/4/16 (and alongside the S+P 500’s 2/11/16 trough at 1810). NYMEX crude oil made important interim lows in its rally, $39.19 on 8/3/16 and $42.20 on 11/14/16; critical interim lows in NYMEX natural gas occurred near in time to these. Remember 8/12/16’s 2.523 and 11/9/16’s 2.546. NYMEX crude oil’s recent high occurred 1/3/17 at $55.24, adjacent in time to 12/28/16’s 3.994 natural gas elevation.

FOLLOW THE LINK BELOW to download this article as a PDF file.
US Natural Gas- a View of the Past, a Vision of a Future (1-21-17)

GREAT EXPECTATIONS: THE FEDERAL RESERVE, INFLATION, AND POLITICS © Leo Haviland March 20, 2016

“I went home, with new matter for my thoughts, though with no relief from the old.” Charles Dickens’s novel, “Great Expectations” (Chapter 48)

****

OVERVIEW

A deluge of money printing and ardent yield repression by leading central banks of course are not the only important potential sources of inflation. Assorted marketplace guides proclaim a variety of opinions regarding relevant inflationary factors and their relationships and consequences. And everyone knows that economic, political, and social conditions, programs, and challenges differ, often significantly, between countries.

Central banking mandates and interpretations regarding them are not precisely the same. Central banks do not have an easy job. In his story “A Christmas Carol” (Stave 3), Charles Dickens states: “it is always the person not in the predicament who knows what ought to have been done in it, and would unquestionably have done it too”.

However, all the bankers preach devotion to their mandate. The Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and the Swedish central bank for the past several years have shared a faith and proclaimed a gospel that achieving and sustaining about two percent inflation is a “good” goal. Thus many leading global central banks believe “too low” inflation (and of course deflation) is “not good” or is “bad”.

Central banking decisions, actions, and rhetoric around the globe have become increasingly interdependent since the eruption of the international economic disaster of 2007-09. Banking captains nobly stress their willingness to do whatever it takes and whatever they must, frequently pointing to their beloved toolkit of monetary measures. Thus they embarked on highly accommodative monetary policies such as yield repression and gigantic money printing and generously provided forward guidance. Yet despite their long-running and devoted odyssey aimed at achieving and sustaining the praiseworthy target of two percent inflation, the armada of central banks thus far has failed in its inflationary quest. Their great expectations have not generated great results.

****

Since inflation (including too low inflation and deflation) concerns and wordplay are so significant for current marketplace analysis and trends, it pays to select and assess variables indicating whether a sufficient and sustained quantity of inflation is appearing or may soon do so. Observers can differ in their choices and viewpoints.

“Inflation”, however defined and measured, may appear earlier in one nation or region than another. Moreover, just because some or sufficient inflation (or deflation) emerges in one territory, they need not do so elsewhere. In any case, let’s focus on America. Not only does the United States play a crucial role on the world economic and political stage, but so does the Federal Reserve Board. Stock, interest rate, currency, and commodity marketplaces avidly monitor Fed statements, signals, and behavior. Finally, America nowadays apparently is (however slowly) showing signs of being a key leader in international GDP growth.

 

US POLITICS: BLEAK HOUSE

In Dickens’s “Great Expectations”, a character says: “’Ask no questions, and you’ll be told no lies.’” (Chapter 2)

****

Most Americans have high (or at least moderate) confidence in and trust the US Federal Reserve Board. In contrast, many Americans nowadays have rather low expectations regarding US politicians “in general”. They distrust and have rather little confidence in most US political leaders. They question the willingness and ability of such representatives to work together to achieve desirable goals.

Focusing on central banks and their monetary measures aimed at achieving sufficient inflation should not cause observers to overlook political causes, including fiscal ones, of inflation and higher interest rates. And interest rates can rise for reasons other than, or in conjunction with, inflation pressures.

In any case, weak national political leadership and substantial political divisions do not guarantee rising interest rates, but they can encourage that development. They also can help to generate a weaker dollar.

The United States currently is a house divided. Income and asset inequality, immigration debates, views on health care, opinions on the appropriate size and role of government, international trade topics, climate change, and other issues inflame America’s political theater. In election year 2016, as in the prior few years, there has been greater than normal partisan strife.

These ongoing significant US political divisions risk further weakness in the US dollar. Underscore the current conflict between the Republican Congress and the Democratic President. Though the American political process has a long way to go until election season 2016 concludes, partisan warfare likely will persist. The House likely will remain Republican; the President probably will be a Democrat (Hillary Clinton). Control of the Senate is a close call.

The battles within the Republican camp look likely to persist for at least a few more months. Will there be a convention fight? “Trump warns Republican elders of ‘riots’ if they fail to back his candidacy”, headlines the Financial Times (3/17/16, p3). Although Trump has great confidence in his own talents, at present the majority of Americans apparently do not share that confidence. Suppose Donald Trump captures the Republican Presidential nomination. Imagine that he wins the Presidency. Comments from overseas leaders suggest lack of faith in Trump’s abilities and policies. Such foreign attitudes are a bearish factor for the dollar.

An ability to transcend partisan divisions only via big spending (fiscal irresponsibility) does not eliminate substantial underlying political factionalism. The massive addition to future US budget deficits agreed upon by Congress and the President in late December 2015 probably will tend to push up interest rates and is a bearish factor for the dollar. (See the Congressional Budget Office’s “Summary of The Budget and Economic Outlook: 2016 to 2026; 1/25/16. See also the NY Times, 12/17/15, pA29; NY Times, 12/19/15, ppA1, 13). In any event, America has a looming long run debt problem. And don’t debtors tend to like inflation?

****

FOLLOW THE LINK BELOW to download this article as a PDF file.
Great Expectations- the Federal Reserve, Inflation, and Politics (3-20-16)

US INFLATION SIGNALS © Leo Haviland June 7, 2015

In their noble war to generate sufficient inflation, insure economic recovery, and slash unemployment, central bankers in America, Europe, and Japan have fought with extraordinary weapons such as monumental money printing and longstanding interest rate yield repression. On the inflation front, they battle furiously to achieve and sustain an inflation target of about two percent. This allegedly good (desirable, reasonable, prudent) goal contrasts not only with bad “excessive” inflation, but also with bad “too low” inflation and evil (or at least really bad) of deflation.

For several months, widely-watched inflationary yardsticks such as the consumer price index indicated too low inflation or inflamed worries regarding deflation. The consequences of the 2007-2009 international economic disaster probably have not disappeared, and the dramatic slump in petroleum prices after mid-2014 has troubled many inflation seekers. In any event, most economic forecasters, including central banking captains, have postponed the achievement of sufficient inflation as measured by such signposts rather far out into the future. Consequently, marketplace warriors, political leaders, and the financial media have focused relatively little on other gauges warning of notable potential for increased inflation in benchmarks such as the consumer price index.
****

The worldwide global economy of course is interconnected and complex. Numerous variables intertwine to produce any given inflation level and trend. Inflation acceleration need not appear first or strongest in beloved indicators such as consumer prices or personal consumption expenditures. Although the United States is not a financial island, focus on the American landscape.

“Inflation” is not confined to measures such as the CPI or personal consumption expenditures; “the economy” includes other inflation benchmarks. Various indicators signal there is more inflation “around” in the US than most believe. Underline American wage increases. Note central bank and marketplace murmurings regarding high valuations or so-called asset bubbles; keep in mind the climbs in US equities and home prices from their financial crisis depths. Money supply growth remains robust. The steely determination of the Fed and its central banking allies to achieve their inflation objectives heralds that monetary policy probably will remain quite lax for some time even if the US eventually raises rates. These factors collectively warn that at least in America, deflationary forces “in general” have found strong adversaries. The recent spike in key interest rates such as the 10 year US government note (and the German Bund) in part reflects this inflation.

Despite the recent rate of change in US consumer prices and personal consumption expenditures, probably neither deflation nor dangerously low inflation are on the American horizon. In addition, sustained “too low” inflation in America probably should not be a worry for the near term. Nevertheless, although a sustained jump in PCE and CPI inflation rates much beyond the Fed’s desired two percent target currently appears unlikely, “sufficient” inflation in America may be achieved faster than many predict.
****

“Flights to quality”, hunts for suitable yield (return), and other supply/demand considerations, not just low inflation statistics, can rally prices of debt securities. Yet did sustained central bank yield repression create or at least encourage “too low” yields for (a price “bubble” in) key government debt securities such as those of the United States and Germany? In the Eurozone, the terrifying enemy called deflation neared. The European Central Bank fired back with a huge quantitative easing (money printing) plan involving government debt securities. Some European government security interest rate yields went negative.

However, was a US (and German) debt security price bubble recently popped?

The 10 year US government note established an important yield low at 1.64 percent on 1/30/15, above 7/25/12’s major bottom at 1.38pc. Since January 2015’s valley, the US 10 year rate shot up about 50 percent to 6/5/15’s 2.44pc. The 1/2/14 summit at 3.05pc represents important resistance. In any case, what should the yield on US 10 year government notes be if inflation (such as in the PCE) is 1.5 percent or higher?

The 10 year German government note made a key bottom on 4/17/15 close to zero, at .05 percent (not long after the UST 10 year note made a minor low at 1.80pc on 4/3/15). Bund yields thereafter blasted higher, reaching almost one percent on 6/4/15. The Japanese 10 year JGB made a significant trough in 2015 shortly before the UST’s, on 1/20/15 at .20 percent.

US stocks advanced victoriously from their March 2009 major low for many reasons, including strong corporate earnings and share buybacks. Yet money printing and yield repression also assisted the S+P 500’s mighty ascent. So if US stocks recently reached “too high” levels, perhaps rising interest rates (or growing fears of them) will inspire those equities to retreat (burst their bubble).

Regardless of whether or not American government note yields recently were (or are still) “too low”, the recent sharp increase in UST 10 year note rates may reflect not just a “technical correction” or a growing belief that the Federal Funds rate (and thus yields in US government securities) will rise in the relatively near future. That noteworthy UST yield leap probably also warns that US inflation “in general” has grown or will do so soon.

FOLLOW THE LINK BELOW to download this article as a PDF file.
US Inflation Signals (6-7-15)