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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ADVENTURES IN WONDERLAND: COMMODITY CURRENCIES © Leo Haviland September 26, 2016

“For, you see, so many out-of-the way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” Lewis Carroll, “Alice’s Adventures in Wonderland” (Chapter I)

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OVERVIEW AND CONCLUSION

Concentrating on and comparing exchange rates of “commodity currencies” offers insight into assorted interrelated marketplace relationships. Since the shocking eruption and terrifying acceleration of the global economic crisis in late 2007/2008, the major price trends for eight “commodity currencies” roughly (and of course not precisely) have ventured forward in similar fashion on a broad real effective exchange rate (“EER”) basis. Over that time, this basket of assorted commodity currencies generally has intertwined in various ways with very significant trends in the broad real trade-weighted United States dollar (“TWD”), emerging marketplace stocks in general, and broad commodity indices such as the S&P Goldman Sachs Commodity Index (“GSCI”).

The substantial rally in the broad real trade-weighted United States dollar (“TWD”) that embarked in mid-2011 played a key part in encouraging (confirming) and accelerating bear movements in emerging marketplace stocks and commodities “in general”. The S+P 500’s monumental rally over its spring 2011 interim high diverged for about four years from the trends in emerging equity realms and commodities. However, the TWD’s late 2015 ascent above its March 2009 peak was a crucial event. This dollar climb helped propel the S+P 500 downhill following 5/20/15’s 2135 pinnacle in conjunction with the emerging stock marketplace and commodity trends.

In January/February2016, these linked price patterns reversed. The TWD has depreciated modestly and stocks (emerging marketplaces as well as those of America and other advanced nations) rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield initially ascended from its 1Q16 low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. These current marketplace interrelationships (“roughly trading together”) probably will persist for the near term, regardless of whether the pattern of mid-2015 to first quarter 2016 resumes or that since mid-first quarter 2016 continues. Marketplace history of course need not entirely or even substantially repeat itself.

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Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are important to the economies of advanced countries such as Australia, Canada, and Norway, the currencies of these lands likewise can be labeled as commodity currencies.

The bearish currency paths (effective exchange rate basis) of key emerging and advanced nation commodity exporters up to first quarter 2016 resembled the similar trends among them during the 2007-09 worldwide economic disaster era. However, these commodity currencies depreciated notably more in that recent dive than during 2007-09’s extraordinary turmoil. In addition, the lows attained by most of them decisively pierced the floors achieved about seven years previously. Moreover, the TWD rallied more sharply in its bull leap to its January 2016 elevation than it did during the past crisis.

The feebleness up to the 1Q16 lows for the commodity currency group, as it involved both advanced and emerging marketplace domains (as it did in 2007-09), reflected an ongoing global (not merely emerging marketplace) crisis. Substantial debt and leverage troubles still confront today’s intertwined worldwide economy. The bear trip of many commodity currencies into early first quarter 2016, especially as it occurred alongside big bear moves in emerging marketplace stocks (and in the S+P 500 and other advanced stock battlefields) and despite long-running extremely lax monetary policies, underlined the fragility of the relatively feeble global GDP recovery.

Therefore key central bank wizards, concerned about slowing real GDP and terrified by “too low” inflation (or deflation) risks, have fought bravely to stop the TWD from appreciating beyond its January 2016 top and struggled nobly to encourage rallies in the S+P 500 and related stock marketplaces. Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. Indeed, rallies in the S+P 500 (and real estate) may help inflation expectations (and inflation signposts monitored by central banks such as consumer prices) to crawl upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices as well as appreciation by commodity currencies in general.

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Noteworthy rallies in these commodity (exporter) currencies from their recent depths tend to confirm (inspire) climbs in commodities in general and emerging (and advanced) nation stock marketplaces. Renewed deterioration of the effective exchange rates of the commodity currency fraternity “in general” likely will coincide with renewed firming of the broad real trade-weighted US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the still-dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.

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“He was an honest Man, and a good Sailor, but a little too positive in his own Opinions, which was the Cause of his Destruction, as it hath been of many others.” “Gulliver’s Travels”, by Jonathan Swift (Part IV, “A Voyage to the Country of the Houyhnhnms”, chapter 1)

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Looking forward, numerous entangled and competing economic and political variables generate a substantial challenge for explaining and predicting the interconnected financial marketplaces in general, including the commodity currency landscape. The commodity currency group as a whole (“CC”) has appreciated roughly twelve percent from its late calendar 2015/first quarter 2016 depth. What does a review of the adventures in commodity currencies since the assorted late 2015/1Q16 bottoms in the context of other marketplace benchmarks portend? Commodity currencies in general probably are establishing a sideways range. The overall camp of EERs (apart from what may happen to individual ones) will not rally much (if at all) above recent highs. The CC camp eventually likely will renew its overall depreciation, with the various EERs heading toward their noteworthy lows attained several months ago.

Although the CC rally since its 1Q16 bottom retraces some of its prior collapse, the TWD itself has dropped only modestly from its peak and thus remains quite strong. Moreover, note the fall in the broad GSCI (and the petroleum complex) since early June 2016. A still-robust TWD not only underlines potential for renewed weakness in the CC complex, but also confirms commodity feebleness and warns of risks to the recent bull move in emerging marketplace stocks (and even to the astounding S+P 500). China is a key commodity importer. As China’s EER continues to ebb (while Japan’s has strengthened), the ability of the CC clan to produce only a moderate overall percentage rally in their collective EER to date hints that world economic growth remains sluggish. Emerging marketplace stocks in general, despite their rally since 1Q16, remain substantially beneath their September 2014 summit.

Although leading global central banks devotedly retain highly accommodative policies such as yield repression and money printing, the inability of US Treasury 10 year note yield to rise much above its 7/6/16 low at 1.32 percent tends to confirm this picture of unimpressive (and even slowing) global expansion. Optimists underscore the S+P 500’s rally to a new peak on 8/15/16 at 2194 from its 1Q16 trough. Yet that new record elevation merely neighbors May 2015’s plateau, exceeding it by just 2.8 percent.

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There is significant marketplace and political talk of trade wars, growing protectionism, and anti-globalization. Much of this wordplay links to populist challenges to the so-called establishment (elites). But even some establishment politicians have become less enamored of free trade. Fears of trade conflicts and protectionist barriers weigh on the CC domain as a whole.

For commodity currencies, much depends on Federal Reserve policy. At present, although the Fed did not boost rates in September, it currently seems fairly likely to do so in December 2016 (assuming no dramatic drop in stocks occurs before then). Especially as the European Central Bank, Bank of England, and Bank of Japan remain married to their highly accommodative schemes, this Fed action will help to rally the TWD and thus tend to weaken the CC armada. Nevertheless, the Fed and other central banks probably will fight to keep the dollar from surpassing its 1Q16 summit; doing so helps to protect stock (and real estate) prices and thus to reduce populist political advances.

The result of the US Presidential election on November 8 naturally remains uncertain. Unlike the EERs of the other seven commodity currencies, the Mexico EER has slumped beneath its first quarter 2016 low. Mexico faces severe domestic political challenges, and ongoing low oil prices wound its economy. However, the increasing potential for a Trump victory and resulting trade conflicts and immigration disputes also have helped to push Mexico’s EER downhill. The Mexican peso crisis of the early 1990s should not be forgotten.

Significant ongoing American political divisions risk further weakness in the US dollar, regardless of who wins the exciting Presidential sweepstakes. The US has a long run budget challenge regardless of who emerges victorious. Though the TWD issue is complex, a Trump victory likely is more bearish for the TWD than a Clinton one. Comments from overseas (and numerous domestic) leaders suggest lack of confidence in Trump’s abilities and policies, which arguably would be reflected in reduced acquisition (or net selling) of dollar-denominated assets such as US government securities (and corporate debt) and American stocks. Trump’s budget proposals, if enacted, will likely expand the deficit considerably and thus probably would encourage interest rate rises. A Trump triumph likely would be bearish for the US dollar in general, even if the dollar rallied against the Mexican peso on a cross rate basis. However, though numerous respected forecasters predict a close outcome, Clinton probably will defeat Trump. In any case, all else equal, a Democratic victory increases the odds of a Fed rate hike in the near term.

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Adventures in Wonderland- Commodity Currencies (9-26-16)

GAMES PEOPLE PLAY: AMERICAN REAL ESTATE © Leo Haviland August 28, 2016

“Home is the nicest word there is.” Laura Ingalls Wilder, author of the “Little House” books, which inspired the famed television show, “Little House on the Prairie”

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OVERVIEW AND CONCLUSION

The United States real estate marketplace played a significant role in the worldwide economic disaster that erupted in mid-2007 and accelerated in 2008. That dreadful time and its consequences probably are not a distant memory within the perspectives of key central bankers and at least some politicians. Otherwise, the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, and other monetary gatekeepers would not have sustained various highly accommodative schemes for over seven years. Though international growth resumed around mid-2009, it generally has been erratic and modest. Despite unwavering devotion to their mandates, these sheriffs thus far have not delivered sufficient inflation relative to benchmarks such as the consumer price index. Although headline unemployment measures have plummeted in the United States, they remain fairly high in some nations.

The United States of course is not the whole world and American consumers do not represent the country’s entire economy. Yet because the US is a crucial player in the interconnected global economic (and political) theater, and because US consumer spending represents a majority of US GDP, the state of affairs for the US consumer has international consequences. Consumers represent about 68.3 percent of America’s GDP (2015 personal consumption expenditures relative to GDP; Federal Reserve Board, “Flow of Funds”, Z.1; 6/9/16). The household balance sheet level and trend (net worth) is an important variable in this scene. Although stock marketplace and real estate values matter a great deal to others (such as corporations and governments) beyond the “person on the street”, they are quite important to US household net worth and thus behavior (including spending patterns) and expectations (hopes) regarding the future.

Thus although US household net worth is not an explicit part of the Federal Reserve’s interpretation of its mandate (promoting maximum employment, stable prices, and moderate long-term interest rates) and related policy actions, it is very relevant to them. So therefore are stock marketplace and real estate values and trends. Home ownership is an important dimension of the ideology of the American Dream. Rising home and increasing stock marketplace prices to some extent bolster faith that the American Dream “in general” (as a whole) is succeeding. And what happens to American real estate still matters a great deal for the global economy.

Sustained yield repression and quantitative easing (money printing) by the Fed and its playmates not only have helped the S+P 500 and many other stock signposts to soar through the roof. These programs (assisted to some extent by deficit spending programs) also repaired much of the damage to America’s real estate landscape. Let’s survey the US real estate marketplace in this context, concentrating primarily on the consumer housing sector.

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The dutiful Fed reviews assorted factors related to personal consumption expenditure (consumer price) inflation and other aspects of its mandate. Consumer price or personal consumption expenditure inflation targets of around two percent matter to the Fed and other central bank sheriffs. Yet sufficient (too low; too high) inflation (as well as deflation) can occur in other realms, including stocks and real estate.

Combine the monumental recovery in US real estate values with the towering rise in the value of stock marketplace assets. Although these are not the only parts of or phenomena influencing the US household balance sheet, current real estate and stock marketplace (particularly note the S+P 500) levels and trends appear more than adequate to justify a less accommodative Fed monetary policy. And US housing trends (including the rental situation) probably are placing substantial upward pressure on key consumer price benchmarks.

Recall the glorious American real estate spectacle before the mournful crash of the worldwide economic disaster. Although that Goldilocks Era for US real estate belongs to the past, the current housing situation recalls it.

The dovish Fed nevertheless will be cautious regarding boosts in the Federal Funds rate. Like other members of the global establishment (elites), it does not want populists (whether left wing or right wing; such as Donald Trump) to win power. To some extent, sustained substantial slumps in stocks and real estate prices tend to encourage populist enthusiasm. The Fed and its allies battle to avoid a sharp downturn in the S+P 500 or housing prices. The Fed meets 9/20-21, 11/1-2, and 12/13-14/16. The US Election Day is November 8. See “‘Populism’ and Central Banks” (7/12/16) and “Ticking Clocks: US Financial Marketplaces” (8/8/16).

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Games People Play- American Real Estate (8-28-16)

TICKING CLOCKS: US FINANCIAL MARKETPLACES (c) Leo Haviland August 8, 2016

“Isn’t it a pity…the wrong people always have money.” From “The Big Clock”, a 1948 American film noir (John Farrow, director)

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CONCLUSION AND OVERVIEW

Ongoing yield repression by the Federal Reserve Bank, the European Central Bank, and their allies plays a crucial role in keeping the US Treasury 10 year note well beneath 6/11/15’s 2.50 percent interim yield top, as well as later and lower heights of 2.38pc (11/9/15) and 2.00pc (3/16/16). For the next few months, running up at least through America’s 2016 election period, it will be difficult for the UST 10 year to break above the resistance range of 2.00/2.50pc or much under its 7/6/16 low at 1.32pc.

The Fed leadership promotes caution regarding Fed Funds rate boosts. The NY Fed President recently argued “at the moment, for caution in raising U.S. short-term interest rates” (“The U.S. Economic Outlook and the Implications for Monetary Policy”; 7/31/16). A Fed Governor is “not in a hurry to lift rates”; he argues “for a ‘very gradual’ path for any rises” (Interview with Financial Times, 8/8/16, p2).

Economic growth in America, Europe, and Japan generally remains subdued. China, though it retains a comparatively strong real GDP rate, has slowed down. Despite massive money printing (quantitative easing) by assorted leading central banks at various times over the past seven to eight years, inflation yardsticks generally remain beneath the two percent target beloved by the Fed and its loyal allies. Ongoing government deficit spending, though less than during the global economic disaster era and the following few years, in recent times likewise has not sparked sustained substantial growth or sufficient inflation.

The broad real trade-weighted US dollar (“TWD”, monthly average; Fed H.10 statistics), though still lofty relative to its July 2011 major bottom around 80.5, remains beneath first quarter 2016’s 101.2 pinnacle. Central banks and finance ministers have been determined to keep the TWD beneath (or at least not much over) its January 2016 summit. For the next few months, they probably will continue to succeed in accomplishing this goal. The TWD also for the near term probably will not plummet more than 10 percent from its first quarter 2016 pinnacle.

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Establishment icons such as the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan probably will retain their highly accommodative policies for the next several months (at least). They will persist in their path not merely because of failure to achieve inflation goals, relatively sluggish growth, fears about global economic troubles (such as the United Kingdom’s Brexit Leave vote fallout) or worries about assorted “headwinds”/”volatility”. So why else?

The economic and political “establishment” (elites) in America and overseas fervently battles to subdue both left-wing and right-wing “populist” advances. See “‘Populism’ and Central Banks” (7/12/16). These guiding lights do not want populist leaders, whether America’s Donald Trump or European (or other) left or right wing firebrands, to achieve power.

The S+P 500 and other global stock marketplace benchmarks have rallied sharply from their 1Q16 depths. The S+P 500 has edged above its 5/20/15 peak at 2135. But a sharp downturn in worldwide equities probably would help populist advocates of “Change” to claim that “the establishment” had inadequate or failing economic (and political and social) policies. So the US establishment and its overseas comrades do not want the S+P 500 and related equity marketplaces to collapse, especially during the countdown up to US Election Day (11/8/16). Keeping US government (and other) yields low and avoiding big moves in the US dollar intertwine with central bank (and other establishment) stock marketplace support and anti-populist strategies.

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Ticking Clocks- US Financial Marketplaces (8-8-16)

PARALLELS IN US NATURAL GAS: 2012 AND 2016 BUILD SEASONS © Leo Haviland, July 4, 2016

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.

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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.

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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)