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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COMMODITIES: CAPTIVATING AUDIENCES © Leo Haviland October 12, 2015

OVERVIEW AND CONCLUSION

The Federal Reserve Board is a widely-watched star economic performer. Elvis Presley sings in “Jailhouse Rock” that “Everybody in the whole cell block Was dancin’ to the Jailhouse Rock”. The Fed’s actual and anticipated soulful lyrics and mesmerizing policy moves likewise attract, enthrall, and inspire Wall Street, Main Street, and political audiences. The Federal Reserve Board congregates 10/27-28/15 and 12/15-16/15.

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Though major stock, interest rate, and currency marketplaces typically grab the lion’s share of marketplace and media attention, recently commodities “in general” have marched to center stage alongside them. Central bankers, finance ministers, and other leading economic players pay close attention to the analysis and forecasts of the International Monetary Fund. October 2015’s featured cover page titles of the IMF’s “World Economic Outlook” (“Adjusting to Lower Commodity Prices”) and “Fiscal Monitor” (“The Commodities Roller Coaster”) evidences this increased fascination with commodities.

Individual commodities such as crude oil, copper, and corn, as well as commodity sectors such as the petroleum complex, of course have their own supply/demand and inventory pictures. Perspectives on these can and do differ between observers. Yet commodity price trends in general are hostage not only to their own supply/demand situation and general economic growth trends, but also to movements in equities, interest rates, and foreign exchange. Particularly over the past several months, stock and other financial playgrounds more closely have intertwined with noteworthy travels in crucial commodity theaters such as petroleum and base metals. Such increasingly strong ties developed in the past during similar sustained dramatic commodity price adventures.

The current significant link between commodities in general (use the broad Goldman Sachs Commodity Index as a benchmark; the “GSCI” is heavily petroleum-weighted) and other key arenas such as the S+P 500, emerging stock marketplaces in general (“MXEF”; MSCI emerging stock markets index, from Morgan Stanley), and the broad real trade-weighted United States dollar (“TWD”) probably will persist at least for the next several months. Stocks, the dollar, and the GSCI probably will all move in a sideways path for the near term. The Fed and its allies do not want the S+P 500 to collapse twenty percent or more (and maybe not even much more than ten percent) from its May 2015 summit. They also do not want the TWD to break out above its September 2015 high (that barrier slightly exceeds the crucial March 2009 major top).

However, the bear move in the S+P 500 that emerged in May 2015 eventually will resume. The US dollar, though its rally from its July 2011 major low has paused, will remain relatively strong. OECD petroleum industry inventories in days coverage terms are very high from the historical perspective. Despite some crude oil production cuts in the United States and elsewhere, overall oil industry inventories likely will remain quite elevated through calendar 2016. So even if in the near term the broad GSCI rallies further from its current level (which likely would occur alongside a further modest S+P 500 ascent and dollar slide from their current altitudes), it probably ultimately will challenge its late August 2015 low.

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As the enrapturing Goldilocks Era ended, stocks peaked before commodities. The S+P 500’s major high was 10/11/07’s 1576, with that in emerging marketplaces (MXEF) alongside it on 11/1/07 at 1345. The broad GSCI made its major peak on 7/3/08 at 894 (the Bloomberg Commodity Index (“BCI”) top also was on 7/3/08, at 238.5). However, this was close in time to the S+P 500’s final peak at 1440 on 5/19/08 (and the MXEF’s final top at 1253 on 5/19/08), and not long after the TWD’s important April 2008 low near 84.2 (Fed H.10; monthly average). The GSCI’s 2/19/09 major low at 306 (BCI bottom 2/26/99 at 74.2) occurred near the S+P 500’s major bottom, 3/6/09 at 667, which occurred alongside the TWD’s March 2009 major top at 96.9. The MXEF’s major trough occurred 10/28/08 at 446, its final low 3/3/09 at 471.

During the worldwide economic recovery that set sail around 2009, neither commodities in general nor the MXEF surpassed their 2008 plateau.

The major high in commodities in general and the MXEF (spring 2011) and their important 2014 interim tops occurred before the S+P 500’s May 2015 height. This pattern differs from the 2007-08 one. In late spring 2015, the S+P 500 (as did China’s Shanghai Composite stock index) nevertheless joined (encouraged) the slump in the MXEF and commodities alongside an acceleration of US dollar strength. Thereafter, as in the speeding up of the global economic crisis after around mid-2008, the S+P 500, MXEF, and broad GSCI retreated together in conjunction with TWD appreciation. Also note the similar late August 2015 troughs in commodities and stocks. Though more recent data from the Fed on the TWD eventually will emerge, key US dollar cross rates in the past couple of weeks hint the broad TWD perhaps has slipped a bit since its September 2015 high.

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Is OPEC’s new policy of reducing high-cost (non-OPEC) production succeeding? Some, but not a great deal so far. Despite the dive in drilling rig counts, OECD days coverage levels and the worldwide supply/demand balance for 2015 and 2016 reveal plentiful petroleum.

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Commodities- Captivating Audiences (10-12-15)

DÉJÀ VU (ENCORE): US MARKETPLACE HISTORY © Leo Haviland October 4, 2015

CONCLUSION 

Via its rhetoric and September 2015 managerial decision to delay a Fed Funds rate increase, the Federal Reserve has battled to halt the S+P 500’s decline relative to its May 2015 peak at around ten percent. Hints by the European Central Bank and Japanese policymakers regarding their potential willingness to embark on additional quantitative easing interrelate with this Fed quest. However, the International Monetary Fund head warns: “global growth will likely be weaker this year than last, with only a modest acceleration expected in 2016”; “we see global growth that is disappointing and uneven” (“Managing the Transition to a Healthier Global Economy”; 9/30/15). The World Trade Organization cut its 2015 forecast of global trade expansion from 3.3 percent to 2.8pc, lowering that for 2016 to 3.9pc from 4.0pc (9/30/15). The WTO says risks to this prediction are on the downside.

 

Worldwide economic growth probably will be feebler than the IMF expects. In today’s intertwined international economy, this overall economic weakness, which is not confined to emerging/developing nations, will help to undermine American GDP growth. The S+P 500 will remain volatile, but it probably will continue to decline, eventually breaking beneath its August 2015 low. The broad real trade-weighted United States dollar will stay relatively strong.

 

Marketplace history for US stocks and other financial domains obviously need not repeat itself, either in whole or in part. A slump in the S+P 500 of roughly twenty percent or more from its spring 2015 pinnacle nevertheless probably would inspire memories of 2007-09. After all, not only is the dollar strong, but also emerging marketplace stocks and commodities “in general” have collapsed over the past few years, and notably since second half 2014.

 

The strong US dollar, the substantial tumble in emerging stock marketplaces, and the crash in commodities in general reflect (confirm; encourage) global economic weakness (slowing growth). Overall debt levels as a percentage of nominal GDP in America (and many other places) remain elevated despite the economic recovery since 2009. The United States has made no progress in reducing its long run federal fiscal deficit problem. These trends are ominous bearish indicators for the S+P 500. What other variables currently or potentially confirm the probability of economic weakness in the US (and elsewhere)? Let’s focus on the US economic and political scene.

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The broad real trade-weighted US dollar (“TWD”) established a major bottom at 80.5 in July 2011 (Federal Reserve, H.10; monthly average). By September 2015, it had run up to 97.9. Not only does September 2015 exceed March 2009’s 96.9 high, attained at the depths of the worldwide economic disaster (and alongside the S+P 500’s March 2009 major low at 667). The TWD’s 21.6 percent appreciation in its current bull move exceeds the 15.1pc TWD advance during from April 2008 to March 2009. Keep in mind that although the S+P 500’s major high in October 2007 at 1576 preceded April 2008’s TWD trough, its 5/19/08 final top at 1440 roughly coincided with that April 2008 TWD low.

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Review Moody’s Baa index of corporate bonds (this signpost includes all industries, not just the industrial sector; average maturity 30 years, minimum maturity 20 years; Federal Reserve, H.15). Despite the Fed’s continued unwillingness to raise the Federal Funds rate, such yield repression in recent months has not prevented the modest yet rather steady rise in medium-grade US corporate debt yields. In addition, the yield spread between that corporate debt index and the 30 year US Treasury bond has widened. Although these rate moves have not shifted as dramatically as they did during the worldwide financial crisis, they likewise warn of (confirm) US (and global) economic weakness.

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Deja Vu (Encore)- US Marketplace History (10-4-15)

MARKETPLACE TWISTS AND SHOUTS: AS THE WORLD TURNS © Leo Haviland September 10, 2015

CONCLUSION AND OVERVIEW

Not only have emerging marketplace growth rates slowed. Many sentinels fear the substantial fall in emerging marketplace equities and currencies has “reached crisis proportions”. (Financial Times, 9/8/15, p3; citing the Institute of International Finance). The World Bank’s chief economist warned the Federal Reserve risks creating “panic and turmoil” in emerging marketplaces if it raises rates in its September 2015 meeting (Financial Times, 9/9/15, p1). However, in today’s globalized economy, central bankers and other important regulators and politicians also fear insufficient growth in many advanced nations. They also worry about further substantial increases in the United States dollar and drops in stock benchmarks such as the S+P 500. Some probably dread that an international crisis akin to the 2007-09 one, even if much less devastating, is underway or may soon appear.

The verbal barrage recently unleashed since late August 2015 by key central bankers and their comrades displays their fears and goals regarding these financial fronts. In any case, their enthusiastic wordplay at times raises marketplace hopes significantly. Their windy talk perhaps for the near term will stabilize the dollar around its recent highs and stop benchmark stock marketplaces from substantially breaching the lows reached in the past few weeks.

However, the foundations of worldwide growth nevertheless remain shaky, despite about seven years of highly accommodative monetary policy by the Fed and its allies. In addition, substantial debt and leverage troubles still confront today’s intertwined global economy. Consequently, this magnificent rhetorical display aiming to boost real global economic growth, significantly alter currency patterns (reverse the dollar’s strength, or at least significantly slow its appreciation) and substantially rally (or at least successfully support) stocks probably will not achieve long-lasting success.

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The sustained rally in the broad real trade-weighted US dollar since mid-2011, and particularly its recent climb slightly beyond March 2009’s crucial peak, has played a key part in encouraging (confirming) weakness in emerging marketplace stocks and commodities “in general”. The S+P 500’s slide since its 5/20/15 pinnacle indicates that its major trend probably will not diverge significantly from those of emerging equity marketplaces.

Focusing on the trials and tribulations of emerging/developing countries and their stock and foreign exchange playgrounds indeed helps analysis of other marketplaces around the globe. However, concentrating on and comparing exchange rates of “commodity currencies” offers additional notable insight into various interrelated financial marketplace trends. “Commodity currencies”, associated with countries with large amounts of commodity exports, are not restricted to emerging nations. Commodity exports are significant to the economies of advanced nations such as Australia, Canada, and Norway, so they likewise can be labeled as commodity currencies.

Paying attention to the currency trends of important emerging and advanced nation commodity exporters highlights the similar trends among them during the 2007-09 worldwide economic disaster era as well as nowadays. Such past and current collective effective exchange rate weakness contrasts with the robust strength of the trade-weighted US dollar. The feebleness both in 2007-09 and in recent times for the commodity currency group, as it involves both advanced and emerging marketplace domains, hints at global (not merely emerging marketplace) crisis. The exchange rates of many commodity exporters are at or near their lows achieved during 2008-09.

Thus noteworthy rallies, if any, in these commodity (exporter) currencies from their recent depths will 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” probably will coincide with renewed (additional) firming of the US dollar. Such depreciation in the commodity currency camp likely will signal worsening of the current dangerous global economic situation and another round of declines in global stock marketplaces.

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Marketplace Twists and Shouts- as the World Turns (9-10-15)