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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MARKETPLACE VOLATILITY: CALM BEFORE THE STORM © Leo Haviland, May 8, 2017

“Danger always strikes when everything seems fine.” From the movie “Seven Samurai” (Akira Kurosawa, director)

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CONCLUSION AND OVERVIEW

In World War One on the Western front, after the initial stages in the horrific conflict, for an extended period little net change occurred in the location of the front lines dividing the entrenched armies. For a long time, neither camp won a decisive breakthrough victory despite significant planning, extensive maneuvers, ferocious battles, great expense, and ongoing long-running carnage. The contending forces were at roughly equal strength.

In a given marketplace, the bulls and bears can be locked in vicious combat for an extended period (with bullish and bearish factors in approximate balance). This will tend to keep prices in a (relatively) quiet overall sideways trend for quite some time, even if some short term fluctuations seem striking. If bullish forces (even if powerful) have only slightly more strength than bearish ones, the upward trend will tend to be slow; the bear slide will be rather peaceful if bearish factors possess only a slight advantage.

Breakouts are not inevitable in either war (or politics) or financial marketplaces.

However, the current relatively (outwardly) calm price situation for the S+P 500, United States 10 year government note, and the broad real trade-weighted US dollar probably will not persist. Volatility likely will increase in these playgrounds in the fairly near future. The recent bloody fall in the petroleum marketplace is one warning flag portending this prospective volatility jump.

The political scene represents another danger signal. Politics of course often reflects and influences economic outcomes (and vice versa). The political arena can signal that “lots is going on under the surface” in the economic realm. The assorted and substantial divisions and fierce fights within the American political scene (as well as similar quarrels overseas) also hint that increased volatility looms on the marketplace horizon. Populist conflict with the establishment (elites) has not disappeared in either America or overseas. How strong is the quality of the American President’s leadership, and how volatile is his temper, and how coherent and consistent are his policies? What if America and other key nations engage in passionate trade wars?

Current and forecast US federal budget deficits and burdens, already noteworthy, probably will explode if some form of President Trump’s murky tax “reform plan” becomes law. But what happens to the joyous “Trump rally” in stocks if his tax scheme and massive infrastructure spending plans are not enacted? What if US corporate earnings hoards buried overseas are not persuaded via beneficial tax legislation to return home? What if US share buyback rates slow significantly? “US share buyback plan approvals plunge” (Financial Times website, 5/1/17). Although stock valuations can appear very elevated relative for an extended period of time, some marketplace captains nowadays proclaim that some measures show stock valuations are on the lofty side. Besides, legislative gridlock itself can spark changes in or accelerate existing economic trends.

The long run path for US government interest rate yields probably is upward, despite their recent near-term sideways motion. The Federal Reserve Board is gradually ending yield repression and boosting rates, and it may be willing to permit “overshooting” relative to its beloved two percent inflation target. The Fed murmurs about reducing the size of its balance sheet. Recent very lax monetary policy by the European Central Bank (including negative rates and money printing) has continued despite the Fed’s slight policy tightening. What if the ECB cautions that it will become less accommodative? Also, watch GDP growth trends, inflation levels, and interest rates elsewhere; for example, note China’s effort to rein in excesses in shadow banking and its property playground.

Judging from recent months, the US dollar’s majestic bull trend seems to have halted. What happens to other marketplaces if the dollar begins a noteworthy retreat? Suppose foreigners become less willing to purchase, or become net sellers of, US Treasury securities?

Will conflicts involving North Korea, the Middle East, or elsewhere (note internal strife in Russia and Venezuela) escalate?

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From the long run historical vantage point, the VIX volatility index for the S+P 500 is very low nowadays. A sustained upward charge in this yardstick probably will help confirm the existence of a top in the S+P 500. In this context, watch US consumer confidence trends. Enthusiastic peaks in consumer confidence at times have occurred around the time as those in the S+P 500; consumer despair has occurred close to a bottom in the S+P 500.

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Marketplace Volatility- Calm Before the Storm (5-8-17)

US NATURAL GAS: HOME ON THE RANGE © Leo Haviland, April 15, 2017

The classic American song “Home on the Range” requests:
“Oh give me a home where the buffalo roam,
Where the deer and the antelope play,
Where seldom is heard a discouraging word,
And the skies are not cloudy all day.”

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CONCLUSION AND OVERVIEW

Did the major bull trend for NYMEX natural gas (nearest futures continuation) that started with 3/4/16’s dismal 1.611 depth finish with 12/28/16’s 3.994 top? Although it is a difficult call, assuming normal weather and moderate United States economic growth, it will be hard for the NYMEX front month price to exceed the high neighboring 4.00 by much (if at all) over the next few months. However, significant support rests around 2.50 (lows 8/12/16 at 2.523, 11/9/16 at 2.546, and 2/22/17 at 2.522; high 1/8/16 at 2.495).

The bull trends that began around first quarter 2012 (4/19/12’s 1.902) and during 1Q16 display many similarities, including their commencement following substantial oversupply conditions. Yet bearish signs exist in regard to the 2016 bull charge. The distance and duration travelled by 2016’s bull climb up to its December 2016 height, though less than average for major bull natural gas moves in NYMEX natural gas (nearest futures continuation), was within the historical range. Several previous major peaks in NYMEX natural gas occurred in calendar December. Current US natural gas inventories are above average. The CFTC’s net long commercial position is very high and consequently vulnerable to liquidation. And the 2012 rally showed an interim high in springtime (5/1/13 at 4.444).

As always, audiences should be cautious about linking natural gas price patterns with those in petroleum and other financial marketplaces. And apparent convergence/divergence (lead/lag) relationships between marketplaces can change, sometimes dramatically. However, these other playgrounds currently suggest that natural gas will struggle to advance above 12/28/16’s 3.994 anytime soon. See “The Oil Battlefield: Evolution, Relationships, and Prices” (4/10/17). Note also “Eurozone Under Siege: Currency Trends and Politics” (3/20/17), “Easing Comes, Easing Goes: US Government Interest Rates” (3/13/17), “Rhetoric and Global Currency Trends” (2/13/17), “Gold and Goldilocks: 2017 Marketplaces” (1/10/17), “Back to the Future: the Marketplace Time Machine” (12/13/16). Even the price gap from 3.568 (1/3/17) to 3.690 (12/30/16) represents a formidable near term roadblock.

However, what does looking further around the corner reveal? Everyone knows “much can happen” over the next six months and thereafter. Yet US natural gas days coverage at the end of inventory build season 2017 (October 2017) probably will be slightly bullish, with that (in the admittedly even cloudier distant horizon) at end build season 2018 more so. Thus an eventual retest of a ceiling around 4.00/4.10 is a reasonable conjecture. Looking ahead over the next several months, it probably will take a much colder than normal winter 2017-18 for the price to stay above 4.00/4.10 for long, and especially to spike above resistance at 4.45 to 4.55. Recall that winter 2013-14 required a freeze and resultant sharp stock draw to soar above the May 2013 and 12/23/13 (4.532) highs. Remember too the price collapse from 11/10/14’s 4.544.

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US Natural Gas- Home on the Range (4-15-17)

THE OIL BATTLEFIELD: EVOLUTION, RELATIONSHIPS, AND PRICES © Leo Haviland, April 10, 2017

In “Street Fighting Man”, The Rolling Stones sing:
“Everywhere I hear the sound of marching, charging feet, boy
‘Cause summer’s here and the time is right for fighting in the street, boy”.

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OVERVIEW AND CONCLUSION

The continued determination of leading OPEC members (such as Saudi Arabia) and some key non-OPEC oil producing nations (such as Russia) to subdue their crude oil output will underpin petroleum prices. The Saudis and their allies will not readily sacrifice their long-sought production restraint agreement achieved with several important non-OPEC exporters in late 2016. Assuming supply discipline by key producers and moderate global economic growth, supply/demand estimates indicate that OECD (advanced nations such as the United States) industry inventories by the end of calendar 2018 will have declined to around “normal” levels in days coverage terms.

Even gigantic producers such as Saudi Arabia and Russia (for political as well as economic reasons) need to generate at least moderate income. Given its planned sale of shares in Aramco via an initial public offering, does Saudi Arabia want a renewed collapse in petroleum prices to $40 Brent/North Sea or less? Given its need for revenues, global political ambitions, and signs of domestic unrest, does Russia want petroleum prices to plummet sharply?

Other political worries help to bolster oil prices. Some (as usual) relate to the Middle East. North Korea’s nuclear program captures headlines. What if Venezuelan political turmoil results in a supply interruption?

However, current OECD petroleum industry inventories remain far above average. Even by end calendar 2017, they probably will be several days above normal. And end calendar 2018 obviously is a long time from now. Compliance with the OPEC/non-OPEC output guidelines by several individual countries has not been universal. And going forward, production discipline should not be taken for granted. Will Iraq and Iran moderate their production? What if Nigerian or Libyan production increases? Also, the net noncommercial position in the petroleum complex, which played a very important part in the explosive oil bull move in oil that began in first quarter 2016, is still quite high and vulnerable to liquidation.

History reveals that petroleum price levels and trends intertwine with currency, interest rate, stock and other commodity marketplaces (particularly base and precious metals) in a variety of ways. The current interrelationship between petroleum and these other arenas probably warns that it will be difficult for petroleum prices to sustain advances much above their first quarter 2017 highs.

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Using NYMEX crude oil (nearest futures continuation) as a benchmark, petroleum prices for the next several months likely will stay in a broad range. Major support exists at around $38.00/$42.00. Significant resistance exists between $52.00/$55.25.

However, assuming ordinary international economic growth, what if OPEC/non-OPEC production discipline continues for the next year and a half (or marketplace faith increases that such restraint will persist)? In this scenario, if (and this “if” is a very important if) no sustained significant weakness in global stock marketplaces (and intertwining/confirming patterns in the US dollar, interest rates, and metals) develops, then NYMEX crude oil prices probably will attack the $60.75/$65.00 range.

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The Oil Battlefield- Evolution, Relationships, and Prices (4-10-17)

BACK TO THE FUTURE: THE MARKETPLACE TIME MACHINE © Leo Haviland December 13, 2016

“Face this world. Learn its ways, watch it, be careful of too hasty guesses at its meaning. In the end you will find clues to it all.” H.G. Wells, “The Time Machine”

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OVERVIEW AND CONCLUSION

Cultural observers inevitably select between and analyze diverse variables to explain and predict economic, political, and social history, including relationships and trends and outcomes, in a variety of often-competing fashions. So marketplace and political visionaries inescapably interpret and forecast probable consequences for Trump’s landmark Presidential triumph in America’s 11/8/16 national election, in which Republicans also captured control of both the Senate and House of Representatives, in various ways. And of course in today’s interdependent world, the American political and economic domain intertwines closely with realms elsewhere.

The extent to which important financial playgrounds intertwine and their alleged trends converge or diverge (or, lead or lag) are matters of opinion, as are perspectives on and reasons for such relationships and movements. And marketplace history need not repeat itself, either entirely or even partly. Convergence and divergence patterns can change, sometimes dramatically.

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Let’s focus on several key global financial marketplace playgrounds. Review relationships in recent years between the United States Treasury 10 year note, the broad real trade-weighted US dollar (“TWD”; Federal Reserve Board, H.10; monthly average, March 1973=100), the S+P 500, emerging marketplace stocks (MSCI Emerging Stock Markets Index, from Morgan Stanley; “MXEF”), and commodities in general (broad S&P Goldman Sachs Commodity Index; “GSCI”).

In the aftermath of America’s November election, it is noteworthy that whereas the S+P 500 has ascended to all-time highs, the MXEF lurks below its pre-election interim high, 9/7/16’s 930 (and 11/9/16’s 907; 11/14/16 low 837). In addition, the MXEF’s September 2016 top stands beneath its important 4/27/15 high (1069), its 9/4/14 elevation (1104), and earlier major tops. (1212 on 4/27/11; 1345 on 11/1/07).

This current divergence between the S+P 500 and MXEF recalls (resembles) the similar disparate major trends in those marketplaces from spring 2011 through spring 2015. During that span, whereas the S+P 500 continued its major upward trend, the MXEF did not. Afterwards, from spring 2015 highs down to first quarter 2016 troughs and up to around mid-summer 2016 (S+P 500 summer 2016 high 8/15/16 at 2194), the S+P 500 and MXEF “traded together”.

It is also significant that since America’s election departed, UST 10 year rates have continued to march upward and the TWD has climbed to new highs. These interest rate and currency patterns, should they continue further, and when viewed alongside the divergence between the S+P 500 and the MXEF, warn of eventual S+P 500 weakness. Marketplace history of course is not marketplace destiny. But it is particularly significant that TWD breakouts in 2014 and 2015 above critical resistance barriers eventually accompanied S+P 500 weakness. Thus at some point the advance of the TWD above its January 2016 plateau may interrelate with an important interim (and perhaps a major) high in the S+P 500. If the S+P 500 indeed weakens, the MXEF probably will slump alongside of it (as occurred from spring 2015 to the 1Q16 bottoms).

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Many money (“investment”) managers in the equity sphere have their performance evaluated on a calendar year basis. As the S+P 500 upswing has persisted after the election, perhaps some of these players are choosing to move cash in their portfolio into US stocks as end December 2016 approaches. To some extent, the ongoing rally in the S+P 500 probably reflects the relatively strong American economy. Compare European economic growth, for example. Share buybacks and still relatively low interest rates remain among the relevant bullish factors for the S+P 500. To some extent, perhaps the ongoing dollar strength reflects faith in America’s economy, at least relative to that of many other regions. Washington’s recent regime change, as it promises substantial infrastructure spending and some hefty tax cuts, likely represents and will result in a more expansionary fiscal policy, which could enhance corporate earnings, particularly for American-based firms.

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The relative strength of the S+P 500 benchmark in comparison to (its price divergence from) the emerging stock marketplace’s MXEF signpost in part may reflect the relative economic and political stability of the United States (despite America’s notable internal divisions).

However, also look at the Presidential winner’s slogan, “Make America Great Again!” (Compare “America First”). Such ardent “populist” wordplay joins to rhetoric which promotes nationalist (American) objectives considerably more strongly than the globalist/internationalist ideologies embraced by “the establishment” (elites). Even if over time advanced as well as emerging/developing nations benefited substantially from globalism and increasingly free markets and free trade, arguably developing nations (especially net exporters) particularly profited. The incoming American President and many of his allies not only are more hostile in general to globalism notions than the preceding Administration, but even have spoken of renegotiating (or walking away from) trade agreements and imposing (or raising) tariffs. Therefore, the renewed divergence between the S+P 500 and MXEF in recent months also probably partly reflects the declining popularity of globalist/internationalist dogmas (free market, free trade) in the US and many other nations.

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Back to the Future- the Marketplace Time Machine (12-13-16 )