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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THE NEW WORLD?! US ELECTION AFTERMATH © Leo Haviland November 15, 2016

In “The New World”, the band X sings:
“Honest to goodness
The bars weren’t open this morning
They must have been voting for the president of something…
It was better before
Before they voted for what’s-his-name
This was supposed to be the new world”.

“Don’t stop thinking about tomorrow
Don’t stop, it’ll soon be here
It’ll be, better than before
Yesterday’s gone, yesterday’s gone”. Fleetwood Mac, “Don’t Stop”

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OVERVIEW AND CONCLUSION

What marketplace consequences will ensue from Donald Trump’s surprising “populist” victory? Much obviously depends on how successfully the new President implements his campaign agenda. Some aspects of his plans in principle and practice require clarification. And he might elect to change his current political views and aims. However, at present one should assume this leader generally will seek to accomplish the broad outlines of his recent messages, particularly in the economic arena.

In trade and several other matters, the President retains substantial freedom relative to Congress. However, even though the Republicans control the Senate and House of Representatives, passage of the new President’s proposed legislation is not guaranteed. The Republican Party has significant divisions. Senate Democrats, as they control well over 40 seats, likely can block many executive branch proposals.

Moreover, in a globalized and multipolar world, America’s political and economic fields, even after dramatic change such as that represented by Trump’s triumph, of course do not move independently of other realms. In addition, numerous assorted and entangled variables and trends, not just those closely linked to the 2016 election and American political (economic) scene, influence financial marketplaces in the United States and elsewhere. Besides, benchmark interest rate, currency, stock, and commodity benchmarks themselves intertwine. The economic game, like the political one, moves as it plays.

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With such complexities and caveats in mind, let’s concentrate on three key parts of the American and global financial marketplace pictures, the United States Treasury 10 year note, the broad real trade-weighted US dollar (“TWD”), and the S+P 500. The long run yield trend for the UST probably is up. In the near term, the dollar will challenge and perhaps break modestly above its January 2016 high. However, as time passes and the new President and his friends fight to implement his policies, the trade-weighted dollar probably will embark upon a notable bear trend. Though it is a very difficult call, the S+P 500 probably will not surpass 8/15/16’s record high at 2194 by more than five percent.

To some extent, and although not exclusively, the patterns of rising interest rates and the (eventually) weaker dollar probably will derive from a growing lack of domestic and international confidence in American political and economic leadership and policies. America’s ongoing severe political and other cultural divisions likely will interrelate with this eroding trust. The passing and outcome of America’s Election Day 11/8/16 did not bury the nation’s substantial conflicts. Widespread support for Trump and Sanders showed that American “populist” ideologies, whether within so-called right wing/conservative congregations or left wing/liberal fraternities, likely will not soon surrender their attractiveness or fervor. But the “establishment” (elites) have not fled the battleground or abandoned their doctrines.

UPCOMING MARKETPLACE ADVENTURES

“Fasten your seatbelts, it’s going to be a bumpy night!” advises Margo Channing in the movie “All About Eve” (Joseph Mankiewicz, director)

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The aftermath of Trump’s victory saw the UST 10 year note yield jump sharply, breaking above 3/16/16’s 2.00 percent. Yet recall that UST yields had been climbing higher several months prior to his win; recall 7/6/16’s 1.32 percent bottom. US inflation expectations also have ascended since early summer. The St. Louis Fed’s measure of expected inflation (on average) for the five year period that begins five years from today has risen from 1.41 percent (7/5/16) to over two pc recently (11/10/16’s 2.06pc).

Why should US Treasury 10 year note yields keep rising from current levels around 2.25 percent?

First, America’s debt was rather lofty and likely to trend higher over the next decade (and probably thereafter) even before Trump’s win. See the Congressional Budget Office’s “An Update to the Budget and Economic Outlook: 2016 to 2026” (8/23/16; this study did not include Trump’s plans). Second, and very importantly, most experts believe Trump’s (Republican) tax and spending (think of infrastructure projects to help make America great again) proposals, if enacted, will result in even more massive budgets deficits. Gaping budget holes, especially those lasting for several years, represent a demand for cash to fill them. Who will do so, and at what price? For many months (a long time before the November 2016 election), foreign official institutions have been notable and consistent net sellers of UST notes and bonds (next Treasury International System/TIC release is 11/16/16). See the essay “Running for Cover: Foreign Official Holdings of US Treasury Securities” (10/13/16).

Moreover, the Federal Reserve Board, which has for several years repressed the Federal Funds rate (and thus the government yield curve) at artificially low levels, again has hinted it will gradually normalize rates. The next Fed meeting is 12/13-14/16. Admittedly, inflation benchmarks such as the consumer price index and personal consumption expenditures have not marched above the Fed’s beloved two percent target. The Fed nevertheless nowadays likely will be more inclined to push rates higher. Not only is the election past, but also the likelihood of monumental US fiscal stimulus (huge budget deficits) encourages rate hikes. In addition, headline unemployment is around the Fed’s goal. Asset prices such as stocks (S+P 500) and real estate have soared from their international economic disaster depths.

In his political apprenticeship on the campaign trails, Trump criticized Fed rate suppression. Perhaps he should have been more careful regarding the higher policy rates for which he implicitly asked. Since Trump and others criticized the Fed for keeping rates on the ground floor, they hardly can complain (at least for a while) about upward Federal Funds rate moves.

In addition, keep in mind that the Fed for several years engaged in mammoth money printing (quantitative easing). Although the Fed ceased QE, it has not reversed its money printing actions. Thus though some inflation measures (such as the CPI) are low, even before the election 2016 outcome, there arguably was potential for eventual inflation ascents as a consequence of the Fed’s ardent QE monetary stimulus. Assuming the new US political regime enacts hefty individual (and corporate) tax cuts and embarks on its infrastructure schemes, Trump’s festive tax and spending party will intertwine with this earlier Fed money printing extravaganza. Also, the European Central Bank and Bank of Japan continue to print money.

Signs of US wage inflation have appeared. There remains some pressure to boost the minimum wage. Would a big infrastructure plan, if it occurs a time of low headline unemployment, lift labor prices? Also, suppose the US deports a significant number of illegal (undocumented foreign) workers; that will tend to push wages and thus interest rates higher, though gurus can quarrel as to how much.

Suppose inflation marches higher and sustains levels around the Fed’s two percent weathervane. To (finally) give savers (creditors) a decent return relative to inflation, UST rates obviously should be above that goal. Focus on the UST 10 year. A one pc premium (100 basis points) makes the UST 10 year yield 3.00pc, well above current levels. The 6/11/15 top was 2.50pc. Above that stands 1/2/14’s 3.05pc peak. A two pc premium makes the UST 4.00pc. Obviously, no guarantee exists that the inflation level, if it advances, will halt at two percent (or that the Fed immediately will fight vigorously to contain inflation once it touches two pc).

Suppose US government (and many other related) interest rates rise from low levels. Will current debt holders start to run for the exits? Supply from those sellers of “old” debt may supplement the US government’s effort to sell “new” securities to finance tax cuts and spending programs.

Finally, suppose America imposes tariffs to ensure “fair” trade. Viewed alone, this perhaps will tend to increase the price of goods and services sold in the US. Of course other nations may respond. Some may cut prices to retain access to the American marketplace. Or, a genuine trade war could help weaken world (and US) GDP and keep prices and rates low.

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The New World- US Election Aftermath (11-15-16)

US ELECTION 2016: ROLLING AND TUMBLING © Leo Haviland November 6, 2016

Muddy Waters’ blues song “Rollin’ and Tumblin’” declares:
“Well, I rolled and I tumbled, cried the whole night long
Well, I woke up this mornin’, didn’t know right from wrong”

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OVERVIEW

Who will or should be the next American President? Will the Democrat camp, the Republican crew, or neither party, capture both the Senate and the House of Representatives? In the aftermath of 2016’s fevered campaign, will the apparently defeated Presidential candidate seriously complain of rigging or request recounts?

In any case, America’s Election Day 11/8/16 results probably will not repair, remedy, or resolve the nation’s severe political and other cultural divisions. In contrast to such ideological and practical splits, marketplace preachers generally agree the Presidential (especially) and Senate/House voting outcomes probably will have important price consequences for American (and related) stock and interest rate arenas as well as the United States dollar and many commodities. Yet financial wizards (as do politicians) differ in their perspectives and gospels. Thus assorted monetary apostles and their devoted partisans nevertheless heatedly debate what the near term and long run financial and other economic repercussions of US Election 2016 will be for America and around the globe.

Despite the uncertainty of US 11/8/16 political outcomes and the variety of competing viewpoints and rhetoric regarding related economic (commercial, financial) implications, why not offer an opinion regarding important price levels to watch in several key marketplaces? That price framework offers subjective guidance for monitoring, assessing, and dealing with intertwined political and economic results, trends, and risks.

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The record high for the S+P 500 is 8/15/16’s 2194 (a 20pc rally from 2/11/16’s bottom at 1810 is 2172; 1/20/16 low 1812). A five percent rally over this is about 2304. The important 5/20/15 high was 2135. A five percent fall from 8/15/16’s plateau is 2084 (note 11/4/16’s close at 2085); 2082 was 12/19/15’s notable drop-off point. A 10pc retreat from the August 2016 summit gives 1975 (1992 was the 6/27/16 low; the UK held its Brexit referendum on 6/23/16), and a 20pc dive 1755. Note the price gap around 2040 (6/28/16 to 6/29/16). Support also may emerge around 1870 (8/24/15 low 1867; 9/29/15 trough 1872).

The shocking Brexit “Leave” result did not merely reflect populist gains. The S+P 500 responded with a sharp (although brief) 5.7pc breakdown (6/23/16 at 2113 to 6/27/16’s low).

PARTING SHOTS

“Here once the embattled farmers stood,
And fired the shot heard round the world.” Ralph Waldo Emerson’s “Concord Hymn” (1837), referring to the first shot of the American Revolutionary War

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Though America’s official Thanksgiving Day arrives 11/24/16, many Americans and others will be thankful with the departure of Election Day 11/8/16.

Suppose Clinton wins the Presidency. Her campaign proposals include increasing taxation on the top-earning “haves” and a more burdensome capital gains tax regime. Suppose Trump triumphs. Most experts believe his tax and spending proposals, if enacted, will result in massive budget deficits. And whoever prevails, a substantial potential for ongoing sectarian conflict and legislative gridlock remains.

Most cultural observers would characterize Clinton’s victory as one for the “establishment” congregation. Some would deem a Trump win revolutionary (or reactionary). In any case, the widespread support for Trump and Sanders indicates that American “populist” viewpoints, whether within the so-called right wing/conservative domain or the left wing/liberal realm, probably will not lose much of their attractiveness or fervor anytime soon.

Besides, significant populist movements (whether rightist, leftist, or some other label) exist in Europe and elsewhere. Therefore populist enthusiasm probably will continue to cause some nervous days and sleepless nights for much of the international economic and political establishment (elite). Political and economic divisions, turmoil, and fears will continue to produce occasional dramas within entangled stock, interest rate, currency, and commodity (and real estate) marketplaces.

Suppose persuasive populist parties campaigning on a platform of “Change” win overall national power (or at least substantial practical influence) in one or more key countries. To what extent would such success encourage or confirm a dramatic shift in long run patterns for many marketplaces?

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US Election 2016- Rolling and Tumbling (11-6-16)

PLAYING IN THE BAND: OPEC AND OIL PRICES © Leo Haviland October 25, 2016

Not long after July 2008’s major peak in crude oil prices, the European Central Bank President, Jean-Claude Trichet, declared that “predictions of the future prices of commodities are probably the most difficult exercise you can imagine.” (“Introductory Remarks with Q&A”, 8/7/08)

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CONCLUSION

OPEC, finally fearful of sustained low petroleum prices and renewed price slumps, troubled by elevated oil production and lofty inventories, formally met 9/28/16 in Algiers. The ministers established a crude oil production target range of 32.5 to 33.0 million barrels per day, beneath estimated September 2016 production of around 33.5mmbd. This agreement reflects a Saudi Arabian policy shift. That nation and its allies apparently will no longer countenance (risk) benchmark Brent/North Sea crude oil prices under around $35 to $40 per barrel for an extended period. OPEC ministers have engaged in dialogue with non-OPEC oil producers regarding output schemes. OPEC gathers 11/30/16 in Vienna. Output apparently will not be cut prior to the November meeting (Financial Times, 9/30/16, p20).

OPEC’s rhetoric and general policy approach likely will help support Brent/North Sea at prices around a $35-$40 range. However, for the near term, OPEC’s actions thus far in the context of the global supply/demand picture probably make it challenging for petroleum prices to sustain elevations more than a few dollars above their mid-October 2016 levels (on a nearest futures continuation basis, Brent/North Sea crude oil around $54, NYMEX around $52). Why? First, OPEC has not adopted specific country-based output reductions. Moreover, given ongoing quarrels within the organization, whether it will do so in November 2016 or even implement them in practice is uncertain.

In addition, actual OPEC crude production of 32.5/33.0mmbd probably will begin cutting oil stockpiles only by sometime around mid-2017.

Ongoing serious dialogue with crucial non-OPEC producers such as Russia represents a victory for OPEC. Suppose production cuts by notable non-OPEC nations combined with genuine OPEC discipline; that probably would help to rally prices above recent highs. The Saudi Arabian oil minister claimed that many nations will join OPEC in cutting production (Bloomberg, 10/19/16). However, he did not name names. If non-OPEC countries support OPEC measures, it is not nearly as clear as the Saudi minister claims that non-OPEC lands will slash output. A production freeze by Russia (and perhaps Mexico and other emerging marketplaces) is more likely, but even that is not certain. Russia’s President suggests his country is “ready to join the joint measures [freeze or production cut] to cap production” (Financial Times, 10/11/16, p20). Recall the 2/16/16 output freeze conversation between Saudi Arabia, Qatar, Venezuela, and Russia did not result in a production cut.

THE PETROLEUM RALLY: IS AN INTERMISSION APPROACHING?

Key resistance for NYMEX crude oil (nearest futures continuation) is the $51 to $52 band. The recent high was 10/19/16’s $51.93. This inched over 6/9/16’s $51.67 and represents nearly a 100 percent rally from February 2016’s $26.05 bottom. Brent/North Sea’s (nearest futures) high was 10/10/16 at $53.73 (6/9/16 top $52.86). Although petroleum and American natural gas do not always travel in similar fashion (“move together”), this crude oil timing parallels 10/13/16’s NYMEX natural gas top around 3.37. Although NYMEX crude oil prices have not fallen far from 10/19/16’s elevation, a five percent drop gives about $49.35, a ten pc one around $6.75.

Remember that OPEC, despite its enthusiastic September 2016 wordplay, and despite its making progress in dialogue with some non-OPEC members, does not have a well-defined (specific) production agreement (with specific quotas) yet. Its current crude oil output remains high.

A weaker US dollar arguably assists petroleum price rallies. But although the broad real US TWD (monthly average, Federal Reserve, H.10) is moderately weaker than its January 2016 pinnacle, the TWD remains strong. At 97.9 in September 2016, it stands above March 2009’s 96.8 major top (S+P 500 major low in March 2009).

The new record high in the S+P 500, 8/15/16’s 2194, surpasses 5/20/15’s noteworthy pinnacle at 2135, but not decisively (only by 2.8pc). The MXEF (emerging stock marketplaces) remains beneath its 4/27/15 top at 1069 (as well as previous highs in its downtrend: 1212 on 4/27/11 and 1104 on 9/4/14).

There are some signs of rising government interest rates, at least in the United States. The UST 10 year note is around 1.75 percent, up from 7/6/16’s 1.32pc. See “Running for Cover: Foreign Official Holdings of US Treasury Securities” (10/13/16). Although the Fed probably will not raise the Federal Funds rate in its 11/1-2/16 meeting (prior to the 11/8/16 US election), it may elect to do so in its 12/13-14/16 gathering.

Global economic growth remains relatively sluggish. Significant sovereign or corporate debt problems exist in many important countries.

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Sometimes significant patterns and heights in net noncommercial petroleum positions can be in rhythm with important oil price trends. The current net noncommercial long position in petroleum is extremely substantial and probably is vulnerable to liquidation. A widespread run for the exits by such noncommercial longs likely would undermine petroleum prices.

 

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Playing in the Band- OPEC and Oil Prices (10-25-16)

RUNNING FOR COVER: FOREIGN OFFICIAL HOLDINGS OF US TREASURY SECURITIES © Leo Haviland October 13, 2016

“I know what gold does to men’s souls,” says a grizzled prospector in the movie, “The Treasure of the Sierra Madre” (John Huston, director)

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OVERVIEW AND CONCLUSION

Foreigners hold a massive quantity and substantial share of United States Treasury securities. Such foreign ownership of and trading activity in UST therefore is an important variable for US government interest rate levels and trends, which in turn intertwine with yield elevations and movements in other American debt playgrounds. And of course to some extent, and in various (and sometimes changing) fashions and degrees, given the importance of America within the global economy, UST yields interrelate with and influence yields overseas, as well as assorted currency, stock, and commodity marketplace levels and trends.

Federal Reserve Board (and other key central bank) policy, inflation trends (in America and other major nations), equity adventures (for the S+P 500 and other important advanced nation and emerging marketplace benchmarks), and the strength of the US dollar will influence decisions by current and potential overseas owners of UST. So will numerous other economic as well as political factors such as the America’s November 8, 2016 election and its aftermath.

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Many marketplace visionaries focus primarily on the grand total of foreign holdings of United States Treasury securities, ascents and descents in that sum, and that amount’s relative share of US debt outstanding. This indeed can provide observers with helpful information.

Yet in regard to UST ownership by overseas entities, the foreign official and private sectors do not necessarily behave the same way. Sometimes this distinction appears significant enough over time to monitor closely.

Thus concentrating on the grand total of foreign holdings and shifts in that statistic risk overlooking an important pattern which appeared in recent months within those holdings. What is that pattern? The net foreign official holdings have fallen not only as a percentage of overall foreign holdings, but also in absolute levels. This substantial official exodus is important.

Suppose not only that such noteworthy net UST liquidation by the foreign official sector persists, but also that the overseas private sector decides to reduce its net buying significantly, or to become a net seller. All else equal, that will help to push UST yields higher.

Selecting variables regarding as well as presenting explanations (“causes”) for marketplace and other cultural phenomena reflect the subjective viewpoint and rhetoric of the given storyteller. And marketplace history does not necessarily entirely or even partly repeat itself. Net foreign official selling (or net buying) of US Treasury securities of course is not always or the only factor relevant to American stock marketplace trends. Marketplace participants nevertheless should note that sometimes over roughly the past two decades (since 1997), substantial net foreign official selling of UST can be associated with a decline in the S+P 500.

US federal budget deficits indeed have plummeted from their pinnacles reached due to the global economic disaster. But they have not disappeared. And they probably will increase in subsequent years. So looking forward (and all else equal), if substantial net foreign selling of UST by both the foreign official and private groups exists, that will make it increasingly difficult for the American government to finance looming budget deficits. Will this eventually encourage UST yield rises? Perhaps the US public will help to fill the deficit financing gap, but it may take higher rates (better real returns) than currently exist to inspire them.

 

A DELUGE OF DEBT

“‘A Ti-tan iv Fi-nance,’ said Mr. Dooley, ‘is a man that’s got more money thin he can carry without bein’ disordherly. They’se no intoxicant in th’ wurruld, Hinnissy, like money.’” (Finley Peter Dunne’s “Mr. Dooley” commenting “On Wall Street”; spelling as in the original)

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There are various measures of US federal (national) indebtedness. Also, reports regarding breakdowns in debt ownership at times vary in their presentation. But regardless of the analytical perspective embraced, foreign ownership of UST is substantial in absolute and percentage of debt terms.

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Running for Cover- Foreign Official Holdings of US Treasury Securities (10-13-16)