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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US NATURAL GAS IN WINTER 2012-13: DRAWING CONCLUSIONS © Leo Haviland, December 17, 2012

The current bear trend in US natural gas (NYMEX nearest futures continuation basis) that began in late November 2012 at 393 will continue. Assuming normal cold winter weather, the price probably will slump to around the 300 to 285 range. When will the price quit sledding downhill? Though it may only be an initial significant bottom, look for an important low in calendar January or February 2013, probably around futures expiration.

End October 2012 inventories were around 3923bcf according to the EIA barometer (Short-Term Energy Outlook, December 2012; “STEO”). Therefore end October’s 56.3 days of coverage rest about 2.6 days above the 53.7 day long run (1990-2011) average. Though not a big overload relative to that long run average, it is sufficient to place some burden on prices.

Moreover, look at the likely increasing relative oversupply in days coverage terms versus the 1990-2011 average for the given calendar month as time passes from end October 2012 to end March 2013. At end March 2013, forecast inventories of 1873bcf (December STEO, Table 5a) represent about 26.9 days coverage (1873bcf divided by 69.70bcf/d). This jumps about 4.7 days over the 22.2 day long run average for that month, more than October’s 2.6 days.

Suppose end March 2013 inventories are 1800bcf. The excess relative to the long run average is 3.6 days (25.8 less 22.2). This still hovers above the 2.6 day end October 2012 difference.

Despite the ongoing near term downtrend, and absent another very mild winter akin to 2011-12’s, a NYMEX natural gas price collapse close to the 190 abyss of April 2012 (or even the 1/23/12 and 6/14/12 depths near 220) is unlikely.

Based on 2012’s substantial switching from coal to natural gas, particularly in the electric power territory, natural gas demand probably will mount if prices sustain levels beneath (roughly) 275. In addition, another factor probably will mitigate price declines. Concentrate on days coverage holdings in recent years.

The desired level of natural gas inventory holding in recent years arguably has climbed relative to that long run average. Consequently the oversupply of October 2012 through March 2013 probably is less than many observers believe.

Natural-Gas-Chart-(NYMEX-nearest-futures)-(12-17-12)

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US Natural Gas in Winter 2012-13- Drawing Conclusions (12-17-12)
Natural Gas Chart (NYMEX nearest futures) (12-17-12)

LIVING ON BORROWED TIME- AMERICA THE DEBTOR © Leo Haviland November 12, 2012

Economic experts, political pundits, and marketplace wizards have made much of America’s looming federal “fiscal cliff”. It has become commonplace to declare that not only for the near term, but also for the misty long run horizon, difficult decisions await the Washington leadership. Of course the nation has assets. However, there has been much less emphasis on America’s “debt hole”, the enormous indebtedness of America as a whole (not just the federal government situation) as a percentage of nominal GDP.

The debt growth trend in recent decades and its mountainous overall level argue that a culture of debt (and entitlement) exists in the United States. Rising debt as a percentage of GDP preceded its acceleration during the glorious Goldilocks Era that ended around mid to late 2007. Since the so-called recovery began to motor forward in 2009, overall United States indebtedness has not declined much. Though consumer indebtedness has declined modestly in the past few years, federal indebtedness has skyrocketed. Thus in a representative government, people (“we, the people”) correspondingly remain very indebted.

And is the President or any of the Congressional Democrats or Republicans in their undoubtedly brilliant “plans” talking of the merit of engineering budget surpluses at any time in the next several years (if ever)? In addition, smoothly singing its mandate hymn, the financial fire-fighting Federal Reserve devotedly has assisted debtors by repressing interest rate yields, printing money (quantitative easing), and other measures. This highly accommodative and sustained central banking liberality not only assists debtors. The Fed thereby provides short term benefits such as boosting GDP, rallying the US stock marketplace, reducing unemployment, and buying time for a fiscal solution. Might there be some long run costs to such supposedly prudent Fed actions? For example, these generally popular Fed policies nevertheless also reflect and encourage the debt culture and delay difficult (responsible) political decision-making and consequently some amount of painful reckoning.

What is the more probable outlook? Perhaps patching over the US’s debt problem, particularly on the federal landscape, will occur, thus easing fears regarding the outbreak of a financial disaster. On the federal fiscal front, the passing of and results of the 2012 election may spark bipartisan efforts that result in a temporary fix of existing difficulties. However, as before the election, there is a Democratic President, Democratic Senate, and a Republican House of Representatives. Remember the lyrics of a famous anthem by The Who: “Meet the new boss Same as the old boss” (“Won’t Get Fooled Again”). And in the Senate, the Democratic majority is several seats short of the 60 votes necessary to stop legislative debates. Even to induce an attractive temporary fix, it is more likely that fearsome existing debt troubles probably will have to worsen further. And don’t overlook the need to raise the debt ceiling again.
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ECONOMIC AND POLITICAL LINES (c) Leo Haviland October 22, 2012

Highlight two International Monetary Fund comments in its recently unveiled “Fiscal Monitor” (October 2012). “With downside risks in the global economy mounting, policymakers must once again tread the narrow path that will permit them to continue strengthening the public finances while avoiding an excessive withdrawal of fiscal support for a still-fragile economic recovery.” (page ix). And: “In most advanced economies, the near-term fiscal stance has to walk the fine line between continued adjustment and supporting the economy.” (p6).

This IMF rhetoric, which many other luminaries embrace, of “tread the narrow path” and “walk the fine line” offers hope for the global economy and for the United States in particular. Maybe subtle financial and political sorcerers somehow can escape the dilemma of an economic downturn (too slow growth or recession) and the consequences of additional (irresponsible) substantial deficit spending! Have faith that wise guardians can discover a middle way to evade further suffering!

In the amazing Goldilocks Era, didn’t substantial and growing worldwide debt and leverage joyously promise and provide nearly limitless opportunity for almost everyone (“us”) to prosper with very little (or at least manageable) risk? In the aftermath of the wonderful Goldilocks epoch, should we believe that the implications of significant leverage and mountainous debt accumulation can be magically pain-free, at least over some misty medium term or long run vista?

Despite such entrancing sermons of narrow paths and fine lines from many respected central banking and political guides, economic and political pilgrims should ask if such a path or line exists in practice. It probably doesn’t. Is there really a way for the United States to avoid the looming fiscal cliff and other long run deficit challenges without significant hardship? Probably not.

Most observers are not focusing closely on the potential composition of the Senate. They should. The Senate election result probably will have notable consequences for legislative action (or inaction) in many domains. For example, think of the troubling fiscal cliff and the terrifying long run deficit problems.

Clairvoyants on balance believe the Democrats probably will maintain control of the Senate. Even if the Republicans gain an edge in the Senate, it would be very surprising for them to capture anything close to 60 seats. According to Senate rules, to end debate (halt filibusters) on a legislative proposal (bill), 60 of the 100 Senators must agree to do so (invoke cloture). The sixty votes do not have to all be from the same party. Nevertheless, the failure of a Senate majority party to control 60 or more Senate seats means that its opponents generally can block the majority party’s legislative efforts.

So suppose the House is Republican, and the Senate is Democratic (or even imagine a modest Republican majority). Given such Congressional division, it will be a major challenge for the parties to readily resolve issues over which they disagree dramatically, such as on how to repair the federal deficit disaster. In that situation, the party membership of the winner of the duel for the Presidency matters much less. After all, for the past several years, the Republican House and the Democratic Senate stubbornly have faced each other. With these battle lines, there has been at best little progress on reducing the deficit. Why should having a Republican President instead of a Democratic one change this partisan deadlock in any notable fashion?

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Economic and Political Lines (10-22-12)
Chart- Commodities- Broad GSCI (10-22-12)

FED FIXATIONS: INTEREST RATES © Leo Haviland September 24, 2012

A key United States interest rate benchmark, the 10 year Treasury note, probably established a major bottom around 1.40 percent in late July 2012.

The Federal Reserve Board’s fixing of the Federal Funds rate at exceptionally low levels admittedly restrains ascents in US government yields. Its benevolent promise and determination to maintain the Funds rate almost flat on the ground until at least mid-2015 encourages faith that government yields generally will remain depressed. Also, heightened flight to quality fears and nervous leaps in recessionary worries may push the 10 year UST challenge back toward or even slightly beneath its July low. The Eurozone crisis, for example, has not disappeared. America’s 2013 federal “fiscal cliff” looms large on the horizon.

However, all else equal, a flood of money printing tends to increase inflation and thus interest rates. And all else equal, cracking or crumbling creditworthiness for a borrower- whether an individual, corporation, or government- tends to boost the interest rate charged that borrower. America nowadays confronts another round of Federal Reserve money printing and has made little headway in resolving its awesome fiscal problems.

The Federal Reserve’s long rumored (fervently hoped for) and recently decreed (9/13/12) third cascade of money printing, QE3, probably will be massive, perhaps over one trillion dollars. Over time, this deluge will help to boost US government (and other) interest rates.

Moreover, given a generous desire to avoid the fiscal cliff and a downturn, Congress probably will continue its huge deficit spending spree. Not only has America become habituated to deficit spending, debt (including personal debt), and assorted forms of entitlement. How many people volunteer nowadays to pay sufficiently more taxes to solve- or at least significantly reduce- near term (as well as long run) national fiscal troubles? For a debtor nation such as America, running substantial budget deficits alongside elevated (and thus expanding) government debt as a percentage of nominal GDP raises the risk of a severe fiscal trial. The arrival of this crisis probably will occur relatively soon rather than at some vague date many years down the road. In any event, this visit will tend to raise US government rates. The US may be an economic fortress, but that does not guarantee that its creditworthiness will be unquestioned or unchallenged. Witness Europe in recent years; also recollect the debt sagas of many emerging marketplaces.

What are key levels for the US Treasury 10 year note? Start at the low end and walk higher.

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Fed Fixations- Interest Rates (9-24-12)
US Treasury 10 Year Note Chart (9-24-12)