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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GREAT EXPECTATIONS: THE FEDERAL RESERVE, INFLATION, AND POLITICS © Leo Haviland March 20, 2016

“I went home, with new matter for my thoughts, though with no relief from the old.” Charles Dickens’s novel, “Great Expectations” (Chapter 48)

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OVERVIEW

A deluge of money printing and ardent yield repression by leading central banks of course are not the only important potential sources of inflation. Assorted marketplace guides proclaim a variety of opinions regarding relevant inflationary factors and their relationships and consequences. And everyone knows that economic, political, and social conditions, programs, and challenges differ, often significantly, between countries.

Central banking mandates and interpretations regarding them are not precisely the same. Central banks do not have an easy job. In his story “A Christmas Carol” (Stave 3), Charles Dickens states: “it is always the person not in the predicament who knows what ought to have been done in it, and would unquestionably have done it too”.

However, all the bankers preach devotion to their mandate. The Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and the Swedish central bank for the past several years have shared a faith and proclaimed a gospel that achieving and sustaining about two percent inflation is a “good” goal. Thus many leading global central banks believe “too low” inflation (and of course deflation) is “not good” or is “bad”.

Central banking decisions, actions, and rhetoric around the globe have become increasingly interdependent since the eruption of the international economic disaster of 2007-09. Banking captains nobly stress their willingness to do whatever it takes and whatever they must, frequently pointing to their beloved toolkit of monetary measures. Thus they embarked on highly accommodative monetary policies such as yield repression and gigantic money printing and generously provided forward guidance. Yet despite their long-running and devoted odyssey aimed at achieving and sustaining the praiseworthy target of two percent inflation, the armada of central banks thus far has failed in its inflationary quest. Their great expectations have not generated great results.

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Since inflation (including too low inflation and deflation) concerns and wordplay are so significant for current marketplace analysis and trends, it pays to select and assess variables indicating whether a sufficient and sustained quantity of inflation is appearing or may soon do so. Observers can differ in their choices and viewpoints.

“Inflation”, however defined and measured, may appear earlier in one nation or region than another. Moreover, just because some or sufficient inflation (or deflation) emerges in one territory, they need not do so elsewhere. In any case, let’s focus on America. Not only does the United States play a crucial role on the world economic and political stage, but so does the Federal Reserve Board. Stock, interest rate, currency, and commodity marketplaces avidly monitor Fed statements, signals, and behavior. Finally, America nowadays apparently is (however slowly) showing signs of being a key leader in international GDP growth.

 

US POLITICS: BLEAK HOUSE

In Dickens’s “Great Expectations”, a character says: “’Ask no questions, and you’ll be told no lies.’” (Chapter 2)

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Most Americans have high (or at least moderate) confidence in and trust the US Federal Reserve Board. In contrast, many Americans nowadays have rather low expectations regarding US politicians “in general”. They distrust and have rather little confidence in most US political leaders. They question the willingness and ability of such representatives to work together to achieve desirable goals.

Focusing on central banks and their monetary measures aimed at achieving sufficient inflation should not cause observers to overlook political causes, including fiscal ones, of inflation and higher interest rates. And interest rates can rise for reasons other than, or in conjunction with, inflation pressures.

In any case, weak national political leadership and substantial political divisions do not guarantee rising interest rates, but they can encourage that development. They also can help to generate a weaker dollar.

The United States currently is a house divided. Income and asset inequality, immigration debates, views on health care, opinions on the appropriate size and role of government, international trade topics, climate change, and other issues inflame America’s political theater. In election year 2016, as in the prior few years, there has been greater than normal partisan strife.

These ongoing significant US political divisions risk further weakness in the US dollar. Underscore the current conflict between the Republican Congress and the Democratic President. Though the American political process has a long way to go until election season 2016 concludes, partisan warfare likely will persist. The House likely will remain Republican; the President probably will be a Democrat (Hillary Clinton). Control of the Senate is a close call.

The battles within the Republican camp look likely to persist for at least a few more months. Will there be a convention fight? “Trump warns Republican elders of ‘riots’ if they fail to back his candidacy”, headlines the Financial Times (3/17/16, p3). Although Trump has great confidence in his own talents, at present the majority of Americans apparently do not share that confidence. Suppose Donald Trump captures the Republican Presidential nomination. Imagine that he wins the Presidency. Comments from overseas leaders suggest lack of faith in Trump’s abilities and policies. Such foreign attitudes are a bearish factor for the dollar.

An ability to transcend partisan divisions only via big spending (fiscal irresponsibility) does not eliminate substantial underlying political factionalism. The massive addition to future US budget deficits agreed upon by Congress and the President in late December 2015 probably will tend to push up interest rates and is a bearish factor for the dollar. (See the Congressional Budget Office’s “Summary of The Budget and Economic Outlook: 2016 to 2026; 1/25/16. See also the NY Times, 12/17/15, pA29; NY Times, 12/19/15, ppA1, 13). In any event, America has a looming long run debt problem. And don’t debtors tend to like inflation?

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Great Expectations- the Federal Reserve, Inflation, and Politics (3-20-16)

AS THE WORLD BURNS: MARKETPLACES AND CENTRAL BANKS © Leo Haviland February 8, 2016

“To every thing there is a season, and a time to every purpose under the heaven.” Ecclesiastes, Chapter 3, verse 1 (King James Version)

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OVERVIEW AND CONCLUSION

To spark and sustain the worldwide economic recovery that began around first half 2009, the Federal Reserve Board and other major central banks warmly embraced highly accommodative monetary policies such as yield repression and money printing (quantitative easing). Who would want to repeat the horrors of the hellish worldwide economic disaster that erupted in 2007 and worsened dramatically after mid-year 2008? Therefore, often in recent years, after significant hints of feeble growth (or recession) or insufficient inflation (or signs of that evil, deflation) appeared, these high priests of the economic system offered further rhetoric or additional (or new) action to accomplish their aims and restore confidence. Such central banking efforts often succeeded. In any case, financial congregations (especially in American and other stock marketplaces) generally loudly hoped for, fervently encouraged, and joyfully praised such central bank rescue efforts.

However, around mid-2015, advanced nation stock benchmarks such as the S+P 500 peaked. Moreover, despite central bank wordplay and vigorous policy action, bear moves in these stock domains have persisted alongside renewed signs of economic weakness and “too low” inflation. Ongoing collapses in emerging marketplace stocks “in general”, the major bear move in commodities in general, and falling yields in the 10 year United States Treasury note accompanied tumbles in the S+P 500 and other advanced nation equities. The major bull move in the broad, real trade-weighted US dollar, which began in July 2011, has played a key role in these intertwined trends.

In the past few weeks, key global central banks once again preached sermons or engaged in actions aimed not only at creating sufficient inflation (defeating deflation) and ensuring sustained economic recovery. Stock marketplaces initially ascended higher after these recent efforts (recall their lows around January 20, 2016), and the US dollar weakened somewhat. The Federal Reserve Board and other guardian angels probably did not want the S+P 500 and related stock marketplaces to crash under their January 2016 lows. In addition, they probably did not want the United States dollar bull move to extend much (if at all) beyond its January 2016 high.

However, and although not much time has passed since these recent ardent central bank efforts, the S+P 500 and other stock landmarks have resumed their slumps. Ominously, many stock marketplaces have fallen under their August/September 2015 lows. In addition, the dollar still remains strong, commodities weak (despite talk about and hopes for OPEC petroleum production cuts), and US government yields (in a flight to quality) depressed. This vista warns that the Fed and other revered central banks are finding it more and more difficult to accomplish their various policy aims. It suggests that people (including devoted investors in US stocks) increasingly are losing faith in the ability of central banks to produce desirable outcomes.

Although it is a difficult marketplace call, these ongoing and interwoven marketplace trends probably will continue for a while longer. Admittedly, if these marketplace patterns persist and especially if they extend, watchers should beware of even more dramatic (and perhaps coordinated) central bank rescue action.

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For additional currency, stock, interest rate, and commodity marketplace analysis, see essays such as “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16), “Japanese Yen: Currency Adventures (2007-09 Revisited)” (1/14/16), “US Natural Gas” Caught in the Middle” (especially pp2-3), “America: A House Divided” (12/7/15), “Two-Stepping: US Government Securities” (12/1/16), “Commodities: Captivating Audiences” (10/12/15), and “Déjà Vu (Encore): US Marketplace History” (10/4/15).

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As the World Burns- Marketplaces and Central Banks (2-8-16)

US NATURAL GAS: CAUGHT IN THE MIDDLE © Leo Haviland February 1, 2016

“So much trouble in the world…
The way earthly thin’s are goin’
Anything can happen”. Bob Marley and the Wailers, “So Much Trouble in the World”

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CONCLUSION AND OVERVIEW

In economics, politics, and other cultural fields, players create a variety of competing perspectives. They select between and arrange a variety of diverse variables to produce their arguments and conclusions. In commodity, currency, interest rate, and stock marketplaces, bulls and bears therefore tell a variety of contending stories. In natural gas as in other marketplace battlegrounds, an array of speakers creates assorted viewpoints fighting to attract attention and persuade eager audiences.

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“Dangerous Times in US Natural Gas” (11/2/15) concluded: “The probable range for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a relatively broad avenue between major support at 1.65/1.90 and significant resistance at 3.10/3.45.” The NYMEX natural gas major bear trend that followed 2/24/14’s major peak at 6.493 smashed through 4/27/15’s 2.443 minor low, 10/27/15’s 1.948 interim low, and the last prior major bottom (1.902 on 4/19/12), crashing to 1.684 on 12/18/15. Assuming normal weather for the balance of winter 2015-16 and spring/summer 2016, this range probably will persist for the next several months as well.

The high since December 2015’s low is 1/8/16’s 2.495. What would enable US natural gas prices (nearest futures) to sustain travels over 3.00? It probably will require significantly colder temperatures for the balance of winter, a blazing spring and summer, or (and especially) noteworthy cuts in natural gas production. Stronger than expected US (and global) economic growth would help rally natural gas prices. A major bull move in commodities “in general” (and especially in the petroleum complex) and a significant reversal of the major bull move in the broad real trade-weighted US dollar to some extent would assist a bull move in natural gas.

However, a somewhat significant containment risk (supplies too high relative to available storage capacity), nevertheless exists for US natural gas around the end of calendar 2016 build season. If containment fears grow stronger, and especially if actual problems develop, the 1.65 floor could be broken. In addition, US economic weakness (especially if accompanied by similar slumps around the globe), renewed feebleness in commodities (particularly in the petroleum world), and a continued strong trade-weighted US dollar would help to keep US natural gas prices under pressure.

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Historical analysis indicates the major bear trend in US natural gas from February 2014 to December 2015 voyaged sufficiently far in price and duration terms to conclude that a trend shift from bearish to sideways occurred with December 2015’s low. However, the dramatic February 2014 to October 2015 price tumble is not the greatest or longest on record. So a further descent in NYMEX natural gas would not be unprecedented.

Anticipated end March 2016 gas inventories probably will be high in both arithmetic (bcf) and days coverage terms, a bearish consideration. However, based upon US Energy Information Administration (EIA) anticipated end October 2016’s 52.1 days coverage level slides 3.4 days beneath the 2006-15 end October average of 55.5 days and 1.5 days under 1990-2015’s 53.6 days.

Nevertheless, modest days coverage levels for October 2016 does not eliminate a containment danger; one should focus closely on arithmetic levels. The days coverage perspective of course does not provide a complete viewpoint on the natural gas inventory situation and related price risks. After all, arithmetic quantities (bcf) of gas must be put in arithmetic storage places. Especially if little new natural gas storage capacity has been (and is being) created, containment problems could emerge around the end of the 2016 inventory build season (roughly around end October 2016). And currently, the containment risks for the end of build season 2016 are not insubstantial; this bearish potentiality weighs on prices.

Yet sustained low natural gas prices could reduce production more than some soothsayers forecast. This would help reduce containment risks. Note the big drop in US natural gas rig counts. A sustained slump back under 2.00 might boost electric power switching from coal to gas.

Everyone knows that much can happen between now and 2017, whether in natural gas or elsewhere. Yet based upon the EIA’s bcf prediction, natural gas days coverage at end October 2017 probably will be less than average, a bullish factor. And the EIA’s bcf arithmetic inventory forecast for end October 2017 implies there probably will not be a containment problem around the end of build season 2017.

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Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” marketplaces and variables. Trend changes in NYMEX natural gas need not roughly coincide with one in the petroleum complex or commodities in general, or currency, stock, or interest rate playgrounds.

However, especially since mid-to-late June 2014 (NYMEX natural gas nearest futures interim high 6/16/14 at 4.886) and into calendar 2015 (gas interim top 5/19/15 at 3.105), bearish natural gas price movements intertwined with those in the petroleum complex (and commodities in general) and the bull move in the broad real trade-weighted US dollar. Such natural gas retreats to some extent paralleled slumps in emerging marketplace stocks. Note also the timing coincidence between May 2015’s natural gas top and the S+P 500’s 5/20/15 peak at 2135. In regard to the timing of the S+P 500’s May 2015 high, note that the nominal broad trade-weighted dollar (Federal Reserve, H.10, which has daily data) made an interim low at 112.8 on 5/15/15 before appreciating further.

See “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16), “Japanese Yen: Currency Adventures (2007-09 Revisited)” (1/14/16), “Commodities: Captivating Audiences” (10/12/15), and various related essays.

Natural gas prices indeed can trade “on their own”. But suppose a sustained bull move finally appeared in commodities “in general” (especially petroleum). Worldwide OECD industry and United States petroleum stocks are very elevated. OPEC next meets 6/2/16. It remains determined to capture market share and induce output cutbacks by high-cost oil producers around the world (including some American and Canadian ones). But is crude oil under 30 dollars a barrel “irrational”? The chairman of Saudi Arabia’s state oil company, Aramco said: “’The market has overshot on the low side and it is inevitable that it will start turning up’”, predicting higher prices by the end of the year.” (Financial Times, 1/22/16, p20). Will OPEC reach agreement with non-OPEC nations such as Russia to boost prices? Might OPEC hold an emergency meeting?

Key global central banks battle to ensure economic growth, create sufficient inflation (avoid deflation), and reduce unemployment. The European Central Bank recently suggested it might ease its already highly accommodative policies further (ECB Statement and Press Conference, 1/21/16). The Bank of Japan recently (1/29/16) eased its lax monetary policy even further, adopting negative interest rates. Will the Federal Reserve delay additional interest rate increases?

The Fed and its allies probably do not want the S+P 500 and related stock marketplaces to crash under their January 2016 lows. They also probably do not want the dollar’s bull move to extend much (if at all) beyond its January 2016 high. The US dollar’s major bull trend has been long and powerful. From its July 2011 major low around 80.5 to the recent January 2016 high at 101.2, the broad real trade-weighted dollar has climbed 25.8 percent (Federal Reserve, H.10; monthly average). What will happen to natural gas prices if the S+P 500 (and emerging marketplace stocks “in general”) rallied substantially? What if the US broad real trade-weighted dollar weakens notably (even if it remains relatively strong)?

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US Natural Gas- Caught in the Middle (2-1-16)

JAPANESE YEN: CURRENCY ADVENTURES (2007-09 REVISITED) © Leo Haviland January 14, 2016

In Akira Kurosawa’s famous film “Yojimbo”, a farmer remarks: “Everybody’s after easy money.”

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CONCLUSION

In recent months, much marketplace and media attention regarding foreign exchange arenas has focused on the travels of the United States dollar, the Chinese renminbi, the Euro FX, and an assortment of emerging marketplace currencies. The Japanese Yen has captured relatively little of the limelight. But it should.

Marketplace history of course need not repeat itself, either completely or even partly, but players should not overlook or dismiss parallels. The Japanese Yen’s rally in the past few months reflects current (and points to further) worldwide economic weakness. Recall the Yen’s rally during the worldwide economic crisis of 2007-09.

During the acceleration of the global economic disaster of 2007-09, both the Japanese Yen and the United States dollar made major bull moves on a broad real trade-weighted (effective exchange rate) basis. The Yen tumbled dramatically from its 2011/2012 summits. But that bear move probably ceased in mid-2015. The modest rally in the Yen since June 2015 has coincided with the continued advance of the dollar’s broad real trade-weighted major bull move. Moreover, as during the 2007-09 crisis span, the Yen’s effective exchange rate climb has accompanied a rally in its cross rate against the dollar.

Not only is the current Yen bull trend a bearish sign for world economic growth. It also is a bearish indicator for the Nikkei, S+P 500, and other key stock benchmarks. As massive Yen depreciation alongside quantitative and qualitative easing (QQE) helped to propel the Nikkei (and thereby other stock marketplaces such as the S+P 500 higher), growing Yen strength (all else equal) tends to push the Nikkei and other stock realms lower. The Yen march upward since June 2015 coincides with slides in equities, a drop in the US Treasury 10 year note yield, and renewed sharp falls in commodities “in general” (and petroleum in particular).

BOTTOM LINES

On 1/14/16, the S+P 500 touched a low at 1879, very close to its 8/24/15 low at 1867. It then rallied, closing around 1922. The Nikkei’s 1/14/16 low at 16944 hovers right above its 9/29/15 trough. What about the Shanghai Composite? Its low on 1/14/16 at 2868 neighbors its 8/26/15 depth at 2851.

Previous essays have discussed the Federal Reserve Board’s effort to slow, halt, or reverse marketplace declines in the S+P 500. For example, see “Playing Percentages: Stock Marketplace Games” (7/13/15). In the current environment, stock slumps of around ten and 20 percent from an important plateau (such as the May 2015 one) are important guideline levels for the Fed. The Fed’s preferred method to stop downward moves of around ten percent is talk (wordplay) rather than action. Falls of around 20 percent (or more) increase the odds of action (perhaps even renewed quantitative easing).

Thus today’s speech from James Bullard, the President of the St. Louis Fed, is rhetoric aiming to support US (and perhaps other) stocks (“Oil Prices, Inflation and U.S. Monetary Policy”).

Such charming wordplay from the Fed (and its central banking allies) can induce rallies in the S+P 500. However, it probably will not stop the S+P 500 from resuming its bear move and breaking beneath its August 2015 bottom. The Nikkei will fall under its 9/29/15 low, and the Shanghai Composite will venture beneath its late August 2015 bottom. The broad real TWD will remain strong for at least the near term; the Japan EER will continue its modest rally, as will the Yen’s advance against the US dollar.

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For additional currency, stock, interest rate, and commodity marketplace analysis, see “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16) and earlier essays.

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Japanese Yen- Currency Adventures (2007-09 Revisited) (1-14-16)