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 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)

ADVENTURES IN WONDERLAND: COMMODITY CURRENCIES © Leo Haviland September 26, 2016

“For, you see, so many out-of-the way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” Lewis Carroll, “Alice’s Adventures in Wonderland” (Chapter I)

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OVERVIEW AND CONCLUSION

Concentrating on and comparing exchange rates of “commodity currencies” offers insight into assorted interrelated marketplace relationships. Since the shocking eruption and terrifying acceleration of the global economic crisis in late 2007/2008, the major price trends for eight “commodity currencies” roughly (and of course not precisely) have ventured forward in similar fashion on a broad real effective exchange rate (“EER”) basis. Over that time, this basket of assorted commodity currencies generally has intertwined in various ways with very significant trends in the broad real trade-weighted United States dollar (“TWD”), emerging marketplace stocks in general, and broad commodity indices such as the S&P Goldman Sachs Commodity Index (“GSCI”).

The substantial rally in the broad real trade-weighted United States dollar (“TWD”) that embarked in mid-2011 played a key part in encouraging (confirming) and accelerating bear movements in emerging marketplace stocks and commodities “in general”. The S+P 500’s monumental rally over its spring 2011 interim high diverged for about four years from the trends in emerging equity realms and commodities. However, the TWD’s late 2015 ascent above its March 2009 peak was a crucial event. This dollar climb helped propel the S+P 500 downhill following 5/20/15’s 2135 pinnacle in conjunction with the emerging stock marketplace and commodity trends.

In January/February2016, these linked price patterns reversed. The TWD has depreciated modestly and stocks (emerging marketplaces as well as those of America and other advanced nations) rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield initially ascended from its 1Q16 low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. These current marketplace interrelationships (“roughly trading together”) probably will persist for the near term, regardless of whether the pattern of mid-2015 to first quarter 2016 resumes or that since mid-first quarter 2016 continues. Marketplace history of course need not entirely or even substantially repeat itself.

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Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are important to the economies of advanced countries such as Australia, Canada, and Norway, the currencies of these lands likewise can be labeled as commodity currencies.

The bearish currency paths (effective exchange rate basis) of key emerging and advanced nation commodity exporters up to first quarter 2016 resembled the similar trends among them during the 2007-09 worldwide economic disaster era. However, these commodity currencies depreciated notably more in that recent dive than during 2007-09’s extraordinary turmoil. In addition, the lows attained by most of them decisively pierced the floors achieved about seven years previously. Moreover, the TWD rallied more sharply in its bull leap to its January 2016 elevation than it did during the past crisis.

The feebleness up to the 1Q16 lows for the commodity currency group, as it involved both advanced and emerging marketplace domains (as it did in 2007-09), reflected an ongoing global (not merely emerging marketplace) crisis. Substantial debt and leverage troubles still confront today’s intertwined worldwide economy. The bear trip of many commodity currencies into early first quarter 2016, especially as it occurred alongside big bear moves in emerging marketplace stocks (and in the S+P 500 and other advanced stock battlefields) and despite long-running extremely lax monetary policies, underlined the fragility of the relatively feeble global GDP recovery.

Therefore key central bank wizards, concerned about slowing real GDP and terrified by “too low” inflation (or deflation) risks, have fought bravely to stop the TWD from appreciating beyond its January 2016 top and struggled nobly to encourage rallies in the S+P 500 and related stock marketplaces. Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. Indeed, rallies in the S+P 500 (and real estate) may help inflation expectations (and inflation signposts monitored by central banks such as consumer prices) to crawl upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices as well as appreciation by commodity currencies in general.

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Noteworthy rallies in these commodity (exporter) currencies from their recent depths 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” likely will coincide with renewed firming of the broad real trade-weighted US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the still-dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.

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“He was an honest Man, and a good Sailor, but a little too positive in his own Opinions, which was the Cause of his Destruction, as it hath been of many others.” “Gulliver’s Travels”, by Jonathan Swift (Part IV, “A Voyage to the Country of the Houyhnhnms”, chapter 1)

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Looking forward, numerous entangled and competing economic and political variables generate a substantial challenge for explaining and predicting the interconnected financial marketplaces in general, including the commodity currency landscape. The commodity currency group as a whole (“CC”) has appreciated roughly twelve percent from its late calendar 2015/first quarter 2016 depth. What does a review of the adventures in commodity currencies since the assorted late 2015/1Q16 bottoms in the context of other marketplace benchmarks portend? Commodity currencies in general probably are establishing a sideways range. The overall camp of EERs (apart from what may happen to individual ones) will not rally much (if at all) above recent highs. The CC camp eventually likely will renew its overall depreciation, with the various EERs heading toward their noteworthy lows attained several months ago.

Although the CC rally since its 1Q16 bottom retraces some of its prior collapse, the TWD itself has dropped only modestly from its peak and thus remains quite strong. Moreover, note the fall in the broad GSCI (and the petroleum complex) since early June 2016. A still-robust TWD not only underlines potential for renewed weakness in the CC complex, but also confirms commodity feebleness and warns of risks to the recent bull move in emerging marketplace stocks (and even to the astounding S+P 500). China is a key commodity importer. As China’s EER continues to ebb (while Japan’s has strengthened), the ability of the CC clan to produce only a moderate overall percentage rally in their collective EER to date hints that world economic growth remains sluggish. Emerging marketplace stocks in general, despite their rally since 1Q16, remain substantially beneath their September 2014 summit.

Although leading global central banks devotedly retain highly accommodative policies such as yield repression and money printing, the inability of US Treasury 10 year note yield to rise much above its 7/6/16 low at 1.32 percent tends to confirm this picture of unimpressive (and even slowing) global expansion. Optimists underscore the S+P 500’s rally to a new peak on 8/15/16 at 2194 from its 1Q16 trough. Yet that new record elevation merely neighbors May 2015’s plateau, exceeding it by just 2.8 percent.

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There is significant marketplace and political talk of trade wars, growing protectionism, and anti-globalization. Much of this wordplay links to populist challenges to the so-called establishment (elites). But even some establishment politicians have become less enamored of free trade. Fears of trade conflicts and protectionist barriers weigh on the CC domain as a whole.

For commodity currencies, much depends on Federal Reserve policy. At present, although the Fed did not boost rates in September, it currently seems fairly likely to do so in December 2016 (assuming no dramatic drop in stocks occurs before then). Especially as the European Central Bank, Bank of England, and Bank of Japan remain married to their highly accommodative schemes, this Fed action will help to rally the TWD and thus tend to weaken the CC armada. Nevertheless, the Fed and other central banks probably will fight to keep the dollar from surpassing its 1Q16 summit; doing so helps to protect stock (and real estate) prices and thus to reduce populist political advances.

The result of the US Presidential election on November 8 naturally remains uncertain. Unlike the EERs of the other seven commodity currencies, the Mexico EER has slumped beneath its first quarter 2016 low. Mexico faces severe domestic political challenges, and ongoing low oil prices wound its economy. However, the increasing potential for a Trump victory and resulting trade conflicts and immigration disputes also have helped to push Mexico’s EER downhill. The Mexican peso crisis of the early 1990s should not be forgotten.

Significant ongoing American political divisions risk further weakness in the US dollar, regardless of who wins the exciting Presidential sweepstakes. The US has a long run budget challenge regardless of who emerges victorious. Though the TWD issue is complex, a Trump victory likely is more bearish for the TWD than a Clinton one. Comments from overseas (and numerous domestic) leaders suggest lack of confidence in Trump’s abilities and policies, which arguably would be reflected in reduced acquisition (or net selling) of dollar-denominated assets such as US government securities (and corporate debt) and American stocks. Trump’s budget proposals, if enacted, will likely expand the deficit considerably and thus probably would encourage interest rate rises. A Trump triumph likely would be bearish for the US dollar in general, even if the dollar rallied against the Mexican peso on a cross rate basis. However, though numerous respected forecasters predict a close outcome, Clinton probably will defeat Trump. In any case, all else equal, a Democratic victory increases the odds of a Fed rate hike in the near term.

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Adventures in Wonderland- Commodity Currencies (9-26-16)