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: A VIEW OF THE PAST, A VISION OF A FUTURE © Leo Haviland, January 21, 2017

Bob Dylan’s song “All Along the Watchtower” states:
“There must be some way out of here,’ said the joker to the thief
“There’s too much confusion, I can’t get no relief”.

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CONCLUSION AND OVERVIEW

Is the major bull trend for NYMEX natural gas (nearest futures continuation) that began in early March 2016 finished? Probably not, though it is a difficult call. In any event, assuming normal weather and moderate United States economic growth, it nevertheless will be very hard for the NYMEX front month price to exceed 12/28/16’s high bordering 4.00 by much (if at all) anytime soon.

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The probable longer run bullish US natural gas inventory situation suggests the likelihood of eventual further moderate rises in NYMEX natural gas prices (nearest futures continuation). The days coverage perspective underlines this, particularly in light of anticipated stockpiles at end October 2017 and thereafter. A comparison of the recent bull move that started in March 2016 to the prior major bull move inaugurated on 4/19/12 at 1.902 offers insight into past and potential trends.

Marketplace history does not necessarily repeat itself, whether entirely, partly, or at all. But all else equal, since 2016’s natural gas rally was less than average in time and (percentage) distance terms, this also indicates the move that commenced in March 2016 probably has more time and price to run. NYMEX natural gas (nearest futures continuation) rallied about 148 percent in about ten months from its 3/4/16 bottom at 1.611 to its 12/28/16 high at 3.994. The distance and duration for eleven major bull moves in NYMEX natural gas (nearest futures continuation) since trading began in 1990 is about 246 percent and twelve months and three weeks.

Some bull voyages took a very long time to complete. For example, the April 2012 to February 2014 advance lasted about twenty-two months and a week. September 2003-December 2005’s flight took 26 months and three weeks; the August 1998 to December 2000 adventure was 28 months.

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However, the move above December 2016’s height may not be substantial and could take at least a few months to occur. Why?

First, US natural gas inventories in days coverage terms at end March 2017, though they likely will slip slightly below those at end March 2013, nevertheless will hover around end March long run averages.

A few major (over 120 percent) bull charges were shorter in extent or briefer in time than 2016’s leap, so an assertion that the 2016 rally ended in December 2016 is not “unreasonable”. Besides, the NYMEX natural gas 26 year trading history is relatively short; compare wheat or the Dow Jones Industrial Average. In any case, one big bull move voyaged up around 123.5 percent, another 129.2pc. For the time horizon parameter, three major bull moves from 1990 to the present were completed quickly. One finished in about two months, another in about three and a half months, and a third in four months. In this context, and although marketplace history is not marketplace destiny, several major peaks in NYMEX natural gas occurred in calendar December, with another one in early January. NYMEX natural gas often attains its major peaks and valleys around the day of the actual nearest futures contract expiration.

The CFTC’s Commitments of Traders reveals a massive net noncommercial long position in the natural gas complex. An elevated net noncommercial position in natural gas has often (but not always) been associated with key marketplace trend changes. The current net noncommercial long position in the petroleum complex likewise is extremely large from the historical standpoint. Both natural gas and petroleum currently are vulnerable to liquidation by the net noncommercial long fraternity, which would tend to pressure prices.

For predicting NYMEX natural gas price trends, monitor those in the petroleum complex. NYMEX crude oil’s 2/11/16 trough at $26.05 (nearest futures continuation) occurred shortly before the NYMEX natural gas bottom on 3/4/16 (and alongside the S+P 500’s 2/11/16 trough at 1810). NYMEX crude oil made important interim lows in its rally, $39.19 on 8/3/16 and $42.20 on 11/14/16; critical interim lows in NYMEX natural gas occurred near in time to these. Remember 8/12/16’s 2.523 and 11/9/16’s 2.546. NYMEX crude oil’s recent high occurred 1/3/17 at $55.24, adjacent in time to 12/28/16’s 3.994 natural gas elevation.

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US Natural Gas- a View of the Past, a Vision of a Future (1-21-17)

GOLD AND GOLDILOCKS: 2017 MARKETPLACES © Leo Haviland, January 10, 2017

“I think I’ll go to sleep and dream about piles of gold getting bigger and bigger and bigger.” Fred C. Dobbs, in the 1948 movie, “The Treasure of the Sierra Madre” (John Huston, director)

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CONCLUSION

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. Apparent convergence/divergence and lead/lag patterns between currency, interest rate, stock, and commodity marketplaces nevertheless offer guidance to players seeking to explain, predict, or profit from financial price movements. Marketplace history need not repeat itself, either entirely or even in part. Thus these relationships can change, sometimes dramatically. Fundamental supply/demand factors and trends are not written in stone. And competing historians and clairvoyants do not necessarily share the same perspectives or tell the same stories regarding either a given financial playground or its relationships to other arenas.

The relationships between gold and the US dollar, as well as those between gold and other commodities and stock and interest rate marketplaces, are complex. Often, gold prices travel in roughly similar fashion to those of base metals in general and the overall petroleum complex. Yet sometimes substantial fears regarding financial meltdown (asset value destruction) or striking worries about political evolution or disruption also can influence gold’s supply/demand and price profile, and thereby gold’s interrelations with commodities as well as currency and securities marketplaces. In any case, significant gold price trend changes often precede or roughly coincide (or “confirm”) those elsewhere.

Gold probably established an important low not long ago, at $1124 on 12/15/16. Suppose this gold rally continues for at least the near term. The gold ascent probably warns of peaks in the broad real trade-weighted United States dollar (“TWD”) and the S+P 500. The current divergence between the S+P 500 and emerging marketplace nation stocks in recent months likewise warns of these trend shifts. Relevant to this viewpoint, the 10 year United States Treasury note yield established a major low at 1.32 percent on 7/6/16. In addition, suppose gold’s recent climb eventually coincides with a renewed slump in the LMEX base metals index (London Metal Exchange) from its 11/28/16 top at 2857, and at least a modest tumble in benchmark petroleum prices. That probably will interrelate with this scenario of US dollar weakness and erosion of S+P 500 and emerging marketplace stock prices.

The American political theater is relevant to this outlook for gold price and its relationship to the US dollar and other marketplaces. Trump’s remarkable Presidential victory and his likely policies probably have increased fears in both American and international domains regarding the quality of America’s political leadership and the consequences of its economic (political) philosophy. Moreover, the nation’s various sharp cultural divisions and related partisan political conflicts will not disappear anytime soon.

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Gold and Goldilocks- 2017 Marketplaces (1-10-17)

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 )

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)