Author: Truth & Hammer

Lumber prices have plummeted over the past 10 months, casting an uncertain pall on a sector that’s been a harbinger of economic downturn in the past. It’s worrying news for Cowlitz County, home to more forest product jobs than any other county in the state.

After peaking at $582 per 1,000 board feet in May 2018, the price of Douglas fir is down to $390 this month, according to Nasdaq commodities data, and experts are unsure of what to expect next.

“We’ll see some slowness this year, maybe continuing into 2020, but then longterm the potential is still there for growth,” forecasts Daniel Stuber, vice president of operations at Forest2Market, which reports on the industry. But that growth is far from certain.

Prices reached record highs last year and the drop could be a rebound back to normal, Stuber said. But global tariffs are slowing lumber exports, and investments in the southern U.S. could make Pacific Northwest lumber less competitive. And there are troubling hints of slowing housing construction, with housing starts and building permits both lower this year than in 2018.

If construction continues to stall, the 12,300 Cowlitz County residents whose jobs are tied to logging and wood products processing could be the first to feel an economic slowdown that has the potential to reach far beyond local sawmills.

That’s what happened 12 years ago, when the price of wood was one of the first hints that a major recession was on the way, said Cindy Mitchell, public affairs director for the Washington Forest Protection Association.

“Back in 2007, log prices dropped really quickly,” Mitchell said. The subprime loans that would be blamed for fueling the Great Recession were still readily available, and public data did not yet hint of the coming economic chill. But builders and lenders were growing wary about the future, and as they hesitated, log and lumber prices fell.

Mitchell does not think the current slump marks a repeat of last decade’s economic collapse, but, like Stuber, she is keeping a close watch on housing starts.

Applications for new home construction building permits were down 1.4 percent compared to a year ago, according to U.S. Census Bureau figures released Friday. Construction of new homes and apartments in January dropped by 7.8 percent compared to a year ago.

“People who are building multi-family housing are on the forefront of what is happening with log and lumber prices,” Mitchell said. “And everything is connected.”

Brian Hatfield, who previously represented Cowlitz County as a state senator and now serves as Forest Products Sector lead for Gov. Jay Inslee, said he remains optimistic. Prices are down compared to last year — but they still are higher than the average over the past few years. After all, lumber prices were at all-time highs last May.

“We may just be seeing a correction from the mid-2018 historical spike in lumber prices,” Hatfield told The Daily News in an email.

As the experts look at the future of lumber pricing, they seem to agree that Chinese tariffs and California wildfires have had little impact so far.

The forests hardest hit by last year’s fires were largely U.S. government-owned and off-limits to logging because of environmental protections, according to Forest2Market. Though more than 11,000 homes were destroyed in the deadly Camp Fire conflagration, that’s a small blip nationally. If all the houses destroyed were replaced, they’d comprise less than 1 percent of the 1.5 million housing units U.S. builders are on track to complete this year.

China instituted a 10 percent tariff on U.S. lumber last year, and raised that to as high as 25 percent at the start of 2019. But mills largely took the export tax in stride.

Washington, which ranks No. 2 in the U.S. for lumber production, has not been hard hit by the tariffs, Mitchell said. “Our producers are primarily making lumber for housing in the United States,” she said.

Less than 1 percent of U.S. lumber is exported to China, Stuber said. “It would be ignorant to think these tariffs are not having any effect,” he said. “But it’s not much.”

And companies that do export lumber, including Weyerhaeuser Co., have already bounced back from China’s tariffs. In a call with investors in February, Weyco President and CEO Devin W. Stockfish said revenue from exports to China is steady over the past year. “Demand has been steady since the tariffs were imposed,” he said. More significant than China’s tariffs on U.S. lumber may be American tariffs on Canadian wood.

In 2017, the Trump administration imposed tariffs that average 20 percent on Canadian wood imports. British Columbian producers decided to import less and start investing in U.S. forest products instead, Stuber said.

“They are primarily looking in the U.S. South, where a lot of Canadians are investing in new saw mills and saw mill technology,” he said. “The South has low log costs compared to the Pacific Northwest, so they are not investing in your region.”

Weyerhaeuser, which owns forestland both in Canada and across the U.S., has made similar calculations. CEO Stockfish told investors last month that the company expects to primarily expand wood processing in the South. “With the South, log costs are lower than they are in the West and in Canada,” he said.

As those new high-tech southern saw mills start to come online, that could make it harder for Washington’s mills to compete, Stuber said.

“Log costs are 50 percent to 70 percent of a mill’s costs, and the U.S. South has lower log costs than the Pacific Northwest,” he said. “If we go into an economic slowdown and lumber prices stay low, that’s a problem for your region. It could translate to fewer jobs out there.”

But that’s far from certain, Stuber added — and if Northwest log prices drop, the trend could reverse.

“We at Forest2Market are predicting that we’ll see 2019 down compared to last year,” he said. “But the long-term fundamentals are still there to see growth in the market over the next five years.”

With so much news hitting the wires regarding the Treasury Inversion level and the “potential pending recession”, we wanted to shed a little insight into this phenomenon and what we believe the most likely outcome to be going forward.  Our researchers, at Technical Traders Ltd., believe the Treasure inversion is a reactionary process to overly tight US Fed monetary policies, consumer demand factors and outside cycle forces.  There is very little correlation to inverted Treasury levels and causation factors other than the US Fed and global central banks.  We believe consumers and consumer sentiment also play a role in setting up the conditions that prompt yield inversion.  The one aspect we believe everyone fails to consider is the uncertainty that is associated with major US election cycles.

The US Fed is obviously a driving force with regards to yields and consumer expectations.  In the past, the US Fed has rotated FFR levels up and down by enormous amounts (in some cases 200 to 500%+ over very short spans of time.  Consumers, you know those people, the ones that are the actual driving force of the local and state level economies, have been the the ones having to deal with wildly rotating FFR levels and the consequences of their debt rotating from 4~7% average interest rates to 8~25%+ average interest rates over the span of just a few years.

Take a look at this chart that highlights the current and previous US Federal Reserve FFR rate changes.  It is quite easy to see that consumers and business, on the receiving end of these changes, often swing from one extreme to another as the US fed makes these dramatic moves.  And, yes, that last 2400% number is correct.  The FFR went from 0.06% to 2.4% over the past 3+ years – do the math yourself if you don’t believe us.

Let’s talk about how the US economy operates as a host to the global economy for a second.  When the US economy is booming, it exports growth, opportunity, and activity to the rest of the world.  When the US economy is contracting, it exports contraction, diminishing opportunity and slower economic activity to the rest of the world.  This may be a bold statement to make, but it is true.  For the past 80+ years, the US economy has been the “mothership” of the global markets in terms of creating and exporting growth and opportunity for foreign nations.

The US Fed, therefore, has an incredible responsibility to safely navigate the current and future global expectations with regards to FFR levels and yield levels as the global economy expands and contracts with political, trade and social issues.  It is a very difficult process to navigate for anyone.

US Presidential Election cycles also play an important role in how these expansion and contraction cycles take place.  Anyone with any understanding of Music understands each note includes an “Attack” and “Decay” process.  The same thing takes place in economic cycles.  Within the Attack phase, the economy builds strength, capability, and output, just as the musical note does.  Within the Decay process, the economy begins to wain in strength, capability, and output, just as the musical note does.  The process within the global economy is very similar to an orchestra of musical instruments playing difference components of the music output.  Some play loudly and dramatically, others play softly and more demure.  The outcome is a finely balanced and enjoyable musical presentation.  The global economy is very similar to this and right now we are starting to see a slower, softer period of economic activity throughout the global economy.

Currently, the US is starting a new Presidential Election cycle where dozens of Democrats are lining up against President Trump.  This is sure to be a battle that will rival “Rocky II” in terms of scale and scope.  It is also starting far earlier than most normal mid-term Presidential election cycles.  This is one of the biggest reasons we believe the Treasury yields may stay rather muted for the next 12+ months while the end of the “attack phase” plays out for the global economy.  Eventually, the “decay phase” will begin within the global economy and we’ll start the process of waiting for the US Fed and central banks to rally opportunity with lower rates and possibly QE ventures.

We’ve highlighted the US Presidential Election “run-up” cycles (the hyperbole 16-month process that takes place before the actual elections) in BLUE on these charts.  It is fairly simple to see that the combination of the US Fed rate levels, US political controlling party policies and consumer sentiment related to these policies and economic factors have driven yields higher or lower throughout the past 50+ years.  In fact, the US and the Globe have recently transitioned from more of a regionally localized global economy to more of a centrally functioning global economy.  One thing has not changed, though, the US is still the largest of the global economic drivers and will continue to be for the foreseeable future.

When we take into consideration how these yield contractions have resulted in asset price changes in the US stock market, we need to compare these moves in yield with the expectations of traders, investors, and capitalists throughout the world.  Remember, the US stock market is currently, and has been, a pool asset valuation protection for global investors throughout the planet.  Over the past 40+ years, the US economy has exported opportunity and capacity throughout the globe while global investors have continued pour capital into US stocks, Bonds and Debt because of the strength of the US Dollar.

Our expectations are that the yield inversion, much like the inversion near 1980/1990 is the precipice of a renewed economic expansion as the planet develops new 21st-century trade, economic and political ties while shedding the 19th-century shackles that are currently binding it to obligation and debt originating from the 1960s through 1980s.  This transition period may be fraught with some dramatic price swings in assets, stocks and economic output levels.  Yet, we believe the outcome of this process will be a fantastic opportunity for skilled traders to find and execute tremendous upside pricing opportunities once it completes.

We have been completing a series of market cycle research that focuses on the alignment and timing of core global cycles.  By our research, 2027 and 2048 are key years for the global markets.  We believe 2027 will likely be a breakout year where the global markets align for an incredible upside price increase and we believe 2048 could be the year that the global economies exhibit some type of “metamorphosis” in terms of capacity and function.

In short, we believe these current inverted yields are nothing more than a “symptom” of the current political and US Fed FFR interest rate climate in combination with the current global economic output capacity and consumer sentiment.  To put it simply, after the US Fed raised rates by 2400%+ and the current trade and political issues are still unresolved – where do you expect yields to be moving?  Right, into further contraction while the US Fed tightens monetary policy and consumers react by tightening their spending.

Once the trade issues are resolved and the US Fed adopts a bit of easing in terms of current rates, we may continue to see have another year of wild and choppy market condition much like 2015, and 2018, but that all depends on what type of resolution there is with the current trade issues.

We’ll keep you informed of our research and longer-term date cycles as we continue to extract more concrete data from our research.  If you like our research and can clearly understand the value of having a team of dedicated market technicians and researchers working for you to help you find and execute better trades, then please visit www.TheTechnicalTraders.com to learn how we can help you.  This US presidential election cycle is going to have top billing for the next few months – get used to it and get used to the fact that the markets and yields will likely do what they always do within these cycles – muted price rotation where underlying fundamentals and consumer sentiment will likely drive future pricing.  Stay tuned and watch precious metals.