It is time to look at alternative ways to hedge against rising interest rates. Unfortunately, with the huge increase in volatility due to so many headline issues from Greece to trading halts on the NYSE, that it makes it tough to hold onto positions. Fortunately, the most liquid interest rate market is structured in such a way that hedging against inflation can be done with a reasonably fixed amount of risk.
Clearly, we hit a hot spot with last week’s piece. So much so, that I kept digging. I came up with more questions than answers but in asking those questions I came up with some data points and open ended questions worth pondering. We’ll look at the push and pull relationship between public and private spending and their combined effect on inflation. Then, we’ll finish with the spark of wage inflation struck by the competition between governmental subsidy programs versus rising wages in entry level retail positions.
More specifically, this piece should be titled, “Diminishing Effects of Global Quantitative Easing in a Long Only Portfolio,” but that seemed a little long. Have we returned to an era where bad economic news guarantees the action of sovereign nations to prop their markets up? Does bad news make front running the Bank of Japan’s direct equity purchases a sure thing? Have we globalized the, “Bernanke Put?” The European Central Bank, the Bank of Japan and the Peoples’ Bank of China have all enacted accommodative interest rate policies since September 8th. Since then, the various global equity markets had all sold off and are now at or near new highs.
The crude oil market has received its just due in the media gaining everyone’s attention by declining nearly 25% since the summer’s peak. The market’s consolidation through most of October clearly spelled trouble in November. Trend traders will tell you that consolidation almost always equals continuation. Thus, the final spike lower hasn’t taken many traders by surprise. Furthermore, November’s range expansion has not been greeted with additional selling. In fact, our analysis suggests that the speculative nature of this decline has nearly run its course. This notion is supported by the fact that for only the eighth time in the last 20 years, we’ve seen the net commercial trader position grow by more than 100,000 contracts in two months as you can see on the chart below.
Today’s Scottish secession vote takes a 300-year-old issue and covers it with 21st century journalism. There’s hardly any angle that hasn’t been talked to death. Surprisingly, I’ve found something of major importance leading up to the vote that isn’t being discussed anywhere. The commercial traders in the Commodity Futures Trading Commission’s weekly Commitment of Traders report are making a clear point that they collectively feel that the currency markets are about to tighten, rather than continuing to widen as they have for the last month or so.
The cocoa futures market is undergoing a dramatic transformation that is rapidly increasing production stability and supply yet, the market is at its highest prices since July of 2011. The market is currently caught between the pressures of efficiency driving the market lower over the long-term and short-term demand doing its best to buck this trend. These are exactly the types of scenarios that create trading opportunities for the commercial traders we follow. Their outlooks and bank accounts are skewed toward long-term corporate growth which allows them to focus on value principles that will remain intact for prolonged periods rather than tuning their operations strictly to the whims and trends of personal sense gratification.
The European Central Bank (ECB) is widely expected to cut their lending rates at the June 5th meeting. There are a couple of really interesting precedents setting up. First of all, the ECB is expected to
not only cut their discount rate but also the deposit rates paid to banks who park cash overnight at the ECB. Given the already low starting rate of .25% discount and 0% overnight, the expected cuts will cut the current discount rate in half and drive the overnight rate negative. Thus, the ECB will be charging banks to hold bank deposits. Secondly, the Euro currency market internals should be weakening ahead of the expected rate cut. After all, the rate cut should make owning Euros less attractive to the investing public’s hunt for yield. We’ll examine both of these situations as the former plays out on the
macro landscape while the latter presents an immediate trading opportunity.
There’s good news on the horizon for the average U.S. retail investor. There’s a bubble coming and for once, Joe Investor is going to miss out on the boom and crash. Two primary stories create the potential for a short-term meteoric rise in prices only to quickly plunge as macro economic forces and political issues sort themselves out. In a world full of financial instruments, global exchanges and products ranging from weather derivatives to technology indexes to silkworm futures, the base metal nickel is inaccessible to the average retail American trader.
Gold, interest rates and the stock market have a very interesting relationship. Normally, declining interest rates are good for business and bad for gold. Post 9/11 and housing bubble, zero interest rate policies (ZIRP) created an artificial situation that fractured this relationship rendering it virtually useless over the last decade. This began to change last summer when the Federal Reserve Board stated that they would begin slowing the stimulus they’ve provided to the economy thus allowing interest rates to gradually rise. These relationships have begun to sort themselves out over the last three quarters and may actually be telling us something about the current pricing in the gold market.
Trading the grain markets has always been tricky, especially during the planting and harvesting periods. Historically, this has placed us at the agricultural epicenter for global grain trade. Obviously, tension in Ukraine and the corresponding 15% spike in wheat prices have reminded everyone that even the agricultural markets are now a global game. In this respect, it’s no longer enough to keep an eye on domestic weather patterns to determine the success of our winter crops or anticipate spring wheat seeding. Now, it is imperative to focus on global production issues and World Trade Organization (WTO) agreements, as well.