As We See It: Everything Selloff, But…

When you woke up yesterday morning, this was the headline of the lead story on Bloomberg News:

Source: https://www.bloomberg.com/news/articles/2022-09-26/everything-selloff-on-wall-street-deepens-on-98-recession-odds?sref=3w8JJB7Z

The past week had been really tough, with bonds and stocks both crushed, regardless of locale. There were panic moves everywhere, but particularly in sterling. Third world type emergency action being considered to control the slide. If the Fed’s mission was to break something, well, mission accomplished. Negative skew everywhere. There was, almost, no place to hide.

Almost because there was one place to hide, a well known asset class that advertises success in periods of adversity and volatility. An asset class that exhibits positive skew, or as my partner likes to say, it crashes up. An asset class that is up this year, and up this month, yet is not particularly dependent on manager skill. Simple Alternative Beta indexes capture the returns nicely. Its liquid and easy to access in a variety of formats.

What is it, you say? Its Managed Futures, of course. Now let me warn you. There will come a point when the markets will settle down, Darth Powell will take his foot off the brake, and traditional assets will recover. Managed futures will likely give back some recent gains, perhaps with a vengeance. But if you had it in your portfolio, the profits you gained could have been rebalanced into those cheap equities and credits, primed for the next move higher. It’s a beautiful thing, but you need to be in the game to win.

As We See It: Commodities Peak? – A Lotta Bit of Yes And A Lotta Bit of No

Here’s a question in everybody’s mind – Have we seen the top in commodity prices? We can see both sides of the argument.

Yes. The Fed is going to move far enough to break things, that will push us into a recession or worse, and commodity prices fall in recessions. It’s global too, with Europe and Japan falling out of bed. China won’t come to the rescue this time either, with the Ponzi bubble that is China real estate deflating and Covid lockdown mania. With the USD on a tear recently, for those overseas buying things priced in USD it’s even worse. Oil in Europe and the UK is through 2008 spike highs already, demand destruction ensued then and will now. Forget it, the commodity trade is over.

No. Virtually every commodity, from grain to oil to electricity to butter of all things is tight.

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One great example, beef. Beef is one of the few commodities that has risen very little over the last year. Why is that, you ask. Because US ranchers have been liquidating the herds and putting that beef on the market, as costs have risen.  That has kept near term prices lower, but if the economy recovers, the herd will not be rebuilt fast enough and prices will rise rapidly. A classic whipsaw, and it’s happening everywhere. Prices have risen because of supply issues, and raising rates will not help supply as it raises the cost of production. Should the Fed take its foot off the brake, supply will not be replenished fast enough to satisfy instantaneous new demand. Result – higher prices, a bit down the road.

Last week we said – watch rents.  Look at this chart. If we have seen peak hawkishness, get bullish commodities.

As we see it – Sep 20, 2022

The reaction to last week’s CPI print was pretty dramatic. We see a couple of related factors:

  • Given the fall in gas prices, the S&P had bumped off the bottom in anticipation of a soft print. Positioning went from negative to perhaps modestly positive. CPI caught the market on the wrong foot.
  • Gas prices as reported in the CPI did fall as expected, but just about everything else went up (see graph below). Everyone knows gas fell because of releases from the Strategic Petroleum reserve. That policy is the definition of “transitory” (they will need to buy it back, no less). With everything else going up, inflation fears pulled a Lazarus.

Watch rents. Lagging but steady inflation indicator, closely tied to wages.

Source: Bloomberg