A Macro Classic?

Classic_CokeMacro trades come in two flavors, modern and classic. Modern trades are short term, liquidity driven, mean reverting market dislocations. You stare at the screen, pounce, make or lose your money, and exit. Symmetric risk, big premium for risk management and timing. Classic trades are long term, cyclical shifts in the investment landscape. Classic trades take advantage of the myopic nature markets – extrapolating the present. Classic trades have the potential to make big money, because the risks are asymmetric and the herd is against you.

We think we see a macro classic – inflation. Take a look at this study from the St. Louis Fed… https://www.stlouisfed.org/on-the-economy/2016/february/future-oil-price-consistent-inflation-expectations. Current inflation expectations imply a future crude oil price of $0 under a semi-reasonable set of assumptions. Quibble with the model if you like, but you cannot escape the fact that current market pricing anticipate little future inflation. Am I able to predict what will drive future inflation….No. Like the card counter in blackjack, however, the deck sure looks rich.

Certain funds that Mount Lucas manages may or may not, from time to time, have positions which seek to realize an exposure to future inflation.  There is no guarantee that such positions, if established, will be established timely and exited profitably.

Know Your Roll – Commodity ETF Edition

The biggest macro-economic event in the past year has been the collapse in crude oil prices.  Since mid-July, WTI crude oil spot prices are down over 50%.

KYR1

Source: Bloomberg

Crude is the most liquid (no pun intended) and most analyzed commodity on the planet.  Its covered exhaustively by a wide array of shareholders and stakeholders; public and private oil producers and consumers, physical traders, banks, and geopolitical think tanks just to name a few.  This is why the most interesting aspect about this huge move in crude is that no one foresaw the magnitude or velocity of this decline.  Bloomberg had an article back in December on the hedging strategy of some U.S. shale drillers which showed that those companies certainly did not anticipate a decline in crude prices like what we’ve seen.

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