2022-11-05

Commodities Signal Something Wicked

Preface: I'm all set whichever way the market goes and I'll change positioning as necessary. Even if you're bearish, it makes sense to have real assets, some physical precious metals and you should have a small watchlist of lotto-ticket junior mining stocks in case things change in a hurry.

Commodities exploded higher on Friday. Market participants and more so financial media, always create an explanation for what happened. The story for Friday's move was China re-opening. 

Another explanation is that the money printers take power away from the Federal Reserve. There is a growing rumor that the Treasury Department led by former Fed chair Janet Yellen will seize monetary power. She has floated the idea of doing a "twist" where the treasury issues new debt and buys back older debts. This would squeeze shorts and shock the market in the short-term, though maybe not. First, if this is done, it is the financial equivalent of draining the SPR for votes. How many votes will the Biden administration get for the SPR policy? It looks like a negative number to me. I bet this move is a larger negative number. It wants to "drain" the treasury market of very favorable debt (from the view of the U.S. government) and replace it with more volatile short-term debt that will reset at higher interest rates. As with the SPR drain, they refuse the simple solution: issue less debt. Instead of sending $30 billion to Ukraine, issue $30 billion less in treasuries. What a concept! As with the SPR drain, if the policy fails and the future is worse, then they've screwed the country. Interest on the debt will bring forward the date when massive cuts in welfare and warfare spending will be made.

It's possible the gambit will fail immediately too. In addition to worsening the government's fiscal position, they are crossing a red line by interfering in monetary policy. As someone who opposes central banks for economic and political reasons, it nonetheless is a superior economic arrangement to a U.S. treasury run by literal money printing MMTers. It is possible the market reaction to this treasury move will be a collapse in treasuries, the U.S. dollar and an outbreak of inflation so bad that there are inflation riots in the streets. For this potential risk alone, it is insane for a Democrat administration to effectively take 100 percent responsibility for the nation's fiscal woes built up over generations, but that is what will be the "narrative" if they do it.

The above scenario is a valid explanation for a sustained explosion in commodities of which Friday was merely the start. Another is that for all the whining by degenerate speculators and gamblers, the Federal Reserve still has interest rates at negative 2 percent measured by core CPI. What if I and others who expect lower inflation are wrong? If neutral policy includes rates of positive 2 percent, that argues for an 8 percent Fed funds rate right now. That would mean mortgages above 10 percent. What if the move on Friday was the market calling bullshit on the Fed and inflation is about to rip higher? Say hello to 10 percent on the 10-year and 15 percent yield on mortgages. 

Intuitively it makes sense. There is no hope of a soft landing given the amount of debt-financed stimulus and lockdowns that preceded it. At the very least, the 30 to 50 percent rise in home prices, more than 100 percent in many places, should reverse nearly 100 percent if the inflation comes out. Factor in lockdowns and the economy should be at a lower level than it was in February 2020. There was a great deal of economic destruction carried out by politicians and then hidden by massive stimulus. The electoral guillotine that will drop on Tuesday November 8 is the public reaction to the tip of an iceberg of destruction that the ruling class sent our way in 2020.

Alright, there's your commodities bull case. How about the bear case? First, the Fed gets serious about inflation if the runaway inflation scenario is real. They do whatever it takes to get inflation down, including the hardest landing for stocks since 1929. You will hear screeching like never before if the Fed does an emergency rate hike, but it is the appropriate move if commodities are taking off. Copper is begging for a 100 basis point emerging hike if it has one more day like Friday.

More likely, the big move is the end of a speculative wave. Whenever I'm writing one of these posts, something big usually follows. Markets get to the starting line of a major phase change many times before they go through with the change. If this isn't the phase change yet, then history says Friday was a great shorting opportunity.

Prior spikes in copper, outside of the Ukraine war pop, came at the end of rallies:

Huge spikes in and of themselves can be bearish outside of V-bottom type moves preceding them. If China doesn't unleash massive stimulus and/or the U.S. treasury isn't dumb enough to trash the currency and treasury market, then that spike is unwarranted.
Friday's move still leaves assets such as gold and copper with their crash analogs intact. Gold did pop up, but that candle could still end up looking like April 2013 before the month is out.
Silver had a similar spike with similar volume in the futures market at the start of October.
That also came within the context of a stock rally. Using the the stock market for context and relative weakness in stocks last week, the pop in commodities looks like it could be an outlier move.

As for the broader market, it can be distilled down to one stock: Apple. The stock has a bearish topping pattern that has yet to break. The measured move off the topping pattern gives a target of below $80 per share. There is a gap at $95 per share. If it fell as much as the rest of BigTech, it would trade down around $110 at minimum. Long-term support is around $124 per share. Apple is the largest stock in the S&P 500 Index at more than 7 percent of the index. It is nearly 25 percent of the technology sector. It is 14 percent of the Nasdaq 100. Finally, it broke the AAPL/SPY uptrend ratio. While not a necessarily a trade signal, it does indicate Apple is officially losing its status as the largest company in the stock market. I doubt this will be a painless transition. It is possible Apple collapses alone, but unlikely. 








We'll find out soon enough what the market has in store. One thing I'm relatively certain of: if commodities go up, then stocks like Apple are going to crumble. If commodities reverse lower, it'll probably be for a bad reason that is also bad news for Apple. It's possible both stocks and commodities rally for a time, but I don't see them rising together for long. 

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