Fed Freeze Fallout: Something Big Is Coming

fallout-4-pc-download

Global bond yields continue to make record lows at a seemingly record pace. Bitcoin rockets through the clouds hitting 2.5 year highs. European banks plumbing new post crisis lows. The Chinese Yuan hits new multi year lows reinforcing this massive deflationary push. Gold rises above 1300 again. USDJPY plunges into 103 territory. The Nikkei plunges 3% for the second time in a week. And now the Fed has balked at hiking rates (again) and the market is starting to lose confidence in the most powerful central bank.

In the midst of all this chaos my favorite indicator is the consensus hatred for hedge funds aka ACTIVE MANAGEMENT.  Investors looked back at the last 7 years and realized if they indexed and sat on a beach they would have made a fortune. Hence investors dropping ACTIVE management like it’s going out of style. It’s hard to imagine a more inhospitable environment for passive investing than the one we find ourselves in today, and I’m not the only one.

TotY

Let’s be clear, bond yields were plunging long before the Fed rate hike. Bitcoin was already on fire. European banks were also hitting new lows, but Gold and USDJPY were kept in check by the Fed’s confidence that it could hike interest rates come June.

I will remind you that it was never the Fed’s objective to hike, but instead to gauge the market’s reaction to a theoretical June hike. Now that the market has come to a similar conclusion, the dollar is getting sold through the floor and the yen is strengthening.

Japan’s savers who have as a percentage of GDP more capital invested abroad than any other nation are getting killed by the rising Yen. Japan’s banks are getting killed by the deflation brought about by a stronger Yen and lower interest rates.

Despite all this chaos, US equities remain within spitting distance of the all time highs.

Sit

This cannot last forever, and I’m willing to bet that it won’t even last 2 years which is why I’m buying June 2018 slightly out of the money puts on US equities.

 

 

Coffee Perking Up

I think coffee may be poised for an absolute major break out. I don’t have a lot to support my thesis except for a few charts courtesy of the wonderful chartist Peter Brandt and the belief that China will transition more towards coffee in the coming years.

image

Coffee

Long term and medium term technicals point to a bottom.

Combined with the fact that the Chinese are buying more food as their wealth has risen. We’ve seen prices for lean hogs and soybeans go through the roof this year.

And now there’s a chance that China as it shifts more to the west, will start consuming coffee.

From bloomberg:

Gao, 29, worked for six years in coffee shops and restaurants in Shanghai before returning home to capitalize on Jining’s rising affluence. He’ll need some bank finance to help him launch Mr C this year, but says he’s confident that won’t be a problem.

“People’s incomes are rising here, and they can afford better coffee,” Gao said, lounging on a Starbucks sofa. “The coffee culture is taking off.”

China’s push to build out its service sector could result in increased coffee consumption. Combined with the technical patterns, this could signal the beginning of a massive bull market in coffee.

This connection may be as thin as Murtagh’s wife’s cooking but I think there’s something here.

 

Greetings from Iceland

13422218_10156956106145034_6592638352970723681_o
I’ve been in Iceland for a week now, and watching the markets move from afar has been quite comforting. Perhaps because my positions have done well as growth continued to slow and the market failed to break new highs.

I have enjoyed watching the bond bulls on twitter hold their version of Coachella the past few days. I must admit, with long term bonds being my 2nd largest position, I too have enjoyed the rally, but watching all this high-fiving and backslapping on twitter certainly has me worried. Then again speculative positioning in the US treasury market is at a record net short.

Maybe I just follow too many similar minded folks.

I think a down move in equities is likely  to be coming over the next month, so I added some short US equity exposure. Despite this, I haven’t sold my 1 year S&P calls. If those expire worthless then the rest of my trades will make a lot of money.

I also added a small position in an oil and gas rig company. Despite the rally in crude, a lot of these companies are still quite cheap. And although my base case is for oil to head lower, the record back to back years of oil and gas capex reductions certainly scream value here. That’s it for now. Going to keep  these posts short so I can enjoy my vacation. I’ll be back with long and incomprehensible posts starting early July.