January 23, 2024

One of the great discussions today among squawking heads concerns when, and by how much, the Fed will make a move towards lowering rates…More specifically, with the futures markets having already built in about a 1% decrease in short term rates by September, Wall Street’s geniuses are all debating whether the market is right…or if the Fed maybe knows otherwise, or knows better, than the market does. The answer, to me, is a no brainer, kind of like asking if a computer today is better than a computer built 40 years ago. In other words, the FUTURES markets DO know better than the Fed, and in reality, for as long as I can remember, the futures markets have anticipated where rates were headed, and the Fed, at varying speeds, has followed.

The total number of contracts in short term interest rate futures (SOFR, formerly being Eurodollars) is greater than ALL of the other varied futures markets on the planet combined…Or, to be clear, take all of the precious metals, grains, meats, softs, currencies, stock indices, other financials, etc. futures contracts on all of the exchanges around the world? And the SOFR market has more participation than all of them combined…And irrespective of any opinion I might have on rates right now, I look at the size of this market, and with the knowledge that where it goes is actually based more on the supply and demand for money (borrowing and lending) than any market we trade…and can only regard it as something of a GIGANTIC financial “organism” that takes its direction, NOT from what a bunch of conservative, crowd following bankers and economists might be GUESSING, but from the dynamics of the marketplace.

In other words, the markets ARE exponentially bigger than the Fed, and are not “guessing”, and as the title above states, THE MARKETS LEAD THE FED…AND NOT THE OTHER WAY AROUND. PERIOD.  The markets can certainly change direction, but right now they are definitively indicating that rates are heading lower, regardless of what you hear from talking heads about “what the Fed might do.”

It was NOT the first time, and it won’t be the last, but the most recent, and blatantly obvious, example substantiating this occurred when the interest rate futures markets started raising rates dramatically back in 2020…while the Fed, having erroneously concluded that the fairly rampant inflation was only “transitory,” sat on their hands almost a YEAR before they reluctantly made their first move towards raising rates, and thereafter spent the next year FOLLOWING/CHASING the Eurodollar markets as the FUTURES markets took rates from zero to 5%...one more time…AHEAD of the Fed.

And the same thing is happening now in the opposite direction. The Fed still hasn’t moved towards lowering rates but the futures markets are, once again, way out in front of them…And the biggest point I’d make here is that with every economic or inflation data result that comes out, all of the chatter about, “Will they or won’t they?”, or, “Does this change the Fed’s plans?”, is basically irrelevant. The markets will tell you, and ARE telling you, that rates are going lower…So every time you see another Wall Street clown talking about “Maybe this news (like CPI upticking incrementally) will slow the Fed down,” to me, it just means keep buying the futures of Two Year Notes, Ten Year Notes, and Treasury Bonds…I continue to think they are all heading higher as rates continue to fall…and one more time, NOT because the economy is slowing, but simply because inflation has been falling and will continue to do so…perhaps even more sharply than the Fed wants to see.

The markets have already built in a 1% decline in short term rates by September…

On another note, the following 3 charts present a picture that is mind boggling to me…that Speculative Funds are short the Treasury Notes and Bonds in numbers that are almost beyond belief…while Commercial Traders (who actually handle Treasury paper) are dead opposite them.

Shorter term rates…

A little further out…

And the long end…

Sooner or later, all of those shorts DO have to BUY the market to exit those positions…

Bonds turned up in October…and have, I believe, a LONG way to go from here…

Here’s an option I LOVE right here…

Still Long the Stock Indices

And I continue to recommend being long the Stock Indices…As I have documented for years, the WORST opinions regarding stocks DO come from the Wall Street Brokerages…and as can be seen from the recent headlines below, with the markets still making new highs, there is PLENTY of their usual doubt and caution…Obviously, new highs has SOME of those guys being forced into the bullish camp, but my sense is we have a LONG way to go before Stocks even begin to reach the Wall Street “FOMO” stage that WILL come from them someday…but most likely, AFTER we have reached substantially higher levels.

So far, I’ve had one guy who took me up on my October Long Stock Indices recommendation so I’m not going to waste any time pushing it here. All I’ll say is continue to be Long any or all of these 3 Indices…and/or equities in general…Call me if you want specifics as to how to do so in futures.

And just to substantiate (again) that knowing what Wall Street is projecting usually tells you what NOT to expect, see the next chart…

In Dec 2022, their average guess for the 2023 S&P 500 close was 4031...And the actual close a year late was 4777! And for 2024? Their avg guess is 4875...which is where we are today...and would represent only a 100 point gain for the entire upcoming year...So if that doesn't tell you that those “experts” are STILL BEARISH, I don't know what will...

STILL BUYING COTTON…which appears to be moving…and as I wrote last month, could duplicate what the Dow did between October and December…that is, go relatively straight up.

STILL SHORTING COCOA

I have been wrong here but have by no means given up...And see this last blistering rally as potentially being a "blow off" top. My recommendation is you buy puts here, with decent time...And if we're still up here a month or two from now, you buy more time and more puts...I might be dead wrong, but at these levels, this looks very much like Lumber, Cotton, Wheat, Cattle, etc. during the past few years...wherein straight up into the stratosphere was followed by MONSTER crashes. This is kind of a money management thing…You spend some, and if you have to, spend some more…Believe me, the hardest part of a trade like this is LETTING IT KEEP GOING when it DOES start down…NOT grabbing some bucks after it has dropped 400-500 points with the idea of “getting back in when it rallies,” or something along those lines.

Thanks if you read this far…

A LOT going on as we start the new year…and some big moves getting started I think…Call me if you want to talk about any of this…

Bill

770-425-7241

866-578-1001

All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: All of them