May 2, 2022
This is “too much talk,” but as I believe we are at a major turning point in any number of markets, I do hope you will take the time to read through everything here.
In the markets, a “Black Swan” refers to an event or occurrence that was totally unpredicted by anyone…basically something that comes out of nowhere...which often leads to surprisingly large, fast market moves or disruptions. COVID was one. As was the Ukraine war…and though it was not an immediately overnight sort of thing, I firmly believe that the recent shockingly rapid, and totally unpredicted, move up in interest rates would also qualify as a Black Swan…whose effects are only JUST beginning to impact the markets…and specifically, the Commodity markets.
For perspective, here’s a look at how Eurodollars, reflecting LIBOR, have moved for the past 7 years…with an eye on how big and fast the rate increase has been just since October.
Last fall when I was virtually alone in my opinion that rates would be moving sharply higher in 2022, I never dreamed that the move would be as big and fast as has been the case you see above…which I view as truly astounding…And while the Fed has barely started officially raising their Fed Funds Rate, in the real world, what you see on the chart above is that RATES HAVE ALREADY JUMPED SHARPLY…to the extent, for example, that if a business is planning to borrow based on LIBOR out in December of this year, it now will be using at least 3.25 % as the base rate…versus 1/2% just six months ago.
In plain English, “You can’t fight the Fed,” and if their number one target has become reversing inflation, they WILL get it done…Talk all you want about how they totally missed on inflation being “transitory,” or that they’re always “behind the curve,” or have “mishandled the economy,” IF THEY WANT TO SQUASH INFLATION, THEY WILL SUCCEED…however ham-fisted they might have to be in doing so…and ONE DIRECT RESULT OF RISING RATES WILL BE BEAR MARKETS IN A NUMBER OF MAJOR COMMODITIES.
And you’d better believe that there is some seriously big money out there that already understands that the jump in rates already built into the markets WILL slow things down…and WILL IMPACT COMMODITY PRICES ON THE DOWNSIDE.
On a related note, it is my opinion that many of these ultra-high commodity prices are much more due to rank speculation than any actual supply-demand issues…that traders, investors and hedge fund speculators are the real reason we’re seeing prices like $17 Soybeans and $8 Corn…or have seen $130 Crude six weeks ago (now about $105) or $14 Wheat (now $10.50). For sure, there definitely are underlying bullish factors that have pushed those markets to stratospheric levels, but I’d surmise that the last 20-30% of their bull moves were nothing but speculative hot money chasing the latest headlines, which IS why both Crude and Wheat exploded in “value” as the Russian invasion began…but then got slammed back down 25%...within 6-7 days…In other words, the “value” of Crude at $130 obviously was NOT real, but simply the combined product of media headlines and an avalanche of funds sloshing into (and out of) the markets…
Here’s an attempt at a blow by blow explanation of how no commodity value is actually real…
And just to be clear, as I have also many times noted, this applies to every piece of paper that gets traded…including Stocks, Bonds, Currencies…WHATEVER…and not just including Commodities…The price of every piece of flimsy paper out there derives its “value” from media headlines, crowd following talking heads, speculative funds, market myth metrics (like PE’s), brokerage house “strategists,” etc…and ALL of those “values” are constantly swinging in price between absurdly exorbitant and/or almost worthless…and NOT due to some specific mathematical formula that determines “the price should be this.” Not a chance…Just like this very small example above, it’s all about where mob psychology is jumping at today, or this week, or this month…And when it comes to market tops, wherein prices get “stupid,” whether it be Facebook changing its “value” from 380 to 180 in matter of months, or Netflix from 700 to 200, it’s all kind of about, “Who’s the last fool?”, or “Who TRULY believes this stock…or this annually reproducible commodity…is really going to go higher, or even stay at today’s all-time RECORD HIGHS?” Who wants to buy today’s headlines that absolutely represent the past…and NOT the future.
AND THAT IS WHERE I SEE THE CORN AND SOYBEAN MARKETS…MOB PSYCHOLOGICALLY PRICED IN THE STRATOSPHERE…WHERE EVERYTHING ABOUT THEM IS BULLISH (LIKE THE SUPPOSEDLY BULLETPROOF FANG STOCKS JUST 4-5 MONTHS AGO), AND I BELIEVE, ANY DAY NOW, DOOMED TO SEE THE SAME SORT OF STRAIGHT DOWN COLLAPSES THAT PERIODICALLY HAVE BEEN THEIR NORM FOR AS LONG AS THE FUTURES MARKETS HAVE EXISTED.
Have no illusions guys. The markets ARE just a giant game…and the next “move” in the grains is going to be sharply lower…while analysts everywhere sill keep citing “bullish fundamentals” while referring to the decline as a “pullback,” and NOT the beginning of the next…normal…bear market in crops.
Yes…I have been calling this wrong…and this might be a dumb statement to make…but I HAVE been here before, where I’ve been early/wrong and looking stupid…but I THINK THE ODDS ARE THROUGH THE ROOF THAT WE ARE SEEING, RIGHT NOW, THE HIGHS IN ANY NUMBER OF COMMODITIES FOR MANY YEARS…SUCH THAT I AGGRESSIVELY SWALLOWED HARD AND RELOADED MY OWN SHORT POSITIONS IN CORN AND THE SOYBEAN COMPLEX ON FRIDAY…And I suggest you take a hard look at doing the same…and urge you to NOT get caught up the lately popular calls for $10 Corn and $21 Soybeans…IT’S TIME TO BE SHORT, NOT BUYING INTO THE UNANIMOUSLY LOUD BULLISH STORY THAT IS COMING FROM EVERY ANALYST I SEE…
In one chart, the big picture…
This 50 year chart presents some perspective as to where we are right now…and why I think it is senseless to be predicting, or trading for, another dollar or two on the upside…especially if you are a farmer wondering about how to market your crops (for this year and the next). I PROMISE YOU. SUPPLY WILL CATCH UP WITH DEMAND…BUT THE CORN AND SOYBEANS FUTURES MARKETS WILL REFLECT THAT THE “SHORTAGE” IS OVER MANY, MANY MONTHS BEFORE THAT DOES BECOME THE REALITY. These markets go up AND down…And I am absolutely, totally, 100% of the opinion that DOWN is what we see next…And yeah, in a BIG, BIG way…and I can’t put it any stronger than that.
I don’t care how bullish the fundamentals supposedly are…There is not an infinite world of buyers out there…and since the beginning of futures trading, and yeah, I keep saying this but it IS true: At some point, everybody who would buy HAS bought…and then you do have nowhere else to go but down…and one more time, however bullish the fundamentals are (really, have been), it just doesn’t matter.
As time goes by, and as markets unfold (both for me and against me), my perspective and objectives…and focus…are always shifting with the changes in prices, and news, that are ALWAYS taking place…And right now, I have tunnel vision: I THINK CORN AND THE SOY COMPLEX ARE ABOUT TO GET SOMEWHAT OBLITERATED, AND WHILE I HAVE OTHER MARKETS THAT INTEREST ME, FOR THE NEXT 2-3 MONTHS I WILL BE HONED IN ON BEING SHORT CORN, SOYBEANS AND SOYBEAN OIL...AS ONE UNIT…SEEING THEM, RIGHT NOW, AS A ONCE EVERY DECADE SORT OF OPPORTUNITY.
Maybe I’m dead wrong, and if I am, it almost certainly will mean losing money, but here are the options I recommend buying here…and I literally mean RIGHT NOW…per today’s sharp breaks down…and as I think there is a ton of evidence to suggest that this whole SKY HIGH INFLATION STORY IS TOTALLY OVER.
My recommendation is to buy all three as a unit, costing about $5719…Obviously, you might pick one in the Soybean complex, in which case I would go with the Soybeans themselves…but at the same time, I do not want to be out of the Soybean Oil, as it IS the most “glorified” markets on the board right now, with “edible oil shortages” just ALL over the news right now…to the extent that I had three different individuals email me three different articles on that subject yesterday…And that is a first…after 42 years of doing this.
When it’s all over the news, it’s usually “all over…period.”
GET ON THIS GUYS…Yep, I’ve been early/wrong but I have stayed on it for what I think are some very BIG reasons.
So pick up the phone and call me…DON’T wait until the markets have started making headlines on the downside…and you feel more confident that maybe I’m right.
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: Soybeans, Soybean Oil, Corn