August 26, 2019
The Storm Before the Calm?
The Trade War is about to start “ending”?
Geopolitically, and in the markets, I don’t think we have EVER seen anything like we have been experiencing for the past 18 months…and more pointedly, during the past month or so…and even more specifically, with the last week potentially representing, I believe, the PEAK of fear, chaos and price extremes in the markets…and in the media…literally, all over the planet.
Between Fed Chairman Powell speaking at the Fed’s annual economic symposium in Jackson Hole, with Trump then actually referring to Powell as a greater “enemy” (!!??) of the United States than China’s President Xi…and the very same day China raising tariffs on $75 billion of US imports…and the Dow dropping 800 points on Friday…and Trump then “ordering” all US companies “to look for an alternative to doing business in China,” and Trump then RE-raising tariffs on China imports on Saturday…AND all the news coming out of the G-7…AND the tweets and statements Sunday night as to whether China and the Trump team were talking…or not?
I just don’t think any of us have EVER seen 3-4 days of major news like we’ve had since Thursday.
With this in mind, it is my opinion that this past week has strong odds of maybe having been as bad as it’s going to get (hence “the storm before the calm”)…that the “great negotiator” has stretched this trade war idea/fiasco just about a far as it can go…and if he expects to have any chance at re-election, or unless he wants to ultimately push the world economy into something worse than just a “slowdown” …he HAS to reverse course and make something positive happen…and fairly soon…or maybe even immediately.
I might be dead wrong, but I have no doubt that the current absurdly low level of interest rates AND the severely depressed prices of a number of major commodities are absolutely due to the Trade War…and that furthermore, I believe that at the first true sign, tweet or announcement of a definitively positive development in ending the war will result in an upside price explosion in commodity prices unlike anything we have ever seen…And I mean that...With so much economic gloom out there, and so many months of things just getting worse and worse and worse, I think no one is really prepared for, and of late, even remotely expecting, a turn for the good…And that when/if it comes…it would not surprise me, in the least, to see multiple bid limit moves in a number of commodities…especially in the agricultural sector. And I reiterate…This is my opinion. This is my read on the markets here…and it is easily possible I might be absolutely wrong.
And commensurate with those moves, IF this does become the case…IF we do seen dramatic rallies in commodity prices…with both Treasury Bonds and Eurodollars priced for a major economic slowdown, and containing virtually a zero inflation premium, I would also expect to see substantial downside action in both of them (which I will address in a separate newsletter tomorrow).
Again, and I cannot repeat it enough…These are my opinions and I could easily be tremendously wrong…but considering all of the above, inclusive of the tremendous volatility we are now routinely seeing in the markets, I simply think it now makes sense to be positioned for an END to the Trade War…before it actually begins to become a reality. Plain and simple…I think that any or all of the following commodities should be bought at current levels, with what I think should be more than enough time to see the “good” news start coming out of the White House.
I recommend buying March 2020 Call Options in the following markets…
I recommended buying all four of these markets earlier this year…and while it “worked” briefly in Corn, Wheat and Soybeans, the idea has been a loser…Nevertheless, this does not change my opinion, nor my recommendation to buy all four as one “unit.” At today’s levels, buying all four call options comes to $5044…and while I firmly believe all four will make bull moves (and of course I might be dead wrong about all four), I have no idea as to what order they might go in…nor which of them might make the biggest percentage move.
And there are any number of permutations as to how the dollars might work out by owning all four, my most basic thought is that if just one of them works moderately ($1 in Corn, Wheat, Soybeans…or 10 cents in Cotton), and the other three become worthless, you should stand a decent chance of at least breaking even…This obviously is not the objective but it just as obviously is a definite consideration.
Give me a call if any of this makes sense to you…
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Corn, Wheat, Cotton, Soybeans