Trader: "Ignore The Fed, The Real Action Is In Commodities"

By Mark Cudmore, macro strategist and former Lehman trader who writes for Bloomberg

Investors are hyped up about Wednesday’s Federal Reserve meeting, but a bigger dynamic that doesn’t hew nicely to a schedule as does U.S. monetary policy isn’t getting the attention it deserves: shifts in commodities.

There’s an inordinate amount of focus on this Fed meeting. Sure, there are plenty of facets to analyze and it will dominate the attention of traders for the next day or two. But there are quite a few dynamics in the commodity space that will influence markets long after every sentence of Jerome Powell has been fully parsed.

Agricultural commodities are collapsing again. It was only in January they reached a multi-decade low. A subsequent bounce of 10% in less than seven weeks for the Bloomberg Agriculture Subindex fed the narrative that global inflation was finally set to accelerate, fueled by rising food prices putting upward pressure on CPI baskets throughout Asia in particular.

But that’s already proved to be a pipe dream, and a major support for higher yields has been removed.

More worrying, perhaps, is the recent slump in industrial metals. This is a negative signal on global growth, and on China’s economy in particular. It’s irrelevant whether the move has been driven more by the financial deleveraging push or by a deteriorating outlook for the real economy -- both are negative for risk assets.

These broad commodity declines are coming even as oil prices are rising. Since energy is one of the largest costs in the extraction, production and distribution of most other commodities, this divergence is remarkable and unlikely to be sustainable.

It’s also causing some notable shifts in terms-of- trade that have not yet fully fed through to relative asset pricing. Australia, Indonesia and South Africa are suffering from severe slumps in terms of trade, even as those for fellow commodity exporters -- Russia, Norway, Colombia -- remain near multi-year highs.

These dynamics are providing a variety of trading opportunities -- many that are being overlooked amid the excitement over one Fed meeting. And they’ll still drive asset moves and provide profit potential when you wake up on Thursday.


slopz38 halcyon Wed, 03/21/2018 - 11:15 Permalink

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In reply to by halcyon

ZeroSpam slopz38 Wed, 03/21/2018 - 11:16 Permalink

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In reply to by slopz38

bigloser Wed, 03/21/2018 - 08:46 Permalink

Some people may be aware that commodities, and base foodstuffs, like corn, wheat, barley, in particular, have been at the root of economic activity for a very long time and are notable in Adam Smith's fundamental analysis of economics in "The Wealth of Nations."

This is important for one good reason. If the prices of agricultural goods are falling, and the price of gold and silver are also falling or stable, over long periods - decades, even centuries - the trend is massively deflationary.

On the surface, people may remark, "food is cheap," or other such trivial talk, but underpinning everything is agriculture, labor, and capital, which may partially explain why this current era of fiat money is lasting so long. Food is cheap, labor is cheap, fiat money is, essentially, worth not much more than the paper upon which it is printed.

That's why the Fed and other central banks are so desperate to create inflation, using everything from QE to ZIRP to artificially pumping up financial asset prices in a vain attempt to thwart the forces of nature, human and otherwise.

It's also important to note that during the Great Depression, those goods which were least affected in the downward spiraling of prices was food. While there were soup lines - just as today we have food stamps - few actually starved in America. Elsewhere in the world was different. Nations without adequate farming infrastructure were devastated.

Thus, it is my belief that there will be a global restructuring soon, if not already underway, because the current paradigm of debt-based money is failing.

Mark Cudmore, the headliner of this piece, may not be popular around these parts, but it's probably because few understand the massive forces at work, underneath the fiat money system. He may be onto something bigger.

bitzager bigloser Wed, 03/21/2018 - 08:57 Permalink

Dude, what are you smoking? "Food is cheap"..??? Chicken $15/whole, Milk $6 a gallon and quality beef not affordable even for "middle class" 13-20$/lb steaks x3 from about 3-6$/lb 20 years ago.. While labor maybe same as cheap as 20 years ago, food prices doubled or tripped since then, not to mention health insurance, education and stuff x8-x10, now you can calculate the real "income"... Yeah, everything is "cheap", if you have a printer in your basement, like fed (treasury)..

In reply to by bigloser

bitzager Nothing Wed, 03/21/2018 - 09:10 Permalink

Well, if China sets tariff on export then food producers might dump some

of their supply to local US market at cheaper prices, hopefully..

P.S. I don't know where you get $1.35/gallon milk at Walmart

in what Country (Iran)? On US East Coast cheapest milk (general)

at Walmart $3 and change per Gallon, unless you bought some expired "clearance" crap ... LOL

In reply to by Nothing

bigloser Nothing Wed, 03/21/2018 - 09:11 Permalink

^^ THIS ^^ What he said.

I reiterate, "food is cheap," and it's getting cheaper. Was-Mart recently rolled out a line of salad dressings priced at 94 cents for a 16 oz. container. Checked the contents, and it's actually no different than the major brands, but, for half the price.

Anybody who lives out in the country, in flyover territory, will tell you stories about incredible bargains at side-of-road stands. My favorite: 8 pounds of delicious, heirloom tomatoes for $3. No lie. They were awesome and contributed greatly to some wickedly good sauce.

In reply to by Nothing

jago Nothing Wed, 03/21/2018 - 09:35 Permalink

big-box store 'food' is closer to soylent green.

pesticides, gmo, antibiotics, hfc, all roiling hormones, immune systems, and dna.

plus a million hidden shortcuts by suppliers to meet those everyday low prices.

i do sympathize with vast swath of our country forced to shop there. 

In reply to by Nothing

carlnpa bigloser Wed, 03/21/2018 - 10:19 Permalink

We have what I will call a hobby farm (not our primary source of income), but raise commercial quantities of wheat/corn/beans.

Beans are the only profitable crop at this point, but we can't raise them year after year due to weed resistance.

The big boys (or their banker) may say no mas at some point.  Think 0 production until the commodities rise in value.

We are seriously considering a year completely fallow, no production.

Scale that up and you may have a different society problem, no food.

In reply to by bigloser

El Hosel Wed, 03/21/2018 - 08:52 Permalink

Oil has been allowed to rally for the Saudis IPO?

Is Donald going to do a Photo op holding hands with a Prince of Oil in the Rose Garden - like little "W" ?

I doubt it, but, he will sell them some big guns.

bigloser Wed, 03/21/2018 - 09:13 Permalink

Russia has overtaken Saudis as the world's largest producer of oil. Happened like a year ago.

Nobody noticed because, well, ya know, we hate Russia.