Notes From Underground: Trade Complications (The Power of the Nation-State)

That headline is courtesy of Whitewave Trading, an interactive chat room in which high-powered analysis for traders generates some great trades and uses NOTES FROM UNDERGROUND to add a fundamental view. Monday’s Whitwave has this advice: “When and if they ever taper, I’ll turn over the trading card.”

For those never on the trading floor this is in reference to going from the BLUE buy side to the RED sell side. In a follow up to last week’s blog post this makes perfect sense for as it seems that a critical indicator to an equity correction in the U.S. would begin with the FED actually moving to a real TAPERING or in Peter Boockvar’s words, A QUANTITATIVE TIGHTENING.

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If my conjecture about President Lagarde’s press conference is correct then Chair Jerome Powell has been placed in a difficult position. IF THE FED IS THE FIRST MOVER OF THE MAJOR TO RAISE RATES AND CUT QE THEN THE DOLLAR WILL RISE BECAUSE OF THE MASSIVE AMOUNT OF GLOBAL DOLLAR-DENOMINATED DEBT. A rise in the DOLLAR would lead to declining profits for U.S. multinational corporations, as well as emerging markets having to raise capital thus initiating a global liquidation of various assets. This would naturally mean a correction in equity markets. I guess we’ll see this week as we get another FOMC meeting and Powell press conference.

If Lagarde has really made things difficult for the FED then the language at this PRESS CONFERENCE will be far more revealing than any plans to taper in any form. If there is sense of a reduction in MBS purchases look for a move to more Treasury buying to replace the mortgage portfolio. Chair Powell will be citing the DELTA VIRUS as a new major concern, giving the FOMC justification for maintaining the present course. I am raising this issue as a critical indicator of what could initiate a necessary equity market correction. There is so much discussion of stretched valuations but with ZIRP in full force around the globe it is difficult to find “reasonable returns on capital” without taking on even greater risk.

So many asset classes getting battered in last week’s price action in response to a renewed COVID threat, yet the SPOOs closed at all-time highs on Friday. This equity market action accompanied by the BLOOMBERG COMMODITY INDEX closing at SIX-YEAR HIGHS, even as the media continued with the end of the reflation threat. At the end of the day, I think the DOLLAR is a very important element to the global inflation/disinflation discussion and therefore important to many asset valuations.

***Return to the unthinkable concept of national states directly impacting markets, I’d like to the July 5 post titled, “A question to ponder.”

The question was the potential impact of nation states and sovereign wealth to affect myriad asset classes. As we have learned with the BOJ and SNB as it relates to equity prices, the power to use futures markets around the globe to push commodity prices UP or DOWN certainly has a modicum of reality.

If CHINA wants to buy raw material inputs at lower prices it can use its vast foreign reserves and leverage to force prices lower in an effort to buy while others are selling/liquidating positions. This is a major reason why the catchword at NOTES is patience in an effort to control your risk. Do not chase markets but look to establish of your risk comfort. The FED and White House have been noting the drop in LUMBER prices as a barometer of the TRANSITORY nature of headline inflation. Maybe some nation-state money manager interceded in the highly leveraged lumber futures market to knock prices down?

In an article published last month, China’s National Development and Reform Commission raised concerns about what Chinese authorities call “LIVELIHOOD COMMODITIES.” These commodities have important implications in the daily lives of Chinese citizens.

We gleaned this from the NDRC: “In recent years, the price control mechanism of important livelihood commodities has been continuously improved, and remarkable results have been achieved in the work of ensuring supply and stabilizing prices.”

In its concluding paragraph the NDRC is straight forward about livelihood commodities. “The meeting also analyzed the current and future price situation, made a comprehensive deployment of this year’s work to ensure the supply and stabilization of important of important livelihood commodities, combined with the improvement of the price control mechanism of important livelihood commodities, and focused on the key points such as corn, wheat, edible oil, pork and vegetables.”

This story merely brings to light the effort by so many governments to control the affordability and availability of critical staples for the poorer citizens. Transitory, how doth one measure your sting. Just reminding all traders of the powerful impact of political actors to maintain their positions. Last week the Russian Government put export taxes on various grains to ensure that there was enough food for domestic consumption. And bonds rally, stocks rally and U.S. equities make all-time highs. Are there any doubts that 2+2= 5?

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