SHIT NO ONE TRADES

2016-11-29 2pm EDT  |  #softs #OJ #cotton #corn #soybeans #sugar

I trade much like I play guitar and fornicate - all over the place, with not much technique but great enthusiasm.

I just love to trade. If it moves, I want to trade it. Sometimes this love of trading gets me into trouble, but other times it allows me to seize opportunities in asset classes that more specialized traders are overlooking.

I have titled today’s piece “Shit no one trades” and before you get offended because I included your favourite futures contract in the list, rest assured I mean no disrespect. A better title might have been “Shit most traders have overlooked in their obsession with stocks, bonds and currencies,” but that didn’t seem as catchy.

In this day and age of extremely low real rates and a gazillion hedge funds all chasing every little bit of alpha, opportunities are hard to come by. Although I trade all the financial asset classes, I realize it is a crowded space and a “fade the hedgies” attitude is often required to be successful.

Over the past three decades our system has become increasingly financialized. Real assets have gone down in price while financial assets have gone through the roof. I don’t completely agree with the definition of “real assets” in the chart below, but it serves to show the general level of outperformance of financial assets over real assets during the past few decades:

But wait, didn’t we just go through a monster commodity bull market during the whole China infrastructure build out of 2002 to 2012? Yes, and that uptick can be seen on the chart.

Yet as vicious as that commodity rally felt, it was still minor in the big picture.

We have suffered through years and years of Central Banks encouraging too much credit creation which has flowed directly into financial assets. Even with the massive expansion of their balance sheets, Central Banks have been unable to create non-financial asset inflation.

That’s about to change. The masses (deplorables) have woken up to the elite’s game of propping up the assets owned by the 0.01%‘ers while the average Joe sees his salary stay the same (or even go down) while the cost of his expenses rise.

We are about to experience actual non-financial asset inflation again. Policies are changing worldwide that will mark the end of financial assets’ dominance. Money will flow to the masses instead of the 0.01%‘ers. It won’t be some two quarter blip. The general price level of regular goods will be increasing at an uncomfortable pace for decades to come.

How do you play it?

Buying the commodities that China drove higher last decade will not work. At least it won’t work as well as many investors would hope. China has created too much spare capacity in these commodities.

No, we need to find commodities that have been neglected. Shit no one trades.

During the 1970’s futures traders like Richard Dennis made fortunes trading trend following systems. They rode the general rise in prices by going long stuff like soybeans, cotton and sugar. Shit that no one trades anymore. Yeah, I know - these commodities still trade, but how many times does Bloomberg or CNBC talk about the big move in sugar versus every little tick in stocks?

These commodities are overlooked and under owned.

Some of them like orange juice and sugar have already started moving higher, but a whole lot of them like corn and soybeans are sitting near all time inflation adjusted low levels.

I have written bullish pieces on the grains in the past, but so far they have just been a bag of hurt. Perfect growing weather has led to record harvests and crushed any hope of a decent bull market.

But more importantly than one commodity’s short term squiggles, is the idea that on the whole, you should be buying breakouts in all these commodities. Richard Dennis’ trend following ride-the-wave system is about to experience a revival.

Let’s go through some charts, starting with the dogs that are bouncing along the bottom:

But for every canine, there are some charts starting to perk up:

And then there are those already showing themselves to be purebreds:

There are obviously individual stories I could write about for each commodity. Soybean oil went limit up the other day on changes in the bio-diesel requirements. The bean meal is rising on Chinese pork feed imports.

But individual stories don’t matter. What I want to emphasize is that the general direction for these commodities will be UP for years to come. Being in these names before the legions of hedge funds come and drive them up to truly stupid levels is essential.

Everyone is looking for the overlooked perfect hedge against over priced financial assets. Well, I would say go look at what the guy in the picture at the top of the post is trading. He is smarter than he looks. After all, you can’t deny anyone is going to steal his luggage…

Thanks for reading,
Kevin Muir
the MacroTourist