TIPping point for commodities
July 30, 2021
–A couple of related charts are attached. One is the ten year inflation-indexed note yield, which has made a new all-time low near negative 116 bps. The five year is, of course. even more deeply negative, also at an all-time low, at -196 bps. Today we get the Fed’s preferred inflation number, Core yoy PCE prices, expected +3.7% from 3.4 last, Headline prices expected 4.0 yoy. With the ten-year treasury yield hovering just over 1.25%, actual real yields are much more negative than indicated by tips. So, what is one to do? Borrow as much as you can, as near to treasury yields possible, because it appears as if the ultimate goal is to destroy the purchasing power of the currency. (At least that’s what the $30 rally in gold yesterday seems to be indicating). Unsurprisingly, AAPL did just that with a $6.5 billion bond offering which will help them buy back shares. Sort of like the Fed buying treasuries…
–It’s not just gold. The Bloomberg Commodity Index made a new high for the year yesterday. In fact, at 97.50 it reached the highest level since before Trump was president, early 2015. When looking at a long term chart of BCOM (attached) it appears to have plenty of room to run. Even if one ignores the extremes entirely caused by crazy oil prices in 2008 ($140/bbl) and in 2020 (negative $60/bbl)… take the 2011 high of around 175 on BCOM and the 2016 low of 72, and the midpoint is 123.5. Versus 97.50 now. All we need is for Tim Cook to take a little of that bond money and copy Bill Gates by buying farmland. TC thought bubble: ‘I’ll let those other idiots build rocket ships. I’m going to buy something people really need, AAPL shares and food. Smart.’
–Speaking of rocket ships, AMZN results underwhelmed the market, causing a pre-market loss of 6%. I know this isn’t the right way to think about it, but according to my back of the napkin calculations, that’s an instant evaporation of about $100 billion in market cap, landing right about where it was at the start of the year.
–In eurodollars, the Dec midcurve 0EZ 9937.5/9912.5 put spread traded 2.5 about 80k, some covered 9956.0. Settled 2.25 vs 9958.5. New buying, as open interest rose about 30k. These options expire in four and a half months on Dec 10. Is it possible, within that 4+ month timeframe, to perceive the Fed hiking in the second half of next year (underlying contract is EDZ’22) when they haven’t even started to taper yet? The top strike is 62.5 bps, vs current 3-month libor 12.5 bps. Real rates are trying to tell us something. Commodities are whispering the same message.
