Month: January 2022

During a historic visit of Israel’s president Isaac Herzog to the United Arab Emirates (UAE) on Monday, the small Gulf country came under fire by a ballistic missile reportedly launched from Yemen. The attack was aimed at disrupting the Israeli president’s first-ever meeting with de facto ruler Crown Prince Sheikh Mohammed bin Zayed Al Nahyan in Abu Dhabi. UAE said its defense systems intercepted the inbound missile.

It’s the third such missile or drone attack from Iran-backed Houthi rebels in Yemen this month, as the Houthis are now attempting to take the fight to the UAE and not just targeting the Saudis (as the Emirates have long assisted the Saudi war on Yemen going back to 2015). 

“The attack caused no damage, the UAE defense ministry said, but follows a series of unprecedented strikes on the country this month by the Iran-backed Houthi militants in Yemen,” CNN reported. Rather than leave the country, Herzog is said to have “pressed on” with his visit.

Further, the Houthis owned up to the strike, specifying that they timed it with the Israeli president and delegation’s visit:

A Houthi spokesman said the group launched “missiles and aircraft” at “important and sensitive” targets in the UAE and indicated that the attack was intended to disrupt the Israeli President Isaac Herzog’s visit.

The President and his entourage were in no danger, an Israeli presidential spokesman said, and the visit continued as planned. Herzog visited Expo 2020 in Dubai — the UAE’s commercial hub — on Monday and met with UAE Prime Minister Mohammed bin Rashid Al Maktoum.

Over a month ago Israeli Prime Minister Naftali Bennett had became the first Israeli leader to visit the UAE, coming after the Abraham accords signed during the Trump administration formalized peace and restoration of diplomatic relations between the two countries. 

Just last week the US State Department took the rare step of issuing a travel advisory warning Americans about the increasingly dangerous situation in UAE, now being routinely targeted by the Houthis. 

“The possibility of attacks affecting US citizens and interests in the Gulf and Arabian Peninsula remains an ongoing, serious concern,” the travel advisory said. It added: “Rebel groups operating in Yemen have stated an intent to attack neighboring countries, including the UAE, using missiles and drones. Recent missile and drone attacks targeted populated areas and civilian infrastructure.”

Meanwhile, the Houthis have vowed to destabilize the UAE, once thought among the safest and economically prosperous places in the Middle East: “The UAE ceases to be a safe place so long as the tools of the Israeli enemy in Dubai and Abu Dhabi are used against our people and our country,” said Houthi spokesman Yahya Al Saree in a televised announcement. 

Prior attacks from Yemen came on January 17 and January 24, which left three foreign workers dead and multiple injured in the UAE capital. The Houthis have meanwhile vowed to expand their military operations against the country. Washington has long accused Iran of delivering increasingly sophisticated missiles and drones to the Shia Houthis, which is giving the militant group longer reach to hit places like Dubai. 

Authored by Lance Roberts via RealInvestmentAdvice.com,

The hard asset, commodity, trade has sprung to life over the last couple of months. Such is commensurate, and logical, with the surge in inflation. However, is the hard asset trade a sustainable one? Or is it a trap that will disappoint investors in the years to come?

When it comes to the commodity, or hard asset, trade, it is usually avoided by the mainstream media. They would rather focus on whatever “hot stock” or investment meme is leading the market at the time. However, from “gold bugs” to “oil traders,” the commodity trade is a source of booms and busts along the way.

For our analysis, we are going to focus on the CRB Commodity Index as a proxy for commodities. From the index, we can then explore how the dollar, interest rates, economic growth, and inflation drive commodity prices.

Is the commodity trade here to stay, or is this another “boom” waiting to “bust.”

A Long History Of Booms And Busts

Since 1980, the start of my data feed for the CRB Index, there have been 4-distinct cycles in commodities.

From 1980 to 2000, the trend of commodity prices fell as the economy shifted from manufacturing to financialization. Beginning in 2001, as the dot.com era came to an end, investment flows shifted to commodities and emerging markets in anticipation of a global resurgence. Housing demand boomed as mortgage rates fell, and energy demand rose on fears of “peak oil production.”

However, as quickly as it came, the demand for commodities faded as the financial crisis crippled the entire global economy. That deflationary trend continued until March 2020. As the Covid-pandemic locked down economies, governments injected billions of dollars to stimulate demand. Not surprisingly, inflation surged and demand for inflation protection in the form of commodities rose.

Since the demand-side of the equation was driven by artificial liquidity, the question is now the sustainability of higher prices?

To answer that question, we must understand that commodities, and hard assets in general, do not live in a vacuum. Rather, they are very subject to the supply-demand equation which ultimately sets their price. Therefore, and not surprisingly, economic growth, interest rates, the dollar, and the money supply weigh heavily on that equation.

A review of those factors, relating directly to inflation is useful in determining the current trend of rising commodity prices. Or, whether deflation is a bigger threat.

All lndicators Suggest Commodity Run Is Limited

If commodities, and hard assets, are driven by demand, particularly in manufacturing, then there are several indicators pointing to the ongoing demand for those assets.

Interest rates are important as rates reflect the strength of economic growth, inflation, wages, and overall demand. There is a decent correlation between the annual change in interest rates (reflecting economic strength or weakness) and commodity prices.

Not surprisingly, the recent surge in commodity prices, from the 2020 lows, corresponds with the jump in rates. Such corresponds with the flood of fiscal policy allowing demand to outpace the economic production capacity. However, with the liquidity now reversed, rates are reversing to levels consistent with weaker economic growth rates.

A consequence of that reversal in liquidity, as measured through M2, is the reversal of inflation over the next 9-months. Again, since commodities are highly correlated to inflation, it suggests the peak in the “hard asset” trade as the economy normalizes.

Lastly, commodities, and hard assets in general, trade globally in U.S. dollars, and the trend and direction of the currency are important. As the dollar strengthens, such makes commodities more expensive for our foreign partners. A weaker dollar allows U.S. consumers to buy more increasing demand. Such explains why there is an inverse correlation between the dollar and commodities.

Where the dollar goes next will largely depend on the relative strength of the U.S. economy to the rest of the world. We suspect that while the U.S. economy will weaken in the months ahead, the rest of the globe will be worse. The U.S. has, and will likely remain, the “cleanest shirt in the dirty laundry.”

It’s The Economy, Stupid

While interest rates, inflation, money supply, and the dollar can give us clues about the commodity and hard asset trade, in the end it really is “the economy, stupid.”

As stated above, all commodity and hard asset prices are ultimately set by supply and demand. If the economy is strong, then demand for finished goods, real estate, housing, autos, etc., will be strong. The strength of that demand will increase production increasing the demand for raw materials. If the economy weakens, that demand falls leading to an inventory glut and a fall in prices. Not surprisingly, commodities track nominal GDP growth.

The surge in economic growth following the pandemic-driven shutdown was, as stated, an artificial “sugar rush” of liquidity flooding the system. Such caused a massive surge in money supply, leading to inflation given the lack of productive capacity. However, as is already the case, economic activity is reverting to its more normal levels.

“As the budget deficit grows over the next few years, interest payments alone will absorb a larger chunk of tax revenue. Such comes at a time when that same dollar of tax revenue only covers the entitlement spending of the 75-million baby boomers migrating into the social safety net.

By the way, the only other time government income support exceeded taxes paid was during the “Great Depression”  from 1931 to 1936.

The debt problem remains a massive risk to monetary and fiscal policy. If rates rise, the negative impact on an indebted economy quickly depresses activity. More importantly, the decline in monetary velocity clearly shows that deflation is a persistent threat.

The last sentence is the most important when it comes to hard assets.

The Hard Asset Trade Tends To End Badly

When it comes to commodities and hard assets in general, they can be an exhilarating and profitable ride on the way up. However, as shown in the long-term chart above, that trade tends to end badly.

Will this time be different? Such is unlikely to be the case for two reasons.

As shown by Goldman Sachs, inflation will reverse later this year.

Secondly, as the country moves toward a more socialistic profile, economic growth will remain constrained to 2% or less with deflation remaining a consistent long-term threat. Dr. Lacy Hunt suggests the same.

Contrary to conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year-end and undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.

As he concludes:

The two main structural impediments to traditional U.S. and global economic growth are massive debt overhang and deteriorating demographics both having worsened as a consequence of 2020.

The last point is crucial. As the liquidity gets removed from the system, the debt overhang will weigh on consumption as incomes are diverted from productive activity to debt service. As such, the demand for commodities will weaken.

Let me conclude with this point from Michael Lebowitz:

The multitude of dynamics that determine commodity prices means there are no quick and easy answers to determining an effective strategy. 

While the commodity trade is certainly “in bloom” with the surge in liquidity, be careful of its eventual reversal.

For investors, deflation remains a “trap in the making” for hard assets.

North Korea’s firing of an Intermediate Range Ballistic Missile (IRBM) on Sunday was the biggest in years. It warranted a response from the U.S. seeking discussions with Pyongyang without preconditions to deescalate the situation. 

Bloomberg reports a senior White House official described North Korea’s latest IRBM launch as destabilizing to U.S. allies and military forces in the region and a breach of United Nations Security Council resolutions. The official said the U.S. is committed to diplomacy with North Korea but has yet to receive a response from Pyongyang to open channels of dialogue. 

Sunday’s IRBM was the most powerful rocket North Korea launched since 2017. The projectile reached a height of approximately 1,243 miles and flew about 500 miles for 30 minutes before landing in waters outside of Japan’s exclusive economic zone. Images of the launch were released Monday by the country’s Academy of Defense Science via the official Korean Central News Agency. 

This year, North Korea has launched six ballistic missiles and seven missile tests overall, already surpassing firing totals of 2021. 

“The U.S. official declined to spell out how the U.S. might take action if diplomacy fails. A solution will require direct engagement and diplomacy on denuclearization of the Korean peninsula, the official said, adding that the U.S. has been seeking to have direct discussions and is ready to meet anytime at any place without preconditions,” Bloomberg said. 

Authored by James Rickards via DailyReckoning.com,

Remember this time last year when the vax bandwagon really got rolling? The vax had been announced in November 2020 and was fast-tracked through the approval process (on an experimental basis at the time).

But it took a while to get to doses shipped and distributed and for people to become aware of where they could get it. That played out over December 2020, but by January 2021, the effort was in full swing.

The first thing those getting jabbed learned was they would have to return in a few weeks for the “second dose.” That was understood and widely accepted, although the Janssen vaccine is different and only requires one shot. Janssen is not nearly as available as the mRNA vaccines from Pfizer and Moderna.

The bandwagon continued through 2021 to the point that about 70% of the U.S. population is now fully vaccinated.

So Much for the “Pandemic of the Unvaccinated”

But by September 2021, doubts arose about the efficacy of the vaccines. They never did stop infections and don’t stop the spread of the virus, but the public was led to believe otherwise. As the Delta variant raged in August and September, followed by the Omicron variant in November, the entire vax story started to fall apart.

The elites who have blamed earlier outbreaks on the “unvaxxed” and those who are fully vaxxed themselves began to get COVID by the millions. They belatedly realized that this was not a pandemic of the unvaxxed but was a pandemic where everyone is vulnerable.

As I’ve said all along, the virus goes where it wants.

Big Pharma Doubles Down

Still, Moderna and Pfizer came forward with a “booster” shot, which is really just another dose of the same vaccine as a solution. Tens of millions lined up for their boosters in the fall of 2021, only to get the Omicron variant of COVID when it ran out of control in December.

So the booster didn’t work either. In fact, there was some evidence that the vaxxed and boosted are more vulnerable to Omicron than the unvaxxed because we have “taught” the virus to evade the vaccines by giving people so many injections.

There’s also some evidence suggesting that repeated vaccination weakens the immune system overall, making people more vulnerable to other diseases. Since these vaccines are experimental, it’ll take years to fully understand their effects.

But rather than admit failure or at least offer a note of caution, Big Pharma is at it again.

Big Pharma Triples Down

The CEO of Moderna says a fourth dose of his vaccine will be needed by this fall. He doesn’t call it a fourth dose; he calls it a second “booster.” But it’s the same thing.

What this really means is that the effects of the vaccine wear off after three–six months and you’ll have to get “boosters” the rest of your life and take your chances with serious side effects, including heart failure and even death.

I can understand why the drug companies favor that. I don’t understand why everyday Americans would. Maybe we should all look to Israel…

96.2% Vaccinated Israel Swamped With COVID

When it comes to vaxxing the entire population, no country is more aggressive than Israel. They acquired large quantities of imported vaccines and recently began an effort to manufacture their own vaccines in order not to rely on imports.

Beginning in December 2020, Israel vaccinated 14% of their population in a mere three weeks. Today, the rate of fully vaccinated Israelis is 96.2%, the highest in the world. Israel was also aggressive when it came to boosters and is already working on plans for a fourth shot (or second booster).

But this vax campaign has not really helped Israel. They had huge outbreaks last summer and another wave from Delta and are now swamped with new cases from the Omicron variant.

All of this is consistent with the best research that shows the vaccines do not prevent infection and do not stop the spread of the disease. However, they do reduce severe cases and fatalities, at least until they lose their potency after a period of months.

Scientists Want Government to Admit Vaccine Failure

Now serious scientists and clinicians in Israel are calling upon the government to admit that the vaccines don’t work as expected and to work on other ways to control the virus, including effective treatments instead of ineffective vaccines.

The letter is addressed to the Israeli government, but it’s equally accurate as applied to vaccine mandates anywhere in the world, including the U.S.

As I stated earlier, it looks like we’re at the point where the vaccines may be doing more harm than good by, in effect, training the virus to mutate in ways that defeat the vaccines.

The irony of this is that the unvaccinated may have better natural immunity than the vaccinated against Omicron since the virus has mutated in order specifically to defeat the spike proteins produced by the vaccines.

Mounting Evidence of Serious Side Effects

More evidence is emerging about the side effects of the vaccines, including heart failure among otherwise healthy men under 40 and reproductive damage to women of childbearing age.

In addition, the number of young, otherwise healthy professional athletes who have died or suffered serious cardiac events is alarming. The number of incidents greatly exceeds what can be expected by chance, based on previous years’ data.

It’s unlikely the Israeli government will admit to any of these failures; they have taken an all-or-nothing approach to the vaccines, much like U.S. public health authorities like Dr. Fauci.

Unfortunately, this means the vax mandates and endless boosters will continue for now.

Still, the rest of the world is wresting with the same issues. Lockdowns, quarantines and mandatory vaccines are not free. They destroy economies. Let’s hope the vaccine madness ends before the economy is run into the ground.

Reason for Hope

And today, there’s new reason for hope.

U.K. Prime Minister Boris Johnson has just announced that England will be lifting requirements for COVID passes, ending mask mandates and canceling work-from-home requirements.

“As COVID becomes endemic, we will need to replace legal requirements with advice and guidance, urging people with the virus to be careful and considerate of others,” Johnson said.

In other words, the virus is here to stay and we’re just going to have to learn to deal with it, like we deal with annual flu outbreaks.

We should protect the most vulnerable (the elderly and those with serious comorbidities), but the rest of society needs to function as normally as possible.

Were you listening, President Biden?

Over the weekend, we reported on the record amount of put-buying that was occurring in US equity markets, with Goldman traders pointing out that we have been averaging $1 Trillion worth of puts per day.

There were several days last week where put notional set records, and Goldman indicates that hedgers tended to be institutional… and mainly focused on the indices:

“Monday for example $2.2 Trillion notional traded in US options market, with 64% puts ($1.4 Trillion) further adding LP hedges and taking the street further short gamma. We have maxed out our index put notional chart.“

But, as Nomura’s Charlie McElligott noted in a report this morning, it appears retail investors have also discovered “puts” after newbie traders took the stock market by storm just a year ago by buying deep OTM calls and sparking ‘gamma squeezes’ in the market’s worst left-for-dead zombie companies.

As Bloomberg’s Elena Popina notes, as the S&P 500 spent the week struggling to take a break from a nearly month-long rout, small-lot options traders – those trading 10 contracts or less – spent a record amount of money establishing new bearish positions.

The average daily premium spent on small-lot put contracts also reached the highest level in recent history. The daily average premium that small-lot traders shelled out for protection jumped to $963 million, twice the level seen in October, Options Clearing Corp. data analyzed by Susquehanna’s Jacobson show.

The smallest traders with bite-sized bets spent a record $6.5 billion buying put contracts last week, data compiled by SentimenTrader show.

It’s the latest evidence that the BTFD frenzy – so much of what has fueled the fintwit/tiktok gurus behind the stock market’s gains since the start of the pandemic – is changing. As Popina notes, the newbie crowd is getting less interested in buying dips — a departure from the trend between the summer of 2020 and middle of last year.

The “steady declines in apparent retail participation on the call side alongside incrementally higher participation on the put side” is supportive “of the idea that retail participants on the option side are generally chasing momentum and not aggressively buying dips,” said Christopher Jacobson, a strategist at Susquehanna International Group Inc.

The question is, of course, whether this dramatic ‘hedging’ positioning is enough to spark a meaningful bounce.

SpotGamma notes that there is little signal that traders are about to release the bulk of their protection, much less short volatility with size.

Therefore, there is still plenty of fuel for a short cover rally fueled by put covering.

More tactically looking at equities, where we are push-pulling between the 4400 strike, which is the largest $Gamma line ($2.08B), the 200DMA at 4430, and the stops above the spike-highs from last week’s FOMC day.

If the market holds 4400 we believe implied volatility will trend lower, which adds a tailwind to equities through vanna flows.

On the constructive side, McElligott notes that we are considerably off the worst levels of the Dealer “short Gamma” hedging dynamic felt last week, which contributing to the violent and “chase-y” moves both higher- and lower-; in fact, the SPX (short) Net $Gamma was cut in half into today, while QQQ (short) Net $Gamma was reduced by nearly 30%…so that erratic trading fueled by “accelerant” flows too is greatly reduced and should contribute to a more “stable” dynamic

However, Nomura’s McElligott raises the specter of the clear theme coming out of the largest downside macro drivers for US Equities as determined from the PCA model, where both SPX and NDX now show:

1) (higher / less “easy”) Real Rates and

2) (wider) Corporate Credit as the two largest downside pricing sensitivities for US Equities…

Hence, two factors which Equities managers need to be conscientious of moving-forward.

STFR?