Agriculture runs

This caught people off guard: Soaring prices threaten new food crisis

Corn ran 13.3% in one day as the closely watched USDA report lowered the estimated US output by 4% which will slash US stockpiles of the foodstuff to the lowest levels since 1996. Oats, barley, soy and wheat also ran sending DBA (+6.3%), CORN (+14.6%) and others on a tear while TSN and SFD got dropped like ugly sisters.

The key reason attributed to the shortage was a convergence of adverse weather around the world this year (hot, dry, wet, etc), though this can hardly be a surprise. In the world of infinitely fast information and literally hundreds of millions of individual market players, what are the chances someone didn't say "hey, maybe crop yields will be 4% lower this year?" We here at inflation bubble are looking for signs of global monetary policies (such as US-QE) showing up as price inflation, which it inevitably has too (unless "this time it's different" ... my favorite phrase).

So, if the price of corn just rose 13% in one day, does this count?

Looking back a bit here, assuming interest rates 'had to rise' (especially in the near term) is one of the most painful calls of my life (the other was betting heavy that GS and MS were going to fall in Oct-2007, I missed this one by 1 lousy year!)... It is obvious now that the Feds can, and will, manipulate interest rates to all time lows and keep them there (for the time being), but this does not mean that inflation will not be seen elsewhere.

IT IS POSSIBLE TO EXEPERIENCE INFLATION WITHOUT RISING INTEREST RATES. Case in point, all this hoopla around the currency wars, essentially a game of international musical chairs of sorts: a race to the bottom before there is no longer any more ink in the press and this whole debt charade goes (potentially literally) nuclear. However, this can take a Frustratingly. Long. Time (the Feds have a shitload of ink). But let's not miscalculate anything here: gold is at $1,350 for a reason, up 350% from 2003, which was coincidently the time that "banks" began rubber stamping NINJA loans to anyone who could fog a knife. After gold, I predicted agriculture would be next. Now that it turns out I might be right, I have stepped out of the woods, shaved the beard, shaken off the $20k in unfortunate late-summer losses (really it was all about money management and not picks-- getting greedy and all), and put my mountain-manned soul-searched being of the past two months to work for the common good.

So with that I'll thank my lucky stars for being long CORN (stock) and DBA Jan11-28 calls and look forward to what next week brings. A crash back down means more hibernation on the inflation bandwagon, but a further run is reason to watch very, very carefully. The times are potentially, as they say, 'a-changin.'

So on to next week and beyond, one initial point to contemplate on the prognostication front: DBA left a nasty "evening star"-esque candlestick pattern back in June 2009. This is indeed troubling as the last few months mirror the run-up to this previous one closely. However, overlay this chart with gold and something eerie is seen: a divergence around that same point in time, Agriculture went down and sideways as gold soared. If one of these plays catch up to the other, then something is going to move, and soon.

Is the hibernation over?

FFO versus Au

Can someone please explain this?:

Some serious decoupling going on around January 2003. Isn't this when the housing bubble was in full swing?

(Source data on fed rate and gold)

Left axis is gold multiplied by the Fed rate (as a hard integrer, not as a percent). On the right is gold divided by the Fed rate.

Whatever this means, were off in the "10,000 units" zone again. Zooming in on the last few years:

Wanna guess where there first purple point ticks off the baseline? Answer: October 2008.

But remember, the Fed keeps the rates low because there is no inflation. At least, that is what you're being told, and the government always tells the truth, so move along ...

Some recent trading activity and thoughts - Last weekend of August, 2010

These are my current TBT and TLT positions:

TLT:

1) 10 Sept-110c (these are meant to capture any further appreciation in treasuries should they still be mid-rocket-rise like Dec 2008, when TLT hit 122+).

2) 4 Jan11-100p (would anticipate rolling these to 105 if TLT should go over 115 this month)

TBT:

3) 60 Sept 35 calls

4) 10 Sept 45 calls (old position that never got rolled down, not expected to make jack here)

5) 5 TBT Sept 40/33 put spread (short the 40 puts, long the 33 puts). This position used to be 10 contracts and I had to shrink it back. Looking to kill the trade off over the course of the month due to disliking short puts on leveraged funds (more on that below)

I also have two more TBT plays I would consider LEAPS (these suck because one of the epiphany's I've had recently is that long term investments in leveraged funds is a non-starter). I'm looking to close these on any near term bounce:

6) 10 Jan11-43c, and

7) 10 Jan12-75c

Suprisingly, should interest rates continue to fall, even after Friday's treasury pullback, I would only need TLT to reach ~113.50 in order to break even on the short term plays (considering also that much of the loss has been factored into the the rolls from August, hence the -$15k bitch-fest in a comment following my last post). So either, treasuries need to go way WAY up (TLT 115+, less preferable scenario), or follow Friday's march much lower (TBT 36+, more preferable scenario).

Another position I entered recently was 10 SDS Jan11-32p. This is a 2X leveraged fund that rises when the S&P500 drops. I am not necessarily bullish on the market, but have certainly noticed a trend in the price action of leveraged funds in general. EVERY THING ELSE BEING EQUAL, PUT OPTIONS ON LEVERAGED FUNDS ARE PREFEREBALE IN THE LONG RUN. This is simply due to the premium the fund must pay to remain properly leveraged. When the market falls in the short term I lose on SDS, but if it stagantes or rises slightly, the puts outperform the calls due to decay in the long term (even if the market drops a little this still works out).

I'm not going to try to dig it up now but last year I noticed something funny about two leveraged funds that were both 2x (or 3x) the US financial sector in opposite directions. OVER 2 YEARS THEY WERE BOTH DOWN, one about 60% and the other 90%. That is, if you had bought puts on both you would've been guaranteed a profit regardless of market direction. This type of 'free money' does still exist and needs to be exploited.

Hyperinflation

Here's a good twin set (original and Part 2 follow-up) blog article pair that lays out a case for American hyperinflation, with a particularly good execution mechanism that ultimately comes around to the following four conclusions:

1) A hyperinflationary event will happen, following the crash in Treasuries.

2) Commodities will be the go-to medium for value storage.

3) All asset classes will collapse in short order.

4) Most importantly—civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.

Forbes editorial

Adding some color to the announcement of QE2:

"I expect the coming doses of quantitative easing will finally spark adverse reactions, first in the dollar and later in the bond market. When a falling dollar forces consumer prices and long-term interest rates to rise, the Fed’s actions will be rendered impotent. The Open Markets Committee will have to make a horrific choice: fight inflation by tightening policy into a weakening economy, or fight recession by allowing inflation to burn out of control. I think it’s obvious that they will choose inflation, all the while pretending that it doesn’t exist."

My question is when?? TBT is killing me. Everyday, interest rates GO DOWN MORE! I'm bleeding tremendous losses and have exacerbated a chasing strategy that has hurt me in the past... the very point of which tracking decisions through a blog was originally intended to help cure.

This week I expect to make some changes. The key is to stay focused, to not panic, and take control instead of losing it.

Bubble forming in bonds

Even Forbes is getting in on it now:

“Have Americans ever been satisfied with earning a steady but low rate of return? What we have in American history is rolling from bubble to bubble, whether it’s stocks, real estate, commodities, emerging markets, time shares . . . when one bubble bursts they are moved to the next one.” Lee implies that the bubble currently forming is in bonds.

Inflation, not economy, now principal risk

Inflation is the 800 pound gorilla in the room, but it is a ghost of a gorilla because you sure cannot see it when mortgage rates are at an all time low (4.54% ?!?!?). This is the point of maximum opportunity. Go short treasuries!