Has the Putin commodity bubble burst?
Regular readers will know that we have been riding these majestic waves ever higher in commodities – from crude oil to coffee to soybeans and more – from the lows almost exactly two years ago. And now the long-anticipated invasion of Ukraine by Mr Putin has occurred – and my question is this: have we reached the terminus of the Putin commodity train.
In this time, Wheat has soared by a pretty stable $5/bu to the recent $9.50. Soybeans from the pretty stable $9/bu to the recent $17.50 and ‘boring’ Corn from the stable $4/bu to the recent $7.50. Historically, these are massive moves for these commodities. That is why I labelled them early on a being in historic bull markets.
But have they topped now that we likely have a Buy the Rumour, Sell the Event condition? Have these extreme prices just about priced in every conceivable hazard to the new crops and have the high grain prices encouraged lower consumption levels than originally expected? That’s what high prices usually do.
In the case of Wheat, demand is relatively inelastic as the price of the Wheat is pennies per £2 loaf of bread. But not so for Corn and Soybeans – both animal feeds. US meat prices are also high, but any weakening of farmers’ margins would immediately cause them to cut back on their feed orders.
Last time, I recounted the story of how the gold market reacted to the 1979 Russian invasion of Afghanistan (another pesky border country) with the abrupt spiky termination of the lengthy bull run on 1 January 1980 which then heralded a long and persistent bear run over many months.
So has history repeated with exquisite timing and almost the same basic scenario – Russia invading a neighbour (and then ultimately withdrawing much in failure)?
If I was cynical (and I usually am), I would suggest that Putin has invaded not only to raise his profile internationally, but to garner major concessions from NATO and the Western ‘democracies’.
Russia is still an emerging economy and they need major investments to keep their people happy. But with their mafia-style kleptocracy dominating, that is unlikely to happen anytime soon. But if Putin can somehow diminish the oligarch’s influence, that could change.
In any case, despite the current sanctions, I believe Russian shares could be at a similar spot to China’s 10 to 20 years ago – a screaming buy.
On Wednesday the 23rd, the invasion got under way and gold spiked to $1975 on Thursday at 10.00 am and then fell hard and was down $100 a mere eight hours later for a daily range of $100 – a rare event in gold.
And VIP Traders Club members were ready – we were taking profits on the way up as I believed I saw the ghost of 1979/80 stalking my trading room. As it happened, that was no ghost or mirage – it is getting more real by the hour as the gold price is failing to recover.
This volatility has suddenly shaken up the market and this is my best guess roadmap. It should decline further and if/when it reaches the major wedge line support, that will be the moment of truth. In the meantime, I will be watching and waiting as this is not the time to be taking major positions.
And as I write, the all-conquering US ags (wheat, corn and soy) have entered a steep correction (at least) with the leader soybeans off a whopping 135 pips overnight. Again, VIP Traders Club members were ready for this as we were taking profits on the way up.
These extreme moves is testament to the degree of bullish sentiment taken by hedge funds (COT data).
As I wrote to members Friday morning: thank you, Mr Putin! He is widely derided in the West, but not here. he remains on my Christmas card list (for now).
But have we reached Peak Putin? After all, even if he does ‘conquer’ Ukraine and manages to installs a puppet regime, how can he top that? By invading the next country – Poland? Or maybe the Baltic states? All of them are heavily pro-Western and have no interest in re-forming into another failed communist Soviet Union, as Putin apparently dreams about.
Even the western section of Ukraine leans very heavily towards Western values and many would try to undermine any imposed Kremlin-lite governance. Mr Putin may have bitten off more than he can chew. And that is why we may have reached Peak Putin on Wednesday.
And the sanctions will hurt. Of course, the West needs his oil and gas and so will not go nuclear option by removing the dollar payments system, Our politicians will remain full of sound and fury, but signifying nothing.
With the West hell-bent on waging its War on Fossil, they have played into Russia’s hands – and laid the stage for an even more severe energy crunch later on. Politicians – don’t you just love ’em?
Stocks rallied hard on Friday – as expected
To my mind, the stock rout had gone too far too fast by Wednesday morning and the newly-launched invasion provided the right context for a Sell the Rumour/Buy the News short covering operation – which we did right near the 32,200 Dow low. I was unsure how high any bounce-back would carry, but since the market had fallen so far so fast, I reckoned it could be quite a big one – and so it has proved.
And with Friday’s close at 34,050 – a two-day gain of almost 2,000 pips – it has certainly qualified as a big one! But it rests now on two major Fibs and chart resistance area with momentum now overstretched to the upside (see arrow). That’s what I call extreme volatility!
And so I will be watching Monday’s opening with more than my usual interest. Several rationales have been offered for the two-day 2,000 pip surge. One story has it that investors bought the dip because they believed the Fed will be less aggressive in its tightening with Russia upping the energy ante.
A more believable and rational reason is that there had been a mass buying of put options insurance against a sharp decline by hedge funds – and they were paying off handsomely by Wednesday. Because most hedge funds are herders, many decided to cash in their option profits and force the indexes higher while still owning their share portfolios (which were recovering previous losses anyway). A kind of win-win for them. Smart play.
But since the trend remains down, I expect the indexes to top out next week – maybe on Monday where it lies at the stiff resistance area? I will be poised.
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An aside that is appropriate for today’s world
Many believe it is the news events that drive markets. It’s logical isn’t it? And it is the MSM that keeps that chain of causation well and truly alive since otherwise, they would be out of a job! If it actually is the other way around – that markets foretell the news – they would be powerless to comment on market moves that totally baffle them.
As it is, they have the magic powers of hindsight to ascribe plausible rationalisations for what has just happened. And most investors buy it.
But if anyone could make profits from this charade then I have yet to find one. No, profits are made by being ahead of the crowd and anticipating the next moves that usually have arrived just before the news hits the headlines. Oh, and acting ahead of the news.
Followers of the MSM are like football fans who watch/read about the last game and delight in the recounting of the great goals their team had scored (only if they had won, of course). It is very satisfying. I used to do it when I followed my team when I was at school (a habit I quickly lost).
Noting the results of the last game will not win any new bets.
To be a successful trader/investor, you must wean yourself away from this line of thought and adopt the opposite model – that markets foretell the news.
And that is what we did in our Gold trading. It was common knowledge for weeks that the Russians were planning to invade Ukraine (massive troop build-ups at the border). Gold was likely to benefit as it is usually a safe haven seen by others. Gold staged a huge rally, but the important point was you had to observe this budding rally before being committed to that view.
If Gold had declined in this period, then something else was happening and you would have been wise to abandon your bullish stance. Never fight the market.
If the market does not respond in the way you imagine, then you have imagined wrongly.
Finally in financial markets, price is all that counts. If you get in at 100 and it goes to 150, then you are right for being bullish, no matter what your reasons. But if it goes to 50 then you are wrong, no matter what plausible beliefs you hold. The markets are always right.
I have made many successful trades where I held my nose on entry. But remember, it is always possible to make a bullish or a bearish case for any market at any time. The bulls ignore the negatives and the bears ignore the positives. Only the market will decide which is right.
And that is why I am always flexible and ready to switch horses if the market fails to back up my stance.
And when you are on the right side of a winning trade, it feels wonderful and you think you are a genius! But remember the times when you were not so lucky and/or smart and that should bring you back down to earth!
But whatever happens, try to have fun in trading – after all it is really a game where you are trying to out-smart the majority. It is simple but not easy.
Crude oil is at a crossroads
Last year, I took the view that with Western governments in thrall to the Green Blob, fossil fuel markets would explode. And so it has proven. Here is the 4-hr chart showing the incredible surge in US Crude this year alone
With the pandemic effects wearing off and economies getting back on track, energy demand has rebounded especially in Asia. Western governments have been falling over themselves to deny permits for new finds and to discourage re-opening old ones (esp North Sea) in their Net Zero zeal, pressure on supplies has been building to where the world is at a critical juncture. And coal prices, ironically, are at record highs.
You can always rely on governments of all stripes to enact rules that produce unintended consequences -and tis one is a real doozy. Those of us that saw it coming have been well rewarded. But US Crude has hit my long-standing target around $100 and is at a critical juncture.
On Thurs/Fri, the price sagged by $10 (10%) as the massively long hedge funds unloaded for huge profits (as we did). They had been building massive long positions and took the opportunity to enact the Buy the Rumour/Sell the News law of trading (see above).