Perusing a Speculative Commodity Rally.

First a kind message to those delightful people that provide rail services to the southeast of England.. "IF I WANTED TO BE HELD IN A SWEATY BOX IN LEWISHAM I WOULD HAVE CALLED A PHONE BOX S+M NUMBER RATHER THAN PAYING TO GET ON YOUR TRAIN!". There. That feels better, but it does strike us as odd that if a bank might possibly have missold a tiny product it has to pay grillions in compensation but should a rail co well and truely screw up thousands of people's day then a tannoy apology suffices. We can hardly see the regulator allowing banks to just get away with "we apologise for the manipulation of your fix this morning, this was caused by overunning profiteering. Once again we apologise for any inconvenience caused".


It's going to be light from us this week as the wild and windy moors or northern England attract us away (if we ever get there) from the wild and windy markets. But these markets aren't really that wild or windy unless you are an uncool dude who is refusing to toke on the spliff of carry and refusing to go with the mellow flow of the market. It's all a bit Apocalypse Now. The beginning of the river trip where whilst you know there is some real badass shit out there, you might as well ride the boat up the river catching some rays, listening to some tunes and puffing on whatever takes your mind off worrying about the next ambush around the corner. As Mrs TMM has often said, "Only worry about what you can change" and yelling that "It shouldn't be here" isn't going to change it.

Which is probably exactly what most people are worrying about at the moment. Core beliefs have not died and we are in that part of the S curve where beliefs are being sorely tested by Mr Price inserting cold steel into the flesh of positions based on fundamental pricing and traditional measures. As mentioned in previous posts, we think that we should hang up the logic and embrace the mood for the next few days. Or at least not stand in front of it.

Does this all end in tears? Of course. You can't please all the market all of the time but in what guise will those tears manifest themselves? Well TMM are putting on their simple hats and see something like this.

Increased asset prices are the transmission function by which CB created cash and liquidity leaks out into the real world, reduces deflation and finally creates some inflation. We believe that western central banks are going to be deliberately along way "behind the curve" in a traditional sense, not wanting to choke off any growth (unlike the idiots in Congress). Equities, when they really start to move, become a form of money as they become a method of payment or collateral for loans in their own right and though not measured as money supply, should be. But TMM feel that any rally, when dramatic enough creates such price stretches that other assets start to look comparatively cheap. Even things that have been considered basket cases begin to look attractive.

Now whilst things don't look good for commodities on a big macro scale, running short has seen at best lacklustre performance over the past few months and in many cases shorts are beginning to hurt. China data is picking up (even if you don't believe it), copper prices are not going down and iron ore prices are going up (as is coal). Now of course this doesn't mean that the macro background is monstrously better but TMM think that the current background of price chasing in equities is starting to spill into commodities.

Whereas equity asset rallies transmit inflationary pressures through stimulating greater leverage against those portfolios (late 90s) commodity price rallies show up directly in inflation. IF speculation spills over into commodities then we could well see a repeat of 2006 where production was being syphoned off into speculative storage just exacerbating the problem of price rallies. Whilst regulators have been focusing on nailing down banks we would suggest that they have taken their eyes off the ball when it came to reducing speculative commodity price spikes, so the risks remain. TMM's greatest counter indicator is also saying its time for commodities to become more interesting - Haven't most financial institutions just finished dramatically scaling back their commodity capabilities?

TMM know that supply has increased dramatically in many of the basics but we still think that there is a strong risk of an "unexpected" commodity spike with its inflationary consequences coming on top of rallying economies and strengthening job markets. Not an ideal time.

So back to the start of this post, an "end in tears" is certainly on the cards, but where tears = inflation,

What are we doing? In the short term and as a spec path of pain trade, as the old favourite of Aus looks already overdone, we are thinking this.

US debt ceiling rebound in risk + Minimal immediate tapering = EM higher beta bounce.
=> EM bounce + rallying commodities + an under-performing market = buy Peru.

Have fun. We will be singing Kate Bush songs about "wiley windy moors" into the teeth of howling gales.