Commodity Gap

This note was originally published at 8am on March 04, 2013 for Hedgeye subscribers.

“Icy with anger, warm with satisfaction, sharp with concern”

-Emmet Hughes


Allegedly, that’s how President Eisenhower reacted to Russian intelligence briefings in July of 1956. While he didn’t sign off on the depth of the American U2 spy plane mission to begin with, “the President’s skepticism (about Russia) had been confirmed by just five days of aerial reconnaissance. The Bomber Gap was a myth.” (Ike’s Bluff, pg 215) The Russians didn’t have anything real.


Like the “missile gap” concerns that came thereafter, the Bomber Gap was part of the political fear-mongering that kept the American People on edge, building home bunkers, and buying canned foods – essentially preparing to be attacked. But freaking people out with a false story that’s based on logical premise isn’t new in this country. That’s how the #PoliticalClass gets paid.


Ultimately, knowing the truth (but keeping it to himself) became Dwight Eisenhower’s advantage in a world that was perpetually on the brink of war. When I see the emerging advantages of sequestration (Strong Dollar born out of fiscal spending sobriety), but hear politicians trying to scare people (when they should just get out of the way), I think about leadership. I also think about Ike.


Back to the Global Macro Grind


Does President Obama get what a Strong Dollar does for the US Economy? Did George Bush? Nixon and Carter didn’t. Reagan and Clinton did. A pervasively Strong Dollar gave the US Down Oil prices in the two most impressive growth decades since Eisenhower.


Last week, the US Dollar Index was up another full +1%. That was the 4th consecutive up week for the US Dollar. At the same time (and not ironically), Commodities (19 component CRB Index) were down for the 4th straight week. Commodity Deflation has been absolute (CRB Index -4.9% in 4 weeks), and now prices are finally scaring expectations.


To expect or not to expect Commodity Inflation, remains the question. Let’s look at last week’s CFTC futures and options net long positioning (hedge funds speculating on money printing, Bernanke Policies to Inflate, etc.) for some clues:


  1. The net long position in all of commodities collapsed another -16% last wk to 447,106 contracts
  2. Oil’s net long position dropped another -16% wk-over-wk to 175,211 contracts
  3. Farm Goods (think food) net long position crashed (again) another -24% to 145,564 contracts


Oh yeah, baby. Strong Dollar – we people who put gas in car, and food in mouth – we love you long time. But what, in this manic market, is a long time?


  1. March 2009? Yep. This is the lowest speculative net long position in CFTC contracts (commodity inflation) since 2009
  2. Corn contracts (down -20% last wk) are perpetuating the lowest food inflation expectations since, again, March 2009


For those of you still long the consumption related assets you bought after the March 2009 lows (we bought Starbucks, SBUX, at $11.52 in April of 2009, and still have it on #RealTimeAlerts; not a typo!), you are probably quite happy.


Freaking-out about the Commodity Gap now isn’t much different than freaking out about it then. I remember then almost like it was yesterday. People were pinging me with live quotes of “Dr. Copper crashing” saying the world was going to end. It didn’t. People who were long of Copper did.


Since the #PoliticalClass always asks for “solutions.” Why not try something no US President (under their Keynesian Economics regimes) has tried since the 1990s.  Why doesn’t the President of the United States hold a press conference today saying something like:


“Today, folks, is a great day in America. We finally cut spending and we are about to get this Bernanke character out the way on your savings accounts. Your currency is strengthening and your purchasing power is being restored. God Bless a free-market America.”


Anyone think that might happen? Bueller? Or does he really get this (and he’s just keeping it to himself)?

In the meantime, all I can tell you is this:


  1. WTIC Oil prices snapped our TREND line of $93.41/barrel support last week (-7% in the last month)
  2. Russian Stocks (which trade off oil expectations) snapped TREND of 1566 on the RTSI (-8% in the last month)
  3. Our immediate-term TRADE correlation between WTIC Oil and the US Dollar is now -0.99!


Enough of the #ClassWarfare speeches already. Mr. President, if you really want to help people who drive to work every day, tell the truth about Strong Dollar (+4% in the last month) and all its benefits as a real-time Tax Cut! Long live the Commodity Gap (down).


Our immediate-term Risk Ranges for Gold, Oil (WTIC), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1549-1589, $89.72-92.93, $3.48-3.57, $81.44-82.65, 91.85-94.68, 1.81-1.94%, 11.96-17.18, 901-930, and 1502-1534, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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