Trapper John and Me

A recent perusal of the Fox News channels (by mistake) showed ad after ad touting the advantages to holding gold in ones portfolio.  The numerous ads all looked creepily similar, with a celebrity spokesperson (like Wayne Rogers-of Mash Fame) speaking about the Federal Government and their printing press, the threat of hyper-inflation, and the instability and distrust engendered by the 2008 great recession. The ads got me uncomfortably thinking about our own line of reasoning with respect to hard assets. Unlike these ads, our thesis is not built on some return to hyper-inflation or some conspiracy theory based strategy that thinks confiscation is just around the corner. Our strategy, at its core, is based on simple supply and demand: when the supply of dollars becomes endless, the value of that dollar is unceasingly under pressure and the way to protect and profit from such pressure is to allocate significant portions of ones portfolio to things that will hold value in the face of this pressure (hard assets). Negative real and nominal rates only add to this pressure leaving all currencies ultimately in a race to the bottom. Buy Stuff.

Sausage Wars: What do they see?

The battle for Hillshire Farms might be looked at from a number of different perspectives. One train of thought is that this is simply a battle to increase scale and market presence and that Tyson simply is looking to increase its market power with its dominant customers: i.e. Walmart and others. The other more interesting strategic reason behind this potential acquisition, is the need for companies like Tyson to see their scale on the raw material side increase, with the possible coming squeeze in retail margins. For years, companies like Tyson and others migrated from pure processed and fresh food manufacturers to predominantly marketing entities. They were able to do so, as the price of the underlying commodity (chicken, pork, beef) stayed relatively stable. The move towards more value added, processed product did smooth out some of the inherent volatility in these various protein markets however. It is our feeling that a large part of the impetus to merge is being driven by what todays Central Bankers so desperately want:namely inflation, although these producers would call it margin erosion. Scale at the farm-gate level would allow these producers to have a greater handle on costs and thus margin, with growth in new markets as only an added side benefit. Food costs are one area which has seen a marked increase this year, and as such we think this move towards consolidation in the foods sectors is not coincidental.

Made in the USA-Reflation

I have to put us in the dumbfounded camp when it comes to the recent action in Treasuries. Yields that are scraping along the bottom, actually negative real yields if you take the most recent CPI data and a sub 2.5% Ten Year Note, would not seem to jibe with the action in Global Equity Markets. It’s hard to imagine that  the equity markets and the fixed income markets both have it right. The explanation for the aforementioned Treasury rally has been laid at the feet of outright deflation, ostensibly exported from the newly submerging markets (China, Brazil, etc..). The geo-political backdrop to a global macro environment that is still based on “beggar thy neighbor” policies would argue that there is less to this deflationary argument than meets the eye. David Rosenberg of Gluskin Sheff deftly points out that the newfound global disharmony, both politically and economically, will have vast implications for forward thinking investors. Mr Rosenberg comments ” Tectonic shifts are taking place and this in turn requires a shift in strategy for anyone operating under the old paradigm of world harmony, political stability, central bank prudence and expanding global trade flows”.The tectonic shifts for which Mr Rosenberg refers are the anchors of inflation/deflation and his argument for a pre-emptive shift in portfolio composition, in our opinion (obviously), is spot on. Position yourself on the right side of the tectonic plate and Buy Stuff. 

Groundhog Day

I can’t help but feel like Bill Murray in the movie Groundhog Day, whereby it appears that every day in the Capital Markets is a repeat of the day prior. Forget the new normal, or the great moderation, we are now in the midst of the Groundhog Day Market. In this nirvana, Stocks rally, bonds rally or at least stay range bound, commodities sell off and volatility across the board stays stubbornly low. Investors in this new era, would appear, like Bill Murray, to be in some kind of twilight zone where it’s not “no news is good news”, its there is no new news. Every day the background noise is the same: “Stocks are the place to be given where rates are”,” The Fed will not raise rates until…”,” Inflation is dead”,” De-flation is the greatest risk”. This world would indeed be nirvana if not for the faulty premise that underlies all of this complacency; namely that Central Bankers have it (whatever it may ultimately be) under control. What concerns us is not the occurrence of some black swan event, but rather the high level of disjointedness which will occur given the significant mis-allocation of capital across all global Capital Markets.Major dislocations in markets usually do not stem from one single “event”, but rather from the collective group -think that believes that all events are simply one-off in nature and thus can be controlled. Market dislocations occur when the macro suddenly overwhelms the micro, thus rendering simple solutions (Central Bank action) relatively ineffective. Don’t mistake sameness for safety, Buy Stuff.

Small Talk

The minutes from the last Fed meeting were released yesterday, and as usual, the mindless chatter was soon to follow. A great deal was made about the discussion of the continued taper and more importantly how, or if, they would shrink their $4Trillion balance sheet. Without going into details, except to tell us that rates would not normalize any time soon, the committee felt they had a sufficient number of unproven methods to either reinvest their runoff proceeds or not. Depending on growth, or employment, or inflation the Fed feels confident that rates will remain low, or not, and that they will make adequate adjustments to policy, or not, depending on whether conditions warrant. Fed speak has been reduced to the most abject level of nonsense, which everyone feels somehow compelled to comment and act on. What was classic in yesterday’s minutes was the discussion of risks whereby some Fed members felt there were potential risks out there involving financial markets, namely tight credit spreads and low levels of overall volatility possibly hinting at extreme levels of complacency. The general feeling was however that it would be” helpful to continue to explore the appropriate regulatory, supervisory and monetary policy responses to potential risks to financial stability”. In other words, stay at the party everyone, we will clean up the mess afterwards- trust us.Trust in Central Bankers at your own risk. Buy Stuff.

Buckle Up

Anyone that has flown as of late knows the ticket inflation that has infiltrated almost every part of the traveling experience. Charges for baggage, change fees, beverage fees, overhead space fees, etc.. We have always wondered out loud how a flight to Florida from Chicago could be profitable at peak travel times for $100 round trip. Well, it turns out it wasn’t, and a Bloomberg article astutely points out the somewhat counterintuitive notion that high oil prices are actually the culprit for a turnaround in the profitability of the U.S. airline industry. In spite of fuel costs doubling over a 10 year period, airlines are on track for a record fifth consecutive year of profits. The reason for the profitability increase was that airlines not only became more lean and mean, flights were  finally rationalized and thus consumers were forced to allow the airlines to charge more. However, most importantly the relatively high fuel cost made starting a new airline cost prohibitive thus finally driving bottom line growth in an otherwise unprofitable schizophrenic industry. We have to wonder if this industry example can be extrapolated into other industries where high commodity costs and low barriers to entry have led to great benefits to the consumer, but low to stagnant profit growth afforded to the producer. More stable profit growth means more stable underlying commodity demand and a compression of the amplitude of the boom/bust cycle that plagues all commodities. This type of shift would ostensibly bring smiles to Central Bankers faces everywhere.

Central Banking 101

We all were enthralled with the new Fed Chairwomen Yellens’ speech in New York regarding the future path of Fed policy. She stuck to the script as all Fed Chairs are wont to do, but in response to a question about inflation she remarked that the “odds of deflation are much greater than the odds of inflation”. In response to a question about the potential for said inflation, she remarked that the Fed would be way out in front of a potentially damaging rise in inflation. The Fed’s inklings of this dangerous brand of inflation would be drawn from a variety of indicators, not necessarily  only a tightening of labor slack. The re-emergence of this Fed “dashboard” gave much comfort to those that were concerned that the Fed would do something reckless like normalize interest rates.These comments dovetail with Minneapolis Fed Governor Kocherlakotas’ recent talk where he stated that he is not worried about what to do in the event of escalating inflation because they already know exactly what to do “that’s Central Banking 101”. I’m not sure where they teach this class, but it would appear that they should throw out the old textbook, as the low to negative real rates of interest imposed by the Fed over the past 5 years have done almost nothing to aid real economic activity.This experiment in Central Planning is still just that, regardless of how Central Bankers may spin it.Drop your Central Banking 101 class and take something more practical like behavioral psychology( you will need it). Buy Stuff Sell Paper

Putin it to the West

The unfortunate  political and human tragedy in the Ukraine has the potential to cause significant shifts across a number of commodity markets, regardless of whether sanctions are imposed or not. We already know the obvious markets involved: Natural Gas, Nickel, Palladium and titanium but there are a number of ancillary markets and outcomes that could be affected by Mr. Putin’s aggressive actions in the FSU. Russia accounts for roughly 30% of Europes Nat Gas needs so it is clear why the Europeans are treading lightly when it comes to heavy- duty sanctions. We wonder however whether Germany and others are speaking frankly with the U.S. and others about the potential for  a step up in LNG and CNG imports. Such a shift would mark an important dynamic in world Nat Gas pricing and one only assumes that the beneficiary of such a trade shift would be China.It is not hard to envision Mr. Putin extending this policy towards other commodities as well, preferring to strengthen his alliance both politically and economically with China. While Russia has been more than happy to use its petrodollars as a diplomatic weapon, the ability to extend this reach across a wide variety of commodities might seem attractive, particularly if it is with a partner that is highly agnostic as to its politics. While the chances of such an escalation are probably not great, Norilsk  recently was in negotiations to sign a long term supply deal with a Chinese buyer for both platinum and palladium (payable in renminbi). The ramifications of such long term deals are that significant supply is taken off the market permanently, which could cause some sleepless nights among non-asian purchasing managers. Putin sees the intrinsic value of Russia’s stuff, take the advice of Obama’s spokesman who recently suggested that investors not buy Russian Stocks, we concur and instead suggest that investors should be looking to buy what Russia has stockpiled.

ObamaCare vs. YellenCare

The most recent Fed minutes came out and we were surprised to see the consternation amongst some Fed Members regarding the downward trend in medical costs. The concern was voiced in the context of a discussion on the decelerating overall price level. Some of the voting members were optimistic that wage growth momentum would be positive for inflationary pressures moving forward, but it should bother everyone that falling medical costs are a concern of those around the Fed meeting table. Correct me if I am wrong, but as I stated in our last post, the goals of monetary policy seem to have shifted towards the touchy-feely variety and as such it would seem that falling medical costs might benefit those that Chairman Yellen seems to be most worried about. Chalk this discussion up to one more example of: Be careful of what you wish for. If Central Bankers are becoming concerned, and thus forming policy decisions, based on naturally shifting price data (some go up some go down), it would seem only natural that they miss the forest for the trees. Particularly since history has proven that their forecast usually misses both the forest and the trees. Pay attention to the forest. Buy Stuff Sell Paper


Leave it to a French attorney to supply us with the latest addition to the list of non-words we currently must endure. In her words before the upcoming IMF meeting, Christine Lagarde commented on the job killing low-flation that exists in the Eurozone. Fed Governor Bullard must have been envious that he did not think of it first when he remarked today that inflation rate in the U.S. will be managed from below (???) and that Fed policy will be highly responsive to any signs of falling inflation. We comment on these remarks because the level of certainty and respect that is currently being afforded these monetary mandarins is bordering on crazy. As we await the ECB’s decision to extend their own non-traditional monetary policies, in addition to rumblings out of Japan that they will extend their monetary carpet bombing even further, we have run across a study by the BOE that throws water on the entire concept of the money multiplier. The authors of said report maintain that traditional concepts of money creation are essentially relics of the past and that the monetary base can only be altered by Central Bank policy, particularly the non-traditional variety. If you like curve fitting studies, then you will really love this one as it looks at the most recent actions by Central Banks and their effects on lending and money creation. The conclusion is that there is no such thing as “money printing” and that Central Banks, through their various non-traditonal zero rate bound policies have the ultimate ability to affect the amount of “money” in the system. The study pays lip service to increased bank regulation and attitudes toward risk, but my point in discussing this study is that we are currently on the brink of giving Central Bankers complete carte blanche, even when it comes to dismissing tried and true concepts of money and banking. The risk, as we have discussed, is that with power comes hubris and a Central Bank mindset that  believes markets, economies and attitudes toward risk can be effectively managed using some intricate (unknown to us) algorithm. It is our belief that this complacent and unjustifiable faith in Central Bankers represents an inflection point, just as the complete lack of belief in monetary efficacy represented a tipping point during the Volcker era.These inflection points are critical as they, in our opinion, represent secular divergences between paper and non-paper assets. Buy Stuff Sell Paper