Blurred Supply Lines

The recent movement towards more on-shoring of production as well as the recent explosion in global tensions across a number of borders has gotten us thinking about the security of the global commodity supply chain. Whether it is the Mideast or Asia or Eastern Europe, we are suddenly faced with multiple flash points in what traditionally have been fairly  stable regions (Mideast excluded). Combine these tensions with a general global shift towards protectionism, and we could see the focus of commodity purchasing mangers shift from price, to availability of supply at any price. The composition of global trade over the past 15 years has occurred against the backdrop of a benign political and social environment. This  subsequently has afforded commodity end users the luxury of longer, more responsive global supply lines. However, in a post crisis world, there have been several important shifts which potentially threaten the accommodative nature of the existing supply chain. One shift has been the emphasis on the part of producers to produce more profitably coincident with their inability to tap global capital markets. Another important shift has been the move towards resource nationalism with countries impeding the export of raw materials in favor of providing more value added at the country level (Indonesia, South Africa, etc.). Both of the aforementioned have the combined affect of reducing the availability of supply. Juxtapose these developments against the climate that exists on the political and geo-political fronts and we feel we have the beginnings of what could be a new worry: availability of supply at a reasonable price. Buy Stuff and maybe some warehouse space

SpellBound

Recent comments by the Bank for International Settlements (BIS) that “Global Markets are under the spell of Central Banks and their unprecedented monetary policy settings” echoed what we and others have been saying for the past 3 years. Not only have they been under a spell, they have been put into a rate induced coma. However, as we have stated repeatedly, the aftershocks and consequences that will result once the spell is broken will be dramatic. It would appear however that neither the BOJ or the Federal Reserve are paying any attention to such talk, as both seem intent on achieving goals that are either ever-shifting or incongruous. Concurrent with these comments, was an article in the WSJ regarding the extensive security detail afforded The Fed Chairwoman. Not to be flippant, but we cannot understand why such security is directed at someone whose main activity these days is maintaing the status quo (doing nothing). Don’t be hypnotized, Buy Stuff.

Staring in the Rear View Mirror

The one singular characteristic of todays capital market environment that has been the most perplexing and frustrating has been the complete lack of concern for what “might” happen. As we have discussed, low rates and the absolute manic focus on additional yield at whatever cost, has produced an almost universal catatonic state. Nothing is more indicative of this than the markets complete lack of attention to the potential for reflation/inflation. We forgive the equity markets for their lack of focus as they have the attention span of a six year old, but it is curious that the Treasury Market continues to remain oblivious to what are emerging signs that pricing pressures are already upon us. Slack in the labor market, spare capacity, and seasonal one-off factors are only some of the reasons given as to why we should ignore what are clearly clouds on the inflationary horizon. Perception is reality however, and the reality of low long term rates will remain until the broadly held mis-perception on inflation/reflation changes. The argument is also made that inflation/pricing pressure will never come to bear primarily because we would have already seen it if it were going to take hold. Our feeling is that all of the liquidity sloshing around has flowed into the easiest parts of the capital markets (debt and equity markets), next up are the hard asset/commodities markets which will in turn lead to overall broad price increases, which will then  ultimately flow through to wages. We have never seen the kind of uncharted, unfettered Central Bank action that we have most recently experienced, so rest assured that when this inflationary cycle unfolds it will most likely not look like anything we have seen before. Buy Stuff

Fed goes really really all in on Wealth Effect

If you were  forced to listen to the circuitous ramblings of Janet Yellen yesterday,one had to be amazed at the degree of precision ascribed to the Feds various forecasts. Not only were the forecasts precise, but astoundingly they did not even make any economic sense. According to Chairman Yellen, the jobless rate is projected to fall to 5.1% by 2016 with prices also remaining  stable throughout that same period. In their rosy scenario, the funds rate only rises to 150 basis points, thus further cementing negative real rates at the front end of the curve. When asked about the recent uptick in the overall price level, she dismissed this as simply noise and also downplayed the decline in unemployment as lacking substance given that the composition of these new jobs was suspect. One has to wonder at what point the capital markets will wake up to the fact that the Fed is simply a one trick pony at this stage. We had to laugh at a Bloomberg interview, post news conference, in which an analyst commented that the Fed has many options still open to it in the event of some “black swan” event. This analyst stated that they always could engage in more forward guidance if need be. We may be wrong, but if the unforeseen comes to pass(and it always does) simply stating categorically that they will do nothing for longer will probably not do the job. The reaction in the dollar, and more pointedly commodities, after this latest round of Central Bank inaction is a clear signal that the maybe the wake up call is now upon us. Buy Stuff

Suppression to Confiscation

Not content with its massive effort on the financial suppression front, the Federal Reserve has supposedly been discussing an imposition of fees on certain bond funds in an effort to avoid potential market dislocation. This causes us an unlimited amount of consternation for a number of reasons 1) They, and they alone, created the atmosphere whereby investors of all risk tolerances are forced to step out on the risk curve in an effort to earn anything 2) Charging exit fees in an effort to stem basic market forces is one more effort to cement their position as the ultimate arbiter of unforeseen events. We always have to pause in instances like this for fear of sounding like a conspiracy theorist, but one has to believe that this has the potential to open the fee floodgates with respect to any market that suddenly could become illiquid (note: this is every market).While some hard assets are criticized by many as non-yielding and thus unworthy of holding in ones portfolio, at least there is no fee imposed by the powers that be on this allocation decision. Sell Paper, Buy Stuff

I Wanna Be Sedated

Much has been made about the lack of volatility, relatively speaking, across almost all parts of the capital markets. The dampening down of what would be considered normal volatility has again been laid at the feet of the command and control Central Bankers.We are not surprised however as the prevailing attitude is that low rates cure all ills, when in reality, low rates create more ills.  We all should be quite attuned to the sedative effects of low interest rates on investors perceptions of real risk, if the recent crisis has taught us nothing else. Thus, when we see potentially serious geo-political flareups such as Iraq or China/Korea, any hint of serious concern is smothered quickly by the “whatever it takes” mentality inherent in  all Central Bankers. However, as Bertolt Brecht said ” Because things are the way they are, things will not stay the way they are”.

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.