Hey There Income Hunter,

 

There is nowhere to hide in a global growth slowdown.

 

In early 2022, everyone who missed the massive commodities run of 2021 moved out of bonds and tech and into commodities. 

 

Unfortunately, it turned into a classic hot money flush. … In the last month we have seen a 30-40% drawdown, with volumes close to triple the volumes of early June. 

 

So, what happened? Why is the hot money crowd getting it so wrong? … 

 

Here is the answer …

 

The hot money group took the Fed at its word. Initially the Fed pounded the table and said inflation was transitory. If you believed that you did not jump on commodities last year. 

 

Then, coming into 2022, the Fed admitted it was wrong on inflation and the hot money jumped into the commodity pool with both feet. 

 

Well, now the Fed has convinced them that it will do whatever it takes to stop inflation … This has caused hot money to close their longs and apparently open short positions.

 

Today, we’ll take a closer look at the commodity massacre for clues on timing purchases to get in at great levels for the long-term bull market. 

 

Commodity Drawdowns Since June 1st

 

• Oil: -22%
• Aluminum: -18%
• Soybeans: -17%
• Iron: -20%
• Corn: -22%
• Copper: -26%
• Steel: -20%
• Cotton: -22%

 

Consider a Paired Long Metals/Short Tech Trade

 

I like buying SPDR S&P Metals & Miners ETF (XME) and selling the Invesco Trust QQQ ETF (QQQ).

 

Heading into earnings season, investors continue to buy dips because once again they want to believe in bank earnings forecasts. 

 

They have come down – but not near enough to reflect the damage inflicted on the economy by the Fed’s tightening cycle into a recession. 

 

A recession is not even close to being priced into the stock market. 

 

Meanwhile, buying commodities into a recession that will force the Fed to pivot back to printing money again offers a very high probability of success. 

 

Notice the QQQ/XME ratio chart below. The spread is in a long-term downtrend as the stock bubble has burst and metals are in the early stages of their bull market.  This bear market rally for the ratio should be watched closely for a chance to put the paired trade on as it nears the downtrend.

 

 

Buy When Everyone Is Selling

 

The US and Eurpope are in recession, while China is obsessed with its zero-COVID policy, which has crushed growth due to complete lockdowns of major cities. 

 

However, China is now stimulating growth by lowering interest rates and spending on infrastructure.

 

Europe will be unable to ever tighten because of how decimated the economy has become since the sanctions put on Russia have limited its access to energy. 

 

The US is very close to the end of its tightening cycle because its debt burden is crowding out investors’ ability to buy US debt …

 

You see, if the US raises interest rates much higher it could push the Treasury into insolvency, causing a Lehman moment. For more on this read Why Central Banks Are Trapped

 

The bottom line is the Fed will have no choice but to pivot back to QE and printing money, and that will trigger a renewal of the powerful rally we saw in commodities in 2021.

 

Notice the table below showing the net position report for commodities. I have highlighted copper and silver, which are both heavily shorted. Check the z-score at the right – that shows the number of standard deviations the net short position is against the 1-year and 3-year mean. A -2 standard deviation is historically an extreme short position.

 

 

You want to own commodities that are in a long-term bull market when they reach these levels in the short-term. 

 

Bring It Home

 

This week’s employment report may cause some volatility, although employment is the last sector of the economy to show signs of recession.

 

The expectations are for a 250k increase in non-farm payroll, a 3.6% unemployment rate and .3% increase in hourly earnings. 

 

We could see volatility pick up big time next week, though. The market will have to absorb $95 billion of US bonds, which has not been easy in the past few months. 

 

Then, on Wednesday, the consumer price index (CPI) will be reported and it could be another high number (8.5%-ish). So, between heavy supply and still high inflation, we could see a new leg down in stocks.

 

That is why I think the timing is right for a long copper and silver strategy paired with a hedge in QQQ heading into next week.

 

Until then …

 

Live and Trade With Passion My Friend,

Griff