Musings Report #28 7-13-13 Why I Bought a Year's Supply of Coffee
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Why I Bought a Year's Supply of Coffee
I've been pondering the possibility that some commodities will rise despite the global slowdown. This is counter-intuitive to most people, as weakening demand is generally assumed to push prices lower as the pricing power of producers erodes.
So why did I buy a year's supply of vacuum-packed coffee from Costco? (Three pound can for about $9.50 is as cheap as it gets.) Take a look at this chart of wholesale coffee:
Coffee could decline further, but I suspect it's close to the point where it's less painful for producers to let the crop fall to the ground than to lose money picking the berries for processing and shipment.
In other words, once wholesale prices reach a certain point, marginal producers exit and supply declines to the level that survivors can eke out a profit.
The larger context here is (as always) oil. Oil has recently broken out of a triangle formation above $100/barrel, to the amazement of those expecting oil to drop to $70/barrel based on weak demand.
What these observers are missing is the speculative demand for oil contracts is the equivalent of actual physical demand; as speculative demand increases (for speculative bets, collateral, etc.), a self-reinforcing feedback loop develops that pushed oil higher even as demand for gasoline and other fuels stagnate. As a result, there could be a financially induced "scarcity amidst plenty."
The notion that oil and a variety of commodities are poised to move higher is reflected in this chart of the CRB, an index of commodities, which has traced out a wedge/triangle that mirrors oil.
The conventional wisdom holds that prices of almost every commodity and product will decline in global recession. That belief doesn't account for the broad impact of the financialization of oil. As oil rises, it pushes up the cost of all goods and services. Perhaps that's why producer prices rose 2.5% over the past year.
Market Musings
Here is a chart of the S&P 500. The conventional expectation was a summer slump ("sell in May and go away") so of course the market has refused to comply with those expectations, rallying big in July. On the face of it, this chart is bullish. We can nay-say the fundamentals, but there is not much here to suggest a rollover and crash.
The key takeaway here is humility. Nobody knows what the market will do day to day or month to month. Anyone who is 100% confident about being right (for example, those with inside information on a buyout) will pony up $50,000 and buy options that will triple or quadruple in value once the move they forecast unfolds. Anyone who has a system that is 100% accurate could turn that $50,000 into $1 million in a handful of trades. That virtually no one is able to do so is persuasive evidence that nobody has such a system.
I have been criticized for forecasting the US dollar would rise, but I have made money going long UUP (the dollar etf). Whomever can extract a gain from a tight-fisted market is right. I am sure many analysts cannot believe oil will go higher. My money is on a rise through at least December. If I'm right, I'll book a gain. If I'm wrong, I won't. My focus is not so much on being right but on being humble about how little I know and cognizant of how little anyone knows.
Anyone with three 100% accurate forecasts can turn $50,000 into $1+ million in three trades using options (or futures contracts). A decent rise or drop will triple an option bought before the move:
$50K -> $150K
$150K -> $450K
$450K -> $1.35 M
The best thing that happened to me this week
I received a hand-written note from a 77-year old retired Lt. Colonel in the U.S. Air Force (the letter also included a subscription to the Musings) that I'm embarrassed to reprint as it is highly complimentary. This meant a lot to me because I respect and admire this gentleman's accomplishments and life's work. To have his admiration is somewhere between astonishing and humbling.
From Left Field
The Rise of the Machines (on drones) - half-hour video on drones, civilian and military: a real eye-opener, great graphics, recommended....
It Puts BEEF Into You (via Joel M.) - a highly entertaining (and graphic) account of London's Thames River pollution in the 19th century, Bovril and honey-ships....
Why are we not surprised? Youth and health, no longer synonymous: Young America’s unhealthiness is changing the economics of care: same old, same old: unhealthy diet + little exercise = chronic disease/early death
A time-lapse video map of 2,053 nuclear explosions from 1945 through 1998 - I think I ran this last year but it's worth another look. What on Earth necessitated France's detonation of 210 nuclear test weapons other than Empire Envy? (U.S. detonated 1,032, the world total in this time period was 2,053)
Where Car Is King, Smartphones May Cut Traffic - the future is automated, decentralized crowd-sourced information gathering and redistribution
"It's the constant and determined effort that breaks down all resistance, sweeps away all obstacles." (Claude M. Bristol)
Thanks for reading--
charles
