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My Futures Portfolio ahead of CPI

Note the decline in Bollinger Band Width on the Nasdaq

Typically, low volatility leads to high volatility. This indicates a move is coming, but the question is in what direction. Given how commodities are super strong, I expect the move to be lower. I'm short the Nasdaq (June) futures, but it is one position in my futures portfolio which is long December corn, September Yen, June gold and WTI crude.

Why short the Nasdaq? Low volatility is the reason. If it explodes higher with Fed QE, the position gets stopped out and my long positions will outperform, so I don't mind the loss. If Powell somehow manages to grow a spinal cord after seeing the high March CPI tomorrow and stands firm on rates and QT in the May FOMC, the inflation trade should sell-off a bit - but the Nasdaq will tumble.

Or, Powell might cut rates and end QT, causing the dollar to tumble and capital to leave the US, which would again hurt the Nasdaq.

While I wouldn't short the Nasdaq here as a single trade, I like it as a part of my overall futures positioning.

(I'm also long gasoline but not in futures).

Ignore rates, focus on liquidity

The primary mandate of the Federal Reserve is to monetize the US debt. They have no choice but to end QT and cut rates, consequences be damned. Any noise we get around the CPI is irrelevant except in the very immediate term.

The Fed has made it quite clear that the liquidity tap is going to open wide.

The bull market in commodities is just getting started.

When I wrote The Evidence is Clear – Inflation Has Peaked, it was a sign for me to start looking at sectors outside commodities for the next macro trade. I made the pivot to buying tech stocks and pretty much ignored commodities until March 2023. I think it's now time for another pivot, this time to being fully focused on commodities and inflation.

I recommend reading the paper Facts and Fantasies about Commodity Futures to get a deeper understanding on this topic. Here's the abstract from the paper:

"We construct an equally-weighted index of commodity futures monthly returns over the period between July of 1959 and March of 2004 in order to study simple properties of commodity futures as an asset class. Fully-collateralized commodity futures have historically offered the same return and Sharpe ratio as equities. While the risk premium on commodity futures is essentially the same as equities, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation between commodity futures and the other asset classes is due, in significant part, to different behavior over the business cycle. In addition, commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation".

Good Trading!

Kashyap Sriram

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