New Trades

I bought soybeans again.
Scaling out of cocoa.

The US vs. the Rest of the World

I'll admit that the latest fall in the US stock market was catalyzed by higher long term rates. But the valuation mismatch behind it also deserves discussion. Basically, the US has gotten very expensive relative to virtually all other stock markets in the world.
Here's a chart of VTI, Vanguard's broad based US ETF divided by VXUS, Vanguard's everything in the world except the US. Dividends are reinvested in both.

This is a spectacular chart! the US has outperformed by exactly double since the start of 2011. Moreover the outperformance has been 16% since Jan 2018.
There have been good reasons for this. First, the US dealt with the detritus from the financial crisis sooner and better. European banks are still not out of the woods. Also, the US economy is the most dynamic in the developed world, and the difference is growing. Finally, the incipiant trade war will likely shift growth from EM to the US. But still. You have to wonder if the market has simply gone too far here. I think it has.
Even if there is no crash in the US, I bet that there will be a long period in which some of this gets reversed. I'm primarily a bottom up investor, but I have made portfolio changes. I have written LEAPs against much of my US equity position. Left the non-US part alone.

More on Cocoa

I took a little off today on the upmove, but not too much. I think this one has real potential, so I'm staying mostly in.
There are a few things I like here...
- As I wrote in the last post, the price is low relative to the stocks to consumption ratio. This is longer term stuff. It will not turn the market around by itself, but if the market does turn, it will become an issue.
 - The west African main crop is forecast to be pretty good this year; that's in the market. But the early part of the crop may be light. I know this is only a timing issue, but people still get nervous when they see poor arrivals data.
- Commitments of traders is heavily short. This is another thing that can add fuel to the fire if the market does turn.
As always, time wil tell......

Taking a shot at long cocoa here

The theory is that it is undervalued relative to the stock ratio. Here's the chart I am working with...

I know it's a little hard to read, but the red circle is where we are now. I'll have more on this in a couple of days.

How is the Trade War Going, and an Underappreciated Risk

It looks like a new, renamed NAFTA has been negotiated. This is no surprise; I said as much last month. All sides had too much to lose and too much to gain for it not to get done. It's possible that the Democrats will hold it up in congress just to spite Trump, but probably not. There are lots of powerful constituencies working in favor of it.
The key part of it, AFAIC, is the reduction of non-North American auto parts. China was using NAFTA as a way of penetrating the N. American car market. Chinese components were shipped to Mexico and then assembled into vehicles. The percentage of Chinese parts in Mexican production is still small (~7%), but rapidly growing. The new agreement reduced the amount of that that can go on. BTW, this is now going on all over Asia. Chinese exporters are shifting their final finishing into Vietnam and elsewhere, to avoid US tariffs. There was a good article on this in yesterday's WSJ. How long this will be allowed is questionable.
I doubt all this will hurt the US or world economy much. The increase in final prices to consumers will be quite small. The production will have to be done somewhere, even if it adds a few extra transportation dollars.
I also doubt that the Chinese economic numbers will suffer much. The government has plenty of levers to keep things almost on course. Note that I say economic numbers. The actual economic benefit from the numbers may well go down. Much of China already has decent infrastructure. Adding more will have diminishing utility. But they will be built.
One risk I don't think is getting enough attention is the financial situation in India. Several non-bank financial institutions, including one very big one, have had to get government bailouts. Apparently this is not because of macro shifts; this company has been doing badly for years, but was able to hide it in its accounts. India should be the growth story of the next generation, so it's important to keep a watch on this.

Almost out of soybeans again.

Going to continue to keep playing this from the long side. One of these days, it's gonna break out and follow through. I hope it wasn't this time!😆

How bad will the trade war get?

I have been reading and pushing numbers on the effect of a US - China trade war. Goldman, for one, says that the tariffs just instituted will raise US CPI by only 3 basis points. That's 3/100 of one percentage point. If the next round (which includes virtually all Chinese imports) occurs, it will be 8 basis points.

If that seems low, it is. The reason is that the cost of manufacturing a product is only a fraction of the final cost in a store. Also, over 60% of the US economy is services, which are not affected at all.

So what's the big deal? To the average American, virtually nothing. To the stock market, somewhat more. There are a fair number of companies in the S&P whose basic business model involves arbitraging the difference between Chinese wages and US prices. If that is cut off, there will be a lot of stranded assets in China. Longer term, these factories could be built or moved to places like India or Bangladesh. But it will cost money and time. That means lower earnings. Goldman thinks about 6% lower. Bad, but not disastrous.

For commodities, the short term question is how China responds internally. If they stimulate the economy by building new subways to nowhere, it's bullish. If they redouble their efforts to rationalize the economy towards consumer goods and services, that's bearish. Time will tell, but I bet they do both.

I took a long position in CF Holdings. This is the US's leading producer of nitrogen fertilizers. The US is an importer of fertilizer. The high cost world producer is Chinese for anthracite coal. So this is a way of playing both the comeback in US agriculture and the market's underestimation of the persistence of coal. I'm short Nov in-the-money puts.