Notes From Underground: Quackser Fortune + Horse Manure

In the famous Gene Wilder movie, “Quackser Fortune and His Cousin In the Bronx,” Wilder plays a character who picks up horse manure in the street and sells it for its rich nutrients. As horses are outlawed in the Dublin streets Quackser finds himself an unemployed manure sweeper, a negative outcome from Schumpeterian creative destruction. However, it seems Quackser resurrected his business and is now packaging horse excrement as an item of political discourse. Treasury Secretary Steven Mnuchin was the recipient of the newest symbol of public disdain for the recent tax “reform.”

***First,the blog post by Mike Temple to my thoughts on Cheniere Energy (LNG) was outstanding. Mike stated why he thinks that the recent divergence between LNG and the spot price of natty gas is not similar to the movement back in 2005/2006 when Amaranth was trying to manipulate spot prices higher. Temple makes the point that the recent rise in LNG stock price is a result of good management reaping the rewards of the build-out of major liquid-natural gas infrastructure while also refinancing and paying off some of the debt load. Mike advises using other stocks to navigate the natty gas pure commodity play–RRC and CHK. As my readers know, WE DON’T TOUT STOCKS IN THIS BLOG but we try to shed light on global macro economic situations that have the potential for profit, especially when previous correlations breakdown.

The world is getting bulled up on another possible TRUMP REFLATION scenario. This theme failed to gain traction in 2017 and commodity traders/global macro hedge funds suffered losses as the equity markets were a growth stock story. The great infrastructure program fluffed by president trump never developed as the health care boondoggle led to an all-out effort for TAX  CUT/REFORM. Now that the TAX bill has passed infrastructure is the lead item on the White House agenda;resulting in the recent bids to commodity, mining and large machinery stocks. Early last year I suggested looking at the large engineering firms, FLUOR, ABB and Jacobs (JEC) as a potential investment for any type of massive infrastructure program. The Swedish/Swiss group ABB has been strong all year closing out 2017 on four-year highs. Flour (FLR) has been a poor performer but recently it is rallying back to approach unchanged on the year at $52.52.

An important technical area for FLR is the May 4 GAP as the day’s range was $51.68 to $50.45, closing at $50.60. Today’s close of $51.45 puts the unchanged level into play. Just something to put on our radar screens as the infrastructure discussion takes hold in the new year. Copper it also seems to be subject to a Trump inflation rally as massive infrastructure projects top the legislative agenda. The theme of an increased global synchronized economy is leading analysts like Gundlach to predict a vibrant year for commodity prices. We will see but the last few weeks has seen significant allocation into several large cap stocks that COULD benefit from massive infrastructure stimulus.

***A serious question: What ails the Mexican peso? Is it fear of the Trump administration radically altering NAFTA? Is it the recent upsurge in violence? Or as some analysts think,the recent tax bill will keep some U.S. businesses for relocating to Mexico? I DON’T KNOW. The NAFTA argument fails in my thinking: The Midwest farmers have done very well under the accord as farm exports to Mexico have dramatically increased. It would not help President Trump to alienate a very important electoral base by causing ag exports to be harmed by radically adjusting NAFTA. I mention recent peso weakness because of the January 27 blog post when I noted that the very weak Mexican peso provided investors cheap access to Mexican market.
The peso is not as weak as it was in January. It was 22.00 pesos to the dollar while today it closed at 19.86/U.S. dollar. But Mexican interest rates are higher than early in the year as the Bank of Mexico has raised rates in an effort to stem incipient inflation increases. Unlike in January, the correlation between the PESO and certain Mexican assets is not as strong. EWW, the ETF for Mexican stocks, rallied almost 33% from January. Once the fears of NAFTA’s demise receded, it is down 80% from its high. The weakness in the peso continues even as WTI oil prices reached $60 today. Pay attention to whatever’s ailing the Mexican peso.


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13 Responses to “Notes From Underground: Quackser Fortune + Horse Manure”

  1. yra harris Says:

    yra–A developing theme, on which I will continue to build, is that the Mexican peso is fundamentally the most undervalued asset in the world. It doesn’t mean it can’t become more undervalued but the Trump team OUGHT to lower the rhetoric for the continual criticism is cheapening the PESO and making it a more formidable export machine. Think about this: Since the inception of NAFTA, the PESO has depreciated by 700% going from 3.2 pesos to the DOLLAR on January 1, 1994. After an initial thrust in inflation following the December 1994 crisis, inflation has settled down since 2000 and has averaged about 3.5% over the last 16 years. Its debt/GDP ratio has climbed but is still at a very manageable 43.2%, mostly because of the drop in oil prices as PEMEX‘s drop in earning has forced the government into higher deficits.

    The day that NAFTA began the Chines YUAN was devalued from 5.8 yuan/dollar to 8.7, a 50% devaluation. Today the YUAN is at 6.88 to the dollar. So Mexico is becoming a tempting place for foreign investment as the depreciated peso plus a cheap labor force provides an added incentive to multinational corporations. Now, if the Trump administration pursues a regime of tariffs the landscape will change dramatically as an all-out trade war will ensue. If that’s the case, THEN THE U.S.EQUITY MARKETS ARE AS FAR OVERVALUED AS THE PESO IS UNDERVALUED. Just putting the issues out there for discussion and potential investment potential.

    this was from the January 29,2017–blog post

  2. Pierre Chapuis Says:

    Could the tax cuts to our paychecks, that will be starting next year, be the equivalent of “helicopter money”. Would this as well be a cause of commodity and gold prices coming up a little lately?
    Yesterday morning about 7:30 am the yield on the 30 yr had jumped to over 3.1%, I checked back on it 10 min later and it was back down to 2.88%. Did anybody else catch this?
    I’ll stop here. I know I’m a minnow swimming with big fish on this blog. =D

    • yra harris Says:

      Pierre–these are thoughtful points and the size of one’s trading does not signify the intelligence of the questions and replies—I didn’t have that 3.1% yield show up on my work–but i didn’t see the euro melt down either—but I don’t think the tax cut is anyway a helicopter money drop,for the Heli Money is the sign of ultra central bank panic

  3. Mike Temple Says:

    A couple of points

    1. I think you are right about the cheapness of the peso. Another bullish factor for it is the stealthy rally in oil. As we have discussed, stocks of major oil companies looking very good technically, and WTI has ticked at $60 today. If MENA troubles arise in 2018, might oil rally $10/ overnight in some Black Swan event. Further boost to your peso argument


    My second point speaks to your outlook for reflation, of which I am a firm believer (good old reversion to the mean). The above St Louis Fed academic paper from 2014!! Is as highly instructive as it is obscure. Author focuses on one of the oldest macro economic memes that NOBoDY much discusses any more—-monetary velocity.

    The auhor’s fascinating takeaway is that the extraordinary QE by the Fed from 2009-2013 should have produced real world inflation of 31%!!! The reason it never happened was due to the historic plunge in velocity that negated all the tinder-like conditions as “everybody” thought the world was ending and simply hoarded cash and the trillions of reserves created by the Fed stayed in deposit within the banking system and never leaked out to the real economy.

    Fast forward to today, you can look at the two key charts in that paper and see two crucial developments.

    A. M2 Velocity has finally bottomed in Q3 2017 after a relentless plunge the past 9 years. Anecdotally, booming stock markets, Da Vinci’s, and bitcoin point to an unleashing of “animal spirits”in an economy with now-3% growth and which looks set to accelerate with the Trump tax cut. Imagine if we get an infrastructure bill to boot. Monetary velocity is now turning UP while QT and Fed tightening is pushing reserves out of the banking system and into the real economy.

    B. In fact, total US banking reserves have dropped from a peak of $2.8 trillion in 2015/16 to just below $2.4 trillion in the past quarter. So, money is now flowing INTO the real economy and into “things”.
    Is it any wonder that oil and copper are acting frisky and that stocks such as FCX/BHP/NUE/XOM appear to be breaking out?

    The upturn in M2 Velocity is my candidate for one of the Big surprises in 2018. Do a “google search” for monetary velocity and you can see that “nobody” is discussing it. Not the NYT/WSJ or FT. Ergo, if there are no headlines, the algos have no stories to read and react to.

    I think reflation is in the bag, the seeds having been planted by all the QE. It took 8-9 long years to finally throw off the yoke of an extraordinary plummet in velocity. I think 2018 is when the market realizes that Inflation is here to stay. To me, Gold is the laggard commodity so far, compared to the industrial metals and commodities.

    Got gold? If not, get some. The gold stocks are beginning to spark. Again, consider the St Louis Fed article. 31% inflation due to the QE of past decade. I M not predicting such inflation. But these markets are not priced for even 3% inflation

    • yra harris Says:

      Mike–having read this piece when it first appeared it provided many nights of ponder.Ben Hunt of Epsilon Theory has been out in front on this discussion and raised the issue of QT leading to increased inflation as the previous parked reserves earning at the Fed would now begin to circulate revving up velocity.It is interesting that the FED began paying IOER as it commenced with QE1–interest was not paid prior to this .If this scenario is correct then the CURVES OUGHT TO STEEPEN dramatically unless the FED gets very aggressive in raising short term rates,especially if the BOJ were to follow the lead of the ECB—Trump needs to put pressure on the Japanese for their overly weak YEN especially in relation to the Chinese Yuan and EURO–Ben Hunt and Boockvar have actually been discussing velocity but your points are well taken

  4. pgrommit Says:

    An anecdotal note on nat. gas vs. stocks. The index of NG stocks (XNG) is 15% off its August low, and an etf of same (FCG) is up 20% from its August low. Neither came close to testing their early 2016 lows.

    It comes down to whether stocks are leading the commodity higher, or they are just getting better at running their businesses in a low price environment. We’ll know in “the fullness of time”.

  5. Mike Temple Says:

    I appreciate your reply, and I agree that Ben Hunt’s view is very instructive. As I ponder the landscape, I truly believe that most folks completely underestimate the looming inflation/velocity pick up. One small but instructive example. Several high profile corporations have announced year end bonuses totaling billions to their mid-tier/lower tier employees, along with some companies hiking hourly wages. Simultaneously, they are also announcing big increases in cap ex budgets. Is it being done to appease POTUS in return for the slashing if corporytax rates. Probably. But, so what? Money will flow and be spent. Just a slight uptick in M2 Velocity should help stoke the embers of all those trillions of reserves still lying fallow within the banking system. Atlanta GDPNow forecast shows 3%+ growth and we have synchronized global growth, to boot. I don’t see how reflation/inflation is not in the cards.

    As you and others have highlighted, European bond yields are even more perverse than UST yield curve. If bunds or BTPs suffer a rate shock next year, whether due to sovereign concerns or simply too hot inflation, that will also hit UST yields.

    Could the recent explosion in VOL for bitcoin be a harbinger for other overextended markets/assets in 2018. I certainly believe so. Gold has been as dormant as it ever has been in the past decade, with realized VOL on the mat. I fully expect to see that reversed this year, with some spectacular gains of 100%+ in leading miners.

    Again, thanks for pointing out the thoughts of Ben Hunt.



    • yra harris Says:

      Mike–let me also suggest the work of Richard Koo and his great analysis on the Balance Sheet recession–really underlines the thesis by the St.Louis Fed– his book as well as copious writings for Nomura provide an excellent analysis–The Holy Grail of Macro Economics,by Richard Koo

  6. Richard H Papp Says:

    Gold has been anything but “dormant” over the last decade! It topped out in the summer of 2011. During the next 12 months it tried 3 times to stay above 1,800 and by March, 2013 it started its downward collapse after penetrating the low 1,500. During 12/2015 it made a low in the 1,044 area. I have a top print of 1,920.30. Is this correct? During the last 18 years the Industrial:Gold ratio is an interesting study. It is currently just under 20
    Wish everyone the best for 2018 and beyond!

  7. Mike Temple Says:


    If you look at the above chart, you will see that the 3-month realized VOL is skirting along at record lows. While gold has not been dormant since 2011, it has been quite dormant this past year. I consider it to be the “dog that is not barking” while currencies and bitcoin gyrate. I firmly believe the dormancy will end in 2018 with a big pick up in price and VOL in reaction to the many cross currents which Yra has outlined in previous notes.

    Gold is most decidedly NOT in the crosshairs of most traders these days.

    • yra harris Says:

      Mike and Richard—-I think you are discussing different time periods.If the decade is the measure Richard is spot on but Mike’s post on this years action is indicative of the ennui of the gold trade.But at 8% vol on the comex options I have been dabbling —-plus I think bitcoin makes GOLD more relevant everyday.I have been maintaining for six years that the IMF and others OUGHT to be securitizing their gold hoards by issuing gold backed bonds–this will now get interesting

  8. Mike Temple Says:

    I believe that is why it is very important to track the success (or not) of China to launch its petroyuan futures contract which will be CONVERTIBLE into gold. China would accomplish much the same thing as if it issued gold-backed bonds. If China succeeds, it makes it even more important for them to buy more CHEAP gold to backstop/hypothecate more yuan issuance. Could be a real “bell ringer” if this contract takes hold.

    As for bitcoin, you are dead on right. If it climbs ever higher, it continues to make gold look cheap. And if bitcoin collapses, then shouldn’t gold recapture its traditional bid? When I layer this “concept” along with the ennui of the current gold market (great word) and so many other Inflation/reflation gauges, I think gold offers tremendous risk/reward in an extremely overvalued world of stocks, bonds, real estate, art, etc etc etc.

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