- 6 weeks ago
Carley Garner, Senior Strategist and Broker at Decarley Trading joins TheStreet to talk commodities.
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00:00Joining me now is Carly Garner. She is senior strategist and broker at DeCarly Trading. Carly, thanks so much for joining us.
00:07Thanks for having me.
00:09So, Carly, we saw PPI come in hotter than expected for July. The stock market initially sold off but has already reversed course and pretty much bounced back.
00:19What did you see in terms of reaction from the commodities markets?
00:23Yeah, actually, given the magnitude of the number, I think it was a pretty muted response.
00:27I think the market's kind of been bracing for this sort of thing, you know, with the tariffs.
00:31We were just kind of waiting for some sort of uptick. Now, the debate is, is this something that continues or is this just kind of a one-time or temporary price shift?
00:41You know, that's yet to be determined. But it was actually not a massive response.
00:45What I can say is the commodity markets in general, there's a few outliers, but most commodity markets are actually behaving deflationary, not inflationary.
00:55And what I mean by that is if you look at the grains like corn, soybeans, wheat, we are trading near multi-year lows.
01:02If you look at a market like coffee, coffee is relatively expensive historically, but we've come off from wildly high prices and we've come off quite a bit.
01:12For example, coming into the year, coffee was around $4.20 and now we're trading in the $3 area.
01:18We've been as low as the $2.60, $2.70 area. So commodities in general are behaving deflationary.
01:25Now, you know, the jury's still out on whether this continues, but, you know, time will tell.
01:32There's certainly one area, though, that's not acting deflationary, and that's beef prices. Beef prices are near all-time highs.
01:40What's behind that spike?
01:41You know, there has been kind of a perfect storm of bullish fundamentals. I mean, I'll just ramble off with you here.
01:50We've shut off the border between U.S. and Mexico because of a screwworm issue.
01:56So that's kind of, well, that's kind of helped prices rally.
02:00We've had a multi-year drought and other conditions that have kind of dwindled the herd here in the U.S.
02:06And, you know, on top of that, we're seeing the consumer shift towards eating beef.
02:13I mean, you know, you've probably seen if you've spent any time in social media, you see that there's an inclination to high-protein, low-carb diets, and beef is a staple in that.
02:23So there's all these things working together to push beef prices to all-time highs.
02:27And the consumer has thus far continued to pay it without really asking any questions.
02:33One thing to keep in mind is we generally don't see a spread.
02:36I just mentioned how cheap grains were, so corn, soybean, wheat.
02:40Usually when there's cheap grains, that pulls the price of beef down because the idea is those cattle are being fed grains.
02:48And the price between those two assets should be more in sync than they are.
02:53This is, in fact, this is the widest price gap we've seen between those two assets ever, and it's not even close.
03:00So my personal opinion is we're probably in the last inning of this kind of chaotic deflationary move in grains and inflationary move in livestock.
03:09But I will tell you, as is always the case, markets can stay irrational longer than any of us can stay solved.
03:16So if we're in the last inning, does that mean beef prices are coming down or grain prices are going up?
03:24I think we're going to get a little bit of both.
03:25I'm more optimistic on beef prices coming down than grains going dramatically higher, although I think grains stabilize and maybe inch higher.
03:32But on the beef side of things, there's a few things we look at in the futures markets.
03:36Well, there's many things we look at.
03:38But one thing I really focus on is seasonality.
03:42Usually this time of year, we start seeing peaks in beef prices, livestock prices.
03:47So seasonals are going to support a pullback here.
03:49But in addition to that, when I look at the COT report, that's the Commitment of Traders report.
03:53It tells us which types of traders are long and short and what magnitude.
03:57Speculators and hedge funds are sitting on the longest net long position in the history of feeder cattle.
04:06And it's not even again, not even close.
04:08It's wildly above anything we've ever seen.
04:10And we're seeing something similar, but not maybe not quite as extreme in live cattle.
04:14So we're in a situation where the news is insanely bullish.
04:18It just keeps the bullish news just keeps coming.
04:22Everybody is long.
04:23All the big speculators, big traders and funds are wildly long, probably way too long for comfort.
04:31And at some point, there's going to be something that tips the scale and entices these people to liquidate.
04:37And when they do, I think the downside is going to be tremendous.
04:40In 2014, we saw something similar, but not this extreme.
04:442014, grain prices were very low.
04:47Cattle prices were very high, just like we're seeing today.
04:50But again, not as extreme.
04:51And the conclusion was we saw the meat market, the livestock futures drop 40, 50 percent pretty quickly.
04:59I mean, within a handful of months, not years.
05:02So these things can be very volatile.
05:05And one other thing that we've got on our radar is economic news has been pretty solid, right?
05:11The economic data makes it feel like the economy is doing very well.
05:15But when I look under the surface and I see how we got to these numbers, I see a lot of leveraged, over leveraged consumers, over leveraged investors in the stock market.
05:24And so I have to wonder if the numbers we're operating on are maybe a little bit frothy relative to reality.
05:32And if there is some sort of event, and maybe there won't be, but if there is some news or something around the corner that surprises everybody and we get a deleveraging event, it could be pretty swift.
05:43And I think cattle would be probably one of the biggest suffering assets from such an event.
05:49So it doesn't sound like you're bullish on live cattle futures.
05:52But what impact could tariffs have on prices?
05:56And could that actually continue the increase then?
06:01Well, we don't know.
06:02We don't know.
06:03But I will say that I think most of the inflationary impacts from environment as well as tariffs are probably built into cattle.
06:11I think we've seen the perfect storm of worst case scenario for anyone that enjoys eating beef for dinner.
06:17What I can say is we are seeing a lot of assets move together.
06:22For example, live cattle in the stock market are correlated roughly 90% of the time, meaning they're trading as if they're the same asset.
06:28And obviously that's not the case.
06:30But it tells me there are a lot of traders out there that are chasing momentum.
06:34And we see this with stocks and Bitcoin and even gold.
06:37You know, all these assets are kind of going up regardless of fundamentals.
06:40We can come up with fundamental reasons to explain why they're going up.
06:43But the reality is they're probably just going up because there's too many dollars in the economy chasing too few assets.
06:50And this is what we get is asset inflation.
06:53I'll also point out that the grains, they've been doing the exact opposite.
06:58They're selling off while cattle is going higher.
07:00But part of this is because of the trade war with China.
07:03China is a really big buyer of U.S. grains.
07:06And when we start having tariff wars and these sorts of things, they pull back and our grain prices retreat.
07:11So that's part of the story there.
07:14And I'll add one more thing.
07:16If the markets were expecting widespread inflation beyond what we already have, I think we would see something a little different.
07:23In 2022, 2023, when inflation was a big problem, a lot of money flowed into commodities across the board.
07:33Crude oil, natural gas, grains, literally anything that was a commodity went up just because it was a commodity.
07:39And the idea was hedge fund managers, portfolio managers, even small investors were buying commodity ETFs and commodity funds in hopes to basically hedge away their inflation risk.
07:51And I'm not sure it worked because we got a bit of a boom and bust type of cycle of those sorts of things.
07:56But we're not seeing that this time around.
07:58So for now, I think that, as I alluded to earlier, I think that the deflation is probably a bigger story than inflation.
08:05And with live cattle, I think that will eventually be the case, even though it's the outlier at the moment.
08:09Well, if you're expecting this day of reckoning for live cattle futures because of the momentum chasing, does that mean you expect something similar to happen to the stock market, to Bitcoin, to gold as well, all of which are near all time highs?
08:23I think these assets are very vulnerable.
08:27I think there's the potential for a pretty big fallout in each of those.
08:32I feel the most confident about gold.
08:35And the reason being, I think that the gold market, I've seen this action before.
08:39I've seen all of these types of excessive headlines before.
08:42That was in 2011 when gold peaked out and took a 45% haircut and took a decade to recover.
08:49So gold is a safe haven sometimes, but not always.
08:53I believe that these prices, gold is actually a risk asset, not a safe haven.
08:57It doesn't pay dividends or interest.
08:59It's at all time high prices.
09:01And if the dollar bottoms out like I think it will, that's going to push gold down.
09:05Let me just put it in perspective.
09:08If the dollar trades identical to how we did in Trump 1.0, which so far it's following that playbook.
09:14If that happens, we should see the dollar index trade up to 108, 110.
09:18And that alone, all else being equal, pushes gold below 3,000.
09:23So you want to be really, really careful if you're a gold bull up here.
09:26It's a time to take some money off the table and wait for a big pullback because pullbacks in gold can be very treacherous.
09:32As far as the stock market goes, you know, on my charts, I see pretty good resistance around 6,500, which were basically there.
09:41And when I look for support, I don't see good support until we get into the 5,000, like low 5,000.
09:46So in my mindset, there's a lot more risk than reward in the stock market.
09:51But of course, you know, this is a market that's been on fire and maybe it just keeps going up.
09:56Momentum tracers are hard to deter.
09:59So, you know, I'm not going to try to predict anything, but I will say we are on some shaky ground.
10:03And if and when there is a pullback, it could be maybe not quite as scary as what we saw in April, but something similar.
10:09OK, so just finally, Carly, where are the investment opportunities right now?
10:17If you are someone that ventures into commodity trading and it's not for everybody, I'll say that out front.
10:24Most people probably shouldn't trade commodities.
10:26But if you are in a place for with risk capital and want to do something like that, the grains are probably a good opportunity.
10:32As I mentioned, corn, soybeans, wheat are all near multi-year lows.
10:36We like natural gas. So natural gas has been just bludgeoned here in the last couple of months.
10:42The weather has been mild and it's allowed prices on the front month to fall below three.
10:48I can't rule out another 10 cents or so, but we're getting to the time of year where natural gas starts to go up in anticipation of winter weather.
10:55And so I think we're looking at some pretty good opportunities there.
10:59OK, we'll leave it there. Carly Garner, senior strategist and broker at DeCarly Trading.
11:03Thank you so much for your insights and for your picks. Really appreciate it.
11:07Thank you. Thanks a lot.
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