The US equity market may be experiencing low volatility but beyond that HFT driven "market" volatility is rising fast. There are a lot of moving parts right now, each of which on their own could cause a severe shock to an extremely fragile global economy.  It is important to stay focused on what is out there and the risks they present.  Maintaining a false sense of security regarding the future of QE is ignoring the real investment risks that are present today.  One does not know when nor which event will be the tipping point so patience is needed.  It's important though to stay focused and educated so when events surface as investors we are ready to react.

I want to focus on global food prices, primarily the recent price action in rice.  Below is an excerpt from a  2009 USAID Study 

"Approximately 1 billion people—or one sixth of the world’s population—subsist on less than $1 per day. Of this population, 162 million survive on less than $0.50 per day. At the household level, increasing food prices have the greatest effect on poor and food-insecure populations, who spend 50 to 60 percent or more of their income on food, according to the International Food Policy Research Institute (IFPRI). Overall, increased food prices particularly affect developing countries, and the poorest people within those countries, where populations spend a larger proportional share of income on basic food commodities."

Rice prices in 2010 relative to the 2007-08 highs are relatively low but as the chart shows, price can accelerate very quickly. 

The chart below shows just how fast prices have begun to move since 2009.  In fact the prior resistance level has already been taken out and a massive melt up is not only possible but also probable.  We are in a yield chasing environment right now.  Those who missed the move up in sugar and cotton, etc will pile in to the rice trade and accelerate this move.  

 "It's really very simple Governor, when people are hungry they die…"  Bob Geldoff

Some mixed messages come out of this week's CFTC Commitment of Traders Report. Below are six charts with my best estimate of what the data is telling us.  The three key takeaways are

• Commercial traders appear positioned for further bond weakness

• Commercial traders are reducing net short positions implying copper weakness 

• Retail traders are positioned for further USD weakness, implying USD strength

Bonds

Looking purely at the relationship to 30 year yield and the SPX, this chart implies that further bond weakness (lower price higher yield) would be a positive for the SPX.  This cannot be taken purely at face value though.  There are many implications to a weakening bond market beyond this chart.  Still, the data below would imply continued equity strength.

Bonds – Commercial Net

Commercial positions continue to move towards a more net long in the face of 30 year weakness.  At face value this chart would imply further bond weakness to come.  It's important to note though that commercial positions are approaching a 52 week high.

USD – Commercial Net

This is a tough one to read.  The commercial trader position is net long and matches that of the prior 52 week high.  It is very possible their net long position grows but considering this position relative to the prior 52 weeks, it is quite possible they begin getting more short which would imply USD strength.  The USD has bounced off key support which would further argue for a reversal to a more short commercial net position.

USD – Commercial VS Retail Net

This next chart is that of the non reporting positions versus commercial positions.  Non reporting (retail) are relatively short versus prior times in the year so there is fuel for a short squeeze in the USD.  Hard to make any definitive call though.

Copper – Commercial Net

This is a rather interesting chart.  Copper caught a nice bid the past week yet the commercial traders are not buying it (literally).  They appear to be getting more net long (this  chart is inverted for comparison sake) which would imply pending copper weakness.

Copper – SPX VS Commercial

Nothing too definitive can be drawn here other than a word of caution for the SPX as commercial positions appear to becoming more net long (chart is inverted for comparison sake).

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So let's see how QE is doing so far.  The goal of QE was to drive down yields thus inflating the economy and stirring job growth.  The bar has moved though as certain goals saw the opposite happen so the next bar was to increase the wealth effect through rising asset prices.  It should be noted housing represents a larger portion of one's wealth versus stocks.

Jobs

This is three months in a row now of huge misses.  Even in the face of reports showing a growing manufacturing and services sector, job growth is contracting.  I say contracting because it cannot even keep up with the 150,000 jobs needed to match population growth.  QE has been in place for almost two years now.  Other than census, there has been zero job growth.

Yields

Yields have risen dramatically since QE2 was hinted at and then announced.  The Fed spun rising rates as a positive that the economy was expanding so fast that the bond market was forecasting rising rates.  If that is the case then why has today's horrid jobs report caused yields to spike even higher and in many instances take out key support levels.  The other component of yields is the damage it is doing to housing.  There is a direct relationship with the 10 year treasury and home prices and in this distressed market, housing needs all the help it can get.  The impacts on wealth affect are indeed negative.

USD

The dollar has indeed tanked and has resulted in higher exports for US manufacturers.  It has also increased input costs which is simply going to choke off an economy that cannot afford higher prices. Employers will manage the bottom line and one way to do it is further layoffs and delays on any immediate expansion.  So the vicious cycle is this. Lower corporate profits due to higher input costs and lower demand results in higher layoffs and thus even lower demand.

The Fed has failed miserably so far.  Even the Russell 2000 as Banana Ben has hyped of late has begun to rollover.

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