There Is No Room At The Bottom

In 1959 at Caltech, Dr. Richard Feynman presented the American Physical Society with his classic lecture titled ‘There’s Plenty of Room at the Bottom‘, outlining his vision of the future and the possibility of engineering microscopic technology down to the molecular scale. Feynman’s presentation has continued to inspire several generations of biologists, physicists, and chemists to this very day. Only in the recent past however, more than half a century later, are we beginning to harvest the fruits of his vision, as our scientific knowledge and technological capabilities are slowly encroaching into the microscopic world.

Unfortunately however it seems that Feynman’s vision has somehow managed to make its way into the collective minds of contemporary economists, central bankers, and investors. With currencies across the globe pitted against each other in an endless devaluation race to the bottom, interest rates are already approaching the finish line and more recently are pushing even beyond. After gorging themselves for seven years on a quick fix solution innocuously termed ‘quantitative easing’ the addiction of investors to a policy of zero interest (ZIRP) has grown so fervent that the even slightest notion of returning to normalcy results in violent convulsions and a panicked response. But then things got even worse. A few years in it became clear that the zero mark simply wasn’t cutting it anymore, the dosage was losing its effectiveness, and like a strung out crack whore the market was demanding a stronger fix.

Unfortunately and perhaps fortunately Mario Draghi was either unable or unwilling to indulge his clientele. He simply is running out of product for a very simple mathematical reason: There is no room at the bottom. Yes you can temporarily drop interest rates to below zero but as the ECB’s deposit rate now stands at -0.3% there simply isn’t any space left to maneuver. What did market participants expect? A drop to -1% or even lower? And if we eventually get there – will investors demand even lower negative rates?

Unlike the realms of our physical world the boundaries of monetary policies are finite and quite well defined. Zero interest means you’re lending your money out for free. Negative interest rates means you are paying someone to hold your money. It certainly doesn’t take a PhD. in economics to realize that monetary policies like these are a measure of last resort but are not what produces successful societies or raging economies over the long term. The can has been rolling down the road for over seven years now and guess what – we finally have run out of road.

The market’s violent reaction after an apparently insufficient drop of 10bps yesterday is tantamount to that of a petulant child used to getting its way, or even worse that of a drug addict experiencing the first symptoms of cold turkey. And we are just getting started. It will get a lot worse before it’ll get better again and I expect 2016 to be a very tumultuous year. As always I will do my best to guide you all through the storm unharmed and hopefully coming out the other side with a bit of profit to brag about to your grandchildren. Just like always we’ll be taking it one entry opportunity at a time without lofty predictions of the future and without letting our personal views interfere with a promising opportunity to bank us some coin.

Soybean Oil Update – it’s moving but given the jump across the futures it’s a bit slow. I’m moving my trailing stop near 30.7.

Wheat Update – brilliant entry yesterday and we are in the money. I took partial profits this morning but am keeping half in the running with a trailing stop above the 100-hour SMA.

Now, like the nefarious market vultures that we are, we have little compunction about feasting on disoriented victims attempting to regain their bearings. EUR/USD may be one and if it pops higher a little I would take out a short position with a tight stop above 1.095. Why that play? Because IMNSO this would be the best spot for a reversal with limited risk. If it pops much higher than that then the ongoing short squeeze may extend into next week. Anyway, it’s a little crap shoot and I won’t risk more than 0.3R.

Gold – grabbing a short here although I have suspicions that this may resolve higher. Thus I would be willing to flip sides above 1062 with a stop around here. UPDATE: that one just got blown out of the water and I didn’t manage to flip it for a long. Better luck next time…

Quite a bit more below the fold – please step into my lair:

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Cheers,