Some people were lucky enough to be born smart, while others were smart enough to be born lucky. I am pretty sure that I am going to have to count on being lucky because I too all often get confused without helpful signs like this:

I definitely got lucky yesterday with the lifting of a portion of my short equity position into the previous day’s weakness.

My trading premise has been that Yellen & Co. will be loath to bring forward the rate rise tightening schedule. There has been a fair amount of chatter about the removal of the “considerable period” language which was part of the reason for the sell off earlier in the week. My bet was that we were going to get another chance to short at higher levels when the Fed came in less hawkish than expected.

I thought I was going to have to wait until 2pm today for my thesis to play out, but yesterday the WSJ’s Jon Hilsenrath reported that the Fed would not remove its “considerable period” language. Hilsenrath is often viewed as the Fed’s mouthpiece when they want to leak information to the market so his comments sent the market exploding higher.

My game plan is to wait until the actual Fed announcement to put my full short position back on. I am hoping we get another big up day today so that I can sell into a Fed induced euphoria. Regardless of the outcome of the meeting, I am going to re-establish my short throughout this afternoon’s trading. Even with a less hawkish Fed than expected, I think stocks are going to disappoint in the coming weeks.

Is a pickup in global growth coming?

Although I think stocks are going to struggle, I am becoming more constructive of other risk assets.

The recent sell off in commodities has been a result of tightening of monetary conditions. I know that many will argue that the Fed hasn’t even begun tightening so how can I blame a tightening monetary policy for the swoon in commodities?

In this day and age of extreme indebtedness, we often don’t need actual raising of rates for monetary conditions to tighten. Don’t forget that the Fed has been easing up on their asset purchases through the QE programs. This has been a tightening of monetary conditions. And although the ECB has been big talkers, they have not actually done any balance sheet expansion yet. Their balance sheet has been steadily shrinking. Finally China has been slowly letting their conditions tighten as they attempt to rebalance their economy. All in all, liquidity has at the margin been slowing down its rate of growth. Yes, I know that sounds absurd. The rate of growth has slowed, so how bad can it be? It is still growing.

But prices are all set at the margin, so this slowing of the rate of growth of liquidity has had a big effect on the global economy and financial prices.

This is why the US dollar has been rallying so hard. Yes, some of it is the result of there being more of the other currencies, but it is also a function of the supply of dollars not growing as fast as needed as well.

As conditions have tightened, the US dollar has rallied, and with it, commodities have sunk. Have a look at this chart of the US dollar index and the inverse of the CRB index.

This rally in the US dollar and decline in commodities gives the Fed some extra room to leave rates lower for longer.

But more importantly, as liquidity tightens around the globe, the rest of the world is finally starting to pick up the easing mantle from the US. We all know that the ECB finally relented from their stubborn refusal to expand their balance sheet. Yesterday the People’s Bank of China (PBOC) also blinked. The Chinese announced that they were engaging in what has been called a CNY500 billion “stealth QE” program.

We have hit a pain point for the rest of the world in regard to their willingness to tolerate the gradual tightening of global financial conditions.

When you combine that with the fact the Fed will be extremely slow in their guiding of US rates higher, I think the worse is behind us for commodities.

I am already long a few different long commodity positions, but I want to increase my exposure.

Yesterday on the Hilsenrath news I bought a little GDX. It is at a decent support level and I think that the precious metal sector will be one of the beneficiaries if Yellen disappoints the bears.

In the coming days I will be picking away at some more commodity type trades. I expect that global growth is going to surprise on the upside as the worlds’ Central Banks turn on the liquidity spigots.

Everyone is betting on higher rates

I came across this great chart that I thought I should share with you regarding Eurodollar options. There is clearly already a lot of rate hiking anticipation built into the short end of the yield curve.

If Yellen doesn’t raise rates as quickly as the market anticipates there are going to be a lot of dusty options in the Eurodollar square…