TDI Podcast: Commodity Carley (#961)

26:43Transaction fees go up. And I think it's really that simple. And I personally think these types of aggressive marketing or products, we can talk about commodity ETFs also. I think they're a bad idea. And I think they've distorted commodity markets to a point where they're almost broken. But anyway, the idea is these products that are generated to commit to generate revenue and commission for brokers and exchanges and all these things, they are creating markets that don't reflect reality, in my opinion. I know other people will say otherwise, but that's how I feel about it. It's kind of like solving a problem that doesn't exist.

27:22They're creating a market that there's no need for. Yes. That's a good way to put it. Yeah. You're right. So the other thing about, I think you've talked about this in your letters, which, by the way, we'll have links to find out more about what Carly writes on a regular basis. The DeCarly letter, I think it's called. DeCarly Perspective. Perspective. Perspective. Sorry. Oh, you're fine. And you wrote about this, you've talked about this, the idea that when there's the potential that these zero date options are, I don't know, messing with market volatility, especially in indices. Is that, how does that work?

28:02I do think they are, yes. I think they're creating more volatility. And I think, I believe in recent years, they've actually allowed markets to probably get a little more expensive than maybe they otherwise would be because most people are trading in that direction. But I have to wonder if what's been helping us see the indices appreciate might work against us, kind of similar to what we saw last year or during COVID when we had that, you know, mini crash, whatever you want to call it. You know, markets always go down faster than they go up. And these markets have gone up pretty fast. So it's kind of scary to think about what could happen if all of that leverage that's built into the system from zero DT options and other products, if it starts to unwind and then feed on itself on the downside the way it has the upside, I think we could be in trouble.

28:59Yeah, there is a lot of leverage in the system. You can see that just from the flows. You can see that from the actual numbers of the leverage numbers that come out, the margin numbers that come out. I think we've been hitting all-time highs, not maybe more recently. They kind of came down a little bit, but we saw that at the beginning mid part of January that I think it was all time high amounts of leverage. A lot of brokers are like, Hey, this is great. I'm like, huh, how's that great? You know, it was great for them, but. For now. Yeah. So you bring up a good point. People are, you're right.

29:29There's more leverage at brokerages now than ever, according to the reports I've been reading. So just to make sure everyone understands, people are buying more stock than they actually have the money to buy. So, you know, this is all fine on the way up, but on the way down, it could be become very treacherous. And I'm going to point out one other thing in addition to that type of leverage, in addition to the option leverage that we see in the markets. Um, and in addition to let, like, let's say triple ETFs, you know, there's a lot of people that are buying these leveraged ETFs. So there's that there as well, But I talk to a lot of retail traders and it's pretty common practice based on, I mean, this is an unscientific poll, but it's pretty common practice for people to avoid paying off debts.

30:12So they're not paying credit cards, they're not paying cars off, they're not paying houses off because they believe they can put that money in an account and generate more income through their stock trading or whatever it is they're doing. So that's a different kind of leverage that we don't even see in the numbers. So there's all kinds of things going on here. You know, back in the day when interest rates were, you know, you get 4 % or less, let's say. People ask, you know, what should we do? Should we pay off our mortgage? Like, first of all, if your mortgage is 4 % or less, no, do not pay that off.

30:46If it's 8%, yeah, well, that's a different story, right? Because at 4%, you could at least make that close to it on a money market. And, you know, over time, maybe make the money in your investments. And there's a break-even calculation you could do with this. But when you margin up your portfolio, it's different than margining up to buy a house. If you buy a house and the house comes down in value, nobody comes knocking on your door and says, hey, hey, hey, hey, by the way, please send us more money. When you margin up and lever up a option slash future slash stock account, and it goes down below the required level, what happens, Carly?

31:29You get a margin call. And that's, by the way, a margin call is not like a, just to be clear, it's not like a friendly call that somebody's going to actually make to you. It is an absolute freaking demand that you put the money in the account now, or we're busting your trades and you're out. Yeah. I've had people ask me if they can send a check. I'm like, no, that's not how it works. Check's not going to do it. You need to wire. Some people don't understand how critical it is. And with the volatility we've been seeing in gold and silver, the real sad reality is a lot of these movements have been happening overnight.

32:06So anyone that's holding on to even a little bit of leverage in gold and silver, we're finding issues where the banks are closed overnight and they can't wire. And then they end up basically running out of money because not only is it a margin call, but it's a situation where they're about to lose more money than they have in their account. And so their trades get liquidated, not because they don't have money sitting in money markets somewhere that they could have wired, but a lot can happen between the bank closure on Thursday afternoon to the market reopening on Friday morning. So it's really, really a tough game if you're trading on any kind of leverage in a volatile market.

32:41So what rules do you have for anyone tempting the, we'll stay with this zero dated option, short dated options and all that from a standpoint of position sizing, when to sit out, you know, stops. Well, I guess what is the stops? There's not going to be stops. Everybody's just going to ride that out to the close, right? Yeah, generally, I don't know how the stocks work. In futures, you can place a stop on an option, but literally nobody does it. people just assume like if they spend$800 on an option or whatever it is, their stop is that option becoming worthless. So that's kind of how they work, look at it.

33:14I will say now I'm not a fan of day trading. Day trading is a very aggressive strategy. Most people lose day trading. It's not something that most people can make money at, but if you are the type that has risk capital and wants to give that a shot, zero DTE options are kind of nice because you have limited risk on that play. It either works or it doesn't. But as you mentioned, it's essentially gambling. Yeah. I mean, way back when, I learned day trading from a very good trader. And there are, the thing about day trading, and by the way, this is, I think you would agree with this, trading, there are rules.

33:53The problem with the day trading or even trading for a living is that most people start bending the rules. That's where stuff goes bad. You know, if you stick to your things can still go bad, right? But when you have the, oh, you know, I'm not taking that profit because I'm gonna let it ride. And, or, you know, oh, it went down. I'm supposed to be, ah, I'm gonna hold it overnight when I'm not supposed to be holding it overnight, right? These are rules. You have rules, right? Absolutely. And you know, humans are humans. It's, you know, it's a tale as old as time. Yeah. So what's lighting you up right now on commodities and options trading?

34:28What markets, what areas, I don't know, what's going on in terms of liquidity? I don't know, the sweet spot. What is it? So, I mean, one market that's moving is crude oil. I am not bullish crude oil. The thing is crude oil has been in a bear market for four years, and we've had these pretty decent sized rallies on the heels of political events or Middle East flare-ups, those sorts of things. And we're getting one of those again. Now, maybe this will prove to have legs and we'll get something out of it. But I highly doubt it. I don't think we've done what we needed to do in the downside in crude oil.

35:01So what we've kind of recommended our clients do, the CME's listed micro crude oil futures, which are great because they're really, really small. They're only 100 barrels, which means a futures contract will make or lose$100 for every dollar crude oil moves. So what it also does is it gives you very cheap options. So what we've kind of suggested people do is using June futures, go short a June future, buy a June 65 call. your risk is very low, five, six, 700 bucks, depending on, I didn't look at prices today, probably about 600 bucks. The most you can lose is 600. You're not going to get rich unless crude oil just completely falls out of bed, but I wouldn't be shocked to see it completely fall out of bed.

35:43And we've bounced off 55 on the downside a couple of times. If this Iran thing turns out to be a nothing burger, like we don't actually get a supply disruption, the Straits of Hormuz don't close, which is the most likely outcome. If that occurs, we probably don't stop at 55 on the way down. We probably keep going. So that's kind of what we're looking at. So you're looking at the short side of oil right now. That's where you're leaning. Yes, with limited risk. No, I'm not telling anyone to go out just thinking. What's your wrong side risk? About 500 bucks. It's a micro. So we're going super, super small.

36:21And if you're a bigger trader, you can do it with a full size. your risk would be five grand. You could do anywhere in between by doing multiple micros. For example, if you did two or three, your risk would be a thousand or 1500. So you can kind of decide how much risk you want to take, but it's a limited risk play. So it either works or it doesn't work. And your upside, obviously, well, it could be a limited if this thing crashes, but you know, if you're, if you're by that point, cause you're not talking about that, I mean, a few months, but are we talking, uh, what, what if we get down to 50?

36:51What kind of numbers we're talking about? Well, I mean, so on one micro from here, that's only about a thousand dollars minus what you paid for the option. So you're not going to get rich if we drop to 50. What, what I'm thinking is if, when I look at oil over the last 20 years, we've had four bear with this, this is the fourth bear market. The previous three bear markets have ended in complete calamity. Like, like, uh, I mean, just crashes. And the, the last, the most recent one was 2020 and we Oh, that was ridiculous. Were you able to capitalize on that? Because I thought every way from a sundown how to do this.

37:25And the whole idea of getting delivery freaked me out, you know, when they were paying me to take the oil. Right. Did anybody make money on that? Not on that, because the reality is only the front month went negative. So in most brokerages that already had already closed it off for trading because it was going into delivery. so even if you wanted to buy it most brokerages shut off the product so you couldn't have bought it anyway um and the problem is for the few brokerages that had open like i think i don't want to say names but there's there were a few that forgot to turn off the platform and you whoops yeah and people were allowed to trade it um but for example you had people that in their mind they didn't think crude could go below zero so everybody in the dog was hitting the buy button when crude was at$1 or$2.

38:17And of course it went negative 40. So that mistake could have cost them 40 grand in like three minutes. That was, I was one of those people like, ah, it's not going below zero. How can I go below zero? How can I do that? I didn't know, like literally, did you know that seriously? Did you know that it could go below zero? Well, I knew theoretically could. I honestly never thought it would. That was really super wild. Something I hope I never experienced again, to be honest. when markets are that off the rails, it's not good for anybody. Like just imagine if you're a producer or an end user trying to, you know, budget for your business, or if you are an investor or a speculator, the odds are most people got wiped out trying to get long before it stabilized.

39:02I mean, that's just, there's nothing good that can happen when markets are like that. And I will also mention a big part of, well, I'm not going to say big. I'm going to say a part of the reason that we saw what we saw on that day. There's lots of reasons. But one of it was the USO, which is an ETF that holds crude oil futures. It kind of blew up. And so that was part of the problem. And they had to restructure and that sort of thing. But I'm not a big fan of commodity ETFs. I believe they have not going to say ruined the markets, but they have really interfered with price discovery and added a lot of chaos.

39:40And I think it's unnecessary, in my opinion. So I'll just leave it at that. You know, it's interesting because last year, after years of part of our diversified asset allocation of clients that we had commodity exposure. And for years, I was like, I hate this. I hate this. I don't like how they operate. There's no way to make money in this. the fact is that if you think about it for a second, this is kind of a really weird view of something, but crude oil, you hold crude oil forever with all the contango and backwardation and the rolls and all the stuff and they're buying it and they're holding it, they're being and they're indexing, they're indexing, right?

40:14So you're at, I'm just picking a number, 30 % crude in this portfolio, never vary, you gotta stay on it. It goes up to 100, you make money, but you don't really sell and then it comes down again and you're never going anywhere. You know what I'm saying? It's not going anywhere. I have no upside. They're not really capitalizing on the trading. They're just kind of trying to keep it level. We switched entirely the entire commodity exposure we have to a trading based system that allows us to move around with 14 core commodities, all this whole discussion, but I won't get all the nitty gritty details, but it made so much more sense.

40:51I'm like, oh my God, finally, finally, we have something that but they can actually pick where they want to invest at any given time. They have parameters. They have to be in 14 different ones, but they can weigh them differently, but they can really move hard. No indexing. And I got to tell you something made out like a bandit last year and this year so far. Good, good. Perfect. Yeah. Commodities are a trade. They're not an investment. Exactly. For those people. Yeah. Yeah. You're right. So it's just putting money in and just sitting on it and not looking at it. It's not the way to go in commodities.

41:18It doesn't work that way. But a lot of these commodity ETFs and mutual funds do just that. The levered ones are even worse. They do. And the problem is this, especially like these trades go viral. For example, when Russia invaded Ukraine, we saw everybody wanted to own wheat because, you know, the world's wheat basket was under duress. And we were going to have a wheat shortage and blah, blah, blah. So everybody tried to, you know, not tried. Everyone tried to put money into the wheat ETF, which then takes that pooled money and buys futures. And the wheat market can't absorb that type of liquidity.

41:56It can't absorb that many people wanting to invest in wheat. And so it really just blew up the market. We went limit up for seven days and it was a total fiasco. And then we came down faster than we went up. And so just so unnecessary. We've seen it in gold and silver. We just recently, we saw it in cocoa a couple of years ago. So the problem is - Lumber did the same thing. Lumber, yep. Lumber too. The problem is when you have an ETF that has the ability to go viral, when I say viral, I mean like popular on Reddit and Twitter and everybody has the same idea. The AI is telling them to buy these things.

42:31And so everybody's trying to put a little bit of money into it, which doesn't sound like a bad thing because we're getting retail traders involved. But the problem is these markets are just way too small. It's kind of like bidding$101 bills into a coin purse is what we're trying to do and it just breaks things. Yep. Wow. It's amazing. It's funny because I've always thought that is there really any true reason, you're going to hate me for this, sorry. Is there any true reason for speculators, I'm not talking about hedgers or farmers, to have any ability to buy, let's say wheat, a food that I need to eat which if they do run that up for some reason, cost me money.

43:20You know what I'm saying? I can't. Yeah, I understand. It's like, Oh, my cocoa crisps are going up. I'm going to buy, let me, let me, let me buy some of the wheat ETF to watch out for that. Right now I will say like, see, I'm a, I'm a futures and options broker. So we have, we deal with farm hedgers, energy hedgers. We also deal with speculators and speculators get a bad rap. because of things that you just said. Because of speculators, we probably add another 10, maybe 15 % onto wild rallies, and maybe we shave off 10 % to 15 % of value in a bear market. But what I would say is speculators do add liquidity, and there are some drawbacks to that.

44:06But the flip side is if you had no liquidity, nobody would be able to hedge the price risk, and the markets become even more volatile. And the reason I know this is that when I look at things like lumber, which has very few speculators, or ethanol, these markets that don't have a lot of speculators are actually more volatile than something like crude oil or corn that does have a lot of speculators. So there's no perfect way of price discovery, but I think there are better ways and speculators make it a little bit better. So again, just to wind back this a little bit, But so you, I think it was in your February 12th letter that you sent out, you were talking and you were focusing on yields.

44:51You're focusing particularly, there's a chart that's in there on the 10-year note future speculators are holding historically large net short positions. Right. And you asked the question, will the unwind result in a massive rally like it did in 2018? And that's here on the chart. You showed it kind of here. Let's talk about, for our listeners, give a discussion of what it means to be short and what the unwind would look like. Okay. So when a speculator, now I'll clarify, there are a lot of people short treasuries in the futures markets. Now, many of them are speculators, but it's very possible some of them are holding treasuries in their investment account and they're hedging.

45:38So you have to keep that in mind. But whether they're hedging or speculating, when they're short the market, basically they've sold 10-year note futures looking for the price of that, the 10-year note or the bond, whatever you want to call it, to go lower and interest rates to go higher. So there's a swath of very large bets that interest rates are going to continue to go higher and treasuries move lower. If for some reason they are compelled to exit and eventually they're going to have to exit, you can't be short treasuries forever and ever and ever. It's very possible that these people have been short for a long time and they've rolled.

46:14We've seen that in the numbers. The net short position has been massive for three or four years and it's just just hasn't found a reason to unwind. in that, you know, if you look at a price chart, that makes sense. Treasuries have really gone nowhere. Nowhere since like 2024. Yeah. And it's funny because if you watch the news, every once in a while we get these big scares like, ooh, yields are jumping up and this and that. They really haven't got anywhere. Like we get a week or two where they jump up a little bit and then they give it back. So it's kind of a nothing burger, even though we've seen a lot of headlines, especially during the April 2025 issue with the Liberation Day treasuries rallied, and then they sold off sharply, and they were trying to convince us that nobody wanted to own treasuries and interest rates are going to 8 % and so on and so forth.

47:06That didn't happen. Anyway, because there are so many people short, at some point, eventually, they're going to have to buy back their short positions to exit their position. So they basically are borrowing treasuries to try to make money on the downside, if that makes sense. They're going short before they even own it. And then they're trying to buy it back later on. In futures, you can do that very easily. You don't have to pay interest or anything like that. You just click a button and you're good. So futures is a very simple way to do something like that. But isn't there a natural buyer in this?

47:42The Treasury is buying billions of dollars worth. And then we have also the other issue of the stable coins buying huge amounts of treasuries. Isn't that stopping maybe some of the overhead from going and moving? Is that part of the problem maybe? I think that that's probably, I think there's a lot of moving pieces. And yes, you're right. Like we are essentially buying our own bonds. The U.S. is buying its own bonds. It's been doing that for a long time. And that has, in a lot of people's minds, artificially stabilized the market. Well, it really, I don't know. Artificially is probably not the right word.

48:23It truly has stabilized the market. It truly has kept interest rates probably a little, you know, a little lower than what they would normally be. However, speculators have also, if you recall, when Russia invaded Ukraine and crude oil was rallying sharply, it was a persistent every single day. Crude oil was up, treasuries were down. There was like algos and people had it in their mind that, you know, the inflation trade, buy oil, sell treasuries, buy oil, sell treasuries. So treasuries were also getting it on the chin from speculators and, you know, the inflation trade hedgers and all those sorts of things.

49:02And I think we're probably beyond that period. I think inflation is much tamper than it was three or four years ago. I mean, we were up at 9 % and now we're at two or three. So that's a vast improvement. But treasuries are still kind of pricing in higher inflation in my mind. The reason I think that is if you look at similar instruments, like, for example, the Greek 10-year note is paying a percentage point less than we are, which is kind of crazy to me. And most advanced nations are paying a little bit less in yield, in some cases a lot less in yield than the U.S. is. So in my mind, we probably deserve to be in the threes, not the fours.

49:46My opinion doesn't matter, though. The point is, if the whole world is short treasuries, and that might mean short futures, like we've already talked about, or it might also mean short in their portfolio, meaning they're holding a lot of stocks and very few treasuries, because it hasn't hurt them lately. Nobody's missed having treasuries in their portfolio. But if stocks start to falter, they're going to be reminded that maybe that might not be such a bad idea. Four or 5 % for doing nothing and maybe getting some capital appreciation isn't a bad deal. I look at it like this, I think of it like a boat.

50:20Everybody sees something shiny on one side of the boat, they all run to that side of the boat, and all of a sudden they realize, holy crap, it's way too heavy on this side. So instead of slowly but surely rebalancing, they all run to the other side, and that just tips the whole boat over. That's kind of like what it's like with a commitment to traders, or when the speculators, or when any investment group runs too hard to one side, just like we saw with Silver, for example, not too long ago, with the move that we saw that it was that clear textbook parabolic blow-off top. I said it when I saw it.

50:54I said, that's a blow-off top right there if I ever saw one, and it reversed down. You need to wait for the reversal, of course. In the couple minutes we have left here, you've been on Mad Money a lot. You've been on Bloomberg. You get around town doing a lot of stuff. The mainstream financial media gets things right and wrong. What do they get wrong about commodities that drives you nuts?

51:20The thing about, I think most people don't realize what we just talked about. Commodities are a trade, not an investment. And so they kind of have in the back of their mind that commodities go up over time because of inflation. And that's really just not how it works. and technologies, deflationary commodities, boom and bust. They always will be like that. And so I don't love when the media starts touting ideas. You know, the media is in the, they're in the trend following business because that's what sells. That's what sells. And that's what people want to hear and watch is when things are moving higher and it's exciting.

51:57And so they kind of add to the bandwagon mentality, in my opinion, in some cases. And I think eventually ends up hurting people. Cause as we've talked about, um, commodities don't go up forever. They reach an inflection point. And when they come down, they come down really, really quickly and catch people off guard. Yeah, I got it. Uh, well, uh, thank you. I want to tell you, so you, you're always a breath of fresh air. I know that you're very busy doing a lot of stuff. Carly Garner, well, where do we get your information, your newsletters, uh, find out more about you, learn about things, your books.

52:29I mean, we have all that on the website, Tell me where we go to get it from you. Thank you. Appreciate it. You can find us at decarlytrading.com. We are a boutique futures and options brokerage. You can sign up for a free trial of our newsletter there. Or if you're not really interested in the brokerage service and you just want some educational material, you can check out our sub stack. It's decarlytrading.substack. And you can sign up for a trial there. And if you like what you see, we do charge$25 a month for the content. But, you know,$25 is only two ticks in crude oil. Three. Two and a half ticks.

53:00I appreciate you coming along. Thanks so much. Thanks, Andrew. And let's go wrap it up for this edition, this show, this episode of the Disciplined Investor Podcast. Getting into the heart of February here, folks, where things are usually a lull in the markets. We'll see what happens as we move through this month and into next. But coming up next week, well, this is what we want, right in the time that we want it. Danielle DiMartino Booth. Then we have coming up Tom Petterfee, the founder of Interactive Brokers. And David Gaffin is coming up from Reuters. Lots to do, lots to talk about. Very excited about this.

53:39Thanks for joining me. If you have an annuity, you know what to do. Otherwise, I'll see you again next week.

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