Yo Soy El Nino

The heavy rain and dangerous mudslides north of L.A. are the first signs of El Nino. The weather is ahead of schedule as we did not expect to be seeing reports like this until Jan. 2016. The latest model projection puts this winter's precipitation at 600x average. As the great Chris Farley said, "All other tropical storms bow before me."

Another large low pressure system is already moving in behind the front that dropped over 4 inches of rain in the mountains northeast of LA. Scientists now believe this El Nino will be the largest since 97/98. What is dynamically different this time is that 1996 saw a 20+% jump in corn and bean prices prior to the El Nino year. The foodstuffs jump did not fuel a pop in the general price level. This year, no such lead-in pressure has materialized.

The 1988 situation is more in line with what we would like to see play out. Heavy rains in the Southwest all winter and lower than normal precipitation in the North and Midwest set the table for a wild Spring and Summer. In 88, year round golf courses saw brisk business in Jan/Feb throughout the Chicagoland area. Then, in Spring, the rains hit the breadbasket hard. Flooding in the Mississippi lowlands delayed planting as equipment bogged down in the mud. Plants were young and behind schedule when the drought hit.

Throughout the Summer, low pressure of California and Florida strengthened stationary fronts on either side of the central plains. This formation is known as an Omega Block (because of its shape) and is critical to delivering El Nino trouble. Rain was blocked out of the growing region the rest of Summer. Eurodollar and Bond traders flooded the corn market with speculative bets. Modern technology trading has removed barriers to entry and allows even more massive amounts of speculative dollars to chase a concept.

Multiple lock limit days is grains would return the action to FI and a common, if ultimately silly, action was selling Notes because grains were up. Inflation, yada yada....  1998 saw similar jocularity in markets but was not as out of control as 1988. The possibility of a herd idea spiraling into carnage is high in my opinion. That the Fed would be caught in a rate hike debate at the same time would fuel the volatility. The last 2 years, we have followed similar smaller tracks that fizzled out rapidly. This El Nino appears to have traction. A few out of the money lotto tickets in grains are worth pricing.

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