I’ve been telling my clients over the past few months that I expect inflation to pick up moving forward. The decline in the dollar this year and subsequent rally in most energy and industrial commodities is creating the year-over-year price change to bleed through to various inflation measures like CPI, PCE and (ISM) prices paid reports. These upswings tend to last at least 6 months and often a year or longer, and it looks like it’s just getting started. This should inevitably put pressure on bonds and other yield-sensitive assets.
Commodities in general have been in a tough bear market for the last 5+ years and have significantly underperformed financial assets (i.e. stocks and bonds) since the Great Recession in 2008. Relative to US stocks, they’re now as cheap as they were in the late 90’s (top of the dot com bubble) and early 70’s – both of which marked the start of a tough decade for stocks but significant gains for commodities.
Variations of the above chart have been bouncing around for the last 6 months. This one is from a DoubleLine presentation, the firm run by the famed investor Jeffrey Gundlach. He was recently out mentioning the same attractiveness in commodities today. There are supply constraints building in a number of commodities that will likely be resolved through higher prices. That’s how the commodity cycle works: low prices force producers to cut back production which lowers supply. Supply constraints, when met with steady/increasing demand, lead to higher prices, which leads to increased production and supply, which then leads to lower prices again… and the cycle repeats.
US stocks have outperformed just about every major asset class over the past 5 years but the evidence is building that we’re close to the turning point where one wants to start shifting away from financial assets in their portfolio and increase exposure to real assets like commodities. In my next post I’m going to talk about the one commodity in particular that I think is poised for the biggest gains in the years ahead.
Thanks for following!
-Nick