Commodities Are The Boss
820 words – a 3 minute read.
In the Grateful Dead documentary series Long Strange Trip there is a scene where the head of the road crew talks about how the “boss” changes: sometimes its Jerry, sometimes its Phil, sometimes it’s the carburetor on one of the trucks – sometimes that’s the boss.
Well in our world it seems like Commodities are the boss now. BofA reports that broad commodities just poked their head into positive territory on a one yr. rolling basis for the 1st time since 2014. Industrial metals lead, food follows, oil is percolating and even gold is catching a bid. We are in the first innings here – our good friend Chase Taylor at Pinecone Macro notes that 2025 WTI is priced at $52pb.
We surely live in interesting times – to have big boy #s one’s choice is either hard assets or Crypto… or dare I say it – both? TPW Advisory is in the both camp btw.
The boss is influencing other assets as well and vice versa. US growth stocks/thematics have been weak, perhaps sniffing out inflation even while UST have been stable. The USD has softened as real yields tumble; it looks to be setting up to weaken further and give commodities another boost.
Here at TPW Advisory we updated our global, multi asset, ETF based Model Portfolio this week and the biggest asset allocation shift was to add to commodity exposure across both debt and equity, with a focus on miners & regional laggards.
This decision was based not only on long standing expectations for a multi-year global economic boom but a growing sense that the intensifying ESG focus could serve to elongate a commodity supply – demand imbalance fueling higher prices & a commodity super cycle.
I am not talking about the temporary imbalances currently being experienced due to the Great Re Opening across Developed economies but rather the financial services industry’s lack of appetite to finance energy and mining exploration – expansion projects (h/tip Bear Traps).
The urgent action needed to dramatically lower carbon emissions by 2030 is creating, in a somewhat perverse sense, a huge demand for more metals. Lithium is just one example – according to the IEA, demand for lithium is likely increase 40x, yes 40x (not 40%) to meet Paris Accord targets as the Americas & Europe focus on transportation related emissions & EV. In Asia the focus is on power generation emissions and hence Uranium is coming into focus. Copper demand is projected to surge as well, along with cobalt, nickel etc.
My view that one could make $ in both old energy and new (expressed last Fall) played out V well. Now the focus is on making $ on the transition to low carbon via both carbon plays as well as mining/metals.
It’s interesting to note how the bond market is reacting to all this – after a mad dash to a 1.7% UST 10 year, the 10 yr. has backed off even as the data comes in hot (well not including todays jobs report – talk about a head fake).
Maybe the combo of commodity price pressures & the “digitalization of everything” will result in a wash for inflation beyond the famed transitory surge we all expect. Is that what the bond market is telling us? That would be super bullish for equity and commodities wouldn’t it?
It would also be interesting for growth stocks which have acted quite poorly of late as the strongest of earnings suggest the best of times (WFH) have passed. This may be true for the FANG names but not the thematics caught up in the same undertow. The challenge is to balance thematic exposure within a multi asset portfolio – something I addressed in the model update as well.
As discussed in the Monthly I expect us to find out more as we move into late summer and begin to get a sense of normalized numbers – this is likely to be the testing time and it looks like others are starting to agree with big options positions being built up around the Fed’s Jackson Hole Conf in August. Don’t be fooled by the Sell in May line, since 2012 the S&P has been down only once between May- Oct.
The time to worry is not with all the wild economic #s we get today but rather when things normalize and we can start to see what we are left with – an economy moving onto a higher growth plane or one that is likely to sink back into the post 2010 weak growth path.
In the interim pay attention to the Boss!
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Enjoy this Visual Capitalist work on thematics!
Please join me and my buddy Jacques Lemoisson for a GATE Advisory webinar Monday at 10 am EST. We will cover the Boss and much more! Join us!