It seems like commodities are the boss now. BofA reports that broad commodities just poked their head into positive territory on a one-year rolling basis for the first 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 live in interesting times. To have big-boy numbers, your choice is either hard assets or crypto. Or dare I say it, both? TPW Advisory is in the ‘both’ camp.
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Summary
- Commodities continue to rise and we have added commodity exposure across both debt and equity.
- Our expectation for a multi-year global economic boom and supply-demand imbalances from ESG considerations both support the commodity supercycle.
- The longer-term economic trajectory will only become clear around late summer, until then watch commodities.
It seems like commodities are the boss now. BofA reports that broad commodities just poked their head into positive territory on a one-year rolling basis for the first 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 live in interesting times. To have big-boy numbers, your choice is either hard assets or crypto. Or dare I say it, both? TPW Advisory is in the ‘both’ camp.
The boss is influencing other assets as well, and vice versa. US growth stocks/thematics have been weak, perhaps sniffing out inflation even while USTs 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. The biggest asset allocation shift was to add to commodity exposure across both debt and equity, with a focus on miners and regional laggards.
We based this decision on two things. First, long-standing expectations for a multi-year global economic boom. Second, a growing sense that the intensifying ESG focus could serve to elongate a commodity supply-demand imbalance fuelling higher prices and a commodity supercycle.
I am not talking about the temporary imbalances currently being experienced due to the ‘Great Re-Opening’ across developed economies. Rather, I mean the lack of appetite from the financial services industry to finance energy and mining exploration – expansion projects
The urgent action necessary to dramatically lower carbon emissions by 2030 is creating, somewhat perversely, huge demand for more metals. Lithium is just one example. According to the IEA, demand for lithium will likely increase 40x – yes, 40x, not 40% – to meet Paris Accord targets as the Americas and Europe focus on transportation-related emissions and electric vehicles. In Asia, the focus is on power generation emissions, so uranium is gaining importance. Copper demand is projected to surge as well, along with cobalt, nickel, etc.
My view last autumn that you could profit in both old and new energy played out very well. Now the focus is on the transition to low carbon via both carbon plays as well as mining/metals.
The bond market reaction is interesting. After a mad dash to a 1.7% UST 10-year, the 10-year has backed off even as the data comes in hot (well, excluding the recent jobs report – talk about a feint).
Maybe the combo of commodity price pressures and 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 highly bullish for equity and commodities, would it not?
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 previously discussed, I expect us to discover more as we move into late summer and begin to get a sense of normalized numbers. This will likely 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 conference in August. Do not let the ‘sell in May’ line fool you; since 2012, the S&P has been down only once between May and October.
The time to worry is not with all the wild economic numbers we get today. It is when things normalize, and we can start to see what we are left with – an economy moving onto a higher growth plane or one likely to sink back into the post-2010 weak growth path.
In the interim, pay attention to the boss!
Jay is the founder of TPW Advisory and former top ranked head of asset allocation at Morgan Stanley.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)