Over the last few weeks we have seen the dumping of commodities stocks like never before.
The recent pull back in anything commodities-related has folks (including many of our readers) question the entire commodity bull market thesis.
But volatility and risk are not the same thing. Commodities are notoriously volatile, while bonds traditionally are not. Our view is that right now one (commodities) is far less risky than the other (bonds).
Why? Let’s quickly revisit our thesis…
- We have a decade of underinvestment in the sector.
- There is no clear supply coming onstream — from anywhere — and thanks to government overreach additional or new capex is NOT taking place.
- And then we also have an international war brewing (and geopolitical tensions are never bearish energy assets).
In other words, we have a number of long-term trends all colliding to create a global shortage of historic proportions.
Meanwhile, the hairy armpit crowd tells us this is all positive and highlights our need to accelerate the shift to “renewable energy.” These people are either stupid or naive, but certainly have little to no understanding of physics.
YOU SHOULD’VE DONE THIS
Staying with commodities…
Take a look at this chart below. Each of the previous three sell-offs during the energy bull market we are now in created an excellent entry point for investors who understood the market.
Now is not just another such time. It is even more egregious than any previous one.
In addition, we’re being told that inflation is over despite Eurozone CPI looking like it just mainlined viagra.
Remember, bull markets climb a wall of worry. And right now, we’re still in that stage of the current one.
ALL THINGS TRANSITORY…
Feels like a lifetime ago, when — back in February 2020 — we started warning that lockdowns will bring about inflation and shortages. Fast forward to today, and this pesky stuff is now part of our daily lives. We recently set up a dedicated inflation channel in our Insider private forum, where members can share their own experiences with all things “transitory”.
Let them eat cake? Not so fast, as member Sean reported:
Bought a cake from M&S last week, price was £1.80. Bought the exact same item today and it is now £2.10! Almost 17% increase…
And member Mike reported on the state of agriculture in New Zealand:
Went to buy some feed for my sheep and cattle from local farmer today, ended up spending an hour talking about the crazy things being introduced in NZ to wreck the farming industry. Some of the stuff is getting so crazy you would have to be a complete moron to come up with it or deliberately trying to destroy the industry.
Animal registers, recording all births and deaths, only vets able to kill animals as in Bobby calves having to be raised and ending up as beef cattle, going to lead to dairy farms becoming unsustainable, currently the meat works cant deal with the current quantities. More restrictions on movement and stocking levels
It’s hard not to see food insecurity getting even worse in the weeks and months to come.
PERSISTENT
That’s the terminology used when describing the opposite of “transitory.”
The US CPI print came out a few weeks ago at 9.1%, ahead of expectations (8.8%).
Here’s the problem. In order to “curb inflation,” you need to be compensated for the loss of purchasing power. So interest rates need to be ABOVE inflation. And right now, this isn’t happening. In fact, we’re nowhere close the official 9.1% number…
It’s simply not possible. Not without the government going belly up overnight.
So what we’re going to see is the Fed funds rate staying persistently below inflation. This is a time to stay long asset classes that benefit from persistent inflation (H/T to @WallStreetSilv for the below graphic).
We’ll see inflation rates drop, rise, and so on, but they will remain above the Fed funds rate. And as long as that’s consistently the case you don’t want to be fooled out of your positions.
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Have a great start to the new week!
– The Team at Capitalist Exploits
