Blog | CB Investment Management

Get A Commodity Allocation.

“Since the start of the year, gold prices are up 16%, and $GLD has had >$3bln of redemptions. Just in April, gold is up 7% and flows into $GLD have been net negative. What do you think happens to the price when the West finally starts to buy gold (or at least stops selling)?

Bob Elliott

“One third of the world uses wood and dung.”

Alex Epstein

Commodities have just started to outperform the S&P 500. Most likely, this time it signals the beginning of a multiyear period of outperformance. Make sure you understand the real fundamentals and challenges now confronting policy makers. From this perspective, most portfolios are  significantly misallocated.

Current policy seems unable to restore either self-sustaining growth or low inflation. Instead, it simply repeats failed policies for short term relief but also digs a deeper hole, while showing a complete inability to address debt and spending excesses, or indeed impose any form of discipline for fear of even a minor setback in near term stock market levels or GDP measures.

The main fundamental for markets and the economy, at this stage, is the decay of the current financial system. Disguise and self-interest has become a priority over addressing essential policy necessities.

Now it is becoming clear that inflation remains out of control while underlying growth remains chronically weak.

Inflation is out of control.

For the third month in a row the inflation data was far above where it is supposed to be. It is incomprehensible  that both the Federal Reserve and the President still advocate interest rate cuts and expect to retain any inflation credibility.

“Core services” CPI jumped by 5.6% annualized in March from February. On a three-month basis, core service CPI jumped by 6.8% annualized, the worst since February 2023. 

Chronically weak long-term growth

The monthly read on the health of small business continues to show a picture best characterized as stagflation. Growth is chronically weak and the most challenging economic indicator cited is inflation concerns. The economy overall can’t be described as healthy unless the NFIB survey looks better than the readings of the last several months.

Headline weakness for NFIB today *understates* the concerning picture of the US econ from small biz. Hard data measures, which generally align pretty well with growth conditions, are decelerating quickly. Adding concern, inflation indications are picking up again.

Policy is reaching Catch 22, and signals a new environment

Policy needs lower rates to help finance the deficit and boost growth. Yet it needs higher interest rates to contain inflation. What will happen? Cost of capital will rise and the only way to contain the size of the deficit will be to sell bonds below the rate of inflation over time. Real rates will have to be lower because growth is weak and yet nomimal rates will have to be higher because of inflation.  This is challenging for bonds, stocks, and the economy, but benefits real assets, or commodities in general.

Global demand for energy, infrastructure and development is far beyond the ability of commodity producers to supply demand

The chart below portrays a predicament that is progressively becoming the centerpiece of the demand argument for commodities. Despite the recent upsurge in construction spending, commodity producers have evidently fallen short of matching this trend. Capital expenditure in natural resource industries has remained near historically low levels, especially when adjusted for GDP. It is important to bear in mind that changes in the supply curve of commodities typically align with the capital spending behavior of underlying producers, albeit with a significant lag effect. Essentially, it requires time for investments to translate into increased supply. The current scarcity of capex among these producers, juxtaposed with the upsurge in construction expenditure fueling material demand, ,in our analysis, portends significantly higher commodity prices to balance these markets in the face of these structural supply constraints. Significantly higher prices, in our view, will be necessary to incentivize new capex investment, and it will take many years before these new supplies come on stream in a significant enough way to alleviate pricing conditions. It has been taking a decade or more on average to bring a new discovery into production in today’s global anti-mining climate given the environmental and social licensing, government permitting, and capital-raising challenges.

Underinvestment in production and supply could take a decade to make up when you look at how far supply has fallen behind demand. So, this will be very supportive for commodities. The new extra energy demands from data centers, and crypto currencies is also a new factor.

Global demand is still far behind developed economies

The average American consumes around 46 barrels of oil equivalent a year of primary energy. In my native Brazil, we consume just over 10 barrels a year on average, while in Africa that figure is only 2! There’s a significant need for more energy supply in the world if we are to meet the needs of the developing world

Fernando Valle

Infrastructure outdated

US infrastructure has never been worse than it is today, according to Apollo. Looking at the average age of highways, streets, and power facilities, US infrastructure is outdated. The average age of highways, streets, and power infrastructure is nearly 30 years old. This is up by an average of ~5 years since 2000 and power infrastructure is up by ~10 years since 1985. As the US transitions to electric vehicles, power infrastructure is outdated. Can the US really handle mass adoption of EVs right now?

 None of the above makes allowance for global supply chain disruptions, new demand for adding more local supply sourcing, or geopolitical instability.

Policy makers are losing control as markets expose policy failure and incoherence.  The Japanese Yen has broken long term support. Central bank buying of gold is accelerating. Central banks realize they will face severe challenges. Growth is weak and they need low interest rates to finance the deficit but inflation is out of control. What will they do? What will happen to real interest rates? Stocks and bonds and domestic currency values may decline relative to tangible assets which will still be in significant demand across the globe.

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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