November 30, 2022

Commodity Insight: Hopping to conclusions

It was exactly two years ago this month that I turned wildly bullish the commodity markets, and with the benefit of hindsight, it was a well-timed forecast.

Over the past two years, commodity prices, hard assets, rose so sharply in values that inflation is now hugging a 40-year high. However, the flip side is the Federal Reserve is so concerned over rising inflation, it is lifting interest rates at the fastest pace in 40 years.

Therein is my concern.

In the past, when the Fed hikes rates quickly it was wildly bearish markets of all kinds. Now, I am trying my best not to jump to conclusions about what the future holds.

History shows there are three fundamentals that can bring all markets to their knees. One is a recession. Another is a war. The third is higher interest rates. Today, all three of those fundamentals exist.

According to the Bureau of Economic Analysis, as of July 28, the U.S. economy is in a recession because the first and second quarters of this year showed two consecutive quarters of a slowing economy.

The war I am referring to is the one in Ukraine. And higher rates have been underway in the United States since mid-June with the Fed chair saying only a few days ago that “restoring price stability will likely require maintaining a restrictive policy stance for some time.”

There was a time when facing such bearish fundamentals I would have been a seller, a hedger and screaming at the top of my lungs for others to follow suit. In fact, many are already doing that.

For instance, Jeremy Grantham, a renowned investor, claims the stock market is already in a “super bubble.”

In past years, Grantham accurately predicted a number of bubbles, including the dot-com disaster and the stock market crash of 2008. He is now calling for a brutal sell-off in other assets, ranging from stocks to housing to property.

He has recently been quoted as saying, “Between COVID in China, war in Europe, food and energy crises, record fiscal tightening and more, the outlook is far grimmer than could have been foreseen in January.”

Others are just as bearish most markets as Grantham. Some are more bearish.

However, one firm is touting my bias. That firm is Goldman Sachs.

From Bloomberg News, “Goldman Says Buy Commodities, ‘Worry About Recession Later.’”

Goldman Sachs argues investors should “pile into commodities” because the recession risks outside of Europe are overblown. They argue that commodities, hard assets and raw material markets are likely to rally moving forward “amid a profound energy crisis and tight, slim supplies.”

Goldman Sachs is expecting commodity values, per se, to rise 38% in the year ahead, which is a huge and bold forecast.

Yours truly is being open-minded and not jumping to conclusions. I am listening to Grantham, as well as Goldman Sachs.

I want to be on the right side of the markets and not find myself in the uncomfortable position of the bartender that jumped to a conclusion when a grasshopper came into his bar and hopped up on a stool.

As the story goes, a grasshopper was quite thirsty one hot day and strolled into a bar for a cold drink. Quickly he hopped onto a stool and the bartender noticed him immediately.

With a big smile and welcoming voice, the bartender said, “Hey, we have a drink named after you! What will it be?”

Somewhat surprised, the grasshopper said, “You have a drink named after me? Well, by golly, gimme a Ralph!”

Based on history, one of the most reliable old sayings on Wall Street is: “Don’t fight the Fed.”

The reason is simple. Down through history, the Fed usually gets what it wants.

If the Fed wants lower inflation and is willing to lift rates to sharply higher levels to bring stocks and commodities to their knees, it will get what it wants.

But history also shows just as clearly that there is a 12- to 18-month lag between higher interest rates and a weak economy coupled with lower stock and commodity prices.

For now and the foreseeable future, I am in the camp of Goldman Sachs and believe that investors and traders should be piling into the long-side commodities now that prices have retreated in the past few months to more attractive entry points.

I am trying my best not to jump to conclusions. But, understand, there is an energy crisis unfolding with crude oil, natural gas and coal with Europe to suffer, plus supplies of a number of basic commodities such as wheat and corn are tight.

I am not bearish commodities despite the aggressive nature of the Federal Reserve in hiking interest rates at the fastest pace in 40 years.