Inflation: Hotter Than You Think
Besides the heavy human cost—more than 5 million lives lost globally—the pandemic also has exerted a large impact on consumers. The cost of living has sharply risen and buying power has fallen across the board.
Is the recent spike in inflation transitory or more permanent? Although policymakers assure us that inflation is only temporary due to supply chain issues, we think inflation is likely here to stay, resulting in a major change in the investment arena. The incredible infrastructure buildout in the developing world, plus a worldwide transition to green energies, require never-before-seen amounts of natural resources.
What to Expect?
The 1970s, at least to some degree, may serve as a useful model. That decade is often described as a time of stagflation and extreme volatility. For investors, however, the most meaningful description is that it was a period in which financial assets – bonds, stocks, and cash – sharply under-performed real assets, i.e., commodities and gold. The dollar, untethered from gold in 1971, also fell.
But even in the 1970s, and since then until May of this year, whenever the dollar rose, even briefly, commodities retreated. The 1980s began with a historic rise in the dollar and a transition to the greatest, longest-running, bull market ever.
For the past half year, though, commodities have remained strong even in the face of a rising dollar. It suggests the markets have recognized a historic shift from the West to the developing world, whose growth means commodities will continue rising.
Fossil Fuels Are Still Needed
The dramatic rise in energy prices, and in virtually all other commodities, should be seen as a warning that the rush to de-carbonize has been a mistake. As I discussed in the past, to transition to a world run on renewable energies, we still need ample fossil fuels now. The sooner we reverse course, the better our chance of achieving a self-sustaining world run by clean energies from the sun and the universe’s most abundant molecule, hydrogen.
Meanwhile, investors must reckon with the reality that the rise in commodities is unlikely a short-term blip from transitory factors. While the steepness of the rise may reflect some supply bottlenecks, by far the biggest bottleneck is that commodities are becoming increasingly scarce and more expensive to obtain.
The West’s retreat from fossil fuels has likely made a tough situation worse. The U.S. asking the Middle East, and Europe asking Russia, to supply the West with more energy is more than just an admission of failure and of the need to change course. It signifies how dependent we’ve become on the developing world and the East. It tells us that the East and West no longer can be considered separate economic spheres.
The Importance of Commodities
The growing importance of the developing world means the current gains in commodities likely are the start of a long-term trend, not a flash in the pan.
The fact that the dollar has remained strong in the face of rising commodities is a singular event. It’s further evidence that Western economies, which center around financial rather than real assets, are losing their influence in the world economy.
This doesn’t necessarily mean we face a vicious bear market in financial assets, though one can’t be ruled out. But it does ensure much greater volatility not just shorter term but probably for a long time to come. The market’s clear message: Give commodities much greater weight in your portfolios. Commodities not only provide opportunities for growth, but also a hedge against inflation.
There’s one commodity in particular that’s poised to experience explosive demand: lithium. This silver-white metal is indispensable for a wide range of industries, notably green tech and electric vehicles. For our favorite lithium play, click here now.