Don’t Expect a Goldilocks Economy

Most commodities are cheap today. But that won’t last. Creating a sustainable world is an existential necessity. However, it will take huge amounts of commodities. These raw materials can be produced in sufficient quantities only if prices are high enough to incentivize producers.

Goldman Sachs (NYSE: GS) estimates that copper prices would need to rise by about 30% to meet future demand. The current economic slowdown has only deferred demand. A recession won’t change how much copper is required to build an electric fleet and the associated infrastructure. Rather, whatever copper isn’t produced today will just add onto future needs.

Even apart from climate change concerns, developing a sustainable economy can wait only so long, meaning that without the incentive of higher prices today for copper (or any commodity), there will be periods of shortages and sharper commodity inflation in the future.

No Hope for Goldilocks Economy

One macro implication is that you can’t easily separate growth from inflation. Central banks will have to abandon any idea of a Goldilocks economy. And the U.S. and West will have to accept that it’s essential to work with countries whose cultures or governments we may dislike.

Let’s face it: The Federal Reserve is powerless to manage the economic situation. Its twin responsibilities, employment and inflation, have become mutually exclusive mandates.

In actions and words, the Fed has shown its current focus is on taming the 40-year highs in inflation that is becoming increasingly entrenched throughout the economy. Many compare it to former Fed Chair Paul Volcker’s fight against inflation in the late 1970s and early 1980s. But Volcker had luxuries that his successor Jerome Powell lacks.

Fundamental Scarcities

Back then, a major inflationary catalyst was surging commodities led by oil. But unlike today, those reflected temporary shortages, not fundamental scarcities.

Moreover, today the distribution of oil and other commodities is predominantly in the planet’s South East, where we exert little control. It’s quite remarkable that while the West is facing recession, Russia’s economy has perked up dramatically and is growing by more than 4%.

In challenging Russia and China, we’re at a terrible economic disadvantage. For the U.S., I think the only way out is through cooperation. For investors, the message is to continue to focus on commodities and gold.

It’s a new world. Let’s hope it will end up new and improved.

Resources Control and Economic Power

The countries with the bulk of resources now align ever more closely with the ones with the most economic power. Eventually that could make commodities, including oil, less volatile.

Until recently, the U.S. central bank had control over the global economy. But today the world is in the midst of a major upheaval that has thrown out the old rule book. One consequence, somewhere around the bend, could be a more unified world where efforts are made to make decisions…whether about oil, money creation, and more…for the good of all.

Okay, I know this sounds wildly utopian. And straight ahead there is likely to be intense volatility, which tends to precede any major transition.

My predictions are based on my observation of the world’s biggest economic blocs, such as the Shanghai Corporation Organization (SCO) and the BRICS (Brazil, Russia, India, China, and South Africa), which on balance hold greater shares of natural resources than the rest of the world.

I Hope Rivals Will Work Together

Russia is a member of both groups and Saudi Arabia has expressed a strong interest in joining both. It suggests to me that ultra-intense volatility in the immediate future could have a longer-term beneficial payoff.

That, I hope, will be a lesson from the war in Ukraine. In today’s world, the big problems can’t be solved by money; they require global cooperation.

For investors, a key implication is that commodities and commodity stocks are now long-term holdings, not mere trading vehicles. They’ll still be volatile, sometimes intensely so, but unlike in the past will have a decidedly long-term upward bias.

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