The New Safe Haven: Commodities

Bonds and gold used to be the safe havens in a sane fiscal policy world, where deficits were still considered bad.  Now, deficits are ignored, and fiscal policy has been off the rails since Trump's tax cuts got passed 4 years ago.  At first, there doesn't seem to be any consequences from the massive fiscal spending, but these things work with a lag, and are cumulative.  The first couple of years of big budget deficit spending + tax cuts don't have  much of an effect on inflation, but then the economy gets saturated with dollars and everything goes up.  Both paper assets and hard assets.  

But paper assets have been receiving all the investment flows since 2008, and commodities markets have mostly been ignored and investment in new production for energy has been mostly absent since 2015.  Shale oil production looks to have peaked out and it was never going to be a long term solution for oil supply.  There just aren't enough shale oil reserves to make up for the decline in conventional oil supplies outside of OPEC.  And even OPEC doesn't seem to have much spare capacity seeing how sparingly they are increasing production, and several countries are actually unable to produce up to their increased quotas.  

If it wasn't the possibly worst seasonal time to be long oil, I would have already dumped my SPX long and gotten long oil, even chasing the strength.  Commodities are the only market where I can picture a big move higher in 2022.  I can't picture bitcoin or any stock market that could match that strength.  Its been years of underperformance for commodities and they have been overshadowed by the big gains in the big cap growth stocks and speculative playthings like bitcoin, meme stocks, NFTs, etc.  

But the last 2 months of massive outperformance by crude oil and natural gas have given us a preview of things to come in 2022 as economic normalization and increased air travel will increase demand at the same time that OPEC added production will likely be less than what's needed.  We forget how inelastic energy demand is until you see a natural gas spiking higher on low inventory levels.  Crude oil demand destruction is one of the most overhyped and misunderstood concepts, because too many assume that the price of gasoline has an effect on how much one drives.  Most people drive out of necessity, and less for leisure.  The first is very, very price inelastic.  The second, leisure, is relatively price inelastic because most of those that travel have plenty of excess savings, and an an extra dollar/gallon of gas is not going to change their plans.  

In 2008, when crude oil went up to $147/barrel, there was very little demand destruction.  In 2021 dollars, that's probably close to $250/barrel.  Its laughable when people talk about demand destruction at $100/barrel.  Which was were crude was trading at from 2010 to 2014.  There was no decrease in demand at those prices.  

In a world where money is increasingly used as an opiate for the masses, the side effects of excess money are naturally going to follow.  Governments printing money to solve short term economic problems leads to debasement of the currency and long term inflation problems.  Instead of shaving and reducing the size of silver coins, they will just print more money and try to brainwash the public into thinking inflation is transitory.  

The best way to play this environment is to be long commodities, in particular those with constrained supply growth like crude oil and natural gas.  The metals and grains should do ok, but the supply is more resilient in those markets than in energy.  In any case, I see a supercharged commodities markets for the next 3 to 5 years, similar to the 1999 to 2008 commodity supercycle.  When they look back at this period, they will say that the commodities supercycle started slowly at first in 2016 and was at its peak in 2022 to 2024.  I know how ridiculous some of these commodities targets sound, because people have heard so much nonsense, especially from gold investors who nonchalantly called for $5000 gold in 2010 and 2011.  But $200 oil seems ridiculous to most people, but its a reasonable target by 2024.  Even at $200 in 2024, on a true inflation adjusted level (not the CPI garbage that they spew out), it would be similar to $120 oil in 2011, which no one thought was outrageous at the time.  

The best inflation hedge is investing in a hard asset that hasn't been driven up excessively by speculation.  Real estate used to be a great inflation hedge but for most countries, low interest rates have made real estate historically expensive, especially in Asia.  Stocks also are a good inflation hedge but the valuations have gone up so high by speculation, that it makes it a much worse choice to protect against inflation than commodities.  It seems investors are finally catching up to the attractiveness of commodities over the past few weeks, although there is still a lot more love for stocks than commodities.  There is still plenty of room on the commodities bus, as most investors are still riding the equity bus which is overflowing with passengers.  

SPX making one its patented burst higher from oversold conditions over the past 4 trading days.  Still long most of my position, I did lighten up a bit on Monday, and that looks like it was a mistake.  I may have to bite the bullet and get back in anywhere close to SPX 4480.  It could chop here and pullback towards SPX 4450, or just keep powering higher to new all time highs.  I give both an equal chance of happening, so you gotta be long, especially before tech earnings next week, IMO.  After FOMC on Nov. 3, a lot of that wall of worry will be behind us and with it higher prices.