Commodity Insight: Unmovable object hit by unstoppable force

The second to the last column I penned for this newspaper in 2022 was entitled “The super cycle is alive and well.”

I wrote: “Commodities in the new year will outperform the other major asset classes, stocks, bonds and currencies. Of course, not all commodities will do well as some will be laggards, not possessing the right sort of bullish fundamentals to spark and sustain higher values.

“But as a general rule of thumb and with 2023 at hand, commodities will be the most bullish group of markets anywhere in the new year.”

In the last column I penned for this newspaper last year, entitled “Cattle report bullish for prices,” I wrote: “Moving forward, I am uncomfortable with the long side of most markets for the first quarter of 2023.

“With elevated interest rates on tap for the entire new year and slower economic growth predicted here in the United States and across the globe, it is not the type of environment to spawn bull markets. And as I mentioned above a wild card for stocks and commodities is the COVID mess unfolding rapidly in China.

“I am uncomfortable being a bull until the first quarter of the new year has passed. I am being patient — and you should do the same.”

In a few weeks the first quarter of 2023 will be history and I am back to be touting the long side of the commodity markets.

I am convinced the super cycle is alive and well, but also urging investors, traders, farmers and ranchers to be patient moving forward as hard assets, commodities per se, outperform paper markets such as stocks, bonds and crypto. We are moving into a new era for the markets and patience is required.

Business Insider recently interviewed Seema Shah, chief global strategist at Principal Asset Management, and I thought it timely to pass on a few of her ideas since they reflect my views perfectly: “The key part of it is that we’re not in an era of unlimited central bank liquidity.”

Shah also likes commodities for the new era, as they are less susceptible to fluctuations in inflation.

“There’s always going to be volatility for a commodity, but if you’re looking over the longer term, the picture of commodities is strong simply because they’re finite resources,” she said.

Shah’s firm is positive on Chinese equities for the next six months because of the tailwind of China’s reopening and the release of pent-up demand. What the world needs moving forward is more stuff.

In January 2022, in my column entitled “Demand for ‘stuff’ greater than supplies,” I wrote: “For over a year, I stated time and again, and to the point of ad nauseam, the world is in the early stages of a super cycle for ‘stuff.’ Based on history, the current cycle has another eight to 10 years to run before it ends.

“And the motivating fundamental pushing the ‘stuff’ markets upward comes down to this simple observation that can be etched in stone: Demand is greater than supply for ‘stuff.’”

This has been a momentous week. Speaking before Congress, Federal Reserve Chair Jerome Powell said: “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

Few expected Powell to say such a thing. It was his words that caused the Dow Jones to fall nearly 600 points and by March 10 was at a three-month low.

On the same day following his speech, the yield spread between the two-year Treasury notes and the 10-year Treasury notes expanded out to a level not seen since September 1981. Back then, interest rates, Fed funds, were trading at 19% and the U.S. economy slipped into a recession.

Based on history, whenever the yield spread expanded out to where it was this week the U.S. economy has always slumped into a recession.

Adding to the importance of this week was the monthly Employment Report. The data showed jobs created rose by 311,000 for the month and above the estimates of 225,000. Thus, the employment market remains red hot and creating jobs at a faster rate than the Fed wants to see.

Here is the issue, the paradox, moving forward. The Fed is standing firm in its fight against inflation. The Fed is an immovable object at this point.

The U.S. economy on the other hand is healthy, robust and creates jobs faster than expectations. The economy has become an unstoppable force.

What unfolds in the future when an immovable object is hit by an unstoppable force? Time will tell.