Commodity Comeback

Recency bias is a funny thing. It’s human nature to expect the near future to look like the recent past.

But we all know that’s not how things always play out. 

And that can be costly, even dangerous, for investors.

Take long-term bonds, for example. Ten-year Treasury yields have more than tripled, from 0.54% to 1.66% since last July. Does that mean the 40-year bond bull market is dead?

Tough to say, of course. We’ll only know that for sure with hindsight. You know… recency bias.

If nothing else, the bond market is telling us price inflation is becoming a thing again, notwithstanding what the Fed might be telegraphing.

According to the Consumer Price Index (CPI), the 12-month change in February was 1.7%. And yet, if you use electricity, gasoline, pay rent, or even eat, chances are your experience has been quite different.

Energy, real estate, lumber, agriculturals, metals, and beyond are all on fire since last March.

Is this the start of a new commodities supercycle? It’s certainly looking that way.

Signals Flashing Inflation

Like I said the bond market, for one, is catching serious sniffs of price inflation.

If I had to guess why, stimulus, money-printing, near-zero, and negative rates, plus massive pent-up post-Covid-19 demand would be top of mind.

Monetary growth has already far outpaced levels from the 1970s. And we know that inflation follows the money supply, often with a lag.

(Click on image to enlarge)

Money velocity has fallen steadily since the 2008-2009 financial crisis, but it’s absolutely plummeted since the start of the pandemic. Is that about to change in a dramatic way? Before you decide, remember recency bias.

Despite low money velocity, a funny thing has happened. Commodities have been soaring along with inflation expectations.

Money velocity has fallen steadily since the 2008-2009 financial crisis, but it’s absolutely plummeted since the start of the pandemic. Is that about to change in a dramatic way? Before you decide, remember recency bias.

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