By Chris Berry (@cberry1)
For a PDF version on this note, please click here.
How Humility, Skepticism, and Opportunism are Leading to a New Playbook in Commodity Investing
COVID-19 has forced a huge dose of humility on the investing public after so much continuous wealth creation. Many are skeptical that all is lost. The there is, however, a huge opportunity in the new economic future and particularly the commodity sector.
The best-case scenario of a V-shaped economic recovery could be looking more U or L-shaped with no identifiable end in sight to COVID-related impacts to the global economy. While a recession of some length and tenacity is all but certain, the duration is subject to an increasingly vociferous debate.
With upwards of 11 trillion dollars pledged by global central banks to stimulate demand and global interest rates near or below the zero lower bound, this may not be enough firepower needed to bring a global economy at a standstill back on its feet (if equity returns are any indication). Additionally, demographic and debt-fueled headwinds are stark impediments to generating the inflation global central banks are intent on desperate for.
This disinflationary shock spells trouble for producers of all goods along supply chains as margins will be tighter owing to diminished pricing power.
By Chris Berry (@cberry1)
For a PDF copy of this note, please click here.
Amidst the once in a lifetime events we’ve endured in recent weeks, the simultaneous crash in prices across asset classes is one of the most notable. The US Dollar has been the singular beneficiary of the volatility and the worsening COVID-19 pandemic. Extreme levels of fear in financial markets indicate that this is likely to continue. The breathtaking collapse in the oil price, ignited by the desire of the Saudis and Russians to control the oil price and wipe out US shale, is also indicative of stagnant growth in the global economy. It remains to be seen if lower oil prices really are the “tax cut” consumers receive via lower gasoline prices given the sudden stop in the global economy.
This geopolitical tussle is an important one as the oil price, perhaps one of the most watched metrics in the world,
By Chris Berry (@cberry1)
For a pdf copy of this note, please click here.
Ed. Note: The following remarks were those I made to investor audiences during a recent bus tour in Munich, Geneva, Zurich, and Frankfurt.
Ladies and Gentlemen, thank you for coming today and investing your most valuable asset in us, which is of course, your time. Speaking of time, what I’d like to do today is take a look back and a look forward and briefly offer some thoughts on where we’ve been in the global economy in the past year and what some of the key questions are in 2016 likely to drive the commodity and broader markets altogether.
Rather than make excuses or guesses as to why commodities continue to under perform, I’d like to examine some of our thoughts from a year ago when we were last here in Europe and see what has transpired.
By Chris Berry (@cberry1)
For a PDF of this note, click here.
With few exceptions, deflationary forces are likely to challenge growth in much of the world in 2015. With the global economy more tightly integrated than ever before, the risk of much of the world catching a “disinflationary” or deflationary cold is pronounced. Most commodities are trading at or near five year lows, real interest rates negative in various countries, and Central Banks are having difficulty hitting their (admittedly low) inflation targets of 2%. It’s obvious to even the most casual observer that the inflation genie is not even close to being let out of the bottle.
Given that the global economy is generally struggling to generate “escape velocity” growth, the main question is how deflation might spread? I see three transmission mechanisms:
globalization, high debt to GDP ratios, and innovation in technology spurred by R&D.
This note discusses the first two mechanisms with a focus on China’s efforts to halt the “export” of deflation.
