The Big Paradigm Shift has begun - July 24
Posted: Mon Jul 24, 2023 9:00 am
Note from Adam Rozencwajg this morning:
In 2016, we published the following chart comparing commodities to the Dow Jones Industrial Average. Mr. Gundlach of DoubleLine had issued a similar chart; however, his version only went back to the inception of the Goldman Sachs Commodity Index in 1970. We were interested in studying previous cycles and decided to construct our equivalent index back to 1900.
Incredibly, by 2016 commodity prices had sold off to such an extent that they were the most radically undervalued in 120 years. The only times that came close were in 1929, 1969, and 1999. Following every prior period of radical undervaluation, commodity and natural-resource related investments dramatically outperformed, both in absolute and relative terms. This cycle, we argued, should be no different.
Read more: https://blog.gorozen.com/blog/the-us-reserve-currency-and-commodities?utm_campaign=Weekly%20Blog%20Notification&utm_medium=email&_hsmi=267481784&_hsenc=p2ANqtz-_qFTXWHPbaOxufjIjNQy8LZzN_PqWfjQNIT9j2W2OrM_ZAIUnKZm1NYt2XeN1B0gxuLv7doZaK38djZEmqS-zfUCHlQg&utm_content=267481784&utm_source=hs_email
As we enter what we believe to be a decade-long resource bull market (for oil), three of the four pre-conditions are unequivocally in place. Since 2010, commodity prices have pulled back more than 70%. The bear market severely impacted cash generation in many commodity industries. Companies have slashed capital spending dramatically. Money creation reached extremes in the 2010s. In the summer of 2008, the US Federal Reserve’s monetary base was $850 bn, or approximately 6% of GDP. By the end of 2021, it had exploded to almost $6.5 trillion representing an incredible 30% of GDP. The money creation over the last twelve years has no parallel in US history, exceeding those in the 1920s, 1960s, and 1990s. Easy credit has led to an “everything” bubble. Equity valuations are nearly as high as in 1999, while at the peak, over $17 tr of fixed-income securities sported negative nominal yields – a first in history. FAANG stocks and crypto-currencies are the mania of the day, much like RCA was in the 1920s, the Nifty Fifty were in the 1960s, and dot-com stocks were in the 1990s.
The only missing element has been a shift in the global monetary system. The final piece may be coming into place: the US dollar might be on the verge of losing its reserve currency status. A change in the dollar’s reserve currency status would be the most impactful market shock of the last forty years. According to our analysis, it would also most likely correspond with a period of robust commodity performance. The monetary regime changes in 1930, 1968, and 1998 were hugely stimulative for commodity prices, and we believe the monetary regime change that will take place this decade will be no different.
In 2016, we published the following chart comparing commodities to the Dow Jones Industrial Average. Mr. Gundlach of DoubleLine had issued a similar chart; however, his version only went back to the inception of the Goldman Sachs Commodity Index in 1970. We were interested in studying previous cycles and decided to construct our equivalent index back to 1900.
Incredibly, by 2016 commodity prices had sold off to such an extent that they were the most radically undervalued in 120 years. The only times that came close were in 1929, 1969, and 1999. Following every prior period of radical undervaluation, commodity and natural-resource related investments dramatically outperformed, both in absolute and relative terms. This cycle, we argued, should be no different.
Read more: https://blog.gorozen.com/blog/the-us-reserve-currency-and-commodities?utm_campaign=Weekly%20Blog%20Notification&utm_medium=email&_hsmi=267481784&_hsenc=p2ANqtz-_qFTXWHPbaOxufjIjNQy8LZzN_PqWfjQNIT9j2W2OrM_ZAIUnKZm1NYt2XeN1B0gxuLv7doZaK38djZEmqS-zfUCHlQg&utm_content=267481784&utm_source=hs_email
As we enter what we believe to be a decade-long resource bull market (for oil), three of the four pre-conditions are unequivocally in place. Since 2010, commodity prices have pulled back more than 70%. The bear market severely impacted cash generation in many commodity industries. Companies have slashed capital spending dramatically. Money creation reached extremes in the 2010s. In the summer of 2008, the US Federal Reserve’s monetary base was $850 bn, or approximately 6% of GDP. By the end of 2021, it had exploded to almost $6.5 trillion representing an incredible 30% of GDP. The money creation over the last twelve years has no parallel in US history, exceeding those in the 1920s, 1960s, and 1990s. Easy credit has led to an “everything” bubble. Equity valuations are nearly as high as in 1999, while at the peak, over $17 tr of fixed-income securities sported negative nominal yields – a first in history. FAANG stocks and crypto-currencies are the mania of the day, much like RCA was in the 1920s, the Nifty Fifty were in the 1960s, and dot-com stocks were in the 1990s.
The only missing element has been a shift in the global monetary system. The final piece may be coming into place: the US dollar might be on the verge of losing its reserve currency status. A change in the dollar’s reserve currency status would be the most impactful market shock of the last forty years. According to our analysis, it would also most likely correspond with a period of robust commodity performance. The monetary regime changes in 1930, 1968, and 1998 were hugely stimulative for commodity prices, and we believe the monetary regime change that will take place this decade will be no different.