A global recession can drive commodities prices down, but all the hungry people in the developing world eventually push them back up.
That’s what commodities traders are telling Jason Trennert these days. “You’ve got billions of people consuming their fair share of protein and energy, and billions more wanting to do the same,” notes Trennert, chief investment strategist at Strategas Research Partners in New York. He points out that China and India have hundreds of millions of people on grain-based diets who are demanding more and better food, if better food means meat.
But Trennert says that today’s fundamentally favorable play in commodities is not because of protein-craving consumers but because of a U.S. shift in monetary policy — Federal Reserve Board chairman Ben Bernanke’s “second act,” as he calls it. As central banks drop interest rates and theoretically fuel inflation, commodities become more appealing, goes this notion.
“It’s in times of inflation that I’m more interested in holding hard assets,” explains Trennert, who predicts that the best commodities trades over the next five years will come when markets move from being deflationary to becoming inflationary (although liquidity remains frozen, at a certain point it must thaw).
Jim Rogers, the Singapore-based creator of the Rogers international commodities index, agrees, insisting that it’s more important than ever to hold real assets: “I have never seen a period in world history when every central bank is printing money so aggressively. Higher prices will result. I’ve already started covering my shorts and buying more commodities of every type.”
Rogers counsels patience, however, because there is typically a lag in matching commodity supply with demand: “You can’t exactly start a new zinc mine overnight in your garage.”
This is the downside for hedge fund managers, who can’t always wait things out.
“Guys like Warren Buffett and Wilbur Ross don’t mind taking the secular view and being wrong for six months,” says Trennert. “If the hedge fund guy took that approach, he could be out of a job in six months.”
Some experts — like Richard Asplund, research director of the Chicago-based Commodity Research Bureau — say consumers drive commodities much more than any monetary policy. What makes him most bullish on commodities over the long term is the combination of population growth and the rise up from poverty of the BRIC countries — Brazil, Russia, India and China. “There’s going to be a huge demand for decades for all the building blocks of global development,” Asplund predicts, adding that heavy liquidation by big hedge funds has played a major role in the recent collapse of commodities prices. “We can count on a countercyclical rally,” he says.
