An often asked question or concern I get from readers is ‘how do you protect yourself in an inflation or deflation environment?’
Let’s look at some examples of previous historic market crashes and then see how a portfolio such as the one we currently hold would have fared.
We have made no secret about our long commodity outlook and our negative stance toward financial equities. These are typically inversely correlated and both trade in long cycles.
Years, not months.
Let us now consider historic collapses in financial equities (happening now), and then look at how a portfolio such as ours has fared in these times.
Since the late 1800s, all three of the major crashes took place while commodity markets entered these phases being significantly undervalued, and in all situations over the following decade commodity markets became wildly overvalued.
Let’s take a look:
- 1929,
- The late 1960s,
- The late 1990s,
- And now. For ease of reference, we’ll call it the 2020’s.
Subsequent to each of these periods, commodities entered decade-long powerful bull markets.
Also — and we talk about this a lot — in each situation not only did undervalued commodity markets perform well, but they all became wildly overvalued. We keep saying that the hardest part is yet to come — when to finally pull the plug and move on to something else.
There will no doubt be asset classes that on a relative basis are better bets, but the odds remain that dragging the chain a bit on getting out is probably not going to be a bad idea.
But let’s take a look at the three examples, shall we, such that we may get an idea of what the fourth (now) may look like.
If you had invested in commodities or commodity-related equities in any of these three previous periods, the returns on both an absolute and relative basis were huge, even in the great depression of the 1930s.
Our Current Portfolio
Let us take our current portfolio, which, for simplicity, we’ll chop up into quarters.
We’ll say a quarter energy, a quarter metals and mining, another quarter into precious metals, and then the last quarter into agriculture. It’s not exact, but it’s a decent proxy.
1929
Such a portfolio in 1929, would have returned 122% by 1940.
Now keep in mind that this was the Great Depression, which took a bludgeon to the stock market which between 1929 and 1940 coughed up a negative 50%. In other words, it halved over a decade.
I mean, you could have lost 25% over ten years, and you’d have been doubly better than the broad market. Ouch!
Also, remember this was a deflationary bust. Consumer prices actually fell by roughly 20% over the decade. Holding cash, for example, would have returned you 20% over the decade. Certainly better than owning the stock market. But owning a commodity portfolio described you’d have looked like a genius… and you would have been.
Many people don’t really know how bad the Great Depression really was as it’s too far in the past now, but this was a time that involved a banking crisis and the sort of poverty and desperation that few in the developed world today can even consider.
1970s
Now consider the 70’s. Well again! That same portfolio from 1970 to 1980 would have clocked you in at over 400%. The interesting thing here is that, unlike the 1930s (which were deflationary), the ’70s were inflationary.
But even so, a commodity-based portfolio outperformed not only the stock market but also the real rate of inflation which ran about 80% from 1970 through 1980.
2000s
What about the 2000s? Glad you asked. This is a market we can relate to here as we experienced it first hand.
In any event, from 1999 through 2010 you’d have made about 360%. Way better than a poke in the eye with a burnt stick, and certainly better than the paltry 35% which equities returned over the same timeframe.
Was the post-dot-com crash commodity bull market of this period inflationary or deflationary?
Well, it wasn’t really either as far as I can tell. I mean, we had the whole Lehman fiasco, leading to the GFC, which sent the world into a tailspin and banking and short-term energy crisis. Kinda a mixed bag.
The thing that is consistent though is that commodities were wildly undervalued going into each crisis.
Same thing today. What we have today (as you’d know by being a wonderful subscriber) is that we’ve got these brain-dead politicians, a populace dosed up on ideological climate nonsense, and woke neo-marxism that is impacting the supply of our portfolio like at no other time in history.
Thank goodness we’re not seeing monetary policy being extreme. Oh wait, we have the most extreme circumstances on that front too.
Oh well, at least we’re not moving towards global and domestic conflict. Shoot, we have that too!
Folks, maybe we’re wrong here, but if so, show me where.
From my little perch it really looks to me to be the perfect storm, and if we’re not to hide in this portfolio, then do tell me where.
How Our Fund Is Frontrunning The Economic Madness In 2022 And Beyond
- Copper – Copper prices have to rise to address a huge supply deficit looming on the horizon.
- Shipping – Shipping is vital for the functioning of the modern world, yet is priced for bankruptcy.
- Eastern Europe – Position for the long-term trend of capital moving from the West to the East with Polish and Russian equities markets.
- US Dollar – We’re bearish on all paper currencies, but believe that the USD will outperform all others.
- Base Metals – Clean energy targets require more battery metals than the existing global supply.
- Off-Shore Oil & Gas – Offshore oil investment has been smashed, yet consumption continues to grow.
- Rare Earth Metals – A play on geopolitics and a cycle that should see a repricing of these commodities.
- Uranium – The looming supply deficit promises to pay handsomely when the market inevitably reprices.
- Gold – Gold sees the perfect storm; the turn of a cycle, supply issues, and lack of faith in the sovereign currency.
- Coal – Modern society is dependent on coal, with the supply continually growing. Is there a more hated investment?
- Personal Defense – Order is breaking down in the US, and the unrest is giving us an opportunity to position for asymmetry.
- Agriculture – Lockdowns and monetary stimulus have ensured food prices will rise, providing deep value.
- Natural Gas – Supply and demand dynamics coupled with a dependency on the US provide a great opportunity.
- Plus much much more…
