On the latest episode of the Odd Lots podcast, Tracy Alloway and I talked to Jeff Currie, the head of commodities research at Goldman Sachs. And I think it's one of the most important and out-of-consensus macro conversations I've had in a long time. His view is that we're heading into a new commodities bull-market supercycle, reminiscent of the 1970s. He argues that President Biden's policy priorities will contribute to a boom in oil prices, and other industrial commodities.
His basic argument has a few parts. One key element is the nature of green stimulus. While moves to electrify and decarbonize the economy will, in the long run, reduce the commodity-intensity of economic growth, these benefits are felt on the back end after years of capital expenditures. In the short run, faster growth and investment will naturally increase demand for commodities by delivering a jolt to growth and consumption. What's more, because of environmental reasons, and the potential lack of long-term demand for, say, oil, these price increases won't be met with increased investment in new production/mining/exploration etc. the way they might normally in a price boom. Again, if you think the long-term future is an economy less dependent on hydrocarbons, why invest now, even if prices are moving higher?
Currie also notes that Biden has a lot of discretion about taxes on drilling on federal lands and that he can institute a stealth carbon tax, lifting the global price of oil in a bid to make clean energy (wind, solar etc.) even more cost-competitive.
Finally, the bigger macro backdrop is that he sees the 2010s as having been similar to the 1960s, a decade characterized by strife on multiple fronts. Hence the potential repeat of the 1970s, when inequality fell broadly before the start of the Volcker/Reagan era a decade later.
The other big aspect of his view is economic redistribution. It's well understood by now that lower-income households have a higher propensity to consume, rather than save, their marginal dollars. So, direct checks, and other forms of wealth redistribution under Biden, will grow the economy faster than, say, the Trump tax cuts. But furthermore, says Currie, the consumption of lower-income households is more commodity-intensive than the consumption of higher-income households. Hence wealth redistribution gives you a double jolt: more growth, and more commodity-intensive growth specifically.
More broadly, we're coming off a decade-long commodity bear market, marked by declining investment in the space, and as it is we're already seeing deficits emerge in various industrial commodities at a time when governments around the world are stimulating their economies to get out of the pandemic.
The macro implications of Currie's view, that commodities will run a lot further for a lot longer, are intriguing. Oil's been on a tear lately. A barrel of West Texas Crude was below $36 at the end of October. This morning it's above $56. There are signs that the economy is in much better shape this winter than had been anticipated. If the reopening does produce the much-expected economic boom, and you get stimulus, and you get any post-stimulus economic regime change, and you see a sustained commodities boom, we could be looking at a macro picture that's unfamiliar to those who've become accustomed to a decade of slow growth and lowflation.
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