Two investing experts from Invesco join Ric to talk about commodities, inflation, and Ukraine
Ric Edelman: You know, funny thing, we never talk about ordinary stuff, everyday stuff, until that stuff is threatened. We don't think about milk until we're out of it. You know, we ignore gasoline until the price skyrockets. So let's talk about commodities. Commodities include grain, gold, beef, oil, natural gas; products that are commonplace. We use them every day.
Well this is the last bastion of pure capitalism left on Earth. Here in New York, they trade everything. Gold, silver, platinum, heating oil, propane, cocoa and sugar, and of course, frozen, concentrated orange juice.
And now commodities are under threat. Inflation is causing their price to rise. Climate change is affecting our ability to grow the crops. The war in Ukraine is threatening supplies. What does all this mean for the economy and for your investments? Well, to help us figure all this out, I want to welcome to the program two experts, Kathy Kriskey, Commodities Strategist with Invesco. She's been in the commodities marketplace since 1987. And Jason Bloom is with us, too. He's Head of Fixed Income at INVESCO. Jason and Kathy, thanks so much for joining me.
Jason Bloom: Thanks, Ric.
Kathy Kriskey: Thanks for having us.
Ric Edelman: Well, let's begin with the fact that that I think people are surprised to hear that the war in Ukraine is affecting commodities. Kathy, tell us how come that is so.
Kathy Kriskey: One fact is that Ukraine is considered the breadbasket of Europe. But another fact is if you combine the grains coming out of Russia and Ukraine, they make up a quarter of the world's grains with all the damage that is being done to the farmland in Ukraine. This has caused a big spike in agricultural commodities, specifically corn and wheat. Russia is the largest wheat exporter and corn actually uses a lot of fertilizer. And one of the components of fertilizer is natural gas. So the cost of fertilizer has massively increased. So that is affecting everything. Corn syrup goes into almost everything. Corn is also used for ethanol. And so people are calling for the possibility of a global food crisis in the next few months to a year. Then energy. Russia is like the second or third largest oil producer so to cut off a major oil producer is a major issue for everything. And just lastly, metals. And so Russia is the world's largest producer after China of aluminum. And so we're seeing problems with aluminum, problems with nickel. And so this Ukraine-Russia crisis is causing commodity prices across the board to be elevated. This is also inflationary.
Ric Edelman: So that's a pretty scary picture that you're painting, Kathy. And you tell me, what are the long-term implications of all this?
Kathy Kriskey: Economies are very dependent on these grain imports. And so when people are starving, they have nothing to lose but to revolt. One of our biggest concerns is that a food crisis could lead to the destabilization of some governments.
The Impact of Inflation on Consumer Behavior
Ric Edelman: Wow. That is a pretty sobering assessment. And let's shift to the inflation. Jason, inflation is already 7%. Is high inflation going to stay here or get even worse?
Jason Bloom: The Fed is really in a bind because inflation is likely to be far more persistent as a result of rising commodity prices. And the Fed can't pull any more nickel or aluminum or crude oil out of the ground. So, yes, at the end of the day, inflation is going to be a bigger problem for longer than it would have been. The Fed has got to raise interest rates. Prices have to continue to go up. That creates a lot of volatility in people's lives. It creates a lot of volatility in the economy. So those are the things that we're kind of dealing with.
Ric Edelman: And so I guess what you're saying is we can expect to see higher prices at the grocery store for just about everything that we buy.
Jason Bloom: Yes. In fact, it takes about a year traditionally for higher raw materials or grain prices to work their way into the products in the grocery store. We haven't even begun to see the food inflation in the US that the most recent surge in commodity prices are likely to generate.
Commodity Prices and Inflation – Connected at the Hip
Kathy Kriskey: And that's why I think it's important for people to understand the relationship between inflation and commodities, right? Because commodities, higher commodity prices are causing inflation right now. And for investors who are looking to hedge their inflation risk, that's why commodities make so much sense. You need a very small number of commodities in your portfolio, basically 5% to 8% of commodities.
Ric Edelman: So related to that, Jason, if commodities makes perfect sense for adding to your portfolio is not only a diversification tool but a hedge against inflation, what about the broader stock market? Is the typical company in the S&P 500 going to be adversely impacted by higher inflation or corporate profits at risk? Or can corporate America figure out a way to maintain their profits and continue to grow in the face of high inflation?
Jason Bloom: Well, that's a wonderful question. And higher rates of inflation are going to create more dispersion within the stock market than we've seen over the last 10 years. So think of it this way: there are companies with high labor costs or high materials costs who are going to struggle to maintain their profit margins as those costs go up. On the other hand, companies that are maybe more leveraged to the tech space won't necessarily face the same headwinds. There could be big winners and big losers, and that's kind of a dynamic that we didn't see in that 2010 to 2020 timeframe where inflation really wasn't an issue at all. It's a very, very different investment landscape that we're looking at right now, and people really have to change the way they think. Now, there are different forces at play that are that are driving dynamics in the market, and it's important to adapt.
Ric Edelman: So what are you saying people should do in order to adapt? What actions should they take?
Jason Bloom: Where we see opportunity right now is both on the traditional energy side, right, as oil and gas prices have gone up. Clean energy companies right now, they're actually becoming profitable.
Federal Reserve Playbook: Tame inflation by Raising Interest Rates
Ric Edelman: Let's focus in on the notion of inflation. Inflation is up, we know that. And the Fed's already raising interest rates. And how much more do you see rates rising this year?
Jason Bloom: The market seems to think that the Fed's going to go to around 2.5% to maybe 2.75%. I don't think that a recession is necessarily imminent. Right now, we don't see any signs that the economy is in trouble, i.e., therefore, the Fed has plenty of room to keep raising rates to get inflation under control.
Ric Edelman: And so by the end of this year, what are you projecting interest rates to be?
Jason Bloom: So seven hikes, so probably around 2.5%, end of the year, beginning of next year. But inflation continues to run hot even in the face of seven or eight rate hikes.
Investing in Commodities as an Inflation Hedge
Ric Edelman: So, Kathy, given all that, as the Fed continues to raise interest rates, what is that going to do to the effectiveness of commodities as an inflation hedge?
Kathy Kriskey: Yeah, so that is a great question. We're not concerned. Depending on how aggressively the Fed behaves, but we think that commodities should be good in this cycle.
Ric Edelman: Oil and gas are, you know, two of the most important of all commodities. There's a movement around the world toward green energy. Everybody wants to move away from fossil fuels and toward water, wind, solar power. What does all that mean for the commodities markets?
Kathy Kriskey: I think it's almost counterintuitive because a lot of people think that commodities prices will go down in the energy transition. But actually, there is a very strong rationale for why net zero actually is long-term bullish commodity prices. There has been a big shift away from investors putting money in fossil fuel infrastructure, right? So this whole industry is literally starved for investment and yet we still haven't hit the peak demand for fossil fuels. So we think the peak demand number is going to be sometime in the 2030s because as there's less money invested, that actual price of the commodity goes up higher. There's four times as much copper in an EV versus an internal combustion engine vehicle, right? And then to make those cars lighter, they're going to be using more aluminum. So this is a very big industrial metals story. And then just lastly, agricultural commodities. The green demand will push people to use more ethanol - ethanol with sugar and corn, and also biodiesel. And that's why in the energy transition, it's a very good long-term hold for commodities. This is going to be a brave new world, almost like the Industrial Revolution, because we don't know how many different commodities we're going to be using. We're guessing what will be needed, but the energy transition will be literally the brave new world.
How Will COVID Impact the Commodities Markets?
Ric Edelman: And we've been talking about commodities in the context of inflation, higher interest rates, the war in Ukraine. But it's impossible to talk about investments without asking about COVID. So, Jason, what will COVID do to the commodities markets this year?
Jason Bloom: No one is expecting there's any broad based lockdowns that would severely impair the economy or the supply chain. We are having issues in China right now implementing lockdowns in some of the major cities. As COVID continues to move there. COVID doesn't look like it's going to have a material impact on demand this year, but it's still causing problems with supply to the extent that China continues to be the manufacturing hub of the world. And that means higher, probably, more pressure on inflation. If you're continuing to constrain supply and demand continues to run forward, then again, it's going to make it harder to get prices under control.
Ric Edelman: Well, one final question I want to pose to the two of you, Jason and Kathy. What else do we need to be thinking about regarding commodities?
Kathy Kriskey: I would say, especially for energy, I want people to remember there's like a triple deficit going on. We have low inventories, low spare capacity and low investment. And that is a concern. There's no sort of release valve right now. And so I think that, again, this is a very strong fundamental story going forward for commodities.
Ric Edelman: Jason?
Jason Bloom: I've never watched politics with respect to the implications for commodity prices more closely than I'm watching them now. Government policy is going to have a massive impact on the supply. So if we're going to need four times or five times more copper than we have now to build all these electric vehicles, we're going to need to increase lithium production by 100 times in the US. Yet we have a political lobby that wants to transition to clean energy, but they don't want to permit the mines necessary to pull the minerals out of the ground to build the clean energy infrastructure. There's an incredible amount of contradiction and conflict right now with respect to government policy that just has to catch up to the brave new world that Kathy described. And we're in the process now of spurring demand and we're still restricting supply from the mining side. And they're talking about prices going higher by orders of magnitude over the next 10 years. How are you going to get 10 times more copper out of the ground 10 years from now without massively higher prices to incentivize that capital investment? Or government policy, this is going to be a really big deal, and it's going to be amazing how political this issue becomes. To your point, Ric, everyone just got along with their lives, and they bought their cars, and they ate their food. This is going to become a very political issue over the next couple of years.
Ric Edelman: Well, I want to thank you both for joining us on the show today. If you have any interest in investing in commodities, Invesco has a variety of ETFs that make that available. The Invesco Optimum Yield Diversified Commodity Strategy ETF, the Commodity Index Tracking Fund. They have an agriculture fund, a base metals fund, an energy fund, a gold fund, an oil fund, a precious metals fund and a silver fund. All of these different ETFs available for you to add to your portfolio if you want to have exposure to the commodities marketplace. Thanks very much to Kathy Kriskey, Product Strategist of Commodities and Alternatives with Invesco and Jason Bloom, Head of Fixed Income and Alternatives at Invesco. Thank you both very much for joining us today.
Kathy Kriskey: Thanks for having me.
Ric Edelman: I spoke with Kathy and Jason actually for about a half hour. If you would like to read, watch or listen to the entire conversation, just go to TheTruthAYF.com.