This Isn't A War Trade

Everyone wants to tie the inflation story to the latest headline.

Today it’s Iran.

Tomorrow it will be something else.

I think that’s missing the bigger picture.

Inflation didn’t suddenly appear because of a conflict in the Middle East. This cycle has been building for years. The commodity bull market didn’t begin last month. It began back in 2020.

First came the precious metals. Then metals and mining stocks started to outperform. Soft commodities followed. Uranium miners took off. Shipping stocks began making new highs. Lithium and rare earth companies joined the move. This year (After energy peaked in 2022) we finally saw energy wake up and start participating as well.

That isn’t what a short lived inflation scare looks like.

That looks like a broad commodity cycle.

The first chart tells the story. 

Every time the yield curve begins to steepen, commodities have historically responded well. Today we’re seeing that happen once again. At the same time, the Reuters Jefferies Commodity Index has broken out from a multi year base and resumed its primary uptrend.

However, the recent pull back has been hard and fast but it looks like it is bottoming out right here, right now.

The second chart highlights another important relationship. 

Agriculture continues to build a massive base while long duration Treasury bonds remain trapped in a long term downtrend. To me, that is exactly what you would expect during a period of persistent inflationary pressure. I expect both of these to resolve their primary trends soon. DBA up. TLT down.

Personally, I don’t think this inflation cycle ends until the Federal Reserve truly decides to end the party by tightening financial conditions enough to slow credit creation and demand.

Until then, I think the path of least resistance for many hard assets remains higher.

Ironically, the fact that so many people believe the commodity story ends when the war ends makes me even more constructive.

The biggest trends rarely end when everyone is watching them.

By the time the crowd realizes this commodity cycle is bigger than a single geopolitical event, the next leg higher may already be well underway.

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