How Long Will the Commodities Boom Last?

everybody's watching. Yeah, you know, we planned to do this episode really because commodities are the new shiny objects. I mean, if you look at the commodities category, which has been really bad for like a decade, it's now the hot spot. Really, it's green all over no matter what commodity you pick, pretty much. And we were going to do it because commodities are up because of inflation fears where they were

Now you have geopolitics. So we've got two major catalysts here that are creating potentially a really attractive category and investors are starting to put in money. And the commodities e t f s have grown by about fift over the past fourteen months. In organic growth. So there's a lot of trapdoors, a lot of um rated our products in here places. To you know that you don't know what you're doing, it can be tricky. So we really need to be careful when we go over a category

like this. So to help us make sense of everything, Mike mccloan commodity strategist with Bloomberg Intelligence, is gonna help us understand the field, this time on trying in the boom in commodities. Last, Mike, welcome to trillions. Thanks for having so. Mike, before you were at Bloomberg, you actually were in the E T F world, So let's just start there. What what would you do before you're a commodity strategist? But I did, I like to say it just took me thirty years to get to Bloomberg. But

Eric and I met on a panel. I was the head of research at et S Courtage, which is not Wisdom Train, and I remember discussing precious medals and stuff like that, and um so we've been it's been how long? Has that there? About eight nine years now? It was probably about ten years ago. Can I just explain what Mike did on this panel? I think we were in Austin, Texas at or Dallas in this like cool art bar. We were using these unique venues to do presentations on

e t s and panel discussions. Anyway, Mike actually brought like physical gold coins or silver coins and he held them up and I was like, I told him after him like props. I like that. That's good. I gotta I gotta use some props in my thing too, because these panels can be so boring, So anything that you can do to spice them up, I like as a presenter, and I was. That's how I first met Mike. And then that night or later that day, I saw him in the line at the airport waiting for bags, and

that's how we started talking, and um we met. That's how we became friends. And man, I remember I had a silver one of those silver dollars. If I had just given you the equivalent, had the equivalent mont of bitcoin, it would have been much better off. So so much for the physical like mindys anymore. I guess they're coming back a little. Also worth mentioning that you you cover cryptocurrencies for bluemrinkin Intelligence, which I'm sure we'll talk about.

But Mike, Mike has gone full crypto. You know, we talk half crypto, Mike's I think he's probably so, Mike, let's start in a non crypto space. Let's talk about Ukraine. UM commodities has been just on this terror there's you know, the word supercycle was dropped many times last year. So where where are we at in that supercycle? And sort of bring us up to speed on on inflation and

what you're seeing in Ukraine. Well, I think the most important thing for investors to realize here is allocating or some partial allocations to commodities has worked really well as a diversifier. And that's been the investors who did that early on UM reaping the benefits at least having that hedge says, you know, the boomer commodity in decks up almost on the year, crew up on as of the beginning of March, and stock market down, you NASTAC down.

They're doing what they're supposed to do. UM. But the key thing that's happened is the market's price for a significant amount of demand about a supply shock out of the Russia invasion of Ukraine. And I still think it's going to be the opposite. I think it's gonna be more of a demand destruction event like happen in two thousand and eight. I'll bring those parallels in there. But one thing we need to point out is this will

be a absolute boom for North American commodity producers. Now we can get in that later and a lot of our our audience will be interested in some of those producers because right now Crudels is the first time w h I really sustained above a hundred dollars of bail. The first time I did that was in two thousand eight, right about this time of year. Will dig into that.

The parallels are uncanny, very scary, but we're basically almost triple the cost of US production shale, where if producers can head you out two to three years based on the curve, and you can roll down that curve when you're investing in those commodities and they can double their cost of production in terms of a price in the screen. It's happening in all the grains and everything. So this is an absolute boom for those producers. It's the question

is sustainability. My fears this war will trigger a global recession which was overdue, and the whole thing will tumble down like two eight. Well, okay, let's that's a lot of like in the no macro talk rate. Let's just take a big step back and talk oil. Okay. Xcel e is a is a popular ETF people use. I believe Lestimer looked AT's in the past year. This wasn't supposed to happen. I remember some people were like, oil is over, this is a green revolution, this will never happen.

Just explain to us why oil in particular is up so much in the past twelve months. If we're supposed to be like over oil, well, the first of all, the bottom line, the foundation for oil going up to Hunter down the barrel was it went down the negative forty back in April. That shut off a lot of production, and from that we came out with this almost unprecedent discipline from OPEC. Now we're returning to a demand environment

and the supply is not they're OPEC discipline. But if the lessons of oil is a good example, the higher price cure should kick in and we should go back to where we were before. So it's point out right now the price of oil is about fifty below the peak, maybe below the peak in two thousand and eight. There's a reason for that because the US back in two thousand eight was a net importer, one of the largest in the world, and we had a financial we had

a real estate crisis. Now the world's largest import is China and they're having a real estate crisis. But the key thing about oil was it's on the back of that major demand shock. Now we're getting supply to kick in, and the rule in commandities I'll leave you with this is a higher price cure should kick in right now.

We have the war and there's fears of how that will happen, and we'll have a cut off of rush and supply, but Russia's supply is probably gonna goes directly to China and then I don't think there'll be a major disruption supply in the planet. But key thing to think about what's happening right now is this is a major shock to inflations, major shock to the FED for consumers, and it's basically repeated what it did in two thousand eight. So I'm worried that this is going to revert lower.

And that's what Karel has been doing since the peak in two thousand eight. I'll end with this three times since two thousand has dropped, So that's what investors have to be worried about, and that would be more of a lower tide for everything. Okay, you mentioned the North American producers, which is an interesting component here because OPEC seems like it's gonna probably just do its own thing,

maintain status quo. But what could happen over here in North America now that there's this that that opportunity, that margin that you know, if you're a shale producer, you're looking at hundred dollar oil that you could spool up real quick and start pumping again. I mentioned I focus on North America, Joel, because that North America's supply has been major paradigm pressure shift in crude oil since the

peak in two thousand and eight. Back then, North America was in that import of about ten million barrels of liquid fuels a day as of this year, Department of Energy Estiment, So we'll probably be North America will probably have a surplus about four of production of liquid fuels versus consumption. Now I say liquid fuels because I'm from a farm background. In this country, towel percent of our unletted gas comes from ethanol, and that bio fuel kick self is kicking in so UM and I have to

include Canada UM. But that's that's spend the paradise m this pressured oil. That's what's changed from just a decade ago. And what does that mean for the future. That supply is not gone forever, it's just coming back, it's revisiting, it's resetting. The key thing is that peak has been in consumption. I just remember being in the business line met eric All. It was all about the peak crude oil supply and it turned out to be Creek Keep

peak consumption in North America. So US total liquid fuel consumption the US peaked around twenty four in barrels in two thousand eighteen. Maybe we get to twenty three million barrels a day. But the major, the most significant returning ever in the history of automotive manufacturers, is towards EVS. I own an e V and that's has probably peaked forever and it's gonna head lower. And also versus GDP, it's not it's insignificant. Now. The demand side is on China.

But what's China facing major property crisis like you US had had. Now if the world has some recession, all that demand pulled for China, and of course it's gonna be a problem. Of course, this effect of China of the automobile sales last year where vs. First time? Ever, where's that going well? I I would add that to make evs you need fossil fuels. I mean, there's a lot of fossil fuel behind the scenes of clean energy.

But let's move to oil. You mentioned something in your first answer, which was the curve, And just to deconstruct this, I have two categories of commodity ets. Those that are physically backed like gold, where it really does track the price very well, but then ones that you can't store, like oil, natural gas, corn. They are different than the price because they own futures and they have to constantly roll them from one month to the next as the one becomes closer to expiry because no one wants to

get oil delivered to their house. So can you explain to me, if we have USO or an oil et F like that, what the annual roll costs look like right now versus what it looked like before, And what should investors be looking for when it comes to those roll costs or is it just worth it? So the key thing there, Eric is it's it's probably questions does it get much better for commodity and energy investors right now?

Because of backwardation. What backwardation means you have to roll that future and every time you roll it periodically roll to a higher to a lower price. The front end this bid. The back isn't Why is the front end bid? Because typically what happens in you but a short term issue with the UM excess demand and lack of slacks supply, and then it's always expected to where can say it does that it's a higher price cure. The question is how much better is it yet? So right now crewe

went in backgardation on a one year basis. I always look at the annual most of the futures positions roll each contract. That depends on how they work. But you meant there's that's the key thing I want to point. You mentioned natural gas. You've got to point a natural gas. It's the world's worst commodity investment history and mankind probably because if you look at the price right now, it's four to five dollars at the same price as twenty years ago, yet's the most expensive to store and always

cost a fortune. UM and it's the key thing to remember about investing commodities. When you invest in commodities, sometimes it's better to be more tactical. And if you're thinking longer term, bye, hold stick with the metals gold. You mentioned precious metals because it will hold the physical you

don't have the role as much. But the way I look at nowadays, you cannot be invested in any commands most noted goal without having some Bitcoin in that space because it's the fact that bitcoin is taking flows from gold and investment portfolio. So looking forward to what it's what's the actual roll yields? It really is dependent hipally. It costs on average five to seven percent annualized to

hold crude oil in a normal contango environment. Right now you're probably making that in positive um positive returns in addition to this spot price. That's just the role. Okay, So we just went over oil, a little bit of

natural gas. I would put all of those as big chunks of what's called broad commodity E T F S H and the biggest one on the market right now that's taking in the most flows and it's up this year, which is one of the best performers of the year's p DBC So this is going to hold a whole bunch of future commodity futures. You talked about tactical and I know that's what you do. You write for people who are trading, But what about a long term investor.

Is this the kind of fund that is better to hold long term or should you never hold anything that holds commodity futures long term? Well, the lessons of commodities is more the latter. Unfortunately, just look at performance p dbc um from two thousand fifteen is you know, it is around twenty four or so right now it's sixteen. The problem is because there's a negative role in commodity. It's not like equities. You can buy and put them away and they're donny. You're you're in coupons, you use

that buybacks. You have to worry about in this type of product. There's always have to rule that futures and the rule commodities is normal contangle. You're always in the long term half gonna have to pay some form of cost of storage. Natural gas is the most expensive. His historic commodity goal is the cheapest the store, and bitcoin is actually the cheapest now, So that's why I wrote that in there, So that's gonna come out through the

future's role. Now there's periods when you have like now, you get some great performance um, and it's just a question of how long that lasts. But the bottom line is always remember is the cure for higher prices and commodities is higher prices. So why is the price of crudal right now? The same price is two thousand and eight wheat the same prices, two thousand and eight corn, the same price, and then let's looking even even um copper, it's the same price as two thousand and eleven. That's

a problem. It has been a problem. You mentioned the performance the last ten years, but looking forward, when prices go up, I mentioned there's so much profits in the space that supply will come back. That's the difference withholding equities or commodity based equities, which I've understand a lot of institution investors like to focus on if they want the commodity exposure, because you don't have that always working against that contangle work in the long term working against you.

So you you mentioned some specific areas there, the wet, the copper, corn, What other et F do you watch and and from you know, from a an investors standpoint, if we're back to a certain level and we have a potential for for this to be an area where we could see increased flows. Which which ETFs are you watching? Uh? Usually watched the man. I don't watch commodity t F particularly much anymore. Having been done, been there, done that. I managed many of um an SMP because I know

what happens with those over time. They're melting ice cubes. It's just the fact that comminded except from the metal. It's the key ones. I watched our g l D and GBTC, and Eric knows which that is, because I think what's going to happen is GBTC will convert to a ETS. It's gonna whip take out that discount, and it probably end up being one of the best ways to get exposure the bitcoin, which is becoming the global digital reserve asset and going the world going that way. Okay, Mike, woa, Okay,

So you just went over a lot quickly. I just want to can we just put bitcoin aside for a minute. We're gonna we'll get there when we When we look at at gold in particular, just it seems as though I guess we can bring bitcoin rebeck in g BTC is a is a trust which doesn't have new share creations, so it's trading in a discount. That's a that's a really unique trade that people are looking at. Let's let's

put that aside. Let's look at golden bitcoin. It seems as though gold is a better store of value right now. It doesn't move around as much bitcoin. It seems to be trading like a high beta tech stock. So what isn't the bid on gold right now make make more sense if you're worried about inflation and the world, you know, having geopolitical situations. It just seems like gold is actually

showing why. It's more uh true zero correl correlation. It's a more better diversifier slash hedge, whereas bitcoin is really more like a shiny object. I have to push back on that a little bit. Gold has been a horrible performer last couple of years, despite the highest inflation in forty years, and bitcoin has done very well. Serium has done a lot better. So I look at it this way. I can't speak about gold anymore without bitcoin in the

same bucket. Because the world is going digital and bitcoins the digital reserve asset, and I see it and sense it every day that the old guard that held and allocated the gold, I'll know they have to have some Bitcoin in that bucket. The key thing about goal is I fully expect it's going to perform a lot better

in a deflation environment UM, and it has. And that is a good indication for that would be when the long bond yields starts dropping, which I expect UM long bond yield right now it's peaked last year two point five percent and now it's like two point one. That's a recessionary trade. And gold had some major competition competition for a stock market last three years in a row of stock markets up SMP five average. Who needs goal in that environment? That to me is what should be changing.

But the key thing fact is Eric and that's why what I mentioned earlier E T S. I watch gotta watch something that tracks bitcoin um because those two belong together. And I say gold is naked without bitcoin in the same bucket. That's just the facts of where things are going and have been going in the last few years. So now that Ukraine and this war is underway, a lot of interest in what bitcoin will do what's your tick.

I think it's showing divergent strength versus stock market. Certainly is Bitcoin is down a few percent, but it has it basically trades that three to four x volatily, meaning the risk two D sixty day valta is that much higher. So Bitcoin at this stage versus the stock market should be done a lot more. So. What I think has happened is Bitcoin is transition from a risk on asset to a risk off asset. And what's happened in this war might have just set that tone, kicked the inflection

point and bend the trigger point. People in Ukraine and Russia who can't get a penny from a t m s have have access to crypto dollars via their phones and cryptocurrencies and bitcoin is the biggest one. So to me, this is the transition. And the key fact is ask a millennial about gold. What do they say, Yeah, sorry, I'm going from bitcoin. The world is going that way, and I look at it, it it is why take the risk of not being allocated to one of the best

performing assets in the world. In the world is going digital, And like I said, I'm bullish gold. I think at some point what's gonna happen is golds is gonna pop above two thousand dollars and ounce and stay there. But I fully expect bitcoint about performing. The key thing is how will we perform if when we get the next down leg in the stock market, which I expect bitcoin is still risk. Gasket will probably gravitate lower. But it's been only very good support around thirty and I think

I'll end with this. I think it's just a matter of time that this global digital collateral goes to under grant. It's just a matter of time that's just based on supplied demand and increasing adoption. Let me ask you this question, which is something that I've been seeing debated on Twitter over the past couple of days, and it's a really good one, which is this idea of crypto trying to have it both ways like and this question really strikes

at the core of that. Should crypto exchanges comply and do what the US government wanted to do in terms of freezing Russian accounts or should it say, no, Biden administration, that's not what we are. We are defy And that's the whole point is that we're not run by the governments.

What should they do? And this is this is this is a war, and in war, the government can make them do it, and they should be smart enough to say, Okay, we're gonna do help the cause here because we have a very oppressive dictator um taking over and and taking over a free country. That's got to stop right away or it won't stop. And so any other financial institution has to do. Why shouldn't crypto exchanges to be different? Also, licensed will be revoked. That's just the fact of war.

Get used to it, and get used to pay taxes when you make money. It's just that's life. The thing is, this is a revolution in digital assets. Now anybody in those they can run their own nodes. You don't have to go through an exchange to do things um, and they can figure it out away from these exchanges. But when you're have k y C and a m L rules and to be licensed in the U S, you gotta do what the government tells since the fact. But that's what's gonna happen this year. I fully expect we're

gonna have more clarified regulation from the US eventually. I know, Eric is your space side. To me, it's just a matter of time we get properly. UM tracking physical ETPs attract an index of cryptos um just catching up to Europe and Canada. You know what's happening. Funds are leaving the world, and but bitcoin is becoming global digital reserve asset, and it's war is defining that. But the exchanges have

to comply to what's happening the world. I expect a year from now we're gonna see Russia completely isolated on a global economic stage. And if we don't do that, we are risking this tyranny spreading. We have to. So it's just like, yes, she's investing when you're when you when your grandmother in Ohio who used the former teacher finds out that some of her pension fund money is invested in Russia, there's gonna be an uproar. It's got to be complete. Pull the plug. Yeah, I agree, Bitcoin

is here to stay, cryptos here to stay. I just think there's a lot of you know, the performance and the use cases are are definitely gonna be debatable for a while in my opinion. But let's cook. Let's just take a big step back and just talk to me about I just told at the beginning of the UM podcast we talked about commodity e T s up a good amount over the past year as as because inflation fears are here, is now a good time to add to that? Uh? And we're you know, what, which, what

practically should people do with a portfolio in terms of commodities? Uh? You know, should they use like a broad commodity and then add it with a little G l D and crypto? And I know we can't give investment advice, but what generally should people think about in terms of how to put this into a portfolio. I think think about commodities

is a hedge. It's worked great as a hedge. But if you want to just be overweight or underweight, the rule of commodities in most markets you should be buying when they're crying, someone when they're yelling and the market is extremely high levels and don't ever underestimate the higher price cure. So I fully expect Rudell can easily drop fifties six seventy this year. UM. And that's just what it's done three times since two thousand and eight, So

be prepared for that. And I fully expect if you are worried about inflation, which is what you should have been worried about a year ago. I mean, it's just it's this is not the time to worry about inflation. It is time to worry about the base effect UM and FED tightening and most assets going back down UM, which has always happened, and it's gonna happen, I think, particularly because we have a risk of this recession UM. But that's the key thing now. And overweighting commodities here,

I just learned this lesson. Been in the business for a long time. You just never want to get two bullish commodities when they when producers can make so much money at such good levels. And you know, that's the old days when the US was a net importer of liquid fuels and now that you as as a net exporter. And this is UM and the world's changed. And and I view commodities as naked if there's not some digital assets in that space, because that's what's changing. The adoption

of bitcoining the theorem is happening rapidly. And I'll leave you with this. The most widely traded cryptos and the planet are digital crypto dollars. People call them stable coins, but the really crypto dollars because the vast majority track the dollar. They're all based on stereum tokens. It's just a better way to do business. Um, just like you didn't learn an ets, it's just a better way to invest. Crypto dollars a better way to do business and um

instant settlements four seven trading costs nothing. You're an interest. What more do you need to know? And the essential I you don't need a bank in between. Um, So that's gonna be regulated. But they're based on the storium tokens. That's part of when the sterium is doing its revolutionaries in the space. And then there's bitcoint the digital version of goal in the world going digital. You mentioned, uh, the potential for recession a couple of times. How do

you see that playing out? And is the commodity market and does that provide indicators for what may transpire? Oh? Sure right now. Spiking energy, the most severe energy crisis in Europe in my lifetime, is a very good sign of what will happen to consumer spending. It's going to get crushed. I mean, just simple facts of inflation. Um. And this is not profound, this is almost exactly what happened two thousand and eight. But it was not. It

was It's gonna be worse. I think this time UM, because it's global, it's being centered in Europe and China and US should come out very well. So spiking energy is really bad. So let's look at the fact that the SMP five is the trolls drop fift this year, yet the Fed funds are still priced for six tightenings pointings in the next year and in the next year. I used the one year measure. The last time we had correction in the stock market was two thousand eighteen.

In September two th eighteen, markets price for four hikes high titans in the next year. By the time we got December, they're they're talking about easy. We're still priced for hikes. So the headwinds are increasing for asset revisions. We have this war, which I think is a significant trigger trigger for UM negative consumer sentiment. And and I'll end on this. At the beginning of the year, versus their sixty month moving average, the SMP five, Bloomberg Comandity

in next were both about fifty above those levels. That's never happened in the last six years where they're both that stretched. So simple mean reversion is what I'm worried, and now we have pretty significant triggers for that. Alright, stuff to watch, you know, Mike. One et F we haven't talked about is wheat w A t you crane being such a big producer of wheat, obviously the war is going to jeopardize that production. What do you think

would happen to that ETF? By low cell hi the higher price cure, there's gonna be massive supply coming on in the US wheat tracks. The US wheat future has to roll and contango. Historically, whea it's expensive to store um. If you're gonna invest in anything commodities in that space, look at soybeans. You know it was virtually it's one of the best roll yields of all commodities UM soy and um corn across you maybe six seven percent the year costs just to hold it. And wheat is great.

But the time to buy wheat was two years ago. And if you know, if you've been long, you're supposed to be lightning up. I would not suggest overwaiting here. And this is the problem. You have to be careful about people chasing markets and that's the last thing you

ever want to do in commodities. If you miss it, you miss it um And if you want to get in that space, look at soybeans because they're not gonna cost you historically, they're easy to store, typically don't have that contangle to roll in we um you have cantangled role and I typically cost you six percent annually just to hold it. Last question for you, what is your favorite e t F ticker? G BTC. Come on, I

was hoping to Eric, I listen, listen. This is why I think Mike's gone full bitcoin because the old Mike, he would have picked g L t R Glitter, which is this cool basket of the physically backed gold, palladium, platinum, and silver. We we we that we kind of like this e t F on the team. We feel like it's a kind of a cool like diversified metals e t F that has no weird role cost in it. And that was from Mike's old company. And but the fact that he didn't pick it shows Mike has he's

gone Bitcoin. He's gone. I gotta give it two reasons why that it was five years binehole accumulate, never trade five years bine hole accumulate, never tried. I think the upside is many exes and GBTC and glitter might be a but to me and and your risk obviously is appropriate and you might lose more too. But I see the upside is, like I said, it's unlikely. Um it's like say, many exes and and for the trends to continue. G BTC, Yeah, I love it, I've I've exposed it

in the past. I liked it, but it's already had a pretty good run. And I think those together paired would be good too also. But again, when you're looking at your portfolio, wouldn't glitter or goal g l D be better to put in the commodities section and g BTC or bitcoin should be you should replaced maybe some tech stocks with that. Well, you could do that, but we're getting that divergence now. Eric I would say theium's more associated with tex stox, maybe a Bloomberg Galaxy crypto

index or an index and EATF. Eventually we're gonna be talking about someday that attracts, you know, an index of cryptos. But um bitcoin has become a global digital claddals, so I think what's transition this year. It's already showing up in the tape is bitcoins transition again from that risk on to a risk off asset, and UM it's we're seeing that with I see bids coming in below on all dips, and it's going institutional. And here's a good fact about it. It's still less than one percent of

most institutional portfolios. And I think most you know Fiducier has realized there great risk is UM not being allocated to this space. They might as well have some rather than being able to tell their grandkids, why did you miss the best performing acid in history versus who lose one? You know, it's not important, and I'm sensing that everywhere. Okay, Mike, thanks so much, Thanks for having Thanks for listening to trillions.

Until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and Wearber else you'd like to listen. We'd love to hear from you. We're on Twitter. I'm at Joel Webber Show. He's at Agriculturists. This episode of Trillians was produced by Magnus Hendrickson. Francesca Leady is the head of Bloomberg podcast fe and the Sister Ter. The sister