Commodities in the age of the 3D reset

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The full transcript of the podcast can be found below.

[00:00:07.930] – David Brett

Welcome to The Investor Download, the podcast about the themes driving markets and the economy now and in the future.

[00:00:29.450] – John Mensack

Ladies and gentlemen, do not adjust your devices. This is a sanctioned takeover of the Investor Download. My brilliant colleague David Brett has kindly offered up his seat in the presenter’s chair. My name is John Mensack and I’ll be your host for the next couple of podcasts. Late last year, our global Chief Investment Officer, Johanna Kirkland, co wrote a research report arguing that investors are facing a new set of financial market conditions. We’re referring to it as the 3D reset, decarbonization, deglobalization and demographics. What does this all mean? Well, we think it will lead to higher inflation for longer, more active fiscal policy, a new world order challenging globalisation, a faster response to climate change and labour shortages driving technology investment. In brief, we’re asking investors to consider what they’ve done for the last ten years and think about doing the opposite going forward. So for this podcast, we’re going to focus on the impact on commodities of the 3D reset to help guide us through the possible implications, our two experts and two of my brilliant colleagues. Jim Luke.

[00:01:35.610] – Jim Luke

So I’m Jim Luke. I’m a commodities portfolio manager here in London, focused in terms of fundamental research and portfolio management on the metal space. So that includes industrial metals and precious metals.

[00:01:50.600] – John Mensack

And Malcolm Melville.

[00:01:52.040] – Malcolm Melville

Malcolm Melville here. I started my investment career way back when in the Asian crisis, 1997, and I’ve been investing in commodities looking at commodity markets for about 20 years now.

[00:02:05.640] – Jim Luke

I start with a question to Jim asking to what extent has central bank resolve been evident in getting on top of this current wave of inflation?

[00:02:14.050] – John Mensack

If you look in parts of the emerging market universe, as you know very, very well, John, in Brazil we have rates up about 13%, 11 to 13% in general in Latin America. Talking to Nick Brown this morning in our EMD team in London, who was saying that in Hungary now we’re up at 18%. Of course, if you look at the US, also, we’ve had the largest and the sharpest increase in interest rates since early 1980s. 500 basis points of rate increases since the end of 2021. So it’s hard to argue that central bankers have not prioritised inflation over growth. But I think for me, what’s going to be interesting in terms of this debate is the extent to which that can last. Because I think between us all, we can probably agree that prioritising inflation over growth, when you have close to full employment, when you have very strong underlying economic growth dynamics, particularly in the US, but you do have inflation way above target, is not a very difficult choice. So for us, I think the big debating point is what will happen when perhaps the cyclical elements of the economy, particularly the employment picture and maybe even the financial stability picture, which we’ve been seeing a lot recently in the US with the regional banking issues, when those factors clash a bit more explicitly with that inflation target.

[00:03:46.010] – John Mensack

Yeah so maybe not mission accomplished, but the first leg of this, the central banks have come out of it looking pretty good.

[00:03:56.250] – Jim Luke

For me. Honestly, John, do we really think they’ve come out looking good? We probably have to say that the Fed made one of the biggest mistakes in history in 2021 by not tightening earlier, by continuing to run ultra loose monetary policy in the face of already full employment, full employment and a booming US economy. So you could argue, you could play devil’s advocate and argue that what they’ve done is restore an element of the credibility that they were rapidly losing in 2021. So maybe that would be, maybe I’m being a little uncharitable there, but maybe that would be my take.

[00:04:34.420] – Malcolm Melville

No, I think that’s right, Jim. And you can also argue, I think, that central banks did not see this wave of inflation coming. Absolutely. And they’ve been running to catch up and maybe they get some credibility now because inflation is coming down. But then, as Jim says, the question is…