Date: 5/07/2021
Author: Mr. X
In the iconic scene from The Matrix, Morpheus takes Neo out of the computer-generated virtual reality into the blasted wasteland that exists in the world. “Welcome to the desert of the real,” he says.
That’s what a lot of investors must have been thinking over the last year. Companies like Zoom [ZM] went from marginal to iconic. Drones, AI, robotics, and private space travel took over the headlines and the markets. Peloton Interactive [PTON] looked to redefine the fitness industry entirely. The ETF of this period was Ark Innovation [ARKK], catapulting Cathie Wood into star status.
However, ARKK is now nearing a now low for the year. ZM is down more than 30% over the last three months. PTON recovered somewhat on Thursday, but nothing near what was necessary to recover from a 40% loss over the last three months, culminating in a massive recall over safety issues.
In contrast, the stocks that are soaring are decidedly low-tech. Over the past few weeks, I’ve discussed agricultural products, lumber, and copper.
- PowerShares DB Agricultural Fund [DBA] is up more than 15% over the last three months and Teucrium Corn Fund [CORN] more than 32%.
- Direxion Daily Homebuilders & Supplies Bull 3x ETF [NAIL] is up almost 60% in the last three months and iShares Global Timber & Forestry ETF [WOOD] up more than 14%.
- Finally, Global X Copper Miners ETF [COPX] is up more than 32% in the last three months. All of these are simply representative of what’s happening to individual companies within these sectors.
What next? The Biden Administration and the Fed have caught themselves in a bit of a trap regarding inflation and interest rates. Treasury Secretary Janet Yellen seemed to indicate that inflation was a real concern before she walked back her comments the very same day. The Fed has previously made statements about keeping interest rates at their historically low levels until 2023, which seems untenable if prices keep increasing. And prices are increasing – just a trip to the grocery store will tell you that.
If 2020 was the year for companies like Tesla [TSLA], 2021 might be the year for companies that seem positively ancient. Raw materials and commodities are what are needed.
To quote from another movie, Conan The Barbarian, there is nothing in this world you can trust, not crypto, not Chinese coffee companies, and not SPACs. But…
Well, you can’t even trust that to hold its value forever. But iron-ore prices just hit a record high and there is surging demand for steel internationally. This is before Joe Biden’s infrastructure bill is passed by Congress, which seems a likely bet either this year or after the midterms.
Bank of America has projected that this could be a bubble. That seems likely on the surface – as with lumber and superconductors, a disruption to the supply chain is leading to a surging price. As the supply chain adjusts, the price will fall.
Yet that will take some time and we might be dealing with something even more long-lasting. The key factor here could be international politics. Former president Donald Trump’s tariffs are still in place, which is having an impact on supply. Tensions with China are not decreasing even with the change in administration, and President Joe Biden has even attempted to co-opt some of President Trump’s “America First” rhetoric on trade.
America’s collapsing COVID-19 rate shows that the economic turnaround is also underway, which will help fuel global demand. Chinese demand for raw materials is also insatiable. Rather than a bubble, we might see something more akin to a perfect storm driving prices for commodities. If we really will see “The Roaring Twenties,” commodities will soar.
You should never try to chase a bubble, but investors should consider United States Steel [X], PowerShares DB Base Metals Fund [DBB], Steel Dynamics [STLD], and other funds and companies. Don’t go all in, but I suspect the gains here aren’t over, just as they weren’t for agricultural products.
Dry bulk shipping is another possible area for growth – Breakwave Dry Bulk Shipping ETF [BDRY] is up over 37% this month even after dropping more than 11% Thursday.
For investors, it’s time to consider taking profits on tech and looking to commodities. The desert of the real is fast becoming an oasis.
