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Executive summary │ Commodities and Trump 2.0
Why commodities are the hedge of first resort against stagflationary trepidation
Imposition of tariffs are textbook stagflationary
Commodities are an ideal hedge – but stay selective, not outright bullish
Three months into the new US administration and Trump 2.0 policies have been nothing short of dizzying. President Trump has imposed towering tariffs on all countries. These tariffs have a distinctly stagflationary flavour. They push up import prices that then pass through into higher consumer goods prices and inflation – acting as a tax on spending and, thus, creating a corresponding drag on economic growth.
In contrast, the tariffs are an aggregate demand shock for the rest of the world. They reduce demand for foreign products in the US. This, in turn, puts downward pressure on both prices and real GDP abroad. Of course, to the extent that other countries retaliate, this flips the script – imposing a supply shock on their economies and a demand shock on the US.
Today’s type of stagflation shock matters. US tariffs – as a negative supply shock – hampers productivity, and will have a persistent effect on inflation and expectations. Consider the twin oil-price shocks of the 1970s – inflation proved persistent despite two recessions. Only by forcing the economy into a protracted downturn, with short-term interest rates reaching ~20%, could the Fed (under Chair Paul Volcker) get the situation under control.
In such a textbook stagflationary environment as today, an allocation to commodities – as real physical assets – have historically proven to substantially improve diversification and the real risk/reward in portfolios. At stagflations core, is the proposition that due to severe limitations on supply, the market needs to rebalance through demand curtailments. A precondition for stagflation, therefore, is the presence of factors which limits supply growth (today’s global trade war). Thus, as commodities are assets which perform best when they are tight, they are an ideal hedge for stagflation, where demand remains above supply (in contrast to recessions, where demand falls below supply, leading to broad-based surpluses, and thus downward pressures for commodities).
Yet, we caution that it pays to be selective across the commodities complex as the source of inflation matters. Today’s inflation risks are a mix of cost push (tariff-induced higher input supply costs) and monetary debasement (deglobalisation-induced dedollarisation).
Defensive (rather than outright cyclical) exposures are recommended in this setting, where the combination of the US pursuit of economic autarky (shift to a “made at home” model) and heightened competition that’s compelling countries to trade greater inflationary pressures for the security of supply, collectively raises the costs of production for physical goods. Against this backdrop, we lean bearish crude oil, guarded on base metals led by copper and structurally bullish on safe haven gold, until the growth momentum troughs.
