Why Short-Term Macro Noise Won't Derail the Commodities Supercycle

Derek Macpherson (0:00)

Welcome back to the Compass. It is Friday, September 11th. It's about 11 a.m. Eastern time. We're post a CPI print, so we'll talk a little bit about that, and kind of rate expectations in the short-term macro, but longer-term thesis is intact.

My name is Derek Macpherson. I'm the Executive Chairman of Olive Resource Capital, with me as always as President, CEO and CIO, Samuel Pelaez.

Samuel Pelaez (0:24)

Where do you want to start?

Derek Macpherson (0:26)

There's lots of, I mean, let's start with the headlines. I mean, obviously, I don't think we've spoken since, we've done an episode since Warsh spoke at Jackson Hole, and obviously, EAPS suggesting that he has a hawkish stance, that he's going to drive inflation down. Saw a CPI parade at 3.4 percent. I think the last I saw, the odds of a rate hike were about 60 percent in the September meeting.

That September meeting is coming up very quickly. I don't have the exact date off the top of my head. But it doesn't seem like the market cared all that much, or the gold market, at least.

Samuel Pelaez (1:09)

I mean, for a start, the CPI number is above the Fed band, but it came in exactly where the number was expected. I think that explains part of the reason why we're not seeing any excessive moves on the markets today. So far, it's a Friday and it can happen.

But I think generally, inflation is higher, definitely. I mean, diesel prices continue to advance. But on other parts of the economy, it seems like inflation expectations are starting to get a little bit more anchored. So we have different parts. The general trend is up naturally, but I think it's not moving up in every subsector and subindex. So the Fed is probably playing a little bit of wait and see, see if they can keep it somewhat contained. But yes, I agree with your introduction.

Chairman Warsh has been more hawkish than some of us anticipated.

Derek Macpherson (2:13)

But yes, it actually raised rates, I think is the other thing.

I think he's trying to talk the long end rates up and hope it does. The other thing that's probably important to note and where a lot of this inflation in the short term is coming from, as you talked about diesel prices, it's directly related to the conflict in Iran and the fact that there's oil flowing there, so we're not going to have this moment where we're going out of fuel, but fuel prices are up. Particularly, I think what has occurred is that it's the refined product that is being the most impacted, not on the crude side. You've got diesel prices and it will go into everything. It goes into tractors, it goes into things that brings your groceries to the market, it goes in, it affects a lot of diesel, diesel prices affect a lot of things. And I think that's a great point. And the Fed cannot affect a supply shock. They do not have the ability, right? I think that's the other thing that they can't make diesel prices lower, right? They can raise rates. I mean, I guess in theory they could. They could raise rates so much, they cause the economy to materially contract. But I don't think that's going to be, that's going to be wild. So I looked it up while you were speaking. The Fed meeting is next week, so just before Beaver Creek. So either they raise rates, I think it might be a bit of a, it might be a little bit of a painful, more painful conference than you would think.

Samuel Pelaez (3:43)

Before you move on from that thought, I always like to look at the US dollar index, something that I talk about frequently on my press releases and what not. And the US dollar index is sitting at a pretty strong support level. So if you ask me statistically, what's more like to happen is we may see a short-term rebound of the dollar, which could coincide perfectly with next week and a potential rate hike. I don't know how President Trump would take that one heading into the midterm elections but this is the state of the US dollar today. Also, what could happen is if there's a big disappointment and breaks below this strong support level, it opens up a complete new possibility for a significantly larger move lower in the US dollar, which naturally in normal circumstances would result in a very strong move upward for commodity prices.

We'll be watching this chart very carefully.

Derek Macpherson (4:44)

Yeah. You mentioned something in there besides the US dollar index, which is critical, but it's really the US dollar index. It is inevitably a function of what's happening. One of the things that's coming up that's going to create some short-term volatility probably or short-term impact is the midterm election cycle. You've got a, I guess it's early November is the midterm elections. And so now we're in a full-on campaign mode.